Posted on 08/12/2005 4:15:04 PM PDT by Das Outsider
It's no secret that momentum is a powerful force in the stock market. It can drive real estate prices too, and may even account for all those color-coded rubber wristbands everyone is wearing today.
Problem is, momentum is often irrational, and advertisers know it.
In a new study, people were asked to buy and sell virtual stocks that had long histories of either increasing or decreasing earnings. For the most part, folks bought winners and sold losers.
If that result doesn't surprise you, then you're just the sort of investor that Joseph Johnson University of Miami wants to warn.
(Excerpt) Read more at livescience.com ...
Baloney...the stock market is just sitting there and while real estate seems high in some places, it is just creeping up in most burbs and rural areas. If gas prices continue to shoot up, and presuming there is a strong growth in telecommuting, watch for shifting sands (but not collapse) in the RE market.
Just got back from moving a friend to Albuquerque. There is a hot real estate market there - but it isn't all of the market.
Nice places that are "reasonably" priced (250-300K), move very quickly. Lesser places that have been "bubble"-priced sit for months, then have their prices reduced. According to one real estate agent I know, the banks are beginning to turn down loan applications because these houses aren't appraising highly enough.
With 0% down, interest only, etc., there is very little margin for the banks, so now the tightening begins. The housing market in Chicago, once red-hot has stalled this summer also.
My brother has is a vy active real estate appraiser (he is the name partner in the top firm in his town) in a big market in the South. He says to me that things get hot, then they get cool...then they warm up slowly. And the whole things starts over again. His clients include all the big banks, and no one is worried.
I think we agree?
"In a new study, people were asked to buy and sell virtual stocks that had long histories of either increasing or decreasing earnings. For the most part, folks bought winners and sold losers."
That's perfectly rational behavior; it would be irrational to invest in enterprises with decreasing or no earnings. Furthermore, that does not contradict the advice to "Buy low," and "Sell high." However, only in retrospect does one know whether he bought low or high. He cannot make that determination beforehand because only if the stock goes up was it low and if it goes down, it was high. That is indicative of only a theoretical understanding of motion (momentum) and not the actual experience of it.
All price movements are rational in the sense that they are real, or actual. Speculations, as the author is doing, is irrational because there is no basis in fact -- but exists only in his mind -- as to what "should be" happening, as though he alone were the arbiter of these things. That's what the market is and does -- despite one's individual value judgments (and one certainly is entitled to his opinion not to make money in this way).
In order to be successful with an investment, the market value has to go up -- in actuality, and not just theoretically in spite of its market price. Every actual investor/business owner knows this to be true. Only academics, who never actually invest but create all kinds of theoretical models and are therefore "objective," have never made any money doing so and think money can never be made that way because it is all a random, zero-sum game.
I think we agree?
The banks are ALWAYS making $$.. on the way up and on the way down. So do the appraisers, real estate agents, lawyers, etc. Only the buyers and sellers get pinched.
No, it's the stock brokes who make money on the way up and down. Banks frequently lose money and are about to take the beating of all beatings...
I'm not gonna defend the brokers, but RE lawyers aren't ambulance chasers...and appraisers provide a valuable service. And they don't make that much dough.
Do you have a point or are you just trying to place blame?
And by the way, I don't care for the materialistic world. I think it is trouble...but who am I to judge?
it would be hard to agree that the stock market has "momentum." "Inertia," or perhaps "potenial energy" is more like it. junk-science alert.
I don't think that it's a matter of assigning blame. It's a complex system. Bubbles don't form overnight and they are not the creation of one or two or even a hundred different professions.
My point, such as it was, is that banks are about to take a financial beating. This may or may not lead to more consolidation or the tax payer picking up the tab, S&L style.
What is happening is very dangerous...
There is no blame. There's just what is. CAVEAT EMPTOR always.
The system is complex...but it works. There isn't much of a bubble yet.
Ho, ho, ho!! The appraiser has a copy of the sales contract in front of him. So he knows the number he's supposed to come up with. The instructions are to find "similar" properties, yes, but the system invites selection bias. Since the appraiser has the sales contract in front of him, he's going to choose properties near that price.
Usually if the property doesn't appraise, it's because the appraiser sees that the buyer is trying to buy something at the bottom of his range; he can't allow that, so the property won't appraise. Then the buyer really wants to buy he can either come up with a larger down payment or make capital improvements to the property. Either way, the buyer will be at the top of his range by the time the sale actually goes through.
See #12 below.
My brother's firm tells banks each and every day that certain properties don't hit their numbers and that the buyer ought to reconsider or make a lower bid.
If he and his firm didn't behave with integrity, their client base would disappear. And their client base includes all the responsible banks that lend in the southeast.
My (now deceased) mom worked in real estate for 17 years and she said that was exactly the way the business worked. Every real estate appraiser in town would get together for breakfast once a week and they'd all compare notes. Some of them probably didn't even realize they were engaging in selection bias. I've seen the appraisal forms; all they said was to list 3 "similar" properties currently on the market and 3 "similar" properties that had sold recently. I saw absolutely no safeguards against selection bias.
I actually applied for a job as a loan officer but my experience as a statistician was not qualifying experience -- there was a wide range of clerical jobs that were considered qualifying experience -- yeah, they'd know about logistic regression, don't you think?
But the great quantity of loans are made in the big markets.
I think the bank made a mistake turning away a stat guy. My specialty in B School was Operations Research...obviously, I am inclined to the strong analytical stuff like you. I generally don't trust the system, but bankers are staid and the institutions that buy there pools are smart guys. I know how the system works but there is always room for error.
Best regards...sorry about your Mom.
August 13, 2005
Do Try This at Home: Assess Your Area's Real Estate Bubble
By DAMON DARLIN
For the first time since the residential real estate marathon began 13 years ago, parts of the country are showing signs of exhaustion. But if you rely on the experts to declare that a particular area's bubble has popped, you may have waited too long.
So how can a homeowner tell if a market is about to go bust? This may be one of those rare occasions when professionals parsing data are at a disadvantage to regular people watching the market. That's because the main driver of today's market is consumer psychology. Home prices go up as long as people expect them to go up.
When they stop believing, prices fall - and no economist in Washington can get wind of that faster than someone chatting over knockwurst at a neighborhood block party. "Economists looking at the macrodata will be the last to know," said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation.
What you will learn from the professionals who are dutifully crunching numbers is that prices are not falling significantly in any of the hot markets, but in a dozen or so cities in the Northeast and in California, they are near the peak. In Boston, for example, the time that homes are sitting on the market has stretched to 46 days from 39 days a year ago.
An analysis of price appreciation, done for The New York Times by the Joint Center for Housing Studies at Harvard, shows that the price appreciation in cities including New York City; Austin, Tex.; Philadelphia; and Providence, R.I., are decelerating. Appreciation in Detroit and Denver has already slowed to a crawl.
"It's taking a lot longer to sell a home," says Karl A. Martone, a Re/Max Properties agent in Providence, where homes now sit on the market an average of 65 days, up from 14 days a year ago. The region has almost six months of inventory, which is up 35 percent from a year ago.
Vicki Doran, a real estate agent with Coldwell Banker in Providence, says: "It's switching to a buyer's market. Last year buyers had to snap things up. Now they can shop around."
Even a few markets in hard-charging California - San Diego, Orange County and Santa Cruz - are part of the trend, according to data from the first three months of the year. Data for the second quarter to be released by the government on Sept. 1 may confirm the trend. But already Christopher Thornberg, senior forecaster at UCLA Anderson Forecast, a service of the University of California, Los Angeles, says California has "peaked and is already coming down the back side."
On Tuesday, David A. Lereah, the chief economist at the National Association of Realtors, said that the housing market was "probably close to a peak right now."
Take a look at the hot San Diego condo market. In Park Place, one of the many sleek towers of condominiums recently slung up around Petco Park, a one-bedroom condo is offered for $719,000. Someone buying it would expect to make mortgage payments of about $3,775 a month, plus monthly maintenance fees.
But someone really wanting to live in the high-rise, with hardwood floors, granite countertops and city views for a lot less, could rent a nearly identical unit in the same building for $2,400 a month. That is clear evidence prices have to move down. You are more apt to see that the price of residential property no longer is connected to its underlying value than a person looking only at spreadsheets of sales data.
Prices in overheated markets must, by definition, come back down to the mean. Knowing which way the market is headed before buying or selling is extremely important to anyone who wants to protect the wealth tied up in a house. And it certainly matters to anyone who is thinking of buying because it never makes much sense to buy at the top of the market. "The turning point is pretty important," Mr. Brown said, "because the trend will play out for years."
The trouble is, economists have been wrong before when they try to call the market. Three years ago, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said that it would be only a matter of months before prices began to fall. Prognosticators at the research firm Economy.com declared that the peak was last summer. Celia Chen, the firm's director for housing economics, is now saying that it will come this year.
"The timing is always difficult with these things," admits Ian Morris, chief United States economist at HSBC Securities U.S.A., who made the same call, repeatedly.
John Karevoll, an analyst with DataQuick Information Systems, which provides real estate data to lenders, said: "We've been told for years that the peak is just around the corner. The economists have so much egg on their faces."
Don't be too hard on them. It's the nature of their science. N. Gregory Mankiw, the Harvard University professor and former head of the White House Council of Economic Advisers, made one of the most famous miscalls. In 1989 he wrote a paper arguing that the aging of the baby boomers was going to undermine the housing market in the 1990's and 2000's. Whoops.
Though it appears the shift is now at hand, the end of the bubble will not look anything like the crash in the stock market after the technology bubble. The stock market turns frenetic when investors scramble to get out and prices fall sharply. In housing, however, a collapse is signaled by a sharp drop in activity as people hold off buying. Houses stay on the market longer. Inventories grow. Only then will prices fall, slowly. Economists say prices will lag a slowdown in the market by four to six months.
Some of the data on where a local market is headed is available on the Internet (links are at nytimes.com/business). In other cases, your real estate agent is your best friend. He or she has access to a storehouse of raw data from the local Multiple Listing Service. Here are some indicators to look at:
snip
Inventory Some of the most crucial pieces of information are held closely by real estate agents. The number of houses on the market is one of them. The national average is 4.3 months; 6 months is closer to normal, the National Association of Realtors says. When it grows, there is trouble coming. Time on the market Agents control access to this information, and be warned: they know how to manipulate it. A house that has been languishing can be taken off and put back to look like a fresh listing. But you'll still be able to see the average time stretching as a clear signal of cooling.
Prices It's what you care about most. But month-to-month comparisons are nearly useless as an indicator because sales of a few houses on either end of the market can skew the figures. DataQuick at www.dqnews.com has some data and the Office of Federal Housing Enterprise Oversight issues quarterly reports.
snip
Loan quality The popularity of interest-only mortgages could become one of the best indicators of a fragile market, several economists say. Mr. Thornberg of UCLA Anderson says it's a sign that lenders are scraping the bottom of the barrel. "We are close to running out of shills," he says.
snip
Popular sentiment To judge from the media, the housing bubble may have peaked in June. According to a Nexis search of magazines and newspapers, that month was the peak, with 312 references to "housing bubble," almost six times that of a year earlier. It fell 24 percent in July.
Of course, there is one constant: real estate agent sentiment. Most of them will never tire of saying it's a great time to buy. Despite the signs of a slowdown, Mr. Martone, the Providence real estate agent, says prices are holding and he still does not have enough properties to sell. He says, "I am the eternal optimist."
In all due respect, I hope you don't think I would read something of such length.
Let me say that there can always be a bubble in any market, anytime. But there isn't a market bubble (outside L.A. and San Fran ) in the U.S. today. Does that mean that something might happen to bring RE prices down dramatically. Of course not. If LA or San Fran or NYC were dramatical damaged by terrorism...an entirely new element would have been introduced and prices would not only fall but property might be unsalable.
But as markets stand now...that isn't the case.
Actually, had 9/11 never occurred and if Islam didn't exist in this world, the stock market and the real estate market...indeed the entire non-muslim world would be looking to the rosiness that our world promises. Without Islam the DJI would be reaching for 20,000.
Actually, I think the whole issue comes down to this war between Islam and the west. But I imagine you would rather not hear about that. DS
Studio apartments in NYC are selling for a million dollars in some buildings, so you can add NYC to your list.
But people get to believe what they want. I've come to believe there are serious problems in the real estate market that do not bode well for the economy. I don't relish the thought, because I have a pretty good idea of what it means if the worst case scenario comes to pass.
Also, please don't make assumptions about what I think about 9/11 and Islam etc. I am a guy who cleared debris off his front steps on 9/11 and was at the site on 9/12. My experience with 9/11 is up close and very personal.
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