Deflating Bubbles, and Tanking Markets

Posted by: Toddi Gutner on January 9, 2006

Okay, so let’s say our reader, who commented on my last entry, is right. Wes said that:

“We will have a number of months (18?) where the numbers show close to 0% appreciation, before finally going truly negative and doing the needed correction before returning to positive levels (2009-2010?)… I expect a full generation of investors will be scarred from the aftermath of this bubble.”

I can imagine a pretty grim scenario for the residential property market if this reader’s prediction is right. I’m not so sure we can expect such a healthy rebound in 2010. That year, the youngest of the baby boomers will be 46, the oldest 64. They will likely begin to think about cashing out and the selling the homes where they raised their children. I know I’m already thinking along those lines and I’m only 45.

In 1997, there was a baby boomlet. There were the most number of children born since the last year of the baby boom in 1964. In 2014, those kids will be going off the college, and their parents (read: me) will no longer want to pay the exorbitant property taxes to support their local school districts. They will be looking to sell their homes and move to those up-in-coming active communities for residents 55 and older. The result? A glut of single family homes and then tanking prices. I wonder if this deflating real estate market might last longer than anyone expects?

Reader Comments

james haft , Director, The US Condo Exchange

January 9, 2006 6:51 PM

The numbers do not reflect this doom and gloom prediction. A quick read of the news on The US Condo Exchange, www.uscondex.com, shows that the arguments are balancing each way and that some indications are that condo prices rose for the first time in a year over the past 60 days...

My experience has been that those predicting a a boom or crash are often late or early ;-) if you need a home, go out and buy one to live in. Don't make the mistake of sitting on the sideline looking to time the market.

Warm regards,

jh

Steve

January 10, 2006 2:51 PM

I think it will be interesting to see what happens. I live in New York City, and if I was going to say anything, it's that there are too many prime neighborhoods now - every 'hood can't cost the same when the boom is over. The own versus rent monthly cost ratios are pretty high right now, I'd guess mostly between 1.7 and 2.3, but that's not what I do for a living or anything.

I think that the market will overall trend down for a while here, but not in every neighborhood. I think that the city is far from homogeneous or equal and the market will move back to charging a premium for better neighborhoods. Only it already is, so it will probably stop charging a premium for everything else. I predict a glut of homes in the TBD undesirable neighborhoods and a normal market correction where those neighborhoods start having realistic prices. That could go on for quite a while.

Pete

January 10, 2006 3:28 PM

Just FYI, the boomers are born between 1946 an 1964 so your 2010 youngest would be 46. At least thats what my demography Prof in grad school would say.

Gary Anderson

January 10, 2006 9:24 PM

If the bust is as strong as some have said, it will be certain that some loans will be called in, as the margin will be bad news for lenders. If you have a $700,000 home, and if you have paid $50000 on the mortgage, and then the value of the home drops to $400,000 this becomes worse than a margin call on stocks, and could result in a lender requiring that you make up the difference of $250,000 immmediately or get foreclosed upon. Who in their right minds would take that kind of chance in the stock market, yet the bubble has made gamblers out of almost all who have a mortgage. The lender has the right to call in the loan.

tj

January 11, 2006 11:00 PM

Why is the baby boom generation also so self-serving that they feel they are the only ones who affect the market? Aging baby boomers will have no effect on the housing market. 20% of the population does not dictate the actions of the other 80%.

Wes

January 12, 2006 12:35 PM

There's a dead cat bounce in every market but I didn't expect it would happen so soon.

Condos have traditionally been the last to appreciate and the first to fall in markets due to their lack of widesread demand.

Funny that reading your website I found the following quote in a news article:

David Seiders, chief economist for the National Association of Home Builders

"Seiders said the market needs to correct itself.

"It's healthy," Seiders said. "We do need to have that happen -- gracefully, though. Affordability problems are glaring in the hottest areas. We've reached the point where something's really got to give."

The US Condo exchange sounds like the investment clubs of 1999. Good luck with your business though.

littletiger

January 13, 2006 4:32 PM

> If the bust is as strong as some have said, it will be certain that some loans will be called in, as the margin will be bad news for lenders. If you have a $700,000 home, and if you have paid $50000 on the mortgage, and then the value of the home drops to $400,000 this becomes worse than a margin call on stocks, and could result in a lender requiring that you make up the difference of $250,000 immmediately or get foreclosed upon. Who in their right minds would take that kind of chance in the stock market, yet the bubble has made gamblers out of almost all who have a mortgage. The lender has the right to call in the loan.

What kind of insane lender would call a loan in this scenario? Lenders do not want to take on the burden of selling foreclosed homes--if the debt is being serviced, the lender is shooting himself in the foot doing any such thing. They are actually HOPING the consumer doesn't stop paying, that the consumer holds on to the loan and continues debt service.

In past real estate downturns, owners simply held on until prices allowed them to sell for what they owed, or more. Lenders did not arbitrarily appraise houses and call loans that already could be underwater. They had enough foreclosures from those who decided to walk away from their loans and leave the lenders holding the bag, and leave the lenders with the downside.

Where did you get your information? What makes you think mortgage lenders act like e-trade?

Goldeneye977

January 18, 2006 11:54 PM

Doomsayers having been predicting doom since the last century and some people like me who believed them in a hurry now repent at leisure. I still haven't bought a home and in the last couple of years missed great deals (which I refused to let go due to all this nonsensical bubble talk) about severe price corrections etc. I agree with "jh" - if you want to buy a house just go out there and buy it. Never try to time the market.

Angie

January 19, 2006 2:40 AM

To address Gary Anderson's earler post...as annoyingly self centered as the boomers are, they really do have a huge impact on the housing market. They are actually roughly 26-30% of the American population. When they retire and begin to sell or downsize their homes in the next 20 years, who is left to buy them? The bust generation that is 45% smaller? The echo generation that is just getting out of college? Surely not the depression babies who sold their houses to the boomers in the last five years and are laughing all the way to the bank. Don't trust anyone over 60.

Glenn

January 19, 2006 7:16 AM

In my opinion, for the last 10 years or so we've built way too many late 20th century homes that will look mighty stupid in the 21st century. In terms of energy and environmental sustainablity, this will turn out to be one of the biggest cases of malinvestment in history. Let's call it a proliferation of McSlums.

steinravnik

January 19, 2006 8:24 AM

The numbers do not reflect this doom and gloom prediction. A quick read of the news on The US Condo Exchange, www.uscondex.com, shows that the arguments are balancing each way and that some indications are that condo prices rose for the first time in a year over the past 60 days...

My experience has been that those predicting a a boom or crash are often late or early ;-) if you need a home, go out and buy one to live in. Don't make the mistake of sitting on the sideline looking to time the market.

Warm regards,

jh

Posted by: james haft , Director, The US Condo Exchange at January 9, 2006 06:51 PM
--------------------------------------------------
Yeah, well what else would you expect the director of the US Condo Exchange to say?

Chris

January 19, 2006 9:49 AM

The way previous housing booms go, they hit a peak, sit close to that for 1-2 years as sales numbers plunge, then drop by some percentage for the next 1-2 years to get to a low in actual $$. Prices then languish for about 8 years, eventually getting to the low in real terms, before picking up again. That's 10-12 years, and has been repeated in US busts ('70s and early '90s), Hong Kong, Japan, UK...do your research if you don't believe me. The durations, and the amount prices drop, vary and could be larger if the boom itself was larger.
The real driver for this response is probably more a confidence thing based on greed/fear in the population than any demographic effect. During the boom everyone sees 'value' everywhere, after the boom no one sees 'value' anywhere. Just look at the stock market now, compared with how you looked at it in 2000.

Drew

January 19, 2006 10:09 AM

With respect to lenders "calling in" their loans - there is language in most mortgages that allows this, yes. Litletiger is right, though - a "serviced," (paid) mortgage is an asset to the lender he will be loathe to give up.

There is another issue. Most mortgages are sold in the secondary market as "Mortgage Backed Securties" - MBS. Not to oversimplify, but mortgages are "chopped up" so that individual MBS bondholders actually own a tiny piece of 1,000 different mortgages, and a commensurate share of interest payments on each. So, once your mortgage is "chopped up" and sold, no one person or entity owns it. For obvious practical reasons, it can't get "called in."

opti

January 19, 2006 12:02 PM

Wes said: "Who in their right minds would take that kind of chance in the stock market, yet the bubble has made gamblers out of almost all who have a mortgage. The lender has the right to call in the loan."

Well, what lender, in a declining market, would be interested in calling the loan if the mortgagee is making payments? Why would they be interested in taking the hit? The only reason these loans might get called would be if the government forced them to for some LtV restrictions that get imposed (illegaly?) after the fact. This is kind of what happened under the RTC where banks got assessed on their loans because of some banks in default. A lot of connected people got very very rich!

In any case, at least in some zip codes, I can't imagine any other outcome than a lot of pain for homeowners for a very long long time...

BRintoul

January 19, 2006 3:21 PM

Not everyone will have the luxury, this time, of "holding on" - with 40% of loans in San Diego county being interest only (for example), there will be NO "holding on"...

Danny

January 19, 2006 6:30 PM

Hi all,

It will be interesting to see what happens with the interest rates in the year ahead. Seems like the short on long term bonds are inverted. Doesn't this signal problems with the economy in the short term?

If inflation climbs, the fed will have to lower short rates, and if inflation falls, rates will climb back up putting pressure on mortgage rates.

If the mortgage rates go above 8%, then you'll definetely see alot of issues with the real estate market. Well, not only the real estate market, but the whole economy.

HARM

January 19, 2006 7:34 PM

"Doomsayers having been predicting doom since the last century and some people like me who believed them in a hurry now repent at leisure. I still haven't bought a home and in the last couple of years missed great deals (which I refused to let go due to all this nonsensical bubble talk) about severe price corrections etc. I agree with "jh" - if you want to buy a house just go out there and buy it. Never try to time the market."

You're absolutely right, Goldeneye977!! People who have been predicting a bubble-bust are nothing more than jealous, bitter renters, envious of the financial genius and success of brilliant real estate speculators like yourself!

So what if prices have been rising parabolically in most large U.S. cities for 5 years --way above inflation, rents and supporting incomes? So what if most buyers are priced out of the market, or are having to resort to "exotic" loans like negative-amortization, interest-only or stated-income? So what if speculators and amateur flippers constitute up to half the demand in some cities?

It's not like it's unsustainable or something --sheesh! Real estate NEVER GOES DOWN!!! Capiche? And don't forget, they "aren't making any more of it". Most metro areas are "land-locked", and you're GUARANTEED 20% per year! Trees really do grow to the sky --take my (and Goldeneye977's) word for it!!! RE is a can't-lose proposition.

And I'm sure Goldeneye977 is putting all his money where his big, fat stupid mouth is and buying up everything in sight with $0-down neg-am loans. Trust me.

Gary Anderson

February 4, 2006 1:04 PM

I would agree that the loans would not be called in unless the payments were not on time. However, technically they can be called in. Must make you sleep soundly at night knowing that!!! This is what I believe: that the consumer could become tapped out soon, that the corporations cannot or will not spend their huge hoard of cash, because it will not be economically feasable to do so, and that these two forces will result in deflation. However, some folks seem to be telling us that monetary stimulus, ie, even larger deficits will cause us to bust out of this malaise, if and when it happens.

NinjaHound

April 17, 2007 12:15 AM

My GOD- so much to process- not enough electrical impulses...Ok then, what about note finding and other types of real estate investments, Is it safe to persue these types of ventures? I heard that nationally, big real estate companies are only selling an average of 2 (TWO!!) homes/properties per MONTH, nation wide. You all don't think that is a very serious sign post? And Real Estate is not THE cause of a depression, or the support against one, there are many other factors ASIDE from real estate as well, and before saying that everything will be fine, those issues need to be examined as well, because if a depression does hit in the next couple of years, it will be very bad, worse than the 30's by far. I hope to God you are all correct.

JL

April 20, 2007 11:45 AM

My impression is that whether it be stocks, real estate, gas prices or the weather, it is usually never as bad as the doom dayers' predictions, and never as good as the bliss-full bulls' predictions. The truth usually lies somewhere in between.

The middle ground in real estate is not a crash or continued appreciation. It is a short term real drop over several years, then flat prices for approximately the next 6-8 years (a real decrease when inflation is factored in) until things eventually balance out. The average homeowner has nothing to worry about, unless they are in over their head and have an ARM about to adjust. One could argue those poeple had it coming.

That is not what concerns me. What worries me is the refinance-well that so many dipped into repeatedly has finally gone dry. Higher interest rates didn't cause it to dry up, flat prices did. No longer can poeple pull out tens of thousands with no short-term increase in payments. The sub-prime issues haven't hurt the stock market (yet?), but what will fuel future consumer spending now that increasing home equity won't?

marie

December 17, 2007 11:33 PM

whoever said real estate never goes down, is in major denial, blind.

we bought 3 years ago, in CA, not on the ocean, when the prices were decent, before they doubled in price, and now well they are back to what they were 3 years ago. in the meantime our 290K HOME, 11 years old. lovely and custom built. could have sold for 469K 2 years later, for the first 6 months of the year '05, to even the end. Next year '06. forget it. I have watched several in our neighborhood, a good one, go up for sale, sit there, and go down to below what it was when we bought 3 years ago. And is still sitting there empty.

It makes me SAD, as naive as I am. I never knew that Housing/ HOMES were mostly big GREEDY business.

We kept our HOME.

My husband is in denial, he believes that 'it' will go up again. and wants to refi, I am sick over this.

Nothing is moving. I feel bad for the people that bought High.

So many people in the financial business behave(d) criminally, and so many naive innocent people are paying the price. I am not jealous because I didn't get rich, I am just glad I have a home at a more or less reasonable rate. I know that life isn't fair, but this is Immoral, if you ask me.

Another instance, these McMansions were built, huge big cheap boxes, tiny yards, narrow streets, and way too close together, people bought them for 400K. Now they are auctioning the ones that didn't sell for 200K. nice eh?

and the builders stopping in the middle of building the 'neighborhoods.'

Yes some made major $$ on the backs for others. Most are guilty of swindling.

I personally couldn't live with myself if I behaved like this.

It is sickening. At what point did $$ and THINGS matter more than people/families? to such a large degree?

The dot com thing hit hard here in Santa Cruz CA. you could buy a house and turn it over 2 months later and make 200K. houses tripled or more in price over the course of 5 years. and they are OLD and moldy. and tiny. for 800K you could get an 1000 sq ft. dump. Now you can get the same dump for 700K.
Since SC is on the Coast, it will probably not go down a whole lot more.
Silicon Valley is 25 miles away and that is what caused this to happen. The dot.commers drove the prices way up here.
I think that this is a seperate issue from the bubble, and the lenders and the financial institutions. It is going on everywhere, forclosures everywhere.

I am sure some will make it $$ on this somehow.

I just wish more people had a place to call HOME. Our society might be a better place. It seems to be deteriorating, and rapidly.

ok I'll stop now.

Happy Holidays
Marie

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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