patrick.net

My neighbor has their house up for sale. They are beginning to get worried because no one shows up to the open houses. Their big problem is that they gave a non refundable 25k deposit on the house they want to move into. I think their deadline is dec. 1st. After that they lose the $25k.

25K is a rather small loss compared to a large debt liability...

“Finally, it is October. What should we expect this month?”

Um, Holloween? Ooooo, scary times.

Darkness will come one hour earlier every day, starting later this month. Another thing to worry about... ;)

You speak a lot more worldly than your age would indicate. I am impressed by your quick wit. What is your line of work? You ‘d excel in a creative field.

I am completely flattered.

BTW, I am a software engineer. I guess a little creativity is great but too much creativity can be disastrous in my line of work. ;)

Not only that, but he has a sense of money. And more than anything else, that will bring him great riches.

Thanks. But I can only talk... Scott, you have real knowledge about the market.

How do you like software engineering?

It is okay.

BTW, software engineering is kind of an oxymoron, IMHO. :^)
No offense intended.

None taken. It is kind of an oxymoron. How about financial engineering? ;)

Owneroccupier said,

"Let’s say if I am confident that USD will go down and we will enter into a high inflationary period, and I’d like to do something with my home. "
--------------------------------------------------

Funny, I tought we already had the inflation (i.e, credit expansion) via the housing bubble. Deflationary periods follow inflationary credit expansions.

The FED cannot create inflation via consumers credit much longer. We're tapped out and the banks don't give money away for free. And another thing, banks don't like to lose what's owed to them via hyper-inflation either.

To create money someone has to agree to be lent this money (unless it's the government like in the case of Katrina). Since the consumer is tapped out, the only inflation (by credit) can be through larger government deficits. In order for our debtors to take on these riskier US loans look for higher interest rates (this will kill the housing bubble with a head shot ... it's already slowly dying from clogged arteries).

So, do you think the FED policy will watch out for Joe Consumer's best interests or the banks and corporations?

Personally, I wouldn't count on inflation. The cycle of Inflation/Deflation/Consolidation makes much much more money for the elite.

Those poor trees…. ....and their iron bar-enclosed 1ft circle of dirt!

Perhaps some day nature will return the marina to it's former beauty...wetlands with herons, otters, and seals.

Jack, don't feed the troll! MassivePrick will get his soon enough.

This blog is great, a ton of the regular contributors post really prime comments, I've learned a great deal. I would say most of the comments are prime, the offer insight, and I've learned a great deal on new topics. However, some comments are not prime and should be deleted. Just my 0.005 euro. :)

However, some comments are not prime and should be deleted. Just my 0.005 euro.

Gone. But I bet you one devalued dollar that he will be back. We need MilitaryPolice.

I just visited a new construction shitbox array (aka new townhouses). Several observations:

1. There is no lottery
2. Deposit is now $15000 (with only a week of cooldown period)
3. Typical price to income ratio is 5 - 6

"Sunday Mercury News Front Page Headline

UNREAL ESTATE: HOW IT WILL END?"

Just read this...it's a rather strong article...beginning with the headline font size being larger than the "San Jose Mercury News" title font size. Then there's the fact that the headline reads: "HOW WILL IT END?", as opposed to "WILL IT END?"
The article is littered with statistics and (often) accompanying graphics (we all need pictures to get us to read the caption, right?).
The entire article and related "sub-articles" span ~3 pages (including (most of) the front page).

Here's an excerpt:
"While the [Santa Clara] valley overall lost 2,400 jobs over the past year, industries fed by real estate sales and home equity loans--including home building, remodeling, landscaping and building supply sales--added 1,500 jobs, according to state payroll."

Several paragraphs are devoted to the local economy's dependence on RE as a savior from the hollowness of the tech economy. It also details how an implosion might unfold:
"Among the first victims would be real estate brokers, mortgage lenders, title companies and banks.... Next to fall would be the remodeling construction trades and retail businesses that depend on home equity refinancing for their customers."

This is the 1st of a 3 part series ("The housing boom's paper wealth"), to be followed by "Meet the players in the housing market" and "How risky loans make housing more affordable" (Mon, Tues resp.).

I don't have a feel for how bullish/bearish the SJMN typically is regarding RE...but this one is shamelessly bearish...even the token bullish part of the article is rather...bearish:
"Not everyone believes that the boom is a bubble, including Kenneth Rosen, a widely cited UC-Berkeley real estate professor. But while not worried about a bubble, Rosen is concerned that so many people are taking on so much debt.
'Two years from now this could all unwind,' he said."

.............huh?

OT: I used bugmenot.com to access a SJMN article & the password given to me was "death2america". bugmenot????? LOL I couldn't do it so I clicked "try again" & it came up with something a bit more palatable. BTW, does anyone else use google as a spell check tool???

BTW, does anyone else use google as a spell check tool???

I do. Isn't that a very natural thing to do? It sure is quicker than firing up Microsoft Word.

Boo, hoo…..how will we ever be able to survive?

http://tinyurl.com/aduyo

Easy. Sell the Willow Glen house and buy a condo in the Marina. ;)

it’s a rather strong article…there’s the fact that the headline reads: “HOW WILL IT END?”, as opposed to “WILL IT END?”

Very interesting...the Mercury also published a few cautionary articles back when the dot-bomb was ticking. Just as now, they preceded the Chron in getting to the gist of the situation. Incidentally, the last time (they published) was on the cusp of a "bust" becoming a topic of conversation, about 3 months before the crash. This all feels very familiar; perhaps the tide is changing towards RE as an "investment'.

Barron's published an article on the unjustified valuation of REITs about 3 months ago. But there is no definitive article from WSJ / Barron's on when and how, not whether, the RE will pop yet.

As far as I remember, the timeline of dot bomb goes like this:
Economist published a feature article on dot bomb in late 99 (something around the fall quarter)
Barron's published in Dec on how much operating cashflow left
SJM published something in Jan, then April crash.

The market is about 3-4 months away from crash, but of course RE turns corner much slower. So I'd say a general 10% dip in price can be expected in about 6-12 months time frame.

What do you guys think will be the general nominal value drop in the Bay Area in the next 3-5 years?

15%? 25%? I am talking about in general, not particularly marginal, high crime districts.

I have a couple of friends who rushed in to buy new Central Valley development in early Mar 2005, I don't think they will come out in one piece.

What do you guys think will be the general nominal value drop in the Bay Area in the next 3-5 years?

My guess is 15% - 65% depending on location and property type.

Central Valley? Hmm...

(Not investment advice)

Well bearblogs been kind of slow...so I headed to the San Diego Creative Investors Association website:
http://www.websitetoolbox.com/tool/mb/sdcia
This site was mentioned on Ben's blog 1or2 weeks ago. There are some cautious bulls there now...some of which have either just recently gotten out or seem to be on the verge.
Then there's this guy: "I don't pay attention to these pencil headed doom and gloomers." LOL.
Anyways, here's a particular thread:
http://www.websitetoolbox.com/tool/post/sdcia/vpost?id=667207

Some (one) actually predicting 50% decline...others in 30-40% sentiment.
The bull population appears to be shrinking (soon to qualify for endangered species protection?).
Interesting reading nonetheless.

Some cool data I read elsewhere:

1967-73, stock market went up, US overall realty median price went up 123%.

1973-74, oil crisis, realty median price dropped 4.5% to 75% in the next 3 years, depending on the region, the overall drop is 18.2% throughout the US.

I think we can sit back and wait for a nice drop of around 20% drop in nominal value if history is a good guide.

What do you guys think will be the general nominal value drop in the Bay Area in the next 3-5 years?

15%? 25%? I am talking about in general, not particularly marginal, high crime districts.

Another wild card I'll throw in is the degree to whichspeculation has pushed up prices. I'm not just talking about investors sitting on properties (a large percentage), but also those who bought high because "RE can only go up". Taking the speculative fervor out of the picture, and inventory could really spike. Add to that--tightening of credit, and I could see that downward jolt Jack mentions--first in inventory, then market sentiment, then prices. This could all take some time.

Despite inventory rising already, I think we're only seeing the "tip o' iceberg" sofar. I recall 10-15% reductions seen in various CA markets. I''ll predict the reductions a little differently, in terms of hits to demand. To the degree an area/segment is overvalued, to that degree it faces a reduction. I think we could see reductions up to 50%--especially in outlying areas.

Huh, I posted this last night but it didn't show up (something to do with "in moderation"...maybe the links?).
Anyways, someone posted a link on ben's blog 1or2 weeks ago to the "San Diego Creative Investor's Association" website; seems to be a discussion forum for socal RE investors.
http://tinyurl.com/7vupn
It appears that the bear sentiment is growing amont the speculators, as in this topic discussion:
http://tinyurl.com/dntcy
Some are talking 30, 40, even 50% reductions.
(One noteworthy exception: "I don't pay attention to these pencil headed doom and gloomers." LOL!)
RE Bulls becoming an endangered species....

1973-74, oil crisis, realty median price dropped 4.5% to 75% in the next 3 years, depending on the region, the overall drop is 18.2% throughout the US.

This was the first stagflationary cycle I referred to on the last thread. It was accompanied by a much larger shock to oil prices (in % terms) than we have today, and the US consumed (demanded) 40% more oil per GDP then.

There is a great deal of controversy about whether or not we are poised for another bout of stagflation. On one hand, we're less dependent on foreign oil than we were in the 70s and early 80s. On the other hand, we have a far different economic structure in the post-manufacturing, globalized world economy.

More than all the cash rich investors could possibly buy! The interest rates will be higher due to inflation and there will be noone to lend money out!

I think there will be plenty of creditors begging to lend out money; it will be quite the opposite from what you propose. The problem will be demand-side: there will be few debtors able to consume more credit.

(My standard drumbeat here): When the bubble corrects it is very likely that the fundamentals will be such that _very few_ will be able to take advantage of the lower nominal RE prices. Only _very_ cash rich people will be in any position to plow extremeley valuable savings into RE during such high uncertainty. (1) Interest rates will be higher; perhaps much higher. (2) There will be inflation in the economy eroding your savings, however, income inflation is very sticky and will lag commodity, energy, and durables inflation. (3) If we hit stagflation, or even the hint thereof, then all bets are off and only the very rich will profit from the downturn in RE. Even then, only if they are in for the very-long-term (multiple decades, perhaps).

Inflation may rise, but I don’t worry about stagflation. Higher energy prices are a concern though.

Where will the job creation come from? That's the troubling question leading to conclusion about potential stagflation.

As to the 70s, there was a very significant net liquidation of RE equity, in aggregate. The "people [who] still bought homes" were almost exclusively confined to those with large cash reserves seeking a safe harbor from inflation, or normal people trading (usually down) to replace an existing primary residence. Also the 70s and early 80s were marked by a dramatic "burning of wealth", as many families consumed their accumulated or potential (inheritence) wealth just to survive.

Someone is saying this in a previous thread:

Hey “Pete”, you really need a reality check. The engineers/programmers writing an accounting program cannot program if he/she does not understand accounting. A engineers/programmers cannot program an insurance program if he/she does not understand the insurance rating system, … The hardest part of being an engineer/programmer is to understand the domain, the business, … The technology aspect is something an 18 year old college freshmen can understand.

But if you can afford to buy, do me a favor and buy it on your own. Don’t use a real estate professional. The test they take to get the license is a joke and they get paid based on the percentage of the selling price. There is NO BUYER’s AGENT! Why should they negotiate for a lower price when they’re getting the cut of the selling price! They’re the biggest thieves around.

If this is the prevailing view of the market, I guess the magnitude of the correction may exceed our wildest expectations.

After your write off the interest, your “$3000+” a month in PITI comes out to no more than $1500 a month. But more importantly, you’re building up equity. After 15 to 20 years, you should have your home outright.

Especially this part. New math intrigues me.

I should’ve listened to the nay sayers of the stock market. Not the nay sayers of the real estate.

Umm...why is it any different this time?

If this is the prevailing view of the market, I guess the magnitude of the correction may exceed our wildest expectations.

Perhaps the very idea that "real estate is different" has pushed expectations (and prices) farther and longer? I notice people fall back to this argument when cautioned.

It's like "logic in a bubble": keeping one's mind free of contradictory data:
http://tinyurl.com/bvpa9

BTW, if $3000+ PITI is $1500 after tax, I am calling my broker.

"Looks like the housing market is weakening according to the selling price"

I find this quote somehow fitting:

"When the only tool you have is a hammer, every problem begins to resemble a nail."
--Abraham Maslow

I thought I'd return after some time away to catch up on the news. It's interesting not being on this blog for a while to remove the biase that we naturally are part of with talking to like minded souls.

Two of my indicators of the Great Fall:
1. My husband is now willing to discuss renting a house - this is someone who has owned a house for a long time, is from a working class background where you just don't rent but always buy, but I ran the numbers for him to buy versus rent and it's pretty much a wash for us - the only part that changes is if the market drops or we need to move in the next few years (which we intend to do) and then the numbers look very scary. That and my yardstick for buying a place is - can we afford to live on one wage? came up negative.

2. I'm on the Palo Alto mothers club, when mentioning renting I've had quite a few mothers ping me to say what reasoning did I have as they were seeing the market drop around them and wanted some extra data; of course I pointed them to this blog and the RE links:) Six months ago the subject came up on the same list and the outcry of a bubble was shouted down as being ludicrous.

We were still keeping a good eye on the South Bay and Peninsula market (mainly the Peninsula) and the market has definitely gone down. Our agent is pursuing us and said houses are going for asking or under nowadays, plus we are seeing houses just not moving. They are still up for ridiculous prices but I've seen houses drop 300k in Los Altos over the last few months before selling. Not bad...

Here's an interesting comment taken from the BusinessWeek article "If Housing Slumps, How Safe Are You?"

I am a lawyer and I represent illegal aliens in deportation. In all but one of 35 cases I currently have on docket the illegal owns a home. But it is the loan terms that fascinate me. One lady finished school at second grade, speaks no English, and works for a recycling company binding cardboard boxes. She makes about $30K per year and is a single mom with three children. She has a $430K interest only loan that she used last year to buy a $430K condo - 100% financing - she paid $3,000 in closing costs. I tried to explain that her monthly payments will rise substantially in four years. She does not believe me, did not understand what I said and told me the loan and real estate agents specialize in real estate and would have told her if her payments could go up. If 34 of my clients with risky loans and no school past at best eighth grade are surprised by rising loan payments, we should be afraid. This is the last group desperate lenders pander to, meaning we're near the end.

Buying real estate without an agent is like going to court without a lawyer, you have a fool for a client.

Excellent analogy!

I don’t worry about job creation. America always creates new jobs. That’s what we do. The business of America is business. Besides, lack of job creation was not the cause of stagflation, government over-regulation was. Price controls and the like caused stagflation and lack of job creation. That is not going to happen this time around, which is why I don’t worry about stagflation.

Lack of jobs--in particular high unemployment--is in the very definition of stagflation. I don't care about the source in this analysis; I care about the effect. Anyways, what makes you think gov't regulation itself isn't cyclical. With SOX, CFIUS, rising protectionism, etc., we could well be heading into another regulatory influence job loss cycle.

It is not true that the majority of people who bought real estate in the 1970s were those with significant cash reserves. It simply is not true. People bought homes and refinanced later when interest rates came down. That’s what will happen this time even if interest rates triple. Speculators and investors are not the majority of home buyers. People are, and people will always buy houses. They always have.

My data is from Mankiw, et. al. and a consolidation of about 75 studies from economics departments across the US. Of course, the interpretation of data is debatable, but I'd like to know your sources.

Further, the 1970s and 80s stagflation cycles witnessed the largest shifts of wealth in the US since the Great Depression. These shifts were away from middle class and into upper class. If you want to assert that lower nominal home prices helped these families, I would like to know how so. Finally, the cycle in the 70s created an inflation gap of over 70% between the urban/coastal populations and the inland/rural populations, which has failed to close ever since. Because durables and many services are nationally priced, these populations have been significantly economically harmed--including by dragging down relative RE nominal prices--comparatively.

I'm sure there will anecdotes of people "making a killing" in the RE downturn. My drumbeat is that this will be the exception, not the rule.

...And, you are right that the majority of housing RE in the US is owned by individuals, not investors. But, the majority of this housing stock also does not turn over rapidly either, and when it does it is either consumed (sold off as it is inherited) and/or shifted to alternate savings. There is almost no measurable economic wealth effect; it is merely a savings effect.

@ScottC: Actually, realtors are in the business of selling, since the seller is their client

At the risk of acquiring a nasty permutation of title, and of speaking for someone else... I think you're missing Shmend Rick's point. There are no sellers without buyers, and Realtor®s make money at the point of transactional friction between the two. So Realtor®s advise sellers, cultivate buyers, create and protect markets, and when the machinations succeed, receive a check putatively from the seller (written by the lawyer, most often), but funded by the buyer.

So tell me again what business they're in exactly? That's right, the transaction (-al friction) business. Sounds like buying and selling to me.

Totally false. As a contractor, you can write off anything from your breakfast, lunch, dinner to the clothes you wear, not to mention gas, car, computer, trasnportation,

Most of these expenses are limited to 50% deductibility, and have floors and ceilings. If you are filing as a sole proprietor, then you'll also experience significant pressures from both AMT and the specifics of the rules on the big-ticket deductions like cars. A general rule of thumb is that it is 15% more expensive to contract than earn salary (net), until you hit the 120K level, where the costs go up because of AMT.

I am currently, and have been often in the past, independent. I've filed as S1, C-Corp, S-Corp and LLC. By far, the most preferential treatment is S-Corp for independent contracting, but you can't deduct a lot of those things if you take that route.

So tell me again what business they’re in exactly? That’s right, the transaction (-al friction) business. Sounds like buying and selling to me.

Floor traders?

A1337: You could always hose yourself down before you step inside the party and go as the burst bubble...

HZ is again dead on. Mortgage interest deduction only benefits marginal earners in a narrow band, which is increasingly elusive in CA. AMT kicks in pretty quickly for CA earners, although I read somewhere that a significant portion of folks just ignore AMT even when they owe it (probably out of ignorance). They may gain from mort-int, but they are unwittingly cheating on their taxes.

The biggest tragedy is that mortgage interest, like everything else, benefits the very rich more than anyone, since they can utilize it for earnings over .5M and usually they have the wherewithall to structure specifically to maximize tax benefit. Personal wealth managers make quite a business financing rich folks' RE so they can reinvest in higher returning portoflios (like PE funds), and effectively arbitrage the low interest rates plus taxpayer subsidized deduction.