Sunday, June 21, 2009

June Real Estate Emotions.

Well... I missed the transition to Capitulation. But in the zip code I care about, you can see a roll into it starting a week ago. Why do I say this? People I know who own and I thought could afford multiple homes are now putting their *primary* home on the market. Families I know who proudly held onto oversize homes are suddenly finding an urge to downsize and move closer to grandkids. Quite a few people just decided to 'retire' (business dried up) and move full time into their vacation home.

While Capitulation seems to be happening is Phoenix and a few other cities, it certainly isn't national. Ok. We're towards the last part of the best time of the year for sellers.

For California, the budget debacle will probably be blamed for tipping us into Capitulation. But I do not think the budget is the root cause. Its just a coincident event. Any tax increase will just be an excuse to cut unprofitable business ventures. Any layoffs will be minor compared to what is naturally happening.

I'm seeing more people going to mocking buyers. We've been hearing this since 2003. Its not going to work on the people that held out that long. Investment emotions have to be worked through. It is a process that cannot be skipped. We've gone from being too invested in real estate to 'doubling down.' Instead of investing in infrastructure, we've extended the bubble. Which as kept the builders building... which lowers the final bottom price. :)

The latest update by Fitch is that CA real estate prices will drop 36%.

Their national prediction seems reasonable. I would have put California price drops, in a longer timeframe, at 30%. We'll see which is right.

In December I noted: "What I'm noticing is that no one seems to be willing to say real estate is a bad investment!" 40% of the local homes are selling to investors!

What I'm seeing is homes that are well priced and qualify for a FHA loan are selling quickly. But what really interests me is that the 'well priced' home is getting better month by month. Local sales are pitiful. Where are the months that break 100 sales per month? That used to be typical for many of the local zip codes? Ranch PV (90275) Sold a mere 17 homes in May at a Median price of $970k. Wait... that is a conforming loan with 20% down! There is an absolute wall above conforming+20% down. Heck, conforming +10% down is slow.
DQ-link, updates to latest (no archive)

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 local market.

What I'm seeing is people are willing to jump in (FHA). If they miss-bet... well, it was only 3.5% and they're planning to keep 10% of the home's price is a crush fund.

As I noted before, the home market is still 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 only a month or two to wait until the start of Capitulation and then another year for the emotion to do its job. We're rolling into the emotion. Let's face it, at today's prices, a buyer must go 'all in' to purchase. Any financial hiccup and they lose their down payment. Should it surprise anyone the market is retreating to FHA? Oh, a few are trying to get ahead.

I'll update this figure when we're into capitulation. We're so close I can almost taste it. The buying season is dying off. Pretty much everyone I know has a close friend who has been hit hard by this downturn. Heck, everyone I know also knows someone with a failed flip.

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 Mid to late summer (update) 2009 well into 2009.
11 Despondency (start of market price bottom) Not before Summer 2010 (updated). Possibly as late as end 2010 (unchanged). 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 miss prediced too short of a panic (six months, it looks to be 10). We're just now blending from Panic into Capitulation. Remember, Capitulation is the time of the greatest price drops. I'm referring to total rate of dollar value drop off. I'm thinking Lancaster might be close enough to the bottom.

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.

Now, there are some positive indicators out there.
But look at CR's latest on DC.

Prices track incomes.

Thus, why I think there are a few areas worth buying into. For most, wait.
The #1 indicator I'm seeing is that some of the loudest 'Prices always go up' people I know have put their homes on the market. These homes would have easily sold for $1.3M to $1.7M during the peak. All quickly drop their prices to below a million. Some then sell, some are still sitting. All above a million... sit. Its the homes that were going for $1.9 to $2.2 that seem to be able to fetch $1.3M right now.

The local equivalent of Case Shiller has been dropping fast. I'm really going to be interested to see the $/sqft for September 2009-February 2010 (see two posts ago). It has the feel of a sharp turn down coming (not yet here).

Until employment improves, housing will tank. Too many areas are near or breaking 10%. What I'm worried about is that people I *never* talk economics/housing with are scared of depression. That meme has taken hold. I'm talking about parents I interact with to be a parent. Around the kids, it should only be about the kids. But too many parents are fearing for their job.

I'm going to remember this spring bounce of optimism. It was interesting. It makes it clear why my fellow bears insisted emotions last a year. I will modify that, they can only change if the seasonal mood helps enable the change. For the stock market its 'Sell in May and go away.' For housing, the spring selling season is quite the drive.

Oh, five friends have admitted selling every stock, mutual fund, etc. They have retreated to T-bills. I'm talking everything (including 401k's). Too many have not made money for two decades in the stock market. While this could reverse quickly... it indicates a sharply changing emotional state. Of those I know who invest in real estate, only a small fraction have any capital left. With 40% of sales to investors... it will get interesting.

Late edit: I notice the latest REMax commercial is sellers 'waiting for the market to heat up' instead of 'buyers kicking themselves for not getting into the market.'
Rotfl. While I appreciate the Realtors (tm) must advertise to both sides of the market... I think their advertising board might be accepting reality.

Got Popcorn?


Rajesh said...

Nice post on the uptrend.
Boise real estate

The Anonymous said...

Neil - I gotta hand it to you on your timing of emotions. Yes some areas have pretty much bottomed, and the national picture looks a bit behind. However, this seems pretty accurate for most bubble areas.

Still considering part of it is ahead and part of it is behind -- for you to set out this timeframe 2 years ago, and basically stick to it with a few modifications here and there. Nicely Done.

wannabuy said...

The anon,

Thank you. But I haven't been trying to 'stick with it.' Oh, don't worry, I appreciate your compliment; what I tried to do was understand investment emotions, predict the timeline and publish my thoughts.

I wonder if I'll keep enough interest to keep publishing on the uptick? I don't yet know. But first to keep going until we hit bottom.

Got Popcorn?

The Anonymous said...

Guess what im trying to say is your prediction, albeit 2+ years old, looks pretty spot on.

I think you should keep it up till CS derivative starts going positive at least. Inventory? Whats there to say, its down, and therefore no longer interesting.

Also, please let us know when you buy. Inquiring minds want to know!

LeD'z said...

a lot of people think like that..but we can't blame them, it's what they mostly see and read..
commercial real estate

Steve Petrus said...

I think this summer month, they will have many customers, The inventory of the estates are great. Can I learn a lot of this inventory?

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