Wednesday, June 20, 2007

Housing Slump or Housing Bust?

Placer County Median Home Price
August 2005: $517,500
May 2007: $410,000
Change: -$107,500 or -21%

data source: [pdf]

From the New York Times:

When Does a Housing Slump Become a Bust?

MANY Americans fear the consequences of a housing bust, but few know what one would really look like. Think about it for a moment. How far do housing prices have to fall before a slump becomes a bust?
During the 1930s, housing prices fell sharply across the nation. According to the S.& P./Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24 percent from 1929 to 1933.
Two economists with the Federal Deposit Insurance Corporation, Cynthia Angell and Norman Williams, have studied housing cycles since 1978 and have come up with a definition of a housing bust. In a paper published in February 2005, they called it a decline of at least 15 percent in nominal prices, meaning not adjusted for inflation.
Other economists, however, argue that 15 percent may be too restrictive a definition. Mark Zandi, chief economist of Moody’s, says a better one would be a decline of 10 percent or more from peak to trough. “When you see a decline in home prices of 10 percent, you get significant credit problems and it’s enough to wipe out equity in most cases,” he said.

Mr. Zandi also said that once prices have dropped 10 percent, there tends to be a self-reinforcing downward cycle. If borrowers can’t afford their mortgages and banks foreclose, their homes are generally sold at significant discounts to the market. That creates an added drag on overall prices, resulting in greater numbers of foreclosures, followed by even greater price slides.

Another reason Mr. Zandi argues for 10 percent is the tendency of housing-price measurements to underestimate declines. Sellers often provide discounts that may not show up in the measured price, but are still significant. Today, some homebuilders are discounting the sales price of new homes by an average of 5 percent, Mr. Zandi said.


Diggin Deeper said...

The next few months should be very interesting...If we're not in the midst of a real estate crash we sure sure are picking up speed right now.

Watch for more subprime hedge funds to crater and begin to rock the underbelly of the financial systems. I fully expect Helicopter Ben to step in an lower interest rates before the end of the year, while the rest of the world raises them to fight inflation.

How did we get ourselves into this dilemma and does anybody have the ba**s to get us out?

Gwynster said...

"How did we get ourselves into this dilemma and does anybody have the ba**s to get us out?"

I do but I'd never get elected >; )

norcaljeff said...

Bear Sterns' mortgage backed hedge fund is in BIG trouble. It singlehandedly took out 100 points on the Dow today in the last hour of trading. Tomorrow should be interesting.

Gwynster said...

Merrill wanted their share but apparently Morgan is being nice. The opening bell tomorrow should have the bond market folkd cringing.

Diggin Deeper said...

I hedged against long treasuries about two weeks ago and am up a little over 7%. Going to stick it out as the inflation scenario unwinds well into '08. That paper has to get more interest rate expensive to compete with the rest of the world. Central Banks (Sweden just yesterday) are raising rates at almost every meeting.

The Fed is trailing the pack with its thumb up its a**, and is getting the finger from the bond pit. I pity poor Ben.

If Bear Stearns is willing to fess up early, as to the problems they face with their subprime portfolios, I can only imagine dozens of others on the edge trying to get rid of their notes before they have to close the doors. Their silence is deafening! This is no small amount of money!. Whatever it is, imho its enough to seriously threaten the health of one or more of the big name institutions.

Keep an eye on the high yield bond markets as they are laced with the same subprime kool aid and will go down just as hard as the unregulated hedge fund markets. Only they'll have to report to the SEC.

Do a search on collateralized debt instruments and you'll find
pages of products begging for your business with "great" return potential. All the Merrills, Morgans, and big banks are underwriting them. Do they have subprime as a foundation for their returns?....Nah...these are well respected institutions. They're only responsibility is to their shareholders...

This is all looking like a "Ponzi" scheme with poor Goldilocks as the victim.

The show's on kids...I'm not going to sit on my hands. There's opportunity brewing out there for some extrordinary gains including real estate at the right time.

Slump or Crash? That's for each to figure out.

Patient Renter said...

"How did we get ourselves into this dilemma and does anybody have the ba**s to get us out?"

Yes, you should check out Ron Paul (he wants to do away with the Federal Reserve, and he's dead serious).