Property Values - Eight Key Charts 24 comments
an article to
-
Font Size:
-
Print
- TweetThis
click to enlarge
DEBT BE NOT PROUD (8/11/09): One school of thought says excess debt must be paid off or written off before we will acheive dynmaic growth. This "Low Debt" and "High Debt" chart shows that the magnitude of the excess debt could be far beyond reasonable. If this school is correct, then we may have years or decades of slow growth unless we take radical steps to massively reduce debt issued during a credit bubble. The outlook for real estate investment is negative based upon this school of thought.
NEGATIVE EQUITY -- TEN-TON GORILLA (8/13/09): How many homeowners would make money by walking away from their mortgage? Whether the number is 11 million or 25 million, the low and the high estimates in this graph, the risk factor is wildly high. It's exactly like Cheech & Chong on Spring Break in Cancun and they are going in to rehab after this last hurrah.
NEGATIVE EQUITY (8/5/09): Negative equity is a major risk factor for which no good research has been done. It's reasonable to suspect that we may experience a foreclosure wave as this variable worsens. Some owners will not pay on their mortgage if it will take five or ten years to get to break even. Social factors are believed to play a major role. And we could hit a tipping point -- after which all hell breaks loose. Bet your bottom dollar that the Fed and the Treasury have this at the top of their "freak patrol" chart.
NEGATIVE EQUITY (8/6/09): The graph shows half of all mortgages issued in 2006 have a balance greater than the value of the house securing the loan. What will happen to loan performance if 50% of all mortgages are worth more than their collateral? Nobody knows, and if nobody knows, then a wild massive risk factor cannot be forecast. If you think that is impossible, please note that Deutsche Bank issued a report in early August saying that 48% of all mortgages would be worth more than their collateral by 2011. This is unchartered territory adjacent to the galaxy beyond the next universe.
SALES - PRICE (8/5/09): THE FALL IN PRICES: There is a lot of good news in the stock market today, but sentiment would turn 180 degrees if it was known that property values would fall 60% from their peak. They have already fallen at 30%. If values fall according to the estimates in this graph, it is a certainty that banks and financial companies will fail en masse. There has been some good news about real estate prices lately, but the vast majority of indicators are still negative.
SALES - UNITS (8/5/09): Looking at the long trend, there has never been a serious problem in terms of the number of units sold. The quality of the sales is another question.
SALES - UNITS (8/5/09): NEW V. USED: A wide gap between sales of new homes and existing homes suggests the stress level in the property market remains elevated.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Joseph L. Sha...
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
On Aug 19 06:23 AM manya05 wrote:
> Thank you for a very nice article. You ponder what the consequences
> will be of going into unchartered waters with so much negative equity.
> My feeling is that homeowners walking away will not be the problem.
> As usual, the major consequence is not always obvious. In this case,
> it will mean a drastic reduction in mobility. People will stay in
> their homes, and do whatever they can to get a job in the same city
> they live in so they do not have to move and sell. If the problem
> persists for many years (decades?), we may get into multi-generational
> mobility problems, as is the case in Europe. Children will graduate
> from college and not assume the whole country is their job market
> because the parents have an empty house to unload, and they will
> choose to stay in the same city where they grew up rather than start
> anew somewhere else. This reduction in mobility and mixing, in the
> long-term, is not good for business (and will slow the recovery),
> and is not good culturally for us as a Nation either.
On Aug 19 10:29 AM nym wrote:
> It seems to me that the affordability chart reflects: large turnover
> in certain states (CA, NV, AZ etc.), mostly of in the bottom half
> of the market on distress (foreclosure et al.) sales. Your results
> may vary. Also, note that the source is NAR, National Association
> of Realators: guess what butters their bread.
The effect was a massive drop off in family mobility as selling a home in a struggling area forced people to recognize their loss, which for most would have meant personal bankruptcy. ( Just like the banks, many consumers do not want to crystalize their loss). This is what led to the famous comment from then Employment Minister Norman Tebbit, that if people wanted a job they had to "get on their bike".
What actually happened was that families splintered as the wage earners left to go to places where they could find high paying jobs, and sending the money home to pay the underwater mortgage. This continued really until the boom under PM Blair in the late 90's
Obviously the UK and USA are different propositions, but this may give us some context. Attitudes have clearly changed towards foreclosure, but still many people are likely to find a way to stay in their house if they can afford it, as the effect of losing their home can cause destruction on many levels, not only financial.
Ironically, when negative equity is a factor, it seems like there is a contradiction between the advantages of increased labor mobility (particularly important in difficult employment markets) and the financial effects of people walking away from their debts.
As an aside, I think that we should resist using words like 'good' and 'bad' when describing trends, unless we are talking from an obvious point of view. This might be nitpicky, but to me the further decay of housing prices is 'good' because it is a necessary step towards a healthy economy.
Likewise, banks having to face up to their imaginary balance sheets is 'good' because it should help clear out the trash management and allow more intelligent businesses to flourish. Bad for them as individuals, good for us as a country. It gets a bit confusing.
On Aug 19 05:57 AM Andrew Butter wrote:
> Nice clear article.
>
> Don't agree 60% peak to trough the extrapolation (red line) on the
> Shiller chart is not correct, the correct extrapolation is roughly
> the line of nominal GDP per housing unit.
>
> My analysis says 40% peak to trough, nearly there.
On Aug 19 10:29 AM nym wrote:
> It seems to me that the affordability chart reflects: large turnover
> in certain states (CA, NV, AZ etc.), mostly of in the bottom half
> of the market on distress (foreclosure et al.) sales. Your results
> may vary. Also, note that the source is NAR, National Association
> of Realators: guess what butters their bread.
On Aug 19 11:52 AM zagrebzagreb wrote:
> Fine article... Charts like these speak like 10,000 perfectly chosen
> words.
>
> As an aside, I think that we should resist using words like 'good'
> and 'bad' when describing trends, unless we are talking from an obvious
> point of view. This might be nitpicky, but to me the further decay
> of housing prices is 'good' because it is a necessary step towards
> a healthy economy.
>
> Likewise, banks having to face up to their imaginary balance sheets
> is 'good' because it should help clear out the trash management and
> allow more intelligent businesses to flourish. Bad for them as individuals,
> good for us as a country. It gets a bit confusing.
Most of the data confirms the fact that housing prices got ahead of themselves in 2006 and 2007. The contraction in new home purchases confirms the fact that few new homes have been built since 2007. That's why the inventory levels are beginning to shrink. In a year, it will probably look like not enough new homes have been built once all the foreclosures have been recycled.
What about all of the positive equity that's being created from the foreclosures. Lot's of people are buying these homes for cash, restoring them back to mint condition, and will make a nice profit when they resell the homes into the market.
The recycling of foreclosures has not received any attention from the media. However, when these $150K homes being auctioned off at firesale leves are fixed up and put back on the market, that will probably normalize the existing home sale prices in 2010.
On Aug 19 05:57 AM Andrew Butter wrote:
> Nice clear article.
>
> Don't agree 60% peak to trough the extrapolation (red line) on the
> Shiller chart is not correct, the correct extrapolation is roughly
> the line of nominal GDP per housing unit.
>
> My analysis says 40% peak to trough, nearly there.
and visit this blog www.calculatedriskblog.../ regularly.
Deflation would be a trend that would be consistent with a serious national recession, housing value declines, major manufacturer and other significant labor concessions (auto unions), significant spending decreases by the 5th largest economy in the world (state of CA), 80% of other US states, and significant unemployment.
...on the other hand, we have a populist administration that is bound and doggoned determined to not let collapse of US asset values be their legacy. They have demonstrated ample willingness to devalue currency to avoid a "meltdown" of the financial system. Their only stated/acknowledged error so far is letting Lehman Bros. collapse.
As far as precedence... US currency was devalued by FDR by "Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates By virtue of the authority vested in (FDR) by Section 5(b) of the Act of October 6, 1917, as amended by Section 2 of the Act of March 9, 1933". This was followed in 1934 by revaluing the dollar against gold from $20.67 to $35 per ounce. Currency devaluation on the world market pure and simple. Similar economic "phenomena" have also occurred in the US in the early 1900's, 1870's and late 1700's. It has been a common occurrence in large and small countries around the world since about the mid 1500's - basically since the monetization of various commodities provided the opportunity for monetary value manipulation.
Currency devaluation would go a long way toward solving many of the current problems facing the US. Major public and private debt problems, Social Security obligations and many other "entitlement" programs could all be paid in dollars that are worth less (worthless?). Wouldn't take much to accomplish. A deftly placed rumor about shifting from dollar based oil, Chinese reluctance to accept US debt, or many other possibilities.
Again, we have a populist administration that is bound and determined to not let collapse of US asset values be their legacy. I simply cannot believe that Obama, Pelosi, Reid, Franks, Maxine Waters, etc., etc., will stand idly by and allow Timothy Geithner and crew to allow US citizens making less than $250K to be devastated by the gale of the economic hurricane (or some such emotional, irrational stuff). They will do whatever it takes (to promote the Democratic party legacy), regardless of charts or opinions.
On Aug 19 06:53 PM nym wrote:
> I urge interested parties to look at this www.campbellsurveys.co...
>
> and visit this blog www.calculatedriskblog.../ regularly.
On Aug 19 08:57 PM Value Added wrote:
> As Fundamental Joe indicated, the wildcard here is the administration's
> monetary policy. Expect M3 to grow rapidly to prevent a collapse
> of the banking sector, still very unstable. With a large enough pump,
> real estate values will stabilize and turn the corner. This will
> create an unusual situation where average selling prices will be
> increasing while inflation-adjusted real estate values (measured
> against anything else) will be falling. So the naive homeowner will
> think things are getting better. Until he buys groceries.
On Aug 19 09:56 PM mlonz wrote:
> In addition to principal and interest, you need to factor in property
> taxes, utilities, maintenance, insurance, and tax write-off benefits
> as well. This will dampen affordability slightly.
On Aug 19 02:28 PM Charles Martel wrote:
> Gentlemen, even though I agree with many of you that the bottom has
> not yet been met, it seems certain commodity variables have not been
> included in this analysis. Yes, with additional supply of housing
> and weak demand, prices will nonetheless lower to more affordable
> prices. However, with developers and builders not creating new housing,
> vacancy rates should lower over next 5 years. But with commodity
> prices increasing, how can new construction developments provide
> such low prices as we're seeing now? Lumber, copper, oil, with prices
> going up due to BRICK consumption, how can the prices we see today
> be available in the future? As generation X and Y get older, they
> will fill the current vacant properties, that is if unemployment
> slowly comes under control, we're not taxed out of recovery, and
> stop spending money we don't have.
On Aug 19 08:57 PM Value Added wrote:
> As Fundamental Joe indicated, the wildcard here is the administration's
> monetary policy. Expect M3 to grow rapidly to prevent a collapse
> of the banking sector, still very unstable. With a large enough pump,
> real estate values will stabilize and turn the corner. This will
> create an unusual situation where average selling prices will be
> increasing while inflation-adjusted real estate values (measured
> against anything else) will be falling. So the naive homeowner will
> think things are getting better. Until he buys groceries.