Open Thread 7-19-2008

Three weeks ago in the open thread of 6-28-2008, I suggested that maybe oil would top and the market would bottom. It is too early to tell if this weeks market action saw both of those occurences, but both of these markets have certainly put in a short-term top and bottom. Only time will tell if it lasts longer. Calculated Risk had an interesting post this week on the economy. In it, he suggests that the difference between a moderate recession and a severe recession is going to be the price of oil. If the price of oil drops, inflation will subside, the FED can keep interest rates lower for longer, and the recession will not be as severe. I think he is right. I also think this is what the stock market is betting on. As long as oil does not rally to new highs and stay at elevated levels, the stock market will probably rally — this isn’t investment advice, just an observation… BTW, I also believe the bullish action of the last few days in financials and homebuilders was short covering and both of these groups will make fresh lows — but I could easily be wrong…

There is no particular theme for the music today, I was just in the mood for Paul McCartney.

What are your observations of the housing market? Are there any interesting properties you are watching? Tell us what you see.

46 thoughts on “Open Thread 7-19-2008

  1. fred

    I’m skeptical of this conventional wisdom for the following reasons:

    1. The conventional wisdom has a very bad recent track record.

    2. The current depression in the housing market and its knock on effects in the financial markets and consumer psychology is enough in and of itself to cause a severe recession regardless of oil prices.

    3. Many of the same market commentators that you speak of also tell us that the price of oil is primarily driven by the dramatic growth in China and India. If this is true then a drop in the price of oil suggests that Chinese and Indian growth is slowing and this suggests a worldwide slowdown or even recession. Who will buy our ever increasing supply of treasury bonds as our deficit balloons, Chinese and Indian trade surpluses fall and the ginormous excess flow of dollars to the oil powers (Russia, OPEC et al) dries up?

    1. movingaround

      I was listening to Peter Schiff the other day talking about how he sees quite the possibility that China will abandon their peg to the dollar sometime after the olympics.

      I know that has been on the radar for years and never seems to happen – but if it does that could change all the ‘predictions’

    2. Kirk

      I think oil may peak again later this year, but I have little doubt that this period is the last hurrah for petroleum. I view 2008 as a lesser version of 1859. I bet if you told someone in 1859 that the demand for whale oil would steadily decline, as petroleum replaced it, that they would have scoffed. Renewable energy is going to relegate petroleum to the plastics industry. But, this most certainly is not going to happen overnight. The demand for oil has just started its long unsteady decline, but few people will notice.

      Just an opinion, not advice.

    3. LC

      While many of heard that inflation rose the fastest in 29 years, did any of us hear that wages fell the fastest in 24 years?

      The job of the Federal Reserve is to make sure that wages do not go up. But they usually present it as fighting inflation for public consumption.

  2. irvinemommy

    There is a 4 bedroom SFR on Sierra Chula in Turtle Rock that has been off and on the market. It is listed as a short sale and then it disappears, only to come back in a month or so. I would be interested in hearing the story behind it.

  3. irvinemommy

    Also interested in hearing about 18822 Saginaw in Turtle Rock. Another short sale. Lowest list price yet on this model.

  4. lunatic fringe

    The health of the stock market isn’t necessarily tied to the price of oil. Oil has been pretty much been going straight up since August, yet the stock market has had (1) 10% drop and (2) 15% drops in that time as well as a couple of 10%+ recoveries. The market ebbs and flows at its own pace but the trend is undeniably down. We will get rallies but don’t be fooled that this has much to do with the price of oil.

  5. SacRenter

    Yesterday I talked to a friend who works as an admin in a realtor office. She said someone from MLS came to their office to talk to them about the market. Their spin is that the housing market won’t recover until 2011 or 2012. For a split second I was giddy that the denial may be ending. But then she said that they all agreed the market won’t go down any farther between then and now. They think prices are at the bottom now and won’t go up for a few more years.

    1. phil

      I guess they have never heard of the Option Arm…for O.C. and Irvine this has to be the next shoe to drop.

  6. lawyerliz

    Well, the realtors have to tell themselves something not that bad or they’d all quit forthwith. My more sensible mtg broker/real estate brokers could read the writing on the wall and went and got jobs. They still have licenses. They have not closed a loan or a house sale since they shut their doors in February. I do have a re-fi. They have said now for months that it was going to close. I no longer believe.

    One real estate and loan broker is hanging on by doing price opinions for banks when deciding what to charge for REOs and what to settle for in short sales. He says hardly any short sales are getting done, that it’s a waste of time.

    Often the banks call back for more accurate comps. The guy says this is the best I can do. There ARE no closer comps. There are no
    more recent comps. The system, which relied on nobody being required to do any thinking is breaking down.

    A surveyor down the hall is surviving on flood elevation certificates. (Virtually all of Miami-Dade County is a flood plain. The question is, how looow do you go?)

    The bankruptcy attys are going great guns. They are scheduled out for months.

    By the way, where are TonyE and Irvine Commuter? Have I just not looked at the threads they’ve posted on?

  7. ochomehunter

    Job loses will be the key to suggest how bad this recession will be, and from what I am seeing, job loses will accelerate. Oil may be high due to part manipulation none other than GS/MS/C, however the billions of $$ of loses in housing is real and it will continue for some time to come. FRE and FNM have no money, Fed will continue to print $$ and bailout the big firms of wallstreet, investors of MBS securities will continue to shy away given the rish vs reward scanerios. I think FHA loans (FRE and FNM) will continue to make loans and sooner or later they will have trillions of dollars bag holders, then what?

    Unemployment will rise dramatically from Sep 08-Jan 09, stock market rise this week was nothing but joined efforts of FED coupled with the financial firms jacking up the prices. Why in the hell MER went up yesterday after losing $4.25billion in three months, loss that was 120% higher than analysts lowball estimates suggested? We are not done yet, I would take the money and get some gold or stocks that sustain during recessions such as PM, General Mills, etc.

    1. Chris

      You mean Altria right? I doubt people will take up smoking during bad time now that smoking cost a lot more than just throw yourself into oncoming traffic 🙂

  8. beentheredonethat

    I’m keeping an eye on 128 Trellis for sale price.
    I think 500k for a 1200sf two bedroom is crazy and someone took the fall after only 6 days. Hmmm….

  9. election watcher

    I can’t believe no one thinks the ’08 election won’t put a reality distortion field around housing and the economy in general.

    1. lawyerliz

      You are probably right. But things are so bad, it may not be possible to do. They will undoubtedly try.

      Our founding fathers are no down spinning in their graves.

      1. no_vaseline

        When you are off 35% or worse and acclerating, what reality distorion field can you create in 90 days?

  10. Larrygg

    I live in Huntington Beach (Seacliff) and there are six patio homes for sale on the street next to mine. They are pretty nice and of course a few blocks from the beach. Homes are 2400 sq ft to 3000 sq ft and the prices are in the $1,100,000 to 1,250,000. Most of them are empty and I can’t see any of these homes selling anytime soon. I figure that they will sit and even if they drop the prices by $200K, I doubt there are many people out there ready to scoop them up.
    I’ll keep you posted

    1. Larrygg

      Oh and another little tidbit is that we are getting flyers from realtors showing properties that have sold recently. Some of them show a price but it isn’t the selling price but rather the list price. They never divulge the selling price. I’ll have to wait till that is shown on Zillow. Some houses that are listed as sold are have actually been returned to the lender and the price shown is the loan balance. Another smoke screen is they sent a flyer showing a property that sold in four days. The problem with that one is that it sold in four days back in 2006. I guess these realtors think they can fool people into jumping into this market but they just don’t get it. The majority of people out there just wont be able to obtain the financing for these overpriced properties and even if these properties are reduced another 20%, there still will be no takers.

      1. LC

        The local throw away gutter collecters Wave & Independent print sales prices. Often late, and never even close to the list price. Check them out before you toss them in the recyling bin.

      2. abdul rahim

        Oh and another little tidbit is that we are getting flyers from realtors showing properties that have sold recently. Some of them show a price but it isn’t the selling price but rather the list price. [end]

        Is there going to be some useful sanction against the entire trade of Realwhores (TM) that stops their flagrant lies and abuse? All sorts of trades have regulations hemming them in, but Realwhores can say any damn thing they please, like the old days of medicine show salesmen.

  11. alan

    I’m still waiting for the really big bank failures that are sure to come, Indy-Mac will not be the last. This will sure put the economy in havoc.

    I’m really angry at the accountants who got control. Why in the h*ll were banks allowed to book unpaid, deferred interest from neg-am Alt A option loans as income on their books. They will never see that money and when they have to right it off they will become insolvent.

    According to seeking alpha, Lehman is in a death spiral despite the fact that it still trades at $20.

    Much more carnage to come.

    The End is Near.

    follow awgee… buy gold! (and bury in back yard)

    1. lawyerliz

      Yes, I too am amazed that booking the neg am as if it were real money thing was allowed.

      You can’t make this stuff up.

      Does Leh have more toxic stuff than most?

  12. South County

    I’m in my mid 40s and work in the construction business, i have never seen a market like this before. According to the Hoffman Company of Irvine the value of finished lots in Corona has droped 40% in the first 7 months of 2008. The problem now is knowone can peg a value on projects, let alone fund a residental project. With this freefall in values we should find a bottom sooner than later.

    1. IrvineRenter

      I recently spoke with an acquisitions manager for an active developer, and he told me there were buying finished lots in Riverside County for less than their replacement cost. This puts the value of all raw land, and even entitled land, at a current value less than zero.

      This should certainly facilitate finding a bottom because there will be no new development until prices increase. Eventually, this will create a shortage that drives prices up.

      This will impact the new home market. Resale is still toast…

      1. phil

        But, these replacement costs are based on the higher construction costs of the bubble period. If construction costs go down the equation changes.

        Or am I wrong in saying construction costs were higher during the bubble? I don’t have much evidence other than common sense of supply/demand as well as my own observations of the rise in retail costs of construction ($100 sq ft went to about $300 sq ft for a house expansion job between 1997 and 2005). Also, per house mello-roos is substantially higher in Portola Hills than in Northwood Pointe. Granted, it’s somewhat of an apples-oranges comparison given the number of homes and location, but at least some of the higher price tag has to be due to increased construction costs.

        1. South County

          Construction costs on production homes in Riverside county run at $90.00 sq foot on the low side. To fully improve the lot runs about $30K, now this is only a general estimate many variables come into play. Off site improvemnts can change everthing.

          An employee of a sub for us just purchased a forclosure in Menifee, 2 years old with 3100sq feet for $240,000. At $77sq foot you can’t build and market even if the land is free.

  13. QBuff

    IMHO, we just saw the bottom for C and BAC already. They may go down a little bit in next few days, but it will go down too much.

    Their next Q earnings will be good though accounting practices they can always delay the bad news. The price will up C to $30 and BAC to $40 at next few months. The bad news will come 2 Q later. But at that time Wall St will announce the light at end of tunnel. So they won’t go down too much. But WaMu and other troubled banks may disappear.

    However, the really stock bottom will happen in 6-9 months. DOW has to test 10000 before next bull market can start

    1. LC

      There are still flippers out there snatching homes from deserving families? That tells me that we have a long way to go to the bottom. As long as there are people like this, the price is kept too high. I will wait for capitulation, and thousands of bankrupt flippers. We need you, Casey Serin!

  14. dooker7

    I think we’re headed for a deep recession. I hope I’m wrong, but I don’t see it otherwise.

    Inflation is a real problem. I don’t see how a retreat in oil prices by itself will cool price growth. If gas prices retreat to $4 a gallon, it is still high. I have been reading UK news sites, and they have been documenting inflation worries all year around the globe. It’s a big concern, and a global problem.

    In terms of demand for goods, if India and China see 10% of their people rise to the middle class, that’s 200+ million people. The fact that asian countries are modernizing and getting wealthier means that they will be consuming lots and lots of goods. As has been stated demand has been high. If it remains high, that adds inflation pressure. If their economies go bust, then we are going down with them too. It’s a no-win situation.

    Then there’s the financial crisis we are in. There are trillions of dollars that will evaporate, as has been documented here on this blog on a case-by-case basis. This has to mean big layoffs for lots of people in the financial and real estate sectors. These job losses and the lack of Housing ATM money will probably lead to lower consumer spending. That has a ripple effect. Governments collect less tax money, and in turn provide fewer services, layoff workers, spend less on infrastructure, …

    So you have in aggregate less income in the US, and high inflation. That has to equate to fewer goods and services being consumed. Small businesses will also find it harder to obtain credit, so companies on the edge may not be able to ride out the storm.

    There are other threats like global warming and a looming water crisis in many parts of the world. Water mismanagement is a growing issue that doesn’t get much press. These issues are more long term, but they could add pressure to food prices soon. A hurricane here, and a drought there and it could get tough. My fingers are crossed that things don’t get out of hand in the near term, which should give society time to regroup.

    I think we need to hit an inside straight for this recession to be mild. With that said, I believe in american ingenuity and spirit, and I am a bull on the US economy in the long run (with emphasis on long). I don’t think it’s all doom and gloom.

    1. Boothinator

      I kind of agree with you except that in order to prevent this whole house of cards from collapsing, they need to allow a lot more people to pay off their debt in a reasonable timeframe, with I think is going to be around 10-20 years. If you think about it, our currency hasn’t been pegged to anything since the 70’s (when it was pegged to gold internationally, but not internally). And with the amount of deficit spending going on, there should probably have been a lot more inflation than there has, due to the expansion of the money supply. But that hasn’t happened because technology (doubling in computing power every 18 months) has been keeping up with inflation. I mean that the efficiencies corporations have gained by utilizing new technologies have allowed them to cut costs at pace with inflation! Think of how Wal-Mart and their insanely efficient distribution system allows them to keeps costs down, and more careful manufacturing techniques allow manufacturers (in China, of course) to use less material to make the same products (so no, they don’t make ’em like they used to).

      But corporations are running out of room to improve efficiency, and Visa takes 2% off the top of everybody’s purchases too (if everyone payed in Visa, that’s 2% of all consumer spending!) You see the start of the move to encourage citizens to be more efficient by using those cheap tote bags in supermarkets (if you go to Staples, plastic shopping bags cost about 4 cents per bag), encouraging use of compact fluorescent bulbs, the popularity of hybrid cars, etc. On the consumer side, there is still some room to save money, but it will be necessary for real people to change the way they live.

  15. Dude

    I’m back in the Solano county area after being overseas for a few years. Radio advertisements are using the phrase ‘hard times’ and similar phrases which were never uttered before. One real estate agent was honest enough to say housing will get worse before it gets better. REOs are dropping to under $150 per square foot.

  16. LC

    Vacancy rate at a six year high in OC. (OC Register Lansner Blog. July 20.) This can only lead to lower rents, and even less incentive to pay double to purchase an apartment/condo.

    As for me, I am moving. I am tired of paying too much for rent.

    1. pencipa

      I live in Quail Hill apartments, know the rent-staff pretty well. They are sold-out (with further demand) for all 2BR. *However* when they talk of 1BR, they have a high vacancy rate, seem “very concerned” about this.

    1. dick

      ooopss I stand corrected:

      “Last updated: 07/17/2008”

      Evidently when you scroll down to the bottom of thepage, you’ll see that it’s been updated as of 7/17/2008.

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