Wednesday, September 20, 2006

L.A. Times: Home Price Appreciation Slackens

There are are some interesting statistics to note in this September 20, 2006 L.A. Times story by Annette Haddad The rate at which Southland home price appreciation is flaming out is just as fast as the rate at which appreciation flamed out in 1989-1990. At that time, YOY price appreciation went from double-digits to zero in just eight months.

In May 2004, Southland home price appreciation (that includes condos as well as SFRs) hit a peak of 27%. In March 2006, the rate of appreciation was 10.7%, still double digit. In August, the rate of appreciation was 2.7%, the lowest level since July 1999, which was over seven years ago. The last time all six Southland counties posted single-digit increases was December 1999, almost seven years ago.

If history were to repeat itself exactly, then we'll hit 0% appreciation in November or thereabouts, which starts in just six weeks. And we aren't really even talking about median price declines yet, we're just talking about going from double-digit to 0% YOY appreciation.

And still, the "experts" and "analysts" do not want to consider the possibility of severe price declines. They certainly haven't held back in the past on forecasting continued appreciation but I guess when it comes to loss of home values, forecasting is forbidden - seeing is believing. Experts see a "leveling off" of values, or "even a decline in prices", as if the potential for values to decline were still extremely improbable at this point. No, the market will "flatten out." It will "come back into balance."

So even though appreciation is flaming out at the same rate as it did in 1989-1990, to quote Haddad, "few experts predict that Southland home prices will retrench at the rate they did during the last downturn, when prices fell 17% between 1990 and 1996, according to DataQuick." (Remember - that 17% number is an umbrella value for the entire six-county Southland region. Your particular area may have flamed out a lot more or a lot less.)

The experts like to point out the job losses and recessions that led to the 1990's downturn. They say that history does not offer any data about the situation we are in now, with a recession "nowhere in sight."

OK, I will offer my interpretation. The recovery from the 2001 recession was fueled by lower interest rates and ridiculously easy lending standards which was like handing the U.S. population a giant credit card by which we could hyperinflate home values and spend until we're dead. We have a negative savings rate (even by fiddled and tweaked government revisions) and record levels of debt. We've had an inverted yield curve for the better part of a year, an indicator which has had a good historical record signalling slowdowns ahead, but which the Federal Reserve calls a "conundrum", caused by a "global savings glut". Is this unprecedented in history?!? YOU BET.

Gosh darn, these economists are thinking, if only the rest of the world created a consumption bubble like ours, we wouldn't have this savings glut, then everything would be normal again. Then we could take our fingers out of our ears and stop singing "LA LA LA WE CAN'T HEAR YOU!!!"

I will be the first to admit that the stock market, which is now testing its May 2006 highs, does not appear to be anticipating a recession. But because of the massive amounts of credit sloshing around in our capital markets, we may well be in a situation where such an incredible distortion of values has occurred that some of our tried and true leading indicators are broken. We are flying an airplane with badly calibrated instruments. There could be something worse lying ahead than a recession.

It's kind of like dog training. When a dog growls, thank him. He's giving you fair warning. When you keep punishing the dog for growling, he'll stop growling. And then go directly to the bite.

4 Comments:

Anonymous Anonymous said...

Test

Since I switched to the "new Blogger" my posts get cut.

This is only a test to see if I can still post on this blog.
Neil

4:27 PM, September 20, 2006  
Blogger Larry Nusbaum said...

I am not looking for the housing market to suddenly turn back up on a dime. Too much inventory to work through. Some of that inventory will drop off as sellers cancel their listings (or they expire) as they were unable to sell at prices that are no longer available. These are the ones who didn't have to sell, didn't have to move, didn't have a bad mortgage to refinance, but were willing to sell at inflated prices and didn't pull it off.

12:02 PM, September 21, 2006  
Blogger LARenter said...

Larry,

Here is a quote from the OCRegister i just saw posted on Ben's blog;

“Sherry Klapp tries to find hope in what’s become, at best, a challenging housing market. This real estate agent from Dana Point says a tough sales environment changes how everybody in her game does business, from buyer to broker, from seller to lender.”

“All these extra household expenses are apparently too much for some folks. Mortgage defaults, late property taxes and foreclosures are becoming common. Klapp says several sellers she’s working with are classically highly motivated to rid themselves of a suffocating house payment. ‘A lot of people overextended themselves,’ Klapp says. ‘They really weren’t looking down the road.’”

I agree with you there were many properties put on the market to cash out at the peak and those properties will fall of the market, but as Sherry points out above many people are discovering they have over extended themselves. The "what have I gotten myself into?" question is being asked in mass. Current home prices are not supported by incomes period. They are supported by home prices continuing to rise, Now that the market has softened many people are discovering they cannot afford their house, this new inventory coming on the market will be much different than the cash out at the peak crowd. This new inventory has to sell. The people that can no longer afford or tolerate their mortgage payments will set the prices of this new more realistic market. Expect those prices to drop. How Much? well thats where the debate lies.

1:27 PM, September 24, 2006  
Blogger bearmaster said...

Speaking of "what have I got myself into", here is a quote from a patient on my doctor's forum. I don't know how this person possibly got the mortgage to begin with.

Loss of health and sanity are other consequences of this bubble:


Dr. X,

I was following your plan for almost 4 months, and was for the first time in my life, starting to feel balanced. i had more energy and motivation to exercise on a regular basis; I slept well, and got up in the mornings feeling less tired and sluggish, and i was even in an overall better mood, just happier. well, then, my life turned upside down-I bought a condo and started working two extra jobs at the same time, on top of my full time job, to meet the mortgage payments. I have been working 7 days a week, morning till night, and started to slowly get off your diet. At first, I was going to the gym during my lunch break to get at least half an hour in (nothing compared to the hour and half i was doing before), but now i don't even have the energy for that. I've been eating junk, not only is it because I get home late and tired, and it's easier to eat a bag of chocolate rather than cooking a meal, but also because when I am stressed, I eat-and I eat a lot of unhealthy foods-and healthy foods-just a lot of it. when i used to smoke, i would smoke ten cigarrettes in a sitting; well, now that i don't smoke, i eat ten cupcakes in a sitting. i feel sluggish and very, very run-down. i have been oversleeping, and still feelings exhausted. you said the best way to avoid unhealthy foods is to not buy any or keep any in your home; well, i can't help but stop by the grocery store to buy a whole bunch of junk food after i get off work at midnight, and eat all of it and pass out, only to start the same ritual over again the next day. just as i was starting to feel a balance in my life, i get sucked into this messy cycle i can't get out of. on top of that, i started the nuva ring, (first time ever taking birth control), and my body is bloated, which makes me want to just give up and eat more.

i am a mess. help me get back on track.

2:50 PM, September 24, 2006  

Post a Comment

<< Home

Dogmation