Wednesday, October 24, 2007

Real Estate Emotions October Update

I *really* wanted to see a transition to desperation. We seem so close to that emotional switch. However, all I've seen is an increase in fear. Fear to a fever pitch, but we aren't yet in desperation. This series will also continue with the Kubler-Ross grief cycle. From what I can see, we're getting a pile up in the anger category. There is quite a bit of venom out there against anyone who isn't REIC or a FB.


To the K├╝bler-Ross grief cycle and what fraction of the population seems to be in each emotion.



Stability: 50% (Old homeowners and bubble bloggers)
Immobilization: 25% (Prices dropping? Can't be.)
Denial: 5% (No! Real estate only goes up!)
Anger: 8% (This one must be discussed)
Bargaining: 3% (Ok, we can cut the price and lead the market)
Depression: 3% (We're going to lose our home. Just let them take it...)
Testing: 4%
Acceptance: 2% (Walk away, we're toast)

We're progressing up the stages, but mostly a bottleneck at Anger.




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 November/December 2007
9. Panic: Early mid 2008 looks to be the start. Exactly when? Depends on the credit markets.
10 Capitulation: Looking like the winter of 2008/2009
11 Despondency (start of market price bottom) Not before superbowl 2009. Possibly as late as 2010. Much more uncertainty here.
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)

So for this month we have more anger and a stronger presence in fear. But desperation isn't far away. But if there is one thing I've learned while doing this series, real estate emotions move slower than you would think; all of my corrections have been to the right. Oh well. We're progressing.

As this winter progresses, I'll get a much better understanding of how will slide into capitulation next winter. Whatever you do, do not buy until we've been in capitulation for a while. This is a world wide event.

update 9:45pm:
This other blog puts us at somewhere between denial and fear:
http://drhousingbubble.blogspot.com/

I think the "anger in the air" puts us at a later state. However, when it doubt, delay purchase decisions during the downturn. There is a reason we have a market. Some think its time to sell, others think it is time to buy. There is no one correct answer. In fact, socioeconomic and geographical differences shift what state each region is in. For example, Seattle and Oregon are back in denial while Florida is up front in desperation. But there is no doubt that we're on the downswing globally. This isn't your father's housing downturn.

As to myself, I believe the risk of depression is constantly growing. (Man did I hate typing that.) Delaying the pain is only causing the seed corn to be expended prior to the planting. I cannot wait for the next rate cut and dive in the dollar.

Got popcorn?
Neil

14 comments:

tj & the bear said...

As to myself, I believe the risk of depression is constantly growing.

Neil,

As I've stated at CR... the risk of depression is already 100%, it's just your awareness of it that is rising.

wannabuy said...

As I've stated at CR... the risk of depression is already 100%, it's just your awareness of it that is rising.

Maybe. I still see ways to avert the bread lines. But I'm "hunkering down" just in case.


The next rate cut is going to kill us. It might be enough to effectively kill the return of funds from our over-purchasing of foreign goods. It certainly will put oil over $100/bbl. Thankfully I've always liked smaller cars.

What we need to do is divert funds to infrastructure. (e.g., poor transportation is going to kill LA's economy.)

What's your opinion on my emotional timeframe? Also, when would be good for you for another blogger dinner? I'm thinking early December on a Saturday night.

Got popcorn?
Neil

sandman said...

Neil,

I've disagreed with you in the past about your timeline, but I think you're 100% dead on this month. That's exactly what I'm seeing here in Phoenix.

There is quite a bit of venom out there against anyone who isn't REIC or a FB.

I especially agree with this statement. Wow, I've had people joke about me not owning a home, but reading that sentence made me realize just how personal it's become lately. It hadn't clicked until just now, but you're right, FB's are getting mad and for some reason they must think that I had something to do with it. Sheesh!

wannabuy said...

It hadn't clicked until just now, but you're right, FB's are getting mad and for some reason they must think that I had something to do with it. Sheesh!

This is getting worse and worse. Unfortunately, it is part of the transition to desperation; but its the part that says the market is holding onto a spiteful fear.

I'm beginning to really wonder how long the "tail" will be. I'm thinking that when prices do hit a bottom foreclosures and fear will keep prices down for a long time. Longer than the normal 18 months.

Yes, that above paragraph is very different than how I thought a year ago. Funny things happen when you read... one's mind changes.

Got popcorn?
Neil

tj & the bear said...

I still see ways to avert the bread lines.

Love to hear them. If they're good, I'll feel better; if I effectively shoot'em down, well...

Emotional timeframe still looks good to me.

Regarding dinner: Just let me know when the next one is and I'll do my best to make it.

OCInvestor said...

I agree with you Neil! I see fear and anger at my office.

One VP bought a condo for 650K last month. He is rich, but smart???? I dont get it!

Also if I see other drivers on the road, i see people are dull in most cars aged 30+....

But dang, markets are holding well.

wannabuy said...

TJ,

How to avoid a total disaster:
1. divert to building infrastructure. Due to the "peak oil," I'm biased towards mass transit. This would include a huge new bus terminal at LAX and Union station. Both connected with feeder roads to the freeways. More carpool lanes, etc. Railroads between the cities need to be fixed. Put some government money in the trans-Chicago railroad project. Rebuild the airports (add runways, rail access), etc.
2. Accept the pain early. We're trying to delay when the losses are recognized. That's only increasing the fraction of our wealth that will be destroyed.
3. Manufacturing. Help rebuild it. This is the trickiest part. China needs to be reigned in, but we don't want to end free trade (it is a long term income multiplier).
4. Further increase food prices.

WHAT?!? you might say. Well... we're doomed to inflation anyway. We might as well help balance the trade deficit this way. Long term, this will give Africa a nice leg up (they have the largest amount of under-utilized farm land in the world).

None of this is cost free.

Now my ideas of employing welfare recipients while alleviating the need for illegal labor at the farms... probably won't go over.

Got popcorn?
Neil

wannabuy said...

I should have commented on the anger.

Its getting pretty common. They do say in real estate markets that are about to break the road rage gets out of hand. But how much is that due to parents over-working to pay for that McMansion and feeling guilt for ignoring the kids?

No doubt it will be ugly. I see about half of the California "millionaires" becoming like one of my uncles: an ex-millionaire. (Note: I have quite a few very successful uncles too. Its never 100% though.)

Got popcorn?
Neil

tj & the bear said...

Neil,

All of those should happen, but won't until well after the depression has been underway. All it takes is one look at DC & Wall Street to know they'll deny there's even a problem until it's literally undeniable.

No, I'm afraid this one's already baked into the cake.

BTW, we'll have to get together sometime so I can pass you some good reading material.

Justin said...

You are not alone in your belief in real esate going down for a long time,

http://www.rgemonitor.com/blog

Nouriel Roubini | Oct 28, 2007

"A friend of mine who is a senior professional in one of the largest financial institutions in the world has sent me privately – and confidentially - the following email messages. Like me, he predicted a year ago that this would be the worst housing recession in US history and described a bust process that would go through 4 phases.

Here is the way he is putting it:

Phase 1: rising mortgage defaults, homes prices start falling, sale volumes falls, housing starts and permits decline.

Phase 2: home-builders’ bankruptcies, housing starts and permits crash, substantial layoffs in construction and real estate-related fields (mortgage brokers, mortgage lenders, etc.).

Phase 3: substantial price declines in major metro areas, large rise in defaults of prime but low-equity mortgages.

Phase 4: large-scale government intervention to help households going bankrupt. This is a political phenomenon, so the timing and nature of this cannot be reliably forecast.

....I fully agree with him with one caveat: we are not just at the beginning of phase 2 but most likely already at phase 3 as most of the aspects of phase 2 have already occurred by now and some elements of 3 are already on their way (home prices are falling sharply in some major metro areas, we are seeing the rise in defaults in near prime and prime mortgages and some near prime and prime lenders are in trouble). And we are getting close to phase 4 as over a dozen proposals to rescue 2 million plus households on the way to default and foreclosure are now being debated in Washington."

I suppose as with anything in life, the phases never follow exactly as planned or predicted.

Winter comes when winter comes, in spite of what the calendar says.

The housing slowdown and decline will follow its own course, in some respects it will follow predictions to a T, in some cases not, but at least you avoided going bust unlike the house buyers will experience.

wannabuy said...

BTW, we'll have to get together sometime so I can pass you some good reading material.

We should meet up. e-mail me at wannabuy3@gmail.com.

Justin,

Interesting info. However, I would argue we're towards the end of phase 1.

To think, many of the other bears think things will be far worse than my current predictions.

Got popcorn?
Neil

therewillbesnacks said...

Tiny diversion, but true to the original post:

We've been watching the CME projections (LA's are Here at CME.com).

It seems strange that this supposedly 'rational' market is predicting only 13% decline in the LA market in the next 4 years, when we are already seeing 10%+ reductions in many areas.

What's with the optimism?! San Francisco's projections are down a lot more than this.

Does anyone have thoughts about these numbers? We've been discussing all sorts of things, including projected population growth due to (legal and otherwise) immigration.

sandman said...

It seems strange that this supposedly 'rational' market is predicting only 13% decline in the LA market in the next 4 years, when we are already seeing 10%+ reductions

First off, they're morons. Second, they're likely counting on a quick bottom, with appreciation taking over to bring things back to only a 13% decline.

Anonymous said...

Neil
I like the cut of your jib.