Could enough cheerleading about housing turn into a self-fulfilling prophecy?Â
My dear readers of bubbleinfo.com are too smart to fall for it, but there are only a couple of thousand of you. What about the rest – the ones who listen to Cramer, read promising headlines, and rely on typical realtors?
Cramer’s rant this week about his latest bottom call: http://www.cnbc.com/id/31388528
Cramer is a buffoon in most people’s eyes, but many homebuyers are tired of waiting – will they compromise on price or quality when they hear that it’s time to get in? Or how about his comment that the banks are flush, and can hold back REOs? Does that erode your confidence that free markets will prevail?
This is a continuation of the comments from the last post, which I really appreciated and wanted to continue. Specifically, that the vast majority of homebuyers who aren’t as studious as you, are the ones making the market today. They are the ones out-bidding you for REOs, buying other non-REO houses at mind-numbing high prices, and spoiling it for those patiently waiting for normalcy.
Or is this as normal as it’ll get, with manipulation gumming up free enterprise?
Dawg is right, of course, that nobody knows for sure, and there’s no telling how it’ll turn out. But let’s explore a hypothetical case.
If over the next two years you saw the banks dribbling out one by one their REOs in your target area, and enough demand to gobble them up and more, at what point do you quit waiting? Let’s add that mortgage rates somehow stay between 5% and 6% – is there a point where you’re going to give up on logic and compromise on price/quality?
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Kramer was called out yesterday by Calculated Risk:
http://www.calculatedriskblog.com/2009/06/cramer-gets-confused-on-housing.html
Kramer doesn’t realize that median price rose on a change in sales demographics. He talks about a lot of things he knows nothing about, and you’d have lost a lot of money if you’ve followed his investment advice over the last few years.
I totally agree.
But can those non-CR readers keep hearing on MSM that it’s a good time to buy, and resist?
I liked this comment from CR:
Gavshire Hathaway (profile) wrote on Tue, 6/16/2009 – 4:43 pm
CR, you assume that CNBC and Cramer in particular are making an honest mistake. They are not. It is intentional deception (propaganda) in an attempt to re-inflate the bubble economy and preserve GE.
I guess I’ll keep renting. I feel like it’s an in between stage right now. Not only can I not find any homes that are a decent price and quality to buy, it’s really hard to find rentals with the same. Try finding a 3BD anything in Encinitas that’s not in either Village Park (no offense) or is of nicer quality at a decent rent. Maybe I’m too cheap, but a 3 bd house that looks crappy going for 2600 a mo? seriously?
Jim,
If what you’re describing comes true…
“If over the next two years you saw the banks dribbling out one by one their REOs in your target area, and enough demand to gobble them up and more, at what point do you quit waiting? Letâs add that mortgage rates somehow stay between 5% and 6%”
The idiots that haven’t been paying their mortgage and living for free will come out and compete with people like myself for properties. And, they’ll be on a level playing field with renters that pay our debts. Sigh…
I sincerely believe in the free market. Government intervention can only steer an economy. (without military intervention) Eventually something will give.
is there a point where youâre going to give up on logic and compromise on price/quality?
I think it’s entirely a case by case choice. For us, we rent in the area we wish to buy in. It’s a nice home and our kids go to great schools. Homes in our area list just out of reach for us. The ones within our reach are REOs or short sales that take either all cash or conventional with 20%+ down. So for us the questions is — do we relocate to a less desirable area just to “own” something or wait for the right house at a price we can afford in the area we have decided to settle in. I don’t buy that we’ll be priced out forever. We’re not waiting for the absolute bottom either — just a little more reasonable prices. Even with the low inventory now, prices are being reduced on homes in that oh-so-stubborn $550-700K range. Until then, we will just wait it out and keep saving up that precious cash. Cramer is a fool.
Cramer needs to die of a heart attack already; I wonder if the guy is really that wound up or if he’s just a better actor than analyst. I don’t think many people take him seriously.
Probably, at some point in the future, the gov/fed will have to choose between housing and handling inflation. Likely around the point we start seeing bread lines, but who knows.
As a first time buyer, I’ll be damned if I step in and use my money to cement the cracks of a crumbling foundation. I’m happy renting forever if it’s the fiscally sensible thing to do.
I can’t speak for the general populace, especially those clueless in the workings of the recent economy. They’re an erratic bunch.
I sort of think the housing market will parallel the Obama agenda. He has basically declared war on those who make over $250k to take from them and give it to those who make less.
So high end homes will struggle as low end continues to burn bright as wealth is re-distributed through subsidizing Fannie + Freddie losses, buying down treasury rates to keep conforming rates low, tax credits for purchases, foreclosure moratoriums, etc. All that interference benefits lower income home-owners and home buyers disproportionately.
The higher the home cost, the more it will struggle and lose value. The lower the home cost, the better it will fare and maintain and rise in value. The equilibrium point will eventually be $1.25m (250k x 5).
So the further below $1.25m you are looking, the quicker you should act. The higher above $1.25, the longer you should wait.
Interesting observation: this past weekend I was in the Bev Hills, & S. San Fernando Valley areas. The extreme proliferation of For Rent and For Lease signs was overwhelming. Where are these renters disappearing to??? I think I know. There are almost no REO’s and short sales available in these areas. Good deals gone – at least for now.
While I agree the banks may be able to dribble out REO’s at a slow pace, the key will be financing for new homes especially the mid price tiers. The lower priced homes are cheap enough that those with cash and funds with cash are buying but eventually if the down rent trend continues even those investors will loose money and stop buying.
In looking up here in SF I can say most banks now require 30% down. You see many a home in escrow and back out and I suspect a large percent is because people don’t want to lend to high risk and the above $500k market typically has not a good rental / investment property made unless you are banking on appreciation.
So my take is the intervention slows the pace of decline but the markets in the long term prevail. And the more they do to manipulate the loans that should go REO, the more they will do to remove new funds to finance new loans. That will be their trap along with the rest of the world pushing up our interest rates.
And I think it’s important to remember that Cramer’s call comes with a footnote — namely he said his assertion of a bottom won’t hold if unemployment goes above 10%. Now the Govt. may manipulate the official stats, but I suspect in Cali the above 10% is an almost given.
Be patient I say. Worst case is you continue to rent when renting makes sense financially over buying and there is absolutely nothing in this recovery that is going to lead to home prices (not the median price of course) increasing rapidly.
The last 35 years have been essentially bubble economies. This housing fiasco was a classic bubble, just like the one in the 1920’s.
All of us can flip the numbers a hundred different ways, but bubbles just don’t happen. It’s not like a couple of banks got the math wrong one weekend, and the next Monday the entire world economy crashed.
Bubbles happen because our culture changes and an attitude of gambling and “I can get something for nothing” comes to prevail.
As long as that attitude exists, corners are going to be cut, data is going to be faked, and a lot of people are going to get caught holding the bag. That’s just the way it is.
We need a whole bunch of new sheriffs in town to clean of this mess and re-establish some standards. Something that hasn’t happened yet. Until we do that, the other guy’s math isn”t any better than my math.
But if I were buying a home, I’d get with someone like Jim, who at least demonstrates the talent and dedication to try and make some sense out the numbers we have; which is hard to do considering a lot of trust has been taken out of the market (another casualty of bubbles).
My rule is: people should buy what they can afford and like what they buy.
Thanks Consultant, I appreciate that!
I do try to make sense of the data, and make recommendations to my clients, many times telling them not to proceed. I was speaking with a potential buyer yesterday who was frustrated that their realtor wouldn’t make any recommendations as far as price to offer or observations about the house – they were just there to complete the forms. That is weak.
Or you get this type of realtor – check the phone conversation in the background of this house tour, particularly at 0:52-1:40 and 2:20-2:37:
http://www.youtube.com/watch?v=9KzKOqQqMUg
“Cramer needs to die of a heart attack already; I wonder if the guy is really that wound up or if heâs just a better actor than analyst.”
Cramer is an entertainer. You’ll know this era is over when Cramer’s show gets cancelled.
Is there a website where I can compare year-by-year historical home price to income ratios by community? I would love to be able to gauge the rationality of individual communities rather than just make blanket statements about everything on the coast vs. inland.
As a first time buyer, I’ll buy when I can afford to put a good chunk down on a home I could live 10-15 years in. This will come from further home declines, increased income & savings or a combination of both. If rates rise, incomes will rise along with or home values will keep falling. Either way, I don’t see the risk in sitting on the sidelines.
“Could enough cheerleading about housing turn into a self-fulfilling prophecy? …What about the rest – the ones who listen to Cramer, read promising headlines, and rely on typical realtors?”
Jim, with all due respect I think you are putting far too much credence on the effect cheerleaders like Cramer and others have on the market. And conversely, also putting too little faith in non-JtR readers. In my opinion, the market is much more driven by the basic supply/demand realities of the market, i.e. interest rates, unemployment, price-levels, migration, lending, etc. Cramer may think he can move mountains himself, but that is just his own hyper-inflated, mega-maniacal ego. Market history is filled with prominent bottom-callers every step of the way, in the end I don’t think they make one bit of difference as to when the bottom is actually put-in. A small subset of them look like geniuses only in retrospect long after the actual bottom is made.
Cramer told my friend google was going to 1000/ share not too long ago so my friend bought 1000 shares at 742.Cramer gives really great stock picks.
My realtor told me real estate in CA was undervalued by 20% right now.I bought her another bottle of jack daniels for her birthday.
Prices aside..why would renters want to buy housing when you simply don’t know what the rules are?
1) CA has a budget issue. How long will prop tax be a sacred cow?
2) CA has high unemployment. Where is the job creation to spur housing demand?
3) Anybody have ‘move-up’ equity left in their small condo / house?
4) Anybody know what mortarium / bailout is coming next?
I won’t buy until there is some upside (property cash flows, etc) to match all this downside.
WOW, looks like the last post kicked up a storm that continues.
I’m not a permabear and I’d like to buy a house, but first the prices have to return to historically sane levels. We’re nowhere near that now, and macro fundamentals are deteriorating, not improving.
No question there’s some strong koolaid being served out there, though. That’s okay, the effects will wear off soon enough.
New_Renter,
Yeah maybe too much, but it’s the compilation of months of headlines like this that give those that don’t read too deep, permission to proceed:
From today’s U-T:
In the latest indication that the gloom in the housing market might be lifting, MDA DataQuick reported yesterday that May prices in Southern California rose for the first time in nearly two years, up $2,000 from April to reach an overall median of $249,000.
On Tuesday, DataQuick reported that San Diego County’s median price rose even more, up $5,000 from April, to stand at $295,000, or $15,000 above the recent low point in January.
âWe appear to be in the early stages of the market gradually tilting back toward a normal balance of sales across the home-price spectrum,â DataQuick President John Walsh said.
Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast, said the prices are âabout rightâ in historical terms and are attracting would-be buyers, but not yet enough of them to completely turn the market upward.
âA lot of people are on the sidelines who are saying it may be beneficial to wait another month or so,â he said.
Cramer’s advice is just about as good as Bernie Madoff’s. His famous “Sell, Sell, Sell” segment caused a massive 401K panic attack. Unfortunately, many investors unnecessarily sold their holdings and were wiped out. I’m glad I decided to ride out. Someone needs to stick a sock in his mouth along with his own foot.
Remember that in 1993, housing prices rose modestly before declining in 1994, 1995, and 1996.
Chuck Ponzi
Every market is due at least one dead cat bounce.
“Or is this as normal as itâll get, with manipulation gumming up free enterprise?”
I don’t see anybody talking about it, but this is a possiblity. As we write in here, the rules of finance in the western world are themselves being re-written. The end result may be intense government regulation of the mortgage and credit industry.
My inference if that happens would be that housing speculation would be no more for a very long time. Prices would be stable, however at cost some of us might not want to pay.
I agree Jim that people see that the median increased $5000 from April to May and just blanket that over the entire market. They think uhhhhh, well, my payment on such and such house will be $4000 a month and prices are increasing at $5000 a month so WOW what a cash cow. My wife and I are considering moving to Japan where they are 20 years past this mentality.
New Term-
“SPECUSITTER”–One who holds off buying a home, which he or she should otherwise buy, only due to their speculation that the housing market will decline in the immediate future–a form of pessimism-aka: “fence-sitter”. As opposed to a “SPECUVESTOR”, one who buys a home, which he or she otherwise should not buy, only due their speculation the the housing market will increase in the immediate future–a form of optimism-aka: “cheerleader”.
We plan on making offers this winter in our desired area. We will end up paying close to what we pay in rent.
The govt manipulation is REALLY annoying! The discounts were finally starting to happen and now they have mellowed out temporarily.
It only encourages me to want to wait another year. I think my husband is sick of me tracking real estate so he reminds me that we need to go out there and take a shot at this crazy thing, make some offers and hopefully end up with ONE great deal.
If we don’t find a deal, I imagine we’ll wait until we find one. It isn’t worth compromising after waiting 4 years.
I’d prefer to call myself a “RENTERVESTOR”: one who does not buy a home because fundamentals do not support current prices while continuing to accumulate cash.
How do you combine the words Speculator and Investor in the same term. Its either one or the other. I’d prefer to call them SPECUGAMBLERS, or SPECUHOMEPRICESONLYGOUPSANDIEGOISSUNNYEVERYONEWANTSTOLIVEHEREIMNAIVEANDAMABOUTTOLOSEALOTOFMONEY-VESTORS
“But can those non-CR readers keep hearing on MSM that itâs a good time to buy, and resist?”
Nope. Some of my friends and coworkers already bought in the last year, and as far as I can tell, the only thing keeping others from buying is the crappy inventory out there. As a data point, we’re all mid-20s to mid-30s, dual-income families (most with no kids yet), looking in the $250,000 to $500,000 range, Orange County. Everybody from my in-laws to their dog thinks we should be buying right now. One set of friends bought in a not-entirely nice neighborhood of Anaheim a year ago, and were competing with multiple offers then. Their neighbor’s foreclosed property is now on the market for $50,000 less than my friends paid, but that’s not something they want to look at or admit to caring about. I hear a lot of “well, we’re planning to stay in it for a long time, so who cares if the price goes down a little more?” Fair enough.
Another key mentality I’m seeing in friends is that they still want homes they can slap their favorite paint colors on and “enjoy” right away. I’ve watched my sister’s family enjoy their home while fixing it up, room by room, for the past 6 years. I’ve always thought a livable fixer would be just fine, especially if it means we can buy something we can pay for on one income, which is a major criteria for me. I could not be happy buying a house that I can see with my own two eyes was purchased by an investor, flipped in a single month, and put back on the market for $150,000 more than that investor paid, but that’s exactly what all my friends seem to want. They’re willing to stretch themselves to their financial limits with 3% down FHA loans to make that happen and, again, fair enough.
Ultimately, though, that’s not how I think, and while I don’t actually care what my friends do, it can certainly be frustrating to see how willing they all are to buy as much house as they can, as soon as they can. I’ve long since decided that we’ll quit waiting when we can comfortably afford it, period. If foreclosures trickle out and competition stays high, and mortgage rates stay where they are (or even go up), we’ll be buying when that big pile of savings we’ve been amassing meets up with a mortgage we can afford, even if we have to overbid on the overall price. I have no idea how long that will actually take, and I’d like to think another year or so would do it, but if not, I’ll make do with the grass on this side of the fence. I don’t love renting, and eventually we’ll want more space than we have now, but my parents saved for 20 years before they bought a house. While I certainly don’t want to wait that long, I don’t see what’s wrong with a little patience.
I did not come up with the term “Specuvestor”, but I do think it is fitting. I think that there should be a term for those who are sitting and speculating the other way–it is, in fact, a form of speculation!
Local Boy, real estate is not the only asset class. There is an opportunity cost of placing 20% down on a $1m house.
??? All that was meant is that if there is such a thing as a “Specuvestor” (as mentioned over-and-over on the bubble-info site), there should be such thing as a “specusitter”–after all both parties are speculators.
At my price point renting is waaaayyyy cheaper than owning and there are more attractive asset classes to invest my money in.
I don’t call that speculation, I call that investing.
“Remember that in 1993, housing prices rose modestly before declining in 1994, 1995, and 1996.”
I bought my house in 1993. I have to say, I am glad I did instead of waiting until later. I really didn’t notice that prices fell after that.
I remember my new next door neighbor in 1998 who started renting. He had just sold his house because he thought Real Estate was going to tank. He lived there about a year before going on to rent another place.
Speculate: to engage in any business transaction involving considerable risk or the chance of large gains…in the expectation of a very large profit.
I think 80-97% leverage on a $500-$1,000,000 property would count?
Invest: to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.
Based on my analysis of current housing fundamentals at my price point I’ve decided to allocate my cash flow to more attractive asset classes. I don’t think that’s speculating. Of course, you can engage in real estate investing, but I would limit that to people who actually understand the fundamentals and exclude people that use terms such as “housing only goes up”, “everyone wants to live near the coast” or “you are throwing money away renting”. That’s what I would call a SPECUGAMBLER. Unfortunately, they’re gambling with Fannie Mae cash.
Duncbdunc,
Get with the program. These aren’t speculators. How could they be when they are only putting 3% down on non-recourse loans? They are gambling with house money. In this case the house is the taxpayer. There is no downside. There is only possible upside!
I would love to see how people’s matra changes regarding housing if loans were recourse and downpayments were reasonable.
The speculators that I really feel sorry for are those rushing to put 20%+ down on an asset before it ‘gets away’ from them (again).
“Iâm not a permabear and Iâd like to buy a house, but first the prices have to return to historically sane levels. Weâre nowhere near that now, and macro fundamentals are deteriorating, not improving.”
Lets be clear about that. They are indeed near historically sane levels and near fundamentals, its just that they are all houses where NONE OF US WANT TO LIVE!
You know what makes me nervous. Look at case shiller or any other graph that shows weve had a huge decline. That is true, but its been concentrated in areas we all think suck. High end out in the IE has been crushed – just not near the coasts.
Even worse, if the next year is anything like the last 3, that chart will show weve bottomed, and high end coastal will still be sitting there, hardly budging at all.
I hate to say it but I think we are all fighting against the current and thats never going to stop. I for one need to reevaluate my priorities. In some very desirable areas, renting has been far cheaper than owning. Thats the way it was in Paris and in NY when I lived there. I just didn think N County would be like that, but it increasingly looks like thats the way it is. As such, I think I will either rent and be happy with it, or just buy farther inland where I can afford it.
“There is an opportunity cost of placing 20% down on a $1m house.”
Approximately $4,000 a year pretax at today’s interest rates unless you want to take on a lot of risk. Inflation you are losing money; deflation you aren’t doing much until you buy something with it.
Jim –
If the government and banks control the supply of REO that hit the market, then now is as good of time as any to get in. I’m starting to think they will. It’ll be like De Beers selling diamonds.
At that point your options are to get in, or wait until inflation catches up and everyone currently under-water can sell again.
Every data point out there suggests prices should fall, inventory should skyrocket. But it’s all irrelevant if it’s a controlled market with polar goals.
I have to run out so I’ll revisit thread later and read through all the comments. Until then I have question for our esteemed host (yes, JTR, you).
How do home builders into the premise of your question? It seems to me that they do not. So, do we assume that the vast majority of the home building industry just disappears once and for all? And if not, in what form does this hypothetical home building industry take?
Just curious.
Thanks for keeping things interesting JTR, you rock.
Oh, and from the last thread, funniest misnomer ever, “permabears”. Hilarious and as a vapid as “permabull”. Either one describes a lunatic and an extremely small minority, or a shill. YMMV.
I donât see anybody talking about it, but this is a possiblity
No, it’s not. Government interference only delays — and aggravates — the inevitable. The only leg left under high housing prices now is unusually low rates, and that one’s just about to go bye-bye, too.
“Approximately $4,000 a year pretax at todayâs interest rates unless you want to take on a lot of risk.”
Based on my analysis, this is a preferable return to investing the cash on a levered asset with deteriorating fundamentals (North County Real Estate). Berkshire Hathaway holds a lot of cash, I presume you view Warren Buffet as an investor, not a speculator, right? Having cash allows you to be opportunistic – which is why some of the best investors keep cash on hand, despite its poor return characteristics.
Again, I have a view based on a deep analysis of long-term housing fundamentals, and I am building my portfolio based on that view. When the time is right, I will take my cash and invest in an attractive asset at an attractive price. That’s not speculating, that’s investing.
sdnerd,
Is the risk of investing in real estate today equivalent to the 2% yield you quote?
Keeping prices high by controlling inventory is possible only in the short-term. Will builders not build any more homes?
The government/banks are essentially restricting the total housing stock by keeping a large portion ‘vacant’. Every house that is ‘released’ from the vacant stock increases the total housing stock. As the vacant houses are released the total effective housing stock increases allowing prices to get closer to ‘normal’. Not flooding the market with inventory is surely keeping prices from falling more than they otherwise would but does not prevent prices from reaching a ‘normal’ inflation adjusted level over the long term.
The advantage De Beers has is that it isn’t as easy to ‘create’ new supply of diamonds.
The other shoe will drop when the government can no longer subsidize homeownership through low mortgage rates and/or low taxes. The larger the budget deficit the quicker that time will approach.
Do you subtract the cost of renting?
There are housing costs for everyone.
In fact, because I’ve been holding cash, I was able to invest in U.S. equities in March when the asset class was trading at 15 year lows (something you can’t say about NC real state). I’m now up 40%+ on those investments, and am slowly rotating that back into cash.
So opportunity cost is much greater than said $4,000.
We closed escrow on Monday after looking for over a year. I am an avid reader of this blog as well as some others that I have found very interesting and informative. I thank you Jim for your blog.
But alas, I am just a mere mortal looking for a nice place to live and I was sick of condo living. I found the right house at the right price at the right monthly amount. I am not looking to make a killing (but I bet I will), I’m just looking to set down roots.
Will the market keep going lower? In my neighborhood, I am guessing no. There will be some dogs that have nothing going for them that are the same size as mine and cheaper, no doubt. But a home is a personal choice indeed and this one fit my family very well.
I would venture that for the majority of folks, it isn’t all about dollars and cents.
Jim, tell me what this house would sell for and I’ll tell you if I incorporated rent đ
Ocean view, Encinitas House, $4500/mo rent
http://sandiego.craigslist.org/nsd/apa/1228186544.html
Depends on what type of interference.
Governments around the world routinely and decisively interfere in markets of all kinds.
It is possible prices could stabalize. Liking why would not be relvant at that point.
Permabears – Hmmm. As I see it, if your attitude is no harm in renting for another year, prices could slide near the beach, and then im better off. Or at worst they stagnate and I buy then. Sounds like an emninently reasonable position.
However, if your attitude is that there is going to be a cataclysm at the beach you are a bit nuts and are indeed a permabear IMHO.
Dunc,
$1.2 million for Crest, conservatively.
“Is the risk of investing in real estate today equivalent to the 2% yield you quote?”
At this moment, I prefer the 2% yield. As such my 20-40% down payment sits in safe liquid accounts at the moment. I want my DP to be as close to risk adverse as possible – as I suspect most others do to. I’m simply pointing out the harsh reality that at 2% interest, the current opportunity cost of someone’s down payment fund is not all that relevant right now.
“The other shoe will drop when the government can no longer subsidize homeownership through low mortgage rates”
Something tells me if the government wants to control and/or offer low mortgage rates the next 5-10 years it will find a way. The line between banks and government is getting pretty blurry.
$4500/mo rent sounds like a great deal then, and even better if its negotiable. That’s about equal to a $750,000 mortgage – I assume property taxes, homeowners and maintenance costs offset most of the tax shield benefits.
sdnerd, you’ll love this for your blurry line:
WASHINGTON (Dow Jones)–U.S. policymakers must “fundamentally rethink” the government’s role in the nation’s housing market, and a key part of that will be determining what to do with Fannie Mae (FNM) and Freddie Mac (FRE), Treasury Secretary Timothy Geithner said Thursday.
Geithner, appearing on Capitol Hill to sell the Obama administration’s regulatory overhaul plan, said it was “essential” that Congress and the White House figure out what to do with the two mortgage finance giants that have been under government control since last September. But any decisions on the future of the two firms should be part of a broader consideration of what role the government should have in encouraging homeownership and housing policy, he said. Additionally, he said the Treasury and the administration “couldn’t do it carefully enough, thoughtfully enough in this time frame.” -By Michael R
(Dow Jones Newswires 10:53 AM ET 06/18/2009)
I love that realtor in the YouTube video. “I think its best to get the offer in.. there are so many ways to get out of the offer…blah blah blah”
If things keep going like this, with trickling inventory, in an effort to keep the market inflated, then I will continue to rent.
It is nice not to be strapped to an underwater mortgage.
Damn it Jim,
I wish you were in Long Beach, CA.
“sdnerd, youâll love this for your blurry line”
Indeed, pretty entertaining isn’t it? đ
The guy selling the plan has a multi-million dollar home he can’t sell; and he’s selling it to a bunch of people who are all probably in the same situation.
I bet this plan has indeed become “essential” now that the high end is clearly under pressure.
sdnerd,
That would be great if the government has the capital to lend at whatever rate they deem appropriate.
Unfortunately for us, the government does not have the capital. They are running a deficit. They are borrowing from investors (many of which are foreign) to buy mortgages. What happens when those lenders to the federal government start requiring higher returns for their investment? Borrowing 10% of your annual income (what the government is proposing) can’t last forever.
Maybe people need a historical perspective on how low these rates currently are:
http://www.freddiemac.com/pmms/pmms30.htm
One of the funniest things I’ve read on this blog over the years is sdnerd’s ultimate nut shot post. Pow! Instant classic.
That was an instant classic – I should give out awards!
Love the rate chart too, it brings back memories of late 1984 when I first started. Rates were in the low-13s, and I was giddy!
At least worth a reprint:
Could this be, in fact, the ultimate nut shot?
You do the responsible thing, and are either priced out or otherwise donât enter an insane market. You work hard, and save up a nice down payment.
Those who do not do the responsible thing get to live in a house youâd like to occupy for a few years at a teaser rate. At the end of said term, when they can clearly not afford the mortgage they get to live there for a year with no payments. Once the free rent term ends, they work into a loan mod program.
With a year of free rent in their pocket, their new modified mortgage, and their nice house they are in good shape. Once the modification process is complete, they drive over to your small cramped rental and just for good measure kick you right in the nuts.
Pow!
sdnerd
T-shirt idea?!
Pure commedy.
P.S. on the realtor talking in the video – We just had to sue her because of non-disclosure.
We found out about construction defects the day before closing that she never mentioned, and she wanted to keep the deposit.
The small-claims judge couldn’t believe it, and we won. I lost my buyer though, so it cost me thousands.
I found it particularly ironic that in the video she glossed over the fact that the listing agent told her there was litigation, and she made it sound like it was a nothing-burger. (0:52-1:40)
At $4500/mo my rent vs. buy decision for this house would be neutral at a purchase price of $1,050,000 assuming 6% interest, 20% down payment, 9% opportunity cost (re: downpayment). This assumes there is no meloruse and I’ll live in the house for the entire loan duration. If you think the real treasury rate goes up (which I do) and/or mortgage spreads over treasury widen, then the price would be even lower. I think I’ll rent and wait.
Personally, I think it’s way too early to call long term predictions, with a few exceptions.
I’d bet the mortgage interest deduction goes away within the next 5 years.
I’d bet Prop 13 goes away within the next 5 years.
Beyond that….yeah, I’d like to see coastal prices come down. During the boom years, a lot of wages on the upper management end skyrocketed to keep up with housing costs. A lot of those people are still making bank, even though housing costs are dropping. This will provide some stickiness to the upper end of the market as long as wages hold.
On the other hand, the bloodletting continues apace for bankruptcies and layoffs. Wage support might not bet there for too much longer for some areas that don’t carry a premium marquee as enclaves for the super wealthy. IMHO, it would not be surprising to see prices start to crumble in coast cities like Oceanside, Huntington Beach, etc… with the last to drop probably being marquee cities like La Jolla and Newport Beach.
The third thing to consider, nobody knows just how much coastal high end housing was purchased by buyers with questionable finances and creative loan products. The banks seem to be (unsurprisingly) a lot more willing to mod loans for the upper end of the market — but just extending the initial terms (rather than a principal reduction) is only kicking the can down the road. Eventually the borrower and the bank have to come to reality that the borrower just can’t afford the property under normal loan terms.
However, if your attitude is that there is going to be a cataclysm at the beach you are a bit nuts and are indeed a permabear IMHO.
Define “cataclysm”. We’re simply talking about a return to historically normal levels.
Just poking around on Zillow for Encinitas oceanfront I find houses that were well under 1M in the late 90’s, rose to 3M in the bubble years and are still asking almost 2M. Without the bubble the price would probably be a little over 1M. Sure, that’s tough on the noteholder, but otherwise it’s simply a return to sanity.
Everybody from my in-laws to their dog thinks we should be buying right now.
Oh yeah, that’s market bottoming sentiment alright.
Dunc,
Here’s another for your buy/rent calculator:
http://sandiego.craigslist.org/nsd/apa/1228600367.html
Rent now or be priced out forever
Great find JE! I thought they stopped making oceanfront property; and the sun seems to shine brighter on this home to boot. This home owner needs to take a math class — at only $4,000/mo this is a no brainer sell.
OK, Jim, curiosity’s got the best of me! What construction defects didn’t that agent mention? *Chuckle* Com’on, you can tell us, right?
During the bubble years it was:
It’s different here.
Buy now or be priced out forever.
Now it’s:
Knife-catchers!
But look people, some things NEVER change in real estate. Property NEVER seems cheap. People push prices to the edge of their affordability. The next bracket up ALWAYS just “would get me so much more for my money”. These are universal truths. And I can see it in many of your posts.
Doncha love everytime someone makes a salient point, guys like TJ respond with that “eyes glaze over – oh my god he might be right – lemme respond with some tired bubble mantra to counter it”.
As I think we can all agree, this blog is more bearish than buyers, always has been, always will be.
The most bearish of those on this bearish blog is TJ.
If anyone is going to be “priced out forever”, I hate to say it but I think we all know who that is going to be.
I see more people (non-blog readers) seeing the truth/reality rather than the headlines. There are so many people affected by the economy and housing bubble that everyone has a connection to at least one person that has been laid off or lost their home or is simply struggling with the debt load. I think this sort of in-your-face reality will prevail over any misleading headlines. I know a lot of people, with good, relatively stable jobs, who are brown bagging it and cutting back on spending. Others see this and hear of real-life stories of a bad economy and that will likely dampen any talk of a re-inflation of a bubble.
Sales and prices are usually up during the spring/summer season, but they don’t seem to be up that much YOY considering how low prices have fallen, the low interest rates, and the incentives being thrown in. I still think that this coming winter will be the season where we will have a much clearer picture of how this bubble deflation will play out. The bottom line is that it will all come down to fundamentals. There isn’t enough easy money to re-inflate…
from CR…
http://www.calculatedriskblog.com/2009/06/coldwell-banker-ceo-move-up-buyers.html
Jim Gillespie, president and chief executive of Coldwell Banker Real Estate, in an interview with Reuters, said sales were only modest during the spring, with demand overwhelmingly dominated by first-time home buyers and investors.
“The more important ‘move-up’ buyers were absent and that is not encouraging,” said Gillespie …”They are key to a U.S. housing market recovery,”
Sdnerd you make me laugh!!! I call it poetry for our times!
When people talk about how bad they feel for “our friends” because they are going to have to move their kids from schools and friends due to foreclosure blah blah blah. I have a hard time feeling any sort of sympathy.
I always say we’ve done our 4 years in our cramped condo now it’s your turn!!!
So homes tripled in value, the economy tanks, and the prices of said homes are going to stabilize?
F the Kool-Aid, I think a lot of you are smoking too much of the kind.
That Realtor (on the phone) falls short of a proper burning at the stake.
dunc, with your assumptions did you just do a NPV or an IRR calc. I would love to see your analysis.
cheers,
pigpen
I’ve been calling a market bottom in the particular market I’m studying (Riverside low to medium end) for a month or two now. Prices ain’t going to go up, but they ain’t going to go down much if at all-on the low end. They might fall a bit after the tax credit expires, assuming it’s not extended, but that’s about it. However, high end properties pretty much everywhere have a way to fall.
The most bearish of those on this bearish blog is TJ.
Hardly. Rob Dawg, CA Renter & I are all in a dead heat.
But hey, please don’t let fundamentals cloud your thinking when you’ve got anecdotes and recency bias on your side. More good news…
Coldwell Banker CEO: “Move-up buyers absent”
We Have Mortgage Lift Off
The spread between mortgages and the 10 year just exploded…
Jobless benefit rolls post first dip since January
On the surface, the government seemed to signal Thursday that more Americans are finding jobs: The number of people receiving unemployment aid fell for the first time since early January.
But that doesn’t necessarily mean more companies are hiring. Fewer people are receiving jobless aid largely because more of them have exhausted their standard unemployment benefits, which typically last 26 weeks.
Government figures, in fact, show the proportion of recipients who used up their jobless benefits averaged 49 percent in May, a record.
In the coming years, how much of a premium are folks going to be willing to pay to live in CA? With the state’s (not to mention numerous cities and counties) financial crisis, there will be a serious drop off in many of the things we take for granted. Certain aspects of the quality of life here will deteriorate.
http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-06-18-state_revenue_flash.pdf
CA Personal Income Tax (PIT) as a % of total taxes Fiscal Year 2008 was 47.5%. PIT % change Jan-April 2008-09 was -33.8%.
“Total personal income tax collections in January-April 2009 were 26 percent, or about $28.8 billion below the level of a year ago in states for which we have data. In April 2009 alone (April being the month when many states receive the bulk of their balance due or final payments), personal income tax receipts fell by 36.5 percent, or $18.2 billion.”
http://www.calculatedriskblog.com/2009/06/report-state-personal-income-tax-cliff.html
There has been some talk lately of instituting a flat tax for CA. There are a lot of people who earn a living here under the table, and are taking advantage of what this state and country have to offer, but they’re not paying their fair share of the costs. Sales tax will be as high as 10.75% in some cities come July 1st. LA county will be 9.75%. How much are people going to be willing to pay for the CA life?!?! Maybe if they legalize it and tax it we’ll all be too stoned to care and the state can make up for its deficit at the same time.
Ha! đ
I was just going to post that you are not the most bearish, tj, then I saw your post. đ
One thing that might be separating the “perma-bears” from the “optimists” is age. Another thing might be how long they’ve lived in California.
For those of us who are older, and who have seen at least one or two RE cycles in California, it’s very easy to still be bearish, even at this point in the cycle.
I’ve never seen the economy in such a bad state here in California — not even during the aerospace layoffs (and we were living in the SFV which was very hard hit during those times). It was very common to see 40%+ drops in those more normal downturns — yes, even in the high-end areas. Trust me, we were looking in Malibu and Beverly Hills, etc. at the time (just checking out available inventory), and my family was in real estate all my life. We’ve seen this before, and the fundamentals today are much worse, IMHO.
Anyone who thinks today’s prices are “market-based” are delusional. If not for all the forclosure moratoriums, artificially suppressed interest rates, tax credits, etc.; prices would be far lower by now.
Yes, the low end is definitely near-ish more “normal” pricing, but the heavy investor traffic tells me there is even more to go (still safer than the higher-end areas).
Only now are we getting to the **beginning stages** of distress in the higher-end areas.
I suspect that CA Renter, Dawg and I are probablty in the same age range–always thought TJ was younger for some reason (no offense to Dawg or CA Renter). đ
I totally agree that having been through more downturns makes you have a more cautious view of where we are just yet–it’s because we’ve seen that dead cat plumment again after its bounce (more than once).
IF you were born in 1970 or later, you probably down even remember the 1990’s or any other real correction. Untill recently it WAS true in your experience that “RE always goes up.”
That’s why looking a little further back can be revealing.
sorry for typos above….
You can’t stop reality from being real.
“For those of us who are older, and who have seen at least one or two RE cycles in California, itâs very easy to still be bearish, even at this point in the cycle.”
I was born in ’76, but where I live it’s pretty easy to still be bearish on prices. Rents are still clearly cheaper than buying. Prices are probably still out of line with incomes.
Interest rates appear to be rising.
Unemployment is high, and probably still rising.
And the CA budget crisis.
‘For Rent’ signs seem to be growing like mushrooms.
The CRE shoe is dangling on the tip of a toe.
It seems like lenders (or servicers) have very little incentive to realize their losses, so there’s probably a sort of de facto mortgage moratorium creating shadow inventory, and limiting supply.
For whatever reason, people don’t really react rationally to price drops or increases. A bad deal that was once a terrible deal is often perceived as better than a good deal that was once a great deal. (Clearly there’s some difference of opinion on what’s going on in the CA RE market, but it’s a bit silly to expect people to start being rational now.)
Great thread and great post by CA Renter.
Let’s face it, California is flat broke. This is one of the main reasons I left the state in April.
When the welfare checks stop, the sh*t will hit the fan (ie. civil unrest, riots, etc..). There are only so many knife-catching cash speculators out there. CA RE prices are destined to plunge again. It’s only a matter of time.
“Hardly. Rob Dawg, CA Renter & I are all in a dead heat.
But hey, please donât let fundamentals cloud your thinking when youâve got anecdotes and recency bias on your side. More good news⌔
TJ – thats a good point as I assume that news makes you more bearish. The point is, the most bearish will always lose out if they remain the most bearish.
– When the economy is going well, the most bearish think its gonna fall, meaning they do not bid enough to out compete their more optimistic bretheren.
– When the economy is falling, the most bearish think its gonna fall further, meaning they do not bid enough to out compete their more optimistic bretheren.
– When the economy is recovering, the most bearish think its just a dead cat bounce, meaning they do not bid enough to out compete their more optimistic bretheren.
There is no getting around this – ever. At every point in the cycle you remain more bearish than everyone else. Unless you have more economic firepower than everyone else on the planet, the most bearish will be priced out by the even slightly more optimistic – possibly with slightly less money.
Im sure you are sitting there thinking:
“that wont happen, there will come a time when things are far worse than now, and EVERYONE is very bearish, and I, oh but I will see this is the true bottom, and suddenly turn more optimistic and outprice them”…really????
Hate to say it my friend, but I just dont see that. The story about the 13 year blogger shouting “knifecatcher” is a great example – she remained the most bearish through the last housing downturn, keeping her priced out – maybe not forever but for the last 13 years. It may not be you, but whoever is the most bearish, will lose out every time.
“Anyone who thinks todayâs prices are âmarket-basedâ are delusional. If not for all the forclosure moratoriums, artificially suppressed interest rates, tax credits, etc.; prices would be far lower by now.”
I agree completely, and this is something a lot of people out there buying are simply unaware of or don’t care about.
But that in itself is my sticking point. The market is being heavily, heavily manipulated. And it’s working – and more intervention is coming!
The market right now is REO dominated. The banks control the REO. The government controls the banks.
Fundamentals may say the price of bananas should be 69cents/pound, but if the only one selling bananas is the government then fundamentals go out the window until there are more sellers.
OTHO has a point, although personally I don’t think CA Renter is a âperma-bearâ. Nothing wrong with waiting for a reasonable price for housing.
But those who wait for the absolute bottom will always be disappointed because the buyers as a whole will have imperfect timing of the market, thus it will bottomed at higher price than it should be.
That is exactly the point I think Jim is trying to make here. We are back into a cycle.
Was 11.5% and growing unemployment in California part of the soft landing scenarios?
I thought the general consensus was after 10% all bets are off.
temecula_guy is right…even Warren Buffett can’t time the market. Nobody can. Those who hit the top or bottom exactly are nothing more than lucky. By the time you know where the bottom is, it is too late and it’s already back on its way up. Same thing with the top. Tops and bottoms are only visible after the moment has passed.
I’ll bet that a whole lot of would-be buyers are going to lose out because the perfect is the enemy of the good. If you can get a good house for an affordable price, then it’s a great time to buy. Holding out for a perfect house beyond your financial reach in hopes that it will come into your financial reach is a fools game. There is always somebody with more reach than you have.
“Holding out for a perfect house beyond your financial reach in hopes that it will come into your financial reach is a fools game. There is always somebody with more reach than you have.”
Why do you assume this? If you’re working and home prices aren’t going up faster than you can save. Mathematically the longer you wait the more buying power have because of a larger downpayment.
“If youâre working and home prices arenât going up faster than you can save. Mathematically the longer you wait the more buying power have because of a larger downpayment.”
But you have to subtract the rent you pay in the mean time in that calculation.
âIf youâre working and home prices arenât going up faster than you can save. Mathematically the longer you wait the more buying power have because of a larger downpayment.â
Thats also the case for the prudent bear who just happens to be slightly less bearish than you. Either way, if you are the bigger bear, you lose.
Shadash, the thing is…an all-cash offer trumps most down payments. Just ask anyone trying to buy at the low end of the market right now. Those people who’ve been saving up large down payments are getting scooped on good properties by all cash offers. A flipper can grab a rock bottom priced property with all cash, raise the price and sell it to someone who has to get a loan funded. You simply aren’t going to get a great property at bottom pricing as long as the all cash players are bottom fishing.
All this chatter about market manipulation is highly specious and sounds like sour grapes. So-called price supports, like tax credits etc., probably make very little difference. They sure don’t have an impact on the middle/higher-end properties.
If you really want to b$tch about pricing distortions, complain about the mortgage interest deduction.
A flipper can also grab an overpriced turkey, lower the price, and lose his shirt. There are entire blogs dedicated to these examples – the funniest ones are the double flops! Morale: Anecdotes are whatever you’d like to make of them.
In the meantime of saving, you do have to subtract your rent but also add on what you would be paying owning. Millions of homeowners are basically renting from the bank with negative equity, and to add insult to injury are overpaying. Which just makes saving that much better. Finally, the worst thing you can do is invest in leveraged depreciation plus interest payments.
We can see just how the “little bears” have done the last couple years using classic must buy logic. Too many bought places they couldn’t even afford, and that’s the bottom line. Add unemployment and the natural cycle and shadash doesn’t need to beat anyone to win. The market is clearly doing it for him.
“Add unemployment and the natural cycle and shadash doesnât need to beat anyone to win.”
Adding unemployment makes shadash more bearish, meaning he still loses to those slightly less bearish.
My in-laws keep telling me to buy now and my husband is desperate to buy. Their argument is that trying to time the market is a bad thing. OK, obviously I know it’s impossible to make the winning bid on a house on the exact day in time when the market is at its bottom.
But to be miss the market bottom (not that it has happened yet) by a few months and overpay by $5000 is much better than missing it by 60% or $300k.
Does anybody else out there contstantly have to argue with family about buying right now?
“Adding unemployment makes shadash more bearish, meaning he still loses to those slightly less bearish.”
Eventually my bearishness buys deadbeats house with cash.
No you lose out again to the other guy with cash who is slightly less bearish than you/outbids you.
Jason,
Eventually someone submits a winning bid. A blanket statement like…
“No you lose out again to the other guy with cash who is slightly less bearish than you/outbids you.”
Is just trollbait. Find something better to do.
People’s view is so incredibly distorted by the past several years. Missing housing by 60%? I don’t think so.
It’s as if people don’t understand what causes prices to change in the first place.
What causes housing prices to change?
– Changes in household income (net of tax)
– Changes in cost of money (borrowing costs)
– Changes in how much people can allocate towards housing (percentage of net income)
Which of these three variables is going to change enough to get housing to increase by double digits over the next year? Is household income going to increase significantly? Will mortgage rates go lower? Will exotic mortgages come back? Will people be able to allocate more money towards housing (and away from other expenditures)?
It’s not hard to be bearish (or at least not bullish). Borrowing costs will likely increase and not decrease. Taxes will likely increase and not decrease. Will households spend a greater portion of their income on housing? doubtful. Will household income grow? maybe.
This isnt trolling, its reitirating an earlier point. If you are the most bearish, there is always, by definition someone less bearish than you who is willing to one up you. Even if you have the cash, the bearish position affects your bid. Its a very good point and there is no way out of this…none.
Whats the answer then? Be a contrarian. The moment everyone gets even more bearish or most fearful, you remain steadfast in your original amount of bearisness, or even lessen it slightly. This ensures you will beat out that other competition at the time the competition is most weakened.
Warren Buffet said it best – be greedy when others are fearful, and fearful when others are greedy. At some point, when fear is running rampant, its the best time to be greedy. When that time comes, are you going to be able to act on it? Think about it…
Warren Buffet screwed up pretty hard last year doing the “greedy when others are fearful” thing.
Jason,
In today’s market, I’m more dumbfounded than either greedy or fearful.
Jason,
Many of us “permabears” are not really bearish at all times. We are bearish when it makes sense, and bullish when that makes sense.
Right now, it makes sense to be bearish, IMHO.
I am not trying to time the bottom so much as I’m trying not overpay on one of the biggest expenditures of my life.
Still, I agree that prices are generally set by those who are willing to take the greatest risks and who are willing to lose the greatest amount of money. That’s a fact. It doesn’t mean that those who are prudently cautious will always “lose out” to the high-stakes gamblers. Right now, the most foolish gamblers are being encouraged to take on more and more risk (courtesy of our govt who refers to these people as “victims”).
It’s after these gamblers have bought…and lost, that the smart money will buy. There is no good reason to be competing against fools at this point in the cycle (again, “buyers” with no skin in the game — free/low-cost call options, courtesy of the taxpayers and the FHA).
BTW, while there are certainly many stories about all these cash buyers, I’m hearing it might be hard-money loans and investment pools. I don’t doubt that there are qualified buyers who are buying homes right now; however, I’m not sure all these buyers are as strong as they might appear at first glance.
Joe Schmoe–I agree with your points, however, those variables effect demand–we must also watch supply. Supply is relatively low in many areas, relatively high in other areas. I think the active/pending ratio that JTR uses is a good gauge to a local market conditions. The odd thing is, areas that have held-up don’t seem to have that many NOD’s to flood the market with a bunch of supply–ie CV–the few that are being foreclosed upon get bought at the trustee sale, and some even flipped.
Not sure anyone is watching this thread any longer.
For those that argue about the low inventory or being the most bearish and losing bids, I want to remind you that we are talking about housing. The last I checked the housing stock is not a finite supply. If prices and demand are high enough builders will build. I’m pretty sure San Diego’s housing stock is greater today than it was five years ago.
If shadash is the most bearish house buyer out there, he will eventually get his house as long as he is willing to pay the minimum price required to encourage a builder to build it.
I’m 100% positive that he would pay a price attractive enough for a builder to build. How do I know? He is paying rent now. The amount he pays in rent, over the long run, must have some relationship to the underlying asset value (replacement cost). He can’t be so bearish that he would be willing to pay more in rent to purchase a house.
You guys can make whatever supply argument you want and it may apply in the short-run. In the long-run however, the economics of supply and demand must prevail.
How about a crazy example.
What if the government controlled the supply of cars for sale? Let’s say only a fraction of car demand is being supplied by Government Motors. This shortage of supply causes the price of the Honda Civic to go up to $75k. Of course the government wants to earn some money from the inventory of cars they have, so they decide to rent the unsold cars out for $5,000 a year. Do you buy a car?
There are other automanufacturers that will enter the market if the economics of producing cars is attractive enough. If a Honda Civic is selling for $75k today, do you think that will encourage the building of cars?
If you had to guess what the price of a car five years from now would be, what would you guess?
Lastly, how is this example that different from housing?
Joe–You are simply comparing apples to oranges–for one, unlike autos, in real estate location comes into play–secondly, real estate is a relatively finite supply and cannot be duplicated like an automobile–can I please put an order in for 10 more ocean front lots in North San Diego County!