Flipped out: Gamblers who walk away

Good morning. Here's how far we've come in this housing cycle: The Mortgage Bankers Assn. is now talking about flippers who gambled on houses, got stuck, and then walked away. Jeez, that doesn't sound like a Washington lobbying group talking, it sounds like a comment on one of those cranky housing blogs.

Annette Haddad writes in today's L.A. Times: "Blame it on the speculators. That's what the Mortgage Bankers Assn. did Thursday in a report showing that as many as 1 in 5 mortgages in default in California belongs to borrowers who are not living in the homes with the troubled loans."

Doug Duncan, the trade group's chief economist: "Defaults are on the rise in most parts of the country, but it should be recognized that it is not always the case of a homeowner losing his or her home but is often the case of an investor gambling on a continued increase in home values and losing that gamble," Duncan said.  Many of these investors "simply walked away from the mortgages," he said.

Our take: Many commenters have pointed out here that the gambling mentality is not unique to investors -- many people who bought homes to live in were also gambling that they'd be able to refinance, or sell the home at a profit.

Your thoughts? Comments?  E-mail story tips to lalandblog@yahoo.com.

Comments

[Mr.X]

A lot of people also just "walked away" weren't gamblers... just extremely shrewd people.

After seeing prices drop and incentives rise, they secured a second mortgage to purchase a larger home with more BR/BA and swimming pool / yard for the same price/ monthly payments.

Then, they just let the bank foreclose on their first mortgage.

These people had everything to gain and nothing to lose... not even a conscience. Who gets stuck holding the bag? The bank? The federal government? The tax payer?

[AndyA]

I wouldn't shed too many tears for these banks holding the default mortgages. These aren't unsecured loans: they are secured with actual land. Even including several housing slumps we've had here in LA, nothing has appreciated like real estate. So the banks aren't getting paid back with $$, but they still own all this land. If we bail them out, they'll hold on to these foreclosed houses (leaving them empty and creating blight) until they are profitable to sell again, then walk away with a DOUBLE reward for suckering people into crazy loans.

[john beaty]

Hey Mr X, got any evidence for this being more than one or two scum, er people?

ANyway, if we help some people out, they should be required to be living in the hose and have lived there at least 1 year prior to getting into trouble (2 would be better.)

John

[vultur]

Can someone PLEASE reconcile these two statements for me?

PRICES RISE 3.2% (BLOOMBERG)
>>U.S. Home Prices Gain at Slowest Pace in a Decade (Update6)

By Kathleen M. Howle
Aug. 30 (Bloomberg) -- U.S. house prices rose at the slowest pace in a decade during the second quarter as lenders tightened mortgage requirements, according to a government report.
Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier, the smallest gain since 1997, the Office of Federal Housing Enterprise, known as Ofheo, said today in Washington. Prices grew 0.08 percent from the first quarter, the slowest since a decline at the end of 1994.<<

PRICES FALL 3.2% (WSJ)

Steep Home-Price Drop Stirs Fears
Market May Get Worse Still
As Effect of Stricter Lending
Has Yet to Show Up in Data
By KELLY EVANS
August 29, 2007; Page A3

The decline in U.S. home prices accelerated in the second quarter as a glut of unsold homes and tighter lending standards continued to weigh on the market.

Home prices nationwide tumbled an average 3.2% from a year earlier, according to an index compiled by Standard & Poor's Corp. The decline was sharper than the year-to-year decline in the first quarter, when the S&P/Case-Shiller national home-price index dropped 1.6%.

WHAT AM I MISSING! WHY ARE TWO OF THE BIGGEST FINANCIAL NEWS SOURCES PUBLISHING CONTRARY STORIES? WHICH IS IT?

SO FRUSTRATED!

[Timc]

Look at it this way, if I walked into a bank with a business plan and asked for $200-300k they would laugh me out of the building. But they handed out mortgages like nothing. Granted, they were secured by the properties they were buying, but the risk is not anything less than what I would ask them to assume in starting a small business.

I feel little sorrow for these banks and their brokers, maybe the ones who were honest. I am not all that thrilled about the flippers and investors either. All of this was a house of cards, fueled by speculation and frenzy. Again, the average Joe, who wants one modest home with a mortgage they can afford will suffer in the end. But not to worry, it will happen again when the next generation of first time buyers goes looking for their American Dream. Next time those banks should look for better investments instead of ruining the home ownership experience for everyone.

[eprobert]

Vultur - you just need to work on your reading comprehension skills.

[investorguy]

vultur: it just depends on how you crunch the numbers, and who is doing the crunching. That's why no one knows what's really going on. Economics is NOT an exact science.

Re: the gambling thing. 1 in 5 is certainly not "most" as AnnS wrote in another thread. Ann, you might want to adjust your statement.

[vultur]

eprobert,

That may be the case but enlighten me, please.

Bloomberg says:

"Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier"

WSJ says:

"Home prices nationwide tumbled an average 3.2% from a year earlier, according to an index compiled by Standard & Poor's Corp."

Which is it? Does WSJ's figure include NEW HOMES and Bloomberg's figure exclude them?

What's going on here?

[Gordon]

I have no sympathy for all the whinning in LA-LA land. You all thought you were sitting pretty with the unsustainable appreciation and spending all you could mortgaging your overpriced homes to the top. Now it is time to pay the bank. Pay up and shut up. If you couldn't see this coming you are blind.

[Kathy]

vultur, check the Times today for an "explainer" story, I think by Annette Haddad. There were different sets of data examined; the set with the resulting lower prices from Case/Schiller included higher priced homes, which was excluded from the data that resulted in the slightly increased prices. Apples vs apples and oranges.

[Pete Viles]

Vultur asks, "Can someone PLEASE reconcile these two statements for me?
PRICES RISE 3.2% (BLOOMBERG)
PRICES FALL 3.2% (WSJ)

Vultur -- Thanks for the smart question. This is an ongoing frustration: so many different ways to measure housing prices, so many different and conflicting stats. The first number, rising prices, comes from a government survey that does not include non-conforming loans, so it is somewhat irrelevant to California, where we have so many Jumbo (417K and above) mortgages. The second survey, which I consider more accurate, includes non-conforming loans. Here is how Annette Haddad described the two surveys in todays LATimes:

"The federal home-price index tracks average house price changes in repeat sales or refinances of the same single-family houses. The agency, however, follows only those sales financed with so-called conforming loans, or loans for less than $417,000.

That's why Thursday's data varied somewhat from another national home-price index released this week that found U.S. home prices actually fell 3.2% in the second quarter.

That index, by S&P/Case-Shiller, includes repeat sales involving both conforming and nonconforming, or "jumbo," mortgages.

The discrepancy between the indexes "indicates that prices of houses financed with jumbo loans or sub-prime loans are dropping much more than houses financed with conforming loans," said Patrick Newport, an economist with research firm Global Insight Inc."

That said, we'd like to hear other opinions on this. Thanks, vultur.
Pete

[MyLessThanPrimeBeef]

Vulture, close your eye and trust the Force.

What does your intuition tell you? Is this a good time to buy? Should home prices be going up?

[are they crazy]

Of course shrub's plan won't work - that's not the point. The point is to calm the masses back into being docile spenders. Look what happened when the MSM finally woke up to the housing bubble story. Up until about a month ago, there was no bubble, real estate never goes down, it's only small pockets. All of the sudden, the general public could not avoid the story - it's one thing if it's happening to you, its another if it's happening to everybody. Lot's of sellers with toes over the edge may sigh in relief at the idea that somebody is going to save them so they take a vacation or buy an SUV. The market psychology is more important than whether the plan ever gets going.

[Eurotrash]

Gordon:

"I have no sympathy for all the whinning in LA-LA land"

What are you talking about dude? Who on this blog has done any "whinning"? Pretty much everyone that posts here are unanimous in their disdain for the attitude you describe. Are you just trying to stir the turd to get a reaction out of people?

The vast majority of us that read this blog did indeed "see this coming". That's why you see such vociferous opposition to this morning's bail-out proposal by our esteemed leader.

[jemarqu]

MyLessThanPrimeBeef: "Vulture, close your eye and trust the Force.

What does your intuition tell you? Is this a good time to buy? Should home prices be going up?"

I almost spit coffee out laughing when I read this. lol

A lot of home buyers didn't use the force when they purchased their home that they couldn't afford. They did however close their eyes when they signed the loan docs.

[chet]

Bernanke said that the lenders need to come up with new products to get themselves out of this mess instead of getting a bailout and I see the logic of that. Why not offer 40 and 50 year loans that lowers the payments so sub-prime homeowners can stay in their homes? Believe me, these people want to stay in their homes...and the banks would get a lot more interest money.

And just my 2 cents ~ why are we constantly preached "Leave the Free Market alone" from Republicans when jobs are headed overseas or they oppose raising the minimum wage - but when a coporation needs a bailout because of bad management they're the first to suggest it?

[MyLessThanPrimeBeef]

Should have been 'eyes,' not 'eye.'

My hands and my brain, they don't get along so well.

[vultur]

The fact that the Fed survey doesn't even recognize loans over $417k and that the AVERAGE mortgage on a purchase in California probably exceeds that should be a major red flag for anyone who honestly believes that average housing prices (of ALL houses, big, small, enormous, apartments, etc.) of more than $500,000 for a population of 30 million+ is probably not sustainable under there is an oil gusher beneath each property.

[Raughle]

Vultur – you'll never read this post because it's too long.

As the saying goes, there are lies, d^#n lies, and then there are “statistics.” If you want the housing stats to be meaningful to you, you have to be willing to take the time to understand how these numbers are all calculated because OFHEO, Case/Shiller, NAR and others all have different methods. If you don’t have the time, I suggest you ignore them altogether. Why? Here’s a brutal yet incomplete list of the way these stats can lie to you:

Average vs. Median: Some stats you read use “average” home prices (total home sales $ divided by number of homes sold) which skews things upward every time somebody sells a mansion in Beverly Hills. Others use “median” which is the point at which half the homes sold were more expensive and half were less expensive. Both are blunt tools.

Listed vs. Sold: The weekly home price numbers Pete posts here are taken from the LIST prices of homes on the MLS, not the prices at which homes are SOLD. It doesn’t reflect the true market value because those homes may or may not ever sell at list, but it IS a more immediate indicator in a market where not much is selling.

Month-to-month vs. year-over-year: Some organizations quote the change from last month or quarter to this month or quarter, and some quote the change this year from the same time last year. The media does a horrible job of differentiating between the two, and it's exacerbated by the eye-grabbing headlines like "Home Prices Down 3.2%" Pete is not off the hook on this one.

Data access: Some organizations only report on the subset of the total market that they deal in (certain city/state/region/loan type/loan amt/conforming vs non/single family vs condo, etc.) and therefore their statistics don’t represent the entire market.

Event definition: OFHEO/NAR/NAHB/RealtyTrac all use different events to measure their sales/construction/foreclosure activity by counting things when they break ground / take a deposit / complete construction / open escrow / close sale / become past due / receive foreclosure notice/ bank takes possession, etc. Some count ‘em at more than one step! Is your head spinning yet?

All sales vs matched pairs: Some indices measure the total of all homes sold in one period against all homes sold in another period, which can skew things one way or another when the mix of homes sold changes (e.g. one year people are buying more condos and another year they’re buying more single-family). Other indices take the exact same home that’s been sold multiple times and looks at the difference (a better measure, but by using short-term sales it becomes heavy on flipped properties in an up market and troubled sellers in a down market…because that’s who’s selling in such a short time).

But since you aren’t even reading the body of those articles anyway and you just want the headline to tell you where home prices are going, how fast, and for how long, I’ll summarize all the stats for you into one headline:

"DOWN, SLOWLY AND PAINFULLY, and FOR A LONG TIME."

[Bert]

One of the big problems of the mortgage crisis is that many home owners did not understand the products which were offered to them. These types are not gamblers. Lenders should be forced to be more transparent when they offer their products. However, Government should stay away as much as possible and leave gamblers to market forces...

Here a great educational site for people who would like to get to know the difference between gamblers and investors

www.marketobservation.com

[NoWayinLA]

Bert: "One of the big problems of the mortgage crisis is that many home owners did not understand the products which were offered to them."

I can certainly see how that is possible, but I highly doubt that it accounts for a significant proportion of the problem. Of the personal stories I've read during this situation, it seems most people understood the product all too well.

Instead, the common theme seems to be a belief that "real estate always goes up." This theme was embraced by everyone in the marketplace... lenders, buyers, real-estate agents, even trade magazines and the national media. Based on that preconception, an interest-only ARM on a new purchase or refinance makes perfect sense, particularly for first-time buyers with little money down and limited credit histories. IF real estate prices continue to rise, then you make the interest payments for 3 years, effectively renting the house from the bank at a fraction of actually renting, then refinance before the balloon kicks in, using your new equity as a down payment and converting it into a prime loan. Brilliant!

Of course, we now know, the original preconception was incorrect. If there aren't any buyers at your price three years from now, your equity goes the other way. It was a gamble, and they lost.

Except in specific circumstances, it's hard to blame anyone for it. I remember in 2006 when I did the math and figured out I couldn't buy a home, perfectly educated and experience homeowners were urging me to get in while I still could. It wasn't a case of bad real estate agents, or mortgage companies, or stupid buyers. The problem was a widespread, systemic belief in a false preconception.

[vultur]

>>But since you aren’t even reading the body of those articles anyway and you just want the headline to tell you where home prices are going, how fast, and for how long, I’ll summarize all the stats for you into one headline:

"DOWN, SLOWLY AND PAINFULLY, and FOR A LONG TIME."<<

Raughle,

Never underestimate who you are dealing with. When my money is on the line I real things extremely carefully. Macro stats mean little anyway- local economies determine real estate prices for the most part, even in international cities like Los Angeles. As long as employment and income levels stay high (no certainty there), and interest rates stay flat or trend down (as they are starting to and trend will accelerate) home prices will not necessarily tank.

[jb]

Perhaps someone could provide some steps that folks who are frustrated with the bailout can take to let our politicians know that we will not ever support them if they let this go through? I am sure we could all complain to various places but perhaps a united front to the best place would have the best effect?

[FM71]

Somebody call John and Ken. Once those guys get a hold of something, they don't let go. They were huge when it came to Gov. Davis' recall. They can help spread the word to start bombarding Congressmen and State Senators with phone calls about a bailout.

[Frank Giovinazzzi]

Game over folks. Prices are going to drop 50% across the country. Take the median income for your area, multiply times three and you'll have the new median price.

And no amount of sob stories are going to erase the memory of everyone who was treated like an Indian untouchable for not being a real estate genius.

Reap the whirlwind.

[michelle]

@ Frank - you promise? Sure, I know prices obviously have to continue to fall, but is there really hope that I'll be able to buy a decent house in a decent part of LA for under 200k. Of course I wouldn't mind, nor would I argue. But even I'm skeptical of that much of a drop and I've been warning my friends since 2004 when they were urging me to BUY BUY BUY! Unsuccessfully, I might add.

I will keep my fingers crossed that you're right and keep banking my money. Until then, I sit on the sidelines and continue to read this blog faithfully!

[Sam]

Bankers, Mortgage Companies, RE Brokers, Title Companies and especially the Gov't will find "new products" to support RE prices and close deals. A very important economic principal in this industry is no one, especially the Gov't, gets payed until the deal closes. All are whores and will make sure deals close, in this current enviroment and forever. i.e. look at the CA tax base, my father lived in a $1.5M house in Palos Verdes and payed $1300/yr in prop tax under prop 13 last year, the chump that bought the 40 yr old house for $1.5M is now paying $15000/yr in prop taxes. This is the only way the CA stays solvent under prop 13. If RE in SoCal did not have the acitvity it did over the last 5 years the state would be broke by now. Too may benefit by closing the deal and the one with the most money, Gov't, has the most to benefit and will make sure the party continues. It is happeniing now and you people waiting on the sideline will miss it game again, like you did 6 years ago.

[Michael]

Isn't it amazing how personal accountability, the free market, and bearing the consequences of one's actions always apply to the average American -- but whenever banks and financial institutions are involved, they're too big to fail? If there's a lesson over the last century, it's that the small guy is allowed to fail every day -- that's capitalism -- but the big guy gets bailed out every time by the gov't, with taxes and inflation paid by the rest of us.

We have two greedy groups here getting paid by the rest of us -- homebuyers who purchased homes they believed were going to appreciate no matter what, and banks who believed their awful loans were going to be covered no matter what. Well guess what, the banks were absolutely right about the gov't. The homeowners near default will get just enough bailout money to continue paying the banks on their outrageously overpriced mortgaged. The banks will end up receiving every cent of the bailout money (i.e. our money) from their debtors. Everybody else gets screwed.

[Pat]

Frank's analysis is overly simplistic. House prices are primarily set by comparisons to recent, neighboring sales. Such a phenomenon fits very well with a 2 dimensional LaPlace equation (or more exactly the Dirichlet problem where the boundaries are set by the new price reductions). In such a situation, the farther you are from a depressed region, the less you are affected by it. To be more realistic, we would have to separate the map into piecewise discontinuous sections because boundaries like city limits, rivers, etc. form resistance barriers to the comparison pricing effect. Thus, if the sub-prime woes are largely limited to outlying areas (such as the Inland Empire, Lancaster, Palmdale, etc.), interior areas such as Beverly Hills, Westside, Southbay Beach cities, will hardly be affected. Thus, we need a good theory for why prices are being depressed to come up with where to start the price depression. How much we depress the prices could be a variable to give us different scenarios (these 2 things give us the boundary conditions in the Dirichlet problem).

As for the median income in an area, this is also too simplistic. That relationship would only hold for the median income of new buyers, not all residents. In addition, the factor of 3 is not right either. California does command a price premium. In addition, as the median income of new buyers increases, the income multiplier breaks down. Someone with an income of $300,000 does not eat or drive 3 times as much as someone with an income of $100,000. At a certain point, income no longer is the driver of affordability, but total assets (think super rich).

So, where do you want to live? Inland Empire? Based upon recent data it looks like prices may drop anywhere from 35% to 50%. Santa Monica? If price depression is mainly driven by sub-prime problems, then maybe 10%. If price depression is driven by loss of jobs or other things that would cause the origin of price depressions to be much closer to Santa Monica, then it would be higher.

[Pat]

BTW, if you are a real economist for an organization like the National Association of Realtors, shouldn't you already have computer models like the one I described for the major metropolitan areas already? Why aren't real economists already running simulations to figure out how things will shake out? Why are the bank's foreclosure pricing models so out of whack?

[AnnS]

By the way, I saw a statitic a year or so ago that in 2004 -2006, 40% of real estate home sales were to (1) investors or (2) 2nd homeowners.

As the Mortgage Bankers Assc. data was reported, the words were blurred. According to the WSJ, the actual report was about non-owner occupied houses. In the Census data, a 2nd homeis reported as non-owner occupied. Pretty sure that holds true for the mortgage stats.

If 2nd homes are reported as non-owner occupied (since that is not the owner's primary residence - a big difference for mortgage purposes), that means the 2nd home buyers are in this large group of defaulting borrowers.

That would eplain what we are sseing in my area where 2nd homes start at $350,000 and go voer $2,000,000.

In the current MLS listings, there are 96 homes listed for sale for 2 townships with a total permanent population of 650 -700 households. Only 4-5 of those properties can be bought by 95% of the residents.

In the county there are 13,297 housing units (houses, condos, apartments.)
7,318 are owner occupied (as in live here full-time.)
1295 are renter occupied.
4,861 are 2nd homes where there is not a full-time resident - either owner or renter.

Median county household income is $47,062 with 8458 households. 21.3% of the population have an income over $75,000, 13.4% over $99,999; 1.9% over $149,999 and 2.6% over $200,000. The poverty rate is less than 2.4%.

There are 668 homes listed for sale. 557 of those (83.38%) are above what the median income can pay. There are 55 (9.8%) listed that can be bought by the median income.

384 of them (57.48%) are listed at $300,000 - $9,500,000. At $300,000 the mortgage and taxes would require and income of $82,100 and only 692 households have the income to purchase any of the 384 $300K and up houses. 83.4% of the population can not afford 57.48% of the houses.

204 of them (30.5%) are listed at $500,000 or more - something that requires an income of $136842 (and that is being generous as the taxes on a $500,000 non-resident house would be close to $20,000 a year.)

As only 4.5% of residents (380 househodlds) could buy any of the 30.5% (204) of the houses in the upper bracket, clearly many are 2nd homes.

At one up-sacle resort with condos and townhouses, so many are for sale by their current owners that the resort opened a sales office to co-ordinate with the realtors.

Over the past 3-4 months, there have been 7 -13 foreclosures a week. (I wasn't paying attention before then.) At that rate it would be 260 in 6 months and 520 in one year.

That is a HUGE rate of of foreclosures - close to 4% of all dwellings.

Given that in such a sparsely populated area, gossip flows freely and the local paper only puts in print everything you have already heard that week, it looks like the vast majority of these foreclosures are 2nd homes. No one has heard of that many permanent residents in foreclosure. (Pus the notices list the addrress of the property and any address of the owner - easy to tell who is not from here.)

So, it may not be all investors defaulting on these non-owner occupied homes - there may be a considerable number of 2nd homeowners. There are a lot of them in the hardest hit states - CA, FL, AZ , NV (Vegas) and, yes, MI (up north and on the lakes.)

[RichW]

Vultur, glad you mentioned these conflicting stats, as they are a major pet-peeve of mine. Not so much the statistics themselves but how people will cherry-pick them to promote their position or agenda (for example a RE agent claiming the median price is increasing while failing to mention the underlying cause is the bottom end of the market falling out). So far I've found the Case-Shiller Index to be the most accurate measurement of the market. For an interesting comparison, check out the graph at: http://piggington.com where you'll see how the median skyrockets up as the Case-Shiller Index drops like a bomb !

[SoldHouseandLeftCali2005]

Chet said -> "And just my 2 cents ~ why are we constantly preached "Leave the Free Market alone" from Republicans when jobs are headed overseas or they oppose raising the minimum wage - but when a coporation needs a bailout because of bad management they're the first to suggest it?"

I said -> Chet's an idiot. Try as you might with your revision of history their my bluetard, but the first national politician to voice a "bailout" plan was Hillary, followed by Obama and Ken..er...Johnny E.

No bailout, no taxpayer funding. Allow those companies to fail that need to fail, and others will spring up in response. Or maybe the fact that we drive the world's economy is an accident that couldn't possibly sustain itself and needs more nanny state policies from both reds and blues.

[investorguy]

AnnS: great stats there -- thank you for the clarification. One of the issues, however, with the "second home" stat is that some lenders, like Bank of America, have been happily making "second home" loans on anyone's first investment property for years. I know of more than one house in non-LA markets where the buyer got in below $30K, and BofA loaned at 80 percent of the $85K, $90K, $100K after rehab value as a "second home." Many of those houses sit empty and tenant-less today. That's a problem.

[Dr. JwB]

Pat- I don't want to be too hard on you, because I like the elevation of discourse that you are promoting, but your math may also be overly simplistic, and even if the math were appropriate, it would only create a model - one of many that would have limited predictive value. There is too much noise in the data to expect a single, predictive model from a differential equation (or a system of many interacting differential equations).

Pat wrote: "House prices are primarily set by comparisons to recent, neighboring sales."

It sounds to me like you want to model prices as a diffusion process. Am I wrong?

That kind of model cannot account for sudden drops in prices, for panic, nor even for the driving force of medium- to long-distance moves ("I'm leaving Santa Monica for the valley, or for IE, or for Arkansas). While housing prices (as a function of time and space) are gradient sensitive, there is much more to it than that.

Let's say you are like me, and you wish to live on the Westside:

The "value" of any house in Santa Monica is a function of: 1) neighborhood; 2) Recent earthquakes; 3) Banking problems (availibility of credit); 4) Other things I can't think of because I haven't had enough coffee.

But #1 is a function of prices in the valley/IE/elsewhere, because if valley homes were free, no one would pay 1 million for 800 sq ft on the Westside, no matter where it was relative to Montana Ave. Prices in any neighborhood are related not just to their nearest neighbors, but also all length scales, to varying degrees. I think this would be difficult to quantify in any satisfactory manner (for example, gas prices would influence commute distance, and therefore the effective "cost" of a house further away). I'm sure people have tried, and I never shy away from difficult scientific problems, but that is a long-term project.

Maybe the best analogy is the weather: short term predictions are not too hard, long term ones are really difficult. That's why people have spent their entire careers just to get where we are in weather prediction (and now "complexity" is a field all of it's own).

[MyLessThanPrimeBeef]

Standard appraisal theory says that the price of a house is determined by 1) comparable sales, 2) replacment cost or 3) something I don't recall right now...maybe cap rate, but it's for income properties.

Going by the method of comparable sales, as practiced by honest appraisers, it should have adequately covered 1) neighborhood, 2) number of bathrooms and whether there is marble countertop or not, 3) recent earthquakes, if this is not the first post-trember tranasaction in the area. It it is, make a educated guess. 4) banking crisis, as long as this is not the first transaction post-crisis, If it is, make another educated guess. (At this time, you might say he's just guessing. Well, life is one big guess. How long are you going to live? What is the precise exchage rate between the Yen and the Dollar? Who know exactly where the atom is AND how fast it is going?)

As for long term whether forecast, the longest term is also the easiest - around the time of the Big Crush, it will get very hot.

[MyLessThanPrimeBeef]

Make that 'BIg Crunch,' not 'Big Crush.'

[Dr. JwB]

Beef- Those sound more like equilibrium "current value" estimations, but we are not in a steady-state situation right now.

The problem with guessing the parameters with equations like this is that the solutions tend to be over-constrained by a ton of data with tons of scatter, and so when you try to extrapolate forward in time, you can be waaay off because of scatter in the data. And you have to run thousands of models varying each parameter to estimate the importance of each parameter, and the significance relative to the uncertainty.

And then there are other things: What is the psychological effect of a long commute on someone who is thinking of moving from LA to Santa Clarita? What is the value of that? What is the uncertainty?

I model complex systems for a living, and it's not child's play.

[Pat]

If the comparables are main pricing driver, then all those other factors will be accounted for by choosing the right constants. Once the basic computer simulation is set up, then we can back test against historical data to come up with the best fit constants. In addition, computer simulations allow us to more easily set different boundary conditions. To model price depressions, we would fix the price at the new level on certain boundaries, but other boundaries would have to float (we could limit the derivative at those boundaries instead).

[investorguy]

AndyA: Sorry to burst your conspiracy bubble, but the banks will never "hold onto" these properties waiting to make a profit a few years from now. They have to get rid of them -- their ability to make loans is directly tied to how much real estate they're stuck with. Every house they have to take back reduces the amount they are allowed to lend.

[Dr. JwB]

Pat- those "constants" are not, in fact constant as a function of time.

but you should go for it. it will make you very rich if you can pull it off!