Charts, charts and more charts. Credit Suisse has decided to put all the rotten eggs in one basket and show durned near everything we can expect over the next several years. There's sure to be something to everyone's taste as long as those tastes run to cold and bitter. Save this articleMortgage Liquidity du Jour: Underestimated No More.
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The interesting thing about real estate prices is the nonlinearity of it. Prices can go up as fast as homeowners can change their mind about how much their house is worth (and that's pretty fast.) They go down excruciatingly slowly, however, as homeowners cling to optimistic valuations.
Foreclosures can, on the face of it, speed that up, but as the chart ably points out, foreclosures are themselves very long, drawn-out processes. Not only that, but I suspect there are plenty of bankers out there who are clinging to unrealistically optimistic prices . . . Virtually the only players in the game who really make prices move to the downside are the homebuilders.
Executive Summary: Housing prices to continue a slow but painful slide, inventory on its way to new record highs.
P.S. Nice find Rob, lots of great charts.
Took a little while to get through all of the charts, but after a careful and honest evaluation the only logical conclusion is that that the worst is behind us, and the RE recovery is firmly underway. Expect single digit YOY price growth by the end of '07 and double digit YOY price growth by the end of '08. Clearly the lenders have isolated the damage to the sub-prime sector, Buy now or be priced out forever!!!
Executive Summary: Housing prices to continue a slow but painful slide, inventory on its way to new record highs.
I agree with all your talking points and your assertion. Housing is not a liquid market like stocks and moves with the speed of molasses. Which is why I find it laughable when the CNBS talking heads keep claiming a "bottom" in real estate. As if a bottom is likely so soon after years of double-digit appreciation.
This housing debacle will take many, MANY years to play out. The best frame of reference we have is Japan's asset bubble. It took upwards of 15 years for real estate in Japan to find a bottom. Prices in residential real estate are now 1/10th of what they were at the peak. (Commercial real estate is even worse)
Is the severity of that downturn likely here? Probably not since despite the speculative frenzy we experienced here in the USA during the housing bubble's rise, it never even came close to Japan's levels.
However, the parallels still exist and while we may not have rocketted as high as Japan, we still have gone up far higher than is reasonable or justified.
But if one is looking for a bottom, the best thing to use is a simple calculation of the P/E ratio for homes which compares rental costs versus home ownership costs. Rents and mortgages have always travelled hand in hand until recently when they suddenly deviated. We'll be at a bottom when they are at parity with each other.
It'll take years to properly clean out this bubble.
I read somewhere today (calculated risk possibly), that the alt-a space is just as crapped out now as subprime owing to overcollateralization, so expect that market to be toast soon too.
Basically, there is going to have to be a return to traditional underwriting standards.
So, expect a return to 1998 prices eventually. (Though it might take a few years).
Harold,
Things never revert to mean. Overshoot is a certainty. That means both creditwortiness standards and prices. I can see 1998 prices adfjusted for inflation. Real inflation not thre Inflation Expectations Downward Adjusted Core number the Fed concocts.
Quote from Mommystop on Craigslist
We have years left before we reach 1995 status.. < mommystop > 07/10 14:23:41
The bottom in Sac hit about 1996/1997. That means that 1995 was within a few quarters of the bottom. Unfortunately, we aren't even close to that yet. I have spoken with agents who worked through the early 90's debacle who told me that more than 30% of the total inventory were short sales at the bottom. We only have about 15% of our total inventory as short sales and only about 1-2% are foreclosures or REOs. Furthermore, the bulk of the resets on the exotic mortgages are just beginning. I don't expect to see 1995 status for a minimum of 3 years. We can expect a sharp 10%+ additional drop in Sacramento over the next year, with gradual 1-3% drops for the following two years. The wild card is the exotic mortgages. We are in uncharted territory with them and don't know how much of an effect they'll have.
I have always found mommystop to be an excellent analyst of the local market
read somewhere today (calculated risk possibly), that the alt-a space is just as crapped out now as subprime owing to overcollateralization
Excellent point and 100% accurate. The Alt-A situation is actually far worse than the subprime meltdown. Subprime mortgages usually have very short terms. Broken down into a 2/28 (2 year/28 year) separation where the teaser rate and interest is only required in the first two years. Afterwards the balloon payments begin coming. Alt-As however, vary from 3/27 all the way to 7/23. So it will take several years for that to unwind. But the scary part is the amount of Alt-A mortgages issued absolutely dwarfs the subprime area. So that should be interesting.
I'd agree with you Rob, if it wasn't for that pesky oversupply problem.
Fact is, a house is probably worth a lot less than it was in 1998 because the supply is much greater (and builders continue to build - what else can they do).
Add that to a return to real underwriting + flat growth in wages and I think we are headed to a new historic low for the real estate market, which I am guessing will be about 1998 nominal. (Though I'm really throwing darts there).
Where I live, 1998 wasn't even close to the bottom though. It probably depends on your location.
Found via Ben Jones' blog.
http://www.nypost.com/seven/07112007/business/roof_caves_in_business_paul_tharp_and_roddy_boyd.htm
"S&P slammed only a chunk of the half-trillion in mortgage bonds it monitors - about 2.1 percent or $12 billion - but said housing prices could crash by 8 percent this year to make matters worse. Moody's downgraded $5.2 billion of mortgage securities."
I forget who was supposed to make the popcorn. Fun times.
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At 9:39 AM, Harold Saxon said...
Fact is, a house is probably worth a lot less than it was in 1998 because the supply is much greater (and builders continue to build - what else can they do).
I was just reading this article:
http://morris.marginalq.com/davis_heathcote_jme.final.pdf
And it raises some interesting points about the relationship between land values and housing prices. and it supports your statement about house prices. The replacement cost of a house does correlate well with labor and material costs. The price of land that is under existing houses is more correlated to inflation and interest rates. This helps explain why tear downs make sense. and why home builders can continue to lower prices on new homes.
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