patrick.net

myth #4 is a myth, because over here in the Cool and Hip Bay Area we have our Fortress neighborhoods coveted by wealthy foreigners and wealthy immigrants. Also as has been pointed out, there are other such Fortress neighborhoods coveted by them in the large urban areas of the Left Coast like Socal, Seattle, Vancouver.

As Sir Greenspan said, since all real estate is local, no bubble but lotsa froth.

No bubble in our Fortresses clustered along the Left Coast, though.

RobSTL says

It is better to keep it pristine and let it appreciate a lot every year.

just shoot me.

but this is, of course, a very old game to play, waiting for the land to "ripen".

land is better than gold as an inflation hedge.

At the end of the day nobody needs gold. But people always need a place to live on this planet.

And so the renters will always lose, by not winning like those with a spot on the housing ladder.

Same thing here, except our inflation is over, done.

The Japanese killed their economy in 1987-89 the same way we later did, 2004-2006.

http://research.stlouisfed.org/fred2/series/JPNCPIBLS

Just took the whole land game one spin too far -- 00 came up, and everyone still in the game lost their stake.

Though they have their strengthening yen that is generally pretty deflationary to their macro situation, a stronger yen makes imports cheaper.

I made it to the 5th point of the original post before I decided to not waste anymore time on it. It's one thing to have a differing opinion on a topic, but this person is just grossly misinformed and/or intentionally leaving out other relevant information to their points. China's avg house price is 1 MIL, but the average salary is 5k? That doesn't even make any sense...and if it is true, that's not owning, that's called renting with creative financing.

We live in a free market economy, so when prices fall, that means people CANT or ARENT willing to pay the original price.

This person needs to take an Econ 101 class

Total garbage. Just what you can expect from a realtor. Nothing in this article is true, just twisted to fit a realtor's mind.

Good, RobSTL should be out there buying any housing in sight. Considering that he thinks housing costs do not have to track income, I expect he can "afford" to buy at least a few hundred homes. It shouldn't be too hard to flip each one for a 30% profit and soon RobSTL will be the richest man in North America.

RobSTL says

The owner wins too, because the apartment appreciates 10-20% per year.

Definition of a ponzi scheme = empty apartment appreciating by double-figures every year, forever. Never ending appreciation without any rents tied to it. These magical condos will just get more and more valuable! Just sit on them! Buy now or be priced out forever (etc.)!! And yet, one can rent them for a tiny fraction of the carrying costs.

This is perhaps the most asinine thread to date, although I do remember a few by bearmarket way back when (on the other end of the spectrum).

Only a delusional individual could call all housing prices before 2001 abnormal while calling prices that were double the cost of renting "affordable".

Please get a clue RobSTL, for your own sake and ours.

I am a Realtor...and a middle class family man here in Huntington Beach. I suppose what I would like to hear from you is a description of how Asians (in particular) purchase property. They pool their resources as do Latin Americans. That is how many purchase property. In America, our society has always been taught to be independent and that, in my humble opinion, is hurting a large portion of America.

FredEx says

In America, our society has always been taught to be independent and that, in my humble opinion, is hurting a large portion of America.

1) I would disagree on what "our society" thinks. It seems like American society is about self-sufficiency, but that doesn't mean you can't ask your family for help. This would seem to be what Asian and Latino families stereotypically do, but plenty of white families have the Bank of Mom and Dad loan junior his/her first down payment.

2) Even if this is true, how does this hurt America? People in extended families tend to buy bigger houses, so if smaller families are buying smaller houses, and larger families are buying larger houses, who's getting hurt?

3) It seems like you're suggesting that Asians and Latinos are more likely to be able to buy houses than whites, for example, and that this hypothetical factor makes them better off. If the return on real estate is not that much when you exclude inflation, then why would people who buy a house be better off? If the return isn't very high, then home buying mainly serves as forced savings. Why is forcing people to save (and receive a lower return on savings) better?

"I suppose what I would like to hear from you is a description of how Asians (in particular) purchase property. They pool their resources as do Latin Americans. That is how many purchase property. In America, our society has always been taught to be independent and that, in my humble opinion, is hurting a large portion of America."

I can take that statement (or collection) a few different ways.

1) In other countries sometimes there isn't as much of a history of banking insurance. In Mexico (I'm not claiming this is indicative of all Latin American countries, I'm just using it as an example) China has banking but I'm not totally sure as to how their functions works.
Russia just started banking insurance in 2003! How does this relate? Well if deposits are not insured people are less apt to use banks. Without banking the only way to have more money is to simply bank it and have it on hand...

2) Mortgages themselves differ. In Mexico I've heard (can't find the link) that the majority of homes are paid with cash. Then a certain amount are built by hand and the remaining are mortgages. I've also heard foreigners cannot buy coastal (within five miles) property. In china it is more of a social aspect towards getting married.
http://www.chinadecoded.com/2010/09/11/homeownership-almost-a-prerequisite-for-marriage/

3) Without getting into a left or right political argument some of the differences here stem from colonialism. What is the most successful former colony (I'm sure someone would say Hong Kong) but it's the USA. Those that are in a colony have to do things themselves and as time goes on it gets ingrained. Going forward in history there was relative peace on the mainland since outside of 1812 and 9/11 there were no attacks from other countries. So building things yourself, doing things yourself became the norm. In Europe, Asia and Africa conflicts have happened on a continuous basis. One could say this fosters a togetherness eventually

Wrong.... real wrong on most of your myths, but I suspect your post was to solicit responses like mine anyhow and not based on fact or common sense...

If I can summarize your post, you obviously believe that a country, like the USA, can be a sustaining economic power by building and trading houses at ever increasing prices... you need to put down the Alan Greenspan books and wake the heck up fella...

thunderlips11 says

This is misleading. The $150k * 3 = $450k. $50k * 3 = $150k. The median household income is $50k, which means the median home price should be $150k. However, there are problems with the median household income. One being, 40 years ago, most households had only one income, typically the wife was a new unit of labor that could enter the workforce in bad times. That option no longer exists, both spouses are generally fully engaged in the workforce. So to compensate for the 1960s typical family, we should be using perhaps 2/3 of a median income.

I don't quite get this one. If both spouses are working and the median income is 50k, total household income would be 100k, using the 3x salary rule, fairly priced houses should be 300k.

thunderlips11 says

This is misleading. The $150k * 3 = $450k. $50k * 3 = $150k. The median household income is $50k, which means the median home price should be $150k. However, there are problems with the median household income. One being, 40 years ago, most households had only one income, typically the wife was a new unit of labor that could enter the workforce in bad times. That option no longer exists, both spouses are generally fully engaged in the workforce. So to compensate for the 1960s typical family, we should be using perhaps 2/3 of a median income.

I don’t quite get this one. If both spouses are working and the median income is 50k, total household income would be 100k, using the 3x salary rule, fairly priced houses should be 300k.

I would have to agree with "Myth #2, : Home prices rising is bad for the economy". Rising home prices are good for the economy, people free richer so they spend more. They cash out the equity in there homes to buy boats. This is of course false wealth an unsustainable policy in the long run, just like any ponzi or pyramid scheme.

pkowen says

Definition of a ponzi scheme = empty apartment appreciating by double-figures every year, forever. Never ending appreciation without any rents tied to it. These magical condos will just get more and more valuable! Just sit on them! Buy now or be priced out forever (etc.)!! And yet, one can rent them for a tiny fraction of the carrying costs.

Yep, I totally agree with you that it is the greatest ponzi scheme in the history of the world. And yet it has gone on in Asia for decades.

http://www.bloomberg.com/news/2010-08-17/at-least-half-of-apartments-in-shanghai-beijing-are-vacant-daily-reports.html

TechGromit says

I don’t quite get this one. If both spouses are working and the median income is 50k, total household income would be 100k, using the 3x salary rule, fairly priced houses should be 300k.

Nope, there are some costs of both spouses working instead of just one working. And sometimes that's substancial too. For instance... another car, insurance for that, more job related cost such as clothing, travelling, communication and transportation. Child daycare cost if you have kids and no guardian available, and this is freaking expensive in some area, could eat up large portion of the salary. Another thing to think about is, increased cost of healthcare, gas, insurance, food etc in general. And we are using whole bunch of new stuffs that we never had in 60's. For example, smart phones, PS3 and Xbox, internet etc. This sounds petty though, the costs of using those stuffs add up quick, and it will easily be over hundreds a month.

So, it will be 2X number on the paper when both spouses work, but the real income after those costs of doing it and with other stuffs to spend, it can be quite lower than that. I'd say, 1.2 to 1.5X at best.

I'd like to comment on something earlier about cost of living and wages.

My last employer had a leak years ago of its pay scales. From this the results were a bit shocking. Not so much of the amounts but where it was leveled. Leveled 1-5. Higher means more pay. It's a retailer. Only a handful of 5's around..LA, SF, Brooklyn, New Orleans?

Anyway after examining the places and numbers we ultimately came to the conclusion that the wages were not based on cost of living but rather the amount of competition. If an area was remote (Presque Isle was on this) it would hardly pay anything..regardless of competition.

RobSTL says

Myth #6 : Home prices collapsed in the USA because they had become too unaffordable

See above myth busters. Homes prices never became “unaffordable” in the USA, especially compared to the rest of the world. What actually happened was that low-income people were allowed to buy dream homes that they could never afford in the first place, thanks to lax lending from banks....

In order for this to be true, then pretty much every California that purchased a house from 2004 to 2006 would have be considered "low income". The only way these properties were "affordable" for most Californians that that time, was with the low interest adjustable rate teaser loans. While there was plenty of liar loans with low income sub-prime borrowers, if this was the only rotten part of the housing sector, I would have expected the housing collapse to stop once the sub-prime market finished collapsing.

You could make a good argument and say the sub-prime market started the dominoes falling. With the sub-prime borrows going belly up, it caused the Adjustable mortgage borrowers to falter and fall, then led into the prime mortgage borrowers. Falling prices led to defaults and than then further falling prices led to even more defaults and so on. But if you remove the sub-prime borrowers from the equation and try to assert that the market would have been fine without them, soon as adjustable rates reset to unaffordable levels, the same thing would have happened, only it would have been delayed for a couple of more years.

As for the rest of the world comparison, just because the housing market bubble in China or other countries hasn't collapsed yet, by no means equals a stable market. Japan, Spain, Ireland, United States all learned that housing bubbles never last forever, it's only a matter of time before other countries learn the same lesson.

seaside says

So, it will be 2X number on the paper when both spouses work, but the real income after those costs of doing it and with other stuffs to spend, it can be quite lower than that. I’d say, 1.2 to 1.5X at best.

That mulitple is just a very generalized guideline. It's not all that useful anyway because many expenses are mostly fixed and don't rise with income. So, there should be a different mulitple for a family earning 50K than one earning 150K.

But some of your "extra" costs are a bit ridiculous. I think most non-working spouses probably have a car anyway. And they probably have clothes too. Daycare is the one that rings true.

Ok so I am glad I did not buy a condo back in 2006. Had offer and during inspection found out it was under insured by about $100,000. Declined to buy. Thought it was underpriced at the time. Dodged a big bullet. It was a bad deal.

Now rent for $1250 per month. I figure a comperable place as a condo would be around $300,000 to $350,000. The prices have dipped here but are trying to go back up. So basically I rent for less than my boss pays just for taxes and insurance on his place. Less than taxes and insurance. So for about 1/3 the monthly cost.

One big anomaly in New Orleans is very high insurance rates. More like 5% of purchase price instead of 1%. That is huge. We are already seeing a bankrupt city/parish (read county) contemplating raising taxes. I am guessing by a lot. The state is in the same boat as well and we already have a pretty large tax burden here. In addition we have literally the most expensive car insurance rates in the country.

So add all this up and I am waiting patently for prices of homes to go down to a reasonable level. Maybe they never will but we can always buy with cash if we so desire.

We do bank the saved money and have done well despite the downturn.

kmoday722 says

If I can summarize your post, you obviously believe that a country, like the USA, can be a sustaining economic power by building and trading houses at ever increasing prices…

Yes, this is the operative point. Buying and selling used houses is NOT production. In order to grow an economy, you have to produce things.

I think some idiot named David Lereah already wrote a book with all of the OP's rationales. It was laughed at not long after it was written.

"Yes, this is the operative point. Buying and selling used houses is NOT production. In order to grow an economy, you have to produce things."

I agree that it isn't production but an economy can grow without having to produce "things". Manufacturing of basic goods is performed by a lower economy. The more sophisticated it becomes the more services are created.

Buying and selling homes en mass is not a way to get an economy going and I say that knowing I worked for years in a housing related retailer. Housing related consumption cannot be used as a barometer for economic activity.

Buying and selling used houses is NOT production.

If it is not production, where does Realtor's 6% commission come from?

mdovell says

I agree that it isn’t production but an economy can grow without having to produce “things”. Manufacturing of basic goods is performed by a lower economy. The more sophisticated it becomes the more services are created.

Sure, but those services need to have adequate value-add in order to grow our economy. There's very little a realtor does that justifies the fee paid. Much of the real work that many realtors claim expertise in (e.g. disclosures) could be done by a good real estate attorney who would often do it for a fixed fee that is much lower than what realtors charge, and you would get real legal advice instead of the nonsense that realtors tell you.

xenogear3 says

If it is not production, where does Realtor’s 6% commission come from?

That's rent-seeking. That's specifically why the realtor lobby needs an antitrust investigation and why they are destructive to our economy. Pergraniteeling houses does very little for our economy.

Residential investment is a forward-looking indicator for the economy. However, residential investment involves true remodeling/renovations and building *new* houses, not putting $10K of fixtures into a poorly built house, without making sure the structure is sound or without improving the layout/design, and thinking it's worth $100K more.

xenogear3 says

Buying and selling used houses is NOT production.

If it is not production, where does Realtor’s 6% commission come from?

Extortion. Through a monopoly. Just because that's what they take from the sale doesn't mean it's equitable to what they "contribute" to it.

thunderlips11 says

Today a couple is “Fully Engaged” with both spouses working F/T

A couple is but not every couple. In my circles, there's a large minority of dual income families that could easily do on one income.
But they don't flaunt their earnings.

thunderlips11 says

Probably still not expressing it right, but maybe somebody can put this together better than I did.

http://motherjones.com/politics/2004/11/two-income-trap

Interestingly, IIRC this is one of the few economics-related publishings that remotely understands the treadmill effect of rising household wages vs rising rents and land prices, pretty much first expounded upon in the 1879 book Progress & Poverty and then largely forgotten during the post WW1 boom times.

"Sure, but those services need to have adequate value-add in order to grow our economy. There’s very little a realtor does that justifies the fee paid. Much of the real work that many realtors claim expertise in (e.g. disclosures) could be done by a good real estate attorney who would often do it for a fixed fee that is much lower than what realtors charge, and you would get real legal advice instead of the nonsense that realtors tell you."

O I agree although on the other side no one forces people to use realtors. It is interesting in some areas where laws actually prop up businesses. In Mass you cannot legally do plumbing work in walls, ceilings and floors. Anything exposed is fine (water basin, toilet, sink etc). Plumbers unions are obviously opposed to changing of the laws.

Maybe this might be a bit OT but the internet has dramatically cut down the need to actually pay for advice from others. If a business works on the idea of giving advice it's going to find itself quickly having to do something else.

to mdovell - respectfully...I definitely earn my commissions. I am not a 'top-producer' but my buyer clients know SO MUCH MORE than they would by hiring an attorney. The disclosures are a bare minimum. To give you a glimpse of what I do for my buyers here in Huntington Beach (which has a variety of soil and water issues):
- discover potential issues with expansive and alluvial soil
- describe the various building methods performed by the various builders over the past several decades (i.e. S&S homes here in HB are very well built)
- keep up with the lending industry because short sales remain the better deals
- know how to work around and with the many entities involved in short sales
- KNOW MY INVENTORY: buyers cannot see many properties without a Realtor...more importantly, I save my buyers valuable time by constantly previewing property in Huntington Beach
- and so much more that goes into being a buyer's agent.

If you want to argue about the value of a Realtor, I suggest you argue the value of a listing agent. The reality is that being a listing agent is much less work. I would be more than happy to discuss this further but I got sidetracked with this as I am doing an open house today.

APOCALYPSEFUCK says

How many Realtors have been arrested, indicted or sentenced this month?

Ahem,
F**ker, it's Realtors®, okay?

FredEx says

- and so much more that goes into being a buyer’s agent.

I think it is fundamentally flawed when the buyer's agent gets a percent of the home sale price as his/her commission. The higher the price, the better it is for the buyer's agent, while it is bad for the buyer. I have no respect for the profession with that kind of vested interest built into the game.

RobSTL says

FredEx says

- and so much more that goes into being a buyer’s agent.

I think it is fundamentally flawed when the buyer’s agent gets a percent of the home sale price as his/her commission. The higher the price, the better it is for the buyer’s agent, while it is bad for the buyer. I have no respect for the profession with that kind of vested interest built into the game.

Agents don't really care about the price, they just want a sale. A seller's agent tries to talk down the amount they're willing to accept, buyers' agents try to get their clients to offer higher. It's all about minimizing the time they have to spend.

shrekgrinch says

Another Realtard Shill trolling on Patrick.net. NEXT!

Ahem, grinch,

It's Realtard®, okay?

mdovell says

In Mass you cannot legally do plumbing work in walls, ceilings and floors. Anything exposed is fine (water basin, toilet, sink etc). Plumbers unions are obviously opposed to changing of the laws.

You have to be careful to tease out safety regulations -- safety is a good thing. In some cases, you need a licensed plumber for safety purposes. Where it gets abusive is somewhere like San Francisco, where they regulate the types of materials you must use, which the plumbers union supports because it raises the price and increases their labor fees.

FredEx says

- discover potential issues with expansive and alluvial soil
- describe the various building methods performed by the various builders over the past several decades (i.e. S&S homes here in HB are very well built)

Both of those are things a good inspector or contractor can tell me. Why would I trust you to tell me about that? Do you have a background in local geology? Do you have a background in architecture or building?

- keep up with the lending industry because short sales remain the better deals
- know how to work around and with the many entities involved in short sales

This might be a value-add service if actually true, although I've found myself to be more knowledgeable about short sale processes than some realtors I've spoken to. If you are good at this, then kudos to you. There are lots of people who don't know enough or don't have the patience to do this, so it might be a value-add to them.

- KNOW MY INVENTORY: buyers cannot see many properties without a Realtor…more importantly, I save my buyers valuable time by constantly previewing property in Huntington Beach

This seems like a red herring. It certainly doesn't seem to be correlated with the fee paid for this.

My friend went to China with his new wife. She sold one apartment, and bought two more. Her friend sold two apartments, and bought three. They don't intend on living in any of the purchases, just flipping them over time.

To be honest, I'm not even seeing any sizable home price decline where I live, just lower demand since the affordability crash.

Investors who are wise, with cash and credit, will snap up the junkers, rent them out, and in 20 years you'll see new slum neighborhoods where you never thought they would exist..

Like I said 6 months ago, I am too busy with my work and life to be spending a lot of time on this blog. It has now been about 7 months since I posted this, so wanted to post just to bring this back to life.

So finally, there is some awakening in the USA and the rest of the world regarding China's ABSURD bubble. India's even more ABSURD bubble is still not well understood, so many more decades before they pop. Meanwhile, good old USA's unbelievably cheap housing continues to get cheaper. No end in sight in economic malaise...death spiral continues...

Year 2050....American median single family home price is down to USD 50000.00 in nominal value. USA median household income is down to $25,000.00. Some bloggers are still complaining about how unaffordable USA housing remains with the house to income multiple being 2. Meanwhile, in the same year 2050, India/China median household income is also now at $25,000.00, but their median small home price is now up to USD 5 million, retaining their historical house to income multiple of 200.

That's all very nice. But the only facts provided to the statements are on the sour American economy. The first thing that came to mind is the word 'spin'. I'm sure there are mega expensive housing units in India and China, but without looking up facts, it is my belief there are billions of poor people in India and China with really cheap tin roofs to go along with them.

I believe everything I read on them there interwebs.

Falling house prices are BAD for the idiots that over paid PERIOD.

Time heals all wounds, when the economy forgets the losers that lost their asses, houses SHOULD start to move and be sold. When houses sale you get the Nesting phenomena, and history has proved time and time again, that is America's biggest economic GDP driver.

Just like had the FED allowed the banks to take their medicine the carnage in the short term would have been offset by the thousands of opportunities for new growth and new business for every one failed large institution. Regardless of the vertical. Those fire sales, auctions, acquired business contacts would have created a boom in this country not seen since Post WW2 or even more healthy growth than what we had during the housing boom.

Up from the behemoth trees decaying on the forest floor, will sprout hundreds if not thousands of new green shoots, reaching for the sun.
What the fed(as the policy around the world) has managed to do, is prop dead and dying trees. You can't build a house with rotten wood.

Thanks global economy, and thanks Ben Bernanke.