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I start this Quick Comment with a short trip down memory lane.
The mystery to me will always be the repetition of the same mistakes. If we hadn't just experienced a collapsed stock market bubble, you could chalk it up to the fact that the experience of suffering by the victims of a severe bubble collapse rarely span a generation, that the grandchildren of the generation that suffered before were doomed to repeat the errors of that older generation. But the stock market bubble was tough on a lot of people, so you'd think the population in general would be more sensitive to the signs. Likely the explanation is that the housing bubble appeared so quickly after the collapse of the stock market bubble, and the stock market so quickly re-inflated with rate cuts and deficit spending that the lesson never sank in.
In any case, no need to re-invent the wheel to understand where we go from here in the housing bubble. The dynamics of a collapsing speculative bubble was stated elequently in John Kenneth Galbraith's, The Great Crash (Houghton Mifflin Company, 1954):
What's the federal government going to give us this time? More tax cuts? More deficit spending? Seems like those bullets have been spent. What happens when you cut interest rates when oil is trading at $75 versus $20 as in 2001 and you have wars raging across the Middle East?
Fasten your seat belts. It's going to be a weird ride.
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Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
Dancing, Booze, and Overpriced Houses
The housing bubble is reaching absurd, bacchanalian heights, which can only mean one thing: it's getting ready to collapse.
06.01.05 by Eric Janszen - AlwaysOn Network
The housing bubble is reaching absurd, bacchanalian heights, which can only mean one thing: it's getting ready to collapse.
06.01.05 by Eric Janszen - AlwaysOn Network
MIAMI, May 22—In the last month alone, you could salsa with dancers in fringed hot pants at Aqua, hear a drag queen D.J. at Cynergi or watch stunt men ricochet off a trampoline at Soleil.
Nightclubs? No. Carnival acts? Not quite.
These were launch parties for condominium projects, one of the stranger forms of nightlife in a city obsessed with real estate. Alcohol and music were abundant, but so were sales agents and brochures with statements like, "It is the impeccable aesthetic of textures and calming shades—limestone and blue marble—that further distinguish these voluminous spaces."
—Salsa Dancers and Stunt Men? Must Be a Miami Condo Project, The New York Times (registration required)
That's from a piece I wrote for the AlwaysOn Network a little over a year ago. In an earlier piece in late 2004, my research led me to conclude that housing bubbles, unlike stock market bubbles, don't crash like stocks but rather seize up:Nightclubs? No. Carnival acts? Not quite.
These were launch parties for condominium projects, one of the stranger forms of nightlife in a city obsessed with real estate. Alcohol and music were abundant, but so were sales agents and brochures with statements like, "It is the impeccable aesthetic of textures and calming shades—limestone and blue marble—that further distinguish these voluminous spaces."
—Salsa Dancers and Stunt Men? Must Be a Miami Condo Project, The New York Times (registration required)
Housing Bubbles Are Not Like Stock Bubbles
Unlike stock market bubbles, real estate bubbles don't pop. Collapsing stock market bubbles are characterized by a sudden collapse in prices because stock markets are highly liquid. You see huge volumes of transactions at ever lower prices during a stock market collapse. Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear. The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they needed to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about NO ONE shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak.
But can't buyers be enticed by declining prices, by bargain hunting, you ask? No. Once housing sale transactions suddenly fall from, say, several hundred a month in a large community to, say, one or two a month, this creates fear and loathing about prices. Long periods of time pass when there are no transactions at all. Think of it this way. What's the comparable on your 3000 square foot home in San Mateo when the last sale was, say, seven months ago? Is it 10% less than the last sale of a similar home on the area? 30% less? This happened in Japan, and prices nationally are still more than 60% below peak prices in 1992, where real estate prices continued to climb for several years after their stock market bubble popped. Sound familiar?
Judging by the most recent entry on this thread over on Mish's Global Economic Trend Analysis, we've hit the seizure point, at least in Atlanta, Georgia. Lights Out in Georgia is the diary of a couple who are Realtors and associate brokers. The series starts out as follows:Unlike stock market bubbles, real estate bubbles don't pop. Collapsing stock market bubbles are characterized by a sudden collapse in prices because stock markets are highly liquid. You see huge volumes of transactions at ever lower prices during a stock market collapse. Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear. The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they needed to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about NO ONE shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak.
But can't buyers be enticed by declining prices, by bargain hunting, you ask? No. Once housing sale transactions suddenly fall from, say, several hundred a month in a large community to, say, one or two a month, this creates fear and loathing about prices. Long periods of time pass when there are no transactions at all. Think of it this way. What's the comparable on your 3000 square foot home in San Mateo when the last sale was, say, seven months ago? Is it 10% less than the last sale of a similar home on the area? 30% less? This happened in Japan, and prices nationally are still more than 60% below peak prices in 1992, where real estate prices continued to climb for several years after their stock market bubble popped. Sound familiar?
2006-01-04
Many of you know by now that my wife and I are both Realtors and associate brokers. We live and work north of Atlanta in the suburbs of Alpharetta and Roswell. I made the point in a post last month that I have always thought that our business gives us some unique insights into the economy, not just here in Atlanta, but across the country.
We are seeing an extremely high level of relocation activity. Our business last year was very solid, we closed twenty six transactions. So far this year, days into the year, we have two transactions pending, booked in the fourth quarter, plus twenty five prospects. If only two thirds of those prospects close, then we already have eighteen or so deals. They are evenly split, buyers and sellers, but much more importantly, nineteen involve relocations. This is a very high level of relocation activity, the highest we have seen in years.
More relocation prospects than any January in memory. The economy remains very strong.
Mish and I would seem to have very different points of view on what 2006 holds in store. I am basing my forecast on what I am seeing, and what I am seeing is a strong economy.
There will be no recession in 2006.
There are many posts along the way as the couple experiences the "cooling" real estate market. Fast forward to the most recent post:Many of you know by now that my wife and I are both Realtors and associate brokers. We live and work north of Atlanta in the suburbs of Alpharetta and Roswell. I made the point in a post last month that I have always thought that our business gives us some unique insights into the economy, not just here in Atlanta, but across the country.
We are seeing an extremely high level of relocation activity. Our business last year was very solid, we closed twenty six transactions. So far this year, days into the year, we have two transactions pending, booked in the fourth quarter, plus twenty five prospects. If only two thirds of those prospects close, then we already have eighteen or so deals. They are evenly split, buyers and sellers, but much more importantly, nineteen involve relocations. This is a very high level of relocation activity, the highest we have seen in years.
More relocation prospects than any January in memory. The economy remains very strong.
Mish and I would seem to have very different points of view on what 2006 holds in store. I am basing my forecast on what I am seeing, and what I am seeing is a strong economy.
There will be no recession in 2006.
2006-07-20
Most of the regulars here know that my wife and I are a Realtor team associated with one of the major national firms here on Atlanta's north side, out in Roswell and Alpharetta. It's been a “character building year” as another agent in our office put it the other day. What makes it more stunning, at least to me, is that it started out so well. We ended the first quarter with nine deals pending or closed, which is a very solid start. Then we hit a brick wall with only three deals in the second quarter and that would make it our worst second quarter ever in our twelve years.
Then it got worse. Normally, over the years, about one in fifteen deals fall out, that is, they fail to close. Usually it's over the inspection contingency amendment but not always. At any rate, two of our three second quarter contracts failed to close. Unbelievably we booked and closed only one contract in the second quarter. So here we are, July 20th, with only ten deals for the year. What a mess.
How those two contracts failed just might tell a story about this years' market and the economy in general. First, one of them was indeed over the inspection amendment. Most of you understand that after going under contract, the buyer is entitled to have a qualified home inspector do an inspection. The buyer then presents a copy of the inspection to the seller along with an amendment to the contract asking for the repair of defects affecting safety or the structural integrity of the home. In this instance, the buyer went far beyond that, asking for, at least in my opinion, cosmetic items and home improvements. Our sellers' response, I thought, was more than fair, but the buyer would not yield. Normally we can work these differences out but not this time. Looking back, it is clear that the buyer was determined to wring additional concessions out of the seller or not close. We had a failed agreement and both parties signed a termination and release as required. That listing is back on the market.
Then the other failed contract was even more unusual. We had been working with relocation buyers from Cincinnati for several months. We found them a great house and went under contract. Ten days before closing they called to say they had decided they did not want to move. [Instead] he is leaving the company [that was] trying to move him to Atlanta. My take on this is he was afraid they would move him down here and then let him go. His company is facing a management reshuffle. But, who knows? At any rate, it cost him $5500, his forfeited earnest money.
So here we are with ten deals and needing a total of about twenty to meet our cash flow needs; personal and business plus taxes. The last year we failed to “make a living” so to speak in real estate was about 1994. Without a strong finish we just may be looking at that again. What are our chances of pulling it out? It's still possible. We have several buyer prospects plus we have ten listings and listings are the life blood of any real estate business. We will, with certainty, get one more listing by month's end. On the other hand, we have a listing that expires at midnight Monday and we don't expect them to renew. They have had two lowball offers and have refused both. My take is that they can't reduce without going under water.
What do you do if you owe more on your home than you can sell it for? Apparently, you just decide to sit on it and hope for a better market, at least for now.
Yes, sadly, sit they will. Most of the regulars here know that my wife and I are a Realtor team associated with one of the major national firms here on Atlanta's north side, out in Roswell and Alpharetta. It's been a “character building year” as another agent in our office put it the other day. What makes it more stunning, at least to me, is that it started out so well. We ended the first quarter with nine deals pending or closed, which is a very solid start. Then we hit a brick wall with only three deals in the second quarter and that would make it our worst second quarter ever in our twelve years.
Then it got worse. Normally, over the years, about one in fifteen deals fall out, that is, they fail to close. Usually it's over the inspection contingency amendment but not always. At any rate, two of our three second quarter contracts failed to close. Unbelievably we booked and closed only one contract in the second quarter. So here we are, July 20th, with only ten deals for the year. What a mess.
How those two contracts failed just might tell a story about this years' market and the economy in general. First, one of them was indeed over the inspection amendment. Most of you understand that after going under contract, the buyer is entitled to have a qualified home inspector do an inspection. The buyer then presents a copy of the inspection to the seller along with an amendment to the contract asking for the repair of defects affecting safety or the structural integrity of the home. In this instance, the buyer went far beyond that, asking for, at least in my opinion, cosmetic items and home improvements. Our sellers' response, I thought, was more than fair, but the buyer would not yield. Normally we can work these differences out but not this time. Looking back, it is clear that the buyer was determined to wring additional concessions out of the seller or not close. We had a failed agreement and both parties signed a termination and release as required. That listing is back on the market.
Then the other failed contract was even more unusual. We had been working with relocation buyers from Cincinnati for several months. We found them a great house and went under contract. Ten days before closing they called to say they had decided they did not want to move. [Instead] he is leaving the company [that was] trying to move him to Atlanta. My take on this is he was afraid they would move him down here and then let him go. His company is facing a management reshuffle. But, who knows? At any rate, it cost him $5500, his forfeited earnest money.
So here we are with ten deals and needing a total of about twenty to meet our cash flow needs; personal and business plus taxes. The last year we failed to “make a living” so to speak in real estate was about 1994. Without a strong finish we just may be looking at that again. What are our chances of pulling it out? It's still possible. We have several buyer prospects plus we have ten listings and listings are the life blood of any real estate business. We will, with certainty, get one more listing by month's end. On the other hand, we have a listing that expires at midnight Monday and we don't expect them to renew. They have had two lowball offers and have refused both. My take is that they can't reduce without going under water.
What do you do if you owe more on your home than you can sell it for? Apparently, you just decide to sit on it and hope for a better market, at least for now.
The mystery to me will always be the repetition of the same mistakes. If we hadn't just experienced a collapsed stock market bubble, you could chalk it up to the fact that the experience of suffering by the victims of a severe bubble collapse rarely span a generation, that the grandchildren of the generation that suffered before were doomed to repeat the errors of that older generation. But the stock market bubble was tough on a lot of people, so you'd think the population in general would be more sensitive to the signs. Likely the explanation is that the housing bubble appeared so quickly after the collapse of the stock market bubble, and the stock market so quickly re-inflated with rate cuts and deficit spending that the lesson never sank in.
In any case, no need to re-invent the wheel to understand where we go from here in the housing bubble. The dynamics of a collapsing speculative bubble was stated elequently in John Kenneth Galbraith's, The Great Crash (Houghton Mifflin Company, 1954):
From the foregoing it follows that the crash did not come—as some have suggested—because the market suddenly became aware that a depression was in the offing. A depression, serious or otherwise, could not be foreseen when the market fell. There is still the possibility that the downturn in the indexes frightened the speculators and led them to unload their stocks, and so punctured the bubble that in any case had to be punctured some day. This is more plausible. Some people who were watching the indexes may have been persuaded by this intelligence to sell, and others may have been encouraged to follow. This is not very important, for it is the nature of a speculative boom that almost anything can collapse it. Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising stock prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who will now change their minds and sell. Soon there will be margin calls, and still more will be forced to sell. So the bubble breaks.
Now the Giant Margin Call on Real Estate begins, followed by a ten to fifteen year correction. What's the federal government going to give us this time? More tax cuts? More deficit spending? Seems like those bullets have been spent. What happens when you cut interest rates when oil is trading at $75 versus $20 as in 2001 and you have wars raging across the Middle East?
Fasten your seat belts. It's going to be a weird ride.
Join our FREE Email Mailing List
Copyright © iTulip, Inc. 1998 - 2006 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer
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