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Tilting at Windmills

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September 20, 2006
By: Kevin Drum

CHART OF THE DAY #2....We've already had one chart today, but here's a second one. It comes from the LA Times and shows the trajectory of housing prices in Southern California. As DataQuick analyst Andrew LePage said, "The data are telling us the market will flatten out by the end of the year."

The question, of course, is what happens after that? The slope of the curve doesn't give me much hope that price increases are going to hit zero and then suddenly "flatten out." A few years below zero looks increasingly likely in the very near future.

Kevin Drum 4:36 PM Permalink | Trackbacks | Comments (70)

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>> The slope of the curve doesn't give me much hope
Sure it does. It flattened out in 90 after all. This case looks pretty similar.

Posted by: jorge on September 20, 2006 at 4:38 PM | PERMALINK

What seems to be on the increase, from what I can tell, is production of drool, by people who currently can't afford to get into the housing market, and believe they'll be able to "once the prices crash".

I think that's a very foolish line of thinking. Prices are going to drop enough to hurt people who stretched to get in, and they're going to drop enough to hurt those who will have to sell for other reasons in the next 5-10 years - but I seriously doubt we'll see any return to broad "affordability". There just isn't enough supply to meet the demand. This is a direct result of overpopulation, and the fact that middle-class Americans don't want to live on top of eachother like they do in third-world countries.

Posted by: Osama_Been_Forgotten on September 20, 2006 at 4:44 PM | PERMALINK

If we only get a few years below zero then we will be fine. If a house that you bought for $700,000 is only worth $640,000 in three years then a lot of people can live with it.

Have you ever heard of Japan?

I know. I know. The US is different.

So, why can't someone explain the unique circumstances that hit Japan and explain why they can't happen here.

I am not saying they will happen here. I am just saying it is a potential DISASTER.

Imagine the $1 million house going for $180,000 in 6 years?

Posted by: neil hecht on September 20, 2006 at 4:45 PM | PERMALINK

It seems to me that there is a meaningful possibility (say 30%) of a serious crash in all asset prices, not just houses.

BTW: Kevin, how much does Washington Monthly obtain from the housing industry, and how much does Washington Monthly pay you?

WTF is that supposed to mean/imply?

Posted by: craigie on September 20, 2006 at 4:52 PM | PERMALINK

shows the trajectory of housing prices

Actually, it shows the trajectory of increases in (or, decreases in) housing prices.

Posted by: Al on September 20, 2006 at 4:55 PM | PERMALINK

One more thing.

The slope of the curve doesn't give me much hope that price increases are going to hit zero and then suddenly "flatten out."The slope of the curve doesn't give me much hope that price increases are going to hit zero and then suddenly "flatten out."

I see you don't understand the principles of supply and demand Kevin. What will happen is that as the prices increases go to zero, the demand will increase. The gradual increase in demand will cause the price increases to flatten out and perhaps even cause price increases to go back up again. So the "flattening out" out of price increases might actually cause greater price increases.

Posted by: Al on September 20, 2006 at 4:58 PM | PERMALINK

Personally, I very much enjoy being gang-raped by the Boskin Comission. They really know how to make me feel understated, by 1% or more. After they are through with me, I know that ALL economists everywhere will agree on their feelings about me, and the CPI.

And since these economists who are the modern-day equivalents of the All-Knowing Oracle at Delphi, they also know that income computations don't take into account benefits like stock options, health insurance plans, workout rooms, covered parking, and outsourcing. Therefore, even if people's net worths decline by 30% or more, when the value of their nest-egg in real estate collapses, that they'll still be more prosperous and happy than they were under Clinton. Who wouldn't lay a finger on me no matter how I wiggled my hips when I walked. He only paid attention to that slut, Monica Lewinsky.

Posted by: (fake)GOP on September 20, 2006 at 4:58 PM | PERMALINK

"principles of supply and demand Kevin"

That may ultimately be true, but it's a bit of a simplistic view. The housing market is intertwined with interest rates, population growth, population demographics, perceived rates of return on other investments, confidence in the economy... (yada).

If the chart went back to the 1970's it would show the previous bubble in perspective... as I recall the negative displacement in housing prices after that bubble was about 25-30% and lasted 5 years or so before it reached parity with the end of the boom.

Hmmm... anyone here old enough to remember the S&L crisis? You might fasten your seatbelts again.

IMHO, the expression of human greed runs in cycles... watch the returns on housing, interest rates and the stock markets. They all cycle one after another.

When one boom is spent, the next takes its place... unless you have a depression or severe recession in which case they all take hits.

Given the current trade and budget deficits my bet is on interest rates. At some point the rates will have to go up to finance our debt The US needs to sell currency, which is it's principal export.

Posted by: Buford on September 20, 2006 at 5:08 PM | PERMALINK

Ha! One of your better parodies, O.

Posted by: wish you were here on September 20, 2006 at 5:09 PM | PERMALINK

I don't think that Kevin's point is Optimism or Pessimism or drooling over the potential to be able to afford a house in California (that's just my anaecdote, people I talk to on the street - including one foolish moron - who is a Conservative, and believes that expensive houses in California are a function of some liberal elitist conspiracy, and can't wait for prices to crash so he can afford to buy a house and kick the previous liberal owner to the curb).

Kevin's point is;
Both Reagan and Bush 41, and now Bush 43, adopted policies that led to high borrowing and high interest rates, that let to housing slumps, a low personal savings rate, shaky dollar, and waves of mortgage defaults, and in Bush 41's (and Neil Bush's) case, S&L defaults.

Under this kind of economic environment - folks' surplus cash isn't being saved, or spent on vacations.
It's being funnelled to the banking industry and oil industry; neither of which is particularly known for re-investing that profit in capacity expansion.

Posted by: Osama_Been_Forgotten on September 20, 2006 at 5:09 PM | PERMALINK
IMHO, the expression of human greed runs in cycles...

Agreed, Buford. It's just that I'm worried that this particular cycle of greed dates to the 1920's, not the 1980's.

Posted by: modus potus on September 20, 2006 at 5:12 PM | PERMALINK

who is a Conservative, and believes that expensive houses in California are a function of some liberal elitist conspiracy, and can't wait for prices to crash so he can afford to buy a house and kick the previous liberal owner to the curb)

Wait, you mean it's not a liberal elitist conspiracy? Damn, that would be the first time, then.

Posted by: craigie on September 20, 2006 at 5:14 PM | PERMALINK

Al, I don't know how else to put it, but you must have slept through the second half of Econ 1. Yes, as prices decline, more people might come into the market. But there's no reason that the new market clearing price is at 0% price increase; it could just as well be at a 10% net DECREASE in price.

Posted by: Steve on September 20, 2006 at 5:16 PM | PERMALINK

Clever twiddling of graphics and selection of statistic to make it look like a problem.

Housing prices chart.

How long would that "rate of change" line have to hover a few percent below the line to drop prices radically over what they were ten years ago?

Posted by: carson on September 20, 2006 at 5:17 PM | PERMALINK

OBF,

Having worked in the mortgage industry I am just waiting to see what happens when all the ARMs reset.

Combined with reports coming out that there are a lot of houses for sale with no buyers (due to prices) and the resetting of ARMs I look for the number of houses on the market to increase along with a reduction in price.

A LOT of people are going to be hurting when the Option ARMs come due, I worked on software dealing with setting up ARMS in an LOS and believe me they are going to get hit and I would not be surprised to see the number of defaults go up while many homes become REO's.

It's going to be a long, hard fall if it goes as predicted.

Posted by: Dreggas on September 20, 2006 at 5:20 PM | PERMALINK

I hope the housing bulls on this comment thread put their money where their mouth is and invest in a condo flip.

No? That's why prices will come down. There are a lot of empty houses out there looking for buyers. Not so much in the OC where Kevin lives, but check out Riverside sometime.

http://bubbletracking.blogspot.com/

Posted by: troglodyte on September 20, 2006 at 5:25 PM | PERMALINK

I don't really understand why so many people who bought in the last several years got ARMs anyway. With interest rates at almost record lows, what was the advantage of an ARM rather than a fixed-rate mortgage? Even if you were planning on unloading the place in less than five years, you couldn't really expect the rates to go much lower than they were, and there was every reason to think they'd go up. Do ARMs have some advantage I'm not thinking of for people who bought recently?

Posted by: Mikey on September 20, 2006 at 5:30 PM | PERMALINK

How do you know carson works in the mortgage industry, Thomas? I didn't see him mention that in his post.

Posted by: Mikey on September 20, 2006 at 5:32 PM | PERMALINK

I don't work in the mortgage industry. Just pointing something out.

By the way, anybody who didn't refinance to a fixed about two years ago has only themselves to blame. Anybody who thought they were going to get rich on their appreciation is pretty stupid, too. A house is a way to preserve equity, not make money, unless you're renting them out and make more than the mortgage.

Like with Enron. A lot of the employees who took a bath had dumped all of their retirement account equity into Enron stock while it was climbing like a rocket. Greed. There was no requirement that they do so, and nothing preventing normal diversification. Sadly, a lot of employees at large corporations like Procter and Gamble and others still have this habit.

Posted by: carson on September 20, 2006 at 5:32 PM | PERMALINK

Thomas1,

His post is all well and good, however given what will happen when ARMs reset and go up with regards to Interest Rates a lot of people who had to go the Option ARM route just to get into a home are going to be flattened and this is no chicken little forecast.

Many in the real estate industry have said the same thing. I could care less about the political significance or non-significance of this, I just know, from experience in writing the code that handles the interest rate adjustments that when it comes time for them to reset it's going to hit a lot of people hard and the number of Option ARMS I've seen coming in suggests it will be a significant number especially in the ALT-A business where it will be even harder considering the high risk nature of those loans.

Posted by: Dreggas on September 20, 2006 at 5:35 PM | PERMALINK

Sadly, a lot of employees at large corporations like Procter and Gamble and others still have this habit.

Yeah, and it's also sad that a lot of companies' 401K offerings are based so heavily on their own stock. Sometimes it's not the employees' fault.

Posted by: Mikey on September 20, 2006 at 5:39 PM | PERMALINK

I hope the value of my house continues to go up, since I would like to move sometime soon, but I'm not sure carson's chart gives me much solace. It stops in 2005. Should'a sold then.

On the other hand, of course, Kevin's chart shows the deline in the increase in prices, which is nearing zero after years of increasing prices. Kevin's only point is that the steepness of the curve suggests actual, and perhaps substantial, decreases in prices are in our future. Maybe he's wrong and the landing will be soft or there'll be a bounce right back. Maybe. But the housing industry folks don't seem to be thinking so.

Posted by: David in NY on September 20, 2006 at 5:39 PM | PERMALINK

Carson,

And of course in the case of Option ARMS which have only recently (IE as the downturn in refi's began) come into "vogue" it's all those who are buying into an Option ARM so they can get a house that are wrong. It can't be that companies are offering these mortgages as a way to increase profit all the while knowing that when the rate adjusts it's not going to adjust down and they will end up hammering those that got locked into this type of mortgage.

Yes the smart ones refi'd into fixed mortgages, and I know a few who went the ARM route who have now refi'd to a fixed. However a lot of people don't know just what is going to happen, and sadly the ones most taken advantage of by the Option ARM are those not making a crap-ton (a lot) of cash to afford the home otherwise, especially in the California market.

Posted by: Dreggas on September 20, 2006 at 5:44 PM | PERMALINK

You seem to have forgotten, OBF, that Kevin has posted DOZENS of Chicken Little "Housing Bubble Bursting!" threads for the entire climb up that chart.
Posted by: Thomas1 on September 20, 2006 at 5:14 PM | PERMALINK

It's true that the whole "housing bubble bursting" phenomenon has been predicting disaster for many years now. . . a disaster that has not come.

However, it has partially come; interest rates HAVE shot up, rather drastically, (my feeling is that Bernanke WAY overshot it) - and people ARE hurting. It's easy for an outside observer to say: "well the idiots shouldn't have gotten ARMs, trying to buy more house than they should have." What is obvious to an outside observer 5 years after the fact isn't obvious to a home buyer, 3 months before he gets laid off from his fabulous dotcom job, and if he can get another job, it's usually for a lot less $.

There's much more to this than the Righteous Wrath of the Free Market God.

And there's more to Kevin's repeated postings than "let's try to bash the Bush economy."

In 1996, there were dire predictions of impending stock-market doom. And in 1997. And in 1998. In 1999, they were coupled with; "oh noes, the y2k bug is going to get us all! serves you infidels right for trusting computers and technology so much!" and "oh noes! teh evul Clintonistas are going to use their army of black helicopters to start a riot in Time's Square on the eve of the Millenium, and use it to turn America over to UN control, One World Government, the Antichrist, the Eschaton, and Liberal Rule for 1000 years! Warehouses full of blue-money!".
And in 2000, the rest of us were like: "uh, sure, whatever." And when the crash finally came, it was Enron(dotCom). Wasn't it? After the Bushies talked-down the economy during the election.

So don't come out complaining now that the liberal bloggers aren't clapping loud enough for Bush's economy. Our houses are the only thing most Middle Class Americans have. And Bush's reckless borrow-and-spend-to-finance-war-profiteering policies are driving up the cost of borrowing, and driving down the value of our homes. It's not enough that Bush's immigration and outsourcing policies are hitting our salaries, now they've got to game the market value out of our savings as well.

Combined with reports coming out that there are a lot of houses for sale with no buyers (due to prices) and the resetting of ARMs
Posted by: Dreggas on September 20, 2006 at 5:20 PM | PERMALINK

That's certainly true in my area. Has slowly building since about a year ago, and the trend has picked up a massive head of steam in the past 3 months. Absolutely no houses have moved. Mortgage broker lady living across the street says she's doing about 1/10th the business she was doing a year ago. And all of those people are refi's from one ARM to another, because they can't afford flats, and most of them plan to refi again, some are gambling that when they refi, their incomes will be better (folks in the construction industry, locally, are also having a bad year).

Posted by: Osama_Been_Forgotten on September 20, 2006 at 5:45 PM | PERMALINK

Also, the suggestion by jorge at the top of the thread that things bounced right back in the early 90's misreads the chart. As I read it, for about four years then, every month housing prices were down about 2-3% from the year before. It's not so much the total drop (10-12%) as the drip, drip effect of such a phase that's bad. People just stop wanting to buy because they expect to see their investments diminish. Some people can't sell at all or have to sell at losses even greater than the average. I saw it before; it's no fun. (Something called "work-outs" became a legal and banking specialty.) Hope it doesn't happen again.

Here's to a soft landing.

Posted by: David in NY on September 20, 2006 at 5:48 PM | PERMALINK

Mikey,

Most got into doing the Option ARMs recently, only as the interest rates started to rise. People had refi'd themselves down with fixed rate mortgages. However since prices stayed pretty high, and interest rates were going up a lot of people could not afford to buy even with lower interest rates because of prices (even a 30 yr fixed at a low rate, here in So Cal, can mean a 2000 a month mortgage payment).

So along come interest only and option arm loans. In one you pay interest only for a set amount of time, in the other (ARMS) you buy in at one rate then 3 6 or more months down the road they reset the rate to the current rate which can increase monthly payments quite a bit, especially again here in So Cal.

The end result is people are going to find that while they might be making a relatively low payment now, down the road they will be hit and the rate will adjust, in the case of ARMS upward as Interest rates go down. They will not however adjust down if rates come down.

The ARM allowed people with the inability to get a home with a fixed initially to get into a home. It was not a creation of the Refi boom because people who refi will do so at a fixed rate, not an adjustable one.

Posted by: Dreggas on September 20, 2006 at 5:50 PM | PERMALINK

Oh, and the banks are apt to get really pissy about lending too. No more free rides. Substantial downpayments required. Etc. Etc. Sours the market a lot.

Posted by: David in NY on September 20, 2006 at 5:53 PM | PERMALINK

However since prices stayed pretty high, and interest rates were going up a lot of people could not afford to buy even with lower interest rates because of prices...

Right!

Because homes WELL BELOW the median price, still ended up as "Jumbo Loans".

Posted by: Osama_Been_Forgotten on September 20, 2006 at 5:55 PM | PERMALINK

That's certainly true in my area. Has slowly building since about a year ago, and the trend has picked up a massive head of steam in the past 3 months. Absolutely no houses have moved. Mortgage broker lady living across the street says she's doing about 1/10th the business she was doing a year ago. And all of those people are refi's from one ARM to another, because they can't afford flats, and most of them plan to refi again, some are gambling that when they refi, their incomes will be better (folks in the construction industry, locally, are also having a bad year).

Posted by: Osama_Been_Forgotten on September 20, 2006 at 5:45 PM | PERMALINK

You bring up another good one here, the ARM perpetuating Refi's to get a slightly lower rate but still higher than a fixed.

People can poo-poo this but I saw the writing on the wall for this one a while ago when ARMs came into vogue and knowing what prices were here in OC (and even in Riverside Co. they are going up). It's going to be a mess for companies who put a lot into the ARM boom when they come due, after all if defaults go up and companies lose money due to it there will be a lot of them going under. Just looking around I have seen a ton of mortgage companies pop up in the area that will tank when the reset comes.

Posted by: Dreggas on September 20, 2006 at 5:56 PM | PERMALINK

There has to be a reality check on housing prices at some point - and I say that as a SoCal homeowner who bought in 2002 for $170k and my house is now worth upwards of 500k. I can't even afford to buy my own house at this point... Those who bought before the price spike cannot afford to move up and those who bought late into the spike are going to lose their butts when those ARM's reset and prices start to drop, which they will as a matter of course as interest rates rise. It is going to be ugly, the only question is just how ugly and on what timeframe. Basic math: interest rates are rising, home prices are way beyond affordability, buyers are sitting on the sidelines waiting for prices to drop. Nobody in their right mind is buying single family residential in SoCal right now. Even Warren Buffett cashed out of the California real estate market last Novemeber....

Posted by: arteclectic on September 20, 2006 at 5:57 PM | PERMALINK

Thanks Dreggas. I wasn't thinking about the fact that ARM monthly payments, especially option ARMs, could be so much lower than fixed. I was just looking at interest rates and wondering why people would choose an ARM on that basis. Got it.

Posted by: Mikey on September 20, 2006 at 5:57 PM | PERMALINK


Because homes WELL BELOW the median price, still ended up as "Jumbo Loans".

Yup, given prices here in cal alone that is very true. I literally saw a small set of cookie cutter tract houses go in, all right against one another so you could literally climb from one to another go up on a small section of land here in oc, starting price was in the 700k's and watched them shoot up to be million dollar homes in a few months time. They were not even in a great location, had no property to speak of, and were ugly anyway but they were selling for over 1 mil.

Compare that price right there to the current conforming limit ($417,000) and you can see that even if the price drops 200k it's still a Jumbo.

Posted by: Dreggas on September 20, 2006 at 6:03 PM | PERMALINK

Accoring to a report by PMI Private Mortgage Insurance Company, prices in the East Bay in Northern California dropped 10.55% from 2nd quarter 2005 to 2nd quarter 2006, and there is a 60% likelihood of lower prices over the next two years.

http://www.contracostatimes.com/mld/cctimes/business/industries/real_estate/15562205.htm

Posted by: CA Pol Junkie on September 20, 2006 at 6:05 PM | PERMALINK

Thankyou OBF for putting it so well. Long term fundamentals -- population and job growth -- along with supply side constraints (NIMBYish and BANANAish zoning restrictions on density) ensure that housing prices are going nowhere but up over the longer term. At the moment we are seeing an iminently rational response to short term conditions of oversupply.

Posted by: o2k on September 20, 2006 at 6:06 PM | PERMALINK

The only ones who will be directly hurt by a dramatic downturn are those who need to sell.

Uh, not quite. Those with ARMs will get hurt when their payments go up by 50% or more. And everyone suffers when the economy slows because people have stopped using their homes like ATMs, and spreading that new cash around.

People with fixed rate loans, who don't have to move, and who don't lose their jobs (or get asked to take a pay cut or see a 15% increase in their healthcare premiums) will be pretty ok.

Posted by: craigie on September 20, 2006 at 6:06 PM | PERMALINK

I've been saying for years of low inflation, that the government has found a way to hide inflation by disguising it as an increasing price of real estate. As long as the price of real estate rises everyone's happy and we have low inflation. We've entered the other phase so look for inflation to show it's face in the prices of the consumer goods we buy.

Posted by: slanted tom on September 20, 2006 at 6:07 PM | PERMALINK

Plenty of people are buying single family residential in SoCal right now (they have to live somewhere). The only ones who will be directly hurt by a dramatic downturn are those who need to sell.

Thomas1,

Are you in Socal? Most aren't buying squat, they are renting and even renting is expensive. I see so many houses for sale in my area alone that are not moving because no one can afford them. The ones looking to sell will be the ones who can't afford the payments anymore and hope to recoup their losses which they won't be able to.

Those who try to sell a home they have owned for X number of years (mainly before the boom in the past 6 years) will still make a great profit since the value of their homes will probably not dip below what they paid (ie around 150-250k for an SFR).

Posted by: Dreggas on September 20, 2006 at 6:08 PM | PERMALINK

...Kevin's been pretty darn pessimistic ever since Bush won in 2000.
Posted by: Thomas1 on September 20, 2006 at 5:58 PM | PERMALINK

Of course he has. I don't see how any rational human being who rejects the claimed divine inspiration of Bush, could be optimistic about anything. The world is in a sorry clusterfuck of a mess, and the only hope is justice for these white-collar-terrorists.

And the only hope for that, is an American Electorate that gets off it's sorry, fat, lazy ass and does something about it that even Diebold can't stop.

There has to be a reality check on housing prices at some point -
Posted by: arteclectic on September 20, 2006 at 5:57 PM | PERMALINK

The reality-check has to come in WAGES. Houses are priced appropriately. Labor prices are massively depresed. This is a side-effect of trying to regulate inflation via interest rates, when you're printing money at "ludicrous speed" (as our Republican-controlled "fiscally-conservative" government is doing). Money has flooded into the housing market, but it's NOT coming from people's salaries.

Those who bought before the price spike cannot afford to move up

Most of the people I talk to, and I'll include myself here; CAN'T AFFORD TO MOVE DOWN! That means, they could sell their house, and then take their equity as a down-payment on a smaller house, and the smaller house has gone up in value so rapidly that they couldn't even afford the smaller house. One freind I know says he's "trapped" in his house, it's too big (he has a *gasp!* spare bedroom), he knows it, and wishes he had bought a smaller house, but now, there's nothing even half the square footage within 40 miles that he can afford.

Posted by: Osama_Been_Forgotten on September 20, 2006 at 6:11 PM | PERMALINK

Finally, something I agree with OBF about -- short of a nuclear attack, no $1 million house is ever going to seel for $180,000 -- talk about drool though.

Posted by: Thomas1 on September 20, 2006 at 4:52 PM

Wrong Thomas1/Al

Imagine ten million dollar homes on a cliff. Landslides cause 9 of them to slide down the slope. Do you really think the remaining house is still worth $1 Million or even $180,000?

Posted by: slanted tom on September 20, 2006 at 6:18 PM | PERMALINK

Compare that price right there to the current conforming limit ($417,000) and you can see that even if the price drops 200k it's still a Jumbo.
Posted by: Dreggas on September 20, 2006 at 6:03 PM | PERMALINK

I know there was talk a few months ago (in CA) of moving up the level of loan considered "Jumbo" based on the rapid increase in median prices. But I think they backed down from that.

Posted by: Osama_Been_Forgotten on September 20, 2006 at 6:19 PM | PERMALINK

Thomas1,

It has nothing to do with personal information. If you do not live here then you do not know what the market is like. Yes thousands of homes have been sold in the not so distant past, mainly as ARMs and during the refi period probably a number of fixed.

Now however there are many developments only half full (when they should have been full) and many for sale signs on other houses. No one is buying because they cannot afford to. The necessary income required along with the credit scores involved are not attainable by most people due to one point OBF made, wages and salaries not rising at the same rate or near it to make things affordable.

As a result many people are having to shop around for loans in the Alt-A and SubPrime market where companies who make their money off these type of loans are making a killing on the ARM because it's what's hot because it's about the only option open to most people.

Posted by: Dreggas on September 20, 2006 at 6:20 PM | PERMALINK

I know there was talk a few months ago (in CA) of moving up the level of loan considered "Jumbo" based on the rapid increase in median prices. But I think they backed down from that.

Fannie and Freddie set the conforming loan limit. I doubt they'd adjust just for California since they operate on a national level.

Posted by: Dreggas on September 20, 2006 at 6:22 PM | PERMALINK

Its interesting that this topic keeps coming up here. I'm not sure what, if anything, a politician, Dem or Rep, is supposed to do about the fact that there is only so much of Irvine to go around, and that no one really wants to live in the 909.

Obviously, absent some bizarre outside force, housing prices can't keep going up 20% per year forever, and of course in some periods they can go down.

But I don't know why Kevin seems to insist in implying that there is something "wrong" about the price of housing in Southern California. The prices would not be where they are unless people wanted to buy the houses. If lending practices were more strict, actual prices might be lower but how relatively affordable those houses would be would be the same (i.e., they would seem just as unaffordable).

The fact that some people bought at the wrong moment with the wrong debt structure is similarly not exactly news.

Is there some political act that is not being taken here? Really, not trying to be sarcastic at all.

Posted by: hank on September 20, 2006 at 6:28 PM | PERMALINK

Thomas1

I see that, I also see they have dropped 25.3% and are most likely going to continue to fall. The number sold in the second quarter, while high, is on the state level as a whole, in individual markets however prices will vary leaving many to absorb a major shock as interest rates go up, and as I have said as ARMs adjust.

Posted by: Dreggas on September 20, 2006 at 6:29 PM | PERMALINK

Opps, September 20th is TODAY!! Did I miss the newsflash? Were there ZERO homes that sold?

I do not believe I ever said 0 homes were sold. Indeed I know people are buying, using Option ARMs, and will have to pay the piper for it which will inevitably wind up pretty bad.

Posted by: Dreggas on September 20, 2006 at 6:32 PM | PERMALINK

If the chart is supposed to make it easy to understand housing prices in southern California, I think it's deceptive.

If I look at the August 2006 point on the chart, I see that it is about the same price as 1997. That's when my house in Corona was worth about $180,000. Yet today, it's worth at least $550,000. When I first moved to southern California around 1990, I remember model home communities starting at around $150,000. Now they start at about triple that price in the same locations.

So whatever this graph is meant to represent, I've got to judge it does so poorly.

Posted by: catherineD on September 20, 2006 at 6:37 PM | PERMALINK

Not if they refinance or sell for a profit and can move before said Option ARMs come due

Oh agreed, at least on the refi part, however refi'ing to a fixed is not always possible either. As for selling for a profit, again with prices as they are not many are buying, at least not like they were last year. The end result will be someone holding a house, trying to sell and unable to do so because few are buying or can afford to buy what the house is going for.

The ones who will still come out of this ok are the ones who bought more than 6 years ago, before the pricing bubble since prices will most likely not go below what they were then. However those who bought high (within the bubble for say 500-700k) could and most likely will be hurt when the decline goes into full swing because the price will most likely fall below those ranges (again this is a prediction, much like weather prediction which can be right and can be wrong, in this case I hope it to be wrong).

Those who bought higher than 700k (which many homes in the OC area were starting at) will definitely feel the crunch and see their homes value go down.


Posted by: Dreggas on September 20, 2006 at 6:45 PM | PERMALINK

My own job is in real estate so obviously it's not to my benefit to believe all this Chicken Littling. We'll just wait and see.

Of course it's not to your benefit, heck the only ones who have a chance of benefiting are the mortgage companies who make money off the interest on a loan, of course they may eat it on Defaults as well.

Posted by: Dreggas on September 20, 2006 at 6:47 PM | PERMALINK

Catherine, your misreading the chart it measures change in home prices, not prices themselves. It isn't saying that a house today is worth what it was in '97.

Posted by: eric on September 20, 2006 at 6:49 PM | PERMALINK

I hope a lot of things will be wrong but am also cynical enough to know most of them will be right.

I hoped that those poo-pooing the Iraq war were wrong, but figured they were probably right.

I hoped Bush's tax cuts would mean a better paycheck for me and that those saying otherwise were wrong but again, they were right his tax cuts meant diddly squat in my check.

Here I hope I am wrong about how bad it will be when the ARMs come due, having seen what will happen (again I programmed these into Loan Systems for a mortgage company) I can be pretty sure that while I hope otherwise it's gonna be bad.

Posted by: Dreggas on September 20, 2006 at 6:51 PM | PERMALINK

Whatever helps ya sleep at night.

*shrugs*

Posted by: Dreggas on September 20, 2006 at 6:57 PM | PERMALINK

" BTW: Kevin, how much does Washington Monthly obtain from the housing industry, and how much does Washington Monthly pay you?"

"Speaking of home values, here are Kevin's (from that other thread below):"

Aw Kevin's got a stalker. Ain't that sweet?


Posted by: Urinated State of America on September 20, 2006 at 7:02 PM | PERMALINK

Extrapolating this sort of graph is hard to do. E.g., in 1991, the change in prices had declined sharply for two years, yet it turned up.

Posted by: ex-liberal on September 20, 2006 at 7:21 PM | PERMALINK

and the #1 cause for the last major housing downturn in that chart (at least in California): the massive reduction in defense spending.
Posted by: Thomas1 on September 20, 2006 at 7:02 PM | PERMALINK

Oh, so now Defense Spending is a beneficial public works project? Wow - "conservatives" really HAVE come full-circle!

And the high interest rates (and defaults, and S&L failures) of the late 1980's had nothing to do with it?

Posted by: Osama_Been_Forgotten on September 20, 2006 at 7:22 PM | PERMALINK

(who cares about SpellCheck; I am convinced that the person who invents WordCheck will make millions ; )
Posted by: Thomas1 on September 20, 2006 at 6:50 PM | PERMALINK

The algorithm is fairly well-understood, at the computer-science undergrad level. It's a very complex problem that just takes a lot of CPU horsepower, and it's not easy to make accurate. You wouldn't want to use even a very high-end computer running it in the background, it'd be dog-slow.

Posted by: Osama_Been_Forgotten on September 20, 2006 at 7:25 PM | PERMALINK

I believe jayarbee has asked Kevin the same question -- is he a "stalker" too?

Has he posted Kevin's home value in any thread, much less multiple ones? Has he run from thread to thread asking the same questions over and over about where WM's revenue comes from, like a broken record? Does he sound like an emotionally damaged child constantly trying to get the big kids' attention? No? You do. Now shoo.

Posted by: wish you were here on September 20, 2006 at 7:26 PM | PERMALINK

...heck the only ones who have a chance of benefiting are the mortgage companies who make money off the interest on a loan, of course they may eat it on Defaults as well.
Posted by: Dreggas on September 20, 2006 at 6:47 PM | PERMALINK

The morgage companies, and foreign real-estate investors (chi-coms) who will be our collective landlords when they pick up all the defaults for pennies on the dollar.

...It's just one more piece of the puzzle those like Kevin are trying to talk down the economy with. You can bet they are really upset with the falling gasoline prices though.
Posted by: Thomas1 on September 20, 2006 at 6:39 PM | PERMALINK

I'm not upset. Nobody is buying it (that it's merely the market, and that the previous high prices were just a blip, and it's going to go down for the long run). Again, pretty much everyone I talk to, in real life, and on the internet, *knows* that this is a pre-election price-dip, that the prices are manipulated as hell, and the "free market" has very little to do with them.

.... I'm not sure what, if anything, a politician, Dem or Rep, is supposed to do about .....Posted by: hank on September 20, 2006 at 6:28 PM | PERMALINK

Not pursue policies that cause skyrocketing interest rates?

...Obviously, absent some bizarre outside force, housing prices can't keep going up 20% per year forever, and of course in some periods they can go down.

Maybe there IS some bizarre outside force. Like - high interest rates? Massive manipulation of energy prices?

..... The prices would not be where they are unless people wanted to buy the houses....

That doesn't make any sense. You're saying that the fact that people want to buy houses keeps the prices up, but the prices can't stay up because people can't afford to buy the houses.

If lending practices were more strict, actual prices might be lower but how relatively affordable those houses would be would be the same (i.e., they would seem just as unaffordable).

They would seem less unaffordable if there were a tightening of labor offshoring practices, a heavy-handed clampdown on white-collar crime, particularly corporate stock fraud, and if the dollar were allowed to float based on it's supply value, not based on what Bernanke says it should be. (and while I blame the borrow-and-spend policies of the Bushies, the chi-coms are also somewhat to blame by fixing the price of their currency to the dollar).

Is there some political act that is not being taken here? Really, not trying to be sarcastic at all.

It's the aggragate of the whole voodoo-economics policy of trickle-down theory that has been in vogue from the time of Reagan pretty much through the present day. The false-economy that has been set up for the defense and energy industries has taken its toll on the economic well being of the American middle class. The postwar standard of living we've enjoyed for so long is nearing an end, and we're entering a state of corporate feudalism, enabled by the legalized bribery of our electoral system. The wheels were set in motion long ago, and they have been grinding on slowly for decades.


Posted by: Osama_Been_Forgotten on September 20, 2006 at 7:45 PM | PERMALINK

Nice graph.

you get that a lot with asset prices: long gradual increases and short steep decreases. Note that "flat" is not the same as declining. I expect houses will lose some value for a while. Lately mortgage rates have declined, and they'll probably continue that for a while also.

Posted by: republicrat on September 20, 2006 at 8:06 PM | PERMALINK

You guys need to do some serious reading before you post another time. Please read

http://thehousingbubbleblog.com/

for a few days worth of posts -- they are all just news reports from around the US and sometimes overseas -- the only histrionics are in the comment threads,

If you want the view of a long-in-the-market bond trader who smells something rotten in denmark, try

http://www.xanga.com/russwinter

There are more histrionics in Russ's blog, but regular doses of sharp insight.

Posted by: troglodyte on September 20, 2006 at 8:07 PM | PERMALINK

High interest rates? Don't you mean low interest rates?

The way I see it, and I'm hardly a conservative, is that the number of truly desirable homes in Southern California has not changed in the almost 35 years I've lived here. Building large boxes out by the intersection of the 15 and 210 may well sell, becuase everyone has to live somewhere, but that does not mean that somehow Harry Potter rolled into town and somehow doubled the size of Newport Beach.

Ironically, unless we are willing to go all "Doctor Zhivago" on the problem and confiscate all of the homes in Brentwood, and then hand them out to the poor suckers who bought out in Riveside, is that I don't see a political solution. Limit growth and the existing houses become even more expensive. Allow rampant building of apartments and all you do is really make the neighborhoods of single family homes more expensive then they already are.

Re-cast the entire economy so that not only are women professionals allowed, but are promoted, and you have housing prices based upon what TWO WORKING PROFESSIONALS can afford when in the 1950's housing prices were based upon what ONE WORKING PROFESSIONAL CAN AFFORD.

Southern California is unbelievably cheap as compared to Manhattan, London, Paris, other top tier cities.

People talk about how houses are unaffodable in SoCal, but these entire threads seem to me based upon the probably unsupportable assumption that someone in the middle class should be able to afford a detached, single family home in one of the most desirable cities in the world, when there is no support for that assumption other than wishing it were so, and brother, do I wish it were so!

However, wishing it were so will not make it so.

Posted by: hank on September 20, 2006 at 8:17 PM | PERMALINK

Dreggas: Having worked in the mortgage industry I am just waiting to see what happens when all the ARMs reset.

My ARM is lower than two years ago, and I see new advertisements for even lower ARMs. People have been predicting increases in mortgage lending rates pretty consistently since I took out my first mortgage in 1984, but the overall trend has been down, and it continues to be down. There are upward spurts, but they have not been sustained.

As housing prices fall, as I think they will a little, and as the purchase rate slows, as I think it will (and has lately), I expect mortgage lenders to reduce their rates even more. Although default rates are up a little, buyers protect lenders by purchasing default insurance for the lenders, making mortgage lending a very low risk investment. If I refinanced today I could get a lower rate than I have, but my plan is to wait a while.

Financial markets are a lot more flexible than they were before the Carter/Reagan deregulation. China sends the US a lot of cash because Chinese are afraid the government will take it to cover government losses (e.g., the three state-owned banks are reputed to be bust and in debt $1 trillion). there is simply no reason to think that interest rates have to rise.

Posted by: republicrat on September 20, 2006 at 9:36 PM | PERMALINK

Housing prices could come down by 20% in much of southern California, and real estate would still be wildly unaffordable for a rather sizeable percentage of people who live there.

Posted by: Linus on September 20, 2006 at 10:23 PM | PERMALINK

CA Pol Junkie:
You're selectively quotting from the Contra Costa Times article, but thank you posting the reference. Actually that was an article that suggested the soft-landing scenario, where it said at the end...

>"We are seeing small declines from the overinflated prices. It was nuts when we had all these multiple offers in the last few years," he said. "Then the whole bidding war started, and it wasn't selling a house, it became an auction. I welcome the new market."

And falling prices are not anything new to buyers searching for a home. Instead, the lower prices are making home-buying more tempting.

David Victor, 36, bought a $975,000, 2,700-square-foot home in Livermore this month after the seller dropped the price by $100,000.

Posted by: beowulf888 on September 20, 2006 at 11:54 PM | PERMALINK

Can anyone explain what possible interest the housing industry would have in giving Kevin money to talk down the housing market? That's like Exxon funding Jim Kunstler to make a documentary.

Posted by: Alex on September 21, 2006 at 6:42 AM | PERMALINK

Past performance is no guarantee of future results - for better or worse.

Posted by: Catch22 on September 21, 2006 at 9:41 AM | PERMALINK


I see you don't understand the principles of supply and demand Kevin. What will happen is that as the prices increases go to zero, the demand will increase. The gradual increase in demand will cause the price increases to flatten out and perhaps even cause price increases to go back up again. So the "flattening out" out of price increases might actually cause greater price increases.

Why didn't these theory work for tech stocks in 2000-2001 as the Nasdaq fell from 5000 to 1500? After all, the price increases did not just "go to zero", they fell well below zero. Shouldn't there have been a "gradual increase in demand" causing the "price increases to flatten out" andf perhaps even to "go back up again"?

I find it fascinating that while most people who are not financial professionals would not even attempt to forecast equity prices, interest rates, or foreign exchange rates going forward several years, when it comes to real estate almost everyone thinks they are an expert.

Most of the theories as to why prices will not fall are quite comical. "People will always want to live in Manhattan". Well people will always want to buy books, so surely stocks of booksellers should never fall in price?

I am a homeowner but I would like to see the overdue correction of 30-40% in real estate prices. I am not planning on selling any time soon so the reduction in my "net worth" would (to me) be completely meaningless, and I would like to see people who are currently shut out of the market to be able to afford to buy a house.

Posted by: Paul on September 21, 2006 at 9:52 AM | PERMALINK

"David Victor, 36, bought a $975,000, 2,700-square-foot home in Livermore this month after the seller dropped the price by $100,000."

A million dollars to live in Live No More. Crazy. I'm with Paul: I'm a homeowner, but I'd like to see prices drop.

As it is, high housing prices just redistribute wealth from those entering the house market (X'ers and Millenials) to those exiting (or downshifting) (i.e. Boomers).

Posted by: Urinated State of America on September 21, 2006 at 10:07 AM | PERMALINK

Come up, up-tick! I'm finally the millionaire next door, fer chrissakes! I finally made it into the president's "base!" I don't think I can live with the same of owning only a $999,000 tract home with a 100-sq-foot yard....

Posted by: Hemlock for Gadflies on September 21, 2006 at 11:55 AM | PERMALINK

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