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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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some good comments from the 10k filing from cfc
http://immobilienblasen.blogspot.com/2006/08/10-k-contrywide-cfc.html
Topic suggestions, not the bits bucket. That will be up in a few minutes.
sorry.
missed that.
Dude’s just trying to drive traffic to his blog. Irritating. Wish you had an ignore feature on here.
I agree tchick…..
is there a problem?
i´ve no ads on my blog. there is no commercial backround.
i post the links because there a generally other links or graphics integrated in the post/blog.
often i underline the main point so that someone has not to read everything.
and after the calls from the builders etc. there is an update after the call.
maybe you can answer what the/your problem is and respond also on
the http://thehousingbubbleblog.com/?p=1311#comments
There are lots of people trying to drive traffic to their various blogs. At least jmf always has something substantive to contribute — rather than simply the occasional lame joke (like me, for instance).
JMF is legit.
And his site is worth a visit.
I enjoy his comments and his site.
Keep posting JMF. You’ve had some good mortgage/MBS stuff on your site.
Thankyou.
Keep posting JMF. You’ve had some good mortgage/MBS stuff on your site.
Thankyou.
jmf has some good stuff: keep posting.
Having an ignore feature would be nice but that should be built into a browser not on the web since everyone is different.
It has good content, and it’s usually just a link. He is not is forcing readers to scroll through spam to get to the next post. OK x me.
He has good articles on his site. He is definitely not a spammer.
a summary from the williams sonoma earnings
http://immobilienblasen.blogspot.com/2006/08/fallout-williams-sonoma-wsm.html
Not a weekend topic but the Today show had a big story on the housing bust. I couldn’t believe it. They actually had someone talking about how people used their houses as ATMs.
The only thing that they don’t seem to be addressing is the fundamentals. If that kind of talk hits the news it will be officially over.
Waiting for same story on GMAmericmess
Oh my God, this crazy woman on GMA is yelling at us to BUY NOW because it’s August, etc. Her demeanor is one of a hysteric……she must do infomercials on the side.
I listened to Robert J. Shiller on NPR’s Talk of the Nation a few days ago, and at least he emphasized the importance of psycholoogy in the runup (and imminent collapse) of the real estate bubble. It’s a shame he’s so tongue-tied and introverted, though, because he is so easily shouted down by guests and callers.
I think the market psychology is almost as important as the affordibility level and other fundamentals…
“almost as important as …”
Consumer confidence trumps all. Have you ever been trampled by a bunch of screaming mimis trying to get to a Cabbage Patch doll? Remember those old black & whites of people storming the banks?
But I agree with you on poor Shiller. I wanted to reach through my headset and jam some of my spine up his back.
Yes, I also got very frustrated watching Robert Shiller when he was on CNBC Survival Guide on Housing. The pro housing side had David Lareah and a couple other pro housing loudmouths and then poor Shiller who was basically drowned out. All he could pop out was “Look at the housing futures.” which doesn’t mean a whole lot to most people watching.
Really! “What is a housing future, anyway? Sounds complicated…”
To begin to understand the bubble, it is very important to account for the psychology of the bubble.
The bubble is based on three principles: Greed, Fear and the Herd Instinct.
CBS evening news did a bit last night, too. Worthless, frankly. Ended with Bob Schiffer asking the correspondant if this flat market will be around for a while. She said, yes - but it will get better (or something like that). Basically, it was a much more rosy view than I expect the reality to be. And so the masses now sit back and say, “Whew! Thank God it’s not as bad as others say!” Please.
I have not once heard any reference to the credit bubble that got us here. But I’m wondering if the media believe info is over the public’s heads. I think someone could dumb it down. Look what they did with the 9/11 report. (comic book version of same)
But I’m wondering if the media believe info is over the public’s heads.
And I’m wondering if the info is over the media’s heads.
The fact that interest rates were too low for too long would be a start. But talking about how the back end of the process works and the various pricing models out there? That might be tough sledding for those boys and girls.
Formerly Upstater btw
Changed i-provider and went with new handle
The average newspaper in the US in the 1960’s was written for a 5th grade education - the WSJ was written for a 7th grade education. I doubt if that has changed for the better.
[apologies if this is a double...]
Those stats were taken from syllable/word measurements. (It used to be fashionable to determine the “grade level” of a piece of writing by taking the number of syllables and dividing by the number of words. Higher numbers = higher grade. So when I write with leeetle words it is easy to read, see?)
The math level in newspapers is particularly deplorable. Our society considers it acceptable to be completely unaware of 17th century mathmatics, let alone any degree of proficiency.
Stochastic calculus for market movements? Huh? Markets move only by conspiracy, right?
Thanks JP, Wasn’t very interested in reading the analysis factors, just a piece of remembered trivia. And the current lack of substantive authentication by reporters on idiotic press releases from vested interests and reporting as verified news is disgusting.
Our education is subject to “grade level” inflation. Your average 7th grade education in 2006 is not as good as the average 7th grade education was in 1960 (remember the “space race”?).
Apparently the average newspapaer is now at a 4th grade level. Ugh.
Fundamentals don’t matter as long as the conundrum continues. In fact, one might add a new definition of conundrum to the lexicon to mean a complete and persistent disconnect between asset prices and fundamentals.
Predictions on stock market downturn? Is anything going to have legs going forward? So much news yesterday and MSM catching on, I sense fear right about now! Should be interesting for the last quarter.
i have the feeling that at least wall street wants to see a new high in the dow. fundamentaly the markets need to prepare for a recession. but never underestimate the big guys. they propably need the historic high to suggest that everything is fine when in reality the us is in a free fall.
adjusted for inflation the dow is well below the nominal 11.300 points. but that never get noticed from the street. good propaganda. but in the long rn fundamentals will matter and the markets will turn south. but short term maybe in part to the elections the market has a chance to move higher.
I have a related question for anyone who cares to answer — Who out there is buying long on bad news? Todays economic news is that durable orders are down 2.4% and that weekly new unemployment filings are at 313K; new home sales likely to be way down — this is the kind of news that lately seems to herald a 100+ point gain in the Dow. Who’s driving up stock prices and why? What the (*&#! is their thought process (if any)?
japan was down big today
german opened down also. but reversed after a very strong sentimentindex (the most importend in whole europe). so europe germany deserves the pump. the us is really weired.
the yieldcurve is inverse and the 10 is unlikely to fall more. i think what is needed to shock the market is a very poor unemployemetreport or a high inflation number or a gib failure form a hedgefonds or a bigger compony. then there will be a freefall.
Sure enough, the numbers for new home sales came out, the news was bad, and the dow numbers are going up. I just don’t understand…
wait until the close. maye some wake up and realize how bad the facts are. i think the real trigger will be when the 10year yield is stabilising or rising despite the bad news.
The market was afraid interest rates going up more… now the market feels interest rates won’t go up and will probably come down and we willl have a soft landing. Inflation may be headed for a new higher level of tolerance by the FED here?
“Who out there is buying long on bad news?”
Myself and thousands like me with accounts fat with housing profits gleened from the sheep.
“Who’s driving up stock prices and why? What the (*&#! is their thought process (if any)?”
Why do you think…to make money, Duh. - Keep in mind the markets are VERY dicey now….I’m actually hoping for a big May style downturn or worse so I can go shopping for some deals. There is ALOT of cash on the sidelines. Not everybody is a FB and that cash has to go someplace…look at how JUNK bonds and REITs have been performing of late. People are desperate for a return and the 6% from CDs gets boring after awhile. Yep, good ole’ American greed on full display…..besides the PPT has our back….lol
Check out this sight, jdog. Taleb’s signature book foretells your destiny…
fooledbyrandomness.com
jdog wrote “There is ALOT of cash on the sidelines. Not everybody is a FB and that cash has to go someplace”
A good chunk of my money is going into my brokerage account, but 50% of that amount goes into Vanguard Prime Reserve Money market and the other half is cash ready to buy energy stocks or value stocks. 50% in cash is no confidence in the stock market. The RE boom and record debt is America’s weak underbelly. Another 9/11 will be a bigger punch against the weak-kneed, white flag mentality prevalent in our society these days.
August 24, 2006 4:43 P.M.ET
BULLETIN
Indexes glued to the flat line
Economy data interpreted as sidelining the Fed, but key stock gauges barely budge.
——————————————————————————
What keeps those indexes (not to mention the prices of individual company stocks which underly them) glued to the flat line, on a day when gloomy durables and housing market data would have sparked a selloff in less conundrumish times?
There may be one more push up to end the current rally, maybe not. I think the highs for the rally from 2002 are all in place. I am expecting the Dow to eventually go below 3000 because manias ALWAYS, and this time will NOT be different, they always go below their starting point when they crash and the 2002 low didn’t even come close correcting; we are just having a very long drawn out correction and this mania was definately started by 3000 and who knows how much below that. Also, sentiment quickly returned to the levels of the 2000 high, and it should take a much longer time to overcome fear of the stock market when a true low is finally reached and the sentiment will not return to the extreme bullish sentiment of the high, because in a normal market (as opposed to a mania) there should always be a healthy percentage of bears.
I agree Kim which is why I expect housing prices to go below 1994 pricing.
Implications of the revised June NAR median in yesterdays EHS report being the same as June 2005. So June’s 0.9% just became 0.0%.
I didn’t see this stressed in either the NAR release or the MSM reports.
-0.9%
+0.9% YOY
David Lereah’s ‘greatest’ Power Point Hits
http://tinyurl.com/hzkry
David
Bubble Meter Blog
The Washington Times has a big front page headline this morning: “Home Prices Fall; Sales Plummet”
http://www.washtimes.com/business/20060823-115813-6690r.htm
This is probably also in a lot of other newspapers as well, given the recent sales numbers, but how many will put it up front like that remains to be seen. Hey Nikki, you think the Balto Sun willl ever put something like that on the front page? When that happens, we know we’re in for it!
This and other news stories this week does seem to indicate that the Housing Bubble is finally catching attention of the mass media. Once they start piling on and make this the latest “hot story”, thta will cruch the market. There are still people out there convinced that there s no slump; hearing it on TV and reading it on front pages might convince them otherwise.
First paragraph says no reductions in the South. Where in the south are they talking about? Surely not FL? My wife and I sold our NE Atlanta area home and are renting in Forsyth County, GA. Every weekend we go out and look at neighborhoods. Builders and home sellers are cutting like crazy. We’re waiting till next year - minimum b4 we buy again. Maybe the rebuilding in the Gulf coast is skewing the stats? Any ideas?
Lots of the South never did take off like Florida did in this bubble, and so their price actions might well be lagging behind in this phase of the bubble.
Add to that the prices in Baton Rouge, Mobile, parts of New Orleans that did not flood, and there’s a healthy chunk of houses changing hands there for top dollar as people bid against each other for a place to live. (Basic, old, crap houses in New Orleans ‘burbs that did not flood are up 20%+ in some areas.)
Those two things might be enough to offset the dire situation in Florida. But I think it’s likely that most of South will catch up (er, catch “down”?) with the rest of the country sooner or later.
I agree. I live in the Mobile area and, unfortunately, there have been price increases over the past year. 14.9% was the last number I’ve heard. I talked to a realtor a few months ago, he said his company was forecasting a 10% increase over and above the normal inflation rates. Looks like they just about got it right.
That does not include the beach areas. Those places are a disaster. Something like 42 condo sales last month with a 3000+ inventory. And they are building more every day.
I propose the following simple scale for prices, as long as reported inflation stays below 5% or so, borrowing tropical storm terminology.
(Can be applied to any region where the sample sizes are greater than a couple of hundred.)
Real median price fall = soft landing
Nominal median price fall 0-10% = hard landing
Nominal median price fall 10-20% = Category 1 crash
Nominal median price fall 20-30% = Category 2 crash
Nominal median price fall 30-40% = Category 3 crash
etc.
Please forgive me for asking this, but real vs. nominal always messes me up. Using a real-life example, let’s say a house sold in 2000 for $125,000 and now it sells for $225,000. Using your category 3 crash theory (a girl can dream, can’t she
), what would the nominal price be?
A better way to think of real dollars is price to say a year’s salary. If the house sold in 2000 for 125,000 in an area where entry level jobs paid $40,000 and the house rents for 12,000 and sold for $225,000 in 2005 (with entry level jobs paying the same $40,000 and rent still 12,000). The third category would be a decline of ~75,000 (nominal means just take the raw figures so it’s .65*225,000). A real decline could occur with increasing, decreasing or stable nominal prices. Say that over the next 10 years the home price is stable at 225,000 but wages rise to 80,000 (and rents go to 24,000) and return to prior home to income or rent levels. Alternatly the same real decline from current levels could occur if prices rose to say $300,000 but wages rose to $100,000 and rents to $30,000.
Nominal is just dollars, real is inflation adjusted, so real prices can be falling while nominal prices are still going up. Why this is regarded as a soft landing is because recent buyers with big mortgages are OK if they can keep up with the monthly payments (and are amortising); their equity is building, just not very fast.
When actual dollar (aka nominal) prices start to fall, things get much uglier.
In your example; if today’s $225K represents the peak then a category 3 crash would see a price of between $135K (40% fall) and $157,500 (30% fall). I guarantee you would be seeing some pretty apocalyptic headlines if this occurred, but even then the price would not have returned to 2000 levels.
Ben,
I suggest a call for video reports from regions around the country.
I 2nd….I thought Lou’s vidieo was very informative…How much are one of those little camera’s…???
Lou, I also thought a lot about your video. I’d like to see a historical log made of everyday people (non-contrarians) discussing the real estate market over the next few months. Kind of a pictorial graph of consumer confidence.
We all know that trillions of ARMs and HELOCs are adjusting over the next three years, and we know that many people have overpaid for their houses now that prices are falling.
The big question must now be, how big is the effect of what is happening on the US and Global economy? Is it 10% or 90% of households who will feel the pain? Is it a small number of flippers, or will half the population have negative equity? The tin-foil hat brigade suggest buying gold and burying it with your backhoe in a safe compund, but what is going to happen in real life…?
Regards,
Loafer
I’m not interested in gold here and I had plenty o fun with it the past three years.
In past discussions, I thought the majority of folks here thought that the big danger was deflation not inflation.
In that case, you want to be in bonds, assuming the fed lowers rates again to kick start things, you’d want to go further out than CDs and MMs.
“In past discussions, I thought the majority of folks here thought that the big danger was deflation not inflation.
In that case, you want to be in bonds, assuming the fed lowers rates again to kick start things, you’d want to go further out than CDs and MMs.”
On http://www.kitco.com some columnists suggest holding (and buying) gold is a great deal during deflation because the Federal Reserve will print $ like crazy to attack deflation. I also like T-bills for now. I’m not sold on the Fed loosening interest rates. the shadow crossing our paths is peak middle east oil. Ghawar, Abqaiq, those should be household words in America. But most people never heard of them. They are two of the giant oil fields in Saudi Arabia. “Twilight in the Desert” by Matthew Simmons, and http://www.theoildrum.com may make you want to buy metals and oil drilling stocks.
I’ve been interested in that too, Loafer. It’s been said that something like 50% of 2005 buyers purchased with ARMs or IOs. But what’s the count? Could the number be “absorbed” like large lay-offs seem to be in an area with a strong economy?
Just from reading this blog I get the feeling that there is pent up buyer demand just waiting to pounce. I would never assume that demand is enough to stop the downward spiral but I wonder if it will soften the blow on the way down. (Dead cat bounce?)
As jdog expressed above there are many on the sidelines waiting for the bargains to appear. At least the bargains will get some cash switching hands again.
How about a discussion of how the housing bust will affect both the mid term and ‘08 elections. Who will be “blamed” for it when all the enraged FB’s stampede to the polls to make someone “pay” for it. Even though most have the attention spans and reasoning skills of a cucumber and will blame whoever the incumbent is or whoever they see on TV, were the seeds of this bubble not sown many years ago?
I think you answered your own questions… correctly.
Only with a strong admonition to stay on-topic. I strongly suspect all political discussion on blogs degenerate into the childish name-calling that seems to pass for political discourse lately. Usually drives the S/N to zero.
“How about a discussion of how the housing bust will affect both the mid term and ‘08 elections. ”
I’ve voted my entire life and just don’t know if I want to watch this next one. (I know you say you don’t vote Txchick) Just like Glenn Beck was saying on Headline News last night, the pols are hunkering down to attack each other and meanwhile the situation in the middle east is heading for disaster. We need to unite against the common enemy (substitute impending downturn in housing/economy). Unfortunately the supposedly best and brightest can’t move beyond junior high mode. I’m praying for a 3rd party to at least figuratively slap these people in the head.
Good question! Evidently Detroit has some of the highest levels of ARMs. When there is rioting in Detroit, will the push for an “ownership society” get some of the blame.
I was thinking about that this morning while out on my bike. If things shake out according to the theory of most of the pundits on this blog, Pat Buchanan is going to be a serious contender in ‘08 (he WILL run) and may actually win. I’m thinking in a Hillary (Biden, Edwards, etc.) vs. McCain (Allen, Rice, etc.) vs. Buchanan election, Buchanan could conceivably sweep most of flyover and might score with one or more of the particularly disgruntled bubble states on the coasts (e.g., Florida). His closed-door, anti-trade stance, though too extreme for me, is going to resonate big time in ‘08.
2008 - Democrats win.
2009 - Sam’s Club Republicans boot country club Republicans out of the party.
2012 - Sam’s Club Republicans win.
Sam’s Club? Who are those?
Perhaps a flat-taxer will emerge, pointing to congressional tax policy (IRC section 121) which seems to encourage flipping after a two-year hold. Further, general tolerance for such intervention in the market, helping to create bubbles, may diminish if it appears that the result was deliberate; i.e., I lately heard one economist discussing the ‘house as ATM’ phenonenum as benign, in that consumers were borrowing from their own inflated equity rather than from abroad to finance their beneficial (in macro terms) spending.
I’d like to discuss real estate lawyers, closings, and borrower culpability for toxic loans. I think experienced real estate experts expect too much of borrowers. Sure, I would read the fine print now, but how about when I was younger and actually bought a house in 1994.
We knew enough to shop around based on APR, and simplified things by going with a no points, rate equals APR lender. We knew we didn’t want an ARM.
There were a massive stack of documents, including mortgage documents, which we provided to a lawyer we hired to review them. It was one of two times (the other being a will) that we had used a lawyer.
No one could have read all those documents at closing. The 97 year old woman we were buying for would have died before the deal was done. Our lawyer flipped through the documents checking his reviewed copies against those presented for signing. He found one discrepency — the bank had added our signing the right for them to access our IRS files indefinately, even after the loan was paid off. That led to a big argument. (The bank pulled several other stunts — rates were rising, they had delayed as long as possible, and they were trying to stop the closing to get out of their rate lock). In the end, I signed and signed, and the deal was done.
This was back in far more ethical times, evidently. And even then not so ethical. We relied on the lawyer, the title insurance company, etc. The seller relied on the broker. That’s why you pay all these people so damn much.
Might the real estate lawyers get sued here, if the borrowers say they didn’t know what the signed?
from what i gathered lawyers are only used in NYC and maybe NY State for RE transactions. Everywhere else people pay RE agents and brokers to know the paperwork, where in NYC they are only salespeople.
One time my offer was refused for a place here and the RE agent pushed me to use her lawyer. I said no thank you, i have a lawyer. The place I ended up buying, i did via FSBO and not her.
from what i gathered lawyers are only used in NYC and maybe NY State for RE transactions
Depends on the buyer. I’ve never bought real estate without a lawyer in the DC area. My family members in the South always use a lawyer as well, even if it’s not specifically needed. I call it insurance, since there are too many things for a rookie to catch, especially when dealing with brokers and banks these days.
As for refinancing, it’s also tempting to use a lawyer there if you know someone affordable, especially when dealing with places like Countrywide that slap on extra items without telling you! But with lots of diligence that can be handled by you, so long as you enjoy reading legal documents.
Just be ready to make sure page by page that what you were reading the night before is the same thing you’re signing today. One mistake and you have to tell them “oh boy, this will take a while” and go through with a fine-tooth comb. They get VERY aggravated, but hey, it was their “mistake” that’s holding up the process.
(Happened to us once, and actually Countrywide’s attorney was sympathetic, though the other title office people were not. Maybe he didn’t mind because was billing them by the hour as we hashed out the discrepencies, all of which mistakes seemed to fall in their favor!)
Anyway, a lawyer will only add about 0.2% to your house purchase cost! I’d never EVER try to skimp on that, knowing what a much-more-expensive mess I could be in later from a simple oversight.
I call it insurance, since there are too many things for a rookie to catch,
Why use a rookie ???? Would you use a rookie Lawyer ???
SoCalMortGuy will also review a mortgage for a fee.
I got both my closing papers in advance so I could go in a nice quiet room and review. In MA I believe there is/was a 3 day requirement. In MA with Wells Fargo as my mortgage holder, we didn’t have any problems.
In NY and with another bank, I had a heck of a time just getting my papers in advance and when I got them they were a mess. I was on the phone with the rep constantly over the next 3 days and still made critical corrections at the closing. (Interest rate and escrow details wrong, errors that had been pointed out several times previously)
I remember going to my first closing on a condo I was buying. The lawyer who showed up (the one I had been talking to had something else come up at the last minute) just gave the papers a quick once over and had nothing to say. I did a quick scan through them and noted that the loan docs said I was borrowing $220K on a $120K purchase price - very interesting. There were embarrassed grins all around.
Everybody at that proceeeding was there to get my money. It sucked. Remember, caveat emptor.
Sorry if this is posted already (didn’t look too hard), and I don’t know if this is a topic or a bit. But PBS Newshour did an excellent report on the housing bubble last night. Nothing new to us, but a good overview for the common folk. Summary:
Background: housing is slowing down.
Lawrence Yun (NAR): Blame the interest rates! Soft Landing! Yes there’s some froth but that’s okay because the bubbly areas still have a great economy and lots of job creation! Could have some repercussions because people don’t spend equity anymore. But everything will be sweetness and light by Spring 2007.
Steve Cochrane (Moody’s): Not really interest rates - those are still historically low. Prices going up faster than wages. no affordability. Condo inventory way too high. 18 months of slump at least — psychology is hard to turn.
http://www.pbs.org/newshour/bb/business/july-dec06/housing_08-23.html
(From what i gathered lawyers are only used in NYC and maybe NY State for RE transactions. Everywhere else people pay RE agents and brokers to know the paperwork, where in NYC they are only salespeople.)
Come to think of it, I guess I sort of knew that. So elsewhere you have the seller’s lawyer review the mortgage documents you sign? It really does sound like people were relying on good faith, and in the bubble good faith disappeared.
One possible reprecussion could be the end of the idea that the real estate/appraisal/mortgage industry is made up of “honest brokers,” and the emergence of buyer’s representatives with expertise in all three.
Meanwhile, the internet may disintermediate the “sales” function of RE agents, while similar expertise (checking out the financials of a prospective buyer before stopping the sales process) is sold to sellers.
Here’s a topic that’s been on my mind. Wages. I think these are really the crux of the matter, as in the NPR anecdote. When our parents purchased homes for ~70K in the late 1970’s, they easily paid off the note by the 1990’s because of wage inflation. Buying a house was always hard, but salaries were expected to rise faster than the house payment, even though at “first it was going to mean ramen noodles”.
I think the hope of rising wages has justified barely squeaking into massive loans, but the last six years have proven that adequate rises in pay have not been forthcoming.
What has been the experience of others? Am I just living in a bubble where my family and friends have had flat wage growth? Are there any managers out there who are currently seeing wage inflation or expecting some in the future?
Arwen, check out this week’s Newsweek which includes a series of articles about the stagnant middle class wages and problems with debt. They also went into detail on how health debt is starting to be an issue with more and more families even when they have insurance.
http://tinyurl.com/nsoy7
Scroll down to center right hand side for the United We Owe section for links to the whole series.
Prices are down, here in NYC I’ve seen comparable properties down 10% YOY.
How is the RE Industry gaming the stats to make it appear that “median prices” are not down?
Prices are down, here in NYC I’ve seen comparable properties down 10% YOY.
How is the RE Industry gaming the stats to make it appear that “median prices” are not down?
Here is a topic:
How about the Shopopocalypse?
http://www.revbilly.com/blog/?p=326#more-326
It would be interesting to know where posters sit on this topic.
I’m on Ebay w/a large “wanted” list, just waiting for the heloc cowboys to start “liberating the equity” in their toys.
this is great.
“The Shopocalypse is brought to the world by you and by me. Not that we are evil people, but somehow we allowed ourselves to get organized into these giant groups, these false personages that rise up without the conscience of even Godzilla. The single job of the marketing departments is to imitate us, so they get chummy with their best-friend smiles, and they teach us that all this bloody mayhem is “Normal.” And we are called “Free.”
How about discussing what property improvements add to the value. We have had numerous posts about what a property “should” be worth, i.e. rent * 150 or 1999 price + 4% per year, but I am guessing that excludes improvements. I see a lot of SFH’s that have been tastefully improved in my area. What are realistic rules of thumb for value-add of the improvements? Also, what are ways to tell if the work done was quality or not. Most folks may not know the difference, but I suspect that there were a lot of “discount” improvements performed. Even though granite countertops are the rage, is it really the best material? Personally, I would rather make my own changes to a property, but many can’t/don’t want to.
Here’s an idea for the weekend: What is the best way to read Ben’s blog?
Seriously, there’s great content here, but I’m spending too much time in it. I would love a digest-of-comments…
(This is partly a followup to somebody else’s comment that it’s become a three beer blog. If we keep it up, it’ll be an AA blog before long!)
I have to admit I just skim the blog now. If the topic is something we’ve discussed a hundred times already (buying gold, what the Fed will do, bashing Gen X-Y, bashing planners adn new urbanism) I keep pressing the Page Down key.
But I always stop to read those “on the ground” posts. The multiple sign twirlers, empty showrooms, prices reduced 20%, pleading Realtor stories. Ahhhh!
1) We all agree that the housing market and related industries are in a death spiral, but to what safe harbor do these displaced souls head? Do they go back to teaching, selling cars, standing on street corners with a ‘need help’ sign? Worse yet, what state is going to get this excess baggage? My guess is that the state with the most generous welfare system will rise to the top of the list. Hey, Gov. Arnold, pass legislation now to keep these waifs from coming to CA to roost.
2) What is minimum wage and ‘living’ wage going to do to your state or locale? CA is thinking about raising the minimum to $8 and Fresno is trying to pass legislation for a $13/hr living wage. How much will this effect businesses and will it continue to drive businesses out of CA?
3) Does anyone get the feeling that the increased volume on housing being reported in the MSM is being seeded and encouraged by BB and friends to keep from over tightening the FFR? Usually there is a lag time between tightening and the effects thereof, but by bringing things to the forefront in the MSM one could better get a handle on resultant effects, if true, kudo’s to BB and pals.
Do you remember the tent cities in Houston in the 80s which were occupied by laid off auto workers from Detroit? Think that can’t happen again?
Now that’s the ultimate “home,” isn’t it?
Nope, but I do remember my sister who bought a condo in Arlington months before the downturn having to take cash to closing to effect a sale.
Only tent city I know of was that Phoenix sheriff that had all the convicts in tents and something about everything in pink.
Yeah…we chatted about this on nnj .. Turning bulls using combo tactics to save half a percent. Sneaky, but politically cheaper that using hikes only, and much easier to shift blame.
Yeah…we chatted about this on nnj .. Turning bulls using combo tactics to save half a percent. Sneaky, but politically cheaper that using hikes only, and much easier to shift blame.
dd…..ddoppleganger sorry.
Being the cynical beyatch that I am, how about this one? How long will it be before we begin to see Newsweek or Time Magazine articles about “The New Austerity” or “Simple Living?” I used to see those all the time in 1990-1991. Of course, these days, you see glossy magazines on the rack extolling these virtues (saw one called “Enough” which, amusingly enough, was loaded with ads selling junk for people who don’t think they have enough :)). Will the FB/RE fashion victims of the early 21st century be chastened or will they come right back and do it again the instant they can get their grubbby little hands on cheap money again. And will the high school and college kids of today have more exposure to this bubble and bust than the 30 somethings right now who were the main drivers of this bubble. Their excuse is, they were too young to remember the last bubble, but of course, they didn’t have the internet.
“Will the FB/RE fashion victims of the early 21st century be chastened or will they come right back and do it again the instant they can get their grubbby little hands on cheap money again.”
TxChick I think we’re close in age. Remember when Reagan took office and the collective sense of relief when it was ok to spend and have money again? I always felt the over the top 80s grew out of the relative spartan restraint of the Carter years. IMHO it’s the human condition to happen again.
“And will the high school and college kids of today have more exposure to this bubble and bust than the 30 somethings right now who were the main drivers of this bubble. ”
how refreshing! can we really pin this bubble on the 30 somethings? as a boomer i’ve become accustomed to taking blame for everything.
I totally blame it on them. We were the ones selling to them. And people under 30 buying houses? Let’s not even go there . . .
Yeah, we under-30 types should just stick with picking our noses…
Wow. I remember that issue. Even TIME admitted a year later that “the new simplicity” was really the next recession.
I remember an article about the wealthy choosing to drive SUV type vehicles so as not to show off their wealth. This was in the early 1990’s and I don’t think they were called SUV’s back then. These big cars were not associated with wealth back then. Look how that trend has expanded up to the present. Yes a new austerity in the size of ones home. It may start with the rich and trickle down just like the SUV fad.
(How long will it be before we begin to see Newsweek or Time Magazine articles about “The New Austerity” or “Simple Living?” I used to see those all the time in 1990-1991.)
Every 15 years ago, my lifestyle is “in.” I told my daughter she should make a few bucks by writing a book about me and a few of my friends: “Cheap Dad, Cheaper Dad, Damn Cheap Dad”
Every generation tries to find a better way to ‘make it’ than their parents. If this generation owns the housing bubble for their foolish belief that owning was investing, well the piper is a coming.
Half joking and half serious question…. what would you say each generation’s biggest mistake was (lessons learned)?
I know a minor one: 70’s bell bottom pants and platform shoes. Some things should just die quietly. Besides, they got caught in bike spokes.
Please, no 80’s fluorescent clothing and puffy hair again…
Anyone want to debate this statement:
“Energy prices matter, but they don’t play the kind of role that housing is going to play,” says UCLA’s Leamer. “The Fed can do very little now. … It made a major error by letting this housing sector get out of control.”
Where did that come from?
It might look like Anderson Forecast people getting a spine again.
From 1975 to 1980 per capita wages in the USA rose 69%. Housing values also rose more, a little more, than from 2000 to 2005, but from 2000 to 2005 per capita wages only rose 16%.
My comments don’t seem to be coming out where I expect them to lately, so they look like orphan comments. This was supposed to go with Arwen’s post about wages.
I’d like to see these numbers without the top 0.5% of wage earners; you know, the CEO’s with massive pay increases, stock options, options back-dating, free apartments, “price protection”, etc.
“Energy prices matter, but they don’t play the kind of role that housing is going to play,” says UCLA’s Leamer. “The Fed can do very little now. … It made a major error by letting this housing sector get out of control.”
Certainly fits the facts as they are now.
On the other hand, if housing prices adjust back to normal in 2007, we have zero rather than negative growth for a year, and a recovery occurs in 2008, Bernanke could say the strategy of not trying to manage asset prices but just responding to the fallout worked. It takes two years to find out.
Too bad there are no controlled experiments in economics.
I do not expect housing prices to get to normal for at least 10 years. IMHO this would be a good topic - Why some think the bottom will be 1 - 2 years and others think 5 yrs and others like me think 15 yrs maybe 20 before normalcy has a chance to return.
I think it will be 7 years for some areas such as San Diego. San Diego RE prices peaked in the summer of 2005. My rationale is based on the last bubble burst. It took from 1990 to 1996 for the prices in many parts of Southern California to bottom. So 2012 will be the year when Time Magazine popularizes renting and the freedoms associated with it. No one will talk about housing in the media. That will be the time to buy real estate. I figure an 8% deflation rate per year in real estate combined with 10% inflation per year in gasoline prices. Peak oil, combined with many retiring boomers downsizing from 2 homes to one smaller home.
A new study (from the Chicago Fed) concludes otherwise:
———————————————————————–
Tech, not spec, fed U.S. housing boom -study
Thu Aug 24, 2006 4:07pm ET173
NEW YORK, Aug 24 (Reuters)
“Don’t look at me.”
That is essentially the message of a new Federal Reserve study arguing that productivity — not the central bank’s own policy of rock-bottom interest rates — was behind a five-year housing boom that now seems to be ending rather abruptly.
“The housing boom has not been driven by unusually loose monetary policy,” wrote John Fisher and Saad Quayyum, economists at the Chicago Fed and authors of the report.
The study also argues the surge in home purchases between 2000-2005 did not constitute a bubble, since it was not due to excessive speculation.
Instead, the authors say: “Current levels of spending on new housing are largely explained by technology-driven wealth creation over the previous decade.”
http://tinyurl.com/mq5tp
—————————————————————————
Note to the authors: Have you ever heard of the tech stock bust? And do you have a clue about what gargantuan magnitude of stock market wealth was lost in the aftermath???
Puhlease!!!
That’s the Homer Simpson defense. “It was like that when I got here”.
Also the Bernanke defense…
Yeah, if they mean by technology the ability to attach an I/O, ARM, or NEG AM loan document with a teaser rate to an email and forward to the buyer vs. inefficiently printing out a 30 year fixed requiring a 10% deposit at “real rates” and driving/faxing it to the buyer. Yeah, its the technology baby!
weekend topic..
let’s use ourselves as a statistical sample. we lay out our monthly cost of living budget including rent. now factor in the added cost of PITI and see what that does to your numbers.
now project our adjusted bottom lines onto john q public and we’ll quickly see why we’ve entered a negative savings rate.
I would like a topic about 401ks/IRAs/retirement funds. If we are headed for economic down turns will the fed abopt these monies to prop up SS or medicare. If the masses lose alot of money from their retirement funds will they want to pony up for a sure thing in SS? Will it be a grab of funds like in Argentina? Will there be a massive up roar? What will the markets do if this happens? Have others thought about this?
KingSlug
Every day for two year.
Is Colorado Bucking the Trend? I found this in the Rocky Mountain News in a story on abysmal home sales across the nation:
Coloradans weigh in on July’s plunge in U.S. home sales:
“We’re not bucking the national trend, and we’re not following it. We’re a separate and unique market. We’re going to see an overall 5 percent appreciation this year. We’re not going to set a record in the number of homes sold.”
Gary Bauer, independent broker
“A lot of the statistical information you’re going to see is coming from markets like Las Vegas and Phoenix that had such great run-ups and are now cooling off. The beauty of Denver is we never saw those kinds of run-ups. Denver has a tendency to be countercyclical to the rest of the country.”
Peter Niederman, owner of home listing service ColoradoMLS.com
“We already have been suffering for the last four or five years what the rest of the country is just starting to experience. In the first half of this year, resale home sales in the Denver area are down 7 percent and new home sales are down 11 percent. But we are starting to come back more than the U.S. as a whole.”
The Big Media are excellent… at noticing trends that have already happened. At the top of the bubble in July 2005, Time Magazine had a coverstory about how great housing is doing.
Now the major media is noticing the giant popping sound. Since they usually get timing exactly wrong, will the market head up a little (gotta make that last shoulder in the chart, right?) before heading back down? Or is this headlong plunge unstoppable due to FBs whose financial state is so bad their sales will now be forced?
Will the options backdating scandal hit other homebuilders besides KB?
What are the implications for these companies if top management becomes the target of a scandal investigation?
http://tinyurl.com/jxrch
KB Home: SEC to conduct stock-option grant inquiry
By Ana Campoy
Last Update: 8:20 PM ET Aug 24, 2006
SAN FRANCISCO (MarketWatch) — KB Home (KBH: 40.67, -0.51, -1.2%) late Thursday said it has been notified by the Securities and Exchange Commission that the agency will conduct an informal inquiry into the company’s stock-option grants. The Los Angeles-based homebuilder said it plans to fully cooperate with the SEC. Yesterday, KB Home said it is reviewing stock-option grants given to Chief Executive Bruce Karatz.
“Do you remember the tent cities in Houston in the 80’s which were occupied by laid off auto workers from Detroit? Think that can’t happen again?”
As the bubble deflates in the upper mid west and rust belt, will the displaced people resettle and try to start over in the north’s ever shrinking economy or will they move south to warmer climes and the possibility of a better employment picture. Our Phoenix suburban city reported that after a summer hiring blitz, they are still about 60 teachers short as school starts. There are also shortages of Drs, nurses, vets, and almost any other field (except real estate) due to rapid growth. I have read simular accounts of areas in Texas and Florida. Will this bubble collapse stop the migration or accelerate it? There is going to be a lot of available housing in these areas at affordable prices. Do we have readers of this blog that are contemplating a relocation? I would be interested in this as a topic.
“As the bubble deflates in the upper mid west and rust belt, will the displaced people resettle and try to start over in the north’s ever shrinking economy or will they move south to warmer climes and the possibility of a better employment picture.”
The trend out of the upper Midwest has been going on for years and I live here because of that. High growth area to me = hell hole tomorrow. I do know of some people here in Michigan that have already moved south to get work. I won’t be leaving unless I have to.
One topic I would like to know is how to determine the real vacancy rate in bubble places like silicon valley.
What I mean is that there are rental vacancy statistics but that does not include investors/flippers who at times of great appreciation do not necessarily have to “rent” but can just hold and sell. Is this another hidden inventory that messes up rental vacancy rates, if these units also hit the rental market ?.
Thanks.
Here’s a topic: How will the mass of forclosures be handled? Well lenders try to avoid owning massive amounts of a declining asset by bending over backwards to help the homeowner? Who actually owns most mortgages today? Will a Federal bailout, a la Resolution Trust Corporation, ultimately be needed?
Also, if large numbers of homeowners are foreclosed, would it be a good time to own REITs that own apartment complexes?
Also, if large numbers of homeowners are foreclosed, would it be a good time to own REITs that own apartment complexes?
——————————————————————————
I think yes.
Is the new homes sales report reliable or even relevant? It does not reflect cancellations, uses a 90 percent confidence interval, and is subject to unexplainable downward revisions.
The last point is the most annoying and needs expansion. Suppose in Q2 an industry sells 110 units and in Q1 it sells 100 units that’s a 10% increase in sales, right? Now, suppose in Q3 it sells 111 units and revises Q2’s sales figure to 101 units, can it really claim that it increased sales by another 10%?
I’d like to see a topic on the news that the Department of Justice isn’t going to file criminal charges on the Fannie and Freddie $10B accounting scandal, but that civil penalties are still up for debate.
Bryce-Good topic. I am dumbfounded by that decision. If anyone can shed light on the topic it would be educational
Well, they had “plunge” in their Aug headline, but they just can’t have a wholly negative article, even as sales plummet and prices flail. It’s different here, see?
http://tinyurl.com/kjqkm
“Though the market in the Baltimore area has cooled, it remains healthy - with sales prices continuing to rise - thanks to strong job growth said John McClain, a senior fellow at the Center for Regional Analysis at George Mason University.
The Baltimore area added 18,100 jobs from June 2005 to June 2006, he said.
“People are being recruited to the area for jobs and looking for housing,” McClain said. “What I also see in Baltimore’s data, places where the housing market is at more affordable level, they still have healthy increases.”
DC declines are never ever ever mentioned in the Sun, even though it was all they could talk about during the boom.
Don’t know if anyone has provided a copy of this yet, if not, here goes…
US: Another Post-Bubble Shakeout
Stephen Roach (New York)
Five and a half years ago the equity bubble popped. Within six months, the US economy went into mild recession, and the global economy was quick to follow. Today, America’s housing bubble is finally bursting. Is the die cast for another bubble-induced downturn in the US and global economy?
All asset bubbles are alike. Sure, there are obvious differences between equities — a financial asset — and homes — a tangible asset. But to me, the Shiller definition says it all: A bubble is an outgrowth of powerful amplification mechanisms — both real and psychological — which create an unsustainable condition whereby “… price increases beget further price increases” (see Robert Shiller’s Irrational Exuberance, second edition, Princeton University Press, 2005). The rise and fall of the US housing market fits the Shiller script to a tee. House price appreciation surged to a 27-year high in 2005, and as of the first quarter of 2006, prices were still rising by 20% or higher in 53 metropolitan areas across the United States. Both pricing and demand were feeding on each other through classic Shiller-like amplification mechanisms.
As always, the upside of a speculative bubble lasts for longer than you think. But when it finally goes, it invariably unwinds with greater force than widely expected. That seems to be the way the chips are now falling in the US housing market. Demand for homes is falling like a stone and inventories of unsold dwellings are ballooning — up 40% for existing homes and 22% for new homes in the 12 months ending July. These are the classic quantity adjustments that set the stage for price destruction — the endgame of any asset bubble. So far, home values just seem to be leveling off at still lofty price points. As the bid-offer gap widens in an excess inventory and rising interest rate climate, price declines will come as they always do. This bubble is not different.
Had trouble posting. Sorry if this gets appears twice:
I’d like to see a discussion about what buyers “on the fence” are really thinking right now. What exactly will it take to get them to buy a home?
For example, I’ve noticed that several people who post here are eager to buy a home but believe that prices are too high to justify a real estate purchase right now. Presumably, they would purchase a house if prices dropped sufficiently.
Just a few months ago I would have counted myself among that group. Falling prices would have been enough to change me from a Looker into a Buyer. Today, that’s no longer true. I’ve simply learned too much about the lax lending standards and shady dealings that drove the current run-up in housing prices. I would need to see both a return to normal prices as well as a more conservative lending environment in order to feel comfortable purchasing a home. Does anyone else feel the same way?
In my area, I would start thinking about buying if the prices dropped half the distance they rose between 2001 and today. Obviously if they were tumbling down I would wait, but I think we are going to see a long slow drop.
gordo
Peggy - I think you are on target. I own (since 1973), but I have children that would like to buy houses and I advise agin it. I am paricularly stunned by DTI ratios needed to purchase at current prices. For many reasons, I expect housing prices to drop by 50% or more over many, many years. This drop can occur by a real drop in price or by inflation allowing wages to justify current pricing levels. Either way it occurs, there is no housing market until house price correction event happens. I have no interest in catching a falling knife.
Just to clarify what I think you meant:
This drop can occur by a real drop in price or by an increase in wages justifying the current price levels.
Inflation does not equal wage growth; be careful what you wish for.
Peggy: Posted this afternoon, didn’t show. Here’s the problem. We don’t know if there ARE many fencesitter fish, really. We don’t know true inventory, because all casual fisherman haven’t pulled in their lines and taken their houses off the market yet. In other words, the sediment has to settle.
In our case, we’ve decided we really LIKE renting. So we’ve created a value = $212.50 per hour on my husband’s and my time saved by not doing ANY of the HGTV nonsense. This equals approx. $1,000 a month in additional savings we would have to see on a home purchase over renting.
Therefore, for us to buy, we would have to be able to purchase the house (same we currently rent) for MUCH less than our rent. this is approximately 1999 pricing.
This considers net tax gain, investment loss on our 20% downpayment over 30 years, insurance increase, maintenance, etc.
We were active bidders, never won a bid, and ended up in a nice rental instead. So current rental happiness plays a part here.
You make some very good points, Pat. I currently live in an apartment. In chatting with my neighbors, I’ve learned that many are new to the area. They tell me that they would like to purchase a house but cannot afford to do so at current prices. For that reason, I tend to think in terms of lots of buyers sitting on the sidelines. I forget that per the latest statistics, almost everyone who wants to and can buy has already done so.
If my house had sold, we’d definitely rent. The biggest message I’ve gotten from this blog is that Cash is King and keeping liquid is strength as we go forward into this thing. I’d also feel I was still buying at the top if I purchased within 1 year of the peak.
A quote from the Studs Terkel book “Hard Times” about people’s memories of The Depression gave me the chills the other night. During a panic your home suddenly becomes worthless because nobody wants it. I hope and pray we don’t have to go anywhere for the next decade!
“High growth area to me = hell hole tomorrow”
I agree with you. The areas which are losing population are attractive to me. I have done the rat race thing, and cannot stand it. I like rural areas. Not only am I a gardener, but also a dog lover who enjoys walking out the back door and throwing the ball as hard and far as I can with no regard for neighbors, traffic, etc. Being couped up in a lousy condo, apt., or townhouse in the city is my idea of hell on earth. I will take less pay for a higher quality of life any day. I would be happier in a 500 square foot cabin on acreage with my plants and animals vs. living in one of those McMansions on a postage stamp lot.