Sunday, January 29, 2006

'Accelerants And Value Killers' For The Bubble

A reader is interested in conditions that might speed up the housing bubbles demise. "I would echo the topic suggestion from last weekend, (that) wanted to discuss 'accelerants and value killers' in a downturn and the current request, 'a thread covering the difference between high end homes' and low end homes' experience in a bursting bubble." "What role, if any, does zoning play? For example, contrary to popular belief San Diego, still has many underdeveloped lots in central areas (lots with single family or duplex that are zoned for 4-8 units). Many of these were flipped during the bubble but with cosmetic improvements only (no further development). With a glut of inventory what role does the possibility of further development play?" "I am also interested in regards to the competition in a downtown market btw re-sales and new homes. I understand how intuitivelly a new home is more appealing and a buyer can be easily seduced from all the shiny new appliances, high ceilings, etc vs. a home that has already depreciated and more prone to needing repair $ in the short term. However, in SD for example, newer homes tend to be the McMansion style (smaller lot, two stories and longer commute to job centers) and there is an abundance of poor construction practices (some stories have hit the mass media)." This is the high/low end topic. "I would like to see a thread covering the difference between high end homes' and low end homes' experience in a bursting bubble. Snippets of evidence on this include the McCain story, and a couple of months ago, the story in the SD Union Tribune about how Randy Cunningham had difficulty unloading his Rancho Santa Fe home." "Note the beginning of the early 90s bust in the LA basin. The ice sheet which spread across the market clearly started out in the wealthy coastal areas and moved inland over time. Initially, buyers were still driving prices into the sky in San Bernardino." "Is the same pattern repeating itself now? It is hard to say, as it seems like sales of homes at the high end have just dried up entirely." Another added, "I think the key will be employment. As long as people have their jobs and they are making the same or more money they may be able to struggle with their mortgage payments if adjustable rates don't move." "A recession in the early 90's plus an aerospace downturn hit Southern California hard from 1989-1995. Some properties took a few years after that to recover their prices, as they were down by as much as 2/3 from their peaks." "If the income rug gets yanked out from underneath, demand could dry up overnight and the need to sell will accelerate."
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7 comments:

  1. Ben Jones1/29/2006 10:34:00 AM

    One that comes to mind here in AZ is the McCain desire to downsize. Rather than prop up the housing bubble, IMO the baby boomers are going to unload millions of homes. In AZ, it is hard not to notice the percentage of senior citizens in grocery stores and malls.

    And there is this: ' Nonetheless, in light of the many hurdles that analysts say now face the U.S. economy, the threat of a housing slowdown, a record trade deficit, high levels of consumer debt, the GDP disappointment was unsettling.'

    'Speaking from Davos in a television interview with CNBC, billionaire financier George Soros predicted U.S. consumer spending would slow sharply next year as a slowdown in housing hurts purchasing power.'

    'There's (a) problem that I think is brewing, and that is the end of the housing boom in the United States and the ability of households to spend more than they earn because the value of their house is rising,' Soros said.'

    'So I expect that by '07 there will be a significant decline in U.S. consumer spending and I don't see what will take its place because it's so important as a motor of the world economy,' he said.'

    'Soros added that global leaders appeared to have an overly rosy view of the world.'

    'The conference is remarkable for its complacency, it's a bit like dancing on the Titanic,' said Soros. 'They're having a very good time and there's a very cheerful atmosphere.'

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  2. Ben Jones1/29/2006 11:27:00 AM

    patco,
    I don't, but being at the tail end of the boomers, it is only logical. People trade down. How many times have you heard, 'I don't need this big ol' house anymore.'

    landgrab said...

    'Wouldn't people rather think positive and see how we can prevent absolute carnage?'

    The biggest contributor to a housing bust right now is overbuilding. Is that in your or my power to stop? Lower rates can't fix over-capacity.

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  3. tarotmaster1/29/2006 11:35:00 AM

    I think many Americans are still thinking in terms of 20th century economic cycles. "It'll go down for a couple years, then it'll come back up". But the consistent force during the 20th century was American ascension: our economy was on the rise, and we were the world-leader in new technology, biotech, etc. The problem isn't so much that real-estate is about to hit a downturn, its that the real-estate downturn is leading a much larger 'American downturn'. There is no next-great domestic industry rushing to take its place. We're simply not going to be the leader in technology next time around. Our manufacturing base has been dismantled. We graduate a pathetically small number of grads in engineering and sciences. And at the same time we've been consuming the lion's share of oil and gas -- which the developing world will now be competing for.

    Back to the topic: The accelerants for housing's demise are basically the same as the accelerants for America's demise -- that is: oil, and foreign dollar purchases. (Both of which are already looking scary). The truly terrifying part about it is that neither one of those factors is controllable by us. We're staying afloat on good luck and favorable policies of foreign nations. .. Not exactly stable footing. And when this cycle ends, there may not be another boom for a very long time.

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  4. Auctionbuddy1/29/2006 01:22:00 PM

    I forsee a death spiral starting this year that will feed on itself.

    The RE industry itself created a huge number of high-paying funny-money jobs during the bubble. These jobs, MEWs and flippers have propped up the economy and added further bubble accelerant since 2000. All of these components are now drying up quickly since the bubble popped last summer.

    Since manufacturing and tech have been largely offshored, I see nothing on the horizon that can break the death spiral. Americans are tapped out. Higher oil prices this year will be the final nail in the coffin.

    This is going to get ugly, folks.

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  5. Ben Jones1/29/2006 03:53:00 PM

    dwr,
    In North Carolina, they are finding 15% is enough to seriously depress surrounding home prices. Even one can be a negative.

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  6. Lou Minatti1/29/2006 04:16:00 PM

    China's building boom will continue to keep building materials at a premium

    China's building boom is so 2004. The China boom is over.

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  7. sf jack1/29/2006 05:30:00 PM

    mr. optimistic -

    There's nothing wrong with being an optimist or buying a Bay Area residence right now.

    If you don't mind what could be considered a substantial risk.

    Since the present housing market around here feels a lot like 1990, here's an article that was written in the SF Chronicle on April 9, 1995:

    "Real Estate Rebound
    After a long, painful slide, housing prices around the Bay Area -- especially in certain zip codes -- are finally heading back up"

    http://sfgate.com/cgi-bin/article.cgi?f=/c/a/1995/04/09/SC67582.DTL&hw=real+estate&sn=006&sc=459

    Or:

    http://tinyurl.com/7ggdn

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