patrick.net

What precident is there for a 92% nominal drop in RE over a widespread area, short of massive devastation from disaster or war? I like the premise, but you’re simply not going to be able to buy a $2.5M home for $200K, even in real terms.

Guys, once again, this topic was meant to be one part comedy/satire and one part conjecture. Never meant a 92% drop virtually anywhere to be taken seriously. This would require a level of housing market pessimism far beyond even my resolute Bearish-ness. Interesting though, that Zephyr noted RE did broadly decline up to 80% in many areas during the Great Depression.

I agree with SactoQT that most people should not put all of their eggs in one basket. The one basket strategy is for people who know what they are doing and can afford the risk that comes with trying to outperform the market. I believe most people should NOT try to outperform the market because they are very likely to fail. They should just put their money in a few diversified mutual funds that are very plain vanilla, such as an S&P 500 index fund.

Most people should focus on increasing the amount of money they save. This is the single most important thing for the average person to improve upon if they are to accumulate wealth.

Excellent advice, Zephyr --and well said. And thanks for your observations on stocks vs. real estate. About the only possible ciriticism I have is that I'm not 100% sure real estate actually does provide a higher return on investment than stocks in the long run --particularly for residential (maybe you meant commercial and residential?). Robert Shiller has argued that it barely keeps pace with inflation over the long run.

Yeah, here's Shiller's data plot from that August NYTimes article:

It shows RE tracking w/inflation fairly well...with the exception of the recent 75% run-up, that is.

Thanks, SJ_Jim --nice graph!

The spike at the end of the graph is a bit alarming, don't you think?

I would think so, ...& I would think everyone else would think so to...except for the fact that...wait a minute, what's the line? Oh yeah, "it's different this time." Or is it: "it's a new economy?"...shit, I can't remember....

If anyone missed it here's a linke to the whole article:
For login, use:
user: onozpwned
password: onozpwned (same as user)
(I got these from the bugmenot.com website)

http://www.nytimes.com/2005/08/21/business/yourmoney/21real.html?ex=1126670400&en=06bbbab74d289302&ei=5070&ex=1125979200&en=b2111856d4b84873&ei=5070&incamp=article_popular_5

Now I just need to learn how to use tinyurl. LOL.

I have seen some people make a fortune by keeping all their eggs in one basket. But like the dot.bomb era, most people don't know when to take the money and run. They get greedy and figure they can do better than a 50% gain, leave their money in the investment and end up losing big. Yes, high risk can mean high return, but the average investor is better to go for the mediocre return (as Zephyr stated earlier) because the average investor is not clear-headed enough to buy and sell at the right time IMO. Truth is, any earnings on your money, even mediocre ones, is better than a loss.

I think Zephyr's advice to increase your bets (risk) on some of your investments but not all is the way to go.

Gee, you might even call that one-time jump in homeprices (1942-1946?) “permanent”….

I recall Schiller discussing how soldiers returning from WWII put a demand on housing, driving up prices. Of course, the difference there was people who bought to occupy, vs. investment/speculation.

Jack,

I'm not sure I see how Shillers' graph makes the case for prices today being perrmanent and sustainable. When prices jumped back up in the early 1940's (by nowhere near as large a margin as today), they were essentially returning to a long-term baseline just above the rate of inflation, established in the late 1800s & early 1900s. It's also interesting to see how housing consistently returned LESS than inflation for 30+ years: 1912(?)-1946.

As for housing achieving a "permanently high plateau" even close to todays prices, I think you've been spending too much time talking to Realtors ;-). Seriously, though, a major “stair step” in RE prices (relative to inflation, wages, etc.) would require --dare I say it?-- a major paradigm shift. Something would need to happen to make RE permanently more attractive as a vehicle for investment vs. other investments, for people to keep paying higher and higher premiums for it, and taking on more and more leverage long into the future.

The evidence for a paradigm shift would come in the form of equally rapid and permanent rent increases (to reestablish equilibrium in the housing PE ratio), even in the absence of wage increases. Remember, if both rents and wages/inflation rise while housing prices stagnate in nominal terms, housing is losing value in real terms. It would also require permanent changes in lending standards that would essentially render down payments and the 15 or 30-year fixed obsolete.

In other words, I seriously doubt it.

For a bit of light diversion--a humorous take on RE in the UK.
http://tinyurl.com/9l5gf

Just for the record, I'd like to add that I don't expect the coming correction/crash to play out entirely in the form of dropping nominal prices, but a gradual combination of both price cuts AND real value erosion (due to rising inflation & rents). Nominally they may drop anywhere from 30-50% over a period of several years in the worst bubble-infested areas (CA, FL, MA, NV, etc.), but the drop in real terms should be considerable higher. This reflects the "stickiness" in housing prices relative to other more liquid assets, and is similar to how the last boom/bust cycle played out in the early 90s. Regardless of the path the correction takes, however, prices will inevitably revert to the mean.

Thanks for link, Kurt S. In a couple of years, I bet someone will be making a similar video using David Lereah, Alan Greenspan & GWB.

When prices jumped back up in the early 1940’s (by nowhere near as large a margin as today), they were essentially returning to a long-term baseline just above the rate of inflation, established in the late 1800s & early 1900s

I'm curious--is there any explanation for that huge slide beginning around '18? Why didn't prices spike after the end of WWI? Was this a precursor to the depression? That trench lasts from ~ '22-43, a very long time. Of course, what concerns me most is the spike on the right: an uprecedented run-up. What happens next could be unprecedented too.

Of course, what concerns me most is the spike on the right: an uprecedented run-up. What happens next could be unprecedented too.

Be very afraid... and position accordingly.

After WWI the boom was in equities, creating the Roaring 20's.

“Robert Shiller has argued that it barely keeps pace with inflation over the long run.”

True, and he also consistently ignores the reality of the prudent use of leverage in RE investing and how that increases returns, i.e., a 10% dp returns 40% @ inflation only rates (though I prefer 20% dp’s).

Mr Right,

I don't know about your own use of leverage in RE --you may be a very savvy investor-- but the picture for average borrowers out there is not so rosy. Most new "investors" these days are either recklessly speculating, or borrowing heavily against their homes for consumption (the housing "ATM"), or both.

On that subject... "Refinancing just for cash creates risks":
tinyurl.com/8g725

"Here's a surprising and somewhat disturbing statistic released Wednesday by the Mortgage Bankers Association: Refinancing accounted for a whopping 44.8 percent of all mortgage applications last week.

I suspect the data is not the result of laggards. Rather, I think it's caused by people who are refinancing to take cash out of their homes — and that's what's so disturbing. It suggests they aren't cutting their interest rates at all; rather, they're just increasing their debt."

Leverage, or the "L" word, is a very dangerous concept.

How much money could we save monthly if society lived within its means?

I think the question is more about where we are spending our money. Living "beyond" its means may not be so bad if we invest in our future. However, we are sadly entering long-term debt to satify short-term needs.

Or, perhaps he believes that, as PeterP says, leverage is a dangerous concept so homes should not be financed? I doubt that is the case.

Leverage is dangerous but necessary. Driving is the most dangerous thing that most people ever do in their lives. Yet we all do it.

@Mr Right,

An average 80-90% LTV on a mortgage would be a vast improvement over the current situation. I can't speak for Peter P or Robert Shiller of course, but I doubt either one really thinks that homes should not be financed.

It's really just a matter of whether the fundamentals suggest it's a good time to buy in a particular area right now. In most urban areas along both coasts, I'd argue the fundamentals are saying "no". A few years from now, they may be screaming "yes"!

Another update...

Inventory on lower-end properties in South and East Bay appears to be climbing with yet more thrust. Do you guys see the same thing? The size of my search list has grown more than 60% in 2 months.

Lori Spiegl--areas served: Los Altos to San Mateo.
Her, and possibly 500 other realtors.

"Crime reduced by legalized abortion. "

Wow, how can a direct correlation between these two things be proven? I mean, we can theoretically look at statistics and perhaps see a drop in crime in X number of years following abortion legalization, but how can it be proven that one caused the other?

I'd love to know which book discussed the issues you mentioned, Mr. Right. It sounds very interesting.

"Be very afraid… and position accordingly.

After WWI the boom was in equities, creating the Roaring 20’s. "

I've been wondering about connections between current economic conditions and the years preceding the Great Depression. I've read that one of the biggest problems back then was the huge gap between rich and poor--wealth very unevenly distributed. Does anyone have any current distribution of wealth statistics to compare? I'm curious.

I agree with Margie that we're living now in the "good ol' days." I've never lived beyond my means, and it makes me sick that it's now become the cultural norm.

"Her, and possibly 500 other realtors."

LOL! At least.

I’d love to know which book discussed the issues you mentioned, Mr. Right. It sounds very interesting.

Jamie, read both! "Blink" and "The Tipping Point" are both worthy books.

Okay, they're in my amazon cart now. :-)

I thought the discussion of legalized abortion resulting in a lower crime rate was in Freakonomics, by Livett & Dubner.

If you legalize something, of course fewer actions will be classified as crime. The only way to eliminate crime completely is to abolish laws. :twisted:

“Blink” by Malcolm Gladwell. Surprising amount of evidence to support causation. “The Tipping Point” was very thin, to be kind, on support for it’s premise.

The author expects you to "thin-slice" after reading "Blink". As a result, "The Tipping Point" needs only "thin" support. ;)

The author must also expect us to be fortune tellers since Tipping preceeded Blink.

I knew you are going to say that. :)

Heh. I guess Kauai beaches are the place for economics books. I was there end of July and read Shiller’s book Irrational Exuberance.

Reading economics in Hawai'i..are you some sort of masochist? ;)

The beaches are just so nice they make you want to just lie there and read something, and that book was next in my queue.

I hear ya--I always take a 'down day' to read. Last time, just for irony's sake, I read Krakauer's Into Thin Air

Phone Scam

If you get a phone call from someone saying they are from the phone company doing a test on the line and want you to press 90#, don't do it. 90# gives the caller full access to your phone line, and they can bill long distance calls to you. Thought I'd pass that on.

Also, thanks for the vacation reading tips. I like Vince Flynn too. ;)

@SactoQT: don't worry -- that 90# thing doesn't apply to normal phone lines.

It only applies to a certain types of office PBXes, for which 90# is the equivalent of "transfer to outside line, dial the operator, and drop off the call". The caller then tells the operator they want to call Nairobi. Hijinx ensue.

@SoldAtThePeak: I never noticed the bulls/bears coincidence/connection before either! I just convinced a coworker that the financial terms came from the Chicago teams though. So if the meme every crosses your path from that direction, you know it was indirectly your fault. He has an MBA and is a huge sports fan, so I don't feel the least bit guilty for his gullibility. :-)

...dispelling scary myths and then creating silly new ones... It's a closed circuit. The second law of thermodynamics remains unchallenged. My work is done for the day.

Have you been to Modesto?

Quesera

Supposedly the phone scam has been confirmed by the major phone co.'s as working on regular phone lines. Don't know for sure, but it's good to be aware.

This crash will be different in that the worst effected will be the affluent. ie. your hedgies, derivative players and wickedly bright young MBA’s.
So, where do these folk’s live?
Places like the Marina and Marin.
Prediction:
Marin’s $850K Novato Eichler special will be available for $475K.

So, does that mean the affluent areas could be hit too? Interesting thought, because that suggests instability in places like Sausalito, Tiburon, and Mill Valley.

Of course, and in all seriousness it has been very, very good to me.

That's good to hear. So do you think Modesto will hold it's value as well as Tim suggests?