From Calculated Risk:
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I would also like to share with you an email and a series of charts I received from a reader named Kirk:
Hello IrvineRenter,
I thought you might find these charts interesting. I made them from the following sources:
Case-Shiller Housing Price Index for Los Angeles:
Effective Federal Funds Rate, 3 Month Treasury Yield, 10 Year Treasury Yield:
http://federalreserve.gov
Consumer Price Index:
ftp://ftp.bls.gov/pub/special
The Y axis represents the various interest rates.
Since the housing price index is an arbitrary number, I scaled it so that it filled the chart from top to bottom.
For the nominal charts, I scaled inflation relative to the first data point for the housing price index – Jan 1987. When housing crosses below the inflation line on the chart it means that the prices were less (in adjusted dollars) than they were Jan 1987.
Some people have been yacking about how the Fed rate cuts are going to prop up housing prices, but if you take a look at the 1987-2000 charts this is obviously not true. The Fed cut rates very aggressively from 1989-1993 and it didn’t stop that slide. They even had more room to cut than they do now.
Take it easy,
Kirk
Los Angeles 1980-2007 Nominal
Los Angeles 1980-2007 Inflation Adjusted
Los Angeles 1987-2000 Nominal
Los Angeles 1987-2000 Inflation Adjusted
Interesting graphs.
Does Kirk have a split personality?
When he is good, he is very, very good, and when he is bad, he is horrid.
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let’s play spot the bubble!
I’m a long time lurker on this blog, so I’ll take the opportunity to thank IR for his work.
What I want to say: The charts confused me as the national graph made it look like the 2000-2005/6 bubble was missing. Well, it does – the charts only go to 2000, or? So the line beneath the two national charts should be edited to “-2000”.
As for “Kirk”, it’s a sad testament to certain parts of the political spectrum that you just couldn’t be sure if his “bad” side was satire or not…
Kirk has a great brain and loves parody, which is what his blog is all about. I really enjoy this guy’s posts, both serious and humorous.
These charts indicate that housing will touch the “support” levels of 2002, regardless of location. The only diff between SoCal and other places in the the “bull” was just a little more extended in SoCal’s case, so there might be a steeper correction.
However, given the increasing poverty of the Cleveland and Detroit areas, along with the increasing unemployment or/and debt overloads among the general population, we might all be looking at very steep corrections in all housing markets.
Even NYC and Seattle are beginning to get hit. The reaction was more delayed in these places, especially NYC, with its massive concentration of hyper-wealth (net worth $100MM or more). But since many of its hyper-wealthy are Wall Street types at the top of the bad-debt food chain, they will eventually see their incomes topple, probably by 2010, when their failures can no longer be concealed. Payback for these folks has only been delayed.
Actually, all the charts are for Los Angeles. Two of them just got mislabeled. The purpose of the 1987-2000 charts is to highlight that the Fed cuts during that bubble did not stop the price decline. All the charts show this, but it really pops out when you zoom in on that period.
I’m interested in checking out Kirk’s blog, what is the URL?
I fixed them.
Ok, thanks for the clarification and the interesting charts.
Shows very well that Fed rate cuts work on the upside if they support existing momentum up – with momentum down, they are quite powerless. Same essentially for the stock market, always amuses when people trust lower Fed rates to prop up prices….
Sorry IR, the years on last two still should be 1987-2000.
The Fed funds rate is too blunt an instrument to directly affect a single element of the economy like housing prices, especially a localized effect like the So Cal “Peace Dividend” defense industry recession.
Here’s something fun:
http://www.ocregister.com/money/house-winning-bid-1972688-vachani-auction
Mark Vachani was bidding on a house in Irvine’s Northpark neighborhood.
…
As the price rose above $700,000, Vachani dropped out. The winning bid was $860,000.
…
Winning bidders were escorted to a curtained-off area to arrange financing with mortgage lenders and sign escrow paperwork. More than a few of them either backed out or failed to qualify for financing, so the homes went back for rebidding.
The Northpark house was auctioned again within about 20 minutes. This time it went for $820,000.
The second winning bidder also failed to close the deal, so the house came up a third time.
…
The winning bid was $810,000.
I have two questions on this:
1) Do we still have a lot of stupid people out there that will pay any price for a house regardless of the fact that they have no money?
2) Has REDC (or Countrywide) hired bidders to create excitement and push up the bids? When a real bidder doesn’t bid the price they want, do they simply go through the motions with the fake bidder, claim the deal fell through and put the property back in the auction?
The auctioneer launched into a rapid-fire solicitation. Bids escalated quickly. Men in tuxedos raced through the crowd, screaming or waving brightly colored batons when they spotted a bidder.
I wonder…
Making an offer on a house is a pretty big decision……
why look at what you can afford ? that’s a lot of work and hurts your head….. crazy men in tuxedos waving neon colored batons and screaming at the top of their lungs makes the decision easier….
luckily banks saved most of these fruit loops from buying homes by rejecting their applications…. these people probably think they were unlucky and wish they were approved…. little do they know how lucky they are
also…. they got a free clown show … not bad
From the FTC:
Types of Fraud: “shill bidding,” when fraudulent sellers or their partners, known as “shills,” bid on sellers’ items to drive up the price.
If someone were to be doing this in the situation you describe, it would have to be a concerted effort by several parties. Yes, it could still happen, but casually assuming fraud puts you in squarely in Ron Paul kook territory.
“1) Do we still have a lot of stupid people out there that will pay any price for a house regardless of the fact that they have no money?”
Yes.
Is it legal for realtors to tell you there is an offer on a home when there isn’t?
IR,
I took the data on housing and charted it relative to the start of the index in Jan ’87. I plotted both 0% and 3% inflation adjusted curves.
What was interesting to me was that the recent bubble is a “double bubble” in that it was twice as high as the previous bubble when viewed with inflation factored in.
It appears that we have now almost dropped to the peak of the previous bubble. If we eventually dip below parity to .9, like we did in Jan ’97, we still have a long way to go. We are basically not yet halfway down, although the decline is steeper than the previous bubble “pop”.
If it stays steep, sometime in 2009 may not be a bad time to buy. Let me know if you are interested in the Excel chart and file.
I think your analysis is right on. This was always a bubble built on a bubble. If the Option ARM had not become popular in 2004, we would have had a correction very similar to the one from 1990-1997. Since we built a bubble on top of a bubble, the quick deflation we have witnessed to date was only the deflation of the upper bubble. We are still sitting on top of the original bubble that will need to deflate down to 2001 prices. We are about half way to the bottom.
A little thanks to Kirk. He seems like a regular guy today.
Thank you, ex-tangelo, for bringing me back to reality. Truly a company like Countrywide would never engage in fraud. How stupid of me to even throw out a question asking if this was possible. If anything, the past decade should have taught me that people fear the law and therefore always behave in an honest and lawful manner.
I forget… I usually just click on his name to go to his blog, which is a howl.
Now that Kirk is revealed to be a regular guy instead of a troll, I hope he will stick with the regular guy schtick.
I want to clarify that the inflation line on the nominal charts is *not* scaled to the 0-20 or 0-10 labels on the Y axis. The Y axis labels only represent the Federal Funds Rate and yields on treasuries. The inflation line is scaled to the housing index line and represents where the nominal housing index line has to be in order for housing to be priced the same, in adjusted dollars, as houses in 1987.
If you are curious, based on CPI, the purchasing power of the dollar has declined 47% from January 1987. Or if you prefer, it now costs $1.89 to purchase the same thing you bought in January 1987 for $1.00. The rate of inflation has averaged approximately 3.07% annually since 1987.
“puts you in squarely in Ron Paul kook territory”
If you don’t have an valid argument, bang the table. If you don’t have a table, call names; the losers last resort.
Ive been nailing NorthPark housewives for a few years now, and even they are saying they are very nervous about their housing values going DOWN the drain…. Oopps…
I’ve been reading Greenspan’s book.
The interest rates in the very early 80s was Paul Volcker killing inflation. The economy at the time was not driven by Real Estate that much.
Of more interest are the rates in ’87 through ’90, that’s when Greenspan was facing a situation more similar to today: reasonable inflation, growing deficit, mild recession and a speculative real estate bubble.
Look at it this way: We bought our house in ’87 and within a year it had jumped 50% in value and kept rising from there. When the market bottomed in the 90s, it was still worth 45% more than we had paid for it….
Well, I rather doubt the 45% you are throwing out. You would have had to have sold the home to find out if that’s what you would get. Of course, individual cases vary, but if you were like most people then your home was still worth 23% more at the bottom in early ’96 than it was in ’87. However, that is in nominal dollars. In real dollars, your home in ’96 was actually worth 14% *less* than in ’87.
Actually, in real dollars the bottom was in ’97 with a slightly greater real loss.
It doesn’t matter though, because 1987 was a good year to buy and anyone using conventional mortgages would have made out. You paid a mortgage rather than rent all those years. And yadda yadda everything already covered here and there on why owning a home is a good thing as long as you don’t buy during a bubble. Hell, even people that bought early in this bubble (pre 2003) will make out as long as they didn’t do any stupid financing and intend on actually living in their homes.
My home was a fixer upper.
Yep, in the mid 80s there were still fixer uppers. We low balled it for 15% below on mid January and they took the offer.
We had a 45 day escrow and the seller tried to get out because the market was taking off.
By the time we moved in, the house was worth 40K more than we had paid.
By the time we had put in some paint and what not the house was worth like 100K more.
True story. We just got lucky and were willing to look past the faults and into the bones of the house.
But then, many people don’t.
It’s nice to hear a happy story for a change.
LL, Kirk is hilarious….bipolar, but hilarious !
Kirk – Great charts, thanks for doing the work, and love your blog.
I am curious if you plugged the SoCal inflation data in as well, and what difference it would make. I am by no means saying it won’t still look gawd awful, but it might scale it down a bit.
From 87-07 the rate was 4.31%, for a total of 86.2%.
From 87-00 the rate was 3.62%, for a total of 47%.