Friday, September 21, 2007

Real Estate Emotions September Update

For the blogger party/dinner on September 30th (6pm), please RSVP on the previous thread.

I'm going to add to my real estate emotions column. I'm also going to start tracking where we are in the The Kübler-Ross grief cycle. I'm not going to say which Kübler-Ross emotion we're in, but rather the fraction of the population in each emotion. Most of the discussion skips three of the emotions, but they are important. Don't worry, I'm also keeping with my "investment related emotions," but as its going on a timeline that's been there for months. The only change is I've moved a chance of desperation starting earlier than what I predicted a month ago. I'm less confident of my further out emotions now. But I'll discuss that later.

To the Kübler-Ross grief cycle and what fraction of the population seems to be in each emotion.



Stability: 50% (Old homeowners and bubble bloggers)
Immobilization: 30% (Prices dropping? Can't be.)
Denial: 5% (No! Real estate only goes up!)
Anger: 5% (This one must be discussed)
Bargaining: 2.5% (Ok, we can cut the price and lead the market)
Depression: 2.5% (We're going to lose our home. Just let them take it...)
Testing: 3%
Acceptance: 2% (Walk away, we're toast)

The dangerous ones are the ones in the "Anger stage." Notice on many blogs the counter is brutal? They are practically screaming real estate "facts" that have never been true. For example, I loved a comment "No market has ever dropped 40%." Oh... how about 90275 in the 1990's downturn? Hmmm... ?

Notice most people are in stability. If you bought a home pre-2003 and didn't HELOC, there isn't much reason to worry outside of flipper havens. Expect this group to shrink; but note that a majority of the people in stable group will remain stable. e.g., my folks live in a neighborhood of homes bought in the early 1970's. Unless medical problems crop up, they'll be living in a neighborhood of homes mostly bought in the early 1970's a decade from now.

The "Immobilization" group is interesting. Expect them to play quite a role during the spring selling season as they go from passive to active emotions. They'll be forced to transition through their emotions fast. But fast means an emotion a month; don't expect anything more. This is a slow process.

This feeds the overall 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 October/November 2007
9. Panic: Early mid 2008 looks to be the start. Exactly when? Depends on the credit markets.
10 Capitulation Could it be summer 2008 2009?
11 Despondency (start of market price bottom)
12 Depression (end of market price bottom) Not over before summer 2011, probably later.
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)








Basically I've lost confidence in my predictions post 2009. :( Why? As I look back over my bubble blogging history, I notice a trend that I'm always expecting things to happen faster than they do. But that doesn't change the overall conclusions:

1. Do not buy today. Heck, unless you can bargain well, do not buy in 2008 or 2009. When to start buying? Let's discuss Fall 2009. ;)
2. Preserve your cash. I'm not an investment expert, so pick your own strategy (goldbug, foreign currency/stocks, "sin stocks", etc.)
3. Sales will continue to slow (buyers doubt/calculation, tighter credit)
4. Prices are getting primed for a sharp drop world wide. Yes, world wide. There are no markets left where "its different here."
5. Whatever you do, don't listen to a salesperson on what to do.
6. Remember, real estate occurs in the margins. It doesn't take even 20% of the people panicking to tank a market. So don't worry about my low predictions. Its going to take 18 months to move a large fraction of the population over.

Got popcorn?
Neil

8 comments:

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Justin said...

Great Posts Neil.
One thing worth mentioning/considering on the Credit Suisse chart:

The Credit Suisse chart shows the number of mortgage resets to occur in October to be 30 Billion to 50 Billion dollars depending on what mortgage you add in or don't add in
(but what is a few billion amongst friends?) ;)

The question that comes up is will these mortgages all reset on the same day (October 1st, or October 31st) or will they reset during different days in the month of October?

This looks like the makings of a very scary Halloween for borrowers.

Got candy corn? ;)

sandman said...

Justin,

I believe they reset on different days (whenever the payment is due). Don't hold me to it though.


Neil,

I still have to disagree, I think we'll see capitulation in 2008. Of course, I'm in no major rush, and I like your idea of "come talk to me later" as that really is the wisest response.

In my case, I'm considering buying in capitulation and relying on my data mining skills to find a house, then my negotiating skills (and the fact that I don't "have" to buy, so I'm under no pressure) to get a good deal. I won't sweat it if I miss the bottom by 10%, I'm basing my purchase off of my financial situation (i.e. what I can afford...a novel concept!) and my best estimates of where the market will be. Of course, come talk to me in 2008/2009 and we'll see if I've changed my mind ;)

Thanks for the awesome blog, have fun at the HBB social.

wannabuy said...

I still have to disagree, I think we'll see capitulation in 2008.

Well... if you're right... all I've done is persuade a few people to wait until it happens. However, I think this market's capitulation will happen after another two rounds of foreclosures. :(

I'm also holding off for one of the markets that traditionally lags in the RE downturns by 18 months... so if you're considering the burbs of San Diego... it might be earlier. ;)

Got popcorn?
Neil

Market Factors said...

Very funny, and perhaps some real insight there! If I had not bought in 2004 I would say wait at least one year, if not 2. We love out house and can afford it. So we will sit this one out I guess.

Future prospects can change, a low Fed rate could make ARM resets a non event and delay the day of reconing for a year. What if the fed cuts to 3.75% over 6 months? The new ARM rate would then be what, 6% - many people may be able to afford that.

wannabuy said...

Future prospects can change, a low Fed rate could make ARM resets a non event and delay the day of reconing for a year. What if the fed cuts to 3.75% over 6 months? The new ARM rate would then be what, 6% - many people may be able to afford that.

Somewhat... but eventually rates will return to historical norms. And the LIBOR is slowly creeping above the fed plus the premium for ARM's keeps growing.

And if the Fed cuts again (I think they will), inflation will get crazy. Everything still points to waiting. The only question is how many years.

Got popcorn?
Neil

sandman said...

Well... if you're right... all I've done is persuade a few people to wait until it happens.

No harm in that whatsoever.


However, I think this market's capitulation will happen after another two rounds of foreclosures. :(

Agreed, but I can see this happening pretty quickly now. From talking to friends (who were mega-bulls a year ago), they all seem to "get it" now. That's also the general perception I see around town. At lunch the other day, an RE agent and a seller were eating next to me and discussing the property and their gameplan. That was one of the most depressing conversations I've ever heard. I actually tried to tone them out, but they got into many heated arguments.


And if the Fed cuts again (I think they will), inflation will get crazy.

Again, agreed. The fed is cutting off America's leg to fix an ingrown toenail. I hadn't bought into the "helicopter Ben" thing until now, as he only recently gave us a reason to use it.

wannabuy said...

I hadn't bought into the "helicopter Ben" thing until now, as he only recently gave us a reason to use it.

Yep... agree 100% on both counts. He's earned his nickname. Now how will the fed act now that its known that a fed cut will raise consumer rates?

As to the timeline... my wife would be really happy if you were right. But as so many of the jobs created since 2001 were REIC, its going to take a bit of time to weed them out. Until the economy recovers, prices will continue to drop.

But I'll be happy if you're correct!

Neil