Friday, March 24, 2006

The MSM is coming around

Slow but sure I suppose. I've recently seen some 'Housing Bust' pieces in the MSM.

Here'd an ABC vidoe that shows what happens when your interest only/ARM honeymoon is over

and then today @ CNN Money

New home sale slump

... now is when I should mention something about a river in Egypt and the smell of coffee.

Wednesday, March 15, 2006

If you're, not readings the articles at Professor Piggington's, you are really missing out. The data and analysis found there are top notch. Check out his entry regarding The FED's Poole's dismissal of the housing bubble (What bubble?... right?) titled "Drink the Poole-Aid".

P.S. make sure to read the me.

Springtime tells the story

I found a very informative article (The next 60 days) which, apart from it's great analysis, shows the "seasonality" of RE and how it revolves around Spring (well o.k., Feb. thru June). IOW , Springtime performance is the "make it or break it" indicator for the entire year.

Tuesday, March 14, 2006

Speaking truth or crying 'wolf'?

By Paul B. Farrell, MarketWatch
Last Update: 6:02 PM ET Mar 13, 2006

LOS ANGELES (CBS.MW) -- Back during the '70s recession I was a real estate expert with Morgan Stanley. We helped banks and REITs work out billions of loser portfolios, reorganize, file bankruptcy, even advised the U.S. Dept of Housing & Urban Development on the collapsed Federal New Towns program. I've worked for developers and mortgage bankers, got degrees in architecture and city planning, taught commercial real estate at Cornell University.

But oddly, like the rest of America, most of the time I don't think about the housing bubble that's about to pop. We ignore the coming storm.

But when it gets up close and personal -- like my family's home -- well, suddenly I'm shocked out of my denial.

The shocker? I just learned we live in a metro area that could see a devastating 55.8% decline in home prices in the next five years. Worse yet, most of the real estate north and south of us -- from San Francisco to San Diego -- is predicted to decline 50% in the next five years. Ouch!

That dire prediction was made by former Goldman Sachs investment banker John Talbott in his new book, "Sell Now! The End of the Housing Bubble."
Next time you're in a bookstore check out his top 130 metro areas. The chapter's titled, "Are You in Trouble?"

Warning: Chances are you're in big trouble, or in denial.

And folks, this is not just an isolated West Coast phenomenon. Talbott points out that America's top 40 cities are facing a average 47.2% decline: Boston is 49.4%. Miami 44.8%. New York 44.6%. And Chicago is 27.3% overpriced. Yikes!

But "so what?" you say. You've heard it before. Right? Warnings reported month after month. For example, Talbott reminded me of an editorial in The Economist last summer: "Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000 ... This is the biggest bubble in history."

Yes, the irrational exuberance of our failed stock market simply shifted over into a new irrational exuberance in housing. In five short years an estimated $30 trillion was added to housing prices worldwide, an unsustainable 75% increase to $70 trillion, largely due to then Fed chairman Alan Greenspan's cheap money policies.
Greenspan dismissed the global bubble, telling Congress it was just a little "regional froth." Happy-talk, while our housing and mortgage industry has been taking advantage of naïve home buyers and sellers with loose underwriting practices: Low-interest home equity loans, and interest-only, low-equity loans feeding housing price inflation.

Curse of Cassandra

My files are full of warnings from America's top economists predicting a housing market collapse and a widespread global disaster: Gary Shilling, Bill Gross, Jeremy Grantham, Robert Shiller, Robert Rubin and others take exception to the deceptive happy-talk of self-serving spinmeisters in Washington, Wall Street, realty brokers and homebuilders.

Lately, powerful voices are challenging the happy-talk. In his latest "Investment Outlook: The Gang That Couldn't Shoot Straight" Pimco's Bill Gross takes direct aim at President Bush's Economic Report prepared by ex-CEA boss and now Fed Chairman Ben Bernanke. He bluntly accuses them of outright lying: "It's not so much that the report was a compilation of untruths or even half-truths. It's just that it failed to tell the truth," hiding the fact that we have "borrowed from the future to pay for today's party."

The party's about over. Economist Gary Shilling recently wrote in Forbes: "The current housing weakness will develop into a full-scale rout ... It's clearly a bubble and is nationwide ... The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin ... China will suffer a hard landing ... and weakness in the U.S. and China will spread worldwide."
Unfortunately, bubble warnings are routinely dismissed. Our brains can't handle all the bad news. Besides we've been brainwashed into short-term thinkers, incapable of long-term planning. Witness the collective denial and paralysis toward mounting deficits from out-of-control federal budgets, foreign trade, war debt, state, municipal and consumer debt, under-funded pensions, Social Security and Medicare shortfalls.

Still, experts like Gross, Shilling, Talbott and others are dismissed as "crying wolf" one too many times. The housing bubble hasn't popped, warnings accumulate, we're overwhelmed, confused, numb, feel helpless, so we fade into denial. And our leaders are even more oblivious, hardened and ineffectual.

But ... am I going follow Talbott's advice and "sell now?"

No. We love our home and our town. Besides, even if prices do fall 55.8%, we're still ahead of the game, out of harm's way. But maybe you should sell now. A lot of people are going to get badly hurt in the real estate crash, far worst than in the 2000-2002 recession when we lost $8 trillion in market cap.

If your stock portfolio were out of whack there's a possible solution: Dump equities now, go all-cash or to the "nuclear bond option:" Put one quarter in each of four sectors: Short-Term Corporate Bond Index (VFSTX) ; Intermediate-Term Bond Fund (VFITX) ; Inflation-Protected Securities Fund (VIPSX) ; and Money Markets or U. S. Savings I-Bonds. Shilling favors bonds in a deflationary recession. They paid roughly 10% in 2000-2002 bear. Alternatively, if you have a well-diversified portfolio, sit tight; back in the 2000-2002 they beat the S&P 500 by an average of 15% annually

Sadly, unlike the stock market there's little you can do once the illiquid housing market collapses. If you can't sell now, you'll have no choice but bite the bullet.

For example, assume you live in one of America's top 40 metro areas. You bought last year for $500,000 with $450,000 in mortgages. If the market drops just 10%, your equity's gone.
And if it drops the predicted 47.2%, your home's worth $250,000, you really are in trouble. If you lose a job, or suddenly get hit with extraordinary expenses, or just can't make tax and mortgage payments, or otherwise forced to sell, you could be wiped out under the tough new bankruptcy laws.

So please read Talbott's book closely: Is your home is at risk? Then quickly decide whether you can hang on in a housing collapse, a stock market bear and another long recession. And if not, consider taking his advice to sell now.

Monday, March 13, 2006

Los Angeles market overvalued by 61%

This article, Mortgage rates up...affordability down lists overvaluations/undervaluations for different U.S. markets and explain how rising interest rates will reduce demand to pressure price drops.

P.S. A 61% overvaluation would require a 38% decline in price to return to normal. Here's the math.

a. $1,000,000 = 161%

b. $1,000,000/X = 161/100 (represented as %) - mult ea. side by 100

c. 100,000,000X = 161 - divide by 161

d. X = $621,118.01

Thursday, March 09, 2006

Industry ‘Heavyweights’ On The Housing Bubble

Industry ‘Heavyweights’ On The Housing Bubble

If you don't know who Robert Shiller is, you should.

Here is another good article he wrote recently.

More Americans are losing their homes

Foreclosures up 45% (YoY) for January. Article here

This article is a great prelude to the subject of affordabilty. Remember, it all comes down to Supply v. Demand. Affordabilty limits demand.

Wednesday, March 08, 2006

Hurry, buy now before prices come down!

Can't afford it? You can't afford not to! Rates are still pretty low you know! C'mon you can still get in at the peak!


The MSM is not covering the bubble as it should. Granted it might not be as sexy as the car chase or cartoon riots, but although I don't watch tv, I do check daily & there isn't much. Thank God for the internet! I almost walked right into this tar-pit of a market, but for blogs. There is a lot of data out there that you have access to. Once I started really doing my homework it became very clear how bad of an idea it would be to buy right now at current prices.

The links are to your right. These blogs have the best data that you won't be getting from any realtors. Use them well and good luck.

Tuesday, March 07, 2006

"surreal estate" exuberance

Price trend = falling in San Diego

This is either
a) hilarious
b) pathetic
c) both

Great commentary though!

Supply and Demand

Pricing is determined by Supply and Demand. Period.

You can say the last bust was fueled by the areospace industry collapse or recession - it really doesn't matter because those things are simply factors that affect supply and demand. You can say exhuberance (irrational anyone?) fuels the increases, but that is simply a factor that affects demand.

And when you look at the RE market purely in terms of supply and demand, and the figures we're seeing right now, there is no conclusion except that a housing bust is upon us. But the market is not liquid enough to undergo sharp changes like the stock market where a single report can drop a stock price like a rock. In analyzing past booms and busts, the RE market is like a rollercoaster, at then end of a large boom (and this is the largest) it slows at the peak and crests. Downward momentum begins slowly and builds exponentially, the force of the movement feeding on itself.

During the years 2001 thru, and especially including, '03-'04, the RE market was in a frenzy. Many listings were sold in days. Not weeks, days - with multiple bids. There was not enough supply for the demand and bidding wars were common. Accordingly during this period of exhuberance, home prices increased monthly. Demand was incredibly high. And because of the strong appreciation, not many people that didn't have to sell were particularly inclined to. Why would you, when holding the property was making you more than your salary over a year? So the supply was very restricted. It's a little weird how these market forces feed upon themselves. But there is a limit. Demand is ultimately curtailed by affordability. If you can't qualify for a loan, you no longer contribute to demand. And demand begins to decrease. How does this end? Badly for some, depending on your timing.

Right now, supply vs demand has turned upside down is getting worse (better if you're a buyer). Supply is going thru the roof as speculators run for the exits. On top of that, demand is decreasing. Prices are dropping due to this pressure in "leading areas" where appreciation came late and strong and builders overbuilt to meet the inflated demand. In other places price appreciation has flattened while listings have doubled or tripled and sales decline steadily. In those places, the sellers may think they're in a staredown that they can win thru patience, but this Mexican Standoff favors the buyer. The buyer can continue to rent indefinitely with no change in lifestyle, while the seller is carrying an extra mortgage payment every month. My $1000 vs his $5000. No contest. Once prices start to slide he loses equity on top of the 5K. That will add "corrective" pressure. ...and the rollercoaster gains speed.

Welcome to my blog

I started this blog so that I could refer people to a single (and continually updated) location for links and articles relevant to the housing bubble, specifically in SoCal.

I am a buyer. I do not own, nor ever have owned any properties. I am a complete rookie. Specifically, I am sitting in a position to buy, down payment ready, but would have to leverage myself (and my future) pretty heavily just to get into a starter. And if it doesn't appreciate or if it depreciates, your starter could be and ender! It's a risky time. The last few years felt very risky too, but in a different way. Risky if you didn't get in, because you could "miss the boat" and be locked out, and risky because even then, prices seemed pretty outrageous. The timing was never right for me though. Something essential was always missing from the equation, so I was really not able to buy in those early (good) years.

Now, my personal situation has changed. Everything is stable, everything is good. And I'm finally in position to be a buyer. Luckily, we have the internet and can get a lot of good data outside of the traditional sources (MSM, realtors, lenders). I'm a researcher by nature and what I have found leads me to believe that now is the very worst possible time to buy a home.

Your comments, charts, & spreadsheets are appreciated.