I’m breaking radio silence, finally, after having sequestered myself for a week and a half to cram for a securities licensing exam. (The exam manual suggested studying for 4-6 weeks vs. my 1.5 weeks, hence the cramming). Anyway, said exam was successfully passed yesterday, so I can close the door on that particularly onerous 10-day period of my life and get back to writing occasional content for this site.
I did check the forums from time to time during my absence, and now that I have a minute I wanted to revisit a really interesting article someone posted. The USA Today article, entitled "Buyers in more markets find housing out of reach," chronicles the plight of a San Diego postdoc who bought a home with 100% financing, whose PITI eats up 70% of her take home pay, and who has among other things taken to selling her fertile eggs in order to make the mortgage payments.
It’s another article on Ye Olde "Housing Affordability Crisis," with requisite fretting about the question of "What Should The Government Do?" This is of course an entirely flawed framework with which to address the situation, as A) the "crisis" is only a crisis to the extent that you pretend the gigantic gap between wages and home prices is sustainable and B) government attempts to legislate away the laws of economics are what got us here in the first place.
But the article is very interesting to me for a different and entirely unintended reason. Our egg-seller’s tale makes it crystal clear that people are still panic-buying.
After all, how else can you explain the actions of an otherwise mentally sound individual who could easily afford to rent a place, but instead chooses to get so deeply into debt that the monthly carrying costs eat up 70% of her income? There is only one explanation: this woman is terrified of not owning a house.
A few people here and there have become wise to what’s really going on in housing, but the irrational, "get me in at any price" mentality is still out there in spades. Imagine what it will be like when these last optimistic stalwarts finally cease to believe that home prices will rise forever. Now, imagine what it will be like when they apply their same infinite-trend-extrapolating mindsets to falling home prices. That’s the kind of enormous sentiment shift we will likely see in Southern California in the future. But as this story shows, and despite victorious declarations of a soft landing, we are nowhere near that point.
My observations are the
My observations are the same. Homeowner frenzy is still out there. The only reasons that sales are down is because of the population exodus and rising interest rates.
It started when higher interest rates reduced the number of first time buyers, and the ripple effect broke the chain. Now we’re seeing the mid-priced homes not selling because the move-up buyer couldn’t sell his home.
But the desire to buy homes is as strong as ever. Even people on this forum want to buy, but are waiting for prices to come down. I don’t have any desire to own a house anymore. I love renting a house. Owning a house is a big turn-off. Does anyone else feel this way?
Congratulations to our fearless leader for passing a test under intense time pressure. Way to go Rich!
I temporarily don’t want to
I temporarily don’t want to own a house, but thats because I am in Berthoud until the 4th. I am sure once I get back to SD that desire will re-assert itself in a most annoying fashion.
Josh
Rich, Congrats on passsing
Rich, Congrats on passsing the series 7, my wife took hers 3 years ago and passed, it is a lot of stuff to review.
I agree the home prices have
I agree the home prices have gone through the roof and it is cheaper to rent than own the same home. With little or no price appreciation, it does not make sense to own a home at this time.
I purchased a home few years ago in an area where the price appreciation had been 6% per year (on an average). The market is so bad that I am unable to sell the house. Just couple of viewings leave alone any offers. I moved to a place where the prices went up by more 120% in the last 6 years. I am renting in the new area. Home ownership is definitely has the intangible warm feeling. However, one should not drown in debt just to own a home.
Did you “sit the 7”? Or was
Did you “sit the 7”? Or was it another exam? I took the 7 in May–it was a bear (but I passed!) In any case–congrats!
Knox Massey
2006 has been the first year
2006 has been the first year showing true signs of a slow down after a very long irrational run. The Panic buying mentality set in during 2003 and escalated into 2005. I guess it is like a moving train. IMO RE is at an almost surreal point right now with permabulls still blowing their horns, women selling their fertile eggs to make their mortgage juxtaposed to rising inventories, falling sales, now falling prices and a nervous Wall Street that is pricing in a housing deep freeze into HB’s. I guess my approach is to just sit back grab a bag of popcorn and watch the show. I think the UCLA Anderson forecast said that it takes 4 to 6 quarters for a contraction in RE to be felt in the economy. It is when people start to feel the impact of a slower economy that the fear of not owning a house will be replaced by a fear of holding one’s job. That’s when the true correction will take place and that is the crux of the argument between a soft landing and a hard landing. I think by this time next year is when we will see a profound shift in psychology.
Personally I would love to own my own home but I won’t do so until the home price to rent ratio becomes sane. My primary motivation for sitting on the sidelines is not so much wanting a bigger house for less money but minimizing the potential risk of a huge loss. People in SoCal are still drunk from their home equity gains, that euphoria is the greatest point of risk.
Ah the 7 and 63, I remember
Ah the 7 and 63, I remember that from another life time :). My wife still gets the ‘I want our own home’ wistfulness from time to time. It’s not an easy thing to detach yourself from the emotions associated with owning a home. But, it’s an easier pill to swallow when you work out the numbers and see what you’d have left to live on.
I recently pursuaded a friend from stretching too far for her home. She bought her townhome 3 years ago in Mira Mesa and has done pretty well, but she now wants to move into Carmel Valley and get a $700,000 house. Even with the $200k in equity she’d be looking at a hefty mortgage. I had her sit down with me and figure out how much they’d have to put into their PITI each month and determine what they’d have to live on — not to mention she’d have to rule out quitting her job and starting a family while her husband worked.
The pressure of buying a
The pressure of buying a home is mostly coming from my wife. We sold a townhome and cashed out this summer. Lucky us.
We’re going to rent 2 bedrooms condo or small house. Depend on the housing market, if the price ‘make sense’, we would buy. Otherwise, we would continue to rent indefinitely.
We love to own a home once again, but we are not going to spend out whole life paying for some greedy mortgage bankers’ retirements.
Why does your wife want to
Why does your wife want to buy? Renting is better than owning, and I built a custom home last year and sold it after living in it only a few months. It was real nice home, in my opinion. I spent months designing my kitchen. Custom cabinets, granite from Iran (green), a Miele steam oven. Most people have never heard of a steam oven, but in Europe they are common. It made the most delicious food. The high cost keeps people away from it. My laundry room faucet is the same one that’s in the kitchen in my rental house. What this rental has in the kitchen, I put in my laundry room. I had Grohe pull-out spray faucets. A real nice kitchen. Marble backsplash. I did a fantastic job in my house design. Real tasteful, elegant. My family loved the house. But then, the bubble…. We had to use common sense and reason and take advantage of the financial opportunity. I didn’t realize we were in a housing bubble until September 2006, after we had moved into the house. I really had no idea about any bubble. I was ignorant.
Now, I love renting. I love calling the landlord to fix problems. Now the common fence needs replacement, and we installed an A/C. THe landlord pays $800 for the fence repair, and half the A/C. He’s paid for many smaller repairs. Meanwhile, I earn 5% interest on my equity which I cashed out.
What is the deal with wives wanting to own a house? My friend cashed out 3 years ago, a little too soon. She got tired of renting, and they closed on a house this month. Too bad, right off the peak. She wanted to have her own house, so she could paint. I say, “Paint the rental”. It’s cheaper to throw the money into the rental house than to lose equity in a declining market.
Let her plant a garden. Spend a few grand on the place. Why not?
I also have a question why you think you would find a house that makes sense before 2011. It ain’t gonna happen. No one is giving away their homes, and prices are still too high. I’m waiting for the bottom before I buy again. I would buy only for one reason: when we are retired, we have a house we own, and don’t have to pay rent. But for no other reason. I have a thread from a few months ago, where I wrote why renting is better than owning. Just find a rental you like, with a stable landlord who is not going to face foreclosure.
When inventory decreases, DOM goes down, and prices start climbing back up, then it’s time to buy. By then, it will probably be 2010 or 2015, and lenders will be tight and want 5% – 10% down, as they did in the 1980’s. RE will be a dirty word, and there will be fear of buying. People will still avoid buying, because they think prices are continuing to drop. The masses won’t know about the turnaround, and that prices are going back up, because the masses are one year behind. You will need the services of an informed realtor to let you know when the turnaround has come, or a site like this. You’ll need data. So you beat the masses, and buy at the bottom.
When you buy at the bottom, you can get a 15 year mortgage instead of a 30 year. Or for the same 30 year mortgage, you can get a bigger house or better location. More for your money. It is worth waiting. Because life is sweet, regardless of whether you rent or own.
I hope that women are smarter than what I’ve been hearing about lately. I keep hearing that the woman wants to buy a house, all finances and bubble logic be damned. This makes women look real bad, I think. Where is the common sense? Understanding? Financial savvy? We need more women to act with reason, not emotion. I am sticking up for women everywhere, to say there are plenty of us who understand finances. hs, PD, lostkitty, and I. Maybe more?
Great website Rich.
It seems
Great website Rich.
It seems to me that the solution to high property taxes and home prices is zoning.
I want to build on my lot by the beach (in florida) and am constricted by zoning to build a SFH. I also am not allowed to build on the first 25 foot so the public can look at a huge front yard (on their way to the beach).
I would love to put garages right along the street and build a four-plex for my extended family or renters. I´d still have room for a pool and a garden in the backyard! I sure don´t need a 4,000 to 6,000 square foot home for myself!
I guess I understand that my neighbors fear capitalist-pig landlords who won´t spend a penny for upkeep, so they prefer SFHs. But why are Americans so in love with the public front yard? Remember the scene in “My Big Fat Greek Wedding” where long-time Americans thought the Greek immigrants were nuts actually USING their front yard for a party?
fuggy
Rich,
First off,
Rich,
First off, congratulations on passing the exam! It’s great to see you opening up new possibilities in your professional life. You will, no doubt, be very successful in whatever you do.
Yes, we remain at that “permanently high plateau” here in SD. It’s amazing, with all the information out there, that there are still people who don’t know about, or care about the bubble. We’ve met quite a few, and they still brag about how much their house is appreciating and how we ought to get in now that the market is a bit slower.
Let’s hope Japan’s tightening will have at least some effect on this housing/credit bubble — and soon. Somehow, sanity needs to be restored. While doctors are being priced out, there are still waitresses, gardeners, maids, etc. who are still able to purchase using suicide loans. I just don’t get how the “powers that be” can see this as a good thing. Why isn’t this being addressed publicly? We need Bernanke, Pres. Bush…someone, to get on TV, each and every night, with warnings to the public about using toxic loans to stretch into buying a house. I cannot see this ending in anything short of tragedy for many, many families.
Again, thank you for your very informative blog!
Best Regards!
We need Bernanke, Pres.
We need Bernanke, Pres. Bush…someone, to get on TV, each and every night, with warnings to the public about using toxic loans to stretch into buying a house.
And oddly, a couple of years ago (can’t remember when), Greenspan encouraged everyone to refinance and get ARMs so they could get a lower interest rate – at a time when 30 year fixed loans were REALLY low. I guess it’s not so odd when you look at what else Greenspan did in the last few years. I suppose as long as the recession happens after he retires, then that’s all that matters, right?
I just started a new job, and went for lunch with my new boss. He just bought a new house in Escondido and told me that with the market right now, that now is the time to buy. When intelligent people are still telling me this kind of thing, I have to guess that it will be a long time before the masses turn the corner. As others have said, it could take a year. However, if there a few successive and LARGE drops to the median price (which is all anyone cares about) then this could get the attention of the press and the people. Popcorn and comfy chair awaits….
I went to dinner with a
I went to dinner with a friend from another bubble area, New York City. He’s a very intelligent, educated person who bought his 2BR condo in Manhattan about a year and a half ago. Despite all the warning signs, he thought there would be a soft landing for a few years followed by more appreciation.
People get too defensive if they own homes and they hear talk about a real estate bubble. It’s as though they can prevent it from happening by failing to acknowledge that it is a possibility.
What are some of the
What are some of the benefits of taking the series 7? What can it be used for? Is it possible to take the 7 and the 24 principal exam and then bypass broker fees for transactions? Or act as an independent broker/trader/consultant?
-re analyst
Thanks for the link to the
Thanks for the link to the USA article.
I don’t know if I’d call it panic buying or if I really contribute it to the need for instant gratification that drive the trouble with credit cards.
Take a drive through many neighborhoods and what you see is house after house where the families have spent their appreciation providing Best Buy with record profits by having to have that big flat panel HDTV above the fire place.
And as side note, go ahead call me bitter, but can someone please revoke Ms. Henderson’s Doctorate of BioMedical Engineering for general stupidity of taking a loan whose PITI that consumes 70% of her gross income.
Your comment highlights
Your comment highlights “panic buying” at a cusp just below the peak of the market, just prior to the chasm below. Such extreme, high amplitude behavior (eg, prices, valuations, credit risk, unabashed consumerism, etc.) has many underpinnings: historically low interest rates; excessive FED liquidity injection into the economy; mortgage innovation which verges on irresponsible bank lending behavior (this is worthy of another discussion that people are not buying their homes but simply leasing even with a mortgage); the large role played by speculators in home flipping; and finally the new idea that mortgages are never to be paid off, simply refinanced or flipped. These factors have all contributed largely to the enourmous speculative bubble in housing that currently exists in many sub markets of the US.
However, all of those are old points already made, ad nauseum. The new point I want to make is that another factor has also driven the insane speculation in housing over the past 6 years. During this period, the percentage of single women buying property has never been higher. We recognize that women (whom we love) exhibit more volatile emotions that men, as a gender difference, for reasons that are well documented. We also know that women cherish a “nest” and the security that it represents, even more than men do. We also know that women, being slaves to fashion and other herd behavior in trends, are hard wired to jump on band wagons.
For all the reasons stated in the past two paragraphs, is it any wonder that this cycle in the real estate boom has exhibited trends which are historically more extreme that anything in recorded US history? And since every action creates an equal and opposite reaction is it any wonder that we will see an historically precedent-setting decline in property values in the markets which have exhibited the most froth?
I know that this missive will attract alot of criticism since it is not PC to evoke gender differences in any dialogue in America today. However, many of the most important social, political and economic turning points in a society are punctuated by extremes of one sort or another. It is with this realization that I pen this point which I have never heard expressed before.
I welcome any and all response.
Renaldo