patrick.net

You have to have very strong capital markets to offload these kind of securities. The banks/agencies need to do massive hedging on loans that they hold on their books.

I just worry that our capital market and OTC derivatives market may not be as strong as we thought.

I simply asked you how you would feel about your decision if RENTS were to double in 5 years. I was pointing out that you might in fact see your choice to rent as a gamble also, if rents start to skyrocket in the near future.

Jack, life is a gamble one way or the other. It all depends on information and expectations.

Afterall, those who have an interest in anything other than information that can be used for an edge are doing themselves an extreme disservice.

Mr.Right, can you explain?

"seattledude Says:

Point is- people with ordinary jobs like waitresses and grocers back in the day could buy a house back in the 70s, it happened plenty, and if you didn’t buy a house in the 70s and were around then, i don’t know what the hell you were waiting for then.- talk about missing the boat when that kind of income to housing cost ratio existed/was just handed to you..."

100% correct...even the 80's and early 90's before the recession.

I remember going over my friend's house after elementary school in the 70s and seeing his dad rolling joints. Biggest friggen' hippy ass loser in the workd...had a house.

Then, on the last block I lived on in South San Jose, where the houses are $800-$900k now, one of the neighborhood kid's dad was a grocer. My friend Scott's dad was a mechanic and his mom worked in the deli section of Safeway. Rob's dad managed a department in Macy's. Mike's dad worked at GE and his mom at the Emporium an Almaden Expressway, before it went under. Gary's dad worked at Moffett Field, Nasa research as an engineer. Another neighbor worked for PGE. Another at Atari when it was happening. Just shit like that.

I got the impression from San Jose, after visiting about three months ago and first time back in four years...that, yes, only the rich in the future would be able to afford it. It was all like turning into Los Gatos affluence or something. Strange and a bit frightening to see.

Phoenix is rising too...albeit at about 1/3 the price but relatively, cops, nurses, etc. are getting knocked out of decent hoods.

WTF is going on here? I'm almost 40, MBA from a state school and can't afford SHIT. Plus, people at work are starting to get nasty and collusive forming little cliques to survive on the job and fight like dogs over scraps.

It's so friggen' bizarre. And now illegal aliens are running amok with free med. care, housing, dental, college, while poor sorry ass sucker military veterans/college educated are stuck with the college bills and getting more behind every year.

You think I'm kidding?

Bad news for your Michael, the congress just passed bills to import more H1Bs and loosened quota for more greencards. It is about time that you write to your Republican senator.

I/O loans that will come due in late 2006 into 2007. Will that be not a ripple, but a rogue wave?

Yep, a "sneaker wave" giving some a really bad wash, for others a trip to the shark's mouth.

Prashant Kothari, president of String Information Services, estimates that as much as $300 billion in adjustable-rate mortgages could be refinanced nationwide next year and $1trillion in 2007

Here's more data for the collective noggin':
According to the author's write-up:
* The HPI tracks the resale prices of the same homes. In other words, if the HPI rises by 5 percent in a year, it means that, on average, every individual home has increased in price by 5 percent compared with the price it sold for last year.
* The trend line (green) is established from the minima circa 1986 and 1997.

Data plot:
http://tinyurl.com/9aq8k
Take a look at "deviation from trend"

More data can be found here:
http://tinyurl.com/8vyxy

Incidentallly, the current deviation from trend tracks to my crude calculations, using comparisons individual home sales over the last 10 years, and analysis of median home prices.

"Yeah, it sucks that housing is unaffordable."

JeffMN, don't you live in Minnesota? Isn't housing affordable there? Or were you just speaking of the coastal bubble areas?

It seems to me that in areas where there aren't an obvious bubble (red states, heartland, whatever), if housing is becoming less "affordable" it's mainly because everyone wants to have a bigger fancier house and there is the easy money available to buy it. Where young families used to start out in 1200 sq foot houses, now they feel cramped unless they start out in 2400 sq ft houses (these measurements don't apply quite as much to CA, where houses are generally smaller).

Houses in many states are becoming monstrosities. 4000 square feet is common. 3000 square feet, to a lot of people, is the bare minimum livable square footage nowadays. This is total sheeple thinking (love that word Peter P!). Humans don't need that much space, nor do they need most of the crap that fills it.

Jeez, I'm starting to feel like a broken record. I need to get a new rant. :-P

Bad news for your Michael, the congress just passed bills to import more H1Bs and loosened quota for more greencards. It is about time that you write to your Republican senator.

I would guess that both parties support these bills.

In the end, the tide of globalization is difficult to stop. It would be in our best interest to look for new niches instead.

RE is a good investment only because of leverage. Without leverage it is simply inflation hedging over long term.

Want leverage? How about Forex at 400:1? :)

*** Not investment advice ***

However, most of us don’t outright distort data as a means to convince individuals to assume massive debts, just to earn a commission.

This is the real world though. I think technical "professionals" like ourselves were too... naive.

There are whole industries that thrive on the financial destruction of small people. I am not going to name them.

NYT reports that nominal wage is up 5.8 pct YoY. How come this board paints such a different picture?

Wage inflation finally.

Just last week I was still arguing that inflation cannot take off until wage goes up. Now it looks like we may see some major inflation before the pop.

But it is too early to tell and impossible to ascertain. ;)

When you buy a home you lock in the bulk of your housing costs to a fixed amount (or at least a defined amount). Over time inflation causes that fixed amount to become trivial, and ultimately you pay off the mortgage and your total cost of owning the home is only the maintenance, insurance and taxes.

Rents will generally rise with inflation, and in most places by a little more than inflation. Prices generally rise with average GDP per household. More specifically, with the average incomes of the upper half of the population (they are the buyers of most homes).

Once you own your home, the price or “value” of your home is not very important. There are only two times when the price for your home is truly important – when you buy, and when you sell.

If you sell to trade up the effect of price level is largely offset by the price of the home you buy.

If you sell to cash out with the idea of repurchasing later, then you are speculating on housing prices in the mirror image of those who speculate on appreciation (flippers). Same logic, same risk, only in reverse.

However, selling to speculate on a decline is a bad bet. Prices go up in 7 out of 10 years, so the odds are against you. Further, when home prices do decline they only decline slowly and modestly. The usual full cycle decline is only comparable to the final one year of appreciation. So if you sell too early all the benefit of selling is lost. Further, you must also repurchase at the exact bottom to get the full benefit. The full benefit is minimal because of the costs of selling and repurchasing. If you sold before January of 2005, you will probably not benefit from the strategy.

We are currently in the early stages of a cyclical downturn in residential real estate. We are also in the normal period of seasonal slowdown. The combined effect is strong. This is not a good time to buy.

Those who wait will be rewarded with lower prices. However, mortgage rates might be a little higher.

"newsfreak Says:

I was surprised at the $1 trillion in I/O loans that will come due in late 2006 into 2007. Will that be not a ripple, but a rogue wave..."

Yes! The bubble will collapse into dishwater and the ensuing tsunami
will be cleansing...Ever hear the song "Aenima" by Tool?

I suppose the gamble is to beat inflation by beating feet in a mad dash to refinance, before mass herd hysteria sets a stampede in motion when the masses come to the realization that inflation has formally arrived...unannounced and without warning.

APS (Arizona equivalent of PGE) now wants to suddenly increase our utility bill by 20 percent!

I find it ironic that people think it was easier to buy 30 years ago. I can tell you it was really difficult then. It was even worse 50 years ago when the average house was around 800 square feet and still only 50% of the population could buy one.

While the hypothetical measures of affordability do show it to be tough today, every published affordability index is only theoretical. Where the real truth is found for the relative affordability of any good (housing or otherwise) is to measure how many people actually own it. And today homeownership is at an all-time record high. With roughly 70% of all American households owning their home, ownership has never been as broadly possible before.

Obviously, there are wide variances in the cost levels from place to place. Specific localities are beyond the reach of the average person. Some places that were once very average have become relatively expensive. This reflects the consumer preferences and the market auction to live in the most sought after areas. Price is the rationing mechanism. Fifty years of population growth combined with rising incomes and wealth have driven the prices up.

Investors have income and/or wealth, and they are using it to purchase property. This is always a component of the market. It has increased in the last few years, as it does in the late stages of every cycle. Those who are long term investors do not destabilize the market. Those who are in for the quick flip, and those who are in over their heads will sell into the decline causing the decline to be more severe. This is nothing new – it happens every cycle.

Real estate is not only slow to sell (normally) it is also expensive to sell. We can sell stock at the click of a mouse at almost no transaction cost. Real estate is a bad market for “day trading” strategies. Normally the best real estate strategy is to buy and hold… never sell.

I say never sell. However, I did sell a substantial portion (about 30%) of properties in Los Angeles at the peak in early 1989. I did that because the market of the 1980s was so unusual. It was not only incredibly bubbly (more so than today), it also had financial disasters compounding (Savings and Loan crisis) and inflation was coming to an end. I was sure that the excesses of the 1980s would be a major factor and that they would take a while to sort out. So I reduced my bet, and paid off most of my debt.

"Seems to me that people like Allah and pbass are gambling just as much as anybody. The future is not that easy to predict. Even now. Each persons situation is different, but all are gambling with thier choice, even pbass."

How am I gambling? What do I have to lose? Do you think housing prices are going to keep climbing to infinitum? Do you think their just going to plateau and stay there? If you were able to convince me (not likely) on either of those situations, I would still be glad I didn't buy into the market...........why? Because prices are too high....for me to buy something I am comfortable with (not likely) where I live, I would have to sacrafice way too much to live.........I would be taking a very big chance on the future of my family and I see no point to that at all! Do you? It's easy for someone like you who has a nice house 100% paid off to be thinking buying is a good idea.....have you actually went over and looked at the houses that people have bought for $500k?........I have...and if that is my only choice, I would rather NOT buy!

I am 100% convinced the prices are going to freefall nothing can change that.....but I will make believe for a second that I am wrong only so I can prove I am not gambling. I can move anywhere I want......I could move to another state and buy a house there! I could do that now if I wanted to and buy a REALLY nice house with cash and have plenty of savings left over to take care of my family.....I know many who have already and have no regrets at all. So how am I gambling? Don't you think I would be gambling if I wiped out my savings to put a down payment on some ugly house I really don't like for fear I'm going to be priced out? If the fact is that I would be priced out and I did go ahead and buy, then my children would CERTAINLY be priced out. In this case WHY would I want to live here? I see no gambles on my part....do you? If so explain.

Why does everybody think that if you ask a question, you are in some kind of bind? LOL I didnt agree with something Allah said once, and he starts asking if I am a real estate agent!

I wanted to know if you were an RE agent because you sounded like one... What does this have to do with some kind of bind? When me and Jamie were arguing about stay-at-home-dads, you were instigating....is this what you meant?

If you bought to make a short-term profit, then perhaps you should sell. If you bought the house to live in it, then live in it.

- Zephyr,

While the hypothetical measures of affordability do show it to be tough today, every published affordability index is only theoretical. Where the real truth is found for the relative affordability of any good (housing or otherwise) is to measure how many people actually own it. And today homeownership is at an all-time record high. With roughly 70% of all American households owning their home, ownership has never been as broadly possible before.

That 70% ownership rate is bogus...........Do you think taking out a "no money down suicide loan" to get into a house is considered owning it? Watch what happens to these people as the crash unwinds.....many of these people are a "forclosure waiting to happen". I wonder what the ownership rate will be in the next few years...should be interesting. As for these people, the walls are closing in on them fast.

Clearly, some buyers are at the edge. This has always been the case. It gets worse at market peaks. However, the vast majority of homeowners are nowhere near financial stress or risk. The average equity is above 50% and the average homeoners spends around 10% of income on housing. This is hardly a doomsday condition.

BTW, if having a high loan to value is not owning the house, then there is no significance to losing the house. Of course, the truth is that the buyer DOES own the house no matter how the financing is structured. And the financial consequences are his responsibility.

The 70% rate is simply a fact.

However, the vast majority of homeowners are nowhere near financial stress or risk. The average equity is above 50% and the average homeoners spends around 10% of income on housing.

Where do you get this from?......This is absolutely not true! Maybe where you live it is, but definitely not on the coasts.

My post is absolutely true. These are national averages. Like all averages there are variations from place to place. Obviously, the more expensive areas will have lower than average ownership rates and higher than average financial obligation ratios.

These are national averages

I won't disagree with that.......I am talking about in the bubble areas along the coasts. National averages mean diddly squat!

LeftHome - things are stacked up way too high against owning right now. If it's just a matter of playing the odds, it is a no-brainer - sell.

the vast majority of homeowners are nowhere near financial stress or risk.

Not in the bubble areas..............When you count the non-bubble areas which account for MOST of the US, it REALLY distorts the facts that many homeowners (if they like to be called that) in the BUBBLE AREAS are heading for finacial disaster.

LeftHome - things are stacked up way too high against owning right now. If it’s just a matter of playing the odds, it is a no-brainer - sell.

I second that.....If so many of the great RE investors are cashing out now, why would you think it's a good idea to wait?

Zeph,
I enjoy your tempered posts, but I have to wonder about something.
The overall tone of your posts is that this up-cycle is roughly the same as the previous ones (i.e. "This has always been the case. ", etc.).

I'm a little young to remember previous RE bubbles, so I'm wondering about previous levels of RE contribution to (bubble area) economies.
Was there as much economic dependence on RE as today?
What I mean is, in bubble areas (this is bay area perspective), many people are using RE for full- or part-time income generation (engineer friends of mine, admin assistant at work, etc.). No matter how you slice it, this income is contributing to the (local) economies.

Now, my feeling is that the CA bubble in the 80's was driven by aerospace/defense, and perhaps some other non-RE-related industries. But today in CA, you could say that RE is, to some extent, driven by RE; it's feeding on itself (again, to SOME extent). And if you agree that this wasn't the case in previous RE expansion cycles, how do you see this factor affecting the RE down-cycle (magnitude, duration, etc.)?

On the coasts, just as in other parts of the country, the vast majority of homeowners have owned their home for more than a year or two.

First of all, if you have a loan....you are not a homeowner......want to test my theory? Stop paying the mortgage and watch what happens. There is a disconnect between owning and just having control over property. I don't believe everyone or even the vast majority of people living on the coasts are going to be in trouble.....what I am saying is that the vast majority of people living on the coasts that bought (so to speak) in the last 4 or 5 years are going to be in trouble. Some of them will lose their house........some will walk away from their house......others will be trapped in a depreciating liability. While those who are still using these "suicide loans" will certainly lose, many of those who didn't will also lose because they paid "suicide loan" prices...also some of these people pulled large amounts of equity out of their houses which they spent foolishly....I believe the economy has a huge amount of turbulance ahead and those who stretched themselves are going to burn...............the other RE crashes will be nothing compared to this time.....Savings is at an all time low, people don't have reserves like they did during other crashes and they didn't use "suicide loans" exept during the great depression and we all know what happened then don't we? Another thing is that salaries while they have grown over the years, they are starting to make a u-turn mainly because of outsourcing and this will continue. People are living off of money they haven't earned yet and they are expecting to earn it. I don't have an exaggerated view at all..........Actually I keep reading about much worse outcomes than I'm expecting.

Fresh buyers are a small minority, and even among those people not everyone is overstretched.

How can you possibly make a statement like that? People have bought now more than any other time in history. Anyone who bought with these inflated prices are already overstretched....although some of them don't know it (yet).

If a few recent buyers are forced to sell or go into foreclosure it may affect the market somewhat, but it will hardly be a crash.

This will not be a few.............that is for sure!

“Want leverage? How about Forex at 400:1?”

What about margin requirement and margin calls?

Well, only a fool will use that much leverage. :)

10:1 is plenty already.

I find it ironic that people think it was easier to buy 30 years ago. I can tell you it was really difficult then. It was even worse 50 years ago when the average house was around 800 square feet and still only 50% of the population could buy one.

On a risk-adjusted basis, was it more difficult to buy back then?

(In terms of equity exposure to real estate cycle and interest rate fluctuation)

I made 200K tax-free in six years using borrowed money.
There’s something wrong with that, fundamentally.
What did I do to earn that? Nothing. Just bought a house and lived in it. Made alot of improvements, using some of my equity. Even after all costs, commissions, pay offs, I come out 200K ahead. I feel like I won the lottery. Now I have to rent, for who knows how long- gotta know when to get out of the game though.

There is nothing wrong about making money doing nothing.

the other RE crashes will be nothing compared to this time…..Savings is at an all time low, people don’t have reserves like they did during other crashes and they didn’t use “suicide loans”

Agreed, there are so many things riding the coat tails of this one...it has me a bit worried. I'll drag this oldie out again, just because some things never change...

http://tinyurl.com/b7bol

Fresh buyers are a small minority, and even among those people not everyone is overstretched. The bottom line is that I don’t understand why you’re saying that homeowners on the coasts are heading for “financial disaster”.

Face Reality, it depends on what you mean by "financial disaster".

What does buying at “inflated” prices have to do with being overstretched?

If I buy something with a huge pile of money I haven't earned yet and that something drops in value (what I could get for it currently).....My net worth is a negative number....I rest my case.

Overstretched people are the ones who took a loan for which they can’t afford to make the payments.

Agreed.

If so many people who bought in the last 4-5 years were indeed overstretched, we would have seen a lot more trouble in the market by now.

People appeared to be getting richer because of the everincreasing virtual appreciation....That has gone on the past few years.......now that has started to make a u-turn.........If you noticed, many news sources that once denied the bubble are starting to change their tune to protect their reputation.......you will see shortly.....there will be many sob stories.......the worst is just ahead.

Don’t you think there’s at least some chance that things aren’t actually as bad as you want to believe they are?

No.........but they may be worse!

What does buying at “inflated” prices have to do with being overstretched? Overstretched people are the ones who took a loan for which they can’t afford to make the payments.

It seems rather easy to connect the dots here. Judging by the news stories, are not recent buyers spending more of their income on housing? That info is well-documented; I could dig it up myself, but so could anyone else.

Therefore, if people tap-out their incomes on the home purchase, they're setting themselves up for higher risk, especially using those crazy loan products.

Anecdotally, I know of people locally who put themselves at risk simply because they wanted to live in a higher status area. Where a fixed-rate in a modest neighborhood would suffice, they opted for an IO that would put them in a trendier area. They may have "worked the numbers" based on a series of assumptions, but it's risky all the same.