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I also think that owning can be a double whammy.
Here you are going through life doing all the right things. You finally decide to buy a house and you get screwed on the deal. The values going down and you cant refi because there's no equity. The double whammy is that your net worth is dropping with the value of the home AND you have to keep making monthly payments every month that are too high.
Contrast that to the stock market. At least you can push a few buttons and cut your losses when you make a mistake.
The point here is that real estate mistakes are very different. They're a special kind of mistake that stays with you for a long time and can easily alter your life. Think of it as a bad marriage.
I bring these words to you from personal experience both in real estate and marriage.
I don't think the nominal price will ever fall 40% in the US, the inflation or USD devaluation-adjusted price will fall more than that, I will venture to say, at least 50% in bubblish areas like the Bay Area, and Socal.
When the nominal fall starts and the joe-sixpacks start to panic, rest assured that Helicopter Ben will drop USDs from a F-16, one round after another to bail out banks and the economy, because he repeatedly said that the Great Depression was heightened by the credit crunch, a mistake he would never make again. So as a Great Depression buff, he would overreact and print money faster than ever just so everybody in America will live in a million-dollar home after he is done, sorry, million-peso home I meant.
So the only way for the bears to win is to sit tight in a diversified non-USD portfolio waiting for this to unfold. I am seeing a 15% nominal price reduction in the soon-to-be US peso for the Bay Area in 3 years, aided by a 35% depreciation of USD.
(not an investment advice)
Randy H
2006 Jan 18, 3:26pm
Do the FSBO homes show up in the MLS??
They don't because the MLS boards don't allow access to non-members. For this reason, and a plethora others, urge people to support the Open MLS Act.
Peter P
2006 Jan 18, 3:30pm
They don’t because the MLS boards don’t allow access to non-members. For this reason, and a plethora others, urge people to support the Open MLS Act.
Randy, I am sure MLS will be open one day. The only question is when.
I feel that planet are aligning for such a change right now...
Peter P
2006 Jan 18, 3:32pm
The best time to buy is about 5 years ago, so unless you can find the right kind of spart plugs for your Time Machine, keep on renting and ranting!
Not necessarily... It is quite possible that we will see inflation-adjusted 1995 prices again.
Randy H
2006 Jan 18, 3:33pm
I believe I stated 30-40% real-price drop. If not, I stand corrected. Nominal prices will be flat to perhaps 15% drop, of course highly fragmented by neighborhood and region.
Inflation is an easy way out because people don't generally realize how bad they're being screwed for some time. During this lag, politicians and policy makers can have their cake and eat it too.
Note: there will not be hyperinflation. Hyperinflation is a very unique circumstance--one that is difficult for an economy like the US to get into. Remember, hyperinflation is 1% per day, which is two-orders of magnitude per year. For that to happen there would need to be much more than simple Fed policy failure, but an altogether collapse of GDP growth and current debt coverage vis-a-vis foreign obligations coupled with an interruption of foreign capital inflows (like China quits selling stuff to us). Since the US produces three-quarters of its GDP activity internally, hyperinflation is unlikely in any case.
The real risk is stagflation ala the 1970s (and very early 80s, there were two rounds in that timespan). The hope here is US productivity, which is an altogether different set of issues to discuss, but not tonight.
Clearly RE is headed for a loft sanding. Why? most lofts need sanding.
Peter P
2006 Jan 18, 3:48pm
Randy, by saying "real price", you imply a measure to compute inflation. What will that measure be?
If you are talking about CPI (Cooked Price Index), I am sure the real drop will be more than 15%.
Randy,
do you mean inflation or USD devaluation? Unless all countries go into a competitive devaluation mode because nobody wants to stick out like a sore thumb, inflation in the US may not be felt worldwide because it may in fact be a devaluation in disguise. If the other countries devalue their currency along with ours, they are in essence continuing to *subsidize* our lifestyle. I highly suspect the European kins will be willing to do this, look at what the French backstabbers did in 1970s and 80s! If the Japanese can find more or less a substitute market with EU and vice versa, meaning, the two trading blocs integrate more than before, they may just stand by watching our USD taking a plunge without participating in the money printing exercise. In that scenario, inflation will only be felt by us, but not necessarily by other parts of the world.
Yeah, sjot, I improved the quality of my life loads in the mid-90s while taking a big pay cut. I did basically the same job in San Francisco as I had been doing in Sunnyvale, but for 30% less. I cut 2 hours a day off my commute, so it was worth it to me.
I ended up working for Wired/HotWired, right at the start of the DotCom boom, so it worked out well in other ways as well.
It is not always about the money.
sj oldtimer Says:
"had to post this: CLOVIS, Calif..."
Clovis?
Half way between a clover and a promise? Clovis?
Bwahahahaaaa...
I think I'm drunk!
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There is no doubt that the housing bubble has burst. What happens next is everyone's guess, but as many contributors of this blog have pointed out, the bubble burst effects will not be pretty to home sellers. While legitimate homeowners, i.e. those who can actually afford paying their mortgages without exotic, creative loans, can hold on through the rough ride, homebuilders and the so-called "real estate" investors (or flippers) will see the ugliest of the post-bubble era. In desperate attempts to beat out the dear neighbors to free off their "inventories", homesellers will resort to an assortment of gimmicks in hope of salvaging as much of the money they have invested. Let's name a few:
1. The Used-Car Dealer's Approach: Instead of marking the asking price down, the seller bumps up the price to about 5 to 8%, which is, conveniently, the expected "normal increase" for 2006. The goal here to let the buyer negotiate down to just about 10%, thus falling into the price range the seller wants to sell. While this approach may work (as it's worked so often in the used car biz), the seller may not be able to attract many bids because after seeing the price tag, many will just balk and will not bother biding even for a toilet cover in the house. However, the seller need not to worry, for all he or she needs is just one sucker.
2. Furniture Stores' Out-of-Business Approach: Some home builders, worried about the seemingly inevitable massive price reductions in the spring, could declare their communities having a "desperate" sale, with up to $100,000 deduction, and putting out ads that are the same as some furniture stores have done. The keyword here is "up to", and the problem here is that you can rarely have a $100,000 deduction out of the current homebuilders' prices. Having a $40,000 reduction on a $600,000 reduction is not much of a deal, as after six more months, your discount will be at least $72,000. The savings they promise are just as real has furniture stores threatening to "close forever" this weekend, just to let the owner going on vacation and re-open the next week. However, while this trick has gotten too old for furniture stores, homebuilders have started to give it a second thought.
In general, I believe house prices will continue declining over this year and next. In my opinion, buying in the middle of January 2006 is still too soon, as sellers, knowing that you are now well-aware of the bubble burst, will try to put on desperate measures to make a sell or two out of you. Good things come to those who wait.
#housing