I would like to remind everyone that we are having another IHB party on Wednesday, January 7, 2009, from 6:30-10:00 at JT Schmids at the District.
Last time was a great gathering, so we are doing it again. Here is your chance to meet many of the regulars of the IHB. Everyone is welcome, so please stop by.
Heart of stone—I tried to reach you Of the altar stone—I tried to warn you But you were not alone—you wouldn’t take the call You wear brimstone—I tried to warm you
On January 1, 2008, I wrote a post titled Predictions for 2008. You can go back and review it to see how well I did.
As a recap, I would like to share with you a couple of charts from 2008 for Irvine and OC:
Click for larger image
Most of the macroeconomic conditions I made in 2008 are still operative, and several of the predictions I made which came true will likely repeat in 2009. These are:
2008 will see the worst single-year decline in the median house price ever recorded
One or more of our major financial institutions and one or more of our major homebuilders will fail
A severe local recession
I predict we will see many more angry homedebtor’s troll the blog
I do not believe 2009 will see median house prices decline as much as 2008, but I do believe they will drop significantly, particularly in high-end neighborhoods. The low-end neighborhoods are closer to the bottom than to the top, so 30%+ declines in these neighborhoods are not likely. The high end neighborhoods will experience big drops. Most did not drop 30% last year, so they have more room to drop. The unemployment rate is high, and the economy is in recession which will put pressures on home prices. The dreaded ARM problem is not going away, and these loans will start blowing up this year and on through 2011.
However, there is one bright spot for the housing market that will blunt the declines in 2009: ultra-low mortgage interest rates. We will see properties at rental parity in 2009. The low interest rates are going to reduce the cost of borrowing to the point that many properties will reach rental parity this year. This does not mean we will be at the bottom. These interest rates are artificially low due to the “quantitative easing” by the Federal Reserve. This policy may persist for some time, but it is not likely that sub 5% interest rates will be around for buyers 7-10 years from now when 2009 buyers go to sell their property. That creates the issue with Your Buyer’s Loan Terms.
With the low interest rates, and with the foreclosures resulting from this year’s loan resets being a year away, we are in a good position to see our first bear market rally. This summer, we might see two or three months of sustained appreciation. This will bring out all the bottom callers. Everyone will be cheering the Federal Reserve, and many will believe the worst is over for the housing market. This will cause some major emotional gyrations for desperate homedebtors. Those who had moved from denial to fear will likely move back to denial for a time.
Remember, the loans that reset this year will take a year or more to become foreclosures. The real problems caused by all the resets will not be apparent this summer. We will likely see a large number of short sale listings, but as we all know, these rarely consummate a transaction. It is only the presence of these short sales listings that will remind us of the impending disaster when the ARM reset problem becomes a tsunami of foreclosures. When these foreclosures start hitting the market in larger numbers, and the market rally is reversed, all of those who call the bottom this summer will act surprised. Ignorance is bliss.
Not to get too far ahead of ourselves, but 2009s bear rally will be wiped out by the first wave of foreclosures. I foresee 2010s bear rally being knocked back by continuing foreclosures and the much-anticipated rise in interest rates when the FED stops quantitative easing as the recession abates. The rally in 2011 will be tepid, but at least it will be for real. For 2012-2015, appreciation will be less than 5% each year as the overhang of foreclosures and a sputtering California economy keep prices in check until Californian’s lose their minds again and inflate another housing bubble.
In my opinion, these artificially low interest rates will simply guarantee that house prices overshoot fundamentals to the downside because the fundamentals in this instance are illusory. The low interest rates will prompt some people to buy, and this increased buying activity will stop prices from falling as much as they would have without the subsidized interest rates. However, very few people currently qualify for these loans. Loan terms are getting tighter all the time, and the buyer pool is very restricted. People talk about the conservative lending terms as if they are too tight. This is nonsense. We are still not at pre-bubble loan terms (20% down, 28% DTI, high FICO, etc.) and until we get there, loan terms will continue to tighten. The diminished buyer pool when combined with increased foreclosures creates an imbalance between supply and demand which will push prices lower.
Many people erroneously believe that low interest rates are going to save the housing market because the loan resets are not going to lead to foreclosures. As I outlined in the ARM problem, the payments are going to increase even if the interest rate remains the same due to the amortization recast. If you want a more detailed explanation from Mr. Mortgage, I suggest you read Pay Option ARMs - The Implosion Is Still Coming Despite Low Rates and Low Mortgage Rates to Spur New Wave of Defaults. The idea that low interest rates are going to save the housing market is another in our ongoing series of denial fixes being fed to a weary populace. It is all bull$hit.
Last year I predicted that we would see banks and homebuilders go under. We did see several banks including WAMU bite the dust. This trend will continue. All of our banks are basically insolvent. Only creative accounting practices and huge amounts of borrowing from the Federal Reserve is keeping them afloat. Even the huge infusion of money through the TARP program is not going to save them. There will be many more failures and consolidations in 2009.
One surprise from 2008 was the lack of bankruptcies and consolidations in the homebuilding industry. Ordinarily, during a recession, the weak companies go out of business or are absorbed by stronger ones. In my opinion, the reason we have not seen this yet in the homebuilding industry is because there are no strong ones, and there is no reason to consolidate or expand while housing starts and sales continue to decline. I think 2009 will be different. In the second half of 2009, the homebuilders will start to rebound. If past history is any guide, the recession will bottom when housing starts bottoms. This is when the industry will begin to consolidate.
I believe we will see massive consolidation in the homebuilding industry. During the 80s and 90s the homebuilding industry was dominated by small, private builders. Many of the small fry were wiped out during the recession of the 90s. During the 00s, we witnessed the rise of the national homebuilders as the dominant market force. I believe we will see consolidation into an industry dominated by a few big names with a few small privates picking up the scraps in various markets.
Last year I predicted a severe local recession. I did not have the courage to predict a severe national recession. Perhaps I should have…
I do not have a prediction about angry homedebtors. As the market shifts from denial into fear, there is a widespread acceptance of the reality of a housing bubble. Most trolling comes from people trying to maintain their denial (if you want to study this phenomenon, I suggest you read this forum thread). With acceptance comes less anger and trolling. However, I have recently launched an article marketing campaign that likely will catch the attention of realtors across the country. We may see a few of them stop by to explain to us why we don’t know what we are talking about. That should be amusing.
Today’s featured property was brought to my attention from a reader. It is a typical Irvine property struggling with a typical Irvine debt load. I predict we will see this house for sale as REO in a year.
Well you know I dont get off on workin day after day I wanna have some fun while Im here I play the game when its goin my way And theres nothin like a party when its kickin into gear
As some of you may have noticed, we are planning another IHB party on January 7, from 6:30 - 10:00 at JT Schmids at the District. Everyone had a great time at the last gathering in November, and we hope to make these gatherings a regular occurrence. I will have books available if anyone is interested.
Baby, its a party as long as youre there Its a party, party, party!
The IHB has grown into a large community and a successful website. It happened by accident rather than by design. Zovall wanted a successful website. I just wanted to write. Neither of us had a grand vision for creating a website visited by over 3000 people a day (well, perhaps Zovall did…) It is funny how things kind of “just happen.“ The Irvine Housing Blog has a page rank of between 4 and 6 (the rankings are somewhat volatile), and an Alexa rating of around 50,000 (this puts us in the top 50,000 viewed websites on the internet).
I did not have a full appreciation of what we accomplished until I started to market the book. I have been exploring all the methods of internet promotion people use to peddle their products and promote themselves. Just getting a hundred people a day to visit a website is a difficult task, and some people (including myself) resort to paying for the traffic.
One of the more interesting methods of generating publicity I came across is article marketing. I did not realize there was this whole world of consultants and guru wannabes writing little articles being posted all over the web. One of the most popular of these sites is EzineArticles.com. It is one of the top 250 websites according to Alexa. It is full of articles written by people trying to direct traffic back to their websites. It is fascinating to explore just to see who these people are and what they are trying to accomplish.
Anyway, I got into the act myself. Since I already had 90,000 words put together for a book, and two years worth of blog posts to draw from, it was relatively easy to chunk almost 200 short articles to publish on these article websites. I hope tp accomplish two things: 1. Drive traffic to the Great Housing Bubble book sales site without paying for it, and find new readers for the IHB. If this marketing campaign is successful, we may see some new faces in the comments. I suspect many of these people will be real estate trolls. Most of the real estate articles on these article marketing websites are realtors trying to generate internet business. Needless to say, my point of view on the real estate market will stand in contrast to most of the articles these directories have posted. It will be interesting to see if any of these people follow the trail of breadcrumbs back to the IHB.
Below the fold is a list of all the little articles I wrote to distribute on these sites. These will go out to the rest of the article marketing websites over the next 6 months. I have them scheduled to go out one per day until they are all distributed.
Does anyone have any real estate news they would like to share?
How many times must a man look up Before he can see the sky?
How many days must a property be on the market before an owner realizes he has priced it too high? Usually after 60-90 days a realtor will sit down with an owner and have the “your property is overpriced” discussion. What discussion do you have after 180 days? or 1 year? And what discussion do you have after 1000 days?
I have never seen a property stay on the market for over 1000 days. It is pretty rare to see one on the market for over a year. Are there people out there who just list their house for a vanity price and keep it perpetually for sale? I suppose you see some of that on Zillow with the “make me move” listings, but it isn’t common on the MLS. Is there a limit to how long a property can be for sale?
How many years can a mountain exist Before its washed to the sea?
Today’s featured property has been profiled before. Back on May 25, 2007, this property had already been on the market for 437 days. I would see it now and again when scanning for properties on Redfin, and I was always amazed that it was still on the market.
Today is Mrs. Irvine Renter’s birthday. Since I manage to forget to get a card for her every year, I thought I would wish her a very public happy birthday.
Hopefully, this Valentine’s Day I will remember a card so I won’t have to write another poem.
I suppose you have to wonder about a guy who would drive around with this license plate:
It is rather entertaining to see the reactions of people in my rear-view mirror…
I want to let everyone know that I will not be as active in the comments over the next week. I have family coming to town to visit for the holidays. I suspect I will have enough downtime to see what is going on, but if you ask me a question in the comments, it may not receive a response.
So what do you think now that money is free? We joke about the free money during the bubble, but with interest rates a 0%, the FED really is giving away free money to any bank wanting to borrow it.
