Who Dropped the Soufflé?
From the UOP's Business Forecasting Center [pdf]:
A Slowing National Economy and Housing Slump Take the Wind Out of California’s Sails but Will Not Sink the Ship
ARMs and Bubbles and Sub-Primes, Oh My!
They’ve made a comeback, frothing at the mouth, the bubble-heads who predicted that the alleged housing bubble would be the Achilles’ heel of the economy and when it burst the next recession would ensue. After tucking tail and heading off into the sunset with their bubble theory burst, the housing hysterics have made another appearance. This time it is sub-prime mortgages and adjustable rate mortgages (ARMs) that will bring about the collapse of the housing sector.
So will there be an ARMageddon? Are the sub-primal fears of a housing collapse justified? I think you know the answer. Just like the earlier declarations of a bubble in the housing market, the current mortgage related prophesies of doom are equally off the mark. The current reality in the housing market is one of continued high levels of inventories of both new and existing homes. The foreclosures that are forthcoming from the sub-prime market will add to this inventory and prolong the adjustment in this market perhaps by a few months, but are not going to be the tsunami that alarmist pundits proclaim will overwhelm the sector. Current worst case scenario forecasts for the housing market suggest California might see a 15% to 16% decline in prices over the next two years, down from their peaks in 2005.
These price declines are not insignificant, but they are hardly the stuff of which bursting bubbles are made. You may recall that in the midst of the housing boom, chicken little were touting studies declaring that some areas in California were 60%, 70% or even as high as 80% overvalued! The reality of the housing sector is that it will not look even remotely like any of the doomsday scenarios we have been bombarded with over the past several years.
22 comments:
"You may recall that in the midst of the housing boom, chicken little were touting studies declaring that some areas in California were 60%, 70% or even as high as 80% overvalued!"
Straw man argument alert!!!
I never read any analysis calling housing 80% overvalued. Snaith must have been huffing the starting fluid.
The UOP forecast has been calling it wrong for two years now. The only people who believe their report are the desperate and the stupid.
Wow, this is quite a hostile tone from such a prestigious institution. Guess someone is getting a little frantic. If these people would have read what people were writing on the blogs they would know that the "housing bubble" was more accurately described as a credit bubble years ago and that the implosion of the mortgage business was predicted at the same time. I guess causality and linked events are beyond the people at UOP, much like anything else.
"...Current worst case scenario forecasts for the housing market suggest California might see a 15% to 16% decline in prices over the next two years, down from their peaks in 2005...."
Where has this analyst been the last two years? Or maybe he is "forecasting" for two years out from the peak of June 2005, thus stating the obvious for June 2007!! Prices are already down 15-16% in Sacramento and the valley towns. Placer County was down 14.2% in 2006 alone, and prices are still dropping there. An informal survey shows REO's are making up 5-10% of all the active listings today.
Also, it only takes a 15-16% price drop to offset a 30-32% over valuation (100% increase in $100k house = $200k. It takes a 50% drop for a $200k home to = $100k again).
So the analyst's forecast of a 16% drop in value suggests he agrees prices were overvalued by at least 20% ($200k home drops to $168k, or 20% overvaluation using $32k/$168k). He is not really that far off.
If prices drop by 30% in the next few years, the $200k house shown above will be worth $140k again. Hmmm, it seems that house is overvalued by 43% ($60k/140k).
A UOP economist should understand the numbers a bit better and take into account the multiplier effects.
I realize I'm not the brightest bulb on this blog.
But don't short sales and foreclosures currrently comprise something like 10% of the current market??
From the mortgage reset graph that was posted the other week, we're barely into the resets. If I recall correctly things really heat up in May. That 10% # could increase to 20 or 30%. And those are small numbers with minimal impact??
Sittin' Out This One said...
"A UOP economist should understand the numbers a bit better and take into account the multiplier effects."
Excellent post. Doesn't sound quite as bad does it?
This unintentially hilarious analysis makes me wonder about the funding for UOP and Snaith. Have they been completely PWNED by Realtors and Builders like the shills at Harvard?
I would tend to beleive that a source of funding one way or another did come via the real estate industry.
However, I think that the unwinding may take a while longer than many think. Yes, a recent KCRA news story proclaimed that 19% of the active listings in the Sacramento area were REOs or short sales.
If we don't start to see rate resents until this summer and fall, and if it takes 90 days to get to foreclosure, then we won't see the start until fall/winter 2007. But what if the bank can see the volume of delinquencies and either slow down the foreclosure process by choice, or by lack of staffing? There are many reports of thr foreclosure process taking 180 days.
Add to that, that if no one buys the house at the foreclosure sale (a growing trend) and it will take quite a while for the inventory to move. As the supply grows, and the demand shrinks (aka no more Alt-A or subprime pool of buyers), then the equilibrium point at which you will entice buyers drops.
Also, I have seen no statistics that shed light on what percent of the market was made up of speculators who never intended to occupy a house? If that number is significant, then you have to factor in that an oversupply of residential units was artificially generated and you now have a glut on the supply side.
In that case you either have to reduce the price level of these "surplus" units until they make economic sense for rental units, or you have to wait for kids to become adults and want to buy a house.
In any event, I beleive that we wont begin to see the largest portion of the decline emerge until next summer or fall.
I think UOP used a simplistinc static analysis that didn't factor in speculators and tightening credit.
ralphk said...
I realize I'm not the brightest bulb on this blog.
But don't short sales and foreclosures currrently comprise something like 10% of the current market??
It's actually 17% for the 4 county area as of today. And it's climbing every day. Just over 4 months ago it was around 6%.
I can't wait till Monday so I can release the sales stats.
# of Sales for 1st Quarter
Sac, El Dorado, Yolo, Placer Counties
2005 - 7,574
2006 - 5,395
2007 - will tell you on Monday...
Anyone care to guess what the 1st quarter 2007 sales stat will be?
Could there be a relation?
From InsideARM:
Economists Start Muttering the S-Word
Since consumer spending eased up a bit in February (and January, for that matter) and the Commerce Department released data Friday showing inflation is advancing, some economists have broken out the MacroEcon 101 textbook and trotted out a word used only when Jimmy Carter is in the White House: stagflation.
Stagflation, that ugly economic combination of price inflation and stagnant economic growth, has long been a popular warning word for economists when trying to scare the wits out of the American public. Nevermind the fact that it’s only truly happened once, in the aforementioned Carter Period.
But the Commerce Department did release numbers today that signal an upward tick in inflationary pressures. The core personal consumption price index was up 0.3% in February, which is high, but in line with economists’ predictions. Some good news, though: January’s increase was revised down from 0.3% to 0.2%. But then some grim news: with the two first months of 2007, core inflation is up 2.4% for the year (measured year-over-year). This is pretty far from the Fed’s upper limit of its comfort zone of 2.0%.
On the heels of other economic reports on consumer spending, the Commerce Department also said in its report that inflation-adjusted consumer spending – the most significant input to GDP -- rose only 0.2% in the month after another weak reading of 0.3% in January.
So you might say consumer spending is stagnant and inflation is on the rise. Enter the S-word.
New York Times resident economist Paul Krugman first used the word in August 2005 to predict the economy’s direction. Oddly, many Indian economists have been using the word to describe the current U.S. economy as well.
But stagflation is a very specific, and extremely rare, condition that is not easy to predict. Overall, the economy is expected to grow at a rate of around 3% this year. While no one will be calling this a “blistering” or even “healthy” rate, it’s still significant growth. So the stagflation talk may just be that: talk.
Related Resources
Some good news on the taxpayer bailout front (but don't relax yet, next year is an election year):
Sweeping mortgage bailout unlikely
http://www.latimes.com/business/la-fi-bailout30mar30,0,4891093.story?coll=la-home-headlines
Borrowers, don't hold your breath for a bailout.
. . . .
And at the state level, "there is only a limited amount we can do for people who are affected right now," said Assemblyman Ted Lieu (D-Torrance), chairman of the Assembly Banking Committee.
. . . .
Some of the country's largest mortgage lenders — including Countrywide Financial Corp. and Wells Fargo & Co. — met with Lieu this week to discuss a private effort to keep at least some foundering California borrowers in their homes, participants in the meeting said Thursday.
. . . .
The risk lenders now face is that they may have to foreclose on many homes and sell them for much less than the amounts loaned — and eat the difference.
That threat is expected to give lenders an incentive to work with borrowers to restructure loans, perhaps temporarily freezing payments.
By contrast, using tax dollars to keep people from losing their homes would be "socializing" lenders' losses, meaning society as a whole would be footing part of the bill, said Paul Kasriel, an economist at Northern Trust Co. in Chicago.
"They’ve made a comeback, frothing at the mouth, the bubble-heads who predicted that the alleged housing bubble would be the Achilles’ heel of the economy and when it burst the next recession would ensue. After tucking tail and heading off into the sunset with their bubble theory burst, the housing hysterics have made another appearance."
Who wrote this and WTF are they talking about? The "theory" is playing out exactly as the "bubbleheads" said it would. This article is delusional.
Check out: MLS # 70033067
1053 Smith Way Folsom
Top 3 offers over $350,000 will be submitted to lender.
House build in 2004. According to Zillow it peaked at $760,000
I'm a little fuzzy with math, but that seems like more than a 15% discount.
Stats on that Folsom Property:
Sold on 11/04 for $466K
Sold on 7/06 for $760K
Original loan amt of $735K
I like the $113/SF though.
All offers being presented on 4/5/07. Should be interesting to see how this goes.
The same model house just listed for $645K and sold for $585K in December 06.
There go the comps!!! I'm almost interested to bid $351k, but then I could wait a year and pick up a similar plan for less.
The Smith Way house sold $760,000 in July 2006? Think about who the appraiser must have been. The lender was New Century, 95% financing? The seller was named Olga Zagorenko!
Cash back mortgage fraud? Straw buyer named David Johnson? There are a lot of questions to ask here. Olga held the property 2 years (escape capital gains?). There is more of this stuff going on than you know.
Call the Feds. Call Senator Dodd. In fact, call Mr. Snaith at UOP! It will be shown Chicken Little was an optimist!
Ralph K,
I just ran the numbers. Your proposed bid of $351k is much too high. Total the bonds, taxes, maint, mngt, ins, and a 5% vac and it will cost you $902/mon just to own this house. Consider you may get $2000/mon in rent (and rents are dropping 2-3%/mon) and you clear $1100/mon or $13,000/year. That is a 3.6% ROI. You can get 5% in T-bills and have no risk this market collapses further.
Ralph, if you buy, you then become the latest FB in Sacramento. I agree with your assessment to wait another year, when this kind of property goes for $315,000 (or less). Then you will obtain a 4.18% ROI.....well, maybe wait 2 more years.
This market still makes no sense to astute buyers. Let some wanna be future FB buy it and put 5% down. The real action will start when the 20%-30% down payment requirements seperate the real investors from the idiots. Besides, this house probably backs up to Natomas Parkway, and 50,000 cars per day.
Some appraiser is going to go bankrupt when Jocoby and Myers gets hold of him in a class action filing from the NY Teachers Pension Fund (big New Century bagholder)!
sittin', thanks for the assessment. My bid offer was in jest.
Way too much house (almost an empty nester) and far too much money even at $100+ sq ft.
Me, I'm looking for something half that size within the next two years. No hurry. I've got a great deal on a rental close to the bike trails in Folsom.
Ralph,
the fact your offer was in jest was clear to me. I just wanted to put the facts out there about how imbalanced the market it today.
It is funny how in a appreciating market, everyone wants a huge house costing high dollars. In a depreciating market, it transitions to a simple house with little debt and lower operating costs.
I live in a rental house costing $600,000 and pay $1650 in rent. The owner pays for the bonds ($300), HOA ($110), taxes ($$575), insurance ($45), maintenance ($30) and management ($150). He clears $440/month to pay is 90% financing of $540,000! His mortgage at 6% will total about $3,300/mon putting him at minus $2800/mon.
I expect a notice of foreclosure to be filed anytime! I will quit paying rent and save $6600 until the foreclosure is perfected and I move to a new place, where rents have dropped to $1500 for the same house.
Very interesting times.
"That's approximately a 31-32% drop in the real value of housing in four years.
Most estimates I've seen, based on historic price to rent ratios, predict a drop in real prices of about 40%.
So take heart. UOP is calling a real drop in prices of 31-32%, while others predict a drop of 40%.
Seems reasonable!"
*******
peterbob's got it right.
I hope someone from UOP is reading here.
They could get an education.
Free.
AgentBubble or anyone else: Can you follow up with that Folsom house once the auction is complete? I am interested in property values in that part of Folsom.
patient renter--I've added the house to my cart and will report back once it closes.
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