patrick.net

Yes, even the delectable Ali Velshi on CNN was musing that, rather than calming nerves, its just going to make everyone jumpy until the next meeting in september.

George, you may be right, but wouldn't it be simple enough to change tack and use “get your loan now before inflation rises any further”?

Well, no matter what happens, your FB can rest easy knowing he still has his car/SUV to sleep in. Whoops --maybe not.

and today, Bendover bent over.

requiem,

Karmic effects are exactly what is pounding FB's, specuvestors, flippers and all the other lazy people that want 200K/500K+ over what they "paid" 2 years prior for just occupying a residence! This is a time for them to consider "their" karma, not for us to worry so much about ours.

As much fun as we have at flippers and specuvestors expense it really has been rank and file folks, your co-workers, friends and neighbors that have done the brunt of the damage. We also have fun with "equity extraction" but more of late it feels like "equity extortion"! Look, I ran my cc's up to their max limit and I KNOW you don't expect ME to pay them! Hence the stalled and sputtering market. Flippers had TV shows so we tend to focus on their folly.

Speaking of delving into the mind of the FB has anyone else noticed the recent battle cry of "it's the flippers that created all this mess"!

I'd even heard one Portland "luxury loft" builder (third major project in 4 years) say that the slowdown is attributable to the speculators! Really? Is that so? Then why do you have a full time realt-whore in your model taking app's with a grand down? Why did you put on events like wine and cheese "lotteries" to see who would get first crack? Your entire sales model (and building) is made to cater to flippers!

I can't wait for Portland to have it's very own "Dark Tower of Financial Doom"!

Lenders have been putting the pressure on fence-sitters with the “get your loan now before rates rise any further” tactic. Though completely divorced from reality (Mortgage rates have actually dropped in the past few months), I’m sure it scared more then a few people into buying sooner rather then later.

That tactic would have been smart 3 or 4 years ago. There just aren't that many people left who can afford a fixed rate mtg, who don't already have one.

The market's up-cycle went like this:
1. Demand catches up with supply in the late '90s as the economy booms and the market starts picking up ('97-'00).
2. Fed starts lowering rates to soften tech crash, making mortgages more affordable and fueling the boom ('01-'03).
3. Frenzy takes hold as home buyers are convinced that they will be "priced out" and flippers begin leveraging their equity gains. Potential sellers hang on to properties because real estate "always goes up," limiting supply. Creative financing becomes the norm, fueling demand. ('04-'05).

The down cycle will go like this, IMO:
1. Inventory climbs while prices stabilize. A few overleveraged flippers are forced to unload properties at a loss, adding to supply. ('06).
2. Creative financing starts to bite, forcing homedebtors to sell to get out of their ARMs. Potential buyers are less frenzied to buy and are more willing to wait things out, limiting demand. Foreclosures and fire sales become more common ('07-'08).
3. Lenders need to liquidate massive inventory and need to slash prices in order to do it. Many FBs send in their keys, rather than face foreclosure or remain in "upside down" loans. Many move away. ('09-'10).
4. Market bottoms out. There are no more real estate radio shows. Nobody talks abour real estate at dinner parties. Nobody even goes to dinner parties. Disgruntled FBs grouse about California's high taxes, smog, traffic, crime, earthquakes and decaying infrastructure. People let their houses fall into disrepair. Local economy sucks. Inventory liquidation continues, along with natural increases in supply (deaths, divorces, job losses and job changes). Inventory stays at relatively high levels. Nobody shows up to probate sales. ('11-
12). This is the time to buy.

Just a guess.

Speaking of delving into the mind of the FB has anyone else noticed the recent battle cry of “it’s the flippers that created all this mess”!

Hopefully that has enough momentum to kill any attempt to bail out FBs. (Not that the builders have no responsibility of their own, but as the saying goes, "the enemy of my enemy is useful".)

Kinda sucks but it seems the Feds are going to do whatever it takes to keep this Ponzi going for as long as possible.

Too late. Look at the last interest rate cycle--the fed started raising rates in Nov, 1998 in order to slow down the stock bubble. They stopped raising rates in May, 2000. By that time, it was far too late for a "soft landing" of the NASDAQ. The Fed eased like crazy to limit the fallout, but it was too little too late. The NASDAQ finally hit rock bottom in'03. The fed lowered rates for the last time in June of '03.

Then the fed started raising rates to contain the housing bubble. After 17 straight hikes, it is pretty clear that the bubble is finally turning over. But at this point, pausing or even dropping rates in a "counter-cyclical" move will not save the housing market.

Glen,

Uh... I'd say, uh... I'd say that about wraps it up! I'm not really a doom and gloom guy but the way you describe the unraveling sounds about right! Also I believe your calls on the upswing were spot on. Many people get the time frames all wrong. Many "homeowners" seem to want to cram the whole chronology from bubble inception to implosion between 2004 and 2005. So basically the free money leading up to that was "A ok". Everything else (in their minds anway) was perfectly normal up until those damn flippers "took over". It didn't happen that way.

I wish I could give proper credit but someone here said it best. When the cost of money is high, there's plenty of land. When the cost of money is cheap, we're running out of land!

SHTF,

do you mind leaving an email here, because I have some questions regarding the biz that you are in, would really appreciate your input.

Back to the housing front, Ben has lived up to his reputation. However, a rate pause is not going to save the bubble, it is just going to prolong it, so that everyone suffers longer.

Even without further rate hikes, people are still not going to be able to afford houses 8-10x their income. Such a pause is going to give a false hope to the FBs, which means, they will hang on to underwater propertiesl until they have absolutely exhausted ALL their personal financial resources. That's how people get into more and more negative zones in their housing equity.

Too bad that this will be a drawn-out process. God bless CA.

DinOR:

Thanks. If I'm right, then I will be the only bidder at a probate sale of nice spanish style 2 bedroom sometime around 2012 or so... So I'm ready for a long wait.

I forgot one more signal that the bust has reached a bottom: most of the Patrick.net readers will have capitulated and bought in around 20-30% off of peak prices (but still 20-30% above where they could buy in 2012). Patrick.net will become much less popular than the many new homedebtor victimology blogs which should be flourishing by then...

George,

we will have a hard landing, the result is almost out of the hands of the Fed.

However, Fed can decide whether we have a fast forward hard landing or a slow-motion hard landing. Looks like we are opting for the latter.

OO says,

"However, Fed can decide whether we have a fast forward hard landing or a slow-motion hard landing. Looks like we are opting for the latter."

Damn, What's a vulture to do? I do want to wait that long to pick through the string of FB carcasses.

Glen,

It's more than academic and concerns ALL of us! The longer we continue to permit the irresponsible notion that the housing madness and affordability issues didn't really arise until 04 possibly 05 the longer our stay in the asylum.

Realtors (TM) would be only too happy to offer up 2005 as a sacrificial lamb to get the volume pumped up again. (So would those that bought from them in 04). What we need is to get the right version out to the broadest audience possible.

SHTF,

Your post about living in office was funny. Though I think the pain threshold for American workers will fall way below that. If things get that desperate, Chapter 13 or torching their house will be much less painful.

What we need is to get the right version out to the broadest audience possible.

The message will get out eventually. People will gradually remember that homes *depreciate* over time. For a while, people will continue to try to justify the fundamentals. Years after the tech bubble crashed, people still claim, for some reason, that tech stocks should trade at higher multiples than the market as a whole depsite the fact that many tech stocks are not fast growers and some are highly cyclical. Slowly, painfully, these stocks have sunken back to more normal levels. Today, ORCL, MSFT and CSCO can be had for around 20x earnings. YHOO, EBAY and AMZN for about 30-35x earnings. Still overpriced, but not as outrageously so.

Similarly, owners will continue to insist that people pay a premium for California housing stock because "everyone wants to live here." This argument will carry considerably less sway as the zeitgeist transitions over the next several years from euphoric elation to depressed desperation.

For those of us who lived in CA in the early '90s, you know what I'm talking about. Every other story in the newspaper was about base closings, downsizing, earthquakes, gangs, crime, traffic, smog, etc... Scapegoating became popular as the "Three Strikes" law and Prop 187 passed by large margins. Storefronts were abandoned and lawns were overgrown. And the recession of the early '90s was mild compared to what is coming. This time, it is going to get ugly.

Compare that to the current climate. The mood is a lot different. Everyone is decorating their home with stylish paint jobs, pergo, granite, koi ponds, landscaping, etc... The chatter is all about "urban renewal" and California's wonderful, diverse population and its wonderful, diversified and "recession-proof" economy. The home equity ATM is open for business with many exciting gifts--vacations, cars, plastic surgery, private school for the kids and various and sundry doo-dads.

The slow, painful, grinding slowdown has started. But it will take quite a while to play out, IMO.

Glen,

That's it! People are forgetting the actual purpose of their homes as places to live. The current prices are based on totally unrealistic future expectations of "flip" or "usage" values.

It's really sad for the strapped buyers with 8-10X annual salary mortgage. They're buying on the assumption that they can sell for at least the present day value. They bought with no awareness of how to deal with their situation if the market goes south 25 or 10 or even 5%. In fact, they must have inflation (to decrease the debt to wage ratio) or asset appreciation (so they can afford to pay realtors and closing costs) just to stay above water.

Seems it was mostly FB's that took this poll!

Astrid said:
That’s it! People are forgetting the actual purpose of their homes as places to live. The current prices are based on totally unrealistic future expectations of “flip” or “usage” values.

True. And the flip side of that coin is that people ignore the opportunity cost of sinking their incomes into a slowly depreciating asset. It annoys me when people say "sure, the market may go down for a few years, but it always comes back!" What if it takes 10 years from peak to trough back up to the old peak?

In my case, I have calculated that I could buy a condo comparable to my current apartment for an extra $1,000/month or so, including taxes, insurance and HOA, but not counting any principal repayment. If I am able to invest this money at 7%, my after tax return after 10 years would be around $160K. Plus, if I play my cards right, I will be able to save another big chunk of money by finally buying a house when prices have dropped off significantly. So my net gain could easily exceed $300K. I think I'll wait.

Allah,
The more indebted the population, the more popular the inflationary monetary policy.

"True. And the flip side of that coin is that people ignore the opportunity cost of sinking their incomes into a slowly depreciating asset."

It's not just income either. Being strapped for cash means they have a much harder time in the meanwhile to change career paths or move or have kids. Their carrying cost and negative equity makes them economically fragile. They're stretched so thin they can't afford to havve anything bad happen to them like losing a job or getting a divorce.

"The more indebted the population, the more popular the inflationary monetary policy."

But what about seniors, would politicians really risk rousing their anger?

astrid :

There is a story in US News print edition featured people who were hoping for a rate hike. Predictable. People who are in/near retirement who have fixed income investments. Yes, boomers !

Now boomers are our new friends ;-)

Seniors are one of the last remaining groups in America that have their incomes indexed to inflation. This is another reason why I don't generally buy the CPI-fraud arguments. But, even if they are true, then this will be a self-correcting problem as Seniors demand ever increasing inflation relief.

You are onto something. People on fixed incomes are usually the first and often the only groups to really detect and feel inflation on an intuitive level. The other big group are poor people on government assistance or minimum wage workers (which includes a large number of workers who effectively have their wages "pegged" to the minimum wage, in that they earn a certain fixed percent over MW). Unfortunately for that group, they have no political voice or power.

Maybe Seniors will create a SPI (Senior Price Index) so that they can have their cake and eat ours too.

@Muggy,

Done.

SPI (Senior Price Index)

Good God, don't give AARP any ideas! Then they'll also have to create a BPI.

Maybe Seniors will create a SPI (Senior Price Index) so that they can have their cake and eat ours too.

SPI:
5% = Canes and orthopedic shoes
5% = Leisure suits at Penney's
15% = Geritol, arthritis meds and Centrum "Silver"
15% = brunch buffet at the Golden Nugget
20% = Winnebago (including gas)
40% = Owner's equivalent rent at Senior Village

what about riverboatel fees and annual cruises and medications that start with V and C? :)

I think medical expenses will be a lot more than 15% of the budget. Those co-payments can really add up, especially for people with diabetes, high blood pressure, and other chronic health conditions.

You may want to substitute brunch buffets for dogfood, leisure suits for Salvation Army mumus, and camping out in their grandkid's room for living at Senior Village -- just to make up the difference.

Man, my hideous grammar!

The third paragraph of the last post should read:

You may want to substitute dogfood for brunch buffets, Salvation Army mumus (cause then you don't need to pay for underwear in addition to adult diapers) for leisure suits, and camping out in their grandkid’s room for living at Senior Village — just to make up the difference.

Anyways, I feel dirty, I'm being so mean to a bunch of hypothetical old people.

astrid :

Anyways, I feel dirty, I’m being so mean to a bunch of hypothetical old people.

You need to watch more Seinfeld. :-)

15% = brunch buffet at the Golden Nugget

14.999999999 = brunch buffet at the Golden Nugget
00.000000001 = Tips & gratuity

You forgot:

Senior discount = priceless!!

I think we should all have a foreclosure pool, like a football pool. Draw up some boxes with all the states in them and when the end of the year comes, the state with the most foreclosures wins. We can also have a bonus, whoever bids closest to the highest amount of foreclosures gets bonus money. I think that would be a good way to end this year. What do you guys think?

That depends on how much everyone is willing to spend. This can also be done by city. That will allow a whole lotta boxes.

Option 4 -

Try to Rent it.

http://www.housingmaps.com/

Before you accept any rental price increase, use this to check what's available in your neighborhood at your current rent. You should be able to ask for a rent freeze or minimum increase if you want to be friendly about it. At my price, in my neighborhood, inventory looks better than when I rented my current place.

Then check out the $2250+ range and laugh at the FBs. I'd argue that both the volatility and the increased mean in Patrick's graphs is due to the long upper tail from desperate borrowers

Where does all our tax dollars go in California?

This should fit the bill:
http://www.ebudget.ca.gov/BudgetSummary/SUM/1249561.html

Oh, and of course “dem damn illegals” and “evil teacher’s unions” ;-).

Holy cow - we spend a lot on prisons!

I just noticed that in 2001, the DOJ reported that CA was spending $25k per inmate. With almost as many state inmates as there are in CT+ME+MA+NH+NY+NJ+PA+RI+VT combined, you'd think we could buy in bulk and save.

(CA: 163,965. Northeast: 172,925)

George,

I'm not quite sure how I feel about this new level of candor. It's as if the "meeting of the minds" rifled through all of their available options to find a culprit and decided that Mr. Flipper would have to take the fall.

Flipper as fall guy serves multiple purposes. Firstly we can shuffle the escalating cost of housing (hence property taxes) on their speculative greed. Secondly the fact that you can't sell the overpriced sh@tbox we just sold you is directly attributable Mr. Flipper's desperate situation. As is the wave of defaults and foreclosures.

"The resulting excess supply has exacerbated the drop in consumer confidence"

This is more bassackwards logic we keep getting from the RE Cartel!

Oh and again with the total focus on 2004/2005! Sheesh! I suppose up to that point everything was on a healthy path?

Please make a tax deductible contribution to the patrick.net "The Bubble Did Not Start in 2004" Foundation! Thank you for your support.

As far as the excess supply "exacerbating the drop in consumer confidence" that's another way of saying the Housing ATM is Out Of Order!