Residential Real Estate Bottom Predictions (2014, foreclosures, 4%, mortgages)

[Humboldt1]

Okay, 2 years ago I thought we would bottom in 2009. Last year, I called for a bottom (price-wise) in May 2010. Now, I think we may be looking at mid 2011 for a bottom price-wise.

Here is what I see:

Chicago bottom price-wise June 2011, CS (Case-Shiller) of 115
Nationwide bottom price-wise June 2011, CS of 130

What do other posters see?

Cohdane and Chet and FMV,

What do you think nationwide and for Chicago?

[Brandon Hoffman]

2 bottoms because price lags based on the # of homes sold. I think this is the year it levels out for the # of home sales.

Following that will be a price bottom, which I think will level out next year (2011).

[chet everett]

I don't like to play this sort of game -- too much local variability. Honestly I have criticized the heck out of Case-Schiller largely because, in my experience, the kinds of houses that sell or don't sell is influenced by a ton of factors. The data then gets rolled up to make it look like prices for all homes are rising or falling, and that is not what I have seen happen. You can have starter homes getting bid up in some places while luxury homes are stagnant or falling. You can see multi-units fall of a cliff as commercial lending goes thisclose to dead. You take out the gimmick of stimulus and kill off some sales.

If hiring in the region is solid for at least two quarters and the Fed sticks with their plan to do what they can to stay the course on rates "for an extended period" (and nothing crazy happens like a terror attack or other "Black Swan") then I would expect home prices to stabilize in most parts of the Chicago region. When will that happen? Maybe 2010, maybe 2011. If does not happen by 2012 (which seems a remote long shot) then O is PROBABLY a one termer (but even that is hard to predict given how unlikely it was for a Senate freshmen from Illinois to be President...).


Nationwide? Don't we have some posts from DC area saying that prices are solid there? Dallas? Even there are alleged bidding wars in California... I have no idea where that sort of mindset comes from, and lots of people here think I am pretty optimistic!

[Silverfall]

You know Oregon is voting on two tax measures one of which will impact small business owners. This could impact our employment problem here. We have relatively stable pricing here right now. I'm predicting a mild decline (5% ish) in home prices (overall average/median) in 2010 or flattening at best. The higher end sectors will see larger drops.

I'll have to see what happens to unemployment numbers here before I call anything after the passing of these two measures.

[cohdane]

I agree with Chet that this is impossible to call because of so many variables, geographically and in terms of the wild cards the government keeps hurling into the mix.

My own perspective is skewed by the complete meltdown I'm seeing every day on the North Shore. A while back, I said prices wouldn't bottom till 2013. More recently, I said 2014-- but that's up here. I think there were a lot of exotic mortgages pulled up here, a lot of spec homes built and there's enough money up here for people to draw the process out while they remain in denial about what's happening price-wise.

I say 2014 because I don't think you go from a relatively steep drop to an instant upswing. Prices can bleed a percent or two for years and that still counts as "not bottomed", even if it's not double digits. So we lose 15% in 2008, 10% in 2009, 7% in 2010, 4% in 2011....and by then people are too weirded out or financially flattened to want to "get in the game" so it continues. The legions of baby boomers trying to unload their dinosaur McMansions won't help the situation.

2014 also gives time for the Alt A's, Option ARMs and bank foot dragging, extending and hiding time to play out. (Don't forget to factor in "owners" playing Produce the Note and other games to lengthen their payment-free ride). 2014 is also a completely random guess in the face of the unprecedented economic forces the world is trying to juggle right now. (I do think there will be a brief surge in sales/prices when interest rates hit 8% as buyers panic they'll be priced out. Then the downturn will continue.)

I'd apply this thinking to any neighborhood that experienced returns above 4% a year during the bubble and especially at the end. However, there are large swaths of the country that remained sane and unaffected. Personally, I think a chart that graphs the ratio of people who've had cosmetic surgery in a neighborhood to the number of pay option ARMs foreclosing would be enlightening. I'm betting there's an overlapping demographic there.

[Humboldt1]

Cohdane,

You may be right about the North Shore in Chicago. What do you think aobut Oak Park and River Forest? Less exotic mortgages there but certainly some jumbo stuff. I think those areas could be a few years off pricewise for a bottom, thus I will be joining the ranks of renters for 1-2 years. Your thoughts?

[Goodpasture]

If the market were left alone, it would be closer to 2012 before it bottoms out and then it would stagnate there for quite a while.

I understand Florida has already passed a law (actually I think it was an order from the supreme court there) requiring banks to negotiate prior to foreclosure.

Obama is going to do absolutely everything he can to make unemployment go away.......he knows that he is now in a fight for control of congress that requires he deal with that issue specifically......further he is applying pressure to banks to not foreclose if they can possibly avoid it. Because he is aggressively trying to regenerate the economy to sustain his majorities, I think we have come close to bottoming out, although the supports will be artificial and not really market driven. But by the time that artificiality comes to an end, the real market will be rebounding......I doubt many pundits will even see it happening.

[Adieoz]

I believe my market has already bottomed. We started our downward spiral before the rest of the county, but foreclosures fell in 2009, number of sales have been up for over a year, and sales prices have now started to level (up some months, down others)

I pulled all the stats for the last 5 years and noticed that once sales dropped off it took about a year for prices to follow suit and the same appears to be true in the opposite direction. I am in Lansing, MI...the land where you can still buy a house for $10,000.

[eskercurve]

Home prices naturally lag sales, as typically a housing downturn causes home builders to stop construction due to oversupply. Once that supply is eaten in to then more becomes available. The trick this time is that there is likely a large amount of "shadow inventory" which the banks own due to foreclosures which will likely depress housing prices until that inventory is taken up. This will be done at a measured rate as the banks do not want to lose too much basic value and neither do they want to reinflate another bubble.

Nationally, it will be varied. I think some places in California and Arizona are already recovering, and places where there wasn't really a bubble aren't seeing large downfalls are recovering as well.

For my local area in Seattle, I think 2010 will be another difficult year. Home values are still way too high for the average first time homebuyer to purchase a home quickly, and high rental rates depress savings further. Both have corrected back to more sustainable levels but in history the Seattle area has seen an average of 5x annual average income be the base rate of home values. Average King County income is ~$74k, so that means that on average a home will cost $350k for your 3 bed, 2 bath home. This is rarely the case still, as there are a lot of buyers who bought during the credit years and wanted to flip it for instant profit, but now find themselves under water. I see homes in some areas priced around $320 and quite literally next door a home that is comparable on sale for $450. It is insane.

This, combined with the fact that Boeing will likely lay off workers both engineering and manufacturing means that home values in the Seattle area, and more particularly in the southern and norther suburbs, will fall as laid off people who have little savings, or found jobs elsewhere, will want to see but cannot find buyers who are in similar situations or worried about thier job. Boeing traditionally lags the market for layoffs and hiring, so I will not be surprised to see quite a significant drop remaining in the southern and northern suburbs. The eastern suburbs will be OK because Microsoft and a number of high tech companies will keep those values from dropping too much, if at all. Seattle itself may see a slight decline but will likely recover as homes near the city and in desirable neighborhoods are usually kept for the long term (many actually outlive their mortgages), depressing the supply and thus increasing prices. Seattle's unique in this case because many want to live near the city core since the neighborhoods are nice and such.

[trickymost]

DC is quite stable inside the beltway in Maryland, DC, and Virginia. Parts further out where there is steady influx of BRAC related job creation also appears to have bottomed out somewhat (Quantico, Aberdeen, Belvoir, Detrick).

Homes priced right are sold fast - in a day or in days, with multiple offers. There are plenty of foreign buyers looking for property who are leveraging the weaker dollar to buy more. There are plenty of dual high income households who want to live in the good neighborhoods close to metro with good schools.

Some counties or areas still are depressed but appear to have stopped hemorraghing, like Prince William County in VA or Anne Arundel County in MD. There are still lots of underwater homeowners in all areas though, but it seems if they foreclose or go to short sale, it'll be snapped right up.

There continues to be an influx of people looking for jobs, and jobs are relatively plentiful in the public sector here. If the economy continues to worsen, I'm sure that will affect RE adversely, but less worse than the rest of the country. If the economy worsens, there will be more government stimulus and more public sector jobs here so we're somewhat insulated.

An anecdote - I pass a BMW/Audi/Porsche dealership in Virginia on my way to work. I pass by their off-site lot, and I recall in early 2008 it was packed with somewhere between 150-250 cars if I had to guess. By this past summer, it was mostly empty - there were probably about 30-40 cars and it looked empty. Today, it's packed again with that 150-250 cars. Shocking some of the assortment too - there were probaby 10 BMW X6s alone. And that is one fugly and muoy expensive car. So they must have some confidence or sales increase to order that much inventory.

But I think we have a large gap nationally between a bottom and a recovery. I think prices bottom this spring in nominal dollars but adjusted for inflation over the next decade fall anywhere from 10-30%.

I've said it before - Helicopter Ben said in his Time man of the year interview he'll put the US through hyperinflationary hell before allowing even the slightest deflationary risks to enter our economy. Whether his policies turn out to be prudent or not, I think we must accept for the next few years that we've hit bottoms in many assets - commodities, metals, energy, equities, and yes even RE.