On the Facebook bubbleinfo, in response to the idea that the bubble won’t be bursting, Matt asked ‘what constitutes the big stagnation when it happens’.
My response:
The Big Stagnation? You’ll know it when you see it.
We used to consider 6 months’ of inventory to be normal, but the new norm is probably 3 months with most of San Diego being 1-2 months today. Rancho Santa Fe is our exception, and has 8 months’ of inventory currently (only because there was a slew of sales last month). I think we can consider stagnation being any market with more than 6 months’ worth of inventory, and/or 100+ average days on market (Avg. DOM in RSF now 129 days).
When the market slows, most of the homes not selling can be explained – bad locations, inferior condition, etc. Start worrying when you see houses that have it all, including a decent price, not selling.
Other outside influences that might cause the market to stagnate include:
- Mortgage rates get back into the 5s. Rates have been under 5% since the end of 2009, which seems like a million miles ago. Buyers would want to stall their plans for at least six months to see if sellers would compensate by lowering their price.
- An occasional bad comp. This happens today when a lowball sale occurs (usually an inside job), and buyers and sellers wonder if it is real. Because there is usually scant information about it, the bad comp ends up being a mystery, and we forget after a few months, but another seller has to go first to prove it was an anomaly.
- Immigration is halted. This would have seemed impossible up until a few months ago, but if it happened, we could feel a significant impact on the demand side.
- Recession hits locally. An economic slowdown may not bring more supply right away because those out of work would wait 1-2 years before they believed they couldn’t get another job, and decide to move. A more immediate impact would be felt on the demand side – we’d be losing buyers right away.
The prime reason for a market stagnation is the resistance that sellers and agents have about lowering their price – they would rather wait and see if it will be different tomorrow.
We might see a 5% or 10% drop without much fanfare, because most every seller around here has gained more than 30% appreciation since 2009 and wouldn’t feel it much. They might give up a couple of bucks, but if a heavy discount is needed to sell, they will dig in. It is very likely that the only reason they are selling is to hit the big-money jackpot.
A stagnant market could last for months or years – they tend to last until people subscribe to the fact that price will fix anything!
But housing has been more valuable than money so far.
Tell that to Taleb’s turkey. 😉
I said “so far”! 😆
In today’s keynote luncheon at RIMS 2010, Nassim Nicholas Taleb, best-selling author of The Black Swan, told the story of a turkey who is fed by the farmer every morning for 1,000 days. Eventually the turkey comes to expect that every visit from the farmer means more good food. After all, that’s all that has ever happened so the turkey figures that’s all that can and will ever happen. But then Day 1,001 arrives. It’s two days before Thanksgiving and when the farmer shows up, he is not bearing food, but an ax. The turkey learns very quickly that its expectations were catastrophically off the mark. And now Mr. Turkey is dinner.
Taleb’s advice: “Let’s not be turkeys.”
The lesson of our doomed turkey illustrates the central problem of unexpected, “black swan” events (or in this case “black turkey,” I guess). We simply do not have enough data to reach empirical conclusions about how a risk will manifest itself and to what degree. “Just because you never died before, doesn’t make you immortal,” said Taleb.
Part of the issue is in the semantics of how we talk about risk. We have created what Taleb called “an illusion of measurement.” By saying, we can “measure” the risk in a particular situation, we are implying that there is a definitive answer. “We should not be using the word ‘measuring,’” he said. “We should be using the word ‘estimating.’” It’s a psychological difference that allows us to gauge “riskiness” more appropriately.
Taleb pointed out that the issue is magnified by the increased complexities and interdependencies of today’s society. There is a greater potential for the unexpected in a society characterized by extreme randomness and connected in ways that it never has been before. You would only have to compare how a theoretical run on a bank would happen today as opposed to 50 years ago. Once upon a time, if you wanted to pull your money out of your bank after learning of its imminent failure, you would have to physically go to the bank, likely stand on line, and possibly even change your mind after being forced to wait half the day. Now you can get the news on your Blackberry, log into your bank and automatically withdraw the cash in seconds. And so can everyone other bank customer around the world. Voila. Instant crisis.
The situation may not be encouraging, but Taleb put his faith in good risk management. “Unfortunately, we live in a world that doesn’t understand risks,” he said. “Hopefully, risk managers would run society and not bankers.”
They certainly couldn’t do any worse.