patrick.net

Housing bubble and recipe blog. Cool.

Clearly, you have to be somewhat smart about how you climb the ladder and not make a large short-term bet risking it all at the end. I don’t think people are all that foolish based on what I see around me in the Bay Area. I’m actually often quite impressed by how adaptable people are and how they find smart new ways to take care of themselves and their families as the economy changes.

Face, if you don't see the inherent danger in the kinds of risks people are taking all around you, then I'd say either you move in a very ecclectic circle of friends, or you're not seeing the whole picture. While you personally may not be taking excessive risk/debt, and you personally may be a very experience savvy RE investor, most of the people out there right now are not like that. When prices plateau or decline, a lot of these "adaptable" recent buyers are bound to find themselves underwater on a lot of debt.

Have you bought recently? If so, do you find RE a good investment in terms of cash flow right now?

The insurance situation isn’t as unfair as you might think. My Dad’s been a chain smoker for 30 years. Tough to get full insurance coverage on a guaranteed bad bet. I love my Dad, but his excesses can drive me nuts. He has heart disease and diabetes. But trying to get him to eat right, exercise and not sneak cigarettes is an uphill battle. My Dad is the quintessential boomer.

You know, the declining overall health situation in the U.S. is bad, and only seems to be getting worse year after year. 2/3rds of the adult population is overweight or clinically obese. Obesity naturally leads to high rates of Type-II diabetes. If we're going to expect people to work well past 65, we also need them to be healthy enough to do so. Unless the situation changes radically for the better, I don't see how we're going to get there.

10TY Note has been on a downtrend since earlier this month and yield is climbing steadily. Although it is not rising long term interest rate is not necessary to burst the bubble, it would definitely help turning crowd psychology around. I am seeing a perfect storm. Do not fish too far away from the shore.

Actually, I’m lucky. I didn’t inherit a lot of my dad’s health problems. My doctor tells me I’m extraordinarliy healthy.

SactoQt, it sounds to me like you didn't "inherit" your dad's poor health because you've made better choices --as in not chain-smoking and overeating. No one knows exactly how much of our overall health is due to choices vs. genetics, but it's safe to say at least 50%. And that's the 50% you can do something about.

Harm

You make a good point. Some have claimed that boomer will be willing/able to work beyond the traditional retirement age in order to finance their lifestyle. At the same time, many agree that boomers are traditionally spoiled and used to living in excess. I think we are seeing the result of that excess in rampant obesity, heart disease, cancer and diabetes. Health care has improved and people are living longer. But I don't think people are living a healthy old age, certainly not healthy enough to work indefinately. Insurance covers some health care costs, but we know it doesn't cover all of them. So that house with all that great equity now has to cover retirement and additional health care costs that come from all that high livin'.

HARM,

Yes, real estate can still be a good investment. For long-term gains, I would buy in places which are undergoing some fundamental change for the better. Such places can still be found, even in CA. For example, Merced where you can still get cash flow with not too much down and where a new UC campus is being built. There are some interesting possibilities in Oregon as well.

Achieving short-term gains is possible as well, but it requires more research and more work in terms of adding value to the property. You need to be smart about what you're doing and perhaps collaborate with other investors who bring their own expertise, but you can certainly make money even short-term if you put in the effort.

I think it should also be said that most housing bears on this blog are probably not anti-RE. I don't think RE has to be a bad investment. I just think that right now RE is a time bomb. We've all heard the old axiom, buy low sell high. So why on earth would I think that buying high is a good idea? The fact that "creative financing" has become the norm to get into a house only strenthens my position that housing at this moment in time is too risky. I believe the market will go down for a time. Like Zephyr, I think that after housing has gone down for a while, and then holds steady for a couple of years, then it will again be a viable investment.

Face Reality, it is insufficient to look for potential. You also need to find out how much of that potential is already digested by the market. Do not tell me that you are not aware of this.

For example, Merced is already flooded with speculators who try to capitalize on the UC campus. The price has alreadt reflected future potential. Why do you think it can go up further?

The key is to buy under-rated things with potential. By the time something is "discovered" by the herd, it is already over-rated.

Most people end up getting cancer, heart disease and/or some kind of dementia regardless of how they lived. Eating better, not smoking, and exercising more may certainly improve your quality of life and even help you live longer, but there's no way to avoid getting the nasty stuff sooner or later, and maybe some not-as-nasty but still expensive surprises on the way.

Something needs to be done about health care regardless of people's lifestyles.

Eating better, not smoking, and exercising more may certainly improve your quality of life and even help you live longer, but there’s no way to avoid getting the nasty stuff sooner or later, and maybe some not-as-nasty but still expensive surprises on the way.

Really? I need to tell my wife about this so that I can eat all I want. ;)

And I can finally quit golf. Perhaps I should pick up cigar smoking too.

There's a lot that we could/should do about health care. But right now and for the forseeable future, health care costs are something we are going to have to factor into our retirement savings.

HARM,

If you're lucky and healthy enough to escape heart disease and cancer, dementia becomes a likely candidate for doing you in. At any rate, the point is that there's a very small likelihood of having little or no medical problems until the day you pass away. In our country, this means serious trouble for your finances. You don't get Medicaid until you're financially wiped out. Actually, pretty much any significant health problems (even earlier on in life) are likely to cause you significant financial stress due to the increasingly lacking insurance coverage.

Face Reality, are you proposing univeral health care? I really doubt that any system is going to work for such a large aging population. Perhaps we can always issue new bonds to pay for health care.

I wonder how come poorer countries can find ways to pay for it, but we can't. I guess one reason is that costs are completely out of control here. If you look at the bills for even the simplest things, you'll be astounded. I recently got bills totaling over $5000 for a couple of stitches in my hand (mostly paid by insurance, thankfully). It makes no sense, and it keeps getting worse. We're rapidly approaching the worst of both worlds: hyper-expensive care which is also often quite lousy. Not to mention the vast numbers of people (including children) who get no care at all.

It makes no sense, and it keeps getting worse. We’re rapidly approaching the worst of both worlds: hyper-expensive care which is also often quite lousy. Not to mention the vast numbers of people (including children) who get no care at all.

We are in agreement on this. Take a look at the Jimbo/Zephyr exchange on "heroic end-of-life" health costs above:

"...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.

...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."

Maybe a solution will require a radical re-thinking of the way we deal with aging, end-of-life and terminal illnesses.

Face Reality, I agree that health care costs are getting silly. What do you think is the cause of the high costs?

We need to learn to let people go without all these heroic measures.

I agree. For the greater good we must learn to let go.

What if we replace the BS/MD degrees with one shorter degree? This should reduce the cost of doctors without much impact to quality. We do not even need doctors for most tasks. I had a flu and went to see a doctor. He just told me to go home and have chicken soup. The insurance was then charged $250. This is absurd.

HARM,

I'm not talking about heroic end-of-life measures. By the way, I noticed that people who can't pay are somehow less likely to receive those measures anyway...

There was nothing heroic about stitching my hand, and it took the emergency room PA less than 10 minutes to do it. Why did it cost $5K? I ended up taking out the stitches myself because I was afraid of a $2K bill for taking them out!

I ended up taking out the stitches myself because I was afraid of a $2K bill for taking them out!

Ouch. I hope you hand feels better now.

But where is the money going to? Why is our health care cost is so much higher, even when compared with other first-world nations?

Face's $5,000 stitches and Peter's $250 chicken soup advice are to me indicative of a broken system, where the billing is completely out of alignment with actual costs of services provided. Part of what's inflating these costs are no doubt having to spread the costs of that "heroic care" to everyone else.

Then there's waste/inefficiency in the form of administrative overhead --I've seen estimates that say as much as 50% of your premium goes to just that.

I also wonder if the current system exposes doctors to too much liability in the form of malpractice suits. When you're average new OB/Gyn is having to spend $100K/year in malpractice (on top of his $250 in student loans) he's got a problem. And then you've got a problem, when he passes these costs on to you.

Peter P,

Fortunately, removing stitches doesn't hurt...

I'm not an expert on health care costs, but it seems that we just have a very flawed system. There are numerous problems with it. Everything from insanely expensive malpractice insurance to lack of meaningful competition between providers to pharmaceutical companies squeezing the US market as hard as they can. In general, everyone seems to be used to getting away with the insanity for the most part, so it continues. There just has to be a better way to do it, but there doesn't seem to be much of an outcry about this.

I like the idea of global healthcare arbitrage!

We should have a limit on payout of liability lawsuits. We should get rid of the "Punitive" judgements altogether. Accidents do happen. There is no point granting large sums of money to victims and then socializing the costs. If gross negligence is involved then the responsible individual should be sent to jail and spanked anyway.

Face Reality, thanks for the analysis.

Again, I am sorry for ranting at you earlier today.

hymie, it is more effective if you do this...

Just chat causally with a realtor-looking friend (accomplice) about evidence of falling housing prices around known homeowners/investors, pretending you do not know that they are around.

Then, just glance them quickly and pretend to look embarassed. Say something positive about housing and move away quickly.

This should be a better psychological play.

(For entertainment only)

astrid, that's why I think truly malicious and negligent doctors should be jailed and/or caned (a la Singaporean). Insurance should not protect these people anyway.

For honest mistakes, we may just have to see them as accidents and grant reasonable compensations instead of absurd punitive judgements.

The current judicial and administrative governing system is not good at weeding out bad doctors. I agree that the current malpractice insurance system is horrible because it doesn’t distinguish between good and bad doctors, but only the the field average.

Agreed --malpratice lawsuits just spread preventable costs/damage from truly incompetent doctors to everyone. This is one of those rare cases where more government oversight (in terms of weeding out incompetent docs) might not be a bad idea. *Shudder* --did I just say that?

Medical malpractice is tough to monitor so maybe *some* kind of oversight would help. How many stories have you heard about the doctor who had multiple malpractice claims, settled out of court, switched towns and moved on. I don't know what kind of system would be best, but it seems anything would be better than whats going on now. It's interesting. I have brothers that live out of state, and we've noticed that information doesn't seem to cross state boundaries. I've heard of doctors and other professionals who run shady businesses who switch their practices to other states and voila' clean record. We need something on a national basis, but that's likely to be a logistical nightmare.

This is a bit off-topic, but somewhere in a previous thread, someone posted a great color bar graph showing the San Diego for sale housing inventory over the last 4 years. I can't seem to locate it --can someone post the link here? Thanks.

We have digressed quite a bit on this thread, but in the end health care is a big issue with the aging of the boomer generation. I know that despite big gains in my parents home equity, they are in a precarious position financially due to two main factors: health care costs and over-spending.

I wish I could say my parents are unique and that the vast majority of boomers will live healthy, long, prosperous lives. But rising obesity and diabetes rates argue against the long and healthy part. And since boomers are notorious for big spending, prosperity is questionable too. The truth is people are counting on their homes to cover all their financial bases and in a volatile housing market that’s not wise.

I recommended to a friend to buy there a couple of years ago, and he bought three houses there. All are cash flow positive, and appreciating nicely. He’s planning to hold on to them as part of his retirement “savings”. Being a landlord is a bit of a pain, though, but that’s the way it is.

Yes, it was probably a good decision buying there three years ago. There may be still more potential now but the risk/reward has changed a lot lately. I am going to be on the sideline for a while.

Cattle,
Thanks for the link. Yes, Krugman’s analysis sounds right. I find it amazing that things like Janet Jackson’s “wardrobe malfunction” or nude scenes in some computer game cause more of a stir among politicians than our unbearable health care situation which no one will dare touch. It’s ok for kids to be exposed to violence, and it’s ok for them not to get health care, but God forbid if they catch a glimpse of a naked body!

Face, please stop --you are making TOO MUCH SENSE! How can we have a debate when I keep agreeing with you?

Face Reality, again, it is always good to buy when the risk and reward are in line. I worry about people who have bought recently using great leverage and are counting on early retirement. For people who stretch, there may not be a "long term" prospect to talk about if they are unable to meet immediate financial commitments during a cyclical downturn.

The statistics don’t help much because people I know and myself would be counted as risky cases (low savings, ARMs, IO loans, etc.) in these statistics, but I think we’re in relatively solid shape, and definitely more solid than if we hadn’t bought real estate over the last few years.

I think anyone who does not count on sustained appreciation to maintain financial soundness should do just fine.

Face Reality, I have always agreed with you on (2). I am not giving up on (1) yet... ;) (It really depends on the definition of crash as well.)

Jack is gone again...

Perhaps we should talk about the relationship between boomers and pre-fab houses... (is there any relationship at all?) :)

Face Reality

I'm sure you have said before, but I forget. Do you think the BA is especially resilient or do you think housing in general will only see a minor correction? I'm curious because I don't have a major disagreement with you. I'm like Peter in that I think housing is a good investment at the right time and circumstances, but I think this market will probably fall more than you predict.

I don't know if you're familiar with the Sacramento region, but there has been a massive expansion of housing here over the last 10 years and I don't see how we can avoid a sharp correction. My pov is colored by the area I live in, and I'm curious if your view is a BA view or an overall one.

I've been watching the 10 year treasuries as well. Do you think this is a trend, or a short term fluctuation?