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Friday, February 09, 2007

Our Present Real Estate Cycle

Just for kicks, let's take another look at the home price YOY change graph that I posted on Wednesday.

I noted that the downward curve on the right that represents the last nine months looks fairly steep. But just how steep is it, compared to the rest of the graph?

In order to get a feel for the "cyclic nature of the market" I ran some calculations. Since things were slowing down at the beginning of the available data (1993), I defined a complete cycle as a slowdown, trough, speedup, plateau. I calculated the average month-to-month change in year-over-year home prices for each slowdown, trough, speedup, and plateau.

In other words, when "appreciation" was on the rise, how quickly was it rising? When it was declining, how quickly was that? I did a little number-crunching, and here are the results.

Cycle #1: January 1994 — June 1998
Slowdown: January 1994 — March 1995
Median YOY Start: +5.33%
Median YOY End: -1.77%
Total Change: -7.10 points
Time Elapsed: 14 months
Average Monthly Change: -0.51 points

Trough: March 1995 — September 1995
Median YOY Start: -1.77%
Median YOY End: -1.82%
Total Change: -0.05 points
Time Elapsed: 6 months
Average Monthly Change: -0.01 points

Speedup: September 1995 — February 1998
Median YOY Start: -1.82%
Median YOY End: +15.10%
Total Change: +16.92 points
Time Elapsed: 29 months
Average Monthly Change: +0.58 points

Plateau: February 1998 — June 1998
Median YOY Start: +15.10%
Median YOY End: +14.67%
Total Change: -0.43 points
Time Elapsed: 4 months
Average Monthly Change: -0.11 points

Cycle #2: June 1998 — April 2006
Slowdown: June 1998 — March 2001
Median YOY Start: +14.67%
Median YOY End: +0.35%
Total Change: -14.32 points
Time Elapsed: 33 months
Average Monthly Change: -0.43 points

Trough: March 2001 — June 2003
Median YOY Start: +0.35%
Median YOY End: +1.72%
Total Change: +1.37 points
Time Elapsed: 27 months
Average Monthly Change: +0.05 points

Speedup: June 2003 — October 2005
Median YOY Start: +1.72%
Median YOY End: +20.00%
Total Change: +18.28 points
Time Elapsed: 28 months
Average Monthly Change: +0.65 points

Plateau: October 2005 — April 2006
Median YOY Start: +20.00%
Median YOY End: +18.17%
Total Change: -1.83 points
Time Elapsed: 6 months
Average Monthly Change: -0.31 points

Cycle #3: April 2006 — ???
Slowdown: April 2006 — Present
Median YOY Start: +18.17%
Median YOY Present: +10.13%
Total Change: -8.04 points
Time Elapsed: 9 months
Average Monthly Change: -0.89 points

As you can see, the slowdown we are currently experiencing is nearly twice as rapid as either of the two previous slowdowns since 1994. Clearly this does not tell us anything about what is going to happen in the near future, but it's definitely an interesting point to note, and one that you're not likely to read in the local newspaper or the blogs by those in "the industry."

Down and down it goes, where it stops... nobody knows.


Wanderer said...

I was having some fun with the numbers as well by looking at what the YOY appreciation will look like in May 2007. What would happen if the "spring bump" in prices this year was just simply AVERAGE? Nothing too crazy faster or slower than that... just average. Looking at the % increase from Jan-May going back to 2000, we should expect about a 6.6% increase during those months. For reference, we saw 9.4% last year.

Soooo... what would the YOY appreciation look like in May if we saw average spring growth? We would be at median (combined) prices of 405,000 and 5.2% YOY growth. Plot that on Tim's graph and it falls right in line.
Is there anyone out there that wants to bet on whether we see the average spring bump? What if the bump is only 4% you ask? Then the YOY appreciation in May will be a whopping 3.0%. Not bad... for Japan circa 1990.

Wait, wait, wait. Assuming 4.4% growth in the spring MUST be ludicrous! Higher right? As it turns out, the average increase Jan-May when you exlude the last 3 years (each above 8.9-9.8%) is 4.4%. Hmmmmm.

Wanderer said...

Btw... the 4.4% avg increase went back farther to '93 by using the median homes prices instead of the combined numbers available after 2000.

Eleua said...

"Down and down it goes, where it stops... nobody knows."

Put me down for 65-75% off the peak by 2010. 80% down for the really kinky properties.

Eastside RE Shopper said...

Eleua - I am a believer in how much things are silly around here, but I think that 50% off peak is even hoping for too much.

I think that about a 25% drop over the next couple of years is realistic. There are too many people around here on the sidelines to let 'cheap' property sit on the market.

If you started selling those houses on 116th in Redmond for 10% off they would all disappear overnight.

Van Housing Blogger said...

Looks like it's starting to get interesting in Seattle! Great graph.

Julien Couvreur said...

Simply looking at the graph, it seems that there are many ways to extrapolate the curve to the recent months. If you look back, there were some pretty steap falls, but the cycle was still not very steap.

SeattleMoose said...

When this is done home prices will have fallen in Seattle anywhere from 30 to 60 percent based on location, amount of "froth" in appreciation, etc.

I base this on a simple formula I use to evaluate properties in various locations.

2007 Home Value =
1) 1997 Price (e.g. Zillow) plus
2) 3%/year appreciation plus
3) cost of upgrades

Just as an example, here (MLS 26184256) is a boring square box (worth 130K in 1997) that is due for a 51% off asking price haircut (asking 390K, formula says worth 200K).

I threw in 20K for what smells like "flip this house" type cosmetic upgrades (hint...sold in 2001 for 180K & then again in 2005 for 305K).

If prices overshoot negative on the way down it could be even worse. Especially for infestors/GFs/FBs who are holding "hot potatos" like the one in this example.

Eleua said...

If you started selling those houses on 116th in Redmond for 10% off they would all disappear overnight.

That is true for today - not 3-4 years from now.

If you were to price a share of Intel at $60 back in the winter of 2000, it would have sold instantly. Today, you would have no takers until you got to $21.

Once the realization sets in that you can lose a lot of money in real estate, there will be widespread loathing and panic.

I'm serious about my predictions.

T,V & Mr.B said...

Eleua could very well be correct in his predictions. It is not unprecedented as we know. There plenty of people in Japan with enough money to buy then but didn't. And Japan certainly doesn't have a lot of vacant land.

It really gets tiring to try and explain to people what the real cause and effect of real estate prices are. Of course not having anything to do with what the optimists claim as reasons for price increases seems counter-intuitive, but demand is driven ultimately by money supply. When money supply and credit is loose and liquid, real estate and housing sales will be brisk. As someone mentioned in yesterdays post, Liqudity is drying up. Kiplinger states that the "decline in housing subtracted a full point from GDP in the fourth quarter, so it is having an impact" and the snowball grows.

This may be the start of exactly what happened in Japan. But we have confidence in our Fed that they won't let that happen right? for me, I don't. If they keep the liquidity fluid, they are only putting off the inevitable, even greater distruction.

So if there were odds on the percentage drop predictions, I certainly would lay down a bet on Eleua being correct.

Eleua said...

Here are some things I am cogitating over when considering the depth of the break we are facing:

What price would put a house payment at a slight discount to rent?

If we get a universal equity wipe-out, just where do we get the down payments for the next round of buying? If banks get religion after getting burned by their latest drunken tom foolery, shareholders/government is going to require an honest 20-30% down payment. YIKES!

A cratering stock market will likely put quite a damper on pay-and-pray type of investments. This includes housing.

2/3+ of Boomers plan on using their home to finance the bulk of their golden years. They will be pretty nervous as home prices continue to drop with no bottom in sight (but a bottom being declared by the REIC and the MSM at every turn).

How far would home prices have to drop to bring cap rates (EBIT) into historic norms?

Just who is buying all these new homes that have been built nationwide? Mexicans? How do they do it?

How does California keep all those homes at those prices, once the bubble bursts, on the back of taquerias and nail salons?

The tax raisers are running DC/Olympia. As time goes on, they will get bolder about their plans. Stew on that.

How much home can you buy if you raise interest rates from 6% to 9%? How about 10%? Do I hear 12%?

If the bulk of the new "creative class" jobs (ack, barf, eyes rolled in contemptous disbelief) are nothing more than the build-out for the RE boom, and retail spending orgy that was fueled by that same boom, what happens to unemployment and defaults as these people hit the bricks?

If the housing boom was a result of the internet boom/bust, which was bailed out by a bona-fide housing bubble, and this "bubble economy" started in '97, and capital has been, by definition, misallocated since then, why would we not roll back prices to at least that time?

What would home prices be if they were in line with historical price/income ratios? (Hint: it was considered really kinky if you were at 4x income) Historic ratios are between 2-3x.

What would housing payments look like if they could consume no more than 28% of gross income?

How much debt do most Uhmurikunz carry? How much of that is now spent on cheap crap from China?

What would happen to supply if a bunch of mortgages (say $2T-$3T over the next 2 years, just to grab a totally random, round figure) reset at a level too high for today's overburdened consumer to pay?

What would happen to forclosures?

What would happen to banks if their REO limits were reached in 18 month's time?

What would happen to house prices, if the general consensus was that the latest housing boom was nothing other than the biggest swindle in world history?

What would happen to housing prices if houses were valued as living commodities, rather than sexy investments?

What happens to PNW properties when almost all of California is trapped in their '60s era, Brady-Bunch tri-level? Esta muy malo. Ponder the unemployment rate on Bainbridge Island just figuring all the out-of-work RE agents that moved here from California in the past 5 years.

When 40%+/- of the total sales are for non-owner occupied properties, what happens to prices when people get sick of losing on more than one property at a time?

What does a complicated war with Iran do to housing? How about 9/11 part deux?

What does a banking crisis do for lending? Is there anything about today's US banks that does not scream "widespread bank failures?" How much of the loan portfolio by US banks are collateralized by overpriced real estate?

Do divorces go up in bad economic times? What does that do for housing?

If all homes are sold to previous homeowners (except first time homeowners - duh!), and most of those first timers need kinky, subprime financing, picture what would happen to the lower housing tier if the subprime lenders got into financial hot water? (not that it would ever happen)

What happens to all the other levels of housing if they have nobody to sell to, because their prospective buyers are tapped out and can't sell?

How long do RE agents put up with listing properties at rediculous, unsaleable prices (keep in mind, this is at the RE agent's expense)? What pressure to they bring to the seller to make a sale go through, and they can get paid? It's one thing to not get paid. It's quite another to have to pay for the privilege of not getting paid?

How will basic yard and neighborhood maintenance fair when homes are underwater? What does this do for property values? Got HD or LOWE stock?

How deep into the Witness Relo Program are Ardell and all the regulars at RCG going to have to hide when this implodes? How many contracts will be out on all the regular nation-wide RE pimps?

How does a generation of 77,000,000 Mouseketeers and all the GenX-want-it-yesterday folks come to grips with the basic no-shitter that you can't speculate yourself to prosperity? Reality is going to be a real bitch.

OK, now the biggie....

Picture several, if not all, of these happening at once.

My advice? Sell now, or start drinking heavily.

T,V & Mr.B said...

The General Accounting Office recently stated.." “A significant number of material weaknesses related to financial systems, fundamental recordkeeping and financial reporting, and incomplete documentation continued to ... hinder the federal government from having reliable financial information to operate in an economical, efficient, and effective manner.”

That means that our government is cooking the books like enron. coupled with what Eleua said, I would buy a shit load of Euros or put my money in gold right about now. As a matter of fact, I think I'm gonna go out and do just that.

T,V & Mr.B said...

Right after I finish my Scotch on the rocks

EconE said... nail lots of good points.

What is your background out of curiosity? Mine is Econ and I'm pretty much in agreement with what you say.

The picture is looking potentially very ugly.

In addition to what you said...the G7 finance ministers met this weekend and one of their big topics was reigning in the hedge funds and starting to regulate them. I wonder what affect this will have.

tv&mrB...I hear ya on the G7 meeting the focus seemed to be on the undervaluation of the that may end up being a potentially better investment than the Euro...but then again...currency markets are something I am not entirely familiar with and don't invest in them take my recommendation with a grain of salt.

I'm hesitant to call for a 60-75 % drop off peak...however 40% minimum seems like a no brainer to me.

greenthum said...


Nice! Always a great read!

When the corrupt election system in this state proclaimed Queen Christine governor I thought surely the voters of Washington would rise up and demand a complete overhaul of our state's voting system. Instead everyone just behaved as though nothing had happened. The biggest election fraud in this state's history and no one gave a damn.

I fear when housing crashes and all hell breaks loose the residents of Washington will stand by helplessly and watch government and the banks confiscate their homes and destroy their lives. How bad will it have to get before people finally stand up and fight back and demand accountability from business as well as government?

Our collective comfort zone is about to crumble and all we're worried about is building a new home for the Sonics.

B said...

what does some kook's bizarro political ranting about the Gov's office have to do with overextended yuppies and clueless subprimes outbidding each other on rickety townhouses?

Oh yeah -- nothing. Way to try and derail this conversation, troll.

Also, if you are seriously engaging in "government takeover" wet dreams, ask yourself what happened in response to past market failures. About the closest thing one can imagine is the response to S&L failures a couple decades ago. I suggest you read up on the RTC.

It's far from clear if circumstances would be so dire that such gov't intervention would be necessary.

[So take the martian logic and unhinged statements back over to soundpolitics or wherever you dropped in from. This is a real estate blog.]

Eleua said...


Current occupation: Very surly cash-on-demand ATM for airline executives (aka - airline pilot). Note: this is not considered a "creative class" occupation, thus I live in the PNW in much the same fashion as a squatter.

Former occupation: Member of a sea-going, misogynistic, ass-grabbing fraternity of prima-donnas that were called into action everytime the President's bent little winkie ended up on the front page. (Naval aviator)

Education: Architecture/Construction Management. Note: this was in the REIC.

I grew up in both the PNW (native), and N. California. My hobbies are woodworking (custom fine furniture), ice hockey, backpacking in the rain, full-time economic gadfly and part-time blogging pain-in-the-ass. I have been an observer of human stupidity for 2 decades and an enthusiastic contributer for the past 4.

It is the human stupidity part that has me convinced this housing bubble will end in a river of tears.

The witlessness of the herd (especially Amercian herds) is a consistantly bankable phenomenon. They always get clobbered just as they think they have it all figured out. (Proverbs 16:18)

EconE said...

I might as well give my background also. funder...currently in Los Angeles...but Seattle Resident from 1993-2000

Education B.S. Economics with a minor in Business Admin. (enough credits for a double major easily).

Hobbies...High end audio...Porsches....following the Seattle real estate market like a frigging hawk...and TONS of economics reading (Journal of the American Economic Association et al.)

And I completely agree with you on your assessment of humanity Eleua.

greenthum said...


Ah! There's that wonderful Seattle tolerance rearing it's ugly head once again. I love this town!