Saturday, March 22, 2008

Real Estate Emotions March Update

Take a minute to sit back and realize what only the bloggers knew about declining home prices a month ago is now common knowledge. If you look at my last two posts, you'll see how the information about the bubble is really gaining traction. The amount of anger in the system seems to be oscillating. I expect anger to peak either this summer or next summer; the Ponzi victims remain upset that the news about the emperor being naked is getting out.

I just love this quote. Its so appropriate to the housing bubble:
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.

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: 19% (Prices dropping? Can't be.)
Denial: 8% (No! Real estate only goes up!)
Anger: 13% (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 see a shift from Immobilization to anger (1%). No, people aren't skipping emotions, that's just the overall trend.

Onto the investment emotions. We're firmly in desperation, with Florida possibly leading into Panic. Note that Florida, due to their multi-year inventories, high taxes and insurance, and low wages is pulling ahead of the pack in the worst ways. This is the same graph I updated in January; emotions are progressing on that timeline. Option-Arms are hitting their limits and helping drive the correction and emotion changes. For most of this year we'll stick in desperation. Anyone who thinks this will turn quickly is trying to sell you something.

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 *****
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. Don't let anyone BS you into buying soon.
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 when I predict the greatest price drops (both nominal and real prices). The bottom is a long way off... We'll be into 2010 before we have enough information to guess when the bottom *might* occur.

The option-ARM resets will be the motivator in 2008/2009. Not the planned resets, but the loans hitting their limits (due to negative amortization) or when J6P realizes their overpriced McMansion isn't the road to riches they imagined and putting 50%+ of income into a failed investment is just throwing good money after bad. Recall, over 90% of Option-ARM borrowers only pay the minimum; that negative amortization is going to drive the market in 2008 and 2009 as more and more home-debtors flee the pain.


I'm being a broken record. Why? Afford ability still isn't here. The baby boomers are going to consume less housing, starting in early 2008! Those are the reasons the 2008 selling season isn't getting traction. 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. When the recession hits incomes, afford ability will continue to improve quickly. You get one guess how that's done.

Interest rates? If they go up it will only drive down prices faster. Mortgage payments must drop back down to a historical fraction of income.

We'll finally start seeing price declines in the nicest areas. The bargains won't exist outside of the rust belt until 2010/2011. 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.

The time to start looking is when your local news goes from covering the foreclosure bargains to why its smart to rent. Until that happens, the wanna be Trumps will be liquidating their failed mini-empires. This will drive investment emotions. Emotions, income, and inventory will drive transaction rates and prices.

This will end. We will recover. Some new industry will offer a new product we all feel we all should buy. (e.g., a la Ipods, HDTV, air travel, etc.) I'm excited about living in a country that invents multiple new industries during every recession. But which cities? Look at this list of airport traffic (indicator of economic strength). Notice that most cities keep a constant relative rank, but some have shot up, and a few are dropping off the international conscience while others have jumped onto the world stage.

http://en.wikipedia.org/wiki/World's_busiest_airports_by_passenger_traffic

Got popcorn?
Neil

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