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Getcher Predictions Here
Sunday, September 2, 2007
Some new conventional wisdom is forming around the future of the housing market. It ain't pretty.
But this shift in mood is inviting a range of people to speculate – er, let's try a better word – predict what's next.
Oh, predictions, what perils they hold. You may some day be held up as a soothsayer, or fool. Here are some of the most intriguing of the last week:
Housing prices down 7% in 2007, and 7% again in 2008 (using the Case-Shiller methodology, which differs from median-price measures). This one comes from Goldman Sachs researchers. They also put forth several specific estimates of declines in new housing construction and sales, existing-home sales, and residential investment (a broader economic measure – they are extremely pessimistic on this one.)
Housing prices down 16% in California, 20% adjusted for inflation, by 2009. This one is from Global Insight, a private forecasting firm (hey, it's what they do), via the New York Times last week. That story has gone pay now but this quickie references it.
Housing prices down 30-40%. This is courtesy of Edward Leamer, director of UCLA's Anderson Forecast. We assume his timeframe is peak-to-valley, no dates as of yet. His view, via Bloomberg:
Leamer said in an interview today [Aug. 31] at Jackson Hole that some former "hot markets,'' such as pockets of California, may see declines of 30 percent to 40 percent.Hey, now, we resemble that remark.
Housing prices could drop by half. This is part of a paper prepared by Robert Shiller (Yale economist who is credited with calling the dot-com bust) for the Kansas City Fed for this weekend's Jackson Hole conference. Click here to go to the conference website; the Shiller paper is the second on the list of downloads. Money quote:
[T]he examples we have of past cycles indicate that major declines in real home prices – even 50% declines in some places – are entirely possible going forward from today or from the not too distant future. Such price declines have happened before. In the last cycle in the United States... real home prices fell only 15% from the peak in the third quarter of 1989 to the fourth quarter of 1996, but some cities' real prices fell much more. Los Angeles real home prices fell 42% from the peak in December 1989 to the trough in March 1997.Best time to buy will be 2009. That's the considered opinion of SoCal RE investor Kyle Kazan, splashed all over Sunday's Daily Breeze. (How to describe an article that was literally teased above the masthead on Page 1?) The article is a must-read for its local angle and its explosion of descriptive language: "perfect storm," "death-spiral," and the enigmatic, "The South Bay is a microcosm unto itself."
Best time to buy will be 2010 or 2011. In perhaps the least analytical of our links, "The Great Loan Blog" says you'll be in the best position after pretty much all of the ARMs now in the pipeline have adjusted.
Notice how we've scrubbed any reference to a national economic recession. Those predictions are flying everywhere these days, too.
Housing decline and recession seem to be intertwined in many analysts' predictions, but we're focused on one issue here – local home values – as best they can be deduced from these big thoughts.
Surely there are contrary views...
UPDATE 9/4/07: The Robert Shiller paper is now quoted above and a link is provided to download the whole paper.
38 comments:
Here are my predictions for the comments to follow:
Someone will call a poster an "angry renter." Then someone else will call someone a "stupid flipper."
The comments will continue to flow this way--two camps disagreeing and flinging insults--until MB Confidential decides to stir the blog pot with another posting. Sigh. This used to be an interesting blog with substantive comments. Yes, unlike mine.
Well, it's a holiday weekend.
I share your hope for a return to substance.
The first 2 predictions are not necessarily in disagreement, since the timeframes of the second prediction are a bit longer (7% compounded over 2 years vs. 16% over 2+ years). Those predictions are also in line with the best time to buy is 2009 prediction. As for the UCLA prediction, I do not think he was talking about Manhattan Beach. If instead you apply those predictions to Riverside/San Bernardino, they may already be correct.
Funny how nobody really remembers three little words when things come tumbling down.
Location, Location, Location.
How old is that saying? How true is that saying.
Happy Labor Day.
Prediction: MBC will stay attached to its bearish bent way too long. Amid conflicting market signals and rising readership, MBC will be thoroughly invested in bearish psychology as the market bottoms in late 2008. Only after the market turn will it be realized that MBC was simply a one-trick pony unable or unwilling to recognize the dawn of a new cycle. Sometime in early 2010, as the up-cycle gathers strength, a disbelieving and mystified MBC will quietly discontinue service.
Hey contrarian, it's possible ;)
i wouldn't be surprised if the downcycle is far milder than anyone of us who spend time thinking about this realize.
the south bay is undergoing a secular change. i'd call it "gentrification", except for the fact that this was already a nice neighborhood. a more apt description is that we are witnessing the gradual closing of the "arbitrage" between south bay & west side home prices. when the construction on the 405 is finally completed this trend will likely accelerate.
the reality is that the marginal buyer today in manhattan & hermosa is someone who is considering a $3-4m house on the west side, *not* a $500-750k bungalow in torrance, lomita or north redondo. these are the types of people who buy $3M homes with movie theaters, $8M hill section estates, or the tear-down next door for $1.3M to turn it into a yard.
these buyers are going to dramatically change the face of the south bay. in fact, i bet that over the next few years we'll see a reversal of the trend to town homes & duplexes. the person who will be willing to pay the most for a 30x120 foot lot in the sand section will NOT be a builder who will create two "starter" homes for $1.5M, but a successful executive/entertainer/investor who wants to build a 4000+ sqft view house for > $4M.
it seems to me that instead of fighting this trend, we ought to be figuring out ways to profit from it. one of the most obvious places is commercial real estate (CRE). the quality of CRE in mb is below what you find in the nicer parts of LA. buying older commercial properties at 5-6% cap rates, renovating them, then re-leasing to higher end merchants seems to me to be a much better way to invest in the changing character of the area than buying a new residential construction at a 3% cap rate.
Taylor, very thoughtful, thanks. You're certainly reflecting what has already begun to happen over a decade or more. One should imagine trends to continue. A big question: Will rich people willfully overpay? They will if it's funny money to them.
As to commercial RE, excellent point. Sepulveda is such an ill-planned wasteland it's embarrassing. Downtown needs help too in spots (preferably without fires as a catalyst, boo hoo El Sombrero et al).
What was MB's profile without Metlox?
As a ten year mb home owner I think it's prudent to point out that MB will never be another Brentwood or even Santa Monica. To those who see numerous $4 million sales in this area, it is just not in the cards. That being said, MB has its own special qualities that make it a great place to live. At the end of the day, however, it is too close to Hawthorne, Lawndale, etc. to attract the amount of big earners that would be required to keep prices anywhere close to where they are now.
Proximity to poorer areas has not been a hindrance for the Golden Triangle area. I have seen many wealthy areas in close proximity to poorer areas in every major city. After all, you can't have wealthy estates without places nearby where all the help live.
I remember Hermosa and Manhattan in the late 70s and early 80s. The fundamental nature of the neighborhoods has changed and is continuing to change.
Seriously, everyone who thinks that Manhattan is going to turn into another Beverly Hills or Malibu needs to take a good, long look at the aborted construction on Highland a few doors down from Uncle Bills. That place has been a shambles for at least a year now, going on two.
Then take a good, long look across the street, at the old Good Stuff building that has only sporadic construction.
Then take a good, long look at the Old Venice / El Sombrero / Art Gallery building that burned down and hasn't had any real construction taken place.
Then look at the flattened Shell station on Sepulveda and Manhattan Beach Blvd, which has sat in a pile of rubble for months.
Then check out the old Beaches and Cream building, which has had its facade ripped out, and hasn't made a whole lot of progress recently.
Has it ever occurred to people that maybe, just maybe, the quality of life in town is actually dropping? There's already been one business vacate the Metlox, and it got taken over by a women's fashion boutique (shocking, no?). There are other vendors in the complex that are just hanging on.
There has been a huge, huge overestimation of the core financial strength of the town, and it's really starting to show up with the sort of construction blight that you'd expect in the 909.
Good point. Even in just the last 10 years there has been a fundamental value shift in MB that can't be ignored. Property values in MB have until recently lagged behind their true value. Not sure I get the proximity to Hawthorne or Lawndale argument, have you ever been to Palms or even SM by the 10?
You can hardly compare Palms to Lawndale. I love MB, but to think that it has any relation to the situation in Malibu or Laguna is just not true. These places are secluded from the "help." Pat, your commenst strike me as slightly racist. Not comfortable with your thought process at all.
If prices keep going up, that's great for me. However, the reality is that we're in store for a significant cut. I'll still be ahead of the game. But I wonder about the folks that have bought in the last 5-6 years.
Manhattan Beach owners may think of themselves as potentially shielded from substantial declines (30%) plus, but consider this.
San Marino is one of the top communities in Southern California: great public schools, very high personal income, beautiful old housing stock, etc.
Back in the housing slump of the 1990s, I knew a family that bought a four bedroom, 3500 square foot house in one of the prime neighborhoods in town. Paid over $1 million for it in 1989.
Went to refinance in 1995 to redo the kitchen, etc. Appraised value then was $650,000.
Now eventually they sold the house at the height of the last boom for for more than $1.8 million, but for a few years there things were pretty bad...
Anon 3:13, get some sleep (posting at 3:13 in the morning?). You just made the precise argument for buying instead of renting, i.e., you can't time the market but if you buy a home and live in it for an extended period of time, you will do very well when it comes time to sell. The only ones who really need to be able to read the real estate tea leaves are the speculators (short-term investors and builders) and those who are buying more house than they can truly afford.
And those that may have a shorter time horizon....say less than five years.
In my mind, that's a toss-up. It's too difficult (at least for me) to make a prediction about home prices five years from now. And, remember, there may be reasons unrelated to just the investment aspect that also come into play here. Regardless, I would think it unwise to buy now if you are planning to sell in just 2-3 years because of transaction costs (but if you can get a good deal in an A+ location, who knows?).
I got the Shiller paper and inserted a quote in the story; also provided a link for readers to download the paper.
Let's say for argument's sake, that we pick a 20% drop in price of homes by 2009 - a median value amongst robust predictions.
Let's do the arithmetic about how this translate to buying now vs. waiting two years:
On a typical 2.5 M home, a 20% drop is an outright savings of 500K (that is 5x the median income in MB), plus the additional savings of decreased property taxes by 1/5, which is payable indefinitely; translates to a savings of approx 65K in 10 years.
Mind you, money in the bank continues to earn interest in the meantime -- which has to be at least 20% of the total cost at 400K and 4% interest -- standard for tax fee munis, that is 32K in two years!
As many have stated, it is not possible to time the peak and trough of markets with any accuracy -- but we know with about as much certainty as the Sun will rise tomorrow that we are being hurled with increasing momentum into a down market for sometime to come, measured in YEARS, not days, weeks or months.
Extend this out to four years (typical of the periodicity of a downswing) and it's conceivable to put a 2x operator to this simple calculation!
The financial imperative here is clear: If you can, WAIT, rent/lease for now and save a bundle!
Anonymous 10:35: It used to be standard advice that it is hard to break even in a 5-year time frame, and to seriously consider renting if your time frame for ownership is less than 5 years.....heck, this is what my own realtor's have told me in the past.
With the current uncertainty, suggesting breaking even in two years sounds like extremely irresponsible advice.
Anon 1:55, if you were capable of reading and understanding my comment without inserting your own bias, you would see that I said no such thing as you can break even selling in two years. In fact, I said it would be a toss-up if you sold 5 years from now. For the past 10 years, the breakeven point in prime locations was 12 months or less (where have you been?) If you can't understand my position, I will try and type more slowly just for your benefit.
I guess sarcasm doesn't come across clearly in print. BTW, since when do the poor constitute a race?
The overwhelming consensus of opinion seems to be that the downturn will take years to run its course. This leads me to believe that the downturn will be relatively brief.
Contrarian, I have formerly restrained from being rude, but you truly are an idiot.
You have absolutely no conception what contrarian means.
"contrarians" look for out of favor investments with hidden value.
With an arguable 10-15% drop (based on same home sales) in South Bay, that ain't real estate in Manhattan Beach.
Anyways, you may want to read some books, or "google" what contrarian means.
Otherwise, I could suggest some other out of favor investments (Florida or Az real estate, or any home builder).
Hell, I have some ISO stock options that I never excersized....that would be a good "contrarian" play right now. Especially since they are bankrupt....everyone knows they are worthless....except perhaps you?
As someone said before, ergo, because everyone believes that the Sun will rise tomorrow, then as a contrarian, the proposition you hold to is that it will certainly not rise tomorrow, with a conviction directly proportion in the negative to the conventional conviction!
This is certainly high logic beyond the purview of the customary constraints of metaphysics and logic! ;-)
The error in this logic is the notion that conventional wisdom is always wrong -- which is plainly false!
In any case, more power to you!
http://www.latimes.com/news/opinion/la-oe-ferguson3sep03,0,6122609.column?coll=la-opinion-columnists
From the Los Angeles Times
Real crises aren't fixed overnight
The fallout from the mortgage meltdown and Iraq war will play out over years, not days.
Niall Ferguson
September 3, 2007
It is extremely hard to know how big a crisis is while it is actually unfolding. Retrospectively, we tend to think of crises -- whether financial or geopolitical -- as one-day wonders: Think of "Black Monday," the stock market crash of Oct. 19, 1987, or 9/11, the terrorist attacks of six years ago. This notion of short, sharp shocks fits in well with our human inclination to live for the moment. Perhaps it is also a symptom of our era's chronic attention-deficit disorder.
Yet the really big crises in history unfolded over months and years, not mere days. In these protracted sequences of events, there were many gloomy nights, but also many false dawns. Because hope springs eternal, people tended to attach more importance to the latter, mistaking them for real dawns and blinding themselves to the underlying downward drift.
To illustrate the point, think of the 1997-98 Asian financial crisis, which started July 2, 1997, with the speculative assault on the Thai baht, but was not really over until after the bailout of Long Term Capital Management (Sept. 23, 1998) and the Fed's three successive interest rate cuts of Sept. 29, Oct. 15 and Nov. 17. In total, that crisis may be said to have lasted 503 days.
What, I wonder, will we see in the next 500 days? The consensus view at the moment is that aggregate losses resulting from the crisis in the U.S. sub-prime mortgage market could amount to $100 billion to $200 billion. What nobody knows yet is exactly who has been hit hardest by these losses. In the coming weeks, we are likely to see a dash for the exits as investors try to redeem money from suspect hedge funds. That in turn could add to the pressure on the banks that act as the hedge funds' prime brokers.
As the shock waves spread through the financial system, jobs are already being shed. And it's worth remembering how much more important financial services are today than they were 20 years ago. Meanwhile, American homeowners are experiencing something that has happened in only a handful of years since the 1960s: Average house prices are actually declining.
The combination of tighter borrowing conditions, job losses in finance and housing and a growing mood of pessimism among consumers could prove to be a more toxic cocktail than many investors want to believe.
To Anon 7:38, what are you referring to when you quote a 10-15% drop in same home sales in the South Bay? Please refer to the statistics in my post under MB Market Update for 8/31/07. Your figures are not even close, probably imagined. Take a Prozac and calm down, will you?
Anon 7:38: Rarely is conventional wisdom embraced with your degree of certaintly.
So contrarian, what is this "conventional knowledge" of what you speak? Half the people here are calling for a drop, have the people are suggesting "things are different" in Manhattan Beach....does not seem to be a consensus.
Perhaps all the realtors express different opinions when no a public blog...don't want to scare the masses? So is there consensus "behind closed doors"?
Maybe you are referring to buying Az and Fl real estate? I know someone with 6 houses in Az who says he is never selling, and that things are fine (he may be right about the first part). So no consensus there either. I do hear builders there have cut prices 30-50%.....is it a good time for you to buy???
I think there is no clear consensus about anything.
CONSENSUS, CONSENSUS, CONSENSUS!!!!
Boy, it's great to hear that word. Since the masses are you usually wrong, that makes me feel better about the market. hehehehe. Rather than aiming for a consensus, aim for your butthole.
The biggest thing to understand about the real estate market is that there is no real estate market. There are thousands of real estate markets. While it's true that certain macroeconomic forces bear on all of those markets, they so so in a highly uneven fashion, which makes precise predictions foolish.
I think it's better to look at generalities. Which have the added advantage of being a lot more fun. My list:
1. The higher they go, the farther they fall.
2. Marginal neighborhoods drop off the tree first. Of course the Inland Empire and Stockton were going to lead it off. They always have, and always will.
3. There is nothing like a popping bubble to deflate pretenses, not just of individuals but of neighborhoods.
4. The tsunami will be ARM resets, and that one is baked in the cake.
5. Millions of Americans literally have no memory of what it was like in the 1970s, especially, say, in the Rust Belt. Yes, kids, things can get really bad. Formerly middle class people were living in their cars. It's going to happen again.
Oh, right, Anon 5:34, I can just see all those investment bankers and lawyers who live here in Manhattan Beach (not to mention people like Lamar Odom and Luke Walton and virtually all of the LA Kings) sleeping in their cars.
We need to take up a collection to help you buy a clue. This blog site is called Manhattan Beach Confidential, just in case you're unable to comprehend the title at the top.
Anon 5:48, I wasn't talking about investment bankers and lawyers when I wrote about formerly middle class people living in their cars. That said, I think we're going to be finding out just how overextended a lot of those successful professionals really are. I used to be one of them, and I can tell you that hubris runs very, very deep in that crowd.
I'm an old fart. Old enough to remember when California real estate was merely ridiculous, not in another galaxy. I doubt Manhattan Beach will ever come fully back to earth, but it's going to get closer to earth. Quite a bit closer, I think.
The downturn in the housing market and the mortgage crisis which exacerbates this trend has already left the station -- the only reasonable question to ask is how far it will descend.
"Numbers" are great -- in analyzing that which has already occurred! Before these quantitative changes occur, there are often large-scale qualitative shifts in both the economic reality and its perception, until it gets to a critical mass, or to use Malcolm Gladwell's coinage, a "Tipping Point".
And there are indeed large-scale shifts in the economic reality underway, which add a huge undertow to any conjectures when juxtaposing current data to 2006, 2005, 2004...
All of these qualitative changes are robust, even unprecedented... the essential wiping out of a sector of the mortgage industry -- with profound repercussions; drops in the overall median prices of US homes, scheduled terminations of hundreds of billions of ARMs in the presence of falling prices creating great difficulty in getting lenders to accept less than pristine borrowers for a reset... which will have widespread influence, including in MB.
Will the now anticipated (or perhaps not as of today) Fed discount rate cut make a substantial difference? Perhaps, but we know that the entire lending paradigm has shifted to a far more conservative stance than even six months ago. Will a 25 or even an optimistic 50 basis point cut really make multimillion dollar homes all of a sudden more affordable? Not likely! The bottleneck is with conservative underwriting -- now asking for around 30% down on non-conforming loans driven by the inability of institutions to find money to lend -- without imposing these far stricter standards. (I just heard through a friend at CW that Countrywide is going to be cutting 15,000 jobs in the next few weeks.)
The days of using HELOCs... to pull cheap money out of houses are over -- the moneylenders are coming to collect a pound of flesh in return! A couple thousand years ago, a very fine Gentleman turned the tables of moneylenders over to make a point. His lesson it seems to me, still escapes many of us.
As Anon 5:34 ("Yoda") stated with prescience: "There is nothing like a popping bubble to deflate pretenses, not just of individuals but of neighborhoods."
I'm the same Anon 5:34. Wanted to say something about the Fed cutting the discount rate. That's a joke.
Most people don't have a clue in a carload when it comes to what the Federal Reserve really does. They don't set interest rates, other than for federal funds and direct lending to banks, both of which are the shortest of short-term rates.
Long-term rates are set in the market, and in the case of mortgages they exist in relation to the 10-year Treasury. This is because the average house turns over in 7 years, which just happens to be the duration (average maturity of coupons + principal) of a 10-year bond.
Treasurys are the default-free rate, and mortgages take a spread over that. I think the big news one of these days is going to be widening spreads between Treasurys are mortgages. Not just jumbos but agencys (i.e., Fannie Mae and Freddie Mac paper). This will happen as two things sink in: First, that agencys are not federallly guaranteed, and second, that there was rampant fraudulent underwriting in conforming loans.
Think it's tough now with a 6.5% fixed 30-year conforming loan? Wait until it's 9% (including a 250 b.p. spread over Treasurys). Ka-blooey!
And guess what? There won't be one single thing the Federal Reserve will be able to do about it. Nothing, zilch, nada!
Just curious, but who would put 20% down on a 2 million dollar home anyway? You'd be way over the 1.1 million interest deduction cap. Unless you've got a high end tax plan (in which case you probably don't have anything to worry about) it doesn't make alot of sense. THat house is above your means and you should A) find another house or B) post reasons on a blog explaining that house is only worth 1.5 million.
Market is getting better now. Cant wait to see how business picks up for us all.
Yes things are finally picking up in our game. I hope this upward slide will continue and I think it will.
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