Sunday, December 30, 2007

What will 2008 be like?

As we look back on 2007 I think we can all agree it was a very interesting year. There were many predictions made in late 2006, few of them were remotely close to hitting the mark. Most economist or organizations that offer these predictions have a financial interest in Real Estate market. This obviously drives them to publish forecasts that are heavily skewed in their behalf. I guess we can’t blame them for that but some of these predictions were made after it was obvious that the Titanic was going to sink. Some of them were so bad that you can almost picture Muhammed Saeed al-Sahaf (Saddam’s minister of information) standing up reading them.

  • In January 2007, the chief economist at the National Association of Realtors said, in regard to the state of the housing market, "The steady improvement in [home] sales will support price appreciation ... [despite] all the wild projections by academics, Wall Street analysts, and others in the media."

  • Former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke, after reviewing home sales and mortgage rates in fall 2006, were hopeful that the market had bottomed out. "It may be too soon to say that it's over. It may not be too soon to say that the worst is over," said Greenspan in an October 2006 speech in Richmond, according to press reports.

  • In a November 2006 speech, Bernanke said he saw some "encouraging" signs in recent housing reports. "Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets," Bernanke said.

  • Ed Leamer, director of the UCLA Anderson Forecast predicts California real estate will remain sluggish for a long time — at least five years — but with little price deterioration other than the failure to keep up with inflation.

  • The California Association of Realtors forecast for 2007 was, “Now, the housing boom is over, with the slowdown expected to continue next year, according to a new forecast by the state’s real estate agents. The median price of an existing California home will decline 2% to $550,000 in 2007 from a projected median price of $561,000 this year, according to the California Assn. of Realtors. Sales are projected to decline 7% to 447,500 units from 481,200 this year.
  • New-home sales are forecast at 950,000 in 2007 and 981,000 next year, down from 1.06 million in 2006. The median new-home price should grow 1.7 percent to $249,600 in 2007, following a 1.9 percent increase last year. Housing starts will probably total 1.50 million this year and 1.56 million in 2008, in contrast with 1.80 million units last year. Existing-home sales are projected at 6.42 million this year and 6.66 million in 2008, compared to 6.48 million last year. The national median existing-home price is projected to rise 1.2 percent to $224,500 this year, following a 1 percent gain in 2006. “Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next,” Lereah says. “However, total sales this year will be fairly close to 2006 because last year started high and ended low.

2007 is in the bag. Mosts economists got it horribly wrong but there were a few that were close. Peter Schiff,
Nouriel Roubini and a few other well known economists did see the meltdown coming and were honest and brave enough to say so. In early 2007 they were primarily seen as tin-foil hat wearing crackpots. I doubt they are viewed with same skepticism today.

Of course, here at Housing Kaboom I am more concerned about my little corner of the universe. What goes on at a national level or in Florida, Arizona or Montana may not have any bearing on our little piece of paradise. We know that the IE is in the midst of the biggest real estate crash in it's history. Whether the numbers show it or not all you have to do is hit the streets or log on to Redfin and you can see how far the prices have fallen. The price declines are accelerating as are the foreclosures and the regular listings. The speed of it all has taken me a bit by surprise (I remember that last one and it was nothing like this). We have seen prices go up as much as 300% in the last 10 years, with most of that happening since 2003. How far will they fall? What will 2008 bring?

My predictions for 2008 are nothing more than "more of the same". Home prices will continue to decline as more and more REO's drag the prices down. Many more home owners will walk away from their homes as the values decline and their payments go up. Construction will slow and the builders will start building small homes on tiny lots in an effort to get the price point down around $200K - $300K. The high end homes will be hit especially hard ($600K-1M). Most of these were purchased by regular Joes trying to live the high life. Without the home ATM they are going to quickly run out of cash. There are not enough high income families in the IE to purchase those homes so the prices will quickly crash in order to attract buyers. I think this price point could easily see declines of up to 60%-65% off peak prices.

On the rest of the IE economy I think we will see something similar to what happened in the early 90's. Many of the new shopping malls that were built will see more and more business go belly up (Furniture/accessory and luxury type stores will suffer the most). Restaurants will start to close as fewer people will be eating out. Crime will obviously increase as more and more out of work construction workers start looking for easy cash elsewhere. Anyone remember how many homes were robbed in the early 90s? I do, and it was a lot!

That sure sounds like a lot of doom and gloom, doesn't it. Well, there are going to be some tough times ahead for a lot of families. Unlike many bloggers, I don't think we are in for the next great depression. I don't think we will see millions of people living in cardboard boxes under the 91fwy. Yup people will lose their homes, but they will move into apartments. Prices will come back down to normal levels and then people will buy again. Hopefully it happens fast, the sooner prices fall back the better.

I leave you with one of my favorite "prediction" clips for 2007. I think I saw the long haired freak working at Don's Used Car lot.....


papasmurf said...

Funny stuff there GX!

I too hope for a quick correction of prices as I would like to purchase a smaller, newer home soon. The bigger homes seem to be falling in price far more than the smaller homes. What's the deal with that.....

I've been talking with a few Realtors and I'm having a very hard time taking any of them seriously. It's like they all live in Oz or something. You ask them about the market and what do they think and they best line they can come up with is "there's never been a better time to buy". Are there any honest realtors out there?

golfer_X said...

Papasmurf, I know I'm a little hard on Realtors here but my family has run across a few good ones over the years (Of course we've also dealt with some real losers too). I'm sure there are a few decent ones out there still.

I wish I could recommend someone but to be honest I can't. When I start to get serious about buying I will also be "testing" them to see if I can find a decent one. I will ask "what do you think of the market?". If I hear a line of BS I will let them know and move on. I want it hear an honest answer about the market. I want a realtor to tell me, hey the market is a mess but they will do their best to try and find you the home I want. I want a guy that is willing to tell a seller they are on crack if an asking price is way too high.

You are right about the smaller homes. They don't seem to be falling quite as fast, YET. I think as the decline spreads it will work its way into all price points. You might have to wait a little longer than people like me that are actually after a larger home. The smaller ones will follow because at some point people will just buy the bigger homes if the smaller ones are the same price.

ButterMonkey said...

Wow, they were seriously laughing at that guy! I bet they feel like idiots now!

I'm still over here across town waiting for sellers in Victoria Woods to get a bit more realistic. $250-300/sq. ft.??? Man, they must have golden toilets or something. LOL!

I spoke to a real estate agent who showed us a few homes over there. She gave us the standard "Now is the time to buy" line. She also told us that home prices hold steady in VW through all markets, good and bad, so we might as well just bid on a house if we like it.

Me thinks I'll wait a bit longer ;)

Anonymous said...

Ha, show her that Suzy Orman video and then have her submit your bid at 2002 prices! Better yet 1998 prices.

Aaron said...

I largely agree with you on your predictions except that I don't think what happened in the early 90s is that comparable to what will happen this time.

On prices, yes we will see prices come back in line with incomes and rents, but the cause is different this time. Last time it was a recession that caused the housing plunge. People lost their jobs. The IE had 10% unemployment rate, nearly the highest in the country.

This time is was loose lending that caused the plunge. That may or may not lead to a deep recession. Yes, the economy will take a big hit as a big chunk of the IE economy was based on real estate and residential construction.
But many people will be better off financially after the foreclosure. Instead of paying every penny to the bank to try to keep up, they will be back to renting and have plenty more money to spend on other things. (As long as they weren't employed as a real estate agent).

Of course, their credit will be shot and the HELOC atm will be closed so I wouldn't want to be a car dealership in the next few years. Like you said, plenty of furniture and home improvement places will go under.

I think the larger IE economy will come out of this OK. Unemployment will go up and growth will come to a near halt, but I don't think to the levels we saw in the 90s.

I also don't think we will see the instant-ghettos we saw in the 90s like in Moreno Valley. Yes, some new tracts near old dumpy areas will go to hell quick, but most of the new home areas will eventually be nice middle-class to upper middle-class neighborhoods once all the liar loan people are forced out.

There are plenty of young people like me who didn't buy into the bubble mess who are waiting to take their spot. In fact, the neighborhood might be even better when the new people move in because these people will have money to do things like landscape that dirt back yard and make repairs when the house begins to age. And unlike the zero-down people, I will have a down payment invested in the house and will actually care about it.

Of course, the big question is how long will it take for prices to come back in line with incomes. A fast quick correction in 2008 that will put the median price in the IE in the low $200,000 by the end of the year would be great, but I think we have too many stubborn "owners" out here and the plunge will be much slower and more painful for everyone.