patrick.net

http://www.housingbubblebust.com/Fed/GDPvsHSG.html

Former, I think this is the graph link you wanted to share. Thanks for the interesting site.

I posted the Reasons it “is different this time” below:

Then Randy H. wrote:

> As to FAB’s “data”, I have provided links to my
> hard data, as compiled by HSBC, annotated
> in hundreds of pages in a PDF, and downloadable
> as analyses in Excel. I’d like to see FAB’s data
> aside from anecdotals.

I didn't think that anyone would even debate anything I wrote below. I chalange Randy to post anything that "even calls in to doubt" anything I wrote...

1. Last time interest rates fell from 1990 to 1994 (This time they are on the way up)
2. Last time most people made at least a 20% down payment (This time almost no one made a 20% down payment or if they did they pulled it out with a HELOC).
3. Last time huge numbers of long time owners were not refinancing to increase leverage since they were happy with their low interest loan (This time with rates falling as the bubble got bigger most people increased their leverage).
4. Last time most people had fixed rate loans (This time most people have adjustable).
5. Last time we didn’t have an internet (This time a company can move an entire division out of CA and with e-mail and video conferencing no one will notice the difference).
6. Last time almost every loan was amortizing (This time most loans are IO).
7. Last time China was a backward communist country (This time everyone that manufactures something in California is trying to increase profits buy using inexpensive Chinese labor).
8. Last time India was a poor country with cows walking past starving people (This time is a source if hard working engineers).
9. Last time everyone working in Retail in CA had a fairly safe job (This time with internet shopping and big box categories killers we will probably have half the people in retail looking for a new job soon….

Is The Housing Bubble Fuelling GDP Growth?

yes, that too... the national Treasurer gleefully reported 'economic growth' for a while there...

empty, internal inflation, borrowing from Peter to pay Paul...

Correlations do not causality make. Or do you agree that it is the diminishing number of pirates in the world driving global warming?

But if it's correlations you want, then here is HSBC's data providing about 50 correlations to various elements of real-estate and the economy.

To take further issue with FAB's tangential data: what portion of the banking failures were due to commercial development lending? You do have a tendency to mix personal residential factors with commercial and re-income factors. Please tell me what I bought an apartment in 1990 with a Home Savings variable rate loan at 2.25% over the 11th District Cost of Funds index (aka COFI) my interest rate was 10.619%. has to do with proving residential SFH price stickiness?

If you can, I'll email it off to HSBC myself.

Randy H Says:

> Correlations do not causality make.

I know this…

> Or do you agree that it is the diminishing number of
> pirates in the world driving global warming?

I can prove that the number of pirates have no effect on the global climate…

> To take further issue with FAB’s tangential data: what portion
> of the banking failures were due to commercial development
> lending?

When the “real estate market” is good, it is good for commercial “and” residential property and when it is bad things are bad for both residential and commercial real estate. I looked at pools of bad loans and REO property from many many banks in the 90s and ALL had both bad commercial and single family loans…

> You do have a tendency to mix personal residential factors
> with commercial and re-income factors. Please tell me what
> I bought an apartment in 1990 with a Home Savings variable
> rate loan at 2.25% over the 11th District Cost of Funds index
> (aka COFI) my interest rate was 10.619%. has to do with
> proving residential SFH price stickiness?

When interest rates go up for commercial property they also go up for SFHs, when rates for commercial loans go down they also go down for SFHs (for all the same reasons). When the price per foot for homes goes up it almost always goes up for apartments in the same area about the same amount. If you graph commercial rents, commercial values and commercial loan rates they will flow with the residential numbers over the past 50 years…

Gen-X is priced out of S. Cali as far as I can tell, the boomers will sell out to the rich foriegn money escaping from whatever 3rd world revolution they helped bring about, remember Iran? lots of expartiats from Iran setteled in Westlake Village in the 1980’s. Do you think they will buy in Phoenix? or texas? hell no.

If things seem so easy to the boomers and so difficult to gen-x, all I can say is that perhaps they have better karma than us.

FAB,

Fine; I don't necessarily disagree...but would you care to show these graphs and data sources rather than narrate them? And again, what does that prove about stickiness? In fact, at first you were arguing that it's different this time, and won't be sticky. Now you're arguing that it wasn't sticky the past two times either.

I'm not at all concerned because real-estate is always sticky. Maybe it will be less so this time; maybe more so. But real-estate is non-liquid and transactional-friction heavy. Therefore, sticky. Real-estate is not arbitragable, therefore sticky. Real-estate is not an efficient market at either a macro or micro level, therefore sticky. When houses trade like stocks, sure then not-sticky.

Btw, I'd love to hear how you can prove that Pirates are not causal in relation to global average temperatures. Unless you're talking about a "statistical proof" vis-a-vis the null-hypothesis, which isn't scientific proof, then you cannot prove a negative. For every "disproof" you conjecture, I can concoct an accommodating theory of Pirates and Global Warming which you cannot refute scientifically. (This is why the burden is on me to prove that Pirates do cause warming, not the opposite).

DS said:
Raw land is intrinsically a riskier proposition than land with something on it. It can be rezoned easily away from the purpose you hoped for. And you might be dead by the time it gets developed up and starts to pay off. Assuming we can even consider such squatting on land to be ethical.

Sean, If you recall my original post, I did not suggest that everyone buy raw land indiscriminately. I just mentioned that I happen to own stock in a company which owns a lot of land in California, as I believe this is a cheaper way to protect myself if California land prices keep going up. I also asked if anyone had any better ideas.

Maybe my investment is a bad one--I am certainly open to that possibility--especially if you have any commentary that is specific to Tejon Ranch Co. But I was attempting to initiate a constructive discussion of how to invest while waiting for the bubble to crash. I'm not terribly happy about earning 5% in a savings account if/when inflation really takes hold, as I will be losing purchasing power. It is fine that you think raw land is a bad investment, but how about suggesting some alternatives?

I agree with the general sentiment here that the housing market is headed for a crash and/or long slow decline. I'm just trying to figure out what to do in the meantime. If you have any good ideas, please post them.

Is that Karma? It seems to me that you make your own luck…

You make your own luck, in this life or next. Working hard does not produce luck.

Seriously… i haven’t seen any RE distress in these two places. Darn.

However, East Bay and South Bay are doing less well.

IMO, Palo Alto now has the best pasta in the area.

I'd say, despite price reductions, I have yet to see many examples of SFHs selling below 2005 peak on this side of the bay.

Yeah, you are seeing 100K reductions, or even 200K reductions, but the initial price was entirely insane (20%+ on top of 2005 peak price). Weakness is showing on 2M or above properties, some of which are already selling at 2000/2001 price, but not in the 1M-2M market. It seems like there is a lot of support in the neighborhoods that most of us would like to move to.

Morgan Hill and Gilroy area is a different matter, but they are not on the dream list of most people here anyway.

Glen Says:
Sean, If you recall my original post, I did not suggest that everyone buy raw land indiscriminately. I just mentioned that I happen to own stock in a company which owns a lot of land in California, as I believe this is a cheaper way to protect myself if California land prices keep going up. I also asked if anyone had any better ideas.

who knows, you have to trust that they are selecting land wisely by proxy, as experts. assuming that you don't think there is something immoral in this continuing speculation over land, as the final outcome seems to be to dispossess people of the option of owning their own home in the interests of profit-making and shareholders. in choosing an ethical investment vehicle, there is a very fine line sometimes in deciding what sort of stock is 'ethical' when you drill down into all it implications for the social settlement.

Maybe my investment is a bad one–I am certainly open to that possibility–especially if you have any commentary that is specific to Tejon Ranch Co. But I was attempting to initiate a constructive discussion of how to invest while waiting for the bubble to crash. I’m not terribly happy about earning 5% in a savings account if/when inflation really takes hold, as I will be losing purchasing power. It is fine that you think raw land is a bad investment, but how about suggesting some alternatives?

i certainly don't mean to imply that the tejon ranch co is a scam company such as the one i posted. however i posted a warning in part to look out for hucksters in the ongoing real estate scam, and for people to think about the moral consequences of what stocks they're buying. buying a stock in a company implies you support their practices and raison d'etre, it doesn't let you off the hook. buying stocks in an arms dealership and living off the profits makes you just as guilty and involved as the arms dealer.

I agree with the general sentiment here that the housing market is headed for a crash and/or long slow decline. I’m just trying to figure out what to do in the meantime. If you have any good ideas, please post them.

i'm making a career of posting good ideas, mate. i just sent a 2 Mb post to the state premier, the city lord mayor and a raft of labor party thinktanks on ways of implementing affordable housing and reinstating a decent social settlement. i've ventured one or two suggestions in here also...

Muggy Says:

"Speaking of “out-of-wack,” I rent for $650/mo. what would cost me $2k/mo. to own."

In most parts of California, 2k/mo. to own would be insanely, low-priced
out of whack. 2k/mo. would be a dream come true in San Jose.

Where do you live? Muskogee, Tennessee? Podunk, Iowa?
Corndog, Idaho?

Interesting disparity...

The problem with that Comstock Partners article is that it is selective use of statistics. They point out the inability of economist consensus to accurately predict recessions, then they in the next breath talk about how Treasury yields predicted 9 of the last 10 recessions.

Significantly, in 9 of the 10 tightening periods the spread between the long-term Treasury rate and the t-bill yield narrowed to under 50 basis points.

Here's what they leave out: More than double that many tightening periods did not foretell recessions (regardless of what the article states). There is an old joke that goes "yield-curve inversions have predicted 20 of the last 10 recessions".

Surfer X/Michael Holliday,

Uh I hate to break it to you guys but it's not just the "Cali" of our youth that the boomers have "re-invented" and custom tailored for their second childhood. It the whole freakin country.

Chance favors the prepared mind.

Very true. Have you read the book, The Luck Factor?

Muggy,

From time to time we have our "resident expert" (George) bring us fresh meat from the FL debacle. As he's a FL realtor you can consider his posts "from the burning bush". Great guy, very well versed in all things Sunshine State.

Diversion time,

CatsThatLookLikeHitler.com

Muggy Says:

> Speaking of “out-of-wack,” I rent for $650/mo.
> what would cost me $2k/mo. to own.

There is a condo for sale at 2208 Vallejo in SF for $2,995,000 (MLS# 307478)

If I make a $600K cash down payment (and stop getting the $2,500 a month in CD income that comes close to covering my current rent in the area) my mortage payment will only be about $15,000 a month + property taxes of about $3,000 a month, HOA dues of about $1,000 and another $500 to rent a second parking space in the area (since the $2.9mm condo only has one space).

Things are out of whack when it is about $20,000 month more than I am paying now in rent to "buy" a condo (not a mansion with a 5 car garage, but a crappy condo with one parking space)...

San Francisco price data. You decide how hard or soft previous landings were.

First chart is median home prices 1975-2005 for the Bay Area MSA, in nominal terms.

Second chart is the real median house price growth for the same period. Note that nowhere did median real home prices drop faster than 8% in any given year. 1981-82 barely broke -5%. 1991-1996 peaked at -8% in 91, then settled back to about -5% until 95, then drifted back to 0%.

Third chart is the same as the first chart, but adjusted for inflation and stated in 2000 dollars (thus real prices). Here you can see the absolute drop in median during the real-price decline years. 81-82 are barely visible. The 90s drop fell from about $380K to $300K (in 2000 dollars).

**source, HSBC, Jan 10, 2006.

(you may need to click on the graphic to enlarge it in your browser)

Yeah, what people who post here don't remember is how absolutely hellish the late 80's were in the LA economy. Unemployment was something like 15%, the aerospace industry was pretty much leaving the area entirely and even so, home prices only went down about 25% over three years.

Even with all the easy money that has been floating around, I don't see it going down that much again, barring a major recession. The economy is not exactly doing great, but we are hardly in any kind of recession.

Jimbo,

Just wait for the HELOC money and RE related jobs dry up. This economy may look better than the one in 1990, but I think the fundamentals are pretty bad. Furthermore, a lot of houses are held by mortgage brokers and realtors, so I definitely see those houses coming on the market whatever the price.

I can demonstrate that decrease of pirates cause increases in global warming. They disrupt shipping and kill people. Disrupting shipping causes a drop in shipping and lower consumption of shipping fuel. It also depresses export economies, causing them to use less fossil fuel.

We also know that people are a likely source of greenhouse gases, which lead to global warming (ref: Al Gore's Futurama clip). If they are killed, that reduces the source.

aeroplanes cause global dimming....

peak oil is still a problem: bakhtiari says it occurred last year....

Oil production limit reached: expert. 10/07/2006. ABC News Online

An international oil industry expert says the limit of global oil production has been reached.

Academic and former National Iranian Oil Company executive Dr Ali Samsam Bakhtiari has told the Financial Services Institute in Sydney the world's oil fields are producing as much oil as they can.

He says giant fields in Saudi Arabia and Kuwait are struggling to meet production targets.

Dr Bakhtiari says the massive output declines in the North Sea oil fields and Mexican oil fields will have a major economic impact.

Dr Bakhtiari says for the first time in 150 years, the world is entering an era in which it cannot have all the oil it wants.

He says there are five years left to plan priorities for the use of crude oil.

astrid,

Now there's something that doesn't get near the "air time" it deserves! In my arena I suppose we would consider these "investment properties" the equivelant of "insider holdings". I can't think of ONE mort. brkr. or realtwhore I've met in the last 5 years that DIDN'T have their own deal/deals in the works. When you think about it if one could pocket a 100, 200, 500K+ that's a lot of commissions/fees that they don't have to generate by sweat of brow! My wife had heard (through the bamboo mafia) that a Filipina realtor in LV got over extended with flipper properties and now has to decide wether she wants to keep up payments on her primary residence and let her inv. prop. go or take her chances at the craps table? Pretty predictable huh?

david cee,

We recently returned from a trip to LV and I dare say the scenario you describe above is the least of their worries. I'd seen a billboard right on Tropicana Ave. offering brand new const. condos (2/2) for "the mid 100's. It's going to be difficult for this investor to do anything when builders are offering all kinds of incentives a private inv. can't come close to competing with. You're right though, this guy is past his denial stage and likely generating considerable "anger". I'd seen several eye catching bold print ads that offer "Close before August 15th and Get a FREE POOL! Mind you this was part of a builder's unsold, never lived in inventory!

yeah, it's all just a big, huge mess... we should never have come down from the trees...

">BTW, Downtown Palo Alto and Mountain View are really thriving. That may cushion the soft landing for certain types of properties.

Seriously… i haven’t seen any RE distress in these two places. Darn. "

I have been monitoring Mountain View and Los Altos house prices, and there have been some price reductions of 50,000 -100,000 some even a bit more - some of the houses are listed as new listings so you don't see the price reductions (800,000 - 1.5m house price range) - but I have the previous listings to compare the new ones. It's only a few cases at the minute and some houses are still selling, but the market has changed here! Houses that are not quite situated right are not doing so well now.

I cant' afford them yet, but I enjoy keeping a tab on them all, so I know what I want when the time is right. :-) Meanwhile I rent a house for 2400, that would cost $8000 per month to buy interest only (rough estimate) and then there's all the home improvements it needs...

Claire

DinOR Says:

Surfer X/Michael Holliday,

Uh I hate to break it to you guys but it’s not just the “Cali” of our youth that the boomers have “re-invented” and custom tailored for their second childhood. It the whole freakin country.

_____

Yes!

The three days of peace, love, and excrement hurled in prodigious quantities, that they called "Woodstock," has spread out like a giant socio-political-economic stain over this great land of ours, 3-4 decades later.

Too bad we weren't of age in Cali during the 70s. By default, if we were able to roll out of bed and make it to work, even if still half drunk and stoned (like many did), we'd now be sitting at the top of the friggen' real estate heap, fat and happy as a clam in a bowl of New England-style clam chow chow.

Conor,

I don't disagree with your reasoning. The only contention I have in your assumptions is the notion that CA is the most expensive cost of operations state. It is about in the middle. I think we ranked 24th most expensive last I looked. Of course, this depends upon industry and varies quite a bit.

Certainly the disparity between "haves" and "have nots" won't be remedied by a housing correction. This is one of the things I get annoyed about from various bear camps. It's one thing to be a rational skeptic, it's another thing to be hoping that some coming calamity will punish the wicked and reward the righteous. That pretty much never happens in economic history. When things restructure the outcomes aren't usually very rational or righteous...they just are different with a bias towards the wealthy protecting themselves while everyone else fights it out.

I do think inflation will go a long way towards correcting the affordability imbalance; but not all the way. Real prices of homes have to drop too. By how much I can't guess. But I insist that there must be wage inflation if there is cost inflation, just lagged. Simply applying cost inflation to the rental market, which is more liquid than the housing market, will put incredible pressure on wages. In fact, wages are already rising very strongly, as last week's data showed.

And just for clarification, I am not a Bull or a Bear, although I usually get called both by extremists on either side. My definition of Bull is "the last guy to realize the party's over". My definition of Bear is "the last guy to capitulate at the top; the greatest fool".

Conor,

Rich Toscano (all around great guy and SoCal Bubble Authority) confirms your take at Prof. Piggington's! He de-bunks more myth than you can shake a stick at. I think the article is "Why is it so expensive to live in Southern California"? He further substantiates *astrid's* position that in a number of cases flipper properties are owned by realtors and mortgage brokers among others that rely on RE as their primary source of income.

Randy H,

My definition of a bear couldn't be more different. Bears typically believe that EVERYTHING is over rated, over bought and overvalued. Sour grapes are always within an arms reach and they would rather take a 6% return when even widows are making 12%!

Bears don't create anything, employ people or innovate new products. They critique what others have done (wether or not they have been asked to do so). I don't really mind either camp, it doesn't bother me either way but what we have been surrounded by for the last 5+ years has been "hogs".

Just as few among us are true introverts or extroverts, most of us are ambiverts. Some things I'm bullish on, others bearish. That's the trick. Knowing what to be bearish on and when to be bullish. Who was it that said: "I made all of my money by selling early"?

DS said: i certainly don’t mean to imply that the tejon ranch co is a scam company such as the one i posted. however i posted a warning in part to look out for hucksters in the ongoing real estate scam, and for people to think about the moral consequences of what stocks they’re buying. buying a stock in a company implies you support their practices and raison d’etre, it doesn’t let you off the hook. buying stocks in an arms dealership and living off the profits makes you just as guilty and involved as the arms dealer.

Well, I generally support Tejon's practices. They own a huge chunk of relatively undeveloped land in the Central Valley. However, rather than optioning it off for "roof farms" to the highest bidding homebuilder, thereby transforming the landscape into seas of cookie-cutter homes which will end up vacant when the bubble bursts, they are committed to sustainable development over the long term. You may want to check out tejon.com.

I don't buy defense contractors or tobacco companies. Other than that, I'm comfortable owning most publicly traded stocks. However, I do not deceive myself into thinking that my abstention from purchasing defense contractors or tobacco companies will in any way hurt their businesses. Because for everyone like me who abstains from purchasing such stocks, someone else will be happy to step in to take the profits. Taxation and regulation are much more effective ways of policing the market than "ethical investing."

Pretty amusing post. Of course this little group here is attempting the same type of market gaming on the other side of the table. We all want to convince each other and as many people as possible not to buy. Once prices come down to a price that any individual one of us thinks is "fair", "doable" or "bottom", we'll pull the trigger and start praying for price increases the next day. We're all rational economic actors, after all.

Here's some more inventory data to convince help our little buyer's conspiracy maintain loyalty...

San Mateo (all price ranges):
6/8/06 1363
6/12/06 1428
6/19/06 1452
6/26/06 1467
7/10/06 1488

San Jose (all price ranges):
6/8/06 3669
6/12/06 3709
6/19/06 3793
6/26/06 3915
7/10/06 3915

Glen,

There has been measureable headway made in the are of "green investing". Just a few years ago these types of funds were almost unheard of. Now they have enough of a foot print they can confront say, Coca Cola about the plastic six pack "rings" that dolphins keep finding on their snouts! So they are gaining traction. Also many charitable institutions by charter are starting to shy away from "sin" stocks. At first it really was just a "feel good" measure but because these funds have little fear of litigation going forward some have out performed. Hell, even I'm more willing to consider them b/c frankly I've weathered about as many class action law suits as I'd care to.

George,

"floating phantom offers"

"even the bargains are languishing on the market"

Oh so good to hear from you my friend. For those among my friends and associates that have not yet "converted" I offer FL as a little insight as to what the future may hold (and you bring it in abundance)! Yes we have considered building as a way around bubble pricing but as they always say YOU MAKE YOUR MONEY ON THE BUY! So if we don't "buy" the lot (or acreage) right I doubt the net result would be different. It's funny to note though that many of the builders pricing and sales tactics during the upswing was that their "nuts were in a vice" yet they continue to discount as they move forward with new projects and sub divisions. What's up with that?

FRIFY,

Up until very recently ONLY BULLS participated in RE. There was no bearish presence at all. Now with near real time coverage and derivatives like "housing futures" bears are finally having "some" kind of input. This is a balance that's been sorely lacking for years (along with some serious restructuring of the RE industry). Like Peter P I'll remain bearish until it no longer makes sense to be bearish!

SQT,

No point. Carry on! ;-)

DinOR,

Now with near real time coverage and derivatives like “housing futures” bears are finally having “some” kind of input.

No, unlike the stock market you can't sell housing short (without suffering significant transaction costs and having the value of your option priced by suspect metrics). Bears have no say other than to try to convince borderline bulls to put down the gun and back slowly away from the house.

We all want to be bulls one day. As bears, when thinking about housing, we find ourselves wishing un-social thoughts (earthquake? bankruptcies? interest rate hikes? recessions? Hurray!). It's not any way to live life, wishing misfortune on those around you. I thank you all for the support, but I'm going to try not to think about it for the next couple years.