A couple days ago I was telling a good lender friend of mine I wasn’t gonna publish my thoughts on this correction’s life span. After reading some of the singers from the Choir of the Left Behind and Bitter, I changed my tune.
Be patient with me here as the following short vignette comes from a phone conversation yesterday with Brian Brady, the most knowledgeably effective mortgage broker I’ve ever met in person. We spent some time going back and forth a bit on what this year will offer in terms of the market correction. I flat said I wasn’t gonna make my opinion public.
Then he told me what’s been happening since the first of the year.
He’s busier than Todd Kaufman’s PR guy. 
Not owners looking for lower rates, but buyers looking for purchase loans. It’s only Friday of the first week of the year, a short week at that, and he’s already only chewing every other bite of lunch to save time. Assume Brian’s givin’ 2008 two thumbs up so far.
Does this mean anything? Who could possibly know one way or the other?
Brian calls it a ‘dead cat bounce’ a phrase drawn from his Wall Street days. I love it when he talks that way.
I’ll leave it to guys like him to show us their takes using charts, graphs and the like. It’s not that I don’t use the same data they do. It’s that my tendency is to dine on data seasoned generously with experience — digest it awhile — have a little data ala mode for dessert — then allow time for digestion.
Everybody has their own way of getting from point A to point B. To each his own, live and let live.
I say live and let live cuz there’s a common denominator beginning to show itself. Those who think the nation’s real estate market is gonna turn around next Wednesday afternoon at 3:34 aren’t daunted by those who disagree, even when it morphs into personal attack. They believe what they believe and are more than willing to let the chips fall.
Many of those prophesying up to 10 more years of financial death and destruction become more than a little irritated when some ignoramus danes to disagree. At that point it often turns personal. They deny any ill intent, but words mean things, regardless of after-the-fact denials. They can’t understand why others can’t see what they think is so obvious to them. Dad used to call them bitter, angry men. At times it seems they’re not so invested in being right as they are reveling in the anticipation of all the negative consequences if they’re correct.
Lord knows I’m not protecting a perfect record when it comes to predicting real estate’s future. As I’ve accumulated the scars (lessons) of nearly 40 years of seeing ups and downs, I’ve also learned a little about recognizing transitions between cycles. Lenders have such a huge role in every stage — for good or not so good.
A few short months ago the first earth shaking changes in lending became reality. I said on these pages in plain English it would last no more than six weeks. It took about 20 days before lenders started undercutting each other with new loan programs which just weeks earlier were ‘off the board’ for the foreseeable future.
Now we’re facing what’s been described by many as draconian changes — by way of the universally feared underwriter.
Draconian changes my Aunt Evie! Give me a break.
If you believe that, I’ve got some other good ones for you — the first an oldie but a goodie.
If the price of gas rises to 85¢ it will ruin the economy in two years max. The Padres will win a World Series in my lifetime. It makes sense to buy San Diego income property.
What those changes amount to is this. It’s gonna be more expensive in upfront costs and/or interest rate for those with mediocre or poor credit histories and scores. What will they think of next? In layman’s language it means middle school teachers can no longer get a stated income loan saying they make $130,000 a year. Lenders will now politely ask them to prove it or go away.
Don’t believe lenders aren’t lending, cuz it ain’t so. Investor loans?
How ’bout mulitiple loans of 90% fixed rate, amortizing — and of course non-owner occupied — for the same buyer? In a location more than a thousand miles away? The biggest change I’ve had to allow for has been for a client or two. Their credit history and score are both stellar. Their incomes, alas, are not. A slight increase in down payment and voilà! we have loans.
So much for draconian changes.
Warning — full speed change of subject coming.
Is Brian right? Are we to experience the appearance of this correction beginning to slow its downward slide — only to realize it was a mirage?
Yes and no. Let me explain.
I assume Brian knows a dead cat when he sees one. That said, I think the sales he’s seeing are more the result of the season and the predictably attached optimism. Or it could be the harbinger of brakes beginning to be applied. That said, the data is fully digested. I’ve concluded the following as a result of what I’m seeing and what my experience tells me is about to happen.
Is recession ahead? I don’t think it matters one way or the other. The old bitter guys are grinding their teeth as they read that, but in truth there are times when recessions go unnoticed by real estate. 2001 is the latest example. IF there’s a recession, it could prove pretty short lived — a year at most.
As I see it, the second half of this year is gonna far exceed the so called consensus expectations. That doesn’t mean there’s gonna be a return of silly appreciation. Far from it. In fact, all that’s required to exceed expectations is for this correction to show even tiny cracks in its armor.
What the heck does that mean? It means this time next year when looking back, the signs will tell us the correction had slowed to begin its U-Turn. It’s timing will be staggered depending the local market. Those that rose the highest have generally fallen the hardest, and will recover more slowly. Not always of course, but mostly.
2008 will very possibly be the year the correction begins visibly slowing, as it ponderously readies itself for a painfully slow trip down Normal Blvd. in 2009. This year, at least until summer some time, the ability for astute investors to remain under the radar should remain intact.
It’s all my opinion which I’ll now attach to the normal qualifier. This prediction along with my heavily armed Starbucks card will buy us all some great coffee and big cookies.
For those thinking this correction will only end when my unborn grandchildren are singing Christmas carols in fourth grade? More power to ya. You could be right. Not frickin’ likely, but you could be right. I am however, very interested in your take. Be nice, be respectful, and let it fly.
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About BawldGuy
Jeff – We’ve seen a big jump in buyers as well, but like you said, it appears to be a new historical norm for us. Used to be that the jump came towards the end of February. Last year was the first year that it actually came the first 2 weeks of January. It’s here again.
With that said, the market is what you make it. If you want it to be dead, it’s dead for you. If you want it to be a great market, it’s great for you. As far as I’m concerned, we fully intend on increasing our business by at least 50% this year and we are on track to do so.
Do we have more room to come down in prices? Probably and, selfishly, I’m hoping it happens sooner than later.
I had a conversation with a client yesterday about prices in San Diego County. The more tony communities are holding their water while the lesser-priced ones are getting hammered. The same thing is happening all over SoCal.
This thing is all about the financing so incomes will dictate the mortgages (and ultimate landing prices) for the common guys’ house.
Interesting info, Jeff: There are SFR’s available, SFRs not condos, under $400,000 in Long Beach, San Diego, and Anaheim. There are condos available under $200,000.
We can’t feel bottom but we can see it
IIRC in the last correction in the 1990s it was the high-end stuff that got hammered. I remember someone who had a house in the OC hills that went from $1.6M to $599K. But I digress, because this time it looks like the lower-priced product is taking the hit.
Jeff, I think your prediction is accurate. The so-called draconian underwriting is simply rationality. We’re gonna be all right. Too many factors and solid fundamentals (so far) will contribute to a turnaround, unless the media scares us into deeper waters. Some markets may suffer longer because of irrational exuberance (e.g., Florida) but all in all I think the second half of the year will be better.
Brian suffers from survivor’s bias. Because he’s a good and effective and productive broker he by definition cannot speak to the possibly 1/3rd of brokers that are likely to disappear in the next year. My uncalibrated finger in the wind tells me people are making one last deal or settling in for a long slow period. The higher end is holding up because it takes time for ripple effects of far fewer entre buyers to filter up the pyramid. It won’t be long before demographics reasserts and attrition of qualified owners trends those price down as well absent the past years of exotic financing. Optimistic is a healthy attitude but one needs to differeniate between won’t suck as bad as some claim and plain old won’t suck.
Robert — I guess it comes down to whether that’s your opinion, or if you found the long lost third tablet Moses apparently dropped.
Agents staying or leaving the business, in my opinion, don’t affect how many homes sell for how much. ‘Surviving’ agents end up doing the business that would’ve been done by the ex-agents.
Your finger could be spot on, as that would indicate a dead cat bouncing, sort of.
Christina — When I first started in the business it was just before Halloween. Dad told me not to listen to other agents about taking it easy late in the year. He said if I worked even harder I’d do the deals they weren’t — and he was right. It also made my Januarys a lot more productive, as those who waited for the ’1st of the year’ either listed with me or bought.
I predict you’ll reach and surpass your 50% goal easily.
Brian — It’s akin to swimming back to shore while in the ocean. You feel the bottom first. Great analogy.
David — Interesting how SD and Chicago are experiencing hits on opposite ends of the spectrum. Local is what we preach though, right?
You mentioned fundamentals, which is the drive train on which I based by thinking. Thanks
IIRC the third tablet starts with:
XI: Thou shalt invest in real estate.
We are all opining here. Save the rigorous analysis for other topics. In my unworthy opinion I do think the number of both real estate agents and mortgage brokers will have an impact on sales and prices and terms. Fewer RE agents will winnow out the less skilled and less ethical leaving a more rational body of listings. No more wild wishing prices or undeclared cashback terms to muddy the waters. Fewer mortgage originators/brokers along with tighter standards puts the rest in the right loans and reduces the temptation to push volume with questionable/borderline deals. The new goal will not be getting someone into a house but getting someone who can preform on the purchase agreement. By definition that is fewer sales and sharper prices. I’m thinking of 2008 as the year of saving for a down payment. It isn’t as if we went from 103% loans to 90% loans over a period of a year or so. It will take time for buyers to re-qualify. Depending on how long that takes 200 could be a very good year indeed but I don’t see it happening this year. But what do I know, just another voice in the crowd.
There is no doubt there is a falling out of agents and lenders. Just look around. And as luck would have it I touched on that subject today.
And while I see where Robert is gowing I’m not completely sold on that line of thinking. Inexperienced agents didn’t just luck into sales of overpriced homes. It was a market force. Just as the market is now culling out the non-pro.
Funny thing is, the producers in our office almost to a man had more sales this year than last. And most feel it will be the same for ’08. But to be new and part time? I don’t think so.
As far as the investor take on all of this it has always been my belief that I’d rather my clients have at least 10% in, anyway. So losing the marginal investor is probably better for everyone involved.
Recession or no. Economic boom or no. There are always people with money, vision and determination.
Chris — I think you and the producers you mention are reaping the deals of those no longer working, as I said above.
Your thinking on the market vs more or less agents is in line with my thinking. The market is the market is the market.
At least that’s what it says right here.
We’ll all voices singing different parts in the same choir. It’s just that sometimes we don’t offer the best harmonizing available.
A shrinking agent pool hasn’t been shown to have a direct affect on ultimate sales prices, at least that I’ve ever heard. Your rationale makes sense on the surface. That said, there’s an unspoken assumption that buyers will change their behaviors significantly enough to alter market prices as a direct or indirect consequence of the agent population. Not sure I can see that.
There’s an unspoken assumption that buyers will change their behaviors significantly enough to alter market prices as a direct or indirect consequence of the agent population. Not sure I can see that.
I agree it isn’t obvious on the surface. Humor me then beat me up if you think I am still off base.
What kinds of agents are leaving? This isn’t a trick question nor a hard question. Let’s pick an extreme example agent and see what happens. I pick that paragon of virtue David Crisp. I’m not cheating, I said extreme example, and let’s not paint with a broad brush. I’m just saying now that Crisp is gone we know that several hundreds of properties in Bakersfield were incorrectly priced. These are the agents that are leaving. It isn’t just his own dirty deals but we are discovering daily that his network was distorting the entire regional market. Even if you want to for whatever reason gloss over any potential price distortions there’s no denying that as all these deals unravel their REO inventory status is dragging prices down.
I’m not making the general case but the challenge was to provide an example. I’d never stoop to comparing people to David Crisp but I doubt anyone can deny his actions have resulted in the distortions I describe.
We honest retail players are no longer going to have to compete with these phonies. That means we get better prices doesn’t it? You honest agents and mortgage brokers don’t have to shave ethics or necessary margins to make the deal either.
It is way too early too declare a winner but I ask you to keep an open mind that my points might have merit pending confirmation.
My challenge was for an entire market. I can also point to extreme agents, and you’re right when you point to the desolation they leave behind.
However, the Bakersfield market in general wasn’t affected either way enough to matter.
Your point about it being easier for us is golden. I’m seeing this everywhere Brown and Brown go. The general quality of agents in any given office are noticeably improved — and that does indeed help you and I.
Your point about it being easier for us is golden. I’m seeing this everywhere Brown and Brown go. The general quality of agents in any given office are noticeably improved — and that does indeed help you and I.
Truer words were never spoken. Disagree with my poor elocution or choice of illustrative example but you definitely get my central thesis. I applaud the noticeable quality improvements of all the participants. And while you didn’t mention it the remaining potential retail investors (we remaining customers) have got to make you more comfortable with their ability to participate successfully as well. It has to have been hard to tell people ‘no’ to a deal because they didn’t grasp liquid reserves or verifiable income minimums.
We can still respectfully disagree about the bad actors and their impacts. I’m looking at the early default rates for loans in 2006-07 and the known investor proportion in places like Phoenix and Las Vegas and conclude that these were not commitments to homes but rather naked bets on margin. I am not talking about 125x rents in a demand market, I am talking about highly leveraged purchases with no real rental investment prospects. Don’t get me wrong about my outlook, these could very quickly turn into opportunity. I’m not predicting general chaos and to be honest you have to admit I’m being pushed into playing a bit of the devil’s advocate here.
Robert:
I don’t think I’m suffering from survivors’ bias; I’m hoping for a case of the “realities”. I’m more firmly in this camp:
http://exurbannation.blogspot.com/2008/01/valley-prices-return-to-may-2005-levels.html
I want it to happen so we can get back to the business of rational optimism rather than castle-in-the-air exuberance.
I do get your general thesis and agree with it on the surface. The quality of agents, as always at this point in the cycle, will noticeably ramp up.
It’s never difficult for me to turn an investor down due to insufficient (or zip, zero, nada) cash reserves. (Sominex Account) I don’t mind being the bus driver, but knowingly heading the wrong way on the freeway ain’t my cup of tea.
I think Brian would agree, as do I about investors treating homes in certain areas like buying stocks on margin.
Problem was, nobody explained margin calls.
It’s my belief, and I’m acting on it, that buying this year will make a positive difference in investors’ lives over the long haul.
It’s my belief, and I’m acting on it, that buying this year will make a positive difference in investors’ lives over the long haul.
There are always deals. We are just “arguing” over a theoretical best time for deals. Angels dancing and all that. Most would grow old and gray without pulling the trigger waiting for that best time. I agree with you that if the deal works at the beginning it will ultimately prove beneficial to the client be it 2008 or 2009. Just because I see the best deals sometime after Q3 ’08 in no way is a condemnation of any deals that might make sense this spring. Heck, you have to look at all kinds of things like foregoing depreciation and rental income and taking months or a year off the note and the possibility that rates may be higher when prices are lower. If rates plummet this spring count me in as an early buyer and damn trying to get the best price at the expense of higher carrying costs.
Frankly, I’m lickin’ my chops in anticipation of getting The Boss and I to some new digs this year. I’m trying like crazy not to fall into the ‘kid in the candy store’ syndrome.
Nicely done… written in such a way that I believe many will come away simply feeling vindicated in their thinking- regardless of what that is. Bottom line is this market is what you make of it.
The buyers are there, and they are looking for an excuse to buy. They want to be told that it is going to be okay.
The Greater Charlotte market is heating up. Builders – primarily nationals with a local presence – hit the panic button in October and they still haven’t pulled off. The give-aways worked on the fence sitters.
I work expired listings, and after 100′s of calls from Jan 1st through now, I can tell you that the ‘I don’t have to sell’ sellers have pulled off to wait and see. The result of the builders’ sell off and the locals waiting is lower inventory in most price points, and strong showings as a result.
We are seeing an uptick in sales in the mid range – which here is $250K- $500K and the upper range. Lower priced homes are also selling well, but against a much higher inventory, primarily because the foreclosures and short sales still haven’t burned off in that range. In mid and upper ranges, the foreclosures and short sales are almost nonexistent, as they go for right at retail.
We – my team and I – make a point of yelling at the top of our lungs against the media negativity. Others need to do the same.
And if anyone believes the election here has nothing to do with this, they need to get their cranium out of their rectum…
>written in such a way that I believe many will come away simply feeling vindicated in their thinking- regardless of what that is.
I wrote in unambiguous English.
The inventory is indeed being reduced, which is having a positive effect, as you’ve pointed out, on existing houses.
Today a Phoenix agent reported his tour of a few home builders’ sites over the weekend. They were busy as a county fair.
Builder inventory, short sales/foreclosures, and panic sellers will pretty much be out of steam by the end of this year — according to my amazingly unreliable & cracked crystal ball.
That’s when, as you seem to say, the regular housing market will begin to heal in earnest.
The media will continue selling death and destruction until they’re overcome with empirical evidence to the contrary. They give up only when they begin to appear foolish in their own eyes. Of course by then they’ve played the fool for quite awhile.