As I mention at the beginning of this week’s voiceofsandiego.org column:
I like to think of this column as a subject-specific version of Mythbusters, albeit much more depressing and without so many explosions.
To that end the next few columns will attempt to bust, as it were, common myths about the San Diego housing market (and for that matter most housing bubble markets).
The myth-of-the-week is the idea that there isn’t a lot of speculation in the housing market. This one is often trotted out by real estate analysts as justification for the idea that San Diego is not at risk for a housing decline. But the truth is that San Diego enjoys housing speculation aplenty.
Interestingly, my editor at voiceofsandiego.org (who is, incidentally, awesome–if you have any interest at all in local politics you should check out his columns) hadn’t heard the "no speculation in San Diego" line all that much and wondered how widely-held this belief really was. I personally have read or heard it a million times, often as a cornerstone of the bullish argument being put forth, but I admit I am a bit of a corner case. I’d be interested to hear what you all think—feel free to leave comments as to whether and how often you’ve heard this one. Examples of its use would be appreciated as well…
April 13, 2006 @ 10:22 AM
The biggest contributor to
The biggest contributor to the myth of little speculation in San Diego has to be the shills at Dataquick.
The following is from Dataquick’s “California February Home Sales” report:
“Market stress indicators are still very low: Down payments are
stable, speculation buying is moderate…”
This statement, with a miniscule variation, has appeared in the
end paragraph of every Dataquick “California
report since I can remember. The miniscule variation being
the recent substitution of the word “moderate” for “low”.
Now the NAR ‘fesses up that 40% of home buying can be lumped
under speculative buying. Did the NAR decide to come clean
before Dataquick, the entity that provides it the numbers?
Rich, recently you called the NAR out for suspect application of math. I believe Dataquick must be in included in the ranks of Suspect Statistics. Their hotly anticipated monthly reports are worth nothing more than their data matrices. Their analyses are at least as
suspect, misleading and mendacious as anything out of the mouth
of David Lereah.
April 13, 2006 @ 11:59 AM
Personally, I don’t
Personally, I don’t know very many people who deny San Diego is in a housing bubble. The housing bubble has gotten far more publicity in the last couple of years then the speculator/real estate investor world.
There are 9,600,000 results when you Google “housing bubble”, the “housing bubble” has made the cover or been featured prominently in every national business or news publication and even Rich Dad himself (the original poster boy for real estate investing in the 90’s) has declared a top in the real estate market. (See his recent columns on Yahoo Finance where he clearly states the market is a bubble.)
Witness right here on our forum when poor SdRealtor who chimed in with a belief that only a 20% housing decline and everyone vilified him as the enemy.
The fact that sooooo many people are believers in the housing bubble is the biggest peice of this whole equation that gnaws at me…my experience in markets has been that the best trades are the ones that start when few poeple are expecting it….I want to try and make money from an eventual market correction, but I just don’t think its going to be playing out quite as simply as most might think…
I have many family and friends in San Diego, including realtors, and not a single one of them would deny the housing bubble.
I also find it ironic that the vast majority of readers of this forum are buyers waiting to buy. 🙂 Alas, I have to lump myself included in that group too…
…I’d really be interested to know how many speculators are still active? Seems the sales volume decline probably reflects a good exodus of most of them….
April 13, 2006 @ 12:41 PM
I disagree slightly.
I disagree slightly. Whereas most people have accepted the word “bubble”, most banter it around as if it means we’ll have a slight correction and flattening out, or slight increases. Nothing could be further from the truth!
When a bubble pops, you are left where you started, as if you’d never put air into the balloon. That means a correction of 50% in bubblicious (gosh, I LOVE that word!) San Diego. Bubblicious San Diego.
How many of our fellow citizens, friends, and realtors believe in the word bubble as it’s truly defined?
And how many people understand the dependence of our economy on RE?
If you understand both, you are way ahead of the pack.
If you see the next bubble is in commodities, you are even more ahead.
You see, the masses are still buying RE. They’ve been slowed down by higher interest rates, but the desire is still there. The masses don’t get it yet! They’re still out shopping, not saving for tomorrow.
I met a realtor friend today, and she told me a new trend is that buyers are selling their homes and renting, so they can come in without contingencies. In today’s market, sellers don’t accept contingencies. We also discussed the seller psychology, and how they insist on keeping their price high. Believe me, most folks are not even aware of this bubble. I asked her what the seller said to her Excel presentation, meant to persuade him to lower his sales price. She said he and his wife nodded politely, said it all made sense. The next day, when she called to ask if they would lower their price, they told her they decided to keep it as is. So, who really believes in a bubble???
April 13, 2006 @ 1:27 PM
I agree wholeheartedly with
I agree wholeheartedly with your comments, powayseller.
I just wanted to add that the talk of a bubble in the stockmarket around 98-99 did not prevent the stockmarket crash of 2001. I recall a lot of talk of a possible stockmarket crash around that time.
April 13, 2006 @ 1:35 PM
as someone that’s been
as someone that’s been looking at rentals in the North County region, here’s what we found:
a vast majority (~75%) of rentals on craigslist can be found on the MLS, meaning it is either an investment or a move-up.
there are lots and lots of brand new or 1-2 year old housing for rent, especially in San Marcos. Unless the down payment by the investor was in the 40-50% range, all will be upsidedown with the amount of rent charged.
even with the market condition, there are still investors grouping up and buying purely for “appreciation” and flip-potential.
April 13, 2006 @ 3:47 PM
Powayseller, I’m very
Powayseller, I’m very surprised at what your Realtor friend said….along the lines of “People are selling their homes and renting so they can make offers without contingencies as sellers don’t accept contingencies”. This was true about contingent offers two years ago when the market was super hot but sure isn’t true today…Sellers will take any offer now if the price is decent. Wouldn’t you agree?
April 13, 2006 @ 4:52 PM
Sellers don’t want
Sellers don’t want contingencies, because it takes so long to sell a house, and the domino effect has ruined many escrows. I was lucky when I sold my house, in that both offers had no contingencies. Several of my prospective buyers also had no properties to sell.
Another friend just went into escrow in Poway, and she told me that her offer had no contingencies. The buyers are realtors who own a house, and made the offer, contingent on them selling their house. My friend countered, saying she would not accept waiting for their house to sell. The buyers took out a HELOC, so they could qualify without selling their house.
Neighbors on my street lost their new house in Temecula, because they couldn’t find a buyer in time. Now their house is pulled off the market.
It makes sense, in a declining market, that sellers want good offers. Sellers know how long it takes to sell a house, and they don’t want their escrow to fall through just because their buyer’s house didn’t sell. How does the seller know if the buyer’s house is overpriced, and whether it sits on the market 6 months?
In my post above, I was just repeating what my friend told me, but it is also what I experienced myself and heard from another friend.
April 13, 2006 @ 1:39 PM
You confuse me
You confuse me RightSide….
I thought you were a “sophisticated investor” who is “wealthy” and can “afford to lose all of my investment”? What are you waiting for? By all means..dive right in!
Just in case you forgot, here is an excerpt from your post in the Bressi Ranch forum topic several days ago:
“I happen to be a sophisticated investor and even though I think there is a high probablity of a signficant housing crash, there is also a good chance I will buy a million dollar plus home in San Diego in the near future.
Because I have a young family and I want to own the house I raise them in. I’m wealthy and I can afford to lose all of my investment. I do so with full knowledge of what I’m spending my money on. If there is a housing crash, I will buy another couple houses when it gets ugly and average down my exposure to the SFR market in San Diego, or use the new futures market to hedge my investment if that emerges as a viable platform.”
Still would love to hear what makes you a “sophisticated investor”….
April 14, 2006 @ 9:13 PM
What confuses you? I’m not
What confuses you? I’m not waiting to buy because of the market conditions, I’m waiting until I find the place where I want to live…hopefully before next winter, because its cold up here…
I stand by all my comments, they are factual and honest and not in conflict with anything posted here.
Although I can only post from time to time, I previously have made some specific suggestions on how someone can make a large amount of money if and when a housing crash occurs. (one of my favorites, that I’m working on right now is to short LEND) I plan to share other ideas along these lines when the time is right and hope that others can provide some good critiques of those strategies and perhaps even choose to take them for their own benefit as well. If there is a housing crash, gold may hedge a bit against inflation, but its going to be in the equities/futures market where real money is made. I realize saying I’m a sophisticated investor might make you scoff…I don’t know what you want me to say, I’ve made multiple millions in the equity options market and was at one time a professional portfolio manager for a nationally recognized mutual fund. Believe what you want…
I don’t happen to be emotionally vested to any one particular idea or outcome about this housing bubble. Keenly interested yes, emotionally, no. The fact of the matter is, I am a HNW individual who is going to buy very soon in the San Diego market. I’m not an anomaly and not everyone who is buying in the $1M+ price range is the dumb lemming you might like to think to fit your scenario of what is happening in the market. I’m not buying a house as an investment, as I said in the previous post, I’m buying a house because I enjoy the benefits of home ownership that I think are intangible. Do I recommend other’s buy? Absolutely not. I’m explaining a personal situation and was compelled to bring it up because I got tired of hearing a bunch of people speak like they know everything and spout off a bunch of inaccurate facts to curve fit their own opinions.
I happen to be personal friends with many home onwners in San Diego that have very large ($5M+) exposure to the SFR market and not a single one I know is considering selling…yet we often discuss various ways to profit and hedge this exposure and I assure you that they are under no illusions about how much their housing assets could decline in value over the next several years.
Go figure, the really rich smart people in San Diego are not selling, yet our resident desperate housewife was quick to unload her 2500 sq foot house in the desert….What’s that tell you? Maybe if the housing futures market takes off, I could have shown her how (including ways to avoid backwardization effects typical in far out months in the futures market) she could have hedged her risk against a price decline and let her stay in the house she built…she said herself that she would have kept it had it been fully paid off.
April 15, 2006 @ 7:18 AM
I’ve read so many risky
I’ve read so many risky things about shorting, for the average investor. It’s too bad that shorting isn’t as simple as going long, because I have a long list of companies I would short. I’ve been told about the “short squeeze”.
It’s too risky for a desperate housewife like me. Humbly, thanks for the compliment..I’m just as good-looking as those gals, and still love the attention that brings.
April 16, 2006 @ 9:07 AM
You can hedge your short by
You can hedge your short by buying call options.
Here’s how it works: say you have shorted a stock that trades at $10. A call option with a “strike price” gives your the right, but not the obligation to purchase the stock at $10.
In this way, you limit the risk in your position to the premium you paid for the call option (plus the “carrying costs” of your short position – margin interest & dividends.)
Of course, your profit as the stock falls is reduced by what you paid for the call option, but a small price to pay for an “insurance policy” on a short position.
Does this stuff take a little bit of time to learn? Of course. However, why bother researching investments if you’re not going to take the time to discover what your “options” are?
April 16, 2006 @ 10:38 AM
First time posting, hi all.
First time posting, hi all. Longtime lurker tho.
What provoked me to register this time is I think I am a pretty good example of a know-nothing. I’m well-educated and make good money at my job. My husband and I are saving at a crazy rate because we decided to rent and bank the difference between the rent and a mortgage. We’ve taken out some short-term CDs with our savings (thinking rates will go up sometime and we’ll want to jump to a faster-appreciating boat) and I guess we have been hoping that eventually the market will tumble to the point where our dream house falls within our reach. But that about encompasses the sophisication level of my investment strategy.
Shorts, puts, calls… means nothing to me! These strategies seem to involve lots of time to track, to the extent that you pretty much need to make it your job to track them full-time, or else find a money manager you trust to do it for you. What’s a small-peanuts person like me to do?
What really gets me is the doom-and-gloomers who say we’re in for a Depression-level economic slide. Hyperinflation, stagflation or something in-between is in the offing, they say. If that happens, I am guessing I’ll be marginally better off than someone who’s already HELOC’d themselves into being slaves to their mortgage, but it would still hurt. I feel a little bit bovine, just staring at the future uncomprehendingly and hoping the axe doesn’t land on my neck.
April 17, 2006 @ 12:55 AM
Gotta echo the previous
Gotta echo the previous writer’s comments. I’ve been looking at housing crash sites for a a number of years now and reading articles in the Economist on the pending bursting of the asset bubble. I know people have made a lot of money over the past five years and have a lot invested in the things staying the same. When you listen to them – like I did recently to some of my relatives – there’s not a hint of doom and gloom – just cheshire cat grins and a lot of I told you so’s. Thing is, they’re right. If I hadn’t been listening to the rants of the housing crashers and my own hyperinflated sense of caution, I could’ve bought a house three years ago and been sitting on a 100% appreciation in my current neighborhood. Now, I know that things have changed. I understand that the economic fundamentals are different now but even if interest rates rise and the excess liquidity drains from the currency markets and people’s ARMs start kicking in and all the other bad stuff happens, blah, blah, blah, I gotta wonder what it really means for a guy like me and my family. So there will be more houses on the market and people may start dropping their prices but are they really going to be giving up all that much? I don’t know. The thing about sites like this is that they sometimes end up becoming echo chambers giving advice just as tainted as self-interested mortgage brokers or real estate agents. You want the crash to happen so bad that you seem to lose perspective. So here’s a challenge. My wife and I are moving to San Diego and we’re trying to decide whether to buy or rent. Based on a myriad calculators on the net we can afford to buy a house worth $500,000. We’re sick of renting, have two small kids, and should be around for at least five years. Tell me oh sages of the San Diego housing crash, whether I should buy or rent and for god sakes, why?
April 17, 2006 @ 6:46 AM
This is a great question.
This is a great question. And welcome to the new posters on this forum!
You know, I kick myself all the time for not having flipped properties. My common sense was too strong. Like you, I kept thinking there is no way this can go on! I also didn’t know about exotic loans until a few months ago. So those of us with reason missed making money on the way up. But you know, that same reason kept us out of money-losing tech stocks, and it will keep us from losing our a##es when housing tanks. In the end, we are financially ahead from those flippers who are now holding overvalued properties they can’t unload without a loss.
By the way, $500K is a huge amount to pay for a house, and it takes a large salary to afford it. Unfortunately, in SD today, that will get me a condo or townhouse. I’m betting that in 5 years, it will get me a house near the beach.
There have been some posts on this topic.
Housing Prices vs. Interest Rates.
Buy or Don’t Buy?
Buyers Waiting it Out
April 13, 2006 @ 1:54 PM
Snipe hunt! Everybody form a
Snipe hunt! Everybody form a conga line!
April 13, 2006 @ 2:06 PM
Sorry, Rich. I forgot.
Sorry, Rich. I forgot.
April 14, 2006 @ 11:30 PM
Can’t say if he agrees, but
Can’t say if he agrees, but I do. Without knowledge and information anyway. Thats what we are here to share is it not? Most of us have a shared belief in the basic tenet that housing as an asset is fundamentally over valued. Should we not then share our ideas on how to ameliorate the effects of a decline?
If someone has ideas on how to protect themselves in the coming bear market or even profit from it, why allude to it? Why not just lay out the strategy? Let that stand on its own and see what others have to say about it. Its the open source model for housing markets.
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[…] home purchases last year were made for investment purposes. (This is out-and-out investing, not the stealth speculation I discussed last […]