From the Daily Reckoning:
Prepare for a ‘Repricing’ of the U.S. Housing Market
In our opinion the more a financial innovation proves successful, the more successful investors will find ways to make it fatal.
Norman Angell’s book, published at the beginning of the 20th century, argued persuasively that new innovations in politics and markets of the period made war unthinkable. People stopped thinking about it. They stopped worrying. They stopped taking precautions. Never had people been more optimistic and more complacent than they were – right up until WWI began in August of 1914. Then, all the innovations that so delighted Angell – industrialization, technological improvements, nationalization – became the exact same innovations that made it the bloodiest and most expensive war in history.
Coincidentally, that was also when U.S. property prices reached their last epic high. In real terms, they went down in WWI and kept going down for 70 years or more. Only in the last 10 years have they gone back up – returning to their 1914 high only in 2005.
And now, a whole new round of innovations are supposed to make market crashes and depressions obsolete. Perhaps it is true. But we wouldn’t bet on it.
The credit bubble has now been expanding at an extraordinary rate for so long that people have begun to take it for granted. But residential property in the United States is taking a breather, maybe even going down a little. U.S. stocks are taking it easy – flat since the beginning of the year. Oil seems stable around $55. Gold is marking time at $640. Bond yields have been rising for the last two months. Where’s all the money going? Or is this great liquidity bubble finally beginning to lose air?
If not yet…when? We wish we knew. Mr. Trichet warns that investors should prepare for a ‘repricing’ of financial assets. We doubt he knows any more than we do…but we don’t doubt he is right.
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Many homeowners have already lost money; they just don’t know or don’t want to admit it. They presume that by taking a property off the market, they are avoiding a loss.‘Cut your losses,’ is an old-time rule in the stock market. You thought a stock would go up…and it didn’t. This tells you that you’re wrong. You should realize that you don’t know what you’re doing; sell the position, and ‘let your winnings run.’
But the idea of ever-rising house prices is so deeply rooted that people cannot believe they’ve made a mistake. They cannot believe that their theory is wrong. They cannot believe that there is something going on which they just don’t understand. Instead, they merely assume that their timing was off.
“I was a little late,” they say.
And they think that if they hold onto the position, the time will come when it will be a good investment again.
‘Cut your losses,’
In RE???? John Q and risk management???. Nobody ever heard the word “loss” associatesd with RE.
Everybody on this site always links to this graph of Robert Shiller’s data:
http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif
His data clearly shows the last peak before the current boom was in the 1893, not 1914.
Who do we believe, the Daily Reckoning or Shiller?
I don’t see it – have been waiting for prices to come down for over a year and it hasn’t happened yet. It is sickening, I have put in a few low offers (15% below asking) only to be turned away with the seller holding out for their price. I don’t know how long it will be before 500k can be enough to buy a nice home in a decent neighborhood.
So when is that Shiller graph going to be updated I wonder?
Any chance the data used is available to the public?
TJ #3 I know it is discouraging at times, but please try and be patient. i lived through the last down turn,a nd it is the same thing all over again, only much more dangerous, because of all the reckless bidding and lending practicees.
Be patient, treat your self, and hang on. You patience will be rewarded.
The real sad of all this that some people have bought houses during the boom and overpaid for the dream home because there was a bidding war. How are they going to get to their break even point? Not to mention if they purchased using an exotic mortgage it will be set to adjust within the next year or so.
Freddie
In the markets I have been following the prices have been coming down on the more expensive properties and the marginal ones (i.e. not choice locations, or not top condition). I believe, eventually this will filter through to the rest of the market as they are used as comparables. The unfortunate issue is due to lack of liquidity and low volumes in the RE market this will take time. My initial timeframe was fall 2007, but I’m thinking more likely it’ll be sometime in 2008. This is all just my opinion and how I plan to handle my decisions.
Prices have been coming down over the past year. I decided to purchase a townhouse in November (just closed in January). Based on the tax records in my development from a year ago, prices have come down 15-20%. Another factor you can look at (which I believe is a good indicator) is the homebuilder stocks (HOV, TOL, RYL, PHM…). They have all been catching a bid off their lows and looks like they reversed their downward trend. Afterall, the stock market discounts future expectations. If nothing else, it shows that at least investors are willing to make the bet that we are near the bottom. In any investment, chances are that you are never going to catch the absolute bottom. I think it is time to start looking.