Someone asked me if I thought the bubble will burst again. I said no.
Not in the same way that the previous two bubbles have ended – with foreclosures driving down prices across the board.
Why?
Because of these reasons:
1. The Foreclosure Process Has Been Compromised – Banks have been handing out loan mods like candy, and keeping defaulters in their houses at all costs. Of the 13,154 houses that have closed escrow this year in San Diego County, only 293 were bank-owned, or 2.2%. Only eight of those were in our La Jolla-to-Carlsbad coastal region, out of 1,730 closed sales YTD (0.5%).
How can banks reverse course, and start foreclosing again? They can’t, and instead the ‘loan-mod’ will become standard banking policy – though vague.
2. Recent Buyers Were Well-Qualified – No exotic financing this time around. Everyone who got a regular mortgage over the last six years had to qualify AND use a down payment. Thanks to recent prices increases, most have tacked on some extra equity too – they aren’t going to panic-sell now.
3. Those Who Do Panic-Sell – The kids who come to town to liquidate their parents estate will more likely sell to a flipper offering quick cash. There have always been investors working the obits, but it is a cottage industry now – and they will improve and flip for a retail price.
4. Boomer Liquidation Less Likely, and Multi-Generational is the Substitute – Many of us have discussed the fear of baby boomers needing to tap their equity, and wanting to downsize. Here is an article:
https://www.bubbleinfo.com/2013/03/05/boomers-cause-next-crash-in-2020/
If they need money, the reverse mortgage is still around, and likely to stay. If aging boomers want to downsize, they need to leave town to have it pencil – because it’s virtually impossible to buy a smaller one-story house in the same area and still save big money.
Plus their kids – who could have afforded a decent house 2-3 years ago – are now left holding the bag. It’s better for the kids to move in with the folks and take care of them, then to buy the crapshack.
5. Sellers are Resilient – If they can’t get their price, they will wait – and agents will wait with them. It is typical for agents to take six to twelve month listings and hope that’s long enough for the sellers to eventually wear down if nobody comes along.
6. Higher Capital Gains Tax – The sweetheart 15% capital-gains tax went back up to 20% at the end of 2012 – a 33% increase! Even though they can sell for more now, investors are very reluctant – they hate paying tax! Especially when a spouse can “die correctly” and leave rental properties to the other spouse with a stepped-up tax basis.
I don’t think we’re going to see the roller-coaster ups and downs any more. It’s much more likely to feel likely a bloated, stagnant slush of goo than an exciting crash. Thankfully, agents work on commissions, otherwise sales could come to a halt!
Why should new buyers pay for home prices that have been manipulated and propped up with handouts for bad behavior?
I don’t know about some people but I don’t get excited about buying a home where someone has got principal reduction or a loan mod.
Free markets worked well for a long time.
It’s a different world now. All you can decide is whether you are going to get your piece of the action….or not.
Besides, after another 25-30 years there won’t be anyone left who remembers free markets.
Joe,
Sounds like you’re talking about people who bought houses 6 or more years ago. HAMP/HARP require loans made before 2009, so I am not sure where the handouts are for more recent buyers (except low rates).
Jim’s point #2 is critical here: any recent buyer has equity, even if prices drop 10 or 15% tomorrow. Buyers from two or three years ago have experienced actual appreciation. So, no reason to sell “just because.” If you’re motivated (divorce, job change or loss, etc) then those are the usual reasons to sell. Everyone else is on the sidelines.
Put another way, the entire world is focused on “OMFG we just had the worst housing bubble in the history of mankind.” To believe that somehow another huge decline is going to happen strains credibility – show me someone smart who is making that bet right now (32% gets us back the 09 low). Loans are just not easy to get: so you can think the prices are stupidly high, but the scenario where they plummet again is not obvious at this time. We’re in for a long slow grind vs. inflation and interest rates, and not a pop.
All points well taken, though I might take issue with the assertion that we are at bubble pricing. My position since the end of ’13 was that the best thing for the market would be a sharp deceleration of gains so to avoid a true bubble in pricing. If 2014 duplicated 2013 I think we would have bubble-ish pricing and therefore be in for a correction. The problem with a correction is there is no way to stop it once it starts and gains momentum. Hopefully 2014 will just muddle along to an unspectacular finish and provide a nice reasonable base to reestablish a normal rational market.
Yes, on our way to goo.
No markets are ever clean, free, natural, normal or unmanipulated. Never have been and never will be.
Seems like prices need to stay high so banks can make lots of interest and taxes keep rolling in.
Now there is a feeling being portrayed that markets will never crash again because of manipulation for the better good.
Hopefully 2014 will just muddle along to an unspectacular finish and provide a nice reasonable base to reestablish a normal rational market.
Normal and rational – wow! 😆
The outcome will be based on quantity and quality too.
If the next five or more sales in your neighborhood were in spectacular condition and priced at or slightly above the last sale, there would be a nice run. Let’s average a 2% increase on each sale and boom – 10% more appreciation, just like that!
But there hasn’t been the quantity to generate sales momentum in most areas. And if no one sells in your neighborhood for the next 6 months, it feels flat.
Sellers aren’t doing much fixup to sell either, which benefits greatly those that do. The sellers who don’t do much, aren’t that motivated – and when a low-offer-that-reflects-condition comes in, they are easily offended. If you don’t want to be offended, fix your house up and and people will pay retail.
The problem with normal and rational is the scarcity factor – the local sample size is so small it’s probably unreliable.
RE prices tend to plateau for a long time, that’s what I’ve read. If we saw a price plateau beneath the old highs (lots of back-to-even selles at the old highs), that combined with higher rates could lead to quite cheap prices, without any crash. That would give a big advantage to cash buyers.
RE prices tend to plateau for a long time, that’s what I’ve read.
Agreed, except for the last 30 years. We’re overdue!!
Except for the last 30 years mortgage rates have been in steady decline, too.
Check out the fifth chart down:
Interest Rate Trends
Punch for the punch bowl!
I’d like to add another reason: the government learned a bunch of neat new tricks last bubble that they can apply to the next one, to further sustain the rise and soften the burst.
I have always said find a house in a neighborhood you love that you can afford w/conventional financing, buy it and get on with enjoying your life. I know people that did this near the pricing peak in ’05/’06 and they now have about 10 yrs of principle payments under their belts and I am sure they re-fied a few years back to lock in those ridiculous rates in the 3’s. And to boot the property values are back up to peak range and maybe beyond. They bought at the peak of the craziest run-up ever and here they are sitting in great position. I’m no cheerleader but facts is facts. Now here’s an opinion – anyone sitting on the sidelines waiting for a big crash better have a comfortable seat.
hmm… Somehow I am not buying the ‘this time is different’ story. I heard it before in 2006/2007. Buy NOW or be priced out of the market. If housing prices don’t crash the dollar will. The former will be much less messy than the later.
I assume that you’re a newcomer? Welcome!
You can’t ignore the 180-degree change in getting a mortgage now compared to 2006/2007. It makes for a solid market full of buyers looking to raise families long-term.
In 2006-2007 nobody thought more than 6-12 months out.
And I am not sure anyone is yelling the buy now or be priced out forever bs anymore. I *think* the prevailing wisdom is that with the gains over the last 24 months or so, prices are back to where they should be more or less, and given all the other factors, huge gains or dips are not really in the cards. So if you want to buy a house to live in, go for it. Speculating on big short-term price appreciation at this point is folly — as is waiting for a big dip in prices. Put 20% down, grab your 4% 30 year fixed loan, and be happy.