The “gloomy sourpusses” were right

From the New York Times:

They Cried Wolf. They Were Right.

IN May of 2004, Dean Baker, an economist in Washington who had been warning about excesses in the housing market, sold his two-bedroom condo after concluding that the market had lost its moorings from reality.

In a way, he was two years too early. Had he waited until May 2006 when home prices in the Washington area peaked, his home would likely have appreciated by roughly 38 percent from its 2004 value, according to an index that tracks home prices in the metropolitan region.

The case of Mr. Baker, who now happily rents a similar condominium a few blocks away, serves as a useful illustration about the perils of calling and timing financial bubbles. It may be easy to spot an out-of-control market, as Mr. Baker and others did, but quite another to predict when one has truly gotten out of hand.

In a replay of the years before the tech-stock bubble burst in 2000, housing market skeptics have spent much of this decade being tarred as the boys who cried wolf. Their predictions were proved wrong year after year as people continued to bid up the price of condos in Miami and new houses in suburban Phoenix.

Academics and economists like Mr. Baker came across as gloomy sourpusses who did not want Americans to have fun and grow rich by flipping second homes on the New Jersey or Florida coasts.

“The naysayers simply look silly at the end of the bubble,” said Mark Zandi, chief economist for Moody’s Economy.com who was among the experts raising questions about the underpinnings of the housing boom. “They are completely discounted and discredited because they have been saying things are askew for a year or two. It’s when the naysayers’ views have been completely discarded and discredited that the bubble inflates to its apex.”

Some in the real estate industry say the early cries of bubble should be called to account on the grounds of intellectual fairness. If the boosters have to acknowledge they were wrong when they provided justifications for prices that were, well, unjustifiable, then the doubters should also own up to the fact that they were too negative, too early.

“Even the people that were talking about booms busting, my goodness they were talking about it in 2001 and 2002,” said David Lereah, the former chief economist with the National Association of Realtors. “And they were wrong for four years and they only became right at the end of 2004.” He and his former employer had been criticized for the optimistic forecasts they made during the boom.

You got some of us sitting there in a distance saying that this is a bubble, we don’t know when its going to end,” said Christopher F. Thornberg, an independent economist who is based in Los Angeles. “And then you have mortgage brokers and real estate agents who are much closer to the buyer who are whispering in their ear that, well, yeah, there are some markets that are out of line but not this neighborhood.”

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64 Responses to The “gloomy sourpusses” were right

  1. grim says:

    Sorry, I couldn’t help but Photochop my own 2 cents in.

  2. SG says:

    BW Article,

    Surprise: ‘Toxic’ Mortgages Are the Best
    A new study from professors at Columbia and NYU finds that the “optimal” mortgage in a perfect world is an option ARM
    by Peter Coy

    Crazy? Not as crazy as you might think. The key, according to professors Tomasz Piskorski of Columbia Business School and Alexei Tchistyi of New York University’s Stern School of Business, is that this kind of mortgage is optimal only in a perfect world—namely, one in which borrowers are fully rational and always do what’s in their own best interest.

  3. lostinny says:

    Good job Grim.

  4. Expired MLS listing says:

    Hello … I had a few listing saved under my profile on realtor.con. They seem to have expired or delisted.

    Is there a place where I can find address for these ? And see what happened to these ? that is did they get sold (if so at what price) ? or were these withdrawn ?

    Thanks in advance.

  5. sas says:

    watching a little Fox news this morning..

    THey had a financial pundit on…

    He basically said the houding market is going to collapse. Sellers better lower prices and if you are buying best to wait 1-2 years!!

    wow, he spoke in very blunt terms and didn’t sugar coast anything.

    Shows that the psychology is really starting to change. YOu never would of heard this type of talk on major news networks one-two years ago.

    SAS

  6. sas says:

    Don’t buy RE, at this point in time its a depreciating asset.

    Markte timing is everything… now is not the time to buy.

    SAS

  7. rhymingrealtor says:

    “watching a little Fox news this morning”

    Sorry SAS you lost my attention after that line. (-:

    KL

  8. grim says:

    Expired,

    Just post them here and someone will reply with the status and history.

  9. sas says:

    Gold at $738.

    Dollar is going to take it in the shins for awhile. THe stock market is false gauge.

    Even Greenspan is calling it out… wow,
    ALthough, Greenspan is not your friend, and tries to pass the buk to the Bush Administration.

    “Report: Greenspan says euro could replace U.S. dollar as reserve currency of choice”

    http://tinyurl.com/yse22f

    If this was to happen, kiss goodbye everything you thought was true and what you are “entitled” too.

    have a good day.
    SAS

  10. sas says:

    yeah… Fox is mostly propganda.

    But everynow and then

    a ray of light shines through.

    SAS

  11. Clotpoll says:

    sas (6)-

    Those who try to time markets are playing against the odds.

  12. crossroads says:

    what news stations aren’t propaganda? it’s one side or the other. which is a shame

  13. PQG says:

    What’s all this talk about a collapse in housing prices!? The Fed rate cuts this past Tuesday are going to pump up housing.

    Let me explain the two parallel processes that will drive up home prices and, thus, return our economy to a healthy state where vast amounts of wealth are created efficiently by the bidding up of existing assets instead of inefficiently by developing and producing new stuff.

    Process I.
    1. Rate cut means more money in the economy.
    2. More money means everyone’s richer.
    3. Richer people can afford costlier homes.
    4. Housing prices rise.

    Process II.
    1. Rate cuts mean borrowing costs are lower.
    2. Borrowing costs being lower mean borrowing costs for homes are lower. That is, mortgage rates will go down.
    3. Lower mortgage rates mean people can afford to borrow more money to buy a home.
    4. Access to more borrowed money means housing prices are bid up.

    Why the Fed doesn’t do this more often is puzzling. They should do it all the time! What’s the downside? It seems to be an economic panacea!

  14. t c m says:

    i think people tend to accuse news outlets of propaganda when they don’t agree with them –

    in my opinion, it’s hard to tell – you may hear something you agree with politically, and it’s still propaganda – the best way to try to get closer to the truth is to keep an open mind and try to watch/read different outlets.

  15. Frank says:

    #13,
    PQG, What kind of drugs are you doing? I want to try them. Keep on dreaming!!

  16. READ MY LIPS: Do not pay more than 35% of income says:

    Currently, there are 36,263 properties advertised for sale in NJ

  17. Frank says:

    Currently, there are 100,663 properties advertised for sale in NJ.

  18. Zack says:

    PQK – yeah, keep reducing rates and soon we will be paying $5 to buy a candy from canada. or $1000 to buy a crib from china.
    Be meaningful in your posts here..

  19. BLB says:

    “what news stations aren’t propaganda? it’s one side or the other. which is a shame”

    Well, exactly.

    Seems to me that after the NYTimes (which freely admits its bias) and CBS News (which got caught with its pants down – Rather than report fairly), people would be a little more reluctant to bash Fox. Glass houses, stones, etc.

  20. READ MY LIPS: Do not pay more than 35% of income says:

    Currently, there are 100,663 properties advertised for sale in NJ.

    Garden State MLS’ public search engine. Currently, there are 36,263 properties advertised for sale in NJ

    Holy Cow

    BOOOOOOOOOOOOOOYAAAAAAAAAAAAAA

    Bob

  21. READ MY LIPS: Do not pay more than 35% of income says:

    PQG Says:
    September 23rd, 2007 at 10:24 am
    What’s all this talk about a collapse in housing prices!? The Fed rate cuts this past Tuesday are going to pump up housing.

    Let me explain the two parallel processes that will drive up home prices and, thus, return our economy to a healthy state where vast amounts of wealth are created efficiently by the bidding up of existing assets instead of inefficiently by developing and producing new stuff.

    Process I.
    1. Rate cut means more money in the economy.
    2. More money means everyone’s richer.
    3. Richer people can afford costlier homes.
    4. Housing prices rise.

    Process II.
    1. Rate cuts mean borrowing costs are lower.
    2. Borrowing costs being lower mean borrowing costs for homes are lower. That is, mortgage rates will go down.
    3. Lower mortgage rates mean people can afford to borrow more money to buy a home.
    4. Access to more borrowed money means housing prices are bid up.

    Why the Fed doesn’t do this more often is puzzling. They should do it all the time! What’s the downside? It seems to be an economic panacea!

    ==================================
    You are a clueless person. Money for nothing has its cost. We are paying dearly for these money for nothing monetary policies.
    The game is over. No more freebies.

  22. rhymingrealtor says:

    Ummmm I think pqg was being sarcastic??

    KL

  23. Bubble Disciple says:

    Regarding PDQ being sarcastic, it’s hard to say: first time I’m seeing that handle.
    Now, if he used “BOOOOYYYYAAA”, we’d all know for sure.

  24. Pat says:

    Well, KL, Oh Thou of Nice Intentions, I am of the opinion that PQG is JB being a smart@$$.

    Who has a middle initial “Q” anyway?

  25. Pat says:

    Disciple, we are too jaded.

  26. Clotpoll says:

    Frank (15)-

    PQG isn’t doing drugs. He’s sniffing glue.

  27. afe says:

    clotpoll said:

    Those who try to time markets are playing against the odds.

    I have to offer that waiting to see what happens with sub-prime lending, or with ARM-resets, etc. are technically aspects of “timing the market”, even waiting to see how many houses go on the market in a particular month (i.e., 9/07) amounts to as much. But if these factors all play into a strategy that is based on the “fundamentals” of the housing cycle, there is nothing wrong with “timing the market”. Just b/c someone has their downpayment burning a hole in their savings account does not necessitate a bid on a house. Other factors have to be in play before this can happen (i.e., opportunites). As Clotpoll has suggested, I do believe these opportunities are occurring but probably not at a discernable rate in the majority of cases.

    afe

  28. Clotpoll says:

    Pat (24)-

    John Q. Public?

  29. zieba says:

    Mornin’ gang.
    I’ve been a lurker for quite a while, just wanted to say hello.

    Given the wide latitude of topics on the weekend discussion thread I figured my post was in line. I’ve uploaded some reports to my site that might be of interest to some.

    reflationinflatioberner – is a report on the fed/buck by Berner a Morgan Stanley economist. The rest are just metals/trading related there might be one or two monetary reports…just browse around….

    http://www.geocities.com/naz_vegas/reports/

    BTW- Greenspan is on meet the press this morning answering questions like “Should the US take preemptive military action against countries that threaten our economic system”….this was right after reminiscing of his first date with Andrea and luring her back to his apartment on the pretext of reading an essay or monopolies….WTF?

    some info:
    the youngest poster here is probably ten years my senior, I’m in NYC and looking to rent in NJ when my firm moves to the cliffs north of GWB, eyeing a purchase down the line if I can unload some uber-appreciated family owned real estate in Europe.
    You think its bad here? I’ve got a 500 urine soaked square feet in a crumbling building with comps in the 60K range…that’s american dolaros….and this is closer to Kazahstan than NYC. :) and oh i don’t make my living in finance, just a hobby on the side…

    cheers!

  30. Clotpoll says:

    afe (27)-

    Exactly. Trying to market-time in securities trading is next to impossible, because volume and velocity are too great. All too often, traders don’t know the bottom is in until it’s in the rear-view mirror.

    Real estate, on the other hand, moves at a relatively glacial pace. It’s the other side of the coin, in terms of bottom-calling. All the stats are trailing, there’s no mark-to-market, and every new day feels just like the previous day. Days like last Tuesday are the rarity…when one can sense an immediate and game-changing move. For example, the forced sales that flow from the gigantic amount of October/November ’07 resets may not have an effect on comps until May/June of ’08. How could one even begin to build a pro/con bottom case on such slow, trailing data?

  31. afe says:

    clotpoll-

    So my read on your assertion re: market timing is that it is much better to go out and play the game than (in an extreme case), sitting around waiting for MSM to call bottom before moving. yes?

    There really are too many other factors at play here to be able to tell when the “right” time to buy is for person A vs. person B. Not only that, but those factors can change over a short period of time (e.g., that bonus that seemed like a secure, sure bet 6 months ago, is not anymore). That is probably one of the main limitations to coming to a board like this. The “we are all in this together” mentality that helped us survive the boat initially taking on water may cause some of us to take too long to start swimming away from the wreckage waiting for everyone else to do so.

    afe

  32. lostinny says:

    Re; market timing. Maybe I have more of a luxury in that I can afford to wait and am in no rush to buy. But the right time for me will be when the market returns to 2000 prices + 5% a year. So if a house cost 200k in 2000, 5% a year appreciation brings it to 270k. For sh!ts and giggles we can say something within 10% of that. That would be 297k or less. Round off to 300K to be nice. Please show me where those homes are because I don’t see them. When I do, that’s when the market will be right for me.

  33. PQG says:

    Just to clear thngs up regarding my last post (#13): It was an attempt at sarcasm. I thought the part where I wrote

    Let me explain the two parallel processes that will drive up home prices and, thus, return our economy to a healthy state where vast amounts of wealth are created efficiently by the bidding up of existing assets instead of inefficiently by developing and producing new stuff.

    would make the sarcasm detectors go to their maximums.

    However, I’ve been watching CNBC and other business news channels for the past few days. Sometimes it seems that many of the ‘experts’ they have on are downplaying the potential downsides of the lowering of the rates and focusing more on how it’s just what the doctored ordered. So I shouldn’t be surprised if the some thought I was being serious.

    After all, I’m sure a lot of people think that if the stock market skyrockets and Kudlow has a big fat smile frozen on his face after some event, then it has to be good for everyone over the long term.

  34. RayC says:

    “Even the people that were talking about booms busting, my goodness they were talking about it in 2001 and 2002,” – David Lereah

    If only HE was being sarcastic. He still doesn’t get it (or is paid to not get it) that the market wasn’t healthy then and sick now.

    It was drunk then and severely hung over now. If it got any more inebriated it could have died from alcohol poisoning. No more analogies for me today, I promise.

  35. Bloodbath in Winter 2007 says:

    Clot – I understand your logic on not wanting to try and time the market … but when you look at JB’s chart above, it does seem obvious that the end is NOT near.

    My humble assessment is to wait and see what happens after all these foreclosures take place. If only 1/5 of people with 3-year arms foreclose, we’re still looking at a tsunami of houses coming onto the market.

  36. Bloodbath in Winter 2007 says:

    PQG – You are drunk, delusional, or both.

    After the fed cut rates, mortgages on 30-year fixed loans went up.

    http://ap.google.com/article/ALeqM5iBKSZB3l69BiVRfJpIp5SSEKir3Q

  37. BC Bob says:

    “U.K. Prime Minister Gordon Brown defended the nation’s system of financial regulation and Bank of England Governor Mervyn King following a run on mortgage lender Northern Rock Plc.”

    “Mervyn King has been a brilliant governor of the Bank of England,”

    [Edit] Brilliant? A monkey could have also turned on the presses. Gordon Brown? You are simply a dolt. Talk about market timing, you sold massive amounts of gold at approx $250 oz. avg in 2001-02, 40 year lows in gold. I can picture the Guinness commercial, “Brilliant”

    http://www.bloomberg.com/apps/news?pid=20601087&sid=ax_4c5abPPMY&refer=home

  38. Bloodbath in Winter 2007 says:

    Curious – friend tell us that instead of putting his money into the stock market or mutual funds, he’s paying down his mortgage by an extra grand each month (has 30-year fixed).

    We don’t think this is the smart thing to do – we think it’d be smarter to get some mutual funds underway. (Friend already has ING account and 401k.)

    Thoughts? (or is much more needed to even take a stab?)

  39. lostinny says:

    Blood-
    I think it depends on interest rates. For me, if the mutual fund earned more interest then the interest cost on the mortgage payment, then it would make sense to put it in the mf. But if the mortgage interest was higher, then I’d put it into the mortgage- especially considering hes’ already got the ing and 401k.

  40. short sale says:

    Anybody here familiar with short sales with WellsFargo? my friends and I are pooling together cash of 825k to buy a house that is for sale by an agent listed at 969k. apparently, the owner owns the bank 1 million dollars. We just heard they got another offer for 910k but with 15% down and an mortage contingency. Which offer do you think the bank will take? how much is the cash offer worth?

    We want to get the house but at the same time do not want to overpay unnecessary.

  41. nino says:

    I also came across a short sale opportunity but the seller has several mortages. Primary mortage and than a few home equity. Do I need to negoitate with all the banks?

    Anyone know?

    THanks
    for the help!

  42. pretorius says:

    JB,

    Congratulations on your timely “I’m calling the top” pronouncement.

    Everyone,

    Instead of looking at Schiller’s national charts, I recommend that you check out this New Jersey chart. I shows that the most recent boom in New Jersey home prices was similar in magnitude to the boom before it. In other words, the most recent boom wasn’t anything special.

    http://njrereport.com/files/nj_ofheo.xls

  43. BLB says:

    I’m assuming the excel data includes places like Burlington County, Camden, pine barrens etc.

  44. LOUIS BREITBACH says:

    WE HAVE GONE WAY UP, DOWN A LITTLE AND WILL COME BACK IN 2008

  45. grim says:

    I’m assuming the excel data includes places like Burlington County, Camden, pine barrens etc.

    It does, it is the OFHEO HPI index for the entire state.

  46. grim says:

    Most certainly not as useful as something like the S&P Case Shiller index for the NY Metro area or the OFHEO HPI at an MSA/MSAD level.

    jb

  47. Bloodbath in Winter 2007 says:

    Pret – If this last boom was ‘nothing special’ then how to explain the massive disconnect between salaries and home values?

    Why then, when we look at previous purchase dates and prices, are we seeing sellers asking for 50-100% more than what they bought for just three and four years ago?

    Pick a house in Bergen County that’s selling for 600k. Then, look up the house on zillow or trulia and see what the owner bought for.

    That difference was simply not there in the 80s and 90s.

  48. pretorius says:

    “Most certainly not as useful as something like the S&P Case Shiller index for the NY Metro area or the OFHEO HPI at an MSA/MSAD level.”

    Why not? I understand the limitations of the OFHEO data, but is there a better long term (20+ years) data set for New Jersey?

  49. BLB says:

    “Why not? ”

    For starters, the character, demographics, and economics of southern Jersey are not really connected to NNJ.

    What you really want is OFHEO data for NJ within a 50 mile radius of NYC assuming it exists which it doesn’t.

  50. grim says:

    pre,

    BLB answered before I could, but my concern is the same. Because of the numerous sub-markets in NJ, I’d prefer to look at the data on an individual MSAD level.

    New York-Wayne-White Plains, NY-NJ
    Newark-Union, NJ
    Edison, NJ

  51. Essex says:

    #47….blood, people took out so much equity that they have to get these prices or they are underwater…..’owners’ have cars, boats, rolexes…..all tied up in their homes…..thanks to easy credit.

  52. sas says:

    “WE HAVE GONE WAY UP, DOWN A LITTLE AND WILL COME BACK IN 2008”

    what makes you think that?

    Many believe we are about to see major…major declines.

    I hope to hell we do. I’m shorting the market, the more people lose homes… the better off I am…

    ahh.. I love life ;)

    SAS

  53. UnRealtor says:

    Always get a kick of how people fixate on Fox News, often to the point of hysterics. Why not read/watch all news sources, and continually evaluate?

    CBS News had Dan Rather’s forged documents.

    The NY Times had “Abu Ghraib” on the front page, above the fold, for 40 straight days. (During this particular propaganda streak, American Nicholas Berg had his head sawed off by muslims, and the NY Times ran the story once, below the fold, then returned to their “Abu Ghraib” propaganda marathon for another 20 days).

  54. Bloodbath in Winter 2007 says:

    true, Essex, but the people who wisely sold in 2005 didn’t do so for that reason … their houses had simply skyrocketed in value, and they wanted to cash out.

    I don’t know the answer to this – and only realtors can answer it, really – but most houses on the market STARTED out asking prices that 2005 sellers got.

  55. UnRealtor says:

    It’s amazing how properties are just sitting.

    Some sellers are lowering prices in small chunks, but most are still close to 2005 mania prices.

    Every few months a property will come on with a serious seller, priced for today’s market (i.e., 2003 prices), and it will sell quickly.

    But those are fairly rare. Most listings just sit, and sit, and sit.

    We’re a long way from 2005:

    1) Today there’s no buyer mania.

    2) There’s no expectation of “appreciation” in the next few years, so it doesn’t make sense to buy a house that isn’t great.

    3) No longer can people buy a house, slap on some paint it, and sell 2 years later for $100K profit.

    4) Exotic financing is disappearing.

    Yet so many sellers are living in a Dream World, determined to “Get Their Equity From 2005.” Not gonna happen.

  56. pretorius says:

    JB,

    Can I find data for those submarkets that goes back across the last 2 cycles?

  57. Essex says:

    I’m liking what I see around here, values and sales….not overbuilt….still semi-affordable in pockets….it is taxes that’ll kill ya.

  58. JCSidelines says:

    who are the winners and losers in a bubble–thus bubble let’s say?

  59. JCSidelines says:

    who are the winners and losers in a bubble–this bubble, let’s say?

  60. Clotpoll says:

    afe (31)-

    Yes. When MSM sounds the “all clear”, you can be assured that it’s already old news.

    You make a good point in asserting that individual needs do (and should) trump timing in determining the when, where and how of homebuying. Waiting to catch a market bottom in order to buy a home you’ll live in for 10-15 years reeks of penny-wise and pound-foolish.

  61. Clotpoll says:

    Bath (35)-

    Sure…but, can you envision 1-2 scenarios that could immediately turn this assumption upside-down?

    I can. And even though they are longshots, they are plausible.

  62. 3b says:

    #44 Louis: please get help.

  63. 3b says:

    #42 pret: Watch and learn grasshopper. You bought at the top, now you are in denial, and refuse to admit that this was a bubble that has now popped. It really is that simple.

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