Posted by: The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

19 responses to “Case-Shiller: Second Derivative Losses Stack Up”

  1. doug

    “prices flatlining in most markets by the end of the year”,, WTF,,,
    More like prices falling off the cliff! The chart clearly shows that.

    The jig is up folks it you bought in the last five years you are about to see how the government and wall street steals from the people.

    its a good time to read a book about Thomas Jefferson or one of the founding presidents who repeatedly told us how teh rich and greedy steal from the people.
    “When the government rules the people their is Tyranny
    when the peole rule the government their is Liberty”

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  2. Erik

    RE: doug @ 1
    Tim thinks inventory will continue to increase and prices will remain the same. I don’t see prices remaining the same as the interest increase takes effect and inventory increases.

    I think inventory will continue to decrease as we have already started to see this month. That will keep prices up.

    Superposition this equation…. add it up.

    Housing prices = (Economic Recovery) + (Interest Rate Change) + (Inventory effect)

    Where I assume (Economic Recovery) is positive since the economy has recovered somewhat, (Interest Rate Change) is negative since interest rates have increased, and (Inventory effect) is positive since I think inventory will decrease.

    Therefore… Housing price = positive + negative + positive

    If tim is correct and inventory increases, prices will go down.

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  3. doug

    RE: Erik @ 2 – H

    How bout this

    Housing prices = (Phony Economic Recovery) + (Bond Market Collapse) + (Shadow Inventory Effect)

    === negative negative negative

    I would like to be an optimist unfortunately do to the politicians corporations and Secret Societies that are running things in ameriKa that would make me an idiot

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  4. mike

    By doug @ 3:

    RE: Erik @ 2 – H

    How bout this

    Housing prices = (Phony Economic Recovery) + (Bond Market Collapse) + (Shadow Inventory Effect)

    === negative negative negative

    I would like to be an optimist unfortunately do to the politicians corporations and Secret Societies that are running things in ameriKa that would make me an idiot

    This could happen, but people were predicting the original housing bubble would collapse for similar reasons – and oddly, that wasn’t what caused the pop.

    Early 2000’s saw a housing bubble fueled economic recovery after 9/11 – Our current economy is not based on an over investment in housing relative to GDP. Housing investment is still very low by historical standards.

    Interest rates were projected to rise all throughout the last decade. The opposite happened. I don’t see another protracted decrease coming, but that doesn’t necessarily mean rates will skyrocket.

    Shadow inventory is occupied. While it will likely change hands over the next few years, it’s not ‘excess capacity’ if people are living in the homes and have to find somewhere to live. Very different from 2006, when there were millions of excess housing units.

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  5. Erik

    RE: mike @ 4
    Last time the market crashed, inventory was much higher. I don’t see prices going down with inventory this low.

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  6. Macro Investor

    If rates merely stay put where they are, prices will slowly come down over time.

    Think about it. Prices generally went up because rates were falling for 3 decades. That made everything work — flips, remodels, rentals, move ups. It was just a bull market that made everyone look smart. The bubble popped because they could no longer lower rates and increase the buyer pool. You had people making minimum wage (or even the unemployed) getting no doc interest only loans. That is the limit.

    For the last 2 years there has been pent up demand and hedge fund money. That will run out. Without something to continually lower buyer costs, the market will stagnate and motivated sellers will again start setting lower comparables.

    A bull market requires continuous new money. Stagnation is not fun for anyone. People lose patience and get out.

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  7. Macro Investor

    By doug @ 1:

    “prices flatlining in most markets by the end of the year”,, WTF,,,
    More like prices falling off the cliff! The chart clearly shows that.

    Crashes are about FEAR. Worsening conditions are the match. Fear is the gasoline.

    In 2008, sub prime mortgages had been failing for a couple of years. The so called experts told everyone to ignore that — and it worked… for a while. Eventually a couple of household name banks failed and started the panic.

    What could cause a financial panic this year or next? The stress now is on Europe and Asian markets. Not here — which is why I predict a slow decline over years.

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  8. Matthew

    This echo bubble wasn’t fueled by easy lending standards, it was fueled by cash investors. They are already running for the exit and will leave loan owners holding the bag when the next wave down comes in the winter.

    If you bought a house in the last 6 months I hope you plan on living in the same place for a decade or so…

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  9. David Losh

    RE: Macro Investor @ 7RE: Macro Investor @ 6

    We are in the same place today as we were in 2006. The difference is the emerging markets, who are in the midst of construction now. I’m going to include China in that emerging market place, even though they have much more capability to weather the coming storm.

    In Peru, Mexico, and Brazil they are building like crazy. Some of the buyers are foreign investors for prime property, but most of the loans are being made to people who are enjoying higher wages, but when the economy falls they will be on hard times.

    This has already happened in Europe, but we ignore that, and concentrate on our own fantasies about what happened to our economy.

    Lenders, and investors don’t care about the price of property. The prices just go on a balance sheet, and are counted as assets. All types of liabilities can be written off against those assets, so it is in the best interest of the economy to keep the asset prices artificially high.

    The mortgages make no difference to the investors who make short term gains, bank the cash, and move on as long as the economy keeps growing.

    In 2007 these assets on the books were used to bolster a long stream of financial instruments that were bought, sold, insured, then traded multiple times under multiple schemes.

    People stopped paying mortgages because the economy collapsed. It wasn’t the other way around. Once we took away 50%, OK, maybe 25% of our economy, global economy, and just called BS, that’s when people lost the will to pay the mortgage on an over priced asset.

    The economy is no better today, as a matter of fact it’s kind of worse, and yet the price of the assets keeps going up. It makes no sense unless you are the speculator hoarding cash.

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  10. Erik

    RE: Matthew @ 8
    More doomsday predictions. I guess we’ve “been warned.” Everyone else is saying flat or a slight decline. I am keeping track of what people say on here and if housing prices are flat or slightly decline, then I’m going to tally a loss for you. You’ve been warned!!

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  11. sam

    Here’s the original post introducing this chart if you’d like more details.

    The link to the above text is broke.

    Looks like there are a lot of homes went into pending over the long weekend as the active inventory for Seattle (from seattle bubble homepage) went down very fast. Looks like we are ~700 fewer listings than what we had last year. I hope we don’t get back to 1800 listings by December.

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  12. m-s

    RE: doug @ 1
    So I guess the government should only rule the rich and greedy.

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  13. Matthew

    Who said anything about doomsday? Lower housing prices are good for everyone unless you are under water and looking to sell.

    Somewhere along the way American society got fixated on the concept that higher home prices were a good thing.

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  14. Erik

    RE: Matthew @ 13
    You were saying to sell now in july because that was the top. You said things were going to plummet after this summer.

    Higher prices are good for people that own a house because they can sell that house and extract the equity. That’s why people think raising housing prices are good.

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  15. Macro Investor

    By Erik @ 14:

    RE: Matthew @ 13
    Higher prices are good for people that own a house because they can sell that house and extract the equity. That’s why people think raising housing prices are good.

    Not really. It’s good for flippers, builders and landlords. For a primary residence, the new house just goes up as much as the one you sold. So you stand still… actually you lose 10% on the transaction costs.

    The property ladder concept is a scam. Just makes your banker and real estate agent rich.

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  16. mike

    RE: sam @ 11 – Listings tend to expire around holiday weekends for some reason. It would be interesting to know whether the decrease was due to an end of summer sales rush or because a bunch of realtors figured they’d rather clear out the stale listings before vacation.

    In my corner of NW Seattle, it appears there was a sales rush.

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  17. Erik

    RE: Macro Investor @ 15
    So when someone builds up a certain amount of equity, they can sell and then either rent or buy something new. If someone had $100k profit on their home, they could sell and buy a new place for $100k. If I had my place sold, I would have strongly considered buying this gem in Queen Anne and updating it with my weekly paycheck. I missed the opportunity, but hopefully more good deals come up.

    http://www.redfin.com/WA/Seattle/1306-Queen-Anne-Ave-N-98109/unit-10/home/40454799

    I would say $20K would make the place pretty nice. Throwing money away on the interest payment on the loan makes me rageful.

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  18. whatsmyname

    By doug @ 1:

    “prices flatlining in most markets by the end of the year”,, WTF,,,
    More like prices falling off the cliff! The chart clearly shows that.

    Never mind that the chart is a 2nd derivative. I am willing to accept it as the ultimate prognosticator. However, as I search the pattern, I am left to ask your meaning. Are these last few months a stronger parallel to the movements in mid 2005 and early 2006 with the immediate cratering that followed those periods? Or is it a reverse parallel of 2009 and the robust price growth which immediately followed that? Will the results not compare to the 2nd derivative drop in the last half of 2010? Will this be like a negative 2011 times three quarters?

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  19. whatsmyname

    By Matthew @ 8:

    If you bought a house in the last 6 months I hope you plan on living in the same place for a decade or so…

    Whoa, graphatar,

    Aren’t people who buy houses supposed to be thinking of at least 7 years anyway?
    Not to be personal, but a 3 year delay in housing plan changes would probably compare favorably to that of some people around here; n’est ce pas?

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