patrick.net

APOCALYPSEFUCK says

What America needs is negative down-payment, negative interest loans

The amazing thing is that these actually existed, though not in combination, but with a recast limit of 125%, there still could be a combo . . .

GMAC Residential Funding Introduces Home Solution 107 LTV Mortgage Product

http://www2.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/10-29-2000/0001351586&EDATE=

"In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan ...

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006... Nearly 1 in 3 California loan applicants are now choosing them."

http://www.calculatedriskblog.com/2006/12/la-times-loan-thatll-get-ugly-fast.html

RobSTL says

You are praising a jobless burrito eater who is yet to create his own post and state his position on anything for the past many years. Right, klarek does not “self-promote”. He just hires TonyFL to lick his lazy behind.

I'm not jobless. I went into work today (Memorial Day), and didn't even have to. So you can EABOD.

I must confess, I have not climbed the echelons of internet superstars like you and created my own thread yet. Rest assured, if and when it happens, it won't compete with the level of asinine stupidity that you created here.

I think it's been a good three years since I've heard somebody deny that there was a housing bubble, or that it was the fault of some random person on the internet for housing prices to have dropped and trillions in equity vanished. Even NAR knows where to draw the lines on the bullshit they think they can get away with, and they stopped that one a while ago.

I'm certain that if I ordered a pizza right now and asked the kid who delivered it what he knew about the housing market, he could give me a more informative, honest, and realistic depiction than you. It's so undeniable what happened (shady loans, low rates, made-to-fail mortgages), what resulted (housing prices doubling nationally in just a few years), and what the fallout was when the loans ended (housing price reversion), that they could teach it to kindergartners in between recess and doing their ABC's. Perhaps if that were to start happening, you could sit in, learn a few things, then bail out before nap time.

RobSTL says

Homeowners lose because of stagnating/falling home values that fails to grow their wealth.

Valuation is not wealth. Whenever someone gets something for nothing -- in any economy -- someone somewhere else is getting screwed.

You want to grow the wealth in your home. refurb it.

Rising home values are totally a zero-sum game. For you to cash-out more, someone else has to cash-in more. The actual added wealth in this picture is ZERO, without any further investment from you into your property.

When the rest of the world is flourishing and prospering with increasing home values and rising wealth, the USA is falling behind rapidly.

You really love that cart-before-the-horse thinking.

Thing is, we're sending hundreds of billions of paycheck money to the third world and it ain't coming back into OUR paycheck economy, it's hitting THEIRS.

$20B/mo deficit with China. $5B/mo with Mexico. $20B/mo with oil exporters.

Every $8 we import from India, we only send $4.50 in wealth back to them.

We're importing $1B worth of oil a day, and the profits from this aren't coming back to our economy as capital investment, instead it's going elsewhere to fund third-world enterprise that has a greater return.

This is why we're going down and they're going up. Their booming housing markets are symptoms of their growing prosperity / lessening poverty, and whatever inflationary monetary policies they've got going alongside that, plus the natural speculative premium that appears in rising markets of any kind that allow specuvestors to play. And of course real estate is always ground zero for the specuvestor class, especially in overcrowded areas like China and India where ground rents really skyrocket due to the ever-increasing population density.

When the density doubles, so do the ground rents. It's a beautiful thing, for the landowner.

I said in my myth buster #3 that while there is actual commodity inflation and the dollar losing its value rapidly, the government and top economists have continued to claim low inflation. Bernanke continues to say any current inflation is transitory.

Later on you begin to reach understanding as to what the Fed thinks inflation is -- simply, the Fed thinks "inflation expectations" is wage inflation.

So yes, when they say inflation is transitory, they are wanting to make the statement that there won't be a wage-price spiral started, prices might go up in some areas but the cost of living and/or standard of living will go down in others to compensate

Most of you, including Troy, believe that higher wages lead to higher home prices. I believe it is the other way around - higher asset prices lead to job growth and wage inflation.

It can work either way, but only the latter is sustainable.

The 1970s actually had a tight job market and all the baby boomers making money was very inflationary, and this inflation and supply pressure of household formation pushed up real estate along with price inflation in general.

Here's rise in real personal incomes:

http://research.stlouisfed.org/fred2/graph/?g=E1

Note the 1970s was rather high 5% - 7.5%, outside the '75 recession, which was caused by the Fed tapping the brakes:

In this graph I've zoomed in and added the Fed Funds Rate in red:

http://research.stlouisfed.org/fred2/graph/?g=E2

Fed policy throttling wage growth in 1973-74 and 1977-80 is clear.

The 1990s also had increasing employment and real wage growth, which started heating up the market.

What happened in the 2000s, though, was the substitution of the bubble machine for actual productive enterprise or capital investment.

We were quite literally making good money selling houses to each other!

That could only last until the greatest fool stopped making payments on the loan he could in no way repay without continued appreciation.

Things actually started cooling off in 1H06 and the 2006-2007 period was just the smart money leaving the market to the bag-holders.

The rest of the world is “inflating” itself to prosperity.

ahah aha ahah. This only works until it doesn't.

Regarding loan rates and home prices, I was just addressing Troy’s statement that rising loan interest rates lead to lower home prices.

I made a list of many drivers. All work independently of each other. Your ability to ignore any counter-argument and stick to your guns is admirable, but, in the end, intellectually dishonest.

So let me break this down a bit more so you can't skate yourself past it so easily:

Nominal wages were down between 2008 and 2010:

http://research.stlouisfed.org/fred2/graph/?g=E4

that actually doesn't look too bad (since the top quintile is masking the lower quintiles) but the true picture is more like this: http://research.stlouisfed.org/fred2/series/U6RATE -- the unemployment picture doubling between 2007-now.

Taxes are steady or down, which is a mild positive stimulus to housing.

http://research.stlouisfed.org/fred2/graph/?g=E5

Interest of course is way down:

http://research.stlouisfed.org/fred2/series/MORTG

but mortgage underwriting is much more tightened now, preventing people with good FICOs from underwriting their own loans with NINJA/SISA loans.

Negative amortization has been purged from the market since 2008. This is an immense effect for the bubble markets, where 30% or more the loans were negative-am in 2006.

Geez Troy,
why you wanna dignify someone like that wasting your intellect calories? -It's not like they're reading Rob's arguments on Fox News Sunday.

Troy says

bob2356 says

What resources did Vietnam have exactly other than tea plantations?

rubber, rice, free labor ready to be incorporated into the dollar bloc. The general idea was for Vietnam to in the periphery our our US -> Japan trade relationship. In itself Vietnam was not of immense promise, but it was land and a people up for grabs between us and the communist bloc in the 1960s.

You are seriously suggesting one of the big reasons for the Vietnam war was rubber and rice? Especially since natural rubber was replaced by petroleum based products decades before. Free labor? Land up for grabs? We didn't look to colonize, we didn't have a clue what we wanted to accomplish, that's why we lost.

Troy says

but if the people were well treated and had a good standard of living the communists would have gotten nowhere.

as I mentioned elsewhere, Vietnam had a very high level of absentee landlords.

Absentee landlords is the very definition of colonization. What is your point? Like I said communism rose around the world because colonization was falling after centuries of exploitation. American leaders weren't smart enough to see the difference and continued to back repressive corrupt regimes around the globe in the name of anti communism. It is possible that for considerably less money than it cost to fight communism militarily we could have launched a Marshall plan type of economic aid into these area's and forestalled or prevented communist takeover. Except it wouldn't have worked either because but the money simply would have been stolen by the leaders we had committed to supporting because they were "anti communist". Ironically communism has now fallen because it is inheriently an unworkable system.

The same forces are again at work around the world as we speak. The post colonialist oppressors are being called to account finally thanks to the internet and cell phone. Lets see if American leaders can get it right this time.

"Sweden was neutral for the 20th century and profited immensely for that. None of these countries needed significant military establishments to defend their interests from the Soviets or anyone else."

Given what happened in Hungry in '57 and Czech in '67 I wouldn't be so sure. Since the USSR already had half of poland prior to the german invasion (molotov ribbontrov pact) it can be argued that they did want europe.
http://en.wikipedia.org/wiki/Sweden_during_World_War_II_%28Timeline%29
I know plenty of people from Eastern Europe and frankly they didn't feel free after ww 2
Sweden wasn't "really" neutral
http://en.wikipedia.org/wiki/Swedish_neutrality
"In the early 1960s U.S. nuclear submarines armed with mid-range nuclear missiles of type Polaris A-1 were deployed outside the Swedish west coast. Range and safety considerations made this a good area from which to launch a retaliatory nuclear strike on Moscow. The submarines had to be very close to the Swedish coast to hit their intended targets though. As a consequence of this, in 1960, the same year that the submarines were first deployed, the U.S. provided Sweden with a military security guarantee. The U.S. promised to provide military force in aid of Sweden in case of Soviet aggression. This guarantee was kept from the Swedish public until 1994, when a Swedish research commission found evidence for it. As part of the military cooperation the U.S. provided much help in the development of the Saab 37 Viggen, as a strong Swedish air force was seen as necessary to keep Soviet anti-submarine aircraft from operating in the missile launch area. In return Swedish scientists at the Royal Institute of Technology made considerable contributions to enhancing the targeting performance of the Polaris missiles.[2]"

Hosting missiles and keeping them secret I don't think is really neutral. To be fair there was a report/book by the carter administration that predicted if war broke out that warsaw pact would stand down..red army would have logistical problems.
The Cold War was just a lot of bullshit, except out in the periphery like Vietnam where it was very much an important struggle to prevent Moscow and/or Peking from increasing its access to if not outright control of the third-world resource base.

"This is not to say the illiberality and corruption of the global communist movement should not have been opposed, but our reactions to its provocations were often self-defeating and immensely wasteful over the long haul."
I see your point. It reminds me that the movie Fog of War illustrated how just a small assumption (that china would back the vietcong) prevented troops from pushing up north.

"The story of the 21st century is probably going to be the US losing its ability to consume 10-20% of the world’s global wealth output. We’re going to see this in energy, and also even food. As the yuan strengthens, the Chinese will be getting a better deal in the trade exchange with us.

Right now a Chinese factory worker has to work about 4 hours to buy a gallon of gas. As the yuan strengthens and the Chinese wage level increases to match ours, this will eventually fall to 1 hour."

But the paradox also is the pegging. Labor advocates try to say that the yuan is undervalued by 40%. If that is true and is fully unpegged it means anything made in china goes up in price 40%..BUT it means (since oil is priced in dollars and precious metals etc) go DOWN 40%. It is interesting as China sort of sets the price of gasoline. While I was there it was the summer of '08 and one day the price of gas went up 8% overnight. No riots, no protests etc. They can only hedge it so long up or down though. I've toured factories in china. I'm not sure what they get paid but working conditions vary dramatically.

"Of course, as their buying power increases, the price of gas is going to rise, and this is going to be the dynamic that forces the American consumer out of the global gasoline market. $10/gallon gas is most certainly in our future."
Price relative to the USA. In China it might be less but that's due the value of the yuan. A similar story happened with DeLorean. He could have made the car in San Juan PR but did it in Belfast instead. The value of the pound surged and he had to raise prices 50%.

"And with food, should the Chinese start redirecting their trade surplus into food purchases from us, this will take food out of our economy, putting more price pressure on domestic food prices. When the yuan doubles, we will have to double the wealth we send to them for the same amount of goods from them. Good thing we’re so fat already."
That's a interesting theory but I think China ultimately is going to add more regulation to the food market.I could take photos nearly anywhere but fish markets for some reason were the only ones to shun you away. I could add that simply taking the sanctions off of cuba could yield more demand.Sanctions in a economic downturn make little sense.

"But that’s not wealth. What I meant by “wealth-creating opportunities” is productive work that creates something that satisfies human needs and wants.
Consumer goods and entertainment IP. That is the meat of any economy. That is why we have an economy, to trade things that satisfy our needs and wants.
But as productivity increases, peripheral jobs in the machine are being lost. Eg. retail and transport:"

I hear you but then again simply shopping online could also cause that. I would argue we have an economy based on wants and not needs.Wants can change but needs don't. If people don't want then we don't have as much of an economy.

"Same story with IT:
http://research.stlouisfed.org/fred2/graph/?g=Dq
sector employment has fallen by 40%, from 17 IT jobs per 1000 at the dotcom peak to 10 jobs now."
I remember the dot com crash I have a AS in CS. I sobered up around 2000 when I realized that non physical work can go anywhere. Internet access is everywhere for the most part.

"Manufacturing of course is a horror show:
http://research.stlouisfed.org/fred2/graph/?g=Ds
Falling from 1 out of 6 jobs in 1970 to 1 out of 13 today.
Now, in the macro sense this decline is not a bad thing, since having an economy where everyone sits in a factory making stuff 20 hours a day is a pretty dreary economy."
I agree. You might like the book Reframing Organizations as it talks about some factory work and how it is boring as hell.Make no mistake we can manufacture anything in the USA but it's the costs that make the difference. On the inverse if gas does go to $10 then wouldn't consumers be forced to buy more locally?

"This is the systemic stresses that are building up. Too many people and not enough wealth-creating jobs."
But what if the desire for "wealth" is no longer needed.As houses go down in price that lowers cost of living. If an individual lives in a city then they don't need a car. The biggest factor in this might simply be population growth.What if we eliminate child tax credits and give one for being single? If there is openness of trade and a growing population and more and more being automated could it be argued that there is simply less work to be performed on the planet? Are western countries actually overdeveloped?

"rising from 1 out of 50 jobs in 1950 to 1 out of 12 today. These are relatively good jobs — helping people — but their pay has to come out of the productive economy, and health services at least has immense producer pricing power over the consumers.
We already pay twice the rest of the world for medical care, and this is also why we’re circling the bowl now."
True to a point but that could invert.A local paper of mine noted that the same procedure in just two cities (next to each other) varied in price by 6K (18K vs 25K) one is boston and one is quincy.Some assume more money means better care but without empirical data to back it up it's hard to say.The consumer doesn't care as the HMO pays but what if the HMO wants to create a industry priceline.com for this thing?

How can we claim to have a strong dollar when we have really no interest rates and have high government spending and lower taxes relative to the 1990’s?

"The housing market will also not respond favorably to mortgage rates going from the ~5% to ~6%.

http://research.stlouisfed.org/fred2/series/MORTG/
This minimal 100bp rise is in fact a 20% rise in the cost of credit."

Well those on lower incomes are getting nothing in bank accounts. CD rates are next to nothing as well. The market has scared the crap out of people the past few years. I'd say we have to raise the rates it's simply a matter of by how much.

The biggest issue I'd say is no one has specifically said how the baby boomers will retire without liquidating the stock market. You can't buy food with stock certificates. Buying something without the ability to sell it is nearly entrapment. Before 2008 I thought what if the market went down 100 or so points a month for a decade or so. Now I see the outright traditional mantra being scrapped (so no kids, no house..maybe no higher ed)
I'd say people are being smarter with their money and the days of mindless consumption that props up various groups is over.

bob2356 says

You are seriously suggesting one of the big reasons for the Vietnam war was rubber and rice?

yes, because while keeping the Mekong Delta in the USD bloc had a small incremental payoff, this was an investment being made with OPM -- and blood -- so the small payoff didn't really matter.

That was 1955 though, by 1969, economics wasn't the sole driver, most of the commitment of the late 1960s was committed to protect the previous commitment of the early 1960s, which was committed to protect the previous commitment of the late 1950s, which came about in our initial creation of the Diem regime to run the place -- essentially a martingaling thing going on.

And in 1955 and 1965 it wasn't just about the resources in SVN. It was about stopping the Maoist global movement and keeping the third-world in our trading bloc and out of the competing Soviet/Chinese bloc(s).

When the French moved out of Saigon we saw a vacuum that we needed to fill, and our failure to keep Saigon and its small but geostrategically significant land in our bloc would ripple out from SE Asia -- SVN, then Cambodia, then Thailand, Malaysia, Indonesia, the Philippines, then Africa, then Latin America.

Also, in the 1950s, OUR economy didn't need Vietnam's rubber, rice, and labor, but the general scheme of things was to retain a resource and commercial outlet for Japan to help its postwar recovery along, a their recovery would help strengthen the overall USD trading bloc.

Troy,

I do not believe that there is any dishonesty in your comments, and I can assure you that there is absolutely none from my side. I appreciate the time and research that you are putting in to post your civil comments.

Having said that, we are just seeing things completely differently on much of this, and I will point them out as I get time over the next few weeks.

A quick one regarding rents : I pointed out that both homeowners and renters "lose" in USA. It is a "lose-lose" situation for both parties in the USA. In India and China, both homeowners and renters win. It is a win-win situation there. How so? Rental yields there, unlike what you posted, have continued to be very low. An apartment that costs USD 200k can be rented for less than USD 5k per year, so instead of buying the apartment with a 10% mortgage and spending 20k per year, the renter wins by renting it for just 5k. The owner wins too, because the apartment appreciates 10-20% per year. Many Chinese apartment owners do not even bother renting out their vacant apartments, as the rent is not worth degrading the apartment. It is better to keep it pristine and let it appreciate a lot every year.

Comedy Central, brought to us by Patrick.net:

apartment owners do not even bother renting out their vacant apartments, as the rent is not worth degrading the apartment. It is better to keep it pristine and let it appreciate

sybrib says

Comedy Central, brought to us by Patrick.net

Ha, that's nothing:

RobSTL says

I do not believe that there is any dishonesty in your comments, and I can assure you that there is absolutely none from my side.

RobSTL says

Myth #4 : There was a huge home price bubble in the USA

http://www.bloomberg.com/news/2010-08-17/at-least-half-of-apartments-in-shanghai-beijing-are-vacant-daily-reports.html

myth #4 is a myth, because over here in the Cool and Hip Bay Area we have our Fortress neighborhoods coveted by wealthy foreigners and wealthy immigrants. Also as has been pointed out, there are other such Fortress neighborhoods coveted by them in the large urban areas of the Left Coast like Socal, Seattle, Vancouver.

As Sir Greenspan said, since all real estate is local, no bubble but lotsa froth.

No bubble in our Fortresses clustered along the Left Coast, though.

RobSTL says

It is better to keep it pristine and let it appreciate a lot every year.

just shoot me.

but this is, of course, a very old game to play, waiting for the land to "ripen".

land is better than gold as an inflation hedge.

At the end of the day nobody needs gold. But people always need a place to live on this planet.

And so the renters will always lose, by not winning like those with a spot on the housing ladder.

Same thing here, except our inflation is over, done.

The Japanese killed their economy in 1987-89 the same way we later did, 2004-2006.

http://research.stlouisfed.org/fred2/series/JPNCPIBLS

Just took the whole land game one spin too far -- 00 came up, and everyone still in the game lost their stake.

Though they have their strengthening yen that is generally pretty deflationary to their macro situation, a stronger yen makes imports cheaper.

I made it to the 5th point of the original post before I decided to not waste anymore time on it. It's one thing to have a differing opinion on a topic, but this person is just grossly misinformed and/or intentionally leaving out other relevant information to their points. China's avg house price is 1 MIL, but the average salary is 5k? That doesn't even make any sense...and if it is true, that's not owning, that's called renting with creative financing.

We live in a free market economy, so when prices fall, that means people CANT or ARENT willing to pay the original price.

This person needs to take an Econ 101 class

Total garbage. Just what you can expect from a realtor. Nothing in this article is true, just twisted to fit a realtor's mind.

Good, RobSTL should be out there buying any housing in sight. Considering that he thinks housing costs do not have to track income, I expect he can "afford" to buy at least a few hundred homes. It shouldn't be too hard to flip each one for a 30% profit and soon RobSTL will be the richest man in North America.

RobSTL says

The owner wins too, because the apartment appreciates 10-20% per year.

Definition of a ponzi scheme = empty apartment appreciating by double-figures every year, forever. Never ending appreciation without any rents tied to it. These magical condos will just get more and more valuable! Just sit on them! Buy now or be priced out forever (etc.)!! And yet, one can rent them for a tiny fraction of the carrying costs.

This is perhaps the most asinine thread to date, although I do remember a few by bearmarket way back when (on the other end of the spectrum).

Only a delusional individual could call all housing prices before 2001 abnormal while calling prices that were double the cost of renting "affordable".

Please get a clue RobSTL, for your own sake and ours.

I am a Realtor...and a middle class family man here in Huntington Beach. I suppose what I would like to hear from you is a description of how Asians (in particular) purchase property. They pool their resources as do Latin Americans. That is how many purchase property. In America, our society has always been taught to be independent and that, in my humble opinion, is hurting a large portion of America.

FredEx says

In America, our society has always been taught to be independent and that, in my humble opinion, is hurting a large portion of America.

1) I would disagree on what "our society" thinks. It seems like American society is about self-sufficiency, but that doesn't mean you can't ask your family for help. This would seem to be what Asian and Latino families stereotypically do, but plenty of white families have the Bank of Mom and Dad loan junior his/her first down payment.

2) Even if this is true, how does this hurt America? People in extended families tend to buy bigger houses, so if smaller families are buying smaller houses, and larger families are buying larger houses, who's getting hurt?

3) It seems like you're suggesting that Asians and Latinos are more likely to be able to buy houses than whites, for example, and that this hypothetical factor makes them better off. If the return on real estate is not that much when you exclude inflation, then why would people who buy a house be better off? If the return isn't very high, then home buying mainly serves as forced savings. Why is forcing people to save (and receive a lower return on savings) better?

"I suppose what I would like to hear from you is a description of how Asians (in particular) purchase property. They pool their resources as do Latin Americans. That is how many purchase property. In America, our society has always been taught to be independent and that, in my humble opinion, is hurting a large portion of America."

I can take that statement (or collection) a few different ways.

1) In other countries sometimes there isn't as much of a history of banking insurance. In Mexico (I'm not claiming this is indicative of all Latin American countries, I'm just using it as an example) China has banking but I'm not totally sure as to how their functions works.
Russia just started banking insurance in 2003! How does this relate? Well if deposits are not insured people are less apt to use banks. Without banking the only way to have more money is to simply bank it and have it on hand...

2) Mortgages themselves differ. In Mexico I've heard (can't find the link) that the majority of homes are paid with cash. Then a certain amount are built by hand and the remaining are mortgages. I've also heard foreigners cannot buy coastal (within five miles) property. In china it is more of a social aspect towards getting married.
http://www.chinadecoded.com/2010/09/11/homeownership-almost-a-prerequisite-for-marriage/

3) Without getting into a left or right political argument some of the differences here stem from colonialism. What is the most successful former colony (I'm sure someone would say Hong Kong) but it's the USA. Those that are in a colony have to do things themselves and as time goes on it gets ingrained. Going forward in history there was relative peace on the mainland since outside of 1812 and 9/11 there were no attacks from other countries. So building things yourself, doing things yourself became the norm. In Europe, Asia and Africa conflicts have happened on a continuous basis. One could say this fosters a togetherness eventually

Wrong.... real wrong on most of your myths, but I suspect your post was to solicit responses like mine anyhow and not based on fact or common sense...

If I can summarize your post, you obviously believe that a country, like the USA, can be a sustaining economic power by building and trading houses at ever increasing prices... you need to put down the Alan Greenspan books and wake the heck up fella...

thunderlips11 says

This is misleading. The $150k * 3 = $450k. $50k * 3 = $150k. The median household income is $50k, which means the median home price should be $150k. However, there are problems with the median household income. One being, 40 years ago, most households had only one income, typically the wife was a new unit of labor that could enter the workforce in bad times. That option no longer exists, both spouses are generally fully engaged in the workforce. So to compensate for the 1960s typical family, we should be using perhaps 2/3 of a median income.

I don't quite get this one. If both spouses are working and the median income is 50k, total household income would be 100k, using the 3x salary rule, fairly priced houses should be 300k.

thunderlips11 says

This is misleading. The $150k * 3 = $450k. $50k * 3 = $150k. The median household income is $50k, which means the median home price should be $150k. However, there are problems with the median household income. One being, 40 years ago, most households had only one income, typically the wife was a new unit of labor that could enter the workforce in bad times. That option no longer exists, both spouses are generally fully engaged in the workforce. So to compensate for the 1960s typical family, we should be using perhaps 2/3 of a median income.

I don’t quite get this one. If both spouses are working and the median income is 50k, total household income would be 100k, using the 3x salary rule, fairly priced houses should be 300k.

I would have to agree with "Myth #2, : Home prices rising is bad for the economy". Rising home prices are good for the economy, people free richer so they spend more. They cash out the equity in there homes to buy boats. This is of course false wealth an unsustainable policy in the long run, just like any ponzi or pyramid scheme.

pkowen says

Definition of a ponzi scheme = empty apartment appreciating by double-figures every year, forever. Never ending appreciation without any rents tied to it. These magical condos will just get more and more valuable! Just sit on them! Buy now or be priced out forever (etc.)!! And yet, one can rent them for a tiny fraction of the carrying costs.

Yep, I totally agree with you that it is the greatest ponzi scheme in the history of the world. And yet it has gone on in Asia for decades.

http://www.bloomberg.com/news/2010-08-17/at-least-half-of-apartments-in-shanghai-beijing-are-vacant-daily-reports.html

TechGromit says

I don’t quite get this one. If both spouses are working and the median income is 50k, total household income would be 100k, using the 3x salary rule, fairly priced houses should be 300k.

Nope, there are some costs of both spouses working instead of just one working. And sometimes that's substancial too. For instance... another car, insurance for that, more job related cost such as clothing, travelling, communication and transportation. Child daycare cost if you have kids and no guardian available, and this is freaking expensive in some area, could eat up large portion of the salary. Another thing to think about is, increased cost of healthcare, gas, insurance, food etc in general. And we are using whole bunch of new stuffs that we never had in 60's. For example, smart phones, PS3 and Xbox, internet etc. This sounds petty though, the costs of using those stuffs add up quick, and it will easily be over hundreds a month.

So, it will be 2X number on the paper when both spouses work, but the real income after those costs of doing it and with other stuffs to spend, it can be quite lower than that. I'd say, 1.2 to 1.5X at best.

I'd like to comment on something earlier about cost of living and wages.

My last employer had a leak years ago of its pay scales. From this the results were a bit shocking. Not so much of the amounts but where it was leveled. Leveled 1-5. Higher means more pay. It's a retailer. Only a handful of 5's around..LA, SF, Brooklyn, New Orleans?

Anyway after examining the places and numbers we ultimately came to the conclusion that the wages were not based on cost of living but rather the amount of competition. If an area was remote (Presque Isle was on this) it would hardly pay anything..regardless of competition.

RobSTL says

Myth #6 : Home prices collapsed in the USA because they had become too unaffordable

See above myth busters. Homes prices never became “unaffordable” in the USA, especially compared to the rest of the world. What actually happened was that low-income people were allowed to buy dream homes that they could never afford in the first place, thanks to lax lending from banks....

In order for this to be true, then pretty much every California that purchased a house from 2004 to 2006 would have be considered "low income". The only way these properties were "affordable" for most Californians that that time, was with the low interest adjustable rate teaser loans. While there was plenty of liar loans with low income sub-prime borrowers, if this was the only rotten part of the housing sector, I would have expected the housing collapse to stop once the sub-prime market finished collapsing.

You could make a good argument and say the sub-prime market started the dominoes falling. With the sub-prime borrows going belly up, it caused the Adjustable mortgage borrowers to falter and fall, then led into the prime mortgage borrowers. Falling prices led to defaults and than then further falling prices led to even more defaults and so on. But if you remove the sub-prime borrowers from the equation and try to assert that the market would have been fine without them, soon as adjustable rates reset to unaffordable levels, the same thing would have happened, only it would have been delayed for a couple of more years.

As for the rest of the world comparison, just because the housing market bubble in China or other countries hasn't collapsed yet, by no means equals a stable market. Japan, Spain, Ireland, United States all learned that housing bubbles never last forever, it's only a matter of time before other countries learn the same lesson.

seaside says

So, it will be 2X number on the paper when both spouses work, but the real income after those costs of doing it and with other stuffs to spend, it can be quite lower than that. I’d say, 1.2 to 1.5X at best.

That mulitple is just a very generalized guideline. It's not all that useful anyway because many expenses are mostly fixed and don't rise with income. So, there should be a different mulitple for a family earning 50K than one earning 150K.

But some of your "extra" costs are a bit ridiculous. I think most non-working spouses probably have a car anyway. And they probably have clothes too. Daycare is the one that rings true.

Ok so I am glad I did not buy a condo back in 2006. Had offer and during inspection found out it was under insured by about $100,000. Declined to buy. Thought it was underpriced at the time. Dodged a big bullet. It was a bad deal.

Now rent for $1250 per month. I figure a comperable place as a condo would be around $300,000 to $350,000. The prices have dipped here but are trying to go back up. So basically I rent for less than my boss pays just for taxes and insurance on his place. Less than taxes and insurance. So for about 1/3 the monthly cost.

One big anomaly in New Orleans is very high insurance rates. More like 5% of purchase price instead of 1%. That is huge. We are already seeing a bankrupt city/parish (read county) contemplating raising taxes. I am guessing by a lot. The state is in the same boat as well and we already have a pretty large tax burden here. In addition we have literally the most expensive car insurance rates in the country.

So add all this up and I am waiting patently for prices of homes to go down to a reasonable level. Maybe they never will but we can always buy with cash if we so desire.

We do bank the saved money and have done well despite the downturn.

kmoday722 says

If I can summarize your post, you obviously believe that a country, like the USA, can be a sustaining economic power by building and trading houses at ever increasing prices…

Yes, this is the operative point. Buying and selling used houses is NOT production. In order to grow an economy, you have to produce things.

I think some idiot named David Lereah already wrote a book with all of the OP's rationales. It was laughed at not long after it was written.

"Yes, this is the operative point. Buying and selling used houses is NOT production. In order to grow an economy, you have to produce things."

I agree that it isn't production but an economy can grow without having to produce "things". Manufacturing of basic goods is performed by a lower economy. The more sophisticated it becomes the more services are created.

Buying and selling homes en mass is not a way to get an economy going and I say that knowing I worked for years in a housing related retailer. Housing related consumption cannot be used as a barometer for economic activity.

Buying and selling used houses is NOT production.

If it is not production, where does Realtor's 6% commission come from?

mdovell says

I agree that it isn’t production but an economy can grow without having to produce “things”. Manufacturing of basic goods is performed by a lower economy. The more sophisticated it becomes the more services are created.

Sure, but those services need to have adequate value-add in order to grow our economy. There's very little a realtor does that justifies the fee paid. Much of the real work that many realtors claim expertise in (e.g. disclosures) could be done by a good real estate attorney who would often do it for a fixed fee that is much lower than what realtors charge, and you would get real legal advice instead of the nonsense that realtors tell you.

xenogear3 says

If it is not production, where does Realtor’s 6% commission come from?

That's rent-seeking. That's specifically why the realtor lobby needs an antitrust investigation and why they are destructive to our economy. Pergraniteeling houses does very little for our economy.

Residential investment is a forward-looking indicator for the economy. However, residential investment involves true remodeling/renovations and building *new* houses, not putting $10K of fixtures into a poorly built house, without making sure the structure is sound or without improving the layout/design, and thinking it's worth $100K more.

xenogear3 says

Buying and selling used houses is NOT production.

If it is not production, where does Realtor’s 6% commission come from?

Extortion. Through a monopoly. Just because that's what they take from the sale doesn't mean it's equitable to what they "contribute" to it.

thunderlips11 says

Today a couple is “Fully Engaged” with both spouses working F/T

A couple is but not every couple. In my circles, there's a large minority of dual income families that could easily do on one income.
But they don't flaunt their earnings.

thunderlips11 says

Probably still not expressing it right, but maybe somebody can put this together better than I did.

http://motherjones.com/politics/2004/11/two-income-trap

Interestingly, IIRC this is one of the few economics-related publishings that remotely understands the treadmill effect of rising household wages vs rising rents and land prices, pretty much first expounded upon in the 1879 book Progress & Poverty and then largely forgotten during the post WW1 boom times.

"Sure, but those services need to have adequate value-add in order to grow our economy. There’s very little a realtor does that justifies the fee paid. Much of the real work that many realtors claim expertise in (e.g. disclosures) could be done by a good real estate attorney who would often do it for a fixed fee that is much lower than what realtors charge, and you would get real legal advice instead of the nonsense that realtors tell you."

O I agree although on the other side no one forces people to use realtors. It is interesting in some areas where laws actually prop up businesses. In Mass you cannot legally do plumbing work in walls, ceilings and floors. Anything exposed is fine (water basin, toilet, sink etc). Plumbers unions are obviously opposed to changing of the laws.

Maybe this might be a bit OT but the internet has dramatically cut down the need to actually pay for advice from others. If a business works on the idea of giving advice it's going to find itself quickly having to do something else.

to mdovell - respectfully...I definitely earn my commissions. I am not a 'top-producer' but my buyer clients know SO MUCH MORE than they would by hiring an attorney. The disclosures are a bare minimum. To give you a glimpse of what I do for my buyers here in Huntington Beach (which has a variety of soil and water issues):
- discover potential issues with expansive and alluvial soil
- describe the various building methods performed by the various builders over the past several decades (i.e. S&S homes here in HB are very well built)
- keep up with the lending industry because short sales remain the better deals
- know how to work around and with the many entities involved in short sales
- KNOW MY INVENTORY: buyers cannot see many properties without a Realtor...more importantly, I save my buyers valuable time by constantly previewing property in Huntington Beach
- and so much more that goes into being a buyer's agent.

If you want to argue about the value of a Realtor, I suggest you argue the value of a listing agent. The reality is that being a listing agent is much less work. I would be more than happy to discuss this further but I got sidetracked with this as I am doing an open house today.

APOCALYPSEFUCK says

How many Realtors have been arrested, indicted or sentenced this month?

Ahem,
F**ker, it's Realtors®, okay?