patrick.net

If people bought a home and lived in the same home for 20 years or more the way they used to, then assuming the home would provide a large part of the retirement would be a lot more realistic.

My argument is that there is also large scale speculation in the market that is driving up prices and lately inventory as building has increased to meet demand. This doesn’t even factor in all the other reasons (NAAVLP’s and so on) that the housing market is shaky. I think Zephyr’s arguments are based on an “all things being equal” premise when comparing past market cycles to now. But I’m not sure that applies anymore.

Bingo. SactQt, I think you've hit the nail on the head here. While I haven't been around as long as MerrillClient (or Zephyr?), I did live through the last RE boom/bust cycle here. I see qualitative and quantitative differences between this bubble and the last.

I don't have all the stats (Posse ?), but I can bet that (even though some of these loan products existed back then) use of "exotic" mortgage products is higher today than at the peak of the last cycle -- MUCH higher. I would also bet that a higher % of buyers today have shaky credit, and are using less collateral (down-payment) AND buying more homes on 100% credit than in any previous cycle. My guess is also that this RE bubble has spread much wider and is closer to being a truly "national" in scale than the one in the late 80s.

After tech and RE, what do you think will be the next boom? Do think there will be something else?

hymie, these are good questions, and topics we've visited in previous posts --and very hard to answer.

If the RE bubble "deflates" gently/slowly (i.e., without bankrupting large % of recent buyers and plunging the economy into recession), then the possibility of it spawning a new "echo" bubble is a good possibility. I am becoming increasingly pessimistic about that scenario's likelihood, given how long and far this one has taken us. I've seen estiamtes that say up to 50% of jobs created since the tech bubble implosion have been directly or indirectly related to RE (looking for the link). That is not a good harbinger for the economy.

I’ve seen estiamtes that say up to 50% of jobs created since the tech bubble implosion have been directly or indirectly related to RE (looking for the link).

Found it:
tinyurl.com/dereu

Meanwhile, of the 243,000 private payroll jobs added in the state in the past two years, 122,000 can be directly tied to the housing market, according to UCLA Anderson. "In short, a sector of the economy that makes up 10 percent of total private sector jobs is accounting for 70 percent of the total job gains."

I really don't know were the speculative boom will be --alernative/nuclear energy? Precious metals (generally a good hedge during recessions)? Foreclosures/repossessions? Tulip bulbs...? Who knows.

I'm not very good at reading tea leaves or speculating, so I just try to diversify, invest long-term in mutual funds with good PE ratios and low expenses, and hope for the best. I'd avoid any fund that's heavy on RE (REITs, bonds funds with lots of MBSs, etc.). Other than that, I don't have any brilliant advice --not a professional investor/broker.

After tech and RE, what do you think will be the next boom?

Oil and energy. I can envision that high gas price will make people wonder about investments in the oil industry, epecially oil field trusts. All it take is new stocks/trusts/etf/funds in the sector. The bubble will form.

SactoQt,

There are some costs associated with moving, but I don't see that as impacting equity all that much. I don't think it matters if it's one house owned for 20 years or 3 houses owned for 6-7 years each as long as the equity is transferred from one house to the next.

Also, if people move that often, then ARMs make perfect sense. That's one of the reasons why I don't consider those loan statistics as being all that alarming. Even IO loans are no big deal if people regularly pay more than the minimum payment. The available statistics don't tell us anything about that.

Other statistics which aren't all that interesting in my opinion are the ones about low savings. The problem is the narrow definition of savings. Some people (and I'm one of them) don't believe in having money sitting in bank accounts or in the stock market. If your money is invested in other assets (such as real estate and stock in privately held businesses), it is not counted as "savings", but that doesn't mean that you're not prepared for retirement, etc.

Times change and financial behavior changes with the times. Unfortunately, the statistics which are collected don't change accordingly, so we get a distorted picture. Yes, a lot of people have ARMs and IO loans, but what does this mean without information about how often they move and how much they're paying each month? Yes, a lot of people don't have much savings, but how much do they have in total assets?

Face Reality, you still imply a hidden assumption that equity will be positive whenever people choose to sell/move.

We are going in cycles because

* You think that ARM/IO loans are fine because people move frequently and their equity will be positive through appreciation.

* We think that their equity may not be positive at all times because the housing market is cyclical and that ARM/IO loans will worsen this particular cycle.

I do not know what you are trying to say.

Bio-Tech in this country? I think the regulations are too tough. In China, it is much easier to get to the "human testing" phase. We simply do not have to political will to get aggressive about anything that has a remote connection to bio-ethics.

I rather bet on boring conventional health care.

I have to add that we may have better technology in this country but it is ultimately a human problem. The market just does not seem to favor taking risks (including political, ethical risks) in breakthrough technologies. This is very sad. Technology leaps only when we have world wars and technology becomes necessary to kill. Sad.

Face

My thinking is that people who move a lot, as is the case more and more, typically move up into a bigger, more expensive house. There will be equity transferred to the new house, but since prices are going higher and higher, whatever equity you have is buying less and less.

Say you buy a house at $250,000 and sell at $400,000 (I'm ignoring all transaction costs, taxes and so on) you have $150,000 equity- great!
You then buy a $600,000 home and have to finance $450,000. Few years later you sell at $800,000 and now you have $350,000 equity- fantastic! But then you buy a $100,000,000 home and have to finance $650,000.

See the trend. Most people today are not downsizing when they move. And the market is driven by the assumption that home values will continue to climb. Say your last move was into that $100,000,000 home and the market declines. The house is now worth $800,000. Your equity presumably would now stand at $150,000. This assumes you haven’t taken any HELOC’s for home improvements or any other reason. Your equity is back to where it was when you sold the first house and you now have a much bigger payment. If you bought the house using a NAAVLP your payment is likely to get much bigger. You could cash out and downsize. But is that $150,000 you have now going to finance your retirement?

And since I’ve used really simplistic math and left out all the costs of moving and transaction fees, it’s a good bet whatever equity you had is now wiped out. I don’t agree that keeping all one’s “investments” in RE is a good idea right now. The market is too volatile to make it a sure bet.

I did leave out that you could sell your $100,000,000 home at $800,000 and buy a smaller home at say $500,000 and that would leave you with a decent chunck of change. But I'm still not sure that you'd be left with enough to fund a retirement without savings elsewhere, which was kind of the point of the whole argument in the first place. :)

Aaaaaaaaaaaaand. I'm getting really long winded today. I painted a really simplistic portrait of a favorable housing market (overall) and I only showed a 20% in the market at the end. I showed pretty straight equity gains without factoring in low payments on principal, varying interest rates and run-up's in other kinds of debt. I think overall, most people are not realizing strong gains in equity when they trade-up in markets like this.

and I only showed a 20% drop in the market at the end.

Proofread........

SactoQt,

If prices 20 years from now are lower than they are now, then you're right. However, I find that to be unlikely to happen, especially in desirable areas. That's one of the nice things about real estate in good areas. You may or may not make a killing, but you almost definitely won't lose your shirt in the long run. Nothing is impossible of course, but fearing the unlikely worst-case scenario leads to paralysis and sub-optimal results in the vast majority of cases.

By the way, I don't know why you think climbing the equity ladder is bad. Again, you're assuming a large persistent price fall eventually which is actually extremely unlikely to impact you in the long run.

Face Reality, why 20 years? I thought you said that people move every few years. Also, many people have resorted to HELL in order to finance fine things in life. They have basically transferred equity wealth into consumption. Can they weather the storm?

...resorted to HEL...

sorry.

SactoQt,

Clearly, you have to be somewhat smart about how you climb the ladder and not make a large short-term bet risking it all at the end. I don't think people are all that foolish based on what I see around me in the Bay Area. I'm actually often quite impressed by how adaptable people are and how they find smart new ways to take care of themselves and their families as the economy changes.

Peter P,

Even if you move every few years, you keep transferring your equity. What matters is what happens in 20 years when you need to use the equity for retirement. In general, real estate is a young person's game. As Zephyr says, make time your ally. It's a pity to spend all those years paralyzed in fear unless you have some damn good alternative game plan.

Really, it is amazing how many self-proclaimed house-rich millionaires that I know are completely blinded by greed with no regard to risk aversion. People do come up with creative ways to destroy themselves though.

Face Reality, I have to apologize for ranting.

You are right, make time your friend. I do have plans and I will be more than happy to take risks when the rewards justify them.

SactoQt,

I'm really sorry to hear what happened to your dad. Just imagine what would have happened if your parents hadn't had the house!

I'm extremely frustrated with the health care situation in this country, and I don't understand why there isn't a lot more pressure from the people about this unbearable situation. The costs are totally out of control, the insurance situation is completely inadequate, and people can too easily lose everything they have (including their lives). Things just seem to be getting worse all the time on this front.

SactoQt, I hope that your Dad will feel better.

Face

I shudder to think what would have happened without the house. But I should mention that my parents were BIG spenders in their day. They would go on month long vacations every year spending at least $20,000 every year. (seems appropriate to mention that on this thread) I nagged them for years to save at least some of that money, but it fell on deaf ears. My Dad is a gambler by nature, and I'm sorry to say the gambles never pay off; he has lost more money in fly-by-night deals it's a wonder my parents are still afloat. Yes, the equity in their home saved them from bankruptcy. But had they saved my Dad could retire. As it stands now, I don't know what the future will bring.

The insurance situation isn't as unfair as you might think. My Dad's been a chain smoker for 30 years. Tough to get full insurance coverage on a guaranteed bad bet. I love my Dad, but his excesses can drive me nuts. He has heart disease and diabetes. But trying to get him to eat right, exercise and not sneak cigarettes is an uphill battle. My Dad is the quintessential boomer.

SactoQt, Your dad has caring children though, which are not really typical any more. It is quite difficult to get someone to change his/her habbits. I cannot even get myself to eat right and excercise enough.

Thanks for your kind words Peter and Face. Peter, you are right about getting someone to change their ways-- tough to do. Eating right and exercising-- even tougher. ;)

Eating right and exercising– even tougher.

One tip: Find something healthy that tastes great to replace unhealthy food.

What tastes better than sugar and salt?

Actually, I'm lucky. I didn't inherit a lot of my dad's health problems. My doctor tells me I'm extraordinarliy healthy. I'm fairly compulsive when it comes to exercise, but food-- like I said sugar and salt, Mmmmmmm.

extraordinarliy?? I'm making up words now.

For suger... try desserts made primarily with fruit or honey.

For salt... I don't know... perhaps just a touch of salt, lime, and olive oil on some grilled fish?

It is a good idea to reduce the use of salt and sugar slowly/gradually, or your dad may find food being too bland. Over time, it is possible to "condition" desire of more subtle tastes with less harmful substances.

Housing bubble and recipe blog. Cool.

Clearly, you have to be somewhat smart about how you climb the ladder and not make a large short-term bet risking it all at the end. I don’t think people are all that foolish based on what I see around me in the Bay Area. I’m actually often quite impressed by how adaptable people are and how they find smart new ways to take care of themselves and their families as the economy changes.

Face, if you don't see the inherent danger in the kinds of risks people are taking all around you, then I'd say either you move in a very ecclectic circle of friends, or you're not seeing the whole picture. While you personally may not be taking excessive risk/debt, and you personally may be a very experience savvy RE investor, most of the people out there right now are not like that. When prices plateau or decline, a lot of these "adaptable" recent buyers are bound to find themselves underwater on a lot of debt.

Have you bought recently? If so, do you find RE a good investment in terms of cash flow right now?

The insurance situation isn’t as unfair as you might think. My Dad’s been a chain smoker for 30 years. Tough to get full insurance coverage on a guaranteed bad bet. I love my Dad, but his excesses can drive me nuts. He has heart disease and diabetes. But trying to get him to eat right, exercise and not sneak cigarettes is an uphill battle. My Dad is the quintessential boomer.

You know, the declining overall health situation in the U.S. is bad, and only seems to be getting worse year after year. 2/3rds of the adult population is overweight or clinically obese. Obesity naturally leads to high rates of Type-II diabetes. If we're going to expect people to work well past 65, we also need them to be healthy enough to do so. Unless the situation changes radically for the better, I don't see how we're going to get there.

10TY Note has been on a downtrend since earlier this month and yield is climbing steadily. Although it is not rising long term interest rate is not necessary to burst the bubble, it would definitely help turning crowd psychology around. I am seeing a perfect storm. Do not fish too far away from the shore.

Actually, I’m lucky. I didn’t inherit a lot of my dad’s health problems. My doctor tells me I’m extraordinarliy healthy.

SactoQt, it sounds to me like you didn't "inherit" your dad's poor health because you've made better choices --as in not chain-smoking and overeating. No one knows exactly how much of our overall health is due to choices vs. genetics, but it's safe to say at least 50%. And that's the 50% you can do something about.

Harm

You make a good point. Some have claimed that boomer will be willing/able to work beyond the traditional retirement age in order to finance their lifestyle. At the same time, many agree that boomers are traditionally spoiled and used to living in excess. I think we are seeing the result of that excess in rampant obesity, heart disease, cancer and diabetes. Health care has improved and people are living longer. But I don't think people are living a healthy old age, certainly not healthy enough to work indefinately. Insurance covers some health care costs, but we know it doesn't cover all of them. So that house with all that great equity now has to cover retirement and additional health care costs that come from all that high livin'.

HARM,

Yes, real estate can still be a good investment. For long-term gains, I would buy in places which are undergoing some fundamental change for the better. Such places can still be found, even in CA. For example, Merced where you can still get cash flow with not too much down and where a new UC campus is being built. There are some interesting possibilities in Oregon as well.

Achieving short-term gains is possible as well, but it requires more research and more work in terms of adding value to the property. You need to be smart about what you're doing and perhaps collaborate with other investors who bring their own expertise, but you can certainly make money even short-term if you put in the effort.

I think it should also be said that most housing bears on this blog are probably not anti-RE. I don't think RE has to be a bad investment. I just think that right now RE is a time bomb. We've all heard the old axiom, buy low sell high. So why on earth would I think that buying high is a good idea? The fact that "creative financing" has become the norm to get into a house only strenthens my position that housing at this moment in time is too risky. I believe the market will go down for a time. Like Zephyr, I think that after housing has gone down for a while, and then holds steady for a couple of years, then it will again be a viable investment.

Face Reality, it is insufficient to look for potential. You also need to find out how much of that potential is already digested by the market. Do not tell me that you are not aware of this.

For example, Merced is already flooded with speculators who try to capitalize on the UC campus. The price has alreadt reflected future potential. Why do you think it can go up further?