Monday, June 12, 2006

The Motley Fool Takes on NAR and David Lereah

The Motley Fool has a very solid article taking on David Lereah and the National Association of Realtors.
Posted by David at 9:08 AM
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17 comments:

  1. AnonymousJune 12, 2006 1:33 PM

    Seth's articles about the bubble date back to the peak of Aug-05. I wonder if he was writing about the bubble way before then but the Fool editors would not publish b/c it conflicted w/ their previous preachings on RE.

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  2. AnonymousJune 13, 2006 11:50 AM

    only nowadays it's "condo" instead of "house" for the family in their 30s. and speculators drove up those prices, not inflation... and those speculators are going to learn the hard way that leverage is a two way street.

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  3. AnonymousJune 13, 2006 12:08 PM

    http://finance.yahoo.com/columnist/article/richricher/5766

    fun little read... enjoy!

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  4. AnonymousJune 13, 2006 3:29 PM

    bacon, it's condo rather than house for a couple of reasons IMHO ... (1) land IS limited and (2) there is more of a focus on amenities than land ... e.g., when my folks bought their first home, my brother and I shared one room, our great grandmother had one room, my parents the 3rd bedroom ... one bathroom in the house, one living room and one kitchen ... no dining room, no garage, no rec room, no dishwasher, no A/C, etc. etc. all in 1000 sq feet. This was your typical 60s suburban house for the middleclass ... and they were glad to have it as it was by far better than their immigrat parent and grandparents had lived in crowed into small apartments, etc. It's all a trade off ... Most of today's condos have more sq footage and far greater amenities.

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  5. AnonymousJune 13, 2006 4:32 PM

    ... oh yeah, I forgot to mention .. it all sat on 1/2 an acre ... land was the relatively cheap back then.

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  6. AnonymousJune 13, 2006 7:25 PM

    Lance, did you just buy a home this past year, bc your postings (long ones always) show some nervousness? Just wondering... and why do you repeat that tiresome talk about "limited land"? RE agents have been trying to sell that one to buyers for years to justify overpricing.

    Of course, land is limited. But in any real sense? Is that why prices rose spectacularly the past five years? Did land suddenly become three or four times more scarce the past year in DC? How do you explain Japan's RE problems since the last 80s with their limited land?

    And wages haven't kept up with with housing costs. I think I read wages are up 15% the past five years in the U.S. and housing is up 40% same period.

    Smells like speculation to me. Look at all the new condos sitting empty in Arlington and DC. Housing inventory has gone through the roof in DC. Where are all the buyers? I thought land was scarce and salaries were high? Why is it 50% cheaper to rent than to buy?

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  7. AnonymousJune 13, 2006 7:43 PM

    http://www.freemarketnews.com/Analysis/224/5267/2006-06-12.asp?wid=224&nid=5267

    Another great unbiased article online. Enjoy.

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  8. AnonymousJune 13, 2006 8:04 PM

    New Guy, There are a lot of differences between "what you pay for" when you rent and "what you pay for" when you buy. Aside from the obvious (e.g., buying allows more control over what you can do with the property) there is the less obvious but for far more important difference related to risks. When you give your landlord $ to live in a place over a period of time, that is all you get ... the right to live there for a fixed period of time. In the area that usually starts off as one year and then goes month to month. The landlord reserves the right to have you leave when the period of time is finished. He/she can do what they want with the property after that fixed period of time. You have no guarantee that you can live there for your same monthly rent or live there at all for that matter. Herein comes the differential you are seeing between rents and buying costs. When people are willing to pay twice as much to buy as to rent (which incidentally is not a number found anywhere other than in this blog), that means that people are willing to pay a 100% premium to "lock-in" the right to live in a place forever. So, why would people be willing to pay that much to lock-in future payments? Because they feel that overtime rents will rise to the point where if they were to continue renting forever, they would be paying in the whole far more than they are paying in the whole at their current mortgage payment amount. It's hedging, pure and simple. Are they right? Are they wrong? Of course, no one knows. HOWEVER, look back at the conditions in the late 60s and early 70s ... An expensive continuing war, runaway spending, etc. etc. The economists at the time wondered whether all this wouldn't lead to massive inflation. President Johnson delivered a speach which has come to be referred to as the "Guns and Butter" speach. In it he made the claim that both guns and consumer goods could be produced without the economy suffering (i.e., no inflation would occur.) Well, if you remember the late 70s, then you know that that didn't happen. The war and very unbalanced budget lead to runaway inflation ... It was to the point where mortgages were at something like 17% and retirees were getting 12% on their certificates of deposit at the bank. The end result of the inflation was that the prices of houses (and everything else ... including wages) skyrocketed. Soooooo ... those with fixed mortgages (and there were no other kind back then) were left paying less and less of their income to pay their monthly housing costs. Whatever "premium" they had paid to buy over rent was very much worth their while. Their $200/month mortgage payments which once had consumed 1/3 of their gross $600/month wages, now consumed maybe one tenth of their much much higher NOMINAL wages. Yes, everything had gone up around them ... gasoline, restaurant dinners, etc. etc. But not their mortgage payments. Rents however, not being "fixed", did indeed go up like everything else. Do you think their is any similarity between the economic conditions this country was experiencing in the early years of the Vietnam War and now? Do some googling on the "Guns and Butter" economic case study. I think you'll find that the bubbleheads are correct when they talk about interest rates going up ... What they're missing though is that it won't be just the interest rates going up ... but everything else. Now, if that is the case, is it a good idea to lock in your monthly housing payments now ... or wait till the cycle has progressed further? I don't disagree with anyone's assertions that flippers have driven up prices. Personally, I find them disgusting ... having gone in and taken advantage of people needing housing. But, I don't think that is the full story as to why prices have risen as much as they have ... and as to why so many folks out there have been willing to pay a monthly premium over what it would cost them to rent ... so that they can "lock-in" their payments for the next 30 years. (And yes, the variable rates folks haven't been entirely wise, but that is neither here nor there.)

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  9. AnonymousJune 13, 2006 8:41 PM

    WEEKEND EDITION
    Guns, butter and the Fed
    Iraq war may have consequences for end-game on interest rates
    E-mail | Print | | Disable live quotes By Greg Robb, MarketWatch
    Last Update: 3:11 PM ET Apr 14, 2006

    WASHINGTON (MarketWatch) -- Name an unpopular war that Congress and the White House were reluctant to pay for with tax increases, leading to budget deficits, sweeping global economic changes and crippling inflation.
    A) Vietnam
    B) Iraq
    C) Both A and B
    For a growing number of economists, the answer is C.

    For the whole story:

    http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BA7DB7B95-7C58-41FB-AF89-1F65136D670E%7D&dist=rss&siteid=mktw

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  10. AnonymousJune 13, 2006 8:49 PM

    So how does this tie in with there being more money in the Washington area helping drive up prices? The cycle of inflation has already begun. The 9/11 dollars are being spent here ... driving up salaries (inflation of salaries) ... driving up real estate prices (inflation of house prices) ... driving up gasoline costs, etc. etc. Just because the inflation cycle has reached you yet where it counts (your paycheck), doesn't mean it isn't out there ... Even if it really is a 100% premium to lock in your housing costs for the next 30 years, that may turn out to have been a good hedge for the folks who took that hedge. But I agree, reasonable people can disagree, and only time will tell for sure if we are going in for a repeat of the hyper-inflation of the mid and late 70s.

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  11. AnonymousJune 13, 2006 9:23 PM

    Lance,

    Did you write something important in all of that? My eyes glazed over with all the text. Sorry I missed it. I'm a renter - ergo, not too smart of a guy.

    Smaller sentences for me please, so I can follow whatever it is you're trying to jutsify - I mean, say.

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  12. AnonymousJune 14, 2006 7:38 AM

    New Guy, Sorry ... but yes, that is part of the problem. The rise in house/condo prices is due to many many reasons. To "simplify" the problem by believing that the entire rise is due solely to one single factor --- speculation --- means ignoring every other reason why prices have ramped up as they have. The increase due to speculation will indeed roll back -- if it hasn't already. It's the rest of the increase that yourself and other bubbleheads might want to worry about. Those factors aren't as easily reversible ... nor as easily understood.

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  13. AnonymousJune 14, 2006 11:00 AM

    The only thing soft is David Lereah's brain. In reality he is the one who was pushing the idea that everything is ok. Seems like Bernanke has bought into that very reasoning, which is emboldening him to raise interest rates. Be careful what you wish for David Lereah!!!!

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  14. AnonymousJune 14, 2006 11:59 AM

    Rents are rising ... Front page story in today's on-line Washington Post.

    http://www.washingtonpost.com/wp-dyn/content/article/2006/06/14/AR2006061400516.html

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  15. AnonymousJune 14, 2006 1:56 PM

    Still I know it's 50% cheaper to rent than buy in DC... I just selectively chose that article to make a point I like to repeat about rents going up to cover the fact that housing has gone up even more -- I work in real estate, after all.

    With the new real estate paradigm in DC prices never go down. Don't be fooled by the "bubbleheads" -- prices have never gone down in DC. Things are different here because the federal government spends a lot of money and we're short on land supply.

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  16. AnonymousJune 14, 2006 4:21 PM

    I guess I hit a nerve with whoever is posting in my name (10:56 am comment.) I guess when you can't counter credible accurate information, you try to discredit its source, huh?

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  17. AnonymousJune 14, 2006 10:59 PM

    Back to what I was saying, with the new real estate paradigm in DC prices never go down -- remember that and don't let the bubbleheads get you down buyers. Things are different in this city here because the federal government spends a lot of money and we're short on land supply. The rest of the country will see price declines; not DC.

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