Discussion: The real estate housing bubble has popped. What next? (Part 4)

Time to finally start Part 4 of this epic 5+ year old Fatwallet discussion thread. The first three parts, chronologically:

Part 1 (11/2003 - 09/2006)
Part 2 (09/2006 - 06/2007)
Part 3 (06/2007 - 03/2009)

were all entitled "Discussion: Is there a real estate housing bubble, and, if there is, what will pop it? Part X" Since Part 3 has gotten to about the length of Part 2 when it was cut off, and the title is obviously now two years out of date, seems as good a time as any to start Part 4 ...

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Let me revive a tired argument & spice this discussion up a bit by saying ...as the OP of the first part, a guy who sold his house in summer 2003 and started renting (although for personal reasons at lest as much as housing price ones) .. I believe that this year or next may end up being the best and safest opportunity since early this decade decade to buy a house in many parts of the country for anyone expecting to stay in that house long term. Furthermore, I expect to put my money where my mouth is, I personally intend to do just that: buy a house. Not all the excesses of the bubble have been wrung out of the market yet, but the Case-Shiller report that came out earlier this month shows that the average house price nationally is down 27% since the peak in 2006. Another report out last week stating that 1 of 5 homeowners nationally are "underwater" right now suggests things may go down further yet, very quickly, if these owners "walk away" or are foreclosed upon, but I expect that process to play out much quicker than the runup in prices (like a real bubble), so I think the bottom is nigh sometime later this year or early next, at the national level (as measured by Case-Shiller), and buyers should move now to take advantage of low rates while they are still being artificially kept low by the Treasury flooding the money supply & by economic fear postponing other investment claims upon this capital.

I am prepared to be labeled a crackpot for saying "Buy Now!" ... just as I was for saying "Don't Buy Now!" in 2004. Hopefully I will not be as early (two years, the bubble peaked in early 2006) as I was in making that first call! One argument that this is just the beginning, and that there are large, prolonged price declines yet to come is that higher interest rates will serve as a downward pressure on prices. This could very well be, I concede, and as I said above I think rates are going up. But I guess, personally speaking, that I just don't want to risk this not being true, and seeing rates go up without prices coming down. I want to buy and hold, so the near future looks like the safest opportunity to get the most house with the least monthly payment (assuming a 30 year locked rate) for those that are not already homeowners, and don't have any known plans to relocate in the foreseeable future (may be an important caveat).

What's next:

Real estate has flatlined for the past decade, when will it go up in value?(Part 5)

ajohnamous said: What's next:

Real estate has flatlined for the past decade, when will it go up in value?(Part 5)I don't disagree. But I also think rates will not be this low again for a long time, so for anyone looking to buy and hold with a thirty year (and not pay all cash,) this may be the year to jump (back) in. I just elaborated in the OP with this controversial statement in order to nudge everyone to the "what's next?" aspect -- what the original part I was trying to do -- and get everyone to drop the "what has already happened" tone that was dominating the end of part III.

SleekWallet said: MarkM said: I don't disagree. But I also think rates will not be this low again for a long time, so for anyone looking to buy and hold with a thirty year (and not pay all cash,) this may be the year to jump (back) in. ...

funny my realtor friend thinks the same way

is your friend Lawrence Yun from NAR?

he kept saying it was best time to buy since bubble started burting

74ak said: SleekWallet said: MarkM said: I don't disagree. But I also think rates will not be this low again for a long time, so for anyone looking to buy and hold with a thirty year (and not pay all cash,) this may be the year to jump (back) in. ...

funny my realtor friend thinks the same way

is your friend Lawrence Yun from NAR?

he kept saying it was best time to buy since bubble started burstingYun is but a mere shadow in evilness of the corporate prostitute that was his predecessor in that role, David Lereah. I've lost count of how many times I offered to rip that guy a new one a few years back in these threads ...

I call him a corporate prostitute because he now claims that he never really believed the words coming out of his mouth, that the one and only reason he used his oral orifice in this way was because his pimps at the NAR gave him money to open it and put those words in: Text

I'm trying to remember which circle in hell it is that Dante reserved for people like David Lereah. One of the inner rings, that I know. How does this man go out in public and hold his head up after admitting he's a corporate slut? How does he even sleep at night? Either no one listened to him, in which case his existence is pointless, or else someone somewhere did, and he is probably playing a role in ruining those people's lives. I had a lot more respect for him when I thought there was a small chance that he was "merely" a complete idiot.

In years past, homeowners have been the ultimate gatekeepers of home prices; if they weren't willing to take anything less than a proper inflation adjusted return on their home then the home simply didn't sell. (barring the mandatory sales due to relocation, job loss, etc)

The large number of bank owned homes and glut of builder owned homes has offset the control wielded by traditional gatekeepers. As these homes are offloaded and consumers grow confident in the economy the traditional gatekeepers will again realize control of pricing.

SleekWallet said: SleekWallet said: 74ak said: SleekWallet said: MarkM said: I don't disagree. But I also think rates will not be this low again for a long time, so for anyone looking to buy and hold with a thirty year (and not pay all cash,) this may be the year to jump (back) in. ...

funny my realtor friend thinks the same way

is your friend Lawrence Yun from NAR?

he kept saying it was best time to buy since bubble started burting

is that the same guy who wrote a book about it as well? im trying to find the link...

"Why the Real Estate Boom Will Not Bust -- And How You Can Profit From It," published in paperback in February 2006.

The reviewers comments on the book are pretty good.

Wonder if there are still suckers trying to buy this book??????

Don't forget the $8k for those sitting on the sideline for the past 3 years! I closed in August, so I got the $7,500 0% loan (over 15 years).

does anyone have any insights or any reports on where San Diego prices are headed for the rest of 09 .

all I know, is the 8k has me starting to look. Then again its more certain foreclosures, and homeowners with realistic wants for their prices that are doing more of it. the guy that wants 50k more then a similar house down the block isn't getting my money.

MarkM said: 74ak said: MarkM from Wash DC gave 5stars as well ?!? LOL, different MarkM. I've actually reviewed other RE books on Amazon, but not this one (but probably not under an ID that you'd recognize ... only my run-on, babbling style of writing might give it away, LOL). I can't review it because I've never read it, and have no interest to.

michal1980 said: all I know, is the 8k has me starting to look. Then again its more certain foreclosures, and homeowners with realistic wants for their prices that are doing more of it. the guy that wants 50k more then a similar house down the block isn't getting my money.I'm glad I had already planned to start looking before they came up with the $8k credit. Because, I'll be honest, I'd be worried if I thought that was what was compelling me to look. I think you have to decide first if it's right for you, and only then do you figure in the credit. Otherwise it's like buying that you maybe don't really want for $100 because it has a $5 mail in rebate.

Although I understand that is the FW thing to do

Me and the wife were already starting to plan. If we were to wait 12 more months, as per plan, and the rebate did not get extended, it would be like running in place.

Yes we'd have a bit more in savings, and our savings now, and after home would be ~$1000/month. That 8k is 8 months worth of extra saving.

74ak said: Eventually, I expect prices to decline from downward pressure of neighbouring counties (due to equilibriom of living cost adjusted for commute and taxes and ingoring prestige or convinience). There are significant declines in property prices elsewhere in the area.

I think this is spot on, and this is personally how I feel as well. You can't have some areas be completely decimated (50%+ drop), and neighboring areas hold up very well (~15% decline or so). It's just not realistic. The reason is simply that there develops an "imbalance" where either the beaten down areas are oversold, or the non-beaten down areas have further declines. Note, that I'm not talking about small areas, but LARGE counties. Of course neighborhoods/etc. could very well hold up, but not large counties.

NorthStar2020 said: michal1980 said: Me and the wife were already starting to plan. If we were to wait 12 more months, as per plan, and the rebate did not get extended, it would be like running in place.

Yes we'd have a bit more in savings, and our savings now, and after home would be ~$1000/month. That 8k is 8 months worth of extra saving.

I'm tired of the govt rebates like this one. Let's delve in a little bit deeper.
1) Assume this $8K subsidy increases the prices of homes by 8K. So, a previously valued 100K home would now be 108K because sellers would automatically increase their price & every buyer has got the 8K advantage you have.

2) In Dec 2009, the rebate vanishes which means the home prices drop by 8K. Now you are down by 8K.

3) You won't be getting the rebate until Feb 2010 if I understood correctly.

4) By giving a 8K rebate, the govt is effectively enabling the borrower to purchase a home 40K more than he/she could afford.
An example. Let's say you have 42K for downpayment. So, with a 20% downpayment, you can afford a 210K house.
Now add the 8K rebate which increases your available downpayment to 50K. Now you are suddenly able to afford a 250K house.
We are back to square one. Buying more house than you could afford.

5) The only people to benefit from this scheme are the stupid realtors(they make an extra 6% of 8K or $480), the sellers who get 8K more than true market price and govt that gets additional tax on the 8K.

I agree with some of what you are saying, however the current markets aren't that efficent. Homes listed before the rebate was annouced haven't jumped up in price.

The rebate can be gotten on this years taxes, as an ammendment, so about 6 weeks after closing.

Also if you are stupid, then yes, the rebate will push you into buying more home then you could. In my case, My price range has changed 0 from before the rebate, to after the rebate.

First off, thx for starting the new thread.

Let me "toss the skunk on table" by saying the another possible title for this thread could have been, "Is residential real estate o-v-e-r as an investment."

Most of us are far too young to remember, but for most of recorded history residential real estate was *not* an appreciating asset. It's really only since World War 2 -- and particularly since tax changes in the 1990s -- that real estate became more than mere shelter, more than just a slow accumulator of wealth and became the brick and mortar lotto ticket of the millenium.

I have no crystal ball, but I am a believer in "reversion to the mean". In the case of residential real estate, I think this takes you to at least 2 different possibilities ...

The first is a reversion to the modern, post-war trend line as evidenced by 1970-1995 house price appreciation. If you buy into this form of reversion, housing prices still have a ways to fall. Possibly another 20-25% in some neighborhoods.

The second is a reversion to the pre-WW2 model. If you buy into this form of reversion, housing prices continue to fall until they -- at least temporarily -- are less than fair rental valuation. That would mean further decreases of approximately 50% putting the bottom at approximately 25-35% of peak prices.

Regardless of which model you buy into, or whether you buy into reversion at all, I firmly believe that the 3000+ s.f. millenial McMansions are not only dead money, but destined to be the tenements of the 21st century. Just as the large, pre-income tax houses in Chicago, Philadelphia, and other major urban centers ended up.

1929 stock market crash, 50% down from peak in a short time.
Sound familiar?
The DJIA went from ~395 down to ~195.
Then it rallied 50% in a short time. Up to ~300 in 1930.
Problem over? Stocks cheap now? Time to get in?
No, problems just beginning.
The decline started again, DJIA down and down, bottoming finally
~ 40 in 1932. 90% drop.
This time housing is the bubble, not stocks.
90% drop from the peak is possible.

Bubbles don't end with a nice return to normality, they end
with a collapse to the basement. THEN you buy.

MarkM said: I am prepared to be labeled a crackpot for saying "Buy Now!" ... just as I was for saying "Don't Buy Now!" in 2004. Hopefully I will not be as early (two years, the bubble peaked in early 2006) as I was in making that first call!I think you are indeed early, as careful trend observers like yourself often are. Here's why.

-Yes, Case-Shiller is down. But it's still above the historical mean--significantly so in many parts of the country. Given that we're in the biggest slowdown in aggregate demand since the GD, all else equal we should expect that we'll certainly correct to below the historical mean before stablizing.

-We're still artificially propping up housing--which can only slow the pricing correction temporarily. $8K tax credit (which can indeed be used towards the purchase price, as Missouri is doing already). Gov't subsidies on mortgage rates. Freddie and Fannie subsidies. And who knows what political pressure will bring to bear before the 2010 mid-terms.

-Too much supply for emergent demand. We simply have too many houses chasing too few qualified/interested buyers. And that's right now. Think about how many current underwater homeowners, those facing foreclosure, et certera will be loath to stretch for SFRs in the near-mid term.

-EDIT: There is your point about interest rates. The odds of a big inflation surge sometime in the mid-term are very high. Once that translates into higher mortgage rates, affordability plumments. Then see above point: less demand.

IMO: if you qualify for the $8K credit and can buy an very affordable (to buy and to maintain) home that you and any family will likely stay in long term, buying soon might make sense. Otherwise, expect that 2010, 2011, even well beyond will offer pricing that will make today's deals pale in comparison.

Thanks for starting this thread Mark.

I agree with Dave in that it is too early.... however, that hasnt stopped me from buying again NOW.

As I stated on page 40 of the Rental property sticky, I too stopped buying as home prices went too high to make sense in 2003/2004. Although I could have still made tons of money flipping all the way through 2006, I dont flip. I buy homes that are cash flow positive and , once mortgages are paidoff, will create a lifetime passive income stream.

So in 2008 , when the #s again made sense and I could rent homes for more than the ownership costs, I bought as much as I could (with financing) because I feared financing would be cutoff. Sure enough, stated income financing was cutoff early this year.

I believe we still have quite a ways to go in terms of a pricing bottom...in prior threads I've stated 2010-2011 will be the golden years, especially in markets where the Option ARMs ruled the world. However, as there is a lot of modification and foreclosure avoidance programs emerging, that may help to prevent a freefall.

i just bought a brand new house in a stable subdivision (few remaining lots) for 70k lower than next door neighbor and 35k lower than across the street with smaller house. house 1+ year ago would have sold for close to 100k more here. 4.875 interest on 30 year loan w/0 points and 8k (or whatever percentage i get of it) from govt. even if houses drop further in my area another 30-50k, i'm still ok. i imagine it might drop a little more than rebound. i bet my next appraisal, my house is already at a profit. money is king rt now. if you can buy, now's the time.

I suspect a quick upshot in house prices sometime late 09, early 10. Then, just when everyone out there starts thinking it's all over BAM the bottom WILL fall out and price declines will be much worse than they are now.

I would sell any house into strength based on this. The time to really buy will be late 2010.

Jay

Home ownership in US now at 67%, lowest rates since 2000: Graph

Years back I looked at this statistic a lot, especially as it went over this level, and argued 67%+ was not sustainable, it was a huge deviation from a 64% +/- 2% level that had held true for over half a century. I though that it possibly indicated people where being given mortgages who were not creditworthy. Obviously we now know that is true, however ... even though we are still above the historical range, I've been reading arguments that part of that rise was due to changes in demographics (older population, due to baby boomers). So perhaps with luck we do not need to drop a full 4% more, back to previous historical norm. That's a big deal since a full 3% further drop would mean that we are only 2/5 the way down from the bubble peak.

I'm certain there is more to come, though, with the widely predicted wave of foreclosures coming during the rest of this calendar year (even BofA vice presidents are talking about that as a certainty at conferences, etc). So it's coming down more, almost for sure -- just maybe not 3% more?