February 10, 2006 at 12:37 PM #6364ARMwrestlingParticipant
We’ll file this one under “the more things change…”
The article is from 1984. Ben Stein, who’s best known for his role in “Ferris Bueller,” but who was also a policy analyst in the Nixon administration, is the author.
In it he discusses how the housing market tanked in LA in 1980, after a serious boom the previous five years. Please keep in mind while reading it that a substantial portion of the growth in real estate from 1975-1980 was due to general price inflation; something that cannot be claimed for the 1999-2005 timeframe. It’s plausible to argue that our recent boom is far more speculative as a result:
It’s funny to see the same arguments recycled twenty-five years later. “Money waiting on the sidelines” and “rich foreigners will always pay a premium” were permabull touchstones decades before this website was even a glimmer in the prof’s eye. We can never accuse the NAR of inconsistency.February 10, 2006 at 1:39 PM #23425
“It’s funny to see the same arguments recycled twenty-five years later. “Money waiting on the sidelines” and “rich foreigners will always pay a premium” were permabull touchstones decades before this website was even a glimmer in the prof’s eye. We can never accuse the NAR of inconsistency.”
I agree that we are overpriced today, but this article has no relevance. Are you saying that housing was overpriced in the early 1980’s? I don’t have any fancy color charts to prove this point but I am fairly certain that if you were fortunate to “overpay” for a house in 1983 in a reasonable neighborhood anywhere in San Diego, it would be worth substantially more today (even inflation adjusted). You certainly would have refinanced the original mortgage a few times since then. You might have pulled out equity to send your kids to college.
Maybe you were smarter than almost everyone else and decided not to put a $20,000 down payment on the house (with an $80,000 mortgage). You decided to live in a garden style apartment for the past 22 years. You knew that Microsoft or Wal*Mart was a great value and bought $20,000 worth of stock. If you didn’t pay any income taxes on the stock, MSFT (which went public in 1986) would be worth $600,000 today @ $30 per share. WMT was $.75 (price adjusted)in February 1983. Your 26,666 shares would be worth $1,200,000 today which would buy you a nice tract home in Carlsbad or Carmel Valley.
Gold was $500 an ounce in February 1983, today it is $550.February 10, 2006 at 2:27 PM #23426ARMwrestlingParticipant
The relevance is in noting that the arguments used to promote today’s real estate to the moon are nothing new. The article shows they’ve been tried before, with the same flimsy underpinnings as now.
Yes, housing was overpriced in the early 1980s. The 1981-82 correction proved it.
If you bought in 1983 and held until today then sure, you’re doing fine. But there were dicey times in the early 1990s when you might not have been. Every investment does well in the long run– provided you can get to the long run.
This dataquick article shows that not everyone in the late 1980s and early 1990s could or did buy-and-hold. Sometimes that’s not an option.
I’m not sure how to interpret your comment about gold vis-a-vis 1983 and today. A 10% increase in price over twenty-two years is a terrible investment. Is that what you wanted to show? If so, we agree.February 10, 2006 at 5:36 PM #23427
“The median loss was $23,500 on a house sold for $203,000, originally purchased for $226,500.”
Good article. It shows that home prices pulled back approximatley 10%. I see predictions on this site of a 50% decline. I think it could pull back 20%. The same thing will happen, people won’t be able to “move-up”.
This chart has different info. It appears that the MEDIAN homebuyers experienced a 10% decline from 1991 to 1995. You would have been underwater until 1998.
As far as the reference to GOLD is concerned, it shows that it is a very innefective hedge against inflation. Even if you lived through a few housing peaks and troughs in the last 22 years, you still would have done better owning a home rather than gold.February 10, 2006 at 8:20 PM #23428BugsParticipant
You would have done better to have sold in the early ’80s, buy in the mid-late 80s, sell in 01/1990, buy again in 01/1996 and hold til 08/2004. By my reckoning, homeownership is a good investment about 2/3 of the time.February 10, 2006 at 10:02 PM #23429
I agree. Market timing is great when you have 20/20 hindsight.February 10, 2006 at 11:28 PM #23430NotARocketScientistParticipant
Actually, you don’t need 20/20 hindsight.
My folks bought their first SoCal rentals in 1971 when defense contracts ebbed near the end of the Vietnam War and the local economy contracted.
They bought again in the early 80s when we had the recession described in the article quoted in this thread. All the local newspapers were full of hard luck stories about people who had been burned by real estate and were fed up with California.
I bought my house in the mid-ninties after watching real estate prices get pummeled by fires, mudslides, earthquakes, riots, base closings and the bankruptcy of Orange County.
I thought I’d be investing by 2005, but I’ll probably have to wait 3-6 years. When Time Magazine finally does it’s cover story on how “the Golden State has lost its luster” again, it will be time to start crunching numbers.
You don’t need a crystal ball to invest in SoCal real estate, you just need to pay attention, have patience and save your pennies.February 11, 2006 at 8:03 AM #23431powaysellerParticipant
Great comment, about buying an asset when it’s out of favor. I also think now it will take 5 – 10 years. Initially, I thought prices would plunge quickly, but am realizing that Rich is right in his statement that the housing market is like a big ship on the ocean, which turns slowly. His historical price graphs show this too: the first bubble was 3 years up, 6 years down, the 2nd bubble was 5 years up, 7 years down, and this bubble has been 8 years up and could easily take 10 years to bottom.February 11, 2006 at 10:31 PM #23432AnonymousGuest
WAL MART WAS ONLY WORTH .75 BACK THEN, SO WAS MSFT… WHAT IF YOU OWNED G.M. PFE, OR OTHER WIDOW AND ORPHAN STOCKS?
ALSO 2 STOCKS OUT OF 3 INDEXES OF 10,000 STOCKS SOUNDS LIKE HITTING THE LOTTERY ODDS…February 11, 2006 at 11:02 PM #23433Jim BrubakerParticipant
I beg to differ. Even though what we are expressing are just opinions. The first two cycles that you mention, I wouldn’t classify a bubbles. There is no argument over the present one as it is a bubble.
Most home owners are in and out of the market every 5 years. If you have a no doc I/O loan, your going to walk in the next two years. If you don’t walk, I can almost guarantee a divorce in 3 years and then a forclosure. Money problems will ruin any marriage.
The baby boomers are starting to retire, and when LA says that crime has dropped 25%, its not better law enforcement, its 25% fewer young people to buy baby boomer houses.
To add some levity to the discussion, the Titanic was a big ship that turned slowly.
What we are looking at here is, people have borrowed 6 trillion dollars in the last 5 years. Who is holding the paper? I just hope its not my IRA!
If you look back at history, most of the loans that defaulted in the 1930’s were interest only loans. When the poor sucker went to refinance, the bank would refuse to refi. It didn’t have the money to say yes.
I say 5 years to bottom.February 12, 2006 at 12:03 PM #23434unlawflcombatntParticipant
Thanks for the link and the article. That’s exactly what’s going to happen in LA again. And the real estate agents are currently making all the same claims. One of the more interesting lines in the article was “Asking prices stayed high, but nothing sold.” Home sellers simply refuse to accept that less people can afford homes. And the number is continuing to decline. Spin is still leading in it’s battle with reality dissemination.
unlawflcombatntFebruary 12, 2006 at 12:11 PM #23435
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