Convergence at end 2Q 2007

Its time for me to put into writting why I think its going to get interesting at the end of the second quarter 2007 (June). There are several factors converging at once.

1. Sufficient quantities of ARMs have reset by then to make a difference. About 1/3rd of the ones that will reset with the majority of those in 2007.
2. Enough population leaving California to finally start to matter (a little).
3. Construction employment finally will start down around late April or May.
4. Enough perception of slowing real estate appreciation to slow sales.
5. Foreclosure rate in Florida, San Diego, and Sacramento gets high enough that the defaults stall the MBS market.
6. Enough forclosures and short sales "return to the market" to correct the shortage of housing created by flippers withdrawing properties from the market.


Each topic:
Option ARMs are the toxic waste of this housing bubble. But they only matter
by the monthly payment pain they induce. As bad as building up a negative equity sounds... for too many, who falsely believe their home is appreciating, only the monthly payment matters. When that ends... ouch.

Supposidly California is losing population. Boy will I be all ears for United Van lines summary that will come out in January of 2007. Have no doubt I'll grab a copy of that pdf and post links. I expect California to get a special mention on the extent of the outflow of population. I simply know too many people who have fled the state. Not to mention I see too many empty homes for sale; the previous sellers long ago cashed out and set up residence in another state.

Calculated risk did a great little analysis of what's going to happen to construction employment. There is a direct correlation between housing completions and housing employment. Since housing completions lag starts by six months... In an article on Nov 17th, Calculated risk notes that by April we will see 300,000 to 400,000 lost jobs in California in construction. The domino effect will be pretty rapid... Some lag is always there... But we'll be feeling it by June (but won't fully get the impact probably until Christmas 2007!).

http://calculatedrisk.blogspot.com/2006/11/housing-starts-and-completions.html

I'm read a book on real estate cycles recently. Not really anything that great, but it spent a whole page going over why home sales slow when the *perceived* appreciation slows. People just lose the urge to buy. Buyers also get spooked by declining prices. So by 2Q 2007... buyers won't be a little spooked, they'll really be on the sidelines. (Smart ones are on the sidelines today... buy June 2007, even some of the dumbest will be on the sidelines.)

The next bit is that enough enough loses in the MBS holders that they'll tighten the credit a bit. Just the requirement for income verification will slow the market enough to drop prices. If people are also required to put some meat into the game... that will cut out most (not all) of the speculators. I've seen coworkers just recently jump into the speculation game, so I know they're still out there. But after a credit tightening... we'll get rid of most of them.

One odd artifact of this bubble is the amount of housing that was artificially pulled off the market for condo conversions, teardown and rebuild, or just greedy speculation (cheap remodels). Once this inventory is made available... the shortage of housing won't be as accute.

So this is why 2Q 2007 is the start of the "interesting times" in my book. Its not the bottom... oh no. Its not even going to be the quarter with the fastest price drops. (That's later.) Oh, I've posted before I thought it would be the period of fastest price drops... but I realize people can hold on for a little longer. It won't be until 2008 that we have the mixture of enough foreclosures and "owners" underwater to create the great stampede out the door.

Will my Fall 2008 be ok for buying? I'm begining to suspect that's too far to the left... But I posted the information. Let's see how accurate it is. Items #1, 2, 3, 4, 5, and 6 will all be getting worse as 2007 progresses.

But its 2Q 2007 when enough either change direction or get "bad enough" to pass the pain threshold. And note I point towards the end of the quarter. Could it happen earlier? Maybe. But we've all be amazed at the "stickyness" of this housing market. That end at the end of the second quarter. It still won't be time to buy. But we'll start seeing *good* progress towards affordability.

Neil