[davelj]

I read Talbott’s book – it’s a good one. But he doesn’t really bring up any new facts, at least nothing that other housing bears like Shiller have already discussed at length. I’d be wary of making decisions on the basis of just about anything that shows up in the popular press. I suspect that when the dust settles, both the super bulls and super bears will both be wrong. But the super bulls will look more stupid, that’s almost guaranteed.

[davelj]

Yeah, they’d buy up portfolios in bulk from banks. They’d also contract out work to locals who would specialize in bulk buying in certain areas. There are many ways for institutions (if they so desire) to get into the residential market in a big way if prices were to drop significantly given the technology available.

Where do the jobs come from? Where do they always come from? Out of the blue. It’s as yet unknowable. The only thing we know is that they get created in places we didn’t anticipate. The problem with being a bear – and believe me, I know a lot about it – is that we tend to overestimate our level of certainty regarding things we think we’re sure about and underestimate the potential impact of exogenous surprises – things we don’t know about.

To use a recent example, many tech analysts thought the chip companies were going to die an ugly death once the PC market got saturated (which it is), but what happened? Ipods, HDTVs, and other products that use chips that were unanticipated. That’s how a dynamic economy works.

We know far less than we think we know. One way or another, innovation and resilience tend to mute the effects of “inevitable downturns”. Having said that, I still think we’re in for a doozy, just not as much of a doozy as purely “logical” analysis might suggest.

[davelj]

Agree completely. You have to distinguish between nominal and real prices when discussing these things. But absent a distinction, most people talk in terms of nominal prices when discussing potential declines. I’m talking nominal prices above, but of course the only thing that matters in the real world are “real” prices. Consequently, the decline could ultimately be 50% in real terms.

[davelj]

Also, if you were to draw a trendline of median San Diego prices starting at 1980, and excluding the period 2002-2005, you’d come up with an estimated median price of about $350K. Instead we hit the peak at around $600K, so you’d need a 42% immediate decline from that point to get to $350K. But, if you assume a 30% decline from peak to trough over 3-5 years and another 5 years of flattish prices, the long-term trendline reestablishes itself around 2015. Consequently, there’s no “need” for prices to drop by 40%-50% in order to mean revert if you assume several years of flattening prices. Just a thought.

[davelj]

and again…

[davelj]

disregard.

[davelj]

I found a graph that has the median in 1989 at about $190K and the median in 1986 at about $160K which amounts to a 16% decline in nominal terms and (of course) a lot more in real terms. Condos got hit a lot harder.

My guess is this time around we’ll decline by 30% or so from peak to trough and I think we’ve already hit the first 10% decline if the stats were correctly reported/adjusted.

As much as I’d like to see things completely implode, there’s a BOATLOAD (many $billions) of well-heeled/institutional investment money sitting on the sidelines waiting for problems in the residential market that will come into that market if prices decline by more than 30% which will put a floor on the decline. It’s shocking how much unlevered liquidity is sloshing around on this planet. That’s the only reason I don’t see 40%-50% declines coming, despite evidence that they probably “should”. Also, history suggests that the uber-bears are almost always wrong, just as the perma-bulls always ending up getting their clock cleaned every few years. In markets, things tend to be “never as good as you hoped, nor as bad as you feared.”

[davelj]

Why do I bother… look, the issue of whether or not “it is far better to collect interest than to pay it” is DEPENDENT ON THE SITUATION. That was my point. I thought I made that clear…

I believe that 85% of the assets on this planet – whether stocks, commodities, bonds, real estate, etc. – are either fairly or over-valued. Having said that, there are plenty of situations out there in which an investor can earn a return substantially above the cost of servicing the cost of borrowing associated with making such an investment. The problem, of course, is that such opportunities are few relative to the total set of investment opportunities. In other words, it’s hard work to find these opportunities. But, I will guarantee you that in 10 years you will be able to look back and with 20/20 hindsight find investments that returned well in excess of the borrowing costs associated with these investments.

I invest principally in private companies. Unfortunately, it’s very difficult to borrow against equity interests in private companies. Bank regulators more than frown on banks that try to lend against private equity as collateral, and for good reason. Nevertheless, I have several investments that, if possible, I would be happy to borrow against at 8% floating (and increase my equity investment in these companies with the debt) because I’m highly confident that these companies’ ultimate IRR will exceed that 8% rate by a multiple. So, it would make all kinds of sense for me to borrow right now, despite the fact that I’m very bearish on the economy, real estate, stocks, etc… but it’s very difficult to do.

As to your specific question, for the most part, no, I don’t see much benefit to an individual taking on mortgage debt right now. But, again, IT DEPENDS ON THE SITUATION. This forum focuses on San Diego and California where leverage will likely be hazardous to investors’ financial health over the next several years. But the world is a large real estate market. (I know people who are active buying properties in such far flung places as Peru and Russia.) I’m sure there are plenty of CRE and MFR properties in the midwest (and other places) that yield positive cash flow after debt service and will show modest appreciation over the next several years. And for people that have the patience and skill to find such properties, then they should borrow as they see fit. It’s not necessarily stupid to do so, and may in fact be quite smart given the circumstances.

The problem with adages, platitudes and pithy pronouncements that people read in the financial press is that often they are just plain wrong. For example, the idea that “it is far better to collect interest than to pay it” is COMPLETELY RIDICULOUS absent any corresponding context.

[davelj]

You CANNOT be serious: “People who understand interest collect it while those who don’t pay it”? This is what passes for wisdom? Good lord.

I’m neither for or against debt in the generic sense. It all depends on what the purpose is for taking on the debt.

But please send your “adage” to Henry Kravis… or Thomas Hicks… or the Basses… or the Pritzkers… or anyone who’s made money in leveraged buy-outs. I’m sure, as billionaires, they’d love to hear your opinions on all the things they don’t understand about utilizing debt.

[davelj]

It is NOT necessarily foolish for someone to be buying right now. As everyone who has taken a little economics knows, all individuals have varying indifference curves relative to one another. In this case, the curve plots money vs. convenience. People are willing to trade one for the other in varying amounts depending on their personal circumstances and attitudes. There are plenty of people who don’t give a rat’s ass whether their house declines by 35%; they’re either very wealthy such that such a decline doesn’t really affect their lives and/or they’re willing to take the hit because the convenience of getting settled is “worth it”.

Again, I believe we’re in a bubble. I believe lots of people are going to suffer in the coming real estate decline. But having said that, there are PLENTY of people out there who are justified in buying right now because of their personal circumstances and attitudes.

I enjoy these forums, but sometimes I scratch my head and think, “How do these people manage without some semblance of economic understanding?” There are books written on many of the economic topics addressed herein (inflation, currencies, behavioral issues, etc.) that will do a far more thorough job of explaining such topics than this forum allows.

[davelj]

net/net, in my opinion, this site is better with both powayseller and sdrealtor, despite the fact that i think a certain amount of what each of them posts is worthless. (and for that matter i’m sure a certain amount of what i post is worthless too as it’s the nature of the beast – see this post for an example – but i digress…)

for example, from PS’s above post:

“…and I got a compliment from Christopher Thornberg, who said to me, in front of about 200 people, “You just summarized our entire presentation in 20 seconds.” John Orcutt, Sr VP of UBS Private Wealth Management, and Ryan Ratcliff, both shook their heads up and down in agreement. I was thrilled.”

basically what you’re communicating to the forum here is, “oooh oooh, look at me, other smart people think i’m smart – they really do!! – so you should think i’m smart too!!” this merely comes off as a pitiful attempt at trying to urge the forum to take you seriously because some economist paid you a brief compliment. puhlease!! you shouldn’t be at your stage in life and need this sort of reinforcement, powayseller. you have some interesting things to say – just say them and leave it at that. if you spend your life seeking the approval of anonymous internet posters, you will lead a life filled with disappointment.

despite the fact that sdrealtor comes across as an apologist for real estate agents (to me at least) and is certainly not as bearish as i am (or the average forum participant), he’s actually posted some thoughtful, interesting stuff here. not as interesting as bugs, but that’s a tall order.

the difference between the two of you is that sdrealtor’s got the thicker skin. “sdr is driving me away”? puhlease. it’s a freakin’ internet forum for christ’s sake!! lighten up.

[davelj]

i didn’t see the earlier thread on the topic (hell, i don’t even know if she rents or owns – i’ve just assumed that she recently sold a house in poway based on her screen name)… bottom line, if her mailing address is/was poway, she’s powayseller, if her mailing address is/was lakeside, she’s lakesideseller. again, it’s no big deal, but if her mailing address is/was lakeside, then lakesideseller would be the more appropriate moniker. that’s my only point.

[davelj]

in about two years there will be forums at the large mortgage banking conferences throughout the u.s. called “keys for survival in the mortgage banking industry.” mortgage banking is one of THE most cyclical businesses out there. and this has been a decade-long up cycle. i suspect that mortgage banking employment will ultimately drop to half its peak 2004 levels and profitability will be hard to achieve even for the efficient operators. bull markets hide all sorts of sins…

also, i wonder how many of this 3,800 are either recent home buyers or serial home equity extractors with “innovative mortgages”?

[davelj]

powayseller,

i thought you lived in poway (for obvious reasons). it’s not a big deal at all, but if you live(d) in lakeside shouldn’t your screen name be lakesideseller? what’s the benefit of being powayseller vs. lakesideseller? just curious.

[davelj]

I’m speculating here, but it wouldn’t surprise if upstate New York has never experienced a real estate bubble. I’m sure it’s a nice place to live, but that region has been losing population for a few decades.

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