patrick.net

DinOR - No problem, I will update when I know more.

"What’s really funny is all the recent articles about people that bought in say 2000/1 that re-fi’d themselves right out of house" - Um, I think my friend falls into this category. She may have even bought before 2000. Imagine buying in the Bay Area pre-2000 and only walking away with $50k profit (if that). Wow.

Can someone here please explain to me how the average Joe's biggest asset can outpace inflation in the long run? Trendy non-essential assets, like tulips perhas, but housing units??? Is it that lending practices and expected lifetimes are inflationary as well?

lunarpark,

Thanks, it will be interesting to see how that plays out. Funny thing is if she's having a tough time getting re-fi'd it's safe to assume many of her potential buyers are encountering the same headwind.

The over extension of credit will result in ruining the realtwhore's pool of marginal buyers for years to come. If it doesn't seem to forward ask her what she thinks her "burn rate" is? I mean, how long can she stay afloat status quo and what are the avg. DOM?

Imagine buying in the Bay Area pre-2000 and only walking away with $50k profit (if that). Wow.

On the other hand, your friend, like millions of other FBs got to "enjoy" a "lifestyle" that they otherwise would never have been able to afford. It's the Amerikan way, after all.

Can someone here please explain to me how the average Joe’s biggest asset can outpace inflation in the long run? Trendy non-essential assets, like tulips perhas, but housing units??? Is it that lending practices and expected lifetimes are inflationary as well?

Credit is contracting right now. This is deflationary and doesn’t bode too well for housing. TOS is living in a fantasy world where everything only goes up; Inflation, Housing, etc. Here is a great article on this.

"On the other hand, your friend, like millions of other FBs got to “enjoy” a “lifestyle” "

While I would agree this description does describe a lot of FBs, my friend is a little different. She took money out to help cover her father's care when he developed Alzheimer's and I think she paid for her grown daughter's drug rehab (twice). She's also paying for college for her son. Of course, I think she is the minority of the FB camp. She even drives a used car!

While I would agree this description does describe a lot of FBs, my friend is a little different. She took money out to help cover her father’s care when he developed Alzheimer’s and I think she paid for her grown daughter’s drug rehab (twice). She’s also paying for college for her son. Of course, I think she is the minority of the FB camp. She even drives a used car!

A very generous FB indeed. Nice to see people being generous with money that isn't theirs to begin with.

lunarpark,

I'm sorry to hear that on BOTH counts. However big hearted her intentions sadly the bottom line is that she *did treat her primary residence as the "Bank of Me" and the equity IS gone. At this point whether it was adjudicated toward family care OR frivolity isn't helping her cause.

The difference is, this is a caring person and one of the few instances where you can get behind their hopefully finding a GF.

Can someone here please explain to me how the average Joe’s biggest asset can outpace inflation in the long run? Trendy non-essential assets, like tulips perhas, but housing units??? Is it that lending practices and expected lifetimes are inflationary as well?

Brent,

Good question. Maybe some of the financial experts here have a better answer, but I think there are a few issues here. First, there's a real factor of comparing apples to oranges. The average US house size in the 1950's was 983sf; In 2004 it was 2349sf. This accounts for a portion of the price increase. Second, there's the effect of people over many years putting capital into real estate, both their primary residences and their investment/vacation properties. Sure, a lot of that money is for maintenance costs, but the home improvement upgrades have to show up somewhere as a ROI. How many 1970's homes had lux bathrooms, granite countertops, and all that crap?

However, if you look at data that tracks resale of the same house historically, like the S+P Case-Shiller index, prices of the same houses resold do NOT increase substantially over time, when you account for inflation, house size and quality. This is for trends in the US since 1890, Amsterdam since the 1600's and Norway since the early 1800's.

Here's one take on this data:
http://economistsview.typepad.com/economistsview/2006/03/shiller_longter.html

But I will say that these trends in deviation from the mean appear to occur over decades and decades, so is it possible that over the course of our meaningful lifetimes, we will not yet see the reversion to the mean for this particular cycle?

lunarpark,

I agree w/ DinOR, I'm sorry to hear that your friend has had all these issues. However, in the end she's basically hoping a GF will foot the bill for the rehab, health care, college tuition.

Incidentally, in turn that GF's salary is probably paid for by a startup, which in turn is funded by a VC, which gets their money from hedge funds (or private equity). The hedge fund gets a big chunk of their money from institutional investors, who represent ... YOU AND ME! So in some small, small way, we're paying for this! Thank you, Amerika!

DinOR - I really hope she does find a GF and at least break even. I have sympathy, but at the same time two of us have been telling her to sell for over 18 months now. Also, I would have been more tough love with the kid in rehab twice, but I'm not a parent so maybe I shouldn't speak on this. Really, with her family life she has bigger problems so in my emotional accounting I do cut her slack. She's actually a very nice person who just happens to be not so good with money.

Also, I think her situation shows how borrowed money has not only held up spending on consumer goods, but other areas of the economy - the healthcare expenses alone, my goodness.

skibum - LOL, she did work for a start-up at one time.

skibum,

Well said. tOs also swept the outrageous int. rates of the late 70's and early 80's under the carpet and elected to go w/ 8.25% to further contort the economic backdrop at the time. Try 18.25% ?

Someone wrote:

> The inflation calculator I just tried said:
> What cost $20,000 in 1977 would cost $68,425.49 in 2006.

Then eburbed Says:

> $68k… that would just barely be 10% these days.

The crappy little homes on the Peninsula that were selling for ~$20K in 1977 (when I was a freshman in HS) are close to $1mm today (and the nicer ~$30K on ’77 homes west of El Camino are all way over $1mm)…

skibum,

Agreed, it just amazes me that whenever we as Americans encounter difficulties our 1st reaction is to rob our own house! What would have become of her family had their *not been a House ATM (TM) conveniently located in the living room?

In ways this scenario cuts to the core of the issue (for me anyway). It's as if these are "built-in costs" when one goes into the housing market these days. If it's not written into the seller's price, it's certainly implied! I just want your home (you can keep the luggage). :(

Brent Says:

> Can someone here please explain to me how the
> average Joe’s biggest asset can outpace inflation
> in the long run?

Most of the homes in California are not that old (and most of the old homes like the one I grew up were very high quality).

In the next 20 to 50 years many “homedebtors” are going to be hit with huge CapX bills that should slow home price appreciation.

P.S. The cost to remove every tile on my parents roof, fix the leaks and replace the original tiles (held to the roof by a single copper wire attached to a copper nail) was more than they paid for their first home…

TOS,

First, your back-of-the-napkin calculations are moot. Buying today at the peak of a cycle is nothing like buying in 1977 (pre-early 80s boom). Second, aside from the (flawed) message, delivering it with your smarminess ("at least read and think", or "do you get it now...") isn't winning many people over to "the other side."

No wonder you couldn't cut it in the investment world, and you probably aren't cutting it as a Realtor (TM). You appear to have a low EQ (acknowledges Peter P).

A house is a hedge against monetary inflation. Since homes are essential commodities and they tend to be credit dependent, credit expansion tends to inflate home prices as well.

skibum,

I hadn't considered home size increases; good point. To some extent industrialization has to offset that some though, as anyone who has used an air nailer over a hammer will attest.

Thanks for the link and your commentary.

A house is a hedge against monetary inflation. Since homes are essential commodities and they tend to be credit dependent, credit expansion tends to inflate home prices as well.

Exactly, just like contraction of credit (which is happening right now) has the opposite effect.

Some people believe that house prices will contract while consumer prices will increase; I disagree, my theory is that all of those consumer goods that the FB's have "purchased" with their house ATM's are going to find themselves on ebay in the next couple of years, further reducing the demand for newer products. I do think we will see very big increases in food prices though along with stagflation.

"Cramer
Most of you are negative about the housing market. I’ve read some of your posts and I’ve to say yall are making some good points. But when do you see housing prices turn really sour? I’m just curious."

I believe most of us tend to agree on a sequence of events for the unraveling of the housing market but there are a few variables subject to individual opinions. This is because not all areas are identical, and different peoples' experiences lead to different theories. Since I don't like ambiguity at the same time not wanting to be a sooth sayer I guess I can offer this: Differentiate between the commodity housing, and the super rich housing. The commodity housing for most areas will revert to the fundamental valuation. (rent somewhat comprable or normalized land and construction) In San Diego for instance that could be as much as a 50% drop. In other areas, it might only drop 10%. An insignificant number of areas might even continue to grow at a normal rate, these areas would be ones missed by the bubble effect.

What we don't know is whether it will be a steep and sudden crash, or whether it will be a decade long correction. The souring though is clearly well under way. Keep in mind that things are worse than the numbers show because the sales price numbers are lagging indicators, and don't reflect the masses of overpriced houses which simply aren't selling, and many will end in foreclosure.

A house is a hedge against monetary inflation. Since homes are essential commodities and they tend to be credit dependent, credit expansion tends to inflate home prices as well.

Peter P,
Unless I'm misreading Brent's original question, he wasn't necessarily asking about the credit-dependent aspects of housing prices, which I would imagine affect shorter-term (over a few years) housing prices. The constantly referenced "fact" that house prices beat inflation, albeit by a smallish amount in the long term, is the issue that needs explaining. It's the long march forward in prices, not the small ebbs and flow from year to year I'm talking about.

The constantly referenced “fact” that house prices beat inflation, albeit by a smallish amount in the long term, is the issue that needs explaining.

Inflation is hedonized to a small number. I guess it is not very difficult to beat.

Even some money market funds beat inflation "constantly."

This is why our bleeding heart, wanna do good, victim mentality nation is going down the tubes:

Activists want foreclosure moratorium
Housing activists say families that have mortgages with questionable terms should be given six months to work out deals.

http://money.cnn.com/2007/04/04/news/economy/foreclosures/index.htm?postversion=2007040413

These a$$holes want to "save" these idiot FBs who got themselves into this mess? Screw them.

The house itself depreciates. It is the land that appreciates enough to beat inflation.

The replacement cost of the structure also tracks inflation.

It is the land that appreciates enough to beat inflation.

I guess they really AREN'T making any land anymore, then!

"What we don’t know is whether it will be a steep and sudden crash, or whether it will be a decade long correction. "

The keepers and publishers of that data (NAR) have a huge vested interest and will spin the numbers in all sorts of ways. I dare say
they may even distort the results (like Enron hidding/covering up the losses). Fact is there is no laws or regulations that bind them into any ethical practice like the SEC or other oversight goverment body. They are anwserable to no one. And no third party reviews their public press releases. Since they believe the bubble is no more than 'media hype' they most likely see them self as Guardians. ( Sort of like Nixon on his last days) and any distortion of the facts is all for the greater good. So the potential fraud is vast.

We could be in a deep decline today or in future period and never really know it.

“What we don’t know is whether it will be a steep and sudden crash, or whether it will be a decade long correction. ”

I think between the number of houses going into foreclosure and the imaginary zillow values (that many people are heavilly fixated on) dropping (due to the relling of those properties), sprinkle in some tighter lending standards and I see prices dropping hard, unlike anyone has ever seen at any other time in history.

Just my prediction.

-relling
+reselling

"It is the land that appreciates enough to beat inflation"

You are repeating at statement many would say is true.
But can you justify that reasoning behind that. I think the reason
is lost from our agrarian roots and may not hold true any longer.

In Silicon Valley we had commercial rents and some residental rents which sky rocketed due to a tech bubble. Since 2000 they declined from $3/sq ft to $1/ft and have stayed flat now for 4-5 years. Yes inflation gone forward year over year. But rents have been flat due to no or low demand.

Currently the market demand for vacant land (future R&D or Mfg.) is practically dead. There just is no need for it.

The flip side for non-vacant R&D office space is there is in many cases a provision to increase rents due to CPI, but lets face it thats more Admin charges covering salary increases for land lord staffs. All the CAM is all pass through which do decline as they declined form my company in 2006 and projected to decline in 2007 regardless of CPI. I worked with this stuff before.

Had we not had a "Computer Revolution" back in the 1980s in SV I doubt we would even be talking about this. We would still be sitting in a orchard field which is a low margin business and seen land prices been flat since 1950s. There would be no demand for land here ... there was no reason...

Currently the market demand for vacant land (future R&D or Mfg.) is practically dead. There just is no need for it.

A free market would have converted those land into residential use. But NIMBYism is a powerful force nowadays.

My comment is awaiting moderation :(

Had we not had a “Computer Revolution” back in the 1980s in SV I doubt we would even be talking about this.

We have to thank Bill Gates for that.

"We have to thank Bill Gates for that."

Oh Lord..... you do know who Gary Kindall was? Actually gary had
a bigger impact in Computers than Gates did.
You do realize Gates was a small player in the early days...
There were others...

But even so, Gates was never in SV. He did but a lot of SV companies
out of business.

But even so, Gates was never in SV. He did but a lot of SV companies
out of business.

See, creative destruction. :)

Bill Gates is just one of my heroes. But Windows really changed the world.

"A free market would have converted those land into residential use"

Actually the free market did ... destroyed all the farms and coverted to
business parks and residentials. We are already seeing that in SF with the new towers near the ball park... I see they are also expanding and building more.

Actually the free market did … destroyed all the farms and coverted to
business parks and residentials.

But residents moved in and voted free market out of business.

allah,

Although we've kidded about picking up everything from Harley's to jet skis on ebay I don't believe this will lessen the demand for "new goods" much at all. These are "tainted goods". Bought with "free money" and neglected almost as much as the shoddy homes that originally "facilitated" their purchase.

Patrick's link about "How to Lose 260K in RE" linked today explains the situation more effectively than I could ever describe.

SF is a self-proclaimed liberal city. Can someone tell me why it is so adverse to changes (e.g. redevelopment, demolition, etc)? I thought liberals are supposed to be open-minded. :)

"Bill Gates is just one of my heroes. But Windows really changed the world. "

BAHAHAHAHAH!
Before Winblow$ we had Mac OS and Geoworks... Far far better!
You have alot to learn about tech my boy! Actually it was Gary Kindall
that changed everything with CPM my boy. Gates was still growing pimples and selling Basic and Fortram and had no idea on creating and OS
which they had eventually buy (clone of CPM).