Dean Baker: The Coming Housing Crash

[powayseller]

This mornings, a series on brilliant economists.

First up, Dean Baker of the Center for Economic and Policy Research.

His latest paper was published 7/31/06, The Coming Housing Crash

This is probably familiar material for most of us here. I post it because it is a great short summary of the current problem, and something you can give to your family or neighbor who doesn’t yet understand what is happening.

Schahrzad Berkland

[PerryChase]

powayseller, thanks for posting the info. I admire your dedication in informing friends and relatives about Real Estate.

However, I’ve given up because poeple just don’t want to listen. They think I’m crazy to predict a 50% crash. Like someone else said here previously, I hate to see people getting hurt by the coming crash, but if it happens it’ll be by their own doing. I don’t feel like it’s my responsibility to educate people anymore.

[Anonymous]

Yeah it is pointless to try to convince everybody. However, among my close friends and relatives pretty much everyone sees the same thing as I do and several friends have also sold recently or are in the process of getting out.

Anyone who is too ignorant or to stupid to see this thing coming deserves to get punished, I have no sympathy for them. It is survival of the fittest. Anyone who has been living here in SD has enjoyed a much better life than most people of the world so what ever suffering this crash causes them will pale in comparison to the difficulty many in the world suffer every day.

[rocketman]

I feel the same way. I’ve been trying to warn everyone I know. I send them links to all the information I can find. I find that my friends and relatives who own real estate in California are in denial. They believe that prices will “flatten out” since California is so desireable. Those who don’t own property want to listen. That’s the way it’s been since June. So now that I’ve warned everyone I know, I am going to stop being an evangelist and just pay attention for new investments.

[powayseller]

Okay, you guys make great points. So let me ask you this, since you’ve probably put some thought into this: what is it about human nature, or these particular people, that prevents them from seeing what you say? Would they read a Dean Baker story like this, and say “Hogwash”! Why?

[JES]

My warning was the sale of my house and the explanation of why I was selling. I left it up to them to research the rest and make their own decisions.

Poway seller – IMO it is confirmation bias – the tendancy we all have to take in information that confirms a belief we have while disregarding information that may contradict it. For example, until I read your posts on another thread about throwing out all your skirts I assumed you were a man! Also, most people tend to be optimistic and want to believe good things are yet to come, don’t you agree?

[Anonymous]

PS, the reality is the majority of the polulation lacks the analytical capacity that those of us on piggintion have. Most people make decisions based purely on trends, what the masses do or say, etc. Why should they believe you when all of these smooth talking sales people on TV, radio, etc are telling them how great real estate is?

[FormerOwner]

I think home ownership is a core American value. The government supports this by subsidizing housing via tax writeoffs and low mortgage interest rates. It’s also reinforced by TV shows, advertising, etc.

Our country had so much open space that it was relatively easy to build houses further and further out from established cities. Until our domestic oilfields hit peak oil about 30 years ago, we had plenty of cheap oil to allow us to use our cars to cover the vast distances that our suburban lifestyle forced us to traverse every day.

Much of this has changed and I think the suburban way of life is really starting to break down, but it’s hard to go against your core values. Most people still say rent is “throwing money away”. It is, but buying is throwing away two or three times that amount. Nothing is free.

I also think that people view their house (rather than their community) as the center of their lives. Maybe that’s a symptom of our communities breaking down (in some places).

[sdsundevil]

First off, Mr. Baker is completely wrong about the stock market bubble. There were numerous people who predicted that, including Alan Greenspan when he talked about “irrational exhuberance.”

Secondly, predicting prices will go down is fairly obvious. The question is how much and when. There are always corrections, downturns, etc. One thing is for certain – in the long run prices will go up.

The prevailing sentiment on this website is a hope for a big crash. Why? So people can finally buy who missed the boat? My opinion is that if you want to own, you should buy now. In the long-term you will be fine. It’s impossible to time the bottom (if there is one).

[PD]

I sold my house because both my husband and I predict a crash. We made our bet and think it will pay off. Don’t we all want our financial moves to pay off? I feel very bad for those people who are going to get hurt and don’t wish that on anyone. However, you can’t hold back the tide so you better start swimming.

[powayseller]

sdsundevil – read the bubble primer before you post again.

[PerryChase]

sdsundevil, did you buy RE in the last few years? If you don’t mind, please tell us a little about the good deal you had, and how you plan on making RE work for you in the future.

BTW, sdsundevil, you’re entitled to your opinion. Please keep on posting away otherwise, we’ll just have one set of opinions here and it’ll get quite boring.

[Anonymous]

Anyone who buys now is a complete idiot, period.

It could take 10 or 15 years for prices to return to today’s levels. Look at the Nasdaq index, still more than 50% off of its 2000 high. While it is not practical to try to time the aboslute bottom of the market, it sure is easy to see we just passed the peak on the way down. There is no retional reason to purchase an inevestment you know is going down in value.

[equalizer]

sdsundevil

you say that there are always corrections and downturns. Then you “whimsically” state that if there is a bottom. What does that mean? That correction will only last 3-6 months, so you must buy now?

“In the long-term you will be fine.” Sure, if you can afford the fixed mortgage. What about people who bought in the last year or so on ARMs? Is that what you told everyone who may face huge payment increases soon?

[PD]

For “the long term” to work out for you, you have to plan to stay in the house and be certain that nothing in your situation will force a sale. Many people won’t be able to afford the long term because they financed for the short term.

[lindismith]

Granted, you may lose some equity over the next 2 or 3 years,

SteeveBeebo,

What kind of equity would I lose? I’d like to know, because personally, I’d love to get out of my apartment, and into a condo. I’m just really worried, that I’d lose a BUNCH of money.

You can use the example of the the condos that are going down 4-5%/year.

I can put 20% down. I’m looking in Hillcrest and Mission Hills for a 1 bedroom.

[SD Realtor]

lindismith –

I think the answer is that we don’t really know at this point. If you want to go buy a place, AND you are committed to stay for at least 7 years, (7 is a guess, 3 more bad years followed by 4 years to maybe get back up… and lots of people here will refute that… guys it is just a guess!)then you will be okay…

One thing that I do believe alot of us bears kind of overlook is quality of life. Look, if you want to live in a home and have things that you just cannot get from renting, AND you are HAPPY with it, AND you will not have to leave or relocate… then yeah you can go ahead and buy. Make sure you can afford it, don’t overextend, lowball the heck out of the seller, and get the best deal you can. Then enjoy life…

Also lindi you don’t LOSE money until you sell… so as long as you are living there then you are okay.

(I am sure the forum regulars are ready to string me up for the words I just spoke) so please read on…

**********

Now my PERSONAL advice to you would be to try to sit tight as long as you can. I think that if you could hang for say 2 years, you may be able to buy a nice 2 bedroom in the future for the same price as a 1 bedroom today. Deep down I do believe the correction will be of a more substantial magnitude. When you look at it from a risk perspective the risk of waiting is minimal to none, while the reward for waiting is substantial (perhaps) monetarily but not in a personal quality of life way (you would still be renting which does not sound palatable to you).

Though quality of life does improve with money…

**********

Along the lines of rausting people who don’t read the primer or who have differing opinions and don’t present thier arguments based on facts…. I also welcome thier postings and I try to respond in a measured response. I think it takes guts to come into this forum as an optimistic poster. I fundamentally agree that all of the data seems to be pointing towards some pretty rough times ahead. I am in the same boat as alot of us… I need to buy a home and I am currently renting. Yet as much as I want the pricing to come down and come down hard, I don’t WANT the economy to crash hard or for rampant unemployment. I know the data screams otherwise and so when people come in with optimistic angles it is like shooting fish in a barrel. I think one misconception about bearish points of views is that people think we WANT bad things to happen. That we would rather have bad things happen then not and stand corrected. I do not think this is true for the majority of us.

[Mark Holmes]

Well, Sun Devil, yeah I do hope there is a crash. Why? Because I want to buy a house to live in. Not to slap a coat of paint on, throw in some granite counter tops and sell to the next flipper. To spend the next twenty years making a HOME. I haven’t been willing to buy a half-a-million dollar fixer-upper in Normal Heights (moved here four years ago and wanted to buy two years ago) so have watched in frustration from the sidelines. Common sense has told me that this mania was unsustainable, especially with the prevalence of exotic lending and insane income to valuation ratios. So yes, maybe I and others are impatient for this to end.

[desmond]

“The crash and post-crash world will not be pretty. Millions of people will lose their jobs and their homes. Unfortunately, the economists who led us down this path are not likely to be among the ones who suffer severe consequences”

I could see how an Economist might miss this crash working with the overall picture and not in the day to day trenches, etc. But how do CEO’s of homebuilders, NAR Executives, etc. with all the sales figures, cancellation and inventory numbers, miss? Very interesting to see if certain execs were in “Lay Speek” and dumping shares or selling properties and still talking a good game.

[murray]

The reason most people don’t pay attention to doom and gloomers is because they’ve heard it all before and the D&Gs have always been proven wrong. The demise of the US economic system has been predicted before and it never happened. Losers like Ruff, Batra, Precter(sp?) make a good living selling D&G senarios that never happen. Oh they produce very convincing data and charts to convince you but they are just guessing. Nobody knows anything.

[Steve Beebo]

Deadzone –

I can’t agree with you completely: “Anyone who buys now is a complete idiot, period. It could take 10 or 15 years for prices to return to today’s levels.” Buying now is a lot better idea than buying 12 months ago. There are some desperate sellers now, a huge inventory to choose from, and you can probably buy cheaper than someone did 12 months ago.

Granted, the market is very soft right now in SD, and will very likely get worse, but a lot of informed people are not forecasting a 30-50% drop in prices. I would say that the average home or condo is off by about 4-5% since 12 months ago. I really haven’t seen anything drop by 10% in the past year, except for some newer housing developments where big incentives are available, and I’m doing residential appraisals every day. Some areas have even seen prices go up slightly in the past 12 months, and a lot of areas are flat over the same time period.

But let’s say that prices drop some more over the next two years, then flatten, then start inching up, and overall are about the same in 10 years. Instead of renting for 5 years, if you can afford it, wouldn’t you rather buy a house sometime in the next year with 20% down and a fixed rate, and start paying down the principle? Granted, you may lose some equity over the next 2 or 3 years, but prices will recover in my opinion. But if you really are convinced that prices will drop 30-50%, I know nothing will make you buy.

[Daniel]

Folks, give the guy a break. Let’s not chase out of this forum everyone who disagrees.

There is a lot of “positive reinforcement” on this site, whether most of us realize it or not. Seeing dozens of people agreeing with one’s views is certainly rewarding, but it is not the greatest recipe for critical thought. I would actually like it very much if more RE optimists were posting here.

Daniel

[sunsetbeachguy]

I disagree, unsupported bullish comments should be shouted down.

If he wants to come to a housing bubble site and present a bullish case, that is supported with data, then everyone is welcome.

BTW, I haven’t yet had an RE bull come forward with a well supported argument that rivals what Rich has put together here.

Stupidity must be punished anywhere it raises its head.

[equalizer]

Daniel

Dont worry about it is a complete Non sequitur.
Gene Epstein, Barrons economist, is MR. Optimist, but at least he presents valid points such as fact that only X % of homes have a mortgage, etc.

[powayseller]

Daniel, I agree with your point, but they really need to read the Bubble Primer before they start posting. Then, they can address the weakness in the Primer, instead of making posts like “real estate goes up in the long run” and “you can’t time the bottom” and other myths that have already been debunked in the Primer. If he reads the Primer, he can refute it or make new points, and such a discussion is very welcome.

[Daniel]

Powayseller,

I think I’ll address some of the issues in the Primer myself. Not right now, because I need to gather some data to make my points, but hopefully fairly soon (in the next few days, if everythig goes well). So, until then, the ball is in my court, as they say.

Now, mind you, I’m not going to come out and say that there is no bubble, as it’s pretty clear that there is one. But I will take issue with the price/income graph that’s at the top of the Piggington page, the one which shows SD housing about 100% overvalued. I think that graph is leading many here to believe that a ~50% drop is in the cards. I don’t share that belief. Anyhow, let me gather my data, and hopefully I’ll be able to put it together in a convincing way. I’ll keep you posted on this.

Take care,
Daniel

[bubba99]

I think the issue of housing continuing to reap double-digit gains is answered. No one expects a continuation of rapid price increases with inventories at six and a half months and interest rates moving up so quickly. But I don’t think the down turn will be as quick as the author of “The Coming Housing Crash” predicts.

He captures all of the standard economic arguments, plus the following:
“many people who had been holding homes in anticipation of price rises will rush to sell, now that the market is headed downward.”
Although this is a logical step, I don’t think it will happen with any great frequency. Having just gone through (4 months ago) selling in front of the price peak, I can say that moving will be avoided by any and all who can.

Moving is expensive and traumatic and a lot of hard work. Catching the peak netted me $500k, but I would be reluctant to go through that now that the peak has passed if I did not have to. Increases in variable rates will force many to the sales office, but the rest who can will keep chasing the price down trying to avoid the “move”.

[equalizer]

Steve

I doubt there are too many people who have 20% down and could afford fixed rate right now. The rent/own differential could be $500-1000 a month, INCLUDING 30% tax deduction.

[Daniel]

Rich,

You’re right on target: I don’t actually have issues with the graph itself, but I do have issues with the way the graph has been used to support certain predictions on this forum. I think the Primer, as a whole, is very balanced and well-written, but that graph has been taken out of context so many times in order to justify certain arguments, that I felt the need to say something about it.

It may not come as a surprise to the regulars here that, almost every time Powayseller cites the “upcoming 50% drop” and the “reversion to the mean”, I come out of the woods arguing with her. So I think I owe her some data and analysis to justify my (somewhat) rosier view of the situation.

[powayseller]

Rich has avoided the flak that I get, because he avoids making predictions. I love a good debate; I must have said that a dozen times. I look forward to your arguments. Perhaps you will show us something that will cause me to change my mind about the 35 – 50% drop? Just to clarify, I am saying in the next 5 years, a 35% drop in the median San Diego County housing prices (condo plus SFH plus attached homes) is certain, a 50% drop is possible.

[Anonymous]

IMHO, in five years or so, this site, and other bubble sites like it, will have been largely discredited.

My reasoning is simple. Prices have gone up 150 percent or more in San Diego and other Cali metro areas over the past 5-6 years. Unless prices decline signficantly over the next few years, then, ipso facto, there has been no bubble and this and other sites have been quite wrong.

If something goes up in price 150 percent and then goes down 10-15 percent, that is not a bubble, that is a serious runup in prices followed by a relatively minor retrenchment.

And I don’t think we are going to see major declines in prices. I expect nominal price declines in the order of 10-15 percent over the next 3-5 years, followed by flat prices for another 3-5 years. That is not a bubble-bursting scenario.

I hope I’m wrong, because I’d like to buy some real estate.

[powayseller]

batleft- What? “Unless prices decline significantly there is no bubble”. What kind of logic is that? It’s a factual statement. I don’t get your point.

[Steve Beebo]

I pretty much agree with Batsleft’s statement – “If something goes up in price 150 percent and then goes down 10-15 percent, that is not a bubble, that is a serious runup in prices followed by a relatively minor retrenchment.”

Even if prices were to drop 20-25%, which I don’t think is likely, I wouldn’t exactly call that a bubble bursting.

Now, if inventory levels in San Diego reached 45,000-50,000, similar to what Phoenix has now, we would have an incredibly big problem. But it seems like inventory has leveled off in the past month, stuck around 23,000+ as measured by ZipRealty. It will be interesting to see where inventory levels are at this fall and winter.

[PD]

It seems like some people are thinking that a 15% reduction can be computed by simply wiping away 15% of the gain. It doesn’t work that way. A 15% reduction equates to a heck of a lot more money than simply wiping away 15% of the gain.

A 15% or 20% reduction would certainly be the bubble bursting!!!

[powayseller]

Steve, isn’t months inventory more important than the inventory number? If we had 50,000 inventory, and 55,000 sales per year, prices would go through the roof. The problem is that sales keep falling at a greater rate every month. First, we were down 10% yoy, then 20%, etc. We were down almost 40% in July 06 over July 05.

Let’s assume inventory stays flat through the end of the year, and the downward accelerating sales trend continues; prices will drop a lot. Months inventory is the important metric from what I have learned. Do you disagree?

Rich, I still don’t understand monetizing mortgages. What is “pinning” the mortgages? Yes, the NASDAQ is still too high, although it has been back to its 1998 level for a couple years now. The P/E ratios are still too high. What do you think accounted for it not fully retrenching; rising consumer demand?

[equalizer]

Daniel

This summary of housing concern in website below probably the same as in the primer but it is very good. Please take a look. The charts are awesome.

Rich
Do you think this link deserves a permanent place in the primer?

http://www.contraryinvestor.com/mo.htm

[davelj]

Yup, I’m with Rich word for word. I’m a major real estate bear and on the fundamentals ALONE you could come up with lots of otherwise logically bearish conclusions. But having lived through the Greenspan era as an investor, one can never ever underestimate to what ends the government will go to defer economic pain into the future. Nothing is out of bounds, I’d say. Thus, a 30%-35% decline in the median price seems about right to me, as I’ve posted before. I don’t, however, trust the government to let the market get to a “true” equilibrium over the next few years (such as a 50% decline). After all, we never reached equilibrium on the Nasdaq (well, yet…), why should the housing market be any different?

[powayseller]

Rich -what is “monetizing mortgages”?

Davelj, we *have* reached equilibrium on the NASDAQ. Pull up the charts back to 1998. We’ve been back to 1998 pricing for several years now.

[mephisto]

Here’s my take on it. Background: I own, well within my means, and think prices are going to drop. And I hope they do, so I can buy a bigger place in a year or two.

The thing about these bubble boards (and I frequent several), is they are primarily filled with people wanting to buy. These posts and sentiments are *everywhere* on bubble blogs/forums.

Yes a lot of speculators are going to lose their shirts, and a lot of soccer moms who bought million dollar homes with 0 down and teaser rates are going to get destroyed.

But, for each person I know like that – I know someone else on the reverse side. Not everyone is a complete fool with money, or living their life on the credit express. There are a lot of people (at least that I know) sitting on huge piles of cash, making very high salaries. I know (conservately) at least 10+ people who are all planning on buying in the next 2-3 years if prices come down some.

If you bought a place 5 years ago say for $300,000. And today let’s say it’s “going” for $600,000 (very conservative). Lets put all other things aside (taxes, maint., etc) and assume a normal rent of $1,500 a month. 5 years of rent is $90,000. Seems to me this person is going to be just fine despite any price downturns assuming they didn’t do anything stupid.

I guess my point is, yes a lot of people did stupid things. But there are a lot of smart people out there as well. There is a very large pool of people waiting to buy – who can afford it and have been saving like mad.

Prices are going to drop I’d say 10-20% depending on the area (yes a dumphole in Temecula or out in the sticks may drop 50%). Then a few years of stagnation. I think you’ll find as soon as prices go down the 10-20% range there will be a whole new flood of buyers that keep prices somewhat stagnant.

And for every “FB” who is about to go under, there will be a circle of vultures all ready to buy at a discount/upon foreclosure.

Gap between the rich and the poor increasing. Nothing else new here.

It’s easy to search the MLS for the few people who are taking a hit. But you can also search and find a large pool of people who made hundreds of thousands of dollars selling homes the last few years.

Just my .02.

[technovelist]

I’m pretty sure the people you know are not representative of the general public. As I understand it, most of the loans made in the last two years in California are “suicide loans”, so there are hundreds of thousands or possibly even millions of people just in California who are going to be demolished when reality hits. I think it is extremely unlikely that there are that many people with huge bales of cash standing by waiting to buy “bargains” at 20% off the peak prices. And why should they, when prices are still dropping and interest rates still going up? Why not wait until prices and interest rates stabilize?

[powayseller]

What percentage of the San Diego population meet the criteria for this group that you describe?

The median family income, according to the 2004 Census Bureau is $51K. My bet is that for every vulture with $500K saved up, there are 300,000 people below the median wage scared to death of their ARM, HELOC, and credit card payments going up.

Since you are into anecdotes too (like me), next time you go to the gas station, walk by all the pumps and see how many people filled up. Then, go to the mall and see how full it is, and how many people walk around without any shopping bags.

One more thought: the housing prices are set by the solds. In July, it was 2500 or so solds in San Diego that set the prices for the other hundreds of thousands of homes. The people who NEED to sell are setting the price for everyone.

Oh, and one last thought: after foreclosures really pick up, Fannie Mae underwriting guidelines tighten, and the FDIC puts rules in exotic financing, the tighter credit will make it harder to buy a home. Buyer fear will reduce sales even more. Who will even want to buy a home next year? As buyer fear increases, the buyer pool shrinks. Your vulture friends, like us here, will wait even longer – they will think “Hey, why buy now when prices are dropping so fast – let me wait until next quarter and see if they have stabilized”. Fear works in reverse of frenzy. On the way up, sales accelerate and on the way down they decelerate. There is not sucker’s rally as in stocks. Just fear that grows.

[mephisto]

>>
The median family income, according to the 2004 Census Bureau is $51K. My bet is that for every vulture with $500K saved up, there are 300,000 people below the median wage scared to death of their ARM, HELOC, and credit card payments going up.
<< Again, it all depends on the person. So the majority of people don't make enough money to actually be able to afford some luxuries. Yes, that stinks - but that's life. I don't recall being given a handbook saying one day I will be able to afford a home, a yacht, a big HD TV, or whatever you want to fill the blank with. If you flip burgers, and your combined yearly income is $51,000 - then yeah, I'm sorry but you probably won't be able to afford a home in San Diego, or a lot of other luxuries. That's just my honest opinion. There are a lot of people making a lot of money out there. Shoot, my first job paid way more then $51,000/year when I graduated school. I know single waitresses making more then that a year. I think your 1:300,000 ratio is a bit off - my opinion. Percentages don't always tell you everything. I fall into the "exotic" loan catagory with my interest only loan. Then again, I put 20% down and have stockpiles of cash in the bank to cover the rest. Yet, I'm still counted in the pool of "FB'ers with exotic loans." I just don't think there is as much doom and gloom as people on these forums think. People still buy stocks after that bubble burst - and quite a few people made a lot of money. Others learned there lessons, some didn't. Life goes on. Not everyone is treading water burried in debt. Don't understimate the amount of people making huge amounts of money. Just my .02.

[PD]

If you have stockpiles of cash, why would you ever get an IO? You must be counting on appreciation.

[PD]

You also said further up that you live within your means. Having an IO is not living within your means.
Just my .02

[mephisto]

—
You also said further up that you live within your means. Having an IO is not living within your means.
Just my .02
—

I could pay off the rest of my mortgage tomorrow in cash.

My other investments earn a lot more then my effective 3% mortgage. And I have a guaranteed fixed 5% fixed rate mortgage at the end of my term.

For me, I prefer this a lot more then the $1,500/mo rent I’d be spending otherwise.

Again, it all depends on the person. But, again, if you focus only on the negative – then your analysis makes sense. 🙂

[PD]

Mephisto, do you live in San Diego or SoCal? When did you buy your house? Do you plan on paying off your mortgage when it resets? Are you making more than 5% interest on your investments? Is it a guaranteed return (NOT in the stock market)? Have you calculated in the cost of the mortgage (fees, etc) when comparing it against the returns you are making with your cash?

[mephisto]

—
Mephisto, do you live in San Diego or SoCal? When did you buy your house? Do you plan on paying off your mortgage when it resets? Are you making more than 5% interest on your investments? Is it a guaranteed return (NOT in the stock market)? Have you calculated in the cost of the mortgage (fees, etc) when comparing it against the returns you are making with your cash?
—

This is getting pretty off topic, so let’s end it here.

But yes, I have lived in San Diego my whole life. I will probably not pay off mortgage as I get better returns elsewhere – and like many here, I’m hoping for significant price drops so I can buy a bigger place – as I’m said, it’s over priced and needs a correction.

Earning more then 5% these days without stocks, etc? Pretty simple, many Checking and Savings accounts pay ~ 5.15%. T-Bills are paying ~6% for Californian’s. And many CD’s are ~6%+ right now as well.

Again, getting off topic though – and these are more financial discussions outside of Real Estate – so this probably isn’t the place to be discussing them.

I believe you proved my initial point though. You saw the words “Interest Only” and immediately assumed I was living above my means – when in fact, I’m not by a large margin.

Not everyone is/has dug themselves into a world of financial ruin. And my original opinions that there are a large # of people anxiously waiting on the sidelines to purchase once prices go back to a more appropriate price range will avoid any 50% immediate price drops – as much as that would be nice!

Again, just my humble opinions.

[PD]

I am earning over 5% on my cash as well but you are paying more than 3% – 5% for your loan when you calculate in costs. As for answering my questions, they are not off topic as RE and finances are what this site all about. You somewhat avoided my question about where you had your money. You stated that saving accounts are paying a certain percentage but you did not say that was where you had your cash.

[mephisto]

—
You somewhat avoided my question about where you had your money. You stated that saving accounts are paying a certain percentage but you did not say that was where you had your cash.
—

Right now my personal preference is TBills, and I have a large portion in IBonds that are still earning a high percentage (purchased back in the days when you could use a credit card – purchased using a 5% cash back card.. so I really like these Bonds as you can imagine).

Shame you can’t do that anymore. 🙁

I use a 5.15% checking account for my day to day stuff.

I’ve been trying to get more liquid in preparation for the next few years (outside of various savings accounts, 401ks, ira’s, etc…)

That’s just my strategy though. I figure the “real” price reductions will probably be in the next 2 years. But, just my best guess… who knows.

[(former)FormerSanDiegan]

IO role in planning …

Seems to me that mephisto has been using an IO to free up cash flow for investment purposes and to provide a large cushion for a future slow down/rainy day/bubble pop/recession.

Seems like an appropriate strategy for high-income folks who purchased prior to 2002 for riding out the bubble. It depends on their other assets and what portion of their net worth the property encompasses.

[powayseller]

mephisto, people like you, who are choosing to get an I/O loan, are the ones these products were originally made for. The problem is that 80% of San Diego mortgages last year were some kind of unconventional loan, many made with stated income. Most of these, I would say over 75% of these loans, were made to stretch into a house, because the buyer thought his house would keep appreciating. Why am I so sure? Because the median family income in San Diego is $51K/year. Since the median house is $500K, that is a multiplier of 10! The usual multiplier is 3-3.5.

When I bought a house in 1987, and in 1997, the general rule was we could get a mortgage for 3-3.5x income.

Now people are qualified on the basis of teaser rates, not the fully adjusted rate, and they can *state* their income. This easy lending has led to escalating home prices, as more and more people rushed in to buy homes.

The housing bubble got so much bigger this time due to this exotic lending. For this reason, you see home prices weakening nationwide. I don’t know if we have ever had nationwide home price declines and overbuilding since the depression.

So while there may be a few people here and there sitting around with cash, they are not the median San Diegan.

We cannot plan the future of the housing market around 2% of the population.

I do like your argument though, mephisto. It would make sense if there were indeed many people like you describe. But the data just doesn’t support it. If you look at credit, MEW, and wages, the picture paints a wage earner whose income is stagnant and who makes ends meet with credit.

The banker associations and government agencies are concerned about the effect of $2 trillion of mortgages resetting over the next 2 years.

Whether 1% of the population, the wealthy, can still pay cash for a mansion in Rancho Santa Fe, does not affect any of this one bit. The wealthy are in a different league, and their housing market in the +$3 mil category march to a different drummer. Stock market gains, option grants, all that kind of stuff.

To understand where the market is going, we have to look at the masses. The economy leading indicator is wages, and the wages of the masses is what is causing this all to unwind.

Just out of curiosity, how did your friends come across their riches? And to round out this discussion, for anyone reading this,
1) how many people told you they have money sitting in the bank to buy a house, and
2) how many do you know who already own a home, so they would not buy regardless of how much money they have saved
3) how many people have adjusting loans without an adjusting income to match (but they will *never* tell you; I bet not even your dearest friends would confess to such a shameful thing)

I’ll go first: I know only 1 other family with cash ready to buy and know several renters who are undecided about what to do; I could name 100 people who own; and I have no clue how many of my acquaintances have ARMs. I talk to a lot of people, since I am kind of a social butterfly, and my experience is very different from mephisto’s, both anecdotally and in the stuff I read every day.

But I am fascinated to hear more about your view, mephisto, that a large group of people sits ready with cash to bail out a housing decline. Please ask those people why they would buy while prices are dropping. Why wouldn’t they wait until prices *stopped* dropping, just to be safe?

[(former)FormerSanDiegan]

Median income earners and homebuyers …

Since San Diego County home ownership rate is historically in the 50-60 % range, why should we consider the median wage earner, relative to median prices ?

Shouldn’t we consider the upper 50 % of wage earners when considering affordability ratios ?

When has the ratio of median wage to median home price ever been in the 3-3.5 range in San Diego ?

[powayseller]

FormerSanDiegan – I need to correct what I wrote. Typically you can buy a home for 3-3.5 x family income. Typically, 64% of people nationwide owned homes, so you’re right, we cannot use the median wage earner’s income at a 3 multiple. The charts in the Bubble Primer show this: the ratio is typically between 9 (peak) and 7 (trough).

mephisto – timing the real estate market is easier than people think. Don’t use the median – it lags by one year. Use months inventory and most important, work with an honest realtor who will know from his daily work in the field when the tide shifts, sales pick up… But not to worry if you are a few months late; real estate moves very slow. Eventually prices will stop dropping, and rise, but I expect that rise to be gradual before picking up momentum. There should be an entire year in which to make a decision.

As for me, I am not looking at MLS, Open House, or visiting builders. I am content to rent for 5 years. Why in the world would I want to look at homes now? To me, a house is like a big stone around my neck, a big turn-off, an albatross. Looking at homes now is like reading the Lucent Annual Report in 1999. One word: yuck! Sorry to offend anyone, but homeownership today, to me, is just plain yuck!

[anxvariety]

Just trying to add a cautioned perspective to this thread..

I dont really see how it’s fair to talk about people not on this forum as “they” and say they are less intelligent.. the writing isn’t yet on the wall, and if you believe that a housing crash is 100% immiment you’re just as nuts as they are in my opinion.. how can it be 100% when you don’t have much control of the outcome?

What if global warming kicks in and the seawater rises 3 feet.. I wouldn’t mind buying some houses a few blocks off the beach.. those would now be beachfront! There’s almost an unlmited number of outcomes… what if a nuke goes off in New York and people on east coast decide they want to move here.. that would gobble supply right up…

I would be careful not to let ourselves be blinded by the self fulfilling excitement about this forum.. just because you have an opinoin and others agree doesn’t mean it’s the right opinion or definitely going to happen… we’re talking about the future here that involves imagination and imaginary events.

[mephisto]

Powayseller –

Oh, I certainly agree that the IO/NegAm/etc type loans have been horribly abused and a lot of people are really going to lose their shorts.

I don’t so much think people waiting to buy are going to bail out a housing decline – I think they are going to constantly buy during the decline causing a slow decline.

Prices are still going to drop, inflation is goign to eat away for several years, etc. IMHO. I personally just don’t believe prices are magically going to drop 40-50% overnight like so many people are waiting for. If you are hoping for your $600,000 house to be selling for $300,000 tomorrow – I think you are going to be eternally waiting.

In 7-9 years, in “real dollars” that may or may not be the case. But that’s a completely different concept then what so many people seem to be thinking.

Houses will go back to places you buy to live in, and not to flip for quick cash. Good thing.

Of the people I know, how did the ones with a lot of cash stock piled get it? All sorts of different ways really.

Some made a lot on stocks. Some made a lot on RE. One person moved back home with his family saving $5,000+ a month in order to buy (started about 6 years ago – he’s salivating for prices to go down and frequents these boards more then me!). Some just make a lot of money.

And if you are dual income, that only makes things easier. I’m not rich, none of my friends are. But we don’t try to live extravagent lifestyles we can’t afford.

Having decent paying jobs, living well below your means, and working hard to save money – thats how I try to get by at least.

Why buy as “the knife falls” as some will say? Like everything else in life, good luck timing the bottom. Anticipation will have its toll, tired of waiting, or just a sweet deal. There are advantages to a large inventory – your selection is much larger.

My one friend living at home saving like crazy has already begun creating his MLS “watch list” of properties he wants to check out as prices go down. You see the same thing mentioned all over the place on these forums.

For every X vultures that start circling above a carcass, a given number will give in and dive in for some food. I don’t know the formula, but I’m pretty certain this is what will take effect.

And at some point, trying to time the market only costs you. 5 years of rent at $1,500/mo is roughly $90,000 give or take some additional expenses. 10 years is $180,000… and so on.

(Ok, if your price range is the 1.5million mark like the poster above.. timing the market has a bit more of a consequence 🙂 ).

If you really want a house (and so many people who believe there is a bubble do – which says a lot for setiment) – then at some point the price and property will line up perfectly in your eyes.

People keep saving, even as house price stay the same or slowly go down.

But then again, who knows. When I bought this place a few years ago, I knew quite certain the housing party was not sustainable and would have a correction. But then again, that was about about $60,000 in money I would have spent on rent ago or something by now. And another 20+% “appreciation” (that I expect to go away) on my place.

Personally, I got sick of renting – sick of moving, tired of roomates, tired of being landlord. Owning, for me, is worth quite a bit of money just to not deal with all that other hassle. So I’m quite happy. 🙂

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

I too welcome the other side of the argument, but would like some numbers to back it up. Just having my own opinion reinforced will not make me any money. The only thing that makes me nervous at all about my view of a 30% drop that has begun, is that I am so sure of it.

My best trades as a trader are always the ones I am the most nervous about. Whenever I have been sure I was right, I have gotten my …. handed to me.

I do completely agree, that the long term prices of real estate are ever upward. However, just from an analysis standpoint I would challenge the bulls to point out one parabolic price move in any asset class ( you can name it ) that corrected sideways during the ensuing correction.

I have yet to find one, and I do not think we are in the midst of one in RE. For those that are new here, I have a good chunk of money in relatively liquid places waiting for a buy spot. That chunk is well into 7 figures, so do not target me as someone who cannot afford to buy a home. You can classify me as someone who is trying to time the market though. That is exactly what I am trying to do.

Timing markets is what I do for a living, and sometimes I am wrong. I am not so cocky as to think that I have the holy grail model for doing this. As a result, I absolutely welcome the bull side. If there is something I have overlooked I would openly consider it.

I am looking in the 1.5 range so mis timing that by 30% is 500k, and that is not chump change, so I wait patiently as a renter for now. I have bought and sold a few homes in the last 10 years, the last sale being at the end of 05.

It does seem to me just anecdotally, that things have changed dramatically in RE in just the last few months. It does feel like the tide is turning, and the numbers do support it. There are 3 major high rise buildings coming out of the ground in Irvine, with not one single pre-leased tenant combined in them. This is unprecedented. The standard would be about 50%. I am sure the appraisers could comment on this better than I can. Although this is commercial, the two are tied together at the hip. This is a topping sign, raw speculation. Two of them are Irvine Co. developments, so it makes it a little better than if it were anyone else because they have no carrying costs.

The comments on Greenspan made by Rich are the correct ones regarding the 2000 top.

[SD Realtor]

Just a quick comment about inventory and the buyer sentiment. As a Realtor I cannot overstate the effect of the buyers sentiment changing. Personally, this has been the most profound change. Now I am not a 20 year veteran agent but I believe the change in attitude is much more responsible for the declining sales then anything else. While alot of sellers are still clinging to outdated pricing levels, there are a good majority who have priced more agressive. Mortgage rates are down significantly from the spring as the 10 year has rallied. Yet sales are SUBSTANTIALLY down. The fact is that the psychology is much different. Buyers do not feel they will be left out of the market by waiting.

Inventory levels should actually drop over the next few months due to seasonal factors. The heaviest listing volume always occurs in the spring. So in the fall and winter you see new listings decline and stale listings drop off due to cancellations and expirations. You also get people who gave up and decided to rent out thier home or sit tight. I feel the tide is going out (inventory wise) but the fun really begins in February when it comes back in. It would not surprise me to see it dip down below 20k into the high teens even. However don’t delude yourself, analyze the data and if the drop in inventory is not matched by a gain in sales then that would confirm that this is simply seasonal.

I believe that the months inventory is a great measure but it can be misleading when there are inventory fluctuations that are seasonal. So even that months (the fall months)inventory may be somewhat optimistic as we tread into the fall.

BTW Chris Johnston – If you ever need a lackey I am your man!

[bubba99]

Chris,

I completely agree that the most troubling factor about the bubble is the belief by so many that it will happen. In the past that kind of assurance has been met with surprise when some un-predicitable factor like the fed and money supply stepped in and shocked the system

Plus I now am sitting on way too much cash. I can get 5% on short-term treasuries, or .8% on Swiss Francs, but the lack of any real robust returns has left me un-comfortable – like what am I missing?

[(former)FormerSanDiegan]

Rich –

Agree that we must work with data that are available.

I was trying to find the data to support PS’ statement :
“Because the median family income in San Diego is $51K/year. Since the median house is $500K, that is a multiplier of 10! The usual multiplier is 3-3.5.”

This is misleading. Unless the median income (in nominal dollars) is the same now as it was in 1995, we were above the 3-3.5 ratio even in the darkest days of median home prices in San Diego of 1995.

No way that is the usual ratio of median income to median price.

[Author]

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