The Housing Bubble

latest from sacramento

I sold much of my rental portfolio this summer/fall. I am sitting with cash ready to pounce when prices drop.

There is no doubt in my mind that EVERYONE will be affected by the housing bust that is currently under way.

And I have mixed emotions about it…

Admittedly, on one hand I am somewhat enthusiastic that the bubble is popping all across the nation- because it is putting an end to what I think has been somewhat of a “Get Rich Quick” PONZI scheme…

What I mean by that is that a very large amount of DICK and JANES across the country found a LOOPHOLE in our system that allowed them to aggressively borrow money at virtually no cost… only to FLIP and make easy profits.

I am all for entrepenurialship, but it really got wildly out of hand- and at the expense of average American people that are just trying to make a nice life for themselves.

Although I am cheerleading for a CORRECTION in housing prices… it is only because I believe they are currently out of whack to the traditional ratio’s of what housing “used to” cost, and should cost.

On the flip side… this major downturn is going to HURT all of us in some way or another. This (once) easy and available money also allowed people to feel “rich”, and many of them took the liberty to purchase all the periphery items… cars, vacations, home remodels, whatever.

This nationwide phenomenon was fantastic for America’s economy and provided jobs and all sorts of good stuff for the general public- as a whole.

In a nutshell, this HOUSING BUBBLE was really BAD and really GOOD for the above mentioned reasons.

Having lived through a RE bust, this is why I am hoping for a quick, sharp reversal. It will be much more economically painful if we go through a five-year plus correction.

Last spring, I answered a comment about folks that were cheering the correction. I pointed out that the commentor wasn’t in someones face; that many readers have been bullied by peers for years about ‘losing out’ and being ‘priced out forever’ and were probably just blowing off steam.

BTW, where were the morality police when ‘chicken little’ renters were told they would never own a home?

I believe it was J.P. Morgan who had returned from a trip abroad in the 1930’s, and asked by a reporter what he thought of the Depression overtaking America Morgan replied, “What depression?”

Somewhat in line with Mr Morgan’s comment, the effects of the coming down cycle will not effect all persons equally. And some it will benefit.

Unfortunately, “homes” themselves are merely the tip of the iceberg in that residential real estate has a very deep, broad base, much of which is not readily obvious.

To think one will not be affected at all in a personal way, one would have to be truly above the frey, both in terms of means and perhaps morality. Who, after all, will not have a loved one or friends who will be affected?

We can, unfortunately, rely on human nature. They surely had warning that Katrina was coming in New Orleans and look at how disasterously that has played out. They knew about the possibility for 70 years and did nothing to fortify the levees, but instead allowed the monies allocated for such to be squandered by a corrupt levee board.

Even now, New Orleans is more interested in Mardi Gras and building up tourism and dividing the “spoils” instead of focusing on the fact that yet another hurricane season is but months away.

They are not prepared, and forecasters agree that we are in a very nasty weather cycle for some years to come.

How quickly people forget, even when reminded on a daily basis.

Schadenfreude is too mild for how I feel as a responsible renter. To wit, Psalms 55:15

“Let death seize upon them, and let them go down quick into hell: for wickedness is in their dwellings, and among them.”

PRAISE JEEBUS

Schumpeterian creative destructionism

Creative Destructionism
One of my favorite economist, Josef Schumpeter, described recessions as periods of CREATIVE DESTRUCTION. This was part of his explanation for the Great Depression.

As the economy grows, and confidence increases, it becomes easier to splurge on items that we don’t necessarily need. We may even take on extra debt to do this. This is also true for business. Some of these excesses are not useful and we are better of without them. Did I really need that new fishing pole? Do you really need …? Do we need another corner store? Does the nation really need …? In the early 1990s, it was hotels and office space. In the mid 1970s, it was energy intensive plants and automobiles (In 1997, the average person used about the same volume of gasoline a year as in 1974).
During economic downturns, the excesses are eliminated. Businesses tear down, sell cheap, or otherwise charge off unproductive resources becoming “lean and mean.” How long this process takes, is the significant factor in the length of a recession according to Schumpeter. There were many excesses built up from the “Roaring 20’s” that had to be eliminated (there was also a natural disaster creating the dust bowl).

Proponents of Schumpeter argue that in today’s highly competitive, fast changing environment, business are less likely to create excesses and eliminate them much more quickly when they do. Many firms will contract work rather than build marginally productive facilities. Still, there will be some and the next recession will occur when too many are being destroyed at one time say the Schumpeterians. The excess manufacturing capacity has been created in China and other overseas sites.

What excess is being created now that could lead to the next downturn? I can’t help but look at the housing bubble, stock market, gold (at 25 year highs) and commodities.

In this Sunday’s Seattle Times report, Lawrence Yun, senior economist for the National Association of Realtors says that the Seattle region my experience a 30-40% increase in median prices over the next two years.

Median price in King County (Seattle area-Bellevue & vicinity) is currently hovering around $400,000. Snohomish County median prices hovering around $320K. I can’t imagine another 30-40% increase, within two years. This is getting absurd.

http://www.Washington-realestate.blogspot.com

As a mortgage broker, I know the party is over. But, I’ve seen this coming for some time now. I’m concerned, but not sweating it out. Why? My wife and I knew this would end, and most likely end bad. Unlike everyone else in my industry, we’ve spent the last few years living as simply as we could and saving like there’s no tomorrow. Both of our vehicles are paid off late 90’s model vehicles (I’ve been heckled many times for being a business owner that drives an old truck.) Absolutly no debt (which includes no mortgages since last property was sold Oct ‘06….yes, I’m officially a renter now) Because of all this, I can stand a long time without worrying about where the next dollar is coming from. The point I’m making is this - Simplfy & Save! I know this sounds very un-American, but if you plan on surviving this mess, the advice is sound. Start doing it today, for tomorrow may be too late.

I work for big oil so times couldn’t be better. Stock through the roof, projects lined up pass 2007. 70% of sales are exports; almost none are in San Diego where the company is located.

The housing bubble has caused loss of American jobs, not due to outsourcing but rather to not be able to hire US citizens. Even with competitive salaries, experienced engineers would not relocate to San Diego due to housing costs. Most recent hires have been foreigners that, even renting, are better off than India, Romania, etc.

The dc market is unique. Employees are somewhat insulated from economic downturns and upturns. The federal government as a percentage is a very large employer. That said, the buyers at the higher end of the market are like those elsewhere so a downturn in the housing market or a general recession will hurt those with the deepest pockets

http://www.dcbubble.blogspot.com

I have been a government attorney for 5 years since graduating from law school. Even though the economy has been sound the last few years, the Republican leadership both in my state of California and federally have made it so that I have faced two major lay-off scares in that time, and the Budget Reconciliation Act that just passed cuts another $90 million from our department to fund the Iraq War, so I may face that threat again very soon. Getting laid off from a government job is almost unheard of, that is one reaosn I took this route, but with the Republicans refusal to raise taxes on corporations or the wealthy, and their preference for shrinking government programs, this is the current reality. If the economy takes a major blow and the tax revenue dries up, I can only imagine how that will impact my career.

That being said, I will admit that I am privately hoping many acquaintances I know take it in the shorts, if nothing else but to teach them a lesson. One guy I know is a mortgage broker with all the toys, $1.5 million home, hummer h2, E class benz, trophy wife, limos every weekend, etc. This would all be fine except he got it by taking advantage of unsophisticated borrowers, mortgaging his own home to the point where he is upside down and using the money to buy all these toys, take extravagant trips and build himself a $100,000 marble and leather office. Now his mortgage business is hurting so bad his trophy wife is leaving him and he is facing possible bankruptcy. I know a few others just like this guy, who were so smug, arrogant and condescending that they truly deserve a “correction” of their own. Trying to warn these guys always got a patronizing smile, like an owner patting their puppy on the head. I’ll admit I will relish the time when the tables are turned.

Several years ago, we moved out of the luxury goods business. Part of it was due to increased specialty tax in CA, but part was also due to the decrease in sales after the dot-com bust. We knew it couldn’t go on forever and so took our savings and spent a year doing charity work. Several months ago, my husband and his business partner started a high-tech recruiting firm. As more and more people are forced to change employment sectors, it leads to more applicants fot the same position and companies without a HR department need help sifting through resumes and finding qualified candidates in the area. Like the previous post about engineers in San Diego, we’ve found most of the people we place are foreign born. While the salaries are good, they’re not enough to own a place here in Orange County, but immigrants have the advantage of being willing to live below local standards while doing much better than if they had stayed in their native countries.

One other thing– if things were to get really bad, how many of you know how to grow vegetables, mend your clothing, and even hunt or raise animals? I don’t anticipate it being totally necessary, but it is sure nice to know that I can sew, plant a garden, raise chickens and other animals. This is how my great-grandparents raised their families during the depression, I know my kids won’t go hungry.

Can I find how to raise chickens on Google?

I am pretty sure the end result will be a much devalued dollar and all that entails. Devalued against what (Asian Currencies, Gold?) I am not sure, but we have a situation which cannot sustain, particularly when at the same time we are expected to compete with overseas workers in a big way. I’m a computer programmer who arrived in San Diego too late to take advantage of the massive runup in RE prices, but I have already been the victim on one occasion of offshoring, and in truth, while our salaries are considered good, there is little room for raises despite the higher cost of living here in San Diego.

The main reason why i think we won’t be in a recesion if housing tanks is that we’ll start a chicken bubble where chicken prices will go up 30% a year, everyone will be in a chicken business and it will account for 30% of all new jobs in the US between 2006 and 2009.

Exporting countries rely on countries to buy their goods. If we cannot buy, they eat the big one. Their currencies will die a horrible death.

US M3 LOOKS TAME COMPARED TO CHINA’S

February 14 – Bloomberg (Lee Spears): “China’s money supply expanded at the fastest pace in two years in January, exceeding the central bank’s official target for an eighth straight month. M2…grew 19.2 percent from a year earlier to 30.4 trillion yuan ($3.8 trillion) after expanding 17.6 percent in December, the People’s Bank of China said…”

I sold much of my rental portfolio this summer/fall. I am sitting with cash ready to pounce when prices drop.

It’s comments like this one that convince me that the bubble will slowly leak rather than pop. It seems that an awful lot of people are “ready to pounce”. I know a few people personally who are doing that in CA, and I read it here. If prices continue to drop into the spring, I think they will level off or perhaps start going up again, as the “bargain” hunters scramble to save 15% on properties that were 50% overvalued to begin with. Overall, I think most of the bubble believers are still lusting after real estate and very much want a piece of the action.

the mortgage industry is in for a triple whammy, declining values, tightened underwriting, limited product, no refis, no purchases, ugly. i would anticipate at 50% contraction in the 500,000 workforce at a minimum, imho.

Im and ICU nurse, not likely to lose my job, especially when all these speculators start jumping out windows, having strokes and heart attacks, heck i’ll be in business till i retire:)

Well, If we are going to have a predictions thread I sure want to put in my two cents!
Housing drop will mirror image it’s ascent this past year, but for several years running. Yep, a real crash that will have to be seen to be believed. Real Estate down 20% by end of year (just the warm up folks)
Economic data will be revealed to be a giant hoax perpetrated by Greenspam and Co. to placate the masses. Figures calculated using methodology in use prior to Boskin commission (early 90’s, Clinton brainstorm) estimates inflation currently at 7.5%-8% and I expect it to keep increasing rapidly (see above blog about Yuan M3 inflation). Unemployment rate using earlier methods (which actually tried to count people out of work as opposed to people actively looking for work) at 8%-9%.
Probably a precipitating event like an attack on Iran,Terrorist Attack, Energy Crisis or Dollar Crisis/Bond Collapse/Derivatives Crisis starts the ball rolling with some large bank failures.
The remainder of 2006 will be consumed with increased unemployment, bankruptcy’s and storys about funding being pulled from Condo Projects.
Real Estate inventory will be at an all time historic level by Dec. 06
The Greatest Depression starts on scedule Jan.07 with capital controls being placed on the movement of money abroad, 401K investment mandates (gov securities only, for protection of course), trade sanctions on China/India, increasingly bellicose military deployments around sensitive shipping lanes and oil supplies.
20% unemployment by the end of 07 with monthly gains of 3-4%.
Middle Class shrinks by 10%, Dollar has lost an additional 15%.
Gas breaks 5$/gallon, Saudi Oil fields revealed to be in permanent decline and the Peak Oil theory finally pierces the collective consciousness of america.
Let’s see where was I? Oh yeah, in June of 06, the sheeple of the U.S. finally get a chance to take a whiff of the turd that the FED and White House have been busy painting for the past several years after the wind from the cheerleaders at CNBC finally dies down with the collapse of the housing market. This allows the collective masses to finally realize they are going to be indentured servants for the rest of their natural lives (trying to pay off 500K loans with interest after their pay gets cut in the recession that has already started, or downsized/outsourced) to the banking institution (you know, the private banking families, the ones who were given a tax free franchise back in 1913 to print money up from thin air and charge interest on it). This all leads to widespread civil disobedience in cities throughout the country, which leads to large scale internment in the camps recently built by KBR (a subsidiary of Haliburton, who just received a “no bid” award for an open ended contract to build large internment camps around the U.S. Of course the reason given for these camps was for an unidentified “immigration emergency”, like folks will be swarming into the U.S. when it turns into a ghetto and the money is worthless. Funny we didn’t see this news being covered in the main stream media)
At any rate, you get my drift. Anyone with money set aside to buy Real Estate better pack a lunch, it is a long way to the bottom of this market. It’ll be tough to figure a “Cap Rate” when the national income is falling like a rock along side house prices.

I have yet to see a tightly reasoned argument why laughing at the people hemorraghing money from a self-inflicted wound is bad, immoral and should not be done.

Come on morality police you can do better!

We live in close quarters in NYC, and we’ve endured some pretty scary times. Close quarters here means you can never really divorce the fortunes of the rich from the poor. If the economy tanks and if housing slides, those who lose out will immediately affect the fortunes of those who are better off. We might congratulate ourselves now on our lack of muggings, car-radio smash and grabbers and scary neighborhoods, but we know that that atmosphere can return as quickly as it left. Our sense of well-being and security is a function not of how the rich are doing, but how everyone else is doing.

And I wonder sometimes, if this bubble is really going to explode, how different NYC will be from the rest of the nation. Smile and do your superior dance, but then check your doors, windows, cars and wallets.

My wife is in psychiatric health, partly funded by the local government (teen drug abuse treatment) and partly private practice (people whining — just kidding). Both are luxuries to a certain extent and will suffer under an economic slowdown. On the other hand, she’s only working part time as it is.

My job is more stable, I work for a large corporation that has a strong product which I do not anticipate will be overly affected by a downturn.

And should depression era disaster strike? We start shacking up more and more family members in smaller and smaller spaces… and if that fails, well, I hear they need workers in Mexico…

only gov workers ( the parasite class) gain in the deflation to come

My two cents…

* The crash will come hard & fast but linger for years.
* I will absolutely revel in the downfall of those “holier than thou” types that annointed themselves money-making geniuses during the bubble (just like those dot-com “new economy” dopes). This includes industry charlatans.
* I have no sympathy for anyone who suspended common sense for greed.
* I have been rather annoyed that honest people making a decent living or surviving on a modest retirement have been priced out.
* I am sympathetic to those that didn’t play the game but still will get hurt.
* I am very afraid what impact this will have on friends and family that have bought into the whole “goldilocks” economy bullsh!t.

No, I don’t know what affect the future will have on my little family, but we’re preparing for the worst. Renting, no debt, no long-term obligations and lots of safe, liquid investments. Working hard both to save and to assure ourselves of future employment.

There will be a time to buy, but the obstacles against such will be huge. Everybody will call it crazy, the future will look lousy, nobody will be lending money, and lots of people will be out of work. Nonetheless, if you recognize that now is not the time to buy, then you’ve got a good chance to tell when it will be the right time. A little saying from a near chopper shop: “In God We Trust… All Others Pay Cash”.

A depression would be nothing like the previous one.

For example, I could always search for jobs in Europe, Canada, or Australia or anywhere else in the world for that matter.

and a massive global depression would of course not be like the previous one either and I don’t think any of us could imagine what that might look like.

So I don’t think it is going to happen.

I work for a telecommunications company in R&D. We have had incredible YoY growth, and is nearly profitable. I’m one of the few that has increased wages of 13% in the last two years. An economic turndown could make people drive less so they will rely on telecommunications more. Or our customers will not risk investing in their subscriber base and will buy less product from us. There could be shifts either way which could make the product just stagnate.

If the product is only sustaining, R&D is at huge risk. My position is borderline in a situation where a 50% R&D layoff would occur. I worked for this company before, and was cut during the dotbomb when 50% R&D was shafted. I’m always preparing for a layoff because I’ve been laid off three times total. This time I’ve been stocking up on more water, food and necessities. I have ideas of how to utilize my skill sets when I’m unemployed to scrape by or prosper.

Oddly enough, I’m concidering some electronic luxury good items because when we have a downturn, electronics volume will drop considerably. That will drive up costs and make new technology prohibitively expensive. These devices will do me no good if the lights go out, but I’m hoping things will not come to that.

Ah, Va_investor…the contrarian…

“My belief is that a good number of those who have been fence-sitting the past 3 or 4 years are simply too afraid to pull the trigger. It is useless trying to time the bottom - they will still be waiting in 15 yrs. Afraid to slip-up.”

Pulling the trigger in the last three years would have only shot myself.

This bubble should have burst two years ago. That’s when all these stupid loans came out. Now the financial pain will be far worse.

My plan for buying is pretty simple.

I have the properties I want in a geographical area, I have charted their high price, and their data. Now all I have to do is wait for a 30-40% reduction on comparable properties, and bingo, I go shopping for a firm 50% off, with one third of the property paid for in cash.

It seems you think you’re some sort of ‘risk taker’, and we are scared fools.

Before I went skydiving at Brown Municipal field in San Diego, I went through my parachute with a fine tooth comb. Myself and my teacher inspected every rubber band, and looked at every fiber and stitching.

He complimented me on being so thorough, and offered me a job.

He, like you, was wondering if my thoroughness would turn into fear up above.

“Absolutely not. In fact, even though it’s my first jump, I can guarantee you my pulse won’t go over 120 on the way down. If you want, you can put your finger on my throat and count.”

Sure enough, I was beyond calm on the jump out of the Cessna. We did exactly two flips, I arched perfectly, and we landed on a cloud of air in perfect position for the float.

Before our chute even open, he was asking me questions on the way down, with the DVD recorder on his hand getting it all.

“So what makes you like this? Why aren’t you freaking out? Don’t you know we’re freefalling?’

“Well, we did our homework, you know what you’re doing, and I am doing what you told me to do. We’re prepared, right? So why get all freaked out? Instead of talking about this, can I ask you a question?”

“Sure!”

“Way over there- see those buildings?”

“Yeah! What about them?”

“They seem awfully close to the Tijuana border. Do you think it’s possible that people are transporting illegal stuff into America under there, in long tunnels?”

“Naw! That would take way too much work, even for Mexicans!”

I think we all know how THAT turned out.

Grace under pressure, baby. Grace under pressure…

…and brains.

My homework is done, Va_investor.

My jump into this market will be correctly timed, with no hesitation whatsoever.

If you pulled the trigger three years ago, or know people who did, they weren’t really taking risks. They were really just shooting themselves.

I have two co-workers who are already talking like housing-serfs. They bought during the last few years. Now they want to consider moving to different jobs. Both of them dismissed jobs that would entail moving house because they don’t want to sell at a loss. One is married but has no children. The other has a big family but uprooted from Chicago a few years ago and his family would love to go back. It is not that they couldn’t aford to take the hit. It is some weird kind of denial.

Auction Heaven in ‘07

LFMAO with that story about parachuting and Tiajuana — if it is true, that is funny as hell. Thanks for the laugh — people just refuse to believe things that go against the grain of “normal” thought.

I have no problem watching the souffle’ collapse and a heck of a lot of people losing their shirts. Since I have been on the receiving end of a few economic shit storms I say the more the merrier! Been through the LBO’s, the corporate bankruptcy, the “Japanese Management Techniques” layoffs, the Bankruptcy Liquidation (rather than sell out to a competitor), and the ever popular “Please don’t tell anyone Sweetie because I would lose my job…but I can’t hire you…not even to work in the mail room with a B.S. degree…you’re the wrong color.” The housing bubble is slowly destroying my job anyway. It has brought so many newcomers into the flooring business that they are running labor and material margins into the ground. Better to have a major shake up than slowly bleed to death.

And here are a few more reasons for schadenfreude:

1. Went through this “dot-com” bubbly thing five years ago. If people can’t remember back five years and realize that the housing run-up is the s.s.d.d. then they deserve to get hosed. They got greedy and their going to get needy-real soon.

2. How damned hard is it to calculate when one makes “x” it is wise to spend roughly 1/3″x” on a car and 3″x” on a house. Not 5x…6x…7x…8x…etc. They deserve to get hosed. The math ain’t that difficult.

3. Lowest 30yr fixed rates in 50 years and people are going with adjustable rates???!!!! WTF!!! They deserve to get HOSED!!! Talk about stuck on stupid!!!

4. Make “x” in a year. House value inflates on paper. Think I’ll pull that “free” money out and spend 2″x” on remodeling my kitchen. $500 new stove not good enough. Must have $12,000 stove. Makes those frozen pizzas much more “classy”.

5. $8000+ tv sets. Gee, seems a bit “pricey” to me. Maybe there is a dollar-off coupon I can use to make that price more reasonable?

6. Don’t like it that I have to park my car on that dirty garage floor. Think a $9000 imported Italian porcelain floor would look better.

7. Tearing out perfectly good recently remodeled (couple of years at most) kitchen and bathrooms. Must have GRANITE and STAINLESS STEEL! Shit doesn’t stink if it is in a matte finish splatter glaze designer Kohler $900 toilet.

8. Master bathrooms larger than most living rooms with showers so large and with so many shower heads they require TWO commercial water heaters or the shower would run out of hot water in under 3 minutes.

9. My own sister is a F@#KED borrower who doesn’t know it yet who called me last Saturday looking for money so she could buy a hybrid SUV. Explained to her that (a) unless gas hits about $9 a gallon she is wasting her money on a hybrid and (b) if she doesn’t have any money to put down on this SUV and needs to borrow $$$ how is she going to make the monthly payments?

I have no problem with people making money…even tons of money. For all of those people who made out like bandits by cashing in and taking their money off of the table good for you. I do have a problem with all of those people still trying to play musical chairs when it has been damned obvious since last summer that not only has the music stopped playing but that there are a hundred people people still standing in the room all trying to sit down on the last chair while trying to hum “real estate never goes down and everything is great” pretending that the music is still playing and trying to rope in another round of suckers to get them off of the hook. Let ‘em hang!

I work for a public agency in California that recieves much of its revenue from sales tax (public transportation). Given that higher home appreciation has led to many homeowners cashing out some equity and up their quality of life (new car, boat, clothes, hdtv’s, etc), if home appreciation recedes or even flattens over the next 3 or more years, local sales tax revenue may also flatten or not keep up with the cost to provide the public service. If other revenues do not make up the difference in lost sales tax revenue, then my agency, and myself, would work to scale back services to basically balance the budget and remain financially sustainable.

I heard a new one tonight. A speculator in Utah figures that if the market turns on his pre-construction gamble, the coming appraisal won’t fund the loan and he’ll be able to walk.

Ben,
If this investor is using the builder’s lender, you can bet that the appraisal will come in at the “needed value” to see the deal through.
Even if it doesn’t, the appraisal will hit the trash without the buyer’s knowledge and another appraiser will be hired who will be more cooperative.

I don’t see how Virginia Investor’s numbers add up. He has owned property for over 20 years. Hasn’t purchased since 2002 and with the largest runup in real estate ever, has only a 20% LTV. That smells of BS.