Wednesday, October 14, 2015

Seller/Buyer Transactions Define Market Value

Is the buyer likely to be the family on the left or the guy on the right?

Via zerohedge...

Whether this is due to lack of demand, or far stricter mortgage supply remains a topic debate, but one thing is undisputed: after a terrible 2014, mortgage applications in early 2015 saw a modest rebound. Alas, it has since proven to be merely the latest headfake in a long series of false starts.  The evidence: earlier today the largest U.S. mortgage lender Wells Fargo reported results that beat expectations by the smallest possible increment. What caught our attention, however, was the fuel that keeps Wells Fargo's engine humming: mortgage applications. Unfortunately for the housing bulls, there was no good news here because after rushing higher in early 2015 on the latest false hope of an economic recovery or due to fears rates are rising, Wells' mortgage applications and the associated pipeline have declined ever since.
...It also means that far from rising rates - a gambit which was meant to spoof potential home buyers into rushing out to get a mortgage ahead of rising mortgage rates, a gambit which has since failed - the Fed will have to come up with a way to lower interest rates even further just in time for the US to finally decouple with the Emerging Market debt crisis and the Quantitative Tightening courtesy of the collapse in commodity prices.

Referencing the picture above, Housing Bubble 2.0 has long since run out of the guys on the left.  Unless you're trying to move a truly "prime" property in Irvine or Arcadia.  What little action that Johnny-come-lately extreme home debtors were providing seems to have petered out as well.  And the recession hasn't even started yet...

International Valuation Standards defines market value as "the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion."  Compulsion and a lack of prudence have been the norm during Housing Bubble 2.0 as have a dearth of willing sellers vis-a-vis willing buyers.  This is no longer the case.

The market value of residential RE in the Bubble areas is being adjusted as we speak.  Asking and closing prices are down in all but the most exclusive enclaves and they have been trending down for almost a year.  As every single other bust has shown downward price momentum tends to over correct.  Sure the timing is difficult, but it is the point of maximum financial opportunity.   

Be patient true believers of math and market economics.  The end of Bubble 2.0 is nigh...


  1. We're the family on the left and despite healthy income and good savings we are priced out of the market. Sitting tight and putting cash to the side while waiting for a correction over the next 2 years. I would entertain selling now and renting for a few years, but SFR rental market seems just as crazy right now.

    -froman118, nathan118's brother

    1. The data supports a correction has already began everywhere but prime. The price movement in the Los Angeles suburbs and exurbs is very real. It's near a statistical impossibility that we don't officially fall back into recession by 2017. As in 2010 cash will be king. Stay frosty brother :-)

    2. Definitely eyeing prime stuff. Not Manhattan Beach prime, but somewhere decent my kids can actually go to public school.

      And reshares like this are fine. Keeps the momentum going. And I emailed you on that outlook email you've got on your blogger account...that thing not work?

    3. This comment has been removed by the author.

  2. My gut is telling me no drop til next recession. The fact that we're 7 years into this recovery, and there appears to be a correlation with presidential makes the next year or two VERY likely.

    "Since 1928, a whopping nine of 14 recessions have begun in the year following a presidential election, far more than then the three that should have occurred randomly. Since 1969, four of seven (or four of six if one excludes the brief 1980 Carter recession) have occurred in the year following a Presidential election more than twice what chance would predict."

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