[powayseller]

zk, I love a good debate, and I thank you for raising these counterpoints.

With some of your logic I cannot argue. You’re right that I cannot predict the future. I have a 95% confidence that prices will drop, and 80% that they will drop by at least 35%. Time will tell if I was right.

The question of whether wages will rise is also valid. In the 1970’s, inflation caused everything to rise: wages, interest rates, housing. Could this happen again? I think not. Now we are a global economy. Goods made by worders earning US$4/day in the export-oriented Asian economies are what sustains the US consumer. If our wages went up, we would lose even more manufacturing jobs. The global economy cannot support higher wages in the US. The only room for wage increase would be in the Asian countries, to bring the $4/day to $6/day. If Nokia started paying their engineers $100K instead of $80K (or whatever they make), then Nokia would instead go to China to hire cheaper labor. So higher wages are unlikely.

If housing prices stay flat, wages would have to double to bring the ratio in half. Do you think it is even remotely possible for everyone’s wages to double in the next 6 years? I don’t know about you, but statistics show that wages have been growing at a nominal 3-4% rate. What would make them grow at an annual rate of 10-15%?

If wages doubled, then the prices of goods and services would double also, so you still have the basic problem of ARMs resetting.

I think doubling wages cannot save this bubble.

The only hope for prolonging it is another liquidity bubble, something that forestalls the ARM resets. The exotic loan resets are the most ominous feature, and what gives me the confidence this will all fall apart.

In the end, all bubbles correct, in nominal prices. Have you ever heard of any bubble which corrected itself by prices staying flat? I’m thinking of past housing bubbles, stock market bubbles,the tulip craze, railroad stocks…they each burst with nominal prices dropping like mad.

I am fascinated by the arguments that people make to try to see if this time really is different. It isn’t. All excesses correct on the nominal side. It’s a law of nature.

Just look at a pendulum. As it swings so close to the right, you can almost convince yourself that if the wind blows hard enough, the pendulum will remain suspended in that position, on the right side. Perhaps a gust comes along and does just that. But no gust last forever. The pendulum follows the laws of nature and reverses course. Regardless of all the observers who questioned the move…

[powayseller]

zk – owning real estate in San Diego is very risky. Did you read Rich’s June 7 Voice article? Wow, talk about a parabolic price spike in SD housing! What percentage correction do you expect?

Do you think that the 2000-2006 real estate bubble is the only asset bubble in the history of the world which does not correct?

Read about asset bubbles. The same fear and greed permeate them all: fear of missing out, greed to get in. They all pop. Every one.

Perhaps some people cannot afford to rent at current rents, because their income doesn’t allow it. Their mortgage is less than rents. Or their home is paid off. Those people ought to stay in their homes. Everyone else: Sell Now.

[powayseller]

My motive is helping people.

Every person who sells now trades in potential bankruptcy for financial security.

This is the greatest gift I can give.

[powayseller]

I found a post from sdrealtor, writing that the UCLA Anderson group missed the 1990’s price bust too. They said prices couldn’t go down.

Submitted by sdrealtor on April 3, 2006 – 9:42pm.

If most people in SD sold who would buy their houses?As for the minds at Anderson/UCLA my favorite story comes from a colleague of mine. Those brilliant minds made a presentation to his company 2 months before the last crash in the early 1990’s and said that CA was recession proof and that real estate never went down. Unfortunately, he listened to them and lost everything he had. He’s still trying to recover.

[powayseller]

Carlsbadliving gave a helpful response.

[powayseller]

FormerOwner, welcome! Regarding point #2, someone told me yesterday that his friend kept refinancing his house to pull out cash to pay the mortgage. The last time he took out $200K, and that would make his mortgage payments and pay other bills for 2 years. His plan: in 2 years, when his house is worth $1.5mil, do another cash-out refi.

Can you believe this spending plan?

How many people are living like this, depending on rising home equity to pay their mortgages!

[powayseller]

John, also include “the”. You say the housing market…

Here’s an important point that none of us have addresed before, and is worthy of its own thread.

With the prevalence of 100% CLTV in 2 loans, there is NO PMI. No more insurance to protect the lender.

Under traditional financing, the owner put down 20%, or paid the PMI company to insure 20% of the equity. This protected the first lender from housing drops of 20%.

What insurance does the second lender have? None.

What is the effect of no more mortgage insurance premium?

[powayseller]

Thanks for your comments. I seriously believed, until today, the media reports with the reasons given for the market moves. It dawned on me these are the same people saying housing prices cannot go down. They are basically clueless.

Does anyone know what causes the markets to move? As you said, the global market has so many influences. How can one discern them all into one nice summary?

I bet the end of the Japanese carry trade is causing some of this. We’ve got $300 billion removed from the global markets in 3 months of 2006: March – June 30. Isn’t that enough money to move markets?

[powayseller]

sunsetbeachguy2 and 4plexowner, how do you think these guys could make an economic forecast based on $50 oil, when at the time of their writing oil was near $70? How reasonable is it for economists to be so off track to think that oil prices can emulate LNG prices? And how does this error in their oil price assumption change the forecast for a recession?

[powayseller]

sdrealtor asked me where I saw 10% price drops. Well, here’s one to point to.

Where does that put the “flat housing prices until 2011” group? At what point will they admit that prices are falling? Falling by 10% in San Diego?

Just because the median is up, doesn’t mean prices are up.

I’m wondering how useful economists really are. Who can count on their forecasts when they are blatantly ignoring reality? How can anyone say prices will be flat until 2011 when they are already down 10% in some neighborhoods?

I guess I’m wondering what it means to say that prices will be flat.

Was that a forecast of actual conditions, or just a numbers game, where you say they are flat because higher end sales change the mix of sales and make the median go up while prices are falling.

[powayseller]

I read the blog entry earlier today. Mish was hinting about the lawyer involved, and the insurance departments. Do you think we’ll see a class action lawsuit?

I had one problem with my house. The roofing crew was non-English speaking, and they didn’t put in the 18.5 sq feet of vents in my attic. When the inspector for my buyers looked at the roof, he saw I had only 3.5sq ft of vents. The blueprints showed 18.5 sq ft. The County Building Inspector defended himself in a letter I sent. The roofer fixed the problem. But this is the real issue: as construction boomed, contractors could not find qualified workers, and did quick and dirty training.

[powayseller]

Call Steven Kellman, an attorney who specializes in tenant law. He charges $200 for an office visit. He’ll advise you on your rights, and fire off a letter if any wrongs have been done. For example, if the property management company has any liability, he’ll know about it.

If your landlord refinanced the property AFTER you signed the lease, you cannot be evicted at foreclosure. If the lease is newer, the bank can evict you when they foreclose.

I’ve seen Steven Kellman for 2 different issues. As far as I know, he’s the only attorney who takes only tenants. He also has a column in the Sunday paper, and won numerous awards for his activism. He’s also a real nice guy.

Tenants Legal Center of San Diego
5252 Balboa Ave
Suite 408
San Diego, CA 92117

office 858-571-7100
info line 858-571-1166

[powayseller]

deadzone, how can you ride out squeezes? As the stock price rises, you have to buy it back at a certain point. I think that shorting was much easier 15 years ago, before most trading was handled by computers. The emphasis on technicals has changed shorting from a bet on the direction of a company’s outlook to a casino where computers trade on every little swing, often making a winning idea turn into a loss.

As I said before, even though I am certain that builders and lenders will lose a lot of money, I am not certain that I can make money shorting them, under the conditions prevalent in today’s market. Only because of the way the exchanges work and the sophisticated players.

We haven’t heard from RS. I wonder if he changed his mind about shorting and is getting the put options instead.

[powayseller]

I’m afraid to short. I won’t do it.

I believe homebuilders, retailers, and lenders will be down a LOT over the next few years.

But I know there will be rallies inbetween the downs.

The rallies can cause a short squeeze, and the big traders know how to kill a small guy like me.

I won’t take the risks.

I would consider an inverse fund, but don’t know of any that short real estate. The ProFunds is a REIT inverse fund, so that doesn’t qualify.

[powayseller]

Oh, and this refutes another of Thornberg’s comments:
“Taxable sales growth should also slow, though strength in tourism and professional services should boost the economy.”

Tourism is not strong, is it declining.

I will post the employment report soon. I’ve got the data together, but need to write it up. Hint: expect 6.5% unemployment in 5 years.

[Author]

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