patrick.net

"Some senators, including McCain, don’t even know what Bernanke is about. How do you expect them to know there is a housing bubble?" --H.Z.

Well that's a good point. And my answer is that I don't think most of them have any clue what's going on right now, and if they do they really don't care. But they're ALL going to know that there WAS a bubble in retrospect, just like they did with stocks in the 90's. As the stock market continued its' inexorable march upwards, basically everyone on Capital Hill was a Cheerleader. After the market crashed, the tone suddenly changed to "how could this happen?!" I think we'll see the same thing in the aftermath of this bubble. Lending standards will be greatly tightened (for a while) Realtors will be more highly regulated (and hopefully their cartell will be broken too).

Basically all bubbles are caused by excessively easy credit/lending though, and this one has been no exception. I think the focus of the crack-down will be on these crazy "exotic" mortgages. Think about it, when we're all looking back on this bubble through our rear-view mirrors, negatively amortizing mortgages are going to seem like the stupidest idea EVER. Of course, most of us here already think they're stupid, and that's why we are Jealous Bitter Renters!

Speaking of Enron, I highly recommend the book "The Smartest Guys in the Room" by Elkind and Mclean. The Sherron Watkins book "Power Failure" is decent too, but not nearly as good as the Mclean/Elkind one.

And after reading both of those books, my verdict on Skilling and Lay is guilty, guilty, guilty!

I'll be following this trial very closely:

http://money.cnn.com/2006/01/31/news/newsmakers/enron_trial/index.htm

I find it fascinating, I guess just because of how insane these people became when blinded by greed and power.

Somebody better bust out the can of "troll be gone" on HITMAN as soon as possible, or I'm going to be posting profanity-laced tirades again very soon...

Sorry, the Great Purge army is powerless here.

Goddammit I'm gonna freak out. It's plain as day that we're past the peak of an asset bubble in real estate, yet HITMAN the Pollyanna creampuff wants us all to be "optimisic." Somebody's got their "eyes wide shut."

What happened in a Real Estate Collapse....

December 1996: The IMF praises the Thai Government’s ‘consistent record for sound macro-economic management policies’.

July-1997: Thai property companies get into difficulties after a real-estate bubble bursts, wiping a third of the value off the stock market and leading to the collapse of the banks which backed them. Foreign investors lose confidence and start pulling out. The Thai currency’s peg to the dollar wobbles. Currency speculators move in for a killing. The Thai baht is floated and the currencies of the Philippines, Malaysia, Indonesia and South Korea also suffer. A wave of devaluations follow, triggering a massive haemorrhage of funds as panicky foreign investors sell up their stocks and bonds. The economies of Thailand, Indonesia, South Korea and the Philippines go into free fall.

December 1997: By now millions are without work and decades of social and economic progress have been thrown into reverse. Of 282 firms on the Indonesian stock market only 22 are technically solvent.

In other words, since real estate is a massive financial purchase, is there a general psychological difference between homeowners and renters? Could it be as simple as optimists and pessimists?

HITMAN

Not that interesting at all, since this subject is thoroughly explainable in terms of real-options pricing theory. As volatility rises (uncertainty about the future), the value of renting increases. Volatility is not merely psychological (although psychology is an input, and is greatly affected by the media and herd mentality), but it is measurable in an objective, quantifiable manner.

RE price volatility has been rising very sharply, especially within regional bubbles.

Morning everyone. I was just thinking about people’s mindsets. If some people are always tring to get rich quick without working (flipping, speculating, condo pre-build options, etc.), why do other people still bother to go to work? Isn't this the psychology that has kept asset bubble cycles repeating over and over again throughout recorded history?

In other words, since real estate is now a massive financial bubble, is there a general psychological difference between speculators and everyone else? Could it be as simple as greedy sociopaths vs. sane people?

I think this would be an interesting debate.

HARM

HITMAN:

For most of us Joe Schmoes that aren't real estate investors, you are asking for a debate that is unwarranted and unnecessary. The plain and simple fact is that real estate is unaffordable to most of us - so unaffordable in fact that the numbers no longer add up - sure I'll double my housing payment just to get a deduction and just to say I'm an owner! Affordability has hit a wall and almost nobody, not even the CA Assoc. of Realtors who cheeerfully publishes these statistics every month - denies it any longer. So yes I agree there's definitely some psychology going on, but it's really a no brainer - the tide is finally turning.

In my usual effort to be objective and fair, there is a new economic study by Chris Mayer (Paul Milstein Prof. of Real Estate at Columbia) and Todd Sinai (Associate Prof. of RE at Wharton), which asserts that there is no RE asset bubble.

Their data, methods and economic theory is sound if their contextual assumptions are correct. The basic argument is that, while nominal and real prices of RE have increased at the fastest pace in over a century, the net monthly ownership burden has actually decreased (this was HITMAN's argument, vaguely).

Aggregate net ownership costs are below 20%, even in red-hot markets. They have fallen from net ownership costs of nearly 47% in these markets during the early 80s.

They ommitted condominiums and second homes; they measured only single-family, primary residence dwellings. They also did not consider credit overhang or financing stability issues (the NAAVLP financing problem). They therefore assume that existing credit vehicles will be available over the longer-term.

These assumptions are not entirely ridiculous, even if they are intuitively wrong. As a theoretical model, their work is pretty sound. My objectiion is that it, like many studies of this type, ignores tipping-point thresholds. What we discuss here often is related to watershed tipping points, like a wholesale change in residential RE sentiment, or a vicious circle of credit failures. Any of these will break their model.

But, to be fair, short of a threshold event, they are probably correct in determining that there will be no crash. I just happen to believe that we are closer to the threshold than they do.

@Randy H,

Pronoun issue fixed. Btw, do you have the link for this study? I'm fascinated to hear this amazing new study that shows net monthly ownership costs are actually falling in the land of 10:1 income-price ratios and rampant NAAVLP use.

Randy:

Who sponsored that study?

I only have access via my Columbia Business School login. I'll look to see if it get's published to the web...I'm sure it will soon enough. The NAR will pimp it if no one else catches on.

They ommitted condominiums and second homes

You just lost LV, CA, south FL, MA and tons of other regions where speculators constitited between 30-50% of total buyers in recent years.

They also did not consider credit overhang or financing stability issues (the NAAVLP financing problem). They therefore assume that existing credit vehicles will be available over the longer-term.

If I assume that trees grow to the sky, then well, yes, there's no problem with 300% price growth over a 5 year period.

How can this be true? The affordability index puts housing out of reach to all but a minimum.

It's not clear if there was a direct-sponsor. I am inferring that the Federal Reserve Bank of NY had some sponsorship (Charles Himmelberg). I did just see that this study is to be published in the Journal of Economic Perspectives this fall, and it is a study covering 1980-2004 in 46 housing markets.

The work is being peer-reviewed (or has been already).

How can this be true? The affordability index puts housing out of reach to all but a minimum.

Like I said, it is counter intuitive. But it's an economic model, not a financial model. Cost of housing, in economic terms is measured by variables not included in a straightforward financial analysis of the same. Think of rent-to-ownership ratios with a utility function.

No surprises here on Alan's last day:

http://biz.yahoo.com/ap/060131/fed_interest_rates.html?.v=12

While the Fed raises rates, the sheeple fall more and more behind...

WASHINGTON — U.S. employment costs rose 0.8 percent in the fourth quarter, just below market forecasts, as wage growth picked up and the increase in benefit costs slowed, but inflation once again outpaced the increase in worker paychecks, a government report showed on Tuesday.

"Their data, methods and economic theory is sound if their contextual assumptions are correct."

This is the Achilles heel of the entire study.

IF we ignore second/multiple investor-purchased homes and the booming condo-flip market...
IF we ignore systemic credit risk...
IF we assume that NAAVLP serial refinancing can continue indefintely...
IF we average in midwestern and southern states with Bubbly regions and only use the neg-am figures when calculating "monthly ownership burden"

...then there's no RE asset bubble.

So what they're really saying is, if any of these assumptions is wrong, then yes, there IS an asset bubble. Am I missing something here?

NAAVLPs are even a bigger problem now that they aren't nearly attractive now versus 2 years ago - may as well get a 30 year fixed - er .... um .... damn, still can't afford that one either! ;-)

"And folks, the Fed raised rates today, and the long bond yield remains unchanged." --HITMAN

That's because todays rate hike was priced into the bond market 6 months ago you fucking moron. Do you really think that any bond investor with half a brain was taken by suprise by todays rate hike, especially given that the fucking FED has been telling the market that they are going to keep raising rates over the past year and a fucking half?

“And folks, the Fed raised rates today, and the long bond yield remains unchanged.” –HITMAN

By the way Shit For Brains, why do you think the 10-year rate closed up about 10 basis points YESTERDAY?!

HITMAN,

Thanks for the indirect props! ;-)

As to your question about pessimism being the cause for the dreaded scourge known as "renting", I'm no sociologist. I'd definitely say that there's evidence for a positive correlation between being lower income and renting (duh). Now, if being low income makes people feel generally less optimistic vs. high income people (plausible), then it's possible that renters are in general less optimistic overall than homeowners.

However, even if this chain of assumptions is broadly true, you are attempting to create a false causality/tautology here:
Pessimism causes renting

Rather, it should be:
Low income causes pessimism. Low income people tend to be renters, so renters tend to be more pessimistic than owners.

Not saying I agree with this logic, but this at least makes more sense.

Regardless of whether or not renters tend to be poorer or more pessimistic as a group, I and most other non-owners here (there are also plenty of owners on this blog) have long maintained that we intend to be owners one day, when home prices are in line with economic fundamentals once again. We're not anti-homeownership (straw-man argument), we're just anti-lighting a match to our hard-earned money.

"Exactly. I’m glad you are in agreement with me that the argument about ‘rising rates’ is going to doom the housing market is totally unfounded, simply because rates aren’t rising."

Too bad however most buyers have NOT been getting 15 and 30 year fixed .... quite the opposite actually in California.

Too bad however most buyers have NOT been getting 15 and 30 year fixed …. quite the opposite actually in California.

Yes, the Fed funds rate hikes affect those with ARMS directly, and such loans constitute a clear majority in CA (and other "frothy" regions") in the last few years.

Even so, I don't think rate hikes will be the trigger here. I believe stalling/negative appreciation will. Once flippers realize they cannot make 20-30% simply by holding the property a few months, while they burn through available cash (remember that term: "burn rate"?), they will rush for the exits en masse. I believe this is what we are starting to see play out right now, as inventory is piling up along both coasts.

The yield on the 10-year bond was 4.39% last week, and closed at 4.52% yesterday:

http://finance.yahoo.com/bonds/composite_bond_rates

That's 13 basis points in a week. If I am wrong as to the exact day of the move, oh well.

"Remember, most talented individuals who work at the top banks and money management firms finish by 25." --HITMAN

I bet that makes you feel like shit when you look back on your life old man. What kind of 45 year-old fucknut comes trolling to discussion boards anyway?

"Remember, most talented individuals who work at the top banks and money management firms finish by 25." --HITMAN

I love it. Pathetic old man wants me to fail. Keep it coming, more fuel for the fire. Oh, I must be such FAILURE because I decided to start the CFA program now that I'm 26. Keep it coming old man.

“Remember, most talented individuals who work at the top banks and money management firms finish by 25.” –HITMAN

Keep it coming you motherfucker. I studied for 2 hours last night and I will study for 3 tonight after getting this motivation from you. Keep it coming.

@SFR,

Please remember that by allowing personal barbs to offend you and reacting, you are only encouraging more of the same.

Calm... focus on peaceful relaxing thoughts...

“Their data, methods and economic theory is sound if their contextual assumptions are correct.”

Let's assume that real estate prices always go up, I hereby conclude that real estate prices always go up.

"Calm… focus on peaceful relaxing thoughts… " --HARM

Deeeeep breath. "Cool blue ocean. Cool blue ocean..."

I shall now leave the blog and relax. Someone PLEASE delete the troll before I get back.

Hitman sounds an awful lot like our other sushi loving troll.

Me?

HITMAN, is it PRIME?

From Wikipedia:

INTERNET TROLL

"In Internet terminology, a troll is a person who posts rude or offensive messages on the Internet, such as on online discussion forums, to disrupt discussion or to upset its participants. "Troll" can also mean the message itself or be a verb meaning to post such messages. "Trolling" is also commonly used to describe the activity."

Oh, I must be such FAILURE because I decided to start the CFA program now that I’m 26. Keep it coming old man.

Assuming you even want to be an IBanker, SF Renter, don't be discouraged by HITMAN: he's full of shit. The average age of IBankers completing Associate level is closer to 29-30. Most top folks in this field take 2 years out to complete their Ivy MBA right around 26. More importantly, if you do the right internship and get the right creds, you can engage at any point up to your mid-late 30s (but I'm not sure why you'd want to). Many from my cohort were non-traditional students who went into IB well into their 30s. Just be sure it's something you want. IB types can be hard to swallow.

Getting into PE is quite a bit harder, but that's more of a cyclical thing. Getting your CFA is a good bet no matter what. The CFA and CPA were rated by the FT last year as being the two most important creds in finance, greater than all but the very top MBAs. With the CFA you can move into a wide variety of operational finance roles in corporations. And these jobs pay quite well and are in heavy demand.

Regarding the Columbia/Wharton RE Econ Study:

I tend to agree with the reactions you guys have had. I would point out that removing speculators and condos is not necessarily damning. They are contending that the speculative & condo markets are different markets (as is the vacation home market). This is what I meant about contextual assumptions. It is quite possible that these segments do not move in perfect correlation, being that primary residential RE is much more sticky.

That said, I still agree that the credit overhang is the problem pushing the whole model towards threshold disruption. I just wanted to point out that there is a scenario which is logically consistent that yields a "soft landing".

Is posting anything that disagrees with housing crash fanatisicm deemed “offensive” or disruptive or upsetting to participants on this site?

Barnum, given the way you've phrased the question, I think it's safe to assume you already know the correct answer: no.

Yes, SFR went "off" on HITMAN, which is why he received a calm advisory. I'm well aware that HITMAN didn't use any profanity and managed to engage in a relatively polite give-and-take discussion (notice that his remarks weren't censored?).

We're not RE-hating fanatics here, and despite the odd rant or outburst here and there (aren't we all entitled to vent now and then?), we welcome a diversity of viewpoints. There are plenty of "reasonable bulls" who post here regularly: Zephyr, Jack, Face Reality, Mr. Right, etc.