patrick.net

We haven’t seen how China performs in a recession.

China survived the failure of "Great Leap Forward" and the Cultural Revolution pretty much intact. A recession is absolutely nothing.

"We are so certain that we are different from Japan"

"We're Americans damnit"

"chairman Cox assuring boomers"

I believe that recent data would support that boomers have been net SELLERS of RE over the last several years? We aren't THAT different from Japan. No, we don't plan for the future and the good chairman can go on reassuring all he wants. Oh and in "Waterworld I believe that placed the highest value on soil, scraps of paper and "wee harems".

Relevant to this discussion, here's a link to the latest newsletter from PIMCO and Bill Gross. As a non-expert, I find his analysis usually spot-on.

http://tinyurl.com/eqbqx

Although the report is bond market-centric, he's also of the camp that the Fed is done and will start slashing rates in about 6 months, primarily based on historical analysis of Fed actions. The other interesting point he makes is about housing:

Recession/no recession is really a faux decision to be entertaining at bond market turning points. Any number of cyclical histories point toward bond market prices bottoming – and the Fed peaking – as the economy downshifts into second or first gear as opposed to breaking to a full stop.

We find that real house prices are pro-cyclical and tend to reach a maximum near business cycle peaks, often after a prolonged period of buoyant growth in activity has raised output above its potential level and inflation pressures have begun to emerge. Subsequently, real house prices fall for about five years and their previous run-up is largely reversed. Real GDP growth slows during the first year or so after house prices peak as do growth rates of private consumption and investment.

MA,

I really appreciate the "don't sweat the boomer factor" link. I've suspected this for the longest time but it's the first time I've seen it from a source the likes of the GAO! Good find. Now we can begin to be as disrespectful to boomers in public as we've been in private.

DinOR Says:

I believe that recent data would support that boomers have been net SELLERS of RE over the last several years?

That, combined with the GAO report MA linked to (whew, thank goodness! Now we can all stop worrying!) makes me even more alarmed about the future. The implication is that boomers are really counting on home equity to fund their retirement. What happens when they all start selling their McMansions and downsizing to some "active adult" community while prices are flat or declining?

Michael Anderson Says:

What more needs to be said? I think we can all look at those two numbers and see the asset dumping hypothesis is all wet.

It's hard to argue with that. Again, more bad news for boomers counting on their housing "nest egg."

What happens when they all start selling their McMansions and downsizing to some “active adult” community while prices are flat or declining?

Perhaps I should look to get a nicer 2/2 condo with an elevator instead.

Can we file lawsuits against active adult communities for age discrimination? I want to live in one but I am underage. :(

skibum,

That is exactly what Harry Dent keeps harping on! As boomers look to downsize (or depart) there will be a growing number of what he calls "don't wanters" going on the auction block. Kids live in CO, Ma and Pa Boomer had a place in FL? Don't want'er! Sell it. Sell it now, sell it today and convert to cash as quickly as possible! You can only get half of what they paid for it? Not my problem. Send the check to........

Here we spent all these years cowering in fright of the mighty influence of the boomer fearing they would sell out of the stock market leaving us (as usual) high and dry. The truth is their COMBINED his and hers 401K rollover amounts to 29K! Go for it dude.

Peter P,

"China survived the failure of “Great Leap Forward” and the Cultural Revolution pretty much intact. A recession is absolutely nothing. "

My guess is very poorly, both economically and socially. The Chinese government absolutely needs the growth to deal with a restless and underemployed population.

GLF and CR may seem like nothing to you, but I assured you, two whole generations of Chinese suffered enormously for them, quite as much as a low grade civil war would have affected it. That they didn't topple the government is due to the Communist government's ability to squash dissent and the lack of deep inter-tribal antagonism within China.

All in all, it's no walk through in the park. Those two situations were at least as tramatic on the modern Chinese society as WWII and the following civil war.

spiralspace,

Firstly, it's nice to HAVE options. Are there ethics in RE? Not so far as I can tell. I don't want to draw a firestorm here but if you bought over two years ago taxes should not be an issue so that's out of the equation. My only reservation is that it cash flows positive "now". Can this be said once all of the repos and "repartments" log jam the inventory? I may be in the minority here but I believe in many parts of the country rents will actually soften as this thing unravels. Also, once the lease expires you may as well list (especially if you have no designs of returning) unless you are patient enough to ride this back down to your original cost basis. My big problem with that is you have to take on a whole new set of risks and retracement is far from gauranteed. IMHO/NIA

It's far from guaranteed also.

SQT, good post. I especially like the "adopt a mortgage broker that's too old to run races anymore but too broke to retire" foundation!

By the by, I’ve wondered the same thing about active adult communities. My grandmother’s is very appealing.

The new one on Sand Hill Rd across from Stanford Shopping Center is very nice. I bet is very expensive though.

I don’t need to sell but the clock is running on my non-taxable capital gains decision. Selling with taxes someday wouldn’t be the end of the world either.

Will you be able to 1031 into something? I doubt there is currently any good RE deal out there though.

not investment advice

Spiralspace,

I'd recommend you break out the calculator and run through the scenarios. First, figure out a discount rate (which might be none, if you expect rent to keep up with inflation) for future your stream of income from the house, so you can put a dollar number over the value of rental income over the time you expect to own it.

Then figure out the profit from a sale now (which might be 5-10% lower than the prevailing listing price).

Then you can repeat the exercise with 10%, 20%, 30% decrease from the sale price. How comfortable would you be holding on? How much profit would you lose? Would those be covered by the expected income stream from renting the place.

The other consideration is that you need to sell within 3 yrs of when you last lived in a home to get the 250K/head tax exemption. Also, rental income is taxed as ordinary income while sales proceeds may not be (though I believe CA taxes the sale commercial property very highly). That may all weigh into your time frame.

If you want to sell the house now. Look at your lease and see if you can get out of it under its terms, or if the terms of breaking the contract are fairly minimal (say 2 months' rent to the tenant). If no escape clause exists, you could always try renegotiating with your tenant and add some cash to sweeten up the offer - offering a couple months' rent and help with relocation will usually do the trick. Those would be things to talk over with a RE attorney (ie, not me!)

Don’t fight them. Join them.
That's defeatist talk, that is!

Mean $50k. Median $2k.
Wheee!

I'm expecting a bigger likelihood of problems in China than here, at least over the next decade or so. There seems to be a large amount of stress building up between the interior and the coast (and their respective factions). The current plan seems to be using unrest as an excuse to shift development inward, and the risks of failure seem so much greater.

...

I also don't think you can "train" top-notch engineers. You can provide a good environment and education, but that's about it. The one thing I hear about such vat-grown engineers is that the creativity is missing. Some exceptional examples may turn up simply from the volume of people involved, but if the system is not set up to detect and award such, it won't help much.

Don’t fight them. Join them.
That’s defeatist talk, that is!

Why?

requiem,

"I also don’t think you can “train” top-notch engineers. "

I think that's precisely the problem in China, at least. Their testing system is based on a rigid "only one good answer" concept where thinking outside the box is punished. Even if a youngster had the potential to be a great engineer/scientist, they're likely to have that potential taken away by 16+ years of soul deadening academic drudgery.

Why?

I'm sentimental about such things like giving up and joining "the other side". Are we taking sides yet? And what's the word for generation-related genocide? geriatricide? If civil wars are bloody, you just know this would be worse.

astrid,

Solid post, good info. I think I tend to get focused on the "retracement" aspect b/c I'm starting to sense that NO RE market is really safe from a down turn. Investor psychology often plays a factor here b/c the original cost basis is perceived as something that is invulnerable. As in; "MSFT MUST be worth $30 a share b/c that's what "I" paid for it"! Now that it's at $24 and change it's very easy to say to ourselves, "Well, when it get's back to $30 I'll make a decision then". Unfortunately the same mind set applies to erosion of profit as well. There's always a tendency to think that a retracement back to "our" c/b is a lay up when in actuality we now have to confont a whole new set of risks (class action suits, key personnel leaving etc.). Those that own @ $24 see nothing but upside!

And what’s the word for generation-related genocide? geriatricide? If civil wars are bloody, you just know this would be worse.

You are delusional. There will be no such conflict.

SFWoman,

Not to rag on your friend too much, but it seems like she might have oversold herself initially to her clients. Maybe tell the sellers that the market has changed and they need to have reasonable expectations about potential offers if they seriously want to sell. She'd lose a lot of potential listings, but those were dead carrion weight listings anyways, especially if the market heads further south.

If she's willing to move down market a little bit and play nice with banks and such, maybe she could position herself to sell foreclosed properties. That's a less glamourous job than selling multi-million dollar homes, but probably a more reliable income stream and no hassle of dealing with unrealistic sellers or fearful buyers.

You are delusional. There will be no such conflict.

Likely not, but I've always loved an over-extended metaphor.

spiralspace,

Oh no problem. Myself as well as others I'm sure use the phrase "repartment" in the loosest of terms. Meaning anything bought on specualtion, unable to be sold at a profit and reconverted back into a rental. Be it a condo, SFH townhouse or whatever.

DinOR,

Cherry picking to sell the good and keep the bad seems to be a common human instinct. Most people, even well educated people, have trouble wrapping their heads around sunk costs.

Probably why so many people in Vegas end up losing it all because they just wanted to get their money back.

Cherry picking to sell the good and keep the bad seems to be a common human instinct.

Most people do not want to realize mistakes. Therefore, we hace "escalation of commitments".

The key is to exploit this human weakness.

astrid,

I don't know that SFWoman's friend over promised and under delivered but my guess is that she probably tried to "manage their expectations" right out of the gate only to be ignored by sellers that had "already spent the money". I see quite a bit of that lately.

spiralspace,

Well, most people (including my mom, I had a horrid time talking her out of a rash condo purchase recently, because prices can't possibly fall back to...) can't wrap their heads around the idea of home prices falling 30% or more, even though that would only get us back to 2002 or 2003 price levels. But I'm a bubblehead, so I gleefully look forward to 50%+ drops in NOMINAL dollars.

What makes the situation particularly funny is that most people over-learnt about never trusting the stockmarket again, only 5 years after talking about how tech stocks were not gonna go down, blah blah blah. Explaining to them why a S&P 500 index fund is likely to be a safer bet than a "tangible" house? Forget about it!

astrid,

So true. I'll go you one further though, the MORE educated people are the more likely to keep the losers. IMHE.

Dead carrion listings? (I love it)!

"Most people do not want to realize mistakes. Therefore, we hace “escalation of commitments”.

The key is to exploit this human weakness. "

What? You mean like selling a $100K condotel for $50K, then collect $3K a month on management fees? (yeah, I thought about it) :)

MA,

WOW! That's a scary comment. I know that realtors (TM) are fond of telling us all about how long they've been in the biz and all but I suspect the truth is that they're only as good as their last sale. True, some may be well connected to an ongoing "pipeline" of business with a steady revenue stream but for every one like that there are a hundred that need next months commission check to pay last months bills! Does anyone know when they have to renew or is it different by each state? This could be a very telling indicator!

Peter P,

I can't believe I forgot the classic rent to own leases, talk about escalating of commitment on iffy property!

DinOR and MA,

NAR really did its established members a disservice by setting up such low barriers to entry. Just imagine if they required a couple difficult financial planning type certifications, a year of apprenticeship with an established agent (while getting paid almost nothing).

Oh, and maybe some more liabilities for deals gone bad?

That would separate the wheat from the all too numerous chaff, much more so than a pathetic monopoly on the MLS database.

I can’t believe I forgot the classic rent to own leases, talk about escalating of commitment on iffy property!

I think auto mechanics rely on this behavior. The more money a person spends on fixing his car, the more likely he will keep his old car. Consequently, more fixing to do!

MA,

"Remember their chief battle is to fight against all the forces pushing that commission down."

Hehe, that might have something to do with the fact that their jobs are obsolete.

RE Boomers' median 401k/IRA savings at $2,000.
Two words: Soylent Green. For every problem, there is a solution. :twisted:

“RE agent rescues” “save a realtor®” foundation
CA's next growth industry :lol:

Even if the Fed tries to “reflate” this will exacerbate the fiscal crisis because SS benefits are inflation-indexed. You can only game the CPI numbers for so long…

Oh... I dunno about that. The Fed & BLS have proven to be remarkably adept at creating inflation and then hiding it from Joe Sixpack. The more Stealth Inflation they can successfully sneak by, the better the SS/medicare obligation situation gets.

Of course, the NAR could never get the sort of legal protection that the doctors and lawyer and accountants have for their jobs. Those jobs were actually necessary and have justifications for stringent compliance. They're just antiquated brokers who really don't have a role in this eco-system anymore.

The completely unscientific desperation index
Number of Craigslist listings using the word "motivated" or "desperate":
LA: Motivated = 252 / Desperate = 4
Sac: 234/3
SF: 549/4
Miami: 902/10
LV: 309/32
OC: 317/11
SD: 274/5

A lot of people post in the wrong geographic area, or include multiple postings, etc... so take these numbers with a large grain of salt. Still, the sheer number of listings in Miami makes me think they are probably farther along into the bust than California. And it is clear that LV has by far the highest ratio of desperate sellers to motivated sellers (I guess this isn't surprising).

Peter P Says:

The new one on Sand Hill Rd across from Stanford Shopping Center is very nice. I bet is very expensive though.

I've heard the smallest units start at $1M. They are doing well, but the talk has been that these condos were supposed to "lure" retirees who want the close proximity to Stanford, an active schedule (lectures from Stanfor profs, campus activities, shopping), but it hasn't been as spectacular as hoped. My guess? Retirees don't want to give up on their Prop 13 advantage in their current homes.

SQT Says:

I think there’ll be a few “fair-weather” mortgage brokers too…

I wonder how many of these people were day trading in the late 90's?