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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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Yogurt in previous thread brought up a good topic:
I don’t know what or how it should work since a buyer’s agenet should get to the best deal possible regardless of the dollar amount of the home.
Amount of money you ’saved’ and split the diff? How much you got below the ‘appraised’ value?
How can things be changed to be truly a “buyer” agent?
How about fixed fees.
Finacial advisors have had a large movemen in this direction, maybe realtors too.
Again, fixed fees seem like a great idea. But they are hard to implement.
Sellers pay brokers out of sale proceeds. Buyers bring no such chunk of cash to the deal, and are already strapped to pay down payments, closing costs, moving costs, lawyers and so on.
Also, buyers are not likely to be willing to pay for someone to cart them around to house showings. Especially since they are used to getting it for free. Look at the difficulty free online sites have had when they start charging for subscriptions.
Fixing a flat commission regardless of sales price wouldn’t work; on a cheap house, no seller’s broker would want to part with their already-paltry commissions by working with a buyer’s agent.
There’s one source of high costs no one talks about: the brokerage agency itself. An individual agent gives half their take to the agency firm, in return for not so much. Agents pay for their own business cards, phones, advertising, desks, and so on. The agency itself does very little, yet takes half the cash.
> How can things be changed to be truly a “buyer” agent?
Flat commissions for services agreed upon in advance by buyer and agent.
The reason for the current fee system was that the buyer is often cash strapped and the seller is not - how likely is that to change?
Want someone to represent you in a real estate transaction? Hire an attorney! I did when purchasing a property in Florida a while ago, and it was worth every penny!
You have to assume that everything an “agent” tells you is either wrong or an intetional lie. Certainly that was the case with us! For example, the land, which had been on the market for years, wasn’t a legal lot! Our attorney fixed it, but it took months. It was stipulated in our contract that closing gets delayed until legal issues with the property get resolved.
And you know what? Once we fixed the legal issues with the lot, the seller (who was prentending he only spoke Korean) wanted to back out of the deal! (Now that we had signifcanly increased the value of his land!)
Since we had an attorney working for us, the threat of a lawsuit made him rethink.
If I had simply used an agent, I’d be sitting with an illegally split lot.
More attorney crap……….
Are you saying that I simply made up the story about how an attorney was useful?
No, but, why make a moronic statement like this;
You have to assume that everything an “agent” tells you is either wrong or an intetional lie.
Because the moronic statement is true. Read it again. He did not claim that everything an agent tells you is wrong or a lie - he only suggested that you ASSUME it to be so. Good advice, if you ask me. Do you trust the crap coming out of a used car salesman’s mouth? Recommending a personal attorney in matters of such financial enormity is simply a matter of CYA. I am not a specialist in many, many matters. But I DO know that no RE agent - buyer’s or seller’s - is working for ME.
“You have to assume that everything an “agent” tells you is either wrong or an intetional lie.”
That is smart advice applicable to any kind of sales routine. Whether it’s a recruiter, car dealer, realtor, etc. If anyone is trying to sell me ANYTHING, I assume the above.
Renter;…Never assume anything….Bad advice…
Moman;…I can’t even respond to that one…Speechless…
You guys hold attorney’s in such high regard…Why ? Because they passed the bar ?? That does NOT make them either competent or ethical….
Unless, we assume…..
No, because they have a sworn and financial responsibility to look out for your best interests, not the best interests of the transaction.
How about a buyer’s agent work for a flat fee, and if he/she finds a house for the client, the client gets the (buyer’s agent’s) commission from the sale? That could be applied to closing costs or just credited back.
Something definitely needs to be done about this.
As to attorneys…although I would not have used one in the past, I would likely use one now. If Realtors are not willing to take legal responsibility for problems with a purchase/sale, then the buyer/seller needs to get an attorney to protect his/her interests. Realtors are **SALESPEOPLE** (and this point needs to be emphasized over and over again). Most people assume they are getting legal (and financial) advice when they use a Realtor. It’s now very apparent to me that agents/brokers are simply salespeople, not experts or qualified financial/legal advisors.
Well, Ca Rent;…..Your going to be a renter for a very long time if you plan on useing a attorney to purchase a house in California…Funny….
Sbeach;……..because they have a sworn……
Oh, that clears it up for me….
scdave,
Please explain…
————————-
Well, Ca Rent;…..Your going to be a renter for a very long time if you plan on useing a attorney to purchase a house in California…Funny….
I’ve posted this before, but it was in a stale thread. We’ve talked a fair amount how rising monthly payments affect affordability and therefore will affect prices. However, foreclosures will IMHO bring an end to 80/20 financing and a return to downpayment requirements. What are the differences in effect? Will that mean that low-end (first time) purchasers be even more disproportionaly affected than usual in this downturn?
Jim A hot topic, this is a little off the mark but…
Speaking from a prospective 1st time buyer perspective, it’s the down-payment that we’re the most worried about. 6 years of savings could easily be wiped out by a downturn.
Further, we live in Boston. Right now our 20% down payment here is also a 60% downpayment in the midwest, where we have family.
After the bubble bursts, a midwest scenario leaves us with some equity, a Boston crash leaves us with none.
This concern isn’t restricted to first time buyers.
We sold our condo last year, and are looking to buy again in Boston, Cambridge, Somerville, Brookine, etc. Our sale proceeds currently make for a good-sized down payment in the area–but they would pay for a house free and clear in other regions. I’d rather live here, but I am not willing to risk that probably once-in-a-lifetime opportunity by buying now.
To JA and Sold at Peak…
The best way to protect your equity is to rent. We have a several year crash coming up fast. If you buy now, regardless of how much your down payment is, you are at risk to lose substantial equity. Obviously, that risk is higher in Boston then it might be in some parts of the midwest where prices did not soar. But before the crash is over, all home prices will drop.
Let’s not forget what happened in the 30’s. Home prices dropped 90% and took over 25 years to recover. Our economy is weaker now then it was just before the crash of ‘29. We will be lucky to suffer only as much as folks did then.
Don’t take the risk. Rent!
Our economy is weaker now then it was just before the crash of ‘29.
Using what measure?
dawnal,
Please tell my wife and her “nesting” instinct. She just wants to settle down. She’s had it up to her ears with this bubble and me yalking about it.
Forget about nesting instinct for 7 years and buy 3 month T-bills. My latest monthly purchase (effective yesterday) have 5.1% yields. No state tax. I think rates will continue rising and will move to 6 month T-bill purchases starting November and then start buying 2 year notes in May of 2007. Your wife will thank you for convincing her to buy Treasuries and preserve principle rather than take a 40% loss if you live in California, Phoenix, Tucson, Florida, New jersey, New York, and other hot markets. 5% annual gains with no state tax is better than 10% annual loss plus paying property tax.
3 MO. T-Bills?? @ 5.1%??
I just opened a 3 MO CD @ 5.76% ….not to mention a MMA @ 6% (3 mo. promo)
PS - b4 somebody mentions “no state tax” I’m in California, a high wage earner, and have never in my life paid CA state income tax…
What’s interesting about real estate is there’s data available on pricing for hundreds of years! And over the very long term, housing prices track inflation very closely. If you think about it, it HAS to be that way. People have to live somewhere, and pay what they can afford, scaling their house to meet their salary. (Few people–other than frugal nuts like me–”underbuy” a house. In fact, the agent told me I was nuts because I could “afford more”)
So if you can rent for 1/2 to 2/3 what it will cost to buy, and you’re really investing the balance (not to mention saved property taxes, maintanence fees, insurance) in bonds that beat inflation by a point or so, you’ll be WAY ahead in 20 years.
Also, there’s another advantage to renting. In a downturn, you can simply move! No house to sell, just find a place where you want to live and call a truck.
I agree with dawnal. They best way to protect your equity is to rent. We are renting in Atlanta, an area that’s supposedly impervious to the HB. However, check out this article from an Atlanta real estate broker who’s doing poorly in an area where the majority of the high-paying tech jobs are.
http://globaleconomicanalysis.blogspot.com/2006/07/lights-out-in-georgia.html
I am not sure of this, but it seems to me, that with global warming becoming an issue, those who live in New England or the Pacific Northwest are going to be the lucky ones if this keeps up. I have been thinking of moving back to Connecticut, where I have family. From what I am seeing regarding national weather, inland areas of the Northeast and Northwest will be the best and safest places to live in the US, provided you are not along a river. No hurricanes, earthquakes, wildfires, less heat, etc.
Come to Cleveland none of the disasterous weather PLUS we sit on the worlds largest supply of fresh water.
Detroit, Buffallo, Cleveland, Toledo all going to make a comeback. Cheap to live, extensive infrastructure, world class hospitals.
> Cheap to live, extensive infrastructure, world class hospitals.
What about vanishing tax base, decaying infrastructure, fleeing jobs. I have lived in Michigan and I liked it there, but jobs seem somewhere else, especially right now. Also, some people seem to prefer hurricanes to blizzards.
I spent yesterday looking up homes in realtor.com for Shaker Heights and Chagrin Falls, two areas in and around Cleveland. Fell in love with both on my visits there. I love Cleveland and think it has a bad rap - although some of the socioeconomic issues are huge are they worse than SoCAl?
Anyway, from a native Californian (who doesn’t mind snow or cold however) Cleveland looks very, very attractive until you look at the tax rates for state and local.
Still, one more summer in East County (San Diego) without AC and I’ll move anywhere I can afford a home with air!
SD RE Bear,
Is this weather something else, or what? We also have no A/C, and I’ll bet our weather is about the same as Florida’s this summer. Right now, it’s raining outside.
Very hot…VERY HUMID!!!!
Move closer to your family, have a manageble mortgage and a life….
It will be great for low end buyers! Houses will come down in price!
So long as you have a downpayment and an excellent credit score.
(However, foreclosures will IMHO bring an end to 80/20 financing and a return to downpayment requirements. What are the differences in effect? Will that mean that low-end (first time) purchasers be even more disproportionaly affected than usual in this downturn?)
That has been true of all past downturns. The low end disappears, some of the high end still sells, and therefore the median price of homes that sell goes up, at least initially.
What might be different is that this time the high end might crash more, due to all those McMansions and luxury condos. Then again, it may be that if there is oversupply, everyone moves up a notch and the worst housing gets abandoned. Lots of precedent for that, too.
While the low end normally gets it first…
Buffet noted this time the high end real estate would take it hard. He didn’t back it up with facts, but then again, he’s Buffet.
Neil
Because the rich happily waste their income on consumption, but hate losing their capital on bad investments.
Currently, the rich share the mad idea that real estate is an investment, and are willing to overpay for a house in hopes of high appreciation just like everyone else.
Once people start taking a bath and realize real estate goes down as well as up, the rich will recategorize their homes as consumption items. They will still be willing to pay for more than you and I for their 10,000 square feet of Italian-marbled luxury, but will not pay an investment premium to do so.
“Because the rich happily waste their income on consumption, but hate losing their capital on bad investments.”
Huh? The “rich” got that way because they know how to manage their money.
It’s the rich “wannabees” who are over-leveraged who buy those tacky McMansions….
Real “rich” folks know that housing isn’t an investment. Buffet has repeatedly said that homes are consumer items that are “used up”, and shouldn’t be treated as an appreciating asset.
Absolutely. Houses are an expense and should be treated accordingly.
Stocks are an investment.
Energy prices could affect the “move up” theory. Smaller homes as of now are the older homes but if prices skyrocket they could become more sought after. I would imagine if this downturn is more US vs worldwide material costs might make new construction more prohibitive over time.
I agree, we did not move up to a larger home for that very reason. We simply revamped our smaller, older home giving it new insulation and new double-paned (sp?) windows and more closet space etc. I don’t need more home to maintain - I would rather have more money and time to enjoy myself.
Also: If I were the home insulation companies I would be taking advantage of the high energy bills and advertising to people to change out their old insulation to make the cost of heating and cooling go down. It does make a difference. Cali energy costs are through the roof.
Nah, material prices are just about to fall through the floor. If small houses come back into style (which they will), less demand for lumber, drywall, etc. Regardless, we are about to see a huge glut of building materials on the market.
Well…that’s our market…but if China, India, others increase their demand that would have an impact too, I’d think. That’s why I made the comment regarding US downturn vs Worldwide downturn.
I thought about that dimension too but disregarded it. Only commodites like cement and iron will stay high. Wood and drywall (majority components) will drop in price. Asian woods are really putting a local hurting on Weyeheuse, GP, and other wood mfgs here. Copper wiring and such many stay higer, but the result is a net decrease in the component costs of an American home, even if foreign economies stay hot.
and canada is cutting a *hundred year* supply of pine over the next few year, rather than lose it from infestation.
Thanks for answering….very insightful.
“I earned money the old fashioned way, I inherited it.” or “I earned money the old fashioned way, I stole it.”
There are an incredible number of rich mopes who haven’t the faintest conception of how to manage their moneys and trust nitwits in the financial industries (hedge funds primarily) to manage for them. Individuals who trust investments that they do not understand are going to be slaughtered.
ARM is pretty scary stuff. one may say “oh the interest rate only went up by a few percent!!“…
(1) say, you purchased an over priced but a normal $750K house california with 2.00% APR interest only ARM… (just to be cool, of course, no downpayment). Your monthly payment is only $1,250. not bad… not bad…
(2) come ARM reset, say additional 2.00%… bringing the total rate to 4.00% or 2x the original.
(3) now your payment’s $2,500
(4) soon, it will be 6.00%… that’s $4,500… INTEREST ONLY…
oops
ps: don’t forget to add $700/month for tax… a few hundred more for blah blah blah…
ouch!
here are the actual numbers for your example. $750,000, 2.0% year one $1250 (actual accrued rate 7.7% current), year two payment $1343 (7.5% increase in the payment, balance up to $792,000), year three payment $1443 (balance up to $837,000), year four payment at 7.7% for 27 years- ———$6,147 ouch.
I was a Math major in college so when I shopped for a mortgage it was easy to see through the “adjustable” problem (especially because if you have a fixed mortgage you could always re-fi if rates dropped. And if you’re not stupid you’d refi for the remaining balance and not try to pull cash out.)
Adjustables only make sense if you actually have the cash in the bank to pay off the loan if you need to! Then you can take advantage of a low teaser rate for a few years.
The mortgage insdustry simply takes advantage of the fact that people don’t do the math and realize that their $1250 payment can become $6147 in a couple of years….
Don’t mistake a plain vanilla adjustable rate mortgate with the exotic ones, such as the option-ARM, interest only, and teaser rate loans.
A regular ARM makes a lot of sense when interest rates are high.
Should figure NegaAm for five yrs with a recast of the loan if and when it gets to 110% to 125% (depends on bank)of the original loan. The bank can authorize an appraisal at any time. The cap on the loan could be as low as 9.95% or as high as 12.95%, in a rising interest rate, declining house value - expect to see more recasts as a result of value. Eg, I buy in housing development for 500K cash, friend buys similar unit same development 95% NegAm 5% down. I hate the 1 hr drive and decide to sell at any price. First offer is 425,000 I accept! All negam borrowers in the same development are subject to the new appraisal. Sayonarra.
BEN, we need more pictures in the photo album. I will drive around Scottsdale and take some pics of commercial signs everywhere. I can’t take hearing from small biz owners about there greedy landlords and 5k rent for a pizza joint, yet there are vacancies and for rent sign all over… especially at the airpark. BTW, up Anthem, and surrounding areas, New River, etc, there are so many for sale signs on the corners, you can’t see where you are going… it is blinding.
Interesting comments on the commercial side Pflip;…
Since there has been an orgy of building along with this bubble, I am curious how people feel about what has been built, how it has been built and where it has been built. For example, condos. There used to be a joke back in 80s that went something like “What is harder to get rid of than____________(fill in the blank)?” The punch line was “A condo in Florida”. I don’t remember what went in the blank, I can only remember the punch line.
But expanding on this theme, how do people feel about all these cookie cutter homes? (What has been built) I assume people are buying them, or they wouldn’t be built in the first place. HOAs are now more widespread than ever and I think they will become a nightmare, for both FBs and HOA boards who lien homes for non-payment of HOA dues and then foreclose. It is possible that FBs, under the existing stress of trying to make mortgage payments that keep going up, will let HOA payments lapse, causing HOA boards to have to lien and foreclose. What are the implications for those who serve on those boards as they become targets that are much more accessible and visible to FBs than banks, insurance companies and local taxing authorities? Whatever happened to the traditional neighborhood?
Shoddy construction: (How it has been built) The stories are already out there and in Florida, Mike Morgan’s litigation against a major builder/developer may be just the tip of the iceberg. What are people seeing in other parts of the country, or is this a Florida phenomenon? What corners are being cut and will these just be minor issues, or could some rise to the level of having to be condemned? Are there life-safety issues? Energy issues? Anyone on this blog know anything about living off the grid?
Where homes have been built: In other words, the building sites. Are homes being built in ridiculous places, next to major freeways, potentially hazardous industrial areas, over dumps and sinkholes, in flood zones, swamps, etc.?
Looking back at what I wrote, I’m thinking that all the above could be summed up under “Is the Housing Bubble Hazardous to Your Health?” (not just financial, but physical) or “Do FBs Have a Death Wish?”
It’s not just Florida and not just new homes.
In the Northeast, many small two- and three-family dwellings were rehabbed into condos. A handful were well done; most slapped granite countertops and polyurethane onto watery basements, wood rot, tilted floors, UFFI insulation, old wiring and old plumbing. They are a ticking time bomb, because the flippers were too cheap to fix them right.
Worse, such small developments are often incapable of keeping up with repairs. If one homeowner refuses to pay an assessment for a new roof, the association may be unable to afford the fix and the entire building may be at risk of significant damage. Plus, people who move into condos are often lifelong renters or retirees who have the mistaken idea that they are entitled to maintenance-free living, and they refuse to care for their property.
I couldn’t agree more, Sold at, ticking time bomb is exactly right. Wow, I didn’t know about the two and three family homes becoming condos. Although I’ve seen people selling half duplexes here in Florida, but those are usually part of a larger development. I can’t imagine how a two or three family condo would even work. What if one owner wants to do something the other owner doesn’t want to do? You are right, if one doesn’t want to pay an assessment, the others are screwed.
I think a discussion of shoddy construction would be an excellent topic. I know Lennar is under the gun in Florida. Can we hear more about that? And I seem to recall seeing that Ryland has quality issues as well. Anyone know anything about that. How about condo conversions? Any examples of shoddy work there? This strikes me as being a useful topic in understanding what is going to happen to the market in the future. Will some of these homebuilders be put out of business because of quality problems?
I think a discussion of shoddy construction would be an excellent topic
ditto.
Just how strong are either new or used home warranties?
Ongoing maintenance is a little discussed, hidden cost of home ownership. Some can be deferred. (ie. not replacing a roof). However, some cannot. (ie. burst water pipe).
A poorly constructed home may use way too much energy.
Much like owning a old unrepairable car, at what point do homeowners throw in the towel?
The only things I’ve seen going up around me are McMansions (I live in the same town as Toll headquarters so go figure) or retirement communities (LOTS of those). In the city (Philly) there’s been a condo building frenzy, but I haven’t really been keeping tabs on it as I have no desire to move downtown.
“But expanding on this theme, how do people feel about all these cookie cutter homes? (What has been built) I assume people are buying them, or they wouldn’t be built in the first place. ”
I had one - the one I bought at the top of the last bubble in California. I never ever want a cookie cutter home again. I was never comfortable in that house. I bought it on impulse when I was young. I am too busy working 55 to 60 hour weeks and my work is going to continue like that for years to come. When my client no longer needs my work, I’m going to take a long vacation at exclusive resorts, but then start to look around and find my dream lot and have a custom built dream house.
HOAs are simply another ticking timebomb. If you were stupid enough to buy into a deed-restricted community, you don’t really own your home!
D’accord. IMHO once you’ve got a HOA, you might as well have a landlord. Either one can tell you what color your front door will be, what kind of curtains you must have, and to not have any toys in your yard. Instead I bought a cookie cutter home built in ‘49 back when ownership ment ownership.
We will see a lot of the cookie-cutter subdivisions HOAs go away. All it takes is one lapse and then it all goes to hell. My friends live in a subdivision with a HOA that prohibits chain-link fences, sheds, and above-ground pools. One neighbor said in essence “f**k you” and put up a shed. Then the second neighbor put in an above ground pool, and the chain link fence isn’t far behind. I’m pretty sure than once one thing is allowed to slide the HOA can’t legally do anything (can’t remove above ground pool with removing shed, etc).
This is a perfect reason many of the cookie-cutter subdivisions of the 1980s are now lower income housing.
HOAs will fail and you will soon see McMansions with 10 vans parked in front of them and a car in the weed filled yard. It’s inevitable.
Absolutely agree with HOA problems. I would rather rent for the rest of my life than live in an HOA-infested community. If you can’t do what you want with it, it ain’t yours. Also, don’t like the fact HOAs can foreclose on your home.
IMHO, the next “big thing” in homebuilding should be HBs selling LARGE (7K++) lots to buyers who can build their own homes. It seems many here would simply like to build their own homes (we would as well). We would like to build using the latest in energy efficiency and set it up so we could live off-grid, if necessary. Also, we want a GOOD floorplan with efficient use of space, normal ceiling height, etc. The McMansions of late are the epitome of foolish waste, IMHO.
Ben.
It is official. The economy is grinding to a halt while inflation is jumping. Stagflation part II coming to a neighborhood near you.
I concur. Would like to read what the excellent economist on this board have to say about the stagflation phenomena ASAP. This looks scary to me, not just for housing, but for many asset classes, and just keeping a J-O-B.
I am sure that I am not the excellent economist you are referring to but my take on this is that the actual inflation (increase in the money supply) happened while the interest rates were so low, and the housing boom is the main source of the inflation, with the war being the other source. The increase in prices we see now is a direct result of the increase in the money supply that was a result of the easy credit on housing. ( For those who may not know, all money in our system is debt or credit, depending on which side you are looking at, and any increase in total debt increases the money supply. So when someone takes out a home equity loan for 100K they are adding that much to the money supply.)
It would have been much better to “take our medicine” (severe recession or depression) without creating this housing boom first which just increased the imbalances. There is no way out of this without a lot of pain. I am expecting deflation; others on this blog expect more inflation or hyperinflation. If housing prices drop significantly this will be deflationary and people will have to cut back on their spending and generally think about saving money wich will be deflationary as excess inventory of various types of products is sold and as people have to sell investments in order to raise cash to live on. I am expecting all classes of investments to drop, even gold, although perhaps I am wrong there.
What to do? Try to get out of debt if you have any debt. This is always a good idea anyway. Hold on to cash in a safe bank (check Weiss Ratings for the safest banks) or in short term Tbills and try to save as much money as you can.
That huge increase in M3 is currently in housing. The only way to keep it from sloshing back into the rest of the economy is IMHO large numbers of foreclosures and defaults.
Buy TIPS
By the way, TIPS are treasury securities that adjust with CPI inflation (and typically pay a low coupon on top of that).
I’m a graduate economics student - in another year I will be a professional economist, but for now…..
We are in uncharted territory for the economy. There is a strong likelyhood (IMO) that housing will become a deflationary asset. All these articles about business and CapEx picking up the reins from housing are full of b.s. Once the consumer (~70%) of the US Economy stops spending, CapEx will fall like a rock.
It’s unfortunate that the past 5 years have been wasted using high value resources (R & D) for low value outputs (housing).
One thing that I can see happening is money rushing out of housing back into the stock market. That would provide a stabilizing force for the markets. Rich people have too much to lose to allow the economy to fail.
The easiest way to fix the problem (gov’t spending) is not possible because of our outright insane budget deficit. Unfortunately, we are on the front row stage of what may be the largest asset devaluation in history.
On a positive note, economics 101 and personal budgeting will become required classes to receive a high school diploma.
Money can’t “rush out of housing” because housing is not a liquid asset. Its not like there are huge funds that own a bunch of houses, and they can just sell them and reinvest the money in the stock markey…its a combination of small time flippers and real homeowners who will lose their investments to forclosure or sell at a loss…these people will (hopefully, for their sake) not take the money they get from the sales and throw it into the market…they will take the money from the sales and use it to pay their loans off.
Money that would have went to housing will instead be going somewhere else. My prediction is the stock market. People have to invest somewhere.
I doubt there will be much repayment of loans. Those people will find some way to walk and start another speculative bubble. The collective memory of this country is probably under 20 minutes…
The money they were using to “buy” their houses came from loans from the bank. You can’t get loans to invest in the stock market, unless you count margin which you need 50% in cash up front to do at all. I don’t disagree that people will walk away from their loans, though. Their credit will be ruined and they will not be able to get loans in the future…but well, they dug their own grave.
I am of the inflationary persuasion with regard to the economy. If the hedonic figures are removed from the CPI (eg. the Cavalier that you purchased for $10,000 in 2001 now costs $14,000 - that is not inflation; per the government, the car has improved by $4000; The Sony computer that cost $1700 in 2005 and now, same model, costs $1400; per the government this detracts from inflation) current inflation for the first 6 months of the year are about 9% and crossed 10 % last month.
From an accounting view: Housing is not an asset. Housing is a liability and unless the house is cash producing will always be a liability. Asset based bubbles have turned the legal responsibility of owning into speculative investments.
I agree with Kim in that I wish we had taken the hit back in 2001, this has taken 12 years of asset bubble induced by free money to get to this point. Where I think inflation is occurring is the result of the international economy. The big 7 emerging markets (E-7) are exploding. China’s expansion is so fast that it will overtake the US in oil consumed per year ~2010, Japan is expanding, Korea is expanding, India is expanding. These countries as well as the Euro bloc no longer need to be tied to the US. Brazil is Chinas farm, Venezuela is Chinas oil source (China is also buying oil fields in Africa). If Opec were to cut the US from any further oil sales, it would effect the OPEC GDP by less than 8.5% - not the 25% that occurred in the ’70’s.
Dr. Bernanke has a dilemma, keep foreign countries purchasing our debt, keep the economy growing and avoid an economic meltdown. In any given year there is a 5% chance of a worldwide economic meltdown, this year the odds are 25% and getting larger.
IMHO the Fed will tighten to try to stop inflation, but then will open the flood gates to stimulate the economy then hyper inflation.
I’m continuing to buy gold and platinum bullion, as well as short term T-bills. I cashed in in 200 shares of PCAR and moved the entire proceeds into Vanguard Prime Reserve money market fund. Some stocks I’ve been watching seem tempting, but my work is getting so busy that I have no time to study the stocks anymore. Nevertheless, I have trailing stops on all my big holdings because I think the crash is on the way. I’m trying to bias toward agriculture and energy stocks, which will do well in bad times though. I am also focusing on yields. But T-bills have a good competitive yield for now. The better the yields, the more money will come out of growth stocks into short term safety. Most investors will do the same, which means value stocks should do well. International value stocks should also do well. I wrote in another post that I am gradually going to move out of short term securities into intermediate term securities as yields move up. Back to metals: 10% of ones net worth should be in precious metals, in my opinion.
In a severe bear market at least 90% of stocks will be affected, so it will be very difficult to pick out the 10% (or less) that will not lose value. For me, the safest thing is to avoid being long on any stocks. If you want to be in the stock market better to find a way to play the downside. It will be easier to pick losers than winners.
Although I think gold is likely to go down more before it goes up I think 10% in metals is a reasonable hedge.
Kim you don’t think the FED will drop interest rates to try an stop asset deflation? Causing inflation and a dollar drop?
BigD;…My preference would be a recession and ring out the excess…A Stagflation cycle like the 70’s right now may be too much for our debt laden economy to handle….
I am not wishing a staglflation. It just appears to be here. One cannot argue with $75 oil, $600 gold, doubling in insurance, energy, food , etc. that inflation is under control. Yet wages are stagnant and the “quality of living” has eroded for some ime now.
staglation (n) period of inflation and little growth. a period of rising prices and unemployment but little growth in consumer demand and business activity.
I do not belive it will reach the pain incurred under the Carter administration, but we are going to suffer .. Helicopter Ben cannot stop raising rates and will be forced to push the economy into recession. We have a classic definition of staglflation upon us.
I know…Just trying to convience myself otherwise…
I think we’ve been in a stagflationary period for a long, long time (from the 70s on, in varying degrees).
If you consider the following deflationary forces:
-When women entered the workforce, en mass, wages have gone down relative to what one’s income could buy (now most families require two incomes+ to shelter/feed/clothe/provide healthcare, education, etc. for a family).
-Open immigration from poorer countries where the workers do not expect a decent wage or benefits. Also, outsourcing. Obviously deflationary.
-Similar jobs now require more education, and college graduates are not receiving as much “premium” for their degrees as before. The strong push for more and more Americans to become better educated (yet receive same or less pay/benefits) is deflationary.
And for the inflationary forces:
-Simple cost inflation. Ignore the govt’s numbers. We all know what’s been happening with cost inflation. Just from my own experience, I’d say it’s up about 6-10% annually, on average (for the things we NEED, like housing, healthcare, food & energy…not to mention education) over the past 15 years or so. Wages have not risen this fast. I’m not exactly sure of the causes, but there has (obviously) been tremendous expansion in the credit markets since the early 80s, and it’s been accelerating over time.
Just MHO.
The Squeeze:
http://www.xanga.com/russwinter
Red Sox players who have been traded are trying to sell their homes. Below is are some photos and captions: I know Nomar’s has been on the market for a while. I’m assuming Pedro Martinez and Johnny Damon listed at least 4 months ago. So far, it looks like they’re striking out with buyers. Pun intended.
http://www.boston.com/realestate/gallery/Formerredsoxhomes/?p1=MEWell_Pos5
Energy issues?
I have had more than just a few folks here in the office complain
loudly about $300, $400, even $500 electric bills from Southern California Edison last month. (mostly caused by 24×7 use of A/C)
To be fair, the heat wave we have here in the OC is very unusual,
but it unscores what can happen if paycheck to paycheck homeowners
get hit with unanticipated expenses. (BTW, don’t even think of telling
these people to turn up the thermostat to save money)
String a couple of months like this together, mix in higher gasoline
and grocery prices and its probably more than enough to push a few folks with no saving reserves over the edge of the cliff.
Even in the “it’s different here ’cause everyone is so rich” OC.
I really like the idea of talking about energy issues. So many homes have been built that require high energy consumption. As I said up above, I’d like to hear from anyone who is living off the grid.
I have a huge interest in that myself. In retrofitting for off the grid or building new.
Exactly. Houses and cars these days are nothing more than profity delivery systems for the energy companies. I think there are profits to be made in companies that can retrofit homes and cars for off the grid. For example, if I can get a car that runs on vegetable oil, that would be great. I don’t mind carting around some extra in case I need to fill up. Even better, just pull up to a supermarket for a refill.
But I’ve been trying to research this on the net and it is frustrating beyond belief. Most of the information is geared either to engineers, Neo-Nazis or Mother Earthers. I just want someone to show me how to do it as cheaply as possible, without a physics, philosophical or political lecture.
There’s a book called “Off the Grid” written by an architect. It’s on Amazon. I have it. Check it out.
Even better, just pull up to a supermarket for a refill.
And you think gasoline is expensive?! Have you checked the price of cooking oil in the stores?
Try straw bale construction or earthship construction methods.
I am pretty sure Tx chick posted them before.
http://mha-net.org/html/sblinks.htm
http://www.earthship.org/
Earthships are a bit out there but were my first introduction to ecologically designed buildings.
http://www.ecodesign.org/
Energy interests me as well.
An ex co-worker of mine was in the process of buying a hydrogen fuel cell to power his house. IIRC it cost $6000 and would allow him to live off the grid. I can believe he would do it; he drove a 1986 car without AC in FL so he was certainly frugal.
I think you are missing a digit for a home sized fuel cell.
I am in the energy business.
Two friends of mine lives “off the grid”, one a close friend. He saves money, but it’s a very spartan lifestyle. He’s got solar cells, deep-cycle battery banks, 12 volt lighting in his place, and a car stereo system.
However, for pumping his water, he needs to start a generator to run his pump and fill the storage tank. Same for washing clothes and some other high-current requirements (e.g. workshop tools). According to him, the cost of occasional gasoline is far less than the cost of all the solar cells and inverter he’d need to handle the very occasional spikes in usage for washing or pumping water.
As for heat, it’s propane. For air conditioning, he just sweats. His fridge runs off of propane, which he says is not all that cost-effective, really. (I suggested he look at Peltier junctions running off his 12v system, but he needs more battery storage capacity for that.)
All in all, it’s not a lifestyle I’d go for. (Nor his various girlfriends over time, it seems!) I’d much rather, were I in his shoes, build an extremely well-insulated house and use few appliances; however, his primary problem is being too far from the grid on his very large proprrty and not wanting to pay the few $thousands up front to get the lines run. To each his own.
in N VA he’ll get 0 ass w/o AC
Gotta search out those hippie chicks. ; -)
It’s certainly my understanding that peltier junction (thermoelectric) devices are pricy enough that they rarely make sense except for either jobs too small for conventional compressor driven cooling or where their no moving parts reliability is imperetive. Keep in mind too that they degrade over time.
Leslie Appleton-Young is an economist, not a shill for CAR.
Is above statement true or false. One word answers only. True or false.
False
False!
An update from a couple of the flips I was following in clairemont 92117.
Out of the 6, two have pulled their properties off the market, two are hanging tight (no price reduction, two are reducing price and trying to mover their properties. One property which sold for 480K in Feb, was relisted at 589K to 619K, on 7/17 lowered to 563K, now 7/28 listed at 529K to 559K. More realistic but still no their for the risk involved. The best strategy out of the six though, how can folks afford carrying costs of not selling a property?
Generally seeing a lot of price reductions in the area, some after only a couple weeks of being listed. Traffic must be non-existent, people are starting to get worried. Feel sorry for some of the folks like the gal on the SDCIA site who went to a real estate seminar, got caught up in the hype, bought a terrible fixer, put too much into it 77K, now can’t sell. Sad.
SDsurfer….”Sad”. I must be an ass, but the story about the screwed flipper gal makes me feel all tingly and happy. I want to see this story repeated over and over. I have worked my ass off and have been a habitual saver since I got out of college (1984). I was a finance major and live by the rule “if it seems to good to be true, then it is”. Any one who thinks they can make a fast buck should be aware that they can lose it just as quickly. This is the same type of gal that would have went to a stock investing seminar in 1999 and took a loan out to invest in YouNameIt.Com
In the mid-nineties, those houses sold for less than 100K, according to a friend of mine that lived in the area at the time.
The flipper in question actually added serious value to that house, but the thought that such a place would sell for more than half a milion dollars is just mind-boggling.
Actually these homes sold for about 150K in the mid 90’s, I paid 163K in 1992 for a 3/2 in the area. In the mid 80’s they were slightly under 100K. The flopper in question did add a great job and added a lot of value, it’s just a tough market for 100K markups. I’m surprised she took the risk pulling money of of their house and credit cards and having four kids to boot to care for. She won’t be the only one taking a haircut with the way the market is. Still see those real estate seminars on TV, in hindsight with the historic 5 year runup, they were right! Five years ago.
The flipper gal really did do a VERY nice job on that house. The difference btwn before & after is astounding. As much as I resent flippers, she’s one of the better ones, IMO. I do feel sorry for her, because she really put a lot of work into that house.
Here is a possible discussion topic. The homebuilders were competing fiercely for land and built up extensive inventories. Now the need for the land has diminished and will dry up soon. And, what do you know?…the prices of land has been dropping. So now the homebuilders are facing the need to write off significant amounts to reflect the loss of value in their land inventory. Seems to me to be worth discussing.
Here is an article about this issue in Forbes:
http://tinyurl.com/ft4gl
Well, this will crack you all up. I’ve put an offer in on something and I think I’m going to get it. It’s a lowball offer on an unbelieveably cool architect built place. It’s sort of an oddball ultra contemporary house that wouldn’t appeal to a lot of people, hence my strong bargaining position. Plus it would be for cash so the seller doesn’t have to worry about me selling another house.
Who woulda thunk it. I’ll post a picture of it if the deal goes through.
LOL
No, not you buying into this market!?! Imposter! What have you done with the real txchick57???
We need more details, photos, prices, before we believe THIS!
(Pigs are now flying….)
(Pigs are now flying…)
…out of my butt.
Do you plan on living in it? Do you realize that you can probably get it for much less money in a few years?
Why, why, why NOW????? Even though it’s a lowball, imagine what you might find if you wait. Also, are you REALLY sure you want to stay in AZ?
p.s.: did you take that hedgefund job?
Anyway, if you do buy it, please take lots of photos! You seem to like very unusual homes (in a good way). I like looking at your examples.
Didn’t someone mention that LV_Landord is the same person as Vegas Gal on WSJ?
http://tinyurl.com/pss5n
“I am putting my house on the market this week. It will never be a better time to sell. I will buy back after the bubble pops and prices return to normal. I will be going on vacation to Belize when this is all said and done. I love pina coladas with those little umbrellas so much!”
She’s so full of shit. Good luck selling it. Remember how she said that all of her properties cash flowed? Why sell then? What crap.
Well even if something cashflows at the basis you paid for it, why not sell now and capture the capitol gains. Buy it back in 5 years after the price has fallen.
Let me translate for you.
Belize = 5-10 years for some criminal activity in LV!
she just posted that the comment was from and imposter. my sincere apologies to lv_landlord if that is the case…now PLEASE come back here, I miss the vegas spin.
LV_Landlord posted that she was the same person. She pointedly gave her reasons for her investments. She never denigrated any other blogger on this site (TTBMK). It is always enjoyable to read a well thought out post that is in disagreement.
How can the UK do R/E transactions at 2% total cost? I have theories, but fflat may have answers!
I was wondering in my musings about MBS and the transfer of real estate asset ownership to foreign interests. Most MBS were obviously purchased by these interests (Japan, Korea, China, etc.) simply as a source of “risk free” returns and as a way to equilibrate the global flows of funds (send our printed money back). The holders of MBS have no intention of owning the assets (home mortgaged), but I wonder what happens if a lot of people start to default on their mortgages and are forced to foreclose. Do MBS holders end up with the ownership of the properties? If so, an involuntary and stealth transfer of real estate assets may already be starting to take place. Although those who own MBS would still be bag holders, they would be bag holders owning big chunks of America’s real estate. Meet your new landlords…
Ever wonder about the word “bankruptcy?”….
Daily Reckoning
QUOTE
“In the past three years America has been enjoying an unusual combination of low inflation and rapid growth,” writes Anatole Kaletsky in the London Times. “This happy combination cannot continue much longer. In the months ahead, either inflation will continue to accelerate or economic growth will have to slow abruptly, to the point where unemployment starts rising and businesses start going bankrupt.”
Our friend, Byron, believes bankruptcy is going to be a popular practice for lawyers in the years ahead, like IPOs and mergers and acquisitions in years past.
He has an explanation for the word, too. “Bankruptcy comes from ancient Rome,” he points out. “Merchants used to operate from a ‘bankus’ - a sort of workbench or counter. If they couldn’t pay their bills, the local authorities would come over and break their bench - bankus ruptus. In England, they kept the bankruptcy procedures left behind by the Romans after they left, even the part where they sold the bankrupt person into slavery. Only, it wasn’t slavery anymore, it was indentured servitude. And many were sold into indentured servitude in the colonies.”
Byron blames it all on one of our Big E’s - Energy.
“It’s because of oil,” he says. “We’re at peak production right now. But there are five billion people who are looking forward to the life that we Americans now lead. In China alone, if people lived as we do, they’d consume 100 million barrels of oil a day. And here we are at maximum production and the whole world only puts out 84 million barrels.
We keep telling these people that they should want what we have. Democracy. Capitalism. ATM machines on every corner. Who’s going to tell them the bad news? They can never have it because there’s not enough cheap oil. The fact is - they can’t be us, because the Earth can’t produce enough oil to allow everyone to live like us. In fact, we can’t be like us either. At least, not all of us. What’s going to happen is that the people who are now getting wealthy in the rest of the world are going to use the oil that lower- and middle-class Americans expected to use.”
Many Americans won’t be able to afford the new, higher prices of petroleum products.
Meanwhile, in the Times, Anatole Kaletsky continues:
“The U.S. economy is now clearly slowing, and what started as an orderly retreat in the housing market is turning into a rout. Yet the slowdown in housing and consumption has come too late to prevent a steep increase in inflation. On Wednesday, U.S. government statisticians reported a further jump in inflation to 4.3 per cent. This was the highest inflation rate reported since 1991 (apart from a one-month blip after Hurricane Katrina).”
Kaletsky has been very bullish on the world economy. In fact, he has been engaged in open warfare with such well-known bears as Marc Faber, for example. Now, he seems to be reading the papers.
In the papers, the Associated Press tells us that existing and new house sales, combined, have been going down for the past seven months. “Area home prices drop,” adds the Washington Post, noting that the median price of a house in nearby Loudon County, VA, is off 1.2% over the year before. To make sure we get the point, it has a photo of a man who is giving away a new car to whoever will buy his suburban house.
Nationwide, inventories are up; sales are down. Prices are falling in key areas, though they are still above a year ago on a countrywide basis.
In Massachusetts, foreclosures are up 66%, says the Boston Globe.
And, we got word from a friend who is trying to sell his house in Santa Barbara that not a single person came to look at his pad in a two-week period.
#1 Examples of Overreaching, Never Built
I submit that Macerich Übermall in Soviet Monica.
Ivana Trump anything
#2 Examples of Overreaching and Built
Riverpark
Traffic would have killed that Santa Monica condo towers. It’s already impossible to drive between sixth and second, and Wilshire and Colorado, without incurring half-hour waits.
Now that the summer heat is here, I’d like to hear from the hot zones about what they are paying to cool their houses.
OK, but you will have to sit down to hear it!
Sit down and think about a 1918 built 963sq. ft. Craftsman house in North Orange County.
Personally insulated all walls and attic. The third bedroom was earthquake retrofitted a couple years ago with R-19 in the walls and R-25 in the converted-to-cathedral ceiling.
Dual-pane Andersen windows, with low-E and Argon gas, attic fan. etc. Only one door isn’t double-insulated; all windows are. Last month’s electric bill was $69, even though we used the A/C a lot. We are on the cycling program which, admittedly, can be hell in a heat wave.
San Jose, CA. 3BR duplex totaling about 1050 sq.ft. A/C in main bedroom but not in other places in the house. Hot tub in backyard.
PG&E bill from 6/17-7/18 $79.53. I expect it to be a bit higher for the July-August period.
We read about $550 to $1500 bills. Is that the McMansion range?
robin,
I know people in the San Fernando Valley who have $500-$600+ bills from DWP, but those are bi-monthly. Oh, and that was also when it was cooler. Can’t wait to hear what the new bills will be like.
We don’t have A/C…it SUCKS!!!!
I live west of the SFV and I paid $238.00 last month. As I said above, my place is only 1400 sq ft. And I have fairly new insulation and dual paned windows but we do run our house cool - 75-76 all day. I have friends who got $500.00 bills.
My friends bill was over $500. and she lives in a 5,000. sq foot house.
I would love to hear what everyone’s plans are when we hit the bottom of this boom. What are the boomers retirement plans? Where are people going to buy and what type of homes are they going to buy? Large, small, condo’s, bungalows, Mc Mansions, rental property? Since the wait has been so long, I am sure we have all thought about it.
I want a single story house, about 2000 sq ft. A couple acres of land for an orchard and a garden with flowers and vegetables. No ceiling over 9 feet for easy painting and heating. Maybe a brick exterior so we don’t have to paint. No greatroom; I don’t want to see my kitchen from my living room. Small floor space in the kitchen so I don’t have to clean very much kitchen floor, but it should have a pantry.
Are you single?
I couldn’t have said it better.
I want a small house with 2 car garage; less to clean.
No, I have been married for 24 years and we have 4 children!!!
Kim,
That’s exactly what we want. Easy to maintain, with a practical floorplan. Hate the “great rooms” as well.
I’d like to hear what people deem ‘fair’ price per square foot for a house in their area. what they see now, what they are willing to pay.
Commercial research Lab buildings in my neck of the woods cost about $450/SF.
A home should cost well less than half of that, depending on the finish details. $125-225/SF.
I do too. I think a reversion to the mean is what we need. That means $300,000.-400,000. in my area of So Cal. I know that may seem high but the median price right now for my city is $1,500,000.00. Can you believe it?
Much the same as Kim, except smaller - around 1200ft works perfectly for me and the husband. As long as I’m not forced into losing Living Room space for a pointless ‘master’ bedroom, then it can be even smaller.
I’m an avid gardener, so having as much land as possible is important to me.
Somewhere in the hills of LA too. I know you’re at greater risk for fires, landlsides, earthquakes etc…but its much much cooler and less energy hungry during the long hot summers.
Older (pre 1995) rather than newer. Lots of cookie-cutter houses have gone up in the last 10 years, and due to the speed of thier construction one has to wonder how well they’ve been made, and if they’d withstand another Northridge type quake.
Plus, things like insulation in walls and roof, double glazing and solar panels for hot water, or even power, is a winner for me.
“NEW YORK (MarketWatch) — U.S. stocks rallied Friday as hopes of an end to more than two years of interest-rate hikes following data showing slower-than-expected economic growth in the second quarter sparked a triple-digit gain on the Dow Jones Industrial Average.”
Stockholders don’t seem to be looking at the bigger picture here. They seem to be hanging their decisions on the belief that the interest rate increases are behind the economic slowdown instead of believing that they’re preventing all hell from breaking loose. Why aren’t they taking inflationary pressures and credit bubble facts into their thinking?
I think this scares me more than anything…..that the driving forces behind our markets aren’t looking at the big picture.
Everyone is holding to the last possible minute - probably driven by hedge funds who figure they can exit quickly. I guess we will see. I recently got a lot more conservative as its harder for me to move quickly.
The press always tries to make everyone think that the stock market rallies and falls by the power of the Federal Reserve, but the real driving force of the stock market is social mood. The stock market is a kind of barameter of social mood.
All the articles about how the stock market went up or down because of this or that news story is mostly just a bunch of balony. News events can have a very short lived effect on the market, but the effect usually only lasts for a day or so or up to a few weeks, as in the case of 9-11.
D’accord! In this case the news on Monday will be how the slowing economy will ruin companies earnings and the stocks will be down. Welcome to the silly season.
West LA rents plummet
“For June, 2006, the average listed rent price of all listed rentals in these areas was $1,903.73, representing a 2.4% decrease in rent prices over two months ago.”
” The largest rent decreases occured in Playa Vista, where the total decrease was 19.0% and Venice, where the total decrease was 4.7%. Rent prices also decreased in Playa Del Rey (Down 4.3%), Palms (Down 2.3%), and Marina Del Rey (Down 0.3%)
“Rent prices increased in Mar Vista by 11.5% and Westchester by 9.2%. Rent prices were also up in , and Culver City (Up 3.7%)”
So much for rising rents saving the housing bubble…
As a local, It looks to me like the flippers are lowering their asking rents because they aren’t getting any takers. Playa Vista, where the largest decreases ocurred, is a flipper’s paradise, being all new construction in the last two years. I am surprised that the Marina didn’t fall much more than it did, as it is full of new construction.
The areas list where rents went up are mostly established neighborhoods with older housing stock.
A related note per the link above: I frequently drive past Westside Rental’s office on Wilshire Blvd in Santa Monica. They have recently relocated 1/2 block down the street to a big new office. Since the relocation, thay have had a sign-twirler standing on the street pointing to their new location. This guy is a real package - he acts out like a high school yell king on meth. Gives me the creeps to watch him.
I’d like to hear what others think the Fed will do at the Aug. 8th meeting. Wall Street thinks the Fed will pause and is already pricing that into the market, however the latest inflation reading came in at 2.9% for the second quarter, the fastest pace in 12 years!
If the FED pauses in spite of CPI increases of 3%, it will seem to have given up on containing inflation, a goal that the FED touted not too long ago. What about their credibility? Instead, they could raise by 0.5% and say that, for the next two meetings, they we would only watch the data and leave rates unchanged. With the effect of the previous rate increases working through the system and median house prices finally falling, they might not be “forced” to contain CPI again.
I agree Peter;…I think they will raise rates even if we get a recession out of it….
I’m betting on a pause.
As the housing market freezes up, homeowners will be unable to relocate for employment. Yet churn in employment should continue and even worsen as the GDP deteriorates and recession looms. And fuel prices are high while broadband penetration is reaching near-ubiquity. Will this be the impetus for more companies and their employees to consider telecommuting as a viable option?
From Yahoo Finance:
Commuting Is a Drag (on the Economy)
I’d like to see what people think about Zillow.
It currently lists my Bro’s place at 570k, when he bought in 04 at 508k. We both know that he couldn’t sell over 500k right now (Hell, probably couldn’t sell at 400k, if you ask me - REAL crappy neighborhood).
Also, I just got a mailbox stuffer today advertising 17443 Ashburton Rd. 92128 “offered at $410,000.” Zillow say $488,064. Do these people have a pressing need to move, or is Zillow that questionable in its “rearview” skewedness?
Just curious how y’all feel about it.
From my experience, it’s definitely skewed to the high side. That being said, they did say that they were fine-tuning it, and would likely get better and better data going forward.
To me, the fact that you can look at recently sold comps on the map (and look at the pretty pictures) is invaluable. I love Zillow!