patrick.net

@Randy H --

"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?"

Yes, what I meant is that, despite the fact that my various investment accounts are increasing at, let's say 6% in a sluggish economy, while you're beating "inflation" (as measured by the nonsensical CPI which backs out food, energy/gas, and housing [in favor of the Rental Equivalency Index]), I can promise that your invested dollars are shrinking in purchasing power.

For example, the Orange County 3/1 house I began renting in July of 2000 was appraised then at $193k, and now with it valued at $650k circa late 2005, $193k wouldn't even be enough for a down payment unless you made $160k (1 HaHa) or thereabouts. You cannot possibly save fast enough.

@FRIFY

"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… "

Obviously, you're in the exact same boat as me. It's awful letting your family down without even knowing it. All this time I was scrimping and saving and eeking the last ounce of life out of my 1994 Geo -- by saving a downpayment rather than jumping into a death-or-glory loan I was unknowingly knocking my family farther and farther behind. The inlaws think I'm a reckless gambler for NOT borrowing 9x my income to buy in. As the siblings were buying more and more condos on more and more exotic loans, it turns out WE were the gamblers, not them. Who knew? They're always asking "What exactly did they teach you in your BSBA program?" Well, they were filling our heads with stodgy, outdated information that used to pass as "financial prudence" (like the whole 20% down, don't take on more than 4x income in debt) but now would be called "overconservatism" at best. Plus, we go to the family functions and it's like a car show, all the sibs and cousins pulling up in the latest Mercedes thanks to their condos, talking real estate into the night. Always reminding me that they can't imagine WHAT I was thinking, and of course I have no defense. It's like the "walk of shame" and we get to do it at least once a week. Like I said, most times I wish she'd just meet somebody who owns a condo, he could sweep her off her feet and that would let me off easy. I could go someplace new, and never mention any of this mess to anybody! Just start fresh and hopefully not be so damn irresponsible the next time around. Screwing yourself is disappointing -- screwing your family is the worst circle of Dante's inferno.

PP,

Do you know how much food can cost you?

I don't want to shock you, but my Sushi intake fell 90% after we had kids. On top of that, Blowfish Sushi has been replaced by Supermarket Sushi.

On the otherhand, Oatmeal and milk expenses have increased 1000% fold...

:-)

I hate to say this, but why the constant attacks on realtors. They may facilitate the process and lie or cheat or otherwise misrepresent the buyer to the seller and vice versa, but really, the problem is the

sellers = insane asking prices, and arrogant insistence that they deserve them

bankers = nutbars allowing people to borrow money on the expectation they can repay later based on appreciation, not income, or more nefariously, hoping for crashes and foreclosures and getting properties back in big money private hands for pennies on the dollar

regulators = maniacs who allowed the fiscal environment to evolve because they feared telling big financial corporations how to operate their lending practices, or didn't want a recession after the dot bomb, and cut the rate to almost 0%

Japanese = carry yen trade, let's face it, in another 10 years the Japanese will own more of America then they did back in the 80s. Just watch...

Seriously, why don't we make fun of sellers more and forget about the realtors?

My $.02.

RW,

That is a single measure of purchasing power parity, not inflation. Inflation is multivariate, and the aggregate is intended to measure the depreciation of the monetary unit against a benchmark basket large enough to include all those variables. The "backing out" problem is very complicated, and you can read about it in many places. It's nothing sinister, just a problem with overloaded uses of CPI.

There have always been depreciating/appreciating assets and even specific deflation/inflation. This is not the same thing as general deflation/inflation from a macroeconomic perspective. If your investments are properly diversified then you are concerned about macro deflation/inflation, not about about specific PPP when measuring your returns.

RW,

I feel for you. However, I hate to sound like a broken record, but hang in there:

For example, the Orange County 3/1 house I began renting in July of 2000 was appraised then at $193k, and now with it valued at $650k circa late 2005, $193k wouldn’t even be enough for a down payment unless you made $160k (1 HaHa) or thereabouts. You cannot possibly save fast enough.

I must point out that you make a major assumption here, which is that the rate of appreciation you observed between 2000-2005 will continue, or at least not diminish significantly. I wouldn't be so sure. Many pockets all over CA are approaching (-)ive YOY appreciation, and that may just be the beginning. Also, not to be too much of a meddler, but it sounds to me like you have a whole lot of fear of dissappointing your SO. Doesn't she understand that (a) your intentions were/are noble (to save the "right" way and buy a home, and (b) even if you're renting now, that doesn't make you a loser as a husband? And what's up with hoping she meets someone with a condo who sweeps her off her feet? Is that Mr. suave FB? I mean, if you're truly hoping for that, you guys have serious issues beyond whether or not you're renting or "owning."

Again, sorry if that's too intrusive.

It is happening. I just do not want everyone to be too excited over the coming correction. It will come. We should be smiling. But we will save the laugh for later.

So you patrick.netters were hoping for a ~45% cut in RE prices within a short span of time (a year?)? When in the history of RE has that ever happened? Past history suggests more like a 6 year span.

HARM,

Quibble if you must, but I save a good chunk each month with two kids and a wife on a lot less than $200K. How do I do it? I rent (and eat in - see PP reply above).

Red Whine,

Yeah I hear you. You didn't bet on black and let it ride for 5 years, so you're the fool at the table with your original chips in your hand. Your inlaws may start changing your tune. I've been the bubble lunatic at the family gatherings for the past 3 years but at our last gathering, the smartest of the extended inlaws admitted there was a rocky road ahead for real estate. It's a 10-12 year full cycle so be patient and don't blow that nest egg.

Randy mentioned that all of the gold bugs who were crowing about their investment strategy a month back have disappeared or shut up. There's a similar quiet thats falling over the real estate boffins. Worst case, you spend an extra $25K and buy a house twice as nice as the POS you would have bought last July. Give it a year.

>>Seriously, why don’t we make fun of sellers more and forget about the realtors?

It's all in the the symbolism.

>>I think what gets me about all the pessimism is that everyone is so annoyed they can’t see the crash happening in real time, in front of their eyes with the smoking ruin of everyone’s equity on the ground for all of us to gawk at.

That's how it always is. It's not a crash until it's over.

c’mon man, your constant posts moaning ...

Red Whine must whine.

>>And what’s up with hoping she meets someone with a condo who sweeps her off her feet?

I read that as a poignant admission of having let her down, not a relationship problem. I thought it was very well written and touching.

Marinite,

Oh, I don't think anyone was expecting a 45% crash in one year. Some people (including me) would very much like to see this happen, but I doubt anyone as counting on it.

I think a 60% crash over the next several years is very much in the cards, I just don't know how long it will take. Four years? Seven? Wish I knew.

Requiem,

People will always spend their income ... and they’re spending anything that isn’t going into the house.

That’s just my perception, of course, and I’m sure there are many who don’t fit the model, but I’d be surprised if it didn’t describe at least 80% of the FBs out there.

The data support your perception:

http://www.bea.gov/briefrm/saving.htm

ARM rates are now 2% above their 2003 low. What do you think Bernanke's Summer Hikes will do to these FBs?

Michael Anderson Says:

I read that as a poignant admission of having let her down, not a relationship problem. I thought it was very well written and touching.

I wasn't trying to make fun of RW. I was just saying in less eloquent fashion than SP that it speaks to an issue that should be brought up between the two. Now before we all start sounding like a Dr. Phil board, I'll shut up, let out a belch and adjust my nads. How 'bout them Mavs?

Most of the ARMS resets are supposed to be starting in 2008. That is also an election year. So here is my conspiracy theory.

Although BB has impressed me lately, I am still in 2 minds about him. Maybe Fed will raise rates once in a while, keep talking tough on inflation till middle/end of 2007. Then there will be enough data showing slowing economy. At that point they will use that as an argument to reduce interest rates once again. In the name of "giving a shot in the arm" to economy, but in reality to save FBs in the election year.

Currently, they also want to manage the FED image and "expectations" about the inflation. Come 2008, they will ignore inflation. If they won't there will be enough political pressure on them to do so.

It may be too late by then. But the "injection of liquidity" will slow down the speed of crisis once again, and build massive inflationary pressures.

I am not a gold bug. Although I do have some long positions in metals and commodities.

Thanks…after all …he is our ceasar.

Give me my salad, our ceasar!

TBAONTBA

In the name of “giving a shot in the arm” to economy, but in reality to save FBs in the election year.

Full disclosure - I'm a Democrat and occasionally put on a tin foil hat to learn what the other side is doing to the country.

That being said, I'm pretty sure Ben Bernanke is apolitical and is truly interested in inflation targeting as a guiding principle. My favorite economist and the darling of the left, Paul Krugman worked with Bernanke at Princeton. When Bernanke was appointed, Krugman remarked that Bernanke's Republican views were extremely mild and that Bush had made an excellent appointment. That's probably the only time that Krugman has had a positive thing to say about the administration over the past 6 years.

Bernanke may inject liquidity as you fortell, but it will be because we're diving into a nasty recession and not to bail out the FBs. Preventing a massive recession will indeed help the party in power, but it's also for the good of the nation.

tsusiat :

Why blame sellers ? We live in a capitalist economy. Seller has every right to ask as much as he or she wants. Sellers were never the problem.

The buyers are the ONLY ones to blame for this madness. They were the ones trying to outbid each other and pay OVER what the seller was asking. It was their money. They were primarily responsible for it.

If and when we can prove in court of law that bankers, agents et al lied, broke law, behaved unethically enough to cause a legal punishment, then let's start blaming them. We might see some of that as well.

This whole mess is purely due to buyers. Our lives have been forever affected in an adverse way by these people who are willing to pay anything for anything. No mercy on them.

Apart from that, the only one I blame is His Highness Sir Alan Greenspan, the most honorable one.

Why blame sellers ? We live in a capitalist economy. Seller has every right to ask as much as he or she wants. Sellers were never the problem.

The buyers are the ONLY ones to blame for this madness. They were the ones trying to outbid each other and pay OVER what the seller was asking. It was their money. They were primarily responsible for it.

Why blame anyone? It just happens. We are here to predict the future. Let somebody else assign blame and we will just sit and be entertained.

Why blame anyone? It just happens.

Bubbles come and go throughout history, this is true. However, rarely has a Central bank and so-called "regulators" ever had such a free hand in creating one and helping it to grow beyond all reason.

Whatever happened to so-called "fiscal responsibility", i.e., taking away the punchbowl when the party gets out of control?

FRIFY,

I hope you are right. I subscribe to Barrons, and in their economic round table, there was at least one analyst who said, BB is true to his words. He claimed to have met BB recently and according to him, BB will just act according to the data. I desperately want to believe, but the previous maestro has put enough distrust in me about the Fed.

I am not sure if the liquidity will solve the problem. I have read enough arguments about Paul Volker doing the exact opposite, and choosing to not avoid the recession and rather break the inflation. That according to the arguments, was better for the economy in the long term.

I find those arguments more logical. Hence my dislike for The Fulcrum Of The Modern Economic Paradigm - the one and only Sir Alan Greenspan.

To BA Or Not To BA:

This "mess" is an economic situation. As such, it's a description of a particular system state that requires certain actions on the part of buyers and lenders to occur. Unless we are making judgments about the moral responsibilities of all parties to the state of the economy, the only people to blame are the buyers who get shafted. The ones who get out with a profit can be counted "lucky", or a similarly appropriate adjective.

If we are making such judgments, then we have to reserve a Special Place for those who know their actions are harmful, then another ring for those who got played. I think the FBs mostly fit in the second category, and the lenders, etc. in the first.

However, rarely has a Central bank and so-called “regulators” ever had such a free hand in creating one and helping it to grow beyond all reason.

Central bank defends the interest of banks. Regulators are reactive, not proactive. This is just the nature of things.

My friend, we will be vindicated. ;)

requiem,

I disagree. I know many buyers simply believed what they were told. I am not a legal expert, and I am not sure if we can prove the lenders/agents cartel did anything that is akin to breaking the law in our current legal system. If they indeed acted in such a manner, yes, let's blame them and punish them.

But the lenders would not have been able to do so, if buyers of MBS did their due diligence. The bond investors may loose, but they were investing for profit and cannot blame anyone but themselves. All the parties involved, are looking to maximize their profits. Again, they have to do that in the framework established by the generally accepted business practices and such blah blah, and I don't know if they did or not. Maybe Fannie Mae should be blamed for not disclosing enough. I really do not know.

But naivety or stupidity on buyer's part is not an acceptable excuse to me. Their stupidity caused me pain. I have no sympathy for them. I am not going to do something, I am not even wishing any bad things. But if bad things happen to the FBs, I won't shed a tear.

that’s fine if trash talking their squandered wealth makes you feel better, just don’t fool yourself that they’re not sitting pretty.

Let me paraphrase, fuck the bay area, fuck the pompous fucks that live there, and fuck it's overpriced everything. Sitting pretty? Oh really. I just love this site, because you can spew shit all fucking day long and feel good about it.

Ok BA fucks repeat after me.

I pledge my alligance to the Bay Area,
And the BMW for which it stands,
All fucking yuppies united,
All others excluded,
Indivisible with blowfuckingfish sushi for all.

Go out of the Bay Area for a while and then go back to the fucking ant heap. I can think of nothing more vile to me than that entire fucking area. Oh, wait, yes I can, the people who live there.

Aww who the fuck I am fooling,

I would give my left testicle to be one of the lucky few that get to live and work in the bay area, get a 150 dollar haircut at Genoviews on University Ave, wear a pair of stupid looked rectangular euro-fag glasses, have the ulitmate trendy accessory on my arm: the asian girlfriend, whirl around in my imported convertible, I don't care what kind as long as its german and expensive, go out to overpriced C+ grade sushi at blowfuckingfish because I don't know the difference plus I look good talking excessively loud into my Motorola phazor 300, I got the super trendy black one, oh so hot.

Damn!

I bought my black "phazor" almost two years ago, and now everyone has one. I'd switch to another if it didn't fit so well in my tailored Hugo Boss jeans. Why oh why did they have to start selling them here in the States?

Ah well, time to get a new paint job on the convertible, it's collected some scratches.

I've been outside the Bay Area, and while there's some nice country out there, I'd need a private jet to fly back to civilization at regular intervals. Being out in the middle of the Arizona desert is pretty when it snows, but good luck finding sushi.

C+ grade sushi at blowfuckingfish

Did you mean Caa? I may give it a single B, which is still below investment grade.

wow, this is the fastest growing thread in history - is it a public holiday there?

Randy H Says:
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.

on the topic, to what extent do you think the 'RE investment gurus' are to blame for the specuvestor frenzy, as per the kind of thing at:
http://www.johntreed.com/Reedgururating.html

these guys hold rolling national road shows charging anything from $5K to $15K a course per person -- they go everywhere, because they can always find suckers everywhere willing to stump up that sort of money to learn how to get rich quick. apart from low interest rates and flexible credit, why else would 40% of new loans be for investment? (for as long as it lasts before the crash)

btw, the market seems to be slowing here, and it has done for at least a year now -- properties have dropped in price and stay on the market longer as investors find rents can't cover the mortgage debt (or new owner-occupiers are under water), which in turns deters new investors -- the big question is still about a soft landing vs a 'plateau going to new highs in X years' (realtor's dream) vs a crash. We've obviously done this to death in the past, which is a mild criticism i have of patrick.net -- there's not a lot of structure to the site, so instead of coming up with some fixed conclusions, we just keep repeating the same stuff over and over again in slightly different ways in new threads -- not something cogent and succinct you can take to your local MP for consideration or use as a lobby...

one scenario: with 40% of new mortgages being for investment, if there is no crash or fire sale but a stabilisation of prices and rents, then we've just created a new society of landlords and tenants at about 50:50 ratio -- almost a dual class society, or a new 'wealth apartheid'. and the thing that did it was millions of individual decisions in 'the market' based purely on unenlightened self interest. more people than ever before will still be renting into old age, with no equity, and with major implications for pensions, social security, etc. the govt isn't even tracking this phenomenon at present. so then what happens?

marinite (our friend from across the bridge at http://marinrealestatebubble.blogspot.com/ ) wrote:

> So you patrick.netters were hoping for a ~45% cut in
> RE prices within a short span of time (a year?)? When
> in the history of RE has that ever happened? Past
> history suggests more like a 6 year span.

In most of Los Angeles most prices dropped ~45% in about 36 months from mid 1990 to mid 1993.

As I posted before watching homes in S. Cal drop in by TENS of thousands per year did not make people happy, but bit did not make people run for the doors like they will when homes in the Bay Area start dropping over a HUNDRED thousand per year.

Most of the single family homes around me in Presidio Heights have gone up in value by $200 to $500K PER YEAR over the past 8 years. There are going to be a lot of long time owners that decide to take the profit and retire as soon as values start going town.

town should be down

To BA or not to BA said:

"This whole mess is purely due to buyers. Our lives have been forever affected in an adverse way by these people who are willing to pay anything for anything. No mercy on them."

In response to my post defending realtors and naming sellers, regualtors and bankers as the turds in the system.

The post was kind of sarcastic. Actually, I agree with you, ultimate responsibility rests with the buyers, their minions and posses. However, I'm just getting tired of picking on realtors, they're not much worse sleazeballs then any other sales profession, and really, they are just doing what they can in a market that has been feeding them nicely.

Just thought I'd stir the pot, why not?

Different Sean Says:

> wow, this is the fastest growing thread in history
> is it a public holiday there?

Threads on BLOGs and e-mail lists usually grow slowly on holidays since most Americans BLOG and e-mail when they are at work getting paid by someone else. I can not figure how all the studies that come out keep showing American productivity increasing since it seems like the people working for me spend hours every day on My Space, BLOGing, Shopping and using Webmail to keep in touch with friends…

the economy is doing fine today.

Huh? Wow, seems someone put cool aid in the water supply.

Note: Don't drink the cool aid.

Which part of the economy is doing fine today? Housing and construction?

I just ran a ZipRealty query on Santa Clara county - reduced listings. It showed me only(!) 200 out of 300 listings. This of course does not count the relistings. So approx 10% (some of which relistings, just a guess) of Santa Clara county homes need to reduce their prices. Granted, some reductions are paltry, most from intially atrocious prices and so on.

But nice trend, don't you agree ?

As can be expected bulk of these are in Gilroy, Morgan Hill and San Jose. The fringe areas are going to be in deep trouble. I could also spot "highly motivated sellers" phrase used in some. Many of the Gilroy/Morgan Hill homes are very new, 2-3 years old.

I am now completely confused. Where is the slow, very slow, very very slow downtrend ? Where is the stickiness ? Don't give me Cupertino/Palo Alto like crap answers. Not even the bearest of bear expected those to go down first.

Am I the only one sensing the implosion ?

OK, I will go back to the thread topic.

If California is exporting the bubble, then it will crash faster. It's not just the ARMs that are the wild card. Many Californians bought second homes in other out of state places (Phoenix, Las Vegas, Salt Lake City) - often using their HELOC. Many BA folks bought in Merced, Brentwood, Sacramento.

That it self makes BA less immune than other cycles. I don't know if any one has a handle on the magnitude of this. But let's not rule out the cascading effect.

Cascade !

FWIW the median income in DC is $90,300

all taxpayers' dollars, given as a 'gift', as per baudrillard. jack abramoff & co. would have raised the average... not to mention the lockheed martin revolving door appointments, etc.

Am I the only one sensing the implosion?

I am seeing it in slow motion. My requirements are more specific (view, vintage, amenities), so "my" inventory is not exploding yet, but it is steadily growing.

That DC median income statistic sounds mighty high. Much, much too high. Does anyone have a cite for it?

Go out of the Bay Area for a while and then go back to the fucking ant heap. I can think of nothing more vile to me than that entire fucking area. Oh, wait, yes I can, the people who live there.

Uh...LOL. Yeah, people here need to get out and see the world doesn't spin around the exis of entitlement.