Real Estate Crash thread

[Spats]

Housing is an investment, just like buying a stock in the stock market.

There are bull markets and bear markets. It's possible to lose money in bull markets, and make money in bear markets, but it's a lot more difficult than swimming with the tide.

There are factors that affect only a local market (such as development policies, existing housing stock, local employment picture, and trendiness of a town or neighborhood) and factors that affect the nationwide market (such as interest rates and inflation).

Right now the national factors, which have been strongly positive over the previous ten years (declining interest rates, low inflation, strong economy) have become less positive. Interest rates are rising, inflation is increasing, and salaries are not keeping pace. However, there are still places where local factors are enough to overcome this.

How bad will the national factors get, and will the local positive factors overcome them? I don't have that answer.

[lemon boy]

I haven't followed this thread at all but here's a little data for it:
Foreclosures Up 53% over Aug 05 and 24% over July 06

[Core Shot]

Wow.

Mass foreclosed-home auction in Michigan
Homeowners in so-called 'auto-wreck' states have trouble keeping up with payments; region leads nation in foreclosures.
By Les Christie, CNNMoney.com staff writer
September 12 2006
NEW YORK (CNNMoney.com) -- More than 250 bank-owned single-family homes, condos and duplexes in Michigan are going to hit the auction block en masse in late September, according to Hudson & Marshall, the company handling the auction.


http://www.hudsonandmarshall.com/auc...&auctionID=303

[Tin Woodsman]

spats speaks the truth. But for those of you who think RE will never go down b/c "they're not making any more land" (might be the stupidest argument I've heard since "Why wear a condom? I'm never going back to Haiti!"), check out this chart from Yale economist Robert Schiller (you know, the guy who was ringing the alarm bells about the tech bubble in the late 90s):



Edit: Why is it all messed up? The image I linked from is clear as a bell.

[Cono Este]

Its like anything else, stocks, whatever. People try to sell you on the idea that you will make some historical average return. Its probably true, but they dont tell you about the volatility inbetween, losing your job etc.. whatever.

add gold and oil stocks to the heap of sucker plays this year.

[iceman]

Procrastination has been a solid play for me again this year.

[shmerham]

I have a problem with this chart. This chart should start post 1920, because mass-production is a unique event that changed the market for good. Prior to mass-production, the house was worth multiple times more than the land it was built on. Post mass-production, such has not been the case. Land was hardly a function of the market prior to 1920. People weren't moving to the suburbs because there was no room in the city. It looks like 1890 was arbitrarily chosen as a start date because it "works" with Schiller's theory. …and how can you look at a jump that's 5 times bigger than any other jump before it and say it's going to correct like the smaller ones did?

If we look at the period where the index has generally stayed around 100 it's only from 1950 to 1996. That's not a long time. To me, it's an insufficient sample size.

The only way the index returns to 100 is if they start mass-producing land. Haven't seen any talks of that happening. It's that or the major businesses and universities in big cities start moving to South Dakota or we start building supertrains. As the price of oil goes up, there's no way most people can expect to commute more than an hour each way. In 25 years there won't be any place to build a house within an hour of a city center.

[rideit]

In 25 years there won't be any place to build a house within an hour of a city center.

Except on reclaimed dumps and waterways...manufactured land, in essence. San Francisco and NYC are good examples of manufacturing land as well.

[cj001f]

Except on reclaimed dumps and waterways...manufactured land, in essence. San Francisco and NYC are good examples of manufacturing land as well.

The Japanese have excelled at it building entire airports on reclaimed land

[rideit]

cripey, look to Holland and Venice for fine, fine examples. New Orleans, on the other hand....not working out so well.

[shmerham]

The Japanese have excelled at it building entire airports on reclaimed land

More like claimed land.

[Cono Este]

For a genuine, full fledged real estate crapout, you need job losses. This has not happened yet. The loss of buying power, as a result of the higher rates, has effected "certain mkts".

When I bought my house in the Bay area, I had a 6.625% morgatge. When I sold it, i had just refied down to 4.625%. Assuming the loan was for 80% of the house value, the added buying power was almost exactly what i sold it for.

Without massive layoffs, or a recession, a big dump is unlikey.

[slippy]

Bozeman is already outbuilding the demand: supposedly the town has 3x the inventory than the amount of interested buyers. (But the amount of interested buyers has not gone down.) Happened a lot quicker than I (and everyone else) thought. Things are changin'.

[DJSapp]

For a genuine, full fledged real estate crapout, you need job losses. This has not happened yet. The loss of buying power, as a result of the higher rates, has effected "certain mkts".

When I bought my house in the Bay area, I had a 6.625% morgatge. When I sold it, i had just refied down to 4.625%. Assuming the loan was for 80% of the house value, the added buying power was almost exactly what i sold it for.

Without massive layoffs, or a recession, a big dump is unlikey.

Cue end of Iraq war and the return of thousands of soliders, all looking for work.

[shamrockpow]

...or we start building supertrains.

Well, it is about time we get our shit together with the MagLev trains...

In any case, we are definitely not running out of land. We'll either form new cities (see Vegas, Las) or just increase the density of the ones that we already live in.

[rideit]

Cue end of Iraq war and the return of thousands of soliders, all looking for work.

End?

Whaaa?

They can either stay, and work for the energy industry, or come home, and work in Wyoming.....for haliburton.

[DJSapp]

End?

Whaaa?

They can either stay, and work for the energy industry, or come home, and work in Wyoming.....for haliburton.

Yeah, I know, probably not the end of shrub's term. I'm just being an optimist on the sidelines waiting for the bottom to fall out so I can scoop up my first home for next to nothing. Do be ready for the post-war recession, it will come.

[4matic]

Re: Postwar recession.

It's different this time.. 160k soldiers is not that many for the workforce to absorb and Military pay is really pretty good. Most of the soldiers will come back flush with cash:

http://usmilitary.about.com/library/...enlbasepay.htm

I'd argue that an end to major involvement in the Iraq war would be a plus for the economy overall.

[Tin Woodsman]

I have a problem with this chart. This chart should start post 1920, because mass-production is a unique event that changed the market for good. Prior to mass-production, the house was worth multiple times more than the land it was built on. Post mass-production, such has not been the case. Land was hardly a function of the market prior to 1920. People weren't moving to the suburbs because there was no room in the city. It looks like 1890 was arbitrarily chosen as a start date because it "works" with Schiller's theory. …and how can you look at a jump that's 5 times bigger than any other jump before it and say it's going to correct like the smaller ones did?

If we look at the period where the index has generally stayed around 100 it's only from 1950 to 1996. That's not a long time. To me, it's an insufficient sample size.

The only way the index returns to 100 is if they start mass-producing land. Haven't seen any talks of that happening. It's that or the major businesses and universities in big cities start moving to South Dakota or we start building supertrains. As the price of oil goes up, there's no way most people can expect to commute more than an hour each way. In 25 years there won't be any place to build a house within an hour of a city center.

You're misunderstanding the chart. The index shouldn't be expect to return all the way to 100. That would imply that real estate provides no return on an inflation adjusted basis. This certainly isn't true for most areas. Rather, what he's trying to illustrate is that real estate, over the long-term, produces a an average rate of return of X (whatever the number is). As you can clearly see if you draw a trend line through the first 105 years of data, this rate of return has been dramatically exceeded since the late 90's. A regression to the mean trend would likely bring the index down to about 125 or so, about 37.5% less than mean home values today.

Do I believe we will in fact regress all the way to that mean nationwide? Probably not. But it goes to show you how expensive housing is now compared to very long term trends and that there is substantial room to fall before reaching the historical market equilibrium. Schiller "chose" 1890 b/c that's when the reliable data set begins.

[smmokan]

That, and just because the war is (or will be) over doesn't mean the soldiers are out of a job. That's not how it works.

[Benny Profane]

Re: Postwar recession.

It's different this time.. 160k soldiers is not that many for the workforce to absorb and Military pay is really pretty good. Most of the soldiers will come back flush with cash:

http://usmilitary.about.com/library/...enlbasepay.htm

I'd argue that an end to major involvement in the Iraq war would be a plus for the economy overall.

holy shit! Flush with Cash!? jeezuz, where do we start? Well, how about the highly marketable skills that these guys are bringing back from the desert. Yup, Wall Street needs Humvee drivers. And they'll probably find that the plant down the street their fathers worked at is long gone to China. But, hey, no problem, most of these guys have Ivy league pedigree and MBAs, so they'll really drive up the real estate market with their newly found professional positions.

Now, you're supposing that there's going to be a quick end to this conflict and everything will be peachy keen back here in God's land, but that may be news to even Rumsfeld. We just built a fortress for an embassy in Baghdad that makes Hussein's palace look like a vacation cottage, digging in for a very long haul. And, more important than anything, as every day goes by, this "war" drives our deficit higher by the millions. With that will eventually come higher interest rates, and then, well, you know, look it up, somebody had to pay for our little party in Vietnam. The economy of the 70's was just wonderful for the returning soldiers then. Yeah, they were all flush with cash and rode Caddies down easy street.

[mr_gyptian]

Cue end of Iraq war and the return of thousands of soliders, all looking for work.

half a million personnel is a rounding error in our labor market. WWII we had 6 million plus personnel and a much smaller labor market.


edit: 4matic beat me to it. Benny, our deficit went down and the amount taken in by the tax man went up.

[DJSapp]

half a million personnel is a rounding error in our labor market. WWII we had 6 million plus personnel and a much smaller labor market.

It's not just the returning soliders, it's the slowdown and possible layoffs in the defense manufacturing industry. There's a lot of internal support keeping those 160k troops going. Even then, it's turning a little drop into a big drop in the bucket, but it could effect smaller markets with a disproportinal number of troops returning.

Ah, fuckit. I will still need 80k to make my down payment. Thanks for killing my hopes of affordible housing.

[4matic]

well, you know, look it up, somebody had to pay for our little party in Vietnam. The economy of the 70's was just wonderful for the returning soldiers then. Yeah, they were all flush with cash and rode Caddies down easy street.

I did a college economics paper in 1974 on the Vietnam post war recession (yes, I am that old..). That recession was influenced by hyperinflation due to rising energy prices which were a much higher % of the economy back then. Gasoline prices were up 500% over a 3 year period. Plus, the dollar and gold were floated which caused termoil in banking throught the 70's.

Relative to 1970 Millitary pay is up quite a bit and remember that in 1970 it was a conscription army. The draft wasn't eliminated till 1973 (lucky me)

[Core Shot]

big week coming up:

On Tuesday, the Commerce Department will report on housing starts and building permits for August. On Monday, the National Association of Home Builders will release its housing market index, a sentiment survey of builders.
"The situation in the housing market is precarious," said Brian Bethune and Nigel Gault, economist for Global Insight. "Emotions could start to play a greater role in builders' decisions, adding downside risk to the numbers."
Economists surveyed by MarketWatch expect housing starts to fall 2.5% in August to a seasonally adjusted annual rate of 1.748 million from 1.795 million in July.

Starts have fallen in five of the past six months to a level that's off about 21% from the peak in January.

"Demand and supply conditions have been deteriorating rapidly," said Jay Feldman, an economist for Credit Suisse.

New home sales are off 22% from the peak, while the inventory of unsold new homes is up 22% in the past year.

Not surprisingly, prices are flat and probably down significantly considering all the extras builders are throwing in for free to sweeten the deal.
"Home builders are reluctant to begin new projects and are reacting to an increase in cancellations," said Drew Matus, an economist for Lehman Bros. Lehman economists expect starts to fall 13% this year and 14% next.
"Speculators, who drove the market for new homes over the past few years, have now fled," Matus said.

A record 1.73 million homes are vacant and awaiting a buyer.