Monday, September 01, 2008

Tardy August real estate emotions

Please see my last article for a list of troubled banks. Note: I expect a few bank failures that didn't make that list. God bless creative accounting. ;)

Why are the banks important? It would take an Indymac sized bank to push us through an early emotional transition or enough small banks to add up to that level of uninsured deposits. Right now... I consider that unlikely before the next chronological shift.

The real estate market is very seasonal. The poor sales of Fall/Winter will drive us to the next emotional level (Desperation to Panic). This will be the toughest emotional call for me. Why?
1. I'm not traveling like I was. No more 3+ states every month (New Baby, I'm staying grounded through 2008).
2. The local emotions are no longer the quiet passive emotions. FB's are no longer suffering in silence. Yea... this is an artifact of the later states of desperation. But it does mean that while my work site has employees from 12+ states... its tougher to separate the local emotions from the visitor emotions and keep a national perspective.

I've been using the following graph to illustrate the emotion changes versus the ARM resets. The missed payments have put us into quite the credit crunch. Alt-A is only two seasons away!

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. There will be a long market bottom.
13 Hope (hey, this investment has picked up off its bottom)
14 Relief (The worst is over...) about 2017
15 Optimism (cycle starts again)

Last Month I created this 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. But most likely, it will happen seasonally at the end of Fall. That is unless some of the large banks we're concerned about are taken over by the FDIC or the stock market tanks. Neither can be ruled out... We're on an accelerated cycle. 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 Capitulation. Remember, Capitulation is the time of the greatest price drops. At least in the markets that survive until then.

Late Edit: Why are SoCal emotions starting to become overwhelming,
From Mish

Notice something? For SoCal, the 'gravity' on prices is increasing. This is the derivative. Its going in favor of buyers waiting. Think about what this will do to mortgage defaults. Heck, the Alt-A resets in Miami alone will clobber Jumbo loan default rates. Add in Phoenix, Las Vegas, and...

Yea. Capitulation sometime in 2009. We can ignore the emotions and come to the same conclusion. Note: Some blogs have the emotions tracking about a year behind mine (Irvine housing blog.) If anything, this is more likely to be a more protracted downturn than the last one.

Got Popcorn?


sandman said...

Great post, as always, Neil. Hope you're getting some sleep :). A few things:

First, as you said, capitulation is where the largest price drops occur (something I've heard many times). But in CA, some areas are down >35% from the peak, and in AZ we're around 25% down. Do you think this is more from local emotional acceleration, or will things really just fall that much?

Second, I'd like to propose one more trigger towards a faster panic. The insurers are beginning to force 10%+ down (despite the best efforts of FRE/FNM). Sure, it's just a bus stop on the way to 20% (or more), but each incremental increase cuts a large portion of potential buyers out of the pool. It's like a pyramid where the top is people who can buy for cash, and the bottom folks have nothing for a down payment. Each step up the pyramid eliminates the largest set of remaining buyers; this is something the market will feel very quickly.

wannabuy said...

Do you think this is more from local emotional acceleration, or will things really just fall that much?

I think that there is plenty of room for further drop. Now... out in Palmdale that might be only another 15%. Yes... far below replacement. But Replacement costs only come into account once the surplus inventory is absorbed. I think thinks will fall that much with most of the price losses going forward being the 'upper middle class.' You know, the ones who invested their shirt in Real estate. ;)

Local emotions always play a role. But I know central Phoenix and Costal California have been lagging their ex-urbs. But oh boy... look at auto sales. Is about to happen. I cannot wait for CR to publish his next summary of Realtor (tm) commisions as a function of GDP. Actually, I wish we could look ahead and see Fall/Winter 2009's numbers. ;) I think Realtor commissions will bottom at 0.2% of GDP (slightly below previous recession bottoms).

The insurers are beginning to force 10%+ down
I 100% agree with you. I've predicted for a long time that 25% down will be the norm during the darkest days of this downturn. 10% is starting to happen... Down payment requirements are going to grow faster than a bad foot fungus once the bank failures get rolling. When? I think we're at about T-minus a year from the 'darkest days' of the mortgage market. Quite a few banks are having trouble selling FHA backed mortgages due to the low down payment requirements. Its it significant yet? Outside of a few bubble markets? No. But again, we bears have been patient, so we can wait another six months.

Each step up the pyramid eliminates the largest set of remaining buyers; this is something the market will feel very quickly.
Yep. When everyone wants out, no one wants in. We're not there yet, but within 18 months we will be. :)

Insurance will be interesting. I'm not just talking mortgage insurance, but overall insurance. Its one of those side issues I normally ignore... but will certainly play a role in the economy going forward. (e.g., due to fraud)

Got Popcorn?

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