The UCLA Anderson Forecast has deteriorated to market cheerleading and bottom calling. This year’s incorrect bottom call will not help their credibility.
Irvine Home Address … 12 Orangetip Irvine, CA 92604
Resale Home Price …… $494,900
I don’t mind the things that you say
I don’t even mind going out of my way
I try and do these things for you
Why should I do it
I’m always untrue
Well, I did you no wrong
Did you No Wrong — Sex Pistols
I attended the UCLA Anderson Forecast for Orange County last Thursday. The keynote speaker, Ramin Toloui an Executive Vice President for PIMCO, was very good. The speaker for the Orange County Outlook, Mark Schniepp the Director of the California Economic Forecast, was awful.
Commercial Real Estate Forecast
The forecast for commercial real estate was not very positive. The commercial real estate market is facing the same woes as residential, but with an 18-month lag. Rents are falling, vacancy is rising, financing is difficult to find, and most borrowers are over-leveraged. It will take many years for the commercial market to recover.
Ramin Toloui was an excellent speaker. He explained the solvency
problem of over-leveraged borrowers facing refinancing (he was speaking
about commercial, but the same applies to residential). A property
purchased in 2007 for $100M may have $80M worth of debt (it probably
has even more). This debt will need to be refinanced during the next 5
years. The value of the property has cut in half, and the new lender is
demanding 30% equity. When this property needs to be refinanced, the
borrower’s loan will be capped at 70% of $50M which is $36M; they need to roll over
$80M. The gap is too large to be overcome. If the spread were smaller,
creative financing may be able to bridge the divide, but as it stands,
we are going to see massive deflation in the commercial lending market.
The problem of insolvency Toloui described is the same facing ARM
reset debtors in the residential market. A property purchased in 2006
for $1,000,000 with little or no money down will be worth about
$800,000 when the ARM resets. A lender will look at comps and limit the
loan to 80% of 800,000. The borrower will need to come up with the cash
to finance the difference between $640,000 and whatever they owe. Not
many will have $300,000 sitting around, and many who do will not want
to waste it by dumping it into a depreciating asset. The FED is trying
to solve the problem of residential insolvency by lowering interest
rates. The commercial loan market will have no such luxury.
This presentation was the best part of the morning.
UCLA Anderson Forecast
According to the website of The UCLA Anderson Forecast,
“For fifty years, the UCLA Anderson Forecast has provided
forecasts for the economies of California and the United States. Founded by professor
Robert M. Williams in 1952, the national forecast has been recognized as one of the
most accurate, and has a reputation for being unbiased – a factor that the numerous
corporate and Wall Street forecasts cannot lay claim to. The UCLA Anderson Forecast
for California is the most widely followed and oft-cited in the state and was unique
in predicting both the seriousness of the early-1990s downturn, and the strength of
the state economy’s rebound since 1993.
I call bullshit.
What I saw on Thursday looked a bit like trained seals balancing a ball on its nose to get a feast of fish. Whatever objectivity and credibility they believe they have, it isn’t reflected in rigorous analysis leading to objective conclusions. Instead what is presented is a bit more like Gary Watts with a shotgun blast of statistics supporting a predetermined bullish(it) conclusion.
The main problem I have with forecasts like these is their lack of direct causation.
I have written before about Telling Good Analysis from Bad.
Once you have accurate data, the analysis of this data must focus on cause and effect. There must be direct causation linking a specific set of conditions to the outcomes these conditions will produce. A good analysis demonstrates this direct causal link in a clear and unambiguous manner. When an analysis relies on indirect causation, it is weak; when an analysis relies on implied causation, it is worthless.
In The Anatomy of a Credit Bubble, I demonstrated a number of direct causal links which impact how much people pay for houses:
- House prices are directly correlated with amounts borrowed.
- Amounts borrowed are directly correlated with the interest rate offered.
- Amounts borrowed are directly correlated with the borrowers debt-to-income ratio.
- Artificially low interest rates (reset issue) and exotic financing cause foreclosures.
- Foreclosures cause higher interest rates.
- Foreclosures above a certain threshold cause house prices to decline.
- Declining house prices causes more foreclosures. (note the causally related downward spiral)
- Declining house prices and increasing foreclosures cause lenders to lower debt-to-income ratios and raise interest rates.
- Lower debt-to-income ratios and rising interest rates cause amounts borrowed to decline.
- Less amounts borrowed (in conjunction with foreclosures) causes house prices to decline.
Notice the focus is always on correlation and causation forming a
chain of events leading to an inevitable conclusion. A good analysis
centers the debate around the premises. If the premises are true and
accurate, the conclusions cannot be denied.
In contrast, a bad analysis states a conclusion and offers support
through indirect or implied causation. When you read through the Gary Watts Real Estate Outlook 2007 you find yourself asking, “How does that impact house prices?” It is a question that is never answered.
The UCLA Anderson Forecast for Orange County is full of statistics just like a Gary Watts support, but the lack of direct causation weakens it significantly.
Residential Real Estate
I knew the presentation was in trouble when the speaker tells the audience to feel secure in buying a house because prices are at the bottom. I felt like I was being sold a used car or listening to a briefing by Baghdad Bob. He even called out the commenters on the blogs of the OC Register as “doom and gloomers.” I felt the camaraderie of the bubble blog world being challenged; besides, we were right.
The presentation is a series of charts and graphs similar to my analysis posts. There were a number of slides on defaults and foreclosures that looked very much like mine in Shadow Inventory Orange County.
There was a moment when the presenter was commenting on how defaults keep rising, but due to moratoriums foreclosures dropped for a time. I was thinking, “yes, that is shadow inventory.” But with a wave of his hands, he stops and says, “don’t worry about it, foreclosures will go down.”
Did I hear him properly? How can you lead people right up to the problem, show it to them, and then deny that it is there? He offered no explanation as to what happens to this inventory. He did say if there is any future inventory problem that it will be absorbed by rising prices.
What is supposed to lead us to believe that the UCLA Anderson Forecast is correct? Their say so? That plus a report full of fancy graphs and trivial statistics is all you get.
Other than perhaps agreeing with my conclusions or maybe John Burns (Webcast: US Housing – Recovery on Government Life Support?) who also says we have 15,000 units of shadow inventory in OC, what would have impressed me?
Timing the Bottom
Let’s say the UCLA boys had taken their wonderful data and applied some historic parallels and direct causation to call a bottom. That would have impressed me. The analysis might have looked like this (with some help from Calculated Risk):
- The last housing recession began in 1991.
- The recession ended in 1992.
- Unemployment peaked in 1993.
- Foreclosures peaked in 1996.
- The market bottomed in 1997.
Let’s look at the direct causation between these events and speculate on whether or not it should happen differently this time around.
The recession in the early 90s was caused by a slowdown in housing and real estate just like this one. That recession also saw slowdowns in defense contracting and other industries that made problems even worse. The recession ended in 1992, but the effect lingered as people had to be retrained to work in other fields, so unemployment did not peak until 1993. The delay between the end of the recession and the peak in unemployment is well documented.
There were many reasons for the foreclosure crisis of the mid 90s, and we have all of those problems back with more force. The foreclosures caused by unemployment do not occur on the day a borrower loses their job. The delay caused by draining all sources of savings, maxing out credit lines and utilizing legal maneuvers can slow the process for two or three years — as we have seen with properties profiled here daily; therefore, it is reasonable to assume foreclosures will peak two or three years after a major unemployment crisis. In fact, I would argue it is unreasonable to assume that foreclosures have peaked for this cycle — as the UCLA Anderson Forecast does — considering unemployment has not peaked, and the newly unemployed will cause defaults.
Last time around house prices bottomed as foreclosures peaked. It is unclear if either one caused the other. For example, if house prices bottomed simply because prices were affordable and supply was low, then foreclosures may peak not because borrowers are not distressed, but because distressed borrowers can sell into the resale market rather than go through foreclosure. Remember, foreclosures are not a sign of distress as much as they are a sign of distress that cannot be masked by selling in the open market.
The more commonly accepted conclusion is that once the pressure of distressed inventory was removed from the market — foreclosures ran their course — then prices rose because there was not overhanging supply keeping prices down. This explanation sounds reasonable, but is doesn’t explain why there was not a lag time between the peak of foreclosures and prices rising to work off the inventory. This lack of lag leads me to believe rising prices were partially responsible for falling foreclosures — something the UCLA Anderson Forecast is counting on this time.
Neither explanation of the coincidence in timing between the peak of foreclosures and the bottom of the market give us any indication of whether or not this phenomenon will repeat. I suspect it will not because the foreclosure volume is so large that there will be a significant period of time to work off the inventory, and contrary to the primary conclusion of the forecast, I do not think it is reasonable to assume that rising prices will magically absorb our shadow inventory because it is too large.
We will see who is right and who is wrong.
When will the housing market bottom?
I originally figured we would bottom in 2011. I was most recently quoted as saying I believe the bottom has been pushed back to 2012. Based on the facts and direct causations assembled above, when will the market bottom?
Well, we can throw out 2009 or 2010 because prices cannot bottom before unemployment peaks and foreclosures peak. On this basis alone, I am confident the UCLA Anderson Forecast is wrong. If unemployment peaks in 2010, and if there is a two or three year delay between the peak in unemployment and the peak in foreclosures caused by various delay tactics, then foreclosures should not peak until 2012 or 2013. If this corresponds to the bottom again, then we will bottom in 2012 or 2013. If we have a significant lag between the peak in foreclosures and the bottom of the market due to a glut of inventory, then we may not bottom until 2015.
Don’t do out and buy a house because you believe we are at the bottom. We aren’t.
Irvine Home Address … 12 Orangetip Irvine, CA 92604
Resale Home Price … $494,900
Income Requirement ……. $92,128
Downpayment Needed … $98,980
Home Purchase Price … $699,000
Home Purchase Date …. 4/17/2006
Net Gain (Loss) ………. $(233,794)
Percent Change ………. -29.2%
Annual Appreciation … -8.3%
Monthly Mortgage Payment … $2,150
Monthly Cash Outlays ………… $2,820
Monthly Cost of Ownership … $2,130
Redfin Property Details for 12 Orangetip Irvine, CA 92604
Baths 2 full 1 part baths
Size 1,689 sq ft
($293 / sq ft)
Lot Size 2,462 sq ft
Year Built 2005
Days on Market 8
Listing Updated 10/28/2009
MLS Number P708154
Property Type Single Family, Residential
HOME BUILT IN 2005 NEAR IRVINE HIGH SCHOOL. 3 BEDROOMS, 3 BATHS, BONUS LOFT/OFFICE WITH RECESS LIGHTING. MASTER SUITE HAS DOUBLE SINKS, SPA TUB AND WALK IN CLOSET. FORMAL AND CASUAL DINNING WITH FIREPLACE. LOW MONTHLY HOA THAT INCLUDES 2 POOLS, 2 TENNIS COURTS AND CLUB HOUSE. UPGRADED KITCHEN AND BATH WITH GRANITE COUNTER TOPS AND STAINLESS STEEL APPLIANCES.
These undesirable properties are getting pounded. This infill site is between the 5, a shopping center and an old condo development next to the high school. It has every combination of negative.
Another excellent post. There are, of course, many alternative future outcomes but you bring some real rigor into your analyses. It would be nice if you are off a bit on the bottom; perhaps, as apparently happened during the ’90s, prices will rise miraculously to end the pain. With interest rates at rock bottom now and nowhere to go but up, that seems pretty unlikely. Once we get to a more sustainable interest rate level there will be considerable downward pricing pressure to offset whatever positive market fundamentals exist. I hope that we can at least bounce along near the “bottom” here for the next 24 months or so, numbed, but no longer in pain. I will count it as a victory if there isn’t another dramatic fall in prices. We can weather the current financial blizzard if there aren’t any additional major shocks.
I agree great read again! Thanks.
Is this a condo? It looks attached.
It looks like a luxury garage. All I see is a gigantic door to drive a car through and a few windows up above.
Listing says “1 common wall”, so yes.
Did somebody call bullshit?
LOL. I laughed so hard I almost had Java City french vanilla coffee coming out my nose 😆
IR: Thanks for the clear and insightful post.
The misinformation that is out there now is probably thicker than in 2004, 2005 or 2006.
I disagree. We are definitely at a bottom-past it, even. Prices are starting to rise a bit, or at least have stopped falling. That’s a bottom, folks.
The question is, are we at the bottom? There is definitely a chance of a double dip in prices, with prices falling again as more foreclosures show up. But it’s not guaranteed, either, no matter how many pre-foreclosures are out there. Inventory of actual foreclosures is still very, very small. If the pre-foreclosures never turn into actual foreclosures, or do so over an extended time period instead of all at once, we may be past the absolute pricing bottom.
Where you are in Riverside, perhaps.
Where we are in Irvine, I really doubt it.
I appreciate your courage to present and defend your views.
Look at the graph in the middle of the page. Leaving it on both (as opposed to just condos or houses), and looking at sold figures, the bottom was March 23rd, at $316 a square foot. It’s currently at $333 a square foot. Condo alone is more flat, with the bottom being on March 16th, at $306/sq ft; currently $312/sq ft. House alone is most dramatic, with the bottom being on March 2nd at $320/sq ft; currently $347/sq ft.
Price charts rarely move in straight lines. In bear markets there are always headfakes and bear rallies that brings in new money. There is no way to look at a price chart of our recent bear rally and make a conclusive statement about whether or not this change in direction of the trend is permanent or if the downtrend will continue.
It is being driven by affordability of payments, so to the degree you believe 5% interest rates are permanent and that there is no further inventory issues is the degree to which you can be bullish. Since I believe interest rates will rise and inventory will be crushing, I am not bullish.
I agree. That’s exactly what I said in my first post. There is certainly a signficant chance that we will have a double dip and prices will fall again. But they are going up for the moment, and a double dip is not guarateed. It is also very possible that the absolute bottom of the Irvine housing market was back in March.
Calculated Risk has pretty convincingly demonstrated that the expiring 8k first-time tax credit was a short-term boon to housing. That at 5% interest rates have been enough to generate a small bump on a longer downhill slope.
If you believe we’ve hit a bottom, I’ve got a condo on Jamboree to sell you.
Well, that credit’s not expiring anymore,thanks to the taxpayers.
Gonna’ be awhile.
So then, the real question is what is the unemployment rate in Irvine. Is it trending up or down?
There is a correlation between things like the unemployment rate and house prices, but it’s not a perfect correlation-that is, just because unemployment (a lagging indicator) is still going up doesn’t mean prices will automatically go down. There is a shortage of inventory and still a lot of pent up demand from people who were priced out during the bubble.
Home prices in Irvine are going up. This is a fact. They are higher than they were in March and are still climbing. In fact, house prices in Irvine are significantly higher than they were this time last year, so this isn’t even a seasonal thing. In fact, if it was a seasonal thing, prices should be falling, not climbing.
That is, despite the unemployment rate, there is currently not enough supply to meet current demand, which means prices are increasing. Now, if all the pre-foreclosures come on the market at once, this would change. But that hasn’t happen yet, and if they manage to keep trickling them out slowly like they’ve been doing, it may never happen.
“But that hasn’t happen yet, and if they manage to keep trickling them out slowly like they’ve been doing, it may never happen.”
Wishful thinking at it’s best. If the Fed signals that interest rates are due to rise then the banks will want to unload their inventory quickly otherwise they will behind the 8 ball in terms of qualified buyers and the spread. So, keep thinking that this is all “contained” and there’s future appreciation you can count on. I’m not counting on it.
I doubt the Fed will raise interest rates significantly until unemployment falls by a lot, or until significant inflation occurs. Both are unlikely in the next year or two. If the banks are smart (a big if, of course), they could trickle out the REOs at about double their current very low rate and keep prices low but steady. If they dump them all at once, for whatever reason, prices will fall dramatically. But there’s been absolutely no indiciation they are doing that.
I originally thought the bottom would be in 2012. I have changed my mind. In real dollars, the bottom will not be in until 2015.
2012, 2015 – what’s a few years between friends?
all this sitting and observing of magical Irvine, California. It’s actually quite hilarious – let the suckers come in and bid the place up / sustain the inflated pricing.
But to wait 5-6 years before buying a house — that’s a lot of apartments and uncertainty for me (I say uncertainty as I have had landlords move back to their rental=boot us out of the home; also family members with horror stories living in FC’d rentals).
There has to be some value placed on putting down roots and establishing your family in a community — the PTA, HOA, Scouts, church, schools, etc can change dramatically, even in the same city. To me and my family, putting down roots was a huge emotional change as our lives are so intwined with our kids, community activities, circle of friends, neighbors.
I’m fortunate to be in an area that’s corrected at least to have incomes in line with home prices; it begs the question: Unless prices correct, why not skip Irvine altogether?
Go ahead and skip Irvine. If you get involved in your local PTA, whether renting or owning, you’ll be helping your local school give you results more in line with Irvine schools.’ Better to be active in your rental community than overburdened with crushing debt in your mortgaged house.
Great post IR. I was one of the bloggers on the OC Register berating this guy. UCLA housing forecast must have gotten a big kickback from the CAR, their cheerleader mentality is disgusting.
He dismissed shadow inventory completely. Did he mention anything about government intervention? Without the massive government intervention we have seen in the last year…this market (especially in OC) would probably be 10 to 20% lower than it is today.
As usual, time will tell who is right. I just hope all these bottom callers offer a big public apology if they are wrong. And I think they will be dead wrong.
I’ve said it before many times here: Low housing prices are the solution to our problems, both in real estate and the economy in general. Low housing prices means reasonably affordable mortgage payments, which will free up cash for consumers to spend elsewhere, driving our economy. Banks won’t be happy in the process, and neither will anyone who still has a vested interest in mortgage backed securities, but in the long run it’s the only way to make things better.
DON’T buy because you think we’ve hit bottom. Buy if you found a house you like and you can reasonably afford it. To me, that doesn’t mean throwing 35% of gross income toward housing, but that’s just me.
There are still too many artificial props. The question is whether those props are sustainable long enough for things to stabilize and function on their own.
That’s funny you should liken the UCLA Anderson forecast to a used car salesman pitch IR. I was test driving a new truck just yesterday and got to talking with a sales guy at the dealership who hit the bubble jackpot.
It turns out he bought a house in OC in 2000, sold in January 2006, pocketed almost 350 grand in cash. He’s currently renting and planning on buying in 1-2 years.
The difference is of course is that this used car salesman put his money where his mouth is. I wonder if Anderson would do the same?
So you met a truck salesman and he told you a story about how amazingly smart he is? Did that increase his credibility to you? Did he provide any evidence at all to back his brilliant results?
Do you think he might actually stoop to an out and out lie to win you over to sell you that truck? –hmmmm 😉
I was thinking the same thing — a good salesman will also try to find a common denominator, and lying about market one’s market timing ability seems to be a pretty obvious ploy. There is no real way to tell if that guy was telling the truch.
Wow a bunch of skeptics we have here today 🙂
Actually he brought it up. We were joking about how most people buying new cars were pulling the $$ out of their houses to pay for them.
At the end of the test drive he did to ask me the usual sales pitch “So how do you plan on paying for your vehicle purchase? we have great financing right now….”
I was thinking about telling him “oh I’ll just take out another line of credit” but that would be a lie. I told him don’t need financing. His ears immediately perked up. I bet he doesn’t hear that everyday.
Property Values Set to Fall 43% from Current Depressed Levels 13 comments
by: Michael David White November 02, 2009
I recall some Fed. White papers in c.a. 2004-2006 saying the housing prices were at proper values and only small local corrections were expected. But looking at the Fed’s graphs, I drew the opposite conclusion, but was tempted to buy anyways.
IrvineRenter, When will you be doing blogs on buying at court house auctions?
+1 on “IrvineRenter, When will you be doing blogs on buying at court house auctions? “
I have been in discussions with two different trustee buyers, and many different potential cash buyers. So far, once we explain the perils of buying at auction (like you often do not get to see inside a property), nobody has taken the next step of working with a trustee buyer.
If we take someone through the whole process, and if they give us permission, I will blog about it. I think it would be great.
Thank you for addressing this nonsense that we are bottom and prices are going to skyrocket next year. It’s nothing but crappery.
Wow, the freeway is almost in this house’s backyard. The pollution and noise must be really bad.
I also agree that in a declining market such as this is/was that undesirable properties take a bigger hit than better ones. You can see this easily in the difference in condo and house prices in Irvine-condos bottomed later and stayed there, while house prices bottomed earlier and have since recovered slightly, since SFRs are the superior product.
Geotpf – Do you understand the difference between a bottom and a bounce?
Anybody with some good primer/reading material on buying at court auction? I want to get a head start on understand the process, pitfalls, traps, and how to pick a good one and how to avoid a bad one.
I don’t have a reading recommendation for you, but a big caution: you often don’t know the state of the house or its finances if you’re bidding on it at auction. You can get stuck with a property that owes more in back taxes than it’s worth (Detroit is full of these just now), or with extra liens and liabilities on it that you just can’t know about.
Do a lot of careful research on the individual property you’re interested in, esp. on title and loan owners, before you bid.
I understand the back taxes, but what other liens are NOT WIPED OUT upon court auction?
Once inspected, how to prevent the house from being trashed between inspection and possession?
My thought has been that you motivate the current tenants with a cash offer payable upon a non-trashed vacancy.
The following are a couple of quotes:
“It never was my thinking that made the big money for me. It always was my sitting.”
–Jesse Livermore, Reminiscences of a Stock Operator
Livermore suggests that making money, big money, you have to be right and sit tight. This is the kiss of death for most traders and investors. Often being right is doing something that the masses deem foolish, stupid, unpatriotic, you name it. To be right, investors face isolation, ridicule, and labels. This pressure is simply too much for most individuals. The drive for social acceptance from group is very strong in humans. It’s easier for the psyche to get slaughtered as a group than stand alone and be right. Even those that have the discipline to stand alone and be right, it is often very hard to sit tight long enough to make the really big money. – Unknown
There is nothing that would excite George W Bush more than to see his mark on the Dow Jones Industrial Average, or any other chart of significance. The markets are all fixed, boys, and the vandals that have fixed them are not beyond graffiti. I expect a W shaped recession, and I am not the only one.
So, this is all part of GWB’s great master plan? Wow, that guy sure is a lot smarter that I had thought.
There is a heat map of Irvine real estate prices at
As a current MBA student at UCLA Anderson, I’m a bit surprised at the severe shortsightedness of the past few Anderson Forecasts. While I am not involved with the forecast, nor do I know the individuals who are, it seems to me that they are championing preconceived hypothesis rather than actually forecasting the data. Looks like they did a good job with the commercial market, and while they certainly aren’t the first to point it out, they are one of the few who actually acknowledge the tidal wave to come. Everyone else prefers to just put their heads in the sand.
I have to disagree that housing did not bottom until 1997 – When I was shopping for a home at that time in west LA, not all that far from orange county, prices had clearly bottomed a few years earlier and were rapidly climbing back to their peak pricing. Perhaps the stats show something different, but that is what was happening “in the trenches.”