patrick.net

Since I have no idea what's permanent and what's not, here's some carryover from the last thread.

Just checked Craigslist for the South SF Bay Area. I've never seen so many houses for rent at any time in the last 5+ years.

What's different is that you don't see only crumbling shitboxes with smelly, dark brown carpets offered by absentee slumlords. These days, you can rent very nice almost new or at least renovated houses for relatively higher, but still ok prices. That, plus the occasional guy who's high on crack and asks $6k for a admittedly pretty nice house in Evergreen, raises the average asking rents, IMHO.
But if you count those out, I claim that you can get more for you money today than just 2 years ago, and you have a much larger selection.

I'm looking forward to renegotiating my lease next year.

But if you count those out, I claim that you can get more for you money today than just 2 years ago, and you have a much larger selection.

Looks like 1BR and 3BR apartments have demand nowadays though.

1BR - perhaps an indicaton of a tech rebound (can it last through a possible recession?)

3BR - demand from bubble-sitters?

Both classes of people may be in the market for houses 1 - 3 years down the road. The next 2 years may be the key. We need to be vigilant.

I do not want to make predictions based on the assumption of a recession because recessions can easily be deferred.

Note that people in the housing industry are not the same as those in the tech industry. Can the tech industry provide enough jobs in the area?

On the other hand, a drop in consumer confidence can eventually ruin the employment picture of all industry.

I should sleep. Perhaps my dreams can be interpreted into something of insight.

keith says:
In some cities (phoenix, vegas, miami, san diego) the entire gain 2004 - 2005 will be wiped away. Housing, like stocks, tends to over-correct as people in burst markets capitulate and become disgusted with real estate

that's quite on the cards, especially the disgust (and exploitation) factor.

SGValley patience Says:
Bubblelicious California slices 40% off the median by 2010.

here's a place that just lost 42% since last purchase in 2003, from the last thread, but it's worth repeating -- mortgagee sale (foreclosure). RE agents are reporting a slow market in apartments and houses. the boom was early here, it may bust early here also.

Housing crash puts sellers in debt crisis

i think a few tasteful bullet holes adds some character... who knows, maybe they even add value...

it turns out there is dark matter in the economy... flowing into housing! your house is full of dark matter equity...

The Intangible Economy: Dark matter II

one last post from housingpanic blogspot... there's some more metaphysical capital:

Housing Panic - The Bubble Blog with Attitude: All of this will seem so obvious two years from now... Barron's latest housing expose: The No-Money Down Disaster

"The following figures are from Washington Mutual's annual report: At the end of 2003, 1% of WaMu's option ARMS were in negative amortization ... At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%. Every month, these borrower's debt increases; most of them probably don't know it. There is no strict disclosure requirement for negative amortization.

This financial system cannot work; houses are not credit cards. But WaMu's situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number $203 million."

now they know how many holes it takes to fill the Albert Hall...

In a word, NONE.

As many astute observers have noted flippers have become their own GF's! It seems to me that when it comes to RE development/construction/speculation the "big score" is almost always in "the next deal". In many markets those that took the plunge in 2004 are offering their homes at losses just to get out from under them. Flippers In Trouble and Forsaken Craft are pretty clear on that. (So in markets like Temecula, Murrieta, Perris, Moreno Valley AND Sacramento we must be flirting with 2003 prices). Must be if we can't find a buyer at 2004's price? Please to note none of the aforementioned markets are in FL, NV or AZ.

Speaking of stupid, how dumb is it to be offered 250/500K in tax free money AND THEN PLOW IT BACK into your next huge and embarrassing failure? STOOPID. (We'll hear that lament with regularity going forward).

"I could have walked away X bubble bucks but NOOOOO!"

newsfreak,

Hmmm. I hope your cousin is not underwater or trying to keep the house all by himself/herself.

$70K/yr on housing...and people wonder what's wrong with this country.

I think there will be mass panic within 2-3 years and the correction will overshoot. Those who have to sell will drive the median price down along with the speculators who have been bailing out for months now.

I just don't see how incomes can increase fast enough to support the gains of the past 5 years. At the end of they day, only senior executives who make 200-300k per year can really affort a million dollar home - hopefully they will be smart enought to realize a tract home is simply not worth that much money.

Interesting perspective about why long interest rates have not moved so much, and why they won't go much lower from here any time soon:
http://www.investorsinsight.com/otb_va_print.aspx?EditionID=370

Quote:
"Central banks have become more willing to buy the debt of private-sector ABS issuers so long as it is structured to have a triple-A rating. Indeed, with insufficient issuance of other top-rated debt to absorb their growing foreign exchange reserves, they have had little choice for the last two years."

"It is interesting to note that the recent growth of private-sector ABS issuers mirrors that of the agencies in the late 1990s, when the US government enjoyed a brief period of budget surplus due to high tax revenues during the stock market bubble. In these few years, the US government temporarily stopped issuing new debt, and Fannie and Freddie expanded their balance sheets to satisfy the market's demand for triple-A paper. In the more recent example, when the agencies were prevented from growing, private-sector issuers of asset-backed securities have filled the gap by quickly expanding debt issuance."

So it may not be all Greenspan's fault after all :-)

Sorry made some spelling errors....a bit bleary eyed as I live in Singapore and it's the middle of the night...

DinOR,

But most people are always re-fighting their last battle. You probably encounter a ton of this problem when people demand to transfer their retirement accounts into last year's top performing funds, even though those funds have a high probability of being duds in the near future.

My opinions are merely ancedotal, but after reading about the report that Sydney, Australia is having as much as a 40% drop in their housing despite the fact that they have a real economy making real money, I feel that San Fran and California is actually more vulnurable than just about anywhere in the country. The rampant out of control spending habits most Americans have is no diffrent in California. Add this to the fact that (duh) its 50% more expensive to live here, and the perfect cataclysmic bust is well on the way.
The sheer volume of negative housing reports streaming out of the press is probably doing more to keep home seekers, and more importantly speculators from buying and at the same time putting almost immediate downward pressure on those people trying to sell. We have said this for years, but the simple fact is that more people than any of us ever realized really did take out more than they could afford to pay back. Especially in California.
I will be honest when I say that I sleep fairly well at night not worrying about housing. I think the gains made in the last 3-4 years will be erradicated, and housing will lose most of its lustre. That brings up some rather disturbing thoughts. Way too much of California,s economy is tied to RE. Most people probably assume that tech is still the way to go here but in reality, the tech market is only marginally better than it was circa 2001.
The only way that the US is going to get out of this recession is by investing once more in real capital producing business and not this stupid crap involving passing the expense to some other sucker in the form of overpriced RE.

Another interesting thing about Sydney: It could be the Australian cousin to San Francisco- nice weather, same look down your nose attitude towards the rest of the country, loads of rich people, lots of " culture" and euro-shiek sensibilities. It is not that diffrent than here, and neither are the people who probably assumed that it too would be dynamite proof and its cultural charm and wealthy populace would spare it the bust that the rest of the country had. Interesting parallels can be drawn between these two cities.

Just wanted to weigh in quickly on the "Greed vs. Preventable" debate.

Let's just say that mortgage burning parties were a mistake this county's lending institutions do not intend to make again! If homedebtors are using their fluffed up and fictitious equity to pay off their CC debt then fine, let's get them into a 40 YEAR mortgage. Better yet, how about getting the home buying public acclimated toward a loan that's NEVER paid!

This IS the "new standard". Amoritizing loans that are one day paid off are for chumps! Besides, in a few years you'll be trading up anyway!

I recently heard a MB quip that prospects are a joke! "They think they're going to PAY OFF a 500K mortgage?" Dude, you can't even pay off your $1,800 Visa Card balance! (True story)

At this rate even if there WERE appreciation (however modest) going forward we now have financial products in place with growing public acceptance that assure NO gains will be permanent!

As for the metaphysical value of housing, I have to say its not very much. Housing is a durable good and its primary value is to provide a sheltered habitat. We can look to Japan for just how low that value can go.

A house that can provide a safe neighborhood, decent schools, good roads/public transportation will have extra things going for it. Meanwhile, a "luxury" house in the middle of nowhere has no such support and is almost entirely dependent on a matter of discretionary taste of a small segment of the market.

SFwoman,
I tend to agree, but I think the more " vacationy" places aka: Miami, San Diego, Aspen CO, and a Hawaii will be hit the hardest. Both coasts will definantly be hit very hard. NYC, LA, Boston, DC, etc will also be hit fairly hard. Basically the more desireable and populated regions will be the first to experience issues. Many already are.
On the other hand, as I have mentioned many times before, the costs of doing business in California and other expensive places has caused a virtual exodus of mainly manufactoring, service, and lower end R&D to go to other states. Manufactoring is king in the SE now. While it is not as sexy as tech or other higher paying jobs, the costs of living are still well within bounds of what is acceptable. Even for low skill jobs. Look at it this way: Nissan, Toyota, Hyundai, Mercedes, BMW, Honda, Saturn, Ford, and of course a myriad of parts and electronics producers like Mashusta, Denso, Alcoa, and DataSouth are all in this region. The average pay at a plant like this is around $20 an hour. The average house is between 65-120k. That is easily afforded by someone working in manufactoring. My brother is probably going to go to work for Denso- a Japanese parts producer. Yet he already has his own house he paid 38k for 2 years ago.
I think that tha forementioned places will suffer some economic setbacks but some parts of the country, like the SE will not that affected because they have an economy based heavily in actual capital producing industry. They are in fact at the same level that California was perhaps 30 years ago- back when CA was in what many consider to be in a "golden age" when the average man could afford to live here.

Dinor,
I can say that firsthand, In know way too many people who are living the life that you mentioned above. My best friend is now in over 20k of CC debt, and is trying to sell a couple of condos that he was hoping he could flip. I really feel sorry for him. he's a good guy who got all caught up in the hype. I just found this out. It made me think hard about some of the thoughts I've had. I've been thinking for years that investors are evil scum and they will get what they deserve. The attitude now that seems to now be raging after years of pent-up anger is that it's time to let the investors fry and bite their fingernails as punishment for ruinin the RE market. But then I hear from people like my friend, who believed everything he was told about RE, that it was " safe", and that all he had to do was wait and now suddenly finds himself in 200k in debt. There seems to be something inside me that wants to blame the industry more than the individual investor. Indeed CC debt is going to pale in comparison to the myriads of families that will have hundreds of thousands of dollars in housing debt.

astrid,

So true. I like to call it "chasing last year's winner". It's done all the time with all types of investments. That's dumb enough, but imagine this for a minute if you will.

You are GIVEN a 100K+ profit on a flip you held for two years. Mostly your "improvements" included taking out the trash and a little weeding. Prior to the sale you make a final dash to gussie up your curb appeal, get multiple offers and pocket 100K.

You're nowhere near 59 1/2 so this is a true "kiss me". Rather than diversify you plow the money into SEVERAL homes to repeat the process with a modest down on each.

You were given a perfect opportunity to walk away. Instead you joined SDCIA.

I'm just surprised we haven't had a perma bull or FB ask "where did the money go?"

all well put, SHTF... altho sydney lead the way in the boom, and liberalised credit products from the lending institutions meant that cashed up sydneysiders (and others) went marauding around the country speculating everywhere once they'd mined out sydney -- always chasing the next 'hot area for growth'... still doing it now targeting perth and darwin...

ah well, who cares, as long as david hasselhoff can sing the 70s ozzie glamrock anthem 'jump in my car' in a spirit of transpacific melding:

http://video.google.com/videoplay?docid=-3382491587979249836

I predict 2008 to 2012 will be good years to buy exotic vacations and slightly used European handbags/cars with cash.

SHTF,

Well said. I'd recently come to the realization that the specuvestors/flippers everyone from David Lereah to the Toll brothers is blaming are not nameless, faceless people. They are are co-workers, neighbors and friends.

Where my wife works it seems like 3 out of 5 employees has done some sort of flip or "investment property" purchase. (We live between mountains and the coast) so several have props. at both.

Is it the industry or the individual to blame? I don't really know. Won't go so far as to say I don't care, largely b/c the dust is still settling.

Think of it this way. I have a client that recently sold a rental (on acreage) he'd bought in the early 80's. On a 400K profit he owes about 70K in cap gains. In a word, it's a mess! He owns two small businesses but neither are profitable enough to do a meaningful SEP contribution. He has grandchildren so we can do a little into 529 Plans (a whopping $180 tax savings). We are now looking into CHARITABLE contributions just to help off set the tax liability. In order for him to make the tax bill of 70K go away he would need to donate 250K!

Look at this mess. If this is what people had to go through every time they sold a home do you think we'd be looking at a HOUSING BUBBLE?

Sean,
I was curious, what areas of Australia are considered the lower cost areas? For example, Georgia and Texas are considered low-cost alternatives here, so I assume Perth would be the equivelant?

Oh, btw let's safely assume he'd already burned through his "one time exemption". This was never his primary residence (and he's too nice a guy to claim that it ever was). Not sure we can say this of Randy H's LL and his desire to keep the utilities in his name.

Scumbag.

SHTF,

LOL! No personal experience but internet chatter suggest Perth is not a low cost alternative. It sounds like Australia doesn't really have affordable for locals RE anymore...it's basically the state of CA in the form of an island continent.

DinOR Says:
In a word, NONE.

AGREED.

DinOR,

Sometimes its better to just pay your cap gain taxes and be glad that there is cap gain to pay taxes on. And the cap gain taxes aren't too bad, that's much lower than income tax - no one would quibble if they did nearly so well in stocks. The rate is too low to worry too much about tax consequences and definitely not prime candidate for charitable giving.

Since your client has already sold the property, I guess the only way to defer may be to 1031 the profits for a like property. But that's a really bad idea right now.

Astrid,
hmmm.. Well that must be awful then if your whole country is like that. I can't imagine the US being totally unaffordable. I've never been to Australia but my wife has family there, so we might be able to go perhaps in a few years. Some of my Australian friends have told me that people in Sydney are actually WORSE than people in San Fran in terms of snobbish attitudes. he equates them more to Parisians than anything else. Again- I've never been there but I'd sure love to see what it is like. heard it is a stunning place.
Sort of a funny story.. years ago we had some friends from the UK come and visit. They were an older couple in their 60's. He claimed that when he was younger, he figured the entire US was deserts with big cities here and there and that cowboys were all over the place. he got a big surprise when he came here ans saw that virtually every state was diffrent.

astrid,

Agreed, agreed and agreed.

It's too late for a 1031 (already took the check) although charitable giving may make sense here b/c he has heirs young enough to milk it for a second lifetime of "pooled income".

Would I rather not have had the profit on which the CG tax is now due? Uh, HELL NO! My point is simply that if more people were subjected to these types of hoops would we be AS eager to throw borrowed money at RE w/both fists?

SHTF,

I've never been to Australia and I don't have any motivation to visit in the near future. (Though I might emigrate there if the opportunity presents itself) Flat dry continent filled with poisonous critters and STD infested marsupials and the occasional locust plague is not my thing.

It's funny to hear Sydney compared to Paris, since it's an Anglo-Saxon backwater city filled with descendants of convicts, and a long flight from any other major city.

Austingal,
Your Aunt seriusly thinks people should buy in MA right now? that market has been tanking for almost a year now. Perhaps she has convinced herself into believing what she says. I recall years ago when Ryobi tool company paid for some of us salesmen to come out and spend 3 days at a hotel looking at their tools. We would do things like drop the tools off of a ladder, take them apart, drive screws, cut boards, discuss motor windings- all as an effort to sell us on their tool's superior quality. The thing is that we all knew they make crappy products. That said, when we came back, I could tell you anything you wanted to know about their products, and found myself trying to get people to but them simply because someone else had told me all the info I coul possibly want to know about them. A RE agent who's job is to get people to buy is just the same.

DinOR,

Obviously, when I yak on a blog I'm just talking out my ass. But my instinct would be to avoid charitable trusts altogether, the tax savings are likely to be too low to be worth the complexity of the form.

SHTF,

"I guess there might be nuggets of wisdom here that perhaps starting with a bunch of former lunatics makes a great country or something like that. Maybe that’s why we relate so much to Australians."

Not disagreeing with you at all. Just finding the comparison to Paris to be a bit exaggerated. Also, at least BA is not geographically isolated. We're within driving distance of great cultural monuments like San Fernando Valley, Mexico City (lots of poor brown people!), LA (no comment), Salt Lake City, and so on.

Plus, our native marsupials are not STD infested. We have God's own marsupials.

SHTF, astrid is right, everyone in oz has got gold fever in housing -- not much respite, as 85% of the population lives in 1 of about 5 major cities... and i remember seeing a bus tour of 12 regional towns advertised for investors -- they would literally bus people around to these little country towns to convince them to buy RE bargains for future exploitation of the locals -- higher cash flow and lower growth prospects -- but it's an investment! lower cost areas are a handful of small regional centres of maybe 80,000 people or less, down to some little 1 horse towns, back o' bourke, and beyond the black stump...

sydney people are a bit funny, not sure if it's a convict/settler class-based thing or a pseudo-parisian thing... people are actually warmer in the states which were NOT convict settlements... jamie kennedy said the following: Sydneysiders suck: Kennedy

the marsupials don't generally have STDs, there are 4 strains of chlamydia attacking koalas, including pneumonia, and the tasmanian devils (a là warner bros) have contracted a form of facial cancer, possibly spread by a virus, which is threatening to wipe them out...

the major cities range from 1 to 4-5 million, they're about 1,000 km apart from each other tho... much of the country's wealth probably stems from primary resources. tom cruise bought property in sydney, as have others, for the harbour and city views...

astrid,

Not that it's all that important but they've made major strides in making charitable giving "turn-key". It's just as easy as buying shares in a mutual fund and no more complicated or expensive than that. You get the income, your HEIRS get the income and on their passing every dime goes to the charity of your choosing. So, TWO lifetimes of income and (a percentage deducted from your current taxes).

For those out there with a perplexing tax issue contemplating CG it's really simple and straightforward. You even get to "name your foundation". Again, if you're in this position something may have gone wrong from a tax planning perspective but if you find yourself here there's no reason to be intimidated by the process.

*Not tax advice

How much of the recent gains will become permanent and material?

It depends upon the metro/city/neighborhood. It could well be that Manhattan retains nearly all of its recent* gains while outburban Las Vegas loses most gains.

I wouldn't be surprised to see the Bay Area retain somewhere around 50% of recent gains. I had hoped for 100% reversion to pre 2002 prices, but I no longer think that is reasonable. Fundamental demand in the area could well start kicking in around 20-25% reversion. This would be at about a 8-12% nominal drop.

I suspect resistance comes from the much more rapid than expected refinancings out of ARMs, strong Bay Area employment, moderating inflation. In such an environment prices will stay extremely sticky, and work in favor of enticing buying demand after lethargic price reductions.

*Recent=2002-Present, or whenever the big spike occurred locally.

Well.. I guess I will have to claim ignorance when it comes to knowing as much about Australia as I'd like to. It doesn't help that a big movie when I was younger was " Crocadile Dundee" with Paul Hogan. I remember years ago when I helped run a film festival. We had this film submitted by this one guy. We got it via email. It was funny as hell. Anyhow, the guy was from Australia and had mimicked an American accent so well that we thought he was from here. I asked him how the hell he did such a good job. " I watched a lot of American TV when I was a kid." that's sort of embaressing if you think about it. Australians probably think we're stupid by watching the crap Hollywood spews out. My parents said they saw "American Chopper" T-shirts in London. Oh boy!- another role model to live up to.
I plan on going to Australia someday along with a lot of other countries so I can make better judgement calls when it comes to what places are like Versus what I see on TV or hear from other people.

DinOR,

So if you're facing short term capital gains, or alternative minimum tax from sale of shares (which have to be sold before a year is up because of a company takeover) - you could put it in a charitalbe trust instead? Or doe it not work in that kind of situation?