The Housing Bubble

I think I’ve written on this blog that I don’t ever want to own again. I don’t want to go through the buying process. I don’t want to go through the selling process. I want to be free and the shackles of a home are not the way to be free. If I were to get a great job offer in Northern California, I would take it tomorrow. I would become NoCalBoy if the opportunity was right.

My retirement strategy has nothing to do with a house and because I have a wife that is on the same page we are doing just fine. I’m with you TXChick. You get my vote.

It’s going to be a hot one in NYC today. The sewers will be a-stinkin’.

If can find a dump to renovate with ocean access at 2002 prices, yes.

txchick57:

Being a single person the thought has crossed my mind on many occassions.

My reasons would be that I can go whereever I want, whenever I want and no hassles about sudden huge expenses for repairs and upkeep.

However, if it ever gets seriously less expensive to buy a little place than my current rent, I will buy again. That will be if it is less expensive than my rent payment by 30% with a 15 year fixed after a 20% down. That will give me the ability to put a ton away in savings on top of what I already do.

Have to give you props TX. I bought my first two books on daytrading and short term trading. I don’t think I’ll be able to make it a profession, and the actual doing it is a long way off (I’m going to read, and read, and read and make play trades for a long time.) You and others on this board first convinced me that I need to understand this stuff like it is gospel. Even if I don’t do anything more than manage my investments better, I figure I’ll be able to educate my nieces and nephew to manage their finances better than I was ever educated. So, thanks!!

The deal breaker for me is having to pay property taxes of almost 2% (Florida) on the house for the rest of my life.

An individual purchases a depreciating asset that requires insurance and maintenance costs AND the government gets to stick their dirty hand into your pocket each year and withdraw 2% of the value. What’s up with that? No thank you.

I am leaning that direction, given how slow the market is adjusting to the new paradigm of negative home equity appreciation, and the fact that I don’t believe I am immortal. If it takes twenty years for the round trip from boom to bust, thanks to REIC efforts to soften the correction, then I will do my best to persuade my lovely wife that other strategies are likely to do better for long term wealth accumulation than sinking our savings into an overpriced and depreciating SFR.

Might as well have one dissenter, why not me?

I own my home, and love it. I love that I can do anything that I want with it (and have). I also have come to love gardening and other outside maintenance- because in my neighborhood when you’re outside you’re comingling with neighbors and friends. Last week I sat in my garden and weeded a huge bed with a trowel. It sounds awful, but it was really nice. While weeding, I taught my 4 yo neighbor the French words for the various plants, I played with the other neighbor’s Chihauhua, had a glass of wine with my across the street neighbor, and split a plant and gave it to yet another neighbor and then played a big game of tag with the kids of the neighborhood. (I totally lost).

I also like the “permanence” that comes with a block of OWNED homes. (I purposefully bought in an area that has low likelihood of renters). I like renters as people, but in general the renters that I’ve lived around don’t treat the area as “theirs” as much. they’re friendly and I have no problem with them, but I have yet to make a meaningful friendship with renters as neighbors, whereas the owners in my neighborhood are all quite close. (I have dinner with at least 1house on my block at least once a week… every weekend night in summer). Part of the reason for this has been that most renters don’t stay for more than 2 years, whereas the owners in my particular block stay for decades… so the relationships can build.

That said, my mortgage payment is less than comparable rent, even more so after mortgage deduction is taken into account, so financially it has also been a good decision.

Even if/when my house loses 20-30% of its “value” I’ll still be happy with the purchase, because it is still “worth” losing that money to me.

However, I would never buy if it didn’t make economic sense. (like in my hometown of SF, which is why I moved away in the first place)

and there are many PITA aspects of being a homeowner. These are easily managed, however, IF you buy way below your ability like I did (the purchase price of our house is less than 1x our annual salaries) then you simply call a person to take care of whatever issue. So when my back porch had a rotted spot, I just called a dude and said ‘fix it please’.

also, I might just possibly have the best neighborhood in the world, that allows me to be so close with the block. Some things that make this possible:
1. it’s an urban block, with houses relatively close together, maybe 15 ft max between houses. Thus, it’s not like a bunch of mansions walled off from each other
2. it’s a very diverse block with open minded people. thus, people aren’t “afraid” of each other or have too many preconceived notions of others, so are willing to tolerate differences
3. we never got hit with the extreme speculation. Thus, even during the boom, we had no more than 2 houses for sale each year. This is very different, especially from the new communities where up to half of the homes go for sale each year. Thus most of us bought here with the intention of STAYING here. then the more we all stay, the more we want to stay.
4. housing in my neighborhood is affordable to the people who live here. we have no “keeping up with the joneses”. And over 3/4 of the people own their homes outright or are close to it.

anyway, just a dissenting viewpoint.

if I were in your shoes, I would no way buy now. But if/when RE fell 50-60% or became financially sound, then I might.

A voice in the wilderness ! I am a fairly happy homeowner. Bought in ‘93 in the exburbs of Chicago for 198K, 3/2.5. If prices are reasonable it makes sense, but now ??? I prefer to have the privacy of a SFH, a yard and other than the F%!&! taxes: low cost in retirement. I agree 110% that renting would be the way to go today. IMHO even if you rent you are still paying the same taxes, maintenance costs, insurance … it just buried in the rent bill. Solution Proposition 13 or better still: throw the current BUMS out. Even if I had 400K +, I refuse to throw that kind of dough into RE, I can do much better job investing in equities.

The whole buying process is so nauseating IMO. That said, I would still buy a house IF and ONLY IF it’s one where I can see myself dying in. I don’t want to go thru the process repeatedly.

I would do it in a heartbeat if I could afford to live in a neighborhood like House Inspector Clouseau described. My friends live in a neighborhood like that and I’m so envious (at least my son and I are welcome over there and we socialize with them frequently). However, that dream will never become a reality for me unless I remarry (which the thought of is almost as nauseating to me as the buying process).

I was thinking the other day about how I’m continually told that I’m “throwing my money away on rent”. But the conclusion I came to is this - ok, maybe I am “wasting” a little on renting. If I bought a house, I would be one of the responsible ones who wouldn’t tap out my home equity. I’d plan on living there for a LOOOONG time so I’d build a lot of equity. Yes, buying a house would make a lot of financial sense to me in the long run.

BUT…I look at people who own, are tapped out of equity, have even more debt on top of their mortgage(s), and who struggle just to go on vacation one week a year. I continue to save $$ each month, never worry about finding money for a vacation (or a car repair, or an unexpected large bill), and I have zero debt. So who’s really throwing their money away?…

As soon as it makes sense (when buying is break even or better than renting), we’ll buy. I have only had *irritating* landlords. The first was an upside-down “investor” who was condescending and came over too much with the builder for inspections. I value my privacy a great deal.

Also, when my washer, dryer, and refrigerator breaks (all this year), I want instant solutions. We owned for 12 years and have been renting for 2. It hasn’t been pleasant, but it’s been financially worth it.

I also like to garden. With the cost of produce increasing here in VA, it makes sense to take advantage of this fertile soil and grow a few things. The kids really like it when they can find strawberries and such. It gives them something to do. It’s difficult to grow anything when you might be forced to move. I haven’t had much success in finding a stable landlord, I guess. In our area, homeowning is the norm and SF rentals with a garden are hard to find.

I think for the working middle-class wage-slaves, paying down a mortgage in lieu of renting is not a bad way to secure a future roof over one’s head.

I think long and hard about this question. I am fortunate now to live in property owned by my family (which I often joke has all of the responsibilities of home ownership but none of the tax advantages), but truthfully it’s a very convenient position from which to sit out the current carnage.

I too would like to have a property of my own that I can modify to suit my tastes (which means no condos, no HOAs, and no over-regulating municipalities if possible), but it isn’t so strong a dream that I can’t rent for the indefinite future. I was able to pack up and move across country with about two month’s preparation because I was a renter, and I would not say I have put down enough roots here in DC to be here permanently. The freedom to move wherever, whenever is nice.

I can say that if I ever do buy, it will be as my own residence, because I want a roof over my head that belongs to me, and not considered as a financial investment. I will never buy property as investment. I have no desire to be a landlord, and it is my belief that since it is the only asset class (that I know of) that the government taxes you just for owning, there will always be better investments.

I fear inflation. I am 35 and have been saving since I was a kid. I invest my money (stocks, metals, bonds, forex), but I do fear the Fed chipping away at the value of my dollars.

Sometimes I just want to turn my paper into a physical object with some usability - like a house. I WILL NOT do it until the fundamentals return.

Sure. You know, like Lincoln should probably have skipped the play that night or Britney Spears is probably a tad immature.

I would bet that the people on this board play the lottery far less than the average homeowner. Personally, I have never bought a lottery ticket.

Greed is a killer. I don’t think Joe6Pack or JanieSiliconImplants realize that winning the lottery will absolutely destroy their life. They only see the dollar signs, not the destruction that such a windfall creates. It’s no different than the housing avarice that is destroying so many families right now.

My DH or I will buy one occasionally. We’ve talked about what we’d do. I’d buy a prius, buy a lot outside of Davis and put a wonder Dwell prefab on it, and invest the rest. I’d still work. That’s about all that would change.

Now the down side to winning would be all the soliciting that would be coming my way. I have a few charities I already work for and commitments wouldn’t change. And if it’s big, there is the fame issue. That’s the last thing I’d ever want. Money is ok but fame destroys. Work in the film industry for a while if you doubt me.

I guess he hasn’t seen that the Northern Virginia inventory is pretty close to the high of last year….

What a bonehead.

I guess he hasn’t seen that the Northern Virginia inventory is pretty close to the high of last year….

What a bonehead.

not to be rude, but are you stupid or something? The district is not showing signs of recovery. Are you a DC realtor? I see that you post your misinformation on many sites. DC prices are dropping like a rock. Almost every house comes with closing costs paid for.. Is that a sign of recovery?

Who the hell pays any attention to the Examiner? For those of you outside the DC area it is a free daily tabloid that is distributed in plastic kiosks bolted to the sidewalk. It isn’t even the best of that genre. The best free daily tabloid is the one associated with the Post - that is the one that has the Soduku puzzle people do on the Metro and it is sort of a junior paper to entice people to eventually subscribe to the real paper. The Examiner is just a rag that is given away in the streets.

Free paper = completely dependent on advertising = don’t believe a word you read in a story that might benefit a class of advertisers or potential advertisers

In GGGR Baldwin was too menacing to be Lereah, Al Pacino’s character was more like Lereah.

Alec is too powerful a presence to play Lie-reah. Maybe one of his brothers, Danny or Stephen:-]

Mr. Martin is probably wound a bit too tight.

Its only in the movies where the old man shoots the young kids with the shotgun and everybody runs off scared laughing.

I’m not so sure. Gas is $8 a gallon in England and no-one seems to modify their driving behaviour - pretty much the same as here. I think people will give up a lot of other things before they give up driving even a mile in their totally unnessary 5,000 pound monstrsities.

Obviously there is a tipping point with prices, but it’s way higher than $4.38 IMHO.

There’s little other than buying a more fuel efficient vehicle that people can do to lower their consumption of gasoline. Now there was a period in the last gas price blowup in the 80s when you could buy a used big Lincoln or other luxury car for a pittance. I suspect that used mega SUVs will be worth MUCH less very soon.

Not only do suburbs require too much energy, the folks who buy overpriced houses also buy the overpriced Suburbans.

My dad told me in 1979/1980 people were giving away V8 Mustangs and Camaros. I’ll look forward to getting a Z71 Tahoe to use on camping trips for a couple grand.

the April 2007 median home sale price was somewhere on the range between $725K-$775K

Great topic. I posted here a few days ago about the news that my friends received down in SW florida. Their 1.2m condo purchase might now go for 750K IF someone were to be out buying. However, there are almost NO buyers out looking at these condo’s and there are something like 160 out of 180 that are EMPTY! It is virtually empty in all 3 buildings and these are all upper end condo’s on the west coast of florida! The builder is offering the penthouse suites for 1.2M, formerly offered at 3.0M. No one knows how far this has to fall but I’m going to predict that ALL of these units are going to be well below 500K before this is over.
The number of people who can ACTUALLY afford a 500K condo or house is miniscule compared to the number of listings that exceed this price. Just imagine what is going to happen in places like Miami if this is happening on the West coast!
This crash is just starting folks. No need to push, plenty of seats still available up front!

As I have argued here before, the higher end stuff ($600 to $850 and above) will crash much worse than the lower end stuff ($100 to $200). There is almost no one who can actually afford a $750K home in the U.S. Even with 10% down, you would need roughly $225,000 per year. There just aren’t that many people that make that kind of money. Granted this blog may skew to the higher end of payscales, but the majority of people make a household income somewhere between $50,000 to $80,000 per year. That doesn’t equate to median home prices in the $600,000’s. The NAR keeps arguing that R.E. is local, but everywhere the homebuilding industry just decided to build homes and charge $500K to $800K (as based on loose lending). Just like with cars, the purchase is predicated on payment qualifying and not on purchase price.

Places like West L.A. and the beaches there will crash. So will most of South OC as the people are mostly fronting and dont have the incomes to back up the show. In our Zip Code in Scottsdale, the median household income is about $85,000, meanwhile the median asking price is about $650,000, so something doesn’t equate. Prices will have to correct and anyone who is into an Alt A or pick-a-payment is screwed. This 15% to 20% correction stuff is b.s., everything will go back to pre 1997 prices guaranteed, and will probably overshoot as many here have predicted.

Subtopic:

If we are willing to maintain the hypothesis that there are not enough buyers qualified to buy at $500K+ for the current number of homes priced on that range, it seems like our policymakers have a tough choice:

1) Reflate the bubble (that is, jump start home price appreciation so unqualified buyers can again purchase in the $500K+ price range);

2) Deal with the consequences of real estate price deflation (like Japan did from 1990-2005 or so).

Do the Fed and other government entities have the means and resolve to respark housing price inflation to levels needed to justify bubble pricing? Or will they either willingly or unwillingly face the consequences of the price deflation needed to realign the U.S. household wealth distribution with the U.S. home price distribution?

If the bubble were successfully reflated, wouldn’t that just take the U.S. economy out of the pan in which it is currently frying into the path of a future macroeconomic conflagration? Because we already have a glut of high-end housing that most Americans can neither afford to own nor to maintain over the long term.

Nice topic choice. A year ago I started my Hardtack experiments, some of you may remember Memorial Day I started posting big lists of inventory counts and median prices from specific metro areas. We have come a full year and there are some intersting year over year stats to publish. I think it would be a great bit of supporting data for this topic.

start buying art. Art is clearly the new bubble.

Other bubbles that may start up again:
probably the stock market again.
possibly gold
uranium for sure.

Commodities are pulling back but should have another leg up. Timing is the key.

I always sell too early too. It’s because I never really believe whatever it is I’m selling is worth what it’s trading for.

Better early then late and leveraged.

IMHO at some level, its all about asset realocation. You don’t want to jump wildly from one asset class to another, but spread you exposure across ‘em. When one of ‘em is going hand over fist great, you readjust and take some of the earnings out and spread ‘em around again, maybe put some into treasuries where they’ll neither earn much or crash. In 2006, the part of my 401K invested in an international stock index fund returned 26%. My response was to take a bunch of money out and put it into Treasuries. It’s not a path to riches, but it helps level out the peaks and valleys.

If you want to have fun, buy the Shanghai market. While it’s a bubble it could easily double again, and maybe double again after that. Because it’s different this time.

Or it could tank tomorrow…

I have no idea what is going to happen. I only know what happened last time — sellers held out for years, 2/3 of the loss in value was inflation. The question is whether the exploding mortgages will speed things along.

Predicting the pace and severity of the decline is almost impossible. There are so many other economic factors (recession, employment, value of the dollar…) that predictions are guesswork at best.
But there are macro economic principles that are in play. When you look at what occurred with pretty much every bubble for the last 500 years, you can predict where this bubble is headed, if not the exact timing. When you look at Prof. Shiller’s chart of Home values over the last 150 years, and see that prices at 4x median income is the overwhelming average and mean, then you can predict that todays 9x - 10x median income prices are way out of whack. A return to the mean is inevitable. Will this be in quick declining prices or stagnant prices for years with values eaten by inflation is hard to judge.
My guess is that with the bloated inventory, mortgage crises, and a slowdown of the economy, plus the vast amount of speculative buyers who can’t just sit tight. We will see price declines over a few years (2-4) as a return to the mean.
The mean is probably 1997 prices plus inflation, around 30% -50% below current prices.

Wages will inflate. That’s the only way people will be able to afford a $500,000 house, gas at $4 a gallon and oranges for a dollar.

Moral of the story: Don’t get involved with drugs.

The father was a homebuilding company executive also.

You are an example of why this is an excellent blog. Thanks for the observation. Would you mention areas in which you make these observations. Thanks.