Housing - no way near a bottom

Discussion in 'Economics' started by Cutten, Aug 2, 2007.

  1. Cutten


    Just a quick piece of advice for anyone considering buying real estate in trouble areas (e.g. Florida, California, New Jersey and so on) - when bubbles burst, the price decline rarely ends in 6-9 months. This bust has way further to go.

    Do not even think of buying until the following conditions have been met:

    1) Total massacre in all real-estate related stocks - blue chips down 75%+, second tier stocks down 95%+, third tier stocks down 98%+ or delisted due to bankruptcy.

    2) Spillover into the conventional banking sector - one or more major banks taking a huge annual loss due to real-estate related losses.

    3) Incredibly negative sentiment not just to real-estate stocks, but to housing itself. Magazines like TIME or Business Week running covers on how it's time to be a renter etc. Market rumours of a major banking bankruptcy due to RE losses.

    4) Politicisation of the RE industry and crash - governments attempting to prop up or rescue the sector, arranging bailouts and so on.

    5) Loads of average joes getting completely wiped out on their homes/mortgages. Entire streets full of foreclosed properties, being sold at seemingly absurd and irrationally low prices.

    6) Experienced and successful value investors starting to get tentatively interested in purchasing real-estate (this normally occurs before the bottom though, so it's a leading indicator rather than a good timing signal). Non-RE corporates starting to buy distressed RE companies and assets.

    7) Serious difficulty in getting a mortgage for most properties, without a hefty deposit.

    8) Former cheerleaders and raging bulls like Oldtrader, Convertibility, Smart Money and Hydroblunt finally throwing in the towel.

    9) Former RE bears finally starting to say that the worst may be over, and buying a bit could make sense.

    10) Social discord and unrest e.g. widespread confrontations with police due to squatting in foreclosed properties, rioting, protest marches, widespread hatred of banks & mortgage companies.

    11) Realtors falling below lawyers and politicians in terms of popularity with the general public.

    Remember how tech stocks looked by mid 2002? That's the kind of total slaughter and overwhelming bearishness you want to see before thinking of getting back into real estate. The RE stocks will bottom first, but actual real estate could take a lot longer.

    Just to give some idea, here was how long it took to really bottom out and turn back up after previous real estate busts:

    California 1990: 5 years
    UK 1990: 3-8 years (depending on region)
    Hong Kong 1996/7: 7 years
    US 1929: 10-15 years
    Japan 1990: 14 years
    Berlin 1990: 14 years
    Buenos Aires 1999: 7 years

    I am not aware of any major real estate crash which bottomed in less than 3 years. We are only about 9 months or so into this one, so I would wait at least 2 more years before looking to buy.

    There are still interesting non-bubble sectors of the US. For example, Texas and parts of the Mid-West could be a good buy during the weakness over the next year or so, based on the good outlook for the oil and agriculture industries. And metro Detroit is having a once in a generation real estate depression - some houses are now literally cheaper than the cars being produced on the assembly lines there.

    The intelligent real estate investor should focus on these segments, not on the areas that are blowing up as we speak.
  2. Dude a good deal is a good deal in any market. Also areas with strong job markets will keep going. Look at Manhattan prices havent come in much one there is job growth there and two people keep coming in internationally. As for Florida and the hyped up places yes there is room to come in. For the biggger cities I think prices will just stagnent for a while.
  3. I agree it's too early to bottom fish, but the bottom in California wasn't accompanied by any of your warning signs.
  4. "And metro Detroit is having a once in a generation real estate depression - some houses are now literally cheaper than the cars being produced on the assembly lines there."

    You gonna buy one of those boarded up houses? Where you gonna go shopping - Grocery closings hit Detroit hard. Liquor stores on the corner and ya buy your groceries at the 7-11.
  5. none of those busts took place with 6% mortgages, and none of those busts took place 2 years from boomers relocating for good.
    prices are down big in hot places already, another 5-10% down and thats it especially in desirable areas. Thats about 30-35% hair cut already.
  6. maxpi


    When you walk past a real estate office and you see one person sitting in there looking more like a security guard than a sales person... it's still not time to buy. Give it a year or two after that, then be very careful, the realtors are starving by that time and they will lie, cheat, and steal more than ever. Hire another realtor to be in your corner and to go over all the documents for you before signing anything.

    There was a one-two punch scenario to every real estate boom I've seen in California that abruptly ended them. Lenders tighten up and ask for big down payments which puts all the first time buyers out of the game and the move up buyers can't sell their houses to first timers so it's game over for all intents and purposes. The smart money was out at the blowoff top when houses were just past the point of selling above the ask price. The smart money won't be back until they see interest rates falling again, and that is years off.

  7. Real estate market is not as violent or volatile as the stock market. Not a good comparison.

    Bottom line- it all comes down to interest rates ( cost of loan) and job employment ( payment of loan). Excluding subprime markets, cities like NYC, Chicago, Seattle, etc. will be fine. Money is still relatively cheap and people are making good income/bonuses. Places like Utah, Detroit & Georgia which are notorious for subprime market are going to do poorly. Those subprime areas including Miami are more similar to the tech stock meltdown.
  8. Enginer


    All these discussions ignore two of the major sources of the current liquidity bubble. 1) The American economy is somewhat immune to withdrawal of credit because even a foreclosed US house is a more secure asset than many businesses and factories in Arab or many Asian nations.

    2) About a trillion EXTRA[/I} USD/yr have been injected into international commerce in the last 10 years since crude oil went from $8 to $76 dollars per barrell with little commensurate cost increase. Eighty pecent of this is outside the US, with much of it fighting to get in one way or another. There is bound to be a little more descretion, but if it cannot be used for loans, it will simply be used to buy hard assets directly.

    Many people would prefer their money to sit in a subdivision of currently unsold US $1E10 houses than an empty hotel in Bahrain.
  9. So does that mean the house selling for 700K in San Juan Capistrano is a bad deal?
    Will it ever go down to 400K?

    I too am thinking prices will fall further, but I've been saying that for years...(5 to be exact)...
  10. You and Paulson are apparently the last two people in America who think our problems are limited to subprime.

    Subprime loans are mostly 2 year ARMs so they are getting nailed first. The more prosperous areas are awash in 5 year option ARMs and IO ARMs. These are time bombs too, they just started with more time on them.

    Money is still cheap but risk isn't. The US government can still borrow money at 5% but if you aren't quite so creditworthy, money suddenly looks real expensive.

    As for jobs and wages... well I don't share your optimism. We'll see.

    #10     Aug 2, 2007