Bits Bucket And Craigslist Finds For September 24, 2006
Please post off-topic ideas, links and Craigslist finds here.
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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Why high home prices are ultimately bad for the economy:
As prices rise and incomes remain stagnent, greater and greater proportion of household incomes go to servicing debt. Households have less and less descretionary money for spending in the general economy for other goods and services. Since most of this debt money is ultimately owed to foreign investors, through T-Bills and mortgage backed securities, the repayment of the the debt plus interest is money that flows back out of the U.S. economy. In the long run we have a net drain on wealth of the U.S. to foreign countries. The Fed, by lowering rates to an extreme and allowing a speculative mania to take hold, has burdened the economy with artificially high debt levels and reduced the availible free cash flow that could be spent in other areas of the economy.
My basic premise is that: Although there may be a temporary artificial wealth effect, this effect is based on debt not savings and investment. The debt service drains money from local and national economy. As the debt levels increase less and less money is circulated in the economy evenually the economy suffers and incomes suffer leading to even less money available to be spent to support the economy. Lower housing costs free more income to be spent supporting local and national business, a more healthy and diverse economy. The Fed should allow housing prices to fall for the long term good of the economy. Without artificial stimulation, prices will reach a natural balance that allows for a balanced healthy economy that is good for everyone.
There’s the alternative view (that requires you to own a tinfoil hat).
The government realized a long time ago that the external deficits were going to have to be paid using the largest asset the US has left - its real estate (indirectly by selling foreigners the MBS’s). In effect, until the debt was repaid, US real estate was slowly being increasingly owned by foreigners.
By dropping interest rates and allowing property to skyrocket in price, the foreigners are getting much fewer square feet of American soil for each dollar they own. Down the road, when folks default and those MBS’s are only worth half their face value, that’s all the foreigners will get for them.
Effectively, the Fed has engineered a way of giving a much smaller fraction away to foreigners in exchange for some internal inflation.
Thus they’ve *saved* America (or part of it, anyway), not ruined it.
Politicians are employees of the lobby industry and many foreigners fund the lobbyists. I don’t think most leaders in government care about the future (5+ years from now) or Joe Sixpack.
i do have a tin-foil hat.
But, i don’t agree. There are lots of pension funds, investment trusts and hedge funds that have absorbed these MBS’s.
While foreign investment may be part of the mix, there are certainly not the majority. Many Americans will get burned.
“Saved America” for who? Certainly not the working class who has to make payments on that debt. And then faces the loss of everything when they can’t!
No they didn’t save America. They transfered its wealth covertly (actually they have been for sometime).
I’ve been amazed at the glee people often expressed when talking about the dramatic rise in housing prices in the U.S. “Isn’t it great?”
No it’s not for first time buyers and it’s not for the country.
The high cost of living is resulting in pricing Americans out of jobs that are being sent to other parts of the world where cost of living and labor is cheaper.
Vmaxer ,well said . I agree , just let the correction take place .
Why the lenders didn’t think about how wrong it was to put people into home loans at more than 30% of income,is beyond me , (I like 25% max. housing debt myself).
real wages in the US starting declining around the time that president nixon took the world off the gold standard. it’s almost been continuing inflation since. is it any wonder that jobs have left and people have acquired so much debt?
i think when you read the wohle piece it may explain why the markets are holding up so well. some good charts and a audiointerview with doug noland from prudent bear.
i think t is a must read and an eyeopener.
credit machine is running amok, mother of all bubbles
This confirms that financial conditions remain extraordinarily loose, as well as suggests that expectations for weaker economic activity only promote greater financial sector leveraging and speculating
Bank Credit expanded at a blistering 11.8% pace during the quarter to $7.894 TN, up from Q1’s 11.3% and Q2 2005’s 9.5% - providing additional testament to the U.S. financial sector’s growing disconnect with the real economy.
http://immobilienblasen.blogspot.com/2006/09/credit-machine-is-running-amok-mother.html
This reminds me of the statement in the mid 90’s about Russia’s economy being a virtual economy. Looks like the US has taken a page out of Russia’s 90’s finance playbook. The Russian finance ministry was advised at the time by illustrious members of the US finance establishment. Maybe it was a test case/pilot run. Hopefully they worked out the kinks.
The current issue of The Economist takes a fearful assessment on the giant credit bubble whose looming presence threatens the global economy. (The cover photo shows a total eclipse on the brink of blocking out all of the sun’s light.)
—————————————————————————————–
Leaders
Financial markets
The dark side of debt
Sep 21st 2006
From The Economist print edition
Public markets for raising and investing capital are plunging into the shadows
Reuters
LENDING is a sober business punctuated by odd moments of lunacy. Genoese lenders’ indulgence of Philip II of Spain’s expensive taste for warfare caused not only the world’s first sovereign bankruptcy in 1557, but the second, third and fourth as well. Lenders recycled petrodollars to third-world countries in the 1970s in the wilfully naive belief that countries, because they cannot go bust, will not default.
The world is once again in the grip of a spree of lending, but this time to companies rather than countries. What is striking is that much of this lending is happening not through public share and bond markets, nor exclusively through banks (see article). The issuance of syndicated loans vaulted to $3.5 trillion last year, from $2.3 trillion in 2000. Thanks to the low cost of debt, private lenders, such as hedge funds, are extending vast amounts of credit to leveraged buy-out firms and other private borrowers. Forsaking the sunlit uplands of global finance, the market for capital is plunging into the shadows.
http://economist.com/opinion/displayStory.cfm?Story_ID=7943243
I just finished reading that article.
Kinda scary
i think the pieces from noland, reichebächer and the economist make much sence and are really scary.
the scariest thing is that this game can continue for at least a few quarters or maybe years.
Just an observation from watching people around me in the last few years of this housing bubble:
There seems to have been two camps, those that have felt that the economy is doing poorly and those that are humming, “Everything is beautiful”. I have noticed that the former camp are cash and pay as you go people, and the Hummers are the debt wave riders.
The massive easy debt has masked for many what their true bottom line is, it is hard for them to see that they are being nickel and dimed to death when they have been handed a boatload of cash at a low cost today. It will be awfully hard to pay back.
Those of us who keep our fingers on the pulse of things, feel and see the changes immediately, and I think others here have brought this up. When you do a regular net worth assessment or just count up the money you left over have each month you see the erosion in a lot of little ways. Bread used to be a $1.00-cheapest, now a $1.50-cheapest, and gas etc. I know that 2006 is not going to be as good a year for me as 2005, I am being squeezed in a lot of little ways.
At least I can plan accordingly, and this is hitting everyone whether they see it or not. The danger for the debtors is that they have not seen that they are losing ground, and are doing the exact opposite of what they should be doing. They really do not have any feeling for how off the ground they are.
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Again, I was out at the mall yesterday and it was PACKED. People shopping and spending like there’s no tomorrow. My guess is mostly financed on entire paychecks and credit card debt. “Got to keep up with them Joneses!!!”
gekko, I avoid Wal-Mart like the plague that I believe it is, but I stopped in yesterday to pick up something. The store was packed, also. I almost completely forgot what I went for because I was so busy looking in other peoples baskets. I’ve never seen so much s@#t in my life. So much of it is crap I wouldn’t even want in my house. We’ve turned into a shopping for entertainment society. That was scary.
Can’t agree with you about WalMart. Most of what WalMart sells is brand name items sold at all the other stores but usually for less at WalMart, i.e., intelligent buying choice for the American people. WalMart’s own brands, when available are very well priced. Men’s clothing is not good at WalMart but the quality of womens clothing, honesty, is comparable to what Macy’s sells. I’ve read that WalMart has been able to get prices from their suppliers in China that sometimes wind up below cost. Its a good deal for American consumers, no question about it. The other stores are buying from the same Chinese suppliers and their quality is comparable but more expensive.
I don’t question the quality of some items at Wal-Mart. I guess I just have to ask who needs all that stuff?
I respectfully disagree regarding Wal-Mart… anything other than simple household items such as branded cleaners, foodstuffs, or gardening commoditities are of LOW QUALITY, and are only marginally cheaper (even then not often) than other stores.
Most electronic items sold at Wal-Mart are simply garbage and no cheaper than higher quality items I can buy at a variety of retailers on-line. Wal-Mart sells the lowest grade products from major manufacturers, only people who have no idea what they are buying find Wal-Mart to be a deal.
For real savings, Costco offers substantially higher quality at competitive prices.
Fortunately, all but one of the communities I have lived in never had a Wal-Mart within 8 miles.
SouthOC only has two of those abominations and both are far from RSM.
Wal-Mart is a terrible blight on any community. I love how people think they are getting savings, but fail to realize the enormous drain on public services a Wal-Mart brings. It sucks down numerous tax subsidies, encourages its workers to get Medicaid(Medical as well in CA) replaces benefit paying grocery jobs at $15-$20 an hour with $8.00 an hour with no benefits, so the workers can take advantage of public benefits while Wal-Mart privatizes the profits. What a deal there!
Just an amusing side note: Wal-Mart shoppers nationwide have lower incomes and education levels on average than Target shoppers, same with Sam’s Club vs Costco. I am not a huge Target fan, just hate the putrid stench of Wal-Mart on the American landscape.
However, the main reason I avoid Wal-Mart is that at least in CA, Wal-Marts are filthy, the stores are in serious disarray, and the parking lots are littered with trash from all the “bargin shoppers” classy ways.
In case someone wants to valiantly defend the honor of Wal-Mart and challenge the claim that Wal-Mart shoppers have lower income and education than Target shoppers, perhaps a link to an AP story will provide some backup for my claim:
Wal-Mart ceases Layaway Service
It has information on the income levels of shoppers, and average income is correlated with average education.
FYI: I couldn’t care less about Walmart / Target / [insert brand here], but your argument pressed one of my buttons.
Correlation does not imply causation.
Correlation with incomes/education can be caused by many factors.
In general, I find increasing confusion in the MSM about reporting correlations. Here’s a correlation: People in the US eat more ice cream during the summer, which is correlated with increased incidences of malaria in India during the summer.
Now, does ice cream in the US cause malaria?
Causation proves correlation, but the converse is just not true, no matter how “reasonable” the converse may sound.
Fair enough, but there is strong emperical evidence that lower education results in lower income. You may offer all sorts of esoteric arguments to dispute that fact, but it has become nearly axiomatic that higher education means higher income on average.
If that isn’t true, then aside from intangible personal benefits, why would you seek to get an education to “better yourself”?
And by the way, Wal-Mart is still bad for America, any company that “helps” its employees get public benefits (state and federal aid) clearly isn’t a boon to society.
I have never liked WalMart’s quality for men’s clothing. I do not know enough about women’s clothing. But over the years I have made these following observations about WalMart’r pricing:
Walmart’s grocery has not been a good deal for me. Their meats are shipped pre-packaged, and by the time they arrive at the store they are very mushy looking. It saves WalMart from having to pay higher wages for highly skilled meat butchers at their stores. (Their meat dept help are just low paid stockers.)
Walmart’s regular prices on most groceries is the same or slightly higher than most other large grocery chains. For example, Kroger’s in my area tends to have slightly lower prices than WalMart. The smaller grocery chains such as the Food Lion tend to have higher prices. When the other Grocery chains have large sales, WalMart does not beat these prices.
WalMart does something very perverse with one of it’s smaller competitor’s called Food Lion. When Food Lion has their packaged salads on sale for $2.50, WalMart will have Food Lion’s advertisement on display and will then mark their packaged salads on sale for $2.38. However, when Food Lion has other non-produce items on sale 2 for 1 (a 50% discount) WalMart does not try to match this, presumably because this discount is too deep for even WalMart to try to match or exceed.
I have also found that WalMart is not offering as many recognizable brands of items. For example, I once purchased an ice cube tray at WalMart that was good for only once use. It cracked the first time that I used it. I replaced it with an ice cube tray I purchased at Target.
Also, I have heard stories from independently owned hardware stores that WalMart now does so much volume in sales that they can literally beat their suppliers to a pulp on pricing, to the point that even these namebrand items suck in quality. For example, a wholeseller took two Black and Decker drills to a hardware store owner. He weighed two identical looking B & D hand drills on a scale; the WM model was lighter than the non WM model. B & D is now forced to reduce their quality to deliver the product at WalMart’s prices. Incidently, the wholesale cost of the non-WalMart model is more than WalMart’s retail price on the WM model. You would be getting a better B & D drill at the higher price at the independently owned hardware store, but most people would not know this and would prolly purchase at WM because of price and namebrand.
I have also heard that the same thing has happenned to the tires sold at WM. When you buy a GoodYear tire at WM you are not getting the standard quality GoodYear tire, you are getting something made cheaper by GoodYear for WalMart’s price point.
People THINK they are getting good namebrand deals on durable goods at WM, but in fact what they are getting is what they are paying for. Some may even say that WM is destroying these namebrands. Much has been said about RubberMaid’s demise having been caused by WM.
So when you buy stuff at WM, understand that you get what you pay for no matter what the namebrand. Also, understand that you may be contributing to the destruction of these namebrands as WM floods the market with these namebrand “forgeries.”
Fair enough, but there is strong emperical evidence that lower education results in lower income.
In your original post, you quoted the correlation between incomes-and-education to shopping-location. That was the correlation I raised a flag on.
I didn’t think your original post was attempting to show that increased education results in increased income.
There is a causitive mechanism for education to increase income. (As a consequence, there is also a correlation between education and income.) You can show increased opportunity, etc as the cause, but simply showing a correlation is not “proof.”
Anyway, sorry for beating a dead horse. Like I said, it’s a button I have… :0
No offense taken, if we aren’t challenged, how can we ever grow in understanding and perspective.
If only people would challenge themselves on the assumptions of Wal-Mart and value,
Kudos to Happy_Renter, execellent post, totally agree, Wal-Mart sells the lowest grade products from a manufacturer. I know about electronics and let me tell you there, look at the specs, read reviews, and compare features for price, and you will realize that Wal-Mart not only sells the lowest of the low, but often the marginal value is less.
But peoples reasoning ability often only goes to nominal price. “Why gummit, surely $198.94 for Brand X is better than $220.00, oh I never bothered to check the model number”
OCMetro,
“And by the way, Wal-Mart is still bad for America, any company that “helps” its employees get public benefits (state and federal aid) clearly isn’t a boon to society.”
Note: Sam Walton Family # 3 on Forbes 400 Billionaire List,
$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
77,500,000,000.00 Billion USD
Andra: “Men’s clothing is not good at WalMart but the quality of womens clothing, honesty, is comparable to what Macy’s sells”
Me: As a longtime Macy’s shopper, I can tell you that this is totally untrue. The clothing at WalMart is cheap crap that’s OK for wearing around the house, but that’s it. If your lifestyle involves anything dressier than jeans and a t-shirt, then there’s absolutely no contest; Macy’s wins hands down.
“Sam Walton Family # 3 on Forbes 400 Billionaire List”
Old list! Forbes 400 Richest Americans list just released this week has #3 as Sheldon Adelson (a former boss of mine) But it is true that an older list (2-3 years old) had 5 Walton heirs in the top 10. (Helen, Alice, S Robson, Jim, and Christy Walton)
“Correlation does not imply causation.”
Case in point: The fact that some condo flipper dude made a great deal of money on their investments during the recent mania does not imply they are some kind of financial genius.
OCMetro: Here in Kentucky we have our fare share of trash trashing out of their cars. I remember seeing a lady toss an entire big bag of Fast Food trash and her drink out of her window just before she turned into a WM parking lot. I decided to follow her and confront her on her trashing ways. When she parked I asked her why she felt it was necesary to use the street as a trash can. She denied it. It is simply very sickening to me to have to share this world with human beings that are so ignorant and repulsive. I wish there was a way for us to permanently banish these people to Third World countries.
jp: Try reading “IQ and the Wealth of Nations.” It finds a correlation between the average IQ of a nation and the wealth of that nation. It also finds causation.
Implication: U2-Bono man is wasting his life.
This from today’s (9/24) Syracuse Post Standard:
“At least six of the 10 houses on display in the Parade of Homes have been sold as of late last week, according to the Home Builders Association of Central New York. Houses at the event range in price from $390,000 to $520,000. (In a separate item, (paraphrased) from CNN/Money.com the median price for the greater Syracuse metropolitan area was $116,800, the 21st cheapest market in the nation)
Today is the final day for the 16-day show at the crossings in Cicero.”
(I threw in this last sentence since the front page of our paper included the headline: “Husband, wife killed in apparent murder-suicide.” This was in Cicero. Its crime rate is much higher than a lot of other communities in the Syracuse area so the $520,000 price point will probably be taking a hit in that town before others.
Keep up with them Benzes -
I was at a big outlet mall (Potomac Mills for the NoVa’ers) and while it was crowded there were very few shopping bags in the shoppers hands. The other anecdote was that both of the high end stores had a wide selection of for example Canali and Zegna suits in many sizes and colors that hadn’t already been tailored, which hasn’t been the case in the year I’ve been here.
both the Netherlands and France just posted their biggest jump in consumer spending for many years; I think the UK had something similar a few months ago. The credit/debt bubble is still accelerating.
Also, I think you have to make a distinction between people who have significant assets and those that have nothing. The last group has nothing to loose (not even with bankruptcy etc.) and they have been living the good life for many years now thanks to the credit economy. When the bubble collapses other people can worry about the debt that they have build up. So in many ways, they made the smart choice and kept the economy going (probably just as planned by the people in charge). The first group has gradually seen their assets erased by inflation over the last years (except maybe if they were very lucky with their investments); in the end, everybody will loose (except for those at the top of the pyramid).
“…they have been living the good life for many years now thanks to the credit economy.”
I sometimes wonder if in the future and in the worse case scenario this whole thing causes all to go broke, will I look back on this time period in hindsight and say to myself, “Why didn’t I just party hardy like everyone else, while I had the chance.”?
The debt levels are so high that I think people have maybe resigned themselves. If they are broke at $30,000 debt are they anymore broke with $60,000 debt? They certainly don’t care if I somehow have to help pay the tab.
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OT: BE AMERICAN, BOYCOTT CITGO
http://www.boblonsberry.com/writings.cfm?story=1990&go=4
I think once in my 35 years I’ve been to a Citgo, and that was an emergency potty break for children. The current wisdom among friends and family was that it was inferior gas.
I’m curious to know how they concluded the gas was inferior.
So am I. I was young and just assumed they were correct.
Viva Chavez!
Bush tried to overthrow Chavez’’s government. What Chavez said at the UN, that Bush was the devil and that Bush had stunk up the place was MILD.
All these guys that the neocons are demonizing are not enemies of the American people. Iran hasn’t invaded any countries and neither has Venezuela. We have no reason to think they’re threatening us but they have plenty of reason to think our President would like to take over their countries with massive violence at a cost of tens of thousands of innocent lives, just as he’s done in Iraq.
yeah, funny these stories. The Dutch government (nothing more than puppets from the Bush regime) recently created a similar scare and suggested that Venezuela is preparing to invade one of the tiny islands of the Dutch Antilles in the Caribbean. LOL! Reality is that there is a huge US base on one of the islands, and the Dutch warships in the region are probably also prepared to assist the US if they do another coup against Chavez (at least, if they are not too much caught up in drugs trafficking …).
Wake up. No reason to think they’re threatening us? Hitler also didn’t invade anybody for the first seven years he was Feuhrer. You say that hate-filled taxi driver running Iran and the “Bolivarian” thug (BHolivar was a great man, by the way, you might want to read his biography) running Venezuela aren’t enemies of the American people? Speak for yourself. Better yet, spew your filth elsewhere.
They may be enemies of the people in their own countries but in what way do they threaten Americans?
They have weapons of mass destruction. They should be over-thrown. With democracy, these nut-jobs wouldn’t stand a chance.
weapons of mass destruction? yeah, right - they have oil, just like Iraq. That is what this is all about.
And sure, with democracy US style Chavez wouldn’t stand a chance because in that system only deep pockets and corporate buddies decide who wins the elections.
Getting all huffy and calling for boycotts just gives Chavez more power and more prominance on the world stage. If you’re angry about what he said, why give him that?
Bob Lonsberry is a douchebag. Fact is, Chavez is doing well by Venezuela, which is what his job is. The Bush administration supported a coup against him in 2002. Which administration has run the U.S. economy into the toilet, Bush, or Chavez?
And which oil company has done more to corrupt American politics and act as a leech on the body politic, Citgo, or ExxonMobil?
I make a point to buy Citgo gas whenever possible. Like buying gas from that corpulent, lying monsetr lee raymond’s Exxon is patriotic. Pbbbbt.
I disagree with everything you say. Just wondering - are there any instances in which you would ever support a coup against a dictator, or do you just have a soft spot in your heart for military types who seize power and refuse to hold fair elections? “Doing well by Venezuela” my rear end - Colombia will be a more prosperous country than Venezuela in a decade.
fiat lux,
I don’t know if this tinyurl will work, as the Washington Post requires registration, but it’s an interesting editorial on what Chavez has actually done for his country.
http://tinyurl.com/ryszd
extremely biased article; I wouldn’t trust any article from US media about Venezuela. 95% of Venezuela is in better shape than before Chavez and apart from that, expensive oil has a LOT of benefits. Of course some extremely rich, rightwing Americans lost money because of Chavez but hey, such things happen
The best info on Venezuela can be found on http://www.vheadline.com
OK - I’m sold on the idea to boycott Citgo. Problem is, I have not purchased Citgo gas in years, but just the same I will never buy it given the opportunity
These homes were lost … and that’s just the beginning
As the housing boom ends, experts worry that rising interest rates and slowing home values will push thousands more Minnesotans out of their houses.
The little stucco box for sale at 2006 Nortonia in St. Paul is just like hundreds on the crowded housing market. Except that its owner never wanted to sell.
But soon, the Schlenners will move on, like the more than 4,200 Twin Cities-area homeowners who have lost their homes to foreclosure so far this year. That’s a low figure, compared with other cities, but a steep increase for the seven-county area, which is on pace to double last year’s record number of foreclosures.
In this, the first part of an occasional series, the Pioneer Press sheds light on what has been largely an invisible phenomenon. With the help of Foreclosure.com, a national data service, we can show, for the first time, the concentrations of foreclosures over the last year and a half that are threatening the fabric of communities in places like North Minneapolis and St. Paul’s East Side — and the scattered clusters of home losses popping up in places like Brooklyn Park, Cottage Grove and Apple Valley.
As the housing boom draws to a close, experts worry that the combination of rising interest rates and slowing home values will push thousands more Minnesotans out of their homes.
The surge of home losses has shocked city and state officials, startling some veteran city planners and foreclosure-prevention pros. Community activists say pockets of foreclosures in the core cities have reached crisis proportions, threatening years of community development. In St. Paul, it’s left city code-enforcement workers struggling to keep tabs on a mushrooming crop of empty properties.
Full article at
http://www.twincities.com/mld/twincities/business/15587100.htm
These people aren’t loosing their homes.
They are walking away from the obligations they agreed to.
Had they not agreed to ridiculous price/terms, this whole bubblemania would have never started. These are the folks that drove the rest of us out of the market.
I have no pity. They could have rented, and now they will.
I think these people still need a lesson; if they just walk they will do it all over again as soon as they get the chance.
On the other side, it would be great if the banksters who lended to them on these idiot conditions, and the RE mob who arranged the deal and elevated appraisals for the properties, get their piece of the cake as well; but I don’t see that happening in the near future.
In all fairness, those who bought homes they could not afford and were only able to do so by helping to create a new upper-middle-income class of priced-out renters ought to enjoy the opportunity to become renters for a few years. It ain’t bad — in fact, there will probably be more homes and condos for rent (per capita) to choose from over the next ten years than there were for the preceding fifty years.
In St. Paul, it’s left city code-enforcement workers struggling to keep tabs on a mushrooming crop of empty properties.
I’m already starting to see this in my area. When home prices are skyrocketing people don’t mind putting money into them. Now that prices are stagnant or falling they see them as money pits.
I find this phnomeno of people willing to buy more for commodities when the price is rising, but less as the price is declining, very intriguing.
I remember after Katrina how some gas retailers in town where running out of gas. People where willing to wait in long lines just to top of their tanks with 2 or 3 gallons of gas. And a friend of mine was filling his auxiliary metal gas cans with gasoline. I tried to explain to him that gas will be plentiful as soon as people stop trying to stockpile it. He expressed concern that gas would not be available at any price, and continued to fill all of his auxiliary gas tanks at very high gasoline prices. The more I tried to explain to him that there will be plenty of gas and prolly at lower prices some time in the near future, the harder he laughed at me.
Well last week the price of regular was below $2.00 since Katrina, there is plenty of gas to go around, and at these reduced prices people are not buying as much.
So now I see the same dang thing playing out with the housing commodity. When prices where increasing people where falling over each other to be the first to buy houses/condos/whatever. Now that prices are declining nobody wants to buy it.
Go figure.
“I find this phenomenon of people willing to buy more commodities when the price is rising, but less as the price is declining, very intriguing.”
It’s called speculation, and it is as old as capitalism itself. The bottom line is that there have always been gamblers who pile on to speculative crazes under the assumption that they will be able to sell at a profit before the Ponzi scheme collapses. Even Sir Isaac Newton, one of history’s most brilliant scientists, fell victim, first making a larger fortune on the South Sea Bubble, then later losing the same thanks to the ravages of the gambler’s ruin effect.
What a bunch of crap this is. “the fabric of communities in places like North Minneapolis and St. Paul’s East Side.” North Minneapolis has been a sh$thole for a long time. White flight killed it in the 50s and 60s. The only fabric in that community is the one woven by the network of crack houses. As for St. Paul’s East Side, maybe there is a fabric. I’ve always known it to be white trash paradise. These boo-hoo articles make me sick. Everybody’s a victim.
Oh by the way, screw anybody that stands up for Hugo Chavez or that militant fanatic in Iran. Take a history lesson, you babboons. I bet you are wearing a Che Guevera t-shirt and pledging allegiance to Castro.
One note of caution, for all of us: be careful what you wish for. I know, no one here is actually hoping bad things happen to innocent people, but let’s face it, we are all experiencing a heavy dose of schadenfreude.
I used to publish a Web site. I had the first commercial Web site in my subject area, though at the time, that didn’t mean much, money-wise. Then the dot-com explosion came and I suddenly had a new competitor, flush with venture capital and later an IPO. They could outspend me 10,000 to 1. They spent $5 for every dollar they took in. Whatever I did, they tried to replicate it. And to make it even more galling, they bragged about not knowing anything about the subject our sites covered.
They were the poster children for the all arrogance and foolishness that encapsulated the dot-com era, and, needless-to-say, I couldn’t wait for them to die their inevitable death.
Well, they did go under in the fall of 2000. There was a big crash in ad revenue as the dot-coms died, which I expected and had allowed myself a huge profit margin to cushion the blow. But the dot-com crash, tech stock crash and end of Y2K spending caused a much wider recession and ALL add spending fell like a rock. Banner ad revenue, +80% of my revenue fell 90% in a matter of months.
I couldn’t believe it. My business was all of my wealth then. I had no house, no real retirement fund, a fair amount saved, but that was it. I was sure it was the end. I had to lay people off, inquire about getting out of contracts, etc.
Finally, I decided to just plug along. I worked seven days a week for the next year and did pull things out and eventually sold th ebusiness to a bigger company.
I knew all along the bust was coming. I was incredibly conservative in my spending and the business had no debt and $40,000 in the bank. And yet, I barely made it out alive.
Likewise, there is a chance the current crash could be much worse than any of us expect and effect each of us in ways we can’t even conceive. It would be unwise for any of us to think they have this all figured out before the fat lady sings, which might not be for a few years.
as a small business owner in Europe this sounds very familiar to me, except that this time it’s not the internet economy but the credit/RE economy in general that is crunching small companies. And that’s not only because too much money is flowing into real estate and related activities that are ultimately unproductive. In this credit economy, big business has a major advantage. They do not worry about artificially high rents, having competitive knowledge and service etc. - they simply pay all the bills and buy extra market share with money they get for free from the banks. And on top of that they get all the tax favours and writeoffs that you can think of (Netherlands is probably the best country in the world for big business by now).
I’m sure many of these big companies will fail as soon as credit conditions revert to normal but I agree, many small businesses that see what is happening will go down with them. And I agree too that it will take at least a few years before the fat lady sings.
Bob, you sound like a pretty put together kind of guy. I’m not one to wish anything bad on any innocent person, but our whole society is coming apart because of irresponsible and reckless people. The only way to stop it is by making people responsible for their own actions. I feel for all those Minn.’s that lost their houses, but on the other hand they may have learned something more valuable. People are reckless because our society won’t let anybody fail anymore. I’m truly sorry to hear about your business because I know that can happen to any of us. In fact, I have a similar story of a failed business. I have very little sympathy for people that payed too much for a house they can’t afford or can’t sell one because their expectations are too high. I, for one, refuse to fall into that trap.
Crash, you’re assuming that everyone who bought “too much house” knew what you, and Bob, and I know. I don’t think that’s necessarily true. What’s different about this episode is that most people want a house for its own sake. I don’t know anyone who wanted to own “pets.com” for any reason other than maybe make a few bucks.
It totally sucks that this had to happen with housing, a basic human need. I suspect there are a lot of people who bought in out of fear, getting priced out, or they were hornswaggled into mortgages the didn’t fully comprehend. What happens five or seven years from now is sort of abstract for most of us - it’s hard to grasp the severity of an I/O ARM, especially when the REIC tells you “no worries, houses only go up.”
There was a piece in the Washington Post this morning about 30-year olds and their finances. One woman making 60K bought a house last year for 270K - 20% 2nd trust, I5-year I/O Balloon, 80% 1st trust, five year I/O.
I shudder thinking about where a house could be found at that price last year and I suspect she is going to get hurt. There’s no joy in it.
i read that piece, so much for fed employees not making bank… 29 y.o. fed pulling 80k for quality assurance job. flatffplan’s gonna pop an artery reading that.
“What’s different about this episode is that most people want a house for its own sake. I don’t know anyone who wanted to own “pets.com” for any reason other than maybe make a few bucks.”
I disagree, somewhat. The people in trouble bought houses just like stock, but with a granite counter top. They had no
interest in planting trees, contributing to the community, and all the other things associated with putting down roots.
Their interest was making a buck, and making big and fast.
They took unconscious and very stupid risks, plain and simple, and now the margin calls have to be paid.
But I agree that there’s no joy in observing any of it.
I do have empathy for some of them, but hardly any sympathy.
I guess my point isn’t so much that innocent people will get hurt, but even many among us, who all see this as coming, are likely to suffer too. Jobs that seem safe, might not be. Housing markets that seem realtively safe (like mine), might take longest to recover.
If things turn really bad, as many here seem to think, I sincerely doubt any of us will escape its effects.
Bob,
“I was incredibly conservative in my spending and the business had no debt and $40,000 in the bank. And yet, I barely made it out alive.”
I hear you Bob, I had this experience, I owned 2 small businesses, and unless you have been through it you cannot believe how fast things can go from a pot o gold, to zippo.
Things are definitely slanted against the small business person, I will never have a small business again. But, I do have a teeny side business in addition to my regular job and overtime. A teeny business is a one man operation out of your home with just yourself as an employee. Getting any bigger does not increase your profits enough to compensate for the extra risks and paperwork.
I have been a teeny side business since 2000. One of the bedrooms in my small two bedroom rental house is my home office, and my cost of being in business is next to nothing. I think there will be a whole lot more teeny side businesses as people realize that they cannot compete with the UAW plant (or any other large employer) that is draining the community with concessions.
I have a very good friend that had a music store. He kept telling me about all of the local government costs involved with having a small business. Every six months he had to take inventory and pay a tax on his inventory. There there was the sewage bill that he had to pay, and it went on and on and on. I kept telling him that I did not understand why he continues with this thing. I reminded him that when the UAW plant came into town years ago their sewage and everything else was paid for by the tax paying saps like him and me. I told him he could not afford to keep subsidizing these large multinationals.
Eventually, he gave up the music store. Now he is a teeny tiny business operating out of his home as a piano tuner. His income has actually increased as he now has more time to be more focused with what he does, and his worries have been reduced. No longer does he have to worry about theft of invetory, taxation of inventory, city and county fees for one thing or another, and paperwork, paperwork, paperwork to satisfy the local government.
I am also seeing more and more people buying into small businesses not because they are viable businesses, but because there is an expectation that a profit will be made when they are sold. Quite often these small business operators will tip their hand when they tell people “I am in real estate,” instead of saying “I own a small bar” or “I own a pizzeria” or “I own a motel.” They are simply hanging on until they can find an even bigger fool to buy their small business at ever more inflated pricing/financing.
You are oh so right Bob. The spouse and I are both in tech and 2002-2005 were very rough years for us both financially and emotionally. Our marriage made it through but most of our savings did not; it doesn’t matter how much emergency cash you stock up, when both of you are in an industry that’s taken a 90% hit, it’s going to hurt.
I’m really not looking forward to having to weather another recession so soon after the last one.
What I really fear is not that the people who took out the mortgages will get hit but the other side of the ledger. The Banks have passed these loans off to mortgage companies who have passed them off to Wall Street brokers who have turned them into bonds which have been sold to who knows where and then Hedge funds have done some deals with them until they have been spread out to the point where almost everyone on earth probably will take some sort of hit from this while those who signed off on these loans are sitting pretty with a pocket full of commission and bonus money.
you can bet that most of the bad debt is now owned by pension funds, local government investment plans etc. (and on top of that, some really big hedgefunds are financed by big pension funds like the Dutch ABP). Most of these losses will have to be paid for by the taxpayer.
Also, you can bet that if the banks even run the risk of serious losses from a credit meltdown, the first thing to go will be the savings from their private customers and small businesses a la Argentina. So adding all up, I think it is highly likely that (if we ever get a real correction) the people who did not participate in the madness will be seriously hurt, while the idiots who did party have at least had a jolly good time (for about 15 years already in my country).
Yes, I don’t think anyone has any idea how this will play out, who the losers will be, etc. Several of the Wall St banks have bought subprime lenders. I don’t know if they are somehow being shrewd, stupid, or just squeezing the last $$ out of the market. These guys do screw up, but as you note, it’s unlikely they won’t find away to spread the pain onto to someone else.
This blog, by Nouriel Roubini, paints what I consider the worse case scenario. I am by temperament a pessimist, so everything he says makes perfect sense to me.
I agree, many people will be affected by the housing bubble bust in a “secondary” way with these MBSs.
When I left my employer in 2000 I took my retirement with me as I rolled it over into a self-directed IRA, and later I converted into a ROTH IRA. So now (as I accumulate dividends and capital gains tax free) I am in control of my own destiny, or at least to more of an extent than the average joe six pack who does not know how his retirement fund is being invested and has no way of finding out. (And prolly does not even care.)
Today, there are 1024 condos for sale in the DC Metro Area… and that’s just on craigslist.
Many Capitol Hill SFHs are being condo-ed, and sellers are hoping to sell a part of or all of their divvied-up homes.
Very sad.
bob in ma:
Well said, the law of unintended consequences have made fools of even the smartest. However, I’d wager that you are wiser and even wealthier for the experience.
I recently saw an article in Sunset magazine extooling the Verrado development in Buckeye Az as one of the best planned in the Country. Haven’t driven through Buckeye in 20 years but it seems to have transformed itself. What’s it like now and what will happen today in light of the current bust to a development so far from the Phoenix core? I understand there has been considerable infrastructure fiananced by the dev community not just sticks in the ground.
Oh but you will get a flood of posters soon here knocking Phoenix. And that is, even so 600,000 people moved to Phoenix between 2000 and 2005, making it America’s 5th largest city. Some of the same people knocking Phoenix are from San Diego and San Fransciso. And yes, how come those two places are losing population? Don’t get me wrong, I love San Diego, San Francisco, LA, and Seattle too. I’m just tired of people knocking Phoenix (and I’m a California native who loves California).
I guess that means you’re a Phoenix fan. Considering that move to Buckeye. Any thoughts on the area. It’s a job related/future retirement move.
Do you have a pointer for statistics regarding the loss of population in the Bay Area?
Thanks.
I’m sorry. I have no link. I looked in my e-mail I sent out to some relatives and friends the last few months but could not find the link. It included a California map showing the counties with net losses of people and the counties with net gains. The net gains were the inland counties.
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/22/AR2006092200023.html
apparently it’s cheap & easy to re-fi to fixed rate.
I think Txchick was alluding to this yesterday in one of her last posts but what about privatization of Social Security as the next great thing/game for the Powers That Be (PTB) with the privatization sold to the masses as a cure for the housing bust?
Just like 9/11 delivered an opportunity for the PTB to unleash their military and geopolitical plans for the New World Order it seems that the financial chaos accompanying the crash of the RE bubble will present a great opportunity to legitimize the privatization of social security.
In one fell swoop the government will be able to eliminate their future social security obligations, rescue many (but not all) underwater FB’s, juice the economy, and provide plenty of cash for Wall Street to play.
The government could make the withdrawal tax free as an incentive while requiring those electing to withdraw to sign a release of the government from unfunded obligations.
Um, how?
“In one fell swoop the government will be able to eliminate their future social security obligations, rescue many (but not all) underwater FB’s, juice the economy, and provide plenty of cash for Wall Street to play.”
Confucius say, if its sounds too good to be true…
Today’s Sunday SD Union Tribune headline says it all. Housing bubble, RIP.
———————————————————————————————————————————————
http://www.signonsandiego.com/news/metro/20060924-9999-1n24convert.html
Condo conversion craze grinds to halt
Oversupply of units hurts prices, leaves investors in limbo
By Lori Weisberg and Mike Freeman
UNION-TRIBUNE STAFF WRITERS
September 24, 2006
* Financial picture gloomy for those holding properties
http://www.signonsandiego.com/uniontrib/20060924/news_1n24finance.html
As recently as last year, the business of transforming aging apartments into stylish condos and selling them to first-time home buyers was seen as an instant pot of gold.
No property in San Diego County was too old, too derelict, too small to be snatched up by the condo converters.
But no longer. Once one of the nation’s leading conversion markets, the county now has a glut of gussied-up apartments for sale with too few buyers.
LAURA EMBRY / Union-Tribune
The Villa Vicenza in La Jolla Village is one of several condo-conversion complexes renting some unsold units to keep a steady flow of income. By the end of June, the number of converted units ready for occupancy or earmarked for sale later had grown to 6,922 in 111 projects, according to the Sullivan Group Real Estate Advisors. There was little change in July, and statistics for August have not been tallied.
The June numbers were higher than those in any major metropolitan area on the West Coast, according to Sullivan. Phoenix, another hot conversion market, was second with 6,024 unsold units in 44 actively selling projects. Los Angeles County, with a population more than three times that of San Diego County, had 22 conversion projects with just 1,326 units.
The conversion slowdown comes at a time when sales in the overall real estate market are also slumping and once-sizzling price gains have vanished. Making matters worse for converters has been the record number of new condos being built in downtown San Diego and elsewhere in the county, also vying for buyers. In June, there were 5,800 unsold condos in new projects, said Michael Carney, a real estate economist with the Real Estate Research Council at California State Polytechnic University Pomona.
Couple that with a 36 percent decline in sales during the first half of 2006 compared with a year earlier and it’s no wonder few converters are taking on new projects.
While the conversion craze was embraced by national developers, it proved especially enticing to neophyte investors. In some cases, they overpaid for older apartment buildings, banking on robust sales to deliver healthy profits. And many chose less-desirable inner-city locations in areas that have been overwhelmed with conversion projects.
“Here’s the problem: A number of people bought these apartment buildings at prices higher than what they should have paid,” San Diego real estate consultant Gary London said. “They purchased knowing they could sell them at a higher price for the converted units, and now they’re stuck in a marketplace that will not allow them to do that, which is why you’re going to see financial distress.
“A lot of these guys are still in denial, and as we get into 2007, I think you’ll see a lot of these projects introduced back into the apartment inventory.”
And now for some cheap entertainment from a grinning Southern California Realtor (TM) whose photo bears a striking resemblance to Will Ferrell’s character Ricky Bobby in Talladega Nights:
From the Sunday SD-UT sdhomes BUYING GUIDE:
“San Diego continues to grow
By Steve Rodgers
President and Chief Operations Officer of Southern California and the Central Coast Prudential California Realty
It’s no secret that people are flocking to Southern California. The beautiful weather and booming job market are just a couple of reasons that new housing developments are popping up all over San Diego.
San Diego County was 12th among counties in the United States in the number of new dwellings last year, with 13,964, according to a recent report by the Census Bureau. California had the second-highest increase in the number of housing units of any state in 2005, adding 181,997 new dwellings.
…
To sustain prices and development, builders are being careful not to oversupply the market with housing stock. Many builders are only starting construction after all the units have been sold. There are also programs that assist builders and agents with the sale of their new homes by arranging for them to take the buyers’ existing homes in trade, making the transaction process easier on all parties involved.
…
New housing developments are continually being build in San Diego, as the city has become one of the most desirable areas in the country. A combination of beautiful weather, a bustling job market and a strong tourism trade will ensure a strong real estate market in the future, allowing San Diegans to continue fulfilling their American dream of becoming proud homeowners in America’s Finest City.”
He mentions a strikingly high figures for new home construction in San Diego and all of California, without bothering to mention the fact that San Diego has recently had net out-migration of its population. Taken at face value, his statistics make it sound as though home builders are flocking to Southern California (in fairness, home builders are people, too).
And the last I read, the bustling job market had cooled down to a temperature that could be described as tepid at best. The logical conclusion is that San Diego home prices will continue their recent decline for the foreseeable future — not good news for Realtors (TM) or those who make the mistake of buying during the period of sharply declining prices, but certainly good news for those hoping that San Diego homes will some day become affordable once again.
The “iamfacingforeclosure.com” guy has posted more details about the fraud he’s done:
http://iamfacingforeclosure.com/
Reading that gives me the same chills I got when I saw the movie The Exorcist.
That guy is either a moron or a sociopath.
Seems like he’s running scared now, site is taken down with a message apologizing to everyone. What a goofball.
Too bad it’s all in the Google cache.
His final realization about his actions:
“Now I crossed the line. I misused my ambition.”
Sounds like the same excuse, Ken Lay, DeLorean, Charles Keating, would be able to offer.
His deep internal rationalization: I wasn’t greedy, I was undone by misapplied energy.
He’ll need a book offer advance to pay for his looming legal affairs.
Maybe he can sell 10 pixels per sq. inch on his blog to recoup his finances and reflect on the humility of his new found ambition: survival!
I forget maybe this is who he resembles:
IGNORANCE, “a brisk young lad,” who joins the “King’s Highway” by way of the “crooked lane” that comes from his native country, called “Conceit.” He follows Christian and Hopeful and on two occasions talks with them. He believes that he will be received into the Celestial City because of his doing good works in accordance with God’s will (read: flippers creed). Christian and Hopeful try to set him right, but they fail. He gets a ferryman, Vain-Hope, to ferry him across the River of Death rather than cross it on foot as one is supposed to, but he is thrown from the Celestial City gate through one of the doorways (by-ways) to hell at the direction of God, the King of the Celestial City.
Posted earlier, but possibly lost in cyberspace — the Sunday SD Union-Tribune headlines are an obituary for the condo conversion craze:
http://www.signonsandiego.com/news/metro/20060924-9999-1n24convert.html
And don’t miss the accompanying piece:
Financial picture gloomy for those holding properties
By Mike Freeman
STAFF WRITER
September 24, 2006
http://www.signonsandiego.com/uniontrib/20060924/news_1n24finance.html
This article in the Dallas Morning News this AM - is a real dazzler.
Remember - this is in Dallas - where the “bubble” is not supposed to exist.
Amazing.
http://www.dallasnews.com/sharedcontent/dws/news/localnews/stories/092406dnmetfrisco.2b9d61f.html
dagan68 this article kindas reminds me of the RE bust in Texas around the mid to late 1980’s. I was living in Arlington at the time.
Entire apartment complexes where built on swamps along the I-30 corridor between Arlington and downtown Dallas. These thing where built without any expectation that anybody would live in them; instead they where designed as scams from day one. Once the scams had run their course these things where bulldozed.
According to the post-bubble newspaper accounts, these properties where flipped at special investors meetings that often took place at big bank boardrooms. The investors where there by invitation only. Anybody asking too many questions where shown the door. Many of these investors where the well connected owners of New Car Dealerships, and Banking executives.
What would happen is that papers where passed around in a circle at the table. Everybody would sign when it was their turn, and at each signing the property value was raised. Thus, an owner of a New Car Dealership could pocket 100s of Gs (or maybe millions) with no risk and for a few hours of sitting at a table. All of these profits where being generated at the expense of very large banks, who where left holding the bag.
Since these people are all well connected nobody was convicted of anything. The prosecutors would have us believe that “no crimes had been committed.”
I would not be surprised if history where to repeat itself in Texas.
TxChick has any of this been going on over there this time around?
I thought that this same sort of thing happened during the Savings and Loan debacle…wasn’t it called “dead horse trading” (or something like that)? Keep ping-pong-ing a property between two friendly Savings and Loan institution, jacking up the price each time, and recording profits and the “book value” of the land, if I recall correctly.
This is kind of interesting… Lender Network 1-2-3 has gone “pop”. Employees coming to work, finding the building locked up. Hope the company was paying it’s unemployment insurance premiums…
http://www.wcnc.com/news/topstories/stories/wcnc-ad-9_22_06-workers.83d6e0f.html
Goldman Sachs Games Gasoline Futures:
http://www.xanga.com/home.aspx?user=russwinter&nextdate=9%2f24%2f2006+23%3a59%3a59.999
The true Tsunami will not hit until the delusional majority, who are holding on for the “uptick” promised by housing-bull “experts” desperately trying to forestall a mass stampede for the exits, see instead a cascading avalange of foreclosures, distress selling, and fire sale pricing. At that point the huge overhang of vacant, speculator- or FB-”owned” houses will be dumped onto a market just as credit requirements are being drastically tightened.
The gleeful crowing of the fools who are rushing into today’s “buyers’ market” with “lowball offers” of 5-10% of 2005 peaks, will soon be replaced by piercing, girlish squeals and involuntary bowel movements as the floor drops out from under their feet. And that, friends and neighbors, is when the REAL buyers’ market will finally start to emerge.
lol, I thought the “Hummer in the driveway” was kind of a stereotype for flippers til I saw it myself. There is a house just around the corner from my rental. Cute little 2 bedroom on the outskirts of a desirable neighborhood. However, we are separated from said neighborhood by two blocks of little Mexico. My mexican landlord warned me not to walk through there at night. Anyways - these guys are selling this little place for $599,000. Yes you heard me right. I have a nicer place in the neigborhood for $1475 a month, but they decided it was worth double. Of course there is a gold Hummer in the drive and the place has been up for sale since I moved in, in June. They recently put in sprinklers, a new lawn, and went from a for sale by owner to a realtor. Because clearly the problem was the selling agent - not the outlandish price.
agreed,
pretty interesting that there are so many ready willing and able to catch a falling knife, of course money is still available, at least it was on friday.
Where does the future demand for $800K+ McMansions currently reside? South of the US border, of course.
—————————————————————————————————-
Sept. 23, 2006, 11:46PM
Immigrants may give slumping U.S. housing market a boost
Finding the dream, owning a piece of it
By BOB WILLIS
Bloomberg News
Thirteen years after fleeing El Salvador’s civil war, Ana Chicas realized the American dream, buying a home in the Washington, D.C., suburbs this year.
Pent-up demand from immigrants like her is providing a rare bright spot for the gasping U.S. housing market.
Immigration at a seven-decade high helped provide the demographic power that propelled U.S. home sales to five consecutive record years.
http://www.chron.com/disp/story.mpl/business/4209007.html