Sunday, August 14, 2005

How Will It All End?

Even though I hold a Ph.D. from an elite university, my predictions in the previous post are nevertheless meaningless. This article, on the other hand, in the SF Gate, written by Michael Abrahams, Ph.D. (managing director at Hoefer & Arnett, a San Francisco investment banking firm, and an adjunct professor at the USF School of Business), is meaningful and furthers the theme of prognostication by asking "how will it all end?"

Some choice quotes:
"...the housing bubble is not just a Bay Area, let alone a U.S., phenomenon. Housing prices have been appreciating worldwide across markets of widely varying demographics, economic growth and location. Prices in South Africa, Hong Kong, France and New Zealand have been rising more quickly over the past year than in the United States."

"This boom has been heavily dependent on record low interest rates and, in the United States, a growing ability of borrowers to leverage their income. Because these low rates are a product of unsustainable economic events in the markets of international finance, interest rates and the ensuing housing bubble hang in a precarious balance."

"And where that trend in interest rates has reversed, as in the United Kingdom during the past year, prices have turned down. A U.S. decline is likely as well, particularly in markets such as the Bay Area, where price increases have been so strong and affordability is so weak."

"We appear to be repeating history: Interest-only loans were the dominant home finance instrument before the Depression. Sharply declining property values, coupled with the fact that the principle was never paid down, contributed to widespread foreclosures in the 1930s. That led to the introduction of the amortizing loan, in which the principle is paid off during the life of the loan."

"How will it end? Regulatory dissatisfaction with interest-only mortgages, rising interest rates and the financial inability of consumers to incur any more debt, or service existing debt at higher interest rates, may combine to end the housing party more rapidly than many expect."

"With consumers taking on record levels of variable-rate debt, many homeowners may find paying their debt, let alone increasing it to finance a more expensive house, difficult or impossible. In addition, a growing number of investors -- in place of owner/occupiers -- raises the risk of a more rapid price decline. Last year, 23 percent of all U.S. home sales were made to investors, who are driven by a need to profit from a house rather than simply to occupy it. Investors are much more likely to hit the exits when prices fall."

"While we should be able to watch the housing market bulls on "Flip That House" for some time, a year of two from now it will be running on the History Channel rather than the Discovery Channel."

And another article from the SF Gate by Robert B. Reich reiterates the China connection:
"China will let its currency rise against the dollar and America's housing bubble will burst."

"A major reason mortgage rates have stayed low is there's a lot of money around. And much of that money has been coming from abroad. China and the rest of Asia have been putting their spare cash into America, in order to prop up the dollar and make it easier for them to export to us."

"But that's about to change. We've been pressuring them to let their currency rise, and they're getting the message. We don't know yet how much they'll let it rise. But the writing's on the wall, in Chinese characters. And other Asian nations are following China's lead."

"You don't have to be a Zen master to see this means less money from Asia money flowing into the United States. Which in turn means long-term interest rates, including mortgage rates, will start to rise. It's just supply and demand -- less money around, and the cost of borrowing goes up."

"As a result, the housing bubble bursts."

"The moral of the story, as told to American policymakers who have been pressuring China to revalue: Be careful what you wish for."

13 Comments:

Anonymous Anonymous said...

When I was 18, I was in college and received my real estate license. This was in 1988. Todays news was exactly the same as it was back then. The only differnce is the reporters and prices. I of course purchased my first investment in 1989. I saw the value drop about 40 percent and it was a negative on a monthly basis.

I did make other purchases in the downturn and still came out on top due to today's prices.

To think that people with 0 to 5% and sometimes even 10% purchasing $1,000,000 to $1,000,000 will be able to afford those payments when the teaser rates disappear is something out of a faily tale novel.

Just wait. History, (i.e.-the early 90's) does repeat itself.

At least that is what my 8th grade teacher said when someone asked why we have to study it.

Aug 14, 2005, 12:14:00 PM  
Anonymous Anonymous said...

The fact of the matter is that September 11, 2001 was a blessing in disguise for the real estate industry.

The FED and friends made credit not only cheap, but easy to get. The problem is that they just remembered that there is a thing called inflation and must start making money a little more expensive and tightening the screws on easy credit.

This is equivlent to someone giving a expensive persian rug to stand on, than pulling out from under your feet.

I hope the fall in home prices is not going to be a hard one.

Only time will tell.

Aug 14, 2005, 12:19:00 PM  
Anonymous Anonymous said...

The sky IS falling, the end IS near!!!

A smart 'investment' is immune to ALL market fluctuations.


You should have bought a house in Marin last year or earlier. You HAVE missed the boat. If prices decline (for the first time ever), do you really think they are going to be lower than 2003 (~20%)? You are running out of time for the 2004 burst so add another 10-15% to that, for you renters/waiters out there I sure hope it is 2006 otherwise you will be renting for a long time.

300 people are leaving Marin a year! Oh no! Just another sign of a doomsday on the horizon!

I can't wait for something to be called a 'bursting bubble' just so you naysayers can scream 'I told you so!', and we can be done with the rhetoric. Then buy a house that has apreciated 50% since 2004, and you can be happy feeling you got in at the 'bottom'.

Aug 15, 2005, 5:07:00 PM  
Anonymous Anonymous said...

The fact that the trolls angrily post is a strong indicator that they are seriously worried. Afterall, if they really thought we were wrong then why would they care what we write?

Given what fuels this housing bubble, Marin is no more immune than any other locale in CA.

Bret

Aug 15, 2005, 6:09:00 PM  
Blogger fredtobik said...

This comment has been removed by a blog administrator.

Aug 16, 2005, 8:41:00 AM  
Blogger fredtobik said...

"The fact that the trolls angrily post is a strong indicator that they are seriously worried."

That was not a troll post, I asked honest questions.

That was not meant to be an angry post just a point of view from someone that frowns at generalizing, and cares about the abuse of buzzwords (housing bubble).

I am really not worried, just sick of reading posts that reek of arrogance. If you hangout with people that always agree, you will lose perspective of any other point of view

"After all, if they really thought we were wrong then why would they care what we write?"

I really do think you are wrong about a countywide housing bubble. I guess my first question should be what do you consider a housing bubble?

Appreciation in Marin averaged 10-12% over the last five years, which are nice gains that probably will not last, but not 'bubble like' considering other California locales (and outside California), that have averaged over 30-40% in 3.

"Given what fuels this housing bubble, Marin is no more immune than any other locale in CA."

I never said anything about immunity. Do you think a market correction in SF or East Bay will have the same effect on the entire Marin County? I don't, which is why I think the renters and waiters in Marin are dreaming.

Aug 16, 2005, 8:56:00 AM  
Blogger marin_explorer said...

You should have bought a house in Marin last year or earlier. You HAVE missed the boat. You are running out of time for the 2004 burst so add another 10-15% to that, for you renters/waiters out there I sure hope it is 2006 otherwise you will be renting for a long time.

That exactly the fear-fraught thought process that pushes homebuyers to make frenzied, unwise purchases, driving prices to stratospheric levels. Of course, it's wonderful for the investor--who cares about people who take on a questionable mortgage just to own a home in Marin? Fuel the fire, keep prices going up--and make a mint!

If prices decline (for the first time ever), do you really think they are going to be lower than 2003 (~20%)?
That all depends on how overvalued a particular property is--and there's a wide gamut of opinions there. Investors see a "new paradigm" in real estate, but the actual market (homeowners) see a huge problem. Guess which will group will dictate prices long-term? It's always been that way.

Aug 16, 2005, 10:25:00 AM  
Blogger fredtobik said...

"That exactly the fear-fraught thought process that pushes homebuyers to make frenzied, unwise purchases, driving prices to stratospheric levels. "

Again 10-12% averaged over the last 5 years. Hardly frenzied or unwise.

A new post today on this blog has a very respectable author stating a possible 25% decrease in prices on the coasts (very general), but that means a house bought today will be worth 2003 prices if the 'bubble' hits tomorrow, and every year there is no official start of the 'bubble' is another year of apreciation that will help soften the blow.


/add paradigm buzzword list

Aug 16, 2005, 11:18:00 AM  
Blogger Marinite said...

"I am really not worried, just sick of reading posts that reek of arrogance. If you hangout with people that always agree, you will lose perspective of any other point of view"

The point about "If you hangout with people that always agree, you will lose perspective" is valid. To make an informed decision all sides of the argument should be considered. Hence, blogs like this exist because there is little balance in the discussion. And, ironically, it is exactly that sort of "group think" that has been in part fueling this bubble. Same could be said about the tech stock bubble. Probably true of any bubble.

And thanks for posting comments. Keep 'em coming.

Aug 16, 2005, 11:20:00 AM  
Blogger fredtobik said...

"The point about "If you hangout with people that always agree, you will lose perspective" is valid."

The sheeple affect.

Which IMO begain in the 50's with suburbs and cars that initiated this consumption society. If we can agree with that, how can that change? Will it change? I doubt there is an easy answer, if there were it would exceed the focus of this blog.

Aug 16, 2005, 11:39:00 AM  
Blogger marin_explorer said...

Again 10-12% averaged over the last 5 years. Hardly frenzied or unwise.

Hardly frenzied--are we both speaking about Marin? Hmm...personally I've seen home prices jump 72% in the past two years--and that's comparing similar properties. That sure sounds "frenzied" to me--and simply unwise to buy (sellers market) and assume it will go up, up, up! Just like the dot-com era, investors inflate their expectations, or if news/stats suggest something out of whack, they ignore them. In either case, It's pointless to suggest they're wrong. Nevertheless, a lot of optimistic people lost their shirts during the dot-bomb.

Aug 16, 2005, 12:30:00 PM  
Blogger fredtobik said...

"Hardly frenzied--are we both speaking about Marin?"

Yes, but maybe different areas.

"Hmm...personally I've seen home prices jump 72% in the past two years--and that's comparing similar properties."

I would really be interested in the details of this increase. Let us keep in mind that comparable properties can and cannot be miles away or right next door.

I look at westbayre.com and sfgate for recent home sales.

Any others?

Aug 16, 2005, 1:06:00 PM  
Blogger fredtobik said...

Comparing Stocks to RE is very apples and oranges.

Stock prices can change in a second, and can be exchanged in a second. RE takes weeks to change owners, and with the cyclical nature of the market (summer sales vs winnter) can take years to see trends.

Aug 16, 2005, 1:08:00 PM  

Post a Comment

Links to this post:

Create a Link

<< Home

Terms of Use: The purpose of the Marin Real Estate Bubble weblog (located at URL http://marinrealestatebubble.blogspot.com/ and henceforth referred to as “MREB” or “this site”) is to present and discuss information relating to real estate and the real estate industry in general (locally, state-wide, nationally, and internationally) as it pertains to the thesis that recent real estate related activity is properly characterized as a “speculative mania” or a “bubble”. MREB is a non-profit, community site that depends on community participation and feedback. While MREB administrators do strive to confirm all information presented here and qualify all doubtful items, the information presented at MREB is neither definitive nor should it be construed as professional advice. All information published on MREB is provided “as is” without warranty of any kind and the administrators of this site shall not be liable for any direct or indirect damages arising out of use of this site. This site is moderated by MREB administrators and the MREB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by MREB administrators. You should consult a finance professional before making any decisions based on information found on this site.

The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.