The Emotional Cycle Of Real Estate
Is it possible to gauge where we are in the real estate cycle by the emotions of human beings? Many believe there is. It is a Sin Wave called The Point Of Maximum Opportunity. It runs through 15 different stages.
1) Optimisim
2) Excitement
3) Thrill
4) Euphoria (Point of Maximum Financial Risk)
5) Anxiety
6) Denial
7) Fear
8) Desperation
9) Panic
10) Capitulation
11) Despondency
12 (Point of Maximum Financial Opportunity)
13) Depression
14) Hope
15) Relief
And Back to Optimism
What stage is The Westside on now?
Posts
61 comments:
I am the anonymous poster who challenged the unrelenting positive poster previously. I am not a permabear. I do read a dozen or so finance articles every day. If you do that, and you can tell me what grounds there are for a strengthening real estate market, I would truly like to know. The stock market is tanking, unemployment is up, baby boomers are retiring and downsizing, we have a massive higher education debt bubble that is about to explode (never mind the fact that college grads are leaving school with an average $23K in debt -- when in the world are they going to be in a position to buy their first house?), most state governments are cutting budgets and jobs, the private sector is not hiring, wages are down, there are over 6 million homes in some stage of foreclosure. Will one of the cheerleaders who posts on this site tell me where they get their optimism? Is it because a Hollywood starlet just paid several million for a house in the Hills? That doesn't make for a healthy real estate market.
"Given the way we are heading towards deflation"
What does the gold, silver, and all other commodity markets say about this?
latesummer,
Have you ever purchased a piece of real estate? Please come clean and tell your readers that you never have owned real estate, and that with your recommendation of waiting till 2018 at least, you likely never will. I think you owe it to your readers.
Anon 7:14 - why should it matter if latesummer has ever purchased a piece of real estate? What insight into the market does buying give you that a careful examination of the data does not?
Anon 7:03 Commodities are saying alot, as they are in a bull run. Especially Gold and Silver, as every other investment class is deflating, while our currency is being debased. It's a double whammy.
Anon 7:14 once again my personal situation has nothing to do with analyzing data. Next time you ask me, or someone else a personal question, you will be deleted. That's it.
"Anonymous said...
Anon 7:14 - why should it matter if latesummer has ever purchased a piece of real estate? What insight into the market does buying give you that a careful examination of the data does not?"
Different Anon here. I think it matters because its an indication of one's judgment and where they land on the bear-bull spectrum.
Case in point -- I used to read a bubble blog from someone who seemed (IMO) overly negative on the facts of the present day. This was confirmed when she mentioned that she did not buy in LA in 1992 because it still seemed "overpriced" at the time.
That right there told me all I needed to know. In hindsight, 1995 was the best time to buy in perhaps 25 years. If she didnt buy then, in all likelyhood she will still be sitting on the sidelines calling LA real estate "overpriced" when it bottoms this time, be it now or 10 years from now.
It could be the same situation with LS2009. If so, it would be revealing to know. That said, I understand his reluctance to reveal personal information (I wouldnt either) so I respect his choice not to discuss it.
LS2009, please do not delete this post. Again, this is a different anon, and I am responding to another poster about the relevance of your choices. I am not asking you to reveal them. Regards.
Looking at prices in Westwood, I think it's still between 5 & 6. Holmby Hills and Bel-Air have cheaper homes (per sq. ft.)! I think they're around 7 & 8. Still a long way to go.
The bottom will be the day we hear that Suzanne The Realtor did some soul searching, put a gun in her mouth and pulled the trigger.
"What insight into the market does buying give you that a careful examination of the data does not?"
I guess one would have to question his crystal ball if he never bought in 1995, or 1996, or 1997...
"as every other investment class is deflating"
You keep saying that, but you never prove it re: westside real estate.
Ask anyone who bought real estate on the Westside in the last 7-8 years if they can sell their original house and come out ahead. There's your answer. Westside Real Estate is still declining and has been steadily ever since the summer of 2007.
Looks like your stuck in the denial stage.
"What does the gold, silver, and all other commodity markets say about this?"
The chief investment officer of a money manager was asked the same question today on Yahoo Financial. He said the price of gold is screaming deflation, for the following reason. In a leveraged financial system (our economy is "drenched in debt"), as prices and wages fall, the burden of debt becomes heavier and heavier and the paper backing the debt becomes suspect. Think of all those mortgage loans. Investors are deserting the paper behind the debt and moving to hard assets. I can say from personal observation that the California Housing Agency bonds backed by single family home mortgages have junk ratings because of the default situation.
On top of that, people are shifting from "paper" gold (ETFs) to the metal itself, which has no counter-party risk. Hugo Chavez has just demanded delivery of Venezuela's gold held by foreign banks.
Gold is supposed to protect against paper assets becoming worthless from inflation and attendant currency devaluation, but (according to this commentator), gold can also protect against paper assets becoming worthless from outsized defaults.
My point exactly.
Cheers!
Who is this person who is defending real estate as a sound investment. Every homeowner in Los Angeles is laying awake at night, sick at the thought of their hard-earned money going down the drain and there's nothing they can do about it -- they're chained to their mortgage, they can't sell the house because they're under water, each week brings worse news, they're thinking about retirement but it's looking farther and farther away -- it's an absolute nightmare. Why would anyone buy a house in this market. I've owned 3 houses in my lifetime and fortunately I've been renting the last 6 years. I thank my lucky stars I'm not a homeowner right now and I won't go near it for many years.
"Who is this person"
It's me, the non-permabear.
"Ask anyone who bought real estate on the Westside in the last 7-8 years if they can sell their original house and come out ahead. There's your answer. Westside Real Estate is still declining"
That makes no sense.
@8.44 That makes no sense.
Of course it makes sense. If sellers aren't making a profit then prices aren't increasing. In other words, prices are still declining.
I don't really understand why you find that statement nonsensical.
"If sellers aren't making a profit then prices aren't increasing. In other words, prices are still declining."
If I bought a house for $800K in 2005, it dropped to 400K by 2010, and is now worth 425K, so in other words if I sold today I wouldn't make a profit, then prices are still declining, even though they're not?
Permabears do not do logic.
More like bought a house for $800K in 2005, dropped to 400K in 2010 and is now worth $375K in 2011.
Permabulls do not understand denial
Permabears do understand logic
By definition, "perma"-whatevers do not understand anything that is contrary to their viewpoint.
LS2009, why did you delete my post responding to the question...the relevance of whether you have ever bought anything?
As I noted before, I used to follow another blog til I realized that person did not buy in 1995 - her judgment was such that LA was "still overpriced and not a good buy" at that time.
That told me all I needed to know about that person's judgment. Specifically it was flawed if she was looking at a 20 year low in real estate and said it was "still overpriced and not a good buy".
Im not saying your judgment is the same, but you can understand the relevance.
My personal business is irrelevant and NOYDB. Stick to the data. If you don't like it, find another blog.
"Ask anyone who bought real estate on the Westside in the last 7-8 years if they can sell their original house and come out ahead. There's your answer. Westside Real Estate is still declining"
I'll copy and paste this again. Anyone who writes this does not understand basic math. I'm sure you'll delete it, but I'll post it again.
"Permabears do understand logic"
At least you can admit what you are your loyal readers are. What step is acceptance in the recovery process?
@ 1.24 pm
I'll copy and paste this again. Anyone who writes this does not understand basic math. .
Again. I'll ask you - what part of that sentence is illogical?
If people can't sell their houses for as much - or more - than they bought them for, what does that mean?
If it doesn't imply that prices are going down or at least staying level - then please do us all a favour: stop with the 'you don't know basic x,y,z' guff and explain YOUR logic.
Article in today's LA Times says the number of delinquent loans increased for the second straight quarter. If that's not an indication of more downward pressure on prices to come, I don't know what is. Where's that non-permabear I was talking to. They need to get a perm!
Okay, non perma-bear or whoever you are, I know a lot about real estate but did not buy in 1995, 96, or 97. Is this because my judgment is flawed? NO! It's because I was 23 then and not in a position to buy. Did you ever think, if indeed latesummer2009 did not buy then, there was another reason, maybe the same one as me, maybe another one equally as compelling? What is your problem and why are you so defensive/rude???
"If it doesn't imply that prices are going down or at least staying level - then please do us all a favour: stop with the 'you don't know basic x,y,z' guff and explain YOUR logic"
I already did. See my hypothetical above. If you can't understand how that disproves what the eminent professor said, then sorry I can't help you.
"What is your problem and why are you so defensive/rude?"
I just ask simple questions and ask for latesummer to back up some of the ludicrous, unsubstantiated statements he makes, and for that I am called a realtor. I am not a realtor. But he is a permabear, and so are most of the other posters. If that makes me rude, well whatever.
Anon 7:15 - I am not a permabear actually and I do advocate buying real estate, WHEN the time is right. The best time ever to buy real estate will be in the future for those who are patient and SAVING money now. But first, we must get through our deflationary period. Given the present economic conditions, ending our deflationary period appears to be at least 5-7 years away.
Whoever you are, the pissing contest is old and you're distracting us from discussing the real issues. Those are dissecting and evaluating CURRENT data and trends.
ANY continued personal questions about me, WILL be deleted. Hoepfully that's clear. Otherwise, goodbye and good luck..
This is hilarious. 6:52/7:14 is a complete jackass.
I think most of the westside homedebtors are in fear and desperation, although it's obvious some are still in denial, which is why they can't sell their overpriced monkey cages. However, there are some markets where capitulation has occurred (e.g., Vegas).
"Okay, non perma-bear or whoever you are, I know a lot about real estate but did not buy in 1995, 96, or 97. Is this because my judgment is flawed? NO! It's because I was 23 then and not in a position to buy."
Likewise, I didnt buy because I was living in Texas at the time, but thats not the point is it? Suppose you werent 23 at the time and were ready to buy, would you have pulled the trigger, or would your judgment (at that time) tell you, prices are still set to fall? If so, your judgment is deeply deeply flawed.
"Did you ever think, if indeed latesummer2009 did not buy then, there was another reason, maybe the same one as me, maybe another one equally as compelling?"
Could be. We will never know because he wont answer personal questions. Not that I am knocking him for it. I respect his right for (some) privacy, and wouldnt do the same either. In any event we will never know if he (a) did buy, (b) didnt buy because he couldnt due to age, financial hardship, location, etc or (c) didnt buy because his judgment told him prices had a long way to fall.
Let's get off of the personal attacks. If you have something to say about the condition of the real estate market, say it. My perspective is that, given everything going on in the financial markets, the level of personal debt in the country, the size of the shadow inventory (massive), the lack of job creation, the wave of retiring and down-sizing baby boomers, the enormous college debt that kids are arriving to the workforce with -- it appears to me like we're in for more downward price pressure.
"it appears to me like we're in for more downward price pressure."
How long have you been thinking that? I know some people whose judgment is we are in for more "downward price pressure" back in 1995. I wonder how holding off buying a house worked for them???
"If you have something to say about the condition of the real estate market, say it."
Check out the SFR inventory levels in any of SM zip codes and then tell me how everything else you said is affecting those markets.
Seriously, you expect a 23 year old to have the wherewithal to buy a house? No wonder you think real estate is a good investment!
It's hard to make money on RE. You have annual carrying costs (interest, taxes, maintenance), and between the buy and flip, you'll have lots of improvements.
Buying at X and selling at 1.2X is probably a loss.
But you have to live somewhere, and rent is a loss, too.
"Seriously, you expect a 23 year old to have the wherewithal to buy a house? No wonder you think real estate is a good investment!"
Which post makes such a claim? I think you have a reading comprehension problem.
"It's hard to make money on RE."
Ask anyone who bought RE in SoCal between 1850 and 2003 if they would do it again and 99.9% would say they wish they had bought as much RE as they could possibly afford. Seems almost like a no-brainer to me.
They bought low. Now would not be buying low. That's so elementary.
"Now would not be buying low."
Says you and the permabears.
Which post makes such a claim? I think you have a reading comprehension problem.
Agreed. The only point I was trying to make was, for those that were in a position to buy or where otherwise watching the market, what was their judgment on the RE market in 1995? If their judgment was, "we've had a serious correction, but now is a decent time to buy", turns out their judgment is sound.
However, if their judgment was "we've had a serious correction, and we are nowhere close to the bottom" then their judgment is seriously flawed, and we should now take what they say on the state of the present RE market with a very very large grain of salt.
I think we should all back off from making bold predictions about future prices. Prices may decline further, but for how long is another matter. It's very difficult to call market bottoms. For ever person who missed the bottom in the mid-1990s by being overly cautious, there was a buyer in late 2009 who mistakenly thought the decline had come to an end. The best you can do is keep monitoring prices and activity and try to get a handle on the local economy.
One thing I haven't heard much about lately is the immigration/emigration statistics for southern California. This was a big topic in the 1990s downturn.
May i respectfully suggest that immigration / emmigration from the state of California doesn't explain the price movements?
If you went back to 1995 you would find that the average Manhattan Beach Sand Section house (on 12th of an acre) sold for exactly the same price as the average two acre horse property in Palmdale and Lancaster
Fast forward to 2011 and you will find that the Manhattan Beach sand section house, without any rennovations, is up 8x from the 1995 price while the Palmdale and Lancaster property is exactly flat with 1995
Different neighborhoods have different trajectories. immigration and emmigration don't explain it
All we can do is look at the upward or downward pressures on real estate. At the moment, it looks like there are many more downward pressures than upward pressures, right?
Anon at 5:26
Your example shows that immigration/emigration can be very meaningful.
The housing recession of the 1990s in southern California was largely a result of huge cuts in the defense budget. The South Bay, a center of defense firms, was severely hit with layoffs of mid and upper level managers, and a lot of them left for other areas. That could explain the roughly equal prices for property in Manhattan Beach and Palmdale in 1995 that you cited. The fact that Manhattan Beach recovered and then soared afterward due to other factors, doesn't change what happened back then.
Also, if you don't think emigration can affect residential real estate, look at prices over the last two decades in Detroit, Cleveland and other rust state cities that have suffered declines in population.
Now that I think about it, emigration may not be an issue in southern California this time around, because the entire country is in recession and there are far fewer job "hot spots" to relocate to.
I agree with 9:10 am. You have to look at emmigration and immigration - but the patterns that the wealthy follow are often different from the patterns of the average person.
Average person tends to "anchor" on what things used to cost when they grwe up. Wealthy look afresh at neighborhoods, without the emotional baggage
Thirty years ago everyone in Manhattan knew of the meatpacking district as a place where transvestite hookers worked it. The families that lived there had nice four bedroom three thousand square foot apartments that they bought for $200 thousand dollars.
Fast forward to today. The transvestite hookers are gone and the same exact family sized apartment that cost $200 thousand now costs $3 million.
Whenever you tell long time Manhattanites about young families not being able to afford the meatpacking district ---$3 million is a little beyond the budget of many young families :) --- anyway whenever you tell people about this they just can't believe it. Their eyes bug out when you tell them that good hard working young doctors and lawyers and CPAs just can't afford the meatpacking district anymore. They refuse to believe it is sustainable.
But the wealthy continue to bid up homes in the meat packing district.
Again go to zillow look it up - families with the foresight to buy in the meat packing district have made 15x their money. And they deserve it. But the people that bought in the safe and steady upper east side haven't earned even a fraction of that return.
Wealthy know that you have to think out side the box
"Fast forward to today. The transvestite hookers are gone and the same exact family sized apartment that cost $200 thousand now costs $3 million."
Yep. Likewise, 20 years before that, the hamptons were largely a haven for middleclass aerospace engineers - the cost of which was largely in line with other middle clas boroughs such as staten island.
Yet as the workforce became more topheavy with bankers financiers and hedge fund managers, the engineers (and their employers) were squeezed out. Today, there are no engineers in the hamptons, and prices there are nowhere near parity with staten island prices the way they were 50 years ago.
The hamptons is now an enclave of the wealthy elite. Any engineer who choose not to buy in the hamptons, assuming it would once again reach parity with staten island, was effectively priced out forever.
Is that the case now for manhattan beach vs. Palmdale? I have no idea. Still, the point is some areas can and do outpace others, and to assume they will always move in a steady relation to one another is pure folly.
Case Schiller index shows that prices dipped once again in June versus July.
If I have to look at the 15-step cycle, I'd say that we have a long, over-arching cycle with a few mini-cycles going on inside it. I think we've already had one full mini cycle. And we're 10 steps through another mini-cycle, but only really 6 steps through a longer further reaching cycle. I'd say we'll see a third and potentially very painful mini-cycle hit within that longer all-encompassing cycle where we finally shake ourselves out of the mess. But it's gonna take awhile.
My question is: do the banks go through this cycle too? I'd say BOA is somewhere in #7/8 right now. However, Mr. Buffet is at his Maximum Financial Opportunity (#12). Must be nice to be out of phase with everyone else. And I'll bet he'll just skip over steps 13-15, collect $200 or his 6% dividend/preferred stock, whichever is greater, and head straight to Optimism, Excitement, Thrill and Euphoria and just combine them into one kickass stage! :D
Of course, there are always many reasons to buy beyond what the current trend is or where in a cycle a market is. Saying to wait 5-7 years is fine from a pure fundamental standpoint, but reality beyond strict fundamentals weighs in quite a bit. I have two young children and was in my previous house for 11 years. The house was exploding with family, pet, two home-run businesses. Sometimes, ya just gotta go when ya gotta go. For us it was time to go. Waiting 7 years when the kids are mid-teenagers was not in the cards. I did nicely selling the house I'd owned since 1999, but I'm fully expecting the new property on the Westside of LA to decline in the next couple years. Nothing I can do about it. For me, life had to march on outside the realm of fundamentals.
RecentBuyer, how about renting for a couple of years -- that way you get the extra space you need, bank the profits from your last house, and wait for better days ahead.
Here is the little secret no one is talking about....rental home prices.
I have considered selling my house, but looking at what is would cost to rent a small house (I have 2 small dogs, so no condos/apts) in Santa Monica or Brentwood is outrageous!!!
$6500 and up to rent a shabby house in a nice area....and spare me the 'You can find one cheaper" talk....I have looked at 20 house in SM, Pac. PAl and Brentwood over the past 45 days....I have a feel for the inventory now.
As rental prices continue to go up, buying will look better and better...especially if you want/need to stay on the westside.
Anon 1:53, renting for me, in particular, is tough because I work in the house. My studio requires more room modifications than a standard landlord would probably be willing to put up with. Plus, moving the studio is an enormous amount of work---the kind that you avoid as much as possible. So, moving from place to place takes it's toll on me more-so than maybe others who simply live in their home.
I volunteered to move the studio to a commercial space, which would have alleviated the problem (but cost more $$$), but the wife was against it. (Working from home is cool as far as I'm concerned.)
Anyway, I had considered the possibility of renting, but I've also watched several people try to time the market by renting, and they sat for 2+ years in a rental afraid to move---all the while, spending quite a bit on rent. 2 years of rent would have been a lot of $$$ down the drain for us if we had rented a bigger house in a good Westside neighborhood (as Anon 3:09 said).
You know, through all these crises in real estate, I've been saying that the real price capitulation would hit the hardest when interest rates went back up. Well, I've been saying that now for YEARS and YEARS because the rates have still not gone up since they were rock-bottomed a bunch of years ago. (In 1999, 7.25% was considered good. That would be a disaster now with 4.5% being "normal". I got news for everyone----4.5% is NOT normal. And 4.5% year after year after year is REALLY not normal.) And now the Fed has committed to the low rates for at least 2 more years. So, really there's no realistic end in sight to the low rates, which will keep things limping along to some degree. But I still believe that when the day comes that the interest rates start ticking upwards again, housing is going to take another bath in terms of sale price....
So, I agree that 5-7 years could be the time it takes to shake things out. But after looking quite hard at my own situation, I decided I couldn't wait that long, and I certainly could not justify renting for that long either. Plus, I enjoy staying in one place for awhile and putting down some roots, so short term paper losses don't really bother me. I'm a patient guy.
In the end, I guess you just gotta come up with a course of action that you can live with, regardless of unknowable future market conditions. I'm confident that what I'm doing is sustainable for me, regardless of how the market acts.
Here are the results of our "When will the R.E. declines stop?" poll:
2011 - 0%
2012 - 3%
2013 - 31%
2014 - 7%
2015 - 59%
It seems we have 2 camps here. Those that think prices will recover in 2013 and those who think it will be 2015 or later. Nobody thought 2011 will be the last of the declines. According to this, there is absolutely no hurry to buy this year (2011).
Stop the presses! Permabears think it's a bad time to buy a house!! This is front page news.
"Stop the presses! Permabears think it's a bad time to buy a house!! This is front page news."
LOL! Yep, no surprise here.
Most damning evidence of the collective judgment of this board? An absolutely stunning 59% of the voters put down 2015. Talk about groupthink!
I wish there was a way to screen out those who thought 2015 (or beyond) simply as an angry, trollish protest vote, and how many really, really think things prices will not stop dropping til 2015. My guess is its probably at least 1/3 a protest vote, but who knows...
Some interesting comments among the chaff here.
Speaking as a renter in socal for the entire last 10 years, I could not be happier. I have complete mobility, and while I missed the chance to buy and flip, I have zero debt. I recently moved to a luxury ocean view condo in RPV and pay less than 50% of the total carrying cost (mortgage, HOA, taxes, insurance). I invest the rest in commodities and precious metals as my hedge against dollar devaluation and simultaneous cost inflation (food, energy, etc.).
I will not be a buyer until I find a property I would choose to live in and which is positive cash flow, net of all costs. And don't include the tax writeoff (I lose it from the AMT anyway), as that is on the table to be eliminated because Uncle Sam is looking for how to raise taxes on the middle class.
Good luck to those here, renters and owners, because we will all need it for the dark decade(s) still ahead.
Anon 1:44 - My sentiments exactly. Right now, people should be trying to buy things of value such as precious metals and commodities instead of things losing value, such as houses and other financial instruments that use paper. This is the new breed of investor for the coming decade. It's good you have a head start. I too have a similar investment strategy. In particular I like silver. Even though everyone is on the gold gravy train (which isn't bad), I look at silver as a seriously undervalued precious metal, due to it's industrial use and it's price in relationship to gold. In the long run I believe it will perform much better than gold.
You are smart to lock in a good rental now, as prices should start rising once others finally figure out the real estate situation.
I am a renter as well. I've got a great place in Santa Monica that would cost triple to buy (at least!) and I don't have money tied up in the down payment that would be disappearing as the value decreased. When I read some of the posts on this site and listen to people pitching the idea of buying a place -- what a great time it is to buy, you've gotta buy, why aren't you buying, buying, buying -- I figure they're either real estate professionals trying to salvage their jobs, or they homeowners trying to get others to jump in because they realize just how dismal their situation is. Why would anyone buy now, given the overwhelming data that says don't?
"Speaking as a renter in socal for the entire last 10 years, I could not be happier."
Let me see if I understand what you're saying. You're 100% happy with your decision to not buy something in 2001 that would be worth about 60-70% more that what you paid for it? So if you had put down 20% and paid the mortgage down instead of renting for 10 years, you'd have a return of about 500% on your 20% down. Is that what you're saying?
Govt intervention stopped the process at 8) Desperation and returned it to 1) Excitement. The question is, how long will they be able to do this and when they can't, how hard and fast does it fall?
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