patrick.net

Davis_renter,

Thanks for the link and the data, even if it is depressing. Numbers like those press even the most ardent free market capitalist like myself. While the evaporating middle classes are the focus of most popular concern here and in other forums, it is the dramatic growth of the impoverished that keeps me up at night. This can only go so far before there are big, ugly, generally unplanned changes that will make just about everyone who reads this blog unhappy.

"consumption has become a distraction"

It's funny you would say that. Jeff Immelt (GE CEO) said basically the same thing today. And this coming from a company that owns entertainment divisions. I think he said we are becoming the "massage capitol of the world".

I've been saying this for years. Don't get me wrong, it's fine to have hobbies and interests but stick with them. I know people that have jet skis, motor homes, ski boats/fishing boats, dirt bikes AND sand rails! Sheesh, pick something and stick with it!

You and I are saying the same thing

Red Whine-
Sorry, sometimes I skim in the interest of time. Agreed: people definitely compete/gloat over their homedebtorship.

Under this scenario, it seems prices may moderate and slide a bit but no crash and certainly no 35% plus drops.

Ahh yeah, that's because everyone in California is a millionare, besides I think all those middle/upper management types making 200K plus are dying to move into 1/1 stucco shitboxes. You Sir are a man of genius richly deserving to be on a bud light commericial.

Just for clarity, the flippers, specuvestors and FBs I talked to in my own small, rural midwestern sampling (sadly many were old friends and a few relatives) were entirely LOCALS.

It's not as if Californians are poring into NE Indiana and SW Ohio flipping the 800K McMansions. It is folks who live there doing it. They just imported our brand of insanity.

What distresses me is that, as a generality, most of these folks have significantly less nominal income + wealth, so they will be bigger FBs as a % of their losses. Some dual income BA yuppies with $250K joint income will get hurt bad enough with a toxic $650K loan, but now imagine the single income, 3 kids, $70K/year family in Indiana with nearly the same sized loan. If BA FBs are "junk bond" grade investments, then the poor folks in the Midwest are "toxic waste" grade.

RW,
What is most definitely true about your thesis is that the American idea of the "middle class" is very likely going to turn out to be a short blip on the historical time scale. Post-ww2 industrialization, the glee of winning the war, the GI bill, etc etc all helped to create the US middle class. We're reverting back to the roaring 20's, robber baron model of American economics.

However, I do agree with Peter - even if you do opt out of your 401K, don't just blow the wad - invest it. I do realize, though, that the current volatility in almost every market makes it a difficult road. Does your employer match your contributions?

The "rolling boom" scares me. Places that I never would've expected to ever be expensive are slowly starting to edge that way. Nashville for example seems to be having a massive influx of Los Angelos natives. Why? Because for one, country music is HOT, MtV moved their CMT operations from NY to Nashville, the whole " good ole' boy" style has been popular in the mainstream for a few years, and so on. People in Lons Angelos incorrectly equate Nashville with the Los Angelos of the South.
As a result, homes in the old part of downtown Nashville are now in the 450-500k range, which is ridiculous for the area. But..... like most of the towns mentioned, you can simply move about 10 minutes out of town and the prices plumet back down to the 75-100k range.
That's the BIG diffrence between Nashville, Austin, Dallas, Boise, and all the places inbetween and California. In California, no matter where you move to, you're Fuck*d. The prices are ALL high, no matter how far you live from the city. In these other areas, a quick 10 minute drive is all it takes. The diffrences between these "flyover" places and here is that the inner cities are being redeveloped for the upper crust of their respective markets. So the rich wanna' live in downtown Boise. Big deal- Just live a little outside of the city proper. With the amount of new building going on in the South, there is no logical reason for prices to get too high in general, but I would agree that the extreme inner cities will.

RW,

1) That the money will decrease in spending power even if your investments “beat inflation.”,

Can you explain what you mean here in a bit more detail?

Red Whine

You can’t go spouting off logic to an emotional woman. C’mon, you know that.

Sadly true, and yes the inlaws are here for me as well. Sigh.

It's a lot easier to tell the other guy to get tough and logical with his gal. It makes me feel like a real man. I was washing piles of dishes last night so you now know where I stand.

I have until Winter to formulate Plan B. Distract and delay tactics are losing their efficacy. Footrubs and massage coupons might last me to next Spring...

Can you explain what you mean here in a bit more detail?

Let me try. Since real estate goes up even if it drops, spending power decreases even if your investment bests inflation.

There are tens of thousands of families with at least 1M of liquid net worth in the Bay Area. A 6-digit saving account means shit if it is not growing as quickly as other people’s investment.

Do not just spend it or save it. Invest it. Increase your understanding of the world. Improve your relationship with God.

Will the person holding Peter P hostage kindly release him?

God? I call my imaginary friends "Bob" and "Sally". Ahhh the propoganda of the BA, tens of thousands of families with 1m liquid. Really. Did this information come to you when conversing with your imaginary friend? People in the BA really should go away for a while and then take a look at their self proclaimed nirvana. Ok, I'll bite, and I'll be generous, say 100000 families in the BA have 1mil liquid. The BA population is what 2-3 million? So those 100000 families are driving the housing costs? Amazing. On a seperate note, how does one qualify for a 650K note? Granted I only make a paltry 95K/yr. Am I missing something, because to qualify for a 650K note you need to make in the high 190s or so. HaHa's bullcrap notwithstanding, how many people are making that much coin? Not many. It's the realm of middle/upper management. I am just so sick of the crap. So you make 250K/yr, what does that get you in the BA or $anta Barbara? A condo or a 1/1 crapbox. Nice.

And you won’t make it into that league unless your born into it, marry into it, or build an empire (like Gates).

You will not get there unless planets align. Seriously. Do not give free will too much credit. Fate is fate!

Surfer-X,
That's a good point. Peter and others can keep citing the oodles of uber-rich BA residents, but the core of the bubble phenomenon has nothing to do with those people. It's the pathetic masses clammoring to buy the stucco sh#tboxes via bidding wars and crappy loans that defines the bubble. Google millionaires will be in their own little sub-world of the BA housing market whether or not there is a bubble going on.

The number of millionaires in the United States surged 14 percent in 2003, to 2.3 million, according to the World-Wide Wealth of High Net Worth Individuals survey released Tuesday by Merrill Lynch and Capgemini.

United States — Population: 295,734,134
According to the CIA fact book.

So 7/10's of 1% of the US is a millionare, BFD. This 7/10's of 1% is driving the whole insane RE market? It corrects hard, sticky? Not a chance, just as you yelled "new paradigm" on the way up, so shall it be on the way down. Or does it revert to "old paradigm" on the way down. SFH are not investments, and just like you were told during the dot.bomb era, it's a new paradigm, the playing field is level. No it's not, it never will be. You fools that think you can keep flipping your SFH and make 200K every two years are drinknig too much cool aid. The music has stopped in the next two quarters the lights are going to be turned on and then you'll truly realize just how ugly your dance partner is.

Good luck suckas.

buffpilot,
I think about 50% of all Californians are thinking of moving. Read any blog, site, newspaper, or talk to people around here- even on this blog about what their plans are, and the answer is if things don't get better, then they'll move. Millions of them already have, and many more will follow. That's why I'm holding off for 3 years. In that time, hopefully a combination of people moving out along with a stall in home buying will bring the demand way down, and the supplies way up, but up because there will be less people. That means cheaper houses sooner or later.

WW2,

"Fuck*d"

While I always appreciate your comments perhaps the next time you use a "PG-13" version of profanity you might want to substitute a letter besides "e". Just a suggestion.

Davis_renter,

I would be very interested in the out-migration data. Thanks in advance.

Dinor,
I was trying to not offend the tender eyes of some of our loyal readers, but being that we're all educated adults, perhaps the "e" will be added as neccesary for a more dramatic effect!

DinOR Says:

While I always appreciate your comments perhaps the next time you use a “PG-13″ version of profanity you might want to substitute a letter besides “e”. Just a suggestion.

How about if he used, "Fucke*"?

Peter and others can keep citing the oodles of uber-rich BA residents, but the core of the bubble phenomenon has nothing to do with those people.

I never said these rich people can/will rescue the housing market. I merely try to demostrate that it takes more than a "six-figure saving account" (mentioned by RW) to stay ahead.

"...what does that get you in the BA or $anta Barbara? A condo or a 1/1 crapbox. Nice."

Who else thinks SB, SLO and evirons are in for a hard landing? Like Surfer-X said, there are only so many rich guys to pump up these coastal markets forever.

The people I know (minus one stock-option rich couple) who have bought in the Bay Area since 2003 all make less than $150k combined, most considerably less. My favorite is the guy who makes MAYBE $60-$70k per year. He bought a condo in SF for $1.1 million using a neg-am in 2004 or 2005 (can't remember). Anyway, at the end of last year he bought another condo in SF to flip and I heard he was in the process of buying another one now. He's still holding the first flip after a $60k price reduction and no takers. According to Zillow, the flip is now worth less than he paid for it and he's put considerable money into the remodel. Yes, there are many rich people in the Bay Area, but there are also many more wage slaves buying property that they cannot truly afford. Something has got to give. Or not. But I still think it will.

Greg,

We've beat deflation to death in past threads. Most of those predicting deflationary depression over the past year -- the ones who were advocating buying gold with cashed in 401k's -- have evaporated.

As to mild-deflation, I give it about a 1% chance of happening over the next 25 years. So long as today's new generation of monetary policy makers are in charge there will be no deflation.

Moreover, deflation would require fiscal restraint. You show me any politician of influence who is fiscally responsible and I'll show you the Easter Bunny, Santa Clause, and Peter P's "fate".

I never said these rich people can/will rescue the housing market. I merely try to demostrate that it takes more than a “six-figure saving account” (mentioned by RW) to stay ahead.

Okay, my bad.

Skibum,

That's why you make the big bucks! I can't imagine anyone taking offense to that! Problem solved.

Greg Says:

There will be no recovery from this housing market crash. The boomer generation drove it up and they will drive it down. There are simply not enough of me to replace them (btw I’m 36)

Problem is, when that time comes, most of the inventory glut will be McMansions in the midst of falling apart. The boomers will mostly want to downsize.

People will need to think of housing as a depreciation asset once again.

I'm cool with that.

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

1) A $800K home requires only a 640K note if downpayment is 20%
2) The first-year minimum payment of a 700K NAAVLP note is less than $2500 (initial, assuming 1.25% start rate)

Since the end of WW II all the people have been trained to think that inflation is normal, well history proves that it is not and this era of constant monetary inflation will come to an end.

US inflation data goes back to 1914. There has been continual inflation for that entire period with the abrupt and unpleasant exception of the Great Depression.

1914 - 1917 saw about 2-5% annual inflation.
In late 1917 it jumped to about 15%
1917-1920 saw very high inflation, nearing 25%
1921-1922 saw mild deflation, over correction from previous inflation fighting

1931-1933 saw the only deflation in excess of "error".

Remember that prior to the Great Depression and Keynes, monetary control was a trial & error process with very little capability to model scenarios and measure effects.

By my measure, that's the better part of 100 years with only three of non-inflation. If you go back to pre-industrial mercantile data you'll find there was out of control (and hard to measure accurately) inflation. Every time new products or rare resources rolled in from colonies the home country suffered staggering inflation (but the colony did not deflate).

Greg,

"as most were never needed anyway" LOL!

Funny! Harry Dent (who's occasionally right) said that more and more homes will become "don't wanters" where surviving offspring on the other side of the country will simply tell the trust atty. to sell mom and dad's FL condo for whatever they can get. They'll be more interested in converting it to cash than holding out for top dollar.

One of the other long term trends he may be correctly identifying is for folks my daughters' ages is that they WILL be confronting a depreciating scenario. This may well be true and I don't see much that can be done about it.

Red Whine Says:

I’ve already started. In the past, I’ve always maxed out my 401k. I’ve now stopped. I’ve started spending this money. I’m going to a Bordeaux tasting tonight that was $250 per ticket. I saw Les Miserables for $100 a head three nights ago.

BIG PIMPIN'

All-

It's funny, I seem to have become the contrarian. I am getting more bearish as everyone else is getting more bullish.

I am now predicting a 60 to 75% drop, at least here in Los Angeles.

Right now I am working on a big email to my friend laying out this prediction in tremendous detail. Will post it tomorrow or the next day if it is finished by then.

But here is an article which contians the key assumption underlying my prediction. Ben's blog linked to it the other day:

http://online.wsj.com/article_email/SB115042445578782114-lMyQjAxMDE2NTEwNjQxMjY0Wj.html

I am quite confident that the market will decline by at least that much, and that all of us will be able to afford a nice place someday. But the question is this: how long do you want to wait? I don't want to rent my POS apartment for another 10 years, that's for sure.

Buffpilot may well have the best idea. I'm getting my professional license in Texas in October. That'll give me about a year and a half to find a job, a house, and move the whole extended family to TX if things don't improve here.

I no longer wonder whether there will be a severe crash. There is no doubt in my mind. To me, the only question is how long it will take. That I don't know.

Greg,

Foreign holders of US debt have little power over US real rates. In fact, they have no choice for the current period to do anything other than hold USD denominated debt unless they are willing to forgo US consumption.

I reemphasize for clarity:

The US derives over 80% of all economic activity purely internally. No other major country comes anywhere close to this. Most US debt is held by countries which depend essentially upon US consumption of their exports, often representing over 50% of their economic activity.

Banks want price stability in a perfect world. Actually not perfect stability, or else they don't make any premiums. Banks earn premiums because they understand inflation and can hedge it better than borrowers.

Banks will take mild to moderate inflation over deflation. Deflation hurts banks worse because they cannot stimulate borrowing in a deflationary environment, and because they earn little on their lending. Banks can try to account for inflation by hedging with various instruments.

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

Ok, I'll bite...
Because the people currently buying them (a group that is getting smaller and smaller by the day, if sales & inventory figures mean anything) believe "it never goes down".
Because they are, by and large, the few remaining clueless stragglers terrified of being "priced out forever" and will do whatever is necessary to avoid this (they believe) cruelest of fates.

The correction/crash is already underway, even though it is not yet showing in lagging median price data. I do, however, agree with those who say it will takes years to fully play out, as cash-strapped FBs hit the wall on serial refinancing & HELOC-ATMs.

I don't completely agree with Peter P that the $2 Trillion in ARM resets 2007-2008 will be a total "non-event", given the massive level of specuvestor involvement --as DinOR & SQT remind us-- 40% of "demand" in 2005 alone. Though it won't be a sudden one-time event, this will undoubtedly hasten the crash in the near future, along with other factors (rising rates, the job market, mass psychology, flat-to-declining appreciation, possibly tighter lending standards, etc.).

Who else thinks SB, SLO and evirons are in for a hard landing? Like Surfer-X said, there are only so many rich guys to pump up these coastal markets forever.

Raises hand, MeMeMe.

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

They aren't. Back to Craigslist for you trollboy.

To your points about rich areas getting hit hard, I have unconfirmed report that Pebble Beach has seen 3 foreclosures this year while there were 0 in the past 25 years.

(maybe someone who knows the foreclosures data sources can verify or disconfirm this)

Well then why are all these $700 plus shitboxes as you call them still selling in the BA??

If they are new, nice, and within Google's orb of influence.

trollboy, whoops, sorry, Hellboy. Does your outfit sell MBS? Hmmmm. And if so, when the excrement collides with the cooling device, how much will you loose?

Interesting.

Joe,
I read that article too. It's mostly stuff that' been touted before, but I definitely agree with the thesis. As I've said before, if what you're particularly looking for is a McMansion built in the early 2000's at firesale prices, you'll be in luck in about 10 years.

The buyers of our bonds won’t tolerate inflation. Who do you think runs our country ? debtors or creditors ?

You know the old joke about debtors, right? "If I owe you a little money, it's my problem. If I owe you a lot of money, it's your problem."

If they stop lending us $$$, our interest rate soars, our economy tips into a major recession and brings down all of the export dependent economies with it. Our creditors are the on the losing end of this game. Not only do they have to tolerate the inflationary loss, they have to suffer the expected drop in the dollar when the game comes to an end. In the meantime, they have to keep forking over $$$ to make the game end gently.

I don't think the Asian Central bankers care. All the $$$ was made by their masses tolling 20 hours per day in sweatshops. Four legs good, Two legs better.