Wednesday, December 17, 2008

The second wave-are you ready???

Most bubble blog readers know that the housing correction will be severe, but I sense that the average Joe still does not quite understand the magnitude of the consequences caused by this Great Ponzi Scheme. The mainstream media is partially to blame for their cheer-leading headlines and quotations from the National Association of Realtors’ (NAR) misleading reports, but it is the homedebtors’ natural reactions of denial and hope that brings mixed feelings to the market.

I spoke to a homeowner last week about the housing crisis and she told me that she’s not worried because once we get all the subprime lending out of the system, everything will revert back to normal and “be okay.” My breakfast almost ended up all over my keyboard and monitor. I cannot say this enough - the problem is much bigger than just subprime loans. Tomorrow, we will be at #16 of this now infamous Credit Suisse chart. As you can see, we still have a long way to go.


This isn’t the first housing bubble we’ve come across and I hear many people comparing this bubble with that from the 80s and 70s boom. While history doesn’t always dictate the future, it gives us a good basis of comparison. There’s no exaggeration when I say that we’re making our way through a bubble of epic proportions. It’s not a joke; this is history in the making.


Remember how the NAR always says that “every market is different” in those malicious tv commercials? Well, there is actually some truth to that. Some markets, like California, Nevada, Arizona and Florida are in fact different - they’re especially bad when it comes to the percentage of new and refinanced mortgages with option payments. It’s no wonder these states enjoyed the biggest run-up and will soon experience the biggest correction, as compared to other parts of the country.


California is in it for a rough one and Los Angeles is no exception. During the boom, we saw homes that doubled in price over just a few years with the bidding frenzy feeding off the people’s greed and ignorance. Now that the fountain of kool-aid has stopped flowing, many are left to wonder how the correction will play out. This is a projection based on the Case-Shiller Indices and according to this chart, the end of the correction is sometime in 2011 or 2012. We are currently at about 225 on the index.

Yesterday, TheArcadian reported the numbers at the national, state and city level. Nothing in the data suggests that we’re “turning around” or “at the bottom.” During the boom, many laughed and scoffed at me like I was a mad woman when I entertained the possibility of home prices crashing 35-50% from the peak. All the bulls and wishful homedebtors should put away their hopes of a rebounding 2008. February’s report shows that Arcadia’s sales volume is down 28% and its median home price down 20.6%, both year-over-year.

We’re not even halfway through the correction yet and all of a sudden, 35% off the peak doesn’t sound so crazy after all.

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