Saturday, February 14, 2009

Late 90s Prices, Once the Bubble Pops?

Lately, signs pointing back to stock and real estate bubbles starting in 1997 are popping up in more and more articles. Those getting excited about 2004 or 2003 prices appear to be premature. It only makes sense, if this is when the bubbles began, and we had 2 of the largest bubbles in history, we will correct back to historical norms, if not worse. Throw in numerous cliff diving graphs with each passing month, and we could just blow past 2000.

Given the following headwinds:

1) Recession/Depression
2) Higher Unemployment
3) Consumer Confidence
4) Underwater Mortgage Effect
5) Tighter Credit
6) Slowing Housing Formation
7) Foreclosure Sales
8) Subprime Mortgage Resets Through 2011
9) Alt-A Mortgage Resets Through 2011
10) Option ARM Resets Through 2011 (Pick-A-Payment)
11) Prime Mortgage Resets Through 2011
12) Once Burned Buyer's Effect, Not Re-Entering the Market
13) Growing Unsold Inventory

We aren't anywhere near stabilizing, in this market. How far do we roll back, before you would consider buying?

18 comments:

Robert said...

It is called...reversion to the mean. think: pendulum.
prices go too far one way, then too far the other way, finally reverting to the mean price which in housing, goes up or down with inflation.
Californians think that this state is different. It was for a long time. But now with the large budget deficit and huge unemployment, California real estate prices even in BH and SM will swing too wide the other way.
Realtors beware....you are advising clients based on yesterday's newspaper. Times have changed and will not soon return to the good old days.
Robert

Latesummer2009 said...

Yes, reversion to the mean, is what history tells us. Perhaps, this is'nt a normal historical event though. You can trace these extreme bubbles back to 1997, that started to bring us out of the 90s recession. Unfortunately, they originated out of easy credit and increased debt. As the first bubble popped (Stocks) in 2000, the next one arrived (Real Estate), with the aid of deregulation of the banks. What we are seeing now, is the rapid deflation of these overinflated assets (Stocks and Real Estate) and hemorrhaging of peripheral industries such as Retail, Leisure and Service.

Right now, the only cylinder operating in the U.S. economy is government. The current U.S. business model is unsustainable, given credit (or debt, really) is collapsing. All that remains, is the velocity in which it corrects and how far back (Prices) we go.

Anonymous said...

I've been waiting for some time, having convinced myself we were in a bubble in late 03/04. I continue to rent for far less than what it would have cost me to buy a comparable home even at that time. I have gone to a few opens lately, and while asking prices are clearly off the peak, sellers are still rather optimistic for the most part. And there are a few buyers who are biting -- I assume they feel they are getting a 'good deal' or simply HAVE to buy for various reasons. I will continue to wait until I see real value. This is probably at 2001/2002 price levels. And if I do not see it, I am prepared to leave the state. Many lovely areas where I could buy a house for half of what it costs on the westside.

Stephen said...

Bear in mind the answer to whether or not to buy now depends on very personal variables. If I see a property that I can envision living in for up to 10 years, allowing plenty of time for the market to stabilize (in my view, anyway), and I can afford it, I'd seriously consider diving in.

JeffL said...

with today's new housing plan, (there will only be relief for people who have conforming, ie under $435k, mortgages) The government has told people who bought with jumbo/Alt-A Mortgages, that they are out of luck. Foreclosure is your only option. Thats what, 99% of the West Side?

The "10-year investment" thesis has just been throw out the window. Watch prices plummet. This is gonna get ugly.

Anonymous said...

Can anyone confirm whether or not the new Obama plan only applies to non-conforming loans, please?

Check out this VERY interesting article - http://www.advisorperspectives.com/newsletters09/pdfs/Son_of_Sub-Prime_Another_Wave_of_Defaults.pdf

jayc said...

When will I buy? When I look around and even the giddy suckers touting "it's a buyers market!" have thrown in the towel and resigned that real estate is a terrible waste of money. When even the fools finally get it, it will be time.

Latesummer2009 said...

With each passing day, buyers become more educated about the declining real estate market. NODs are accelerating and foreclosures are creeping further and further into the Westside. The velocity in which Alt-A and Prime mortgages are defaulting has started to open up some eyes. The increasing inventory and significant declines will be a rude awakening, as we head towards the traditional selling season.

Anonymous said...

I agree that we're a long way off from seeing prices in desirable neighborhoods fall to their pre- bubble days. Condo prices, while not perfect, are an interesting means of gauging price declines. West Hollywood is still dominated by generic two bedroom condos listed at $500,000. These same condos were selling for roughly half that value in the late nineties. Factoring in inflation, I will begin to believe that prices have corrected when I see several West Hollywood 2 bedroom condos in the low $300,000's. Those days are coming, but they're a long way off.

Anonymous said...

Coming Bank Nationalizations - http://www.capitalismgonewild.com/2009/02/bank-nationalization-for-citigroup-and_20.html

Anonymous said...

I just got a loan modification approved by my lender for my super jumbo loan in Santa Monica. Interest rate of 3%....glad I bit off more than I could chew when I did....Thanks taxpayers for the bailout.

Anonymous said...

Can someone explain how adj. rate mortgages will be affected negatively since all the indices (LIBOR, etc.) are so much lower ....won't they adjust DOWN from where the interest rates are now???

Anonymous said...

I'm curious to hear an answer to that too- is there a clause in most adjustable rate loans (that are tied to current market rates) that state the interest rate can't go below a certain point?

And we're waiting for prices to decline to 2000-ish prices. Despite high pressure on the part of the local realtors, we're using the conservative estimation of not going past 3x our yearly income.

And GOOD that most of the home owners aren;t getting bailed out! They should have waited like the rest of us instead of driving the prices sky-high.

JL said...

Just a quick note on that "price rollback" survey. If prices go back to pre-1997 levels, isn't the decline becoming LESS severe? According to Case-Shiller indexes, the Los Angeles housing market bottomed in 1997 after coming down from its last peak in 1990. If prices go lower than what we had in 1997, then we're actually going back to pre-1988 prices.

JL said...

In regards to rates adjusting on ARM loans, the new rate over the initial five-year rate (if it was a 5/1-ARM) usually includes a substantial premium over rates such as LIBOR. The idea is that, if the borrower were to pay down the mortgage over the entire life of the loan, he would pay higher rates after five years to compensate for the lower rates during the first five years. So, yes, with rates being so low now, the new re-set rates wouldn't be as high as they might have been back in 2004, but they're still likely to be substantially higher than the borrower's current rate.

Latesummer2009 said...

The results are in from the latest reader poll. When asked how far back prices would roll back, we found:

26% said 1997 or before
33% said 1998 - 1999
30% said 2000 - 2001
11% said 2002 or after

Since prices are currently around 2004-2005, those are some hefty price cuts, that still remain.

Anonymous said...

1999, if i am employed when the roll-back arrives.

Smack MacDougal said...

The house price appreciation bubble began with the 1997 1031 Exchange law.

This kicked off the era of McMansionism, as persons rolled up $250k (single), $500k (couple) every two years.

On top of the buy ups, persons refi'd to buy big screens and Beemers.

The Dot bomb interest rate cut combined with the post-9/11 interest rate cut added fuel to the McMansion fire.

All should expect prices to revert to 1997 trend.