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The bubble will burst soon
Behold the bubble is about to pop. The bubble will pop (price declines) within the next 12 months.
Why?
1) People are stretching to their limits to buy (look at how many IOs and ARMS)
2) Lending practices will tighten given Fed's reccomendations
3) Greenspan just used the term 'bubble'
4) The foriegn buying of loans is slowing
5) More public awareness of the housing bubble situation. See the increasing number of articles referencing the bubble (use a Google or Lexis Nexis news search)
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Blogging will continue as the housing market continues to decline.
Thanks for reading!
Posts
not a bad prediction at all
ReplyDeleteAre foreigners slowing down in buying the loans?
ReplyDeleteDoes anyone have info/stats on that?
That would be a T-riffic sign.
"awareness about the unsustainable speculative forces in the housing market have reached a large number of people now."
ReplyDeleteI think that's what's really going to make a huuuuge difference here. Unlike stocks, which are more liquid than housing and also have a higher percentage of people who know a little bit more about the market, risks, etc, I think a good number (40-60%) of home buyers don't really know of a bubble, or how markets work, they just need a place to live. (Maybe the numbers are high, but I'm pretty sure that chunk of the population is out there.)
And when Joe Average starts to get the feeling that there are "unsustainable speculative forces" out there, I think demand will dry up pretty quickly.
just a thought.
"Unlike stocks, which are more liquid than housing "
ReplyDeleteWith stocks, you can become a bag-holder and ride them all the way down to the bankruptcy of the company who's shares you are holding. You may walk away with nothing.
With a house, you can just live in the house and enjoy your life. The house isn't going to evaporate into thin air UNLESS the buyer made poor decisions and took out I/O loans or something like that.
The majority of current homeowners do not have I/O loans. If you have concrete evidence to the contrary, please post it here.
We will see. I predict we will unquestionably know one way or the other by mid 2007.
ReplyDeleteNOVA Fence Sitter
A thousand thanks and congrats on running such a great learning/sharing forum.
ReplyDeleteLets hope next year at this time you'll be close to being able to retire this blog due to a "unforeseen" change in market conditions.
"We will see. "
ReplyDeleteWe will see if houses evaporate? I predict that they won't, but I don't have any hard evidence to back up my position. :-)
We do have many, many documented cases of equities essentially evaporating, leaving their owners with nothing.
"Unlike stocks, which are more liquid than housing and also have a higher percentage of people who know a little bit more about the market, risks, etc, I think a good number (40-60%) of home buyers don't really know of a bubble, or how markets work."
ReplyDeleteI don't think this is even close to true. Sure, generally speaking average investors know what a mutual fund or bond may be, but I'm certain that these same people can't analyze an income statement or a 10-k, or calculate the fair value of any particular stock. Securities are far more complex than home mortgages.
"We will see if houses evaporate? I predict that they won't, but I don't have any hard evidence to back up my position. :-)"
ReplyDeleteTell that to the residents of New Orleans. Individual houses do burn down, flood, develop black mold etc. just like indvidual stocks have idiosyncratic risks. At least with stocks you can diversify those risks away. I don't think the SP500 is going to evaporate either but I guess I don't have any hard evidence to suppport that:)
NOVA Fence Sitter
john fontain said
ReplyDelete"Lets hope next year at this time you'll be close to being able to retire this blog due to a "unforeseen" change in market conditions."
I don't see that this problem will go away any time soon. Unlike the stock market bubble burst most investers had a relatively small percentage of the funds into stocks, here investers have a large percentage, if not overextended, of their funds into one or a couple of properties. For stocks they can afford to take a loss in share values, but in houses they can not afford even a 25% loss in housing prices. I don't expect any great reduction in house prices. I can see that there will be alot of foreclosures, bankruptcies and empty houses. A year from now I can see David posting pictures of developments with empty houses and posting articles about Fannie Mae fraud and upward trends in foreclosures. Today it's Ken Lay making the headlines, next year I can see Fannie Mae execs making the headlines. The most sad predication I have is most of us will apartment dwellers will still be in apartments.
If anyone says I'm a doomsayer, please have the decency to provide facts that support the premise that the housing situation will improve.
Anon 5:26 - here is your evidence to the contrary. 54% of loans in DC were interest only in 05. Yes, this is not the same as all "current homeowners" but it is troubling in any case.
ReplyDeletehttp://www.washingtonpost.com/wp-dyn/content/article/2005/05/27/AR2005052701345.html
About 54 percent of home buyers in the District purchased their homes using interest-only loans so far this year (2005), according to LoanPerformance, a San Francisco-based company that tracks loan originations nationwide. About one-third of buyers in Maryland and Virginia are buying with interest-only loans.
fencesitter,
ReplyDelete"Tell that to the residents of New Orleans. Individual houses do burn down, flood, develop black mold etc"
Ever hear of homeowners' insurance?
Ok, so 54% of owners in 2005 used IO loans. What percentage of all DC purchasers do they represent? I'd say they represent a small proportion of all DC purchasers based on simple common sense. The ones who are most at risk in a rising mortgage rates environment are those who have no equity in their homes and who already have stretched their finances to afford a home. And I have seen no empirical data indicating how many people are in that category. Of course I can relate personal anecdotes and make up stats, but that's not a very convincing argument.
ReplyDelete"Ever hear of homeowners' insurance?"
ReplyDeleteHomeowners insurance doesn't cover everything. Trust me I have family who have had property damaged by hurricanes. Homeowners insurance is probably the only risk management strategy for houses. There are many more for stocks (e.g., options, trailing stops, dollar cost averaging, etc.) Not that I don't think stocks are overvalued at this point. If housing goes the stock market will go with it.
NOVA Fence Sitter
"here is your evidence to the contrary. 54% of loans in DC were interest only in 05."
ReplyDeleteThat is for the year 2005, which are a small fraction of the loans issued between, oh, let's say 1976 and 2006.
To put it another (easier) way; How many homeowners have I/O loans? Not "people who bought homes in 2005", but "homeowners". There is a big, big difference.
"Homeowners insurance doesn't cover everything." NOVA Fence Sitter
ReplyDeleteSo basically what has happened in this thread is as follows:
1)bubbleheads (NOVA and Polish) are arguing that homes are investments.
2)there is no #2.
I thought part of the bubblehead philosophy was that homes shouldn't be treated as investments? And you argue against homeowners who don't look at their homes as investment vehicles with a "homes are investment vehicles" argument?
That's messed up.
"the equity is gone the person is left making payments on a property for more than it's worth. "
ReplyDeleteSounds alot like renting to me.
Anonymous 7:34
ReplyDeleteHomes are shelter and investments. A sane bubblehead realizes that home ownerships does not lead to vast wealth. Furthermore, when you pay a mortgage, you are paying RENT to the lending company anyway.
"Homes are shelter and investments. A sane bubblehead realizes that home ownerships does not lead to vast wealth."
ReplyDeleteUnless you are lucky enough to catch a speculative episode.
"To put it another (easier) way; How many homeowners have I/O loans? Not "people who bought homes in 2005", but "homeowners". There is a big, big difference. "
ReplyDeleteI/O loans alone are not going to be the only things that bring housing down - talking about I/Os ignores ARMs, where rates will rise soon, and all of the HELOCs that people took out. In fact, people who owned before the boom are just as likely to have leveraged themselves with HELOCs based on the "equity" in their homes thanks to the boom. I know plenty of people who did this these past few years. Limiting the possible downturn in the market to I/Os ignores so many other issues.
"Limiting the possible downturn in the market to I/Os ignores so many other issues."
ReplyDeleteI'd be more convinced if you just argued that in general, people do stupid things. (the "issues" you are referring to)
Not everyone makes truly stupid decisions concerning their personal finances; but you're right, most people do.
http://research.cibcwm.com/economic_public/download/cwus-092005.pdf
ReplyDeleteThis is a pretty good summation of the ARM and I/O explosion of recent years. It also demonstrates why it will increase foreclosures.
Of interesting, yet scary note - the last time I/O loans were this popular was during the 1920s...
"With a house, you can just live in the house and enjoy your life. The house isn't going to evaporate into thin air UNLESS the buyer made poor decisions and took out I/O loans or something like that."
ReplyDeleteDid you miss the the Lethal Weapon movie that burned down the housing track (Was it LW3? or 2?) I'm current working about 30 miles from where that scene was filmed.
Now my other point, buyers do walk away. I went down to the shop floor to ask the blue collar guys what their opinion is of the housing market this morning. I never asked... a group of them were telling stories of how they walked away from homes that they purchased in the *last* downturn as so many were available they just jumped to rent a mile or so away.
I would add I have another reason I think the market will tank and it has to do with tightening lending; required down payments are going to go back up. 20% will become the minimum and once again 30% will become the *expected*. You do remember those days, don't you? It was only 15 years ago that a 30% down payment was require for the lowest interest rate. Think about it this way, how much would today's market go down if *most* buyers had 30%+ equity?
We're not going to see a normal correction in my opinion. Too many people are going to be underwater.
Neil
While I'm in general agreement that many people do many stupid things, I'm not convinced that everybody with HELOCs or second mortgages is going to be screwed. I know its a foundational argument for many bubbleheads that dumb homeowners used HELOCs and second mortgages to buy plasma TVs and boats, but I've not seen any evidence to support this argument.
ReplyDeleteThe fact is that many homeowners refinanced to pay off other debt, like student loans, that carried a higher interest rate than the refi, and they also received tax benefits for doing so. I have friends who did this to pay off higher interest rate law school loans. Refinancing debt like this makes financial sense. Even if home values decrease, many people who did refi responsibly will be in better condition than if they had not used what bubbleheads call the "house ATM."
I see that the DC market does Not rank among the top ten markets with Interest Only loans. (See Chart 3)
ReplyDelete"the blue collar guys what their opinion is of the housing market this morning. I never asked... a group of them were telling stories of how they walked away from homes that they purchased in the *last* downturn as so many were available they just jumped to rent a mile or so away"
ReplyDeleteThis is a blog about the DC market. Thanks for pointing out that you are "above" blue collar workers.
Now go to Hooters for lunch.
All you guys who claim that 2005's I/O buyers are meaningless to an analysis of the market because they aren't a large percentage of overall homeowners are missing an important point. Its those small number of overall owners who bought using I/O's in 2005 that drove prices to their peak. Take them back out of the equation and prices return to earth in the future.
ReplyDeleteDon't forget, its the relatively small number of homes that do transact that set market prices for everyone.
"back out of the equation and prices return to earth in the future."
ReplyDeleteThat cool with me. It means more homeowners like myself who are in it for the long haul. This makes for better neighbors, neighborhoods, and a better economy in general.
Now lets get back to speculatin' hatin'....
I agree with somewhat with john fontain re I/Os. They contributed to setting a high "clearing price" on housing stock. But we don't know whether buyers with I/Os could have paid the same prices with or without I/Os. This is just speculation.
ReplyDeleteAnd I think commenters here way overblowing the impact of ARMS. Contrary to what I've read people argue here, its very unlikely that there's going to be a day when ARMS reset, causing a meltdown in the housing market. ARMS generally don't work that way, they usually have collars that ensure a slow and easy increase of interest rates (and mortgage payments). For example, I had an AMR at 4.75%, and the annual reset was capped at 2% increase per year. So if I still had that ARM, even after the first reset, my rates would still be below the prevailing market rates.
"Let's take Joe Flipper who took some Get-Rich-Quick real estate course. He goes out and picks up a foreclosure on an $800K McMansion for $300K. Many homebuyers may not want to touch it, at that price, out of ignorance or an inability to gain financing, or worry about risk (maybe the previous tenant trashed the place.)"
ReplyDeleteI think that is sometimes referred to as a market correction. The house will be bought at the new percieved value both by Joe Flip and by Sam the next guy. i wonder if Sam will see the profit Joe made, extrapolate the same hapenning to him, and the cycle repeats. Kind of like a dampened oscillation to the "mean".
Money magazine has profiles of different types of ARMS and I/O loans and how the monthly payments could change for the borrowers.
ReplyDeleteFor example, they show how a $162,000 5/1 hybrid ARM could go from $833 to $1272 when the ARM resets. Her max jump is 5%.
Another couple has a $217K Interest only 5/1 hybrid ARM with $51K in HELOC (the coupld profiled did this to avoid PMI). Their worst case scenario has a payment jump from $1900 (now) to $3445.
In NY - $560K monthly option-payment ARM. $3452 to $5785
All of these are worst case scenarios for the montly payments. Most people will not see increases this high. But for many, increases of even $200 or $300 could hurt.
If you think that only a small % of mortgages are in this category, keep this in mind. In 2004, 70% of the mortgages that originated were refis. In 2005, 40% were refis. When you cross that with the fact that in 2004, 30% of mortgages were adjustable (as opposed to fixed) and in 2005, 34% were adjustable, you start to see that a vast number of people (even those who may have been refinancing) now have adjustable mortgages (the estimated amount is $1 trillion). I just don't see how this could not impact people's lives or the economy, and the future of lending for all of us.
this will still take a while to play out.
ReplyDeletethere is not much evidence that a major drop is in the works in my area (Boston metro).
still could happen, just not much going on. houses still sell.
By the way, for those who read Ben Jone's blog, HousingBubble2, there are often calls from the louder posters for earlier moderate voices to appear and defend new news.
ReplyDeleteI just want to point out here (as I am unable to there) that Ben used to delete posts which conflicted with his views. Now he has the ability to block the posting of any designated person.
This limits debate on that blog to a chorus of mostly idiots.
Would appreciate someone passing that on as I am blocked and unable to do so.
Well, there's an estimated 8.5 trillion of outstanding mortgage debt in the USA now. Assuming your numbers are correct, that means 11-12% of the mortgage debt is "adjustable." This is a relatively small proportion of the debt. And this still doesn't mean anything in terms how these mortgages will adjust, or whether the people who hold the mortgages can make the payments post-adjustment. As I said before, I don't think you can assume that everybody with these types of mortgages will be unable to make the payments.
ReplyDeleteI wouldn't be surprised if a lot of people with adjustable mortgages begin to refi in the fall, lock still historically low rates, and diffuse this particular bubbleheads' doomsday scenario.
Personally, I think credit card debt and lack of savings is a much bigger issue than I/O and ARM mortgages.
last year in ca 70% of loans were i/o or arms.if you qualify at a 50% dti ratio for a 5% arm,and it goes to 7% your payment goes up 40%.guess what,you now cannot qualify for a fixed loan,or make your house payment.oops.the average downpayment here was 2% last year,and in my county,yoy appreciation is flat as of may 1.we also have an almost 9 month supply of homes for sale,not counting fsbo and new construction...and there is plenty of both.these are werechickens coming home to roost and no doubt about it.
ReplyDelete"I have friends who did this to pay off higher interest rate law school loans. Refinancing debt like this makes financial sense. "
ReplyDeleteI'm sure some people did this, but they must have owned prior to the boom and graduated law school prior to 2001, because everyone I know who consolidated their law school debt after that date has interest rates anywhere between 1 and 4% - nothing but an I/O or ARM would get you an interest rate so low.
Either way you swing it, when you refinance, it's still debt, and you still owe it.
"The bubble will pop(price declines) within the next 12 months."
ReplyDeleteGiven today's housing data, would you say that you were wrong? 12 months ago, you predicted price declines. 12 months later, and the price declines have not materialized.
When you were referring to declines, did you mean regional or national decline?
The problem with alot of RE bears is that they are PermaBears. It doesnt matter what the real time conditions are, they've made up their minds that said asset is going down and continue to make up new 'excuses' as to why it hasnt happened yet.
make sure you vote in the express pole today!
ReplyDeletehttp://www.readexpress.com/pollcenter.php
"Given today's housing data, would you say that you were wrong? 12 months ago, you predicted price declines. 12 months later, and the price declines have not materialized"
ReplyDeleteDavid would never say that he was wrong.
Anon 11:26
ReplyDelete"Given today's housing data, would you say that you were wrong? 12 months ago, you predicted price declines. 12 months later, and the price declines have not materialized"
Nationwide price declines have not materialized, in bubblicous markets such as DC metro price declines have materialized.
"David would never say that he was wrong."
In this case he does not have to.
This is a good example of unfounded accusation.
>Not everyone makes truly stupid decisions concerning their personal finances; but >you're right, most people do.
ReplyDeleteDoes not matter - the price of the house is determined by the stupid decisions of _other_ people. If stupid people buy at high prices with I/O, your home also gose up in value. If stupid people bail out at a loss, your home also goes down in value. Without understanding the fundamental economic principle that 'price is determined at the margins' no sane discussion is possible
>With stocks, you can become a bag-holder and ride them all the way down to the>bankruptcy of the company who's shares you are holding. You may walk away with >nothing.
>With a house, you can just live in the house and enjoy your life. The house >isn't going to evaporate into thin air UNLESS the buyer made poor decisions and >took out I/O loans or something like that.
Not really.
Stocks can be sold with a click. Not houses. Thats another economic principle - market liquidity.
An illiquid investment limits your oppurtunity. You cannot sell it and invest in something better. In the case of housing, it also limits your job mobility.
Poor decision is not just an I/O loan. If you sacrifice your retirement, kids education and vacations for paying the mortgage, you made a stupid decision, *even if you have a fixed rate 30 yr loan*.
And if you plan to use your home for funding your retirement, vacation, or kids education, you *are* treating your home as an investment. These are planned, known expenses, not a surprise.
There seems to be a new theory being propounded by anons on this blog, that if price falls slowly, rather than a crash, things will be better.
For those who are into it for long term, its not good *if* they purchased at more than post decline prices. For eg: If you bough at 250K and price went to 400K and crashed to 225K, you lose, even if you are long term, even if that crash happened in 10 yrs.
Now a lot of these "slow crash" proponents are thinking its never going to crash to 225K.
Sorry guys, thats not enough.
(1)All those prices in the example above are in real terms. IF houses dont appreciate as fast as inflation you are losing money.
(2)And thats not considering the interest and other costs. If you cosider those, houses have to appreciate as fast as (inflation + carrying cost) for you to break even.
[I am too lazy to do the numbers.
See here http://www.oftwominds.com/blog.html 05/25/06 post "Inflation and Housing: Calculating the Bust" for an example]
So in effect, if *your* house cant fetch a price which is enough to cover inflation and *your carrying cost*, when its time for *you* to sell, you threw away money.
It does not matter whether you took I/O, ARM, Fixed, 30 yr, 15 yr, whatever. That matters only in terms of cash flow and leverage - or in other words whether you can hang on or not in tough times. Getting through tough times does not necessarily mean you will not lose money.
Unless you are really a big fish, you cannot win this game - you might feel wealthy, but that would be an illusion, you'll pay down the line. All that's going to happen is that you'll see your illusory wealth draining, and you'll get angry and will look for scapegoats - immigrants, Chinese, liberals, corporations and what not. Scum politicans will be there to feed into that. But you will never, never, let go of your delusion - that your house made you rich, or your house will not lose you money.
Take the extreme case - if everyone's house doubled in price today morning, will everyone be more wealthy? Even if you cashed out, all that's going to happen is that your cash is going to lose it's purchasing power, or you end up investing in yet another investment which is overvalued.
Houses cannot produce wealth. It's that simple. It would be the good of this country if the public realize that.
"in bubblicous markets such as DC metro price declines have materialized."
ReplyDeletethis is that part that's unfounded.
"Houses cannot produce wealth. It's that simple. It would be the good of this country if the public realize that. "
ReplyDeleteYeah, supply and demand simply do not apply to real estate. Oh, wait ...
bibba; you're so angry! have a drink.
ReplyDeleteand now i will sign my post just like you do in order to have legitimacy just like you do.
bubba
(see? we're cousins!)
"Yeah, supply and demand simply do not apply to real estate. Oh, wait ..."
ReplyDeleteYeah, and the government prints more land whenever it is in short supply, just like they sometimes do with cash. Oh, wait..."
"(1)All those prices in the example above are in real terms. IF houses dont appreciate as fast as inflation you are losing money."
ReplyDeleteIf rents increase faster than inflation, then you are losing money as a renter. Regardless, you can just deduct your rent from your annual income to obtain a tax advantage. Oh, wait...
Dave,
ReplyDeleteI would force people to login. This makes drive by noise more difficult.
In my opinion the comments on this blog tend to degenerate into trivial squabbling, which I believe is the intent for some people.
"Stocks can be sold with a click. Not houses. Thats another economic principle - market liquidity. "
ReplyDeleteYou clearly aren't a biz school student. The value of a stock is premised upon the fundamentals of the company that issued the stock. UNLESS A BUBBLE EXSISTS in the stock market.
If the company if fundamentally disfunctional, then the stock is fundamentally worthless UNLESS A BUBBLE EXSISTS AND YOU CAN FIND A SUCKER TO SELL TOO.
No, you cannot sell a stock with a "click". You can offer to sell your stock with a click; bring it to market with a click. A "market" exists for stocks. (It is called "the stock market") In any market, a seller AND a "buyer" are needed. Look it up, its true!
Uh, yeah; I graduated from a top ten biz school. They learned me all about the equities market.
>
ReplyDelete>
> "Houses cannot produce wealth. It's that simple. It would be the good >of this country if the public realize that. "
>
> Yeah, supply and demand simply do not apply to real estate. Oh, wait >...
Supply and demand cannot create wealth. They can only affect prices.
What does wealth mean to you ? Can you tell us?
Following is "arlingtonva's" profile. So un-anonymous of him/her:
ReplyDeleteProfile Not Available
The Blogger Profile you requested cannot be displayed. Many Blogger users have not yet elected to publicly share their Profile.
If you're a Blogger user, we encourage you to enable access to your Profile."
"(2)And thats not considering the interest and other costs. If you cosider those, houses have to appreciate as fast as (inflation + carrying cost) for you to break even."
ReplyDeleteAnd thats not considering the stylin' lifestyle of renting! I especially love the struggle to find a parking spot (unless you are paying extra for a reserved spot) and the long schlep with groceries to the poorly made place I rent and call "home". Heck maybe that is why I'm so damn angry! And it is worth thwe 1% of my total annual income that I save over owning a home.
>No, you cannot sell a stock with a "click". You can offer to sell your stock with a click; bring it to market with a click. A "market" exists for stocks. (It is called "the stock market") In any market, a seller AND a "buyer" are needed. Look it up, its true!
ReplyDeleteNo argument there - but stocks are more liquid than houses. Are you saying that houses are more liquid than stocks?
>Uh, yeah; I graduated from a top ten biz school. They learned me all about the equities market.
And?
I love it when people think the mortgage deduction is the final word on the rent/own debate.
ReplyDeleteDuring the first few years of your mortgage, you are probably paying more in interest than I am paying in rent. Very little acutally goes to principal. Interest is just 'rent' to the bank. The actual equity built is very low - I am building more equity in stocks and mutuals. (And mine is liquid....)
Crowing about the deduction for the interest you pay makes me smile. It is just spending to save.
"Supply and demand cannot create wealth. They can only affect prices."
ReplyDeleteBut supply and demand are the very forces that create long-term gains for solid stocks. One share of T (look it up) purchased when it was first issued would have been worth what today?
So basically, Bibba, you cannot argue that the fundamentals of the stock market (which you do not grasp) apply to the housing market, and then turn around and say that they don't apply to the housing market. That is precisely what you've just done.
Anon 12:15
ReplyDelete"this is that part that's unfounded"
Are you saying that there are no price declines in the DC metro area?
"No argument there - but stocks are more liquid than houses. Are you saying that houses are more liquid than stocks?"
ReplyDeleteNot at all. So what is your point? Do you suddenly now understand the basic premise for stock valuations OUTSIDE of a bubble condition?
You've completely disconnected with the premise of your position in a matter of minutes.
biz school girl
I particularly love this post:
ReplyDelete"During the first few years of your mortgage, you are probably paying more in interest than I am paying in rent. Very little acutally goes to principal. Interest is just 'rent' to the bank."
Honey, I own a home, AND I have a six figure investment portfolio. It isn't "either" "or" for many people.
I smile at your innocent, narrow-minded outlook.
By the way, the portfolio took a beating over the past two weeks; both internationally and nationally. Did yours, or are you privvy to super-secret, rock-solid stocks that weren't affected by the global market downturn?
"Crowing about the deduction for the interest you pay makes me smile. It is just spending to save."
ReplyDeleteAt certain income levels, people start looking for tax deductions. A mortgage is a good way to acheive a substantial deduction without resorting to funny business. Perhaps you are in a line of work that will afford you the opportunity to look for ways to LOWER your taxable income? If you're income were higher than it apparently is now, you'd understand.
>But supply and demand are the very forces that create long-term >gains for solid stocks. One share of T (look it up) purchased when >it was first issued would have been worth what today?
ReplyDeleteDoes supply and demand for stock create wealth? For eg: there was a lot of supply and demand for Internet stocks at one time.
The example you provide, of T - how was that wealth created? by the servcies ATT produced, which created wealth, or by pure demand for the stock T -like demand for stocks of pets.com?
Why do you think that houses are more worth than what they produce, ie. housing/shelter as service? Even granting that owning is a privilege worth paying extra more than renting, how do you explain the disconnect between renting/owning?
"Why do you think that houses are more worth than what they produce, ie. housing/shelter as service?"
ReplyDeleteWow, this is actually how people think on this board. You are a world-class moron.
anon 12:29,
ReplyDeleteOnline usernames allow readers to focus on comments from usernames (fake or real) that add value, and quickly skim the ones that don't, which of course is a personal preference.
Software like Wordpress and Scoop provide sophisticated tools to manage content, maybe it's time to upgrade.
Example: Someone just posted 2 minutes ago You are a world-class moron. If this user had a username, fake or real, I would be able to quickly skim future posts by this user because they have lost my respect.
ReplyDelete"Houses cannot produce wealth. It's that simple."
ReplyDeleteBibba, obviously you didn't buy real estate in Dc (or elsewhere) in 1998-2000.
>You've completely disconnected with the premise of your position in a matter of minutes.
ReplyDeleteWhich premise do you attribute to me?
The only premise I'm making is that stocks are more liquid than houses. You are just setting up straw men.
Yeah, if you brought a crackhouse you cant sell unless its a bubble.
We are not talking about crackhouses either.
If you are in the equities market, there was no safe place to hide these last couple of weeks. Not national, international, emerging, sectors, commodities - nowhere, nohow.
ReplyDeleteI got my mud flaps pounded in the market, and now my rent check is due. Hide the razor blades, please.
Anon 12:43
ReplyDelete"I particularly love this post:"
First you brag about your assets.
Next you bash someone who just made a perfectly reasonable statement about mortgages.
Finally you state the obvious and ask a pointless question.
"The example you provide, of T - how was that wealth created? by the servcies ATT produced, which created wealth, or by pure demand for the stock T -like demand for stocks of pets.com?"
ReplyDeleteYou are making my case for me and you don't even know it.
First, you compared stocks to houses to connect the two. Then I illustrated that, outside of a bubble market, the value of a stock is premised upon the company that issued said stock.
Now you are coming back at me and saying "the value of a stock is premised upon the company that issued said stock." Uhhhh, duh.
You also said that supply and demand don't create wealth, they just set prices. Well, T issued only so many shares of common stock; thereby *limiting* the "supply". Get it? So the "supply" of the equities were limited, while the "demand" for those equities continually increased because of the fundamentals of the business (ATT). Get it? Limited supply, increasing demand for equity in a strong company. NON-BUBBLE WEALTHCREATION FOR THE SHAREHOLDERS.
By owning an equity, you own a portion of the company's future revenue stream. Look it up.
Now, you're back to trying to compare stocks with houses. The two things are FUNDAMENTALLY DIFFERENT ANIMALS, yet supply and demand effect them both.
I rented for a long time at $1200 per month (not including utilities) in a very nice aparment. Now I own at $2000 per month, PITI on a 30 year fixed that was issued several years ago. That $800 is not a big deal to me, and well worth the difference in renting vs. owning for me. Freaky, huh?
>You also said that supply and demand don't create wealth, they just >set prices. Well, T issued only so many shares of common stock; >thereby *limiting* the "supply". Get it? So the "supply" of the >equities were limited, while the "demand" for those equities >continually increased because of the fundamentals of the business >(ATT). Get it? Limited supply, increasing demand for equity in a >strong company. NON-BUBBLE WEALTHCREATION FOR THE SHAREHOLDERS.
ReplyDeleteWhat's different between ATT and pets.com? Both have limited supply of shares, demand increased, so why did one take off, the other tank?
Because ownership of T gave you a share of what ATT produced. And ATT started producing more, so the value of what you owned increased.
Now what does a house produce?
"Now what does a house produce?"
ReplyDeleteYou just don't get it! Somone called you a "moron" based upon this position of yours. I won't do that. I've been trying to explain it to you.
Clearly, my tutorial about the equities market got through to you. Now consider this: Houses and equites are two very different things. Here is what they do have in common:
1) Buyers (demand)
2) Sellers (supply)
3) A Market (buyers and sellers coming together)
That's it. Try to understand that because a market exists for houses, it doesn't mean that they are like stocks. A market exists for automobiles too, but they aren't like stocks either. Get it? You can get rich being a car dealer (maybe), but that doesn't mean that cars "produce" anything other than fumes.
"Because ownership of T gave you a share of what ATT produced. And ATT started producing more, so the value of what you owned increased"
ReplyDeleteI'm glad to have help you learn something today. Honestly. I'm not being facetious.
Oh, I get it. I'm a moron.
ReplyDeleteBut in what ways are houses and equities different? Not in the superficial sense, but in terms of creating wealth?
"But in what ways are houses and equities different? Not in the superficial sense, but in terms of creating wealth?"
ReplyDeleteSigh.
Drug dealers can be wealthy. They don't "create" anything. So now there is a bubble in the meth market, too. Right?
I recommend a 101 business textbook.
Drug dealing is a business, however criminal and evil it is. Every business creates a service.
ReplyDeleteHow do you value houses? If you were to buy one?
http://books.google.com/books?id=1S8rx7Z7MpsC&dq=property+valuation+book&oi=print&pg=PA3&ots=c-dtyrdUGR&sig=HyepH1ehdCjqAIHOAVDnl8fzabc&prev=http://www.google.com/search%3Fhl%3Den%26q%3Dproperty%2Bvaluation%2Bbook%26btnG%3DGoogle%2BSearch&sa=X&oi=print&ct=result&cd=3
ReplyDeleteThis, and whether or not the hotties dig my crib.
That book is on *income* property valuation?. I have not read that book. If you have read that, can you tell me, if according to that, are properties overvalued, undervalued, reasonably valued now?
ReplyDelete""Given today's housing data, would you say that you were wrong? 12 months ago, you predicted price declines. 12 months later, and the price declines have not materialized"
ReplyDeleteDavid would never say that he was wrong."
When I posted that post, I meant in the bubble markets. Some bubble markets have seen YoY price declines.
First:
ReplyDeletePlease stop posting without a username. Due to anon being nothing but flamebait, I've decided to ignore the moron's posts from now on.
On topic: While in DC for vacation, the number of condos for sale rocked me!
I know way too many people too deep in debt due to their homes. And I know way too many people bragging at lunch on how easy it was to buy this or that with their HELOC. The number of my coworkers who "own" at least five flips is incredible. You do the math. How many people at 41% service can take a cut in overtime? bonuses? Loss of a salary for 3+ months? Not the numbers who could have 10 years ago.
To think I work in an industry that is notorious for its frugalness. Not anymore. Its the 1920's again... caution has been thrown to the wind and everyone is living the good life.
Let's put it this way, after every housing run-up there has been a 20% drop in home prices here in California. I'm sure the same is true of DC.
Do you really want to bet against history repeating itself?
I hopefully stopped a coworker from buying a flip today via a HELOC. I hope...
Fewer and fewer people will qualify for a mortgage; there is no way with the current negative savings rate of Americans that the market can continue on like this.
Again, wait until Oct. 15th. By then we'll see the price downturn. The question is, will this send us (the world) into recession?
Neil
bibba,
ReplyDeleteBreak all your mental connections between the stock markets and the housing markets. (notice the plural usage.)
There is NO global or national housing market. There ARE global equities markets.
If I want to buy a share of a solid US-based company, I can do that, even if I'm living in Guatamala. If I want to buy a primary residence in Seattle, it doesn't make a lot of sense if my life is based in Madrid.
Housing markets have local, regional, and national forces effecting them. If Microsoft goes out of business next week, the Seattle housing market will be impacted in ways that will have no effect on the housing market in Philadelphia. THERE IS NO NATIONAL HOUSING MARKET.
There is a national mortgage market. So issues in that market will have an impact on all local housing markets, but the mortgage market isn't the ONLY factor in all local markets.
Factors effecting the value of homes at the local market level include:
1) Local job market
2) Supply
3) Demand
4) Natural factors (Many Katrina evacuees aren't going back)
5) "Other" (Many NYC dwellers bailed after 9/11)
6) You name it.
"How do you value houses? If you were to buy one? "
ReplyDeleteBy the price a willing buyer will pay to own it. The owner of the house owns that value. Many factors, economic and demographic, can press the willing buyer's bottom line up or down. What is so hard to understand about that?
>There is NO global or national housing market. There ARE global equities markets.
ReplyDeleteAll right - lets take the DC market - overvalued, undervalued, fair?
"All right - lets take the DC market - overvalued, undervalued, fair?"
ReplyDeleteDefine the DC market. Manassass? or Bethesda? Big difference between just those two areas of the "DC market" in terms of housing stock, taxes, and government entities (VA or MD). However, a lot of similarities exist between the two on things like local job market and the climate.
I'd never buy a house in Manassass because the commute would be brutal and the housing stock is poor. (see the "plastic house" discussion below). The housing stock in Bethesda is typically older (made better) and it may be near the Metro.
Two very different areas appealing to very different buyers, yet they are both in the "DC market". Now, I'm not trying to be difficult, but this is the actual nature of a local housing market.
Bethesda - one of the best places to live according to CNN.
ReplyDeleteAll right. Why are houses a good value there now? Or more importantly what happened so that valuation changed 15% from last year to this year?
"Define the DC market. Manassass? or Bethesda? Big difference between just those two areas of the "DC market" in terms of housing stock, taxes, and government entities (VA or MD). However, a lot of similarities exist between the two on things like local job market and the climate."
ReplyDeleteOne thing they have in comman is house prices are sickning.
Congratulations on your blogoversary! One of my favourite daily reads.
ReplyDeleteWhy would anyone call anyplace in Va or Md part of the DC market? DC market means DC, and within DC there are other neighborhood markets, none of which include Manasssass or Bethesda.
ReplyDeleteAnon 2:11
ReplyDelete"By the price a willing buyer will pay to own it. The owner of the house owns that value."
Yes, the owner of the house owns that value, but that owner is the bank. The person who is residing in the house and paying the mortgage has paper equity, none of which materializes until it is sold for that amount. This is all a giant scam, and anyone banking on their home to make them wealthy is the sucker. I feel sorry for the boomers who truly believe their house will allow them to retire comfortably. Even if prices just stagnate, these people will have nothing--inflation will have pissed all their "equity" away.
"This is all a giant scam"
ReplyDeleteTypical comment. Nikki's site contains more unbelievable assertions and baseless arguments than most bubble blogs.
I'm glad David's blog has survived a year without degenerating into nothing but a soapbox for the lunatics.
Anon 3:05
ReplyDelete"Why would anyone call anyplace in Va or Md part of the DC market? DC market means DC"
If there was no DC what would NOVA Montgomery, Prince Georges and Frederick be?..........Farmland, Wilderness and maybe small country towns like Fairfax, Herdon, Gaithersburg, Rockville etc....
Sometimes DC is understood as the DC metro area. True DC is not like Manassas, but Embassy Row is not like Anacostia. It is safe to say this bubble discussion applies to the entire DC metro area.
"The person who is residing in the house and paying the mortgage has paper equity, none of which materializes until it is sold for that amount."
ReplyDeleteNikki has a couple bucks socked away in a "savings account", but what she fails to understand is that her money is actually being loaned by the bank to people to finance their home purchases and/or their small businesses.
Nikki, your money really isn't in the bank. Your monthly statement is just your bank's way of saying "I.O.U."
Sounds like you'd better withdraw your dough as quickly as possible, because it is all a "scam".
(for anyone who didn't know that the money in your savings account is NOT actually secured in a giant vault; I'm sorry. But that is the truth. Your bank lends "your" money out to other people and just sends you an "I owe you" every month.)
WVU, Actually, people who live in Md and Va surrounding DC tend to call the entire metro area "DC."
ReplyDeleteDC residents, in comparison, always refer to these states and the district by their proper names. No DC residents say, hey I'm going to visit my friend in DC, when in fact the person's friend lives in Va or Md.
This generalization I suppose isn't a big deal, but I think many DC residents find it irratating because there's really no excuse for it. I mean, its not that hard to just be specific.
And this just isn't DC residents being troublesome. I've also seen Va and Md residents get upset when people confuse their states. I had a girlfriend from NoVa, and she'd always very quickly correct anyone who accidently said she lived in Md. My friends from Md would be annoyed if people said they lived in Va too.
"Yes, the owner of the house owns that value, but that owner is the bank. "
ReplyDeleteNo, at most the bank owns a lien. It has no rights to the property unless several conditions are met. What's a scam is giving a landlord a sum certain every month so that he can treat you like a worthless terd, raise the rent as much as he possibly can whenever he possibly can, come in your apartment when he wants, never fix anything, and steal your security deposit at the end of your lease term. Thanks, but no thanks.
Many people "love" DC and say they are "From DC", yet they'll be the first to tell you that they'd never live "in" DC.
ReplyDeleteThey will attend a world-class university in DC, or take advantage of world-class employment opportunities, or enjoy world-class entertainment and cultural opportunities in DC, or just relax at a nice restaurant in DC. But "live in DC"? Eeeeewwwww.....yuck.
Now let me get back to my home in DC...Where in DC do I live, you ask? Rosslyn. (That is in Virginia for all of you who don't know.)
Dude, why do you even bother?
ReplyDeleteAs you can clearly see, we are willing to go to extreme alien-abduction-level lengths to deny any and all of your points, no matter how logical or well written. We can never be proven wrong in our blogsheres.
OK?
"All right. Why are houses (in Bethesda) a good value there now? "
ReplyDeleteWho said they are a good value now? Only those people who actually BUY NOW think the current prices are of reasonable value, all other things considered.
It is up to you to make decisions for yourself, dear Bibba. It isn't up to CNN. Bethesda is pretty stable, so if you can cough up a 20% downpayment to get a conforming loan at today's (still low) interest rates, and you plan to stay there for a decade or more, it may not be such a bad idea. Or not, depending on your own unique circumstances. Heck, lowball a seller and see if he bites.
On the other hand, I'd avoid Manassas completely. :-)
Surfer-X is the best thing to happen to the blogosphere, since, well, since electricity.
ReplyDeleteDude, self-deprecation is a sure sign of strength. Phonies tend not to be self-deprecating.
But humorous self-deprecation?! It is a sure sign of advanced intelligence. (seriously) All hail Surfer-X!
>Who said they are a good value now? Only those people who actually BUY >NOW think the current prices are of reasonable value, all other things >considered
ReplyDeleteWell, you had a book, a theory and a valuation model. How does that do with the current prices?
Or forget the price, how does that valuation model explain a 15% increase in a year?
Or are we all back to where the buyer and seller determine what the value is? In which case we can stop right now. Bubbleheads think it's not worth it and you think it's worth it. And thats that.
"Or forget the price, how does that valuation model explain a 15% increase in a year? "
ReplyDeleteSupply and demand. You'll hear about it when you get to about 8th grade.
>Supply and demand. You'll hear about it when you get to about 8th grade.
ReplyDeleteIt can cut both ways, if demand drops, price falls. That does'nt conclude anything.
What's the demand for houses? Is it demand from people who want to make a fast buck flipping it? Or demand from people who want to live in houses?
[When supply and demand raises prices, it just transfers wealth from buyer to seller. It does not create any *new wealth*. Oil is a good example. It can make the seller wealthy and the buyer poor, as long as such transaction is a small part of the economy. When 73% of the population in a consumer economy is paying for overpriced housing, the economic slump is going to drain everyones wealth]
"It does not create any *new wealth*. "
ReplyDeleteB.S. Developments in the local economy increase the desirability of nearby residential real estate. It *is* more valuable because it enables people to participate in economic activity. Notice there's no "bubble" in North Dakota.
>B.S. Developments in the local economy increase the desirability of nearby residential real estate.
ReplyDeleteYes. Developments in local economy raises economic production, which increases income. Increased income is what drives that prices - one can afford to pay more because one can produce more in that place, and earn more. Is that why the price increased 15% from last year?
"In which case we can stop right now. Bubbleheads think it's not worth it and you think it's worth it. And thats that."
ReplyDeleteHuh? I'd never buy a house in Bethesda. Not worth it to ME. Will a house sell in Bethesda this weekend? Probably. In which case it is worth it to the buyer.
As for the book and valuation models; why don't you do some reading of your own?
For observations on Westchester County, NY see http://westchesterny.blogspot.com
ReplyDelete"Yes. Developments in local economy raises economic production, which increases income. Increased income is what drives that prices - one can afford to pay more because one can produce more in that place, and earn more. Is that why the price increased 15% from last year?"
ReplyDeleteNo, and that was not my explanation. that's your straw man.
"there is no bubble in North Dakota."
ReplyDeleteSounds like bubbleheads have discovered their Nirvana!
Let us know if you need help packing up the stuff in your apartments as you get ready to move to ND.
"Sounds like bubbleheads have discovered their Nirvana!
ReplyDeleteLet us know if you need help packing up the stuff in your apartments as you get ready to move to ND."
LOL! They need to change thier name to Dakota first.
I wish the anonymous poster who has posted many very, very well-thought out and informative posts on economics would also come up with a nickname. Because while some bubbleheads would then be able to quickly read past that person's posts (echo chambers don't want to hear dissenting views), I would like to thank him/her for his/her very enlightening posts. Very well done. This blog needs more of these kinds of rational, well-informed and well-written posts. Instead of those screaming about how home ownership is nothing but a "scam."
ReplyDelete"Instead of those screaming about how home ownership is nothing but a "scam."
ReplyDeleteMost of us bubbleheads believe in homeownership WHEN the time is correct. Buying at near the top of a speculative episode is what we are against.
"Buying at near the top of a speculative episode is what we are against."
ReplyDeleteThen don't do it. And don't delete this post.
I'm not into speedboats; I think they are expensive wastes of money and fuel. I'm not going to buy one. Let me start a blog now....
Oh wait, speedboats aren't like houses. There is a perpetual, intrinsic demand for houses....
David said: "Most of us bubbleheads believe in homeownership WHEN the time is correct."
ReplyDeleteIf that is what "most" believe, then that's great. But there are very clearly some who post on here who are against homeownership AT ALL because they think it is one giant scam. Such views are simply illogical.
I actually agree with what you said in your 9:24AM comment. :-)
ReplyDeleteI certainly do NOT believe that 'homeownershiup one giant scam'. I actually encourage homeownership when it makes financial sense. It often does. Now, in the bubble markets it rarely makes sense to buy.
>No, and that was not my explanation. that's your straw man.
ReplyDeleteWell, what is the "B.S. Developments in the local economy increase the desirability of nearby residential real estate." then?
If what I said is a strawman, what's your reasoning? For prices going up 15%?
Because demand has gone up? Why has demand gone up? Is it a a temporary spike in demand? Is it flippers or people who want to live there? Can people pay more? If so, how can they pay more? By earning more? By shifting expenses more to housing? By borrowing more?
Is there an economic boom in DC?
Did a lot of rich people move to DC?
Let's hear your reasoning.
"If what I said is a strawman, what's your reasoning? For prices going up 15%?
ReplyDeleteBecause demand has gone up? Why has demand gone up? Is it a a temporary spike in demand? Is it flippers or people who want to live there? Can people pay more? If so, how can they pay more? By earning more? By shifting expenses more to housing? By borrowing more?
Is there an economic boom in DC?
Did a lot of rich people move to DC?"
It's very simple, though you choose not to listen: increased economic activity (more jobs, higher paying jobs, commerce, and industry) leads to greater demand for housing nearby. It's not merely "more income" = "willing to pay more for same house." That's certainly part of it, but it's not what I emphasized (in fact, I didn't even mention it).
That's why your post was not particularly effective.
>Increased economic activity (more jobs, higher paying jobs, commerce, and industry) leads to greater demand for housing nearby.
ReplyDeleteSo more jobs, higher paying jobs? More commerce, more industry? That's the reason for 15% increase in prices from last year?
Let's get down to verifiable things. Let's try to quantify them. Rather than "supply", "demand", "economic activity" - which are all true. All those have an effect on prices. Either up or down. All those terms tell you nothing about whether 15% or 30% or -10% is the effect on prices.
>It's very simple, though you choose not to listen
Give specifics, instead of generelizations. You can pick your choice of measure, to measure "economic activity", "jobs', "commerce" etc.
"Most of us bubbleheads believe in homeownership WHEN the time is correct."
ReplyDeleteEssentially Bubbleheads want to be market timers.
It's easy to see when real estate is trending up or down. 2000-05 it was trending up. Everybody was aware of that trend. Now its trending down. Everybody in America knows it now too. Bubbleheads don't have a monopoly on this knowledge.
But the more significant issue is knowing when the trend has peaked or bottomed. This often requires a lot of luck, or an incredible amount of inside knowledge, thus market timing is not an adviseable strategy for most.
Most of what I hear from bubbleheads is backward looking data. This is pretty much useless for market timing. Often trends change course long before its indicated in backward looking charts or graphs.
I predict that the real estate market will bottom, and then begin then begin to go back up, and the bubbleheads will still be sitting on the sidelines. This is what happens when someone insists on buying at only what they believe to be the absolute bottom.
Well, real estate cycles are only for a decade, so after this cycle bottoms, bubbleheads will get another chance to buy at the bottom in about 2020.
>Essentially Bubbleheads want to be market timers.
ReplyDeleteNot really. Making the landlords pay part of the cost of housing - a subsidy for the tenant from the landlord - is too good to refuse. Why should you, when someone hands you free money?
When its worth buying, we'll buy. Assume a premium for the privilge of ownnership, and when renting and ownning falls in line, it's time to buy.
If - as someone posted above - the landlord feels the renter is a "terd", what can the renter do. Who is the renter to say how the landlord spends his money? If the landlord wants to pay money to the renter, so that he has the privilge of feeling the renter is a "terd", I say that's fine.
>Essentially Bubbleheads want to be market timers.
ReplyDelete"Not really. Making the landlords pay part of the cost of housing - a subsidy for the tenant from the landlord - is too good to refuse. Why should you, when someone hands you free money?"
This is one way to look at it, and a very simplistic one too. Ignorance is bliss, they say.
For the pro-buy crowd. One question.
ReplyDeleteHow do you propose to make today's mortgages more attractive on the secondary market once any risk to them is perceived? I see a crisis in packaging mortgage backed bonds coming down the pipeline.
Since bonds are very risk/reward sensistive what happens?
1. Higher rates to compensate for the risk?
2. More PMI to reduce the risk?
3. Require larger down payments to reduce the risk?
4. Buy bond insurance which translates to higher mortgage interest rates?
I'm curious. For I know a bunch of people in the loan repackaging industry and all of them see much higher foreclosures in the coming year and thus difficulties selling mortgage backed bonds.
Personally, I think buyers are maxed out on monthly payments so that any increase in payment will result in transactions occuring at lower sales prices. But hey, that's only my opinion.
Neil
"For the pro-buy crowd. One question."
ReplyDeleteHow does not being a chickenlittle equate to being "pro-buy"?
Sarah in DC, who are you voting for in the DC city council elections this year? Do you have a favorite mayoral candidate yet?
ReplyDelete"housing costs are out of whack 'pretentious'."
ReplyDeleteNo, no no. You don't get it.
You are pretentious because you tell the world that you live in DC, yet you do not! It *is* that simple!
John; on my way to Vermont. (Maine, actually, but why be factual when Vermont is much trendier these days?)
Anonymous seems to have some serious problems. Perhaps a huge mortgage and a reset looming?
ReplyDeleteJust because a number of us do not own, does not mean we can't afford to own. I can afford a 1M house. However, I'm smart with my money and see that now is not the time to buy.
$1M house w/ 20% for a conforming loan at today's (still low) interest rate = $200,000 downpayment and approx. $5,200 per month. (assuming a credit score in the 800's and a conforming [non-jumbo] loan package)
ReplyDeleteOK, I know several people who can do that and still afford to live comfortably.
If you're in the market for a $1M house in Culpepper, Manassass, or anywhere in PG County; now is NOT the time to buy.
If you are in the market for a $1M house in Chevy Chase (DC or MD), Cleveland Park, or Georgetown; now may INDEED be a good time to buy, given the current low interest rates.
But if you are indeed in the market for a $1M house in a neighborhood like Georgetown... you aren't likely to be hanging around this website.
Anon. (but not the anon who hurls insults)
LOL, this anon cracks me up.
ReplyDeleteYou talk about fiscal responsibility and yet you say that right now 'may INDEED' be a time to buy because INTEREST RATES ARE LOW?
Ya, thats the #1 reason I would ever want to buy a house... because interest rates are low...
What you fail to realize that borrowing 800k from a bank over a 30 year term, will make you PAY BACK to the bank more than twice that amount. Thats no chump change.
Why would I ever want to do that? The only loan I will ever get is a 15 year fixed, with pre-payments to get me out of there in 10-12.