Saturday, February 20, 2010

Real Estate Bears and Bulls

Apparently, we have 2 separate camps on this blog. Those that think prices still have a ways to decline (Bears), and those who think the bottom is in and increasing home prices will leave would-be buyers behind (Bulls). Whichever camp you fall into is fine. We all have our reasons for what we believe in. However, to be taken seriously here, you need to back up your comments with a few facts. Otherwise, you are just popping off without any credibility. Nobody really knows what the future will bring. However, with a bit of research, at least you can formulate an educated guess. This blog is not about having to be right or blasting others for their opinions. It is about discussing the latest sales information and how it affects the real estate market. It would be great to see specific transactions that demonstrate price increases or price decreases, rather than bantering about what others say.

Obviously I am a Bear. The way I see it is, buying real estate is always a risk and one needs to decide exactly how much risk they can afford. What is the % of risk to the upside compared to % risk to the downside and % risk of being flat. For the Westside, I would estimate a 70% risk to the downside, a 20% risk of being flat and a 10% risk to the upside. When you find most of the risk in the neighborhood is to the downside or being flat, there is little need to buy and you should protect your future investment (down payment). With all the headwinds facing our economy, the real estate prices of 2007 are long gone. Here are just a few factors that I believe will drive prices down further:


1) Unemployment and Underemployment
2) Federal Government's ending of tax credits and subsidized low interest rates
3) Large overhang of unsold inventory. (Listed and Shadow)
4) Alt-A and Option ARM recasts from 2010 - 2012
5) Increasing default rates for Prime Mortgages
6) Record Notice of Defaults (NODs)
7) Increase of foreclosures
8) Increase of negative equity
9) Rising interest rates
10) Commercial Real Estate Bust in 2012-2013
11) Renting option being half the cost of a mortgage
12) California budget problems
13 ) Tightening of credit from banks
14) Future bailout of FHA and FHA loan foreclosures
15) Lack of move-up buyers

The list goes on and on and on etc....

With this much down side risk, or even if prices drag along the bottom for a couple years, there isn't any rush to buy. Why not preserve or invest your capital, then wait and see if prices continue declining.

43 comments:

Anonymous said...

Latesummer, you are 100% correct.

However, you need to understand that the realtors are hurting bad. Many of them are earning literally nothing right now as the pace of sales has slowed.

Many of the realtors agree with you that prices are likely to go down, but in order to earn a living they have to lie to their buy side clients and tell them that prices will go up.

So the "bulls" posting here are often people that don't really believe what they are saying, they are saying what they need to say in order to earn a living.

Show some sympathy for the bulls. If you were in their shoes you might be doing the same thing they are doing

Anonymous said...

The trend has been downward for prices for the upper end, especially during the last year. There is no "factor" that would lead to an increase in prices. I know that 10% is a low %, but I would put the probability of price increases at 0.1%.

One other factor not mentioned is that the banks have significantly tightened their lending practices (we are talking jumbo here so the FHA, etc., isn't important). To afford a house you must have the 20% down AND have another large sum invested (but not in a 401K). It used to be that the 20% came from the procedes of the sale of the old house, but now there is no equity in the old house, at least if it was purchased sometime over the past 4 or 5 years. So, there aren't many move up buyers in the market to purchase upper end homes.

latesummer2009 said...

Anon 9:22, Thanks for mentioning the credit issue. That is huge and belongs at the top of the list. I meant to include that and must have been overwhelmed by all the other factors.

Anonymous said...

Hey - I am confused. I just saw 861 20th was listed feb 20 but when i go on realtor .com I don't see it
Does anyone know - does realtor .com operate with a delay or something - some sort of lag between when something is listed and when it shows up


Beautifully built in 2008,this architectural townhome exudes tranquility & sophistication while feeling like a single family home!Wonderful details throughout this front corner unit,Boffi kitchen & bathrooms,distressed walnut floors,oversized custom front door,high ceilings,custom lighting system,hand troweled Venetian plaster,custom glass tile,bull nosed counters & walls,dual Pella windows,2 zone air conditioning,built-in speakers & more!Great floor plan for indoor/outdoor entertaining!

Anonymous said...

I just went to see 861 20th
Nice build quality. I wanted to like it.

Somehow it just seemed too dark for me. Perhaps it is the really dark wood floors or dark paint, but the place just seemed gloomy, even with the windows open.

The place somehow felt cramped, even though it was two thousand square feet.

I would be interested in the impressions of others. The open house was absolutely packed, for whatever that is worth

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Anonymous said...
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Anonymous said...

To those claiming that thing are getting better and there is no second leg down, this came from the treasury,

“(Realty Check) Treasury officials today said they are still concerned about a coming wave of foreclosures, many from pay option ARMs and many from the prime jumbo basket, particularly hard hit by unemployment. Only 2/3 of borrowers in the HAMP program are current on their payments. That’s why officials now say they are looking at unemployment options and more incentives to borrowers to keep paying on trial modifications and on loans that are significantly “underwater” with respect to the property value.”

Thanks to Doc Housing Bubble. You won't see any housing won't go down comments on his blog because he backs it up with deep statistics. LaterSummer has it right on the nose!

I have a feeling that many real-estate industry people thinks that they can reach a lot of potential buyers here so they try their standard sales tactics. Don't blame them. On the flip side there are also lot's of people wishing that they can afford the area and overstate their reasons. People can say what they like, you have to use your brain to analyze what is said and arrive at your own conclusions.

Anonymous said...

Real estate prices on the Westside could remain flat or go up as banks will continue to purposefully withhold foreclosed inventory from the market. I am talking about massive amount of shadow inventory and banks sitting on it for years. They can hire cheap labor to maintain the property and rent it out.

Anonymous said...

Huh? Banks becoming landlords? I don't think so. Wishful thinking though.

Anonymous said...

Just like LS2009 to point to a host of problems that continue. Fact is, when a bottom hits, all the drags on the economy do not disappear. Some of them linger on for years as they are flushed out of the system. Yet by the time each and every one of those factors is worked out, the housing market will be well off the bottom.

The superbears seem to have a rather unrealistic view of what the "bottom" is, as if there should be fountains of champagne sprouting spontaneously out of the ground across the country, along with neon signs that announce the official end of the price declines.

That's not what a bottom looks like, and if that's what you're looking for, you're going to miss it. It begins with sporadic leveling out, with some indicators that aren't obvious until after the fact. Unemployment often lags the end of the recession, as companies don't rehire until the consumption of the recovery has been established. The NBER won't even see it until months after the fact.

While the economy comes back, the lives of some people are going to suck and for some, it will keep getting worse. This demand for amazing year-on-year gains, full employment and zero foreclosures as confirmation signals of a bottom is just unrealistic. Those who want a perfect recovery are never going to get it, and they're going to miss out on opportunities waiting for signals that will never happen.

Anonymous said...

Agreed, finding the bottom isn't easy. There are no fireworks. That said, it's obvious we're not even close. You don't need fireworks to realize that, at least if you're using your head and being objective.

Anonymous said...

I agree with the above...How can we even be close with the amount of shadow inventory looming and many, many more properties about to become distressed when the Alt A-s and Option Arms on them recast in this falling market.
As for the bulls...if you believe what you are saying then fine, of course who knows what the future holds, but I don't have sympathy for liars and swindlers. They helped create this housing fiasco with lies, and propaganda so they are reaping what they sowed as an industry. I'm glad there are blogs like this that shine a little truth and light onto what the real-estate industry has tried to conceal for so long.

Anonymous said...

From the always reliable Professor Piggington

"If the shadow inventory slowly dribbles out over many years, then it could be kind of a non-issue (and the offset coming from lower homebuilding is one of the reasons). But if it were to hit in fairly short order, I don't really think it makes a difference how fast they are building homes. I guess my point is that this is an issue of for-sale inventory, not of overall housing supply. The shadow inventory has the theoretical ability to greatly increase inventory (and must-sell inventory at that). Of course, whether anything like that will happen is a giant question mark."

http://piggington.com/new_foreclosure_activity_on_the_decline#comments

Anonymous said...

I live in the San Francisco area.
Any home in a decent suburb, priced under $800,000. still sells within 30 days of listing.
We have a LONG way to go down.

Anonymous said...

Agreed LONG way to go down. I mean all you have to do is look at Case Shiller and see...

Oops - nevermind!!!

Anonymous said...

Case Shiller shows improvement in L.A. home sale prices and and also a drop in jumbo loan interest rates...

Anyone want to throw that into the mix?

Anonymous said...

The advice I always give to newcomers to los angeles is to divide the city in to quarters. La Cienega is the N / S divider and Wilshire is the E / W divider. the only quarter of the city to look in is north of wilshire and west of la cienega. If they stick to that rule they will be safe and if they violate that rule they might wind up in a neighborhood that is fills up with gangs. Simple

Anonymous said...

Case Shiller shows improvement in L.A. home sale prices and and also a drop in jumbo loan interest rates...

Lower end selling and upper end is not. Simple. LA is such a large and diverse area you can't really use this data. Also, interest rates fluctuates over a range. The range is what you must look at not a blip. If you want to look at broad data like this then why not look at the data of how bad new home sales are. "record low...since 1963"

I've been looking my local Westside market. Last year, there was one house and two condo for sale at unreasonable prices, they sat on the market for hundreds of days. Now there are 4 or 5 houses with 4 condo in the same building for sale. I also see that most of those sales are already bring a check anywhere from $50k to $125k to closing. On top of that, many listings that I've been keeping an eye on are now listed as Short sales. So to me, it looks like my local market is not dong well at all.

Anonymous said...

"Lower end selling and upper end is not."

And yet, Case Shiller high tier went up too.

Anonymous said...

From the "Bear Book of Doom" on how to deal with “unpleasant” realities (like Case Shiller):
1. Ignore the fact you used to cite it regularly when it was going your way.
2. Question the credibility of the source…if that doesn’t work…
3. Question the way it was calculated….if still no luck….
4. Cite the role of the government…..then…..
5. Cite lagging indicators like employment…..and finally…..
6. Just start calling every opponent a "realtard" (TM) and start writing crap that makes no sense.

Anonymous said...

From the "Bulls Book of Doom" on how to deal with “unpleasant” realities (economic fundamentals):
1. Ignore the fact you used to cite it regularly when it was going your way.
2. Question the credibility of the source…if that doesn’t work…
3. Question the way it was calculated….if still no luck….
4. Cite the role of the government…..then…..state it will go on forever.
5. Cite lagging indicators like Case Shiller…..and finally…..
6. Just start telling everyone that they will be priced out forever.

Anonymous said...

I can't think of a case where a buyer cannot rent and "has to buy." I can think of many cases where a seller "has to sell."

Anonymous said...

The question was "why not wait and preserve your capital?" Would the bulls please provide a list of realistic objective economic factors indicating why prices are likely going to increase, and why down payments are not going to be at risk?

Anonymous said...

5. Cite lagging indicators like Case Shiller…..and finally…..

BZZZZZ oh, sorry. You otherwise had a good, funny, and logically consistent retort til you got to this one. Please rework this one and try again...

Anonymous said...

I do not believe the a mere uptick in the case shiller means much. Most markets are up and down, but there is a general trend either up or down. Right now the general trend is down, and I believe it will continue down for several years and then bounce along the bottom for many more years. Perhaps things will be even worse like Japan where real property prices are still declining 20 plus years after their real estate bubble burst. I don't see any factors that point to a real economic recovery, or a return to easy lending practices for jumbo loans. That said, there are some people out there that can't control themselves, or have money to burn, etc., and must have that home. I wish them the best.

Anonymous said...

"Lower end selling and upper end is not."

And yet, Case Shiller high tier went up too. --

RIGHT! CS "high end!" - What a joke. CS higher end is $500,000! This has nothing to do with the $1mm, $2mm and higher market.

Anonymous said...

"RIGHT! CS "high end!" - What a joke. CS higher end is $500,000! This has nothing to do with the $1mm, $2mm and higher market."

Talking Point #3 From the "Bears Book of Doom" on how to deal with “unpleasant” realities.

Anonymous said...

dear perma-cheerleader -- simply calling me (11:19am) names does not address my point -- CS is calling the high end those houses that are the mid-low end in LA and well under the $729k loan pumping BS. Your attempt to call names instead of addressing the real issue where you try to cite CS to relate to anything in the SuperJumbo and cash purchased housing market is a joke. If you can't do better, than go away.

Anonymous said...

Many claim the CS index is the most accurate indicator of prices in a given area.

Anonnyblogger @11:26am says "its different on the Westside.

Full story along with weather and sports @ NBC news 11.

Anonymous said...

5. Cite lagging indicators like Case Shiller…..and finally…..

hum, wasn't the 2009 Dec CS that just got published? We are almost done with Feb of 2010...no? SO what does lagging mean if not behind?

Anonymous said...

Now... CNN news and headlines at noon:

"NEW YORK (CNNMoney.com) -- Despite signs that the real estate market might be lurching forward, prices are expected to fall further this year and next... according to a joint report between Fiserv and Moody's Economy.com...
Other disastrous performances will be turned in by the Hanford, Calif., metro area, where prices are projected to plummet 27.2% through Sept. 30, 2010 following their 36.9% drop for the previous 36 months. Ft. Lauderdale and West Palm will also register steep drops."

Anonymous said...

Okay, leaving the CS discussions aside without concluding how that factor plays out, the bulls have no factors/circumstances indicating an increase in prices. On the other hand, there are 15 factors/circumstances indicating a decrease in prices. I think this post has played out and the bears win in a shut out.

What do the bears think about the decrease in prices? 3-4 years of decline and bounce along the bottom for several years? Or, a slow decline for the next decade? I'm hoping the former because I will not buy in a market that doesn't make sense, but I don't have a strong view one way or the other.

Anonymous said...

http://www.firstrepublic.com/lend/residential/prestigeindex/losangeles.html

this is interesting - high end only chart by First Republic Bank. Shows the continuing price drop, albeit not quite so sharp over the past 3-6 months.

END OF DISCUSSION!!

Anonymous said...
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Anonymous said...

Looking at that graph, prices still have a long way to decline. Thanks. The previous bubble took 7 years to correct, and this bubble is much bigger, so maybe the better view is a Japan type scenario. What a bummer: I just won't buy in an irrational market. I just can't see losing $300,000-$400,000 because I'm anxious.

Anonymous said...

Anonymous said...
Okay, leaving the CS discussions aside without concluding how that factor plays out, the bulls have no factors/circumstances indicating an increase in prices. On the other hand, there are 15 factors/circumstances indicating a decrease in prices. I think this post has played out and the bears win in a shut out.

Come again? Bears are up in many factors except the most important one - PRICE. Like so many football games, you can lead in many categories & still lose.

Heres the stat sheet
Shadow Inventory = rushing yards
Govt Intervention = turnovers
Unemployment = time of possession
Case Shiller = SCOREBOARD BABY!!!

Anonymous said...

What the hell is this?

Shadow Inventory = rushing yards
Govt Intervention = turnovers
Unemployment = time of possession
Case Shiller = SCOREBOARD BABY!!!

I think it's time for a new thread as this one is old and boring.

Anonymous said...

To those noting Case Shiller as positive data for high-end homes: you are simply wrong re: expensive SoCal real estate.

The general high-tier median is being fueled by more sales of conforming $700K+ loans.

Don't believe me. Look at the link below. The data is specifically extracted from Case Shiller and represents the true high tier. Note that in SF and LA, there were quarterly decreases for each quarter is 2009.

Plus, anyone who thinks this data is artificially bearish or slanted to fit an opinion is silly. First Republic has been doing this for 20 years; I know them; and they are a LENDER! Their business only improves in a rising price environment.

Bulls quoting CS and simply uninformed. Everyone, please do your own research.

-Jason

http://www.firstrepublic.com/lend/residential/prestigeindex/losangeles.html

Anonymous said...

Yes, time for a new thread, although I find the bulls posts pretty humerous. I mean, such delusion it's hilarious, but I do respect Latesummer's wish to keep things civil.

Anonymous said...

There is only a handful of listings in SM under a million dollars. There is no supply and and infinite amount of people wanting to buy as nomatter if your bull or bear everyone still would want to own thier own home. It's just a matter of price. At some point a bear will become a bull.

Anonymous said...

FLOL...an "infinite" amount of people wanting to buy? Last I checked, there were only 6.x billion people on the planet. And of those, what ridiculously miniscule fraction could actually AFFORD to buy in SaMo (not to mention actually would want to - not everyone does)? Just because everyone "wants" to buy doesn't mean everyone CAN buy or DESERVES to buy. You seem to think Santa Monica exists in a vacuum. SURPRISE! There's no shortage of alternatives.

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