Is Real Estate The Asset Most Prone To Bubbles?
Readers suggested a topic on financial bubbles and real estate. “Something I’ve been thinking about recently: Not only do real estate bubbles exist from time to time, but it seems RE is the asset class that is MOST prone to bubble extremes and boom/bust cycles.”
“Consider: In the past century there have only been two real US stock-market bubbles (I won’t count ‘87 because we were higher by the end of ‘88). There has only been one real gold bubble; 1980. I wouldn’t count any of the runups in oil prices as bubbles, because they were in response to fundamental shifts in supply and demand. There was only one tulip bubble ever, and so on.”
“But RE… we’ve had three in the last 30 years or so: late 70s, late 80s and 2000-05. We also had one in the 20s in addition to various smaller, local bubbles such as Denver in the late 1990s. Look in other countries: The UK has had two in the last 20 years, Germany had one in the early 1990s, SE Asia had one in the mid 1990s until 1997 and of course Japan had the late 1980s… all these bubbles were NOT correlated in time, and formed independently of each other.”
“So I ask: (1) do you agree and (2) what is unique about RE that causes this to happen? One answer to #2 may be that RE is the one asset that is most accessible to the public at large, where herd mentalities and ignorance in financial matters are prevalent.”
One replied, “Real Estate bubbles continue to happen primarily because they’re not (or haven’t been, until now) as dramatic as more liquid bubbles - e.g. stocks and tulips. In particular - the last two bubbles haven’t really been ‘bubbles’ per se, in that the non-inflation-adjusted prices didn’t actually go down in most areas. Thus even after a ’small bubble’ RE is seen as a low-risk (even no-risk) investment. Contrast with stock bubbles which are obvious risks.”
“The only real bad price declines in real estate have been very localized and/or distant history, at least in the US anyhow - Florida in the 20’s, and Hawaii in the 90’s, and the latter still wasn’t that terrible. That’s all about to change.”
Another said, “I think that because RE is the only asset class where J6P can get leverage, relatively small price movements (and expecially falls) have an exaggerated impact on the popular consciousness.”
“Also, RE experiences can be far more localised than Stock Market ones. Consider that since 1968 the NAR’s numbers have never shown a national full-calendar-year annual decline.”
“You could in theory argue that the US as a whole has had zero fully played out RE bubbles in that time, since there have been no actual nationwide busts. (Mind you, have fun arguing that proposition to anyone who lived in the Houston region during the 1980’s.)”
One made a comparison to stocks. “RE has (at least) two differences to the stock market: much larger leverage, and less comparability between objects. One IBM stock is the same as another IBM stock, but houses are not alike.”
“Larger leverage might explain the magnitude of booms and busts, and the incomparability might explain the inertia of RE, which also masks some bubbles in retrospect. You have to plot house prices as a ratio to wages or to consumer prices to see the ups and downs clearly (well done by Robert Shiller or by Rich Toscano about the San Diego RE market).”
One had a personal experience, “Interesting points…if one accepts there were no national bubbles in the last ’70s and ’80s (we have discussed local bubbles during those years many times here).”
“Many people certainly got hurt, even in parts of the country you wouldn’t initially expect. (Example: My family moved to NC in 1988; folks moved away in ‘93. Dad lost about 25% on our house in NOMINAL terms. In North Carolina, not Boston or LA).”
“If there was never the ‘zero to 100 to zero’ effect in RE, the runup and pullback still affected a lot more people, because as realtors™ like to say, everyone needs a place to live, and it’s the middle class’s largest asset.”
not so far
but 80’s had hard money,down payments, oil patch early death, and major tax changes in 86 to pull investors out
You bring up some good points. The 86 tax changes did have a huge effect, but so did the tax exemption passed in the late 90’s.
When I started studying RE as a major in college, the head of the RE school, who was a VP with Grubb and Ellis, drew a series if up and down waves on the chalk board. Then he drew a similar one with the peaks and valleys barely out of synch with the first and continued with about four more. He said that as each market rose and fell, the ideal was to jump from one at the peak into one at a trough. My point is that it has been well known within the industry that the boom/bust cycle dominates. BTW, this was in the Dallas/Ft Worth metroplex in 1984, just before all hell broke lose.
Ben, we need a special subject area about mortgage fraud and cash back deals. All hell is breaking loose on that very subject down here in Phoenix/Mesa/Scottsdale. This is the house of cards. The FBI and state department and getting knee deep here and I fail to see that this is not a problem country wide. We need a place to start exposing these crooks and start contacting authorities with crooked deals. This by far could become the big story on 2007 IMO as it affects all aspects of the real estate industry and it has explosive repercussions for the mortgage industry as well.
I have been posting about mortgage fraud since the spring of 2005. I made the point then that when a scam is busted, it was hard to distinguish from the bubble activity.
The only difference now is that the bubble part is going away.
Sorry if this has already been posted. The mortgage fraud indictment of the Rev. (oh brother!) Saundra McFadden-Weaver (city councilwoman) has been big news in Kansas City for a while now.
http://www.kansascity.com/mld/kansascity/news/local/16375466.htm
http://kansascity.fbi.gov/dojpressrel/pressrel07/mortgagefraud010307.htm
KANSAS CITY, Mo. – Bradley J. Schlozman, United States Attorney for the Western District of Missouri, announced that a Kansas City, Mo., City Councilwoman was among three co-defendants indicted by a federal grand jury today for conspiracy and wire fraud for their role in a scheme to engage in mortgage fraud.
Saundra A. McFadden-Weaver, 47, and Emanuel M. Kind, 51, both of Kansas City, Mo., and Ricky L. Hamilton, 52, of Grandview, Mo., were charged in a seven-count indictment returned by a federal grand jury in Kansas City. McFadden-Weaver is a member of the Kansas City Council. Hamilton is a mortgage broker at Trinity Mortgage.
Au contra er; the 86 tax ‘reform’ was a disaster and caused the S&L crisis. You couldn’t write off all your RE losses so investors and speculators walked. The lenders ended up with a bunch of RE on the books which they had to write down. When they couldn’t come up with more capital the FSLIC and FDIC took them over, screwing the stock holders. I blame a bunch of idiots in the Congress and on Ways and Means, Rostenkowski and Matsui as well as Thomas for the 86 tax change. Donald Ragan (of Merrill Lynch), sec of treasury under Regan, does not get off free as he wanted to change the investing habits of the US from real estate to stocks. Comprende.
Au contra er; the 86 tax ‘reform’ was a disaster and caused the S&L crisis. You couldn’t write off all your RE losses so investors and speculators walked
Get your damn history right. Tax revenues soared in the mid 80’s. and the S&L crisis wasn’t until the early 90’s. Part of that was from a tax hike that Bush 1 signed off on.
I hate revisionists and ignorance. Pick up a book once in a while; would it kill you?
Jackie Childs…please note…I was buying Colorado RE HUD foreclosures and this is what was then.
April, 1987–Edwin Gray ends his term as chairman of Federal Home Loan Bank Board in June. Before his departure, he is summoned to the office of Sen. Dennis DeConcini. DeConcini, with four other Senators (John McCain, Alan Cranston, John Glenn, and Donald Riegle) question Gray about the appropriateness of Bank Board investigations into Charles Keating’s Lincoln Savings and Loan. All five senators, who have received campaign contributions from Keating, would become known as the “Keating Five”. The subsequent Lincoln failure is estimated to have cost the taxpayers over $2 billion.
May, 1987–Bank Board begins phasing out the remains of the liberal RAP accounting standards. S&Ls must conform to GAAP accounting standards, as banks do. Effective date of this rule postponed by new Chairman of the Federal Home Loan Bank Board, M. Danny Wall, to 1/1/1989.
August, 1987–Competitive Equality Banking Act of 1987 enacted. The Act authorizes $10.8 billion recapitalization of the FSLIC with only $3.75 billion authorized in any 12-month period. Also contains forbearance measures designed to postpone or prevent S&L closures.
February, 1988–Bank Board introduces the “Southwest Plan” to consolidate and package insolvent Texas S&Ls and sell them to the highest bidder. The strategy is to resolve insolvencies quickly while conserving scarce cash for FSLIC. The Bank Board uses a number of strategies to pay for the difference between assets and liabilities of the failed institutions: FSLIC notes, tax incentives, and income, capital value and yield guarantees. The Bank Board disposes of 205 S&Ls through the Southwest Plan with assets of $101 billion.
I wasn’t as clear as I liked earlier. The S&L crisis has it’s roots back to the early 80’s and deregulation and the spike in short term rates and limites they could pay on deposits. Certainly there was much corruption involved as well.
The tax cuts of 86 were not the blame though as an earlier post mentioned. The tax hike in the 90’s did put the nail in the coffin of the real estate market back then. The RTC as I know wasn’t created until 1989 and went on until the mid 90’s, I think it was 96.
Time Monday May 27, 1985
When a savings and loan crisis hit Maryland last week, depositors knew all too well what to do. They gathered up their lawn chairs, thermos bottles and portable radios and lined up outside the banks as if they were embarking on a familiar American outing. In a sense, they were. Only two months ago, depositors across the U.S. witnessed scenes right out of the Great Depression during a panic that temporarily shut down Ohio’s 69 privately insured thrifts. At the time, Governor Richard Celeste warned several other states that they should prepare for similar events. “You’re sitting on a time bomb,” he told Maryland Governor Harry Hughes.
The rest at
http://www.time.com/time/printout/0,8816,956993,00.html
I was buy REOs and HUDs in 1988 and 89…Auctions actually started in 88 and first time auction buyers went into foreclosure 6 months later when property prices finally plummeted in later auctions. It was absolutely amazing to watch when HUD recalled properties in one auction early in the day because they thought the offers were too low..and then at the end of the day put whole developement up again to clear the books. 3 bdrm 2 c garages brick townhomes going for less than $20,000. Some buyer bought out the whole ball of wax and became a millionaire overnight.
Real estate is something most people can relate to and something most people believe they understand.
Of course, what most people misunderstand is all the INVISIBLE things that come to bear in the real estate market. They fail to understand interest rates, financing (particularly the “exotic” products of today), the conflict brokers have, the cheerleading of the media, the importance of sound construction in a home, the effect of local politics on supply and demand (from property tax policy to permitting) and maybe another dozen important factors I haven’t listed that could easily turn what appears to be a “deal” into a “steal” (by a seller).
All most people see is a building and all they evaluate is the direction other people are heading. Why? Who knows what the “right” price of anything (much less a complex investment such as real estate) is at any given time? Whenever ALL of us are “uncertain” don’t we look for clues from what others are doing?
And that may be why people will, periodically, grossly overvalue assets like real estate. It is, like the stock market, always “uncertain”. In fact, I suggest that the moment a market does appear to be “certain”…heading in a distinct direction… it is just about at the end of the appreciation slope. When an inherently unknowable entity seems to be “clear” that’s when huge mistakes can be made.
Add in the natural leverage (generally, the only leverage most people ever employee in an “asset” purchase during their lives) and you have the fundamental possibility of a bubble developing whenever confidence, greed and “consensus” combine with “easy” money.
The reversal of this is ugly. Since most people really didn’t understand it on the way up, they aren’t likely to understand it any better on the way down. Many will do exactly the wrong thing, at the wrong time. As with waiting to buy until they are “certain” its “safe” or “predictible” they’ll wait to sell until that moment when it seems like “everyone” knows real estate is “stupid”.
Bubbles will never cease to occur. They are as natural as the emotions that inflate them.
‘what most people misunderstand is all the INVISIBLE things that come to bear in the real estate market.’
Right, and something I wasn’t aware of before starting this blog. Think of all the myths and assorted baloney about RE held in faith by so many people. I wonder how many have ever added up the total mortgage and interest payments in the life of a loan and compared it to what they paid? Sure they bought a home, but they bought the banker two or three.
Add in the cost of inflation and a lot of people really don’t make anything on their house “investment”.
I think for 99% of folks, housing “appreciation” is merely the effects of savings with an inflation hedge. Even during non-bubble times, you aren’t breaking even (rent vs. own) until year 5-7, due to up-front costs.
The CALCULUS teacher at my school couldn’t (didn’t) wrap her head around the issues until I pointed out the follies of some of the young folk in our dept. She said that her parents’ house (purchased in 19?? for $??,???, sold for $???,??? in 200?) had appreciated TONS, so RE must be good in the long run. I asked her to plug the numbers into the equations she teachers our TENTH graders (Algebra 2) on interest/inflation.
Something like .2 above inflation - not including any upkeep OR PROPERTY TAXES.
When you did the calculation, did you figure in the rent that her parents would have paid if they didn’t own a home?
The 3 bedrooms outside Boston were renting for $2200/mo in 1998. If those rents had stayed stable…(ha! ha! ha!) we’d have spent $264,000 in the last 10 years. We would have had no yard and live in about 1000 sq feet.
Instead our payments were $750/mo on the Cape house with an acre land, and $950/mo here and we’ve put less than $40k in the 2 homes in maintenance. Total 10 year output= $146800. My home will be paid off in 5 years and then those payments will drop to under $500/mo. Anyone renting any 2000 sq footers on an acre for that?
Yeah. I had an 8.25% loan in 1990 on a $96,800 house. In 2020 I would have paid $200,000 or so more than the original price of the house, in addition to pay for the house itself. I sold for a loss in 1996.
posted ” Sure they bought a home, but they bought the banker two or three.”
Yes, but what are you going to do? I am not an investor, years ago if I could buy a house for what it cost to rent even including the tax write off, that was a deal. Plus it stablized or fixed one very important cost in the family budget.
A house is a house is a house… people need a place to live and operate thier lives from. If you get blown out in the stock market you have a pile of paper.
The only people I know that made real money in RE held a very long time…. long enough to get the renters to pay off the note.
Ben you nailed it with that comment. I have always said, you pay for the house and twice for the interest. Good luck trying to make money on that 750K home in 30 years. Break even ON JUST LOAN is about 2.3million after closing costs. Now add in taxes, about 6oo a month at 1% annually. Add another 100 a month for insurance (fire, mortgage, etc.), add another 200 a month for association fees and the like and finally another 250 a month that sheeple use for maintenance, upgrades, and junk for the house. That’s another 1150 a month or 414,000 and then add another 50-100, conservatively, more a month for utilities. Grand total=2.75 million for that baby. If I take that amount and divide by 360 months I get $7,639 per month. Even with my utilites I am paying 2,300 a month. My rent could increase $150 per year for the next 30 years and I would still only be $6,800 per month. Ouch! Home ownership the new AMerican NIGHTMARE!
Why would you compare your $2300 a month rent to a 750K home? By the way, at the end of the 30 year note, the 750K home will be worth more than all the PITI plus maintenance you paid over the life of the loan. Plus, you got to live in it for 30 years.
Why would you compare your $2300 a month rent to a 750K home?
Perhaps because he is renting a house and comparing it to the carrying costs of buying an identical place? Comparing rent vs. buy on an equivalent property is hands-down THE best way to determine if you’re really saving any money by buying.
By the way, at the end of the 30 year note, the 750K home will be worth more than all the PITI plus maintenance you paid over the life of the loan.
Wrong. You’re thinking in NOMINAL terms, not REAL (inflation adjusted). R. Shiller proved that long-term, housing has only beaten inflation by about .2%/yr –and that’s INCLUDING the huge run-up in prices over the last 7 years.
Plus, you got to live in it for 30 years.
And I CAN’T live in a house I’m renting (for 1/3rd the cost of loan-ownwership)?
Is OCDan really renting a 750K house for $2300? I find that hard to believe. Here on Long Island I could rent a $500K house for about $2500, which is still pretty nuts.
I’m not saying that he should go out and buy something, especially not in this market. I’m just wondering where he’s getting his numbers from.
If you have a link to R. Shiller’s calculations, I’d like to see them. Do they include the real estate’s income-producing value and tax benefits as well as the rise in its appraised value?
IIRC, Shiller’s computations only treat the appreciation. By using the _successive_ sales price history of individual houses, and then adjusting them for inflation. Since about 1890 or so.
One component they don’t include is upgrade spending, that may have become statistically more important during the recent boom.
Others have done the more complete calculation you suggested and found that over the long term, housing seems to be profitable. Of course, that is for people who intend to actually pay off the mortgage over the long term. (Not many who buy at the later stages of a housing boom seem to have this strategy in mind.)
For flippers, the Shiller appreciation data should be a warning. (Flip only during the up side of a bubble!
)
You can always make money by buying low and selling high. You would be doing the opposite by buying in many places now.
Housing is only profitable if you sell into the bubbles. My parents bought a house and sold it 20 years later for a $9K gain (before realtor fees). I know the carrying costs were enormous.
Peolpe don’t count the time spent maintaiing the house on the weekends. They don’t count the costs of maintaining the lawn for 30 years. What is the cost of watering, mowing, weeding, fertilizing, and the rest of the equipment needed.
You can always hire illegal aliens, but then your taxes increase to support their families welfare and education.
When you use as an example a 750k house I would agree it would be better to rent then buy. However use a home that sells for the bubble price of say the national average price of 250k and a fixed interest rate of less than 7% and it probably does make sense if you intend to live there a long time. I have always made an extra payment with each mortgage payment and in some years I made two payments in December. So I would never pay all of the interest that it said I would on the note. I also pay less taxes because I own a home. No one ever points that out here! And then the one thing that makes home ownership the right thing to do is that when it is paid off you have no mortgage payment and also no rent payment.
Now I don’t think that people should rush out and buy a house right now as prices will probably fall back to 2002 or 2003 levels by 2009.
They didn’t buy the banker two or three. You’re disregarding inflation and the time value of money. Not to mention that, if you allow for even a very modest appreciation, the house will be worth more than all the PITI you paid over the life of the loan. Plus, you got to live in it for 30 years.
Plus you got to pay for new roofs, broke down furnaces, the city assessments for revamping of the sewer system, new windows, carpeting, doors, exterior upkeep, removal of dying trees etc. etc. etc. Show me a house that doesn’t constantly call for additional funds and I will show you a gingerbread house.
Ok NYCityBoy - think about the person renting in NY city living on SS. Now think about the person who paid off the mortgage and is living on SS. Big difference, very big difference.
Not to mention that, if you allow for even a very modest appreciation,
Big assumption. After one of the largest run-ups in history (300% in 6 years in most parts of CA), and affordability in single digits in some cities, what makes you think they will head higher from here? Is it wise to use debt to buy an overpriced asset at or near it’s cyclical price peak? Do trees grow to the sky?
…the house will be worth more than all the PITI you paid over the life of the loan.
Again –patently false. Contrary to Realtwhore propaganda, there is *no guarantee* that real estate always appreciates. And even if it does in nominal terms, you have to factor in inflation. Robert Shiller proved RE appreciates just barely above inflation long-term.
Plus, you got to live in it for 30 years.
Same goes for your rental house. And with a rental, I don’t have to tie up 75% of my earnings and all my net worth in an undiversified, illiquid asset, the way I would if I bought right now. I can save/invest a bundle, keep my powder dry and be ready to strike once the bubble has deflated.
one of the major problems with these calculations is that from around 1985 (the Greenspam era), inflation numbers are heavily manipulated and because of that people start making wrong financial decisions. At least in Europe, interest rates on savings accounts (and T-bills etc.) are far below actual inflation, while house price appreciation in many countries has been above real inflation (and FAR above official inflation) for nearly 20 years. This is a historical anomaly, but if it continues for so long I can understand that people believe it will continue forever. On top of that, in some countries housing is heavily subsidized by government with HMD and other incentives. In hindsight, in many parts of Europe RE was by far the best investment ever over the last 20 years or so; nothing comes even close. No surprise that you get a huge housing bubble with all these ingredients.
The “INVISIBLE things …” A very important point. I recall the first time I did the math and “discovered” that the $75,000 house was going to cost me over $200,000! I was completely blown away. That shock was falsy lessened by the lie about the mortgage interest deduction. I say lie because once I understood that you had to spend a dollar to save .30 it became clear that while it was a discount or reduction of the overall cost it did not mean I should spend more than I could and that was the lie being put forth to me by the REIC.
I have a sense that most folks simply are not motivated to do the math and instead they choose to have faith that the REIC will look out for their best interests. This is what puts most people into that place where they make those bad decisions at the worst times. The culpability is with the sheeple and the REIC. The sheeple need to do the math. The REIC needs to stop claiming to adhere to such high ethical practices. I read a NYTimes article yesterday wherein an REIC shill mentioned that RE agents were one of the few “professionals” who had to attend mandatory ethics training. If true, then they are doubly suspect simply because they cannot claim that they knew not what they were doing when they lied, manipulated, and deceived their clients.
oc-ed:
” I say lie because once I understood that you had to spend a dollar to save .30″
“I have a sense that most folks simply are not motivated to do the math”
Therein lies the two biggest issues…..the term “write off” is thrown around like leaves and few comprehend the truth. As far as “do the math”….I’m not sure people have enough sense to comprehend math; much less apply it. Personal finance is not taught in school and parents sure set a great example…NOT!
There’s nothing wrong with compound interest. The key is using it to make money instead of being a slave to it.
Cheers to both of you (oc-ed and Dan). After teaching math for quite a while and feeling angry that nobody would educate the public about which side of the compound interest transaction is the advantageous side, I became cynical enough to lend my own money to people who think I am doing them a favor. In a way, I AM doing them a favor: without me and my pinmoney, they would be borrowing from crooks who make their money on points and fees and bullscheet.
Actually, you can figure out that invisible thing if you finance your a vehicle or take out a school loan. The documents spell it all out out quite nicely….didn’t realize I was such a numbers geek for actually reading that stuff.
Do the math:
I pay $12000 in interest and property taxes (200k$ home) and it returns to my wife and I (wait for it…) $750 per year in taxes over renting (e.g.: Standard Deduction of around $10000). At a 25% tax bracket I had to even add in the state sales tax deduction I wouldn’t otherwise have to get that much tax return from home ownership.
If you are single with a $600,000 loan then I can start to see how you can get up to the full effect of the 30% or whatever “tax break”.
In Texas, however, the “tax break” at this level might almost pay your outlandish property taxes.
There ARE advantages to owning the house that you live in. You can redecorate to your taste, You do the maintenance and upkeep to your taste. In effect, you’re your own, on site property manager). There ARE often advantages to using a conventional mortgage to assume the house price risk in exchange for making the bank assume interest/inflation risk.
I think that a big part of the problem here is that many people simply have no real idea what they can afford to pay. They instead believe that the bank’s interest in not foreclosing is sufficient to insure that they don’t get a loan that they can’t afford. What they don’t realize is that there is so much stupid money in the finance markets buying MBSs that the person selling them the loan does not have the slightest interest in whether they can pay or not. The mortgage brokers ONLY interest is whether they can make it APPEAR to aformentioned MBSs purchasers that the loan won’t default. There is an ENORMOUS shell game going on, bundling loans into different tranches, trying to hide risk.
“…all these bubbles were NOT correlated in time, and formed independently of each other.”
Yet, is the situation different this time, given the apparent simultaneous bubble markets in Europe, Asia, Australia and N.America? If this is a near-global situation, what is fueling the speculative fire? Too much loose currency floating around?
Also, I think he meant to say Robert Shiller.
‘If this is a near-global situation, what is fueling the speculative fire? Too much loose currency floating around?’
Some have said here that the global property boom is just a self reinforcing side effect of a larger credit bubble. Maybe if some economic historians are reading, they can let us know if there have ever been so many simultaneous booms before.
In the latest edition of “Manias, Panics, and Crashes” the late CPK and Robert Aliber repeatedly make the argument that the last 25 years or so have been so interesting because the manias and crashes have come so frequently.
The book was written in early 2004, so it doesn’t really identify the US housing market as another asset bubble (although in a few places, there’s speculation that it might turn out to be).
Also worth noting that they believe that the asset bubbles from Japan in the late 1980s are what fueled the real estate boom (and collapse) of Southeast Asia in the mid 1990s, the US tech market crash in the late 1990s, etc. The US housing market of the early 2000s would be an obvious continuation of this cycle. In other words, what we are witnessing is really the same bubble that is just repeatedly manifesting itself in different places and different forms.
Walt526 reply: You are correct about Charles P Kindelberger [CPK] in that book..Somehow, I get the feeling we’re getting to the end of this Credit Expansion Boom; in as much it is pricing out the particpants.Stocks, Bonds, RE..
Ben, this has never happened before where Central bankers have acted in such unison..ALL inflating at the same time…
Even still today, the big boys can borrow money from the Bank of Japan for 0.25% interest, and buy MBS, CDO, etc..
I have relatives in both Australia and Poland and “loose credit” coupled with low rates are the 2 biggest culprits. Another factor is a very strong push by “RE Is Good” gurus (i.e. rich owner, poor renter).
Easy money and the promise of how to use your newly acquired “easy money” to make lots more “easy money”.
Anyone who could fog a mirror could leverage relatively large amounts of cash and buy tons of RE….and that is exactly what happened. 50% of the listings right now in the U.S. are “empty” which means they are owned by “infestors”.
Throw in all the commissions and self-feeding “I want a slice of the pie” parasites in the process and it became a ever growing snowball gathering monmentum…..but now an unmoveable brick wall looms and when it hits all the shysters, parasites, and GFs will be flung out like garbable…
And our “leaders” who only look in the rear view mirror while “leading” will proclaim they knew it all along. The guilty will be self-righteous and the innocent will be punished. Instead of Ben being hailed as a visionary he will be tarred and feathered….”his negativity caused all of this”…ad nauseum.
You could not go into a bank and get a “no questions asked” loan that far exceeds your means in order to buy gold or stocks. So yes, RE is different in a sense.
“infestors” - good one, I don’t think I have seen this joke on this blog before (although I don’t read everything every day)
“Fueling the fire”. Come on. You have not figured it out? Banks with “printed money need to loan”. It’s that simple. Do you expect them not to create money?
You are right. This time it’s different. It’s a global real estate bubble. This one spans from New York to Vladivostock. Fascinating comment Ben because it’s soo scary.
Clever opening there, Ben.
Yes, the housing bubble isn’t even THE bubble, but it will be the proverbial “straw that breaks the camel’s back.”
there are many facts that point to the central bankers’ credit bubble as cause of the global housing bubble, just to name a few:
- the housing bubbles started first in the big financial centres (cities/countries)
- housing bubbles are worst in countries with high speculative markets (e.g. large % of financial services companies)
- many of the newer housing bubbles were caused by money spilling over the borders of the original housing bubble countries, like Netherlands and UK. When markets stop going up at more than 20% a year, money starts looking for new markets where it can multiply without restrictions.
Housing is simply the only ‘real’ asset left that can absorb all the money the bankers are producing on their printing presses; it has to go somewhere and the longer they continue their inflation, the bigger the worldwide housingbubble gets (it is still growing, despite some hiccups in the US).
I think this bubble really got out of hand because of the lending .Real estate was kept in check some what in prior lending cycles that limited speculation to about 10% of the market and affordability use to cap the market out pretty quickly so it couldn’t overshoot to much . The overshoot in this National real estate market is alarming .
I find it interesting listening to the “Commercial Real Estate is Different” argument. I agree that it is income producing but it depends on rates which are going up much more than residential so once rates start going up even by a tiniest fraction it will effect it. Right now commercial is extremely overpriced because of cheap rates once it gets to 6,7,8% in financing cap rates for commercial will go from 34567 much higher.
One thing I have noticed about commercial real estate is the lag time between demand and supply. Last year in Irvine, commercial tenant rents went up more than 100%. There are now several mid rise and dozens of tilt-up commercial buildings going up all over the area. When this huge increase in supply hits the market all at once, rental rates will likely flatten or fall depending on how much they overbuilt.
in Netherlands there has been a huge oversupply of commercial properties for years (15-30% empty, depending on area). Despite this overstock, rents have been increasing strongly (although not as much as property valuations). Owners of commercial property prefer to have lots of empty units instead of lowering the rents they charge. The major cause for this is that all this property is backed by huge mortgages from the banks. The property valuation is based only on the official rents, and not on vacancy rates. As long as rents keep increasing, commercial property values will increase too (also helped by the stellar bubble in private homes) and the banks ask no questions. So: supply does not always affect pricing, it can be out of sync for a very long time, especially if government interferes.
There are some recent proposals though for government-subsidized (of course!) teardown or conversion to apartments of most of the older commercial properties, in order to keep the commercial property market ‘healthy’ and keep values going up. It’s a pyramid game just like the bubble in private homes, it just works a bit different.
I am reminded of a bit in the Robert Heinlein SF novel A Door Into Summer. In a satire of agricultural price subsidies, the protagonist gets a job at a junkyard destroying brand new cars that had been purchased by the government to keep autoworkers employed.
Because after mortgage payments, the average joe has nothing left to invest in stocks. Anybody who bought a house after 2003 doesn’t have a basic grasp on economics. Markets driven by uneducated investors are going to be more prone to bubbles. The stock market is much more volatile and fluid than housing so investors usually realize they don’t know what they’re doing long before they lose $100,000. Housing though, is different. You can get a no doc loan without a job to speculate on a half million dollar asset. Hence bubbles.
Don’t forget that most places in America are hellholes that are worse than Rwanda or Zimbabwe. The only place worth living is the area from Boston to DC. Everyone else in the world might as well commit suicide.
Here in Oregon, there are a few Californians I’d like to repeat that to
Perhaps in the 1790’s…
Jerry, are you kidding me? If I have to drive from DC to Boston to arrive on the islands off the coast of Maine, I am holding my nose the whole way from DC to Boston, not just through Secaucus. To live comfortably in NYC etc you must be super-rich, no?
I was being sarcastic. Many of the posters here seem to think that way though.
I don’t think that, in general, people believe that the NE corridor is an amazing place to live, at least not amazing enough to justify the amazing prices. But to a large degree, that’s where the jobs are. The post-industrial, internet world may flatten payrolls out across the country considerably. But If you’re going to hire a telecommuter who you never see, why not get one in Bangalore instead of Bangor?
Something these posters got me to thinking about: with houses, there are so many angles that people speculate in housing and maybe without being fully aware of it. For instance, second homes. Most are speculators, IMO, but I am sure people convince themselves otherwise by focusing on ‘vacation’ benefits (myth) or saving money on hotels. Or buying a condo for a student.
Name another asset where the buyer may not even understand he is making a bet on appreciation!
It’s all about leverage. You can’t buy stocks with 0% down or even 20% down. You can’t buy a stock with 0% down and get 25% cashback on your transaction. This only happens in RE.
If Goldman Sachs let you borrow a million dollars to buy a stock with zero down and $200K cashback, why not go for it? If the stock goes up, you cash in plus you get to keep the $200K cashback. If the stock crashes, you just walk away with $200K and have bad credit for a year - that’s right, one year. I am hearing ads on the radio offering 100% mortgage loans one year after filing for foreclosure or bankruptcy. Flippers can now walk away from being underwater and buy a flip again next year. Only in America.
If I had it my way, we would bring back debtors’ prisons or forced labor to teach these FB’s a lesson.
Perhaps a new CCC instead of prison: Civilian Consumption Corps. Out of workers being paid to consume. (At least the government wouldn’t have trouble finding available and experienced workers.)
I think it can be argued that stocks are bought and sold mostly based on appreciation and most investors don’t realize it. Very rarely do stock prices get anywhere near their cashflow value. If investors only bought stocks at cashflow value, they might go years on end without making a purchase (note that Warren Buffet doesn’t buy often). Most people who purchase stocks think it is an investment, but in reality it is speculation.
You are so right. The last time stocks approached a good value based on cash flow was at the end of 1974. And that was also the last time I put most of my money in stocks !!!!!!!
Yep. A stock is worth the higher of either an estimate of all future divedends, discounted by the time value of the money or Assets - Liabilities / shares outstanding. I think that people sometimes don’t realize that a price higher than current divdedends is based upon the speculation that divedends in the future will be higher. This is why we sometimes see the collapse of prices for “growth” stocks as they approach market saturation.
sure, this is a very important issue.
In Netherlands we have an ongoing issue in the courts with a stock-leasing plan called ‘LegioLease’. 5-10% of all Dutch households joined this plan or similar investment schemes near the end of the stockmarket bubble in the nineties. It was presented as a savings plan, but it was just speculation with borrowed money. The first people who joined made a lot of money and started spreading the word. Of course by the time everyone else was getting in, the stockmarket crashed and people ended with sometimes huge debts. What else to expect in the country of the tulip bubble, people never learn…
Of course, people now say they never understood that they could loose money so they are demanding their money back from the issuing banks in court. Politics got involved and is now trying to enforce a ‘fair solution’ where people who were speculating with borrowed money are compensated for 2/3 of the total amount, and people who were speculating with their own money get to pay the debts out of their own pockets. A similar issue is starting in courts about life insurance investment plans, and there is more to come; it will keep the courts busy for many years.
The funny thing is that no one talks about what is happening in the housing market. Not 5% but more than 50% of the Dutch population is speculating in housing, not for 20K euro or so but for at least 10x more, and with far higher leverage as well. And of course, with huges subsidies from the tax office. Of course people where stupid to speculate in stocks when they had already appreciated several hundred %, but appreciation in the Dutch housing market is much higher now. Go figure …
The sad thing is that when the Dutch housing bubble finally bursts, we will probably see the same kind of ’solution’ from politics: people who were speculating with borrowed money (our ‘FB’s, representing a big chunk of all voters) will get compensated again and the taxpayer will get the bill.
Yes, this is exactly the problem with the lax loan standards. You would never get the same degree of leverage with a brokerage account that one can get when buying a house. Not even close. I don’t care what anyone tells me, the mortgage industry let this one get way out of control because they damn well know better.
There are a couple of differences between stocks and real estate. First, for many years, stocks were mostly limited to the middle class and the wealthy upper class. A few plumbers, electricians, construction workers, bus and train drivers, etc, bought stocks but they were few and far between. That really changed around 1982 when the stock market started to “bubble” and word got out you could get-rich-quick buying stocks and the unwashed masses started to invest big time in the greatest Ponzi scheme the world has ever known. The US stock Market.
The second (more important reason) is that even though this IS a property bubble and a BIG bubble at the moment, for those who can afford the mortgage payments and who stay in their badly valued property (because they bought at the top) after the bubble has run it’s course and deflated, they at least know that eventually prices will catch up.
It might have been a bad investment for a lot of fb’s but for those who BUY AT A GOOD PRICE (not yet!) and stay in the property for at least 8 or 10 years, they will have done okay.
On the other hand, stocks are a little like gambling. The owner of a stock has nothing to show for their investment but a pretty piece of printed paper (actually they don’t even have that anymore!) and there are a whole slew of bad things which can happen where a stock, valued at $100 say, might drop to zero or near zero overnight. Try Enron for example but there are countless others which would fill 500 pages.
However, we are in a confusing time in history and things have changed. We COULD see stock market bubbles appear more often than property bubbles in the future because, when the stock market goes bust and millions of investors get wiped out, the Financial Gangsters Of Wall Street are fully aware that in 10 or 15 years, a new generation of naive suckers will arrive who know hardly anything about the previous stock market crash. Even after the 1987 crash and the 2000 crash, people are still trying their luck at the stock market roulette wheel. The 1987 crash was not that bad and by 1998 it was almost history but a LOT of people who invested got scared, sold at a huge lost thinking it was another 1929 type crash and cashed in what was left of their chips.
The “things chage” is the most important part. Financial systems are now TOTALLY manipulated. Government figures (and government in general) cannot be trusted. Very easy to do when you control the currency printing press. The stock market now has the mysterious Fed controlled PPI (Plunge Protection Team) which steps in and floods the stock market with freshly printed dollars if a serious crisis arrives. Paper currency now has NO asset valuation as it once did (like $1 of gold for every $1 printed). It’s now worth only the paper it is printed on. The current “sound bite” is that a currency (the dollar for instance) is “faith based”. In other words, people have faith in the ability of the country to be responsible and manage it’s finances in a prudent manner. NOT a good premise to go on as far as I’m concerned.
Other things worth noting. Millions of americans put money into their 401k’s. Others put millions into mutual funds, etc, and the money POURS (literally) into Wall Street. If GW Bush gets his way (very doubtful now) and gets private accounts for medicare and social security there will be even a bigger pot from which the Financial Gangsters of Wall Street (Paulson being one of them) can steal from. Therefore, when the stock market “bubbles” these days, then busts, the damage is limited because there is no way the government can allow it to crash 1929 style. A 25% wipe out maybe but that’s all but there could be more mini-crashes in the future. Just enough for the Wall Street Financial Gangsters to steal several hundred billion in one swoop. Then they will sit back, count their gains and wait for the next generation to arrive.
Working people save for Saturday night - The wealthy plan for decades.
Stocks are alot riskier but can also be alot more profitable. FRPT was at $.75 last January and is not at $20. Plus you don’t have to pay insurance, property taxes and so on with stocks. Someone with $5K can invest in stocks or mutual funds and not have to go in debt. The only way to put $5K in a house is with a 110% loan.
i don’t get this love affair with gold some people have. if a depression or the end of the world comes you can’t eat gold. you may be able to eat a few greenbacks for the fiber, but i’m not sure if the ink is deadly.
but every time there is inflation or some other scare, i don’t get this love affair of buying gold
Agreed. Also, if inflation runs ramped then the Fed will increase interest rates, and then yields on savings accounts, money markets, and CD’s will increase as well.
Buying gold and selling at the right time is very speculative, but I still respect gold it that it represents the ultimate real form of monetary exchange.
It is interesting you point this out about gold.
I read an interesting autobiography from a soldier who went to Hiroshima shortly after the atom bomb explosion and subsequent surrender. He needed money, and went to the local trading company to see how much he could get for his gold plated watch. Surprisingly, a lot less than the spot price. Apparently, given that to everyone living in Japan, their world had come to an end, they were cashing in all their gold for bare necessities, thereby vastly increasing the supply and diminishing its value. If things really got bad, as other people have said, spend your money on a gun and bullets, rather than Kruggerands.
That being said, there is still some satisfaction in holding gold and knowing that no Wall Street thief can take it from you…it is not an asset defined by digital bytes stored in a computer somewhere. However, like Jim Rogers (of the Rogers Commodity Index) says, Gold is by far not the best investment of the commodities…he holds some, but very little because its opportunities are limited compared to other assets.
Gold Bugs love to say if, and when, the monetary system collapses, gold will be the standard. You can always trade it for the necessities of life. For 30 years I’ve heard you can trade gold for a sandwich; but not if the guy wants a warm coat in exchange…….
I think it goes back to when we had the gold standard. People were ingrained with a base value for the metal. Don’t get me wrong, it’s a valuable metal with unique properties for industry…and looks great. LOL I own gold because I *like* it; not for “investing”.
Just my two pennyweights of 24 karat opinion.
dba reply: “IF” you read your Constitution, you’ll see that the only money allowed by it, is ’species’ [eg. gold & silver]..
Why bother with that old relic scrap of paper any way, when you can have unlimited Fed Reserve Notes..Print’m Ben!!
There are several reasons for the love affair w/gold. First, it has many uses. It canbe used as money, it can be used as a commodity, and it canbe used for goods. Also, unlike many consummable items like oil, it can be used over and over again. I have a coin, for example, but decades later it can be melted down for use in jewelry. Third, an ounce of gold has pretty mush maintained its value since at least Roman times. That being an ounce of gold could buy a decent toga and sandals. Today, 500-600 will get you nice shoes and a suit and maybe some underwear. See, if money collapses you will need something that people will want in exchange for what they have that you need. Gold and silver, to a degree, fill that need. Hell, no one wants my baseball cards for water if the dollar dies tomorrow. But many people will take the gold and silver off my hands.
Finally, look at gold this way. In 1971, it was valued at $35 an ounce. 35 years later we’ll call it an even $600 an ounce. That comes out to roughly an 8% annual increase. Seems to me that gold keeps up with inflation. Interesting parallel there. While I am not a gold bug or in love with it, it is good hedge against currency, which is almost always now backed by nothing but faith in it. Not really a good way to run an economy!
“…it is good hedge against currency…”
Without naming a specific currency — that is a very good way of putting it. Something overlooked by the vast majority of Americans it the intrinsic value of gold to the masses of the third world. You can buy a LOT of labor with it, when times are tough (and provided you can get to the labor).
OCDan: reply; Your’re correct about gold…BUT after WWII, my dad sent CARE packages to Austria…They wanted cigarettes over there…They were more valuable than gold…
Some people argue that gold is worth having during a deflationary depression because government will inflate its way out of it. My argument against gold is that gold bugs love to say how the greenback has lost value relative to gold. But if you had money in T-bills instead of a savings account, you would have kept your principle and kept up with inflation, provided you reinvest your gains in T-bills all the time they mature. This is what I’m doing with T-bills. I like gold and platinum for economic crises. As a poster above noted, if a nuclear bomb was dropped over my city and I was lucky enough to survive the initial blast, perhaps gold would fall. But then you have to assume that everyone these days owns gold. That’s not true. More people own ammo than gold.
No you would not be ahead of the game by buying T-Bills and reinvesting them even if you only pay Federal Income tax and no state tax which, in California, reams you a new one. There are several studies out which show that investing in T-Bills does NOT keep up with inflation. I have money in T-Bills and CD’s for safety sake just in case the stock market crashes and I lose my investment BUT I’m very conservative. I do not expect to keep ahead of inflation with CD/T-Bills. For about the last 4 years T-Bills have been paying 1% or 2 %. CD’s not much more. Of course, if you think inflation has been running at 3/4% then you are correct. However, TRUE inflation (not the government figures which exclude energy, food and property) is and has been running at anything between 7% and 10%.
Gold to some (I’m not one of them) is an asset that others want in bad financial times. You cannot eat it but they feel it’s better than paper currency. The same can be said of expensive art works. Usually those which are a few hundred years old and have held their value over time.
I’m not a holder of gold because I think gold has come and gone. The nut jobs out there who think that “when it happens” you will need a machine gun and gold to protect yourselves are as whacky as those who think property will drop to 10 cents on the dollar. Ain’t gonna happen unless China (who now has 50 state of the art fully armed nuclear submarines according to British intelligence in a report issued yesterday) decides to decimate the major cities in the USA. Again, a whacko prediction.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” Alan Greenspan.
“Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” Ben Bernanke
In my mind real interest rates should be set by the market and not Central Banks. In essence they do not pay us enough to save in Fiat currencies because the only way they stimulate their economies is devalue the fiat currency. The IMF currently says the dollar is 10 to 35 percent overvalued. What if it is more than that? I do not view gold as a way to prepare for the end of the world. Food, shelter heck even a warm place to take a dump will have priority. I currently view precious metals as a better way to save. Do you want to save something that is unlimited in supply or limited. I expect more and more people to realize we are being taken to the cleaners.
“But while these currencies enjoy a precarious value abroad, they have never entirely lost, not even in Russia, their purchasing power at home. A sentiment of trust in the legal money of the state is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value…. They do not apprehend that the real wealth, which this money might have stood for has been dissipated once and for all.” John Maynard Keynes
Well the demand by “guns and Kuggerands” types is what drives the price of gold. If the housing bubble throws us into a serious recession I think that the odds are pretty good that demand for Au will continue to rise.
I love when people bash gold. The fact is, you cannot have an inflationary mess such as we are having now on the gold standard. Paper fiat money creates the mess while you deride golds’ ability to stand the test of time. You won’t be able to eat gold, or dollars, but one will have value after a crash, and the other won’t. The confederacy could not buy food with its’ own currency at the end of the civil war; go to the grocery store with a continental and see what you can buy. If you want to learn about gold, try Ben’s gold blog.
Except for the 74 last years, when we decided that being tied to gold, along with the rest of the world, was too hard of a thing to do…
Gold was merely the worldwide standard of wealth, for many thousands of years, as it will again soon be, after the utter collapse of financial markets worldwide, a flight to quality~
Let’s compare buying physical gold i.e. kr’s cml’s ae’s,etc, vs buying a house:
Gold: Payment in full, with cash or cashier’s check, for immediate delivery, typically you can’t buy with a credit card, as the 2% is almost equal to the buy/sell spread.
House: Lie about whatever you need to, to qualify for a loan, go for a initially lower payment, because everybody else is doing it, it must be good? If you can’t afford the house, just agree to wreck your credit forever and walk away.
Shocking how a $650.00 item requires real people, with real money to complete a transaction, whereas, the past 5 years, buying a $300,000.00 item was full of deceit on both ends, the buyers and the financial world that made it happen.
Buy as much gold as you can. Seperate yourself from the 99% of our citizenry that will have nothing, when their wealth is in paper or computer form and worth bubkis.
Yeah, I love these arguments against gold, too.
Governments tell their people “guns are bad” yet governments are armed to the teeth. Governments also tell their people “gold is bad” yet governments are the biggest holders of gold. Do as I say, not as I do. Sorry, I’m not that gullible.
Amen. The assclowns who trash gold here don’t get the big picture: loss of faith in the whole credit system. Thats where were heading, write it down.
I prospered by being a “naive sucker” who arrived in 1989 in investing and dollar cost averaged ever since. Ask me what my basis is over the last 17 or 18 years is. So you think Stocks are all going to crash again (large co., small co., international, sector) simply because Enron crashed! I laugh. But before you reply, note that I diversified into Savings bonds, my state’s municipal bonds, PMs, a few CDs and a money market fund.
I think domestic stocks (those who only do business in the United States or do most of their business in the United States) have peaked and will fall quite substantially. But I’m into large multinationals, as well as international stocks in my mutual funds.
I agree with this thread. Real Estate is prone to bubbles. And I think the primary reason is what others have stated: People think they know what their doing - they “see” their investment and live in it. It’s in their every day consciousness. Many people dollar cost average into equities and a 20% loss in year x will be forgotten because five to ten years later they will have 40% to 120% gains. You can ignore Vanguard’s 500 index fund average annual gain since August 1976 if you want. I won’t. It’s over 12%. That is a 31 year period.
If you lived in a house over 31 years and maintained it, you may have kept it as good as new, but then section 8 may have moved next door. It’s why location is very important. Otherwise investing in equities and renting are much easier things to do.
What? Me? Worry?
Section 8 can move almost anywhere these days. HUD will buy any house and even brand new ones in new subdivisions and move a family with 11 chillun in right next door to your $250K house. Of course you have a mortgage and bills to stress over. The single mom with 11 chillun from five different fathers will be sitting at home eating bon bons and watching daytime talk shows while her chillun vandalize the neighborhood. Your taxes will pay for her housing while you fret over losing your job and foreclosure. If ony you were reckless and irresponsible, you too would get a free ride. Only in America.
Is HUD buying homes and placing tenants in them now? As I knew it, Section 8 was a combo of private / public sector. I had a few properties and I rec’d calls all the time from people that would ask if I took Section 8 vouchers. I looked into and I did eventually go that route with 2 properties. Big mistake in hindsight.
I did have a tenant with 3 kids. Her rent was $900, the city guaranteed $898 of the $900, and she paid me $2 every month. No sh*t.
Read my post. Enron wasn’t the only company to crash. There were scores and scores of stocks which fell (deflated) during the tech meltdown and they were on a par with a crash. JDSU - $900 down to $15! You don’t call that a crash?! QQQQ from $120 down to $20! You don’t call that a crash? I checked my charts for some companies which were in the stratosphere during the tech boom…..and I cannot even find them ’cause they are GONE. I laugh. To this day I have friends who lost thousands and thousands during that bust because they THOUGHT they knew what they were doing and figured investing in stocks was a great way to go.
As for multi-nationals? The theory is that if the US catches a cold, the world catches the flu. I personally think the US has peaked in terms of power both militarily and financially but history tells us the decline of an imperialist power does not happen overnight. Where the USA is concerned, it will take 30 to 40 years by which time I will not be around but the decline is inevitable but during that time another (or several) countries will become lead players.
However, seeing as I trade on a daily basis and I’m not a flag waver or a patriot for ANY country, it doesn’t concern me WHO is running the show. I’m usually in and out of a stock within days and sometimes within hours. If I see the multi-nationals are ahead of the field I’ll trade them but I’m not seeing it yet.
As for your Section 8 comment. I live in an area where houses cost $30,000 in 1965 and are now selling (still) for $675,000 and more because the area has been maintained and policed for 40 years. Most people ain’t dumb enough to stay in an area where a lot of section 8’s start to appear.
My wife was born and lived in Detroit when she was younger and she tells a great story about the 1960’s. The people in the area where she lived were white, blue collar. Mostly auto workers. A lot of whites (because it was the 60’s) were sympathetic to the blacks at that time because, and there is no question about it, they HAD been denied their rights. However, blacks started to move into the area where she lived as they began moving up from the south to work in the booming (not anymore) auto industry….and crime followed. In a matter of a few years the crime statistics went though the roof and 95% was black crime. Streets which were once safe were now no-go areas. Suddenly (and my wife laughs cynically when she tells this story) the blue collar white property owners started to sell. My wife said her mother would ask them why they were moving, they would say stuff like, “Well, we really need a bigger kitchen.” Or, “Sam is getting older and needs a room of his own without sharing it with his brother.” Interestingly enough, that blue collar area is now a drug riddled,crime infested neighborhood where only an idiot would live and only a bigger idiot would buy property. Sad but there it is. I’m not a racist but I’m also NOT politically correct (a bad American disease which has spread to Europe) but if too many black faces appear in my area - I’m gone. And btw, if anyone reading this posting feels I am a racist and they are NOT, prove your point and go and live in South Central Los Angeles for a few months…….then come back and tell us what you think.
So, my point being, you can run around like a headless chicken trying to figure out ways of avoiding what “might happen” be it a nuclear attack, a meltdown of the stock market, a housing bust or property in your area suddenly becoming blighted with section 8 housing or anything else but the chances are (99.99999% of the time) those doomsday scenarios will NOT happen.
No doubt Asia will take over. China and India will lead the way. Europe is old and dying off. They are being replaced by immigrants who have no loyalty or appreciation of Western Culture. Africa will never amount to anything. Nearly 40 years after the end of European colonialism, those countries have gone backwards towards the stone age. South America will always be unstable with extremist right and left wingnuts battling for power. The Muslim world is…well we all know what they have done the past 1,000 years. They’ve managed to get into hundreds of years of conflicts with Jews, Christians, Hindus, Buddhists, animists, pagans, and among each other.
IMPIO
…but the chances are (99.99999% of the time) those doomsday scenarios will NOT happen.
Well, one thing we do know is that you won’t be prepared.
…there is no way the government can allow it to crash 1929 style.
BWAHAHAHAHAHAHA!!! Yeah, right!
[Over ice cream, Hammond starts to tell Ellie how he plans to fix the park.]
John Hammond: Creation is an act of sheer will. Next time it’ll be flawless.
Ellie Sattler: It’s still a flea circus. It’s all an illusion.
John Hammond: When we have control—
Ellie Sattler: You never had control — that’s the illusion! I was overwhelmed by the power of this place. But I made a mistake, too. I didn’t have enough respect for that power, and it’s out now.
Of course 10-15 years is when the peak of Baby Boomers will start showing of on Wall street to cash in their chips. Who will be buying?
There is no question that loose lending standards enabled this bubble to reach unprecedented highs. In previous bubbles, lenders limited the mania because they still required downpayments and they seemed concerned with risk (unlike today).
However, people still had to enter into these transactions. The greater fools had to look at extremely overvalued real estate and think buying was a good idea. All of these GF’s fundamentally misunderstand the difference between investment and speculation. Investment is the purchase of cashflow, and speculation is a “bet” based on appreciation. Houses, in particular rental properties, can be an investment, but the numbers haven’t made sense for this kind of transaction since about 1998. The really crazy part about this bubble was that appreciation became so strong for so long that it didn’t seem like a bet anymore.
If you plug consistent appreciation into a spreadsheet analyzing the rent vs. own decision, you quickly see that a little appreciation goes a long way. In fact, once you start putting in 8%-10% appreciation, no purchase price is too high. No matter how bad your negative cashflow, strong appreciation will bail you out. If you truly believe in those levels of appreciation, negative amortization loans actually make sense. In a strange way, all these GF’s were making rational decisions. Their error was in believing trees can grow to the sky and appreciation above long-term wage growth is possible. But once you have seen 10% or greater appreciation 4 years in a row, I can see how the less sophisticated might come to believe that kind of appreciation is possible, or even likely.
Many of us who post here chide these people as lacking common sense, and some certainly do. However, I would note that seeing this bubble for what it was takes a certain degree of financial sophistication beyond Joe Six Pack’s capabilities. It is sad that so many didn’t see it and will get crushed by the falling market, but I would argue that some of the decisions these people made looked completely rational at the time, and only in hindsight will it be seen as the folly it was.
Excellent point about “investing in cashflow” vs “speculating in appreciation”.
Excellent points, irvine.
That said, if you look at almost every great bubble in history (not merely real estate cycles, but bubbles such as tulips, or the South Seas, or the stock market in 1929), they are always inflated by extraordinarily loose lending standards (relative to the time.) This bubble is no different.
Nice analysis Irvinerenter,
It is amazing how quickly semingly smart people thinks they perceive a long-term trend. My boss and another scientist in this area (S. Oregon),both with PhDs, have told me “RE goes up 20% per year around here!” As if it was a normal long-term pattern.
once you have seen 10% or greater appreciation 4 years in a row, I can see how the less sophisticated might come to believe that kind of appreciation is possible, or even likely
In the Netherlands we have had (on average) more than 10% appreciation in the housing market for nearly 20 years now. Many people in the Netherlands have made more money by just owning a home (or even better, several homes) than by working.
Actually, people without any assets who buy severely overpriced homes are still making a very clever bet. If the idiots at the ECB continue their policy, their home will keep appreciating at high speed while at the same time their debts are inflated away. And if the ECB comes to its senses (which is extremely unlikely) and the housing bubble bursts, these people can easily walk away from their debts (most homes have special government insurance that pays all remaining debt on the mortgage if you have to sell at a loss) and have a least enjoyed owning an expensive home for very little money.
I am sure that in Europe it will take at least one generation to root out the perception that buying a home is the surest way to get rich.
Well for good or bad we don’t expect much sophistication out of Joe 6pack. There will ALWAYS be people willing to borrow theselves to the poorhouse. We have traditionaly be able to rely on better judgement from the banks and the bond market. We expect the banks not to make loans that have little chance in being repaid, and we expect the bond market not to buy bonds secured by those loans. Having a bucket full of money a box full of stupid is an unstable situtation. Unfortunately we seem to have discovered that stupid is contagious, and has spread to those with money, even as has been filling their buckets from the helicopters of money falling from the sky.
I don’t know, video game systems seem prone to boom/bust cycles.
and let us not forget watson, lereah, LAY, CAR and NAR as contributors to a run up in prices.
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=aUFq_2ubqJNU
Gotta love this. No bubble?
http://phoenix.craigslist.org/rfs/266304046.html
I’d have to say real estate is one of the least bubbly products out there.
Dot coms stocks traded at PE values of 200:1 at the peak.
Oil tends to be very heavily leveraged and has terrible year to year changes that often make no sense. Slight increases in summer production levels cause prices to shoot up when no shortages actually materialize.
Gold is probably the worst… it has little economic value, gets over-leveraged and is all over the place.
I disagree with you. Wealth is the ability to influence others in exchange for a good/service. You could trade away your house after a long while but it lacks two things.
Liquidity and transportability. You could transfer stock from country to country shifting wealth along with you same with gold even easier just carry it in your pocket. But with real estate it becomes a belief into the localle you are buying into that the country won’t descend into civil war or that the part you bought in wont be annexed by someone and your estate dissapears. Also the ability to bleed your wealth is increased by its inability to leave with you.
It seems that leverage/debt is the real bubble creator. Look at the current Real Estate Bubble, and the culprit was easy mortgage money - low down payments, creative financing, etc. The level of price appreciation would have been much lower if buyers had been required to qualify on documented income/assets, put 20% down and use a 30-year (or less) fixed rate amortization loan.
The other recent bubble, 1999-2000 in telecom and tech/internet stocks, was a result of all of the day-traders and their margin account purchasing of risky stocks, using their portfolios as collateral for the additional trading funds.
one reason RE is more prone to bubbles is that most times you don’t know what you are buying. If I buy a stock i usually have a lot more information for free than buying a home.
i buy a home i have to go through a RE agent most times who will lie about market conditions to increase what i pay. i also have to have an idiot home inspector who will probably miss a lot of things wrong with the home. during the time i own i’m also subject to backroom deals that might put a mall in my backyard, raise my property taxes by double digit rates and whatever. most people don’t question the decisions made by others that will affect their homes.
when i buy a stock i have the company’s entire financial history in front of me and access to every news story ever written about that company. i also have access to the company’s entire trading history including volume information that i can use with a variety of technical analysis tools whose roots go back hundreds of years.
if my RE agent or the previous homeowners lie i have a lengthy legal process ahead of me. if the company’s CEO or management lie they can go to jail just as Enron’s and Worldcom’s executives have gone. And just like some other executives may get in trouble due to the options backdating thing.
Hello! “The company’s entire financial history in front of me”. After all the perp walks we’ve seen from companies Enron to Adelphia to Wcom and all the big fines for companies who cooked the books and these deals where CEO’s walk away with the cash register with $150 million in it and shareholders didn’t know anything about it, you gotta be kiddin’, right? You would invest in a company’s history with all the crooked CEO’s and brokers and analysts out there?! A company’s “entire history,” could include a LOT of cooked numbers these days not to mention hype. I once invested in a company because of it’s history and potential….until I woke up and found the price had dropped 33% overnight. This was a company which operated many retirement communities (sound pretty safe because people retire all the time) and a had a great record. That was until the CEO and and a brokers analyst got together…..
And it’s certainly normal to physicaly walk around and look at a house, even hire a professional inspector to evaluate it before purchase. It’s not that there aren’t hidden defects in houses, but I don’t think that they’re worse than the accounting irregularies that are common in the business world.
I could go $2 on this
http://cgi.ebay.com/SOUTHERN-CALIFORNIA-LAND-NEAR-PALM-SPRINGS_W0QQitemZ260076768618QQihZ016QQcategoryZ15841QQrdZ1QQcmdZViewItem
What a scam…the high bid obligates you to buy the land at the listed price. Misleading in the extreme.
A legal commitment to purchase… sure it is. I’d like to see them try that in court. But he bid $1 on ebay, your honor.
I just read a report that says the rise in housing is due to restrictive zoning laws, around the english speaking world. No mention was made about mania’s or bubbles.
Q: does anyone believe that this bubble is driven by zoning? and a scarcity of land??
As far as I can tell, all zoning laws in the Western World were suspended simultaneously to permit the building of “luxury” crap in placed never before allowed. I don’t believe this was a coincidence.
just look a bit around in the world: there are severe housing bubbles in countries where there is plenty of land available and/or zoning does not exist at all (like Oz, NZ).
On the other side, when a housing bubble is developing, zoning will probably cause even higher prices.
The only real estate bubble in modern times is the S&L crisis of the late 80’s and the RTC days of the early 90’s.
Tell everyone in Arizona that prices didn’t fall and we’ll call you a lier!
Over SPECULATION brought on by phantom tax-laws and the 1986 real estate tax law(which ended this tax-deduction) brought every one of the S&L’s in Arizona(and most other places) to their knees. NOT ONE SURVIVED!
But maybe that wasn’t a real estate bubble just a cash bubble.
NEXT
Housing Bubbles are bigger for three reasons:
1. Home ownership is “The American Dream” (the drug)
2. Home Builders & Mortgage Lenders have no incentive to stop until they blow up (the drug dealers)
3. Leverage (the crack pipe, needle, etc.)
Bubbles are characterized by a build-up in debt relative the the underlying value of the asset being leveraged. From this perspective, the housing bubble has been expanding for about 60 years. Here’s the data…
Year — Mortgage Debt/Value of Residential Real Estate
1910 - 10%
1920 - 9%
1925 - 14% (top of the last real estate bubble)
1932 - 18%
1946 - 12% (bottom of the last real estate bust)
1960 - 23%
1970 - 25%
1980 - 24%
1990 - 33%
2000 - 39%
2006 - 48%
The bust is just beginning. The housing bubble has been able to continually grow because lending standards have been in a steady decline for more than 50 years. Gradually, banks and lending institutions have required lower down payments and allowed refinancing — which has allowed homeowners to accumulate a large amount of debt against the value of their real estate. This is a bubble. When debt finally begins to contract versus the value of the underlying value of homes, we can finally say that the bubble in unwinding. That will take many years — as it did from 1925 to 1946.
Regards,
Steve Puetz
“Bubbles are characterized by a build-up in debt relative the the underlying value of the asset being leveraged. From this perspective, the housing bubble has been expanding for about 60 years.”
That data is a devastating testament to the Keynesian debt bubble which has steadily inflated since the Great Depression. At this point in history, leverage has sucked all the liquidity off the beach, and a Kondratiev tsunami is fast approaching…
P.S. Is there some reason you believe that helicopter drops will not work to keep the boom aloft forever? So far, so good…
Is that ebay guy for real? I mean come on…
This thread was/has been meatier than my last (very nice) steak. Good stuff, no fluff.
“RE has (at least) two differences to the stock market: much larger leverage, and less comparability between objects. One IBM stock is the same as another IBM stock, but houses are not alike.”
This time is different. Too many identical faux luxury McMansions and condos on the market at the same time will make the downside look more like a stock market crash than in previous busts, when the “uniqueness factor” helped save some SFR owners from having their pricing power destroyed.
There is, essentially, one stock market. There was one tulip market. There is one oil market. There are tens of thousands of independent housing markets. If stock, commodities, or oil crash, everybody feels it and everybody knows it. If a particular housing market crashes, the poeople in that market feel it, but elsewhere all the people hear are stories about their neighbors bad luck. And even when a housing bubble bursts, not eveybody get’s hurt. People who can wait out the bust, or who moved in long before the bust, can end up just fine. We’re not seeing one housing bubble, we’re seeing dozens. That sounds even worse - until you realize that many areas of the country don’t have bubbles at all. They won’t suffer dramatic declines in home values because they never had significant climbs. I see a lof of “the sky is falling” talk here. People take the most pessimistic numbers from several regions, add a “but they’re liars” factor to make them more negative, and then declare that the entire country is in a slump. Meanwhile, most real estate pros see serious declines in a few markets, mild declines in some others, and stablity to mild increases in others. Not every realtor is lying when they say that they aren’t seeing price declines. Some come from non-bubble areas. In summary - don’t be overly pessimistic (or in some of the cases of those who are hoping for a complete economic collapse - too optimistic). The totally unsustainable housing price expansion is over. Some people, mostly those who overbought or who took out bad loans, will lost their shirts. The bloated lending, real estate, construction, and “flipping” industries will recede to normal sizes. Some regional economies will slacken as their home values decline. But most people will sit in their moderately priced homes, gaining little equity, glad that they are out of all the fuss.
You’re assuming this is just a “housing” bubble. In truth, it is a **credit** bubble.
Any region which has seen an increase in suicide loans, specuvestors from other areas (with bubble prices), an increase in HELOCs, etc. is likely to be in a bubble.
Some areas will undoubtedly do better than others, but as is evidenced here on Ben’s blog, this bubble exists all across the country — and the world.
If the large metropolitan areas see a severe enough housing crash, the entire economy will likely be affected.
Only time will tell…
But most people will sit in their moderately priced homes, gaining little equity, glad that they are out of all the fuss.
yeah, moderately priced like some remote and unattractive areas in the Netherlands where housing has only appreciated by 600% over the last 15 years. Are they lucky that they are not starting from over 1000% appreciation when the brown stuff hits the fans!
“IF” YOU’RE GOING TO HAVE INTERNATIONAL TRADE, YOU’RE GOING TO HAVE TO HAVE AN INTERNATIONAL MONETARY SYSTEM…
MONEY IS MONEY [not Fed Res. notes], and the states [countrys], should NOT have the power to control the interest rates and the supply of money…
GLOBALIZATION will illucidated this in the years to come..The FAULTS of the present system are becoming GLARING!!!!