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Housing Bubble- Hurricane Katrina- Roller Coaster

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john p

Joined: 10 Mar 2006
Posts: 1820

PostPosted: Thu May 04, 2006 5:30 pm GMT    Post subject: Housing Bubble- Hurricane Katrina- Roller Coaster Reply with quote

Lots of the people posting here have varying senses of context with regard to "what can happen" here in Boston. Within the framework of graduated risk, think about how people built houses close to the wetlands. Flood plain maps typically indicate year storms like 10 year, 50 year, 100 year, etc. Usually, a contour line like an elevation above sea level indicates where the 50 year storm line would impact. The 100 year storm water would rise higher than the 50 year storm... Temporary localized flooding can happen where water gets trapped regardless of the elevation above sea level. When people look at what happened here in Boston back in the late 80's they say "Hey, it was just 10 percent or so." These folks need to be reminded that some towns got absolutely killed and others didn't feel the pain as much. 10 percent or so was just the average. Is this new storm going to be the 11 year storm that the 80's and 90's were or could it be bigger?

The issues are where the areas are most at risk i.e. low lying areas in a flood, what market segment is most at risk, and are we due for a big one?

I see the areas getting killed are the highest degrees of "alternatives". This basically means in an ideal situation a person would love to live in area "A". If "A" is too expensive, they choose the next alternative "B", then the next alternative "C", etc. If there is no vacancy they are staying at the Cuddle and Bubble Motel. If you can get to Vegas mid week, you get a much better room cheaper than if you go during a weekend. Now as the growth rings around Boston push further out, the alternative "W" is where we have the greatest amount of new construction. Builders in towns like Grafton, Mansfield, and Lakeville may have started their project planning two or three years ago and their forecasts of growth may be way off. These areas are going to feel the pain greater than the Lexington’s, Westwood’s, and Hingham’s. Within the city limits of Boston, the areas most at risk are like the newly created basement condos in sketchy neighborhoods. Economists suggest that in order for Boston to come into line with fundamentals, prices would need to drop 30 percent (ON AVERAGE). What would this mean for the for the areas that really have their asses hanging out in the wind. Think about the alternatives. If alternative "A" is now more affordable, "B" needs to be even more affordable in order to compete with "A". If there are now more "A's" available, "B" really has to step it up. Alternative "W's" really got to get it in gear to be competitive, again, especially if there is a ton of supply in "W". I'm not saying that the Hingham’s are going to be hit; they have their own "W" versions within their town. The run down capes asking in the $600k's will get whaled on.

The Roller Coaster: Imagine groups of people being broken up as passengers in a string of cars on a roller coaster. The ones in the front of the car are the ones that have a heightened awareness of what the future is going to bring. They are first to see the peaks and first to see the dips. The folks in the back of the car might think that they are still climbing, when the ones in the front are facing downward. The surreal feeling is being "ahead of the curve" in the front car, staring downward and wondering "Why am I not falling?” The reason is that the weight of the cars behind you. The laggards that still think that the market is climbing create a more laminar flow of the decline. It's like when you quickly turn the hose on, the water rushes out and when you quickly turn it off it is more gradual because all the water already in the hose needs to get out. Always remember the saying "A" students teach, and "B" students work for "C" students. You always need to benchmark with where Joe Six-pack’s head is at. Perception is reality. Lastly, the guy who manages the ride down on the ground is like the Fed. He can slow the ride down or speed it up. Every time that mortgage rate climbs it eats affordability from buyers. The segment of buyers for that price point significantly reduces further tilting the buyer/seller ratio. The question is at what point a critical mass becomes aware of their advantage.

My advice is to find a buyers agent with an "A" level awareness who can speak the language of the "C's" of the market. In reality, for people to sell their home, they need to buy something else, or rent. If in May, the prevailing discount is "x" percent under asking, and in August, it increases to "y", you can't easily expect "y" until the overall market mentally gets there and catches a glimpse of the dip.

The last major contributing factor is the all of the above affect. If interest rates rise, a potential seller would walk away from their low cost of capital and pay a premium to pay the higher finance interest rate in a new purchase, which weakens their buying power. If prices drop, people won't have as much for a down payment to upgrade. In combination, each month compounds the situation. People can always tap into their mutual funds or 401k but lots of people have those funds earmarked for their kid’s colleges, retirements etc.

The saddest part of Hurricane Katrina was that it was the poorest people without good information who had no awareness that this sort of thing was possible got impacted the hardest. Understanding things like "topping the levies", "breaching the levies", Category this or that, was over the heads of them as is the economic forecasts, fundamentals and indicators are for the housing market. They felt safe, they didn't know that the Arabian horse guy had their back.
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PostPosted: Fri May 05, 2006 12:51 pm GMT    Post subject: Correction Reply with quote

whaled - Moby Dick
wailed - Beat the crap out of
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john p

Joined: 10 Mar 2006
Posts: 1820

PostPosted: Fri May 05, 2006 1:10 pm GMT    Post subject: Reply with quote

You should have seen this before I ran spell check. What did you eat a dictionary for breakfast? Wink
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PostPosted: Fri May 05, 2006 1:46 pm GMT    Post subject: Reply with quote

Just had two large Dunkie's this morn.
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