Housing Boom ‘Set In Motion In 2001′
The USA Today reports on September 11th and the markets. “Since the attacks hit during a recession, it forced the Federal Reserve to slash short-term interest rates more than expected, says Liz Ann Sonders of Charles Schwab. Short-term rates hit an almost unheard of low of 1% in 2003, which helped inflate a housing bubble, she says. Now that bubble’s deflation is haunting investors, she says.”
The Street.com. “Could there have been a U.S. housing boom without the events of 9/11? It’s a matter of much debate. Most experts agree that the U.S. housing boom was caused by a confluence of factors set in motion in 2001, including very low mortgage rates and a newfound desire for tangible assets like real estate.”
“It’s a mistake, though, to think that 9/11 alone created these factors. In fact, the Nasdaq’s plunge in the spring of 2001 first put the ball in motion for the Federal Reserve’s rate cuts and the flight to hard assets after millions of Americans saw their paper wealth evaporate in the dot-com bust.”
“Prior to the attacks, the U.S. housing market was floundering with the rest of the economy. It’s hard to imagine a time when housing wasn’t a dominant topic on Americans’ minds. But in 2000 and early 2001, housing sales were flat and residential spending was slow.”
“In summer 2001, the U.S. faced a weak economy, a weak stock market and a meandering real estate market. The Fed had already cut short-term rates from 6.5% at the beginning of the year to 3%. ‘The Fed was cutting rates because the economy had slowed dramatically; 9/11 most likely worsened that recession,’ says economist Phillip Neuhart.”
“Sales did not immediately boom, though. Five weeks after the attacks, Jonathan Miller, head of New York City real estate appraisal firm Miller Samuel, thought about changing careers because the market was so slow. But near the end of 2001, Miller began noticing some of the beginnings of the boom.”
“Around this time, Miller witnessed a five-way bidding war for a one-bedroom apartment in a nondoorman building in the East 50s, an unusual phenomenon, since this was not a luxury property but a fairly generic one.”
“This trend began to repeat itself, and bidding wars became the norm in New York City and areas of California in late 2001.”
“By February 2002, the National Association of Realtors was reporting that January’s existing home-sales data had hit a record monthly high. By April 2002, Federal Reserve Chairman Alan Greenspan was already addressing the issue of a possible bubble forming in real estate prices.”
“As the housing bubble deflates, no one knows for sure how dramatic the boom would have been if the terrible events of 9/11 had never happened. Still, it’s hard to imagine any sort of housing boom happening without the dot-com bust first occurring.”
The last two newsletters from Liz Ann Sonders and now this statement, makes me think that she has been lurking on this and the other housing bubble blogs.
I have been quite sure for some time that this blog is probably quite (un)popular at the NAR, at regional ARs and across the Realty Clown spectrum.
I’m waving “hi” to David L. and his minions right now. You friggen scumbags! See ya at the bottom of the recession. I’ll have fries with that!
I know that David Lereah was recently told about the David Lereah Watch Blog.
David
David Lereah Watch Blog
No funny money, no housing bubble. If a government has no respect for its currency, why should its people and banks? Missing from these equation is the massive plunge in the dollar.
“No funny money, no housing bubble. If a government has no respect for its currency, why should its people and banks? Missing from these equation is the massive plunge in the dollar.”
This is true! Not to get too OT but over the last 6 years all of the Governmemt spending and an UNPAID for war, along with Tax cuts is just crazy.
These are 2 hugh holes, one on the private (housing side) and the Government defict. I recall that old advice “when you find yourself in a hole, first thing to do is quit digging!”
Don’t even get me started on this funny money thing. The amount of debt in this country, at all levels, will never be paid back. Oh, and don’t forget all the entitlement programs at differenct levels. We are royally screwed as a country. The only question is when does the defecation hit the fan. Anyone for a third world country cheap.
It must have been obvious in 2001 that we were likely to go to war using the national credit card to underwrite everything including any reconstruction afterward. That plus the guns and butter context in which this occurred implies the Fed should have been extremely cautious and tight with rates, but instead they ripped the lid right off because they saw no other choice. History will never be able to make any sense of this because it doesn’t make any.
it makes perfect sense in a historic context, many previous world empires followed the same road to destruction.
A great book about just this is American Theocracy by Kevin Phillips. It make much of what is happening now make perfect sense.
I’ve also noticed at least 3 differnet FRB locations (Richmond, NJ and one other) that visit my blog…I wonder what they’re looking for. David, I know you’ve got them too…
Come on, what else are Realtors going to do during the day, other than reading blogs? They sure aren’t selling any houses.
FRB?
Federal Reserve Bank? just a wag
Thanks!
Yes, Federal Reserve Board. They come about once a day, sometimes more, from several locations throughout the US. What is the Fed doing looking at housing bubble blogs? If they want the true pulse of the nation’s RE markets, they’re looking in the wrong place. We bloggers all know what needs to happen to get this over with, so to speak, but it’s todays sellers that haven’t yet gotten the memo.
I do and lots of other interesting folks.
http://bubblemeter.blogspot.com/2006/05/who-is-reading.html
David
Bubble Meter Blog
Add the University of California, Davis Human and Community Development Dept in there too >; )
“As the housing bubble deflates, no one knows for sure how dramatic the boom would have been if the terrible events of 9/11 had never happened. Still, it’s hard to imagine any sort of housing boom happening without the dot-com bust first occurring.”
One can only conjecture on such matters, but it seems reasonable to conjecture that the 9/11 attack made a bad economic picture far worse, giving extra impetus for the Fed to hold the monetary stimulus pedal to the metal for much longer than they otherwise would have. The prolonged period of negative real interest rates gave plenty of novice real estate investors the chance to become convinced that real estate is a far more lucrative investment than stocks, bonds, or pretty much anything else (gold and oil excepted).
Right, it is one thing to lower rates and another to keep them there for so long. This chart of the Dow shows how the financial markets were spooked in the fall of 2002. The Fed was talking about deflation. And now these trillions that the housing boom created are going away.
Did the Fed wait too long to bring rates back up? Consider this from the first post:
‘A factor that ended the project: Glickstein’s buyers were tired of the waiting game. The final straw was seeing one buyer, ‘near tears,’ come into the sales office, Glickstein said. The buyer had used his daughter’s college tuition for his down payment.’
“…it is one thing to lower rates and another to keep them there for so long.”
So good, it should be repeated.
- ‘The prolonged period of negative real interest rates gave plenty of novice real estate investors the chance ‘… Well said.
It’s just so true Ben that the failure of Greenspan to raise rates at the proper time was one of the biggest factors that kept the mania going . And than the masses/experts tried to justify the false market after it spun out of control .
“it’s hard to imagine any sort of housing boom happening without the dot-com bust first occurring.”
well, maybe if you just look at the US … but most of the EU housing bubbles had their biggest gains during the stockmarket runup, before the dotcom burst happened.
That’s a good point.
Has Europe or Oz had the same type of housing market “stall” that some of the pricier markets here have had in the last 12 months? Did they stall earlier in the decade, and then continue to go up? Or have they always kept their upward trajectory? And have any of them seen a “meaningful” price correction (-15% or more) in the past 5 years? Very curious.
yes, we had that in Europe - although most readers here don’t want to hear about it
In the ‘old’ bubble markets like UK and Netherlands there was significant panic around 2001/2002 (don’t know exactly when) and there were sudden price drops of around 30% in the more speculative markets - mostly with the more expensive properties in the big cities. Even the realtors organisation was forecasting a significant price decline for the next year.
But it just didn’t happen. Prices quickly recovered thanks to even more easy money from the ECB (and even more loose lending) and spreading of the bubble (both inside countries and within or even outside the EEC). In Netherlands, the national average sales price never went negative yoy, but it was probably negative by 10% yoy or so for certain market segments / areas. The drops in the big cities were masked by surging prices in the outer areas (the ‘equity locust’ problem discussed more often on this blog).
In the Netherlands in most areas individual homeprices are now 60 to 90% higher than in 2001 (when gains were already in the 400% range) and the national average is up around 40% over the last 5 years.
I don’t know about the rest of the country, but in NOVA, inventory was trending downward at least since 1997. So this boom was in the making even as far back as then. Inventory bottomed in 2000, at which time prices began climbing upward. The dot-coms and 9/11 just added fuel to the fire I think.
I think that the start of the bubble 1996 -> 2000 was justified as we had wage grouth and a stock bubble to pay the higher home prices, however after 2001 the values went up on speculation and creative financing…
The departure of the housing prices from the trend line of CPI definitely started in the late 90’s. See Gary Shilling’s article of 6/29/06 on Forbes.com
In-city Seattle prices started doubling’96 or ‘97 too. Stock options from Microsoft seemed to be the spur. That’s when the bidding wars began and every seller knew their house had turned into a gold mine.
Whole neighborhoods seemed to go up for sale. Prices rose so fast and uncontrollaby that I’m sure sellers thought it’s “Now or Never”- like prices couldn’t possibly go any higher so they better cash out while the getting was good.
It just continued from there, with minor slowdowns in appreciation along the way.
“In-city Seattle prices started doubling’96 or ‘97 too. Stock options from Microsoft seemed to be the spur. That’s when the bidding wars began and every seller knew their house had turned into a gold mine.”
Same thing happened in San Jose, CA too!
Also in LA and San Diego. All of a sudden, in around 1997, I saw my first “flippers” — and couldn’t believe what a killing they were making. We lauged about the prices they were asking for **in 1997/1998** then our jaws hit the floor as the homes sold within weeks. By 2001, I think the game was over, except that the Fed (and all others related) lit off the credit bubble.
That’s why I think we’ll be seeing pre-2001 prices by the time this is over with (barring significant wage increases or govt “credits”).
Perhaps that’s because ARMs have always been prevalent there and so interest rates have less influence in house prices. (since buying at low interest rates doesn’t imply low interest rates for the life of the loan)
this varies strongly within the EU so I doubt if it is really important.
In Netherlands ARMs are certainly not a factor; when the bubble started mortgage rates were still over 10% yoy and most people took out 10-30 year fixed rate loans. In NL the first part of the housing bubble probably had to do with declining rates, but after that crazy lending took over (instead of 3x income you can now get a loan for 10x income; instead of 20% downpayment we now have 110-120% mortgages, etc.).
The pattern was similar here in the U.S. Prices started going up because of lower rates and then lenders lowered standards to preserve market share and that kept the bubble going. My thinking, obviously poorly expressed, was that perhaps where people are accustomed to ARMS prices would be less driven to mortgage rates since people are used to their payments going up and down with rates. Since low rates aren’t locked in for the length of the loan, there is less reason to pay more when rates are low. Of course this assumes more rationality than buyers have actually been showing.
And for that matter, the point in time when US housing prices took off at an unprecedented real rate of price inflation was 1998 (after the Russian debt default / LTCM bailout), not Sept 12, 2001. So I would say the policy response to the tech stock bust and 9/11 attacks added fuel to a fire which was already burning hot.
I know in Sacramento, late 1998 is when I saw the bubble starting but we actually had wage growth then. When it kept going after the tech lay-offs, i knew something was fishy.
When it kept going after the tech lay-offs, i knew something was fishy.
Precisely! That’s when I began to wonder what exactly is going on.
“By April 2002, Federal Reserve Chairman Alan Greenspan was already addressing the issue of a possible bubble forming in real estate prices.”
I don’t believe this statement is accurate, but someone should check. While AG may have expressed veiled concerns about the housing situation as early as spring 2002 (much as he fretted about “irrational exuberance” in the stock market as early as 1996), he also insisted that there is no national housing market, and hence there could not be a national housing bubble, although there were quite a few locally frothy markets which were a growing concern.
Nuance of word choice was always of paramount importance to AG; in this case, admitting there was a housing bubble in the national real estate market would have raised the question of how such a situation could come about.
When did he address this bubble - in 2002? No way! Not publicly. I dont even think there was a national bubble 2002. I know real estate prices in most places didnt even take off with any significane until 2003. Also, rates didnt even reach rock bottom until 2003.
Actually you can go back to Silicon Valley in 1999 to 2001 when prices shot up. Annually we were seeing 25-35% annual increases. By 2002 it already doubled. I saw this TH from accros the street in Campbell CA go from $187K (1997) to $500K (2001). This was fairly typical of this area. Now its over $700K.
What gives!
Needed the add there is a Discussion group on RE bubble on Wall Street Journal… it started in 2002.
http://discussions.realestatejournal.com/RealEstateJournal%20Discussions/1?rejpos=home_inside
Nationally I would indeed say the question came to be in 2002.
Silicon valley was clearly one of the local bubbles in 1999 (maybe even earlier). That I will agree with 100%. I had several former co-workers who worked there and I followed that market closely. There were even several news stories on how homes prices were driving out teachers, police officers, etc… Some of these guys could not even find a place to rent in the late 90’s as the occupany rate of rentals was somewhere near 99%. So yes some market were way ahead of the national bubble.
Yes this is correct to say crispy… seemed to me each year since 2000 prices could and should crash.
Needed to add that we had a huge reversal on rentals in by the end of 2002 into 2003. Rentals dropped by 30-40%. This certainly should have sent shock waves in the Rental-Investor communites.
there was a study several years ago (I think by the OECD, not sure) about relations between the stockmarket and housing market. They found that in many countries prices in the housing market follow prices in the stock market, but the strength of the effect and the delay varies strongly from one country to another (depending on tax laws, HMD, loan system etc.). In Europe the lag is usually 0.5-2 years.
IMF study. Google “When bubbles burst” to find it. Or click here (link to .pdf file):
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf#search=%22when%20bubbles%20burst%22
Larry,
This was the “sweet spot” for many of us. I’ve been an owner most of my adult life and I think I know “solid” appreciation from an unbridled mania. (At least I think I do). That’s why 2005 really blind sided me. My thinking was how can any rational person think this could possibly continue? Show’s how much I know.
This is someone trying to re-write history.
I recall Greenspan denying a housing bubble existed until the spring of 2005. He was, however, aware of the rent/price disconnect in fall 1999, because he mentioned it in the last Fed minutes of that year.
“He was, however, aware of the rent/price disconnect in fall 1999, because he mentioned it in the last Fed minutes of that year.”
In my opinion there was already a slight housing bubble before 2000, but it was on the verge of becoming deflated by the recession, and probably never would have been noticed if the Fed had allowed the economy to finish the barely started correction of the imbalances instead of lowering the interest rates so much and REALLY inflating the housing bubble.
Home prices, in light of rents, didn’t make sense in central Texas in 1998. I wrote it off as a byproduct of the tech boom, but who knows.
The ratio of median house price/median rent/multiple back to 1940. Source Census Bureau:
1940 2938/27/109
1950 7354/42/175
1960 11900/71/168
1970 17000/108/157
1980 47200/243/194
1990 79100/447/177
2000 119600/602/199
The current median house price is $230,000 and I read recently that the median rent was around $850 (although I’m not sure of the source) this would give you a multiple of 270 which is at least 35% above any historic precedent.
crispy&cole,
While I can agree that the now infamous “froth” comment didn’t come until much later, by 2003 what grip on reality we did have was broken. When the implosion is complete we’ll know the exact date/dates for each given market. How much did Greenspan know and when did he know it! Look, I don’t know but our “ramp up” started well prior to 2003 and by 2005 it was an obvious disaster. Typically RE appreciates at inflation plus a point ot two. When was the last time any of us saw that?
I agree that there was significant run up in many locations prior to 2002. But IMO the national bubble did not inflate until 2003 when rates were kept way too low for way too long.
C&C,
Agreed. By that time it was “Why we’re going gah-gah over housing”!
Yeah, O.K, whatever.
I guess I can get on board with the rest of “the choir” and say the bubble started 9/12/2001 but that is a gross over simplification. As Wall Street continued to be entagled in late trading/market timing, accounting 101 w/Harvey Pitt, WorldCon, Enron (and let’s not forget the Rigas familiy at Adelphia) issues, just about ANYTHING looked better! But please indulge me for a minute? Imagine that on the 12th of Sept. 2001 we also repealed the God awful legislation that made home ownership a “favorite child” and most profits tax free?
This sense of excitement and (can you believe they’re letting us get away with this?) that beat strong in the heart of nearly every American and MANDATED that MEW and FLIP were are real friends! Something just a little less base than say bodily functions was going to yield major pay outs? Pffft. Don’t gotta tell me twice!
Doing your toenails? Your house is making you money!
Taking a nap on the couch? You’re making money baby!
Twenty minute “four flusher”? You just “made” a grand! Tax Free baby!
I mean, what wasn’t to like?
D. I agree. I think of it as one part local housing bubbles 2001-2002, one very big part credit bubble mania 2002-2005.
Suzzane,
You know that is SO true. I felt pretty good about the appreciation we had seen from say 1994 to 2001. I mean for goodness sake you could buy a place on the Oregon shore for 100K in much of the 90’s! Inside bathroom and everything. (Now the lots alone are over a 100K). I suppose the reason a good number of us here didn’t profit more was simply b/c we didn’t feel comfortable carrying ever more debt. So if you’re O.K with being in debt up to your eyeballs you probably made out pretty good (until now that is).
The bottom of the last bubble was 1995, at least in NYC, according to this link — http://www.youdovoodoo.com/80sbubble.htm. My husband and I bought a coop in Manhattan that year, and sold it in October of 2001 for two and a half times what we paid for it. So I would argue that, in some areas at least, the great Real Estate runup was already underway. However, it might also be argued that the runup we saw in the value of our home was due to an overcorrection from the highs of the 80s bubble — we bought the place for just about 75 times rent, at the absolute nadir of the market.
that’s interesting to hear and somewhat similar to the experience in Europe. The EU housing boom started in some of the financial capitals (London, Amsterdam) and gradually spread outward over the years. It makes sense too, because the financial capitals is usually where the ‘hot money’ enters the real world.
wow, what a freaky trip down memory lane, Bubblewatcher. Thanks for sharing the link.
I am not sure Liz Ann Sonders has it completely correct. I recall RE was booming in the bayarea, even after 911.
Greenspan had already started raising intererst rates before 911 to cool the housing market, then suddenly right after 911, the interest rates dropped, and we prceeded from there with lower interest rates. Which as we all know, created a bubble in the RE market.
If I can find a interest rate link to backup my above statement I will post it here.
I think the Bay Area RE market was crashing in 2002.
South Bay was crashing. East Bay was booming. It was a matter of where you were, as there is no overarching regional housing market in the Bay Area, only a bunch of small, weakly-correlated local markets.
I would not say crashing.. it dipped… It did not go down far enough to call it crashing. By 2002 stock option game was over. But the low interest rates proped it back up.
In the SF South Bay, I have seen prices over the past 6-8 years go from High $100k’s to over 700k’s. It just didnt make sense each year.
I would say a 20% dip is a crash. But you don’t actually see that much evidence in the data, because when rich guys’ home prices fall by 20% in market value, they generally have the financial resources to wait until they come back up to sell. If you average in the very slow rate of sales in 2002 for the South Bay with the very rapid rate of sales for the East Bay and don’t adjust the weights in the respective strata for the fact that the South Bay market was relatively dead, then the overall picture (say, using a CSW index unweighted for selectivity bias) is that the greater Bay Area market held up relatively well during the early part of the tech stock bust.
Nope. We closed (at 13% under asking, nonetheless, mostly because the seller was moving to NYC and was afraid real estate was tanking because of 9/11) on our first home ever, a San Francisco condo in December of 2001. Summer of 2002 the appraisal came in at over 20% appreciation (in 7 months!), so we refi’d to a new loan without any 2nd piggyback any longer, and no PMI. The gains in ‘03 and ‘04 were unbelievable as well. We then sold that condo in April of ‘05 for 80% more than we bought it just 3 1/2 years before. Rent now, and no regrets.
We always believed it was the post-9/11 dip that got us in the place, but with articles like this it makes me think we rode the whole cycle.
lauravella,
I get beat up pretty regular for bringing this up but would cheap/free money have looked as good if you had to pay capital gains every time you flipped, re-fi’d or sold your home/homes?
9/11 was the “point of NO RETURN” not the origins of the bubble. In your IRA you’d have to wait until you are at least 59 1/2. (Most people today are having a hard time visualizing this coming Friday?). With the House ATM “Equity” Liberator (TM) it was just a matter of waiting for the “appraisal” to get back. (Hopefully in time for a weekend run to Home Depot!)
As for any other form of “investment” it’s just about impossible to compete with that! I’ll look for the “cartoon” of the over night lending rate. It’s pretty cool, you can see it unfold 10 years in about a minute and watch bubbles inflate/implode as it plays out. If you find it first, please feel free!
“pay capital gains every time you flipped, re-fi’d or sold your home/homes?”
You only got the income tax free if you lived in the house for two years, so the flippers did have to pay taxes.
There are ‘creative’ ways around that. Enough imaginary negatives equal big positives. The only place easier to do that than in real estate is medical practices.
azSun,
Oh and don’t you know it! In fact it seems to me that with the total lack of anything resembling enforcement it’s safe to say that residential RE is exempt from capital gains altogether. One would have to awfully stupid to get busted on this scenario. I’ve even heard of “landlords” asking the tenant if it would be O.K to leave the power or water and sewer bill in their name if it’s all the same to them? What we have here is basically an “honor system”.
Anyone out there in blogshpere EVER hear of anyone getting popped on this? I mean it’s basically a he said/she said kind of situation. O.K Mr. Auditor, prove that I didn’t live there!
Unless your “rental” is in another state whatchagonnadoaboutit?
Kim,
That’s true. What I think we’ve come to realize collectively though is that we’ve had to broaden our concept of just exactly what defines a “flipper”. Just b/c you were not on a TV show doesn’t mean you get to skate away scot free. When most Americans “re-fi” they are basically buying their house a 2nd or 3rd or 4th time. I stayed in the same home for 10 years (big deal) my folks stayed until all of us were grown up and gone and then a few to fix all the stuff we wrecked. So about 30 years give or take. How many of us do that any more?
I’ll stand by for my standard bludgeoning but if the tax code said FIVE years or even 10 would we be in this mess? That puts it out far enough to remove it from the limited attention span of would be greater fools and effectively removes it from their train of thought. When we had the “one time exemption” for those OVER 55 housing was a lot more affordable. Now we’re all a bunch of “playahs”.
Not true Kim.
First, the $250k/$500k exclusion for primary residences are “pro-rated” on that two years (ie. 1 year of residence = 50% of exclusion)–second, 1031 exchanges allow tax free flipping (as long as proceeds are reinvested into another property), and third, the transactions were simply not reported properly in more cases than you’d care to believe.
This was of coarse replaced the 100% exlusion (no tax) IRS code. Would have been better off with older rule.
When we bought in San Diego in the spring of 2001, the bubble was already pretty puffy — houses had shot up something like 50-60% in the previous couple years, particularly in north county. While it’s a nice simple explanation — the house bubble is the fault of terrorists! terror! terror! — I’m not sure that the bubble can be blamed on 9/11 and its aftermath.
Boston area too, saw a lot of growth in 1999-2001.
First a lot if improvements were made with profits from the stock market, which naturally boosted prices a bit. Then around the summer of 2000, prices got high enough that fundamentals were being forgotten. I was looking for a multifamily in marginal neighborhoods in Boston and could not find anything that would give me a net profit even with a 30% deposit.
Then /911 happened, and mothing moved for three months. But no prices came down. Then prices doubled in the next two years!
In early 2003 daughter’s preschool teacher, whose husband runs a small painting business, bought a $600,000 house. People who earned about half of what my household earns were outbidding me.
So for Boston, as in San Diego, 9/11 was not the point where the bubble happened, but where a small bubble, capable of correction by a flat market for a few years while inflation caught up, was last seen. Everything since 9/11 has been hyper-bubble.
Tulkinghorn,
Thank you, thank you, thank you!
My home in the Portland area (Oregon that is) climbed by AT LEAST 15-20% per year in the late 90’s! So sanity and us said bye-bye to fundamentals long before 9/11. At first it felt great b/c if you’ve been up here it is quite nice and yet we had never really kept pace with the rest of the country. Between 1994 (purchase) and 9/11 we had basically doubled in value. DOUBLED! Sure it was a nice house and all, but doubled? In 7 years? This is when joy turned to apprehension. I’m no damn visionary but I lived to tell about the stock market bubble and knew I didn’t want to go through another! By 2002 I began actively scripting my exit. True, I did sell well prior to the peak, but I made plenty of money and had gotten burned for being to damn aggressive before! I’ve been a bubble-sitter since the start of 2004 and have NO regrets.
DC area was going up in 97-booming by 2000
Prior to 911 San Diego might of been a little underpriced and I think San Diego was a front-runner in the housing bubble with California in general following SD. Maybe because in general in the 90’s California prices remained so flat or went down 30% it was due for some increases by 1999. What ended up happening was off the charts bizzare regarding where prices climbed to and engulfed the whole state of California .
A friend of mine bought a condo in San Diego in 1999 for what the previous owner paid for in the early 90s. The seller was ecstatic when my friend bought - he thought he’d never recoup his “investment.”
In 2004, my friend sold his condo in one day for 2.5 times what he paid for it in 1999. Likewise, I bought in 2001 and had neighbors sell comparable units for double what we paid. Now? Now a neighbor tried pricing his unit for sale using the same price as a previous owner who sold in early 2005. Had it sit and sit and sit for four months, before taking it off the market altogehter. Similarly, a block over there’s a SFH that’s been on the market since April and has basically gone from $850k asking down now to $650k and is still sitting. Owners bought it for $400k in 2002, so that’s probably they’re floor, but it does make one wonder what YOY appreciation is going to look like in 2007…
I should probably add that when we started looking at houses we were totally puzzled as to how people could afford what was then available, like $375Kk for a house in a decent neighborhood. Then our realtor explained that It Is Different In San Diego and told us we really needed to talk with a lender about the Special way financing was done down here. The tap for funny money and funky loans had already been on for a while.
True that. My wife and I went to a presentation on negative am loans put on by a realtor with ZipRealty in San Francisco in summer of ‘01. The guy pitched that anybody with any kind of sense was doing it, just like he had for his current and previous home. It took about 5 minutes of discussion afterwards with my mother, who’s a loan officer in Indiana, to realize it wasn’t worth the risk for us, no matter what gains people like the realtor were lucky to obtain in the short term. As curious as we were about how people were able to afford San Francisco homes before we bought in 2001, we were equally disgusted by the reality of the proliferation of these types of loans by summer of ‘05. (not to mention no-docs) Right now there’s got to be a whole lot of people crapping their pants as we speak.
I still maintain that there are substantial socio-economic reasons with much broader roots. Consider A) the passing of the generations which survived the Great Depression removed hard-learned life lessons and enabled the excesses. If a person was 10 years old in 1929, and therefore might have some meaningful recollection of events, by 1999, if still alive, they were 80. Most of the cautions of the relatively few survivors would have been unheard, unheeded, or disregarded as exaggeration by younger, more aggressive generations. Look at the stock market upswing, beginning in about 1981, 52 years after the Crash. B) As generations live longer and pass down wealth more slowly (and spend more on health care), there is much less available on a macro scale for younger people to get started in life. Younger people become more willing to take risks to try to get established. Recently, this sentiment approached desperation as the “buy now or be forever priced out” garbage was foisted off on relatively naive buyers - but they believed it. C) Corporate profit reports have been overwhelmingly positive for an extended period of time. Basic economic theory tells you that this is only possible if they are either i) failing to pass on profits to the general marketplace in the form of expansion, wages, etc. or if they are ii) providing deteriorating quality of serivces and products or iii) achieving some super-efficiency that their competitors are not achieving. The market reports have been claiming efficiency, but all corporations have fully integrated computer-based and internet efficiencies by now. Consumers know in their hearts and pocketbooks that it is the quality of goods and services and wages which have been declining for some time. This is an additional spur for the consumer to seek out sources of income and wealth other than through traditional hard work, and the situation created additional pressure on younger generations to achieve their success through unconventional means. When the interest rates dropped, it was the final ingredient in this witches’ brew of ignorance, fear and greed, and the boom burst forth.
“The market reports have been claiming efficiency, but all corporations have fully integrated computer-based and internet efficiencies by now.”
No way. There are still a lot of middle-men to be “disintermediated.”
Such as Realtors ™.
Anyway, I will take issue KIA’s criterion of 1919 or earlier birthdate as being a little too exclusive. My late father and my mother were born (in the UK) in 1925 and 1929 respectively, and you better believe they had/have “meaningful recollections” of the 1930’s Depression, which affected their attitude towards money for life.
Objectively they may be small things; but people NEVER lose little-kid memories of their friends being at school hungry, or with cardboard stuffed in their shoes because they couldn’t afford to replace or re-sole them. I know this because both my parents told me at various times when reminiscing that they had never themselves gone unfed or unshod.
Or maybe a friend wasn’t around any more because their family just got evicted (or worse yet you witnessed the eviction).
Hey, if you put ‘tm’ in parentheses, it gets translated into the symbol. Cool.
Now what does double parentheses do? ((tm))
Rats.
Forgot to mention - before 911 the stockmarket was started going down in 2000 while interest rate had been going up for about a year before 911…
Greenspan really over did it when he lowered the interest rates immediately after 911- it propelled RE to all new price levels…We would have been half way through a buyers market by now.
The boom was in the late 90’s and again in 99 and 2000 in Colorado, it was all the tech funny money from venture capitalists and the stock market boom that fueled the Colorado boom (Janice funds is in Denver).
All it takes is a lot of money, easy lending and ignorant buyers to fuel a boom. I was an ignorant buyer in 96, and again in 98. Without the internet I’d still be ignorant, Realtors(TM) certainly aren’t any help, I bought 3 houses through Realtors(TM) and never did learn all the dirty tricks (I even fell for the fake “offers” trick). They never even spill the beans with their selling clients because they know you’ll be a buyer next.
The Fed use of interest rate cuts as a stimulus to economic activity is like Gallager smacking watermelons. Great show but you never know where the crap’s gonna land. That it went so hard into RE speculation was unforeseen. Personally, I don’t blame anyone for the bubble. Just a whole lot of individually motivated ‘playahs’ wanting to score, finding themselves with the perfect scoring opprotunity.
Further, we consistenly miss an important datapoint in the whole mess:
Savers were penalized by the Fed. With the most safe investments making, at best, 1%, anyone saving was effectively being penalized.
It’s one thing to say that people should adhere to old values and look to their retirement as well as to sending their kids to college. It’s another thing to make those people suckers for doing so.
With the real ‘cost of retirement’ soaring, as well as the cost of education, and with the stock market fallen off a cliff, it’s no wonder so many otherwise well-intentioned bipedal carbon units saw housing as their investment-of-last-resort.
So here is our recipe:
1) Diminish their IRAs in the market meltdown
2) Diminish their savings by the savings interest rate meltdown
3) Increase their credit exposure during the housing meltdown
Anything else we can do to our citizens?
“It’s one thing to say that people should adhere to old values and look to their retirement as well as to sending their kids to college. It’s another thing to make those people suckers for doing so.”
Yeah exactly what my wife and I went through. Did things the ‘right way’ and have essentially been saving up for the downpayment on a first home for, oh, 7 years or so now.
It was pretty depressing to look at the pathetic interest rates we were (and still are) getting on our money. All the while the reckless/lucky/older/whatever types are gloating in their nice homes, and the cost of everything has shot though the roof…
Rocky Road Ahead for Homebuilders
By Dan Fitzpatrick
RealMoney.com Contributor
9/11/2006 10:55 AM EDT
URL: http://www.thestreet.com/p/rmoney/homebuilders/10308127.html
Friday’s press release from Lennar (LEN) , in which it updated its third-quarter earnings estimate, mentioned certain land adjustments as one factor that contributed to the warning.
I believe we’ll start hearing a lot more about adjustments in land values, although I don’t hear anyone talking about it now. Instead, the market seems focused solely on home sales.
At some point, homebuilders like D.R. Horton (DHI) , Hovnanian (HOV) , KB Home (KBH) , Toll Brothers (TOL) and Pulte (PHM) will be unable to sidestep Statement of Financial Accounting Standards (”SFAS”) Rule 144 any longer. This rule requires revisions in the value of assets when it becomes obvious that they are worth less than stated book value.
A Closer Look
Here’s how it works. Housing projects and land held for development and sale are stated at cost. It is assumed that a builder pays fair value for land. However, if facts and circumstances indicate that the fair value of the assets is “impaired” — that the carrying amount of the land is not recoverable from the sale of the finished product — then the asset value must be adjusted downward.
This type of revaluation requires a lot of internal research and work, so it doesn’t happen overnight. Because the big national homebuilders consider each region to be a separate reporting unit, they rely on the information they receive from each division in the company. As I have previously noted, the executive talent pool at the divisional level is questionable at best. Many highly paid executives are breathtakingly young and are byproducts of a prolonged bull market. Many of them have no experience in down markets, so they assume that buying interest will pick up shortly — just like it has done before. With 2006 bonuses right around the corner, we won’t likely see any asset write-downs until early 2007.
Homebuilders are also hesitant to make any 144 adjustments because they’ll be effectively shooting themselves in the foot. Most public homebuilders are also land developers — and land sellers. They’ll buy a sizeable chunk of land for the development of a master planned community, and then sell portions of that land to competing builders at premium prices. These partial sales reduce risk as well as the developer’s cost basis in the land. Nobody in that position will announce willingly to potential buyers that the land isn’t worth as much as it used to be. But FAS 144 requires them to do just that.
The Concession Factor
Right now, the bid-ask spread in land deals remains wide enough to drive a D9 through. Sellers want yesterday’s prices, while buyers worry about tomorrow’s prices. The Rule 144 adjustments will certainly narrow this spread. Under Rule 144, the land must be reported at the lower of its book value or fair value minus cost to sell.
As we know, homebuilders are offering massive concessions, which are included in a builder’s cost to sell. So, for the purposes of Rule 144, it doesn’t matter whether builders simply reduce asking prices or offer concessions. These are the “events or changes in circumstances” that trigger Rule 144. Also, the six-figure concessions aren’t having much impact on net sales. So do you think these concessions will go away anytime soon? What if they are instead increased, or if builders start slashing asking prices even further? Either way, Rule 144 adjustments are required.
Most SEC filings that I have read address this issue in a fairly benign way by inserting boilerplate language. For example, in its 2005 10K, Beazer Homes (BZH) addressed the Rule 144 aspect of inventory valuation by noting that:
” [t] hese evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses and other factors. Due to uncertainties in the estimation process, it is reasonably possible that actual results could differ from those estimates. Our assumptions about future home sales prices and volumes require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. We continue to evaluate the carrying value of our inventory and, based on historical results, believe that our existing estimation process is accurate and do not anticipate the process to materially change in the future.”
As we hear one builder after the other express surprise over the weak demand, I wonder when they’ll face reality and price their assets accordingly. Are the homebuilders cheap relative to their book value? Maybe they are now, but they won’t be if book value is adjusted downward.
Although I see a lot of downside in these stocks, I wouldn’t short them right now because there still seems to be a committed bid under most of the sector, but that should change over the next couple months. The time to buy is when things just can’t get any worse, right? My bet is that Rule 144 adjustments will make early 2007 a rocky road for the homebuilders.
Be careful out there.
Thank you for that post txchick57.
I have just one question:
What happened to the older, experienced executives? Laid off? Downsized? Age discrimination/bias?
( “Many highly paid executives are breathtakingly young and are byproducts of a prolonged bull market. Many of them have no experience in down markets, so they assume that buying interest will pick up shortly.” )
Thanks txchick57. If I follow, then you are saying that the impairment writedowns will probably take place next year, since exec’s dont want to miss out on Christmas bonuses.
This is interesting because there are still analysts rating the HB’s as buys or neutral, instead of sells. Lots of bs going on all over. The other thing is what will happen if anything, when the HB’s decide not to make the impairment adjustments to their Balance Sheets…
Fast forward 5 years. In a Mikey Ds restaurant…
Manager to David Lereah: No, No, No…When a customer comes in you go to the counter….When the beeper starts, you pull up the fries….And quit telling the customers our prices are going to go up.
You and Leslie cant do anything right…You are a mental midget.
nah, he’ll be releasing his latest book, “Are you missing out on the commodities boom?” or whatever is the bubble du jour.
“Are you missing out on the coming foreclosure boom?”
Chapter I- I told you in 2004 to stop buying real estate and to wait for the bubble to pop
Personally, I like to imagine him being led off in handcuffs muttering “It would have worked except for those meddling bloggers.” like a scooby doo villian
I think the broader debt boom may be linked to 9/11 more than the housing boom per se. In the depressing wake of the disaster, the FED and business worried that people would stop spending, causing the economy to crash. They encouraged people to live for today in order to avoid this. And certainly here in NY, the shocking disaster drove plans and sacrifice for the far-off future from everyone’s mind.
People took the advice to an extreme. Instead of cutting back, they went overboard. I guess you could say the consumer’s “discount rate” for future vs. present spending soared, as interest rates fell.
if there is anything the (global) credit boom can be linked to it is Alan Greenspan. Everything started around 1987 when he took control at the FED with his policy of ‘curing’ every problem in the financial markets with more easy money. 9/11 did throw some oil on a fire that had already started long before (both in the US and Europe; the ECB dumped twice the FED amount of easy money in the markets after 9/11). As mentioned above, around 1995 in several EU countries the housing/debt bubble was already well on its way. In 2001, many EU housing markets already had bigger % gains than the US has seen up to now.
Good thought. Something akin to the WWII mentality of ‘there’s no tomorrow’. A ‘personal futures discount rate’ = ‘buy now or be priced out forever’. Is this the basis of all bubbles???
shout out to Robert Kammikazi
hows that gold teatin ya?
He’s probably not doing too bad…it’s still above the price it was when he started announcing his “bullishness” on commodities (and bearishness on RE)…
He founded Yamana gold (AUY), named after his mother (maiden name), $0.10 a share a few years ago, so I don’t think he’s doing too badly.
KIA said:”I still maintain that there are substantial socio-economic reasons with much broader roots. Consider A) the passing of the generations which survived the Great Depression removed hard-learned life lessons and enabled the excesses. If a person was 10 years old in 1929, and therefore might have some meaningful recollection of events, by 1999, if still alive, they were 80″.
You are absolutely correct KIA. My mom had me late in life, she is 79 and still in good health and was only a child during the great depression, but remembers it well, which ingrained frugal spending habits in her throughout her life. She made due with what she had, and always told us kids to live that way too. Her younger friends could never dicipline themselves to save anything, where as my mother was able to save quite alot of money for only early $1 dollar an hour in wages. My father is 83 years old and still to this day, has never had a credit card-he pays cash for everything. He has never felt inconvenienced by it at all…
I will admit, its difficult for most people not to buy into the propaganda and advertising machine glamourizing a certain lifestyle. It has brainwashed this country into thinking WE MUST HAVE everything that is advertised…we need this or that to make our lives better or easier, but in reality, its all a bunch of BS to get us to spend money that we don’t have, without any thought to saving for a rainy day.
Most people in general are spenders by nature and will learn a hard lesson why its important to save.
Indeed. In talking with my father about my 99 y.o. grandfather, he related that he receives about 40K each year from his investments, which gives a basis of some 600-700K. And this from a man that never earned more than $5 an hour in his life, and had finshed working 30+ years ago. Never had a credit card, almost zero debt, cash for everything. A very different mindset.
Good points lauravella ….The 1950″s was the beginnings of the spend spend spend culture after the Depression/World War2 was over . There was a housing shortage after the war so a housing boom started in the early 50″s . Soon people had two cars instead of one and all the other gadgets that came on the market . Than it was the keep up with the Jones and TV with all the advertising .
We have been a spend spend spend society from the shortly after World War 2 onward .
First in the 50’s it was the one earner family ,than it started shifting to the two-earner family with the extra money for things ,but the buying power kept going down so now it takes two incomes to make it now.
I just wonder what would happen if Americans all of a sudden ,out of the blue ,turned into a save save save economy .
Our whole economy is based on spending and we can’t stand it when unemployment goes up . Whenever there is a recession the whole idea becomes to get us spending again .
The whole system seems like it needs a overhaul .
I can definitely notice the difference between people over 60 and under 40 when I do tax returns. Those under 40 ususally have no money even though they make above-average incomes. Meanwhile the people over 60 ususally have retirements paying thousands a month (like my parents).
The younger people just spend and spend, without thinking. They try to keep up with everyone else (who also has no money / savings) and purchase cars and boats, etc. I am really trying to live on a cash basis for everything and while I may not be able to buy homes this way - I can sure live that way for everything else. If we dont have money in our pocket, then we dont buy it. Plain and simple. In the coming months and years, those with debt are going to get screwed. There are still people that don’t realize that they may not be able to erase the mortgage forclosure deficiency judgement under the new BK laws for these reasons: not lived in home long enough, refinanced, lied on loan app regarding income, lied on loan app regarding owner-occupied, etc. Its going to get ugly.
I think the 1% interest rate policy would have happened with our without 9/11. Government leaders of both parties have learned that recessions = I might lose my job. The business cycle is the bane of incumbents and must be defeated. How do you postpone a recession past the next election cycle? You lower interest rates, increase credit and let the bubbles blow. This strategy works until it doesn’t. Don’t think for a moment that Hillary or whoever comes around in 2008 won’t try the same thing.
“Government leaders of both parties have learned that recessions = I might lose my job. The business cycle is the bane of incumbents and must be defeated. How do you postpone a recession past the next election cycle? You lower interest rates, increase credit and let the bubbles blow.”
this is wisdom! could it the great GRANT???
Exactly. The low rates had to remain in effect until after the election of 2004. People vote their pocketbooks. Between cheap money and parroting media the powers have the people of this country running around like sheep. Now that housing prices are tanking the herd is going to vote the other way–Democrat. That would be bad news for the Dubya, but Bill Clinton has already arranged to keep the Village Idiot from being impeached in exchange for the Republicans clearing the way for Hillary in 2008. It’s all a really bad chess game. Oh, and all the people who overextended themselves in the frenzy… well, the new improved bankruptcy laws will make sure they stay off the game board for good. (It was part of the script; you just had to be looking three moves ahead.)
DinOR said:”I get beat up pretty regular for bringing this up but would cheap/free money have looked as good if you had to pay capital gains every time you flipped, re-fi’d or sold your home/homes”?
Completely agree - no it would not be a good investment if capital gains were collected. That made it too easy to flip and move as one pleased… the housing standard deduction was raised two or three times to the price it is today of 250/500. It seems there were so many different elements that contributed to this bubble- the no capital gains factory, the 250/500 deduction, dot com monies, cheap interest rates..the greed factor just had so much temptation along the way, there was no where else for this thing to go.
lauravella,
Thank you, and like I say there’s more scrutiny and enforcement over nickel dime issues than there is for 500K?
Hey, the guy said he lived there! What do you want me to do about it?
“Sales did not immediately boom, though. Five weeks after the attacks, Jonathan Miller, head of New York City real estate appraisal firm Miller Samuel, thought about changing careers because the market was so slow. But near the end of 2001, Miller began noticing some of the beginnings of the boom.”
i disagree strongly with this statement. in my building on the uws of manhattan, a 1-bd apt sold for $135K in 1986, then $135K in 1998, then $320K in summer of 2001 — PRE-9/11! there was already a tremendous runup in prices between 1997 and 2001, probably directly related to the dot.com bubble. and then there was a bit of a lull for a few months after 9/11 — and then prices continued to soar. the same 1-bd sold for $535K in spring 2005.
this new “9/11 started the boom” is the latest NAR attempt to make sheeple think that everything will be fine in 2-3 years, assuming 2005 was the top. “we’re already over the top and it’ll take 2 or 3 years to the bottom, but then things will be normal.”
i don’t think so. maybe 5-8 years before the market actually turns around, and 10-15 to any kind of “normal.”
the nar knows that the longer the bubble expanded, the longer it’s going to take to deflate. they’d rather we didn’t know that.
manhattanite,
So true! Speculators and 9/11 caused the bubble (not cheap, tax free money) as has been widely disseminated on the internet by paranoia feeding bloggers!
hehehe… it most definitely was a credit bubble looking for an asset to inflate. housing was just the next “there.”
I ment to say in my last post - the no capital gains factor.
not factory….LOL I guess it actually would fit come to think of it.
hope this doesn’t post twice.. what is the tax on a flip, without the 2 year hold..thanks
hope this doesn’t post twice.. what is the tax on a flip, without the 2 year hold..thanks
hope springs eternal…
In 2003, Congress was looking into U.S. housing prices. The Senate Banking Committe will be holding hearings in two days at 10:00:
http://tinyurl.com/qchnp
they’ll be referring to this document (I think):
http://www.opencrs.com/document/RL31918/
Likely updating it. I think the conclusions that were drawn at the time were somewhat logical. There wasn’t much they felt they could accomplish at the federal level at the time.
Check out those links everyone.
The title of the hearings is: “The Housing Bubble and the Economy”
They are actually calling it by it’s real name now: a BUBBLE.
The 2003 paper is interesting. They were considering things like fundamentals and what could happen if things got out of control. Three years ago.
In the meantime prices have doubled again in many cities and the bubble has infected the whole country.
JOE up 10% with a huge pop at about 1:00 EST…
Any news or thoughts out there???
http://www.marketwatch.com/tools/quotes/quotes.asp?symb=JOE&siteid=mktw
These builders (and non-builders) are all hugely oversold with a big short position. They may eventually trade lower but the upspikes will continue to be brutal. Short positions are typically in what the Street calls “weak hands” - the short squeeze is the oldest game in town.
To just follow that up: there may be other reasons why financial institutions are monitoring this blog. I like the blog, but I still say shorts shouldn’t advertise their positions.
Good point. I remember Enron had a strategy called “Get Shorty.” Not sure of the details, but I am pretty sure it is defunct at this point…
Thought: The worse the news, the bigger the pop…
This is an example of good news is bad news for the shorts. At this phase of the cycle, exiting the home building market is good news for Joe’s shareholders b/c of deteriorating industry profit margins.
Moreover, Joe was in an akward position competing with its customers, other home builders. You can be sure there was some revolt at the end of the distribution chain.
In addition to building too many homes, too many builders entered the industry. Now, with all this excess capacity, you can expect more builders to exit differing markets across the country or exit the industry entirely. It is no longer profitable.
Joe’s move confirms what we have been saying on this blog, the housing bubble popped.
Le me get this straight. Now we’re blaming the housing debacle on terrorists? Without 9/11 this would never have happened? Retch.
I don’t think Alan Greensperm would have gotten a free pass to keep rates at zero without the “patriotism” and “its not our fault” of 9/11
the refis were well under way prior to 9/11. the takeoff point for my business volume was in january, 2001. by, 9/11 the refis were in full gear. do your research.
No one is “blaming” the housing bubble on the terrorists, but the more astute observers have noted how the government’s REACTION to the economic blow of the attacks–a lowering of the federal funds rate–accelerated a tendency towards excessive real estate speculation.
Firstly, did anyone contemplate the effects of Mortgage Backed Securities (MBS) and their impact on home price appreciation and deteriorating lending practices?
Secondly, has anyone considered the GSEs’ role in stimulating mass homeownership?
Lastly, has anyone contemplated the inefficiencies of expansionary fiscal and monetary policies? Afterall, one of the outcomes of this expansion was first, second, and even third home purchases.
inefficiencies?
for the FED these policies were extremely efficient in ballooning the money supply; just what they wanted!
I contemplated the MBS impact on appreciation and lending practices. Clearly MBS buyers have more to do with lending rates than the FED at this point. There will come a shock at some point to the MBS investors that there is more risk than they thought, and they will slow buying. It is because there has been a huge demand for MBS that lending standards could go out the window. Once the demand slows then we’ll see a return of standards. The GSEs still stimulate homeownership, but not in the way that MBS markets have (whether for good or bad).
Precisely why I eagerly await the demise of the MBS market.
Once lending goes back to what it once was, these prices return to reality.
One thing not mentioned is that the homebuilders actually stopped building right after the attacks - at that time, they were much more conservative about inventory and the lessons learned from the late 80’s. Combined with a tight supply of resale homes and low interest rates, this caused ‘panic buying’ in late 2001 into 2002 here in So Cal. Watching this unfold as an appraiser was like watching a fire being doused with gasoline.
Good point. I saw the 2001 slowdown as well. IMHO, it was a regular housing boom before 2001 and a credit bubble after 2001. I belive the prices would have fallen at that time, if not for the low rates and lax lending standards.
I’m not sure that I agree with the statement that the housing market was in the slumps. In L.A. the housing price had risen steadily and I think significantly between 1997 and 2001. A house in the SFV that I bought for $193 in Feb of 2000 sold for $532 in June of 2004. It’s probably worth around $625 now - if you can find buyers!!!!
House prices just went up like crazy when all of the investors jumped in and all of the CREATIVE financing deals were dangled in front of people. People bought a house based on the monthly payment - just like how most people finance a car.
The boom was built on a pathetically weak foundation!
What a short memory eveyone has. This Liz Ann Sonders person was one of the classic pump and dump analysts on Maria Bartiromo’s show, plays of the week. She has never had an original thought of her own. Wake UP!
David said:”I do and lots of other interesting folks”.
http://bubblemeter.blogspot.com/2006/05/who-is-reading.html
David
Bubble Meter Blog
Thanks for the link David. I’m glad to see who is reading these blogs! The pulse of the nation is right there on their monitors…lets hope they listen.
Another vindication moment. I *always* said, the bubble was clearly in force by spring of 2002.
‘Typically RE appreciates at inflation plus a point ot two. When was the last time any of us saw that? ‘
That was the norm my entire adult life from 1982 when I graduated college until about 2002. And that was the few good years when properties actuallly did go up.. Real estate was always a very safe, boring and get rich slow investment..
the historic norm (three and a half centuries of RE experience in the Netherlands, used for most of the original studies on the subject e.g. Shiller) is inflation plus 0.75%. Obviously, this 0.75% return does not cover maintenance and taxes. Even if you consider the yearly rent (which you save, or receive minus taxes if you rent out the property and live somewhere else) RE usually is not a great investment except for those with great timing (usually the opportunity occurs only once or twice in a lifetime).
History shows that huge swings in prices can happen because of economic boom/bust, war etc. - but until 1970 prices always returned to the historical trendline (inflation/GDP). Netherlands is now 6-10x above the historical price trendline; and I don’t think there was any time in history when RE was considered a ’safer’ investment …
‘The current median house price is $230,000 and I read recently that the median rent was around $850 (although I’m not sure of the source) this would give you a multiple of 270 which is at least 35% above any historic precedent.’
Many midwest markets have multiples as low as 100-120 on median priced homes today. No price bubble there however most have the same overbuilding bubble and credit bubble. That we have among the highest foreclosure rates already in Texas and Georgia doesn’t bode well for the future in the coastal bubble markets now that folks aren’t getting bailed out by appreciation anymore..
‘One thing not mentioned is that the homebuilders actually stopped building right after the attacks’
So true. The major component contributing to excess inventory. Nothing will stop the extreme excesses in the bubble markets. However if builders suddenly took a sabatical and stopped building in Dallas/Ft Worth among other inexpensive fast growing markets for a year those overbuilt exhurb home prices would skyrocket too.
We signed the contract on our new home in Irvine about a week or two before 9/11. In the eight months looking for a new home and getting a feeling for the market, the price on the plan we finally bought skyrocketed $60K to $362K. Yes the bubble inflafted before 9/11 in the OC. Immediately after 9/11, house sales were slower and many buyers cancelled. We decided to hang in since we didn’t want to lose our deposit and were happy with the plan and location of the house, but I was ready for the price to fall 5%.
On a side note, I know financial planners don’t seem to rank that much above realtors on this blog, but in my CFP finnacial planning class at UCI in 2000, we discussed home price appreciation in terms of retirement planning. The class and instructor seemed to remember the bear market in the first half of the 90s and agreed that the safe estimate for home price appreicaiton was CPI or just above it.
I think it took about about six months before prices start to move upwards. I kept on waiting for the fallout from the dot.com bomb but it never happened. Where are people getting the money to buy a house? It can’t be the stock market. Then I finally figured it out - toxic loans and non existent lending standards. Can you fog a mirror? Here is a home loan of any amount for you.
We cashed out two months ago, and are now vulture renters. We may buy in 2008-2009 when the banks and homebuilders are desparate. Maybe a little early in the down cycle, but we don’t need to catch the bottom. Near it is fine for me.