Calculating a Housing Bottom: Volume vs. Price

Via Jon Lansner over at the Orange County Register, here's an interesting contrast in the outlook for the nation's housing market over the next few years based on two surveys - one from real estate brokers, the other from OC Register readers.

The box in the lower right of the graphic below has been provided by yours truly to neatly summarize the findings. Not surprisingly, those in the business of selling real estate are far more sanguine than are potential home buyers and sellers.

But there is something even more interesting about this data that too few housing market watchers will immediately realize, helping to explain why the results are not all that surprising after all.

Here's the survey:
How is this data not surprising?

As noted here before on many occasions, sales volume and sales price are two very different components of the housing market and, while home buyers and sellers are more interested in sales price, those in the business of selling real estate are surely more interested in sales volume.

Both surveys simply asked about a "housing bottom".

As a result, both survey results may prove to be correct - realtors forecasting a bottom in sales volume next year and OC Register survey respondents forecasting a bottom in sales price in 2010.

This goes back to one of those Freakonomics stories where, with just a little thought, it should become painfully clear that realtors care a lot more about making the sale than they do about the sale price.

For example if a $300,000 home is sold through a realtor, a six percent commission would result in $18,000 to be divvied up between the agents and brokers for the buyer and seller. If the sale is not made, the commission is zero. Whether the sale price is a little higher or lower has no significant impact on the commission amount, relatively speaking. What's important is that the sale is made.

Realtors will naturally think of a "housing bottom" in terms of home sales and the number of commissions they are likely to generate rather than home prices and the size of those commissions.

Comments

[Rantor:]

Great article, what I would like to see is a study of projections on the impact of increasing unemployment on the housing market. I am confident that we will see a serious increase in foreclosures over the next two years--propelled by both unemployment and ARM refinance problems. This will exacerbate the recession, possibly tipping us into depression. Unfortunately I haven't seen any decent projections on this. Most pundits seem to avoid this, optimistically believing that the market will be healed within 6 months.

2008 Dec 06 07:51 AM

[Mr. Boater:]

This is an interesting article asking an interesting question. However we must go to real data to find out just what the status of the real estate market is. The opinions do not mean anything if the basis for the opinion is bogus. Barclay's and Credit Suisse have put out charts listing the dollars worth of ARMS by type and the month of reset. Please look below for the status of the RE market. It is grim. We will see 3-4X the defaults 2009-2012 that we have seen so far. Therefor I say , based on real empirical, verifiable data thet the realbottom of the RE market will not come till 2012 or later.

Crash 2 is starting in May and running in neighborhoods near you till 2012.

I am sharing with you below a couple of powerful charts from Barclays and Credit Suisse. Europeans seem to tell a bit more truth than the American banks, probably because our banks have so much to hide.

The next downdraft--I call it Real Estate Crash 2, will start slowly in May 2009 and continue till mid year 2012. Possible the markets will try for a bottom early 2012 in anticipation of the end of the RE collapse.

The subprime mess was caused by 615 billion in loans buried in derivatives--I am guessing about 20-25% of those loans went bad. Many of those people are trying desperately to keep their homes.

The next session will incorporate 1.1 trillion of option and interest only ARMS held by thinly capitalized speculators who got in too late and got trapped in upside down loans. They are screwed. I think over 50% of these loans and their derivatives will go bad--2009-2011 will be very bad years for the housing market, labor, and the consumer. I see gold and the Dow meeting at 4000-5000, Bonds will be crushed.

Note the credit Suisse Chart at the bottom resets drop off starting end of 2008 and then a whole new series of Interest only and Option ARMS readjust starting May 2009 till late 2012. In the 615 billion subprime adjustments that started all of this mess, many people worked hard to try to keep their homes.

The new series of adjustments are weakly capitalized speculator held homes that the speculators are caught upside down in and cannot get out of the contracts. They will be wiped out by the resets increasing the mortgage payments beyond their ability to pay. These failures will do severe damage to what is left of the economy after the Paulson rape of the taxpayer.


The Option ARMs and Interest Only (IOs) loans scheduled to reset in the next few years will add more trouble. These loans represent about 15% of securitized loans and some have negatively amortized, increasing the payments and making refinancing more difficult. According to data from Barclay's, about $300 billion in option ARMs and $820 billion in IO's are set to recast. The results could be payment shocks over 80% for option ARMs and over 60% for IOs according to Barclay's.
Option ARM Recast and Payment Shock Forecast



Putting it all together......the months with the green tops were mostly the subprime arm resets which is about $615 billion till may 2009, which have caused all the problems we now have.


---the orange/pink tops are another whole set of resets just starting in 2009 which is about another $820 billion between 5/2009 and 6/2012. Anyone calling a "bottom" in real estate or the home construction industry simply is lying or do not know what they are talking about.

2008 Dec 06 01:35 PM

[closedbooks:]

Interesting

2008 Dec 06 01:52 PM

[Jeff:]

Rantor,

I to would like to see an honest conversation evaluating that aspect.
The talking heads at CNBC etc, are calling bottoms, yet the consumer has never faced so many affronts at one time, EVER.

* Housing prices falling 30%+ with no refi moneys available to spend
* Stocks down 45%, causing a reverse wealth effect
* Job loses totaling 1.9 so far, and the second side of a recession is always worse than the front side, plan on at least 3 million if not 4 million jobs lost.
* Access to credit is being cut at every level, credit lines pulled, credit cards canceled, limited, or interest rates arbitrary raised, auto loans unavailable.
* No saving available for spending

What I want to know is, how is our government going to get moneys to a consumer who is swimming in debt, while at the same time, all of his assets values are declining at once?

I guess the government figures, who needs collateral anymore, just print, print, print. Maybe a two year mortgage holiday will work.

Jeff

2008 Dec 06 01:56 PM

[Urbane Gori...:]

Basically, it is just a poorly worded poll. The correct question would be either; "When will home prices bottom out", or "When will we see an increased volume in home sales". Our political polls are often times poorly written, causing an incorrect reading of the results. Well conceived article though.

jegan

2008 Dec 06 02:15 PM

[Jeff:]

Mr Boater,

Thank you, maybe you should be writing articles here instead of Tim.

My 5 year interest only loan is up in May and I'm sure that I am not alone.

I truly wish that someone would connect all of the dots of this current economy, like you have with the next aspect of the housing mess. People really need to know how housing effects banks, which effects derivatives, and hedge funds, which effects funding for small to mid sized company's, etc. etc. etc.

There is so much going wrong at once as to be almost impossible to perceive and accurately predict, like you have with the next phase for housing. I wish they would stop comparing this to the great depression because it is different and should have it's own name and identity.

The Great Debt Destruction of 2008.

P.S. How can you call for bonds to fall when deflation will be the name of the game under your housing scenario?

Also, I could not see your chart.

Jeff

2008 Dec 06 02:17 PM

[Rob Viglione:]

A big question I'm grappling with is how the inflation-deflation battle will end? It's undeniable that monetary aggregates, credit markets, and even commodity prices are telling us deflation is a serious short-term concern. Long term, though, I am skeptical...I find it hard to imagine that the velocity of money will remain permanently suppressed, and the trilions of fiat currency printed globally will remain idle.

Nonetheless, short-term we must guard against deflation risk. In a deflationary environment, you want to be a net creditor. On the credit side, corporate debt is looking extremely interesting. I'd even venture to say that mortgage instruments-the high quality type-are favorably priced.

Longer-term, I'd be scaling into gold. The fiat currency system is likely approaching its deathbed, at least without serious restructure in public finance.

2008 Dec 06 03:27 PM

[c smith:]

Simplest, quickest solution to the entire housing mess is to make mortgages assumable. This would eliminate all the tolltakers (real estate agents, appraisers, lawyers, title insurers, etc.) who drive up the cost of getting properties in the hands of people who can afford them. It would work, but it will never happen.

2008 Dec 06 04:00 PM

[Jeff:]

Rob, I agree with your assessment, short term, assets are unwinding "debt destruction" at an amazing rate, all at the same time, but then comes that 8 trillion bail out......... At this point I just don't see any effect of the bail out moneys on the general economy. The current result, is the adrenalin to the financial heart, to keep the zombie walking.
Jeff

2008 Dec 06 04:09 PM

[W T F:]

Regarding Mr. Boater's chart:

I believe his chart is taken from Credit Suisse's research report entitled "Mortgage Liquidity du Jour: Underestimated No More". In that report on page 47 look at exhibit 42 entitled "Adjustable Rate Mortgage Reset Schedule". The horizontal axis entitled "Months To Reset" has January 2007 as its starting point.

I hope the following URL is visible:
www.billcara.com/CS%20...

If you are unable to see the URL for this report perform a Google search on:

credit suisse Mortgage Liquidity du Jour: Underestimated No More

The first hit is a link on Bill Cara's website to the entire report.

For those of you who still believe that the whole subprime debacle was an unexpected event will note that this research report was published in March 2007. Clearly some folks had a clue as to the enormity of coming events.

Seasons Greetings to all.

2008 Dec 06 09:47 PM

[Kunst:]

Double the money supply, double prices and incomes, double house prices, problem solved. Already underway, coming soon to an economy near you.

2008 Dec 07 02:43 AM

[specks:]

WOW. That's amazing. Is there such a thing for Canada or Europe?

2008 Dec 08 04:35 PM