Head for the hills!

Okay, so I was wrong - think I'll admit it?

WSJ columnist James Stewart, who I assume is not the gentleman pictured to the left, is crowing about calling the bottom of the residential market last summer and now claims that the office glut is ending. I wonder if the Journal passed out bongs as Christmas bonuses or Mr. Stewart is just determined to wish his way to happiness, whistling “Buffalo Gals Won’t You Come Out Tonight?” as he goes.

In any event, I think he’s wrong on both counts.


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23 responses to “Head for the hills!

  1. gideon fountain

    You will soon see reports of sales of properties that sold in the “bad old days” of 2009 now being re-sold for substantially more. We are undoubtedly UP from 2009, no matter how many times you insist otherwise.

    • You simply don’t have data to back that up. Wishing something were so is not the same as making it happen.
      UPDATE: Or feel free to share this data and I’ll be happy to post it. What I see instead, however, is, just as a for instance, a 0.23 scrap of land (with tear down) on Lockwood in Old Greenwich, coming on today for $1.575. I don’t think that will sell any faster than another house I’m familiar with in Riverside, right down the street from I-95, appraised at $1.8, originally priced at $3 million and now offered for something around $2.750. Both would be prices well above 2009 (and 2008, 2007, 2006, 2005, etc., for that matter) prices, neither will sell for anything close to that. So asking prices are indeed up from 2009. Selling prices are not (well, one caveat – almost nothing sold in 2009, so it’s possible that the few that did did so because they’d been marked down severely – in that respect, we could see a rise from that low level, but if a house sold last year for 2002 levels, an increase today isn’t impressive, unless it’s one big whopping increase. So far, I’ve seen n evidence of that happening.

  2. out looking in

    I hear Jim Cramer is also pounding the table on real estate. A broken clock is correct twice a day…

  3. Retired IB'er

    David Rosenberg’s piece today is an excellent summary of where we are today and why comparisons to 2009 are not very helpful. For those who don’t like to read, just look at his charts starting on page 5. Hopefully the link works:

    Click to access Breakfast_with_Dave_040610.pdf

    • Unfortunately, IB’r it seems to be paid subscription only.
      UPDATE: but easy to get a trial subscription. I read all 17 pages but I see what you mean about his charts. What looks like a nice recovery from 2009 is still so far below 2002 (in many areas:income, real estate,etc.) that it’s laughable. His charts go back to (at least) 2002, and this becomes glaringly obvious. Thanks for the link.

  4. Retired IB'er

    From Diana Olick’s blog today where she says foreclosure are about to begin in earnest. I thought her insights on pending sales increases in last paragraph to be particularly interesting:

    “The big question of course is how will the new wave affect home prices, especially in the hardest hit markets.

    I pushed Fannie Mae’s chief economist Doug Duncan on this in an interview today on the mortgage giant’s new National Housing Survey. He cited the over 5 million mortgages out there that are seriously delinquent, and said that while the 30-day delinquencies seem to have peaked, “certainly some of the foreclosure backlogs are working their way through the system at this point.” He also said home prices will dip again before hitting bottom later this year.

    Yesterday we saw a big bump in the Realtors’ Pending Home Sales Index, but my sources tell me that was largely driven by contracts on short sales, which have a far lower rate of closing than regular sale contracts. Estimates are that only about 35 percent of short sale contracts go to closing versus 80 percent of conventional sale contracts.”

    Link to story:

  5. shoeless

    From the newly-released FED minutes on March 16, 2010:

    “Participants were also concerned that activity in the housing sector appeared to be leveling off in most regions despite various forms of government support, and they noted that commercial and industrial real estate markets continued to weaken. Indeed, housing sales and starts had flattened out at depressed levels, suggesting that previous improvements in those indicators may have largely reflected transitory effects from the first-time homebuyer tax credit rather than a fundamental strengthening of housing activity. Participants indicated that the pace of foreclosures was likely to remain quite high; indeed, recent data on the incidence of seriously delinquent mortgages pointed to the possibility that the foreclosure rate could move higher over coming quarters. Moreover, the prospect of further additions to the already very large inventory of vacant homes posed downside risks to home prices.”

    Mr. Stewart can take a break from patting himself on the back.

  6. Anonymous

    Don’t underestimate the importance of the homebuyer’s tax credit. When it ends, you will see a reduction in volume at the lower end of the market.

  7. Mortimer

    On a national level our housing market might not be hitting bottom, but certainly in the Greenwich market it looks like that could be the case. 2009 was a year of panic, negative equity and short sales. I’ve seen homes sell at absurdly low levels (8 st. Claire ave 900k; 53 Park Av South $1050k in short sale originally listed at $2.5m) that have not been replicated in 2010. By definition this represents a bottom whether it’s attributed to special circumstances or not. If a house sold at 2002 prices and has not been replicated since, to me that is a bottom.
    Just as those who were deep in the analysis of the market did not see the top of the market coming and the pending crash, the same type of psychology applies to seeing a bottom.
    Chris Fountain , I’ll remind you of what you wrote in Late 2006 – “If you believe our mainstream media, the housing market has collapsed and everyone who wants to buy a house should be sitting on the sidelines, licking their chops, waiting to pick up houses for a faint whisper of their asking price. Don’t be stupid. The Greenwich market is okay, and won’t be going anywhere drastic in the foreseeable future”…that foreseeable future was about 9 months later, a lot closer than we thought.
    We might not be seeing a rapid increase in prices anytime soon nor does it mean there won’t be fantastic deals to be had, but I believe history will show that 2009 was the bottom for the Greenwich housing market.

    • Maybe I should have sold Alan Greenspan a house back then!

    • And Mort, there are so many short sales clogged in the pipeline (3 in this tiny office alone) that I would not consider the lack of them being consumated yet this year as a string signal of recovery. 47 new foreclosure actions in Greenwich started just since January (adding to the 200+ already underway) and, looking at them, I’d say that every single one of them is hopelessly underwater. They are saddled with second and even third mortgages that were taken out at the peak of the market. We aren’t going back there for a long, long time.

  8. Peg

    “The office glut is ending”?? Who is going to be renting all that space – the folks who are going to give us all our free Obamacare?

    Yep; that must be it…….

  9. HG

    I’m in Gideon’s and Mortimer’s camp. David Rosenberg is a fantastic, iconoclastic economist, and he called the crash. He may be right today. However, if you listened to him you missed the 70% stock market rally from the bottom because he told you to ignore the cheap valuation of the stocks and focus on the likelihood of a continued deep recession or, at best, a weak recovery. In fact, it wasn’t “the economy, stupid”…it was the price of the thing that was most important. For people who did not buy when the Dow was below 7,000 I doubt they boast about their great call–not to buy–simply because stocks have not regained their previous highs. In other words, if you are not going to buy a house after the greatest housing crash in history and convincing evidence that prices have bottomed, when are you going to buy?

    Likewise, while supply (foreclosures) is important and I would never dismiss CF’s “on the ground” anecdotes, supply is only one part of the equation. Almost everyone on this site probably has an old Econ 101 book in their house. Somewhere in the first few chapters there are supply / demand graphs. One axis is volume (in this case, foreclosures) but for any given amount of supply there is a PRICE (the other axis) that will bring out enough demand to clear the market.

  10. cos cobber

    2009 will not be the bottom. foreclosure sales will be around for another couple years. i think we are in for a flat bottom running from 2009 to 2012. there will be some transactions that suggest we rolled back to 2002 prices and some sales that indicate 2004. there will be nothing concrete as every sale is unique.

    i think the housing market in greenwich will finally improve in a meaningful way in the spring of 2012 just in time to assure Obama a second stint in the white house.

  11. shoeless

    Mortgage rates up 27 bps to 5.31% in the last wek for 30-year fixed. That should help keep prices up!

  12. HG

    CF (and CC), I am not predicting a big price increase in the next few years, but buyers today will earn excess returns over the long term. Where I don’t have enough experience is to know whether a bottom for actual selling prices can occur before sellers capitulate en masse.

    Shoeless is right that higher rates are bad, but a buyer financing at 5.3% today gets offsetting value by locking in the low rate (the buyer is, in effect, short Treasurys). Fed’s goal is to inflate the price of everything by 2% per year over the long term, including houses. This 2% nominal return can be levered to 7-8%. Finally, it is more likely that the Fed will miss its target and inflation will be higher than 2% over time since votes in the US are allocated per capita, not per dollar of net worth (WJ Bryan’s Cross of Gold speech). Of course, all this is irrelevant if you are paying well in excess of intrinsic value (structure’s replacement cost + value of land).

    • That sounds reasonable, HG, and I do believe that a buyer today should be okay in the future, providing he buys smart. The trouble is in finding sellers who are as smart as the buyers. There aren’t many out there.

  13. shoeless

    Anyone in need of a mortgage to purchase a house is focused primarily on the monthly “nut” required to finance said transaction. The Fed engineered lower long term rates through $1.2 trillion in MBS purchases over the last year, keeping rates artificially low. While anyone that was able to secure an artificially low rate will likely be ok due to the implicit short position in interest rates, those that are still trying to sell will be forced to lower prices in order to attract buyers going forward. In two different interest rate scenarios, the same house will sell for the same monthly cost, which by definition will require a haircut to be acheived in a higher interest rate environment.

    Rates are going up due to the massive supply of paper coming to market. Inflation has been historically stoked by increases in wages, higher personal consumption expenditures, and increases in residential invenstment. New home sales (the engine of residential investment) is at a multi-decade low (1983 levels, I believe). Inflation ain’t comin’ to houses, inspite of any and all Fed efforts to the contrary.

  14. HG

    Shoeless (“Rates are going up due to the massive supply of paper coming to market”), I agree with you in the short run but even a cash buyer should buy today rather than holding cash. The massive supply of paper tells you the US government is a bad credit. The dollars in your pocket are an IOU from the US government. The US government has debt = 17x revenues. In the words of Springsteen, that is “debt no honest man can pay.” If the government / voters are dishonest, they will inflate that debt away (Friedman: “inflation is always and everywhere a monetary phenomenon”). If they are honest you get your 2% per year before leverage.

    My question is whether you would rather own a house at today’s price close to intrinsic value (construction cost + land) or an IOU from an entity that has debt = 17x revenues and is controlled by the average American voter.

  15. Mortimer

    CF those are interesting stats on short sales and foreclosures…the question I have is what do these homes now trade at once they come on the market as a foreclosure. There are different slices of price points with different demands (i.e. $1- 1.5 has different activity than >$5m. I think a good investor is going to figure out what component of this market is either going to rebound or at least hold it’s value over the next 2 years. Time will tell…

  16. shoeless


    Intrinsic value on almost any historic length of time one wishes to analyze, states that the median house price should be approximately 3-3.5x median income. We ain’t there yet.

    On the topic of Freidman, if inflation were always and everywhere a monetary phenomenon, after 20 years of printing and borrowing, Japan would have oodles of it. The bursting of a credit bubble has very different outcomes than a traditional recessionary pullback. The debt monster is too big for even Helicopter Ben at this time. At some point, you are correct, I will not want to hold USD. At the present moment, every other devloped world currency is in the throes of turning their fiat into toilet paper. Beggar thy neighbor is in full swing, and the strong and soon to be stronger dollar will add to existing deflationary headwinds.

  17. G'wich Transplant

    Mortimer, I think that is a very good point. My guess is that the houses sold now at lower price points (say, under $3M) hold value better than the more expensive sales over the next 5 years.