June 24, 2006

Home inventory piling up while sales dry up. Care to wager a guess on what comes next?


Phoenix is now at 50,000 unsold listings and gaining. Sales volume is plummeting. Builders keep delivering new unsold units to the market, while slashing prices and adding huge incentives. Yet homeowners keep their houses on the market at last year's price. This scenario repeated in cities across the US.

Well, the question is not IF this situation will change - it's a question of WHEN the standoff will end. The smart folks in the room will lower their price NOW - take anything they can get and get out, even at a steep loss. The stupid and greedy ones? They'll hold out and hold out until they lose everything. Having felt they "deserved" the price their neighbor got last year, or that their realtor/appraiser/lender/Zillow told them their house was worth.

There'll be interesting negotiations and decisions taking place throughout the country, where upside-down owners have to consider offers that will leave them with a debt to pay off for years. There's folks out there who just bought - in the past 12 months or so - that today are thinking of getting out already.

There are some renters who think FINALLY - let's go jump into this cold market with lowball offers - only to buy a house that keeps depreciating like the falling knife it is.

You'll see condo developers slash their prices, getting sued by the current depositers who'll be underwater when or if they close. You'll see Bob Toll selling more stock before it hits $0.

Feel free to get on record with your guess of price declines. Catherine Reagor, the lazy Arizona Republic writer, made up an unsourced number of Phoenix falling 10% from the peak. I'll stick with 33% minimum as we get back to the mean.

Price declines - the next stage of the bubble. We predicted the euphoria stage, we predicted the exploding inventory, we predicted the denial, now comes the panic and significant price cuts.

89 comments:

PopLA101 said...

prediction: Cost of owning (mortgage+tax+insurance-deductions) will be slightly less then renting. This would be about 50% off in some areas like Los Angeles, Phoenix and Miami.

Anonymous said...

There will be a time when an investor can buy property in California and it will cash flow $200-$400 per month.

Anonymous said...

Yes Rents will be rising over the next 7 years and prices will be falling.

PopLA101 said...

in some areas rents will go up, in some others they will go down, depending on local economies. Areas where home building is a huge economic contributor, such as Las Vegas and Phoenix will likely see declines as there are fewer jobs, areas more deversified economically such as New York and Los Angeles, will probably see rents rise with inflation

traineeinvestor said...

If the experience we had in Hong Kong is any guide, the time to be confident about re-entering the market is when:

1. investors can get a positive cash flow on a heavily (70%+) geared property; and

2. the cost of owning is less than the cost of renting( i.e. P+I mtg + outgoings < rent).

Property prices dropped about 50-60% from their peak in 1997 over a six year period before we reached that point.

popla101 is right on the money there.

Los Angeles Friends In Deed said...

traineeinvestor wrote:
Please clarify "investors can get a positive cash flow on a heavily (70%+) geared property...".

What does the "70%+" represent?

Thanks

skytrekker said...

From DOW JONES Marketwatch today re; housing and the economy.

Housing is the key
The rosy 3% scenario is based on economists' best guesses that housing will slow, but not collapse, and that consumers will be able to keep spending at a healthy rate, bolstered by decent wage gains. Capital spending by businesses is expected to fill some of the gap left by housing.
The danger, of course, is that growth might be much weaker than 3% if housing prices fall rather than just level off, or if energy prices go higher, or if wages continue to stagnate, or if the dollar collapses. Or if the Fed overtightens.
"The risks are on the downside," said Robert McGee, chief economist for U.S. Trust, who says the dangers of a housing collapse are underappreciated.
Housing was the pillar of strength in the economy for the past four years, contributing not only to investment but also to employment and to consumer spending. Deutsche Bank figures about 2 million of the 5 million jobs created since 2002 were related to the housing boom. The Fed figures that income from mortgage equity extraction increased from about 3% of personal incomes to about 7%, adding trillions of dollars to consumers' spending and allowing the personal savings rate to fall into negative territory.
All that growth was based on ever-higher home prices. But now home prices are leveling off. Even assuming a gentle slowdown, the housing sector will be a significant drag on growth, employment and spending.
A few people think home prices could actually fall nationwide.
"The outlook for home prices is much worse than the consensus thinks," said Anirvan Banerji, director of research at the Economic Cycle Research Institute. Banerji said the ECRI's leading index of home prices is flashing warnings that real home prices (adjusted for the rise in consumer prices) could fall.
"We'll have a harder landing than people expect," Banerji said.
Factories slowing too
Banerji also rejected the idea that capital spending or exports will save the day. The ECRI's long leading index of global industrial production is falling, signaling a global industrial slowdown in the next year. ECRI's forecast is being confirmed by recent softness in new orders in the Institute for Supply Management index.

Other economists expect capital spending to slow, following the weakness in consumer spending. "Turning points in the growth rates of retail sales typically lead turning points in the rate of growth of manufacturing output by a quarter or two," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.
The slump could be serious, Shepherdson said.
The recent rise in corporate bond yields suggests that the Institute for Supply Management Index could plunge into the mid-40s by the spring, "very close to recession territory," Shepherdson said.

Bake McBride said...

The 7 "I's"

Rising interest rates, increased inventory, increased order cancellations, enhanced incentives, increased construction costs, investors selling their properties, and intense cost reduction initiatives by home builders.

And just think....it's only getting started.

Anonymous said...

What does the "70%+" represent?

I believe TraineeInvestor means a property that is financed at 70% or more. Pretty easy to cover costs when you finance 5% of the price, not so when you finance 80%, 100%, 120%...

Anonymous said...

you also predicted gold well...oh wait, you didn't and got crushed.

veritas_faust said...

40% fall from the peak, before it bottoms out.

BUT:

Look for a 15-20% drop with a slight recovery, lasting maybe 30 days, with the usual fanfare and hopes that its a 2nd wind. Then it rebounds 5-7% before the true bottom falls out.

Phoenix and Miami are the poster children, but far from being the only ones slaughtered.

Joey said...

Popla - you are incorrect to lump LA in with the other cities that you mention. The cost of renting is currently at or above the cost of owning in the desirable areas (west side) of Los Angeles.

Mark in San Diego said...

Spring selling season didn't happen. . .

I found that quote somewhere this past week. . .probably here at HP. If houses don't sell while the kiddies are out of school, they are NOT going to sell in late August and September, because parents want their kids to start at a new school then. I think panic is setting in now that June is about over and houses are still piling up all over the country.

Anonymous said...

Robert Kiyosaki is a charlatan and a con artist, so why quote him?

http://tinyurl.com/47g6j

Mark in San Diego said...

Robert Kiyosaki was the BIGGEST chearleader during the bubble. . .

buy real estate! he screamed from his books, tv shows, etc. . .so it is very telling that he is saying the market has collapsed and the
"pros" will step in and make money. . .if you read through his quotes, he tries to make people who bought his books feel like they are part of the "pros" not the lemmings. . .

Joe Logic said...

My sister is renting a house in Las Vegas for $1400/month with a zillow of $330k. She said the landlords, who once were amicable and friendly, suddenly turned into dicks who are constantly threatening eviction and fines. The landlords are no less california flippers who bought up a couple other properties in that subdivision, whose plan was to rent them out while they appreciate.

I told my sister that they are probably panicking and want to get out because LV is looking ready to crash.

It's crap like this that makes me smile when I hear about flippers (especially from vulturfornia) getting fried - and the coming crash that will fry em all.

AnonyRuss said...

>>>The cost of renting is currently at or above the cost of owning in the desirable areas (west side) of Los Angeles.

That is simply not true.

PopLA101 said...

i've lived in LA all my life. Prices are way out of whack with rents. sold my condo last year for 440k, according to west side rentals, units in the same building were renting for 1300-1400. (mortage on 440 is about 2500?).
also a friend just bought a 2 bedroom in Westwood for 620k, their paying 3900/mo. last time i checked you can rent the same place for 2000-2500/mo

Johnny said...

When will the bubble burst? What is your prediction? This looks like the listings are already about 8 times the sales and yet it still doesn't burst. What does it take to burst? 10 times? 15 times?

Anonymous said...

I rent a $1M condo in LA for $2k per month. From what I have seen, currently in LA you can rent for 25% to 50% of the monthly cost of buying. It is completely untrue that rent = mortgage payment right now in Southern California.

...Maybe the person who said otherwise is talking about rent = the one year teaser rate payment on a suicide loan.

Anonymous said...

Love it. I bought my McMansion in a Southern California in '85 off of a bank forclosure and soon after the bank went belly up. I paid 3 times my annual salary and it wasn't that great. Things are a lot more out of line now with people paying 9 times salary. There are going to be a lot of foreclosures coming down the line and the middle class is going to be working until age 90.

Anonymous said...

I love to see idiots always point to Keiths gold recomendation, it give me a good laugh to see idiots. I made money on GLD, it was real easy, it's called a GD stop loss!

Now back to real estate, it's garbage because there is no stop loss, you sit on the ropes, taking shot after painful shot, watching your face gush blood and your eyes and nose swell up, when no one wants your overpriced crapbox, and the fun is just starting!

Now back to the fight!

Anonymous said...

The massive speculatory bubble and its grotesque offshoot Real Estate bubble are 2-4 months before meltdown. Yes, it is that close.

By December, the layoffs will start further dragging down the speculatory fever and possibly leading to a deep worldwide recession. By this time in 2007, it will seem like a nightmare with little ending.

InfidelSix said...

Just to prove to a friend that it's much cheaper to rent than buy in L.A., I looked up a real-life example. First to craigslist. Right there on the first page, I found a rental listing for a 2+2 condo in Malibu for $2100. Sounds about right. Then I check that address in Zillow and see 10 sales in the last year at that address (same complex). Avg sale price $760. That comes to about $4900/mo (30 yr. fixed) to own vs. $2100 to rent (not including ANY maintenance or repair costs). If you invest the difference for 30 yrs. @ a measly 4.75%, you'll end up w/ $2.3 mil. Easily enough for 2 condos given avg inflationary appreciation (from today's overpriced valuation)!

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