Thursday, June 26, 2008

June Real Estate Emotions

With the focus on oil prices, its almost not worth writing what I consider my signature article. The talk is all about "middle class price out" in between discussions on new $15,000 motorcycles that get 50 or 60 mpg. (Sweet rides! If I wasn't about to become a father... oh, I think a few 'fish stories' on mpg are creeping up around various social circles.)

If you read last month's article, don't even both reading except for the concluding paragraph. Despite oil, stock prices, economic pain... The investment emotions haven't progressed at all. This is the weakest summer selling season in over a decade. Most comparisons are too the 'peace dividend recession.' And yet... there is a false hope out there.



We're continuing on in the major emotional transition state of Desperation. The amount of anger in the system seems to be oscillating with no perceptible national change this month. 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 Why? active emotions peak in hot weather

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: 17% (Prices dropping? Can't be.)
Denial: 8% (No! Real estate only goes up!)
Anger: 15% (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.)
No change.


Comment: None. No change. We're in idle. My data has big holes in it every year this time of year... it seems to be a time that buyers are ambivalent about real estate (in general, not everyone obviously). Or maybe its just me enjoying the weather change. :)

Onto the investment emotions. We're deep in desperation, with Florida trending into Panic as the front runner. 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 ***** since mid/late February 2008
9. Panic: Fall 2008 looks to be the start. Probably late fall
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.

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.

Yea... an almost copy and paste of last month's article which was a copy of the month's before. Really, nothing much changed. I expect no change until the Fall. Ok, I HOPE for no change until the fall. Otherwise I'll have to change my prediction from "R" to "D" if it happens much ealier.

Got popcorn?
Neil

4 comments:

stealthcat said...

I live in R.B. and would like to buy someday (not for 2 years, at least!). I have an idea of what I think a fair value *should* be, based on some assumptions. What I'm curious about is if anyone can tell me which assumptions are correct or incorrect. (I apologize in advance for the onslaught of numbers)

From memory, RB had median income of ~$69k w/ median house ~$350k in 2001 (5x). Income, per (http://www.onboardllc.com/prod_Neighborhood_Navigator.html) for 90278 is ~$83k.

Here are some of my assumptions:
1) Using a 5x multiplier again would put the median house price in the low-to-mid $400k.

2) A modest 3/2 SFR could be considered a "median" house?

2a) If I'm looking at 3/2s, I am primarily competing with "first time buyers" and not with current homeowners (ie: people w/ equity).

2b) The number of "first time buyers" with 10-20% ($45-$90k) cash right now is "small".

3) A "normal" loan on a $450k house implies a monthly payment of ~$2500

3a) Property tax roughly equates to interest deduction savings to make the math easier.

4) $2500/mo is 33% of $91k, 36% of $83k (gross).

5) The majority of mortgages in RB (even from bubble times, due to neg-am and teasers) and rent are in the "less-than-$3000/mo" range. <-- This is the one I am really curious about. IE: "what are people really paying *right now* for housing of any sort"

5a) The number of households (a) able to, and (b) willing to afford the "greater than $4000/mo" payments that even a "modest, low $600k" house requires is "very small".

So...am I off base with any of these assumptions, based on some of you who have been in the area a while. (For the record, I'm an engineer of ~7yrs in the area).

wannabuy said...

Ok,

The best RB blog:

http://sbbeachbubble.blogspot.com/

I feel capable in answering, but bearmaster knows RB better than any other blogger. :)

1) Yep, but assume some inflation.
2) Alas, the median home isn't a great 3/2...
2a, not quite true, this is SoCal
2b. lol Trivial! No one has savings.
3. That will depend on interest rates, but $2.5k for PMIT sounds about right.
4... ok...
5. They're paying all over the map. I'm going to have to let Bearmaster answer that one.
5a. But you have a concentration along the coast of the high incomes.

What it comes down to is that the engineers will struggle to get into the market. What's going to matter is how the huge retirements are going to impact the housing market. I just do not see the savings for most to retire in the prestige areas. So we'll have an opportunity soon.

Now I'm an engineer too. I think it will happen. But I'm not as bearish as some.

Got Popcorn?
Neil

sandman said...

Neil,

Your copy/paste skills are second-to-none :) In all seriousness, you've hit it on the head again; there's no real info to add to the prior months' posts.

I'd like to toss out a topic idea for the forward-looking folks around here. As it relates to the emotions chart, what kinds of bargains do you think we'll see at each stage? Obviously, there will be an abundance of homes at "bottom prices" late in Depression. But what about before then? Will a determined buyer be able to find such a bargain in Despondency? Late it capitulation even? Also, what about people who are willing to risk an X% drop from their purchase price (where X depends on the individual)?

I often wonder when people plan on buying. Rough estimates of course, as it really depends on market signals.

stealthcat said...

Neil,

Thank you for the feedback. I probably should have posted this one on the sbbeachbubble blog, but from reading your blog, it seems that we're in the same industry, and I guess I wanted to see what a fellow engineer thought :)

The reason for wanting to check my assumptions is that it makes a difference in knowing what I may be competing against in the market. When the bubble was in full force, but before I was aware that it was such (2005ish), I really thought people were paying $4000/mo+ that a $600k mortgage requires. I thought, "man, I thought engineers made fairly good money, but maybe not, since everyone seems to be buying at these outrageous prices. So what am I doing wrong?". Of course, then I find out that people *weren't* really paying that much, because they could get a 4% IO teaser for $2000/month (half the true carrying cost).

Anyway, that's all review from what we know. But the difference is that if the *majority* of people were in the second boat (low teasers), then all I have to do is wait until that crap is flushed out of the system (of course it will, regardless). But if people *really* are paying these kinds of full carrying costs, then we have a different situation.

Again, I think it reasonable to assume that the more prestigious areas (MB, PV), as well as the immediate coastal areas will remain high(er) for obvious reasons. What I think is less reasonable is to think that ALL of RB (and 90505, 90503, which I should have added were in my interest list) will remain inaccessible to someone making above the median salary for the area.

Finally, are you sure about the 3/2 not being median? According to ziprealty, for 90278,90277,90503,90505, there are a total of 683 properties for sale. 472 of them (70%) are "3br+, 2br+". (or...only 30% of properties are smaller than 3/2). Note, I said "modest", not necessarily a great property...

Thanks again. I don't tend to post much, but very much enjoy reading your blog and the bearmaster's, as they provide great insight into the local area.