Tuesday, July 17, 2007

Real Estate Emotions July Update

This time I've decided to graph out my real estate emotions on the famous Credit Suisse reset chart. The blue line is what is now in the past.

A review of the investment emotions:

1. Optimism
2. Excitement
3. Thrill
4. Euphoria (market price peak) Peaked in late 2005/early 2006
5. Anxiety (I'm a long term investor, not a speculator.)
6. Denial (Reached in October of 2006 until mid-May of 2007)
****7. Fear (Reached in mid-May of 2007). *****Current state****
8. Desperation Predicted to start in mid-October/November/December 2007
9. Panic: Early 2008 looks to be the start. Exactly when? Depends on the credit markets.
10 Capitulation Could it be summer 2008?
11 Despondency (start of market price bottom)
12 Depression (end of market price bottom) Not before summer 2010
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...)
15 Optimism (cycle starts again)

What you should notice is the surplus of housing and rapid reset of ARMs forces fairly quick progress through the initial emotions. However, the integral of the pain will slow steps 10 through 12. In fact, Hope might not happen for quite a few more years than the 2012 timeframe I currently show.

I am making a few assumptions that are new:
1. Mortgage holders continue the recent trend of walking away from losing properties before the ARM reset.
2. By 2011, inflation has taken away much of the sting of the reset.
3. The job losses of late 2007/2008 accelerate the process.
4. The FB's who walk away from their homes can re-enter the market three years post-foreclosure.
5. Home starts in late 2008 drop well below the absorption rate (on a national level).
6. The fraction of FB's who can delay the day of reckoning via refinance is continuously declining.

Points #4 and #6 play quite a bit in my assumptions on when the optimal buying window closes. Notice its a long multi-year window... No rush. None.

Look at the image. Notice something? The pain we've seen so far in 1H 2007 is far less than the pain of mortgage resets in 2H 2007.

I consider anyone who calls a bottom prior to 2009 as someone who has just not looked into the data nor compared this bubble to a previous downturn. The more I look at the data, the further out to the right I correct my predictions for the bottom... So be it.

And if you think that buying window shouldn't start until 2010 or later... let's delay that discussion until 2009, shall we? ;)

The buying window should start after the first wave of prime ARM resets. (In red on the Credit Suisse chart.) I do not believe the Option-ARM resets will occur as graphed (in Green). Too many of those borrowers are doing the minimum payment; thus triggering a reset in 2007/2008/2009. I believe that the driving force of those loans will shift to the left. No proof or links... just logic based on Countrywide et. al reporting that (IIRC) 90% of the option ARM buyers are only making the minimum payment and thus will hit their 110% (or 120%) caps forcing an early reset. :)

The foreclosures of today are going to trigger foreclosures in the winter/2007 spring of 2008. Those foreclosures will pile on the inventory in fall/winter of 2008. It will take until 2009 until people just give up on housing. Only by then will the Sheeple stop listening to the sales people.

But one day it will recover. Its smarter to own long term than to rent. Just not today during such a bubble as we've seen.

Got popcorn?


baddriver said...

Neil, I think you are way too compressed on your time/emotion scale. I don't think we have entered fear yet, there is still a TON of denial going on in the home buyers and sellers that I know and in the media. I like the one emotion per year idea suggested by a commenter in an earlier post. It comes to the same conclusion though, optimal buying time is 2011-2012.

2003: Excitement
2004: Thrill
2005: Euphoria
2006: Anxiety
2007: Denial
2008: Fear
2009: Desperation
2010: Panic
2011: Capitulation
2012: Despondency (Time to Buy)

Also this great chart from patrick.net:

Trent said...

I work for CurrentForeclosures.com, a foreclosures site and have seen a huge increase in the number of foreclosures in the past 7 months. I believe it is a combination of not only sub-prime and ARM mortgages, but also the high number of people who have gotten loans with interest rates at an all time low... in addition to the rapid depreciation in some areas and the difficulty some are experiencing in selling their homes.

Anonymous said...

Love this chart. It needs smiley, uhh I mean, frowny faces!

Here is my new toy, courtesy of the LATimes website and dataquick:



(sorry if there are multiple comments, the form isn't working so well with my browser)

Don said...

I think 3 years to be able to get back into the housing market after walking away from a bad loan is very optimistic. I had the misfortune of getting laid off my job in 1996 and ended up selling my house in a short sale. I had a pretty rocky financial situation for the next four years as I paid off all the debt that I had accumulated during that time (having to sell your house usually signals that one's credit has been pretty thoroughly tapped). The earliest I could have been able to buy something would have been 2002, and that got cut off because of 9/11 and yet another round of layoffs, although I was in a much better position financially to weather the second round.

Remember that dumping the house through a short sale leaves the former homeowner with a tax bill on the amount of the mortgage the bank wrote off. When I sold my house, I ended up with a $10K tax bill. The losses this time around will be much larger. I'm not sure, but I think even in a foreclosure, the former homeowner will have a tax liability. What's more, these are amounts that can end up pushing people into higher tax brackets, so Joe Fish with an annual income of $70K, and a $100K shortfall on his foreclosure/short sale/deed-in-lieu of foreclosure, will end up with a tax bill of 25% * $7,100 + 28% * $83,740 + 33% * $9,150, or well over half is post-tax income. He won't be paying that off anytime soon.

wannabuy said...

Neil, I think you are way too compressed on your time/emotion scale. I
Baddrive, for emotions I go off what I'm seeing around me. Most of my coworkers... are very logical. But a few... are great indicators of the herd. Could my timescale be too compressed? Yes. But the mind set has really changed of J6P. I think things are falling apart fast enough for multiple-emotions per year. Are people still in denial? Yes. There will be people in denial through 2017. ;)

But what matters is... when to buy. Its not for a while. For low ballers 2009. Oh, I really liked the Patrick.net link.

Here is my new toy, courtesy of the LATimes website and dataquick:

Interesting... except the site had a note that it was down... hmmm... too popular? But the links to area prices interest me... Hmmm...

I think 3 years to be able to get back into the housing market after walking away from a bad loan is very optimistic.

Don, normally I would agree. However, after the last downturn it shocked me how quick deadbeats were back into homes. I use the 3 year rule as that is how long it took those with good jobs to qualify for a home. I do feel for your situation.

Do understand, I am willing to lose 10% on a home if it gets me into a really nice place (w/view, near amenities, quiet, etc.) that I'll love for a decade or more. But only for a home I know I can afford. The tough part will be predicting when we are "close enough" to the bottom that will be tough.

Let's put it this way, if I'm off... we'll discuss in late 2008 with no harm done. ;) I also believe in low balling... :) But I believe that both the frequency and magnitude of financial manias is being amplified.

Has the real estate roller coaster been updated with 2007 data?

Got popcorn?

sandman said...


I agree, I'm willing to lose 10% (maybe even 15%) if it gets me into a house I can afford and really love.

Another thing to consider when you talk about the mountain of option-ARM resets in 2010 - Many of these people aren't currently under water, and they're refinancing into 30 year fixed loans. I know 2 of them at work that are doing so partially to shut me up :)