patrick.net

Do most of you just stay silent and smile, cheering on the home-buyer person when the topic comes up? The conversations came up a lot of this during the 8000 credit time, learned to quickly just be quiet and smile. Now people seem to be in the “buy mode” again cause mortgage rates are “at an all-time low.”

I would have told him to read up on Robert Shillers, Irrational Exhuberance, 2nd edition published in 2005.

Unfortunatly you cant afford to smile and thank them, price inflation on homes over the past 10 years have accelerated job migration out of the California.

I dont expect doctors to understand this... but that is the consequences of such action. Dont kid yourself prices are still in process of correction back to the
long term trend...

In the Bubble, it was never difficult to contain my disdain for Idiots making poor decisions, that any Jack ass could foresee was just going to burden the tax payer down the road.

Less so over the last three years. I would just warn the Saps that the prices were still falling, and to expect to still lose 50 to 70K over the next year or so.

Now prices are getting more in line, for people that want to find a house, that are in line with the rent they are paying. As long as they don't hit me with any notion that they plan on making money from the purchase.

"How do you respond to ecstatic soon-to-be homebuyers?"

It's a difficult question. Would it have helped if the message of an impending housing bubble had been more widely disseminated in 1997-2002-2007? Undoubtedly. Did it make a difference what a single person said to their friends and relatives? Not as often as one could wish for. Just look at the evidence.

Historically speaking the question is somewhat unpractical, because in 1997 or even 2002 there was not a critical mass of non-MSM news outlets to be able to make any real difference. Just talking to people one-on-one did not help. We were completely out-gunned by all the realtor propaganda in the mainstream media. And now the entire country, guilty or not, are suffering the consequences.

Today it ought to be different. It might help regularly to send links and articles to people have not bought but may be in the danger zone.

The way how I know about them buying a home and the attitude when they talk counts. When they're absolutely sure about what they're doing, or they're bragging about it, I don't have to give a damn about them for they are not listening. They only will get my opinion when they sincerely ask for it with open mind. Your advice worked because your friend were willing to listen w/ open mind toward you.

John Bailo says

I soon learned the value of holding my tongue when it involves personal taste.

That may be the unfortunate case, but it isn't always about personal taste.

NOT to John Bailo in particular, but what he said made me think:

The problem is that by not speaking up about bad choices that people are about to make, be it politically or financially, or BOTH, we will ALL suffer the consequences.

Cases in point: Voting for Bush II. Buying into the housing bubble.

Very bad things have happened in the human history because too many people were too polite or too afraid too speak up.

I say WOW how did you come up with the whole payment! They say no no we took out a morgage. I say,... oh!,... I thought you said you bought the house?

sometimes I ask who owns your house? the I get puzzeled looks. Then I just feel like an A-hole.

renting the money is still not the same as owning the house! (it's getting closer but not quite 0% yet)

Surprise, surprise. I agree with Nomo & Troy. Tell them that you wish them well and move along. If they ask specifically what you think, still tell them that you wish them well and move along. Unless you're a trusted friend or financial advisor, they don't really want your opinion. They want you to reinforce that they're doing the right thing. Why be a buzz kill?

Besides, they'll probably be pissed off that you said not to buy - and if you're found to be correct a couple of years down the line, they'll hate you.

elliemae says

Besides, they’ll probably be pissed off that you said not to buy - and if you’re found to be correct a couple of years down the line, they’ll hate you.

Absolutely. Of the people I warned a few years ago, a handful managed to avoid buying a house at the peak - now, they thankfully acknowledge the timeliness of my advice.

However, the larger number of people who ignored my advice and are now underwater homedebtors seem less inclined to acknowledge that I had given them sound advice. Some of them seem to subconsciously believe somehow that I am responsible for the market collapsing under them. Which is why I no longer bother to say anything to the fools who are tripping over themselves to 'take advantage of these low rates'...

Every market returns to trend, and we are far away from trend, and we may (normally do) overshoot to the trend just as we went over on the up side, (could you imagine a overshoot of that magnitude I can't but I can see another 30-50% from here (Nat Avg.)

FYI I am in Ca. I know some areas of the country are not in as bad of shape as we are in Ca. I think 2011-2014 are going to feel like recession if we don't double dip, it is going to feel like it. I mean 1.5 GDP is what they say it takes to stay even, and we are likely going to be running at .5 to 2 GDP for the next 4-12+ quarters if all goes GREAT and if not, and or any more surprises we will double dip.

I am not seeing what is going to break the back of the Structural issue (Demographics' are stacked in a bad way, it seems to me) Now granted we thrust in to this recession with a balance sheet issues, that has morphed in to what would have been coming in without the banking crisis. as I see it.

I try to warn them. When they say "but my realtor said now's a good time to buy, and she works in the industry so she'd know", I'll make a real smartass remark congratulating them for their stupidity, or ask if they know what the term "knife-catcher" means.

klarek says

I try to warn them. When they say “but my realtor said now’s a good time to buy, and she works in the industry so she’d know”, I’ll make a real smartass remark congratulating them for their stupidity, or ask if they know what the term “knife-catcher” means.

Wow. Smug and a smart ass. Sounds like a great friend.

Did they already put a contract on a home? If yes, then wish them well.

If not, are they seeking, or receptive to your advice?. If not, then wish them well.

Just wish them well and move on.

I don't know a single person in the position to buy anything right now. I do know a couple who bought this Spring. They bought a 4 bedroom Eichler in San Rafael for $709K with 3.5% down....now their roof is leaking.

PasadenaNative says

I don’t know a single person in the position to buy anything right now. I do know a couple who bought this Spring. They bought a 4 bedroom Eichler in San Rafael for $709K with 3.5% down….now their roof is leaking.

Obama will repair the roof with a proof of unemployment. :)

tatupu70 says

Wow. Smug and a smart ass. Sounds like a great friend.

I was being a good friend, the best they could ask for. If they listened to me, they wouldn't have been severely fucked by the most obvious bubble in the world.

I tried to keep people sane and away from really stupid financial choices. If they thought that their agent knew best and was being honest, my ridicule wasn't just warranted, but the least of their problems to come.

This is more along the time frame of 2004-2008. Now I just wish them luck.

I think Paralithodes has it right.

Paralithodes says

Did they already put a contract on a home? If yes, then wish them well.
If not, are they seeking, or receptive to your advice?. If not, then wish them well.

It seems to me to be similar to when my wife asks if she looks fat in the outfit she chose for the evening...

I made the mistake of giving advice once. They just got indignant and mad.
Now I just smile and wish people well. If they want to make poor decisions that's there problem. When there house is underwater they'll have no one to blame but themselves.

cearka says

I made the mistake of giving advice once. They just got indignant and mad.

Now I just smile and wish people well. If they want to make poor decisions that’s there problem. When there house is underwater they’ll have no one to blame but themselves.

I have gotten some bitter flack for my dire warnings as well. Part of what I learned in RE agent school (this was not in the text) was that from beginning to end, you have to keep buyers in "emotion" mode. Turn off their brain and appeal to them with fuzzy warm feelings of family, security, and PROFIT. Any information that runs contrary to this is met with the same level of disdain one feels when awaking from a really "pleasant" dream. Of course, it's not reality's fault that it was all a dream anyway. But the difference is that some realtor will keep that dream going long enough to collect their commission, the dream ends, and your efforts have been wasted.

shrekgrinch says

Yeah, that too. I know because I myself am in that boat with some people.

Same here. It's not like I'm going to rub it in, they know I won't. But it makes all discussions about housing kind of awkward. Some people I've tried to help and angrily dismissed me.... they have drifted into different social circles.

shrekgrinch says

I’ve had similar problems with discussing other things when I find fallacies people have that can easily be shot down with basic economics, history and civics. They don’t like hearing that, either.

Like this one?shrekgrinch says

From the side that can say, “See how the house prices collapsed even more because interest rates went up?”*

Please show me the time in history when this occurred.

tatupu70 says

Here’s a free lesson for you. When interest rates rise, incomes also rise. When incomes rise, home prices rise. Home prices depend much more on incomes than they do on interest rates.

Got it?

While there is some truth in that, it's not quite so simple. First off, rising interest rates in themselves do not create real wage growth. The devaluing of the dollar in fact decreases those real wages. The longer-term impact will be real wage growth, but it is very long term and will not be able to stop housing prices from tanking in the mean time. Also, interest rates for mortgages could significantly increase without an equally corresponding fed funds or discount rate change. Rates go from 4 to 8 percent in a purely leveraged system, nothing from nominal wage growth will offset the downward impact that has on housing prices.

klarek says

While there is some truth in that, it’s not quite so simple. First off, rising interest rates in themselves do not create real wage growth

No, definitely not. Interest rates follow inflation, they don't cause it.

klarek says

The devaluing of the dollar in fact decreases those real wages.

Sure, but house prices are quoted in nominal dollars, not real dollars. That's why they are often considered an inflation hedge.

klarek says

Also, interest rates for mortgages could significantly increase without an equally corresponding fed funds or discount rate change. Rates go from 4 to 8 percent in a purely leveraged system, nothing from nominal wage growth will offset the downward impact that has on housing prices

A lot of things could happen. I just don't find it very likely that interest rates will rise significantly without corresponding inflation.

tatupu70 says

No, definitely not. Interest rates follow inflation, they don’t cause it.

I never said they did.

tatupu70 says

A lot of things could happen. I just don’t find it very likely that interest rates will rise significantly without corresponding inflation.

They generally go hand in hand, but the effects are spread out over time. I don't think rates will rise either, but it won't be a zero-sum game if they do. Housing market will suffer more than wage growth will gain.

On the flip side, one of my friends started buying rental property back in 2000 and asked me if I wanted to join in. I didn't really have the capital too, and not sure if I would have even if I did.

He ended up borrowing a starter "loan" from his parents. Now he owns 5 apartment buildings, pays his mortgages on time, and is making tons of net positive revenue each month. So I guess caution can work both ways.

CaffeineAddict says

He ended up borrowing a starter “loan” from his parents. Now he owns 5 apartment buildings, pays his mortgages on time, and is making tons of net positive revenue each month. So I guess caution can work both ways.

On the flip side of that plenty of people went bankrupt buying real estate 4-5 years ago. The risk/reward has to be weighed. Right now the reward and risk are pretty vague... There's no clear safe haven... End of 2000 the NASDAQ started plummeting... Real estate was the logical safe haven. Currently the stock market is on a huge rally from 6000 bottom... If the market crashes again maybe some money will go back into inflate real estate... But if the market crashes again.. We'll have bigger economic issues to deal with also. Right now the only thing keeping people from rioting is steady unemployment checks and the fact that everyone's 401Ks look a hell of a lot better than a few years ago.

CaffeineAddict says

On the flip side, one of my friends started buying rental property back in 2000 and asked me if I wanted to join in. I didn’t really have the capital too, and not sure if I would have even if I did.
He ended up borrowing a starter “loan” from his parents. Now he owns 5 apartment buildings, pays his mortgages on time, and is making tons of net positive revenue each month. So I guess caution can work both ways.

He got right timing, and the support called "his parents", not "the bank". It looks like he was savvy too. What he bought was business not home. Him being able to use his resources for business is perfectly fine and good for him. You didn't have the luxury he had back then. Of course, you could be his partner, and get some profits out of the business though, it won't be you who made it happen. All things hindsight, such as would've, could've something something, are sort of pointless. Opportunity lost is a goner. Thinking about it won't make a difference. It can make you better prepared only when you actually look into it, find yourself about what is the lession you can learn out of the event.

"How do you guys respond to your family/friends/colleagues who are all excited about buying their first home?"

Twelve year ago, when I was in business school, I would probably crunch the numbers, list all the econcomic factor and argue the points to death.

But business school is not close to big time real world. You don't manage relationship by being confrontational, there is no benefit, you manage relationship by listening to what other has to say and respond positively but legitimently informed. So now after real business school, which is really training on how to deal with people, if someone ask me something like this, I would listen to their reasoning and congratulate them and offer some opinions and talking points if appropriate that are positive.

In the end, no matter your conviction, they may be right anyway.

Los Angeles Renter says

What do you believe will happen in the next say 5 years.. that would allow interest rates to rise to say.. 8%?

Any thing is possible in the magical fantasy world if you are willing to confuse Cause and Effect. It also helps if you mix up Correlation for good measure.

All you gotta do is Believe In Yourself and not try to deflate the housing market and hurt America.

I am Alfred E. Neuman and I approve this message.

shrekgrinch says

On Planet Tatu that might happen. I bet the pigs fly there too. But the rest of us live on Planet Reality.

Still waiting for that time in history when interest rates rose and house prices fell. Should be very easy to find since that's Econ 101 on planet Shrek.

tatupu70 says

Still waiting for that time in history when interest rates rose and house prices fell. Should be very easy to find since that’s Econ 101 on planet Shrek.

Historically you appear to be correct... But arent' rising interest rates simply a symptom of the overall economies health... As the economy improves.. wages improve, unemployment drops, and through cause and effect interest rates rise...

Is there a point in history where wages were stagnant and/or falling, unemployment was stuck at near all time highs, and the overall political and economic climate was in such disarray as it is today?

How low can interest rates go? Could we see 2% before we see 8%?

Los Angeles Renter says

Historically you appear to be correct… But arent’ rising interest rates simply a symptom of the overall economies health… As the economy improves.. wages improve, unemployment drops, and through cause and effect interest rates rise…

Exactly correct.

tatupu70 says

Still waiting for that time in history when interest rates rose and house prices fell.

The world of the Black Swan: because I haven't seen it happen, it can't happen. But in a climate of a correcting market and fears of inflation, it can happen. Stagflation is not a phenomena that's unseen. You're just using the housing market as a bellwether to suggest it can't occur.

klarek says

The world of the Black Swan: because I haven’t seen it happen, it can’t happen. But in a climate of a correcting market and fears of inflation, it can happen. Stagflation is not a phenomena that’s unseen. You’re just using the housing market as a bellwether to suggest it can’t occur.

Sure it can happen. A lot of things could happen. I'm just saying the odds of it happening are very small.

So far most people have said that what they do in personal relationships is to nod their head and wish the buyers good luck.

Good thing we have patrick.net where we can speak our minds. And even better that many people now read it.

The question remains about what is the right thing to do in trying to prevent terrible outcomes such as as the Great Recession.

Peaceful relations with your friends and neighbors, was it worth a Great Recession? Could we have made more of a difference?

John Bailo says

When I was 8, during a block party in our neighborhood, a younger boy rode up to me with his new bicycle.
It was purple.
I said, that’s a cool bike, but shouldn’t it be blue, because blue is for boys?
This caused the kid to break down and cry and five minutes later I was surrounded by angry adults asking me “why did I say that!?”
I soon learned the value of holding my tongue when it involves personal taste.

Reminds me of the time when I was 10 and told the 6 yo across the street that the Easter Bunny wasnt real - to this day still can not believe how long I got lectured about how I ruined the kid's Easter Holiday. If it were today I would tell him how good fried Rabbit tastes and be done with it.

robertoaribas says

Been discussed over and over, but these two nitwits can’t get it. Interest rates and housing prices appear correlated due to a confounding factor: economic growth

Seriously. Have you read anything I've written?? Or do you just not comprehend it?

How do you respond to ecstatic soon-to-be homedebtors?

Try to muffle your laughter and prepare your I told your "I told you so" speech for 2012-2013 when the market truly bottoms out.

“How do you guys respond to your family/friends/colleagues who are all excited about buying their first home?”

Well, at first in 2006-2007 when friends of mine were moving to Florida, of all places, from Oakland, CA, I sent them a link to this site. They promptly ignored it. They told me that they would never be able to own anything in the Bay Area so if they wanted to own a house they must move to Florida. They couldn't really explain why it was so important to own other than to claim that it would provide more stability somehow in their relationship and that they would no longer be "throwing money away paying a landlord without seeing a return." They kept insisting that Florida had such an incredibly cheap cost of living that they could improve their standard of living so much there. I tried to point out that due to the multipliers etc, they'd be making far less in Florida than they were making here in the Bay Area.

They kept telling me what a paradise Florida was for having such a cheap cost of living and the cheap houses there and somehow that everything was better in Florida. I mentioned how no matter where you live, you take yourself with you and that most people find that in moving across the country, they have some of the same issues that they were dealing with back from whence they came. I'm a prime example of that, and I expected no different and am still happy with my decision to move here to get into a different career.

Then other friends jumped on that band wagon with a friend who was a Realwhore cheering them on telling them that they might get priced out forever, they're not making anymore land, and real estate prices only go up, and it's always cheaper to buy than to rent, etc.

I learned to smile, nod, and say, "Good luck, I'll miss you."

The friends I had bought a house in St. Petersburg for a then reasonable price, packed up, and moved. They had a hard time finding work (as I thought they would because the recession was well under way in Florida at that time). They found jobs and were earning much less than they were making here. But they were still happy because they were "home owners." They'd call me regularly to tell me how great it was in Florida and that I should visit them any chance I got and to pack up and move out there with them. I just congratulated them on their happiness and explained that I couldn't afford the plane tickets to fly out there because I didn't make enough at that time. They actually told me to charge the plane tickets on a credit card. LOL!

Well, over time, I've gotten fewer and fewer phone calls from them. I've noticed that prices in St. Petersburg have fallen considerably since when they bought. I'm sure that they are under water because I knew that they only put something like 1-3% down on a mortgage. Real life started to catch up to them and they started to have real life problems in their paradise of heavenly cheap living in Florida. They called less and less and now I don't hear from them anymore.

The friends who stayed in the Bay Area made too little to qualify for any loans and didn't buy. They're still here renting and are moving on with their lives.

So, I've learned that it's much better to let go of friends who insist that they will be happier somewhere else because of cheap living and the lure of "home ownership." And I've learned not to get involved in giving my opinions about whether or not a friend should or should not buy a house whether I'm asked or not. I learned that even friends will do whatever they wanted to do in the first place even though my advice runs contrary to what their current view of the situation is. I've learned that most people still believe the bullshit that "owning" is better than renting ipso facto. I've also learned that buying a house is usually an entirely emotional decision for most people and for me to attempt to get in the way of a friend's emotional attachment to a financial decision would be foolish because most friends just want me to parrot what they believe to be the case about the wisdom of their "purchase."

I no longer give any financial advice to friends who ask. I just ask them what they'd like to do and wish them well when they follow through with their plans, no matter the consequences. It tends to keep these friendships intact.

shrekgrinch says

Keep waiting. If it was someone else asking, I’d help them figure it out. But you and your ‘prove to me that the sky is blue’ BS questions aren’t worth it. Go find some other Google bitch, troll.

I wasn't exactly holding my breath... Your track record of actually showing any evidence to back your stupid claims has been very poor.

I was hoping you might actually learn something though in your efforts. Obviously that was asking too much...