patrick.net

One other thing. News brought up oil prices and the cost of commuting. I’ve never understood the attraction of getting up at 4:00am to go to work just to have the joy of having a house. That aside. It seems previous housing busts were often affected by oil prices, and the cost of oil had definitely been in the news lately. I wonder if were hitting the pain threshold yet? How expensive does gas have to be before it effects a persons willingness to commute? Is it coincidence that oil is getting more expensive or is this to do with the value of the dollar, foreign investment and asset appreciation? I don’t know how cause and effect works in this situation, but oil prices often seem to play a part in our boom and bust cycles.

Jack
You may not be a bubblehead as far as Marin Co. goes, but even you have to admit Sacto price appreciation is ridiculous. Since we are proped up by BA commuters to some degree, we are a lot more vulnerable to a crash. Your market dips, ours crashes.

Anyway, got to leave soon, I hope I can clam up for my husband's sake. Won't be easy though. ;)

Fake P

I hear ya..
Much of the property out here is lovely. But you're right about the weather and restaurants. Sacto is one of those areas that has really benefitted from proximity to the BA. I guess it's kind of like Bakersfield is to LA.

I wish I had some good stories to tell about the soiree with the local RE agents, but everyone was on pretty good behavior. The only time RE came up, everyone pretty much agreed that everything is way overpriced. (RE agent was not present at this time). It's interesting. Everyone present liked the area we live in, but not one person thought their house was worth what the going market price is. I've heard it said that when everyone's talking, it's a good sign the bubble's peaked.

You know, in hindsight I'm sorry we couldn't have gotten into the RE discussion more. I would've loved to have been able to bring up the subject of NAAVLP's. :)

Sorry if my use of the smiley face icons is annoying, I just figured out how to do them and I am having way to much fun. :) ;)

So far most of the postings seem to be in repsonse to the Who will pay? issues, but not the other question:

How/why did this happen? Who/what drove this massive “paradigm” shift in mortgage risk over the last decade or so?

Until the mid-'90s, the GSEs collective share of the overall mortgage market, though not tiny, was never that big (

For some reason the latter half of my post got chopped off

...

Here's the rest:

So what chaged? It's not like the GSEs or their practice of buying & re-selling mortgages to investors is new. Fannie Mae went private in 1968, and Freddie Mac was founded in 1970.

I'm asking because frankly I don't know.

Did some banker wake up one day and say, "Hey, I've got a great idea! Let's sell all of our mortgages to Fannie & Freddie (especially sub-prime loans). That way we don't have to worry about default risk or screening borrowers' credit history. We can open up the credit spigots and boost our sales/profits exponentially!"

Or did some act of Congress directly or indirectly lead to the GSE-subsidized flood of debt? A little of both? Neither?

Who/what drove this massive “paradigm” shift in mortgage risk over the last decade or so?

It was probably due to excessive faith in the market and the need for the financial industry to market ever more complex intruments. This may be a response to globalization in which the US is attempting to transform itself from a manufacturing economy into a service-oriented economy.

Very simple: GREED!

Well, that's one way to look at it, but I doubt excessive greed is something new to the mortgage market ;-).

...the need for the financial industry to market ever more complex intruments. This may be a response to globalization...

Peter, you may be on to something here, but I'd like to know what specifically caused the GSE's share to balloon so quickly over such a short time. Globalization/off-shoring has been happening for a long time, but what was the particular event (or events) or the tipping point that changed the status quo?

HARM, I always think that economy events are more like earthquakes. Pressure or trends can develop over a long term with little visible effects. Suddenly, something happens and all the accumulated effects are realized in a flash.

Personally, I think the 1995 peso crisis, the 1998 LTCM crisis, and the 2000 tech bust must be playing a role. But again, these events are both causes and effects. One crisis sets the conditions for further econo-seismic changes, causing more crisises in the process.

You may be right, Peter. Maybe there is no one "trigger", but a series of related events, each one amplifying the effect of the one preceding it.
I guess you could also add in the 1997 RE capital gains law, which basically doubled the old homestead exemption & shortened the ownership period to 2 years (thanks, News).

Inquiring Mind, I think most of the arguments have been tackled before.

The housing bulls assume that a speculative bubble does not exist and then proceed to argue that higher price is a response to a change in supply and demand.

An easy counter-argument is that rental prices have been falling, which indicates that there is no underlying supply and demand imbalance if speculation is removed.

They sometimes also use future expected demand and current supply to justify high price, which is another classic sign of speculation.

When demand is high in the future, there will be higher population density. Homes will be demolished to give way to high-rise condos (remember the recnet supreme cort ruling?). The government can receive many times more property tax revenue from the same plot of land, and developers can make a lot more profits as well.

Many cities in the world were thought to be built-out decades ago, but people are still able to find homes as population increases rapidly. The simple revelation is that we are not running out of land, and we will not be running out of land. At least not until we run out of economically-feasible oil.

One thought: competition + moral hazard = guaranteed crash

Re: Pender article
"the builders are trying not to build a lot of speculative inventory. They are trying to build more to order," Lieber says.
And I am sure the builders never never fill orders for homes that speculators purchase.

Anyone care to poke some holes into some of her arguments?

“Housing bulls say home prices are soaring not because of a speculative bubble, but for a simple economic reason: Supply has not kept up with demand. ”

Patently false - The increase in housing gupply is actually OUTPACING demand/immigration/population growth: tinyurl.com/ahqpu
New home construction is now at the HIGHEST level seen in 21 years: tinyurl.com/ds7j9

“On top of organic demand for homes due to population growth, immigration and divorce, many people now see housing as a better and more enjoyable investment than stocks, which you can’t live in or can’t trust, and bonds, which are yielding next to nothing.”

Well, duh… As long as flipping houses/conods keeps returning 20%+ per annum, of course people are going to see it as “better” than other types of “investments.” This not only doesn’t prove there’s a speculative bubble, it lends credence to the idea.

“Low interest rates and more liberal lending standards have allowed more people to buy homes, helping to raise the U.S. homeownership rate to 69 percent from 64 percent over the past decade.”

Yes, indeed. Those rock-bottom rates and NAAVLPs certainly have helped feul the market over the past several years. Problem is, most of these new “owners” will find themselves upside-down equity-wise if mortgage rates go up, or if prices plateau or decline.

“Also fueling demand is the 1997 tax law that lets married couples sell a primary residence and pay no tax on up to $500,000 in profits as often as every two years. (The limit for singles is $250,000.)”

This one I agree with. Far from proving there’s no bubble it (again) provides more evidence that there IS one. If people are buying houses with the expectation of selling for a tax-free profit in a short time (as opposed to buying them to LIVE in them), then these buyers are speculators by definition.

“Housing bulls expect these trends to continue…”

When do bulls/industry insiders NOT expect good trends (for them) to continue?

FYI: Patrick recently reinstated his Bay Area median rents tracking page (he had cancelled it due to lack of interest/clicks): patrick.net
There's also a link to it at the top of his main "Crash" links/Why? page: patrick.net/housing/crash.html

As I have said before, median price increases on lower volume is a non-confirmation on price trend continuation. Moreover, the median/average price is for all single family house transactions, any change can be attributed to a cross-sectional market shift.

I have been tracking the market and am surprised that the lower-end of the market is slowing dramatically. This may also explain the increase in median price.

Honestly, if there is a good instrument for me to bet on increasing median price in the short term, I may do so. I think this number will continue to go up even in the early stage of a crash.

Note: in Las Vegas, median price is still going up even though it is no longer a seller's market and the market is flooded with inventory.

I still don’t see any signs of the dreaded "crash".

By the time you see it, we will have been at 6 - 9 months into the crash. Do not misunderestimate the interconnectedness of the real estate market. (Or should I say NAAVLP markets?)

I’m actually somewhat surprised that prices haven’t stabilized already.

So you see the median price increase as a confirmation to your theory even though it deviates from your premise?

It was the second-highest volume for June EVER! Volume is down year-over-year.

http://tinyurl.com/9jw88

It does not matter that it has the second highest volume. Higher price on lower volume is always a non-confirmation.

We are going to witness the greatest wealth destruction in history. Sit tight.

But if the median price were going DOWN, you would use it for confirmation of your argument.

I do not need ANY confirmation by the time that happens.

Let me add that a bubble requires ever accelerating increase in price and volume to sustain. This is why a bubble always goes bust.

High price appreciation and volume alone do not indicate health.

By YOUR LOGIC then……, you would also have to agree that it will take 6 to 9 months for YOU to see that the market wasn’t only “taking a breather”, and not crashing at all.

Jack, this is due to the nature of that particular statistics. I cannot help it.

Oaktown girl, quite a few listings on my watch list are just sitting there. Some were gone and then suddenly reappeared (TFT?). I think this may indicate that affordability is becoming ridiculous even with NAAVLPs.

Face Reality, the median price per square foot of resale houses went up from $464 to $468 from May 28 to June 25, an increase of 0.8%. Is this what you are talking about?

KG, I believe population statistics cover illegals. BTW, other than laid-off tech workers who are in technical violation of the immigration law and gangsters who see no law, what illegal immigrats have a lot of money? Can they get a loan without an SSN?

Regarding where we are...

San Diego and Las Vegas are probably at Sept 2000.
Bay Area is probably at around Feb/Mar 2000.

There are many who make good money, so let’s assume that the average income for illegals *is* in fact the same as legals in broader society (this may not be true, but let’s assume it).

This is highly unlikely. The average income for legals include a lot of out-lying cases like Bill Gates and Steve Jobs. For the illegals pool to attain the same average income they will have to make significantly more than their legal counterparts.

One way the government can do in a severe bust is to give green card to anyone who buys a home for 1M or more. I do not think that this is very politically feasible though.

Jack/Face/Peter/KG,

RE: "reading the tea leaves" I think we can all agree that one month's data, regardless of whether it shows a net increase or decrease in housing volume and/or price does not a trend make. I think we're going to need to see at least several months of consistent across-the-board flattening or price declines before we can call a peak. Personally, I'm not 100% convinced it won't still go up another year or so (until that $2.5 Trillion in NAAVLPs start coming due). I repeat: "Asset bubbles always go higher and last longer than any rational person..." (you fill in the rest)

Until then, quibbling over M-M stats is a "tempest in a teapot" ;-)

If it goes up another 15-20% in the next 12 months, then the US economy is going to have a big problem when it falls, as the hit to the economy will be that much more severe. Think of Nasdaq at 3500 in late 1999 vs. 5000 in March 2000. More people will get screwed in the trap.

In total agreement on this. The longer this thing lasts, the worse the crash, *ahem*, CORRECTION will be. (Don't want to upset Jack ;-) )
Unfortunately, just because it's a bad thing does not mean it won't happen. :-(

Who tracks such price declines?

As a priced-out buyer I keep monitoring MLS information. There was a property in Evergreen ("3272 Nipoma Ct, San Jose CA 95135) that was listed for 1.03million. The listing expired. It was relisted at 979K. Now it shows as Sale pending.

I happened to visit the property during open house. The RE agent said all the usual stuff. There are multiple bids, prices are going up etc.

Well that is a 5% decline in at least one property. Then there is another one "4017 Louvre Ave" in the same area. It was listed at 1.17m and has remained on market for 7 months. It was relisted on 6/28. The e-mail alerts that I get from RE agent shows days on market as 11.

It seems cooling has started but not visible yet.

Peter P, I know of an unlicensed handyman who makes roughly 10k a month doing remodeling work. He works for 7 days a week, does very nice work and doesn’t pay taxes. So, that will be 120k a year, all into his pocket. There are plenty of such people around, if you haven’t noticed.

We can keep quoting outlier cases and the discussion can go on forever.

Does the handyman already own a house? If so, people like him are probably not going to be the "buyer of last resort". If high-income illegals like him rent, why are rental prices still going down?

Illegal immigrats who do not report income are breaking both the tax law and the immigration law. It disgusts me when our policies encourages this.

If the illegals are necessary to our economy then we should legalize them. If not, we should seek to prosecute them.

cell800, the marker is definitely cooling. Many listings that go "Sale Pending" are somehow reappearing. Looks like TFTs are becoming popular. And I am not talking about flat panel screens. :)

I am pro-immigration. But I do think that more effort is required in curbing illegal immigration. We cannot have laws that are inadequately enforced. We certainly cannot reward people for breaking the law.

Maybe the problem is that the immigration law isn't realistic considering the needs of the society here. In this case, it should be changed. California is particularly dependent on illegal immigrants, so it's quite strange for a California resident to be advocating clamping down harder on illegal immigration. Instead, I would advocate modifying the immigration law so that it's more appropriate for our needs.

Not to unnecessarily prolong the discussion on immigration. But I was a teacher at a low income school with a high % immigrant population. We had kids from, Russia, Ukraine, Laos, Mexico-- you get the picture. I don't know the % that were illegals, when the kids register we ask for proof of residency(can be a utility bill) and birth cert. (maybe green card required, but I doubt it).

Anyway, most of the families in the area were clustered in apartment complexes so they could be around other families that understood their language/culture. These were not well to do people. Most of the adults did not speak english very well and had to take low wage jobs to get by; and many times had to work 2-3 jobs. This is not a wide view of the immigration situation, but it's what I've seen and I think it's fairly typical of the immigrant life in California.

Let me put it this way. I substituted for 2 years prior to getting my credential in 3 districts. In the more affluent areas, virtually no immigrant population; in the low income areas very very high % immigrant. I don't see the immigrant population buying into the housing market in large numbers anytime soon.

You guys are killing me - you must be living somewhere else. The housing market is doing absolutely great overall right now in the Santa Clara and San Mateo counties (I'm less familiar with other counties). The statistics for the last few months look fabulous. In general, the economy here seems to have picked up. Finding parking in Mountain View during lunch time is very hard again (just like during the bubble...) This wasn't the case just a few months ago.

Face Reality, I totally agree with you. We should definitely seek to legalize those who are adding value to the society. We need the tax.

At the same time, I also suggest eliminating minimum wage, which IMHO encourages hiring illegal immigrants.

SactoQt,

Do you actually live in the Bay Area? A very large percentage of the buyers of homes in the most affluent areas here over the last few years are immigrants (mostly legal, I would assume). Most of them are from Asia (China, Taiwan, India). In fact, native-born Americans are already a minority (or are fast becoming a minority) in many areas here (including very affluent areas).

Nope, don't live the BA, I'm speaking strictly about my neck of the woods. I guess I have a hard time seeing the high percentage immigrant home buyers you're talking about since we are not seeing that here. Is this just a BA phenomenon, and will the rest of the country have a different outcome due to the immigrant equation alone?

Face Reality, what job growth are you talking about?

http://www.viewfromsiliconvalley.com/id66.html