August 19, 2006

Today show report from a few weeks ago about the bubble bursting

Housewives watch this show right? Probably caused a few dinner table conversations that night:

"I told you, you fool, not to put OUR money down on that Phoenix pre-construction condo! You idiot! How could you!"

That type of thing...

49 comments:

Anonymous said...

what a difference a year make. I am more and more convinced a true crash of epic proportion is on the way.

fact: an investment group with 7 homes, all purchased with 0 down 100% financing is now facing foreclosure on all 7 homes in SD.

fact: the property manager that have to deal with 7 angry tenants just got another request by another investor who purchased over 20 properties with 0 down 100% financing. he is saying no to the investor because he doesn't want to deal with 20+ more angry tenants in 3-6 months.

it is happening!

keith said...

ponzi schemes sometimes end with a bang, not a whimper

it just takes a change in the collective consciousness, and the introduction of a time tested emotion called FEAR

geeski said...

love it - another quote from a biased realtor stating that this is the "best time to buy". you have to be a complete idiot to believe any of this crap. oh, and the sellers in distress from san diego, "suck it". i bet they're thinking there home is worth far more than it is. last thought, keith, san diego is still ground zero for the collapse, phoenix, as always, is a little behind.

Anonymous said...

oops, "their home", not "there home"

keith said...

oh, no, I'd still say Phoenix. Went up faster, will come down faster, and has crazy amount of dead inventory

Plus people in Phoenix are dumber than people in San Diego in general

Anonymous said...

Phoenix area people are a lot more dumber than people in ANY area of the USA, the whole planet for that matter.

Anonymous said...

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You all strike me as being smart and full of money.

I want to advertise to you. How is this possible?

ROFLMAO

Anonymous said...

Nobody here claims to be "smart and full of money". Just not dumb enough to blindly lose all of their money.

Anonymous said...

Adding insult to injury of dumbness is David Lereah, who not long ago wrote a book about "...missing the housing boom," only to say with a straight face that price correction is needed. When he wrote the book, he knows fully well that the "boom" was predicated by inflated prices and now correction? What a hypocrite.

Osman said...

Interesting piece. Seemed level and on the mark to me.

As for ending with a bang Keith, I don't think so. It's going to be a slow deflation in bubble markets and to varying degrees a sympathetic process in non bubble markets.

Remember, houses aren't tech stocks or tulip bulbs. The tangibility of the asset to the end user plus relative illiquidity slows things down. Even the foreclosure process is a long road toward price correction. And even then, foreclosures bought on a "short sale" typically don't set neighborhood market values. People look at the low price of a foreclosure and think, "Oh, but it was a foreclosure."

The real question is no longer whether there is (or was) a bubble. It's how will the bubble's deflation will affect the economy and local real estate markets. If you're an investor, you want ideas for how to play the downside of the bubble.

Here's one.

A key point often ignored when it comes to bubbles: The market overreacts on the upside and the downside. One of your commenters on HP keeps pointing it out for housing stocks. It's no longer time to short housing stocks, they've already hit or will soon bottom. Now is the time to begin sifting throught the wreckage in order to highlight companies with strong fundamentals. Which companies are sitting on large cash piles, ready to pounce for the inevitable round of consolidation? Which companies have the majority of operations in non-bubble, yet stable growth areas?

The stock market leads the economy, not the other way around.

Markus Arelius said...

Break out the rolling pins!

Anonymous said...

I am a renter in Southern Cal. I am resigned to waiting until 2009 if I have to - or moving altogether. Something is definitely not right here. People are starting to notice the stench...

Anonymous said...

A lil Hypocricy from David Lereah, hmmmmm

Anonymous said...

Osman,

In your opinion, given what we're in now (bubble); when would be the best year to buy, assuming price correction has taken place.

Please comment.

keith said...

Os, I'd say this housing bubble burst has begun with a bang - I think it currently takes 20% off of the peak price minimum to get any lookers. then the slide will go on for years - I'd guess 4 to 6. And it will overshoot - you'll know it's time to buy when 1) the fundamentals say it's OK (you can rent it out and get positive cash flow) and 2) people are disgusted with housing as an investment

As to homebuilder stocks, I'd be buying not selling at this point, but I choose to do neither. You'll start seeing consolidation and takeovers really soon, with big daily jumps when a deal is announced

You'll also see writeoffs and scandals, with 20%+ falls in a day.

too wild for my taste. I'm moving mainly into cash for the time being

Anonymous said...

A mortgage and a rental! This young couple and Many others are in the same sinking boat!

ocrenter said...

any market where a guy can buy 20+ homes with 0 down and 100% financing and is trying to rent each one of them out at 50% underwater and to have property managers reject doing business with him is a market doomed for a major crash.

Anonymous said...

Extremely apparent that the switch from seller to buyer has reared it's ugly head! From the local news, major networks, Today show, CNN, and on and on.

A mindset is all it takes!

auto fx is chickensh*t said...

Dow: Up

NASDAQ: Up

Rent: Up

Gold: Down

COP: Stagnant

Keith: Sad, but strangely "gleeful"....read here Poor,poor Keith

anonopussy said...

It’s a long way down to the river from the top of Everest.

Anonymous said...

Doesn't matter if they are "up". Being that insider trading irrationally pushed them up, the fall will just be as hard.

Being a insider toward economic growth, Augest has been a AWFULL month, maybe the worst month since Q3 2001. literally, housing has collapsed this month and is making June/July production look great. Business spending for housing has collapsed. Consumers cut back heavily after the July binge along with Housing chilly, chilly. If this pace continues into September, a Q3 growth contraction isn't out of the question.

StickAforkInIt2006 said...

"It’s a long way down to the river from the top of Everest."

Not if you are strapped with 800 pounds of Interest only, option ARMS! Look out belooooooooow! Avalanche baby.

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Anonymous said...

Osman:

Your comments are generally thoughtful, but I have disagree with the whole "illiquidity (sp?) of the housing market" argument. I was in the RE bus. in the NY metro area (not as a broker)in 1989. It was if the lights went out & all the guests were told to leave. By 1991 I started to see the first closings (all condos) where sellers had to bring $ to the table. The market fully tanked by 1992.

Why does 1989 matter? Then, a 90% LTV ARM mortgage (with PMI!) was the most radical product available. The rate of home price increase from 1984 to 1989 is in no way comparable to the rise over the past five years (in fact, it's hard to find any period in history that is). And the MEW for lifestyle enhancement culture that we have today was largely absent then. All factors indicating that today it will be far worse.

And foreclosures not a concern in setting market prices? The opposite is true. Foreclosures, particularly in cookie-cutter subdvs. and condo complexes (i.e, where the units are essentially fungible)are always considered by appraisers in determining value. Yes, there is an adjustment based on the distressed nature of the sale, but appraisers usually know exactly which way the wind is blowing and, once the market starts to change, will go into full CYA mode. In fact, if you really want to know how a market is doing, talk to the court clerk in charge of the foreclosure docket. And nothing tells a buyer out house hunting to run and hide faster than the sight of a foreclosure sale being conducted on the front lawn.

Anyway, as has been said, we shall see. And I honestly would not wish my predictions to come to pass.

Anonymous said...

Little Miss Suzie Q with a lisp can't sell her house after a whopping 24k in reductions. Doesn't it just make your heart bleed?

How about 224k in reductions, dip stick??

Osman said...

Anonymous,

The best time to buy depends on your personal situation and the location you are thinking about buying into. Do the math on buy versus rent for your expected holding period. Or, if you're buying property as an investment, be sure to consider your alternatives. There are many factors that could affect the outcome of your investment decision. Try some of the free calculators out there as a starting point.

By the way, I decided to build my own excel model to help clients analyze the decision. If you (or anyone else) would like a copy, contact me and I'll gladly send it to you. Be sure to leave your phone number on my contact form because I need to call you and ask a few questions before I email the model.
Calling the peak or trough of a market is notoriously difficult. In real estate, you're dealing with hundreds of local markets which makes it even tougher. On top of the "many markets" issue, information is often weeks if not months old by the time it's released to the public. Contrast that with the financial markets where trade information is available in near real time (I know settlement is a couple of days behind the actual trades). With those caveats, I'll go on the record for the next 12 months.

I think we'll see re prices flat to moderately declining in the once hot bubble markets for at least the next 12 months. For the moment, the most desireable properties are still commanding price premiums from last year while the ugly ducklings sit on the sidelines. When those sellers eventually cut their asking price, declines will start to appear in earnest.

In attractive non bubble markets (like Boulder) prices will be slightly to moderately up in most segments of the market depending on the volume of buyers we see from exodus states like California. In central/midwestern non bubble markets, I think we'll see mostly flat to slightly declining pricing for the next 12 months.

Admittedly, there's a lot of wiggle room in my rough forecasts. I think the Fed might have one more rate increase this year before it pauses or even starts to decrease rates. Meanwhile the economy is showing mixed signals. Ultimately, the actions of the Fed and the direction of the economy are the two biggest indicators to when we'll reach the bottom in real estate.

Ok, enough rambling. I have my own blog to write.

Osman said...

ok, one more..

Anon wrote,
"And foreclosures not a concern in setting market prices? The opposite is true. Foreclosures, particularly in cookie-cutter subdvs. and condo complexes (i.e, where the units are essentially fungible)are always considered by appraisers in determining value. Yes, there is an adjustment based on the distressed nature of the sale, but appraisers usually know exactly which way the wind is blowing and, once the market starts to change, will go into full CYA mode."

I agree. Let me clarify.

I live in a community that is rapidly converting the its remaining cookie cutter ranches (built in the 50s and 60's) into distinctive custom homes. Sometimes I forget that much of the rest of the country, indeed many areas just outside of Boulder, are stacked high with cookie cutter homes.

Depending on how similar the homes in your neighborhood and volume, foreclosures could have a very significant effect on overall market values.

As for the late 1980s, recall that the mortgage markets were quite different back then. There's been alot of innovation in lending since 1989. Securitization and the creation of secondary markets, with all of its derivatives, have spread the risk of default to the broader economy. Meanwhile the speed with which the markets react and evolve has increased multifold.
In the end, not only is it possible that a correction comes faster, I think it's also likely it will last far shorter than expected.

Anonymous said...

This site is tracking ACTUAL sales declines in real estate with evidence verifying the authenticity of the sales

http://sandiegomarketmonitor.blogspot.com/

The decline has already started.

As Jackie Gleason used to say..

And away we go....

Corvinus said...

Osman is saying, in other words, that the housing rout will be long and drawn out. Painful too, no doubt.

I suppose one could say that the figures in home closures (people actually buying homes) is undergoing a sharp pop and drop, but the figures in home prices is doing a slow deflation as it takes a while to dawn on sellers that their crapbox is 2x (5x, if you live in Phoenix) the price it should be.

Both of you seem to be correct.

crispy&cole said...

Per Osman - Boulder is different anyone who says that has ZERO credibility!!!

Anonymous said...

Osman you're dreaming. Boulder won't make it through this one. No area will be uneffected by a economic recession. It will crater some markets and dent others. But, they'll ALL be effected. It's all about consumer debt. Remember 1980? I do and it was beyond belief. This go around will be much worse. Boulder ain't seen nothing yet.

Got debt? You're screwed.

Osman said...

After reading my whole post, you think all I'm saying is "Boulder is different"?

I'm not.

I'm saying real estate markets will (and are) responding differently to the bubble bursting. In Boulder, inventory over the past three months has averaged about 8% and 17% more than 2004 and 2005, respectively. In the bubble markets, inventory has raged 200% higher or more. Since you have seem to have difficulty with reading comprehension, look at the inventory charts comparing Boulder to the bubble markets. Picture books are fun, aren't they?

But, forget all of that. Better to just let your preconceived notions and sound bites guide you Crispy. We need folks like you to have asset bubbles. Gold is big, better take your housing money and buy buy buy. I hear there are riches to be made.

;)

Anonymous said...

Osman you don't understand. The bubble is a wave. It'll be in Boulder in 3-6 months.

Have you read the articles from the Atlanta Agent "Sonnypage" on The Motley Fool? It will rock your world. He didn't believe in a bubble until the market stopped. It didn't slow down, it STOPPED.

Osman said...

Alas, I think you're right Anon, Boulder won't "make it." We're all doomed.

I hear City Council is planning to issue an ordinance allowing homeowners to deconstruct their houses for firewood this winter. It's the only way we'll be able to stay warm with those higher gas prices on the way. Might end up resorting to cannabilism to feed ourselves too. And with all the media coverage from the Jon Benet circus, there's no way we can hide it from the public spotlight.

Better stay away Anon. It's dangerous and going to hell in a handbasket in Boulder.

Seriously, please stay away. ;)

Anonymous said...

http://www.howestreet.com/articles/index.php?article_id=2824

Anonymous said...

http://www1.youreletters.com/t/392068/12851847/792294/0/

Anonymous said...

Osman you need to prepare yourself financially. I'm not a gloom and doomer. I lived through the 1980 real estate market. It was a very scary time for the family.

This looks like the big one (again) to me. It could very well last longer this time. Be prepared.

StickAforkInIt2006 said...

Osman's reply screams 'you are all a bunch of Chicken Littles"...typical case of denial. We will see who is right pretty soon as in next year. We shall see was shall see.

Osman said...

The desperate need to argue seems to drive some of you into putting words in my mouth. With spelling errors and other typos, no less.

I didn't write, nor do I think you're all a bunch of chicken littles.

Yes, some perpetually think the sky is falling and I have to wonder what keeps them from reaching for the spiked Kool Aid.

Others have more interesting (and sometimes profit generating) perspectives on housing, the economy, and when Keith chooses to detour, politics.

Sifting the wheat from the chaff on this blog is the price we must pay.

keith said...

os, I enjoy your posts, but we disagree on Boulder.

It's gonna come down, just like every other place. It's special, but it's not different.

Especially given the prices there. It shouldn't cost $1 million for an old 2-bedroom house near Chautauqua. The income isn't there to support that level. Just ponzi-scheme trading.

Same with new lofts on Pearl. Who's going to live there? What's the cash flow on a 1-bed loft at $500,000 if you needed to rent it?

Exactly.

Osman said...

You're right, for a lot of reasons I don't share your belief that prices will drop substantially here in Boulder. Guess we'll see what it looks like down the road.

By the way, I too would like to see homes near Chautaqua and Mapleton Hill sell for substantially less than they are now because I want to live there too. Who knows, maybe we'll be neighbors someday. The only difference is that I'm not waiting for a price drop, I'm expecting to increase my personal income to reach the level needed to buy into those markets (need 4BR, minimum though).

And as far as the p/e = rent arguement... I've heard it many times and agree with it on the intellectual level, but admit something doesn't jibe.

For one thing, most buying choices are not rational and that means ownership and renting are not equivalents. If consumers only made rational decisions, very few new cars would be sold each year and we'd have a vulcan society that discounted emotions and sensuality. Instead, we have the opposite. People simply don't think of housing as a debt prison and even if the economy fell off a cliff, most will continue to value the emotional rewards of ownership over renting. Don't discount that factor. Renting isn't the American Dream, is it?

Anonymous said...

osman,
just think... your wrong again.

StickAforkInIt2006 said...

Osman,
WHere are you on the chart right about know..denial? acceptance?
You remind of the RE agent I spoke to who when I mentioned the hot spring selling came and went he said..dont worry the winter is the new hot selling season this year. I couldnt believe that shit. I got to give you props in the 'optimism' dept though. No matter what hard data is thrown your way you just remain positive. Cult like behavior if you ask me. Good luck.

Osman said...

Hmm.. What "hard data" have I denied?

Have I written "winter is the new hot selling season?"

Maybe you should try using something other than a straw man arguement if you really want to dialogue.

Anonymous said...

I agree with Osman here - there is an emotional appeal to owning a house versus renting. If you're planning on moving in a year or two, sure, rent. If you're planning on staying put long-term, if you love your house and your neighborhood, if you are looking at where you live as a home rather than a guaranteed sure-fire investment opportunity, what's wrong with buying? I'm not saying be stupid, I'm not saying buy more house than you can afford, I'm not saying go take out an ARM and put no money down, but if you can afford a house and want to put down roots and be part of a community, I don't see what's wrong with it.
- Raising The Roof

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