San Diego Housing Bubble News and Analysis

I would expect most regulars on this site to be surprised by this year's incredible stock market run up. If you had all you money in CDs, too bad. But it has been crazy and againts all logic. Today, for example, Citi (the largest bank in the world) announces a 1.4 billion write down and what happens? Citi stock goes up and the Dow rallies to record highs.

For the most part, the housing market doesn't require substantial in depth analysis. There are relatively few variables to consider. On the other hand, capital markets have hundreds of moving parts that require serious brain power to analyze.

No doubt, there are plenty of amateurs and idiots on wall street, but for the most part, there are many sharp, Ivy League types that try to outsmart the competition and therefore create fairly efficient markets. The creation of derivitives by math whizes is what allowed the housing bubble to occur. The real estate folks were simply going along for the ride.

Take a look at the housing market and you find very few Ivy League educated Realtors and Mortgage brokers - just kids from a brain power standpoint. Order takers.

The housing market is a cute playground that allows some to feel smart and important... paint the house and add a room because that will sell the house... yes, an ARM is a great mortgage for you...

eye-pod, you won't see much in the way of shorters' reports until the market takes a dive... someday.

I think home prices will go down mainly because prices are so astronomically high compared to incomes and savings and rents and 10 years ago. But the stock market is being driven up by high corporate profits and a wall of money from China and other countries exporting to the USA. Who knows exactly when that will turn around? The timing is not as clear as for the overvalued residential real estate market.

Patient renter in OC

I agree with michael on the brain power part. The stock market is also very fast moving. With RE you can see it evolve. RE is very local.

With some little trading on my part, I mostly trust my financial planner to take care of my portfolio.

It's not just shorters that are quiet. Bulls are quiet on a down day.

Observation: no one likes to feel like they made the wrong decision, or had bad timing.

You'll here the bear stock market folks on the days the dow/nas takes a beating, and then the bulls will go silent.

----- Sour grapes for everyone!

The reason you see a lot of market comments is that a lot of the housing bears invest their surplus cash in various places that in the past and in the future will likely be back in housing, plus were bored in our rentals. Watching the housing market decline can feel like watching paint dry. Sure there are quite a few people who were shorting the builder and mortgage stocks but on average I bet most of us are not bearish on everything, just housing in certain bubble markets like Southern California. Do I understand why the market is hitting new highs while we are on the verge of a recession, no I don't. I think the weak dollar helps but I don't understand it all and thankfully I have some long positions and mutual funds that are doing quite nicely, still doesn't mean I know exactly why. What I do know is that housing has less moving parts as was stated above, the fundamentals are simple for my small brain to grasp, so I can make predictions and they will likely come true. I still use a full service stock broker so you won't hear me tell anyone what to do with regards to stocks because I still pay a guy to tell me.

Well for the folks who did the obvious play and shorted homebuilders and subprime lenders instead of the broad market, this has been a VERY, VERY gleeful year.

This is why some of us believe in a balanced portfolio, including stocks (both US and foreign), cash, with some added spice of gold, commodities and some selected short positions (e.g. the dollar), plus for me ... even a dash of real estate.

Some of us have been around long enough to know there are plenty of ways to be wrong about the markets. And timing is the toughest thing to be correct on.
Real estate and cash holdings helped me get through the stock bust of 2000-2003. Foreign stocks, shorting the dollar, and cash will probably help me get through the current bear market in real estate. If you have balance, you don't have to be right every time.
For example, knowing that real estate was overvalued in 2003 didn't do you much good if you cashed out and tried to short at that time. Same goes for following Greenspan's irrational exubberance advice in 1996 and shorting the overvalued stock market all the way to the poorhouse. Sure he was eventually right. But timing is critical to all-or-nothing positions.

15yrs ago I read a stupid book "At the Crest of the Tidal Wave", which prompted me to adhere to putting my money in low yielding CD type accounts. As a result, I am now scrambling to get caught up for retirement. Had I not read that book, I would have kept my money in the runaway mutual funds I was in and therefore been able to retire.

I was a bull when the economic fundamentals supported a bull market. That is no longer the case. Yes, I've missed out on the post rate cut explosion (somewhat, I still have a few energy and tech equities,) but I cannot believe this bull run will last much longer. Historically, markets don't stay high for long when the entire bull case is "hoping for another rate cut."

Historically, markets don't stay high for long when the entire bull case is "hoping for another rate cut."

I agree that there is certainly downside risk in the market based on decaying economic conditions. But I am not genius enough to predict the outcome. However, I disagree with the opinion that the stock market is currently "high". Even after the recent run-up, the P/E for the S&P 500 is currently about 14.9. That's about the average over the past 125 years.

I also don't think the entire bull case is built on "hoping for another rate cut". That point of view is simply the daily media chatter for explaining yesterday's market fluctuation.

Unfortunatlety I don't think one can predict the tops and bottoms of both the stock and real estate markets...Everything cycles and you have to be well diversified in both camps and hope that the dollar cost averaging approach will leave you looking good when you hit retirement age... Things move very quickly as I remember from the correction of the mid 90s emerging market stocks, where profits were erased in a matter of weeks....Makes me feel uneasy about adding to my foreign positions like FXI (china ETF)....Can't put all your eggs in one basket

That being said , I wish I had a crystal ball.....

Meanwhile, the dollar lose purchasing power daily....

Meanwhile, the dollar lose purchasing power daily....
Yes. That's why a balanced breakfast also includes foreign stocks (e.g. EFA, EWJ, EWH etfs to name a few) , short dollar positions (e.g. UDN), Gold, maybe some commodities (e.g. DBC), and large US companies (JNJ, PG) that benefit somewhat from a weaker dollar.

"there are many sharp, Ivy League types that try to outsmart the competition and therefore create fairly efficient markets".

And El Presidente Bush is one of them!!!! Ivy league dont mean jack!!!

csr_sd: You said it! Sharp, Ivy League types that have given us: RJR/Nabisco, Eastern Airlines, Long-Term Capital Management, Enron and Tyco. Uh, yeah, okay.

As to "Efficient Market Theory", well that one has pretty much gone the way of the dodo.

Long-Term Capital Management (LTCM) probably represents the sharpest group of financiers going, back in their heyday. They employed Fischer Black and Myron Scholes (co-authors of the Black-Scholes Formula for options valuation, and Scholes went on to win the Swedish Central Bank's prize for achievement in Economics - the finance world's Nobel Prize). They were widely considered the "smartest guys in the room" by all of the major investment banking houses (Goldman Sachs, Bear Stearns and Lehman Bros) and went on to nearly blow up the bond world in 1998 due to an over-leveraged hedge position, necessitating a major bailout by the Federal Reserve Bank of New York, Sandy Weill and Citibank and others.

So, if you truly believe that these smart Ivy League types are helping ensure "efficient markets", pick up a copy of "The Wall Street Journal" or "Financial Times" and read up on derivatives, options and "off book" instruments (QSPEs - Qualifying Special Purpose Entities - an old Enron standby).

Get back to me when you're done.

Hey Allan -

Dont forget they (the ivy leaguers) are pretty good at counting cards as well...

SD Realtor

Get back to me when you're done.

Yeah, I've read those, and more (just finishing Traders, Guns, and Money). Now I'm convinced that at least in the short-term the markets are basically rigged. The individual investor has no chance going up against the big guys. Sure, LTCM exploded, but I doubt they ever had to cut back on their hookers and blow. It's everyone else who pays the cost. I do statistical pattern analysis for a living, and even so, I buy and hold index funds. I can make more money analyzing time series in other domains as a consultant than I could screwing around trying to predict the market.

There is another fundamental difference between the stock market and the real estate market.

The real estate market is generally driven by must have purchases, by that I mean that everyone must have a place to live. Money spent, for the most part, is counted as part of your living expenses and therefore comes out of your non-disposable income pool.

The stock market is driven by investments, this is money that is extra, beyond your normal living expenses, and is considered not must have purchases.

The former is tied to income, the latter is not.

The real estate bubble happened because the housing market became the playground of Wall Street and was treated as yet another market to invest in. This, of course, drove up prices beyond logic. The trouble is, that Wall Street pulls out as soon as the market turns, caring nothing for the devastation that it causes. Normally this is of limited concern, because the devastation is limited to what ever company/mutual fund/etc. was being invested in, but when that market is the real estate market, that everyone depends on, it has drastic results, as we're seeing.

I wish Wall Street kept out of places that it does not belong in, but such are those who want to make a buck without caring who's lives they're ruining.

greensd: Just started "Traders, Guns, and Money". Have you read Lowenstein's "When Genius Failed"? It is about the LTCM debacle, and a very good read.

A good buddy of mine is a former Montgomery Street Securities and Bear Stearns dude. I fell out when you opined about the hookers and blow. You nailed that one on the head!

Less funny is your assertion about the rest of us picking up the tab. Sad, but true.

"Well for the folks who did the obvious play and shorted homebuilders and subprime lenders instead of the broad market, this has been a VERY, VERY gleeful year."

Would have been a tough couple of days if you were in short positions on Homebuilders. Standard pacific up over 10% in a day.

NeetaT, your story strikes a chord with me.

You are now where I was 2 years ago. Then 2 years ago, I had to take part in a charity event involving picking stocks. They turned out to be made-up companies, like in Monopoly, but I didn't know that beforehand.

To prepare for the event, I read Jeremy Siegel's "Stocks for the Long Run". His argument about stocks having lower risk than bonds over long holding periods made some sense to me. So did his argument that inflation is better hedged by stocks than bonds. I bought into his theory that the world of dividend-paying stocks is more rewarding than the non-dividend-paying stock world, based on what I know of the corporate world.

Finally and very importantly, I was tired of progressing towards my financial goals at a snail's pace, despite a very high saving rate, when homeowners and stock investors and others were mostly doing much better than me, even though they spent way more than me (and saved way less). So I began immediately to research individual stocks with good dividends, and buying them as soon as I saw one I really liked. I am very pleased with the results 2 years later.

You should allow yourself to think about what long-term investments you really believe in, and then take actions to get familiar with them and make diversified purchases over a reasonably long period. Make sure you have your own arguments worked out that enable you to live with the investments through temporary ups and downs.

Sorry for the unsolicited advice but, like I said, your story struck a chord...

Patient renter in OC

Lonestar2000 nailed it. Real estate became a playground for wall street.

As far as the Ivy League types... I'd partner with any of those guys over some shmoe that just read a copy of "Rich Dad Poor Dad" and has uncovered the secret of becoming rich overnight. For every wall street idiot, there are hundreds of wannabe real estate "investors" or mortgage brokers (call themselves bankers).

Long Term Capital Management demonstrates just how complex capital markets are. The effects of the Russian default in 98' along with other factors blew up the fund. But the fact remains that the types behind LTCM, Ivy League types or not, are a little bit more sophisticated than the geniuses you see on "Flip that house" or your local real estate experts... The housing bubble was cool in that it made even the dumbest folk feel for the first time in their lives that they too were smart investors.

Hey Allan -

Dont forget they (the ivy leaguers) are pretty good at counting cards as well...

SD Realtor

LOL...SD R,

First you ridicule me yesterday about Torrey Hills. Now your giving me crap about my education. You're on a roll here, I'm waiting for what you have to say tomorrow.... :) Just kidding...

Truth is that there are more than one way of getting into an Ivy. Lot of trust fund babies get in through back doors, as our Prez demonstrated. I've seen a fair share of idiots when I was in school.

If you've been shorting SPF for the last year plus (when it was around $25, now its $6), then the 10% gain over the last two days really doesn't matter much does it? I'll leave the math to the reader.

Michael: LTCM demonstrates what unbridled arrogance and a mistaken view of your own superiority gets you.

If my two choices are some schmoe who just read Robert Kiyosaki (a true schmoe in his own right) or some Ivy Leaguer, well, gee, I guess I'll go with the Ivy Leaguer.

As far as LTCM demonstrating how complex capital markets are: Not really. The geniuses running LTCM were and are no different from the quants putting way too much faith in the alchemical nature of their precious computer models. The idea that these guys are somehow more attuned to the nature of risk and its proper dispersion is a joke.

All of this risk supposedly being better managed and better spread is about to blow up in credit markets throughout the world.

A good friend of mine is a Stanford MBA, and a two decade long veteran of the investment banking industry and he has been using words like "catastrophe" and "disaster" to describe the impending meltdown. These selfsame "sharp" Ivy League types that you place so much faith in are absolutely terrified right now. And for good reason. We've been playing a rigged con for the last 20 years, and the party is just about over.

Allan,

It’s my understanding that quant funds are driving 50%-70% of the volume on the NYSE.

They buy because the stocks are going up…..and there going up because the quant’s keep buying. Fascinating!

FLU sorry man was not EVEN trying to rail on you buddy...believe it or not I was referring to the Bringing Down the House book...if you haven't read it please do cuz it is a VERY fun book.

I would LOVE to have lived that guys life for a few minutes... As you have read I am not afraid to throw down a wager on football here and there.... So to say I really enjoy a good game of poker/craps/blackjack is an understatement. My take on Ivy league is that the majority of these people are really smart... so much so that making money to many of them is more of a game then anything else... if they really HAVE to, they can fall back on working... but why work hard when it is so easy to make money other ways?

D Realtor

sjk: As a former CFO, I am a pretty decent hand with MS Excel, and have programmed with Visual Basic for Excel. I have seen some of these financial modeling spreadsheets that quant guys have put together and they are simply amazing. They blow anything I am capable of doing with that program clean out of the water.

The one thing every one of these models share is this, however: They have never been tested in the real world. All of the assumptions are exactly that: Assumptions.

What everyone who assesses risk right now is extremely nervous about is what happens when the real world intrudes on the assumptions. The general consensus is that, like LTCM back in 1998, it ain't gonna be pretty.