patrick.net

Jeez, I'm starting to feel like a broken record. I need to get a new rant. :-P

Bad news for your Michael, the congress just passed bills to import more H1Bs and loosened quota for more greencards. It is about time that you write to your Republican senator.

I would guess that both parties support these bills.

In the end, the tide of globalization is difficult to stop. It would be in our best interest to look for new niches instead.

RE is a good investment only because of leverage. Without leverage it is simply inflation hedging over long term.

Want leverage? How about Forex at 400:1? :)

*** Not investment advice ***

However, most of us don’t outright distort data as a means to convince individuals to assume massive debts, just to earn a commission.

This is the real world though. I think technical "professionals" like ourselves were too... naive.

There are whole industries that thrive on the financial destruction of small people. I am not going to name them.

NYT reports that nominal wage is up 5.8 pct YoY. How come this board paints such a different picture?

Wage inflation finally.

Just last week I was still arguing that inflation cannot take off until wage goes up. Now it looks like we may see some major inflation before the pop.

But it is too early to tell and impossible to ascertain. ;)

When you buy a home you lock in the bulk of your housing costs to a fixed amount (or at least a defined amount). Over time inflation causes that fixed amount to become trivial, and ultimately you pay off the mortgage and your total cost of owning the home is only the maintenance, insurance and taxes.

Rents will generally rise with inflation, and in most places by a little more than inflation. Prices generally rise with average GDP per household. More specifically, with the average incomes of the upper half of the population (they are the buyers of most homes).

Once you own your home, the price or “value” of your home is not very important. There are only two times when the price for your home is truly important – when you buy, and when you sell.

If you sell to trade up the effect of price level is largely offset by the price of the home you buy.

If you sell to cash out with the idea of repurchasing later, then you are speculating on housing prices in the mirror image of those who speculate on appreciation (flippers). Same logic, same risk, only in reverse.

However, selling to speculate on a decline is a bad bet. Prices go up in 7 out of 10 years, so the odds are against you. Further, when home prices do decline they only decline slowly and modestly. The usual full cycle decline is only comparable to the final one year of appreciation. So if you sell too early all the benefit of selling is lost. Further, you must also repurchase at the exact bottom to get the full benefit. The full benefit is minimal because of the costs of selling and repurchasing. If you sold before January of 2005, you will probably not benefit from the strategy.

We are currently in the early stages of a cyclical downturn in residential real estate. We are also in the normal period of seasonal slowdown. The combined effect is strong. This is not a good time to buy.

Those who wait will be rewarded with lower prices. However, mortgage rates might be a little higher.

"newsfreak Says:

I was surprised at the $1 trillion in I/O loans that will come due in late 2006 into 2007. Will that be not a ripple, but a rogue wave..."

Yes! The bubble will collapse into dishwater and the ensuing tsunami
will be cleansing...Ever hear the song "Aenima" by Tool?

I suppose the gamble is to beat inflation by beating feet in a mad dash to refinance, before mass herd hysteria sets a stampede in motion when the masses come to the realization that inflation has formally arrived...unannounced and without warning.

APS (Arizona equivalent of PGE) now wants to suddenly increase our utility bill by 20 percent!

I find it ironic that people think it was easier to buy 30 years ago. I can tell you it was really difficult then. It was even worse 50 years ago when the average house was around 800 square feet and still only 50% of the population could buy one.

While the hypothetical measures of affordability do show it to be tough today, every published affordability index is only theoretical. Where the real truth is found for the relative affordability of any good (housing or otherwise) is to measure how many people actually own it. And today homeownership is at an all-time record high. With roughly 70% of all American households owning their home, ownership has never been as broadly possible before.

Obviously, there are wide variances in the cost levels from place to place. Specific localities are beyond the reach of the average person. Some places that were once very average have become relatively expensive. This reflects the consumer preferences and the market auction to live in the most sought after areas. Price is the rationing mechanism. Fifty years of population growth combined with rising incomes and wealth have driven the prices up.

Investors have income and/or wealth, and they are using it to purchase property. This is always a component of the market. It has increased in the last few years, as it does in the late stages of every cycle. Those who are long term investors do not destabilize the market. Those who are in for the quick flip, and those who are in over their heads will sell into the decline causing the decline to be more severe. This is nothing new – it happens every cycle.

Real estate is not only slow to sell (normally) it is also expensive to sell. We can sell stock at the click of a mouse at almost no transaction cost. Real estate is a bad market for “day trading” strategies. Normally the best real estate strategy is to buy and hold… never sell.

I say never sell. However, I did sell a substantial portion (about 30%) of properties in Los Angeles at the peak in early 1989. I did that because the market of the 1980s was so unusual. It was not only incredibly bubbly (more so than today), it also had financial disasters compounding (Savings and Loan crisis) and inflation was coming to an end. I was sure that the excesses of the 1980s would be a major factor and that they would take a while to sort out. So I reduced my bet, and paid off most of my debt.

"Seems to me that people like Allah and pbass are gambling just as much as anybody. The future is not that easy to predict. Even now. Each persons situation is different, but all are gambling with thier choice, even pbass."

How am I gambling? What do I have to lose? Do you think housing prices are going to keep climbing to infinitum? Do you think their just going to plateau and stay there? If you were able to convince me (not likely) on either of those situations, I would still be glad I didn't buy into the market...........why? Because prices are too high....for me to buy something I am comfortable with (not likely) where I live, I would have to sacrafice way too much to live.........I would be taking a very big chance on the future of my family and I see no point to that at all! Do you? It's easy for someone like you who has a nice house 100% paid off to be thinking buying is a good idea.....have you actually went over and looked at the houses that people have bought for $500k?........I have...and if that is my only choice, I would rather NOT buy!

I am 100% convinced the prices are going to freefall nothing can change that.....but I will make believe for a second that I am wrong only so I can prove I am not gambling. I can move anywhere I want......I could move to another state and buy a house there! I could do that now if I wanted to and buy a REALLY nice house with cash and have plenty of savings left over to take care of my family.....I know many who have already and have no regrets at all. So how am I gambling? Don't you think I would be gambling if I wiped out my savings to put a down payment on some ugly house I really don't like for fear I'm going to be priced out? If the fact is that I would be priced out and I did go ahead and buy, then my children would CERTAINLY be priced out. In this case WHY would I want to live here? I see no gambles on my part....do you? If so explain.

Why does everybody think that if you ask a question, you are in some kind of bind? LOL I didnt agree with something Allah said once, and he starts asking if I am a real estate agent!

I wanted to know if you were an RE agent because you sounded like one... What does this have to do with some kind of bind? When me and Jamie were arguing about stay-at-home-dads, you were instigating....is this what you meant?

If you bought to make a short-term profit, then perhaps you should sell. If you bought the house to live in it, then live in it.

- Zephyr,

While the hypothetical measures of affordability do show it to be tough today, every published affordability index is only theoretical. Where the real truth is found for the relative affordability of any good (housing or otherwise) is to measure how many people actually own it. And today homeownership is at an all-time record high. With roughly 70% of all American households owning their home, ownership has never been as broadly possible before.

That 70% ownership rate is bogus...........Do you think taking out a "no money down suicide loan" to get into a house is considered owning it? Watch what happens to these people as the crash unwinds.....many of these people are a "forclosure waiting to happen". I wonder what the ownership rate will be in the next few years...should be interesting. As for these people, the walls are closing in on them fast.

Clearly, some buyers are at the edge. This has always been the case. It gets worse at market peaks. However, the vast majority of homeowners are nowhere near financial stress or risk. The average equity is above 50% and the average homeoners spends around 10% of income on housing. This is hardly a doomsday condition.

BTW, if having a high loan to value is not owning the house, then there is no significance to losing the house. Of course, the truth is that the buyer DOES own the house no matter how the financing is structured. And the financial consequences are his responsibility.

The 70% rate is simply a fact.

However, the vast majority of homeowners are nowhere near financial stress or risk. The average equity is above 50% and the average homeoners spends around 10% of income on housing.

Where do you get this from?......This is absolutely not true! Maybe where you live it is, but definitely not on the coasts.

My post is absolutely true. These are national averages. Like all averages there are variations from place to place. Obviously, the more expensive areas will have lower than average ownership rates and higher than average financial obligation ratios.

These are national averages

I won't disagree with that.......I am talking about in the bubble areas along the coasts. National averages mean diddly squat!

LeftHome - things are stacked up way too high against owning right now. If it's just a matter of playing the odds, it is a no-brainer - sell.

the vast majority of homeowners are nowhere near financial stress or risk.

Not in the bubble areas..............When you count the non-bubble areas which account for MOST of the US, it REALLY distorts the facts that many homeowners (if they like to be called that) in the BUBBLE AREAS are heading for finacial disaster.

LeftHome - things are stacked up way too high against owning right now. If it’s just a matter of playing the odds, it is a no-brainer - sell.

I second that.....If so many of the great RE investors are cashing out now, why would you think it's a good idea to wait?

Zeph,
I enjoy your tempered posts, but I have to wonder about something.
The overall tone of your posts is that this up-cycle is roughly the same as the previous ones (i.e. "This has always been the case. ", etc.).

I'm a little young to remember previous RE bubbles, so I'm wondering about previous levels of RE contribution to (bubble area) economies.
Was there as much economic dependence on RE as today?
What I mean is, in bubble areas (this is bay area perspective), many people are using RE for full- or part-time income generation (engineer friends of mine, admin assistant at work, etc.). No matter how you slice it, this income is contributing to the (local) economies.

Now, my feeling is that the CA bubble in the 80's was driven by aerospace/defense, and perhaps some other non-RE-related industries. But today in CA, you could say that RE is, to some extent, driven by RE; it's feeding on itself (again, to SOME extent). And if you agree that this wasn't the case in previous RE expansion cycles, how do you see this factor affecting the RE down-cycle (magnitude, duration, etc.)?

On the coasts, just as in other parts of the country, the vast majority of homeowners have owned their home for more than a year or two.

First of all, if you have a loan....you are not a homeowner......want to test my theory? Stop paying the mortgage and watch what happens. There is a disconnect between owning and just having control over property. I don't believe everyone or even the vast majority of people living on the coasts are going to be in trouble.....what I am saying is that the vast majority of people living on the coasts that bought (so to speak) in the last 4 or 5 years are going to be in trouble. Some of them will lose their house........some will walk away from their house......others will be trapped in a depreciating liability. While those who are still using these "suicide loans" will certainly lose, many of those who didn't will also lose because they paid "suicide loan" prices...also some of these people pulled large amounts of equity out of their houses which they spent foolishly....I believe the economy has a huge amount of turbulance ahead and those who stretched themselves are going to burn...............the other RE crashes will be nothing compared to this time.....Savings is at an all time low, people don't have reserves like they did during other crashes and they didn't use "suicide loans" exept during the great depression and we all know what happened then don't we? Another thing is that salaries while they have grown over the years, they are starting to make a u-turn mainly because of outsourcing and this will continue. People are living off of money they haven't earned yet and they are expecting to earn it. I don't have an exaggerated view at all..........Actually I keep reading about much worse outcomes than I'm expecting.

Fresh buyers are a small minority, and even among those people not everyone is overstretched.

How can you possibly make a statement like that? People have bought now more than any other time in history. Anyone who bought with these inflated prices are already overstretched....although some of them don't know it (yet).

If a few recent buyers are forced to sell or go into foreclosure it may affect the market somewhat, but it will hardly be a crash.

This will not be a few.............that is for sure!

“Want leverage? How about Forex at 400:1?”

What about margin requirement and margin calls?

Well, only a fool will use that much leverage. :)

10:1 is plenty already.

I find it ironic that people think it was easier to buy 30 years ago. I can tell you it was really difficult then. It was even worse 50 years ago when the average house was around 800 square feet and still only 50% of the population could buy one.

On a risk-adjusted basis, was it more difficult to buy back then?

(In terms of equity exposure to real estate cycle and interest rate fluctuation)

I made 200K tax-free in six years using borrowed money.
There’s something wrong with that, fundamentally.
What did I do to earn that? Nothing. Just bought a house and lived in it. Made alot of improvements, using some of my equity. Even after all costs, commissions, pay offs, I come out 200K ahead. I feel like I won the lottery. Now I have to rent, for who knows how long- gotta know when to get out of the game though.

There is nothing wrong about making money doing nothing.

the other RE crashes will be nothing compared to this time…..Savings is at an all time low, people don’t have reserves like they did during other crashes and they didn’t use “suicide loans”

Agreed, there are so many things riding the coat tails of this one...it has me a bit worried. I'll drag this oldie out again, just because some things never change...

http://tinyurl.com/b7bol

Fresh buyers are a small minority, and even among those people not everyone is overstretched. The bottom line is that I don’t understand why you’re saying that homeowners on the coasts are heading for “financial disaster”.

Face Reality, it depends on what you mean by "financial disaster".

What does buying at “inflated” prices have to do with being overstretched?

If I buy something with a huge pile of money I haven't earned yet and that something drops in value (what I could get for it currently).....My net worth is a negative number....I rest my case.

Overstretched people are the ones who took a loan for which they can’t afford to make the payments.

Agreed.

If so many people who bought in the last 4-5 years were indeed overstretched, we would have seen a lot more trouble in the market by now.

People appeared to be getting richer because of the everincreasing virtual appreciation....That has gone on the past few years.......now that has started to make a u-turn.........If you noticed, many news sources that once denied the bubble are starting to change their tune to protect their reputation.......you will see shortly.....there will be many sob stories.......the worst is just ahead.

Don’t you think there’s at least some chance that things aren’t actually as bad as you want to believe they are?

No.........but they may be worse!

What does buying at “inflated” prices have to do with being overstretched? Overstretched people are the ones who took a loan for which they can’t afford to make the payments.

It seems rather easy to connect the dots here. Judging by the news stories, are not recent buyers spending more of their income on housing? That info is well-documented; I could dig it up myself, but so could anyone else.

Therefore, if people tap-out their incomes on the home purchase, they're setting themselves up for higher risk, especially using those crazy loan products.

Anecdotally, I know of people locally who put themselves at risk simply because they wanted to live in a higher status area. Where a fixed-rate in a modest neighborhood would suffice, they opted for an IO that would put them in a trendier area. They may have "worked the numbers" based on a series of assumptions, but it's risky all the same.

They may have “worked the numbers” based on a series of assumptions, but it’s risky all the same.

No they didn't, their honest RE agent and mortgage broker did......They know whats best for them :twisted:

Judging by the news stories, are not recent buyers spending more of their income on housing?

Virtual reality...I mean Face reality doesn't read those things.

Since we're on the subject of "facts" about the housing market, let’s recap a few more:

1. Housing affordability is now at an all time low (14%), as measured by CAR (conservatively assuming a traditional 30-yr fixed-rate mortgage): http://www.car.org/index.php?id=MzE3ODY=
It hasn't hit this low since the peak of the last bubble (May-June 1989), so exactly where are all the new buyers going to come from, especially with rates going up? Maybe that’s why “One-third of households spend more than 30 percent of their income on housing, and more than one in eight spends more than 50 percent.” http://www.msnbc.msn.com/id/8175152/

2. Buy vs. Rent in this market?? A no brainer in most parts of both coasts:
http://www.cepr.net/calculators/hb/hcc.html
http://dinkytown.net/java/MortgageRentvsBuy.html
Where’s the logic in buying when you can rent an equivalent house/unit at a discount of 30-50%? Unless, that is, your “counting” on perpetual appreciation of 20%/year forever.

3. Contrary to the belief of some on this blog, RE speculation (especially in CA) is widespread, rampant and having a BIG impact on the market. In fact, speculators comprised 23-36% of the entire national market in 2004:
http://www.rismedia.com/index.php/article/articleview/9512/1/1/
Even non-speculator FTBs have essentially been forced into using speculative financing, simply to compete in bidding wars against flippers, which explains why 70% of BA homes have been financed with IOs this year:
http://www.sanluisobispo.com/mld/sanluisobispo/business/11698635.htm
Nationally, the figure’s at 23%, an all-time high:
http://www.latimes.com/business/la-fi-rup26.3oct26,1,1539369.story?ctrack=1&cset=true

4. In 2006 some $100 billion in “creative” mortgages convert to adjustable rates (from current artificially low “teaser” rates):
http://query.nytimes.com/gst/abstract.html?res=F30E13FE3C5F0C758DDDAF0894DD404482
In 2007, this shoots up to $1 Trillion. Additionally, people with IO & neg-am loans also get the double-whammy of having these loans convert to fully amortizing mortgages at some point, usually 3-7 years from the date they signed the papers. Imagine what happens when these people (many of whom can barely “afford” their loans now) see their payments shoot up 50-100% per month?

5. That average homeowner equity “above 50%” stat is nothing to crow about --quite the contrary. “Between 1973 and 2003, homeowner's equity actually fell—from 68.3 percent to 55 percent through the second quarter in 2004. In other words, Americans own less of their homes today than they did in the 1970s and early 1980s”:
http://www.commondreams.org/news2005/0110-04.htm
Talk about eating your seed corn!

As for rents doubling, it’s often said that a thing is worth what someone is willing to pay for it. That’s wrong. A thing is worth what someone is willing and able to pay for it, and that’s a huge difference.

This is the basis of the bubble....people are willing to pay these inflated prices and with these "suicide loans" they are able to, but when the bill comes due they will find out they were never able to in the first place. These loans are very similar to credit cards....they are basically putting their house on a credit card and paying the bare minumum due (just the interest) and Americans are very notorious for being good with credit cards!:lol:

........and as far as rents doubling, people have a choice..........if they don't want to pay the price, they get up and go somewhere else..rent is controlled by supply and demand........If you own a house in a down market, you have no such choice. Being that so many people want to own a house, they will most likely leave and buy somewhere cheaper rather than to piss away their hard earned cash on a overpriced rental.

Just so I'm not accused of being a Doomsdayer/perma-bear (again), I'm not predicting a global financial meltdown, just a very severe correction/crash in the most inflated housing markets (CA, FL, NV, MA, etc), and a moderate one elsewhere.

Soft landing coming? 'Face Reality', indeed!

Overstretched people are the ones who took a loan for which they can’t afford to make the payments. You can buy at “inflated” prices without being overstretched, and you can buy at a reasonable prices and still be overstretched.

Prices are inflated because people overstretch to buy houses.

Similarly, I don’t follow much of your logic. If so many people who bought in the last 4-5 years were indeed overstretched, we would have seen a lot more trouble in the market by now. Don’t you think there’s at least some chance that things aren’t actually as bad as you want to believe they are?

As soon as prices stop going up, we will see a lot of trouble. There are many voodoo financing options when prices are appreciating.

Again, reflexivity.

Similarly, I don’t follow much of your logic. If so many people who bought in the last 4-5 years were indeed overstretched, we would have seen a lot more trouble in the market by now.

Rear-view mirror driving anyone?