Sunday, October 01, 2006

What Type of Landing?

The housing boom has clearly ended in the vast majority of the bubble markets. We are now seeing some price depreciation. Last summer there were four basic opinions as to what will happen in the bubble markets going forward. The housing head argument that the boom will continue has proven false. So which of the remaining three options are we likely to see in the bubble markets? How much will prices fall in real dollars (inflation adjusted)?
  • Boom Continues
  • Soft Landing (0 to 20% real dollar price decline (peak price to bottom))
  • Hard Landing (20 to 40% real dollar price decline (peak price to bottom))
  • Crash Landing (40% + real dollar price decline (peak price to bottom))
I see a hard landing happening in many bubble markets, with some bubble markets experiencing a crash landing. The time period between peak real dollar price and bottom real dollar price will probably be between 4 - 8 years.


  1. Simple reversion to mean in coastal markets = 50% drop, with a possible negative bubble and boomer retirement depressing prices further than this.

  2. I say a crash. 45% or so.
    It's hard to believe that anyone would call a 20% decline a Soft Landing. I can see that it might appear that way, if it takes a log time and we're taling REAL dollars.

  3. nurseliz,

    Loudoun County = hard landing. Bottom will probably be around 2011.

  4. Turbo-yield: Real estates in Romania!


  5. Two years after the majority of the Republican party are out of office, = 45% real dollar decline. 2010 sounds like the year.

  6. I think we have already seen what you call a "soft landing", i.e., real price declines of 0-20%.

    What is really difficult, though, is to say what the "price" of a house in the DC area is right now. The Washington Times (which I otherwise usually avoid) has a "Friday Home Guide" that is in supermarkets. They sometimes publish a record of the DC area inventory and sales over 2005-2006. Basically, inventory has been 40-50,000 homes for months now, while sales are slightly lower than 2005 levels. This seems to me to mean that 70-80% of DC area homes for sale are not selling. So when your "price" is based off of the tiny minority of homes that do sell, I am not sure how meaningful that is. The real price to clear the markets obviously must be much lower.

    I think other bubblicious areas might be the same way right now.

    A Redskins fan

  7. Based on the choices, I gotta go with 'crash landing.' Prices will fall 40 to 60% in the DC area over the next several years. It will like be 15 years or more before we ever see peak bubble prices again.

    I'm starting to wonder about the chances of a market overcorrection happening if sentiment gets too negative. If prices can be driven above true fair values based on psychology, there is no reason they can't be driven below fair values (meaning below 50% of peak bubble prices) due to negative psychology.

  8. I am actually more interested in nominal price declines, that's where it REALLY hurts, when to sell you have to cough up cash to pay down your mortgage.

    In nominal terms, for one-bd condos in the district, we're down 10% from what I see--2bds and efficiencies don't seem to have come down so much yet, though of course, I'm not sure if they're selling at those higher prices. But for 1bds, the listing prices are lower than last year's selling prices by about that much.

    We've got a long way to go, though. Just to get to 2004 prices requires a 20% drop in nominal prices from peak, and I have no doubt we'll be there, and I don't think that first drop will take that long.

    How long can the builders and flippers hold out, really? Flippers are even dropping their rents in buildings where they're desparate, including mine.

  9. It is going to be something in the upper range of the "hard landing" scenario.

    DC is going to see something in the 30-45% range as far as declines are concerned but only about a half of that will be right up front. The rest will be over the next few years.

    Some areas in Florida and out west are going to see a true crash, and it is gonna leave a mark for sure...


  10. Based on these definitions, I would suspect a crash landing.

    Check out this website and enter zipcode 22201 (that's the Clarendon through Ballston corridor in Virginia). Condo's right on the metro line, prime location etc.

    Average price is down 11% and median price is down 23.99%! That's not counting inflation. These are results through August and I would suspect these transactions were being considered and finalized as the negative pyschology was just beginning to form.

    My $0.02.

  11. National: Hard landing.


    Most of Florida: crash
    NOVA: hard landing to minor crash
    San Deigo: Crash
    Sacramento: Crash
    Pheonix: upper hard landing to crash.
    Orange County, CA: hard landing to minor crash.
    Los Angeles County: Hard landing, but a crash in the most bubbled of certain markets (e.g., 90277, 90401 through 90411, 90802, and a few more).

    Overall, most bubble markets will drop in nominal dollars 30% to 60%. :(

    This is going to be ugly for years. I predict the steepest slope in price declines will be in mid 2007 through summer 2008. Why?:

    1. Market panic
    2. Option ARM resets get into their peak
    3. Enough time for the 1st and 2nd wave of REO sales to complete.

    Then I predict a few years of slowly declining prices (in nominal terms).

    The first communities to uptick will start in 2009. The worst bubble markets? 2011.


  12. The wildcard you're all so obliviously overlooking is you as exemplified in Fencesitter's recent decision to buy now that rents are rising and upping the "floor" below where sales prices can fall. It isn't a vacuum out there. Those on the sidelines will be out in droves soon. Go to an open house ... you'll see what I mean. I went to one across the street the other day. I was pleasantly surprised to see the number of people there and the general excitement in the air. I was also surprised to see asking prices yet higher than before ... and prospective purchasers not flinching. Getting my news from here had led me to believe we were on the edge of Armagedon. We're not. It's just business as usual and a regular business cycle like Va_Investor has reminded us. And btw, Redskins, you're 80 -85% calculation is overlooking the fact that new houses come on the market every day ... Now for all you bubbleheads, it's a beautiful day out there ... a good time to go to open houses. Prices are lower than last year, interest rates are relatively still low. What's holding you back? Could it be greed? The kind of greed that drives all flippers on? ... hoping to get an even better deal? Like I've said before and will say again, bubbleheads are nothing more than flippers without the means to use investment dollars to speculate ... So they instead use their housing expense dollars to speculate. And holding off now for even greater price reductions is speculation pure and simple.

  13. People aren't hesitating from pulling the trigger in buying houses in US of Creditland JUST because of the inital and hidden costs.

    They are slowly awakening to the realization that that they MUST change their Media driven expectations and standard of living to survive in this country. I expect a Major Crash and a long Recession.

  14. Lance-

    What you are overlooking is that, all anecdotes aside, the actual data show that inventory is through the roof while sales are slightly lower. There is an enormous amount of inventory out there, and I suspect an even larger amount disguised as houses "for rent" because no one will pay outrageous prices for them.

    A Redskins fan

  15. Lance-

    What you are overlooking is that, all anecdotes aside, the actual data show that inventory is through the roof while sales are slightly lower. There is an enormous amount of inventory out there, and I suspect an even larger amount disguised as houses "for rent" because no one will pay outrageous prices for them.

    A Redskins fan

  16. threadkilla said:
    "or lack there of, the ONLY way i could afford a 660K tear down shack would be to get an IO ARM and that IS SPECULATION."

    And what's wrong with buying the "ready to move in to" $350K condo instead? ... knowing that you are making your way to your eventual "dream house".

  17. I say crash for Washington, but a lot faster than 8 years. I think it will happen in 2-3 max.

  18. Somehow I get the impression that those at the open house were all doing what Lance was doing.

    All of them housingheads, all agreeing that the price was reasonable, but no one REALLY interested in buying.

  19. My quick thoughts:

    Washington, DC market:
    NOVA...HARD Landing. The RE market in NOVA has been more volatile due to the massive speculation in Fairfax and Arlington Counties. Loundon County will have steep real estate price drops.

    Suburban MD: Montgomery County will have a Medium Landing. The I-270 corridor from Rockville to Germantown should be OK because of the proximity of bio-tech and medical sciences sector. I am afraid Eastern Montgomery (Olney, Wheaton, and Silver Spring) will see bigger price declines. These areas are economically less affluent and there is little higher-paying jobs in that part of MontCo.

    PG County should have a softer landing because that area has not witnessed huge appreciations. Homocides, carjackings, and gang activity kept PG country from heading into bubblicious territory.

    The District: The bubble burst will not hit the city as hard as the suburbs. Demand for housing in the city will continue to be stable, which means prices might drop at 10 percent at the worst. Demand for housing in areas like Logan Circle, DuPont, Adams Morgan, LeDroit Park, Capitol Hill etc. will be still attractive for the eager YUPPIE buyer. I would call a SOFT landing for the District. I am sure Adrian Fenty will be happy.

  20. Same as it ever was, to quote the Talking Heads. A reversion to the mean, which in my neck of the woods (Los Angeles) means about a 40% reduction over the next five years or so. IMHO, of course.

  21. To all the housinghead cheerleaders...

    You can't keep kicking the horse to run faster. Sure it works in the short term, and as hard as the speculators / flippers / sky-is-not-even-the-limit crowd has pushed these markets, this horse is falling and won't get back up for a long time.

  22. If IO loans go away it will dry up a lot of the potential demand. I've been saving for two years just to come up with 5% down. I've could have saved up more if not for saving for retirement. However, I'm quite frugal relatively and I doubt that other people save as much as I do. Also, I'm far from rich but I'm certainly above the median income for NOVA.

    NOVA Fence Sitter

  23. ihateyuppies,

    Your predictions show an unjustified bias toward Mont. Co. and against Fairfax, Loudoun, and Arlington. The reality of the situation is that ALL these areas are heavily dependent on federal spending ... and since 9/11, federal spending has been moving away from non-defense related government services such as Health and Human Services (and Bureau of Standards) which drive the I-270 corridor and instead towards defense-related government services such as all the Dept. of Defense that is more prevalent on the Viriginian side of the Potomac. Additionally, you fail to take into account that people don't necessarily work where they live. Check out the traffic jams over the American Legion Bridge into Virginia in the morning and out of it in the evening, and you'll understand how the correlation between employment opportunities and prices isn't a straightforward one.

  24. I would have crossed out the possibility “soft landing” instead of “boom continues”. As long as banks are willing to make crazier and crazier loans, and the Fed prints money, housing prices can go up into hyperinflation. There is no way it can have a soft landing though, because “investors” already have a negative carry, so if price appreciation goes even slightly negative, they will rush the exits to avoid going broke.

  25. How hard the NE corridor of DC is hit depends entirely on two things:

    - Who is the next administration (GOP vs. Demo)
    - What that adminstration does with regards to defense and homeland security

    lance had it right in that that corridor is very defense-centric - thus Loudoun's recent's rise to #1 growth rate in the country and also #1 median income since 9/11. That area's unemployment rate is about 2.3% right now - incredibly low. If things stay status quo - that area will probably experience a soft landing or *maybe* a slight hard landing. If instead a new administration comes in and gets us out of Iraq and cuts back on homeland security then watch out - we're talking definite hard landing and maybe crash for Loudoun and Fairfax counties.

  26. I don't think anybody is taking immigration into effect here. The number of people in the US is set to hit 300 million at any second ( That is approximately 80 million people more than when I was in High School 20 years ago or a 36% increase. All of those people HAVE to live somewhere. And nobody is closing the door any time soon. That is how housing prices got so removed from income levels to begin with; the demand is growing faster than incomes. The bubble part of this growth was fed by the "exotic' mortgage part of the market, but the demand for housing is not going to go away. Unless they actually build that fence.

  27. You struck out "Boom Continues".

    However, I think that should really say "Doom Continues", instead..