What I'm noticing is that no one seems to be willing to say real estate is a bad investment! Too many are itching to buy. Thus... We seem to be getting further from capitulation.
But then we see rates on jumbo and jumbo conforming disconnecting from the standard product. Not to mention the jobs situation. Nothing like a dose of financial reality to splash cold water onto the bare scalp of a Trump wanna be.
As I noted last month, its worse than I expected. I'll repeat what I've been saying: "For those waiting for the crash in house prices in high end neighborhoods, the big drops happen during Capitulation." You have four or five months to wait until the start of Capitulation and then another year for the emotion to do its job.
For the business cycle, let's look into one of the rare forward indicators, the Baltic dry index. Basically, there is very little demand to charter ships.
The above is from Bloomberg
You can now charter a ship for pennies on the dollar compared to six months ago. This is a really ugly forward indicator. Until this index shoots up a lot (say to 5000 from the current 733), it implies an imploding world economy. Yea... things are much worse than I thought they would be.
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: since mid/late February 2008 to late September 2008 (~8 months)
9. ****Panic*****: Current state, started Late September 2008.
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)
I created this graph on emotions and value, for its not really a sin wave, its much more of a rounded sawtooth...
I wonder if everything falling apart won't correct house prices like the stock markets. Oh... there will be a six month delay (or more). We're on an accelerated cycle. Panic started barely within my fall prediction. 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 (six months instead of a year) that blends right into Capitulation. Remember, Capitulation is the time of the greatest price drops. At least in the markets that survive until then.
Note: Some blogs have the emotions tracking about a year behind mine (Irvine housing blog.) If anything, there is a chance of a protracted downturn than the last one. I would love it if someone who point out a forward looking indicator that isn't ugly.
To think, the majority of layoffs lie ahead.
Got Popcorn?
Neil
7 comments:
What I'm noticing is that no one seems to be willing to say real estate is a bad investment! Too many are itching to buy. Thus... We seem to be getting further from capitulation.
Hm, sounds like a bailout mentality.
Not me! But yea... too many have the 'bailout mentality.'
Sigh... I wish more people read history.
Got Popcorn?
Neil
Neil - interesting article in Forbes today about east coast cities doing better because they are generally older, denser, and more geographically contianed (i.e. more diffucult to overbuild).
This is not surprising and pretty self evident. However, what is surprising is CA migration patterns. Basically it looks like CA gets lots of positive immigration during boom times (followed by explosive overbuilding) and lots of negative emmigration during downturns:
"Migration in California tends to be very elastic," says Mark Zandi, chief economist of Moody's (nyse: MCO - news - people ) Economy.com. "People move there quickly when the economy is good and leave when it's not."
The only exception was San Francisco, which is so geographically constrained that it's difficult to overbuild there.It's this kind of constraint that helps many East Coast cities resist volatility. Less room to build protects these cities from the crippling oversupply that's hurting places like Phoenix or Las Vegas."
This could explain why your U Haul index never seemed to waiver much on places like DC where we still have positive job growth. My guess is if you looked at LA now, the picture would be a high outbound rate. Overall, an interesting article:
http://www.forbes.com/realestate/2008/12/16/cities-ten-homes-forbeslife-cx_mw_1216realestate.html?partner=relatedstoriesbox
Neil,
Here's a fun one for you, taken from our local MLS (http://www.armls.com/stats.html - 2001-2008 sold charts).
Direct link for this month is here: http://www.armls.com/pdfs/SoldChartNov08.pdf
Looking at the second and third pages, it appears that Phoenix lost 3 years of appreciation around April (2005 matches 2008), we lost 4 years of appreciation by September, and we're just about to eclipse 5 years (back to 2003!).
This is somewhat affected by the mix of homes sold, of course, but it's interesting that both the median and average sales prices show the exact same trends.
The 2008 row explains the economy better than any analyst.
Looking at the second and third pages, it appears that Phoenix lost 3 years of appreciation around April (2005 matches 2008), we lost 4 years of appreciation by September, and we're just about to eclipse 5 years (back to 2003!).
Wow! That is acceleration. Gulp!
Its accelerating.
The Anon:
California does have a dynamic population. But having a 'zoned limit' just moved the growth elsewhere. San Fransisco is now taking it the hardest.
I admit DC is doing a bit better than I expected. But they're in the top 10 of expected decliners (and how could Phoenix be off that list?!? Not to mention Las Vegas and most of Florida?)
The #1 donar state to the US Federal government is hurting. We need funds. During the great depression the Federal government had to do at least two 10% pay cuts... Interesting times ahead.
As long as the Baltic Dry Index is below ~5000... we're in trouble.
Got Popcorn?
Neil
Neil,
Seems that people are looking at total price declines and assuming that the top few cities (excluding Cali) are about to level out.
As for the acceleration in Phx (actually Az, I misread the graph), a lot of that is due to the fact that we've given back most of the bubble gains. So now we're eating into years with normal appreciation - and doing it at a fast clip.
You hit the nail on the head with the Baltic Dry index. That one really scares me.
Neil,
In the 80s and 90s the baltic dry index was below 2000. i can't imagine it going above that until the next housing boom.
I wonder how the hope of low interest rates will distort the emotional cycle. It has encouraged some of my friends to say that now or soon is the time to buy. Maybe one of your cycles within the cycle.
Skye
Post a Comment