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housing crash
- Thread starter silk
- Start date
Quote from BlueHorseshoe:
DHOM builds homes in central Ohio and Kentucky. This from Friday:
"DUBLIN, Ohio (AP) -- Dominion Homes Inc. said Friday that it sold 33 percent fewer homes in the fourth quarter of 2004 than a year ago.
The homebuilder sold 392 units during the three-month period for revenue of $75 million, down from 586 homes in the prior-year quarter, when sales totaled $110 million.
For 2004, home sales declined 20 percent to 2,450 units from 3,071 in 2003. Total sales decreased 17 percent to $460.3 million from $554.7 million.
"Real estate is a cyclical business and many of the homebuilders in our region are experiencing a slowdown in sales," Dominion's chairman and chief executive, Douglas G. Borror, said in a press release.
The company closed 605 homes during the quarter, a 32 percent decrease, and closed 2,837 homes during the year, an 8 percent drop.
Dominion said its backlog at the end of the year was 632 sales contracts with total value of $127.5 million, lower than the 2003 backlog of 1,019 contracts worth $198.9 million.
Shares fell 79 cents, or 3.4 percent, to close at $23.89 on the Nasdaq."
That is one nasty fall people. And this is Ohio and Kentucky - not San Diego or other purported 'hotspot.'
http://finance.yahoo.com/q/bc?s=DHOM&t=2y
The question here is whether this is symptomatic of the homebuilding industry in general, or whether this is more specific to DHOM in particular. My view would be that DHOM is one of the weak sisters of the publicly held homebuilding business.
For instance, the latest report from D.R. Horton, who is the largest homebuilder in the US, says that sales are up 31% in their 1 st quarter of 2005, versus the year prior. They were up in all regions of the country.
http://biz.yahoo.com/ap/050111/d_r_horton_sales_1.html
Meritage Homes says business up 48% in the last quarter versus the last quarter of 2003.
http://biz.yahoo.com/ap/050106/meritage_homes_outlook_sales_1.html
My view is that DHOM is not only a weak sister, they've also turned over some of their upper management. Picking these guys out as a symptom of the industry at large is a poor choice.
That said, I do think that in my area in the Midwest prices probably peaked last year....I've said this many times here. I'd say sales volume overall has slowed.
I'd be careful about picking out a piece of information to suit your argument as Bluehorseshoe has done, versus looking at all the information before you decide what your argument is. Certainly looking at just the press releases for all homebuilders one would have a hard time coming to the conclusion that one gets from looking at DHOM only.
OldTrader
Quote from Smart Money:
FWIW, if you compare the dollar to gold, and the Euro to gold, you'll see some interesting stuff. During the benchmark date for the Euro, our dollar was at the top of a cycle in terms of strength (i.e., gold was cheap when purchased with U.S. dollars). Basically, I think they set the benchmark price for the Euro at the extreme end of a cycle and it kind of exaggerated the widening gap between the two currencies, even before we started to "somewhat" abandon our strong dollar policy. In fact, if you look at the price of gold since 1972, it was at a low, on a decreasing saw tooth pattern, implying that the value of the dollar was about as high as it ever was back in 2000 or so. A strong dollar is good, but if its too strong, then it hurts exchange. Its kind of crazy that until recently, it was cheaper for germany to import raw materials, make volkswagens, and then ship them here rather than just produce them here.
I strongly agree with you about either the dollar tanking or rising interest rates to support the dollar creating more inflation. They must, indeed, choose between a stronger dollar or a hurting RE market. However, if they leave the dollar where it is, inflation will continue to kick in, justifying the lofty RE prices everywhere but California, New York, etc. I think thats why we've seen the dollar stop its freefall lately. I think someone knows EXACTLY what they are doing and I do believe it will save us from a RE bubble collapse because everyone will have more cash in their pockets on payday. The cash will make those mortgage payments, but it won't buy much gold. It may buy a hell of a lot of Chinese crap...which seems to get crappier by the day if you look at the junk in Wally World.
SM
i started to write responses to this post several times and each time i got frustrated because there are just so many variables. then i read the above link vhehn posted. it really sums up my thoughts so much better than what i was trying to express.
the only thing i would add is that most of us are assuming certain standards of ethics. that most of the players are either looking out for our best interest or their immediate own self interest. most, discount any hostile participation, i think this is a mistake. but that is for another thread....and would probably end up in chit chat anyway.
Vhehn's link:
http://www.frontlinethoughts.com/pr...sp?id=mwo011405
Quote from Cutten:
Whether or not we have a "crash" depends on how you define a crash. Personally I would say a fall of more than 20% in real estate prices is a crash. Remember most people are highly leveraged in real estate, a 20%+ fall would wipe out the equity of anyone who purchased at the top. Anything which can wipe people out has to be considered a crash, IMO. A 20% fall in the S&P is just a bear market, not a crash, because investors aren't generally leveraged 5-1 or more in stocks like they are in real estate.
Oldtrader makes the point that a "crash" won't occur without major job losses. Well, there are alternative ways to get a 20%+ price fall in real estate, which have occured historically - one is to have interest rates increase significantly from low levels; another is to have an adverse change in government regulation or tax treatment; another is to have a speculative mania which then bursts. All of these can cause a 20%+ fall in prices, and have done so in the past.
Examples:
Rate rises - US real estate in the early 80s, when Volcker was inflation-busting. Regardless of your employment situation, taking out a mortgage at 15% per annum interest is a lot harder to afford than at 6%. Thus, prices will fall significantly to compensate.
Government action - rent control (e.g. NYC) has caused major price falls in the past.
Speculative bubble bursting - e.g. the Florida land boom and bust of the mid 1920s. There was no recession in the state or major rate rises - but you got huge price falls all the same.
Currently there is quite a bit of speculation in certain "hot areas". There is also the prospect of higher rates. Going by history, those two factors combined are more than enough to set off 20% falls in the more speculative areas. And that is enough to send people who have bought rental property into bankruptcy, or force them to sell to stave off financial disaster. Bankrupts and forced sellers have to unload at any price. Whenever you get a lot of price-insensitive sellers in a market, there is the potential for large price falls.
As for Oldtrader's question of what existing homeowners are going to do - you don't need people to sell out and start renting to cause price falls. As mentioned, this tends to happen only in extreme circumstances. But current owner-occupiers are only one source of market demand and supply. You also have RE investors, and owner-occupiers on the demand side (people trading up or down, or relocating) - if they get put off by higher rates, inflated prices, or negative sentiment, then demand will fall even if stay-put owner-occupiers don't change their behaviour. Equally, on the supply side you have landlords cashing out, builders/developers, and DDD (death, debt and divorce) sellers. If they are not getting enough interest at current prices from buyers, then they will have to cut prices, simple as that. They are not there to hold property for the long-term, they need to sell now. Prices at the margin are determined by people who - for whatever reason - are actively buying and selling in the market, not by owner-occupiers who are intending to sit in their houses until kingdom come. Unless OldTrader thinks that stay-put homeowners are the only people who buy and sell houses, then IMO he needs to reconsider his view.
Good post Cutten. I thought I'd address a few of your points.
First, you're right...alot depends on how you define "crash". Alot of guys in this thread and some of the other threads have compared residential real estate to the NASDAQ in 2000. This is a point that I completely disagree with. I've seen predictions of 70-80% drops, not just 20%. Personally I could see a drop of 20%....especially in some of the more volatile types of areas like California. And certainly I agree that the guy that bought at the top is going to feel that drop because the chances are huge that he will be underwater.
I don't happen to call 20% down a crash. Heck, in some parts of the country that doesn't even get you back to last years prices. Keep in mind these predictions of "crash" have been going on now for years, so for most of these guys to end up even half way right they need a much bigger drop than 20%.
So that you know, home equity overall is much larger than 20%, so that overall the guy who is living in his home, a 20% drop takes away part of his equity, which a few years ago he didn't have to begin with. His lifestyle other than that doesn't change much.
But let's talk a little about some of your points:
1) Rate rises: Back in the early 1980's we saw rates rise to 21%. They doubled. I bought a house just before rates doubled, and sold it a few years later while rates were still very high but down a little from the peak. I made some money even after the realtors commission. This was in the Midwest. Lots of predictions in those days of "crash"....it just didn't happen....because people either just didn't sell, or they sold using creative techniques that didn't involve the bank, and therefore could offer lower interest rates than say 21%.
2) Government action: Completely agree with you here. Who can forget the Tax Reform bill in 1986 which single handedly wiped out many investors at the time in real estate, the oil business, and others who relied on depreciation to make their investments. I'm not expecting government action in residential real estate, but of course if something negative happened on this front it would be a real problem.
3) Speculative bubble bursting: Unfortunately, the example you give is of the Florida land boom, which of course was not residential real estate but undeveloped land. We do have examples though of drops in value in real estate....California recently, Texas and other oil states prior to that. My view would be that these were more related to employment though than speculation. For instance, when the oil industry contracted because of a major drop in the oil price, people lost jobs, and therefore couldn't make the house payment.
Finally, let me say that the guy who bought rental property isn't necessarily forced into "bankruptcy" if prices drop 20%. Alot here depends on what the income of the property is. Personally I don't buy properties that don't cashflow.....so what is important to me is the rent. In the situation that you envision, presumably we will see more renters around, more demand, and therefore it is possible that rents might rise. In other words, a landlord who entered into the property in the right way might not have the problem you envision. By the way, non-owner occupants always have to put more equity into the deal to get financing....they aren't financed like owner-occupants are. 20-25% equity has been a standard for non-owner occupants on prime loans for years. In the scenario you envision his equity would be wiped out, but if he has a positive cash flow he won't lose the property.
Again Cutten, I've never said prices can't drop. I've noted that they are down a little in my area of the Midwest. My argument is against the sort of major calamity that some envision here. And too, understand that what happens in California is going to alot different in all probability than what happens in the Midwest.
OldTrader
Quote from OldTrader:
Good post Cutten. I thought I'd address a few of your points.
First, you're right...alot depends on how you define "crash". Alot of guys in this thread and some of the other threads have compared residential real estate to the NASDAQ in 2000. This is a point that I completely disagree with. I've seen predictions of 70-80% drops, not just 20%. Personally I could see a drop of 20%....especially in some of the more volatile types of areas like California. And certainly I agree that the guy that bought at the top is going to feel that drop because the chances are huge that he will be underwater.............................
OldTrader
geezzzzz will you get off of the nasdaq reference. i don't think anyone is suggesting RE will collapse 70%. move on dude. at this point maybe you need to define crash/bubble in very exact terms since you are the one so caught up on this. i personally would consider a 30% decline very painful for many especially if it were quick. is there a bubble rule book out there........ please post a copy of the bubble max/min parameters.
Quote from ratboy88:
geezzzzz will you get off of the nasdaq reference. i don't think anyone is suggesting RE will collapse 70%. move on dude. at this point maybe you need to define crash/bubble in very exact terms since you are the one so caught up on this. i personally would consider a 30% decline very painful for many especially if it were quick. is there a bubble rule book out there........ please post a copy of the bubble max/min parameters.
Perhaps you need to go read some of the various threads regarding RE if you think it has not been compared to NASDAQ or this type of decline is not being predicted.
But to directly answer your question: I'm not calling this a "bubble"....you are. I'm not predicting a 20-30% decline....you are.
But here's the thing....I also believe that IF there is a drop, that 20% might be a "reasonable" sort of decline. I could see it....I'm just not predicting it.
Look, you guys have got all sorts of reasons why you believe real estate will fall by varying amount 20%, 30%, 50%, etc. More power to you. These predictions have been going on now for the last 3-4 years...and ALL have been wrong.
It's an easy thing to make a prediction, and who knows, if you make it every day perhaps it will come to pass. But what I would like to know is when will you know you are wrong? I'd like to see some degree of accountability other than just talk. Because right now that's all there is....a bunch of guys who presumably making an easy prediction.
Look forward to you answer.
OldTrader
Quote from OldTrader:
..........But to directly answer your question: I'm not calling this a "bubble"....you are. I'm not predicting a 20-30% decline....you are.
But here's the thing....I also believe that IF there is a drop, that 20% might be a "reasonable" sort of decline. I could see it....I'm just not predicting it...............
Look forward to you answer.
OldTrader
you didn't directly answer the question. you say there is no bubble so what is your definition...what are the parameters?
as far as time frame goes i was wrong for almost two years regarding the nasdaq and smart asses kept running their mouths....so i guess we can start the clock ticking right now...i just made my prediction so give me up to jan 2007 give or take a few months.
Quote from ratboy88:
you didn't directly answer the question. you say there is no bubble so what is your definition...what are the parameters?
as far as time frame goes i was wrong for almost two years regarding the nasdaq and smart asses kept running their mouths....so i guess we can start the clock ticking right now...i just made my prediction so give me up to jan 2007 give or take a few months.
I don't have a "definition" per se of the term "bubble". To me it's one of those things that I think I'll recognize when and if it occurs.
I do think that we may be at a spot where prices will do some resting, consolidating. I'm talking in general because of course real estate is regional.
Finally, I don't know about you, but I spend my day "timing" what I do. I don't make a prediction and then give myself 2 years to be right. LOL. That's weak.
OldTrader
Quote from OldTrader:
........Finally, I don't know about you, but I spend my day "timing" what I do. I don't make a prediction and then give myself 2 years to be right. LOL. That's weak.
OldTrader
i spend my day "day trading" so yes, timing is very important. i don't make predictions about my trading...if i need to change my opinion on a dime, then i do it. it is not about being right or wrong..it is about what i do when i am right and what i do when i am wrong. has nothing to do with making a prediction on a chat room board. LOL LOL LOL and believe it or not i am not married to being right about the bubble..... if we experience hyper-inflation then i would change my prediction in a heart beat.
and btw, 2 years is nothing for a bubble....these things take time ya know.
but bottomline we will never know how this plays out because you are afraid to go on the record and establish what you would consider a bubble. if we hit 25% you would say that is not enough.....30% who knows. i say get off the fence oldtimer and get some balls.