patrick.net

It is wise to distinguish between investment real estate and home ownership, and the reality of timing the market for the latter purchase.

Mr Right, you are right. However, it is *always* unwise to stretch with unsound financing options.

@Mr. Right, Zephyr & Jack,

I don't think anyone (on this blog anyway) has been predicting a crash for 3 years, nor predicting that RE will fall to zero overnight (a-la Pets.com). I've only been posting here myself for a couple of months and lurking on Patrick for about a year, so I could be wrong on this, but I don't think we're all perma-bears.

Regardless, I firmly believe in CA, FL, NV, the Northwest and New England, there is a speculative bubble now and has been for at least a few years. Is there a "national" bubble? Probably to some degree, but it's been driven mainly by that "froth" along both coasts. As you've pointed out, the average cost of housing nationwide is still around $260K. Of course, I'm reminded of the fable about the man who asked his neighbors what the average depth of the local lake was. They told him it was 3 feet. So he waded out with his fishing gear and promptly drowned (because while the average was 3', some areas were much deeper than that).

We're in a situation here in CA, where the median price-to-income ratio is at an all-time high of 10:1. Affordability is now at a 15-year low of 16% (see CAR stats), and is likely to drop again when they recalculate the HAI for the June numbers. We've seen the NAR admit that 23% of the "demand" last year was from speculators, and another 13% was for "second/vacation" homes, also new records. It's trending even higher this year. We also know that 50% of 2004 CA home purchases were made with "exotic" NAAVLP-style loans, and it's trending around 70% this year. None of this is a good sign, in terms of long-term sustainability.

There is undeniably a large unsustainable bubble in the CA real estate market, which is the one I know/care the most about because I live here. I also see strong evidence of many other concurrent bubbles in other parts of the country, and in other countries. I'd rather be slightly wrong in favor of caution than end up losing my life savings and being upside-down on the largest financial decision most of us ever make in life.

Just my personal opinion and "not investment advice".

hymie Says:
I must say, Marina Prime cracks me up. His posts are pretty darn hilarious when taken with a grain of salt. I like how he ends it with Yes! Yes, a troll, but amusing. I thinks its good for the blog. Not so serious.

Hymie, I hate to admit it , but you have a point. MP's NY Times “Fear of Committing?” link was one of the most hilarious pieces I've read so far (even though it wasn't meant to be funny). I also think his posts have slightly improved over time --more data & links, fewer insults.

However, I'm not quite ready to take him off the "Troll warning" list just yet. He's still ALWAYS ON TRANSMIT, NEVER ON RECEIVE, and a large % of his posts still consist of bragging and renter-baiting. There are plenty of non-troll housing bulls here who are willing to engage in a two-way debate, with genuine give and take.

And btw, MarinaPrime --right back at'cha:

"Report: Bay Area homes among most at-risk for price declines"
tinyurl.com/awrgd

Yes!

hymie - good thread idea.
I think this one still has "room to grow" for now, so maybe this can be the next one.

It is really hard for me to separate the national housing bubble from the CA bubble. I live in an area that has seen unprecedented housing appreciation, so it's impossible for me to believe that the worst housing busts are behind us and the only thing on the road ahead is a mild correction. That may be true for the national market, but I'll never buy that argument in CA.

I also never claimed there wasn't and echo boom, it just said I didn't think it was going to be significant enough in numbers to fill the gap left behind when the boomers retire and start dying off-- many many years down the road. I think areas that have seen sharp increases will see sharp declines. Because CA is one of the worlds largest economies this may have a bigger impact on the national picture than others believe.

I totally agree about the baby boom generation showing an incredible willingness to transfer costs to future generations. As a 24-year-old, I forsee myself having to spend half my monthl earnings supporting them through Social Security, Medicare, etc. This selfish generation as a whole has done absolutely nothing to save for its own retirement or elder care needs and those of us in our prime earning years will pay for it. Thanks!

Sorry this rant is a little off topic.

@x'er,

You know I've never been all that comfortable with pat demographic labels (boomer, Gen-X, Gen-y, "greatest generation", etc.). They range from being useful oversimplifications at best, to gross stereotypes at worst. It's not like if you were born on Dec. 31st, 1945 @ 11:59pm, you automatically grow up to be a self-sacrificing hard-working saint, while if you were born a minute later, you turn into a hedonistic, drug-abusing group-sex-having yuppie.

In general, though, I've seen a strong hedonistic/selfish pattern among many born in the "boomer" generation range, though it's by no means contained to only to boomers. I've also met plenty of selfish yuppie types in my own generation (Gen-X), and some from older generations --as you mentioned.

@Kevin,
No need to apologize, bro --your rant is very much "on-topic. ;-) Btw, if you want to see a really over-the-top anti-boomer rant, I give you an Archives classic by Surfer-X:

From June thread “TV Reporter looking for interviewees”

Surfer-X Says:
June 17th, 2005 at 1:58 am

Think about it, boomers come of age in what the early 70’s? What happens? The drunken orgy called the 70’s. Remember the 70’s? Give me an ommmm from the belly and chant, “lets get high and have sex”. Ok enter the 80’s, a bit of malise, boomers chomping at the bit but the old guard won’t go away. Gordon Gecko etal. Now enter their accension, the 90’s, those fuckers, the “greatest generation” are finally able to be driven off, and what do we get, DOT BOMB. Clinton etal. Greatest transfer of wealth the world has ever seen. The gloves are mother fucking off. Boomer on board. Look the fuck out. Ok so that drunken orgy goes by the wayside after they’ve stolen most everyones pension and/or 401K. “No Chuck i think tech is excellent, “fuck it sell boys, I’ve got all the suckers buying”. Hmm what to do now if you’re a boomer who wants to get high and have sex? Wait a minute, Easy Al is playing ball, whats say we buy some more houses. You know what is better than a Navigator, an Escalade, (que the Zep man) what’s better than an Escalade? A Hummer. Buy buy buy. Fuck it we can just borrow the money, after all we’ve never had to pay yet, why should we ever? Lets get high and have sex. Peferably in our zero plot line McMansions. Fuckers don’t even have decent taste. Follow the heard boys.

I am going to buy puts on housing stocks. The only question is ... which stock?

I would prefer MTH, since I think it is the most overvalued, but they don't have any LEAPS for MTH, so I will probably stick with TOL.

Has anyone else looked into this?

I am shorting the housing stock primarily as a way of hedging my investment in real estate: a duplex in Noe Valley.

I bought it three years ago with a fixed 5.25% 30 year mortgage. I am not too worried about the housing market going down, but then again, I plan to keep this place for the rest of my life, so it doesn't make that much difference to me one way or another. I would be a bit distressed if the rental market goes down anymore, though.

In the long run, like 10 years from now or so, I will probably be forced to buy a place in East Bay by my fiancee, who prefers the weather there. Right now, to buy where I would want to live, either Rockridge or lower Piedmont, I would have to sell my house in Noe, which I don't want to do.

I suspect that we are in some kind of mini-bubble, similar to what happened in California in the 70s and again in the 89-90 period. I know 20% appreciation rates are unsustainable. I think a lot of you have underestimated how much the "saver" countries, like China and Japan, are willing to keep propping up our spending. They are as addicted to our buying as we are to their lending.

And as for the boomer question, yes of course, taxes are going to have to go up to support all those old people. It is not even a matter of selfishness really, just survival. When you have twice as many old people per worker as you do now, something is going to have to give. Unless you want to see grandma eating cat food and picking through the garbage, like you did before Social Security. Hopefully, we will find some way to stop spending so much on health care though.

Just found an ever better Surfer-X anti-boomer rant while trawling the archives:

From thread "Forum, Rising Supply":

Surfer-X Says:
June 8th, 2005 at 6:30 pm

Oh what’s the matter people? Freedom of Speech only includes “being polite”. I’m sorry, what exactly is polite about being priced out of a housing market by greedy fucks whose sole goal is making a buck? What exactly is polite about the boomers behaving like locusts, consuming everything in their path? Just went to Austin TX, drove there, funny thing, from here to Austin there are tens of thousands of houses, empty houses, ZPL pieces of shit. From the CA/AZ border to the TX border there is a continous line of billboards advertising “55+” Del Webb Communities. Great billboard in TX, “did you know your house is made of money”. Don’t like the language? I don’t feel the world owes me anything, but what I do not like, more than religious fucks, is when trend sucking boomers shove a bunch of shit down my throat, first the dot.com, now housing. Think it isn’t the Boomers? Look at their record. Fuck them. Fuck their SUV’s, fuck their greed, fuck their trite music, fuck their conspicous consumption, did I say fuck their greed yet? Oh, I can hear the boomer comments now, “but what about the civil rights?” Sorry that was LBJ and the WWII generation. Getting high and having group sex doesn’t mean you actually contributed to the “movement’. Interesting side note, when did the Vietnam memorial go up? It was 1982. How many US soldiers died? 54K. When did the WWII memorial go up? 2004, how many died? Around 400K. What does this have to do with the housing crash. Nothing, just me wishing they finally get theirs. I’m sorry but am I the only one outraged by this horseshit? The silver spoon boomers who have never really worried about anything, well other than getting high and having group sex.

I think a lot of you have underestimated how much the “saver” countries, like China and Japan, are willing to keep propping up our spending. They are as addicted to our buying as we are to their lending.

Jimbo, point taken, but I'm not so sure this arrangement can continue forever. China's recent "basket currency" RMB re-pegging raises a red flag in my book. --see "The China Syndrome" thread for more about this.

And as for the boomer question, yes of course, taxes are going to have to go up to support all those old people. It is not even a matter of selfishness really, just survival. When you have twice as many old people per worker as you do now, something is going to have to give. Unless you want to see grandma eating cat food and picking through the garbage, like you did before Social Security. Hopefully, we will find some way to stop spending so much on health care though.

I'm not so sure that taxing other generations alone (Gen-X, echo boomers) will work, for two reasons:
1. There won't be enough workers per boomer, and
2. "Fixing" the Medicare/SS /savings deficits through taxes alone would require phenomenally high payroll taxes (I've seen estimates as high as 50-60% of take-home pay).

How are Gen-X/echo boomers going to like being impoverished & taxed to death, while their income gets handed over to boomers, who are in this situation primarily because they refused to save/plan ahead when they could? This is the kind of stuff that leads to social upheavals & war. I think we'll probably see the official retirement age raised significanly higher than 65 --maybe 68, or 70, which will help a lot. And we'll probably also see a combination of benefits cuts and somewhat higher taxes --just a guess.

Yeah, but just covering Social Security won't require those kinds of tax rates. It would require a national federal tax rate rising from 25% of GDP To 30% or so. This is a big tax raise, to be sure, but as recently as 1999, federal taxes were 29% of GDP, so this would be nothing earth shaking.

Medicare is what can really break the bank though. There are plenty of countries, like Sweden, where the government spends 50% of GDP, but I have a hard time imaging it happening here. The Boomers are going to weild a disproportionate impact on politics in the next twenty years, to be sure, so they might just get gold plated medical care which the rest of us pay for. I sure hope not. Something like 50% of lifetime medical care is spent on a persons last six months of life. We need to learn to let people go without all these heroic measures.

And yes, raising retirement age to 70 is probably on the way. I think 67 is already on the books for me (I am 40) but I expect it to go higher. I am not convinced that alone will be enough though.

Jimbo: On healthcare you have hit the nail on the head. Our high medical costs are driven by use not cost per item. Heroic care in the final months of life are a huge expense. Other developed countries spend far less on this and thus far less in total, while maintaining high quality healthcare in general.

Let us not forget that healthcare is a scarce resource, and the more we devote to heroic care at the end, the less there is for preventative medicine and other care for other people.

Jimbo: Federal taxes have generally been less than spending. Federal spending has generally been increasing during the last 50 years. It was about 16% of GDP in 1950. It peaked at about 23% in 1985. It has declined steadily since then. It was recently about 18%. This includes all federal government spending including Social Security, Medicare, defense, etc…

The boomer social security shortfall can be fixed without taxing the hell out of younger generations if we increase the tax now. Tax increases are not in the vocabulary of the current president. However, economists estimate that an increase of one percent would eliminate the entire projected shortfall. The shortfall would also be eliminated if we continue to experience strong productivity growth in the coming decades. But that is a bit of a gamble.

I say raise the FICA by one percent now.

Looks like you are right Zephyr. I confused overall tax rates with federal tax rates.

A cyclical downturn will be a reduction of activity – not a complete stop. In fact it will be only a very small reduction for most businesses. It can be severe for others, such as housing. However, even housing will continue, but at a slower pace.

It is wrong to say that producing housing is producing no value. Housing is part of our infrastructure like schools, roads, grocery stores, etc. These things are needed to enable continued growth of the economy. The workers must live somewhere. To the extent that we are now overbuilding, we will have to compensate later with reduced building. However, in the long run we must keep up with population growth.

Jimbo: Overall tax level of 29% of GDP in the 1980s sounds about right. State income tax, property tax, and sales tax would fill the difference.

Perhaps a thread on women’s needs contibuting to the bubble. My girl wants a house but I will not give into the pressure, she has no idea.

I'm amazed at how much this kind of pressure can drive otherwise rational men into irrational spending. My husband tells me almost daily how grateful he is that I'm not a big spender. I hear stories all the time about co-workers who try to put their wives on a budget, but ultimately end up fighting a losing battle. I know so many women who have to have the big house, the clothes, the jewelry and the car.

And oddly, this does have a little to do with this thread. I wonder how a spoiled generation like the boomers, who raised another spoiled generation are going to convince the rest of us to pay significantly more taxes to support them in their old age. Granted, the next President (especially if a Democrat) may raise taxes. But no President who wants to get voted in for a second term is going to crazy, at least in the first term. But even if taxes are raised, the boomers will never see the kind of money they would need to support them in the way they have been accustomed to from social security.

I have long asserted my opinion that the troll lives an imaginary life fueled by fantasies lived online. I say we just delete his comments (Harm?) and be done with it. His act doesn't change enough to stay entertaining; now he's just an annoyance.

no President who wants to get voted in for a second term is going to go crazy.

It's all in the proofreading.

TWIT

I could kind of live with keeping the troll if I thought he had anything new to say. But I haven't read anything unique since he started posting. He has no imagination and it's *yawn* boring. He's a terrible storyteller. No depth, no character development, no forward motion in the story....

I know a few boomers who are prepared for retirement. But my husband cringes at how many clients he has who are late 50's with no retirement and no plan. I don't know statistically where the boomers stand on retirement savings, but again savings rates are at an all time low. Is all their money in RE? If so, is that a wise move?

I have long asserted my opinion that the troll lives an imaginary life fueled by fantasies lived online. I say we just delete his comments (Harm?) and be done with it.

However personally satisying that might be, as long as Sauce more or less behaves himself, he gets to stay. Sorry :-(

However personally satisying that might be, as long as Sauce more or less behaves himself, he gets to stay. Sorry

Aw heck.

I always wanted Sauce to *be* a porn producer.

At least he'd *be* interesting.

opnr that is pretty much my plan with my duplex. I am hoping that the tenants, how pay half the mortgage now, will pay all of it plus taxes and insurance in 20 years, by the time I am ready to retire.

That way even if I blow it with my investments, I can still live on Social Security. But I am not planning on blowing it. I put aside the max into my 401k every year, and so does my fiance.

Jimbo: To paraphrase Warren Buffet: Someone sits in the shade today because someone else planted an acorn long ago.

Make time your ally…

I am shocked and disturbed by how many people make almost no financial plans for their future.

I started my planning before I was out of college. The key is to spend less than you earn, and invest what you save. Then time is your ally.

Astrid: We had a burst bubble in the 1990s. People did lose interest for a while.

The saving mantra, live beneath your means. Does anyone follow this anymore?

Astrid

I think if there becomes a public perception that RE has become too speculative due to Prop 13 maybe something would change. But right now people are dependent on Prop 13 to keep their homes affordable, and I don't think there is a link in the mind of the herd that propery prices and Prop 13 are related.

During the Great Depression GDP fell by 50%, and 25% on an inflation adjusted basis. Today we are at such a dramatically higher living standard. To put it in perspective, IF we had a recurrence of the Great Depression like drop in GDP, our living standard would fall back to the level we had in 1988.

The disturbing thing to me is the YOUNG 20’s and 30’s who are doing the speculating!

My husband is a financial consultant and had to deal with this age group in the tech boom. They drove him NUTS! There just isn't a more spoiled and clueless group of people. They have also had it way too easy. The tech boom was immediately followed by the housing boom, and that allowed too many to shift their speculating from one area to another without suffering long term losses. I thought at the time the losses in the tech boom would be enough to slow the young investors, but you'd be amazed at how many are funding their speculating with money from the parents. And yet if you talk to them, they earned all their money themselves and they are the most brilliant people in the room. Reminds me of someone, can't think of who though......

Another perspective: On an inflation adjusted basis, incomes are double what they were 50 years ago.

I do not have those stats handy at the moment. But I believe the effect would not be materially changed.

Except for occasional brief periods, housing has always been important to the economy.

Astrid Good point about the double incomes. I'm with you, quality of life is way more important than the quantity of stuff one has.

astrid: The main reason we need a college education for a middle class life is competition from the 50% of the HS pop that goes to college. If you don't go you are in the bottom 50% (future).

Things really have improved in real terms, not just published GDP. Fifty years ago the middle class lived at a level that is not much better than what would be considered the poverty level today.

I don't think anyone would dispute that people are living much more lavishly these days. What concerns me is the lack of saving that is going on. Large numbers of people are relying on their homes to end up funding their retirement, and I'm just not sure how realistic that's going to end up being.

If you pay off your mortgage before you retire, then your cost of living will be much lower. There will be some wealth effect for those who sell at that point and move to a lower cost area. People who think their homes will simply make them rich are deluding themselves.