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:
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.