Last year on FPTALK, a chat brewed up over the "will happen/can't happen" housing crash. I was the "will happen/ IS happening" view ;)
We live in interesting times. This has been a pet research area for me the last few years.I am opposed to the current "bail out" for variety of reasons, even whilst conceding imperfect understanding of every nuance of "credit default swaps" and some other Wall Street Neutron Bombs (economically speaking). I suspect several levels of scam with the Wall Street for Wall Street nature of the Bail Out request, as in who is requesting it and why... suspicious. I am amazed and gratified (though not yet reassured) that it is Republicans, no doubt bolstered by wave upon wave of anti-bailout clamor from constituents, who are quashing the Bailout... so far.
Previously I argued that overt lack of regulation and pseudo free market (privatize gains, socialize losses. money for the "free market" ultimately coming from the Fed, credit bubble from Ayn Randian Al Greenspan) would give disaster, with the Housing Bubble (representing actually a gov't sponsored credit bubble) leading the way, but also with that Housing issue being symptom as much as cause.
I noted that housing prices could fall 50-80% in hottest areas (cali, phoenix, florida, etc) and that even the "first to rise last to fall" Manhattan would plummet, though that last point has not happened... yet. Latest data cites 40% drop in parts of Cali. I note that aside from Wall Street issues, the core forces (macro economics, not personal views) behind the now at least recognized by most folks housing crash... well, those core forces are still revving up. The Alt- A and Jumbo markets (far bigger than "it's all contained" Sub-Prime) have not yet even peaked on resets, never mind finished resetting. Foreclosures should continue to accelerate through 2010 perhaps, and continuing for years after.
The core issue on Housing (now blossoming due to Wall Street's betting ON Housing) is affordability, measured by couple parameters.
1) Mortgage + fees (tax, hoa, etc) should be less than equivalent rent in a "stable" market' 2) Median House should cost in any area (some areas richer than others) 3x Median Income. In California in which towns have median household income of 50k, housing median should be around 150k (there are some tweaks, but let us start there). In many such towns Median blew by 500k. Go figure 3) Houses should cost about 120x the stable monthly rent (with some spread not huge spread for highly desirable areas)
There are more, but that's a start.I have quoted below some of the chat from FPTALK last year. Yanked most of the names as I'm more interested in the content and in the "what's next" than in who said what when. I left my own quotes named (i'm the second one down in the quoted stuff below and more below that).
The verbiage from "economic leaders" the last year has paralleled (not that correlation equals future outcome) 1929.
I am curious to hear fellow penfolk views of housing, the economy, where this is headed.
Anyway.... here is some of the chat from last year, triggered by a fellow list member's move to Arizona.
The quotes below recede in time as one scrolls down. The first quoted post is a response to me.
regards david ----------------------- On Oct 14, 2007, at 3:05 AM, wrote:
All this palaver over whether a nice pen-collecting/selling veteran should join his kids in Tucson and go semi-communal? I thought I was reading posts to the Fountainpencollecting group for a while there. My FPtalk list sub-mailbox was aglow with more pro and con on what our Northwestern friend should do, than I have seen since Max found a new cache of pen nibs and ink bottles for sale. Be careful what you listen to as most of the real-estate and relocation advice given...well just consider the source. And I am only getting involved because I began to see some of the best econ-jibberish Ive seen since the word investment came up in the context of pen purchases!Now, I am not smart enough nor did I study hard enough to be a doctor, but if I were I bet I could probably bone up on all this in my spare time, and if I could get a few quiet night shifts, well, I might find enough time to study the matter pretty thoroughly...or at least read Business Week I guess. I just wish I could turn my 30 plus years in banking and finance into a medical career! (tongue firmly in cheek and elbow in ribs here) After all we are friends right?But since I got into this, I thought I might point a few things out.There are 2 variables you might want to consider, and the variables make all the difference: 1) The irrepressible ingenuity (read profit incented creativity) of the free enterprise system and its myriad of independently simultaneously operating buinesses and similarly incented business peopleand2) the historical business economics truth is that if you can predict a disaster (one that is not unalterably controlled by forces of pure mathematics, physics or chemistry) it will not occur.Oh and there is a 3rd: An Economist is someone who has no better idea about what will happen in the future than you or I but he has a degree to prove it.Anyway...The unstoppable forces of number1 will almost always intervene to determine the final outcome that takes place in number 2 work.Each new problem or financial difficulty only provides opportunities to "sell" the new remedy for the new problem.But more importantly, the financial world and the real estate finance world, in spite of recent overzealous mortgage brokers squeezing the wrong folks into the wrong loans, and the securitizing of real estate finding their way (wrongly) into hedge funds, is pretty well regulated and some of the behavior attributed to the actions or lack there of that banks will or wont take as predicted in Dr. i's scenario, simply should not happen that way. And that will tend to shorten the length of the crunch. I can not fault his logic as applied to the facts listed but there are many variables unaccounted for in those facts. There are significant rules about what banks assets must be "written off" and what may not be. In general a bank can not simply choose when to write something off or not. There is a very formal thing called "non-performing asset" which can not be hidden. Simply put it is a loan (loans are bank assets) that is 90 days past due. At that point the loan is placed on non-accrual which means it is not to be counted as a bank asset nor is any accrued income coming from that asset to be counted in the banks income. "Writing it off" is not like doing you taxes and deciding to take a business loss...it is a mandatory thing that can not be delayed other than the loan being brought current. One more thing...Reserves. Every bank must set aside reserves for bad loans long before any real losses are on the horizon. These reserves are created by a charge to income. These reserves are set aside in preparation/anticipation for/for loan failures. These funds are already "written off". Thus banks do not hurt themselves by taking the loss on a loan unless the loss is greater than the reserve already set aside. REO (real estate owned - the name for properties foreclosed on by banks) will be fixed up and sold at a market price and only the difference between what was the loan loss and what is the funds recovered on sale will stay written off, all the rest will come back to the bank as "recovery" of reserves. As a banker for the past 30+ years and bank management team member for the past 15 years, I can attest to the day in day out (read constant) discussions, planning and design of new products to satisfy current and predictable (or not) future possibilities so as to protect shareholder value. Shareholder value is NOT to prop up false financial information in the very short run, especially at the risk of certain precipitous backfiring at many times the current loss in the not too distant future...not to mention the great possibility of running afoul of many punishing regulations (Sarbanes-Oxley, for example), which punish faulty financial reporting that might tend to mask problems and to present a rosier-than-normal view of financial performance.And don't be alarmed that the long list of acronyms that stand for low-down, low cost loans was done without the full knowledge that if the borrower failed to pay that the property would be foreclosed on. That WAS the plan from the beginning of that type loan. And do not confuse these loans as a class with "sub-prime". Sub-prime refers to the borrower and not the loan category. There are plenty of prime borrowers and loans in the categories mentioned. Of course there are many sub-prime borrowers who have taken advantage of these easier-to-qualify for-loans, too.This adjustment process has already begun. Among them are early conversions to reasonable fixed rate loans already being offered today to avert the crunch Dr i mentions. Some of the new terms are in my mind bad in general but good in some cases (40 year fixed rate mortgages, for example) but they do smooth out the differences between the monthly payments on the old low monthly cost loans that Dr i mentions will be coming due soon, and and the fixed rate mortgages that at 40 years is more affordable as an alternative.Having said all that (and I apologize for it not being as coherent as I would like - that would take a book ), I do agree with Dr. i that there is and will likely be a continuing decline in some property values, I do not believe it will be as severe as to see prices falling 50% nor long lasting as 2+years... By that time the ingenuity of the business world will come to the "rescue" with their own innovative, profit driven solutions to avoid the worst...as it always has.isaacson@xxxxxxxxxxxxxxx wrote:I hear you. :-)I will take stab at predicting major decline over next few years, especially in inflation controlled (never mind international- currency controlled in fact of our plummeting Dollar, thanks Ben Bernanke), buckerooties.I will dig up links another day, but the Sub Prime debacle often cited of late (often called "contained" which might be true if contained means contained in an open system with no time limit LOL) is but tip of iceberg just on the front of loan resets. The zero- am, neg-am, zero-down, cash-back, heloced-to-death, alt-a and most of sub-prime is set to re-set during the next three years. To degree that current drop in prices (note, the median price for house is underestimating the fall. more on that next paragraph) is due to the "re-sets", well... the resetting is just warming up and will peak (NOT end) in couple years yet from now. Forclosures, Short Sales (devastating to owner d/t 1099 hit) are waaay up, in some parts of country more frequent than actual regular sales. FC's drive down the comps. And, the process is slow and drawn out as bank-owned (REO) properties are being held back and not "marked to market" and sold at actual demand prices, as it behooves Banks in short term to not sell at loss (keeps up numbers for stocks and bonuses) even if the long term loss on such properties will be greater than if hit taken now. This is the horror of publicly owned companies- short term trumps long term goals. An unsold house not marked to market *seems* less loss on paper... for now. Many of these houses are rotting physically.Median is bad indicator. In any credit crunch housing crunch, high end tends to hold out bit longer than entry level. Thus, currently, more pricey houses are trading at relatively greater rate than lower priced houses, skewing up the median while not reflecting the crash in total units traded. Better indices are median price-per- square foot (down much greater than the NAR's claims about median price per whole house) . Better still the Case-Shiller index which tracks individual houses and does number crunches relative to prior sales.My guess (this i'd have to research before making hard claim) is that Tucson Phoenix are down about 20% during last 16 months, the warm up (not the end) of the housing smoosh.Of course what with being a poor dumb doctor, i keep open mind when taking stand on business issues ;-) Always more to learn.david > No disagreement on facts. Credit is national -- and has been for > some time. In general, not many product demand and supply > determinants are completely local anymore in the US. No doubt > housing market outcomes have a strong component of local > determinants. I don't know anyone who would argue that only local > conditions determine "all real estate" making that "old myth" a bit > of a straw man. The housing market price outcome in any particular > locality has lots of determinants, including other national > conditions and decisions (such as national income, inflation > expectations, Fed decisions, etc.) plus important local conditions > --e.g. demand based on income, population, local taxes, weather, > neighborhood, prices of heating, cooling, expected future house> value--the list could go on. Agree that these favor soft prices and> slower sales for awhile in Tucson. Hard to predict how long, but> personally doubt that prices will decline for more than 2 additional> years. Also depends on how fast they fall, which is really hard to > predict. > > Hmm, If the prediction of a MAJOR price decline were to occur, I > would consider buying a retirement house in Tucson! Indeed, > interesting few years :-) . > > > Quoting David: > The fundamentals of affordability (median per SQUARE FOOT) for > housing relative to median income favors a major slow leak/crash in > Arizona.> An old myth (myths are not untrue, just believed true whether true > or not) is that all real estate is local. However, today, all credit> is national. > > Should be interesting few years ;-) > > david > > Quoting > > > No disagreement> > about the past, Tucson had a big increase in housing prices since > > 2004 or so. In the weak mortgage market, that clearly makes Tucson > > vulnerable but it doesn't guarantee big price declines by any means. > > Although the mortgage markets are national, home construction and> > sales are predominantly local and depend heavily on local > > conditions. As far as I can tell, Tuscon also continues to have> > strong population growth and that is predicted for many years into > > the future. Condo prices in one area of Ora Valley I'm familiar with > > rose strongly in 2005, dropped a lot (over 10%) last year but look > > steady or even stronger this year. Hard to tell anything from one> > example. I saw some research report that prices are still > > increasing in Tucson but that quantity of sales is slower--a > > different form of soft market. Personally, if I were moving to> > Tucson, I might rent for a short time and watch for a few months or> > a year to see if prices will get softer. However, given the> > population and other growth and history if the area, I suspect that > > anyone who waits several years to buy a house will be paying more,> > particularly in growth areas of Tucson. The predictions from > > researchers on this are quite varied right now, so take under> > advisement anyone who sounds like he or she *knows* what will happen> > (and that includes me :-) . Business cycle timing is quite> > difficult to predict and is seldom the same from one downturn to the> > next. > >> > I wonder if anyone has studied how fountain pen sales behave over> > the business cycle. I'm sure they follow the fluctuations in > > income, but no idea to what extent. Interesting. > > > > > > > > > > > > > >
