‘Stop Worrying And Love The Bursting Bubble’
David Leonhardt writes at the New York Times. “You remember the great real estate crash of the 1990’s, don’t you? In New York, inflation-adjusted prices dropped almost a third in less than a decade. The fall was even worse in Los Angeles, and it wasn’t pretty in Boston, San Francisco or Washington, either. Thousands of families were forced into much smaller homes.”
“Large numbers of people did not lose their homes. If anything, the drop in prices allowed a lot of families to buy their first house or trade up to one that they never could have afforded in the 1980’s.”
“Now it looks as if we might be about to go through it all again. But instead of panicking, most homeowners should be taking a deep breath. The real estate slump of 2006 offers a fresh chance to puncture the No. 1 myth about the nation’s No. 1 topic of conversation: the idea that we should all be rooting for high house prices. The myth is good for real estate agents, but it creates needless anxiety for everyone else. It’s time that most of us learned to stop worrying and love the bursting bubble.”
“‘Even in the most vulnerable markets, most people just have to look through it and ignore it,’ said (economist) Mark Zandi, ‘because it’s of very little relevance to them.’”
“That’s the good news. The bad news is that a big part of the country’s economic policy has been built on the myth. As long as you are living in the house, you have no way to lock in your gains. Yes, you can borrow against those gains, but new debt is not exactly found money. And when you move, odds are that you will go someplace that has a real estate market very much like yours. Whatever profit you make you will just plow back into a new home.”
“This is why the housing boom of the last decade has not made many people rich. Do you know anyone who retired at age 35 after selling her condo in San Francisco?”
“Obviously, there are exceptions; people who do have a very real stake in the short-term value of their house. Worst off would be the families who have borrowed heavily against their homes. For them, a price drop could erase all of their equity, leaving them with no money for a down payment when they move.”
“But the victims of a moderate price decline don’t come close to making up a majority of Americans. At most, 10 percent of households are so leveraged that their mortgage debt equals at least nine-tenths of their home’s value, Mr. Zandi said. Compare this with the more than 30 percent of families that don’t own a home and clearly have nothing to gain from further price increases.”
“So there is a good argument that society has a compelling interest in keeping house prices from getting too high. Reasonable prices allow young, middle-class families to buy a house without going into too much debt. They also let people live where they want. Right now, there are a growing number of workers making long commutes, solely because they cannot afford a decent-size house in a close-in suburb.”
“They can blame our tax policy for part of their plight. It pushes up home prices by handing out $80 billion a year in subsidies for home ownership, mainly through the mortgage interest deduction. There really is no sound argument in favor of it. It overwhelmingly benefits well-off families who would buy a home even if it didn’t exist. About 70 percent of tax filers get nothing from the deduction, in large part because many don’t make enough money to itemize their tax returns.”
“In fact, a tax panel appointed by President Bush recently called for the mortgage deduction to be replaced by a smaller and fairer tax break. Unfortunately, Mr. Bush seems more inclined to listen to the National Association of Realtors, which has warned that reducing the mortgage deduction would surely cause house prices to fall. To which the rest of us should say: And what’s so bad about that?”
Thanks to the readers who sent this in.
Good Lord… NEW YORK TIMES reporting on the housing bubble?
This is where is starts to get inneresting.
It won’t be long before MAINSTREAM MEDIA rides this donkey every day, and all day (CNN cable network news scrolls 24/7, etc).
I could swear I just heard someone shouting something about “emperor” and “no clothes”. Oh my, if that should spread…..
Bush and any legislator is toast if they try to take away the mtg interest deduction. That also goes for the property and state tax deduction as well. Bush is an idiot on his tax panel and an idiot on his immigration ideas.
Well said, my central coast brother!
Why? Most people have mortgages below the limit and many do not itemize. The tax reform will be *very* attractive for most people.
Homeowners in a just few places will be very badly adversely affected.
You are from Pismo Beach right? Nice place. Love Cracked Crab.
Most sheeple miss the fact that the mortgage deduction makes them little better off than the standard deduction. You need to understand the tax code a bit better than the average American homeowner does to grasp this fine point.
What irks me is that the deduction for a primary residence is only on the mortgage. It discourages paying off your mortgage, in a sense. (Granted, you save more per year by paying the full tax amount than paying the mortgage company their share and then writing off that amount, but still, many folks think it unwise to pay off a mortgage because of this tax matter.)
Also, this deduction encourages folks to take bigger mortgages, go deeper in debt, etc. It seems like the only winners in this tax code are the mortgage brokers, realtors, and lenders. Hrm….
Paying a dollar to save 25 to 38 cents never seemed very smart to me.
I’m not sure what you mean by mortgages “below the limit”.
Oh, proably the limit in the new proposal (as opposed to now). Sorry!
Oh, you probably mean the limit in the new proposal…sorry, i get it now.
Actually, many people don’t benefit from state tax deductions because of AMT! In fact anyone who’s not hit by the AMT has NO RIGHT to complain about his taxes. You’re getting off easy!
Any thoughts on this over here?
Help! I got home a little while ago and the landlord put a for rent sign in the yard. My lease is good till the end of march. I’m looking through my contract and see no where that it states they can do this. I’m a little pissed about having it in the yard for the next month. What do you think?
One of the hazards of renting…look for a new place?
I am getting the hell out of here when my lease expires. I do not believe I should have to live w/ a for rent sign in the yard why I’m paying rent. I think it is bullSh@t!
Just push it over every night. The neighbourhood kids did it.
Call the landlord and act like your someone else that is looking to rent the place. I’ll bet your landlord will spill the beans.
Read your lease. The landlord probably has the right to put a lockbox on your door too. And show the property. If so, your interference could cost you your security deposit (Breach of Lease).
The lease says nothing about having a sign in the yard. It does say that they can show the property for the last month.
I don’t like the sign in the yard because of security issues.
“It won’t be long before MAINSTREAM MEDIA rides this donkey every day”
It’s dramatic enough that everyday people will become consumed with the crash and crash news. “Prices plummet”, “equity wiped out”, “widespread forclosure”, “lives destroyed” will be the headlines. I’m not saying it will be Katrina level coverage but enough people are scared to make this downright spectacular.
I can here the news now:
“Why isn’t the gvt coming in to bail out these poor folks?”
Speaking of reporting.
do you guys remember back when the CEO at Toll Brothers unloaded their stocks, in the hundreds of millions. In hind sight, these guys were geniuses compared to the blockhead flippers, who believed the CEO’s explanation that they were just diversifying. Alot of news these days of the slight of over 30% of the builders group stocks since july. hahaha. what a bunch of idiots.
they WERE diversifying. A person would be crazy not to. There is no wisdom in keeping all your holdings in a single stock, even if its your own company.
is this a spoof of Dr. strangelove’s full title? ‘Stop Worrying And Love The Bursting Bubble’
If that movie is any indication of things to come than all i have to say is
YEEEEEEEEEEE HAWWWWWWW
There is no bursting bubble, but there is a falling bomb…
Well, boys, I reckon this is it - noo kee ler combat toe to toe with the Russkies…
LOVE your bubble.
One of the best things about the article is the accompanying chart.
People in the SF Bay, and San Francisco is the worst of it, just absolutely love to “delude” reality: “Prices never go down here.”
Oh, really?
Thats why Silicon valley turned into Silly Valley. Prices gone over the top. So much so, employers can no longer afford to keep employees (their morgages) and make a profit. “Prices never go down and jobs go elsewhere”. At the end so do the people who say these things. Lots of swindlers out there.
Excellent article! All the points are right on. I never understood why even houseowners are so excited about quickly rising house prices, let alone first time and future buyers who face crushing affordability problems. Imagine if people started hoping for 20% annual increases in the price of cars! How absurd would that be?
Existing homeowners were excited, and prospective homeowners were dismayed. But now the tables are turned…
You are right! Actually I am more than dismayed.
If I may please be allowed to vent my feeling here a bit :
People like us who otherwise have family with kids , have above average income, today find we can hardly buy a CONDO!
Every other person who are otherwise my peer or have much lesser income , today is talking about increasing networth of $500K over 4 years.
How much can be saved from Salary over 4 years, $50K?
So I am more than dismayed! What did we do wrong? Did not buy a home beyond our means by 0% down or interest only loan or 2% loan for first 2 years? That walking out of a house mortgage or filing Bankruptcy is not how we are brought up?
What have most hose homeowners done “Smart”? Buying a house to live in , albeit with added responsibility of a mortgage.
It is not fault of those homeowners but I am justified in wishing that fall. Actually feel guilt perhaps to wish something like that!
As an existing homeowner, the insane appreciation just looked like higher taxes to me.
I strongly agree.
What I want is a home to live in that I can *afford*. Not an “investment” which will put me in a financial bind for the next 10 years if appreciation does not continue at 10% per year, or heaven forbid go down in value…
. . .
Maybe someone here can answer a qustion I have about REITs. Can REITs also buy up residential SFR homes? Or is there regulation that limits them to apartments, commercial spaces? If they can “invest” in residential homes, I am curious to what level these investment groups have contributed to skyrocketing prices/flipping during 2003-2005.
WTF??? Media acknowledging that low affordability and extreme appreciation may be a bad thing? We’re not all getting rich?
He called it “the real estate slump of 2006.” Have I been sleeping? Is it 2008 already or did he actually report on TODAY’S housing market?
Feeling dizzy … head about to explode …
My bet is this guy is a “Flat Tax’er” He is in bed with Steve Forbes…
“Flat Taxer” or not, he has a point. The mortgage interest deduction is one of the driving forces of the bubble, and even worse, it is driving people use their home as a piggy bank through HELOCs. It means that renters pay high credit card rates to borrow money for consumption, while homeowners pay subsidized rates. The MID is flat-out social policy manipulation through the tax code.
IMHO, interest should either be deductable or not, regardless of what the money is borrowed for, or how the loan is secured.
Agreed. And homeowners are far wealthier than renters, as a group. So why should we give tax breaks to more wealthy people to borrow? They don’t need the help.
In a normal market, renters pay the full cost of the PITI payments (unless the investor is an idiot). Why should the LLs receive the benefit of deductions (prop tax and MID) when it’s the renters who pay the full cost?
In a way, it seems renters are subsidizing LLs in two ways: pay full PITI and subsidize their deductions. Is that right???
Ca Renters, on average, don’t pay full costs of ownership to their landlords. Most, if not all, landlords own rental units with negative cash flows. Cap rates of 4% or less are common. If you own property in LA, SM or other socialist cities they have rent control. On July 1 if you own property you can raise rents 4%. Prior years were 3%. To evict someone over 62 you have to give $8200 , for someone under 62 only $3200. There are other restrictions as well. Is this a great country or what. Ca owners were counting on increasing property values to make a profit. Ordinary passive loss up to $25,000 changed to long term gain at 15% tax subject to AMT. Oh you don’t know what AMT is? Bend over with the KY and get ready.
Prior to the boom that was true for 1 to 4 units and it will continue to be that way for quite awhile. Caps got out of focus depending on the area around the time of 9/11 or when the floor fell out of the interest rate bucket. If I remember correctly this happened around the same time. It’s really going to be interesting just how much of a blood bath is going to occur in the residential income market over the next 2 or 3 years there has been insane lack of using the basic fundamentals of determing what is a good or bad investment. I mean 100k+ a door for mastered metered buildings downtown los angeles is insane especially since during the last downturn you could pick them up for 10k a door like shooting ducks in the barrel compound that with all those downtown lofts they are building that they are not going to continue getting those insane prices for along with draconian rent control. I’ll say it again blood in the streets is going to be considered a good day when the market completes it’s turn in Los Angeles, Venice, Sant Monica et al. Hopefully the ground doesnt shake too bad this time around
Presuming any sort of competitive market, the price of a rental reflects the savings owners earn on taxes and the full cost of ownership. Current rental markets are impacted by the bubble in two ways which work to reduce rental payments:
First, owners expect capital appreciation and are willing to rent at below their operating cost in the hope of further capital appreciation.
Second, the pool of renters declined as more flexible credit standards allowed people whose finances would have meant renting in the past to buy. The bubble meant that credit risk mattered little, even if the owner gets behind on payments, the house could almost always be sold for more than the value of the note.
Um, let’s simplify this, ok? Rents are flat or falling in bubble markets because there is no housing shortage. There is no “land shortage fueled by immigration,” to put it in the words of one Robert Toll. Owners are willing to rent for less than “operating costs” because, a) they have no choice, and b) they think real estate only goes up. Well, it’s stopped going up, and rents are still flat. What a great investment!
At least those who bought stocks at the top get dividend payments on their shares. Imagine having to pay Bill Gates, every month, for the privelege of holding the Microsoft stock you bought for $80 in 2000? That is the predicament that many real estate “investors” are about to find themselves in, and it is nothing less than ruinous.
McMansion owners to priced out renters: “Let them eat cake.”
All tax deductions distort our economy and complicate our tax code. A simple progressive tax without any credits/deductions would make the economy more efficient and would be fair for all regardless of marital status, number of children, or what assets they own/finance.
Taxes should only be levied against the real return of investments. I am sick of being taxed at income rates on my nominal interest earnings when my real return after taxes is negative!!!
Even worse, it is driving the McMansion boom, which is related to the fact that a bigger house with bigger appreciation results in a bigger tax break. Unfortunately, the resulting distortion to the relationship between the kind of homes which get built versus those which satisfy fundamental needs implies the bubble fallout last for twenty or more years.
definitely; just look at the Netherlands: the most crazy HMD system in the world (40-50% of the mortgage is paid by the tax office; nearly every homeowner has a mortgage even if they don’t need it at all simply because they save huge amounts of income tax) and probably the biggest national RE bubble worldwide (by percentage gains).
On top of that we also have 0% tax on home sales (even if you sell your home with a couple of million euros gain), many crazy subsidies for all kinds of homeowners and the lowest interest rates in 4 centuries (30-year fixed for about 4%, which is effectively 2% here). So housing is not only heavily subsidized but it is also the only tax-free income; plain stupid except for those with a vested interest in the RE mob (like most politicians).
FINALLY someone is talking about the benefits of affordable housing.
It will be a great day when the word “affordable” gets tacked on to housing to mean “housing that is affordable to buy on a regular working salary” rather than “housing that is affordable because some government agency is setting up a program for all of you have-nots”.
The change in the meaning of the word affordable in relation to housing has really produced a degradation of will and motivation to succeed in this country.
Housing has gotten so expensive that- unless I am willing to mortgage away my whole future and then some- there really is no point in even trying.
It will be a huge relief -and a good thing for this country as a whole I think- when the price of a house is reasonable enough to give one incentive to go out and work to buy one.
And by “buy” I mean that one actually has the hope of owning the home they live in one day rather than renting from the bank ad nauseum. The definition of “buying” a house is another thing that’s changed radically in this whole price run-up.
I will be really grateful when the words “affordable” and “buy” in relation to housing revert to their original meanings.
Yes this bursting bubble gives me a lot of hope for my own future and for everyone elses too. There will be those who get burned initially but I think their numbers will be more than offset by those who benefit. After the initial period of adjustment the whole country will be on a much more solid footing.
I suggest using the word “mortgageowner” instead of “homeowner.”
After the bubble pops, I suspect that there will be more than a few people who will be wishing that they never sold their soul away in the first place.
If you want affordable housing move to Trona or Mojave, Ca. You could even migrate to Ely, NV. Couple good cat houses there.How about Bismark,Mt in January. Better yet get an usable education and quit wasting time whining, hanging out in bars, or watching MTV and Opra. If you can’t afford a house IT’S YOUR OWN FAULT !!! Don’t look to me or the government to bail the lowlife losers out.
“In fact, a tax panel appointed by President Bush recently called for the mortgage deduction to be replaced by a smaller and fairer tax break. Unfortunately, Mr. Bush seems more inclined to listen to the National Association of Realtors, which has warned that reducing the mortgage deduction would surely cause house prices to fall. To which the rest of us should say: And what’s so bad about that?”
Thats way too funny! The NAR is a joke. Someone needs to shut down their PAC in Washington DC. They make the Temsters look tame.
While it is interesting to see mainstream commentators bluntly calling the bubble bursting, it is still largely glossing over the economic pain the correction is likely to bring, as people increasingly find themselves swamped with debts they can’t refi their way out of. So they can now use the B-word, but not yet the R-word (recession).
NYT editorial board and the mayor as well ought to start worrying about the “kill the messenger effect”, IMO. A few more mayoral remarks or NYT articles about falling prices, and millions of NY area homeowners will know exactly whom to blame for their plummeting net worths…
Agree with you. The “bubble bursting” to this commentator means prices leveling off or falling slightly. For example, he says that based on the fact that only 10% of Americans have a cushion of less than 10% of their equity, the pain will be limited. Evidently he thinks that more cushion than that will be enough to protect against the bubble. I find this hard to believe. I can’t speak for the nation, but in my Los Angeles neighborhood, home prices are 500% of what they were in 1996, while rental rates in the same neighborhood are 150% of what they were in 1996 (neither of these figures is adjusted for inflation). Given that rental rates are the single best yardstick for the actual value the market places on housing, would someone please tell me why housing prices shouldn’t fall back to at least the point where they, too, are 150% of the 1996 price? This would translate into a 70% decrease in nominal prices. And this estimate makes no account for the possibility that that a fall of this magnitude could have a domino effect on the economy such that rental rates, too, would fall, justifying yet lower sales prices.
Rents will fall with purchase prices, as renting and buying are substitutes in household consumption. So the 150% increase in rents since 1996 will fall along with purchase prices, just by not as much, once the market adjusts to the spectacular amount of new supply due to a combination of speculator dumping, condo conversions, and new construction.
However, you have to take SUPPLY of RENTALS into account. In one of the areas where we own income property (single family), so many ‘investors’ are plopping their properties onto the rental market that vacancies are going up and rent is going down…despite the increase in purchase prices.
Oh man a 70% decrease in prices in Los Angeles or surrounding areas. That would be anarchy(sp?). Do not even speak of that. I would have to buy a gun, stock water and mre’s. That’s too scary too even think about. Shame on you for even bringing it up.
You have to read this blog to feel the love!
I new my comment would get someones dander up…..
At least the Times is finally owning up, but this “oh we should all be relieved” smacks of a day late and a dollar (or rather, billions of them) short. This is not your father’s housing cycle here - this is a market that has been run up to the point that its faltering has the potential to be very harmful–to all of us, homeowners or not. The Times and other press should have been sounding the alarm loud and clear for at least a couple of years instead of being the cheerleaders this reporter is suddenly so against.
The problem with the article is that it fails to point out that rising house prices benefit the real estate taxing entities (with the possible exception of some states). In many states taxes are marked to the market, so rising property values dramatically increase the coffers. It is not in any governments best interest to see stagnant or deflating property values.
Exactly Hoz and Moopheus too - Stop worrying, my ass
It is not in their interest, but they will have to learn to live with them…
For all the run-up in prices here in FL in the last five years, and the insane property taxes, the schools still suck swamp water, and the roads are in such bad shape they are barely navigable. I don’t know WHAT they have been doing with all of that money, but rising property values don’t seem to have improved anything.
Of course not. But you see the construction on the lee Roy Selmon, I-4, and over by the airport all at once. It sucks here. If it wasn’t for the job, I’d be back down in Sarasota, but the commute sucks!
If you look around Tampa you can see at least 5 cranes in the skyline building. What will happen to all these condos?? It’s scary to think about it all. At least I’m glad I’m not holding those anchors.
There’s a highway/roadway called the “Lee Roy Selmon?”
That guy was a linebacker on the old “terrible Tampa Bucs’” teams, right? Though he must have been around when they made that run and lost to the Rams in the ‘80 (?) NFC final.
Roads named after linebackers?
I could see Singletary, Butkus and Nitschke (sp?) - but Selmon?
The Bucs actually made the NFC championship one year with him and the playoffs on others. This is when Doug Williams was the Qb. After a few years they slipped back into mediocrity for a few decades before reemerging because of Tony Dungy, and eventually won the super bowl (after dungy left).
It used to be called Crosstown before they named it after him.
OOPS! I mean 50 cranes.
Unfortunately here in California, a very large percentage of property taxes go to the state, not the county or city in which the property is located. While that may fill state coffers for giant public works (read: pork), it does nothing to fix the corner pothole.
I just received my tax “re” assessment. Because of the ridiculous real estate price increases in the sh*thole that is Phoenix AZ, I now get to pay 30% more.
At least here in CA, prop taxes can only rise 2%/yr, even if the actual value went up by 100%. Thank prop 13 for that.
In Ca if your property values drop you can get your property taxes reduced. There is a method for doing this in Ca under Prop 13. (Eat your hearts out property owners in other states).Any way, in the last recession in 1991, I had the taxes on two properties reduced based on comparable sales. Get ready for another recession as the ‘yield curve’ has been inverted for 3 months.
I did the same for my condo in ‘94. My purchase price was $104k in ‘90, and comparables had dropped to $85k by then. My property taxes were reduced, but only “temporarily”. They are allowed to rise faster than 2% when the market recovers. Still my condo would sell for $300k today, and I’m only paying taxes on $140k of that.
Prop. 13 is great if you stay in one place long enough, and it screws you if you don’t. It’s basically a tax on newcomers.
You don’t quite have your ducks in a row. Yes under prop 13 here in Ca, taxes can only be adjusted upward a set amount. However, when you sell the new owners taxes are adjusted to the purchase price of the house. This means that a neighbor may be paying $1000 a year property tax while you the new owner may be paying $5000 to live next door. Second, when property values fell I had my taxes reduced. The reduction lasted two years and then when property values went back up the prop 13 valuation that I was under now changed to market value and my taxes went from $1200 to $1900. Rule of thumb, check the fine print.
Under Prop 13, taxes can only rise 2%/yr from the price paid basis. If you got a temp reduction, great. If the property rises later to meet the original sale price, the original tax amount is restored, along with the 2%/yr since any reduction.
If you stay in one place a long time Prop 13 is wonderful. If you plan to move around a lot, you’ll pay top dollar in CA prop tax. Moral– Relax on your deck, have a glass of wine and stay put.
Setting: the summer of 2006
New acquaintance: “Hey, what do you do?”
Me: “Me, I love my bubble.”
NA: “What - what’s your bubble?”
Me: “The housing bubble, ya know? I’m a bubblesitter and I’m just loving my bursting bubble.”
NA: “Wha… but, but, but - I thought here in the land of milk and honey, and the SF Bay being the poster child of all that, how could….?”
Me: “Ah, relax. Don’t you worry. Just wait - and learn to love your bursting bubble.”
Can we get some housing bubble bumper stickers printed up?
How about…
Friends don’t let friends buy real estate
http://www.thehousingbubbleblog.com
How about “Lose money now, Ask me How.” and the little REALTOR symbol.
Or just:
Love Your Bubble
http://www.thehousingbubbleblog.com
This one I could put on my car w/o fear of being rear-ended :lol
“The myth is good for real estate agents, but it creates needless anxiety for everyone else.”
This myth was really good for real estate agents for the 7 good years just ended, and will be really bad for them in the 7 years just begun.
“Genesis 41:25 And Joseph said unto Pharaoh,
The dream of Pharaoh is one:
God hath shewed Pharaoh what he is about to do.
:26 The seven good kine are seven years;
and the seven good ears are seven years:
the dream is one.
:27 And the seven thin and ill favoured kine that came up after them
are seven years;
and the seven empty ears blasted with the east wind
shall be seven years of famine.”
AMEN !!!!!!…1.2 million of those blood sucking varmits accross this country…We need to get it down to 500K or so….
As tranactions dry up the agents will be talking prices down. They need sales to make commisions. They’ll be singing a different tune this year, to create transactions.
JMO
This is already happening. Agents in my area seem to be on the buyers side now. They don’t like showing a house every sunday for 8 weeks without getting paid.
San Mateo Bitch!
Are you suggesting that Realtor’s are PROSTITUTES? Just doing and saying whatever they need to, to put some bread on the table??
There’s some hungry realtors in Broward county in Florida.
With almost 2 mil population, only 500 houses were sold in January. Wonder how many realtors are competing for those sales.
Hmmm… nice analogy. Yeah, more or less.
I walk into open houses and hmm and ha a lot. Unless the place is a knockout, the agent sitting there doesn’t waste much time before ’suggesting’ that the seller might be ‘flexible’.
Not PROSTITUTES, just RealtWhores.
“In many states taxes are marked to the market, so rising property values dramatically increase the coffers. It is not in any governments best interest to see stagnant or deflating property values. ”
Agreed… However Arnold in California has RE croonies by his side.
He always his likes to “Pump California Up” with his speeches. Sadly the employers are moving jobs to other states or overseas. There is a sad disconnect. He just doesnt get it!
Actually, as far as jobs goes, Arnold does get it. The problem is the bureaucracy is so far gone and will not change. Arnold has said many times that the brick-laying business he started in 2 days way back when, would be next to impossible to start today. I have some really good quotes from him in an old magazine that talked about his journey to America, and how he became successful. He said that Joe Weider “taught me how to fish” instead of just giving me fish. Arnold and Franco Columbo worked hard and started a bricklaying business. They employed other bodybuilders and people from the gym, and that is how they made money to support their training. It wasn’t until later that endorsements, bodybuilding, and acting took over.
Arnold knows businesses are leaving…but there is not too much one person can do about things anymore.
Again, I’m not talking about this in a ‘political’ sense. The article was actually in a bodybuilding magazine. I think Arnold would prefer lowering taxes on businesses, and encouraging growth, but in today’s “whats in it for me” climate….nothing gets done, and nobody will give up their ‘good deal’.
SoCalMtgGuy
Arnold made a fortune investing in real estate.
Arnold showed how little business acumen he really has by coming up with a huge list of proposals for dealing with California’s chronic disorganization. Think about that. Huge lists lead to paralysis even in functional organizations.
Lower taxes sounds great, but there is no easy way to get there. The prison system eats up more than education even though we know the overal benefit is less even just in terms of counting individuals processed by these systems. So far Arnold has proposed big loans which will make things even worse in the future, especially when combined with the paralysis through large lists strategy.
Having an ideology is one thing, being able to make things happen in large organizations is quite another. Arnold is so far out of touch that he ordered his staff not to talk to the press about his agenda. Think about that. And you wonder why not much good gets printed? Even a pro like Arnold can only do so many camera oriented dog and pony shows and then the content runs out.
“Even in the most vulnerable markets, most people just have to look through it and ignore it,” said Mark Zandi, the chief economist of Moody’s Economy.com, “because it’s of very little relevance to them.”
Too bad a rigorous look at the evidence shows that Mr. Zandi is making these stories up off the top of his head…
(CAUTION: LINK TO IMF PDF)
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf
I also thought Zandi was somewhat cavalier with his “Obviously, there are exceptions” and his “10% at most” statements with regards to those individuals most affected by the bubble (i.e. over-leveraged, debt ridden, suicide loan types.) I agree with Zandi’s comments concerning the type of person, I just believe there are a lot more of them than he is allowing for. Besides, even if the right number is 10%, that’s still a heck of a lot of people and because RE prices are set at the margin, 10% is more than enough to foment a complete RE bloodbath/meltdown. And how can a complete RE meltdown not lead to a piercing of the giant credit bubble and a cascading cross-default situation that impacts everyone?
He also glossed over the house-atm wealth effect that permeates the entire economy as well as RE’s role in employment.
My 2 cents…your mileage may vary.
Good Point Darth Toll,
Just wait ’til the folks driving the new Escalades, borrowed on a home that is “worth” $250k less than they paid for it on an A.R.M. loan… WAKE UP ONE DAY and realize they are a FB!
OUCH!
That 10% will climb sharply when prices drop back to fundamental levels.
The fall was even worse in Los Angeles, and it wasn’t pretty in Boston, San Francisco or Washington, either. Thousands of families were forced into much smaller homes.
The housing bubble house price rises of 2004 and 2005 weren’t pretty. Thousands of families were forced into much smaller homes.
* * *
The newspapers are finding out that everyone wants to read about how the bubble is bursting.
In a few years time, no-one will want to know. Then, maybe it is time to think about buying.
I nominate David Leonhardt for God.
The very first reporter to both ‘get it’, and not be afraid to say it.
Auction Heaven in ‘07…
Yuh, and we all know the news is “TRENDY”…
So EVERYONE was writing about the white hot market, now they are ALL going to be writing about the SOGGY market. (to use the fire and water extinguisher analogy)
I think Kelly Zito (SF Chronicle - Hearst papers, right?) and Kimberly Blanton (Boston Globe - owned by NY Times Co.) have done a very respectable job. Zito even said last week that prices “would probably go down some” (or something close to that). They just haven’t been able to “say it” like this because their bosses/editors and some of their readership would probably kill them.
Literally.
Now it’s open season on the Bubble for the major city dailies. Mr. Leonhardt let the horses out of the barn…!
And yes, the Chronicle has surprised me lately.
I’ve called them “one of America’s worst major city newspapers” - which is still true - but they appear to be improving, at least on this issue.
Keep it up!
I thought this was worth reposting. Apologies for length. It is not linkable.
Mar 01, 2006 1:48 pm
Minyan Mailbag: How to Cut Your Losses In Real Estate
print this page
Bennet Sedacca, John Succo and Fil Zucchi
Mar 01, 2006 1:48 pm
The biggest mistake in investing, which destroys wealth, is selling at the bottom…
Professors,
I have the all the respect in the world for you. I don’t send e-mails unless I’m really concerned, and you have me VERY concerned for my family and me. I live in West Palm Beach and every time you mention the housing bubble, you have me looking clearly in the mirror. We have four houses and four condos. All my properties have at least 30% in Principal and 30 year fixed mortgages, ranging from 5.75% to 7.75%. They all have renters and I’m barely breaking even on a few and losing a couple hundred on two properties. How is this all going to blow up in my face? I feel that I have staying power with these. I have tried to sell two of my properties in Naples the last two months at 40K less then the next closest house…still no bites. I hate to reduce the price more even though I feel when all the ARMS run up the house will drop even more. As I said we are breaking even building equity.
When I started my real estate buying in 1998, my goal was to have 10 houses paid off in 2020 when I turn 50. My retirement! Am I the person you see getting beat?! I’m a big boy, please tell me the truth. We also have 401K’s worth 300k, a brokerage account worth 290k and equity in these eight properties worth over a million. I don’t count that because I feel they’re all going to drop but if we fight through this cycle and don’t lose all the renters at once, we’ll be alright. Where does my whole life fall apart? Please be brutally honest!
Thanks for your time,
Minyan Tom
——————————————————————————–
MT,
This reminds me of someone that has a position that is wrong-sided and then tries to ‘defend his position’ by buying more. Institutions do it and retail does it. It simply doesn’t work, particularly when leverage is down. And 25% equity doesn’t seem like a huge cushion to me in any event. Personally, when I find myself ‘wrong-sided,’ I re-examine why I put on the position in the first place. If I am wrong, I reverse course. The key here is to not wait until it is too late. The signs are there. The bubble IS unwinding. Therefore, you might want to consider reducing the position size, even at a loss, even if it hurts.
-Prof Sedacca
——————————————————————————–
MT,
The biggest mistake in investing, which destroys wealth, is selling at the bottom. This is caused by not correctly assessing risk, understanding what you can lose versus what you can afford to lose. Being able to hold onto assets through price declines is essential in building wealth.
I cannot predict the future. I have tried to warn Minyans of what I see as the potential problems that lie ahead (or may manifest themselves immediately) due to the great macro experiment being conducted by central banks: fostering accelerated globalization by accepting great financial imbalances. Combine this with (in the U.S.) the fact that $40 trillion in credit that has been created in 20 years and we truly have a risky situation. If the credit bubble unwinds during this phase of global economic development there would be a depression in the U.S.
I don’t think you can dismiss that as a low probability. In managing risk you must consider all possibilities and handicap them accordingly. I put the probabilities of a depression in the U.S. in the next year or so at 15%. I put the probability of a significant recession at 35%. To me that is real. A depression would cut property values in half at least; a recession 10-20%. You must decide for yourself if those probabilities make sense to you and more importantly, if you can withstand each scenario (not sell at the wrong time).
A few areas of concern I should point out.
Your equity may be low to sustain shocks and it is concerning that you are carrying the properties at less than rental value. You may want to do a cash flow sensitivity analysis to understand the likelihood of rental income declining. I suspect W. Palm Beach properties (I am guessing they are vacation properties or related to the industry) would suffer in either scenario, but don’t really know the sensitivity (I could easily be wrong on that as rich vacationers continue even in recession).
Notice I did not comment on your impressions of current prices and the market. If you decide that your risk is too high they are irrelevant to your decision. It does not matter if you take a loss: if given a serious analysis of risk you decide that you are carrying too much risk and would be forced to sell given either scenario, you might think about selling it now.
Only you can make that decision.
-Prof. Succo
——————————————————————————–
MT,
A few observations:
I don’t know your market specifically; if you were in the DC area, and your 30% equity cushion were based on today’s valuation, my sense is that there is a great likelihood you’ll be upside down on your mortgage when the next downturn is in full swing.
This piece I wrote recently touches on a lot of your dilemmas. After reading it, ask yourself: is my goal saving or investing? I know the two are easily confused in the main stream financial media, but the first looks for return of capital plus the equivalent yield on a risk-free instrument; the latter looks for a return on capital, which inherently requires risk.
How long can you absorb vacancies for? Could you make do with rents 10%-20%-30% lower than they are right now?
What you do with your homes is not an ‘all or nothing’ proposition. We just sold 50% of our real estate and are going to keep the other 50%.
If you are speculating with your homes, do you have a stop loss plan – as you would with stocks? Think about that, because a margin call in stocks liquidates your positions. A margin call in real estate often = foreclosure.
Are you sleeping well at night? And this is not meant to be a joking/rhetorical question.
How much equity do you think you have tied up in your homes relative to your other assets?
I’ll echo what John and Bennett suggested: what you paid for the properties, in my humble opinion, is irrelevant. Can you afford today’s losses? Can you afford a loss twice as big? Can you afford losses more than foregoing potential gains?
It’s bad enough to make an investment based on the hope that it will appreciate. Are you hoping that your properties will not lose you money? As Toddo often says, hope is not a viable investment base, let alone something you should rely on to avoid serious financial pain.
-All the best, Prof Zucchi.
Apologize for my ignorance but who are these professors? Are they notable in finance? i.e., what I’m really after is should I know who they are?
Good article. I too have been amused by all the people who think they are getting rich thru the appreciation of their home. Unless you are willing to take on a bigger mortgage, or move to a significantly cheaper place, all that equity amounts to just a shell game. I suppose 20 years from now ehn I retire I can move to Podunk and buy a mansion outright, but for now the high prices just put more money into real estate agents’ pockets, and jack up the real dollars I have to pay for property tax on my next house at the 1% rate. Speculative fever is never good.
I posted this over on the fool - so I’ll copy it here…
I think that one thing that almost every article misses comparing this boom to the last boom is the use of some extremely leveraged mortgage products this time around.
15 years ago an I/O ARM existed - but wasn’t in common use. In the last year over 80% of mortgages in San Diego are ARM’s with over 50% now being I/O or Neg Amort.
The cheap money is what’s been driving these prices - cheapest money in living memory and banks that are willing to loan to anyone - and I mean ANYONE.
Before people had to have 20% of their own skin in the game - real cash they had saved up for a downpayment. They knew how long it took them to save that money - how many months of brownbag lunches at the office instead of eating out. Now it’s all just numbers on paper somewhere disconnected from wages, earnings and savings - sign this paper and someone hands you $500k and you are a homeowner. Before they had a psychological incentive to just wait it out instead of just walking away - it was their money they’d sweated to save.
During the last “Crash” rates dropped by 2% - allowing a buyer to pay the same price for a house and have a lower payment - an increase in affordability - this time around rates will be heading the other direction - making the pain much much worse. 2% is 15% ish increase in affordability.
So If house prices in the last crash dropped 30% and rates dropped 2% to soften the blow, and this time around rates rose 2% making things worse then the prices would have to drop 60% ish to have the same change in what people are actually commiting to pay every month.
That’s ignoring the effect of going back to 10-20% down 30 year fixed will have once the I/O ARM’s vanish from the lending landscape as “too risky”.
Uncle Git,
Good Points!!
You pretty much nailed a point about which most economists seem woefully or willfully ignorant when predicting a mild aftermath to the worst housing mania in US history (and maybe in the history of the planet, no less!).
Yes, but you’re still assuming a “reversion to normal” for credit. If instead you figure a “reversion to the mean”, standards will be much higher than they were. Figure perfect credit, 30-50% down and your first born!
Those are all good points. The lenders have been handing out “Monopoly Money” like candy to just about anyone with a pulse.
And a lot of these people who took out NegAm or I/O or other creative exotic mortgages are going to be so so so screwed once interest rates go up, housing prices fall, or even on the individual level of losing a job or having a medical emergency and so forth. Whoops, now the I/O and NegAm buyers won’t be able to afford their homes! Now what?
There’s a reason that, historically, most lenders wanted to see 20% down, good credit and income verification - and it was not to be big meanie poopyheads and deny buyers a bit of the American Dream. Rather it was to make sure asses were covered on all sides, lower the chances of foreclosure, and lessen the chances that someone (lender OR homeowner) was going to take a bath. These days, it’s like funny money. If you can fog a mirror you can get a loan. That is so incredibly stupid. I mean, if I can’t trust someone I am not going to lend them $50, let alone just fork over $500K with no questions asked.
All sides - lenders, realtors, buyers - are just eat up with the dumbass.
I did. You didn’t seem to until just now.
Excellent!
Thanks txchick for that Minyanville repost. How do you like membership at that site? I’ve subscribed to a couple of sites that look at monetary policy (Weldon’s Money Monitor and Wall Street Examiner) but it’s mostly for entertainment - I haven’t found much of a correlation between the liquidity climate and actual market action.
I’ve been a subscriber from day 1. It’s worth every penny and way more.
Canadian realtors pick up “soft landing” phrase.
Coincidence?
Vacouver in For Soft Landing
Yeah, tell me about it. In the Metro free newspaper today, the big 48pt font headline was “Buy that condo now!”
Unbelievable. link
Warning: The following is a rant.
Open letter to Realtors
You are liars.
And you lie to make money.
I feel so foolish having listened to your analysis over the years about market conditions only to discover that you are nothing more than pitch salesmen and women trying to squeeze every last drop of money out of anyone within your grasp using whatever tactics you can. To keep the party going in good times and to get the party going in bad, there is nothing you wont say and there’s nothing discouraging you will admit to as long as there’s a party and you’re charging money at the door to get in or out.
Capitalism should not include by deception. And make no mistake about it, you people do not tell the whole truth. You occlude, you twist facts, and you manipulate data to your ends. From David Learah to Leslie Appleton-Young to the busboy who just got his RE license, you will never tell the truth about the market if it doesn’t favor you making money in it. You don’t even tell the truth when the market is white hot. You talk about the new model of investing and 20% YOY gains to the end of the decade, which you really can’t believe, can you? The problem with that is that people, and to their shame, the media, listen to you and take your comments as sent down from on high. And the fact that even the leaders of your association lie and twist the facts does not give me much confidence in “Dottie Remax” down the street.
So you, Mr. Realtor say, well we’re not all like that. There are those of us who hold ourselves to a higher standard and look out for our clients best interest even if it means a sacrifice for us. We provide a valuable service that you need. To which I say, I DON’T CARE! And the reason I don’t care is that you have let the great unwashed and dregs of the sales society into your ranks. 1 in 75 people in California have a RE license! Who amongst these gives a damn about me? Who amongst these even knows what they are doing? No, I’m sorry, I will not wade through the sewage of this rank and file to search for the gem amongst you. You should police your own industry and shouldn’t have let in anyone with a pulse and a $200 license fee.
I wish your industry ill. I hope the Internet and this Bubble expose you and yours as the shills that you are and that in the aftermath you wont even be able to say 2+2=4 without people running to look it up.
Rainman
Bring on the flames…I usually try to keep a positive attitude on this blog but I’ve just about had it with realtors. I can’t read anymore of their BS so flame away. This is how I feel today and that’s it.
It’s worse– 1:50 in CA are realtors.
then just multiply my disdain by .25%
1.25?
Actually, multiply by 150%
If you go into a car dealership with no comprehension of how they work then you’re going to get 3 layers of rust proofing. Buying a house is a much bigger decision than buying a car and if you go in assuming everybody is your buddy then I don’t feel a lot of sympathy.
Capitalism, like a democracy, requires informed voters. Should we abandon democracy just because some people don’t know what the First Amendment is? If you’re voting for a politician or buying a house and you haven’t done basic research before hand then you can’t complain when things go terribly wrong.
I know a lot of realtors. Some lie and feel bad about it. Some are old, wise, and honest. The real problem is the speculative fever brought on by the record low rates from the Federal Reserve.
KirkH-
Now that was a waste of time. He obiviously needed to blame someone. he went thru a lot of time to type that no matter how off base and fanatical it sounded. Let him have his day.
One comment I can make is not all the Realtors are the same. There are some on here who would agree with almost every word you said. The problem is the more recently enthroned ones.
Second comment is that hate won’t make you any money unless you happen to be in politics. Your attitude will prevent you from separating the wheat from the chaff and finding an ally who will steer you toward the good deals once the screaming reaches a crescendo. The ally who knows you as smart, and sees passing you a bargain as an instant no-work sale, so they lower their commission and want to keep you as a client — repeatedly.
feepness-
You had me up to the point of lowering of the commission. If I’m the realtor passing you “repeatedly” good deals. Why would you question my commission? Surely 1 or 2 points is not going to kill your deal. If so then I’m not doing my job and you definitely shouldn’t be looking at it as a good deal. Especially since your not the one paying it. The banker who flooded the market with exotic loans will be on the hook for it and also the FB doing the short sale. Well actually the bank will be on the hook for that too.
But the overall concept of the post was good. thank you for the kind words on behalf of all us realtors out there who have been around awhile were in the trenches during the last downturn and see the same thing you see.
I wasn’t questioning anyone’s commission. It seems that if I were a Realtor I would do so because a quick sale to a trusted buyer entails less work than carting around a picky couple.
Despite the fact that I hope to be doing that when the right time comes, I have never been on either side of even one such a transaction so I am admittedly pulling that out of thin air.
I do know two agents whom I trust. One of them does rail against how negative the media is about Real Estate… which she has been doing since 2004. But I tell her she’s wrong and then we laugh. I am going to owe her dinner since I bet in July 2004 that we would see a drop in prices by April 2006. I was too early and didn’t understand the process as well as I do now. Oh well, I buy her dinner, and keep in contact with a knowledgable friend (25 years in the biz).
And no, she wouldn’t do double-or-nothing, damnit.
-KirkH
The problem I have with most of the realtors that are quoted is that from the top down the vast majority of them are obfuscating the data for monetary gain and doing so in the guise of ‘expert’ opinion in the media and in person. Weather or not you have the time, intelligence or even the inclination to drill down to the truth is irrelevant to me. You shouldn’t have to.
Gee, I wasn’t aware that they feel bad about it. That totally changes everything.
And as far as speculative fever being the real problem, there’s no doubt that’s part of the many components of it but IMO realtors have exacerbated the problem greatly.
-mrincomestream
Fanatical? Sure. Off base? Nope. If you’re one of the honest realtors then I say sincerely good for you. But the tarnish by association because of their actions is yours and your organisations’ to bear.
-Feepness
Thanks for your comments. I’ve always respected your posts and mine are never rant-y like my previous one. It was just one realtor quote over the line for me today.
It has always amazed me how sneaky they (Realtors…NAR, etc.) are in regard to the print media, mainly newspapers. Even before the bubble, they try to disguise their “ads” in the paper as actual columns or stories written by some expert or unbiased journalist. You have to look carefully at the top of the page for the small print to see that the “Real Estate Advice” column is actually a paid advertisement. How deceptive. Years ago I got in the practice that if anything was written by a Realtor I immediately discounted what they had written as sales propaganda.
>
Spray-paint an outline of a dead body on the sidewalk outside your house. That should be enough to deter would-be renters.
You made me laugh.
WOW!! Another very informative thread!
So I’m thinking the economists who call the shots with the media have given up the ghost here and basically said “damned if you do, damned if you don’t”
They are already so beat up from flatfooted reporting on so many other issues they have decided to just be out with it so that they aren’t the scapegoat when the economic origami we’ve got here unfolds!
Now out with the derivative/default swap situation, dollar vulnerability, and lack of global competitiveness and pressure the politicos to start investing with a seven generation perspective!!
Interesting rge article here for the economically inclined re: our debts here… kept me up last night:
Things that keep the President of the New York Fed up at night
http://www.rgemonitor.com/blog/setser/119341
“When I started my real estate buying in 1998, my goal was to have 10 houses paid off in 2020 when I turn 50. My retirement! Am I the person you see getting beat?! I’m a big boy, please tell me the truth. We also have 401K’s worth 300k, a brokerage account worth 290k and equity in these eight properties worth over a million. I don’t count that because I feel they’re all going to drop but if we fight through this cycle and don’t lose all the renters at once, we’ll be alright. Where does my whole life fall apart?”
I think he’ll be fine if he stays the course. However, that’s irrelevant to anything. Let’s break it down.
“Am I the person you see getting beat?!”
No. You’ll survive. But for every guy like you who survives this, there will be at least two who didn’t. You’re different because you have something that very few of the other specuvestors have — 401K’s worth 300k and a brokerage account worth 290k. You sound stubborn/hell bent on proving to everyone that real estate is the path to riches, and you could feasibly drain these savings down for long enough to ride out any hard times. Not that that’s how I would advise you to invest nearly $600k of money you actually earned, but suit yourself.
“but if we fight through this cycle and don’t lose all the renters at once, we’ll be alright.”
True. But I thought the objective was to retire at 50 — not just “be alright.” To do that, you have to be a saavy investor, not a stubborn investor.
“… equity in these eight properties worth over a million. I don’t count that because I feel they’re all going to drop”
So you just admitted that you’re probably going to lose a million dollars, and the justification for not selling once you have THAT information is WHAT? WTF??!! There are exactly zero scenarios where it makes sense to lose “equity” when you don’t have to. Even if you’re R.E.’s biggest fan, wouldn’t it make more sense to sell now, and buy them back closer to the bottom?
But what’s relevant ISN’T that we’ve found a guy who would lose a million in equity AND whittle down some of his $600k nest egg in the very same process (and whittle it will with repairs, a month or so with no renters, cleaning up and advertising between renters, declining rental prices, adjusting mortgages, etc.), but rather that there are a bunch of people just like this person WITHOUT the $600k to (eagerly) lose during hard times. And the specuvestors WITH the cash cushion will experience plummeting values courtesy of the specuvestors who pushed the prices down by NOT having any sort of cushion.
“Where does my whole life fall apart?”
It won’t. You’ll just lose money, and your goal to retire at 50 will be delayed. On the long list of people who are about to be rendered insolvent, your name does not appear.
After watching the tech bubble burst, and now the R.E. bubble, I’m 100% positive that human nature usually dictates that people will stubbornly hold falling investments and go cashflow negative on those investments rather than adapt to a changing environment.
I always thought “buy and hold” was short-sighted as a basic investment strategy, but this “hold and hope” behavior is downright ignorant.
“After watching the tech bubble burst, and now the R.E. bubble, I’m 100% positive that human nature usually dictates that people will stubbornly hold falling investments…”
-Vegas has known this for a long time.
PT Barnum said a sucker is born every minute. Keeping in mind that the population has more than doubled since his time, we’re probably getting them every 20-30 seconds.
Plan accordingly.
With equity over 1M, and you are holding on? WTF! Don’t be a moron. Sell now and take your 1M and be happy you got out when the getting was still good.
Taxes and transaction costs may take a chunk of the million anyways.
The devil you know…
Again, not saying this applies to the upside-down I/O negative cashflow flipper. But there are people who can ride it out and face a catch-22.
Feep,
I concur that transaction costs must be taken into account. Taxes, depreciation recapture, re commissions, closing costs, lost rent (nothing sends a tenant packing faster than a for sale sign) plus, presumably, giving up a good fixed interest rate. Also, there are costs to get back in the market.
I think his plan is solid and if his properties will be paid off in 15 yrs his retirement stays on track. His net rental income could sustain him, together with his others savings/investments.
Plus, he would have to invest his net proceeds somewhere if he sold out. At age 35, I don’t see a problem with just riding this out and letting the tenants pay off his mortgages.
I have the same plan. I went through the nineties having bought 8 properties in the late 80’s. A serious correction is not pleasant, but there is volitilty in every investment. We stayed the course. Everything I have will be paid for by the time I am 55. Several are already free and clear.
Amen!
Even though I have benefited from the “Mortgage Interest Deduction”, I would love to see it go. Phase it out over 15 years if you don’t want to shock anyone.
House prices would simply drop and the net for home buyers will be the same, the Government would get more tax $$$, and taxation would be a bit more equitable.
Couple of points here. First, any serious decline in home values is gonna have a wicked effect on the GLOBAL economy. Not just the US economy. THE GLOBAL ECONOMY. The indirect and direct effect of housing on US GDP growth is about 3%. Take away housing over the last four years, and you have no US economic recovery. But, add back in housing, and you get the WORST US economic recovery since before the 1950s. That’s right, the WORST. Of course, the rest of the world has benefited as the consumer has turned his house into an ATM, China and Japan and Mexico and Canada in particular. In fact, the consumer this time around represents 20% of GLOBAL GDP. So Greenspan did what he had to do by killing interest rates. But the recovery, again, has been all housing, direct or indirect, on balance. Now, what does that say about business investment? HAHAHA. There has been MINIMAL business investment this cycle (since the recession in 2001) compared to prior cycles. Big deal, right? RIGHT! Why? Because if you know that business investment hasn’t been driving our recovery, if you know that housing has, then what do you expect to happen when the party ends this time? Okay, let’s play the game out. Housing craters, which means the consumer has cratered. That’s right, the consumer has increased its spending, INCREASED IT, for every quarter over the last 14 years!!! Amazing. And now we have negative savings and more consumer debt as a pecent of GDP than ever. I’m talking 25% more debt for the consumer now than what he had prior to the ‘91 recession. So the consumer craters and housing does, too, and Big Ben says, ‘Oh no, this isn’t good, let’s drop rates just like Al did.’ Great. Well, what’s gonna happen? At that point, who cares? Business isn’t gonna rush out and start spending BECAUSE BUSINESS HASN’T BEEN A BIG SPENDER WHILE THINGS HAVE BEEN ‘GOOD.’ Business isn’t too stupid this time around (other than the mortgage guys, I guess), so business is gonna wait till the consumer revives. Well, how long is that gonna be? How long is it gonna take to pay down all of that debt and erase the nasty memory of being upside down? It’s prolly gonna take as long on the downside as it did on the upside, at least.
So I guess it’s okay to be cavalier about the housing crash and it’s impact if you really understand who you are and what’s at stake for not just you, but for everyone else. But, frankly, I’m not sure most folks really know who they are and what really is at stake. I mean, do you think 43% of all stock purchases in 1999 were made on 100% margin? That’s not even legal, 50% margin is the limit! Yet the total equity market cap grew to 150% of US GDP at the top in 2000, then cratered to about 110% (or something close). Well, guess what the total real estate market cap is now? Yep, it’s GREATER than 150% of US GDP, and ‘margin’ this time is at least twice as bad. Does buying stocks with 100% margin with the NASDAQ at 5000 sound like a well-informed decision made by someone who really understands what they want? Because that’s what 43% of real estate buyers did last year.
actually I was just going to post about that Get’
and would just like to direct everyone to
http://www.financialsense.com/fsu/editorials/jain/2006/0130.html
oh, and hi everyone, I love this site. Nothing like watching TSHTF in real time
March 1st, 2006…
A New Independence Day?
More Inventory to come, friends.
It only gets better from here.
Repeat after me…
“SAVE SAVE SAVE!”
“SELL SELL SELL!”
Next year…
Can we all get back to having babies again?
And talking about families, instead of Real Estate?
Sure would be nice.
Maybe Ben could make a new blog next year:
http://www.howtochangeadiaper.com
Now that would be a very, very nice change of pace…
…with a smell that might take getting used to…
…but hey,
…it’s all about the kids.
DAMMIT.
How To Change A Diaper:
1) Invite female friend who just loves babies over to visit with baby while you are on duty. Whoops, maybe the baby needs to be changed! “That’s fine! I’ll do it.” How sweet of them!
2) Delay feeding baby until just before spouse is intended to “take over”. Note that the baby will determine if delay has taken too long, just listen for the ear-splitting screams indicating either murder or a slight twinge of hunger.
3) If #1 / #2 do not work, be sure to make feeding baby take as long as possible. Instead of changing one diaper immediately, you might end up changing two. If you’re lucky you can even dawdle until you’re off duty.
4) Put diapers at the changing station back in the box in closet. Claim station was empty and ignorance of location of new diapers. Suggest that newspaper was considered… and rejected.
5) Leave baby without diaper to play on the lawn. Hey, it’s natural, right?
I just thought of #4/#5, but I have to admit to the other three…
Just to put the nail in the coffin of this bubble, I would like to say for the record that it has been so, so hard for us as a family (my husband, 3 kids and I). We bought our home for 200K in 1996, and though it was just a small starter home we didn’t think in our wildest dreams that we would have such an impossible time trading up. Three kids later, we really, really need more space, and a decent backyard, and are completely priced out of the market assuming any sort of normal financing. The type of house we need, 4 bedrooms with a yard, has been flying off the market here in LA for 1.3 million plus, as far as I can tell mostly to baby boomers who either have loads of equity in their old homes to put down or have no qualms about taking on a mountain of debt. In any case, we have been stuck, stuck in this shitty little stucco box, and have to be grateful for it because our friends just a couple years younger than us can’t even afford a condo. This is not a normal situation, and when families like ours, with 200K+ annual incomes, cannot afford a decent home, something’s gotta give. Even if this bubble bursts tomorrow and we are able to buy something decent, I think this has really detracted from the experience we have had raising our children during their early years, having had no room to play catch, kick around a ball, etc.
You don’t have a park nearby where you can do those things?
I live in a townhouse and my wife takes the kids to the park every day during the week, and I take them on the weekends.
How can anyone who bought in 1996 feel sorry for themselves?
Very easy. The 800K we could get for our house now, giving us 600K in equity, is not nearly enough to buy a house for 1.3M. Also, our property tax bill would be 17K PER YEAR!!! As for the parks here, they are full of homeless people, illegal aliens, the bathrooms are locked so gay guys can’t blow each other in there (’I'm not kidding) or are right next to LA freeways. And other kids always steal our sand toys.
If it’s that big of a deal, then monetize your equity and rent. I refused to have my daughter live in a shitty 700 sq foot NY apartment, so now I rent a $1m+ house in Greenwich for $3,200.
Wish I was so lucky to have been a few years older so I could have $500-600k in potential equity to monetize from a house I bought in 1996.
“Monetize your equity” mean sell the house, and hand all your gains to some landlord? Then what?
We ‘cashed out’ in 2003 and moved into an apartment with our 2 small children. Personally, I think living in an apartment is a good experience for my children. When my daughter goes to a friend’s house with a big back yard, she’s totally impressed. I tell her one day we’ll have a house with a yard and she gets so excited. I think when we do buy a house, she’s really going to appreciate it rather than take it for granted. In the meantime, we have a great park a few blocks away
I do think there are pretty nice homes in LA or at least the SFV (in areas with good public schools) for under 1.3 m, but I know everyone has their own standards.
LMFAO!
My entire SOUL felt better just reading that, feepness!
Isn’t it silly that we’ve spent so much time worrying about this…
…when we could have been doing so much more?
The day will come when we will stop discussing Real Estate.
I’d much rather talk about diapers.
DAMMIT.
Auction, you crack me up.
If I met you on the street somewhere
Would I recognize you…
because you talk like you type?
In pseudo-zen sentence fragments?
Dammit
7 years ago, I was actually in the position of being asked to chose between a house and trying to have a (second) baby. We couldn’t afford both, hubby decided. I think he was initially hoping I’d chose the house. A 900SF PoS we basically hated, but we had this little window where we could ‘get into the market’ and the RE people seemed so worried that we’d never catch up if we didn’t buy it…very very sad way to live.
It’ll be nice if this craziness ends for a number of very good reasons…
cheers!
I do hope this is the last blast of helium for my town’s bubble…
From today’s CAR data:
Sonoma
January 2006 median price: $785,000.00
January 2005 median price: $440,500.00
YoY change = 78.2%
At the end of December 2005 the median price was $686k… and less than 7% of the population could afford to buy a home. What happens at 0%?
Scary proposition, but since I have the inside track working with lenders, I’ll tell you. We will do precisely what the Japanese did right before their market tanked. Lenders are, even as we speak, preparing “Multi-generational” mortgages which run 40-50 years instead of the conventional 30. It didn’t work well in Japan and I don’t think it will work well here, but, hey, who listens to the lessons of history anymore?
yeah, we have these multi-generation mortgages in the Netherlands too. Very nice for the banks, if the housing market tanks they also have the older parents with their big home (and usually lots of equity) on the hook. These m-g mortgages have been used for 2-3 years now (althoug they are not widely advertised) and prices are still rising …
This happens at 0%…
Dated February 28th, 2006.
They said it couldn’t happen there, because it was different.
http://www.mercurynews.com/mld/mercurynews/news/world/13980047.htm
Housing market in Shanghai collapses
American homeowners wondering what follows a housing bubble can look to China’s largest city.
Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to close thousands of offices.
For the first time, homeowners here are learning what it means to have an upside-down mortgage — when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.
Shanghai’s housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation. With China’s economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up. At least 30 percent to 40 percent of homes sold were bought by speculators, says Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai.
“Ordinary people had no option but to follow the trend,” Zhang said.
Thanks for that Auction Heaven… and yet they think this time it will be different. Sonoma is special don’t you know? Everyone wants to live there.
DISCLAIMER:
I am NOT out to SLAM ASIANS.
HOWEVER…
…there IS a cultural weight put upon OWNING versus RENTING in the Asian community.
This is what happens when people DO AS THEY ARE TOLD.
‘Cognitive Dissonance’ is without doubt, a terrible, terrible thing.
If you feel I am creating ‘Cognitive Dissonance’…
…PLEASE…
…QUESTION AUTHORITY.
Call me a liar.
Call me self-interested.
Call me whatever you want.
THINK FOR YOURSELVES.
Here in America, the REBEL has attained the status of ROCK GOD.
Why?
Because the REBEL- as in JOHN WAYNE, JOHN WESLEY POWELL, ABRAHAM LINCOLN, OR BENJAMIN FRANKLIN…
…has DARED to QUESTION AUTHORITY.
THINK FOR YOURSELVES.
QUESTION AUTHORITY.
And please, for crying out loud…
…teach our Asian friends to do the same!
Please?
I have already done my part….
I have a good Asian friend that was a bubble denier up until early 2005.
We had a conversation and he admitted that it had been a bubble all along and is holding off on trading up.
Good advice, but foreigners losing their ass in RE at the tail end of a bubble is a good American tradition that will dampen some of the negative affects of the bursting bubble.
Auction,
I think you make an important point about the different ways in which some of the ethnic communities approach real estate. I’ve tried to get people to bite on this in other threads, but so far no luck. Some quick observations from SoCal…
1. The information available to people who get thier news from Spanish and Chinese language media is VERY different than what is available through mainstream English language media. I’ve discussed this issue many times in the past year with Chinese and Mexican-born engineers who work at my company. The “get-rich quick” real estate articles are still flying in the non-English print and broadcast media.
2. When looking for a place to buy last summer, I was surprised byt the number of real estate signs in my part of town that were printed totally in Chinese characters. I called two or three of these realtors, only to find out that they had a very difficult time conversing in English. One of them told me to get all the details from the flyer. And the f-ing flyer was printed in Chinese! The same thing happened again this winter after I had been converted into a happy renter by this blog and others. One house in the Raymond Hill area of Fullerton was for lease. When we called the number, the agent (who spoke very poor english) told me the place was ‘already gone’. It is STILL for lease almost two months later. I’ve left two more messages for the realtor since then, but she won’t call me back.
3. I have witnessed many visits to houses in my neighboorhood where the family and realtor are from the same ethnic group and speak in thier native language while visiting the property.
4. Finally, an unscientific personal observation. Is it just me, or do immigrant real estate investors seem even more interested in HELOC’ed bling-bling than anglos? My landlord (nice hispanic man, runs a small carneceria, owns SIX $500K+ houses in San Bernardino county) recently showed up in a brand new gigantic dooley pickup, all tricked out in leather and upgrades. When I admired his ride, he said this was a gift from his wife, who doesn’t work and dosen’t speak English.
My question: What can be done to help break through this ethnic news bubble and help immigrant communities understand that there are risks associated with RE investing?
MC White, you don’t need to teach immigrants anything, they are a lot smarter than you think. When shit hits the fan, they will leave the country and the lenders will hold the bag.
They’ll come back a few years later and start the game all over again.
You are correct about Latinos and the love for bling. I admit that most are show-offs of fake wealth and strongly in denial. Not all of us though. But it’s no just the Latinos in SOCal. I live in a predominately anglo neighborhood and they are up to the hilt in debt buying flashy boats and off road vehicals, trucks with big tires all equity funded.
Am I the only one that sees the similarities between now and the 2000 stock market crash? Just substitute the word “house” for “stock”.
Assets tend to overshoot both to the downside as well as the upside away from the mean. If we believe that prices are 30% overvalued, they should fall much farther below that before they find a bottom and then start to stabilize and find a true level of value. Given the extreme overvaluation that exists in the current real estate market, I would not be surprised to see 40 to 50% haircuts in some areas.
Another interesting story here in the Sun-Sentinel about the negative impact of the housing bubble. Here’s a snippet — basically it quantifies how no one who really makes a living here can afford to buy a house with a reasonable mortgage any more.
http://www.sun-sentinel.com/news/local/southflorida/sfl-caffordable02mar02,0,693688.story?coll=sfla-home-headlines
Major gaps exist between what a single-family home costs and what most can afford to buy in all 25 Broward cities studied. That difference is $266,000 in Fort Lauderdale, $110,000 in Hollywood and $141,000 in Pembroke Pines.
While condos remain a cheaper alternative, they, too, are out of reach for many households in 12 of those 25 cities. Those places include Fort Lauderdale, Hollywood and Pompano Beach.
The problem exists not just for store clerks, waiters and secretaries, but for firefighters, teachers and police officers.
Three-quarters of Broward households earn less than $77,000 a year, but would need to earn $91,000 to afford the current median price of $361,000 for a single-family home. The median sales price of a condo is $193,000, but roughly half the households don’t earn the $50,000 a year needed to buy such a place.
i saw these numbers and thought, jeez, why is it that I am close in profile to that ‘earner needed to afford current median price’ but that is toooo rich for my blood…where do they get the numbers, and so I used the calculator over at fanniemae…the ‘how much house can you afford’ calculator. I keyed in 78K and 100bucks of monthly debt, for say a cheap car payment or a student loan, and they shot back at me with a monthly *gross* income of 6500, I can ‘afford’ a payment of 3150 for housepayments!
WTF?
That’s 48% of my gross pay?! that’s what fanniemae says I should consider affordable?!
So, with 15K for downpayment and closing costs they say I can buy a house for 350K if rates are at 6.5% and 400K if rates are as low as 5%.
I thought I used this tool some time ago and it didn’t let me borrow so much?!
And double all of those FL numbers to get a representation of what people in the coastal areas of CA face. Even the inland $hitholes like Fresno, Bakersfield, San Bernadino, etc are higher than the FL prices. What is going to happen to the people left in this sewer? Arnold is going to ride to the rescue to “rebuild Kaalifonia”!
in my country (NL) it is considered ‘normal’ that a decent home costs 10-15 times the average income. Even with two working partners you need extreme leverage to buy but seems nobody cares.
Fifteen years ago a house cost only 3-4 times average income (we have 40-50% HMD, so the multiplier factor is higher than in other countries).
but well, the whole country is a ‘coastal area’ so maybe that’s why (and yes, they are making more land here from time to tim - it’s just not available for purchase for normal citizens).
apart from that, it was just reported that at least some 20 billion (that’s a lot for a small country) of black/criminal money is coming here every year from the US, and most of it ends up in Dutch real estate.
yeah, obscene, but I *swear* when I used to go on that site–I think it was fanniemae’s website and mortgage tools I had used in the past year or three when wanting a calculator–they’d not “let” me spend so much money on housing.
I’m really curious to know whether calculators are being calibrated differently…that would be amazing.
wow, even the netherlands getting bought up by investors in US?! is it residential RE being bought there by ‘black market’ money?! I’m having visions of ‘vice’ money figuring amsterdam is a good place to do business and they’re really running out of real estate!
I actually came for a cybervisit here to download about how I got a call at 8:30am from this mother of a classmate of my kid’s about how she wants to sell her house and heard I was looking! Before 9am! And it’s winter vacation this week here! And our kids do *afternoon* kindergarten, so we’re often not up that early on a school day!
And she’d called like a week ago and I hadn’t returned the call then! I only answered it because my hubby just yesterday flew to schipol en route to nairobi to visit his brother who’d just gotten released from being held hostage in somalia. Usually I screen my calls, but lately I’m just picking up the phone. So I didn’t notice that it wasn’t him calling from the airport or something, and instead got a blast of housebubble frothy blathering crap. Not to be mean, but jeez…I told her I’m taking a break from housing stuff, and I think so is hubby, for whom this incident I think gave time to realize that there’s other issuesto think about in life maybe.
Hey, land is probably very cheap in Somalia, for the investors out there, especially in that section of the country where 2.5 million people are projected to be dying of starvation in the next months, where we’ve not done anything though we’ve seen it coming for a while now, and where it’s a challenge to get aid workers in because there’s little governmental control and even if there were it has been custom to kidnap as a business venture or even to settle business disputes for a while now. Maybe that will be the trend in SCal “buyer’s market”…taking people at gunpoint and forcing them to buy your house!
I’m really curious to hear from husband about his brother’s house outside Nairobi…yes, I think there are Mcmansions of a sort even out there, in these foothill exurbs, but I don’t know much because they’re not build by like Toll bros. so they don’t have website adverts as far as I know. buying there though, cheap as land may be, you gotta work in the extra cost of security hires, since you need to have your own ‘gated’ community as it were. There the bennies of not having to rent are probably huge…being at the mercy of a landlord in a land where for instance prisoners recently agreed to give up their lunches to feed starving non-incarcerated citizens might get even uglier than housebubble frenzy here in the US, no?
People looking to retire in say S. or Central America might want to look into this kindnapping thing there as well. It happens quite a lot, usually to wealthy businessmen, but who knows…maybe wealthy retirees buying up land will be next! Have those HELOCs in place, just in case…
cheers all…
I’m having visions of ‘vice’ money figuring amsterdam is a good place to do business and they’re really running out of real estate!
sure, Amsterdam had its fair share of high level (RE mob and associated stuff) drive-by executions in the last year. It will probably get worse before this housing bubble is over. Too much people getting scared about their ‘investments’.
don’t know about Somalia but there is already a big property bubble in Dubai which also has lots of desert, so who knows