patrick.net

brightc, thank you ;)

You keep giving 'em hell, surfer-x! :-)

Typical reators' (tm) home value appreciation statistics:

January 2005: House values have gone up 20% since January 2004, and will very likely to continue going up another 20% by the end of this year, then perpetually, forever and ever!

December 2005: House values are tanking, which is somehow a good sign that we're returning to a "normal market". Still, prices are up 10% comparing to the second quarter of 2005!

January 2006: House values are now officially tanked, but we're still up 4% from 2004! Forget 2005, we like 2004 better.

It's must be a good time to apply for an interest-only, one year ARM before house prices go back again in spring!

official gov’t propaganda figure of 2% for inflation

I don't believe we're having a 2% inflation, either. Just went to get some gas today, $2.57/gallon at the Shell station in San Jose. Last year, the price was $2.37/gallon, so it's about 8.5% increase. The 2% inflation is truly out of touch.

I've heard they've excluded energy and food out of the inflation calculation because we all accept to get screwed to get these items anyway. Too bad San Mateo house values only increase 4% from December 2004. Boy, how can you buy food and gas with this kind of equity appreciation? Hope I'm not sounding too desperate! :-)

Surfer-X,

I have pals and family down in Melbourne. Shoot the questions this way, will try to answer as much as I know.

CPI has become oxymoronic. It is no longer primarily a *consumer* index. In fairness to the government, there are quite legitimate economic reasons for this shift. Mainly, the many forms of annuity expenses that have been linked to CPI, like pensions, business contracts, and entitlement payments. However, the inflation measure for governments, businesses and other organizations requires a different mix (like exclusion of energy, food, and other inelastics). People, however, can't exclude these costs.

The true FPI (family price index) is closer to 6% by most figures I see. Some go as high as 10%, but most of that relies upon wage inflation which isn't high enough in the BA to carry our local FPI that high.

No matter how you slice it, RE prices in the BA are trending negative in real terms. We may see negative nominal trends by the end of this year, but not if we finally get enough wage inflation. Instead we may see flat nominal prices in RE, but a more rapidly decreasing real price.

I like to remember the saying: "Inflation is the cruelest tax of all". People don't usually get it. They think they're getting ahead because their paycheck is going up. But they are "getting it", just in the wrong end.

BSAS EXPAT
Went to this arts musem on liberdad ave. saw the painting by lucogiardino,
the mathemetician. this is a painting of an elderly lady but with so much poise and dignity. also saw "elgreco". then as i was coming back i heard this chants in the recoleta church.
I saw so many old people there praying.
these people can hardly move but there is the faith.. I have seen that same thing in the old people when they come to the temples in India. The services were in spanish which I can hardly make out. There are these clositers which were used by the ?fransiscan monks. Do u know any small book that i can easily read and comrehend about their life? BTW i got a small book about evita peron in english. I am going to read it.
thanks for the suggestion about tigre. it has been raining so much that i cannot do anything except may be go to the museums.

Help me with the inflation number. Does the government once a year publish the number including gas, etc. to adjust Social Security? This would not be the artificial "core" rate that no one experiences.

The Federal Reserve banks publish CPI data. FRED from the St. Louis fed lets you download different filtered datasets, or take the entire set. I think they publish it monthly, but there is daily data in the downloads.

You have to check each entitlement program to figure out just what period and formula it uses to index inflation. But most all of them are linked to CPI or a derivative of CPI.

ReneeInSF

Save all the cash you can and be very long term patient before you decide to move up to a condo. The housing market in Japan has been declining for 15 years from 1990. So, wait, wait and wait some more. You will need a good credit history and maintain your employment for the consolidated remaining banks to give you a mortgage when you want it.

The home buyers in SF and through out Southern California have taken out interest only or option ARM mortgages on 1/3 up to 1/2 of sales. Plus, the equity of current owners has been removed by HELOC's, etc. With a drop in value from the peak price of say 20 percent, all these heavily in debt owners in Southern California will not be able to refinance their homes.

The downhill avalanche will follow the ripple effect of lost construction, insurance, service sector and major purchases in Southern California.

Cold feet will put the entire new inventory and soon to be inventory under water. Foreclosures and bankruptcies will follow.

One can not refinance without equity. A drop of 20 percent wipes out the equity of the I/O's and option ARM's. Equity in conventionally mortgaged homes has been dropping severely for cars, vacations, education etc. Borrowing against homes added $600 billion to consumers' spending power in 2004, according to research by Federal Reserve Chairman Alan Greenspan.

Refinancing will be dead.

ReneeInSF,

Many here have faced similar decisions to delay a purchase, sell and rent (like me), or simply sell vacation homes/investment properties. It's a scarry step to take, especially when the mainstream is blasting "buy now or be forever regretful" in your ear.

There was a time, not to long ago, when .18 - .25 of your gross income was considered a full burden to pay for ownership (including taxes, insurance, interest and mortgage). Even today I wouldn't recommend anything north of .33; .50 is way way too much. Your exposure could well have turned out to be a financial catastrophe.

If you want to protect yourself against further home price inflation, then just pretend you bought the place and put the difference in a fund that will meet or beat inflation (preferrably one with a low/no tax profile, like a tax free Muni). You won't make any windfalls that way, but you'll go a long way towards plugging the gap in any upside that might be left in the RE market before it corrects in your target purchase area. (And despite what you might read here, don't run out and by gold for crissakes, lol)

If the price of the home goes down 10% you’ve lost half your investment, if it goes down 20% you’ve lost 100% of your down payment!

In the spirit of fairness, there is a time factor. If you are one of those extremely rare people who view their house as a homestead--one in which you will likely live out most of the rest of your life--then the above does not apply. However, very few people in any major metro area fit this profile anymore. But, if you plan on living there for 25-30 or more years (long enough to actually own the place), then you only need to worry about paying the mortgage, not about the equity position.

Is there a chance San Francisco houses will experience much longer time in market, thus will reduce in prices dramatically? The reason is that I'm seeing SF as less and less a place desirable to live.

Before everyone's jumping on me, here are my reasons:

1. San Francisco is a nice, if not outstanding, place to visit, but not a desirable place to raise a family, while most homebuyers are those who want to settle down and raise a family. The school system is terrible, and unless you live in a rich neighborhood (which automatically means you can afford private schools for your kids and shield yourself away from the disgraceful SF public school system), you'll have to deal with pesky problems like your car windows getting smashed, your car getting dented by people's first attempts to parallel park, and occassionally, you're followed by one of those friendly homeless guys who want to share their intimate knowledge of the streets with you.

2. As a young person, your dream may be living in a metropolitan place, where all the actions are. However, your dream could be killed pretty fast after circling the whole ten blocks trying to find a parking spot just to get your takeout food, renting a Blockbuster movie (I know, they have online service now, but what if you suddenly want to see Demi Moore one particular night), or even grocery shopping. Finding a parking spot in my South Bay neighborhood's (Rivermark) Safeway at 5 PM Sunday evening is already a problem. SF must be worse than that. I don't know about you, but I hate driving around to find a parking spot in the street, and the only people coming out have absolutely nothing to do with parked cars.

3. Crime. Need I say more? I'm not talking about living in bad neighborhoods. Just a so-so, middle class one, Civic Center, maybe? Still, car window smashing and homeless problems are still prevalent. Last thing I want to do is to go home after work, and revisit my thought about whether I should go buy a pistol and learn how to shoot.

I do not know much about SF, but those are just some impressions I have from many times visiting the city. I used to date a girl living near the Civic Center. To me, SF has too many problems for families, and because homebuyers are the type that wants to have a stable family, I can see the demand for SF properties declining and fast.

This is off the current topic but too good not to post! I just got home, flipped on the tube, and this guy Russ Whitney has an infomercial on KRON4 all about property flipping. He just said "Let me show you how I took $1,000 and turned it into $4.7 million in less than 18 months!" Ha ha ha ha ha! Then he had some fat lady named Diana from Texas talking about how great his program is, and she says "now I'm making the money I not I only want, it's the money I DESERVE." Yes you deserve everything you've got coming to you honey.

Randy H

The downhill avalanche of collapsing home equity will cause the ripple effect of lost construction, insurance, service sector and major purchases.

Even if your personal equity is irrelevant because you just plan to live in your house forever, you won't escape the deflation or stagflation.

Then he had some fat lady named Diana from Texas talking about how great his program is, and she says “now I’m making the money I not I only want, it’s the money I DESERVE.”

I guess it's not over until the fat lady sings.

Even if your personal equity is irrelevant because you just plan to live in your house forever, you won’t escape the deflation or stagflation.

I agree. However, I am assuming that your ownership burden is between .20-.30, which means it will be equivalent all things considered to renting, especially in an inflationary environment (rents are less sticky than housing prices and alternative returns are diminished by inflation).

In a deflationary environment it is true that renting would be preferrable, that is if you're willing to suffer the changes in ownership that will occur in the rental properties. I guess if you only rent in a large corporately owned complex, and stay away from individual owners, then you'd be pretty well off.

Like I said, if you can afford your PIMI for 30 years, then infl/defl won't matter in the short-run. Most people don't fall in that category, myself included.

I guess it’s not over until the fat lady sings.

Hilarious! Or, "it’s not over until the fat lady cries". :lol: :lol: :lol:

If the fat lady is dead, is it finally over?

HARM wrote: the fat lady cries

Cry Me A River
by Justin Timberlake

You were my sun
You were my earth
But you didn't know all the ways I loved you, no
So you took a chance
And made other plans (like flipping condos)
But I bet you didn't think your thing would come crashing down, no (you haven't heard about the housing bubble, have you?)

You don't have to say, what you did,
I already know, I found out from him (the collection agent. Damn, they don't respect anyone's privacy.)
Now there's just no chance, for you and me, there'll never be
And don't it make you sad about it

You told me you loved me
Why did you leave me, all alone (the house is foreclosing, honey. I'm finding a motel)
Now you tell me you need me
When you call me, on the phone (are you fucking crazy? I'm avoiding the bill collectors like the plague. No phone!)
Girl I refuse, you must have me confused
With some other guy (I must have pretty good disguise, and I'm already fat, so it helps)
Your bridges were burned, and now it's your turn
To cry, cry me a river
Cry me a river-er
Cry me a river

Now, now, let's not be too cruel with our schadenfreude, Randy. ;-) Besides, it's MUCH more entertaining watching f@cked borrowers writhe and squirm as they go down in flames than merely having them keel over and croak. :mrgreen:

DinOR

The California Department of Real Estate announced that the number of real estate agents approaches 500,000. Using the census, this works out to 1 real estate agent for every 75 Californians.

brightc,

Not bad. Something tells me that the coming RE/finance meltdown is going to be inspiring *a lot* of sad Country-Western tunes.

How about "My broker screwed me, my wife left me, my hound dog died, and then the bank foreclosed" ?

"Then again, wait a bit longer till you’re dead, and then nothing matters anymore. The only thing that matters is how well you’ve lived your life, and I really can’t see a correlation between that and home ownership.
Especially these days." -- Girgl

WELL SPOKEN!!

San Diego County resale house prices tumbled last month by the biggest number in 18 years of record-keeping and contributed to the smallest year-to-year rise in overall prices in six years, DataQuick Information Systems reported Monday.

The median resale price for existing single-family homes dropped $15,000 from November to December to stand at $550,000, the largest month-to-month decline since DataQuick began keeping records in 1988.

I wonder if the McDebtors ate jalapenos for dinner, cuz they've got to be feeling the burn.

SV renter.
Well said about SF and I totally agree. The only reason to live in SF is because you want to be around gay people or maybe you are an indentured servant from china or a homeless crackhead looking for a monthly handout(does the city still give $300 bucks a month to homeless people?)

I'm partial to Mougins in Provence. That's France for those here from San Jose or Columbus, Ohio.

BA

Do not buy Gold.

I predict DEFLATION. Not just deflation but a deflationary DEPRESSION by the end of 2007. The era of ultra fast communications via first the internet, then radio programs and last the main street media will create an avalanche world wide. I look for real estate be down 80 percent from the peak, stocks down 85 percent, and mortgage backed bonds down 95 percent by the end of 2007.

The whole problem is when the collateral fails through foreclosures and bankruptcy pushing the houses (collateral) into the hands of the GSE's (Freddie and Fannie). This causes the mortgage backed bonds to fail or be seriously impaired. Borrowing against homes added $600 billion to consumers' spending power in 2004, according to research by Federal Reserve Chairman Alan Greenspan.

Banks will fail and cause commercial loans to medium or small businesses to disappear. Credit risk and credit ratings will fall slowing the "velocity" of money and the GDP. The hundreds of trillions world wide in derivatives based on mortgaged backed bonds will unwind destroying worldwide liquidity. The feds will step in to salvage and consolidate the surviving banks and thrifts after the collapse as the lender of last resort. The fed will be "pushing on a string", unable to stimulate the world’s economy.

People will not be able to buy major purchases. Many foreign manufacturers such as Honda, Toyota, Chinese, India, chips or computers and memory makers will fail as Americans fail to buy. Services such as insurance, tourism, entertainment will diminish proportionately. Democrats, aka “progressives” led by Hillary will sweep into power bringing crushing regulations and tariffs. Commodities, including gold and oil, will fall as people hoard what little money they have left.

My opinion is that commodity investing for producers, industrial consumers, professional specultators and investors and perhaps a very very tiny portion of individual investors. I've given my reasoning in previous threads. In short, regular folks almost always get killed in commodities, be it gold, silver, copper, molibdenium, pork bellies, or soy. Even if you bet in the right direction, you'll get destroyed by transaction costs and won't come out enough ahead of where you'd be with a much less risky investment. That is, unless you really know what you're doing (and your wardrobe includes yellow or red sport jackets).

Buy gold in the physical form at the bottom of the deflationary depression. All the central banks will reduce their "discount rates" to member banks to near zero. Liquidity(credit) and money will be created for as long as it takes to restart inflation. The central banks mostly likely will overdo the easy credit policy and start hypeinflation.

jeffolie,

Of course, time will tell. But I'd sell that bet on tradesports.com all day. The US generates between 76-78% of its GDP through internal economic activity. In fact, the US is by far the least dependent upon international capital flows as a GDP factor when compared to all other developed nations. The catylst for your scenario would need to be a catastrophic shock on a scale not seen in modern times. Otherwise, the existing levers will be sufficient to prevent depression. If your events unfold, I rather think we'd inflate our way out of trouble, causing long-run stagflation. Liquidity would be fine within the US, even if it dries up in terms of international capital flows. Europe and Japan would be a different story.

Just one point. You cannot buy physical gold either efficiently or effectively. Even in the very narrow circumstances in which you can take legal ownership over physical gold stock, you pay more in transaction fees and storage costs than your return. Or, go ahead and keep it in your basement. I'm sure no one will find out about it...at least I hope for your sake they don't.

Randy H

We agree to disagree.

I am predicting a catastrophic shock on a scale not seen in modern times. Derivatives based on mortgage backed bonds worth hundred of trillions will unwind as these bonds become "junk bonds". Derivatives are world wide to bonds as what program trading was to the US stock market.

Ha Ha
The best place to live in the bay area depends on many things. I think it depends on your income, whether you have children, your sexual orientation and your ethnicity. At lot of money is a cure all in my opinion, but let's face it, we're all not rich.
I have to believe that the best place for me is somewhere out of the bay area. I've been here for 36 years and lately I've been thinking about where else I want to live. I have property in Nothern Cali but it's too far to commute. If I completely quit the program, I'm thinking about the desert or northern or central coast beach towns.

How's that for a lousy answer

Unalloyed

The lenders that sell the mortgages they originate into the marketplace and do not keep them in their portfolio of assets are least likely to need a bailout.

Spread your deposits among many FDIC insured places so that this diversification will allow you to make withdrawls at each. In extreme times the feds may limit how much and how often you may withdraw from each place.

In my deflationary depression, banks will fail. During the Great Depression of the 1930's banks were closed for a "bank holiday". Keep enough cash safe (not in a bank that may go on "holiday") to buy food and gas.

Sunnyvale_Renter Says:

"To get real inflation figures, take George Ure’s advice and track prices of things YOU buy a year ago, and now. The items in the CPI are not very relevent any more..."

Very good observation. I'm at the point where I just look around at stuff with my own eyes, and do my own analysis. I cannot count on the media to put it all together for me. I think shit IS going up.

Salaries, my salary that is, is down in real terms. Not even stagnant, but down. Corporate profits are up. People doing the work of two and three people, legacy systems in use, etc. Greed!

And it's not even a salary, it's a wage minus benefits. I'm on contract at a Fortune 500 company through Manpower Professional.

I don't know how a lot of people are making it. A crackup's got to be in the cards...even if in slow mo.

Glad I'm not going to be in Cali when the wave hits...

It dropped 80% in an imaginary place called “Tokyo”.

Japan sufferred secular deflation. Their monetary policy was too tight, largely due to currency intervention. A country cannot manipulate currency and control money supply simultaneously. Japan had to do this because they are an export economy. The US is not an export economy. The US has a credit culture whereby Japan did/does not. Willingness to take on debt encumberance is essential to the fed interest rate lever. This works well in the US. It even worked well in the 30s during the depression. When the new fed policy reversed the "shake out the riff raf tightening" era, things started to become more liquid almost overnight.

The US is neither likely to suffer secular deflation nor hyperinflation (the definition of hyperinflation is 50% per month, which is over 1% per day, implying two orders of magnitude increase in prices per year). As to the depression hypothesis:

"Economists believe that the mistakes that led to the Great Depression are unlikely to be repeated. The Fed is unlikely to allow the money supply to drop by 25%. Further, the unecessarily long deflationary period of the early 1930s was directly responsible for the depth and length of the depression. A 'Depression' is not an economic state, but a sociopolitical state. Economic models do not support a prolonged deflationary period without a persistently falling money supply.

The fiscal-policy mistakes of hte Depression are also unlikely to be repeated. Fiscal policy in the 1930s not only failed to help but actually further depressed aggregate demand. Adherence to balanced budgets and debt controls worsened the deflation, a policy few economists would recommend today. [text goes on to invoke IS-LM models and econometrics supporting the validity of those models]"

--Macroeconomics, 5th Ed. (2003)

Welcome back, Randy H, glad to see u here again.

I predict we will have stagflation, 10% - 20% inflation a year on oil, food and anything that needs to be imported due to currency depreciation, no or minimal growth on wages. Any asset that is dependent on wage growth, i.e. houses, will actually see a pricing decline, while anything that has a much more inelastic demand, e.g. food, heating, healthcare, will see jumps in price.

DinOR

Orange County in California went bankrupt because it used derivatives based on bonds. The levage went against the OC when it guessed wrong on the direction of interest rates. Hundreds of trillions of derivatives will unwind bankrupting manifold holders. Todays liquidity in the mortgage backed GSE's (Fannie and Freddie) packaged bonds have produced the enormous, expodential funding of mortgages.

When bonds are downgraded to "junk" it usually means that the interest payout has been impaired by credit risk or actual reduction of the interest payments. Look at the OC bonds during the OC's bankruptcy, the OC suspended payments. The yield did not go through the roof (ie 698 % in your example), the yield went to 0 %.

Most pensions and institutions in the US hold lots of the mortgage backed bonds. A bond does not have to go into default to become junk. The US auto makers, GM and Ford, have junk status. I predict that deflation of houses will reduce or suspend the payouts via foreclosures and bankruptcies.

I am predicting a catastrophic shock on a scale not seen in modern times.

One can not refinance without equity. A drop of 20 percent wipes out the equity of the I/O’s and option ARM’s. The home buyers in San Diego and through out Southern California have taken out interest only or option ARM mortgages on 1/3 up to 1/2 of sales. Equity in conventionally mortgaged homes has been dropping severely for cars, vacations, education etc. Borrowing against homes added $600 billion to consumers’ spending power in 2004, according to research by Federal Reserve Chairman Alan Greenspan.

No home owner will escape by refinancing.

Refinancing will soon be dead

The California Department of Real Estate announced that the number of real estate agents approaches 500,000. Using the census, this works out to 1 real estate agent for every 75 Californians.