[Blissful Ignoramus]

Back in 2003, the bubble was just hitting it’s stride

True, but the reasonable perception at that time was different. Have a look at the graph that Rich posted in his latest Voice of SD column:

In terms of median house price/median income, a peak was met in 2002/03 that was the equal of the two previous peaks. People who were paying attention, reasonably, called it as a peak. We were incorrect in that prediction, as a number of factors (loose credit, aggressive sales tactics) kept the runaway train on its tracks. That doesn’t mean that it wasn’t the best prediction at the time, it only means that it didn’t turn out that way. And the fact that it didn’t turn out that way does harm to our position of authority on the matter. Sure, the argument from authority is a logical fallacy, but that’s what most people are going by.

I am concerned that you have given up on economic cycles, as you suggest “maybe the bubble won’t burst and prices won’t drop”.

I agree that the bubble bursting is the best prediction, easily. But the best predictions don’t always come true, just as they didn’t in 2003. I can’t think of what tricks are left to keep things on course, but that doesn’t mean something won’t happen at least to keep current prices propped up for awhile.

And if the deflation of the bubble occurs as I expect (a slow process that will take years, with occasional market rallies in reverse of the overall trend downward), we will hear again and again about Chicken Little. No, I do not believe in a soft landing: I expect a significant decline in prices over the next several years.

[Blissful Ignoramus]

Personally, I don’t see any reason to harass realtors. The real estate market has taken an odd course, and it doesn’t need my help in correcting itself.

What the realtors will always be able to argue is that people like us have been saying for years now that the bubble is going to burst, and it hasn’t happened. Of course, they are right about that. I would never have imagined that the bubble of 2003 was not only not going to burst, but that it would continue to expand at a record pace. I told people then that investing in inflated CA real estate was nuts, and two years later, people who did that and sold made a lot of money.

Rather than talking about bubbles, I think it’s more important to talk to people about not buying houses they can’t afford. Maybe the bubble won’t burst and prices won’t drop, but you know damn well they aren’t going to continue going up like they have, and people shouldn’t get themselves into lending situations where they NEED that to happen. We need to dust off the old guidelines of 20% down/30 year fixed/mortgage no more than a third of your income and remind people that until a few years ago, this was practically law.

[Blissful Ignoramus]

Well, I’m pretty sure I would never buy one of these condos.

However, I do find it difficult to resist the panache associated with spelling the word ‘Point’ with an ‘e’, and will have to take this factor into consideration.

[Blissful Ignoramus]

It’s the simple distinction between isolated cause and effect (lower rates lead Norm to buy a property at a higher price) and a general cause and effect (lower rates lead to increases in median prices over a large geographic area).

We also have to keep in mind that rates go up and down for a reason. As a matter of monetary policy, they’re raised to fight inflation, and one of the prices going up in an inflationary environment might be real estate. In those cases, increased interest rates may only put a drag on increases, and not actually be able to drive them down.

[Blissful Ignoramus]

Exactly. The replacement cost is basically a sunk cost in the case of these new condo projects. The seller has a choice: 1) Wait it out to get his price or 2) sell for whatever the market dictates. You can’t force the market to give you back what you put in, and with the exception of cases where the developments are being paid for in cash up front (yeah, right) the seller can only wait so long.

[Blissful Ignoramus]

I’ll do my best to keep the discussion positive and argument free, but it really isn’t fair how (in terms of point of view) you give two options, the obviously reasonable “bull” who believes in long-term ownership, and the shrill “bear” who is calling for Armageddon. I mean, come on, you’re laying the rhetoric on pretty thick here.

Anyway, the “mild correction” issue is the crux of the argument. Obviously, the central theme in this blog is that the correction is not going to be mild, and you see things otherwise.

Even if the correction is going to be more than mild, you are probably going to be fine if you like your home and location, plan to stay there a long time, and can afford it.

The question is whether you would be just as well off renting. That of course depends on what is important to you.

Beyond that, the real problem is that people are buying homes they can’t afford, and/or buying overpriced homes with the idea that they are going to make money.

[Blissful Ignoramus]

“Whether a house is worth $699K or $729K is a little of an art, not a science, right? ”

More slight of hand than art or science…

[Blissful Ignoramus]

Both true, but they also assumed the average rate for “conventional” mortgages (whatever that means). Certainly, when you consider the number of “unconventional” mortgages in CA, the average interest rate in CA must be much lower.

You’re probably right though: I would guess that the estimates for CA are all biased on the low side.

[Author]

Posts