Market Outlook, November 2008

I am calling it a definitive bottom in certain hard-hit areas, as per my market bottom triangulation principle. Mostly inland (but not too far) areas like Carlsbad, Vista, (some) San Elijo Hills, Clairemont, Linda Vista, Mira Mesa, El Cajon, Chula Vista, (some) North Park, etc… but in some coastal pockets too. In my opinion these lower-end, harder-hit areas are the only place it makes sense to park money. I believe the stock market will eventually crash further… below 8,000, with rising unemployment and no end in sight to the credit crunch. And I predict massive displacement out of higher-end homes (not to mention unofficially occupied “vacant” homes) into more affordable housing. This will drive up rents, which is also why I like the low end market.

And as for the next level real estate pricing tier… the $750k-$1.9m range… I reiterate my forecast about 35%-40% declines off peak values, which has still not moved much to date. In fact, I can’t see a way for this not to happen. I still hear the same types of wishful-thinking arguments posed during the “sub-prime” collapse, but nothing based on fundamentals that make sense to me.

Until salaries (that people can prove) get back in line with 40% DTI’s we will have downward pressure. It is not a socio-demographic thing… but rather, a math thing… the model of which has just played out before our very eyes. It is the next logical domino to fall. And this time it will push unemployment above 10% and we will have a depression.

This runs contrary to popular opinion, which first said a depression is not possible because the government will keep open our fiscal policy… not possible because we will pour in (tax) money to allow banks to make new loans… not possible because we learned from depression-era mistakes.

Umm…

  • Fiscal policy can lower central banking rates, but long term mortgage rates are ultimately set by the supply and demand of investors.
  • We can pour tax money into banks to free up liquidity, but before lending out new funds, banks must first repair their reserve requirements on the value of shrinking assets… assets, which have limited buyer demand and limited buyer liquidity. And apparently banks must also first fund take-over plays… and take care of off-balance sheet items and bonuses and Christmas parties…).
  • Learning from mistakes to avoid our circumstances was a possibility… before we over-leveraged the whole financial system… but the mistakes have long been repeated already. And so, yes, another depression is possible (probable).

The same pundits generating the popular “not possible” opinion also hint that on the off chance, if we did have one it would be a “soft depression”, not “hard”. In the first place, what is the difference? And secondly, with more mouths to feed than in the 1920’s, with fewer people creating real value, and fewer jobs to be done… couldn’t another depression be worse than the last one… or “harder”?

There is a lot of outrage about what the government is doing and not doing to help the problem. But the real root of the problem is this… too many people, not enough resources. Too much repackaging of value, not enough real value creation.

I paint a gloomy picture. But unlike the depression era imagery etched in our mass consciousness with people living in black-and-white, wearing fedoras, waiting on lines for their money at banks, and for bread to eat… these lines will be in color and people will still go surfing. And smart money will buy up low-end rental property… and I will try to stay in business long enough to facilitate these types of transactions. And our country will get through this. And a whole lot of people are about to change their perspective on what is really important. And necessity is the mother of invention. And when things get painful enough the human spirit adapts in remarkable ways. And if a frog had wheels he wouldn’t bang his ass on the ground.

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