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Posted by on Feb 6, 2012 in Bottom Talk, Market Conditions | 27 comments | Print Print

CR Calls Bottom

Bill at CR is letting it rip today!

An excerpt:

For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.

As the first graph shows, housing starts, both total and single family, bottomed in 2009 and have mostly moved sideways since then – with some distortions due to the ill-conceived housing tax credit.

New Home sales probably bottomed in mid-2010 and have flat lined since then.

Back in 2009, when I first wrote about the two bottoms, I thought we were close on housing starts and new home sales – but that it was “way too early to try to call the bottom in prices.” In real terms, house prices have fallen another 10% to 15% since I wrote that post according to the CoreLogic and Case-Shiller house price indexes.

And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012.

The problem with using the house price indexes to look for a bottom is that they are reported with a significant lag. As an example, the recently released Case-Shiller index was for November and the index is an average of September, October and November – so it is a report for several months ago. The CoreLogic index is a little more current – the recent release was for December, and CoreLogic uses a weighted average for prices (December weighted the most) – but that is still quite a lag.

Both of those indexes will bottom seasonally around March, and then start increasing again.

There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices (especially if prices fall another 4% to 5% NSA between the November Case-Shiller report and the March report). Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales (the probable mortgage settlement, the HARP refinance program, and more).

Of course these are national price indexes and there will be significant variability across the country. Areas with a large backlog of distressed properties – especially some states with a judicial foreclosure process – will probably see further price declines.

Bill also added this post with more facts and graphs:


  1. Rob Dawg wrote on Mon, 2/6/2012 – 10:40 am In defense of CR’s position:

    The typical mortgage payment that home buyers committed themselves to paying last month was $935. That was up from $931 in November. October’s $924 was the lowest since at least 1988. It was $1,055 for December 2010. Adjusted for inflation, last month’s figure was 58.2 percent below the spring 1989 peak of the prior real estate cycle. It was 66.1 percent below the current cycle’s peak in June 2006.

    This from DataQuick for California December 2011.

    I consider this a very persuasive bottom call – Rob Dawg

  2. There’s bound to be somebody who calls a bottom right. Seems to be some significant optimism right now. Time will tell.

  3. Did you start that blog of yours yet?

    Because I’m tired of hearing you here.

  4. Jim…
    Isn’t 1998 considered a local housing ‘bottom’ year? Do you remember anyone calling that one correctly at the time?

  5. No.

    I’m not sure if we can agree on what/when a bottom is – it is probably different things to different people. The bottom for me 1995 when I had 9 sales. In 1996, I had 16, and big mo behind me!

    You may have heard me tell the story about a buyer calling in from one of my for-sale signs in July, 2004. She was very critical about the property, and the price, which was the first time that had happened in this cycle.

    When I hung up, I turned to wifey and said, “It’s over”. The frenzy continued through mid-2007 thanks to the Tan Man, so there was different high points for people/markets between 2004-2007.

  6. Oh, great. Although CR says house prices are “close” to the bottom – and qualifies it by saying we need to see another 4-5% drop between Nov and March to be sure – sellers will only see BOTTOM HERE NOW – TIME TO RAISE PRICES…

    Honestly, for all of us fence-sitters, I truly hope this doesn’t mean we were too picky and waited too long. 🙁

  7. Hey Jim!

    Here’s hoping it’s the bottom! We’re making offers like crazy, it seems. We hope to find out tomorrow or Wednesday on our submitted best and highest.

    My agent, Brad, says he has more buyers than he knows what to do with.

    And, let’s not forget, that if anyone I know has the right to call a bottom, it’s Bill. He’s a very conservative guy.

    As for you, you have my highest regards, but people will automatically discount your opinion because you’re an agent. It doesn’t make your opinion wrong, they just think it matters less.

    If I “catch” this bottom, it will be the first in my lifetime. Let’s hope there’s many more.


    PS, our offer (which is reportedly a very aggressive one because it’s 70 over ask) is only 28% more than the original purchaser paid in 1999. That works out to less than 2% appreciation per year. Cross your fingers!

  8. My only bottom call was saying “December, 2011” at the voiceofsandiego’s housing panel discussion back in April 2009 (I think). It was a WAG though.

    Good luck Chuck!

    (where are you, in LA somewhere?)

  9. Might be close if the banks continue to let the inventory bleed out slowly.

  10. The bleed-them-out-slowly policy is working so well for the servicers, I can’t imagine it’ll change:

    Max fees, and max long-term employment for employees of servicers – they probably get bonuses too!

  11. I can think of no other person more knowledgeable or qualified to make such a call and be beyond questioning. After 7 or so years of daily reading his blog it’s obvious that the conclusions he draws are the result of logic, reasoning and research to the n’th degree.

  12. Agreed.

    Just having the guts to publish it says something about his conviction.

  13. According to Piggington and Rich Toscano’s conference call we are fairly priced as to price to rent and price to incomt. When you address current downward momentum, 27% reo sales, past history, current lending trends, and human emotions we will probably over shoot to the downside

    That combined with 35% at negative and near negative equity in San Diego we have another 5%- 10% to go.

    I do not feel we are over priced but far from underpriced. As we know fair value is is rarely the same as current market value.

    Do not be embarrased , be patient, and bid 10% below the lowest comp to avoid catching the falling knife.

  14. Daniel: RHE horse property less than $1 million. Nice buy. Makes me homesick 🙁

  15. CR is probably right for the medium-term, for the next 8-10 year or so. I’ve also followed CR daily for a long time (since 2003 or 2004) and I’ve been amazed by the depth of his analysis.

    In the long term, the era of free government cheese will come to an end. All the western world (plus Japan) is Greece now: it’s just a matter of time. When that happens, interest rates will have to rise to defend the currency. However, the “bug government bubble” can continue for a long time. In the US we have perhaps ten years or more. Historically, currencies have started to topple when their debt-to-GDP ratios exceed 100%. As Italy, Spain, Japan and Portugal are proving, the game can go on for quite a while past that point until it all comes crashing down. Greece is a total basket case and look how hard it took to come crashing down. The United States is in far better shape than virtually all the countries in Europe so there is still a while to go…

  16. I think CR is right on the national level but Real Estate is local. I still see room for more than a 10% correction in parts of Sonoma County.

  17. I was looking in Napa and Sonoma for over two years and agree with Tom. In six months to a year. that area will be a great buy. The State will hate it though, because the tax revenue is going to crush budgets.

  18. Greenlander,

    in 8 to 10 years, I’ll pay down between 17% and 22% of my original note (if I don’t do further payments). Plus inflation is always pushing up from below. I wouldn’t get too attached to the long term. Things often turn out far different than planned. And, in my case, far more optimistic than I had originally planned.

    Temecula Guy,

    I think you’re setting yourself up for disappointment. I see 3 types of buyers out there:
    1. Guys that gotta get “the deal”. The deal is more important than the house, and they settle for crappiest house on crappiest lot for the right price.
    2. Guys that want the house. Location, location, location is the name. Price is important, but not the most important factor.
    3. Guys where the wife’s in charge. If she loves the house, it doesn’t matter what the price is… they gotta have it.
    If you’re #1, you may be passing up houses where you’re going to live for a long time and be happy because of the perceived price. I won’t tell you how to live, but I can say as a reformed “deal” guy… nice houses are a better deal in my opinion.


    I’m in Orange County, so yeah… things are hot when properly priced inventory comes on. Price fixes everything, as we have more than 6 months of “inventory”, but it’s not the houses sitting out there that sell. They have to lower prices to market before they get interest.

    The bank is making the decision on our offer today (supposedly), and we waived our appraisal contingency to make our offer stronger (there are a number of all cash offers). But, I know the area very well, and I won’t have a problem getting the appraisal.


  19. Chuck

    I agree that a better house is more important than a better deal.

    You brought up a couple of interesting issues/questions:

    1. “Sellers have to lower prices to market before they get interest”. Seems like buyers are more in tune with the market, so why don’t buyers simply put in offers at market price? Are sellers simply rejecting those offers or do buyers simply not bother to put in an offer on an overpriced house?

    2. How does waiving the appraisal contingency strengthen your offer? Did you keep the inspection and loan contingencies? If so, you can still back out for almost any reason, right?

  20. iamnoone,

    I don’t want to hijack the conversation, so Jim can weigh in on these areas as well, he has a better feel for the NSDC area.

    We made offers at recent comps on overpriced homes. They were ignored, or worse, my agent was berated. Most people do not want to be told their house is overpriced. Besides, it’s not worth my energy to try to convince someone of something they’re bound to not understand.

    I think Jim would agree that the appraisal contingency could be a factor when you’re offering way over asking, and when you’re competing with all cash offers. This will probably only work when you have plenty of cash in case the appraisal comes in low. And yes, the other contingencies are still in place, and yes, within the 17 day inspection contingency period, you can pretty much back out for any reason. (there are always reasons). This was unique because there are at least 12 other offers, and it was listed well below market value (I believe) based on recent comps. (less than 1 month old, even which was a house we bid on and did not get, same model, smaller lot.)


  21. As a South African property investor I read this blog for a bit of a heads up (America sneezes, world catches cold sort of thing) middle class South African houses are made from bricks and mortar with tile or steel roofs and last a long time with only cosmetic maintenance (my home was built in 1927 and while we have a new stove, refrigerator, light fittings, electrical power points etc. the cabinets are the original 1927 Oregon pine ones). The discount between a new 100 square metre home and a second hand one is now 35%, the mortgage interest rate is 9% (the lowest for about 40 years) and the government is printing Rands to pay out welfare recipients. Considering all this and incipient inflation I consider CR may well be right.

    Oh and good luck chuck ponzi! hope you get it as I think now is the right time.

  22. I call bottom and I’m just a sporting goods industry sales guy. Our trade shows are showing increased action and attendance after 5 year lull. Specialty retailers in sports/lifestyle industries are alive and getting healthier. When people start spending more on non essential stuff (sports luxury items vs food and basics) you fell the page is turning. And…we just sold/bought a home with Jim late last fall so I’m in with skin in the game!

  23. Chuck

    I like the psychological analysis on how guys buy houses. Thank you for sharing.

    Unfortunately the data suggests otherwise. First there is actually a fourth buyer, woman. Second, emotions no longer buy the majority of homes, capital and credit now is needed to buy homes. When you have no money for 20% down and 6% commission you lose demand from the buyer who wants to upgrade if you have limited equity.

    You also are looking from a demand side and missng the supply side.

    Pull any data anywhere in San Diego and you will see interesting stats. Corelogic just reported
    –600 Homes with 20% negative equity in 92130
    –3100 homes in Mira Mesa with 20% negative equity
    — Two high end RSF 2 acre, 8000 + sq ft homes build after 2001 just sold for $220 a foot. .There are three more pending below $270 a foot. Houses are selling well below building or reproduction costs. Pending sales are falling on $1mm + homes as you will see in the March data

    Where is the money coming from to drive the markets? Capital does not just appear after a recession and Qcom Stock options are still underwater.

    I feel you should bid 10 % below comps often and do not let the agents strong arm you. Be counter intuitive, avoid herd behavior and stay patient. if your bid embarrasses you and your realtor, then your price is right.

  24. Chuckie Et al

    As was pointed out by Rich Toscano and Robert Shiller, one of the key attributes of most bubbles is that, when they finally burst, prices tend to “overshoot” on the downside, crashing well below fair value until all the exuberance is wrung out of the system.

    Robert Shiller has a good track record and correctly identified (in advance) two major price bubbles in recent decades—the stock market bubble of the late 1990s and the housing bubble of the late 2000s.

    Sorry, We need 10% more on the downside

  25. You can believe whatever you want, but that video was crap. I’ll address it tomorrow.

  26. I’d have a lot more confidence in bottom calls, or any other economic forecasts, if this wasn’t a presidential election year. Every four years the incumbent administration does everything it can to try to goose all the markets while the opposing party travels the country trying to tell us we’re going to hell in a handbasket if things go on without change. This has been going on for as long as I can remember, and it turns the entire economic landscape into a pair of competing theme parks for at least 6-8 months.

    OTOH, these election years usually provide incredibly good refi opportunities. 🙂

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