patrick.net

Moonvalley:"I think they’re just all overleveraged and scared stiff"

Yeah, that's it exactly.

My daughter's friend visited. His parents came. They plan on selling in spring 06. When I mentioned the dramatic ramp up in inventory in Fairfax (DC), they said all the right things . . . "won't go down, desirable area, blah blah blah." But I could see the muscle tone of their faces just disappear. No grins, no frowns. Just slack muscled numbness. The concept, for them, who have been planning to sell and move for 5 years and were just waiting for the son's graduaiont - the concept for them that they may have missed the peak and will be selling in a glut was a lot for them. I can imagine. As I once said, for them, retirees, the difference bewteen 600 and 700 is a lot of good steak, or tofu, whatever.

A $hitbox in SLO will set you back ~650K. The average wage is ~$10/hr, go figure.

Makes little sense, does it? I can't see why retirees will plunk down their life savings for a hovel in SLO when they can get much more elsewhere. Of course, I'm speaking of in normal market terms (outside of the recent boom/expectations). The wealthy aside, most retirees have a limited income source, and still: everyone likes value/money. That's why I suspect job-poor retiree areas could see a major correction in a bust. There will be far fewer "wealthy" people after this scenario is played out.

Central coast not only has a lot of retirees, but the market from Santa Cruz to Santa Barbara is loaded with vacation and second homes. Prices notwithstanding, I can see why. Close to beaches, near perfect climate and outside the hustle and bustle of LA and Bay Area.

I’ve mentioned before, we rent in Sonoma now and won’t be buying up there until things go down.

Moonvalley, do you follow prices/inventory in Sonoma? I was there this weekend, and at casual glance of listings, I saw a lot for sale. Last month, on Sonoma square, one realty office had a big article "THERE IS NO BUBBLE" taped to their front window. Gotta wonder if they've changed their tune now.

the sharks are so mean and nasty that they will actually follow you back to your SUV to attack you.

Last summer (I think), I swam out to the end of Avila beach pier, and one week later a woman was killed by whites in the same spot. yikes.

that fool woman was “communing with nature” dressed in a black wetsuit, trying to swim with a bunch of harbour seals, while dressed like a harbour seal

That's right, sounds like the sharks were following the seals, and she was picked off. Still a little shocking for such a busy beach. Entering the ocean food chain isn't my kind of "communing".

Central coast not only has a lot of retirees, but the market from Santa Cruz to Santa Barbara is loaded with vacation and second homes. Prices notwithstanding, I can see why. Close to beaches, near perfect climate and outside the hustle and bustle of LA and Bay Area.

And, I think we're seeing a high degree of speculation-driving pricing on the coast, due to the impression that "everyone wants to live there, they're not making any more land, bla bla bla". However, I'll also throw in that until a homeowner experiences coastal living first-hand, they might not realize how much money and work it takes to maintain a coastal home. That nice summer weather turns into a beast come winter, and I think many retirees will find themselves over their heads with constant pre-emptive maintenance. The coast gives the impression of endless leisure, but it's not as easy as it looks. I'm guessing the surprise factor will give some owners second thoughts.

@investwith6s & Surfer-X,

Thanks for the great laughs!

RE Agent Leper Community (REALC)...
It’s going to be a gated little community where former RE agents can escape the humilation that their family and friends...
There will be playgrounds with slides for the kids. I’ll name the playground slide ‘The Property Ladder’ because you climb to the top only to slide down and fall into a sand pit at the bottom (6′ below from where you originally started — the kids have to scatch and kick their way out of the sand pit — which I may nick-name the ‘debt pit’ — it’ll be good fun and educational too).

you drive by on any given weekend and over 70% of the $hitboxes have no open windows. So either no one is occupying them or they are doing their Silence of the Lamps tributes...
It pays the mortgage or it gets the hose.

Gotta respond to this. . .

I said that "I seriously doubt many" people benefitted [made money] from the depression.

Somebody wrote back . . .
"You are incorrect. My great grandfather bought a lot of oil stocks during the depression and held on to them. As a result he became very wealthy."

First, I didn't say "nobody," so I'm not incorrect based on your grandpaw.

If what you're saying is that your grandfather bought at the trough when he stock was undervalued, then hung on for some years until they were worth more, then, OK , he's an example of somebody who made out. But I'd guess that very few can be said to have "benefitted" from the depression.

In other words, had there been no stock ramp up and no crash, I think that virtually everybody alive in 1925 would have been better off without the depression that with it. Barring the people who bought stock and assets low and waited years to cash out, most people who made money during the depression would have made more money without a depression.

That's all.

1935, that is.

SactoQt:

sorry - i though you were an anti-bubble troll. please ignore, i havent read enough of your posts to know one way or the other.

My post got cut short.

John Haverty

I meant to say thanks.

When the bubble burst open... or perhaps in other words when credit supplies finally shrink..

People over extended in real estate with no other diversification will suffer. Even if home values stay flat (unlikely, but if they do) people will have $100,000 doing nothing for them for 10 years or more. Imagine if you could pay half of what you pay into a mortgage into an IRA or Brokerage during that same period.

International Stocks will probably do well... some say gold, not to sure... others say it is time for large caps to come back... who knows, anyone?

I am sick, can't talk much.

Patrick, thanks for stopping by.

Peter P

I am sorry you're not feeling well, hope you get better soon. And yes it was very nice to hear from Patrick.

Experts at business schools banish the housing bubble and claim prices are reasonable:

http://www.inman.com/inmannews.aspx?ID=48000

hi Kurt, I’m living ‘on the coast’, less about a mile from the water.
I don’t see that it takes more maintenance. Or were you thinking of homes right on the beach?

Hi Peter--that's what I meant: water/beach front. I realized that distinction was lost after I posted. Glad to hear your house doesn't get beat down that much. If we move, that's all we'll miss, there are many positive "intangibles" after all.

The best scenario for us is, we will have a huge crash over a period of 1 year and be done with it. Move on to the next boom.

However, I don't think US will be left off the hook so easily this time around. This country has lots of structural problems, our persistent budget deficit (which is only a symptom of something deeper underneath), our school system, our industry competitiveness, our out-of-whack consumer debt and consumption habits which brewed these debts to start with... name it. I am afraid we will have a very tough ride ahead, for at least a decade.

However, I don’t think US will be left off the hook so easily this time around.

I tend to agree. We got off very easily after the tech boom thanks to the Fed and extrememly low interest rates. But this bubble is a different animal altoghether. With 70% home ownership there's a lot more people invested in this bubble, which is why I think the bubble deniers are still at it. How scary is it to be paying at least half your income in a house only to have people start talking about a housing bubble and how your main asset is likely to lose value? And if you were so foolish as to take money out against your home, further ratcheting up your debt, you'd have to be shaking in your boots. If you had a brain you would be.

I mentioned the bubble to people at work with homes. They get angry at me.
“You are a fool!”
“It is the best investment you could have made in the past 20 years”

Did these people happen to buy in the bubble (last 5 years)? And if so, how far did they analyze their risks?

http://mwhodges.home.att.net/exchange_rate.htm

Here is a site that summarizes some major problems that we have as a country. A bit more on the negative side, but full of empirical facts. I can deal with an one-time hit of exchange rate correction, or a realty crash, it is not like this country hasn't seen any of these before, and we have come out alright. But what bothers me is, it seems like some of the underlying cornerstones that made us a great country start to crumble. I am usually not a nay-sayer, and I try to look at everything from a positive angle (including how to benefit from a depression, as an example), but I do think this country needs some serious reflections on what we have done right and what we have done wrong.

For one, the RE bubble is consuming too much of everyone's energy. People are either griping about it, or bragging about it, all this energy and attention is going into something that does not generate value. Real estate is a derivative of the collective economic value the local community can generate, not the other way around. A commercial real estate is only worth as much as the gross revenue it can pull in, and a residential property is only worth as much as its owner's earnings can soar, from non-property sources. RE is also occupying too many resources, talents, that can be allocated elsewhere to ensure a long-term, sustainable growth of this country.

I think the bubble will burst in 2011, after this decade is over.

What do you think will happen in the meantime?

What do you guys think? I can wait, no problem w/ good rent.

But I thought you already own a nice house in Marina? I must have mistaken.

Margie,

the FDIC can just print money, that is what our government has proven to be really good at in the last 5 years. I have 100% confidence in the core competence of the US government, printing money, that is.

The question is, how much will the $100,000 be worth post-bubble compared to pre-bubble? The $100,000 question is where do you stash away your pre-bubble paper $100,000 so that even after our government prints another trizillion after the bubble bursts, my money will still retain its buying power prior to the crash.

A response to Margie read . . .

"Certainly don’t keep more than 100K in any single bank account. Not sure why you think FDIC won’t be able to insure everybody. Their ability to give you back your nominal account value is infinite."

I think Margie's concern is a valid concern. Yeah, sure, I'm a paranoid nut and what the hell do I know?

I know this . . . To think that it's impossible that a bank will simply stop paying out is ridiculous. I think it is more likely than not within the next 5 years. With a fracitonal reserve of about 1% and banks lending out more and more to risky lendees, I think it's only a matter of time before you see the first bank go under. Smaller, local, etcetera.

But if and when it spreads, and people start to think, "hey, I don't want to have to deal with the Feds to get my "insured" money back," - in combination with more defaults and bankruptcies, then the crap is really going to hit the fan. In the event of monstrously widespread bank failurees, the government will not simple hand out the money. It will not simply print more money to hand to people.

So me? I don't keep much money in the bank either. The way I see it, you're better off having a bit here and bit there - that way, when the crap starts flying, you won't get shut out all at once. Better yet, cut your costs to the bone. Get rid of all excess. The fat will die first.

Forget the illusory 100k gaurentee - it's only as worth as much as the dollar, which is dying.

I disagree. It doesn't take time to bring down a house of cards.

I think it's much like the room full of mousetraps.

The whole floor is covered with mousetraps. Each mousetrap has a pingpong ball on the moving part so that when it's triggered, the ball gets launched into the air.

That's the housing market. The article cited by Inquiring Mind is disturbing. It's dead on, however. It's the worst case scenario unfolding - everybody who has been planning to hold on for a bit longer, who is speculating, who is retiring, is now running for the door.

A single ping pong ball has been dropped into the room, as it were.
I predict nationwide drops in house values of at least 10% by spring, yoy.

I am so freaking sick to death of this type of crappy quote . . .
"Mortgage broker Klingsheim said the community's falling prices doesn't mean the proverbial housing bubble is bursting, rather the market is correcting itself after years of exorbitant growth."'

Here are two more anecdotes.

I was speaking with my mail man the other day. Just shooting the shit about nothing. Out of the blue, he says, "yeah, with the way the economy is going . . . '
Tonight, I'm talking to a guy at a college conference. He's a blue collar guy working for a municipality. Says he lives in an 1100 sf house. I wonder if he got the number wrong. It's possible. He wasn't sure if we were in Iraq or Iran . . . So I asks him, "what do you think of the economy.?" He looks at me, looks down, thinks on it a bit, and says, "I don't think it's doing too good, with housing so expensive and interest rates coming up."

More writing on the wall.

Lisa, that is a good point, buying up distressed properties during the downtown. I always believe that BA has a good fundamental value, just not at the current valuation.

That's why it is critical that we protect our cash well so during the downtown our cash doesn't turn into paper along with the property value. Which one is a better way to go? Foreign currencies vs. oil/gold/commodities? I am also a bit worried that when the world depression hits, all countries will be racing to print money to save their asset bubble asses (RE bubble is now a global problem in ALL English-speaking countries thanks to AG). So, I am more geared towards commodities/gold/oil than paper money from other governments. Any thoughts?

But the USD bond may not compensate me for the loss in USD value.

USD lost 75% of its value since 1970. Did the bond return account for that? My goal is to retain the current buying power of my USD.

Dear members
what do you guys think about the singapore dollar and holding some cash there? Also will we able to liquidate it into whatever currency when we want?

However, somebody on this board mentioned that if there is a global financial crisis that the money would come back to the us. i do sense some logic in that because of the trust that the whole world imposes on the us $. But if the rich banks and their cronies decide to short the dollar and take it to the woodshed all bets are off.

It is scary to think that the fdic can renege on their promise. Well every one will be in trouble at that time. so we will have a lot of camarederie.

Also what if the government imposes the 1933 gold rule?. will other governments across the world do the same thing

I should really read this more. A group of smart people is smarter when they're all listening to each other.

I'm happy you all (well, nearly all) post thoughful comments.

Patrick

Oh, and thanks Patrick. Glad to see you posting here. It was your links site that convinced me. Count me a soul saved from significant financial hardship!

Patrick definitely deserves some kudo's! I've learned so much from the links posted here and even more from the discussions on the blog. I'm also happy to see a lot of new "regulars" posting. It's always good to have more viewpoints, and new blood keeps it from getting stale.

(thanks Surfer-X, you’re a blog legend!)

I'll second that.

(thanks Surfer-X, you’re a blog legend!)

I agree. And SactoQt is the most eloquent writer here.

I think home price appreciation will level off initially. A lot of RE professionals will say, "see, soft landing". After 6 to 18 months of increasing inventory and slower growth, we will see sharply higher level of foreclosure activities and prices will start to decline.

I believe the most interesting part of the crash will happen when ARMs adjust en mass in the 2007 time-frame. Homeowners will find out the hard way that it is no longer possible to refinance to a cheaper structure. Yet another wave of foreclosure will hit.

Stanman, I don't agree with your assessment of stock options. In a start up environment, they are a smart way for companies to motivate their employees without using up scarce cash. They also are very effective at ensuring that employee incentives are lined up with owners and managers.

Think about it: without stock options your economic incentive is to get paid as much as possible for as little work as possible. It is your bosses job to work you as hard as he can without paying you any more for it.

When you own stock, you are literally a part owner of the company. If it does well, you do well, in a very tangible fashion. I know it has worked to motivate me in the past and does so in the present.

I work for a smalish company that recently went public though, so I am not as much a cog in a machine as say. someone who works at Cisco or Microsoft.

Think about it: without stock options your economic incentive is to get paid as much as possible for as little work as possible. It is your bosses job to work you as hard as he can without paying you any more for it.

Well, it is a market after all. Without stock options, there need to be other compensations to make up for it. Nothing is free, stock options come from unwary shareholders whose ownership gets diluted over time. I think companies should definitely expense stockoptions.

My husband also gets stock options as part of his pay package, but the company doesn't start paying them until the employee works at the company for awhile. I think in this case it's 8 years, but I'm not totally certain. Anyway, I would say that all the long term employee's I've talked to said that most of their wealth is from the stock options.

I agree that in a tech start up stock options are only as good as the paper they're printed on, but an old established co. with a good track record that pays out options can be an entirely different story. So I guess the options are only as good as the company you work for.

---Well, it is a market after all. Without stock options, there need to be other compensations to make up for it. Nothing is free, stock options come from unwary shareholders whose ownership gets diluted over time. I think companies should definitely expense stockoptions.

The argument against expensing stock options is as follows (and it's pretty hard to counter). What expense, in actual GAAP accounting terms, is a stock option? Options have always been required to be disclosed in the 10K. The dilution is known, and it is reflected in the stock price. Why does FASB assume that an otherwise efficient market is somehow unable to factor in this one, singular aspect of capitalization? If options are now expensed, they are double counted because it depresses the P&L, which reduces EPS, which depresses the stock price, which is already considering the dilution. A complication is how to price options. The FASB mandates they should be valued according to volatility and Black-Scholes computation of equity options. But ESOs are not equity options, they are worth far less due to their restrictions. Worse, the SEC just rejected Cisco's and Microsoft's attempts to create marketable securities which mirror the real-world nature of ESOs in an attempt to arrive at the true value of ESOs. Their rationale was that their plans didn't factor in all the restrictions. So what, a less realistic Black-Scholes valuation is better? It's actually quite insaine.

I agree that ESOs aren't free. I'm not arguing that someone (the shareholders) don't pay for them. But, why expense these in a P&L. If anything they should be either balance sheet items or off-balance sheet items. They are an impairment to equity, not an expense.

(but then, I'm not an accountant, either. i just get annoyed at nonsense policy)

Absolutely. It is silly when people talk about stock options as if money grows on trees. The money is coming from THE COMPANY! Most of the time when stock options are exercised, the company needs to use its cash to buy back stock in order to provide the shares to the employee exercising the options. Even in the rare event that the company actually issues new shares upon exercise, that simply dilutes the wealth of the existing shareholders. All it is is a socialist transfer of wealth from shareholders to employees who are getting a lucky deal and earning much more than they would command in a sane market. A market is never sane when its participants think the money is growing on trees.

oops.. Forgot to close my tags.

Absolutely. It is silly when people talk about stock options as if money grows on trees. The money is coming from THE COMPANY!

Stock options granting is the electronic printing press. Money comes out of it, but there are externalities.