Is it sunlight or a train at the end of the tunnel?

Oh, I've felt for a long time that we are in for much more trouble on the housing front. This thing will not turn around quickly. Everyone forgets that the market moves in cycles, and the cycles take years to complete.

Lots of trouble still to come. Economy slowing, lending standards tightening, rates rising, resets still to come on adjustable rate mortgages and according to OFHEO a rise in Boston area real estate prices since 1982 that was higher than any where else that still really hasn't corrected... It just goes on and on.

We all need to remember that the LORD is still in control. No matter how gray the outlook may appear, we need to put our trust in the LORD!!!!!

Bengi,

In all things material, we must use the minds we were blessed with, too.

If Bill Gross really believed that housing was going down 10% more, he would not be the largest buyer of FRE bonds over the last 2 weeks. Watch what people do, not what they say.

It's all the fault of the whining post baby boomer generations.

Long way to go to hit bottom - no doubt about it. Look at long-term historical trends and adjust for CPI. Population isn't growing in the northeast, there's little to light inflationary pressure, and sentiment has shifted for at least a generation *away* from housing as an investment. You have to live somewhere, so rent - if you rented a $500k apartment/house over the past year in MA, on average, you would have netted $50k in capital depreciation.

All real estate is LOCAL, folks, LOCAL!

As we've seen here on this very blog, bidding wars are still happening in the desireable areas. Places like Arlington, Newton, Brookline and the South End are weathering this so-called storm quite handily. No evidence of the foreclosure problem and prices continue to rise and rise.

Frankly, if I had buyers looking in these areas I'd advise them to buy NOW. The sooner the better!!

Bill Gross could also be buying FRE since he saw an arbitrage oppty after the explicit govt guarantee... Meaning nothing about the fundamentals.

I see a recession coming. Tough to say how long. Fed may have to start raising rates soon, and consumer spending is going to be hard hit by less access to credit. We still haven't seen the follow on effect from the real estate slowdown, but it will happen.

Question is for how long. But no question I'm still way short the S&P, and happy to be so.

On real estate in particular, things should get markedly uglier. As many have pointed out, the lack of sales still hasn't hit prices really - real estate price drops won't be over until there is a real buyers market. Meaning desperate sellers, not sellers who are waiting for the market to bounce up again.

The recovery points above are laughable. Really. Paulsen's job is to say good things, whatever he may think. How is the Fannie/Freddi bailout possibly going to help the situation??? Before, a strong fannie and freddie were supposed to lift the markets - now there is no chance of that happening (not that there was before). Secondly, Fannie and Freddie under the best case will make fewere loans and make them at higher rates. That will INCREASE the rate of price drops.

Yet a number of News outlets continue to talk about a Fannie/Freddie bailout as helping things. Without ever saying how (no surprise, as its utter nonsense). It just stops the real estate market from the 75% drop that would happen if they went under, and holds it to the 15% drop we are experiencing.

Traditional rent/price ratios indicate we should be dropping another 30% or so. I'm sticking with the fundamental numbers, not politicans nonsense

Downward pressure:

Mortgage rates today (July 23) are higher than in any time in the past 5 years.

If wages do not keep up with inflation, affordability will put more downward pressure.

Foreclosures are still in the range of the peak, adding to the inventory.

Downward spiral:

The profile of buyers are that of aggressive low-ballers who aren't afraid of risk, so most likely are in a financial position where they can't be pushed around. The profile of a great number of sellers today is those who most likely have to sell. When you pair up these two profiles and think about that these are the predominant profiles in the relationship of those that ACTUALLY come to the table and deal, deals will lean towards the buyers. Sellers need footing in order to hold their positions.

The amount of potential steam that is burning off from the overvalued market is the amount of risk that lenders and buyers absorb. Banks are asking for a larger down payment because they do not want to be exposed to that much risk. If they end up owning a property because a borrower defaults, if the property is worth less than what they lent out, the banks lose quite a bit. A higher down payment reduces the amount of potential buyers. Fewer buyers’ means a lower buyer to seller ratio which will make prices drop further and increase the risks and down payments.

Psychology and herd behavior might drop the values beyond the fundamentals as they did overshooting them. Irrational pessimism?

Three ways to deal with too much liquidity:

First, overvalued assets drop in value and people take their losses (it burns off like steam).

Second, the medium of exchange (the value of the money) reduces.

Third, a new segment of the market emerges where the excess liquid can flow to i.e. the speculation in railroads in the past, the internet boom, the wireless boom, today's investments in emerging markets etc.

Among these, lenders are afraid that if we get inflation, the money that is owed to they will reduce in value, which is why long term rates are going up. If affordability and solvency become an issue, banks have to deal with more defaults and we risk a recession because people are just not buying anything. If a sizeable portion of spending in the past 8 years came from home equity loans, the entire economy needs to reset and adjust to the amount of spending that is based on fundamentals (money that is earned and saved as opposed to borrowed). All today's inventories, price points, employment levels etc. are based on unsustainable spending levels based on cannibalistic practice of eating into our future. THE ECONOMIC ANTEDOTE TODAY IS EITHER TO DILLUTE THE POISON WITH INFLATION, OR TO QUARANTINE THE SICK AND LET THEM ABSORB THE PAIN AND SHOCK. Given the fact that many responsible people didn't overextend and have paid the higher price tag due to irresponsible lenders and buyers, I think that the antidote will be a combination of both, inflation and letting a certain segment pay the price. I would like to see a new industry explode out to relieve some pressure. My guess is that we will have a new type of blended gasoline, a new pump at the gas stations, and a kit that you can install in your car to run off this cheaper blended gas. I think this will be the intermediate market until better more efficient cars come on line. The solution also could include telecommuting so all the infrastructure that is associated with that will be emerging.

The silver lining:

Of the buyers that bought in the past five years, only a percentage can't pay their mortgages. Guess what, a vast majority can. Banks will be getting cash flows from all those people that overpaid in the past five years, and that excess will compensate for the ones that can't. Banks were not that dumb, they weighed the amount of potential defaults against the buyers that could clear their hurdles. It's kind of like how the Boston Bruins weren't filling the stands, but made money because they overcharged for the seats that did get filled. Where we are in the market today is like the Bruins, they need to put out a winning team; a losing strategy can only last so long. Politicians were behind the 8-ball because they never articulated how many economic casualties were acceptable. We have had redistribution in wealth in the past decade which has polarized winners and losers. Capitalism has winners and losers and democracy needs to provide the acceptable levels of regulation that yield an optimal fair and just society. We are seeing the pain of the losers on television, but are forgetting that others are cashing in. If the root of the problem is that we have too much money (check out the M3 money supply) that money needs to find a home eventually and it is not a crime if regular folk get a taste of it. Further, you're going to see more mergers and acquisitions of banks and other industries and concentration market share players. The host of issues that come along with that as well as the obvious increase to industry regulations include the tougher barriers to entry which reduce the competition that keeps affordability in check, i.e. as the price of an plane ticket reduced with deregulation and the entry of low cost carriers. We need to tune the economic engine through a proper balanced approach that defines the rough cut and the optimal economic climate. People like Jamie Dimon seem to have the right balance. Hint to presidential candidates: Consider Jamie Dimon as a potential VP. The economy is that much of an issue and having someone at that level be more than a coat rack would be beneficial to our Nation.

The other part of the silver lining is that we have some pretty smart people here and that we are taking our medicine. Bernanke is not a Polly Anna or chicken-little. Rebalancing and retuning from a decade of a bubble economy in the midst of globalizing, emerging markets and a shock in demand in global commodities and resources are a lot of balls to juggle. For us to be holding up this well thus far is saying something. Tough times create shock to our system and sometimes we need that shock to wake us up and realize our potential. I think this stuff is nothing compared to our potential. I wouldn't bet against the United States.

Notice that most of those in the "Recovery is coming" camp are either politicians or bankers, both of whom have a vested interest in cheerleading.

"So what do I tell my clients?" - Personally, I think real-estate agents have no business advising their clients on where the market is going. If brokerage houses "advised" their clients on the direction of the stock-market in the same way that RE agents advise their clients, there would be lawsuits all over the place.

I've said it before and I'll keep saying it: WE ARE NO WHERE NEAR THE BOTTOM!!!! Despite what Paulson, Bernanke, Bush and all the other pundits say, the real estate market and economy are in terrible shape. Remember when sub-prime was contained, we were near the bottom in real estate, inflation was under control, etc. etc. You have to take what these people say with a grain of salt, because they see everything through rose colored glasses. The fact is, if the government was honest and didn't manipulate the data, the numbers would show that we are in a recession (and have been for a while); inflation is up in the 11% range; unemployment is near 12%; and things are going to get worse.

it's pretty fascinating to watch how the local vs national crowds battle it out here time and time again. i try not to get too caught up in either side of the debate b/c i believe both sides are extremely important to the equation. all that being said, we live in a GLOBAL economy. if some individuals feel more comfortable believing their god chosen location is the perfect place to live and that isolates them from the economy as a whole that is wonderful. however for the majority of us in the real world we buy real estate with us currency, not brookline, arlington or south end dollars. inflation, rising interest rates and the devaluation of our us dollar affects us. we finance the transaction through an institution that generally has exposure in many geographic regions and is heavily regulated by the federal government. pseudo-federal agencies assure that there is a secondary market for our notes. we are also enticed financially through the federal tax code, hud and various "well-intentioned" legislation, especially in election years. if you can tell me in a rational and well-reasoned manner how living in arlington, or brookline or anywhere else is going to protect my family from diminishing crude and exploding demand, plumeting international securities markets and soaring domestic food prices sign me up. i'll move there in a heartbeat. at some point affordability has to come back into the equation. take a look at the tag on your clothing or the manual for your tv. bombs in the middle east and typhoons in china affect our wallets. you may have skills evaluating trends in your given market and matching clients to properties. if that's the case please keep your advice to the topics that you know well. let the buyer inform themself as to the state of the real estate market as a whole. an interesting topic that i haven't seen explored to any great degree is the apparent widening gap of the haves and the have nots and how the fundamentals vary for both. it may be a factor to consider when evaluating why wealthier towns tend to be more resilient in down markets.

Waiting: that's an important perspective. This is what I'd consider though: we have ownership rich. Because we were leaders in industry we invented forms of money and saved lots of it. With that wealth we bought shares of emerging industries and our ownership shares provide income. Many created or invest in revenue generating entities and sit back and let the dividends roll in. So what does the guy in Weston care if that investment is in the US or in India? So think about the service industry, the electrician in Newton can charge lots of these ownership rich people a lot more than the electrician in say the back woods of Maine. Until their shares get diluted, they will build and get more money to buy and control more. Massachusetts has a lot of wealth.

Local influences to consider that have affected the real estate market here in Massachusetts are: rent control policies up until the early 90's significantly reduced new housing development, Boston/college town had college student enrollments skyrocket and universities never built enough dorms which ended up adding to demand for units around them, all that came with the global influences of lower interest rates, the capital gains tax shelter laws of 1997 and then real estate being an investment to shelter from losses from the stock bubble correction; add the salary inflation of 2000 and you get a mixture of local, national and global influences. One of Kim Blanton's recent articles describe the difference in price declines within the Route 495 Belt. I honestly didn't buy into the "sanctuary" rich towns stuff; Some towns are overpriced and past their prime.

it seems all of the data goes straight to the middle. any idea where to find data that segments the info to cull say the top quarter to maybe 3rd of family units (income and wealth) and corresponding data on the upper 3rd of housing to see where the fundamentals lie for that group? one of the biggest mistakes the pure econ people on the board make is to assume that negative national econ trends affect individuals and properties the same. if one property drops 50% and another stays stagnant the data will tell you price dropped 25%. to me it's not as much about sample size as it is about the appropriateness of the sample size. no question that the fundamentals for the region will level off but for me the more appropriate analysis is the degree to which the leveling takes place in the wilmingtons vs the westons. the other one is that housing is a commodity and that people act "rational" but that's a whole nother story.