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My usual one word response for predictions: TimeWillTell They just might surprise us with their ingenuity. TimeWillTell
They're going to need to surprise us (and themselves) with their ability to adapt, first and foremost. Frankly, I'm more worried about the 40-somethings with high expectations and practically no retirement savings in the adaptation department...
Cmon Bob....OKC isn't that boring compared to COS. All you have to do for some excitement is to go down to the U-Haul place and ask if they know where to buy fertilizer
They're going to need to surprise us (and themselves) with their ability to adapt, first and foremost. Frankly, I'm more worried about the 40-somethings with high expectations and practically no retirement savings in the adaptation department...
Bob, that is the point I was trying to make, albeit bluntly. Adapting will mean probably seriously adjusting expectations about where and how those people are going to live--even to the question of whether they have children or not. Unlike their parents who thought they could "have it all" and tried to by shoving the country to the brink with overconsumption and debt, this younger group is probably going to be the one that actually has to live within or even below their means to survive--and the "Colorado living experience" may be one of those things that goes by the wayside.
As for the broke 40-somethings--most of them are going to get exactly what they asked for. No one held a gun to their heads and said, "Live and consume beyond your means." Greed and hedonism got 'em there--those chickens do come home to roost.
bob i tried to put some numbers on your hypothetical $350K house based on the small rate of yoy decline in the denver case-shiller housing index and the decline in 30 year t-bonds and a resultant yield increase, looking for the sweet spot between price and mortgage rates. as i stated in a previous post, i think that the low end market's sweet spot is here now (from 2005 through feb 2008, it's declined 18%). however, there are too many unknowns at this point to predict the mid and high end markets since those folks tend to hold tight unless forced to move due to job considerations. wait six months and we'll see how it all shakes out. interest rates, house prices, inflation rate, basic commodities, energies, stocks...all are pretty much unknowns right now. but the flow of money tends to favor the most undervalued asset, and this year i see it as houses. so, no, i don't expect a further 50% decline in the denver market based on my reading of the data. i can't comment on the cos market though since i don't have access to all the data.
i think that the low end market's sweet spot is here now (from 2005 through feb 2008, it's declined 18%).
How much did values increase from 2000 to peak in 2005? If that answer is more than about 42% (18% drop plus 3% per year inflation adjustment), it still has a ways to fall.
Quote:
Originally Posted by multitrak
the flow of money tends to favor the most undervalued asset, and this year i see it as houses. so, no, i don't expect a further 50% decline in the denver market based on my reading of the data. i can't comment on the cos market though since i don't have access to all the data.
I think there's a strong case to be made that people should not consider a home as an "asset" in the investment sense. That mindset is part of what caused this train wreck...borrow as much house as the bank will allow, and speculate with the roof over your family's head. Historically, housing appreciation barely beats inflation...not a wise investment choice. And I think many actors in this epic debacle have gotten that message...maybe enough to alter the way housing is viewed in the greater financial scheme of things. Or at least I hope so.
I don't see evidence that mid and high end owners tend to sit tight. That may be true for the very high end (i.e. $1M+) but there are a lot of people that overbought and are sinking fast. The upper-mid segments ($400K-900K) of the COS market are practically dead. I think we're going to see a number of those sellers (some of whom have had houses on the market since last summer already) start to panic as Fall sets in and the realization that this is not a temporary market bump takes a grip and pummels the snot out of them each payday. There are a lot of clearly overleveraged positions in that price range, and the supply of next greater fools waiting in the wings to save them from themselves has all but vanished.
How much did values increase from 2000 to peak in 2005? If that answer is more than about 42% (18% drop plus 3% per year inflation adjustment), it still has a ways to fall.
from 2000 to 2005, the low end denver housing index went up 39 points (100 to 139). and it has gone down 24 points (139 to 114) from the 2005 top to the recent release for feb 2008, which is nearly a 60% retracement. another 15 point decline would bring it back to 2000 levels for a 100% retracement. true, the low end market is getting hit hard due to the subprime loan defaults. but after this summer, the bulk of the subprime loan resets will be history. i still think that the over all denver housing index is near a low now and the next 6 months.
true, the low end market is getting hit hard due to the subprime loan defaults. but after this summer, the bulk of the subprime loan resets will be history. i still think that the over all denver housing index is near a low now and the next 6 months.
I keep trying to tell people that we are nowhere near seeing the full fury of the subprime default and foreclosure crisis, much less the coming wave of Pay Option ARM and Alt-A misery. Why do you think Bernanke is sounding the alarms after flooding the markets with more cheap cash?
This chart shows that we are still 3-4 months from the peak of the subprime resets, but we still have massive numbers of them every month until early 2009. And keep in mind that the time from reset until default and a completed foreclosure process is 9+ months. So the peak of the foreclosures from subprime resets isn't really upon us until late Spring of 2009, and it will continue through the end of 2009.
Now look to the right, from late 2009 through 2012, at the option adjustable rate resets. Over 70% of the people with these loans are making only the minimum payment, and when the POA recast occurs, their payments will more than double. The default rate is expected to be even worse than subprime (50-60%) because of this. Over 40% of the loans made in California in 2006 were of this variety.
I'm not sure the 100% retracement to 2000 numbers captures the effects of a double-wave of defaults and foreclosures that will make it quite apparent how overbuilt Denver and Colorado Springs have become. Having the low end of the market at 2000 prices won't sell houses if there is still a more than 1 year inventory overhang and another known wave of foreclosures coming.
BTW, there's a guy named Arjun Murti...an oil analyst at Goldman Sachs...who says we're in for $150-200/bbl oil within the next 24 months. Call him crazy, but in May 05 he forecast oil climbing from $58 to $100/bbl and was called a heretic. What will this economy look like with gas at $7 a gallon?? How will the housing market look with the Pay Option ARM wave plus $7/gal gas?
I have to wonder how people talked about what was happening around them in 1928, after the property bubble in Florida and the midwest imploded, and before the crash of 1929. Would they have believed the Depression possible? I doubt it. But for whatever reason, most people won't even stop to think what the downside possibilites are, and try to hedge against them even if just a little. Jazz and I aren't being irrational in our expectations of bad things to come. The data is there. The historical lessons are there. The same human nature is there. We are at real risk. Risk doesn't impart a certainty of a negative outcome, just an elevated possibility. IMHO a very elevated possibility.
Last edited by Bob from down south; 05-06-2008 at 09:54 AM..
I've had to run some errands the last couple of days. The talking heads in the media--you know those pretty girls that read from the teleprompter--cheerfully tell us that things aren't that bad, interspersed with the occasional "hard luck" story about someone that might be having a hard time. They talk about increasing gasoline prices and home foreclosures like they are a temporary irritant to an otherwise happy future scenario.
Well, if you go out and watch what people are doing, and see what is happening in your own Colorado town--you get a very different picture. Here's some snippets of what I saw in my own community:
The gas station. People aren't filling up their tanks anymore. They are buying what fuel they can to last for a few days--$75 fillups are too much to take for many of them at one time. You hardly ever used to see the pump reject a credit card with "Card declined" (presumably because the cardholder had exceeded his or her credit limit). I've seen that happen to the people the next pump over twice in the last four times I've filled up.
The grocery store. There are a lot of people who are buying what is on sale and nothing else. I noticed yesterday the "manager's special" bin at the meat counter was full of expensive steaks marked down because their "sell-by" date was about to expire. I asked the Asst. Manager who checked me out why that was. He told me that they order a minimum amount of the expensive cuts of meat now, but a lot of that sits unsold in the case until the last day that it can be sold by the store. By the way, that store, one of the major chain supermarkets, has reduced its workforce by nearly 1/2 in the last 18 months to cut costs, as have two other chain markets in the same town.
Cars. I talked a friend who is a used car dealer. He specializes in 3-6 year-old vehicles in excellent mechanical condition. He generally has them priced well under retail and has been successful for over 20 years in business. I asked him how business is. He said that it was really slow--mainly because many people can't even get financing to buy used cars now. He won't even trade for big SUV's or diesel trucks now. "I can't even wholesale them," he said, "Nobody wants the damned things. Last year, I couldn't get enough of them to sell."
Foreclosures. I stopped by the courthouse. The Public Trustee's office is plastered with foreclosure notices--more than I've seen there in 20 years. This in a county that is supposedly in better economic shape than many in Colorado.
People can argue about what counts as a "recession." There isn't any argument on my part--I think we are in one, and it very well could turn into a Depression. As Bob says, the real "bad ****" hasn't even hit the fan yet.
This chart shows that we are still 3-4 months from the peak of the subprime resets, but we still have massive numbers of them every month until early 2009.
this histogram (which is found on every housing bubble/bust/whatever site) is a snapshot from over a year ago. the data is stale. if you could find an updated graphic, the subprime and option arm loan "peaks" would probably disappear at best or be substantially reduced as folks now have either refinanced their loans with or without the government's help, gone into foreclosure, or declared bankruptcy. hence my interpretation that the worst of mess will be done by summer's end. where does that money come from to refi? well, many families are working 2 to 3 jobs outside of their primary jobs and saving that money to work out their problems. imagine that, people actually taking responsibility, adapting to a bad situation, and changing their destructive financial behavoir. and for those who don't change, expect more "help" via housing subsidies in an election year. plus continued low consumer confidence numbers tells me that a majority of families are worried and pessimistic about their future, which as a contrarian interests me since the public is usually wrong at market turning points. as the stock market continues to climb the "wall of worry," i see some parallels from the 1974-82 time period, not 1928-29.
Foreclosures. I stopped by the courthouse. The Public Trustee's office is plastered with foreclosure notices--more than I've seen there in 20 years. This in a county that is supposedly in better economic shape than many in Colorado.
Add to this another new phenomenon - multigenerational families living under one roof. A successful RE friend of mine has seen a big spike in this kind of living arrangement over the last year.
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They just might surprise us with their ingenuity. TimeWillTell 
