Sunday, February 24, 2008

Real Estate Emotions February Update

What a difference a month makes! The change in emotions is huge, we're in desperation or so close no one will ever be able to say this couldn't have been the transition date. While I did indeed note less anger in January, its the exact opposite in February. Oh boy and the Ponzi victims upset that we're dissing their hero!

Ponzi's supporters were outraged at the officers who arrested him. 17,000 people had invested millions, maybe tens of millions, with Ponzi. Many who were ruined were so blinded by their faith in the man or their refusal to admit their foolishness that they still regarded him as a hero.

The above quote is important. The faithful cannot understand their greed has ruined them. Instead they will point blame anywhere else. Let's help point it at the REIC where it belongs.
quote from:
http://en.wikipedia.org/wiki/Ponzi


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



Stability: 40% (Old homeowners and bubble bloggers)
Immobilization: 20% (Prices dropping? Can't be.)
Denial: 8% (No! Real estate only goes up!)
Anger: 12% (This one must be discussed)
Bargaining: 5% (Ok, we can cut the price and lead the market)
Depression: 5% (We're going to lose our home. Just let them take it...)
Testing: 5%
Acceptance: 5% (Stop payming, we're toast. Move back in with mom.)

If you compare to my previous months (eventually I'll do graphs), you'll notice I pulled from Stability and Immobilization and populated the later emotions. Some of the people in Denial only need one discussion to flip into anger (and back); be careful what you say at work! I'm serious... there were nasty arguments this week.

Onto the investment emotions. We're transitioning into desperation. This is the same graph I updated in January; I put enough work into that timeline that it should hold for a while. Option-Arms are hitting their limits and helping drive the correction and emotion changes.

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. Lasted ~10 months)
6. Denial (Reached in October of 2006 until mid-May of 2007, ~8 months)
7. Fear (Reached in mid-May of 2007 to mid/late February 2008, ~9 months).
8. ****Desperation: Current state ***** edited from last month
9. Panic: Fall 2008 looks to be the start.
10 Capitulation: Spring 2009 through the winter of 2009. Yes, basically 2009!
11 Despondency (start of market price bottom) Not before winter 2009. Possibly as late as 2010. Much more uncertainty here.
12 Depression (end of market price bottom) Not over before summer 2011, probably later. It could be as late as 2014.
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (Its almost what I paid for it...) about 2017
15 Optimism (cycle starts again)

Sellers bet the farm (house) on appreciating real estate and those days are gone. This year will only begin to shake out the more feeble 'homeowners.' 2009 is still when I predict the greatest price drops (both nominal and real prices). The bottom is a long way off...

The option-ARM resets will be the motivator in 2008/2009. Not the planned resets, but the loans hitting their limits or when J6P realizes their overpriced McMansion isn't the road to riches they imagined. Recall, over 90% of Option-ARM borrowers only pay the minimum, so that negative amortization is going to flatten them when the payments reset.

Do read my article on inventory and sales. Ouch!

Basically, the 2008 selling season isn't getting traction. Why? Homes are not affordable. Look at the Wells Fargo Afford ability index. Most people are still priced out by historical measures. Its getting better, mostly by price drops but a little by income increases. Guess what, when the recession hits incomes, afford ability will continue to improve quickly. You get one guess how that's done. Interest rates? Going up will only drive down prices faster.

We'll finally start seeing price declines in the nicest areas. But wait. The bargains won't exist outside of the rust belt until 2010. Some areas like Bakersfield and Riverside have seen amazing drops in January prices; its like a cancer. It will spread. Credit will tighten. Get your down payment in order and wait.

Later update/Edit:
Home Prices Drop 8.9 Percent in 3 Months

Nothing the bears didn't already know, but if that doesn't give both the bankers and buyers pucker butt... Let's just say I'm not expecting anything but a slowing in the velocity of money.

Got popcorn?
Neil

2 comments:

sandman said...

Ok ok, I'll finally make a blogger account, I can't resist ;)

Another excellent post, Neil.

Locally (Phx), I would have argued that we entered desperation closer to the holidays. It's interesting, though. Lately, I'd almost say that we dipped back into fear. I've heard a lot of (otherwise sane and smart) people talking about immanent recoveries. My response is simply "call me when the inventory drops 20% YOY - spikes not included".

wannabuy said...

Thanks for making the account.

I think in my newer thread we see the anger. ;)

For Phoenix (sorry for not seeing this comment earlier), you did enter desperation earlier. I'm trying to keep the perspective national. :)

Got Popcorn?
Neil