patrick.net

- be on a couple
+bet on a couple

Any astrologer in the audience?

Seriously.

I hope you're all kidding about the numerology stuff. The bushisantichrist parody site was amusing, but really, people...

@Peter P,

Ok, you got me on the million dollar Malibu trailer on rented land. Even so, I'd say that's a weird exception. Plus, the morons who paid a cool mil were no doubt paying for the location, not the 1970's double-wide itself. I see a lot of new mobile homes being built out in SBO-Riverside, and they're going brand-new for not much more they were 5 years ago.

There's not much of a bubble in construction/raw materials.

hmmm, what about 6/6/1906, 6/6/1806, 6/6/1706, 6/6/1606, 6/6/1506...

and that the Julian/Gregorian calendar wasn't in use at the time Revelations was written... although you never know with prophecy, do you?

weren't they talking about the Roman Caesar of the time, persecuting Christians? Can't imagine why he'd want to do that, heh....

Then the morning and the hangover comes. And the bearded lady in your bed shocks the hell out of you. She is having your baby.

Fear.

Lawdy. Carnivalé.

Looks like every housing article posted on this site is finally negative.

As the laws of financial physics begin to kick in, and fiscal centrifugal force shakes the market, the weak hands are being shaken out while the greed and hysteria are mercifully coming to and end.

Thank god.

Looks like it's almost time to bust out the Dom.

Where will all the quick-buck-artist, wilted flower children of the great housing mania of 2000+ go? Precious metals?

Who cares...

Michael Holliday,

I began informally tracking the "article sentiment index" almost as soon as I discovered this website about 18 months ago. There was actual frustration on my part b/c so much of the mainstream media coverage would start by acknowledging the possibility of a bubble (and perhaps a serious one) only to conclude that things are still "rockin and rollin" then basically dismiss a crash as paranoia or wishful thinking on the part of JBR's. Although there was a marked change in DEC 05/JAN 06 it has only very recently gone almost completely bearish with virtually NO ONE calling for a continuation of outrageous "appreciation. Statements like, "15% for OC is already in the bag" are looking more like damage control and in the face of overwhelming evidence to the contrary there's always a Bull somewhere pointing to a "last hurrah" bidding war and thrusting it in your face as proof positive.

Harm,

How much money has been made off of the "anti-christ"? From death metal albums to movies and games etc. Whoever this guy/thing is should be getting SOME royalties! Perhaps this is why he/it is so ticked off.

Btw, I believe it's a LAND bubble. Lots in our "up scale' neighborhood top 80K. Then there's about 20K in SDC's (up from 16K last summer). So even here in Oregon you're upside down before you even start pouring the foundation. My wife and I bought our first home in the late 80's for around 69K. That was on a 10,000 sq. ft. lot which was the standard here for years. The "up scale" lots are about 7,000 sq. ft. Dimensional lumber prices did go up during the bubble and certainly post Katrina but not nearly enough to justify 2004/2005 asking prices. The trade pub. that posts lumber prices is called Random Lengths if you're curious.

Good post DinOR.

I think a segment of our working population are addicted to bubbles now.

I think the psychology of the Nasdaq bubble simply moved into housing and found its pathological expression there.

Do you think gold & other precious metals will be the new thing?

You can alread hear the hype about "all the gold ever mined could fit into..." and "the price to mine silver is..." etc.

You gonna bust out some Dom soon?

Maybe a Dos Equis is all I can afford but if the pickens get good, maybe I'll ditch Phoenix for my home town of San Jo.

We shall see!

I'll be honest... Every day that I have to listen to depressed, miserable, overworked people bitch, complain, and moan about their life of whoas, mostly concerning the high cost of living, the high cost of housing, and the loopholes they have to jump through to just live in California, the more I realize that my ultimate decision to go back to my home state of TN and move out of CA was a wise one. I'm so tired of all the silly little under the breath statements about "the bible belt" and those conservatives- whoever they might be- and this and that, and how GREAT the weather is here despite the fact that for 3 years solid, it's rained all damned winter long, and how much culture there is, and how it's all worth it.I fail to see compelling evidence that the intelligence, natural beauty, or diversity is that diffrent here from anywhere else. We ALL have our own perceptions of what a truly diverse area is, and if you make a statement that "there's too many bible bashers there", then you yourself have failed to comprehend the very word " diversity". You must learn to be truly tolerant and open to ALL forms of religion and opinion.. after all, isn't that what SF is supposed to be about?An open minded mindset? If you fit in the above classification, then perhaps you would be better off to simply claim that the local character of certain california regions fits your limited perceptions better than other places. That would be by far more accurate.
What really pisses me off more than anything is hearing people say" golly- lookit' what 300k will getcha' in Palooka Alabama! I could buy 10 of em in a row! Listen. 150k.. 200k... 300k is SERIOUS money in these areas. You go in there sashaying your way around- the big Californian or New Yorker, shell-shocked from years of unrealistic housing prices, and lo and behold- a 200k house with a yard! So it sounds cheap cheap cheap! Forget the local character... maybe you can ignore the so-called ignorant ways that you project on the locals. Perhaps a little coffee shop there.. a little coffee shop here, and maybe.. just maybe it'll look like San Francisco! This sort of crap is what I see every single time I visit Nashville. There's a whole slew of neighborhoods absolutly full of Californians. They live in the most pricey part of town. They are moving there by the thousands.. and they are making the real estate prices go up up up, not because there's a limited supply, but because Californians will pay anything, without haggling on a house that they percieve as "Cheap" by their CA real estate scales, but expensive by TN standards. All I am trying to say here is that I feel that CA, NY, MA, etc muddied there own water. If they want a solution, then the answer isn't to go and start round 2 in another state. I think the change for TN, NC, TX, and VA is GREAT. I see a very bright, diverse, sophisticated, and healthy region coming of age where the other traditional regions are going to have a serious decline over the next several decades.. in essence, CA and NY are the next Detroit, with an industry based in the comfort and retirement of old farts, while the brain power will be long gone. But for those that are simply moving there because it is cheap, and hoping to simply ignore the local traditions and customs, then please stay in your little hovels in SF and LA.
Seriously, I'm just about fed up with all of it. Sorry for the rant. I've had a lot of thinking going on this weekend.

George,

Your "bar metaphor" is nearly perfect except you left out the folks that "know their limits" drink responsibly and left before the only people on the road are cops and drunks. The ones that "cut themselves off" to post their observations on the housing crash blog?

Michael Holliday,

Peter P and others that track precious metals would be a much better resource than myself. I have a lot of things to track and I do not believe trading gold is a casual undertaking. You need the desire and commitment to become a "student" all over again. At my age (late 40's) I'm not sure I have the energy to be the new kid on the block. Additionally I don't really know any commodities guys personally so I don't have an "in" at all (no one that owes me favors anyway). Also, with 2 daughters in college I don't have the liquidity to become a professional traders "new best client" or his "go to guy".

I saw a commercial that perfectly summarized the premise of this topic. It was a REMAX TV commercial.An older couple with white hair in tropical clothing, in front of what I can only assume was a house in California. "We wanted to retire.. to Mexico", exclaimed the elderly gentleman. Thus the dialouge of the commericial continued, how to "make your retirement dreams a reality",in the form is selling what I can assume was their vastly inflated house for a bazillion dollars, then showing their immence house in Mexico with scenery of perfected coastal Mexican shoreline replete of any Mexicans or poor people. To me this sums up what so much of the housing bubble is now all about, which is convenient exploitation of not only of 3rd world countries, but many parts of the more affordable regions of the country.

Good post Nomad.

Good post DinOr.

Din:

I'm just asking an intuitional question: "do you FEEL that precious metals are the next bubbe?"

Not an analytical question. What's your hunch?

Thanks!

Your “bar metaphor” is nearly perfect except you left out the folks that “know their limits” drink responsibly and left before the only people on the road are cops and drunks. The ones that “cut themselves off” to post their observations on the housing crash blog?

Perfect metaphor with this addition. Although I'd like to think my wife and I are some market timing wizards, in fact we simply cut ourselves off after the 3rd stiff round of housing bubble cocktail and hailed a cab home.

This market is crazy. Fannie Mae may restate its accounting error to the magnitude of 11 Billion (boys and girls, this is a 57 billion dollar company), and yet its stock price barely came down a few cents. Any other company with this kind of scandal would have folded long time ago.

I am no conspiracy theorist, but I am starting to believe the PPT (plunge protection team) story, it seems every bit more plausible as days go by.

Randy H,

Here it is Monday morning and we're talking about cocktails. O.K, I'm a sport. How does one make a housing bubble cocktail?

Randy, I'm not trying to break my own arm off patting myself on the back either. The fact that our old house sold on the last day of 2003 (before the mania was a full blown circus) was more coincidence than anything. If you participate in the "sweet spot" of a movement you're fine. The older I get the more I'm convinced that investment success is based more on "what you don't own".

DinOR,

I believe that Randy sold at the top, spring of 05. He beat you to the game :-)

I am just shorting a bunch of housing related stocks, haven't really reaped a big profit yet, but hopeful, as long as PPT doesn't screw my day.

Michael Holliday,

I really wasn't trying to dance around the issue, it's just that I'm not qualified to render and opinion. I don't even try to be an expert in all aspects of trading. Now, given that, I have a sense that the mortgage "re-set issue" is going to be bigger and more impactful than the financial media is letting on. In fact I think it's so horrific most of us would just as soon not entertain it. One of the articles linked said that the sales pitch for the 2/28 sub-prime ARM was that after 2 years the homedebtor's FICO would improve and then they could re-fi. One lender they interviewed said point blank that just isn't happening. There isn't any equity and their DTI is worse than ever. Capital always seeks it's most efficient use. Dollars will likely continue to flow out of MBS (as it should) and into other asset classes. Will gold benefit? How can it not?

SFwoman,

one house down my block is trying to sell for 1.8M, and I looked it up on zillow, the owner paid for 550K in 2004. Speaking of bubble!! It is the same darn house, the owner didn't even throw in a granite countertop for god's sake.

Yeah, money starts to grow on roof...

OK, excuse me for my ignorance, can anyone tell me why I/O loans have to reset? Can't they pay I/O loans forever? Is it mandatory that the borrowers have to refinance? Why if they keep paying their interest?

Sorry for the question list since I never bothered to look at this option anyway. I always thought you could just pay I/O till eternity.

Owneroccupier,

Oh that's right, rub it in! No, I don't feel bad at all. I'm all about the "sweet spot" of the move. My oldest daughter graduated HS in 2003 and we knew we would have to help support her in school so there were personal issues as well. Not the least of which was that everyone loved the old house but what do you think your chances are of getting a teen-age daughter to spend her Saturday afternoon on a riding lawnmower? Everyone loved the Christmas lights but was no where to be found when it was time to put them up. I'm not AS bitter about it but it became a one man show and the girls were becoming young ladies with their own interests (sports, boys etc.) and painting gutters wasn't on their agenda.

Owneroccupier,

Good question! I suppose that the only reason I/O's and ARM's re-set is so they can re-sell the loans in the secondary market. It gives the appearance that the borrower has at least some design to ultimately repay the loan otherwise it's just like renting. Hey wait a minute, it is like renting.

1.8 mil in 06 from 550K in 04? What's the matter? Don't you like Amurika? A 227% return in under 2 years? Why would we grudge anyone that? Afterall, they did take the trash out and did some weeding!

Mr. curious,

speaking from experience, the last nail on the coffin has to be a stock market event, that is how the RE fate was sealed in Japan and Hong Kong. Otherwise, the sheep's attention won't be secured. Stock market loss is the biggest wake-up call.

What I predict will happen is the implosion of either of the GSEs, Freddie Mac or FNM, or some BIG REIT fund going under, sending the tremor to the whole sector. GSEs don't have to go under, but they have to be distressed enough that a government bailout is absolutely necessary to treat them as a going concern.

When that happens, the sheep sellers will slash price left and right, sending the price of homes spiraling down.

I recently looked up some new developments in the fringe of the valley, many new homes of almost exactly the same lot size, home size and location are selling at 100K-200K less than the 5-year old homes. While the homebuilders are aggressively unloading, the individual sellers obviously haven't gotten the memo yet.

Mr. Curious,

"we ain't there yet"

I agree, but we're close. There's a growing consensus in the media that this is awfully big to be swept under the carpet. The funny thing is that the pain started in places that seemed the least bubble prone. Defaults in Ohio? Appraisal scam in Kansas City? Appreciation was tame in these areas when compared to CA. What will happen re-fi's are no longer a viable answer there?

DinOR,

further questions.

What about those people who are on 30-year, 15-year ARM loans? These people are not categorized into the reset right? We've had the traditional ARM for years right? In fact, most of Europe and Oz, Canada are on ARM.

So the only resets required are those that don't pay down their principal? As long as you pay down your principal, you don't need to reset?

So I/O loans or negative am loans cannot be packaged off to the MBS market and passed on to the next sucker? Does it mean those who issue these exotic loans will have to be the bagholders?

Thanks.

Owneroccupier,

Good questions. I don't portray myself as an expert in the mortgage underwriting process but part of the appeal of buying ARM's in the secondary is that they DO re-set. This provides a hedge to the investor going forward. Many of these have Pre-payment penalties which also protect the lender and investor. My understanding is that that about 500 bil. will re-set this year. As I've said before, hauling GSE exec's out on the carpet will not help MBS shareholders (although it may make them FEEL better) it will not provide relief. All ARM's have provisions that allow the lender to change rates and ultimately payments as in "adjustable". There are new legitimate firms out there that actually help folks with debt/micro management issues like getting their credit cards paid down, then they wittle away at you auto loans and then focus on pre-paying your mortgage off in 8 to 12 years instead of 30 or God forbid 40. They are not that popular and I don't understand why. I guess when you can buy a home on "04" for 550K and sell it in "06" 1.8 mil who needs a financial advisor?

SF Woman,

Points well taken. Not long back Harm coined a phrase about GSE's that just about summed it up.

Privatize Profits
Socialize Risks

Says it all for me!

”finding the bearded woman in your bed and she is having your baby.”

OK, I'm going to need some more coffee this morning. I'm having flashbacks to that morning I woke up in Cleveland with no idea how I got there.

Owneroccupier,

Just a final thought. If we must buy MBS, then we should at least look at "seasoned" MBS. Most people that are in the 28th year of a 30 year mortgage are not going to default. It's always possible but normally their equity carries the day. It's really leverage on top of leverage with much of the MBS ETF's though b/c the new loans are done w/little or no down and then the use the portfolio to buy even more loans! Some as much as 35%. We're just not being adequately compensated here!

NIA

Mr Curious,

not necessarily that far out. What happened in the RE busts that I have seen is, the bubble reached new height precisely because of the participation of flippers/investors and excess credit. So typically at the top, half of the new buyers are flippers. Flippers are not married to anything except for the profit, so if the comps drop, they will be fighting for the exit.

The first 15% loss in Re value comes fairly rapidly due to the exit of these non-occupiers. Then we will be in a holding pattern for a couple of years while the job loss, as you pointed out, impact the crowd. However, the two examples that I watched up close and personal were Tokyo and HK, two cities with enormous savings and frankly, more average affluence than the deeply indebted Americans.

When Tokyo bubble popped, an average Japanese household (if my memory is correct) held a total savings of around 450K USD, the number of HK people with more than 125K in savings (excluding home) was something like 150K out of a population of 6.5M. How much savings other than homes do you think an average Bay Area household has? Therefore, it takes much less time for the crash to play out in the US, IMHO.

Mr. Curious,

"will hold out for much longer"

That "holding out" has been the subject of much debate here. Those w/equity will try to salvage it. Those w/out equity may try to salvage their dignity. I can say from experience that there are times when it can be a far better thing to admit defeat early and walk away. For those of us that are "internally motivated" we always assume that we are the problem. We're not working hard enough, we're not putting in enough overtime! We should quit whinning and get a third job etc. Sometimes when we "hold out" we only make matters worse b/c some situations (like a stock market crash) are much bigger than our own motivation.

Not Parental Advice

Also, there is a huge difference in expenditure structure, and I think this idea is worthy of further probe by economists.

In Tokyo and HK, most people rely on public transportation, which is a big saver, not only in total cost, but in cashflow. Gas, insurance, the car itself, more often than not account for a very big part of the household expenditure in the US, and you can hardly make any cut there! Not the case in Asia. The beauty of relying on public transportation is you pay as you go, you spend $5 each day, as opposed to spending $600 on car payments and insurance at the beginning of each month regardless of usage! So the cashflow situation of an American household is rather ugly when it comes to transportation costs.

Now, during the recession, what are the areas that you can cut back? I remembered seeing a BW article last Nov that American consumers started to put gasoline on credit card bills, because they don't have enough cashflow to buy gas! So how stretched we already are! And if you live on the west coast, the only way for you to get to work is by driving, while in Tokyo, the company pays for transportation!! Transportation renumeration is a part of standard package in Japanese salary structure. In HK, you have so many choices of public transportation so you really get to choose how much you want to spend.

Therefore, I totally disagree that there is much space for the Americans to "save up". Because we already have so much credit card debt, and we have a fixed expenditure structure, there is not really much room for cutting back. The fall will be rather swift.

A plausible set of reasoning, in my opinion, as to why most non-speculator owner occupiers will opt to hold out even well past the obvious point of no return:

http://gsbwww.uchicago.edu/fac/richard.thaler/research/MentalAccounting.pdf

Put simply, people are pre-programmed to think in non-optimizing terms. The best example is "found money". Most people, if they find $500 by surprise, will tag that money as "free", and tend to frivolously risk or spend it, instead of incorporating it into their overall "rational strategy".

The same applies to home equity. Very much a gambler's curse. I'm holding on until I at least break even, kind of thing.

Bazerman also has some good insights about larger scale group psychology (like institutional failures) in the first book listed here:

http://www.people.hbs.edu/mbazerman/

George,

completely agree. But what is more mystifying is, who are frigging idiots buying them??? Who? Which fund? Why? Why would any fund/investor in the sane mind be buying FNM/FRE at this point??? And why won't the investors be unloading like there's no tomorrow with these two bagholders??

Obviously someone with a very strong heart, perhaps as strong as Ben Bernanke himself?

SFWoman,

The Bible Belt runs deep in that area, and right through all of N Kentucky, S Ohio, S Indiana and S Illinois. When I was a kid public school teachers used to seperate the Catholics from the Good Christians in grade school classrooms; and I'm talking about the early 80s, not the early 50s. The local "liberal college" (which is a Quaker college, lol) where I went to HS in Souther Ohio published a survey a couple years ago that found that the KKK was more well respected within the County than such controversial entities as public school science teachers, "Wall Street Bankers", computer programmers (the study covered a period of Y2K scare), the UN, and J K Rowling.

Randy....
The state with the largest number of KKK chapters is California. Just thought you would find that intresting.And this is Circa 2006.. not the 50's.

George,

Not delisting fannie and freddie really ticked me off. Where's the motivation for all the firms that report in a timely manner? Absolutely right. Had it been anyone else the normal process would have taken place. But RE is special.

It is rather shocking that with a northern California focused blog no astrologer has popped up. Maybe they read the stars and not blogs for their real estate scoop?

Yes, a bit shocking.

I prophecize that real estate will tank in SF in the next two years. And I don’t mind. I’ll look less affluent on paper, but is my city house or country house going to provide less shelter or fun gardening if it is “worth” 40% less?

Very true. However, for many people, a house is the only "ticket" to what they see as wealth.

11.5 years ago I paid about 25% for my property of what it would sell for today. Bubble!

Although your conclusion is correct, the reasoning is not necessarily sufficient. There can be fundamentally sound scenarios in which housing prices increase rapidly. For example, a place who is experiencing high wage growth. However, in these scenarios, rent would also rise rapidly. This is not what we are seeing here.