Monday, October 16, 2006

'Big, Sharp Slowdown' for Central Valley?

From Inman News:

Ken Rosen a professor of real estate and urban economics for the Haas School of Business at University of California, Berkeley, said the prolonged surge in real estate sales and prices was artificial in some ways because lots of buyers were purchasing homes as investment properties rather than as primary residences.

"That was a false boom in many markets. A lot of investors were buying houses who weren't planning to live in them. We built too many houses because people weren't planning to live in them -- we overbuilt. It made the economy look stronger than it was," said Rosen, who is also chairman of Rosen Consulting Group, a real estate market research company...

"This is the worst speculative bubble in residential housing that we've had. Lending standards were much too loose, interest rates much too low. We're overdue for a correction," he said. "In the end, mean house prices will be 5 to 25 percent lower in some markets, with a national house-price decline in 2007 and 2008. That puts (prices) back to levels they should be at..."

While Rosen said that the national economy as a whole might avoid recession during the real estate slump, some states and regions may suffer more during the housing slowdown. Florida, for example, is at a higher risk of an economic recession, and he expects a "big, sharp slowdown" in California's Central Valley and in Arizona, Las Vegas and Washington, D.C. Generally, the areas that were most overbuilt are at the highest risk of economic problems, he noted.

8 comments:

Anonymous said...

Right on top of things, CAL! Professor of real estate history apparently.

For give my earlier critisim of the JC prof.

Dr Housing Bubble said...

"This is the worst speculative bubble in residential housing that we've had. Lending standards were much too loose, interest rates much too low. We're overdue for a correction," he said. "In the end, mean house prices will be 5 to 25 percent lower in some markets, with a national house-price decline in 2007 and 2008. That puts (prices) back to levels they should be at..."

Amazing that considering this has been the “worst” residential housing market we’ve had that they are only predicting a slight decrease of 5 to 25 percent. Not only that, they’re projecting this out until 2008? Hah! San Diego is already down 8 percent in less than ONE YEAR! Peak was in November and now it is off all time highs by $42,000.

If anything the central valley will see the exact same effects as San Diego possibly even worse. Leverage accelerates on both ends of the spectrum. Going up it makes small investments seem large and going down it makes small loses seem large. For example, an 8 percent drop doesn’t sound bad but what about losing $42,000?

drwende said...

Rosen is one of the pundits I respect... but his 25% decline is optimistic for "where prices should be" in regions where housing prices almost doubled in three years.

Housing ordinarily increases just a bit above inflation. The houses that gained 30%+ a year for three years will need to take a drop between 35% and 40% to get back to where they'd be under normal circumstances.

tom stone said...

the market is rebalancing.you bet.i have been officiously informed of this by several people in the real estate business.they also told me about the big upswing coming in 2 or 3 months.with great force.i'm having a rough day,and i still didn't kill them or even scream.am i a saint?

drwende said...

Tom, just remember that the realtor who b*s's you today is most likely doomed to be a telemarketer hawking debt consolidation scams within the year.

Anonymous said...

These two statements don't add up:

From Rosen: "A lot of investors were buying houses who weren't planning to live in them. We built too many houses because people weren't planning to live in them -- we overbuilt."

From Leamer: "In California, a state that is home to many of the least affordable real estate markets in the country, the Anderson Forecast does not expect a recession or a substantial drop in house prices."

My question is this: if there are more houses available than there are people/qualified buyers to live in them (and Agentbubble's 10/13 post on vacancy rates - http://sacrealstats.blogspot.com/ - supports this too, even though it apparently doesn't include empty/never-sold new houses), how will they be sold and who will live in them unless there is a substantial drop in prices. Will the owners/investors continue paying the mortgages on these empty boxes until, say 2009 (according to Rosen) when there is enough growth in the population and in wages to fill them with real, qualifed homeowners? Maybe the fed govt will loosen lending standards even more and accelerate immigration or the "guest worker" program to bail out these unfortunate investors?

For me, I'm going to sit on my hands, on the off chance that this boom turns out to be worse than the one that ended in 1990 and it actually takes 10 y or more to correct.

drwende said...

Will the owners/investors continue paying the mortgages on these empty boxes until, say 2009

Good question, but it's more complicated than that.

Let's say you're an "investor" who bought near the peak of the market, so you paid something like $400k for a standard nearly new 3/2 that was worth maybe $230k in 2002. It commands about $1300 in rent (if you can find a renter), which won't cover payments on a conventional 80% mortgage, much less on an 80/20 I/O.

Your choices right now are:

(a) Sell and take the loss now. Comparable houses have dropped to $365k, so this is a major loss. Once the loss plus fees surpasses the down payment or otherwise cuts into your savings, you'll have no choice but to hold.

(b) Hold until 2009 and sell at the bottom of the market, for maybe $250k. That's a huge loss plus huge carrying costs. Only the desperate will do it, and there won't be huge demand because so few people will have money and decent credit ratings. California's job growth was driven largely by real estate. Very bad things are about to happen to California's economy.

(c) Hold until the market rebounds, ideally until the new market price looks larger than the old one, around 2015-2019. The result looks like a profit on paper, but thanks to carrying costs and inflation, it's actually a negative return on the investment. Really substantial increases in rent -- greater than Sacramento saw in the housing shortage of 1999 -- would reduce the pain.

(d) Default somewhere in the interim, having run out of money to flush.

There are no good choices left to investors -- any move gives a negative return. That's why entire neighborhoods will be bulldozed and others will become slums. This happened in the 1990s, which was a smaller bubble with much less irresponsible lending behind it. It will happen again. It will be ugly.

Anonymous said...

Does this mean what I saw on my last run up I-5 -- all those acres of never-lived-in McMansions in the middle of nowhere with the "INVESTMENT" billboards -- will be coming down?