Monday, December 31, 2007

Predictions for 2008

Before I make any bold guesses about 2008, here's what I said one year ago:

"I think the big 2007 housing story will be the rising foreclosures and bankruptcies due to ARM adjustments. I also think at least one, or possibly two major mortgage lenders will collapse due to forced buy-backs and increases in default. Ameriquest is my top choice, but Countrywide, Washington Mutual, and H&R Block (Option One) are top contenders."
As you can see, I was completely right about the big story of 2007. As for my other prediction, I was way off the mark. Sure, Ameriquest and Option One are out of the underwriting business, but so are over 200 other companies. Not exactly "one" or "two". :) My record, therefore, stands at 50%.

With that in mind, here are some guesses predictions for 2008, in no particular order of importance:
  • At least three publicly traded house builders will go bankrupt.
  • Countrywide Financial will be out of the origination and underwriting business.
  • There will be a run on Washington Mutual. No prediction on whether it fails or not.
  • Fiscal crisis at the state and local level as tax revenue declines and bond funds dry up.
  • Unemployment in California will reach 6.5%, and 6.1% in Sacramento.
  • SIT losses in the four-county area will reach $1 billion at some point during the year.
  • The FIT will return as banks begin to liquidate in order to raise cash.
And my boldest prediction:
  • There will be a dead-cat bounce in Sacramento real estate this spring, resulting in one or two months of appreciation. This will quickly reverse itself by July, and by September record price drops will resume.

Happy New Year, everyone, and thanks for continuing to support this and the other fine blogs in the Bubblesphere. See you in 2008!


Anonymous said...

Good job on past predictions and I agree with your general view of 2008. One question, though: why the forecast of a dead-cat bounce? Is this simply the result of looking at past charts and extrapolating them onto the current bust?

If so, may I suggest that we are in the midst of a historic credit bust that will likely culminate with GD2. In other words, this isn't your daddy's RE bust, this is something altogether more sinister and dangerous that happens once in a lifetime (K-Winter.)

The credit bust appears to be picking up steam, and the last three months of housing data really show a tremendous downward acceleration of the trend. Also, with inventory once again making a record going into the new year, it seems a very bold prediction indeed that there will be any appreciation in the spring.

IMHO, there will be no dead-cat bounce and the bloodbath will actually intensify in the spring. There may be a dead-cat bounce in 2009, but even that will be met with further declines. In fact, it seems like you are describing 2009 rather than 2008. You may be right though, and stranger things have happened.

Josh said...

why the forecast of a dead-cat bounce?

You're going to love this: I think sales will slow to a trickle, with outlying areas like Elk Grove and Natomas screeching to a halt. The city core, however, will continue to show enough sales to bring the overall county stats into positive territory for a couple of months.

Of course, this will be on paper only, but it will be enough for the Bee to start touting a "recovery". The bloggers will go crazy with frustration, but the downturn will continue soon after.

2cents said...

Max - I don't think there's enough inventory in the city core to offset what's happening in the burbs. I think lower prices will spread to the core (E. Sac, Land Park, etc.) in 2008. There's still no good reason for prices near $350-400/ft2 in these areas: public schools are generally poor; there's crime, homelessness, and lots of rundown rental units; many houses are close to freeways; and the job market is the same as for the burbs. Of course, owners who owe $500K on a house that's worth $400K aren't going to be selling in 2008 no matter where they live.

I agree with you re: consolidation in the building and mortgage businesses. I think one of the big changes in 2008 will be that banks will capitulate in a big way to unload their repos. This will probably happen in the second half of the year, after the trend becomes perfectly clear to everyone (the "silent spring" I'm predicting).

DT - people keep fearing a credit crunch, but the evidence shows that interest rates remain near historic lows. Long before there is anything approaching a credit crunch, interest rates would begin to move up in a convincing way. Credit is a global commodity these days and China, Russia, and the Middle East are awash in dollars.

Anonymous said...

I commend you on having the courage to make the predictions and post them where everyone can read them! I, too, am not so sure about the dead cat bounce, but it depends on how one defines "appreciation," rather by average sales price per square foot, same house (Case-Schiller) or median home price. A very safe prediction would be that regardless, the NAR, SacBee (and SBOR) will report everything as a sign of the "bottom," "turnaround" and "best time to buy!"

Thanks for the great blog!

Anonymous said...

"Be greedy when others are fearful" advised by Warren Buffet.

I bought one REO property last month based on your Blog info. thanks, it is a good job. I hope I will buy more properties this year.

Anonymous said...

One factor that may play a role this year is further restructuring (bail-out) of all those resetting ARMs by the feds. The normal sh*t-hitting-the-fan reaction they're already experiencing will be compounded by election year politics, a president desperate to salvage his reputation, credit crunch, and a growing realization that things may get worse than just a recession. Let's hope common sense prevails.

Anonymous said...

BTW, nice job Max, er, Nostredamus! The information you and some of the posters here provide is invaluable. The Bee may be a joke when it comes to reporting what's going on in RE, but if it hadn't been for their story, I would have never found you!

BTW, when you say that Washington Mutual may not make it, do you mean the real-estate arm, or the WHOLE bank? Should I be advising friends to get away?

Wadin' In said...

Max, You always give me pause for thought. It is so wonderful to have you and this blog available to our community. I agree with the general scope of your predictions. Like Anonymous 10:24 (who is probably also 12:46 & 12:52) I have been wading into the market on selected occasions, hence the blog handle "Wadin' In".

I recently bought a bank owned house for $300,000 less than it sold for in early 2006. The best part is the house is the "pick of the litter" in terms of amenities, and I paid $125/sf. My ownership cost is equivilent to renting, after tax benefits are applied to the numbers. You, my friend played a big part in helping me be patient and form a good buying strategy. That said, I may still be a bit early on pulling the trigger, but I am happy with the result.

You are right on the money with WAMU. Thay are a joke in my opinion. WAMU is foreclosing on a house in my neighborhood. They lent $836,000on it SIX MONTHS AGO to a suspected fraudster. The listing prices for the same models today run $545,000 and less. It will be hard for WAMU to make a profit when they have to write off $300,000 per house in a six month span. Maybe they can make it up in volume! LOL. They were an easy target for the fraudsters and were the last bank to get a clue. They recently stopped accepting all brokered residential loans, but their horse left the barn over 2 years ago.

Your dead cat bounce theory holds a lot of water. So far, the genereal economy has been percolating nicely, in spite of the housing bubble. If the econony suffers a downturn, the whole real estate market may take another spiral down.

Keep in mind, 2008 is a presidential election year. There is usually a lot of money pumped into the economy in these years. Whoever is elected president is going to inherit a huge mess. If Hillary or Barack wins the contest, they will have a hard time cleaning up W's mess, and they will take a lot of blame for something they did not create. I can hear my unsophisticated friends blaming them already!

I think Darth Toll is right about 2009. But only after 2008 presents a false bottom.

Question: SITs will approach $1 billion in losses? What are the total SIT losses as of 1/1/08?

Thank you for all you do. We all really appreciate it.

Josh said...

BTW, when you say that Washington Mutual may not make it, do you mean the real-estate arm, or the WHOLE bank? Should I be advising friends to get away?

The whole bank. I've been telling people to keep their savings accounts below $100K there for a while now, and to research their money-market accounts to make sure they really are in legit assets. You'd be surprised how many "safe" MMs are in subprime CDOs and other nonsense.

Josh said...

Question: SITs will approach $1 billion in losses? What are the total SIT losses as of 1/1/08?

Over $250 million. Keep in mind this data represents the cumulative paper losses being taken at the time of listing, based on asking price alone. Think of it as the sellers marking to market and acknowledging a loss on paper. Once enough of these houses sell, I should be able to calculate actual losses.

Anonymous said...


A credit crunch doesn't necessarily imply higher interest rates. A credit crunch is much more about the availability of credit and banks willingness/ability to lend and borrowers willingness/ability to borrow.

We aren't fearing a credit crunch, a historic credit crunch is happening right now. Many of the mortgage products that were available in 2005 are simply gone. The notorious no-doc, liar, option-arm, neg-am, 125% LTV, etc. All gone. Subprime gone. Over 200 lenders (and counting) gone.

Interest rates were around 4% going in 1930, not far from where they are now. IMHO, you are looking at the wrong thing, and therefore won't be able to see what is actually happening.

anon 10:24, good luck with that. IMHO, you will catch a falling knife and get cut badly. Most people misinterpret Beffett's comment. I keep hearing many people calling the bottom for RE, and as long as that keeps happening, the herd is not fearful, they are still too greedy. When everybody thinks RE is a terrible investment and that it always goes down, and everybody thinks that there will NEVER be a bottom, THAT is the time to buy. Or when the fundamentals just make sense! :-)

BTW, as the economy spins further into recession, rents will be depressed, thus making cash-flow calculations difficult, but certainly making housing worth less. It's a moving target. You can't say a house cash-flows today so let's jump in when a couple of years from now that house won't cash-flow any longer. You have to look at the big picture.