patrick.net

I really don't mind straying from exclusively housing related topics. To me, the housing bubble is already established and there's tons of better formatted information about it elsewhere. I come here for discussions about the economic repercussions of the bubble burst, economic survival strategies, and the interesting discussions on whatever.

What drew me to this site are the active participation of some very sharp and interesting people. I'm afraid the collegial atmosphere that existed for the last year or so may be coming to an end, regardless of what we do. The chemistry of what makes a website great is pretty fragile, and it's particularly difficult to maintain without constant supervision. I've seen it happen to Washington Monthly's blog. It was really great for the first 6 months, but then more and more troll went to it and now I hardly ever read it, and I never bother to read the comments.

If this site goes further downhill, I'll probably spend more time participating in Randy H and Brad Delong's websites.

As for buying real estate. I don't even think about buying for the next 5 to 10 years. Renting is not only cheaper, but more economically efficient and has a more economically transparent structure. If I rent, I sign a lease and I know that's how much my rent will be for the remainder of the lease and I know how much it'll cost to break the lease.

That's the sort of flexibility and certainty I'll need to survive the hard economic adjustments I see ahead of us. The next 10 years will be very punishing for any family or individual who is trapped in a high cost and inflexible lifestyle.

doodler,

I agree with you, but $100K bought a lot more than $700K today. Furthermore, the problems of buying 25 years ago was centered on high interest rates, which then proceeded to go down. The prices themselves weren't all that high and taking a percentage loss on the principal is easier.

I'm burnt on this housing insanity.

I'm confident that what goes up must come down.
The salaries and jobs just aren't there to sustain this
kind of BA insanity.

Just when you think prices will stay high forever, just when you're about
to collapse from exhaustion and disbelief...the wave will crash...
BLAM!

It's pure economic physics.

And don't this new market paradigm sh-t. There ain't nothin' new under the sun. A San Jose sh-tbox is all it will ever be. Just that: an SJSB.

"there was panic over getting “in” before rates got even higher!!"

I though buyers had adjustable rate mortgages during that time period.

Lower principals and higher nominal interest rates are very important. Even if they stayed the same, wages would go up. Thus, the mortgage payment and taxes would go down in real terms five or ten years onward. The lower principal means, as I've already mentioned, that selling for a percentage loss is not nearly as huge of a cost as it is nowadays.

Agree that a lot of the irratability is due to our dawning realization that the crash will take a long time.

The market has pretty much been flat for a whole year now. Declines are just around the corner, but MEANINGFUL declines appear to be quite a ways away. I don't know about you, but a 5-10% reduction isn't exactly going to make me run out and start placing bids.

Some of us don't want to wait another 5-10 years just to get a middle class house. The pace of our lives may not coincide with the pace of the market. I know that my eldest will be ready for school in two years, and I want to be out of this apartment by then.

That is what is making me grumpy, anyway. But it's a good thing, too. I have to make decisions instead of simply sitting and waiting for the market to change. It feels good to make a decision and take action. For example, I will be getting my Texas professional license in September. I am excited about looking for a job there. TX will have its share of drawbacks I'm sure, but I am CERTAIN that I can afford a decent house there. Right now, today. And as I begin to make preparations, the day when we will own a house seems to draw closer. That feels good.

Joe Schmoe,

Can you get a decent long term rental in LA at a reasonable price? I know you're concerned about being close to your parents-in-law so maybe a compromise short term solution would make more sense than a move to Texas. If housing is your primary concern with living in California, then I'd urge you to consider staying. Renting is not so bad and lots of kids grow up just fine in apartments and lots of kids in upscale subdivisions get into trouble. Parenting and the right school will matter more.

I'm not pointing this comment towards you, but I do think too many young people here are too eager to buy. Being stuck underwater on an expensive house is a terrible drain on one's life. Renting nowadays doesn't involve sharing walls or living in a bad neighborhood. Overall, I don't understand the need to "own" rather than to rent.

I've read this blog for a long time, and once in a while, contributed, and once in a while, asked for advice. Given the rather pessimistic tone lately, I would like to say this.

My brother recently moved from Long Island NY to SAC. The process started in the fall of last year. He wanted to buy a house, so bad. He wanted so bad to set up security for a new family. I told him no no no. I told him why, I told him it's gonna suck for the next few years. I asked for advice on this blog.

SQT gave me great advice on where to live, which I passed on. He's got plenty of $. Not an issue at all. Anyway, he now rents somewhere in Rocklin (I think). He just got married. The wedding was last weekend. He moved his wife and 3 kids age 6 to 10 there from LI. He's got a nice place, with a pool, that will do for the time being. He pays less than half what he would to buy. He is really amazed at how different it is, and how constrained LI was, and how much opportunity there is for the kids in SAC.

He's happy, his wife is happy although it sucked leaving her friends and extended family, but she did it, and he did it, because they love each other. The kids have NO idea, they don't care, they just love them both.
They have a nice place, a nice home. Everyone's really happy, starting out on a new adventure.

My point is this... A "purchased" house is not a home, it is the people in it, the relationships, the pursuit of happiness, that makes life. It is decidedly NOT a mortgage, or "asset appreciation", or anything else.

Be happy, keep smiling. Rent or own, it has no, and I mean NO, consequence. Both renting and owning have given me happiness. By no means, are they, will they be, or should they be, the the driving force.

In conclusion, thanks to all the regular contributors, the bloggers

And particurly to SQT. You made a difference.

RIC

Guys,

the first tranche of meaningful scale of ARM reset begins in May/June this year. Have a bit more patience please, the biggest reset will begin mid 2008 - 2009. From what I see, banks are still giving out toxic ARM/I/O/neg-am loans left and right manufacturing NEOs as we speak. So the decline will be meaningful by year end.

Most people on this site are not targeting the beginner homes, so you need to wait out a bit. The multi-million trophy home aside, all homebuyers rely on the lower strata to cash out on their current homes to move up, if the beginner homebuyers bail out, the mid to higher end homebuyers will definitely feel the pain, just a bit later. There aren't that many people with more than $300K DP and $300K household income to put down on a 1.2M home and haven't bought yet.

You have to at least wait out till 2007/2008 to cast your verdict because the reset of this period will affect the homebuyers who jumped in at the top in 2004/2005, pretty much the most marginal buyers you can find, and they account for 65% of the purchase in 2004/2005. They are already upside down as we speak. Now we are just waiting for them to turn over the keys, which won't take long, because such homebuyers typically have little financial resources to last, if they did, they would have bought much earlier in 2002 or 2003.

Give it another 6 months, 2006 winter will start to become very rewarding for those who waited.

If I were a fresh grad, I'd be thrilled at the supply of so many homes on the market. If you can delay your homesownership urge for about 10 years, you have sooooo many choices.

Seriously, when I was renting back then, I didn't have half the choice. The rental homes in the Bay Area were run-down, downright ugly, dirty, and the landlords didn't care. Never have I seen such a big stock of nicely updated houses / new condos available at less than half of the ownership cost. I'd be nuts not to rent if I had to make the choice today. Trust me, 15 years ago, even if you were willing to pay 200-500 more for a nicer SFH or condo, the options were NOT there. Today, the options are plenty.

I think the younger folks will have a better lifestyle than us if they didn't hurry into buying. Subsidized housing really takes on a new meaning in the Bay Area.

OO,

I agree wholeheatedly. I've rented plenty, good and bad. We found a great house to rent in Boston in 1991. It was like going to an interview; we wanted it so bad. We knew it was gold. We rented it; a really nice house for $1,000 a month, from a guy that moved up in life but no way could get the money he put into the house out of it. We were good tenants, he was a good LL. We lived there for 3 years.

Then we moved, out of MA. To more sane places (yes, this economic bubble and crash shit has happened before)

We could have bought the place for 160K. It sold several times since then. 160K, 220K, 330K, 550K. Just for fun, I track it on domania.com.

I have no, and I mean, no, regrets about not buying that house.

Money, equity, etc is not that important. Really. I mean it.

Joe Schmoe Says:

"...I will be getting my Texas professional license in September. I am excited about looking for a job there. TX will have its share of drawbacks I’m sure, but I am CERTAIN that I can afford a decent house there. Right now, today. And as I begin to make preparations, the day when we will own a house seems to draw closer. That feels good."
_____

Hey Schmoe, Nice!

I used to live in Arlington, Texas. It's between Dallas & Ft. Worth.
It has some small rolling hills...very nice!

I liked Arlington. Of course the population went from 100K to, I think, 400K now!

Anyway, Texas was fun as a kid from San Jose. I did a lot of fishing and mini bike riding and thuderstorm watching.

There's a lot going on in the Dallas Ft. Worth area. Big, nice houses, big spreads. Brick homes. Pretty cheap. Go for it. It's hot & humid in the summer and sometimes snows/sleets in the winter, but WTF. Beats living under a bridge in San Jose. At least you'll have some pride etc.

That's the problem with the Bay Area. It's hard to make it through the day with any sense of pride since you're getting fricken' raped every which way you turn.

Go to Texas young man. You'll have some pride of ownership and pride of personal progress.

Just my 2 cents.

Then vs now

I was in college in the South Bay in the early 1980's, when the prime rate was near 20%. Lived in the same neighborhood I have always lived in. Same neighborhood inside of East S.J.

Even though I was a teenager at the time, I was fascinated by the local real estate market. I used to read the classified ads a lot.

What I remember was that the mortgage rates were prohibitively high at the time. It was just about impossible to borrow at those rates, and it made construction go on pause for a few years. I also remember that just about every listing included the terms of the seller's mortgage. This was because at the time, the loans were assumed by the buyer. It was kind of like, taking over the payments. The difference between the mortgage balance and the sales price would be financed at market rates. The terms of the assumable mortgage were detailed right along with the descriptions of the property. I don't remember or maybe never knew who would finance the second mortgage, - if it was the seller or if it was a third party or S&L or whatever.

The consequence was that this made some liquidity in the market, and the amount borrowed at those extreme rates was a relatively smaller amount.

It's funny, whenever I read stuff in the popular media about real estate trends and what happened in the Volker years, I don't ever find any mention of the mortgage assumptions.

Joe Schmoe,

My advice, having done this. Expand your horizons and remain flexible, particularly at first. But if you like TX, go for it.

When we moved from Boston in '94 (I was 33 at the time), the biggest thing was COL escape. We targeted small or second tier cities close to big metro areas, with reasonable weather (preferably not COLD). We were both "east of Mississippi river" people with family in NY and DC. We targeted Charlotte, Richmond VA, and Pittsburgh PA. Mr. Gore's now ubiquitous innernet being virtually non-existent, I subscribed to Sunday newspapers and had them sent to Boston. As my handle suggests, I found a job in Richmond.

We rented for the first six months - mind you this was at the bottom of the last cycle - but Richmond is not exactly bubble territory - bubble yes (as is the world), extreme bubble no.

We bought a 4 br POS fixer in a nice neighborhood no one else would touch for a pretty good deal and spent a lot of time fixing it up. I learned all about fixing up houses working on my own house, and even turned it into a nice little business when I was done and tired of spending money on my house when I figured I could be making money doing work on other people's houses.

Now I don't do that anymore because it's just not that important to me. But as the cobblers wife has no shoes, my wife does not yet have her pergraniteel. :) But it will come.

Anyway, it's the best move we ever made. I took a huge pay cut, my wife quit working, our income went in half, and we made out like bandits as far as I'm concerned. My daughter was born 3 weeks after the move.

For all who are frustrated..... wait and rent. Your time, like mine at the time, is coming.

RIC

One thing home buyers need to realize is, only less than 5% of the entire home stock come on market every year. You don't need all the homeowners to go belly up to secure a good deal for yourself, you only need slightly more than 5%, perhaps 5.5 or 6% of them to go upside down in their finance to snap a good deal. Nowadays, with the % of "home ownership" at historical high, which logically implies that the % of potential owneroccupiers at historical low, you probably only need 1-2% of the housing stock to capitulate to make the market crash.

I'd say 50% of the homeowners in the Bay Area are fine, they have enough equity, and a secure enough job. Housing value goes up or down 50%, they are still living in the same home, just paper gain or paper loss, no material impact on life whatsoever, and certain number of them will die in their own homes, it is just a roof over the head.

What we are interested in is the other 50% of the homeowners, or more precisely, the single-digit percent of homeowners who are marginal "owners" that probably shouldn't be given a loan to buy a house to begin with. That's why the waiting game is rewarding, because only a very small number of desperate home "owners" are required to crash the market.

OO's marginal owners

Dear OO,

This is an interesting analysis. What I find surprising is that I am starting to hear "little stories" like the one a reader named SQT shared, about your 50% longtime home owners who have made themselves into marginal owners, in their pursuits of a higher apparent quality of life.

It is even people I know. Now it all makes sense, "how they could afford that".

The wildcard that I cannot put a finger on, and you did not mention in your post, is all of the immigrants wallowing in cash. From elite families in their countries (mainly India and Shanghai, I suppose), even bubble prices seem low to them, in comparison to what they get "back home". For some reason, they all want to live in the Bay Area or LA or Vancouver. Maybe, those rich Asians will bail out the people in SQT's story and bail out my friends too.

SQT,
One day, I will visit my brother. On that day, I think a blog party is in order!
RIC

I was out there shopping for a lawn mower yesterday at Home Depot.

Since I haven't been to Home Depot for a long time, I was shocked to find most any item priced above $100 had a monthly cost label next to it. I was looking for a lawn mower costing around $300-500, well, there is a monthly cost label of "ONLY 15 a month!". Then I went through the home appliance area, the refrigerators, stove ovens all have BIG CAP LETTERS of $50 a month, $30 a month hanging on the doors, it took me a while to find out what the overall cash price is!

I await the day when we go to Starbucks to find our latte price quoted by "Only 0.2 a month!"

OO, my starbucks habit is $2/ work day, so .2 a month would be a most welcome experience.

I think I am developing diar-Leah of the keyboard tonight. :)