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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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I hear a lot about how Ben Bernanke is doing it all wrong. Do not fool yourself, the guy is smart as a razor whip. This doesn’t mean he’s doing it right, but he might not be as clueless as we make him out to be.
IMO: he has the third hardest job in America right now, behind my job, and funnel-cake maker at 6-flags.
it’s easy to criticize. How bout this:
What would YOU do if you were the Fed Chair?
do you go slow and steady with the 0.25% raises?
do you hit the market with a 0.5% raise to show them you mean business?
do you do a little pause, and assess the results of the previous 16 rate hikes.
Or do you do something different, like Bitch Slap David Lereah and chief of NAR research Suzanne?
it’s easy to criticize. Time to put up.
clouseau
I’ll go first:
I would start making statements (in person, in Fed Reports, etc) making it crystal clear that I INTEND to keep raising rates slowly again and again and again so that everybody prices that into the market now, but I would leave an out with a clause saying that we MIGHT pause if economic fundamentals started to falter. (the opposite of what they did, hinting that they may be done raising, but could need to raise if economic indicators were too strong)
and then I would quietly start mandating (not suggesting) different lending practices by the mortgage arena (using reserve requirements, examining loan portfolios, etc), to stop the lending madness, but also do it quietly to avoid panic about the lending situation by the general populace.
and I’d try to add a little stealth inflation to the mix as well!
Hey. gotta be a little honest.
clouseau
Clousea, again respectfully, how did we get to the point were we are playing word and guessing games with unelected leaders. Do we run our own housholds like this?
“Gee Honey, I INTEND to put enough money in the checking account to cover our bills, but I MIGHT pause if my paycheck bounces?
Waaahoo:
agreed. It is sad, but this is the way our markets work now. It is 10% fundamentals, 90% psychology, and 15% housing only goes up. Oh and 22.572% electronic trading.
So you gotta navigate it all.
clouseau
I’d do what ever it takes to send this country, and world, into the healing recession that it needs, and should have gone thru after 2001. We would have been well on the way to recovery had not Mr Greenspan decided to flood the world with liquidity and drop the rates to zero. All he gave us was a short reprieve and created a monster of a bubble.
Expansion and contraction- it’s the name of the game. You need both for a healthy economy.
I agree nnbrkr;…Recessions always have significant casualties but my fear is that if we don’t support the dollar (Higher rates) we could see a complete meltdown of our economy/country ? Depression ?
I’d do what ever it takes to send this country, and world, into the healing recession that it needs,
Fine. But HOW. Again it’s EASY to say what needs to happen, a lot harder to figure out how to do it.
This is why I think we underestimate what BB actually has to do here… He really is in a near-as-I-can-tell IMPOSSIBLE situation.
I like the quote in Milton Friedman’s book “The Fed has given its heart not to controlling the quantity of money, which it can do, but to controlling interest rates, something it does not have the power to do. The result has been failure on both fronts: wide swings in both money and interest rates. These swings, too, have had an inflationary bias…the Fed has been much quicker to correct a swing toward a low rate of monetary growth than to correct a swing toward a high rate of monetary growth.
The financial public, too, believes that the Fed can control interest rates, and that belief has spread to the Treasury and Congress.”
The Fed needs to put the brakes on the money supply, which I guess it is actually doing; there was a link posted a couple of time a month or so ago to a story about how the Fed is beginning to put pressure on Banks to slow lending.
Recession coming?
Here is an interesting quote from today’s Rude Awakening:
“”On Tuesday, the Ben Bernanke hiked short-term interest rates to 5%…Over
the ensuing three days, global stock markets have stumbled, the dollar has
dropped 2% and the gold price has skyrocketed more than $50.”
****************************************************************
Manipulating markets isn’t so easy, it seems.
I’d like to say I would resign. But actually I probably wouldn’t, the perks are too good.
Bernanke is in an impossible position, not of his creation. Greenspan’s liquidity pumping over the years has created a series of ever-larger asset bubbles. I doubt that they can be deflated without serious pain, especially in the US. But activist central banking has been the problem and is not the solution. Bernanke should return to targeted money supply growth (target growth of M1) rather than targeted rates, let rates fall where they may, and fortify his building.
I’d even argue it’s not Greenspan’s creation either. The freakishly high and accelerating productivity we’re seeing is deflationary. Greenspan was right in his description of a “new economy” he was just early.
The Fed is losing its grip because they’re running out of options to combat these enormous deflationary pressures. Rates were at all time lows for a reason. I’d argue they’re already too high.
Most people are using old broken linear models which, when you plug in our current numbers, scream inflation. They’re hiding the M3 because most people will mistakenly panic if they see how high it is.
So they have to create enough liquidity to combat deflation while preventing a dollar crash from mistaken investors who aren’t wondering about the productivity connundrum.
The problem with housing is that even with rates at zero there is no way to make people buy. Prices will drop until they’re re-attached to fundamentals.
The problem for the economy is that even with an exploding M3 the money isn’t raising median wages. Businesses are raking in huge profits but consumers have to rack up debt to buy products. That may be the “pushing a string” problem from a different perspective.
Clouseau, I respectfully disagree with your appraisal of BB’s smarts. Anybody who believes that that they are smarter than the millions of individual minds that make a free market, or that they can somehow, with a few of their buddies and some rearview mirrors, correctly predict the future needs of an entire planet, is an idiot.
Book smarts don’t count as intelligence.
As for what I should do were I wearing his dress? Well, I would correct the crime of un-backing our dollars with actual gold by linking the fed fund rate to the price of gold. Then I would go surfing and let the market regulate itself.
Gollum for Fed Chief! My Preciousss!
Sure - so I guess the individals here on this blog are obviously wrong as the free market has determined that there is no housing bubble…..
People are sheep - it’s numbers and facts that talk.
The free market would have never been able to blow up this housing bubble if one guy at the fed didn’t mis-guess on the correct interest rate that would balance production and demand. That’s my point. It’s the history of the fed. Always over and under compensating because it is impossible to make such decisions with backward looking data. It has to be done in real time and the only way to do that is link the rate with something “real” and constant. There is no need for the fed.
I agree, the Fed engineered the bubble. It would not be here to this degree without them.
The definition of a bubble is when a market behaves very diffrent than the fundamentals would suggest.
Its part of free markets.
Truly free markets aren’t subject to the whims of a Federal Reserve. Bubbles are a result of human nature, including greed, and the only way to get rid of them is with communism, which I’d argue isn’t a great trade-off.
Anybody who believes that that they are smarter than the millions of individual minds that make a free market, or that they can somehow, with a few of their buddies and some rearview mirrors, correctly predict the future needs of an entire planet, is an idiot.
We all have failings. His failure may be his arrogance at his power, but it disagree that this makes him an overall idiot.
There is no person who has ever walked this Earth who hasn’t overestimated his/her abilities.
I agree that the Fed in general (and many academician economists) overthink and have an inflated idea of their self worth/power. This doesn’t make them idiots overall, just about their conceit.
Although the Fed is clearly not all powerful, they DO have a lot of power.
We are double speaking as much as they. I hear people here say “the Fed thinks it’s omnipotent, it isn’t” and then one breath later “the Fed should never have allowed this to happen”.
IF we recognize that the Fed could have done something better to avoid the current situation, then we must also recognize that the Fed can do something NOW to improve the future. Even if we wish them to do nothing or cease to exist (which is in itself an act- the Fed could declare itself to no longer exist)
clouseau.
“IF we recognize that the Fed could have done something better to avoid the current situation, then we must also recognize that the Fed can do something NOW to improve the future.” Unfortunately, this is a logical error. Just because the fed did something to get us to where we are today DOES NOT mean that they have the authority or ability to UNDO those damaging acts. I think that we all WISH this we true, but some processes are unidirectional.
That being said, there is an intertia that makes me THINK (but am happy to read contrary evidence) that the economy generally, and housing specifically, have reached a tipping point that cannot be “untipped”. Just MHO.
Unfortunately, this is a logical error. Just because the fed did something to get us to where we are today DOES NOT mean that they have the authority or ability to UNDO those damaging acts
sorry, I wasn’t trying to infer that argument actually, so I agree with your statement
The argument I was TRYING unsuccessfully to make was more like this:
If the Fed in the past was able to make a situation worse (e.g. they screwed us with interest rates, making the bubble worse)
THEN
The Fed currently has at least some power to affect the future again. Not necessarily to UNDO past problems, but at least change the future. They may change the future again for the worse like last time, they might make no changes whatsoever, or they might make some changes that are beneficial (which may or may not revert us back to our situation pre 2001)
hope that made any sense. I’m having a hard time elucidating my argument. I guess I should join the Fed!
Here’s a schematic: (we’ll use 100 as a baseline)
In the past:
Economy was 100, it dropped to 80.
if Fed would have done nothing, it goes to 70, then maybe back to 100
however fed screws with rates. We now have economy of 50.
So overall fed bungling screwed us.
(That said, who is to say that if the Fed weren’t around that the economy would have tanked to 5?)
Anyway, now we’re at 50
fed can do nothing, and who knows what happens (but doing nothing is an action in and of itself)
Fed can manipulate. This COULD lead directly to economy staying at 50, or maybe going up to 75, or maybe even up to 100, or maybe it’ll plummet to 0.
So my argument isn’t that the Fed can guarantee a change in the positive way, only that they DO have power to change the market, although the effect is often different than the intention.
I think of the fed like a blunt war-hammer. Lots of power, but hard to use in a finessed way. You could clearly alter a Ming Vase with the war-hammer, and thus have a lot of power over it, but the fine control is lacking.
Many of you advocate completely free markets. (I actually shudder at such a thought, I don’t have faith of “the market” that many of you and Ayn Rand have). In this case your action as Fed chief could simply be to abolish the fed. This is an action. And would have immediate and powerful consequences. I am assuming that those who advocate for this envision that Fed Abolision would improve the overall status of things. That’s your action!
probably just a little bit clearer than shattered crystal.
also, for a free market to work equality to a certain degree should be assumed. unfortunately, that will never be the case. it always bother me that a lot of people believe so much in the power of the market, yet they are the first ones to advocate having elites run their lives.
I get your argument and agree with your analysis. There are many probability paths that the Fed can take. Do nothing, scenario 1-100, disband, etc. The only issue I have is the calculus relating to how to unwind this blip most effectively (i.e. with the greatest efficiency and with the least amount of pain to society). Now defining “least amount of pain to society” is pretty vague. I have intentionally left it that way. Some would argue that the least amount of financial dislocation should be the salient target, but I’m not so sure.
I get a bad feeling in the pit of my stomach when I look at average and median incomes over the last few years. There has been an accretion of income upwards in a way that skews the numbers to mask fundemental income imbalances. Some people on this blog have written about how incomes haven’t risen with inflation and housing costs. That’s true, but it also worries me that pay for the richest americans has risen while the middle paid american has fallen. This is not some soft headed concern for the sheeple, but a concern for the fundementals of economic growth and sustainability. The people will vote themselves bread and circuses if genuine opportunities aren’t available.
I’ll stand by my assessment of BB as an idiot (which I fully admit to being myself) if only on the fact that he was silly enough to accept the position with the the consequences of the previous fed head dangling above his head. Consequences that dopes like us could see plain as day.
He might want to get his name into the history book as the man who fixed the g-man’s conundrum!
I would opt for what the founders felt was the best way to keep the gov’t for the people and by the people, a gold standard. I feel we’ve tried the “it’s different” this time, we can make this fiat currency thing work…really…we can. Apparently, it was no different than at any other time in history. Gold bug…no. Doomsayer….no. Look at what is going on, and draw your own conclusion. We as a nation/world have put our trust in bankers. Other times that has happened, very bad things happen, and a lot of people were killed. There is going to be a lot of hardship no matter what happens, but we started with a system that couldn’t be manipulated nearly as easily as it is now. Higher interest rates, lower interest rates….etc. Guessing game? I just want to work hard, and save what I earned. I don’t want to make money for doing nothing. It involves way too much “trying to guess” what others are going to do with their savings. Or even worse, trying to guess what the Fed is doing with rates so that even putting into a “safe” CD can end up killing my savings by inflation. Just let me take care of my own needs by saving. Unless we are back to a currency backed by something other than faith, it just isn’t going to happen. That, IMO, is essentially not a free country at all. We are being told how much something will cost..period. That is why we are all on the housing blog. All of our elected politicians have essentially, and indirectly, told us how much a house will be worth, and we are saying “you have to be kidding me”.
My history memory is hazy but Jefferson had a plan to limit Gov borrowing and by that the ability to easily go to war by requiring that previous bonds be paid off before new could be issued or something along those lines. Of course it wasn’t implemented.
Exactly kerk. Your time should be worth X amount dollars depending on the raeity of your abilities and that dollar should never change in value at the whim of some college professor. Only then can the real value of everything else find a natural balance.
Good thing BB is already bald.
why don’t we look at how corporations are essentially running our lives. our founding fathers never intended thern to have the same rights as invididuals like us. now the bets are stacked so much against us that the only way to get it back is clip their power. imo, the only difference between today with the kings/lord/dukes of the past is that their power is passed on through meritocracy, in general, whereas before its by blood. is this feudalism all over again?
Read Bastiat’s “The Law”
The poor have a new tool to steal from the rich. It’s called Democracy. Socialism basically says: The rich stole from us back in the day so two wrongs must make a right.
I love Democracy but it’s succeptible to vengance. Voters are going to want someone to blame for their own greed so in ‘08 you can bet with certainty that a populist socialist type will be our next president. Say goodbye to free markets and hello to French style bureaucracy.
Amen. And the soon we get that bureaucracy, the better off we’ll be.
Jose. You can defend yourself against a corporation. Stop buying what they sell. You can’t defend yourself against an entrenched politician that takes his paycheck from your pocket.
wait a minute. meritocracy is a good thing. like bill gates and paul allen and even those guys at google. now that slug at exxon with the billion dollars is something else altogether.
I think BB is doing things just like he should. He will be criticized no matter what he says or does. He has to get inflation under control quickly. I for one am glad he inflating RE, it sure made me quite a bit of money. The smart money has left RE now. The challenge is determining other than stocks, where might the next inflated asset class be? Commodities? Hedge Funds? Foreign markets? Foreign Currencies?
When the housing selloff picks up steam, where will the money flow to ? What about that as a topic?
I second that topic Chris. I sold the majority of my commodity-related investments a few days ago thinking that the run up in gold and oil would have to take a pause and consolidate gains before heading towards $800 an ounce and $80 a barrel. Now I am wondering if there will be an opportunity for re-entering the market before Gold continues the March to $1000 per ounce and we see $100/ barrel oil. $1000 per ounce for Gold does not seem that high when you examine the amount of inflation since 1980 in healthcare, transportation costs, insurance, taxes, food, utilities, telecommunications etc. It’s not like everybody is talking about mining stocks at work, but perhaps commodities will yet become the next pop-culture asset class.
i’d like to think a little inflation (less than 10%) for a while (10 year plus or minus) will be his best option. it will help the fed in the long run with its debt and the housing bubble. or course fiscal policy has to cooperate wrt to deficits. just hope it doesn’t spook holders of dollar denominated debt to cause a sudden collapse in the exchange rate.
Weekend topic suggestion:
How about a thread specifically for posting url’s, statistics and graphs, with a view towards archiving them in their own library?
From time to time, people post some really informative items like rent vs. own models, YoY inventory/price levels, etc., but they get lost because there is no good way to access them unless you recall what thread they appeared in.
correction, BB did not inflate RE, I meant the Fed and inflated = inflating, sorry for the poor grammar!
People here love to slam ordinary Americans for their ballooning household debt, ridiculing them for their Hummers and Plasmas, but studies are showing it’s mostly not about over-consumption, it’s about the skyrocketing costs of things like health care, education, and of course, housing. Where is the outrage? It’s all too simple and convenient to see middle-class Americans’ predicament as entirely the result of their own personal choices. The current administration is shifting tons of wealth into the hands of a very small minority, and the middle class is being swallowed up by an ever-larger share of our system’s costs, despite their stagnant wages. I wouldn’t mind hearing pro or con arguments about whether the coming bust is in fact a direct consequence, and culmination, of the “Brazilification” of America we’ve been seeing for years. See the link below.
http://tinyurl.com/fk52g
I’ve been calling it the “Latin Americanization” of the US, but Brazilification rolls off the tongue a bit nicer.
It is clearly taking place, and it has clearly been the goal of Republicans for years.
Jeez. If we discussed this, the truth about the republikkkans and Konservatives would be told and their lies exposed. Are you sure we want to do that here?
You’d find a way to interject your hatred towards rebulicans on any thread… you’ve never needed an entry point before….
It’s a housing bubble blog and yes, your 1965 fleetwood single wide is considered a house but you’ve got to take the wheels off first.
Perhaps you can discuss the consequences of this bubble and how it affects your trailer park.
Yes Lingus please stop “hating” on those republicans who are A$$ raping the country…it is so unseemly when class warfare is turned on those who got fat practicing it.
Kenny, don’t you know the desperate republikkkons will do anything to stifle opposition? Poor desperate republikkkons.
Hey isn’t it wonderful that our Republican government just voted to borrow $70 billion from The chinese so they can do this:
The tax cut reconciliation bill (H.R. 4297) provides households with income of $1 million or more an average tax break of $42,000. In gross contrast, the more than three-quarters of the nation’s households with annual income of $75,000 or less will receive an average tax cut of $30 for one year - not even enough to pay for a single tank of gas. And average families will end up footing the bill for millionaire tax breaks through cuts in vital services and added national debt.
And guess who is going to be paying back that 70 billion dollars plus interest….I will give you a hint, the same people who got $30.00
Comment by KennyBabes
2006-05-12 10:02:07
And guess who is going to be paying back that 70 billion dollars plus interest….I will give you a hint, the same people who got $30.00.
_______________________________________________
And guess what, those get the $30 back just might be figuring out how they’ve been played by the republiKKKons. There’s a growing believe that you won’t see another republikkkon majority in either house for a very very long time.
Too funny. Cunni in a single wide !
IMO this is an excellent article - I hope all can read in entirety.
From the Monthly Review
http://www.monthlyreview.org/0506tabb.htm
…While experts debate how long things can go on without a serious crisis, there is a structural issue of great importance to consider, namely the lack of significant domestic investment by U.S.-based transnationals and the continued expansion of their investment elsewhere. While U.S.-based corporations are earning record profits, they are investing little in the United States. For 2005, the Standard and Poor’s 500 U.S. corporations set new records, spending half a trillion dollars both to buy back their own stock and to pay dividends. Even the fund managers who profit in the short run worry that companies are underinvesting in their businesses. While profits were in many cases setting records, firms were not increasing investment; instead they were retrenching. Their profits were in fact coming from cost-cutting. This is not to say consumption was not rising. It did increase. But the majority of the increased spending was funded through debt creation, most of this due to the wealth effect of the increased value of real estate. Between 2000 and 2005, U.S. house prices increased by more than 60 percent. The market value of real estate in 2006 is about 200 percent of personal disposable income, and mortgage related assets are equal to over 60 percent of bank lending compared to 25 percent in 1970. As one investment analyst has written, “George W. Bush was re-elected president during 2004 because he presided over more housing inflation than any other American president.” …
Good article, but h-e-a-v-y — better read before lunch than immediately after. Thx.
Great article! Thanks!
There was a great book written about this called the Two Income Trap by Elizabeth Warren. In it she pretty much dismisses the popular notion that people are getting financially burned by excessive credit card debt and SUV purchases. Debt is high, but it is not the thing that ruins people. What does ruin a fair number of people, are these circumstances:
Families are willing to spend an incredible, almost limitless amount of money, to raise their children in what is deemed a “safe” neighborhood, often around other families who have the same desire. Since school attendance is dictated by physical borders of where your house lies, there has been a bubble in houses that are inside what are deemed to be “good” schools. The bidding on house prices has gone up to the limits of one income, and now Two Incomes (hence the name of the book) since the greater number of women now entering the workforce have doubled the amount a family could pay for housing. Now even that limit is stretched. The problem now, is this family is doubly setup for failure because now if EITHER spouse loses their job, the entire family is in jeopardy. This is now twice as likely as before.
Additionally, it used to be that if one spouse or family member had a serious illness, that there was a “backup” spouse who could care for that individual. Now that is no longer the case, and also, it is now twice as likely for that sick person to be the very spouse who is bringing in income. She sites that basically we are now 4-5X more likely to see families get into a financial trap that they cannot easily dig themselves out of due to these 2 factors ALONE. Sure, there are the occasioanlly irresponsible people buying huge vacations, but that isn’t enough to bankrupt you irreparably - illness and losing one of two jobs required to pay for you primary residence is.
Anyway, the problem is that people, by nature, are optimistic. They believe they will never get sick, and will always work together to their fullest capacity. Also, “scrimping” on your kids is considered being a bad parent. There is no end to the amount of money parents will spend on childhood environment and development. It’s an incredible heart-string that works in politics and at home (”think of the children!” - it’s a great way to sell everything from child safety seats to new laws to protect children from potential online predators and rapists). And it works on families when they consider whether to fork out another $200K for that house that is “just that much safer”.
…..The problem now, is this family is doubly setup for failure because now if EITHER spouse loses their job, the entire family is in jeopardy. This is now twice as likely as before.
Additionally, it used to be that if one spouse or family member had a serious illness, that there was a “backup” spouse who could care for that individual. Now that is no longer the case, and also, it is now twice as likely for that sick person to be the very spouse who is bringing in income. She sites that basically we are now 4-5X more likely to see families get into a financial trap that they cannot easily dig themselves out of due to these 2 factors ALONE. …..
BINGO! I have been preaching this for a LONG time. To me it is so obvious that this is what is happening. Instead of planning for what *could* happen (if someone got sick, loses a job, etc), many dual income families plan for the here and now…with no backup. That’s how they get in trouble. If all of the monies that the family brings in goes towards the basic necessities, they are screwed if the wind shifts. Even with my single income, as I have mentioned before, I live below my means…no credit card debt, regularly re-evaluating my expenses and reducing costs, saving…not just to be able to afford the fun stuff, but just in case I found myself without a job or ill and had to rely on unemployment or disability income. I don’t want to burden my grown children unnecessarily if indeed I do need their help…this way things will be easier for all of us and none of us are devastated.
It’s a shame that she had to write a book about this and that people couldn’t or can’t figure it out on their own. To me it’s just too obvious.
BayQT~
the term i heard that is more appropriate than tax cut is *tax deferment*. these deficits are being borrowed to be paid by future taxes. unfortunately, only a very few takes the bulk of it.
To spend is to tax.
To spend is to tax future generations.
Fixed it for ya.
I think you bring up a good point. The pressure on the middle class in this country is a fact. However, it’s also all to simple and convenient to see the current administration as the responsible. The fact is that middle class Americans are having a harder and harder time competing in the global economy. They aren’t alone; Western European economies are in far worse shape. The emerging economies of China and India are gradually putting the squeeze on us because they are rapidly improving their productivity.
If I were to assign any blame to Republicans, it would be for their total abdication of control of our education system to liberals. While you are making fun of the utter stupitidy and igonrance of even the most basic economic principles demonstrated by the people caught up in this housing bubble mess, remember that they were probably educated in our public school system.
Every year our students fall further behind the rest of the world in competitive testing. You can’t expect our workforce to command a premium in the global marketplace if they don’t have the basic skills they need to be competitive. I don’t care who you put in the white house.
“The fact is that middle class Americans are having a harder and harder time competing in the global economy.”
BRAVO!! I went to college in California with plenty of Asians who could barely speak the english language, but most of them ranked at the top of the class setting the grade curve. The bulk of the locally raised college population went for the easy liberal classes that demanded little in the way of mathematics. Personally, I’d like to see more Asians get involved in government; they would likely do a better job of forcing the indigenous latino and negro populations to work, any work, even the WallMart greeter. Unfortunately, today’s pudgy white folks (yesterday’s hippies) just don’t have moxie to make it happen. BTW, did anyone happen to see Wednesday’s USA Today piece where a woman (living in the projects) is “planning” on having a child? Having a child is one of life’s most demanding tasks, and here we have USA Today giving legitimacy to this absurd practice of welfare from the cradle to the grave by publishing the story in their first section. No wonder everything has turned to $hit!
“People here love to slam ordinary Americans for their ballooning household debt, ridiculing them for their Hummers and Plasmas, but studies are showing it’s mostly not about over-consumption, it’s about the skyrocketing costs of things like health care, education, and of course, housing. Where is the outrage?”
I’d like to see more on this too Low Tenant. People keep ranting about Joe Sixpack buying the Flatscreens. Well, where I come from its Joe Six Figures blowing it on the Flatscreens and Hummers…yet they still keep getting all the taxbreaks.
According to the last FDIC report I read, 30% of America isn’t even eligible for credit. So when you add in the next few income brackets, let’s face facts here. Are we now prepared to write off 50%, 60%, up to 70% of the population? Do you really think writing off that much of America is going to leave us strong? If your employees can’t afford to eat or educate themselves, are your businesses really going to thrive? Oh yeah, what businesses…we’ve moved to asset speculation market only. Even though many of those being slammed spent $40,000-$80,000 on education, we can stand in the bread line with those that didn’t while the elite tell themselves we made “poor” decisions. When will the masses see the “poor” decisions we made are that we didn’t throw these elitists out on their kiesters before they destroyed us!
“Well, where I come from its Joe Six Figures blowing it on the Flatscreens and Hummers…yet they still keep getting all the taxbreaks.”
Where I grew up the six figure families are the ones who pay huge sums in taxes because of their college degrees, hard work, and dual incomes. The typical $45k/yr family doesn’t pay much in taxes by comparison, so a tax break doesn’t amount to anything for them. Maybe I’m misunderstanding something?
The Japanese yen has dropped from 118 yen to the dollar to 109 in less than a week. My guess is BB will protect the housing market before the US currency. I mean what’s he going to do? He’s got to save those fools with the ARM ticking time bombs. It’s in neither political party’s interest to see a serious housing meltdown and I doubt they will let it happen. The red-hot housing market of the last two years has been completely cooled if not stopped cold. This is as far as the Feds will go.
Anyway I blame the entire mess on Greenspan… but that’s another rant.
The dollar should be allowed to fall some to correct the trade imbalance—foreign goods are too cheap for Americans, US goods to costly for others. If I were BB I’d go over and kick John Snow’s behind.
Firtly, Ben thank you for all of your hard work on this Blog.
Weekend Topic suggestion:
How can the average Joe or Jane Sixpak maximize their buying power as a bottom approaches in the future? Lowball bidding is one way I have seen discussed here. What about foreclosures? Is that an area where normal folk can tread to get even deeper discounts? How do we do that? Were in the process is the “best” entry point for our friends, the Sixpaks? Is it Pre-foreclosure, auction, or REO? What are the pitfalls of such an excursion?
Man, I gotta get that fat finger fixed …. Firstly - not Firtly and Where - not Were. See any more? And top of the morning to you as well
Anyone who is going to worry about a couple of silly typos has too much time on their hands.
I’ve had quite a few friends tell me after looking at repos here in SD during the 1990s that they were no bargain. The discount was very little. They were far too beat up, needed way too much work and the prices did not reflect that. I’m wondering if there will be bargains to be had as the bottom approaches or will it not be worth the trouble?
Bargains don’t have to be repos. There will be plenty of people who will have to sell at the bottom of the market for any number of reasons, including all those who become unable to service their mortgage.
Chip and Wicked, good info from you both. I now recall the stories of people walking away from properties in the early 90’s and ripping fixtures out of the walls. Not a pretty picture. I think I’ll keep it simple and not pursue the repos.
As I understand it, one of the safest ways to enter this segment of the market is to consult the lis pendends list maintained by the county, which identifies homeowners who have received notice from their lender that they face pending foreclosure. You get the benefit of a more typical buying experience compared to an auction (e.g., you get to fully inspect the property before purchasing and you can take some time to make your decision), but you still have a very highly motivated seller who may be willing to make some significant concessions.
OT — Don’t forget, everyone, to click on the blog’s GoogleAds to help pay Ben for all of his efforts.
I think the best plan is to simply wait until the media and public is disgusted with housing and everyone is saying RE is a bad investment and then go out and find a nice house, it should be a good price by then. Forget about foreclosures, etc, unless you want to make a business out of it. It will probably take at least a year before anyone should be looking, maybe two or three years. We are not planning to try to time the bottom, since we owned our last house outright. I am expecting at least a 30% drop from today’s prices and we will probably buy when prices reach that point unless they are still falling very fast.
Ben, I have been a faithful “reader” fo your blog since last September. I wanted to thank you for taking the time to post this information. I rarely reply because of my schedule I often can’t read it until I am a day behind….. However, I think there are hundreds more “readers” like myself who enjoy this blog and are true bubble believers. We sold our home last year in SFV at almost the top and are renting now in Scottsdale, AZ. There are so many people who are in DENIAL about home prices. I have a friend who recently bought a home in Maricopa, AZ…… My aunt just took a HELOC to buy an 85k motorhome……. the list of stupidity goes on, as I am sure everyone here has their own stories about friends and relatives.
Keep up the good work and the good information. It is truly appreciated.
Kris (gone to az)
I have a fellow investor friend that has made a lot of money…He did well in the 90s run up in the stock market and has done very well
in real estate…He is currently purchasing tax delinquent properties.
Can anyone glean some of their wisdom about whether this is a good
investment. My friend claims there are a lot of properties in distress
and you can pick them up for just paying the taxes…
Do you know if these are IRS seized or are they delinquent on property taxes? I do know that for IRS seized they have like 6 mos or something like that to take the property back, not sure for delinquent prop. taxes though. Also obtaining title insurance is hell for either situation.
These are just tax delinquent. You just pay the back taxes and the property becomes yours. The caveat: The original owner can has a year to pay back the taxes and some interest and get the property back.
It depends on the area of the country. Towns in Upstate NY have tons of property tax delinquent properties that are auctioned off a couple times a year at the city halls. They auction off several hundred properties per year and it’s a real extravaganza.
I bet there’s places in the South where the same thing’s happening.
As to whether it’s a money-maker, it’s like all RE. Location location location and where that particular area is heading economially/socially. And timing.
I believe the powersthatbe’ do want the dollar drop….this will increase our exports, balance trade a bit, and help us slow the debt bloodbath.
This is all balanced on the edge of a knife as the slow exodus from the dollar is already becoming painful for many segments of the market….that being said , a severly pruned rose bush flowers best the next year
http://www.safehaven.com/article-5151.htm
Which markets are least suscepitiple to a big correction.
For starters, take a look at pp 20-25 of this report (PDF file).
http://tinyurl.com/kv4a3
That’s a pretty comprehensive report — saved a copy. Pretty much reflects what we see in other reports, but includes more data relative property markets in other countries. Thanks for posting the link.
There is an interesting discussion here about the conundrum that Bernanke faces. http://bigpicture.typepad.com/comments/2006/05/some_thoguhts_o_3.html#comments
On one hand he has to control inflation, but on the other hand it will kill the housing market. The last fed statement was the first one to really acknowledge this.
CNN says ” If you’re a speculator … get out now !”
http://money.cnn.com/2006/05/04/real_estate/realestatetips/index.htm?cnn=yes
Good luck with that….
Pretty picture!
Well, I did that wrong.
http://stockcharts.com/h-sc/ui?c=hgx
Collectively we should bring together and set priorities for a range of reforms to prevent this from happening in the future.
With loans, for example, there appear to be a number of obvious rules to avoid breaking in the future: For large purchases should require some down payment such as in the 10-20% range. Loans for more than 100% of the cost are risky. Adjustable, zero, or reverse interest loans also have risk. Perhaps these additional risks should show up in credit ratings so that one’s credit goes to junk or nearly so whenever holding suicide loans? That might help with the multiple loans problem. Buying existing loans in practices should not be discouraged, but it does seem like some more rules regarding disclosure are needed since a lot of stinker loans appear to have been sold as goodies.
The loan regulations are part of this, but there are related issues such as zoning and rent control that should if at all possible also be dealt with in this meltdown.
It seems the unfortunate likelyhood that reactions to the crisis will be mostly split along political lines and likely to become paralyzed even though these should not be left versus right issues.
While I agree that too many loans are way too risky, I don’t like the idea of more government involvement. Rather, I think the requirement should be fuller disclosure of the risks — to the bag holders at the end of the chain. I’d think there have to be some clueless pension fund managers out there who have no idea of the extent to which they are exposed in MBSs.
my 2cents:
i’m no student of the federal reserve, but from reading this blog BB came into his current position with a reputation of being soft, hence “heliben.” it appears the commodities markets still regard him as being soft. we’re heading farther in the wrong direction than when he took over. he should have raised rates 1/2 point at his first meeting. he didn’t. he’s already failed.
I’ve whipped up a graph from the ZipRealty data that was posted on the “cnn tells speculators to get out now” article.
http://www.flickr.com/photos/ericskiff/145095429/
Might be interesting to discuss the growth curve (which is almost an exact, straight line, not the logrithmic curve that I was expecting, but also represents a constant 3600 homes added to the phoenix market each month. If growth holds steady, there will be 55,000 homes for sale in the Phoenix market, not counting FSBO, exclusive listings, or new homes. That’s up from 10,768 on 7/20/205
that is insane!
When will it slow down? I know speculators that were buying in December.
I cannot draw a line that straight, freehand. Interesting.
I would like to see if we can get a consise posting of where the collective opinions of how to best invest money going forward to protect ourselves from the ongoing meltdown of prices. And that would include how to best invest a large lump sum, as well as onging monthly (weekly) savings that are made on a regularly scheduled basis (i.e., $250/mo into an IRA)etc. Any insights would be appreciated/helpful.
I dunno if there is going to be a safe place to invest as this unwinds. Maybe in foreign equities ?
I’m sitting 50% in gold and doing OK the last 2 days in spite of the market going lower. That doesn’t mean I will fare OK in the next few months, but so far gold is holding up OK.
i was just wondering. how do you buy and sell gold. is it like stocks/mutual fund where you buy and they hold/store it for you. or more like buying ebay stuff that store the gold yourself and send/mail it to them to sell. thanks.
There are many ways to buy gold or paper related to it. Ben has a metals site:
http://moneyandmetals.blogspot.com/
Kitco and Blanchardonline sell gold, bulk and coins. It’s pretty easy — you set up an account, peg the price and send them a check. If you want to have the gold in your possession, they send it by registered mail.
If you’re in a major city, you probably can find a local dealer.
I buy GLDs on the NYSE. Pretty darn simple. I can be in or out of a position in 5 minutes. Gold held up really well today. Given its rise lately, I was expecting a sell off.
A superficial summary:
Physical gold and the gold ETFs are taxed as collectibles (28%), so unless you can hold the gold ETFs in something like a Roth IRA, it’s probably not worth it. Some folks insist on holding the physical gold (but caution against storing it in a bank’s safe deposit box because the Feds could take it away).
Precious metal mutual funds provide a relatively carefree way of investing in precious metals. I think Vanguard has a $5K minimum investment. You can also invest in individual mining companies (you can look at the prospectuses of various mutual funds for ideas of companies, to start).
do you have a link? why would TAXES on an etf be different for pm than stocks?
I was meaning to post this last week;
In the span of a couple days I’ve heard three different people (live conversations) jokingly talk about arson as a way out of being trapped in a house that couldn’t be afforded. Granted the conversation topics were RE related, but it was strangely serendipitous. How did this though suddenly cross so many minds?
So my question is: What would really happen if a FB’s house burned down and it was ruled an accident? IANAIA (I am not an Insurance Agent), so I don’t know. Would the mortgage be paid off and the borrower now be the owner of a paid-for pile of rubble? I suspect not. Can someone in the industry enlighten me?
Also, are there any other “Radical” scenarios by which a FB could ‘escape’ a mortgage?
I suspect for some people (FBs), desperate times are ahead. And I would not be surprised to see an increase of desperate events, even if they can’t work as the FBs would hope.
i think what happens is that the insurance company will pay for rebuilding the house. i am not sure though if the insured has an option of just using the money to retire the debt if the collected money if enough, instead of rebuilding the house. remember, it is only the property that is insured, the land is excluded.
Fire investigations are very thorough nowadays, and companies know what indicators of stress to look for. The chances of getting away with this are actually rather slim, and the punishment for this kind of fraud is really quite severe in most states.
This is fascinating. I am a proponent of liberty, but I’m wondering at what point towns have to protect themselves from someone owning this many properties and then defaulting on them.
http://www.app.com/apps/pbcs.dll/article?AID=/20060511/NEWS/60511035
The story about the real estate “mogul” who owned 129 properties.
“Dwek’s arrest has sent ripples throughout the real estate community.
Last week, Ocean Township couple Sam and Terry Nowell thought they had a solid deal to sell their Monmouth Road home to Dwek. A week after they put it on the market for $569,000, Dwek made a cash offer, sight unseen, for the property.
The Nowells then contracted to buy another house in the township, and that home’s owners then bought another house out of state.
Then the domino effect set in.
The night before a Superior Court judge froze all of Dwek’s assets on May 3, including at least 129 properties, a lawyer for the real estate mogul faxed the Nowells a one-sentence letter: The deal was off.
“We had already boxed all our things up, and we were in the process of buying a new home,” said Terry Nowell, 55. “Those people (the sellers of the other home) had already bought a house in South Carolina.”
Now, both homes are back on the market. The Nowells are not only out at least $500 in expenses, but they also wonder what will become of Dwek’s office-building project on Monmouth Road not far from their cozy two-story house.”
“Work at the construction site ceased last week, and there are hardly any signs that it will start again: The portable toilets were loaded on a truck and removed Monday.”
You know, if you are wondering whether a given project in your city is going to be finished, seeing a truck taking away the portable toilets should pretty much answer the question.
dwek has just traded 129 little houses for one REALLY BIG house.
Towns in Upstate NY have had this problem: Somebody buying up way too many properties, letting them deteriorate, not paying taxes, wrecking the whole neighborhood. It can turn into a real mess.
It seems to me that the last auction I went to, you had to be approved by the city to get the property you bid on. In other words, the days of anything goes were over.
Here are some Berkeley folks up a creek (literally) LOL
Up a creek without a permit
By Carol Lloyd, Special to SF Gate
Friday, May 12, 2006
Joanna Graham stands in front of her Berkeley home. Unbek… The urban culvert near Joanna Graham’s Berkeley house is … Joanna Graham stands near a sign warning about the danger…
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Carol Lloyd
Surreal Estate
Note:This column appears Fridays on SF Gate and Sundays (abridged) in the Chronicle.
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Up a creek without a permit
05/12/2006
Old (and shabby) makes a home homier
05/05/2006
The promises of a time-share seldom pan out
04/28/2006
Suburban pied-à-terre promises the joys of a happy childh…
04/21/2006
Home Is Where the Heart Is Open
04/14/2006
Joanna Graham remembers the exact moment she learned of Strawberry Creek’s proximity to her West Berkeley home.
Four years ago, a neighbor knocked at her door on North Valley Street with a petition from environmentalists requesting a study of the 300-foot culvert that surfaced just two houses downstream from her house. In the course of a creek-restoration project, they had noticed huge chunks of concrete falling off the 6.5-by-8-foot pipe into the stream below.
“I told her, ‘I don’t even know where the creek runs,’” explained Graham, a small woman with salt-and-pepper hair and the seasoned gaze of someone unaccustomed to feeling sorry for herself.
“And she said, ‘Oh I do — it goes right under your house.’” Graham, who bought the modest 1930s home with her husband in the ’70s, cracked a painful smile.
“I told her, ‘I feel you’ve just told me I have terminal cancer.’”
In an era when having a home in the Bay Area has taken on monumental financial implications, bad news about one’s house can indeed feel like a death sentence. Standing with Graham at the fence at the end of her dead-end road under a sign that reads “Keep Out Creek Culvert Potential Collapse Hazard,” I wasn’t surprised that she feels dismayed.
Despite the blooming spring weather and a wild turkey strutting down the sun-dappled street, one notices things that would give even the most intrepid homeowners insomnia. Since the culvert’s failing was first discovered, 20 feet of creek bank has eroded as the pipe continues to disintegrate. And within the last week, neighbors say they have noticed the distinct smell of leaking gas from an adjacent PG&E pipe, which a fence post has fallen on.
Back in 2003, after discussions with the city about repairing the culvert went nowhere, one downstream neighbor filed suit against both the city and upstream property owners.
Because the estimated costs to fix the pipe run between $2,000 and $7,000 per foot, the repair bill for the estimated 50 feet running under Graham’s home would be more than they could afford and would force them to lose the house.
So Graham, a self-described Marxist who considers her home a place to live and not a speculative investment, joined with other upstream homeowners to file their own suit against the city. Another neighbor filed a suit in turn, and eventually the courts rolled all of them into one big case.
Graham and her fellow plaintiffs are arguing before the Superior Court of Alameda that they have been subject to “inverse condemnation” — a constitutional principle that holds that it’s illegal for a government to take or damage private property without just compensation. The suit, which is still in the “discovery phase,” contends that these culverts function as part of the city’s watershed and storm-drain system and therefore are providing a public service.
“Individuals shouldn’t be compelled to maintain a public improvement,” said Alan Jang, who is representing Graham, her husband and four other homeowners in the suit. “The cost should be spread among all the taxpayers who benefit.”
Sound reasonable? Well, in the world of water politics, even statements like these are subject to debate. Like many urban areas built up before the advent of the environmental movement and stricter rules governing riparian zones, Berkeley was constructed on top of a network of streams and creeks — the biggest of which are Codornices Creek, which runs from the North Berkeley Hills to the bay, and Strawberry Creek, which runs from Strawberry Canyon through the UC Berkeley campus and under the central part of the city to the bay.
Many of the culverts — like the one running under Graham’s home — are made of unreinforced concrete and date back to the early 20th century. Because these culverts were created in a time before water-management plans and real estate disclosure laws, many owners had no idea water ran under their property — until 2004, when the city released an official list of properties that would be affected by a Creek Ordinance passed in 1989, which was intended to restore and preserve the city’s natural waterways. The list comprised an estimated 8 percent of the city’s properties.
As is true of many of the culverts in Berkeley, there are no records showing who built the one under North Valley Street. In court documents, Deputy City Attorney Matthew Orebic wrote that the creek was likely diverted underground into a culvert by a private developer to increase the amount of buildable land.
He also contends that the culvert doesn’t operate as a public improvement but that the city has another “formal storm drain system of pipes that run parallel to the creek.”
Like most governments faced with water-related lawsuits, Berkeley has argued that whether it’s a creek, culvert or drainage ditch, waterways on private property are the sole responsibility of the property owner.
The controversy in Berkeley has been made all the more complicated by the creek ordinance. Although no self-respecting Berkeleyite would admit to being anti-creek, the ordinance has become a lightning rod for impassioned creek advocates and terrified homeowners.
Although the law has been revised and is being revisited even now, it still has clauses that seem onerous to homeowners.
The ordinance prohibits new construction within 30 feet of an open creek. It also places strict limits on homeowners’ ability to make additions to single-family homes, requiring a dreaded “conditional use permit” — which allows anyone in the city to protest a given proposal. Among the limitations are requirements that house must have no more than two bedrooms and be no larger than the median size of single-family homes within a 500-foot radius.
Under a condition that only a Northern California city could draft, “The proposed addition will not be detrimental to the health, safety, peace, morals, comfort or general welfare of persons residing or working in the area. …”
Taken as a whole, the liability of the culvert, plus these regulations, could make it harder for homeowners to sell their property, get homeowner’s insurance, refinance or sell.
“This is f–ing with people’s lives,” said Terry Mandel, a member of Neighbors on Urban Creeks, a community group formed to respond to the creek ordinance. Her Berkeley Hills home straddles one of the city’s seven culverted creeks. Ever since an unrelated accident (a water pipe burst under her kitchen sink, ruining much of the first floor of her newly remodeled home and requiring significant structural work), she has become increasingly anxious about the prospect of dealing with the limitations of the revised creek ordinance.
“I’m a single woman who is self-employed,” she said, blinking back tears. “Where is the money supposed to come from?”
With Berkeley’s engineers estimating that it would cost several million dollars to repair all known culverts, is it any wonder that the city is trying not to take on the extra financial burden at a time when so many public agencies are strapped for cash? “[City officials] have reason to be fearful,” conceded Shirley Dean, a former Berkeley mayor who is active in Neighbors on Urban Creeks. “But the problem is not going to go away, by ignoring it. They are thinking in little boxes — they need to confront the big picture.”
But as this battle over failing urban culverts is fought out around the state, often the best bet for homeowners’ is for the government to quietly approach them to make a deal. “Our hope is that they’ll just look at this as an isolated problem,” said Graham, who feels that she and her fellow homeowners can’t afford to be martyrs for every creek-side homeowner in the city. “The problem is just too big.”
Carol Lloyd is currently at work on a book about Bay Area real estate. She teaches a class on buying your first home in the Bay Area, and another class based on her best-selling career counseling book for creative people, “Creating a Life Worth Living.” For more information, email her at surreal@sfgate.com.
SF Chronicle finally noticing a BA slowdown.
Housing development ebbs as outlook cools
Kelly Zito, Chronicle Staff Writer
Friday, May 12, 2006
Bay Area Home Sales. Chronicle Graphic
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In the latest sign that some of the steam is seeping out of the region’s housing market, Bay Area real estate developers are trimming prices, converting residential projects to commercial uses and, in some cases, walking away from certain properties altogether.
After years of rampant building spurred by soaring home prices, some developers now are getting squeezed by rising interest rates and construction costs, an uncertain housing market and a jump in the number of units on the market — or coming soon.
Two years ago, developer Monahan Pacific bought a 1/3-acre site at 535 Mission St. with an eye toward erecting a 34-story, 273-unit condo tower. Last month the company sold it to Beacon Capital Partners, which is expected to turn the property into offices.
The developer pulled the plug because he felt it was too risky — high-profile developments from Mission Bay to Rincon Hill are adding several thousand condos to San Francisco’s SoMa district.
“We just don’t think it’s prudent to bank on further price increases because there’s more supply, and rates on mortgages are going up and impacting the prices people can pay,” said Jeff Hutchinson, Monahan Pacific’s director of acquisition and finance, who confirmed published reports about the transaction.
While investment in housing remains strong around the Bay Area, it is clear that builders — who must ramp up projects years in advance to clear regulatory hurdles and find financing — face a shaky market:
– Developer Opus West last month scrapped plans to build 100 condos on the south side of Mission Creek in the sprawling Mission Bay development in San Francisco, though the firm just opened a sales center for the 110 condos it still expects to build on the north side.
– Home builder Shea Homes recently dropped plans to build nearly 100 townhomes and live-work lofts on a 5-acre site in San Jose.
– Lennar Corp., after beginning negotiations to develop several hundred units on a downtown block in Oakland late last year, decided in early March not to move forward.
“It’s certainly a different market than it was a year ago,” said Adam Lubow, principal at Praedium, a new-home sales and marketing firm in Pleasanton. “Then, if you had product that was well positioned and properly priced, there were lines out the door and lotteries. Now we have higher interest rates, gas prices that are going up and fewer buyers in the market and fewer mortgage programs as readily available.”
Despite some developers’ reluctance to invest in certain areas, the overall market for new homes — which represents a relatively small portion of the region’s total housing market — remains healthy. The number of new houses and condos sold edged up less than 2 percent between March 2005 and March 2006, but the median price paid for a new unit jumped nearly 12 percent, from $594,000 to $663,000.
Thomas Davidoff, an assistant professor of real estate at UC Berkeley, doesn’t believe the market for new or existing homes is in danger of crashing. Instead, he said, developers are simply adjusting to a more measured pace of growth. Although he expects construction to ratchet down further, the region’s population and job growth will continue to drive a certain level of building.
Of course, Davidoff and others point out, if building activity were to slow to a crawl, it could ultimately create a whiplash effect — driving prices higher if supply slipped too far behind demand.
“It’s a high-risk, high-stakes game — it’s the art of development,” said Seth Nodelman, senior director of retail services at commercial real estate firm Cushman & Wakefield. “Good developers have great timing, and they understand where demand will be and they build for it.”
Meanwhile, Mark Ritchie, president of Ritchie Commercial in San Jose, hears about deals falling through every week. One of them was his own: A large builder just backed out of a 300-unit apartment complex on a 60,000-square-foot downtown plot in San Jose. Ritchie estimated that the builder had shelled out several hundred thousand dollars in planning costs but could not make the project pencil out because of a slower market and pressure from neighbors to reduce the number of units.
Other builders find they must work harder to sell the homes they have ready.
Their incentives range from swanky events to straight-up cash discounts to free cars.
“Much of it depends on how much inventory they have and how quickly they need to move it,” said Joseph Perkins, president of the Home Builders Association of Northern California, noting that many large, publicly traded builders must meet quarterly sales projections.
Even ecologically friendly projects are finding the Bay Area a tough market to crack.
At GreenCity Lofts, a 62-unit development in Emeryville that touts sustainably harvested wood floors, a 1,100-square-foot one-bedroom loft is being offered at $499,000. Recently, a similarly sized unit sold for $640,000 — although it had some perks, such as views of the Berkeley hills.
To help attract more interest, sales manager Teresa Marlow said, the firm will be upgrading units with chic appliances, breakfast bars and ceiling fans. On Thursday evening, Marlow hosted an invitation-only art viewing at the complex with hors d’oeuvres from a noted chef.
“It all helps in terms of driving traffic to the door,” she said.
Doug Krah, president of Standard Pacific’s Northern California division, is hoping to appeal to consumers’ wallets — particularly the fence-sitters who may need an extra push. His firm is offering packages worth as much as $75,000 in the form of discounts, incentives to brokers and upgrades. With those tactics necessary to sell homes in some developments, Krah is hesitant about laying out lofty sums for new land.
“We’re just like the buyer who’s wondering whether this house is going to cost more or less this year,” he said. “If they think it’s going to cost less, they don’t buy. If I think that land is going to cost less next year, I don’t buy.”
E-mail Kelly Zito at kzito@sfchronicle.com.
Let’s get Suzanne’s comment on the Bay area articles, as she is the research expert. And let us have her give an update on the starving squirrel situation in San Francisco.
There isn’t a bit bucket yet for the weekend, so I am posting this here. Robert Prechter just came out with a notice that he feels the Dow has topped this week, and the big 3rd wave of the bear market in stocks is about to begin. The 3rd wave is the second down wave, the second wave is the rally during the last few years.
Actually, I just read the article again, and he says the Dow is topping, not that it has topped, but he believes that it may either have topped or will top within a few days, from what I can tell.
Not really a topic but more of a question really….
I’ve heard numerous reports, especially here in California, that low unemployment is one of the primary forces that’s driving the abnormally high housing prices. I also know it’s been discussed here on numerous occasions that the majority of the new jobs created are housing related. I’ve heard/read anywhere betweeen 35 to 50 percent of existing jobs in California are currently in construction, property brokerage/agency, etc.. As the market begins to correct, the immediate impact to the economy are job cuts in these areas. It’s in fact happening as we speak with mortgage lending job cuts at WAMU and Ameriquest.
My question is, in a “normal and healthy” housing climate, what should be the appropriate housing jobs-to-total employment percentage?
Thanks and great weekend to you all….
You not only need jobs, but also jobs that pay enough to support housing. Now a median waged person generally can’t buy a median priced house, but they should be able to buy a starter with the hopes of moving up. Average household incomes in my area are about 60K a year. Starter homes, in a safe area, start at about 300K. These homes sold for 150K 3 or 4 years ago. We need to go back to that.
Hi, I’m new here. I have a couple topics/querries that have crossed my mind lately.
1. Where is all this mortgage interest money going? To the Federal Government through Fannie Mae and Freddie Mac is the best I can figure, and this whole bubble seems engineered as a new method of taxation, above and beyond property taxes… probably to support a war in Iraq and other misspending by the Bush Administration.
2. What’s going to happen to the dollar with all of this? Here’s my suspicion. Gold is just a bubble, and the dollar and treasury bonds are in good shape and will remain stable through increases in interest rates. The Fed controls the value of the dollar, BushCo controls the Fed. The wealthiest .5% Bush constituency doesn’t benefit from a deflating dollar, and have already profited from the real estate bubble, and whoever is getting all these interest payments certainly won’t benefit from dollar deflation, so the dollar will stay about where it is, and interest rates will continue to rise, real estate will crash, and the general economy will either slide into a recession/depession or barely hold on by it’s fingertips.
Use of the term BushCo isn’t generally geared towards higher end economics, but I’ll bite anyways.
If this “wealthiest 0.5%” isn’t going to benefit from a deflationary dollar (why not?) then why WOULD they benefit from a recession/depression? These are essentially the same thing.
do you read this blog? everyone here talks about buying boats, suvs, etc from all the fbs who are overextended, because WE have cash, and they do not. now pretend i have 1000x the cash…
Exactly. I was questioning his statement:
You and I are asking the same question. He said they don’t. Why not? I agree they certainly do benefit. Maybe you were replying to him, I dunno.
Something that I find astonishing is that there was no spring sales rally in real estate this year. Usually the buyers come out in spring and the market takes off. This year was the opposite. The sellers came out and that trend doesn’t look like it is done yet.
The other funny thing is the CNN headline of “If you’re a speculator … get out now”. So how many months ago was it that CNN was running headlines about RE being the next sure thing ? 6 months ? The tide has really turned and quickly and we are no where near low tide yet. Where are all the economists that were saying first of all that there was no bubble and then that the landing would be soft. We haven’t hit the ground yet, but this doesn’t look like it will be soft !
Its funny to see bond yields rally the last week after having been stuck at 4%ish for so long. It seems the stock market is waking up to the deficit and housing bubble situation and starting to take things into account.
I’ve noticed some resistance to the mention of politics in the comments on this site, often expressed in the most hostile, irrational manner. This has me shaking my head, frankly. So my suggestion for a weekend topic is the relationship between inflation and the long-term aims of the dominant political & financial culture, i.e. the authoritarian corporate state. Yeah, I know … but leaving this off-limits is like diagnosing a critically ill patient by the color of his socks — and even the larger picture is based upon a fundamental underlying assumption about what we are that’s completely false.
John — a lot of resistance. For one, I agree with that resistance. And for what it’s worth, I see a broad spectrum of fundamental political philosophies here, something that surprised me a little, and I admit to weighing in on occasion when my party / philosophy is mis-quoted.
There are limitless blogs out there and doubtless many of them encourage freestyle comments that go anywhere and everywhere. Partisan politics and the subsets of oil, political personalities and the like draw in fierce proponents and opponents who quickly dominate the thread.
For my one vote, I’m here to read and learn about the real estate bubble and what people are doing about it or forecast as the best steps to take. I believe that can be done quite well without getting into the morass of partisan politics. Even trying to begin with the no-names “authoritarian corporate state” could easily, I believe, touch off the type of debate that I and many others avoid. Just my lil’ ‘ol view from sunny Florida.
What Chip said!
Chip -
Although I try to avoid the countless name-calling contests that tend to erupt spontaneously, I agree with John that we are missing the forest for the trees . . . we often don’t look at the genesis of this problem. If you don’t want to call it politics or label it, I get that. But there are policies instituted by political actors/parties (and even more importantly, by powerful interests) that got us into the precarious situation we are in today.
Do we have to wait to see all of the blood flowing in the streets before we can discuss how we want to do things differently in the future? Tighten money supply. Create realistic and sound lending standards, while still encouraging public home ownership. Avoid the policies (whichever they are) which led to the creation of this housing bubble.
I realize that this may engender anger and bickering by certain people on this blog. I don’t think those types of exchanges are useful, but this is a public forum for discussion (even rants at times, which I am guilty of) and a necessary evil in the dissection of our present situation.
Please, no politics. There are so many other places to discuss it. One of the reasons I like this blog is that people stick to the facts and leave the political baggage at the door. This blog is how life used to be before the hyper saturation of political spin that came up in the last 20 years thanks to a large number of factors.
Please, keep the political zoo somewhere else.
greed is apolitical, and this topic is contentious enough anyway.
I’ve come to believe that there is enough stupidity and greed on both sides of the aisle to explain any manipulation of the fiscal health by those in power. But I also believe in a free market economy and that is what I want to read and comment on here.
i love free markets. i also love santa claus and the easter bunny. why don’t we toss aside our lovely, pure, ideologies and focus on working solutions?
30 year treasuries just cracked 5.3%.
http://www.bloomberg.com/markets/rates/
UK’s spring bounce
started down in summer 04 and now rebounding slightly ? =wierd
What does everyone think the impact will be, if any, of the introduction (and eventual mainstreaming of) 40 and 50-year loans. Also, what are people’s opinions on a government bail-out of people in foreclosure trouble vs. the government just bailing out the financial institutions? Will America continue to try and stretch out its problems for future generations instead of truly resolving the issues?
40 year:
http://www.bankrate.com/brm/news/mortgages/20050602a1.asp
50 year:
http://money.cnn.com/2006/05/10/news/economy/economy_mortgage/index.htm
I think some of the impacts won’t become apparent for decades-like when current families buying their starter home retire. Historically, one could often live of say 50-60% of preretirement income due to the fact that one’s house was often paid for, removing the expense of mortgage/rent from the equation-often 25% of one’s monthly expenses, so just cut back on everything else a little and there you are. These types of mortgages, along with all the negative amort. and interest only are going to mean that, when people retire, they are much more likely to still have those expenses.
Article below shows most Americans aren’t going to be ready:
“Most Americans fear retirement shortfall
Fidelity poll shows 83% of workers say they aren’t putting enough away
NEW YORK (CNNMoney.com) - An increasing number of Americans agree they are not saving enough for retirement, according to a new poll, but the firm that commissioned the survey says the results could herald a change in future saving habits.
The survey, produced by Fidelity Investments, revealed that 83 percent of American workers said they are not socking enough money away for retirement, an increase from 78 percent in the previous year.”
but if you are retired, why will you want to live in a house that you have to spent 40% of your retirement income? or, why stay in that city/state/country?
Well, what if you don’t have a choice-if you have been paying off some 50 year mortgage, or interest only or neg-arm, and your house has depreciated or stayed flat since you bought, you might be trapped there and unable to “downsize” without bringing cash to the table. Also, many people retiring want to stay near their children or community-moving from there to some cheaper state might not be realistic. I see what you’re saying, but choices like the ones you describe are much more realistic if you own your house outright-much more difficult if you need to bring cash to the table just to get out from under your current situation.
if you are that *destitute* and at that point in your life do you still have to worry that much about your credit history?
I suppose-all I am saying is that both of my grandmothers were able to live on just social security plus a federal pension and payments from an annuity, respectively, because they didn’t have to send in a house payment or pay rent each month….up until now if you had lived a working or middle class life, you probably had a paid off house (one was a farm wife, other married to a small-town city employee). Most people now are not only saving LESS THAN zero (nat savings rate is -.3%), many are not even paying off a house-they may think they are due to runup in appreciation, but if this crash happens as all predict, that “equity” is vapor
I think the impact will be limited, as they were introduced right at the peak of the bubble. They were introduced for similar reasons to I/O pay option ARMS: For the purpose of helping those who cannot afford bubble prices nonetheless qualify by lowering the monthly payment. Once it dawns on the general public that these loans offer much larger total income payments to the bank in exchange for a slight reduction in monthly payment, and that bubble prices represent a peak, not a permanently high plateau, their popularity will wane as quickly as it waxed at the bubble top.
Consumer sentiment suffers
Gasoline takes toll
University of Michigan reading sees steepest monthly decline in history.
Middle class: Feeling a squeeze
http://tinyurl.com/hneem
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It was the gasoline price which killed off consumer confidence; it obviously had nothing to do with the empty home equity ATM machines, right? Or that skyrocketing gold prices suggest future inflation is on the way; i.e. that cash will not be going as far in the future as it is now?
Here’s a good one: any real life stories about people impacted by the resetting of ARMs?
I have one: one of my students told me just yesterday that she and her mother are having to move. They rent half a duplex from her aunt, who has four rental properties, all with ARMs. They have reset, and now the aunt is having to unload all of her properties, because the payments have nearly doubled and the rents will no longer cover them.
This is, I suspect, only the very beginning.
I like that topic. Hopefully it will be a recurring one during the next 2-3 years.
Also, hearing lots of ads on the radio up here in the Bay area advising people to break their ARM, and then the subtlety in the ad is that they will put them into another arm (saying five year fixed, etc). They are continuing the loan churning without any regard to the customers they are supposed to be servicing. Then hearing that Chris O’Donnell at the O’Donnell group cares about you and will get you a 40 yr, 5 fixed, at low rate, etc (till I get sick from all of the lying)
We will have real stories all over about ARMS resetting.
I had made some comments last month about people using arson to try and escape toxic/upsidedown mortgages. I think there will be some that really try it. I am sure there will be a lot of investigation before any payouts, and most get arrested if they are caught. Any other thoughts.
But do you have to declare a gain to the IRS for the forgiven portion of the loan? HA HA HA
Check out Lasner’s blog on a tight rental market and more risk (is it possible) in the mortgate bus:
The U.S. consumer price index may move higher as the U.S. housing market slows and the rental market strengthens, Federal Reserve Board Governor Susan Bies said on Thursday.
Noting that the CPI’s gauge of housing costs is based on rents, Bies told a banking conference in answer to a question: “We’ve come through a period of weaker rents. Now, housing has really sort of peaked … that may rejuvenate rents and so you may see may see that, in turn, higher (CPI) inflation going forward.”
Without evidence yet to support my theory, I suspect that a large number if speculator owned, unsellable housing, including lots of condos, will be coming onto the rental market soon. With so much uninhabited housing about to disappoint its owners, how can it be otherwise?
The rental market isn’t going to get tighter. As people sell their investment properties that are now sitting empty they will become rentals and thus rental supply is going to increase.
the Realtor vs FSBO war!
Foreclosures going higher.
http://abcnews.go.com/Business/story?id=1946250&page=1
tweedle:
Homeowners who negotiated ARMs in 2004 and 2005 could face interest rate increases that boost monthly payments by as much as 50 percent. One in eight of these people is expected to default on their loans — as many as 1 million, according to First American Real Estate Solutions, which compiles national real estate data.
1 in 8? Do any of you think it will be that low?
Politics & the housing bubble. This will get more messy as time goes by.
http://globaleconomicanalysis.blogspot.com/
A couple of possible discussions that may or not be related to eachother:
1. Will the damage the bubble creates cause people to permanently change their lifestyles? Will a deep recession turn FBs into the new dustbowl Okies? Will it eventually become more fashionable to save and to pass on all the bling-bling? Will the sheeple even be able to afford bling-bling anymore? No more MTV’s Cribs for a while?
2. Many of us on this blog probably have parents or grandparents that passed on thrifty values they learned during the depression and never forgot after a lifetime. Is that why some will survive while others will loose everything as this crash continues?
Or was it just lucky timing? Like Forrest Gump out on his shrimp boat during the storm while the whole fleet in the harbor got blown to bits.
The group on this blog might be throught of as the miners that emerged after this mineshaft disaster of an economy heals itself and the American people are gonna want to know why.
Isn’t that Special! I hear that property will never go down here because (Irish history, limited land, Polish immigrants, SSIA, yada yada…)
But Tokyo and Hong Kong had limited land, London and Amsterdam had Polish immigrants and yet property values fell there.
It seems that every area has special reasons why property values can’t possibly fall. What are the special supply/demand and economic gravity defying features which assure that property bubbles will never deflate in San Francisco, Los Angeles, Las Vegas, Phoenix, Washington D.C., Tampa and your city?
None , its a myth .
Isn’t that Special!
I hear that property will never go down here because (Irish history, limited land, Polish immigrants, SSIA, yada yada…)
But Tokyo and Hong Kong had limited land, London and Amsterdam had Polish immigrants and yet property values fell there.
It seems that every area has special reasons why property values can’t possibly fall. What are the special supply/demand and economic gravity defying features which assure that property bubbles will never deflate in San Francisco, Los Angeles, Las Vegas, Phoenix, Washington D.C., Tampa and your city?
There may be a small associative neural area that is a combination of wealth effect, lotto fever, no work income, kool aid and greed that is also linked in with egomania. So that when that lotto part lights up with external stimulus like absurd RE appreciation coupled with NAR Lies the egomania cortical area is fired also and that allows the brain to actually believe that “it really is different here, this time, for me, …, etc.” It could be, maybe, kinda, sorta ….
I would have a topic about why people believe the bubble bursting isn’t going to be confined to the coasts. We sold our Albuquerque house, after the crazy californians came to town, and made our house go up 30% in one year. This is happening all over the country. It’s going to get ugly.