I couldn’t convince my neighbor there’s a housing bubble

[powayseller]

I was trying to help my neighbor, who is moving to Ventura County for a job promotion, from making a big mistake and buying a house up there, but she was not convinced.

I showed her a graph of Ventura County housing prices going back to 1976, and she pointed to the last data point (Q2 2006), which was only flattening out, and said, “Look, it’s not going down yet”. True, OFHEO data’s last release was for the period ending June 2006, and the index is flat from the winter. However, the Ventura County graph looks similar to the San Diego graph: flat prices to 2000 and then a big spike.

Her realtor told her that this is her busiest year, she is selling lots of homes, and prices are not going down.

Well, if the large reduction in sales is any indication, they will go down a lot. I told her Ventura County is lagging San Diego in the bubble, both on the way up and on the way down.

My neighbor didn’t want to believe any of it. She said prices simply cannot go down, that people should buy homes if they can afford them and have a down payment, and that the relationship between rents and mortgage payments is meaningless.

If she can’t get the price she wants for her home, she will rent it out. I reminded her that prices could drop in half in 2 years, and she will lose even more money on the sale at that time. Plus, she’ll lose her capital gains tax exclusion if she hasn’t lived in the house 2 of the last 5 years. She seemed surprised by the tax comment, but not worried about losing money on the sale, since she thinks that is unlikely. She said, “people want to buy in San Diego, so prices will never get that low. And if they do, they will go up again. Real estate always goes up in the long haul”.

I told her it could be 2 decades before prices get back to today’s level. Oh well, at least I gave her one other viewpoint, which she will not get from her realtors.

I’m sure she’s going to buy a house up there. She has a relocation package, so she doesn’t care if she sells her house here or not, so she may be firm on the price and rent it for a few years. She may end up with 2 overpriced homes: the one she’s buying in Thousand Oaks, and the one in Poway that she may not sell because it’s overpriced. And I feel like a total failure for not being able to show her the folly of those decisions.

[Critter]

I have a friend who lives in Newbury Park, which borders Thousand Oaks. She and her husband just sold an oceanfront rental they had on the East Coast and made a lot of money since they had owned it for 15 years. Their original idea was to buy a second property in Ventura County and rent it out. After running the numbers, they decided nothing was worth buying, and they would be better off paying long-term cap gains on the sale of their East Coast home.

In other words, their cap gain penalty was a better deal than buying a depreciating asset. They will take the rest of the proceeds and buy in two-three-ten years, AFTER prices finish plummeting.

Your friend sounds like her mind is already made up.

[VCJIM]

I live in a town adjacent to Thousand Oaks; I’ve been closely watching the market since February. Make no mistake, the sold prices are dropping. Pick a property, any property in T.O. on Zillow and look at the comps. They can be arranged in “date sold” order and one can plainly see the dropping prices, especially those in August and September. As you wrote PS, VC is lagging SD. Countrywide is probably the second largest employer in this whole area, behind Amgen. Is there a reason to think this area is different than SD? Not that I have been able to determine. In fact, we may be the region MOST similar to SD.

On the other hand, your neighbor will have strong negotiating power because many sellers are desperate. She should definitiely make VERY lowball offers. There are quite a few properties with NODs, if one compares Zip and Foreclosure.com.

[PerryChase]

The fact that you “feel like a total failure for not being able to show her the folly of those decisions” shows that you’re taking this coming Real Estate crash a little too personality.

You’ve told your neighbor already. Just chill and let her be. She’s gonna do what she’s gonna do. Me, I would only tell my neighbor if she were my friend also. I’ve learned my lesson; never deliver bad news to strangers. They’ll resent you.

[4plexowner]

Psychology of Denial

If you really care about influencing the opinions of others, I would recommend that you read a little bit about the ‘psychology of denial’.

The psychology of denial says that once a human being has made up their mind about something you have almost zero chance of changing their mind.

Related to the psychology of denial is a feature of the human brain called the reticular activating system (RAS).

The RAS causes us to focus on what we are interested in and filter out all of the other extraneous input. For example, you go buy a new car and as you are driving home you ‘happen’ to see numerous cars just like yours – your RAS is alerting you to something you are interested in – and your RAS had been filtering all those cars out until you bought one.

The RAS also helps up maintain opinions that we hold. If I decide that the world is flat (and can convince my brain of that), my reticular activating system will cause me to focus on all the ‘facts’ that support my (incorrect) view of the world. My RAS will also filter out (deny) any facts which would upset my view of the world being flat.

So, how does this apply to real estate?

Currently we have a nation of people that mostly believe: “real estate only goes up”; “you can’t go wrong with real estate”; “it is better to own than rent”; etc.

Some local beliefs: “we are running out of land in San Diego”; “more people are moving to San Diego everyday”; “if I don’t buy now I will be priced out of the market”; etc.

The RAS’s of the people holding these beliefs cause them to focus on the positive news about real estate (which is provided in spades by the real estate industry, US government, media, etc) and filter out (deny) any of the reality about the current trends in real estate (which we discuss in this forum).

When you try to point out real estate realities to these people their RAS has to do something to allow them to deny your input. Categorizing you as a ‘gloom and doomer’ or ‘pessimist’ or even ‘arrogant asshole’ helps them maintain their (delusional) reality.

I have been on the ‘gloom and doom’ bandwagon for about 4 years now and I have made numerous attempts to educate family and friends about the future we are facing here in America.

None of the people that I tried to educate about silver and gold purchased any (too bad – could have bought gold for about $375 and silver for less than $5).

None of the people that I have tried to educate about real estate have been influenced by my input either.

Between 2002 and 2005 I sold five fourplexes and explained to many people why (the market is about to tank) (yes, I sold “too early”). Regardless of my words and actions, a family member bought a 400K house in 2003 and one of my co-workers bought a 900K house in late 2005.

Anyway, my point is that you shouldn’t get worked up about people denying what you perceive to be reality. They will eventually realize that you were right and then they will like you even less!!!

[sdrealtor]

Logic would say the opposite viewpoint regarding a bearish view on RE is true also.

[Mexico Resident]

PS, sounds like your neighbor will buy soon at tier 1 prices (since they have a good realtor advising them). But really PS, why in the world would you have any interest in a neighbor’s move? Who cares? Let them do whatever they want.

[equalizer]

4plexowner

Thanks for the phys lesson. It appears that way too many people on this board are in real denial on many topics. Better to insult others than possibly modify a viewpoint.

[Diego Mamani]

With the relo package, your neighbor’s employer will pay for the 6% sales commission. Also, she’ll get a subsidized, 5-year interest-only loan for up to 20% of her new house’s purchase price, and all closing costs paid by her employer. If she moves again in less than four years, she’ll probably lose money. OTOH, if she intends to stay put in Thousand Oaks, and grow old there, she’ll be OK, even if her monthly payments go up a bit when the first five years are up.

Let me add PS, that I’m with you on this one. If I were your neighbor, I’d rent a nice house for a couple of years, instead of buying. However, all of her employer’s subsidies make the rent-vs-buy comparison a little different than for most people.

[Author]

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