Advice to San Diego Homeowners: Sell Now and Rent

[powayseller]

zk, I love a good debate, and I thank you for raising these counterpoints.

With some of your logic I cannot argue. You’re right that I cannot predict the future. I have a 95% confidence that prices will drop, and 80% that they will drop by at least 35%. Time will tell if I was right.

The question of whether wages will rise is also valid. In the 1970’s, inflation caused everything to rise: wages, interest rates, housing. Could this happen again? I think not. Now we are a global economy. Goods made by worders earning US$4/day in the export-oriented Asian economies are what sustains the US consumer. If our wages went up, we would lose even more manufacturing jobs. The global economy cannot support higher wages in the US. The only room for wage increase would be in the Asian countries, to bring the $4/day to $6/day. If Nokia started paying their engineers $100K instead of $80K (or whatever they make), then Nokia would instead go to China to hire cheaper labor. So higher wages are unlikely.

If housing prices stay flat, wages would have to double to bring the ratio in half. Do you think it is even remotely possible for everyone’s wages to double in the next 6 years? I don’t know about you, but statistics show that wages have been growing at a nominal 3-4% rate. What would make them grow at an annual rate of 10-15%?

If wages doubled, then the prices of goods and services would double also, so you still have the basic problem of ARMs resetting.

I think doubling wages cannot save this bubble.

The only hope for prolonging it is another liquidity bubble, something that forestalls the ARM resets. The exotic loan resets are the most ominous feature, and what gives me the confidence this will all fall apart.

In the end, all bubbles correct, in nominal prices. Have you ever heard of any bubble which corrected itself by prices staying flat? I’m thinking of past housing bubbles, stock market bubbles,the tulip craze, railroad stocks…they each burst with nominal prices dropping like mad.

I am fascinated by the arguments that people make to try to see if this time really is different. It isn’t. All excesses correct on the nominal side. It’s a law of nature.

Just look at a pendulum. As it swings so close to the right, you can almost convince yourself that if the wind blows hard enough, the pendulum will remain suspended in that position, on the right side. Perhaps a gust comes along and does just that. But no gust last forever. The pendulum follows the laws of nature and reverses course. Regardless of all the observers who questioned the move…

[zk]

Those are good points, PD. However, the point of my post wasn’t to debate the finer points of selling vs. not selling. (In fact, that is a lengthy discussion which has only been debated on this forum in bits and pieces.) The point was that making hundreds of thousands by selling and renting is not by any means the sure thing it seemed to have been made out to be.

[powayseller]

I am more convinved that selling and renting is a sure thing, than I was in 1999 of the tech stocks collapsing.

The tech stock bubble was my first experience of an asset bubble. I did not participate in it, until the end, when Lucent was $5/share. I couldn’t believe that rational people lost all rationale.

The psychology and thinking of anyone doubting that nominal home prices will collapse is the same as those doubting the tech stocks could go down.

The future cannot be proven. I can’t prove that housing prices will go down. I can only make parallels from the past, tell you why this time is worse, and hope you listen.

As you can see,even someone as well-read on this housing bubble as zk, is not convinced enough to sell his own house. If only high schools would teach economics classes, with a 2 week section on asset bubbles, then this wouldn’t seem like such a remote possibility. zk has been so programmed by the RE industry, that housing prices cannot fall, that even all my logic, data, and charts, cannot change his thinking.

[PD]

Zk, nothing is a sure thing. My husband and I sold our house because we felt that there was at least a 90% chance that housing prices were going to decline. 90% is a big number. It is very rare to see an investment opportunity with those kind of numbers. There is certainly a chance we could be wrong but we will still feel like winners.

I’ve been telling everyone I know that now is a bad time to be in RE. A few have gotten mad at me because they have significant exposure in RE. I’d rather have them mad at me now for making them fearful AND mad at me later for being right then mad at me later for not telling them the truth when they still had a chance to do something about it. If they make an informed decision to ride it out, then at least they know the risks.

There might still be some upward movement in RE — if interest rates went to 2.5%.

[Anonymous]

For most working class San Diegans, selling their house now is the best investment choice they will ever make in their lives. We will probably not see another financial bubble of this magnitude in our lifetimes, this is a rare and unusual situation but it is also an ubelievable opportunity for those with real estate. Selling your house is the only way to take advantage of it.

Most people are clueless and have no idea how bad real estate is going to crash in San Diego. However, if you actually thought prices were going to drop 30% or more, would you still hold onto your house? Of course not. People continue to try to rationalize not selling but there is no rational reason to not sell unless you are filthy rich. Amazingly, there are still people buying! What idiots!

[lendingbubblecontinues]

deadzone,

I agree with everything you said. I also think, however, that we are likely to continue to see repeated financial bubbles of this magnitude every few years from now on. After all, wasn’t it just five years ago that NASDAQ peaked and then burst?! Here we are five years later and FL, MA, and AZ housing markets are certain to burst! SD, SF, OC, Excremento, LA are soon to follow…

I have faith in the INABILITY of the masses to AVOID getting sucked up in the backwash of bubbles, getting pitched, then thrown “over the falls” headfirst into the sand EVERY few years. Many break their “neck” yet continue to paddle back out into the shorebreak “tsunami” time and again.

[Carlsbadliving]

I agree completely with PS. So many people right now have a chance to cash in on something that may never come along again in their lifetime. Several hundred thousand free and clear.

Unfortunately, it just comes down to how many people actually understand and believe that there will be a major correction. Everyone debating on this board has a good grasp of the bubble and the impending implications. However, the vast majority of the population go about their day with no clue of the waterfall lurking ahead. It goes back to the media, and the fact that the worst thing that’s been reported so far is that prices may stay flat for awhile. But if the media reported the truth and everyone knew that prices were in for a major correction then everyone would try to sell and nobody would be dumb enough to buy right now. So there reaches a certain point that if enough people know the truth, then the opportunity to cash out becomes less. So PS should actually thank the media and the general public for being oblivoius to the whole thing. Without them, you wouldn’t have made all that money.

It’s the smart people that understand this bubble that will make the money. I wish I’d had the fortune to buy 5-8 years ago. I’d be selling right now in a heartbeat.

[zk]

Nothing is a sure thing. Exactly. That’s my point.

[PD]

zk, nothing is a sure thing but there is such a thing as The Best Bet.

lendingbubbleco, your comments about bubbles are right on. I think that it is interesting how these bubbles, one right after another were dependant on a new phenomena – it suddenly became easier to get into the party.

The tech bubble rose right after it suddenly became easier to invest in the stock market. It used to be that you had to have a stock broker and were forced to pay big commissions (there were a couple of discounters but it was hard to get info, the internet made that easier). Suddenly there were all sorts of online firms that made it possible for garbageman Joe to get into the party with his 2k, swelling the numbers.

The housing bubble has been created by easy, cheap money. Fill out a form online, produce minimal paperwork, make a few calls and you’re a homeowner or a multiple homeowner.

[zk]

Well, PS, I’m not sure if calling someone “programmed” passes the “gentleman test” (or in this case the “lady test”) but I’ll respond anyway.

You are correct that your logic cannot change my mind. I don’t always agree with your logic. But I have found plenty of information and solid (in my opinion) analysis that does lead me to believe that a good chance exists that nominal prices will fall. And, as I mentioned in an earlier response to one of your posts, I have sold my house and I am renting. I am simply not as certain as you are that it was a good move.

I, like you, want to help other people. And that is why I point out on this forum that, in my opinion, your certainty is excessive, and that anyone reading this forum and basing his real estate decisions (at least in part) on what he reads here should hear a different viewpoint.

[powayseller]

zk, do you own any real estate? If so, what are your reasons for holding on?

deadzone and carlsbadliving, I completely agree. This was the easiest money I’ve ever made. I felt guilty for selling my house to the young couple who bought it. My husband and I doubled the money we’d scrimped and saved at $500/month for 20 years, in one fell swoop. We earned a half lifetime of scrimping and saving in that one deal.

And for those who are saving $2k/month, you don’t have kids yet. Just their activities are $900 – $1200/month. I am thrilled to blow my money on those little darlings though. You should have heard my son play his sax at that SD Youth Wind Ensemble downtown last week, and my daugther sing and dance. My 9 year old plays Chopin. Add tutoring, rec sports, instrument rental, music lessons, preschool…And clothes, additional airline tickets, more driving, toys/books/games… All worth it, I say.

So if you don’t have any kids yet, keep saving, because it gets harder once you’ve got kids and activities and a wife who stays home. All you men out there, please see the value in a woman who keeps a house humming and sees after you and the children. Don’t ask your wife to work outside the home. A woman with children should spend most of her time looking after her family, or else, why bother having kids? She should clean her own house, not hire a maid to do so. Housekeeping and child rearing are jobs that shouldn’t be outsourced. Off-topic, but I couldn’t resist making a pitch for babies who can fall asleep nursing in their mommy’s arms.

[zk]

I assume our posts “crossed in the mail.” As you can see, I’ve sold and I’m renting. I own no real estate.

Despite our slight differences in opinion on RE, I think we agree on a lot of other things. My wife stays home with our daughter; she has since before birth. And I, too, am happy to spend thousands of dollars on ice skating, ballet, gymnastics, soccer, swimming, piano lessons and art class. As I occasionally say to my wife, those things (and saving for college) are the very reasons I work so hard.

[PD]

Is anybody else getting fed up with hearing, “Year over year prices are up!” I can’t wait for November when they won’t be able to say this garbage anymore.

[powayseller]

zk, I didn’t mean to insult you at all. I just meant to point out that the “RE only goes up” mantra is so ingrained in all of us, that even a well-read person like you is doubting that it CAN go down. Your decision to sell and rent was brilliant. Why are you having second thoughts?

I pat myself on the back everyday for selling. Each article about the falling market is confirmation that I did the right thing. So far, nothing has happened to question my move. All signs point to “good decision”. The more I learn about the global liquidity bubble and dollar problems, the more I believe I did the right move.

[zk]

I don’t doubt that in CAN go down. And my doubts that it will go down are limited. But they are there.

I agree that most signs so far point to “good decision.” But I figure that just to break even (after real estate commissions, increased property tax, and moving costs but not increased interest rates) nominal prices have to drop about 12%. After that, how much further they have to go for it to be worth the hassle is a nebulous matter. In any case, I have some doubts, albeit mostly limited ones. But those limited ones, I must admit, do weigh a bit on me.

Something to think about for those thinking of selling and renting. How sure are you, and how much concern will you have during the long period of time that it will take for this supertanker to start heading in the other direction and then actually make significant progress in that direction.

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