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[ Follow Ups ] [ Post Followup ] [ The Forum Board ] [ FAQ ] Re: What are you basing it on? Posted by Daniel De Carolis on May 06, 2008 at 5:15 PM In Reply to: Re: What are you basing it on? posted by Tom on May 05, 2008 at 10:08 PM Tom, The USD depreciation doesn't justify today's prices. Sure, in terms of foreign currency or in terms of precious metals, housing didn't appreciate that much. It's all relative. But most homeowners and future to be homeowners are paid in USD and inflation actually hurts their monthly budget. I've yet to come across an employer that gives an inflation bonus of 10% - 15% to all of their employees at the end of the year. So I'd say that inflation due to the Fed's USD debasing policy will actually hurt RE prices. Unlike the belief of the RE agents, I strongly believe that we can have an inflationary price environment for non-credit dependent products, while credit-dependent asset (e.g. Housing) can experience a deflationary cycle. Everything is area specific but unfortunately the underlying cause for today's problems in the financial markets is all the same. I think we'll see the problem extend into "A" paper. I see significant changes in the NOD & NTS momentum for Coastal OC cities. Nothing too serious yet but other areas also started with changes in momenta of various data that wasn't too serious, initially. I think that we'll see much A paper loans defaulting over the next 6-12 months and belief that the "alt-A" & "A" paper financial crisis will be bigger than the subprime as the loan amounts are substantially greater than the other loans. I've said since I called the top in 2005 that the downward spiral will be similar to that of Japan. Also take into account how the Fed already shot must of their ammunition (e.g. interest rate cuts). Many of the big CEO's of various RE companies were ignorant of all the facts that were out there. They obviously didn't even remotely understand the fundamentals of the RE bull cycle otherwise they wouldn't have made all kinds of acquisitions during the height of the housing bubble. We've been following in the exact same footsteps fo the Japanese Housing bubble. Now I'm not calling the people at the Fed stupid because they obviously know what they are doing. They, the banking cartel aka Fed, just operates as its semi-private company and has their own interest at heart. That's part of the reason we experience this tremendous financial mess right now. And yes, I think we'll drift lower than 2001 prices; unless we reach a hyperinflationary environment. : I think you only need a 50% decline to wipe out a 100% increase. So if we are down 25% to 30% in California already then we only need another 20% to 25% to get back to 2001 prices. : You bring up an interesting point about the decline of the dollar. If the dollar is down 40% since 2001 then are the houses really that over valued? : Say we have a house that is 250,000 in 2001. That same house would be 500,000 in 2005. Take a 30% decline and it is 350,000 in 2008. If you say we have a dollar decline of 40% then the value compared to 2001 is 210,000. Assuming the dollar has fallen that far the prices aren't that far off from 2001. : Just some thoughts. : Tom : : Realtors always used to say (in 2005) that Orange County and San Diego could never see significant home price depreciation again because the economy is no longer exposed to the defense/aerospace industry. I've always argued that while it is true that the economy is no longer exposed to that one sector it wasn’t the defense industry in itself that caused home prices to depreciate. It was the economy that was too heavily dependent on one single sector – at that time aerospace / defense. I’ve “always” argued that this time the economy became too dependent on the Real Estate sector. The dependency is much stronger this time around than it was in the 90s. Not only do we (or did we) have many people employed in the Real Estate sector, but home price appreciation fueled the economy as many spent their home equity in the local economy. : : As far as price forecasts. Home prices never could have appreciated like they did had it not been for the three variables that were present in so many financial bubble markets throughout history: 1) historic low interest rates; 2) creative financing terms, 3) low loan qualification standard. The combination of those three variables pretty much always allows the demand-supply equilibrium to be thrown out of balance as “artificial” demand begins to outweigh supply. With that there comes price appreciation which leads to more demand, etc. : : We have to ask ourselves how “high” home prices would have gone had those creative financing terms, historic low interest rates, and low qualification standards been absent. Coastal Homes in my area (South OC) would go for $550,000 instead the $900,000 they went for in 2005 and 2006. : : I think we’ll easily see 2001 prices again, even in the more “upscale” Coastal Communities. In fact, we might see them go even lower as markets tend to overcorrect themselves. We are far from that point in time yet as many homeowners and Real Estate professionals are still in the “denial” phase. : : Fact is: : : - NOD and NTS are still rising : : - Sales volume (without trustees deeds) is still low : : - Affordability is still near a historic all time low : : - Financial Institutions just now begin to become more aggressive as they realize the severity of this down turn. Short Sales, REOs, and properties purchased at the foreclosure auction are hitting the market in significant numbers to impact the sales comps. : : - Unemployment is rising (and many commission based jobs are actually experiencing wage decreases) : : - We are not even 1/3 into the ARM reset : : - The slowdown in the Real Estate sector and the Economy (that was too dependent on the Real Estate sector and Real Estate appreciation) is starting to affect the more affluent areas, e.g. Coastal communities. Reduced spending on their part hurts other areas of the Economy. : : : : On top of that we have a Federal Reserve which has a policy of US Dollar devaluation. The USD lost ~ 40% of its value over the past 8 years. It’s not the price of oil that is causing inflation, it’s the creation of more money which devalues the purchasing power of our monetary unit. : : I further believe that we’ll see an increase in Credit card defaults in the near future. During the bull phase of this housing market people could accumulate tens of thousands of credit card debt just to “consolidate the debt into one easy tax-deductible payment” through a home refinance. Those days are history. So while home appreciation saved credit card defaults in the past I think we’ll have a tsunami of Credit card defaults ahead of us. (Watch out for GE which is exposed to subsidiary GE financial and its credit card services). More defaults in that credit market will cause a further tightening in the credit markets. : : Taking all those variables into account, I don’t see how RE couldn’t correct to at least 2001 levels. There are those that say that inflation (US Dollar devaluation) will act as a safety net for Real Estate prices. At the current time I have to disagree with that reasoning. The devaluation of the USD would certainly make US Real Estate cheaper for foreigners, but Americans are still being paid in USD and I haven’t come across an employer yet, especially in today’s economy, which gives its employees a USD devaluation bonus of over 10% at the end of the year. Also, the devaluation of the USD brings higher gas and food prices with it. Imported goods will also become more expensive. In my opinion, this is all negative for the current Real Estate market. : : I’m sure there are some out there that think I’m too negative. I’ve heard that in the fall of 2005 when I convinced friends to sell all their Real Estate and purchase Gold and Silver with their gains. I’d like to be more positive but I’d rather be realistic than optimistic. Some day the realistic approach will have me look opportunistic at Real Estate price appreciation. But that’s some ways away. : : : : You mentioned: "We'll se 2001 prices if not lower". I am curious...what are you basing your assumption on? My gut tells me that it will probably get back to those levels, however very few people would agree with me on that, specially since I heard Bruce Norris say back in 2006 that he would expect prices to fall about 25-30%. Well, if we talk about CA we are about 25% lower already in many areas. To get to 2001 home prices, it would have to fall by 75% more. However the fact that prices skyrocketed that much in the first place is ridiculous, so my gut tells me that 2001 numbers could be right. However if that is the case, pretty much nobody would make any money buying at the auction at 30% discount from todays price. What is your experience in RE? Give me your opinion. : : : GC : : : : : : about what you are using to estimate : this is just the beginning, we'll see 2001 prices if not lower. In O.C I'm seeing more NOD in "upper income" coastal areas. : : : : : http://biz.yahoo.com/ap/080415/california_homes.html Follow Ups: Post a Followup: Name : E-Mail : Subject : Comments: : Tom, : The USD depreciation doesn't justify today's prices. Sure, in terms of foreign currency or in terms of precious metals, housing didn't appreciate that much. It's all relative. But most homeowners and future to be homeowners are paid in USD and inflation actually hurts their monthly budget. I've yet to come across an employer that gives an inflation bonus of 10% - 15% to all of their employees at the end of the year. So I'd say that inflation due to the Fed's USD debasing policy will actually hurt RE prices. Unlike the belief of the RE agents, I strongly believe that we can have an inflationary price environment for non-credit dependent products, while credit-dependent asset (e.g. Housing) can experience a deflationary cycle. : Everything is area specific but unfortunately the underlying cause for today's problems in the financial markets is all the same. I think we'll see the problem extend into "A" paper. I see significant changes in the NOD & NTS momentum for Coastal OC cities. Nothing too serious yet but other areas also started with changes in momenta of various data that wasn't too serious, initially. I think that we'll see much A paper loans defaulting over the next 6-12 months and belief that the "alt-A" & "A" paper financial crisis will be bigger than the subprime as the loan amounts are substantially greater than the other loans. I've said since I called the top in 2005 that the downward spiral will be similar to that of Japan. Also take into account how the Fed already shot must of their ammunition (e.g. interest rate cuts). Many of the big CEO's of various RE companies were ignorant of all the facts that were out there. They obviously didn't even remotely understand the fundamentals of the RE bull cycle otherwise they wouldn't have made all kinds of acquisitions during the height of the housing bubble. We've been following in the exact same footsteps fo the Japanese Housing bubble. Now I'm not calling the people at the Fed stupid because they obviously know what they are doing. They, the banking cartel aka Fed, just operates as its semi-private company and has their own interest at heart. That's part of the reason we experience this tremendous financial mess right now. : And yes, I think we'll drift lower than 2001 prices; unless we reach a hyperinflationary environment. : : I think you only need a 50% decline to wipe out a 100% increase. So if we are down 25% to 30% in California already then we only need another 20% to 25% to get back to 2001 prices. : : You bring up an interesting point about the decline of the dollar. If the dollar is down 40% since 2001 then are the houses really that over valued? : : Say we have a house that is 250,000 in 2001. That same house would be 500,000 in 2005. Take a 30% decline and it is 350,000 in 2008. If you say we have a dollar decline of 40% then the value compared to 2001 is 210,000. Assuming the dollar has fallen that far the prices aren't that far off from 2001. : : Just some thoughts. : : Tom : : : Realtors always used to say (in 2005) that Orange County and San Diego could never see significant home price depreciation again because the economy is no longer exposed to the defense/aerospace industry. I've always argued that while it is true that the economy is no longer exposed to that one sector it wasn’t the defense industry in itself that caused home prices to depreciate. It was the economy that was too heavily dependent on one single sector – at that time aerospace / defense. I’ve “always” argued that this time the economy became too dependent on the Real Estate sector. The dependency is much stronger this time around than it was in the 90s. Not only do we (or did we) have many people employed in the Real Estate sector, but home price appreciation fueled the economy as many spent their home equity in the local economy. : : : As far as price forecasts. Home prices never could have appreciated like they did had it not been for the three variables that were present in so many financial bubble markets throughout history: 1) historic low interest rates; 2) creative financing terms, 3) low loan qualification standard. The combination of those three variables pretty much always allows the demand-supply equilibrium to be thrown out of balance as “artificial” demand begins to outweigh supply. With that there comes price appreciation which leads to more demand, etc. : : : We have to ask ourselves how “high” home prices would have gone had those creative financing terms, historic low interest rates, and low qualification standards been absent. Coastal Homes in my area (South OC) would go for $550,000 instead the $900,000 they went for in 2005 and 2006. : : : I think we’ll easily see 2001 prices again, even in the more “upscale” Coastal Communities. In fact, we might see them go even lower as markets tend to overcorrect themselves. We are far from that point in time yet as many homeowners and Real Estate professionals are still in the “denial” phase. : : : Fact is: : : : - NOD and NTS are still rising : : : - Sales volume (without trustees deeds) is still low : : : - Affordability is still near a historic all time low : : : - Financial Institutions just now begin to become more aggressive as they realize the severity of this down turn. Short Sales, REOs, and properties purchased at the foreclosure auction are hitting the market in significant numbers to impact the sales comps. : : : - Unemployment is rising (and many commission based jobs are actually experiencing wage decreases) : : : - We are not even 1/3 into the ARM reset : : : - The slowdown in the Real Estate sector and the Economy (that was too dependent on the Real Estate sector and Real Estate appreciation) is starting to affect the more affluent areas, e.g. Coastal communities. Reduced spending on their part hurts other areas of the Economy. : : : : : : On top of that we have a Federal Reserve which has a policy of US Dollar devaluation. The USD lost ~ 40% of its value over the past 8 years. It’s not the price of oil that is causing inflation, it’s the creation of more money which devalues the purchasing power of our monetary unit. : : : I further believe that we’ll see an increase in Credit card defaults in the near future. During the bull phase of this housing market people could accumulate tens of thousands of credit card debt just to “consolidate the debt into one easy tax-deductible payment” through a home refinance. Those days are history. So while home appreciation saved credit card defaults in the past I think we’ll have a tsunami of Credit card defaults ahead of us. (Watch out for GE which is exposed to subsidiary GE financial and its credit card services). More defaults in that credit market will cause a further tightening in the credit markets. : : : Taking all those variables into account, I don’t see how RE couldn’t correct to at least 2001 levels. There are those that say that inflation (US Dollar devaluation) will act as a safety net for Real Estate prices. At the current time I have to disagree with that reasoning. The devaluation of the USD would certainly make US Real Estate cheaper for foreigners, but Americans are still being paid in USD and I haven’t come across an employer yet, especially in today’s economy, which gives its employees a USD devaluation bonus of over 10% at the end of the year. Also, the devaluation of the USD brings higher gas and food prices with it. Imported goods will also become more expensive. In my opinion, this is all negative for the current Real Estate market. : : : I’m sure there are some out there that think I’m too negative. I’ve heard that in the fall of 2005 when I convinced friends to sell all their Real Estate and purchase Gold and Silver with their gains. I’d like to be more positive but I’d rather be realistic than optimistic. Some day the realistic approach will have me look opportunistic at Real Estate price appreciation. But that’s some ways away. : : : : : : You mentioned: "We'll se 2001 prices if not lower". I am curious...what are you basing your assumption on? My gut tells me that it will probably get back to those levels, however very few people would agree with me on that, specially since I heard Bruce Norris say back in 2006 that he would expect prices to fall about 25-30%. Well, if we talk about CA we are about 25% lower already in many areas. To get to 2001 home prices, it would have to fall by 75% more. However the fact that prices skyrocketed that much in the first place is ridiculous, so my gut tells me that 2001 numbers could be right. However if that is the case, pretty much nobody would make any money buying at the auction at 30% discount from todays price. What is your experience in RE? Give me your opinion. : : : : GC : : : : : : : : about what you are using to estimate : this is just the beginning, we'll see 2001 prices if not lower. In O.C I'm seeing more NOD in "upper income" coastal areas. : : : : : : http://biz.yahoo.com/ap/080415/california_homes.html [ Follow Ups ] [ Post Followup ] [ The Forum Board ] [ FAQ ] WWWAdmin 2.0a © 1997 Matt Wright and DBasics Software Company, All Rights Reserved

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