Thursday, July 17, 2008

July Real Estate Emotions

This aricle is early. Why? The emotions due to the Indymac closure. I believe we are one to two major bank failures away from an acceleration to the next emotional state. Even without the bank failures, we're going to hit panic by the late Fall. The economy is that bad! We're still in desperation... but its only going to take one or two more trigger events to send us into emotion #9: Panic.

This is a photo of what the lines are like at Indymac. Its not ust this Pasadena location, I've seen it at several others. People are moving their money around... its not normal. If Indymac had failed in the fall, it would have sent us into panic. Since if failed now... its wait and see if another big bank sends the real estate emotions forward. Note: I always expected bank failures. Its just odd watching them be the drivers.

I'm halting doing the Kubler-Ross scale. I haven't found it to be a good predictor of anything... Not when all of the lemmings are going towards the cliff together...

I've been using the following graph to illustrate the emotion changes versus the ARM resets. At this point, it might be better to graph versus something else... or maybe I'll keep it; the missed payments have put us into quite the credit crunch.

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. Late Fall without a trigger
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 end 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 (The worst is over...) about 2017
15 Optimism (cycle starts again)

I've decided to redo the graph on emotions and value, for its not really a sin wave, its much more of a rounded sawtooth...

We're pretty much right on schedule. The only new bit is that one or two more trigger events will put us into panic. We could be into panic as early as August (I think we've survived July). But most likely, it will happen seasonally. That is unless some of the large banks we're concerned about are taken over by the FDIC. We're on an accelerated cycled. Each emotion is supposed to be for a year in a normal environment. Well... The housing bubble overshot the normal levels, so the downside will be more severe and is happening fairly fast. At most 9 or 10 months per stage (on the way down).

I'm predicting a short panic that blends right into Capitualation. Remember, Capitualation is the time of the greatest price drops. At least in the markets that survive until then.


The Anonymous said...

Neil - very OT but you might like this, its a list of all the starbucks locations closings.

Im struck by the number of closings in CA - maybe I shouldnt because of its populaiton, but also, las vegas - like your U haul index, is there a starbucks index to tell you how an area is doing?

sandman said...

anon: I don't really think that means much. The closures are a function of market saturation, which differs greatly from area to area. Interesting theory though.

Neil: I'm not sure how to interpret the second graph. Prices went up 100% (doubled, yes) and will go down 100% (zero) from the mean? Either way, I certainly hope that you're right about the emotional states becoming compressed. I'd rather not consider the alternative. Also, I'm all for a very short panic, but unless there are external triggers (i.e. failures) I don't know if we can go through a whole emotion during the slow season. Thoughts?

wannabuy said...

The Anon,

Thanks for the link. There might be a Starbuck's index hidden in there... I'm going to have to look into that! Do understand, the joke is that the current Starbucks closures would be bad if all happened in Santa Monica, that would cut the number of franchises by 50% in that city! ;) I'm rare among the bears in liking Starbucks. I remember what coffee was like before Starbucks and I'm thankful for what they've done. Now... they over-expanded and will suffer for it. But I do like their product.


The second graph should be a price drop per time. Since there is more area in the first part (positive) than the second, prices stay above. I'll have to figure out a way to write that into the description.

My thoughts on the compressed emotions is that a trigger event (which is almost certain) combined with the off season sends us into Panic. That compiled on top of tight credit, a recession, high oil (which should weaken, but not go away this winter), and the beginning of the impact of layoffs.

Layoffs are the big issue. We really haven't felt the impact yet. We'll start in the Fall... and by spring it will be major.

Hence why I'm predicting an extremely compressed cycle for Panic to Capitulation.

Hold on tight. Starting this Fall, it gets too interesting.

Note: I've been wrong on one major prediction. I thought we would have more civil unrest this summer. This was based on the pain in the working class communities combined with the seasonal tendencies. This is actually confusing me. The economic pain is there... They've been under worsening economic conditions for a few years... Did I get the time constant wrong?

Why do I point this out? Simple. I really try to constantly improve my predictions. Not to make them what I want, but to make them worthwhile predictions. This means finding out why I was off. (I'm a big believer in peer review.)

Got Popcorn?

wannabuy said...

Further comment on the Starbuck's list. Of the whole list, only two of the Starbucks I've bought coffee at are closing. The Mammoth one isn't a surprise, the other Mammoth location, a block away, is 10X better for foot traffic. (Ok, a see a 3rd on Google maps... But I'll ignore any I haven't been too...)

The Santa Monica location surprises me. Cest la vie. Maybe the rent was too high.

Got Popcorn?

wannabuy said...

Map of California Starbuck's closings from the Sacramento Real estate stats blog.

Note: The areas Sans Starbucks closings are certainly NOT doing better (e.g., Long Beach), they just weren't as oversaturated. Although... I expected more closings in Costal OC.

Got Popcorn?

sandman said...


Ah, integrals, now I understand. Thanks.

Excellent reasoning in your explanation, sounds good to me. Unfortunately, I expect many major events in the near future. The question may be when will they end?

As for the civil unrest prediction, I can throw out a couple of reasons why that hasn't manifested, but I won't claim to be correct. First, the prospects for a job are still there. Rightfully or not, people still say "I can always find another job in a couple of months". Second, the scope of this hasn't hit most people. They (media, congress, etc.) are still "solving" the tiny subprime crisis. There are a lot of bulls out there who still talk about the (now late-) 2H recovery, and that the holidays will be fairly strong. Finally, we haven't seen a real recession around here in decades. I think people have forgotten what the term means.

Bottom line, IMHO your prediction ran head first into a giant ignorance-reinforced wall of denial. For what it's worth, I would have agreed with you a year ago. I never expected the bullish chorus to blind so many to the truth. I guess you hear what you want to hear. My guess now is that you were off by about 6 months, and the phrase "good will to men" will be lost this year.

wannabuy said...

Second, the scope of this hasn't hit most people. They (media, congress, etc.) are still "solving" the tiny subprime crisis. There are a lot of bulls out there who still talk about the (now late-) 2H recovery, and that the holidays will be fairly strong. Finally, we haven't seen a real recession around here in decades. I think people have forgotten what the term means.
Excellent point. People have forgotten and thus are easily fooled by false promises! But people fooled and then finding out the dark side panic quick. Interesting times ahead.

My guess now is that you were off by about 6 months, and the phrase "good will to men" will be lost this year.

I could be off. One reason to publish and discuss is to figure out if and why I'm off. This Christmas scares me. I won't go into how far the holiday has gone off track. Rather, I think the pressures of the holiday season will probably bring out the worst in people. Ugh..

Got Popcorn?

sandman said...

Honestly, this Christmas doesn't scare me too much. I don't think folks will be on their best behavior, but I also don't expect chaos and anarchy. There will be big discounts (yes, I'm a black friday follower) and overall I'll guess that retail sales will come in around 80% of last year.

If sales come in a lot lower than that, I fully expect a lot of businesses to go under. The canary in the coal mine right now is Circuit City. If they go bankrupt with no buyer I can see that making a big impact on everybody. Most didn't know what Bear Stearns did, but CC is very visible and their failure means at least a major inconvenience for many of us (worse for the employees).

wannabuy said...

Oh, Probably not chaos and anarchy, but it will be a slow season.

As to CC, I think that will be area dependent. In this area, they were so outdone by the competition that their failure sans buyers would go unnoticed (poor locations that are being turned into TJ Max and other discount clothing stores).

My 'canary in the coal mine' will be TV sales over $1,000. People will spend on TV's until the end.

Got Popcorn?