[powayseller]

The San Diego Housing Commission states in a fact list that the median household income in SD County is $64K, far short of being able to purchase the median priced home. I remember once reading that a family needs to make $22/hr to afford to live here modestly, in an apartment. Although you make a decent wage, it’s hard to afford living here. You make more than I made after college in my first software job.

Per capita income for San Diego (city) was $35,600 in 2003.

We have the same problem with getting ahead. Too much of our income goes to housing. The only way to get ahead financially is spending less than you earn. The major impediment to that is the high cost of housing.

[powayseller]

If we eliminated interest only and option ARM financing, and compared our mortgage costs on the basis of the payment on a 30 yr fixed loan, then the mortgage servicing costs today would be much much higher.

Funny post.

I would write the NAR, but it would be just a waste of time. Think of it this way: if we worked for them, what would we say? If we spoke the truth, we’d be fired. Their job is promoting real estate, not being an economic forecaster. Unfortunately, they’ve done an excellent job of convincing us that they know it all. Each time I tell someone not to buy RE now because it’s overvalued, I get the question, “Are you a realtor?” I’m going to start saying, “No, I can’t. I know too much…”

[powayseller]

Rich, a smart guy like you can make the right moves to protect himself in a rapidly changing economy. But most people are average, or below average. They can’t adapt. Your entire software group cannot become design managers or team leaders.

Only a few can rise to the top to manage the masses. So my question then is: what should happen to the low-level coders and software testers if they are outsourced? Should they work retail, mow lawns? And whom will you manage if your employees are stationed in India? Will you have to learn Hindi? What if your customer is outsourced, and you have to make design decisions with your customer in Bangladesh?

I don’t see how this can end well for the US economy, when only the smart ones can keep their good jobs. If we did this in health care by providing access to healthcare to only the most healthy (diabetics and those born with genetic illnesses are denied insurance coverage because of pre-existing illness, doctors might say it’s not worth spending $200K on a preemie) it would be considered abhorrent. As a society, we feel every life is worth saving.

But then we don’t seem to care about saving anyone’s means of livelihood. Basically, what can 75% of people who are average or below average do to adapt?

My family is not affected by outsourcing, so this is not a personal issue. I’m just wondering how many American jobs will even exist in 20 years, and how our society will be affected if the majority of intellectual jobs are moved overseas, and we are left only with lower-wage service jobs in health care, retail, restaurant, travel, repair of stuff (car, clock, house), pet sitting, etc., basically anything where you work on/for a human or his stuff.

Did anyone read Fed Reserve Governor Kohn’s remarks today, where he said the Fed only manages the macroeconomic stability, not asset stability, and that people shouldn’t expect the Fed to protect their recent housing equity gains.

Sdkid – so much for a dumb question…

[powayseller]

San Diego wages are not higher to offset for the increased cost of living. The U-T ran an article about this a few years ago, calling it the “Sunshine Factor”. Most people here earn less, but pay more for the priviledge of the weather. They gave examples of wages for plumbers, engineers, and I was surprised that you really do earn more in other states. I can’t remember the details.

Before we moved here from Phoenix, I did a superficial study of wages in San Diego, comparing government jobs in both cities. Surprisingly, they were about the same, although at that time the cost of housing was double in San Diego. But wages had not increased to keep pace with that. At that time, and until a few months ago, I though everyone around me was rich, to be able to buy those expensive homes plus new cars plus vacations plus remodels plus send their kids to too many activities. Now I realize they were all getting low interest loans.

Has anyone noticed in the last few months, so many Hiring signs at retailers? Almost every store I go to, whether grocery, furniture, cell phone, is hiring. This couldn’t be due to any economic recovery, but is probably related to the exodus of people leaving San Diego, leaving their jobs behind. Jobs are harder to fill, as we can’t get people to move her to fill them.

[powayseller]

The chart that says it all to me is the one in his Bubble Primer, median house price/per capita income, going back to the 1970’s. I’d like to see ongoing updates of that chart.

[powayseller]

I see.. if we impose tariffs, China would export less, having a lowered need to buy dollars. The same result occurs if spending slows due to declining home values/higher interest rates and lowered home equity withdrawals. However, don’t the dollars they buy just cancel out the dollars we spend, so as we buy fewer Chinese goods over the next few years, China buys fewer T-bills. Whether we buy $60b/month or $30b/month from China, they would buy either $60bil/month or $30bil/month in T-bills. They are financing us either way.

I know why tariffs are bad, but my thinking was that American companies can not hope to compete against Chinese companies, regardles of the level of innovation. Every idea must be manufactured, and all labor which does not absolutely require face-to-face customer interaction is at risk of being exported. Even radiologists are at risk of losing jobs, as American hospitals electronically transmit their images to Indian radiologists.

Unless you are dealing directly with an end-user customer, your job can be outsourced to India. It doesn’t matter whether your product is good or bad. You can have a clever idea for a new asthma drug, but then the manufacture takes place in Japan. You can invent a fabric which doesn’t wrinkle, but the Chinese will manufacture it. You can design a car with lower gas mileage, but it will be made in Taiwan.

Regardless of American ingenuity, the lack of tariffs will cause all work to eventually be done overseas. Unless that work requires you to interact with the customer or know specific local regulations, such as engineering, law, medicine, your job can be outsourced.

Is anyone reading this certain that their job is safe against Chinese competition? Wouldn’t any of you feel better with tariffs, even if that means you must pay a little more for certain goods to cover the high cost of health care for American workers. With tariffs, we give up having a lower cost for our goods, but we gain the security of keeping American jobs in America. With the current system, we are going into debt financing China’s emergence into an industrialized nation. They are competing with us for resources (oil, commodities, goods), driving up the price of resources for everyone.

I thought about this many years ago, and felt that it was only fair, humanitarian, for us to lower our standards of living and wages until it meets the gradually raising standards of 3rd world countries. While a humanitarian and selfless goal, it is disaster for our economy in the long run. American wages must be reduced by an amount equivalent to the rise in Chinese wages, a zero sum game.

Why couldn’t we just close our borders, and just buy and sell things to each other?

[powayseller]

As far as tariffs as subsidies, I see that point, but the US has no problem with subsidies. Look at the huge handouts they give to farmers. I don’t even know of all the industries that are subsidized, but it is really unfair. What US corporation can compete against a Chinese company paying $3/day? The tariff would prevent deflating our wages to become on par with the Chinese wages. This is where we are headed, I think: US wages will come down, Chinese wages will come up, until they meet in the middle. Indians are already catching up in Engineering. My friend is constantly concerned that her software management job will be outsourced to India. It seems that import tariffs would encourage us to buy American-made. Perhaps we’d be better off if we all drove GM cars instead of Toyotas? We wouldn’t have the huge layoffs in Detroit.

[powayseller]

Any question about bonds shows you’ve got brains, since most people don’t even think enough about them, to even ask a question. Most people don’t even know what they are. I believe this is not taught in high school.

Rich, I read these articles again, and I have 2 questions: Why do you say that tariffs are misguided? It seems that tariffs would discourage Chinese imports, causing us to buy American. A good situation for US business, right? Second, what do you think is the effect of Iran selling oil in euros, and the thwarted port deal, assuming Middle Eastern countries got the message we’ll take their $$s only if they are used to buy treasuries, but not to buy hard assets. Could either of these devalue the dollar?

[powayseller]

I’m not sure how rental housing affects the value of housing. I think the City of San Diego has good intentions, but wonder how they will pay for affordable housing plus all those promised retirement benefits.

[powayseller]

Very interesting. I made a note of the economists mentioned, so I can read further about them, and of the funds. I’ll look for Talbott’s book, too.

[powayseller]

The OCC guidance is under review and open to comments until March 29, 2006. I wonder if the lenders have to follow that, since they are just recommendations, and no penalty is given if those are violated. As long as investors buy the loans, what can the Feds do to stop it?

The OCC document (12/19/05) is rather inert, and does not specify specific risk targets or specific penalties.

The day after the OCC guidance was issued, a mortgage loan officer (housingbubblecasualty.com) wrote on his blog that his company removed BK seasoning! That means that 1 day out of bankruptcy they will give you 100% financing. They didn’t sound too scared by the OCC.

Check out his website, where in January he writes that lenders’ standards keep getting lower (BK, no tradelines), but the investors are more carefully scrutinizing the stated income applications. They are not as easily believing the stated income of the borrowers, and along with the rising interest rates, fewer borrowers are qualifying. One account rep was reprimanded by his manager for not being aggressive enough in the grey areas.

So although I wish the Fed’s guidelines would cause lenders to tighten standards, the evidence for that has yet to come in.

If the Fed had any power at all, you’d think they would have reined in Fannie Mae. What company could admit they have an $11billion accounting problem, are violating GAAP, and not submit financial statements for 2 years?? Senator Rudman formed a Committee to investigate and found nothing further wrong. Although his report is less than a month old, today Fannie Mae admitted that they have many more problems.

Although Fannie Mae operates under a government charter, the Feds have been powerless to rein them in. How much power do they then have over other mortgage companies? Perhaps the power is there, but it boggles the mind that they are choosing to not use it.

By the way, today another person I know showed up on the foreclosure list I track. The fallout from this loose lending is going to happen. The standards, even if they are implemented, are 4 years too late. If the Feds had enforced these standards in 2001, this housing bubble would have been avoided, and we wouldn’t have to witness 10% of our friends going into foreclosure over the next 6 years.

[powayseller]

You’ll get some great feedback from the investors and bankers here.

In the meantime, I know that the IRS considers unpaid mortgages as income, and you are taxed on that. How would you like to pay taxes on the $200K you didn’t even earn while you are in bankruptcy? Plus, you’ll be unable to get another mortgage for 7 years. As lending standards tighten, you won’t qualify for the “1DayOutofBK.com” blue-light special.

Can your friends handle the mortgage in 2 years when it adjusts, and payments double? Are their jobs secure to handle the recession? Remember, SD’s economy is built around us buying/selling homes to each other, and servicing our insatiable demand for clothes, cars, trips, food by spending our home equity. If your job might be affected as these industries consolidate/downsize, be wary of taking on a large mortgage.

[powayseller]

In 8 years, your construction cost went up 2x, while your land cost went up 5x. Did construction costs increase at a constant 9% annually, due to tight labor markets, or was there a sudden jump in the last year due to hurricane demand effects?

Any permanent rise in cost of construction cost would lead to a permanent rise in the value of housing. The speculative element, and the artificially high price of land, which has risen despite any change in fundamentals (population, wages), will be eliminated.

So when the bubble bursts, perhaps we’ll be at a higher plateau? Or will construction costs decrease as the labor market weakens and the temporary hurricane effects dampen?

[powayseller]

Interesting idea!

This will work only if your friend plans to stay in that condo until prices go back up to today’s levels, i.e. 12 years. If they’re a young couple, perhaps a baby will come along in 3 years, and they’ll want to sell and get a house with a yard. They’ll be upside down on the mortgage. They’ll sell for $200K, and owe the bank $400K. Then they’ll get the $350K house w/ yard, and get the mortgage on that. Now they owe $550K in mortgages.

Even if they stay for 12 years, there is still the interest rate risk. I look at it this way: I am 100% certain that housing will crash, and I’m 80% certain that it will crash by 50% over the next 4 – 6 years. However, I have no idea what the Fed will do with interest rates in 2010, and neither do they.

If housing falls by 50%, interest rates must increase by 50% from today’s levels to break even on the payments, so they must go from 6% to 9% as you said.

If they go higher, your friend wins. As long as they can afford the payments when they are fully adjusted, your friends might be okay with that strategy.

Anyone financing with an ARM has a high likelihood of edning up on foreclosure.com.

Each month they delay their desire for homeownership (delayed gratification, as I teach my kids constantly when they want something), the cost of the condo will go down by $5 – $25K. By fall, that condo might be only $325K, and we know interest rates are not going over 5% by fall.

In closing, they must meet 3 criteria to win this game. If they have a fixed rate mortgage they can afford for at least 12 years (or an ARM where they can make the full payment after it adjusts) and they are guaranteed secure jobs/living situations so they can ride out the bubble, and interest rates go up over 9%, they win.

Best of luck to your friends, and congrats on a well-thought out strategy. It’s a gamble, but it might work for them. I’d advise them to wait. (NOT INVESTMENT ADVICE)

[powayseller]

North County Jim said, “I don’t think he’s including land price appreciation into his increase in construction costs.”

It would be highly unusual for a builder to exclude one of the most, if not THE most, expensive component of construction, when he gives his construction prices. When we finished building our house, in September 2005, the land cost was 30% of the appraised value. It was probably 25% of the price when we started construction. Perhaps a builder’s costs would be slightly less, as he buys in large quantities.

Pattinson states that cost/sq ft has been increasing over the past 2 years.

I’m saying that the increasing cost of land over the last 2 years has been the major contributor to that.

As far as the rest of his speech, I’m not sure how much to believe. Builders try to make us believe if it weren’t for the environmentalists and government regulations, they could build affordable housing. I don’t buy it for a minute. It’s possible to build cheaper housing, but hey, then they’d actually have to reduce their profit margins!

Has anyone checked on the rising profit margins of public builders?

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