Thursday, December 06, 2007

'A Housing Recession Like None Ever Imagined or Experienced'

From Reuters:

Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over, a report from Moody's Economy.com said on Thursday...Punta Gorda, Florida, and Stockton, California, are the hardest hit markets in the U.S., with price declines from peak-to-trough forecast at 35.3 percent and 31.6 percent, respectively.
...
These markets have been hard hit due to several reasons, namely the exiting of investors from the areas, a fair amount of subprime mortgage loans causing an increase in foreclosures and overbuilding by home builders, Zandi told Reuters.
Moody's past predictions for Stockton home prices:
  • -25% (September 2007)
  • -16% (October 2006)
As of October, the median home price in the city of Stockton had dropped 31.4% from peak, according to TrendGraphix. San Joauqin County's median was down 25%.

From Reuters:

    There is a "substantial" risk that U.S. home prices will slide for the next three years or more, in a downturn that could be unlike anything seen before on a national level, Morgan Stanley said on Thursday in a report. Price levels of the RPX Index, a derivative index based on home prices in 25 U.S. metropolitan residential property markets [including Sacramento], indicate an expectation that prices will decline for the next three years, with a recovery likely to occur between three and four years from now, Morgan Stanley said.

    "The property derivatives market seems to be suggesting that we are in a very different environment, on the heels of market events that could force a housing recession like none ever imagined or experienced," Morgan Stanley analysts said.

    39 comments:

    Sippn said...

    I believe we are already experienceing this on a case x case basis but the averages and medians and especially the Case-Shiller Index, which is a lagging indicator, wont pick up the history until it is. . . history.

    So when you see a "prediction" like this from an expert, the data is already there for them to find. They're not that brilliant.

    Buying Time said...

    "...that could force a housing recession like none ever imagined or experienced."

    How come they never give the complete story by saying "which follows a market boom like none ever imagined or experienced"

    Lander said...

    BT- Real estate is special. "The bigger they are the harder they fall" logic doesn't apply.

    Sippn - Is there an indicator that you do like?

    Cow_tipping said...

    This is the drop for the median. As in, the houses that do sell, and the median is down 30%. You list it 50% down and dont sell ... you dont figure in the count. Its a huuuuuuge mistake to say its only dropped 30%. Its prolly closer to 2X that.
    Cool.
    Cow_tipping.

    Diggin Deeper said...

    Sippn...that's correct, and I agree...I guess what continues to defy historical logic is that with no reference point to hang on to, all bets are off. It's what breathes life into blogs like these. Most past data is subjective anyway and usually doesn't pertain unless all the elements and fundamentals of the past period can be applied today.

    This one's a mess and has proven, so far, to be on its own with regard to history.

    Patient Renter said...

    Wow, a -6.6% revision from Moody's in 3 months. Things move fast nowadays. Wonder how fast their next downward revision will come?

    smf said...

    "These markets have been hard hit due to several reasons, namely the exiting of investors from the areas, a fair amount of subprime mortgage loans causing an increase in foreclosures and overbuilding by home builders, Zandi told Reuters"

    THERE WERE NO INVESTORS IN THIS HOUSING MARKET.

    These were speculators. The only reason they bought was on expectation of future price gain.

    Subprime mortgages were used hand in hand with the increase in prices. Don't forget to mention that brokers derived much bigger fees from pushing these products.

    As to overbuilding, that is my song and dance. Never seen such irrational exhuberance and stupidity.

    Patient Renter said...

    WSJ readers are overwhelmingly against "the freeze".

    http://forums.wsj.com/viewtopic.php?t=1035

    Gwynster said...

    Here is a nice write up from Bloomberg

    Herb Greenberg
    Straight Talk on the Mortgage Mess from an Insider
    http://tinyurl.com/2ota6e

    All things that knew or highly suspected but still entertaining.

    Patient Renter said...

    gwyn, that was great. tnx.

    Sippn said...

    "The property derivatives market seems to be suggesting that we are in a very different environment, on the heels of market events that could force a housing recession like none ever imagined or experienced," Morgan Stanley analysts said

    Sometimes analysts get too caught up in derivatives and miss the basics. . . (that's how we got to the peak also)

    norcaljeff said...

    Those of you who bought thinking Sippin was right, I hope you get an apology Christmas card in the mail.

    You want a freaking indicator? How about the indicator that the housing market sucks so bad, builders are going bankrupt, other are abandoning their projects, housing stocks are down 80% from their yearly highs and the White House is so worried it would affect the rest of the economy they are asking the lenders to freeze rates on subprime borrowing for 5 years. How's that for an indicator?

    alba said...

    gwyn, I learned tons from that article. I couldn't figure out if Hanson mentioned one type of loan: what I have heard called the piggie-back loan. I look at RealtyTrac regularly and often see those in distress have 2 loans from the same bank 80/20, so no PMI. I would think all of those second loans are absolutely worthless, when most of these homes have dropped below 80% of their value. Additionally, I'm not sure of how these loans are settled at auction, but I presume the lenders are SOL, as the buyer pays the TRUSTEE, representing the first only. Can anybody explain?

    Jacob said...

    The owner of the 20% second doesn't get paid until the primary loan is paid in full.

    And forclosures are selling for more than 20% off so the second doesn't get paid at all.

    Diggin Deeper said...

    The more we press into the details of this credit crunch, the more revealing it becomes. One of the guys I follow closely is Bill Gross. Here are some exerpts of what he told CNBC on Dec. 5th:

    http://www.cnbc.com/id/22113418/

    "What we are witnessing is essentially the breakdown of our modern day banking system, a complex of levered lending so hard to understand that Fed Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August,"

    "Standby for a tumultuous 2008 as the market struggles to move from the shadows back into the sunlight of sounder banking and financial management, accompanied by fed funds levels at 3% or lower,"

    Bernanke reminds me of the Great OZ in "The Wizard of Oz", the little gray-haired guy behind the curtain pulling levers, pushing buttons, trying to keep the ruse intact. The poor guy is probably a one termer.

    The financial systems are cracking. We see it in hedge fund failures, huge losses at respected banks, money markets falling to below par, loss reserves sucking more and more liquidity away from needy borrowers. Consumer confidence is dropping every month, car sales are falling, layoffs are being announced weekly, and profit warnings are the norm now rather than the exception. As they say "connect the dots"

    A recessionary period is normal and necessary for an economy to jettison its waste. We've artificially avoided it for years, gotten addicted to cheap money and credit, and now we're being weaned off. It's a great time to find opportunity and real estate will be one of the key areas to look at.

    jmf said...

    Great comment Diggn and great article Gwyn.

    Personally - I am girding for a period of stagflation. Our American self-centered view of the world let's us believe that the people holding the oil want to help us out, that the world will take pitty on our dollar and continue to hold losing investments. This is now a WORLD economy, and we are not really well liked - especially when we run out of money. We are the kid with no friends, and the world is at our birthday party - they are going to leave as soon as the cake and ice cream are gone.

    Maybe it's a bad morning...but I still keep thinking - "Will I really want to own a home when they finally become affordable?"

    jmf said...

    Wanted to find out more about those "Pay Option Arms", and came across this site first...

    http://mortgage-x.com/library/
    option_arm.asp

    They sound so good, I just might go out and get me one of them - with my extra money every month, I'll make payments on a new wake boat, new car and Xmas....

    Cmyst said...

    jmf-

    If I were younger, I'd be more likely to buy when things finally shake out.
    My fear is that as prices move down, my window of productive work life gets smaller as well. As the time I need to pay off a mortgage shrinks, so does the amount I'm willing to pay for a house. I work with a lot of elderly people, and I've seen what happens when you hit retirement age and still owe a house payment.

    Jennifer said...

    "It's beginning to look a lot like Christmas......."

    How excited am I?! I was seriously looking for a house six months ago, but I could never get up the nerve. Yes, all the media scared me straight!! And now I m renting a great house in the neighborhood I want for at least half of buying!

    Check this one out. This is the area I am looking at. The prices are tanking and the foreclosures are just starting to pour in.

    #70123167 These suckers paid 1Million, now $719

    #70121544 These paid over $800, now $575

    I told my husband we would probably buy at $575, but I am surprised it is there already. I think it will go lower!!!!

    smf said...

    JMF,

    Hate to break it to you, but the rest of the world basically has the same problem we are having now, except that they are not really on the news now.

    China is furiously attempting to stop rampant speculation by their citizens in their economy.

    If the US goes into recession, demand and price for oil will go down, affecting those countries. And there are some people out there giving information on how the price of oil has suffered from the same speculation that housing went thru.

    When house prices in Vietnam go up 100%, you know this bubble was not just a US bubble, but global as well.

    For all:

    The beginnings of the unwinding are starting here, but the rest of the world will sure follow. So there is no prior history of this unwinding to be able to make good assumptions as to HOW it will all end.

    bubblemachine said...

    I told my husband we would probably buy at $575...

    Don't even think about buying until later next year. Prices will continue to go down for much of 2008.

    I was ROTFLMAO watching the political whores on TV talking about their wonderful plans to save the poor home buyers who are about to reset. We have not seen anything yet. 2008 is going to be a lot worse than 2007.

    AgentBubble said...

    Jennifer,

    My wife and I were looking at the same house on Clover Ranch and thinking the same thing! I remember when that would have been snatched up the first day for $800K.

    Diggin Deeper said...
    This comment has been removed by the author.
    Diggin Deeper said...

    Don't forget about deflation. While stagflation is occuring in hard assets needed to build new economies outside the US, our paper assets, including what's left of home equity, are deflating due to the weak dollar that created it. Artificial wealth is evaporating the deeper we go into this real estate meltdown. And, imho, soon we will be importing higher and higher prices from abroad. That's an uncontrollable problem, because the US doesn't make anything anymore. If we did we could consume our own cheap dollars here.

    Stag and D just might meet someday. If they do, the net result would pack a combination punch that could leave the economy reeling for some time. Prices for goods and services ramp up, while paper real estate and credit assets continue to fall. That's hardly what I'd call a light rain. It's really why I'm not interested in buying anything until we get a handle on what we're facing. And it costs basically nothing to wait it out.

    smf...I agree with what you say up to a point. Other economies are building and staffing huge manufacturing bases, they are creating middle classes to self consume, they are credit positive with the world, and they are on the right side of trade imbalance. The US can only provide consumption and as time goes on that advantage goes away.

    smf said...

    DD,

    Other economies are improving, but this still has not made them immune to the rampant speculation that gripped the US and other parts of the world.

    This includes China and India. You can easily find reasons why an apartment in China 'should' cost the same as one in New York...

    Diggin Deeper said...

    As far as the price of oil and demand is concerned, having been in the energy business for 30 years, I find that most people don't understand what the real problem has become. We just assume that oil is available because it always been available.

    Have you ever questioned why OPEC seems reluctant to increase their production? Or when they agree to pump more, they never get to the higher production number? Could it possibly be that they can't produce more because production is dropping due to field
    depletions?

    China and India have unleashed double digit rising demand based on huge populaions that will swamp any cutbacks we're likely to give back. Speculation? Sure, every market's got it. Over speculation, I wouldn't bet on it.

    smf said...

    DD

    Couple of links:

    http://tinyurl.com/2qhlpq
    http://tinyurl.com/3xcq39
    http://tinyurl.com/389zrk

    Don't become a bubble denier in other parts, just like those who denied the US bubble for so long.

    sacramentia said...

    jennifer,

    Why not throw them a bad offer? The seller knows they are screwed and absolutely nothing points to a rebound. 400-425 seems reasonable to me...

    Diggin Deeper said...
    This comment has been removed by the author.
    Diggin Deeper said...

    smf...appreciate the reading material. I'll stand unwaivered regarding oil. It's no more a bubble with a 12-15% speculation factor, than any other hard asset commodity being traded today. If 10% of the speculation was washed out, it would take gas prices down from $3.30 per gal to
    $3. Big deal. Any supply disruption would bring that back overnight. It's called market risk and markets don't function without it, or we all WOULD be rich.

    Even if China and India's economies dropped by 50%, so what? That would mean their GDP's would come in at 4-4.5%. Not bad. It won't stop the migration of tens, if not hundreds of millions of people from rural to city life. It wouldn't stop the demand for power, housing, distribution, roads, clean water, oil and gas, bridges, dams, and other necessary infrastructure from getting built. We're talking about a complete social shift, that bears resemblence to our our Industrial Revolution, only much bigger. The US is 25% of world's consumption. All of it can't go away. A good portion is non-discretionary. The only things that go away are the excesses. Unless you're calling for a worldwide depression caused by over speculation, not much is going stop Chindia from completing what they've started. We're not going to be needed that much longer before they have a middle class big enough to pick up the slack.

    smf said...

    "We're not going to be needed that much longer before they have a middle class big enough to pick up the slack."

    But they still are not there. While they have made progress, a lot of their progress still depends on what happens to the US.

    Imagine what would happen to China if the US stops importing from there.

    "If 10% of the speculation was washed out, it would take gas prices down from $3.30 per gal to
    $3. Big deal."

    30% speculation in housing caused 200% rise in prices. The relationships are not linear.

    Look, as a foreigner I get somewhat upset when it is assumed that Americans behave differently than others. Given the same set of circumstances, we all behave the same.

    Hence, the disruptions in the US were created by similar circumstances and behavior throughtout the world. It then follows that those countries that behaved similarly to the US will witness the same disruptions we have.

    Diggin Deeper said...

    "30% speculation in housing caused 200% rise in prices. The relationships are not linear."

    No they're not linear at all, since housing demand was artificial to begin with....and you're assuming speculation was the only driver that affected price increases? Respectfully, I don't think so.

    Here's a link you might look at.

    www.chinacoalwatch.com

    Here's a simple graph on how energy consumption affects living standards...If I have to accept that we're all the same and will behave similarily, heaven help us when a third of the world's population want raise their standard of living to ours, because oil would be too cheap at $200 per barrel

    smf said...

    "and you're assuming speculation was the only driver that affected price increases? Respectfully, I don't think so."

    Speculation was the initial driver to the whole bubble, yes.

    Speculation = The process of selecting investments with higher risk in order to profit from an anticipated price movement.

    SacramentoCrash said...

    Saw two listings that have dropped below $140 in higher quality Elk Grove neighborhoods. The peak was about $200 per square foot = 30% minimum drop in value. The houses are still sitting, it is going to get real bloody from the way it looks.

    watchingthebubble said...

    Gwynster,

    That Herb Greenberg article is like a cold, wet dose of mortgage reality. Maybe Mark Hanson needs to be in charge of the Fed! Thanks for posting it.

    alba said...

    Speculation came as a result of the design to leverage equity in existing homes. The Fed has a responsibility to maintain liquidity in the financial markets, and to stimulate growth. Secondary markets were designed to do just that; to stimulate growth. It was by design that this market existed to suck out as much equity in homes as possible. Free money, a loan for everybody; all part of the process to fulfil the need for leveraging equity and stimulating growth.

    Financial markets are global, and financial institutions all over the world participated in the growth plan.

    SMF, you're stuck on this being a housing issue, but its just much larger than that, at the root cause.

    Speculation came when things looked too go to pass up, along with exploitation and greed. Not only is it a secondary cause of our economic situation, it has less to do with what ails us now - banks with bad bets.

    I've just wanted to repurchase one home for the last 2.5 years, but things keep getting worse. It took me quite a while to realize that a recession or depression is more likely than just an extended housing downturn; with much greater impact on (my) economic conditions.

    Keep watching Paulson and hide your money. Housing is a lagging indicator.

    Diggin Deeper said...

    "It took me quite a while to realize that a recession or depression is more likely than just an extended housing downturn; with much greater impact on (my) economic conditions."

    alba...thankfully, at least you GOT the message. Many won't. If you sense a recession or depression is inevitable, there are ways to take advantage and profit from the downturn. Some people look at a receding economy as a "death sentence" event. Yup there's pain involved, but there are ways to thrive when the economy sours. Study recessions, and you'll find common opportunity themes that emerge. Play into those and come out the other side much better off.

    smf said...

    "SMF, you're stuck on this being a housing issue, but its just much larger than that, at the root cause."

    Really? Nah. I don't think this is only housing. The best phrase I have seen to describe this is the 'Global Equity Bubble'.

    norcaljeff said...

    I can't believe you guys would ever consider a house in the south area for over $250K and I don't care how big the yard is. Both have a Sacto address, one doesn't even have green grass and the other has a one car garage. That's insanity. You're also looking at tax bills of over $500 a month and probably mello roos as well.