You must remember this
A kiss is still a kiss
A sigh is just a sigh
The fundamental things apply
As time goes by
As Time Goes By — Frank Sinatra
Frank had it right, didn’t he? Fundamental things apply.
(Click on either image below to enlarge)
From Goldman Sachs…
From IrvineRenter…
It is one thing when some crackpot bubble blogger says the market is overvalued and due for a fall. It is quite another when Goldman Sachs, one of world’s largest investment banking and securities firms, says the same thing.
Anyone think Goldman Sachs is full of it?
Goldman Sachs report on California House price valuations — PDF File
We never doubted you for a minute, IR! Why doesn’t the Goldman Sachs report cite your work? You said it first.
—–
I’m not sure we are going to have to wait until 2011 to see a 40% discount from the top. Maybe in the median, but it seems actual home prices are a ways ahead of median. I am guessing another 18 months as this all completely falls apart when the bulk of resets hit over the next 12 months.
Goldman Sachs is certainly a well respected firm, but the extremely skeptical commenters here shouldn’t suddenly lose the ability to question the stats, motive, or any bias in the study.
Does Goldman forecast what will occur in CA? We know homes exceed affordability by 30-40%, but will they return to the historical standard of affordability in all cities and how long will it take? To Goldman’s credit, they have been shorting the subprime market, so they’re “putting their money where their mouth is.”
Why would we start to believe these guys now? Just like they were late to understanding the forces at work and why we were going to have a market downturn, they are underestimating just how far this one will go down. So now they think the market will drop to the point where incomes versus home spending makes sense. Yet when the home prices were at levels that most housing bears thought was completely insane they could justify those numbers based off of current incomes. No, the same mania that drove housing prices to unrealistic levels will also drive it below “reasonable” levels. I don’t think there is any mathematical formula that can determine where the bottom will be. We will know where the bottom is when inventories get to a tight level and sales and home prices start to rise again. But we are years from seeing that.
my2cents
Stock brokers never tell you to sell (tho why I don’t know; they make money coming and going.) When Merrill tells you to sell it is always far too late. Also, Merrill’s advice, given wholesale, would crush a stock, even if maybe it didn’t deserve it.
Real estate brokers never tell you not to buy.
Analysis folks are in bed with the folks they are analyzing, usually, and frankly if they started saying unconventional stuff, nobody will listen, eyes would roll, and fees would fall off.
If you go with the flow, nobody will be mad at you if you’re wrong. If you oppose conventional wisdom and are wrong, myohmy, heads would roll.
IR, I have a questions. I understand why all those dots are floating up in the graphical heavens, but why are some of the dots which are later quarters, floating to the LEFT of the earlier dots?
Because the X-axis is the ration of Disposable Income to Long Term Interest Rates. Essentially, the X-axis measures your ability to service debt.
If interest rates rise and disposable income remains constant, the X-axis moves towards a small ratio. This is what has been happening in the last year.
If disposable income rises, the dots move right. It also tends to move right when interest rates fall. Fallen disposable income or rising rates move it left.
Ok, I understand. So the last time prices had anything remotely to do with reality was 2004.
And before 2004
Thank you for this great article.
If this prediction is so accurate then …
… why is there a 2003 rollback thread at
http://forums.irvinehousingblog.com/discussion/1067/2003-prices-or-rollbacks/#Item_6
Shouldn’t Q4 2003 + inflation to 2007 be the benchmark to return to?
Even in our locale, since all the “bubble” was due to newfangled financing, which was available everywhere at the same time?
Is so, how can there already be 2003 like examples, already, before the true crash has already happened?
Would you believe that Lansner is giving IHB a hat tip?
I have a feeling we will have some stage 2er’s stopping by.
G, I went to Lansner’s blog and only found one comment ! Doesn’t he have a lot of readers ?
You should start a thread with the link and encourage IHB’rs to simply comment “Yes” to his question: “Should real estate prices drop 40%”.
He does have a lot of readers but Sunday is a very slow day for him and us when it comes to traffic. I’m sure more will be added later tonight and tomorrow AM.
I like your idea.
The second wave is what concerns me. I had been anticipating possibly buying by 2009 thinking that the subprime debacle would be enough to drag prices down to “normal”. But the Option ARM resets (page 8) could trigger another cathartic drop from 30 to 50%.
If this area went down 30% in the last bubble, it is not hard to imagine a 50% drop. IR’s chart fits this pattern well, but it is depressing to think I have to wait more than 2 years.
I looks to me that Goldman Sachs reads IHB. Great catch IrvineRenter.
Looks like we’re already a year ahead of the IHB timeline. If we’re down below $500K median this time next year, I’ll be pretty happy.
You mean they are “putting their mouth where their money is.”
I agree with them, though I also think it might happen faster.
The rapid exchange of information helped drive the price up so fast, and it will help bring it right back down.
IMO, I think it’s pretty much a given that median will be below $500K by this time next year. The delay in irvine is that once outlying areas (IE) and South OC roll into the high 3’s, low 400’s and the dominoes will roll right into Irvine.
It’s not going to be easy seeing my home depreciate, but then again I was always shocked each time a house sold in our neighborhood 50K-75K higher than the previous one.
I have a background in empirical analysis methods using predictive models like they are talking about.
I read this report carefully. They don’t give a ton of details on how their model works, but I can say with great confidence that their conclusion IS NOT supported by their analysis.
Their analysis proves that “something” happened in 2003, 2004, 2005, 2006 and 2007 that represents a fundamental change from years past that drove up home values. It proves that this “Something” raised values about 35-40% from where they would’ve otherwise been today.
It’s completely fair to say that the factors they assume (not prove, but assume) drove up housing prices as they specify, but they ONLY assume, they dont prove. There are a lot of variables that they should’ve either included in the model, or said they didn’t include (along with reasoning why, and/or “it didnt end up working in a robust manner in the model”):
1) Population trends in a given area
2) Square root of population trend (This represents pressure from commuting)
3) Strength of US dollar vs basket of likely foreign purchasers of property here
And most importantly:
4) THE MAIN VARIABLE THEY SAY DROVE HOUSING VALUES, THE AVAILABILITY OF CREDIT BEYOND SIMPLE INTEREST RATE.
I would maintain that while credit wont be as easy to get as it was 2 years ago for a very long time, it sure as hell is a lot easier than it was to get in 2000. Remember how hard it was to even get a loan application in at a bank in 2000? It’s sooo easy now… and you have way more products to choose from. You can still get a loan with bad credit today, it just costs a ton more. In 2000, you hardly could get a loan at all with bad credit.
Anyhow, Because they dont regress vs their actual hypothesized cause, they cant quantify how much of the housing market shifts were due to it, and they cant predict how much teh drop will be. All they can do is give the prediction they can give, which isn’t ACTUALLY a “35-40% drop in values”, but rather, “at most a 35-40% drop in values”, which is a lot different. Given that loans are a lot easier to get now than in 2000 STILL, I would guess that the actual drop number, while large, is smaller than 35-40%… it’s too bad they weren’t more thorough.
I wrote them an email asking for clarification, sometimes these sorts of guys write back…. Knowing what variables were dropped and why from their model would tell me a lot about how rigorous their research was and if its actually predicting the future, or just covering the “Worst case” scenario.
– Zileas
Of course we are ahead of the IHB timeline. THe reason is that we have massive foreclosures flooding the market. Normally in a housing decline, people stall selling, so the market loses liquidity and the price doesnt move significantly for ages.
In this case, we have massive foreclosures — I was looking at houses this weekend and it felt like half the properties I saw were REOs. This glut of inventory will cause the time on market to extend longer, cause more people to panic, and allow a liquid enough market to force a price decline and a correction in much faster time than previous corrections.
The level of inventory in this down market is pretty much unprecedented, and its being driven by the foreclosures and people avoiding them due to their teaser rate loans.
might be faster, a glut of sellers (REOs, etc) are forcing a correction at much faster speed it seems. Normally, in a slow housing market, people just hold on to houses.. with time bomb mortgages and REOs, sales are starting to be forced.
That was my objection too, they prove the prices are anomalous relative to the trend they plot, but they don’t account specifically for the anomaly so they cant predict the future trend. I made a long post a few threads down about this…
Liz,
I believe that 99.999999999999999999999999% of REAs will never tell people not to buy.
I used to believe 100%, but this 1 article changed my mind.
http://www.brentwoodpress.com/article.cfm?articleID=17858
So what’s a homeowner to do? Sit tight if you can, and wait for the market to settle, advised Brian Sharp of Sharp Realty in Brentwood.
“I’m telling clients not to buy right now if they don’t have to,” he said.
1 lone REA is keeping me from despising them all. I cannot believe it.
The Option Arm’s schedule reset is based on when their interest rate is scheduled to reset.
But we have seen in statistics here that the great percentage of Option Arm holders are making the minimum, negatively amortizing payment.
That means that the great majority of Option Arm holders will have their reset occur well before 2010. I think a lot of them are resetting now. A lot more will reset over the next 12-18 months.
The only people that will make it to the 2010 reset are people that are at least making their full interest only payment.
These Option Arm resets in reality are set to blow up at the same time as the subprime arms.
Thanks, good point.
The way things are going, the Fed will devalue the dollar to help all of these losers and in five years my house will be worth
FIFTY MILLION….. PESOS…….
OLE! AY!
Yeah, snicker all you want, but in five years we’ll have to scrap the dollar and do what Mexico did…. turn 1000 “old” pesos into 1 “new” peso.
Or we could go into LIRA….