Here's my take. It's all based on leverage, and as we know now, with stocks you can get 50% margin or leverage. With homes, it's infinite - $0 can get you $1,000,000 or more. Lose 10% on $1 million of leverage/debt, you're bankrupt. Heck, even little kids can get $2.4 million with nothing to back it up.
5%: Correction / Bust / Adjustment
10%: Housing Panic
15%: Epic Historic Housing Crash
20%: Housing Devastation
25%: The end of all that is sane and holy real estate meltdown
30%: Are those locusts? Grandpa get your gun! Housing Armageddon
Interesting thing is that in some markets, we're already seeing 30% off. This one will be for the history books. Wonder what they'll call it?
NEW YORK: Many Americans fear the consequences of a housing bust, but few know what one would really look like.
Think about it. How far do housing prices have to fall before a slump becomes a bust?
In the stock market, we have a pretty good idea what a crash is. Among stock market experts, there is a consensus that a 10 percent decline in a major index is a correction while a 20 percent decline is more significant: a crash or a bear market, depending on the time involved. For the macro economy, there is also agreed-upon terminology. For example, a recession means two consecutive quarters of declining gross domestic product.
But when it comes to declines in housing prices, there is no such framework. As experts debate whether we are headed for a housing bust, you would think that we should at least be able to define it.
The problem is that economists have not agreed on a definition. In part, that is because severe declines in housing prices tend to be rare events, not a common subject for discussion. The last really big decline in national housing prices occurred more than 70 years ago, during the Great Depression. Another reason is that the data measuring the housing market is far more opaque than that for the stock market.
June 18, 2007
International Herald Tribune asks: When does a housing slump become a bust?
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36 comments:
How far do housing prices have to fall before a slump becomes a bust?
A: When the only buyers are bringing grow houses to your hood!
If you don't call the late 80's early 90's real estate bubble as a "burst", in comparison to this upcoming one as a "real burst", then we are in for worse than I ever imagined. I doubt it will be that bad but in a way I sort of hope it will be because our society really needs a rude awakening.
"The last really big decline in national housing prices occurred more than 70 years ago, during the Great Depression."
As you highlighted Keith, case closed on what's coming. FUGLY!
I think it's when house prices drop below what they were before the boom perhaps adjusted for inflation. But it is hard to define because people that owned their homes before 2000 and don't need to sell are probably still sitting pretty. Many have seen their home values go up 100% - and their taxes too. It's really only people that bought between 2000 and now that will feel it. But those taxes are never coming down
In no previous r/e bust have prices fallen to below the first year of the preceding boom prices. Never. This past boom started in 2002. Unless it's different this time - and it is never different this time - prices won't fall to pre-2002 levels.
And like all other busts, you only get hurt if you have to sell. Had you bought at the last peak in 1989 and held on for 10 years you would have made money (nominally at least). Again since it's not different this time, even if you bought in 2005 and can hold on to 2015 you'll end up fine.
So who will get fucked...people who bought 2003-2005 AND have to sell.
Please, stop linking to IAFF and stop calling him a kid. He is an adult, he should take responsibility for his actions (which he isn't and probably never will) and he is an arrogant fuck who does not deserve all the free publicity you are giving him.
So who will get fucked...people who bought 2003-2005 AND have to sell.
This is not an accurate statement.
MANY homeowners who bought well before 2003 decided to refinance multiple times, in order to 'extract' equity from their crapholes. Inflated prices allowed them to make such a stupid choice.
They now are facing payments they cannont afford under their new loan terms. They cannont refinance because they are now upside-down. These fools are in deep doodoo.
anon said:
In no previous r/e bust have prices fallen to below the first year of the preceding boom prices. Never.
Really? That's just flat out wrong. You might want to check housing prices in the infamous Florida housing boom/bust (circa 1925) where mansions were selling for upwards of $1 million (NOT adjusted for inflation, but $1 Mil in 1925 $$$), only to plunge to 5% of the peak, to remain there for decades to come. There's other more contemporary examples, but to say it never happens is absolutely foolish and misguided.
This past boom started in 2002.
Well, I'd say earlier (circa 1999-2000), although it would depend on where in the nation you're talking about. There's some areas of the nation that seemingly were bypassed by the boom, and others that were late to the party (e.g. Pacific Northwest).
Unless it's different this time - and it is never different this time - prices won't fall to pre-2002 levels.
Well, you right in that it isn't different, except the bubble was MUCH LARGER compared to prior bubbles! This rapid price appreciation dwarfs the 1980's bubble/burst, and even makes the 1990's run-up seem like a small blip. See the charts showing run-ups in places like the West Coast, if you don't think so.
Of course, the significance is that the fast/steep run-up pre-peak means faster drops, relatively speaking. Of course, it'll still take a few years to hit bottom (some think 2012 is not unrealistic).
But as you say, this one won't be different, so it's no surprise to anyone that real estate markets follow a 12-15 year cycle, with 7 years run-up, followed by a drop-off or stagnation for quite some time. I think the drop-off will be steeper than anything seen before, as the topsy-turvy lending practices that allowed the stratospheric run-up in prices is now effectively decoupled from the balloon. Worse yet, most buyers who got into a property haven't built any equity yet (Thanks to I/O, ARMs, etc), so there's nowhere to go but down....
And like all other busts, you only get hurt if you have to sell. Had you bought at the last peak in 1989 and held on for 10 years you would have made money (nominally at least). Again since it's not different this time, even if you bought in 2005 and can hold on to 2015 you'll end up fine.
Well, just hope you don't have to move, etc, in the meantime. Otherwise, peak buyers better be prepared to bring cash to the closing table to make up the price difference of what they paid vs. what they could sell, as that's the whole problem with being over-extended.... With prices dropping $10k per month, it'll be little time before most buyers ARE upside-down. Those who tapped HELOCs are screwed, as they've lowered any equity cushion they might've already built....
So who will get fucked...people who bought 2003-2005 AND have to sell.
FWIW, we've seen instances of rollbacks to 2003 prices in some California areas. Like they say, easy come, easy go. Hope the buyers didn't forget about that, and didn't start spending money they didn't have in hand (home equity is NOT your money UNTIL you sell the property, and cash-out).
Thank you for posting this. The wanna-be RE trolls who are eating mac and cheese for dinner all this week insist that we "bitter renters" just can't buy a place. Such people are a total joke, that don't understand economics at all. If the RE trolls had any brains whatsoever, they'd realize that ALL OF US can buy several houses easily.
Since it's funny money doing the "buying" and all.
But instead of the inevitable outcome that, for instance, the strawberry picker making $14,000/yr and buying a $700,000 had, we prefer to truly buy (with a real down payment) once prices are in accordance with fundamentals.
Until then, may the RE trolls enjoy the mac and cheese. It's three boxes for a dollar.
HEY ANONYPUSS!
So who will get fucked...people who bought 2003-2005 AND have to sell.
June 18, 2007 9:28 PM
You are forgetting VERY important categories. Anybody that has HELOCed their home, doesn't matter when they bought it and those that refinanced their home with Toxic loans, doesn't matter when they bought it. Anybody that opened Pandora's box of "cheap" ARM credit or other creative financing will probably suffer.
To answer the question as to when a slump becomes a bust is when the effects are felt BEYOND the big bubble areas. Which would mean it would have to go beyond CA, NV, AZ, FL, MI, OH and IN.
Florida and California are foreseeably toast though. CA budget is out of control and they have millions of illegals to care for all of which are sending THEIR money back home.
I agree that it doesn't take much for a slump to become a bust. 10% is a lot when you only put 5% or less down.
You can buy stock on margin but most people don't. EVERYONE buys their home with leverage though (yes, I know there are exceptions but the proportion is low).
10% is also a lot more when you're talking about a nominal decline and the CPI is raging.
I think the way to define them would also take the time frame into consideration.For instance a bust would be the data points just past the peak or say a 5% decline over 3 months or so. That same 5% decline over 3yrs would not be the same, that would be a slump and it would be labled a correction if the prices were to resume.The word crash is a powerful word in this instance,it implies that the prices would drop at rates that increase(going down faster and faster). A motivated seller would have to chase the prices down.If the prices were to drop the same amount over a longer time frame but sellers did not chase the price, would that be a crash? I don't think so.IMHO a crash would be defined by a 30% or 40% price retracement over a 2 or 3 yr period max.This time it's different might mean there is no suitable word.
"This one will be for the history books. Wonder what they'll call it?"
The die off
U.S. Stocks Decline, Led by Homebuilders; Lennar, Centex Drop
By Eric Martin
June 18 (Bloomberg) -- Most U.S. stocks fell for the first time in four days after confidence in the homebuilding industry dropped to a 16-year low, renewing concern that the housing slump isn't over.
Homebuilders Lennar Corp., Centex Corp. and Beazer Homes USA Inc. slipped to the lowest since April. Wendy's International Inc., the third-largest hamburger chain, retreated after the company cut its earnings forecast. Transportation stocks declined as oil rose to a nine-month high.
The deteriorating housing industry, combined with a six- week advance in bond yields, prompted concern that higher borrowing costs will restrain consumers and businesses.
``Stocks are still nervous about what higher interest rates mean to the economy and the market,'' said Rick Campagna, who helps manage $3.5 billion at Provident Investment Counsel in Pasadena, California. ``The market's worried about every little move.''
more http://www.bloomberg.com/apps/news?pid=20601103&sid=aKPaUrbq99N8&refer=news
The problem is that prices have only went down in a few area's and primarily in condo flip area's(florida). Utah, seattle, austin, oregon all up. I'm only familiar with those area's. LA also has not dropped and the people just keep taking equity out to pay the bills and buy crap but i have not seen any real decreases.
Keith, this is Casey Serin, goof ball extraordinare. He's not the second coming of Charles Ponzi, Jesse James, or Machine Gun Kelly. You've deified him into the anti-hero of the housing bubble.
I wouldn't be surprised.
The very group of people not
wanted in the neighborhood will
be primarily made up of them.
By the way, growers also drive nice cars, and wear expensive suits - not to mention the ever-present arm candy.
Anonymous said...
How far do housing prices have to fall before a slump becomes a bust?
A: When the only buyers are bringing grow houses to your hood!
You're wrong, and not looking at what affects you indirectly and down the line.
Foreclosures and bank reposessions translate into higher costs for those who still have jobs after this crisis - that means you, me and anyone here who didn't get ground to a pulp from this catastrophy - yet.
Home owners, house debters, renters ... we all have one thing in common ... the majority of us will get impacted negatively by all this as things get increasingly worse in the housing market.
Anonymous said...
In no previous r/e bust have prices fallen to below the first year of the preceding boom prices. Never. This past boom started in 2002. Unless it's different this time - and it is never different this time - prices won't fall to pre-2002 levels.
And like all other busts, you only get hurt if you have to sell. Had you bought at the last peak in 1989 and held on for 10 years you would have made money (nominally at least). Again since it's not different this time, even if you bought in 2005 and can hold on to 2015 you'll end up fine.
So who will get fucked...people who bought 2003-2005 AND have to sell.
Hmm, dont get me wrong, this housing crash will probably destroy the American economy. But, the housing price drops earlier this century were due to the cost of producing a house going down and it actually started in the twenties and was a boon for the economy. The great depression was the result of by wild speculation in stocks, the Smoot-Hawley tarrif act, bad banking practices, and currency manipulation by Great Britain. Incidentally, the problems resulting from stock speculation were greatly exacerbated by buying stocks with leverage which is similar to how houses are purchased.
Honestly though, the real estate bust may cause a recession here, but I think you are citing a historical precedent that is not valid.
those are some conservative numbers there..or am i completely out of touch w/ reality at expecting near 50%
Hey here's the deal. Prices have to fall a bit further this time because they doubled in the last 5-10 years and everyone is sitting on so much equity. My parents house went from 300-700 in about 10 years. If it drops to 500 (which would be a huge drop) they still feel rich. So I'd say a 30-40 drop would hurt at the level of an epic crash. Not 10-15% however.
A housing slump becomes a bust when you go down more than 10% in real estate prices from the peak .
In no previous r/e bust have prices fallen to below the first year of the preceding boom prices. Never. This past boom started in 2002. Unless it's different this time - and it is never different this time - prices won't fall to pre-2002 levels.
And like all other busts, you only get hurt if you have to sell. Had you bought at the last peak in 1989 and held on for 10 years you would have made money (nominally at least). Again since it's not different this time, even if you bought in 2005 and can hold on to 2015 you'll end up fine.
So who will get fucked...people who bought 2003-2005 AND have to sell.
----------------------------------------------------------------------
Man.....I only hope this is the case. I completly agree, but much smarter people than me on these bogs have got me real worried. Its much more complicated than just buyers that got in over their collective heads.
What IS different this time is the:
250K tax free capital gain.
MBSpaper/derivitives/tranches/foregn investments/hedge funds etc..
and all the creative financing that only partially existed since..guess when....the Great Depression.
I just found out my so called 'low risk' pension/IRA I left with an old job has a significant amount tied up in MBS paper. I'll be rolling that into something else soon.......
Meanwhile, I'll just be waiting/watching and learnig as much as I can so I can a smart play
Housing downturns have normally been the result of a recession. This time it will be the cause of a recession. Hopefully it ends quickly like the neck of the REIC being snapped and a new brighter day will start where people can afford to buy a home without crazy loans.
a few months before HP, i sold my LA area home fearing a 40-50% price drop. not because it was epic or unprecidented, on the contrary, seems to happen every 8-10 years or so, just the norm around here.
"a few months before HP, i sold my LA area home fearing a 40-50% price drop. not because it was epic or unprecidented, on the contrary, seems to happen every 8-10 years or so, just the norm around here".
-------
I agree-50% drop is a normal recession that happens every 10 years.
This time around the drop will be Great Depression proportions.
Keep dreaming... you might get a 5-10% drop in some areas, but I see many many sales, lots of jobs and people spending money. Yes I would love to buy a place for pennies on the dollar, but It's not going to happen. Live within your means and enjoy life.
Alot of the problem with bubble sites like this is they're overdramatic, using terminology that undermines credibility.
Keith's site is clearly on the over-dramatic side, being parabolically pessimistic, and reading it makes you want to find a skyscraper and jump off it, ALA Black Tuesday! Either that, or buy guns and MREs and hole oneself up in a bunker in Montana! Not really, of course, but you get the point.
People carry preconceived ideas of what's discussed when they hear terms like "crash", "bubble/pop", etc. While it's dramatic, it's also intellectually dishonest and irrationally pessimistic (which is just as dangerous as the bull's tendency to ignore the downside, AKA irrational exhuberance, IMO).
When trying to educate people, you need to attempt to be fair and balanced, or you'll be dismissed. Yes, a lot of housing bears DO come off as tin-foil hat wearers, EVEN THOUGH they've largely been vindicated this year.
So enough with the defensiveness, the "I told you so" stuff and the gloating with the "I was right, you were wrong" attitude.... It's time to educate, as it's too important NOT to tell people what's happening.
@@@@
Anyway, since everyone's making reference to the "Stock Market Crash of 1929", maybe it's important to remember how that one played out on a timeline.
First common misconception: realize there wasn't just a SINGLE crash in 1929 that triggered the Great Depression, with prices plunging 90% in a single day. The reality was the declines were spread out over a 5-year period, with rallies in-between.
After the market dropped in Sept 1929, losing about 50% of value in 2 months, the market actually rallied back to 80% of peak values over the course of the 7 months that followed (sound familiar?).
But the more devastating "crash", the "final nail in the coffin" as it were, occurred in an 800-day period from Apr, 1930 to June 1932, where stocks continued to slide, losing 86% of the prior value.
THIS was the "crash" that led to the Great Depression.
See this page:
http://tinyurl.com/yskuxr
Main points: stock market crashes aren't fast, but happen in slow motion; investors see their investments die a death of 1,000 cuts. Real estate corrections are typically slower, due to the illiquidity of houses.
HOWEVER, the housing price correction will no doubt occur more quickly, as here we have sellers who have a DEADLINE: those ARMs are ticking, and buyers will either bail now, or mail the keys back to the bank. In this current downturn, time is of the essence for over-leveraged sellers.
In many 'bubble' markets, I'm seeing prices on outlyers falling $2k-5k a month (and due to the irrational run-up, the prices are STILL too high).
Bottom line: the pressure play is on, and a lot of people are feeling the squeeze play, without the Feds having to change interest rates.
Housing downturns have normally been the result of a recession. This time it will be the cause of a recession.
And interestingly, stimulation of new construction activity is what was used to pull the nation out of the Great Depression:
Here's a neat historic video from the 1930's showing how it happened:
http://tinyurl.com/2fpgsk
But nowdays, we're in a different situation: we're already overbuilt (that is, now that we're seeing how many speculators bought multiple properties they didn't need, ALA Casey Serin!), interest rates have remained well-below historical standards, and EZ money mortgages have reached their limits.
Not to mention, we're currently spending massive governmental money on a war (another trick to stave off a threatening recession/depression), Medicare and Social Security is facing impending disaster, etc.
We'll see if our wondrous leaders have any other tricks up their sleeves, besides raising taxes! SO glad Bush et al allowed all the specuvestors to keep their capital gains riches!
Man.....I only hope this is the case. I completly agree, but much smarter people than me on these bogs have got me real worried. Its much more complicated than just buyers that got in over their collective heads.
Smarter? Not really. more arrogant, more rude, a poorer vocabulary, a lack of grammar...yes.
They are paranoid and delusional people that see a slight correction as a sign of an epic doom. Come on do you really see 50% off housing coming? Do you really think a house worth $1M will be selling for $500K anytime soon? For crying out loud they are also convinced Ron Paul will be the next president of the US. That is what you're dealing with here, irrational people.
I don't know if you were around in late Feb when the stock market fell 4%. These loons were talking about the start of the great depression. Here we are 4 months later and stocks are up 10% from the "crash".
These bloggers are entertaining I'll give them that. But smart? Not a chance.
There is a 5 year supply of homes over 500000 dollars in Monument Colorado. A suburb of Colorado Springs. There have already been 20-30% PRICE IMPROVEMENTS!! They still aren't selling and these are gorgous 4000-6000 sqft houses on 2.5 acres. They have a long way to fall though because in places every other house is for sale. I don't feel 50% price drops are out of the question here with 70% possible before all is said and done in 10 years. In the main part of Colorado Springs the state tree of Colorado the For Sale sign is everywhere. We have over 8000 homes decorated with them. A 56% increase from May 2005 and a 28% increase from May 2006. This represents 8 months of supply at 1000 sales a month.
I am currently renting a 5000+sqft home with a 5 car garage for 1900 a month. Couldn't own it for 3500 maybe 4000 a month with recent mortgage rates.
So explain the benefits of owning again. Anyone anyone please because I want to buy but can't make the math work.
This is only for the trolls out there especially the ones who can't even afford Ramen Noodles anymore.
Sequoia512
They are paranoid and delusional people that see a slight correction as a sign of an epic doom. Come on do you really see 50% off housing coming? Do you really think a house worth $1M will be selling for $500K anytime soon?
Of course, the flipside to your question is, what makes you think prices rising 2.5-3.5x over the course of 7 years is rational? Do you think a house "worth" $1M today will be selling for $2M a year from now?
If so, just how long do you think housing price runaway inflation can last? Just how long can double-digit housing inflation in prices continue?
If you don't know anything about the topic, you NEED to learn something about market mania and asset bubbles. Why? You're in one, and it's imploding (as they ALL must, whether it be based on tulips, Japanese Nikkei stocks/real estate, South Seas Investment scams, etc)...
A "slight" correction?
That's very dilusional.
We all know full well prices are
dropping, and will have to drop
drastically to start seeing any
real recovery of housing starts.
I have know idea on what percentage
the drop will finally be ... but
drop it will by several percentage points more - that's a fact.
Smarter? Not really. more arrogant, more rude, a poorer vocabulary, a lack of grammar...yes.
They are paranoid and delusional people that see a slight correction as a sign of an epic doom. Come on do you really see 50% off housing coming? Do you really think a house worth $1M will be selling for $500K anytime soon? For crying out loud they are also convinced Ron Paul will be the next president of the US. That is what you're dealing with here, irrational people.
I don't know if you were around in late Feb when the stock market fell 4%. These loons were talking about the start of the great depression. Here we are 4 months later and stocks are up 10% from the "crash".
>>>>These loons were talking about the start of the great depression. Here we are 4 months later and stocks are up 10% from the "crash".<<<
aw now wait a minute........
"Smarter? Not really. more arrogant, more rude, a poorer vocabulary, a lack of grammar...yes."
That describes you to a T!
"They are paranoid and delusional people that see a slight correction as a sign of an epic doom. Come on do you really see 50% off housing coming?"
The fact is that housing remains unaffordable for over 85% of the population in many metro areas, like L.A. In your arrogant mind that may be fine since you seem to loathe anyone who makes less than 100k a year or who is a person of color.
Home prices were driven up the last few years by lose monetary policies (a subject about which you know nothing), but that will no longer be the case since lenders will have no choice but to tighten their lending standards. If you were not so illiterate, you'd recognize the pattern that has been repeated several times throughout history.
"Slight correction" by ass! You're a bitter owner deeply in debt and deserve what you have coming for being the asshole you are.
I couldn't agree more - great post!
I said it in a previous post, but its worth repeating ... housing should have *never* become speculative.
When anyone can become a real-estate expert overnight (i.e. Casey Serin) it's a very bad sign.
The government better come up with
a better idea than raising taxes though, since I wonder just what percentage of the population will be able to bear the burden of increased taxation and still manage daily living expenses.
~~~
Adam said...
Housing downturns have normally been the result of a recession. This time it will be the cause of a recession.
And interestingly, stimulation of new construction activity is what was used to pull the nation out of the Great Depression:
Here's a neat historic video from the 1930's showing how it happened:
http://tinyurl.com/2fpgsk
But nowdays, we're in a different situation: we're already overbuilt (that is, now that we're seeing how many speculators bought multiple properties they didn't need, ALA Casey Serin!), interest rates have remained well-below historical standards, and EZ money mortgages have reached their limits.
Not to mention, we're currently spending massive governmental money on a war (another trick to stave off a threatening recession/depression), Medicare and Social Security is facing impending disaster, etc.
We'll see if our wondrous leaders have any other tricks up their sleeves, besides raising taxes! SO glad Bush et al allowed all the specuvestors to keep their capital gains riches!
June 19, 2007 5:47 PM
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