PDA

View Full Version : Ka-poom and house prices



karim0028
01-05-09, 04:25 AM
I'm curious what happens to house prices if/when the poom happens? If there were to be massive inflation would the prices of real estate fly through the roof?

Can anyone point me to somewhere in the itulip theory that points or talks to what happens to house prices/real estate with regard to other asset classes such as gold (as ive been reading gold will go to 2-5K)....

-Karim0028

jtabeb
01-05-09, 10:01 AM
I'm curious what happens to house prices if/when the poom happens? If there were to be massive inflation would the prices of real estate fly through the roof?

Can anyone point me to somewhere in the itulip theory that points or talks to what happens to house prices/real estate with regard to other asset classes such as gold (as ive been reading gold will go to 2-5K)....

-Karim0028

I think you've asked the million-dollar question, and as far as I'm aware, it has not YET been addressed on this forum.

So place your bets!

As per housing vs gold, I think a min call of 100oz Gold = median home price, is a CONSERVATIVE CALL. But it could be 100 oz AU = $5000 = median home price OR 100 oz AU = $500000 = median home price.

That's why this is so tricky, ratio-wise it's realtively straight forward.

1 ounce gold = DOW or,
100 ounces of gold = median home price.

The real QUESTION (and you are brilliant for asking it) is "what will the dollar price be" during/after POOM.

BECAUSE, if the dollar price goes up to $500K for a median priced home, then real estate would be a GREAT BUY!

BUT, if the dollar price goes to $50K for a median priced home, well, let's just say that would be a bit of a haircut from today's $218K or so median price.

Hope this helps.

P.S. BTW $5000 per ounce of gold and 100 ounce per median home implies $500,000 median home price. IF you by the assumptions.

don
01-05-09, 11:44 AM
Or put another way, when will falling housing prices be caught by rising inflation? Housing, with all of its equity busting problems, will be among the last "caught" (2010?). The length of its horizontal leg in its L price recession will be the amount of time to decide to jump in or not.

grapejelly
01-05-09, 04:27 PM
1. real housing prices will fall for many years.

2. for nominal prices to level out, typical cycles take about 6 years or so peak to trough. 2005 being peak, we are talking 2011 for nominal prices to level out.

jtabeb
01-05-09, 06:46 PM
1. real housing prices will fall for many years.

2. for nominal prices to level out, typical cycles take about 6 years or so peak to trough. 2005 being peak, we are talking 2011 for nominal prices to level out.

No Argument for #1

Not so sure about #2, have you noticed HOW FAST things are happening? What if the FED pushes the 30 year down to .5%? That's again THE problem. How far the FED can push down 30 year rates will have a big impact on when the intermediate bottom comes in nominal home prices.

grapejelly
01-05-09, 06:51 PM
Not so sure about #2, have you noticed HOW FAST things are happening? What if the FED pushes the 30 year down to .5%? That's again THE problem. How far the FED can push down 30 year rates will have a big impact on when the intermediate bottom comes in nominal home prices.

I don't think it matters.

And I don't think they can push rates down much either.

You have to think "underwriting standards", not rates.

Very few folks qualify for real estate purchases at today's prices, and with incomes falling and defaults rising with unprecedented consumer debt levels, it won't get better very fast.

That is why this takes years. The current efforts of the Fed are a pipe dream.

Gnosis
01-05-09, 07:17 PM
I'm curious what happens to house prices if/when the poom happens? If there were to be massive inflation would the prices of real estate fly through the roof?

Can anyone point me to somewhere in the itulip theory that points or talks to what happens to house prices/real estate with regard to other asset classes such as gold (as ive been reading gold will go to 2-5K)....

-Karim0028
Beautifully asked. It is the very question I have as well. I have a Palm Desert, CA (2nd) home that I need 215K to cut even that is valued to sell at 260K in today's market. I wonder if I should cut and run (sell) rather than play land lord and run a rent deficit for the next months to years. Opinions from iTulips please

jayers4647
01-05-09, 08:34 PM
My bet is that nominal real estate prices go higher, surprisingly higher as this all shakes out. It may be sooner then we think. Can we really have all these homes go into foreclosure and be upside down. Nope. Answers will be coming.

vinoveri
01-05-09, 08:40 PM
I don't think it matters.

And I don't think they can push rates down much either.

You have to think "underwriting standards", not rates.

Very few folks qualify for real estate purchases at today's prices, and with incomes falling and defaults rising with unprecedented consumer debt levels, it won't get better very fast.

That is why this takes years. The current efforts of the Fed are a pipe dream.


With all the Fed has done and alluded to doing, why do you think its a pipe dream? To me, anything seems possible up and until american creditors pull out, but even then the charade can continue to some extent.

The fed can print money and buy long term T bonds and agency debt, so they can drive rates wherever they want I would suppose.

I seem to remember about a year ago when the housing bubble collapse was becoming widely recognized and even the MSM were pointing to a primary cause/blams being Greenspan holding rates at 1% for too long.

Hey, now were at zero% and for an indefinite but probably long duration. What happened to that fleeting wisdom?

And about 6 months ago the MSM is finally highlighting all the poor underwriting standards and collusion between players to generate all these loans that propelled the bubble, liar loans, no down payments, bad credit, etc.. What's to prevent the same from happening again, albeit under another guise - the gov just last week began funding sub-prime car loans, it's only a matter of time before the loosening of standards again.

zoog
01-05-09, 09:34 PM
My bet is that nominal real estate prices go higher, surprisingly higher as this all shakes out. It may be sooner then we think. Can we really have all these homes go into foreclosure and be upside down. Nope. Answers will be coming.

I don't think that nominal home prices will go to the moon (again) for a very very long time. The rate of decline in home prices in bubble cities has been so rapid, it appears increasingly likely that they will overshoot to the underside. Perhaps you think they will then spring back up just as quickly, but I doubt it. Seems to me the only thing that would jack up nominal prices again would be revaluing the currency, as in lopping off a zero or two.

http://img71.imageshack.us/img71/5013/chartusa1900nominalss1.png (http://imageshack.us)

grapejelly
01-05-09, 09:46 PM
With all the Fed has done and alluded to doing, why do you think its a pipe dream? To me, anything seems possible up and until american creditors pull out, but even then the charade can continue to some extent.

The fed can print money and buy long term T bonds and agency debt, so they can drive rates wherever they want I would suppose.

I don't think this is true.

If they are too aggressive, the dollar tanks, and long bonds plummet, driving long rates up. Just a whiff of inflation (soon) and long bonds will begin to plummet...

Could be sooner than we think.



I seem to remember about a year ago when the housing bubble collapse was becoming widely recognized and even the MSM were pointing to a primary cause/blams being Greenspan holding rates at 1% for too long.

Hey, now were at zero% and for an indefinite but probably long duration. What happened to that fleeting wisdom?

And about 6 months ago the MSM is finally highlighting all the poor underwriting standards and collusion between players to generate all these loans that propelled the bubble, liar loans, no down payments, bad credit, etc.. What's to prevent the same from happening again, albeit under another guise - the gov just last week began funding sub-prime car loans, it's only a matter of time before the loosening of standards again.

Over half the sales taking place are distress sales. The lenders haven't even begun to deal with the overhang of foreclosures and REOs. They are expecting a bailout. This will cause the current huge inventory of houses to continue to swell. Many houses will be vacant for years.

Meanwhile, consumers are deleveraging. Debt levels are at all time highs and starting to fall. They are not in a mood to overstretch and buy a depreciating asset.

That is why this is a pipe dream, this idea of nominal increase in housing prices.

Consumers won't borrow like this to buy a house. For many years. At least two years and probably many more.

don
01-05-09, 10:03 PM
Mortgages could be fixed by the Feds at 0% with 0 points and it wouldn't help existing mortgage holders in houses that are underwater. None of these people can come up with the cash differential to make the new mortgage go forward. Only a principal reduction and refi can "solve" that little problemo. Of course this could also happen but to date, vested lender interests have passed.

A passing comment on these fiscal musings. If any thing can happen is allowed free rein in the discussion, the discussion soon borders on Intelligent Design being applied to economics.

vinoveri
01-05-09, 10:30 PM
Mortgages could be fixed by the Feds at 0% with 0 points and it wouldn't help existing mortgage holders in houses that are underwater. None of these people can come up with the cash differential to make the new mortgage go forward. Only a principal reduction and refi can "solve" that little problemo. Of course this could also happen but to date, vested lender interests have passed.

A passing comment on these fiscal musings. If any thing can happen is allowed free rein in the discussion, the discussion soon borders on Intelligent Design being applied to economics.

Perhaps some of the $8Trillion promised by the Fed and Co. (and perhaps more to come) will find its way "magically" taking the place of owed principal?:( Afterall we are witnessing a great transfer of private debt onto the public and where it is to stop is anyone's guess - which I suppose was a point I was trying to make. Everything will "work" its way out and the public debt will be $30T. Hey, the debt is already over $10T and the bond holders just keep sucking it up. I don't understand it.

Couldn't agree more with your point on how the discussion can devolve once "anything can be done by the fed/gov" is invoked - but this is why these musings, IMO, ultimately become more and more speculation based on too many unknowns and what ifs (not that they're not interesting of course):)

I prefer "Self-serving Myopic Blunderers" to "Intelligent Designers" in the case of our current economic masters.

GRG55
01-06-09, 02:36 AM
I don't think that nominal home prices will go to the moon (again) for a very very long time. The rate of decline in home prices in bubble cities has been so rapid, it appears increasingly likely that they will overshoot to the underside. Perhaps you think they will then spring back up just as quickly, but I doubt it. Seems to me the only thing that would jack up nominal prices again would be revaluing the currency, as in lopping off a zero or two.

http://img71.imageshack.us/img71/5013/chartusa1900nominalss1.png (http://imageshack.us)

zoog's chart says it all - reversion to the mean, and probably by way of an oscillation excursion beyond it. The best the Fed and Treasury can do is drag out the decline process as long as possible, spreading the pain out over time, and hoping all the while to find some way to boost nominal incomes to ease the funding demands on US "homeowners".

With the death of the FIRE economy comes the death of asset based lending, and levered asset bubbles...including real estate almost everywhere around the world. Welcome to the age where a house is something you live in.

vinoveri
01-06-09, 10:09 AM
With the death of the FIRE economy comes the death of asset based lending, and levered asset bubbles...including real estate almost everywhere around the world. Welcome to the age where a house is something you live in.

Will start to believe this as the evidence mounts. To me so far, it seems like the FIRE economy, or perhaps its mutating relative, although dormant, is only down for the count.

The Fed now lending to Hedge funds? http://www.ft.com/cms/s/0/989db158-ce30-11dd-8b30-000077b07658.html?nclick_check=1.

Why or how do you think this will end? How many undiscovered "Bernie Madoffs" are going to get access to Fed money? Incredible! Where's the outrage?

The FIRE economy is surely a formidable adversary not to be underestimated.
What's frustrating to me is that the powers that be, instead of slaying this beast, are shielding it, feeding it, and protecting it while it metamorphs into something else (probably worse).

FRED
01-06-09, 11:44 AM
I'm curious what happens to house prices if/when the poom happens? If there were to be massive inflation would the prices of real estate fly through the roof?

Can anyone point me to somewhere in the itulip theory that points or talks to what happens to house prices/real estate with regard to other asset classes such as gold (as ive been reading gold will go to 2-5K)....

-Karim0028

Our position on the housing bubble since 2002 is that, like all bubbles, once it collapses it will not "come back" for at least a generation because:


There will be tremendous economic associated with residential real estate.
The fallacies upon which the housing booms since 1980 were built -- with the 2002 to 2006 housing bubble the '"grand finale" -- will dissipate with the collapse of the bubble over time. By 2012 no one will regard a house is an investment.
Lack of sources of affordable financing. Mortgages, no longer subsidized by the government through tax policy and government backing of mortgages, will lead to market rates for mortgages as in other countries, that is, expensive.

jimmygu3
01-06-09, 12:04 PM
Beautifully asked. It is the very question I have as well. I have a Palm Desert, CA (2nd) home that I need 215K to cut even that is valued to sell at 260K in today's market. I wonder if I should cut and run (sell) rather than play land lord and run a rent deficit for the next months to years. Opinions from iTulips please

Sell it. If you have any debt use the 45k to pay it off. Put the remainder into CDs, short term T-bills and PMs. Let somebody else run the rent deficit for a few years. Buy back in when the market has cleared and you are relatively certain the bottom has passed. Only buy rental property with positive cash flow. JMHO.

Jimmy

GRG55
01-06-09, 01:48 PM
Will start to believe this as the evidence mounts. To me so far, it seems like the FIRE economy, or perhaps its mutating relative, although dormant, is only down for the count.

The Fed now lending to Hedge funds? http://www.ft.com/cms/s/0/989db158-ce30-11dd-8b30-000077b07658.html?nclick_check=1.

Why or how do you think this will end? How many undiscovered "Bernie Madoffs" are going to get access to Fed money? Incredible! Where's the outrage?

The FIRE economy is surely a formidable adversary not to be underestimated.
What's frustrating to me is that the powers that be, instead of slaying this beast, are shielding it, feeding it, and protecting it while it metamorphs into something else (probably worse).

I hear you vinoveri. I am also mystified by the lack of outrage. Is it because people do not understand? Or possibly they do understand but are in stunned disbelief? Or maybe it's just bailout fatigue? Some combination of all of these, plus some other factors? Who knows.

Regardless, I am of the view that all the efforts will ultimately fail. But not before they take down the global economy several big notches first, and not before the ROW decides its had enough of US economic hegemony. Japan's pain is now finally becoming so acute that even it may decide it wants to "renegotiate" and reduce the price it pays for US military protection. THese things all take time...;)

hoodoo
01-06-09, 02:08 PM
What about the huge mass of what appears to be "dark real estate"? In bubble areas there seems to be an unprecedented amount of housing stock awaiting liquidation. Unlike the acres of cars parked in Long Beach, it seems many homes have "disappeared" from the market.

Several months ago there were over 250 homes in various states of foreclosure as reported by Foreclosure radar, the web service that was started by one of EJ's colleagues. Today the same search only lists 40 homes even though I know that most of the homes that were previously listed are still empty. Now, some of that "trimming" of the listings is probably related to the hold on forclosure proceedings. But even the bank owned listings have been trimmed dramatically - and not due to sales from what I can tell. In my neighborhood, there are scores of homes that have for sale signs in the front yard, a lock box on the door, but do not appear on the MLS. There are also a number of homes that have been vacant for at least six months with no for sale sign, MLS listing, or foreclosure listing.

I'm sure the hope is to dribble these homes back onto the market as things stablize but it seems a fools game. I can't see how housing in southern california will even be able to squeak out nominal price stability over the next three years.

Hoo

Gnosis
01-06-09, 02:49 PM
Thanks Jimmy.
I believe this is good advice.

SeanO
01-06-09, 03:05 PM
Several months ago there were over 250 homes in various states of foreclosure as reported by Foreclosure radar, the web service that was started by one of EJ's colleagues. Today the same search only lists 40 homes even though I know that most of the homes that were previously listed are still empty. Now, some of that "trimming" of the listings is probably related to the hold on forclosure proceedings. But even the bank owned listings have been trimmed dramatically - and not due to sales from what I can tell.

You are right, the temporary delay created by CA Senate Bill is at least partially to blame, we saw huge decreases in the number of new foreclosures in September and October - though we see those numbers climbing back up now.

The other things we are seeing is a number of lenders starting to aggressively pursue loan modifications. Like the moratoriums we expect this to only create a short term impact given that current modifications are focused on payment rather than principal. Essentially the banks are making payments affordable through short term teaser rates (same thing that got us here in the first place), but still leaving the owner a prisoner of debt. We have believed from the beginning this would only result in delaying the foreclosure... which appears to be coming true (http://online.wsj.com/article/SB122875409101488333.html).

Finally, with regard to bank owned property inventories, note that by default ForeclosureRadar drops bank owned properties from its standard search results after 120 days - without regard to whether it has been resold or not. You an find older properties by checking the "Include Historical Records" checkbox under Foreclosure Details. We are also working to add the data necessary to determine whether these properties have been resold or not. We have not found another reliable source for this metric to use in the mean time, though we think maybe as much as 1/3 to 1/2 of the 333,952 California properties that banks have taken back from 2007 to 2008 remain on their books.

Be sure to check out our CA Foreclosure Report (http://www.foreclosureradar.com/ca-foreclosure-report.php) for our take on the foreclosure happenings each month.

Best,
Sean

karim0028
01-06-09, 03:33 PM
Our position on the housing bubble since 2002 is that, like all bubbles, once it collapses it will not "come back" for at least a generation because:


There will be tremendous economic associated with residential real estate.
The fallacies upon which the housing booms since 1980 were built -- with the 2002 to 2006 housing bubble the '"grand finale" -- will dissipate with the collapse of the bubble over time. By 2012 no one will regard a house is an investment.
Lack of sources of affordable financing. Mortgages, no longer subsidized by the government through tax policy and government backing of mortgages, will lead to market rates for mortgages as in other countries, that is, expensive.


Fred,

So does this mean that even with a hyperinflationary scenario that IMHO i believe itulip describes (if im mistaken please correct me) houses would still be getting cheaper in nominal dollar terms? That would mean that a car that used to be 20K could go to 50K in cheaper dollars but a house would still continue declining to ~100K or less?


Then in that scenario, would it be good to be a landlord? Would rents decrease accordingly?

I've been contemplating this since being tuned to itulip about a year and a half ago.... Honestly, i love reading and studying history and i cant find a time in history where its ever bad to be a landowner (and i dont mean a debt slave who thinks he owns) unless your hiding from the church or king or in this case where your drowning in mortgage debt..... Obviously, im talking about also keeping in mind the rent to purchase and cap rate, etc....

iTulip mentions the end of the FIRE economy with which i whole heartedly agree, but i still believe people will need places to live, so then how do the two realities jive together..... House prices decrease bc there is no bank willing to lend to J6P and rents stay the same (an assumption) or if they decrease that will also push house prices down (rent to purchase ratios and all)..

Doesnt it make sense that if house prices decline, rents also decline? I guess, im asking if it still makes sense at this point to own cash flowing properties?

P.S. I feel my comment is not very clear, but im not quite sure how to word it differently, so please forgive if its not that clear... But, i guess im just trying to understand where land ownership goes from here as historically land ownership has always constituted wealth until the FIRE economy bastardized it and drove prices to rent ratios out of whack....

SeanO
01-06-09, 03:44 PM
The one thing I'd like to add to Fred's points is that most people buy homes (and cars!) based on payment (or "affordability") NOT price. So determining what will happen to prices in your neck of the woods requires thinking through three things:

1. Where prices are today vs. incomes and loan terms.
2. Where do you think incomes are headed.
3. Where do you think loan terms are headed.

Loan terms tend to be national, but average incomes, and current price levels vary a great deal - even between neighborhoods within a city.

If you look at the case shiller index (or median prices generally) from 2000 to today, the increase and subsequent decrease in price can be completely explained by income and lending terms (at least in CA where I've studied it).

From 2000 to 2003 we saw drops in interest rate as Greenspan pushed rates down after the tech bubble - lower rates mean one can "afford" a higher price for a given payment. From 2003 to 2005 the increase in price can be explained by the popularity of the 5/1 interest only ARM, and from 2005 to 2007 the increase can be explained by the pay option ARM with initial teaser rates. Similarly the decline from August 2007 to today can be explained by the removal of loan products.

If you take CA median household incomes over time, and calculate price based on the popularly aggressive loan product of that time, you'll find that it almost perfectly matches median home price over the entire period.

Take median income for your neighborhood, calculate the price that income can afford using current Freddie/Fannie guidelines, and compare to median prices. It will give you a VERY good idea of how much prices still need to correct in your area.

Sean

hoodoo
01-06-09, 06:26 PM
Outstanding update - I was not aware of the option to examine historical records. That being said your estimate of properties being held by banks confirms what I see around me. What I've found curious is the fact that the properties "go dark", nobody lives there, they aren't offered for sale, and the tax records often seem to still point to the former owners. Clearly the system must be completely plugged up.

I think it is important to remind people that For Sale signs and MLS listings are only a part of the available housing stock.

Thanks,

Hoo




You are right, the temporary delay created by CA Senate Bill is at least partially to blame, we saw huge decreases in the number of new foreclosures in September and October - though we see those numbers climbing back up now.

The other things we are seeing is a number of lenders starting to aggressively pursue loan modifications. Like the moratoriums we expect this to only create a short term impact given that current modifications are focused on payment rather than principal. Essentially the banks are making payments affordable through short term teaser rates (same thing that got us here in the first place), but still leaving the owner a prisoner of debt. We have believed from the beginning this would only result in delaying the foreclosure... which appears to be coming true (http://online.wsj.com/article/SB122875409101488333.html).

Finally, with regard to bank owned property inventories, note that by default ForeclosureRadar drops bank owned properties from its standard search results after 120 days - without regard to whether it has been resold or not. You an find older properties by checking the "Include Historical Records" checkbox under Foreclosure Details. We are also working to add the data necessary to determine whether these properties have been resold or not. We have not found another reliable source for this metric to use in the mean time, though we think maybe as much as 1/3 to 1/2 of the 333,952 California properties that banks have taken back from 2007 to 2008 remain on their books.

Be sure to check out our CA Foreclosure Report (http://www.foreclosureradar.com/ca-foreclosure-report.php) for our take on the foreclosure happenings each month.

Best,
Sean

vanvaley1
01-06-09, 06:29 PM
I don't see a short term solution to the real estate 'problem'. If there's an intent to reestablish a viable real estate market a couple of things need to be done. The obvious ones are reduce rates and reduce inventory. Don't think that can be done with conventional thinking bout short term solutions. Well, not without scaring the beejeebers outta everybody from bankers, taxpayers, buyers, sellers, etc. A long term, conprehensive, and thoughtful program is needed to solve the real estate 'riddle' considering the fiscal and financial mess we're in a this time. This is beyond my paygrade and experience though an owner of free and clear small apartment units and one residential rental, a Realtor for a number of years, and as about conservative an investor as ya can find:If I thought I could bury my assets in the backyard with full security I'd do so...but our Rott passed away recently...so that's out.

But I'll throw out some ideas for criticism and/or approval.
Reduce Inventory: If 'unsafe' housing is vacated and contains substantial hazards such a lead based paint, asbestos, mold, etc. demolish it. Construct parks, local solar or whatever energy conservating facilities that might be applicable, etc. Banks get their writeoffs, folks get employeed, and more deleveraging occurs. Some banks go under...the more 'zealous' ones.

Secondly, vacated 'safe' housing is turned over to public entities such as school districts, fire and police departments, etc. of state, county, city, and US government where applicable with the proviso that housing must be kept in good condition and rented to district employees at below market rental rates and housing must be kept for seven to ten years before financing or selling subject property. This has to be staggered in some manner so 'tons' of local, state, and city properties don't hit the market in seven years. Benefits are a reduced housing inventory, a source of 'known' income is established for an agency, government balance sheets look better, employee benefits look better with low rental charges thus allowing increase in consumer saving and/or future spending for cars, houses, etc., stable income for said agencies, etc.

When property sells a certain amount goes towards paying down government 'gift' to local, state, city, etc. agencies of original property from closed or participating banks.

Remodification of loans:

Reduced principal is good idea. 'Free' moral hazard ain't. Reduced principal picked up by government and established in account to be repaided when housing increases in value and sells at some future date. Remodification loans can have stable fixed rate with proviso of extending loan payments as rates increase up to a certain limit...say 10% cap. Something similar to a Calvet loan program. Folks have some freed up capital for consumption or savings or paying down debt or etc. etc. etc.

This is getting too long. Apologies. I'm for moderately and carefully reflating real estate market. Not a big fan of 'laissez-faire' free market force arguments as I saw what it did to folks in foreclosure during the 1989 to 1995 real estate 'slump' in California and what it's doing to folks now. Even less of a fan of giving 'winfalls' to obscene wealthy individuals, funds, corporations, etc. as in RTC days.There's got to be a comprehensive plan to reestablish a sensible value to housing in a judious manner to the public's benefit.

SeanO
01-06-09, 07:13 PM
Outstanding update - I was not aware of the option to examine historical records. That being said your estimate of properties being held by banks confirms what I see around me. What I've found curious is the fact that the properties "go dark", nobody lives there, they aren't offered for sale, and the tax records often seem to still point to the former owners. Clearly the system must be completely plugged up.

I think it is important to remind people that For Sale signs and MLS listings are only a part of the available housing stock.


Yes. Note that it can take assessor's offices months to update their records, and then some online sources for tax records are only updated once a year.

A couple of large servicers have told me that they are holding some inventory in an effort to maximize price. Basically their concern is that if they list too many properties at once they will get less for everything. Same concern about selling in bulk. They may be willing to sell a $100M pool for $.60 on the dollar, but are worried the buyer will market it for $.70 and bring down prices on the rest of the their holdings. Interesting times for sure.

Sean

grapejelly
01-06-09, 08:06 PM
Today there are many tranches of real estate waiting to be sold:

1. Sellers with equity have been holding off selling, for things to "bounce back." Eventually they will get tired of their situation and sell at whatever price.

2. Banks have been hoarding REOs waiting for a bailout.

3. Banks have been NOT foreclosing on people who aren't paying, waiting for a bailout.

4. Loan mods are being done with non-creditworthy borrowers who don't have a prayer of meeting the newly modified loan's commitments. These are people living in houses clearly beyond their means.

Principal reductions would mean trillions of real losses. It would mean moral hazard bigtime. There is a move afoot to provide for principal reductions in chapter 13 bankruptcy and I think this will win passage this year, 2009. That will usher in principal reductions.

5. There are an unprecedented, record number of vacant houses that will have to be disposed of.

6. Builders continue churning out new houses.

7. There are several years of inventory already on the market in most markets.

8. Banks are reverting to tighter lending standards, and lower appraisals, thus killing a lot of potential deals.

So, with all the above, I don't see real estate coming back even in nominal terms for a number of years.

cbr
01-13-09, 03:15 PM
Any stats/sources on regional vacant/inventory? That would be telling on the look at real property as rental income investment.

If you can buy real property on a good fixed rate loan during the Ka, , particularly by a small or regional mid size lender, would you expect any dirty 'tricks' to deal with inflation from the lender's perspective during the term of the loan? If not, and you can rent it successfully during the Poom, if rents (i.e. incomes) can even come close to inflation rates, rental real property should be as good an investment as any on the planet. I dont know of many other income streams that can outpace their cost basis that way.

Andreuccio
01-13-09, 03:40 PM
Thanks Jimmy.
I believe this is good advice.

I would do the same as Jimmy. If I had a rental unit that:

1. Had positive equity
2. Would rent with negative cash-flow, and
3. I actually thought would sell

I'd have sold yesterday.

Andreuccio
01-13-09, 03:48 PM
zoog's chart says it all - reversion to the mean, and probably by way of an oscillation excursion beyond it.

I wonder what the mean actually is, though. Looking at the chart, housing prices seem to follow the CPI pretty closely until the late 1980's, then they separate and housing starts to take off. How far off the mean would housing be if it were compared with actual inflation rather than the CPI?

GRG55
01-13-09, 11:00 PM
I wonder what the mean actually is, though. Looking at the chart, housing prices seem to follow the CPI pretty closely until the late 1980's, then they separate and housing starts to take off. How far off the mean would housing be if it were compared with actual inflation rather than the CPI?

Simple usually works best. Best fits straight line through the multi-decade price data pre-FIRE economy is probably plenty good enough.

zoog
01-14-09, 12:20 AM
I wonder what the mean actually is, though. Looking at the chart, housing prices seem to follow the CPI pretty closely until the late 1980's, then they separate and housing starts to take off. How far off the mean would housing be if it were compared with actual inflation rather than the CPI?


Simple usually works best. Best fits straight line through the multi-decade price data pre-FIRE economy is probably plenty good enough.

Or the more complicated way...;) Using the adjustment factors (http://www.nowandfutures.com/cpi_lie.html#adjust) on Bart's website, I've plotted what I call "Estimated True Inflation". Bart usually refers to his version as "CPI + lies", and notes that it does not include all of the adjustments from John Williams' Shadowstats. It is my opinion that in this context the gap between official CPI and anyone's adjusted version of inflation does not really make much difference in regards to housing prices.

http://img150.imageshack.us/img150/8231/chartusa1900nominaltv1.png (http://imageshack.us)

http://img220.imageshack.us/img220/6761/chartusa1900realfc4.png (http://imageshack.us)

Andreuccio
01-14-09, 01:23 PM
Or the more complicated way...;) Using the adjustment factors (http://www.nowandfutures.com/cpi_lie.html#adjust) on Bart's website, I've plotted what I call "Estimated True Inflation". Bart usually refers to his version as "CPI + lies", and notes that it does not include all of the adjustments from John Williams' Shadowstats. It is my opinion that in this context the gap between official CPI and anyone's adjusted version of inflation does not really make much difference in regards to housing prices.

http://img150.imageshack.us/img150/8231/chartusa1900nominaltv1.png (http://imageshack.us)

http://img220.imageshack.us/img220/6761/chartusa1900realfc4.png (http://imageshack.us)

Surprising. I would have thought there would be a much bigger difference between CPI and "true" inflation. I'd like to take a closer look at the original data. A couple of percent per year over a 20 or 30 year period should make a much bigger difference than that shown on the graph.


Simple usually works best. Best fits straight line through the multi-decade price data pre-FIRE economy is probably plenty good enough.

I disagree in principle, although if Zoog's graph is correct, it looks like you're right in practice. If the currency is debased, it's not unreasonable to expect housing prices to increase at the same rate as all other items, independent of whatever rate housing increased at previously. In this case, I'm not sure at what point in time the FIRE economy is considered to have started, but if we merely extend the line following the Case-Shiller Index from 1900 to 1975, it would give us a much lower price for housing than what would be reasonable given the high rate of overall inflation, (CPI or otherwise), post 1975. Also, using historical data for the value of the dollar in the ratio assumes that the dollar's value will continue to change at the same rate as it has in the past.

Thinking about all this, I'd be curious to see housing prices expressed in relationship to something other than dollars. I know I've seen graphs like that around here. Charles McKay did one with housing/gold, and I imagine either Finster or Bart, or both, also have similar graphs. Time to do some digging.

labasta
02-01-09, 09:11 PM
I'm with Grapejelly and Fred on this. 2011 looks about right for prices to bottom nominally. I'd expect an overshoot too.

I think the poom stage is initiated with a weak dollar. The government has to raise interest rates to keep the same amount of foreign money flowing in.

So, it looks like the amount someone can borrow will be restricted not just by the crap situation of the banks, but also high interest rates. So, I suppose high inflation is cancelled out by high interest rates.

My indication of a bottom would be the restrictivesness of lending by the banks. If you think the restrictiveness has bottomed out, or even getting a touch better (over at least a period of 6 months to a year in case it's false) then jump in for a purchase (if you can afford it in what will be a very crappy employment situation).

I wouldn't be too worried about finding the absolute bottom. I would think about your own situation first in terms of affordability. If you are a cash buyer then I suppose this wouldn't matter much, unless you might need the cash if your income disappeared.

My concern with the Kapoom theory, is that the government offering higher interest rates to keep foreign lending money flowing in might not be enough, as the money might not exist in the world in the first place. Creditor nations might just not have the money any more as their income is gone due to the US's bad economy. Unless, the creditors print money and inflate their own currency too, then I can see kapoom being the logical conclusion.

World Traveler
02-01-09, 11:57 PM
I graduated from college in 1970 and so was a young working adult in the 1970's. I was not very interested in finance or economics at the time, so I can only speak of what I remember about the world around me.

What I remember from the second half of the 1970's, when inflation really started getting out of control, was that people mistrusted paper assets - cash, stocks, bonds, etc.

Only hard, physical assets seemed to hold their value was the common wisdom of the time. And that was what people wanted - gold, silver, houses, commodities.

The interest rates paid on the "non-hard" assets, whether savings at the banks or bonds, did not match the actual inflation rate and most people recognized that.

I had a lot of friends in late '70's who bought a bigger or even more houses than they needed, because the common wisdom was that you would repay the debt in inflation-debased dollars and make your money that way...cheaper dollars paying for a hard asset that would go up in price.

Of course, the rug was pulled out from under them when the Federal Reserve pushed up interest rates to incredible heights in the early 1980's, to break the back of inflation.

It turned out that the perceived best investment strategies of the latter '70's were nullified in the early '80's, in a way that the majority of the population did not expect.

That's why I think iTulip's strategy of sitting on the sidelines right now is the best. It's just too murky right now to make long-term bets on inflation and interest rates at this moment.