A place for residents of Marin County, CA and others to express their views regarding the real estate bubble and in particular the Marin real estate market
Friday, September 30, 2005
Of Bubbles Past: A Chronological Listing of News Headlines from the Last Housing Bubble
There's been some confusion on the blogs about just what went on during the last housing bust in Southern California. I was there then; I lived through it, I owned property, and I can tell you it was no fun at all. Then, like here, like now, people were saying things like "housing has never gone down here before (so it won't ever go down)", "housing always goes up", "houses aren't like stocks", "we're special", etc., etc., etc.
Below you will find a chronological listing of selected Los Angeles Times articles originally published between the years of 1985 and 1997 (inclusive) culled from their archives. The similarity among headlines from then and now is quite informative.
Housing Starts Surge 14.9% During January, Best Gain in 20 Months Los Angeles Times (pre-1997 Fulltext); Feb 20, 1985; pg. 1
Inventory of Housing Dips in Southland Unsold New Homes Declined by 3.2% from End of l984 DAVID M. KINCHEN; Los Angeles Times (pre-1997 Fulltext); Mar 16, 1986; pg. 1
Housing Sales Boom Keeps Inventories Slim DICK TURPIN; Los Angeles Times (pre-1997 Fulltext); Aug 24, 1986; pg. 1
1987: Housing still booming, prices increasing, inventories low.
High-End Home Sales Push Up Median Price Dick Turpin; Los Angeles Times (pre-1997 Fulltext); Mar 15, 1987; pg. 1
Inventory of Unsold Homes Sets New Low Los Angeles Times (pre-1997 Fulltext); Mar 15, 1987; pg. 1
Fewer Homes, High Prices as Mortgage Rates Climb TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Sep 10, 1987; pg. 1
Fixed-Mortgage Interest Rates Surge Woes Mount for Home Buyers, Brokers TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Sep 10, 1987; pg. 1
Unsold Homes Inventory Drops for Third Time DAVID M. KINCHEN; Los Angeles Times (pre-1997 Fulltext); Sep 13, 1987; pg.1
1988: People start to question the boom. Realtors assure us the boom will continue. Houses aren't like stocks afterall.
'88 Outlook Bright for U. S. Real Estate Dick Turpin; Los Angeles Times (pre-1997 Fulltext); Jan 10, 1988; pg. 1
County's Median Resale Price of Homes Reaches $179,999, Costliest in California JOHN O'DELL; Los Angeles Times (pre-1997 Fulltext); Mar 23, 1988; pg. 5
Unlike Stocks, Home Prices Rarely Collapse JAMES FLANIGAN; Los Angeles Times (pre-1997 Fulltext); Aug 28, 1988; pg. 1
Southland Inventory of Unsold New Homes Lowest in Decade DAVID M. KINCHEN; Los Angeles Times (pre-1997 Fulltext); Sep 11, 1988; pg. 10
J. M. Peters Reports Skyrocketing Sales for Second Quarter MICHAEL FLAGG; Los Angeles Times (pre-1997 Fulltext); Sep 14, 1988; pg. 5
Limit Issue Driving Up Home Prices Dick Turpin; Los Angeles Times (pre-1997 Fulltext); Sep 18, 1988; pg. 1
Hot Housing Sales Belie Doom Forecast Ryon, Ruth; Los Angeles Times; Sep 25, 1988; Vol. 107, Iss. 297; 8; pg. 1
1989: Prices are very expensive; affordability an issue. Sales slow and prices drop. Mention of risky loan types.
Housing Prices in State Climb 3% in February Furlong, Tom; Los Angeles Times; Mar 29, 1989; Vol. 108, Iss. 116; 4; pg. 1
Stock of Unsold Homes Drops Dramatically DAVID M. KINCHEN; Los Angeles Times (pre-1997 Fulltext); Apr 2, 1989; pg. 9
How First-Time Buyers CAn Get Their Piece of the Dream Myers, David W; Los Angeles Times; May 21, 1989; pg. VIII1
State's Home Sales Drop 14% Median Price Tops $200,000 for First Time Crouch, Gregory; Los Angeles Times; May 25, 1989; pg. IV1
Sales of Existing Homes in State Fall During May Furlong, Tom; Los Angeles Times; Jun 23, 1989; Vol. 108, Iss. 202; 4; pg. 1
Orange County Home Sales Drop by 22% in May TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Jun 23, 1989; pg. 1
Realtors Tackle New Topic: How to Handle Slow Housing Market Myers, David W; Los Angeles Times; Oct 1, 1989; pg. VIII1
Prices Drop, Sales Slow in State's Housing Market TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Nov 29, 1989; pg. 1
Housing Affordability Rises Outside L.A., Orange County Kristof, Kathy M.; Los Angeles Times; Dec 06, 1989; Vol. 109, Iss. 3; D; pg. 1
Survey Cites Four California Banks With Possibly Risky Realty Loans JAMES BATES; Los Angeles Times (pre-1997 Fulltext); Dec 30, 1989; pg. 1
1990: Prices take a serious plunge. One article claims that housing booms are a bad thing and we should hope prices stay low. Increasing mortgage rates are blamed for the bust. The word "recession" is mentioned. Gloom and doom.
Home Sales in Southland Plunge in '89 Samuels, Alisa; Los Angeles Times; Feb 8, 1990; pg. D2
The Number of Homes for Sale Sets a Record Real Estate: San Diego becomes buyer's market, with 4,000 existing homes listed in January. GREG JOHNSON; Los Angeles Times (pre-1997 Fulltext); Feb 13, 1990; pg. 2.A
Pray That the Housing Boom Stays Dead Jones, Robert A; Los Angeles Times; Apr 24, 1990; pg. A3
Climbing Mortgage Rates Hurt Existing Home Sales Samuels, Alisa; Los Angeles Times; Apr 26, 1990; Vol. 109, Iss. 144; D; pg. 3
California Is Nearing the Edge of Recession, UCLA Forecast Warns Anderson, Harry; Los Angeles Times; Jun 29, 1990; Vol. 109, Iss. 208; D; pg. 1
California Real Estate Market Continues to Cool TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Jul 26, 1990; pg. 1
Home Sales in July at Slowest Pace in 4 1/2 Years Furlong, Tom; Los Angeles Times; Aug 28, 1990; Vol. 109, Iss. 268; D; pg. 2
Realtors Hear Gloomy Price, Sales Forecasts Myers, David W; Los Angeles Times; Oct 7, 1990; pg. K1
O.C. Home Resales, Prices Fall Sharply Housing: Realtors group attributes slump in county and state figures to fears of recession. MICHAEL FLAGG; Los Angeles Times (pre-1997 Fulltext); Oct 26, 1990; pg. 5
Housing Slump in California Seen Worsening TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Nov 21, 1990; pg. 1
1991: A "dead cat bounce"? Some folks wondering if the bust has bottomed out or not. Sales are abysmal (e.g., -42%). Other parts of the country showing some signs of recovery.
Back to Basics Inman, Bradley; Los Angeles Times; Jan 20, 1991; pg. K1
Re-Assessing When Home Prices Fall Boyer, Jeanne; Los Angeles Times; Feb 3, 1991; pg. K1
California Still Among Lagging Areas, Fed Says JAMES RISEN; Los Angeles Times (pre-1997 Fulltext); May 2, 1991; pg. 1
Reading Signs--Is Market at Bottom? Inman, Bradley; Los Angeles Times; Sep 8, 1991; pg. K1
County's New-Home Sales Plunge 42% for Quarter * Real estate: New figures indicate the market is sputtering again after a brief recovery. The inventory of unsold houses rose by 15%. GREGORY CROUCH; Los Angeles Times (pre-1997 Fulltext); Oct 4, 1991; pg. 5
Home Sales Decline in California Los Angeles Times; Nov 26, 1991; pg. D1
Home Sales Decline in California Housing: The drop in mortgage rates fails to spur sales in the state, but sales of existing homes across the country edge up in October. Los Angeles Times (pre-1997 Fulltext); Nov 26, 1991; pg. 1
1992: No one is buying; housing is an investment that no one will touch. Desperate political efforts being made to encourage house buying. Rock bottom prices and lower mortgage rates encourage some purchasing. The year ends with some buying. Another "dead cat bounce"? It's not clear.
Move-Up Home Buyers Pretty Much Left Out Real estate: While Bush's plan may boost first-time purchases, it does little to dispel caution in the other key housing sector. JUBE SHIVER Jr.; Los Angeles Times (pre-1997 Fulltext); Jan 30, 1992; pg. 4
Home Sales in State Fell 6.2% in 1991 Shiver, Jube, Jr.; Los Angeles Times; Feb 12, 1992; D; pg. 1
Spring Thaw Real estate: The local housing market is showing signs of recovery. More realistic selling prices and reasonable interest rates have helped to spur sales. PATRICIA WARD BIEDERMAN; Los Angeles Times (pre-1997 Fulltext); Mar 26, 1992; pg. 1
Housing Starts Increase 6.4% to 2-Year High * Economy: A strong surge in apartment building leads the way, providing economists with more evidence of a sustained recovery. JUBE SHIVER Jr.; Los Angeles Times (pre-1997 Fulltext); Apr 18, 1992; pg. 1
June Home Sales 3.5% over May but Trail 1991 Figure Los Angeles Times; Aug 2, 1992; pg. K1
August Housing Starts Rebound 10.4%, U.S. Says Marshall, Matt; Los Angeles Times; Sep 23, 1992; D; pg. 1
California Home Sales Surge Myers, David W; Los Angeles Times; Nov 25, 1992; pg. D1
Sales of Existing Homes in California Rise Again Myers, David W; Los Angeles Times; Dec 24, 1992; pg. D1
1993: It's definitely a buyer's market. Some people are saddened by the fact that current prices are 50% of what they were in the 1980's. The housing bust in Southern California is clearly negatively impacting the California economy and the national economy at large. Sellers are desperate to sell (and some people taking extreme measures like putting huge "for sale" signs on their lawns for passing planes to see). Folks who waited out the boom to buy at the bottom are being handsomely rewarded for their patience. Proof-positive of the contrarian investing style -- be greedy when everyone is fearful and fearful when everyone is greedy. The "slump" may be ending.
Long Southland Housing Slump Finally Ending? DAVID W. MYERS; Los Angeles Times (pre-1997 Fulltext); Feb 10, 1993; pg. 1
Housing Market Warming Up After 3-Year Slump Real estate: Optimism returns to Southland with rising sales. Number of homes on market is down. DAVID W. MYERS; Los Angeles Times (pre-1997 Fulltext); Feb 10, 1993; pg. 1
A sad Westside story: Home prices have declined up to 50% since late 1980s Myers, David W; Los Angeles Times; May 28, 1993; D; pg. 1
Couple Put Up a Big Sign of the Real Estate Slump Housing: They write `For Sale' in huge letters on their lawn, hoping to attract attention from passengers in planes and jets on flight path to LAX. DICK WAGNER; Los Angeles Times (pre-1997; Apr 29, 1993; pg. 8
Home Sales in County Climb by 3% Real estate: The market bucks the downward trend of neighboring areas. But analysts say don't be too optimistic. STEPHANIE SIMON; Los Angeles Times (pre-1997 Fulltext); May 28, 1993; pg. 1
It's a Buyer's Market as Peninsula Home Prices Tumble Real estate: Younger families are taking another look at an area that was once beyond their economic grasp. This could revitalize the school district. TED JOHNSON; Los Angeles Times (pre-1997; Jun 24, 1993; pg. 3
Home Sales Up 6.3% in State, 4.6% Nationwide Real Estate: Analysts credit low interest rates and say buyers are beginning to think that prices may have bottomed out. DAVID W. MYERS; Los Angeles Times (pre-1997 Fulltext); Jun 26, 1993; pg. 1
California's real estate slump deepens Miller, Greg; Los Angeles Times; Jul 27, 1993; pg. D2
Southland home values lead U.S.--Downward Myers, David W; Los Angeles Times; Aug 4, 1993; pg. D1
Bottom Line: Housing Market May Be Mending Real Estate: Despite a three-year slump, experts say prices are stabilizing, especially for homes under $500,000. PATRICIA WARD BIEDERMAN; Los Angeles Times (pre-1997 Fulltext); Aug 22, 1993; pg. 1
Buyers Seek Bargains as Home Prices Keep Sliding Real estate: La Canada Flintridge emerges as bright spot with a nearly 21% increase in sales over same period last year. ANDREW LePAGE; Los Angeles Times (pre-1997 Fulltext); Sep 2, 1993; pg. 1
Sitting on the market: After the cash, owners adjust to the region's housing slump Myers, David W; Los Angeles Times; Sep 20, 1993; D; pg. 1
State's bargain hunters boost new-home sales to 3-year high Myers, David W; Los Angeles Times; Oct 1, 1993; pg. D1
Home Sales Rise Sharply in State, Nation Real estate: Size of increase surprises housing analysts. Median price in California is down 4.3% from 1992 figure. DAVID W. MYERS; Los Angeles Times (pre-1997 Fulltext); Oct 26, 1993; pg. 2
Jump in new-home sales spurs hopes of long-awaited revival Myers, David W; Los Angeles Times; Nov 3, 1993; pg. D1
Drop in Southland Home Sales Slows in First 10 Months of '93 Los Angeles Times (pre-1997 Fulltext); Nov 28, 1993; pg. 4
U.S. home sales hit 14-year high Myers, David W; Los Angeles Times; Nov 30, 1993; pg. D1
Slump in O.C. Housing Market May Be Ending Real estate: November figures show a major year-to-year increase in the number of units sold. Median price still sags. JOHN O'DELL; Los Angeles Times (pre-1997 Fulltext); Dec 21, 1993; pg. 1
1994: Housing begins its comeback. People who had the intelligence to wait for the bottom are buying now at great values. Even rising mortgage rates are not shaking the recovery.
Bright Spots Some Areas Showing Signs of Recovery After Four-Year Slump in Home Prices Los Angeles Times (pre-1997 Fulltext); Jan 16, 1994; pg. 1
Lenders scramble to keep housing comeback alive Myers, David W; Los Angeles Times; Mar 30, 1994; D; pg. 1
First-Time Buyers Who Waited Spark Housing Rebound Real estate: After years of ice-cold sales, the city's Westside market is finally starting to heat up. SCOTT SHIBUYA BROWN; Los Angeles Times (pre-1997 Fulltext); Jun 5, 1994; pg. 10
Home Sales Up 24% From Last Year Los Angeles Times (pre-1997 Fulltext); Jun 26, 1994; pg. 6
June Home Sales Best in 5 Years Ventura County Is Leader Jack Searles; Los Angeles Times (pre-1997 Fulltext); Jul 26, 1994; pg. 8
Rising mortgage rates shake but don't break state housing industry Lee, Patrick; Los Angeles Times; Oct 7, 1994; pg. D1
1995: Some parts of the Southland are recovering others are not. People with "negative equity" are in despair.
Home Sales Rise 10.5% in State, Hit 5-Year High JAMES F. PELTZ; Los Angeles Times (pre-1997 Fulltext); Feb 9, 1995; pg. 1
Southland Home Price Rebound Fails to Appear JESUS SANCHEZ; Los Angeles Times (pre-1997 Fulltext); May 22, 1995; pg. 1
County Home Sales Slide 20.4% in May DAVID R. BAKER; Los Angeles Times (pre-1997 Fulltext); Jun 13, 1995; pg. 1
Home sales surge 19% in May, raising doubts of rate cut Mowbray, Rebecca; Los Angeles Times; Jun 30, 1995; D; pg. 1
Study of Homeowners Finds `Negative Equity' a Problem Real estate: Nearly 5% owe more than homes are worth. Impact hinders the state's economy, experts say. DEBORA VRANA; Los Angeles Times (pre-1997 Fulltext); Jul 6, 1995; pg. 1
O.C. Real Estate Sales Drop Property: Preliminary figures for July suggest the county's housing market is still in a slump. DEBORA VRANA; Los Angeles Times (pre-1997 Fulltext); Aug 1, 1995; pg. 1
1996: A tentative recovery is still in the making.
State's housing market finally in turnaround Sanchez, Jesus; Los Angeles Times; Oct 25, 1996; pg. D1, 1
O.C. homeowners more confident Fulmer, Melinda; Los Angeles Times; Dec 3, 1996; pg. D.2
Ready to fly? Region's housing prices on rise, moderately Sanchez, Jesus; Los Angeles Times; Dec 29, 1996; pg. D.1
1997: Finally, housing has recovered.
Southland Home Sales Are Unseasonably Hot Real estate: In O.C., October sales were 46.5% higher than last year. Median price of $208,000 was highest since 1994. E. SCOTT RECKARD; Los Angeles Times; Nov 14, 1997; pg. 1
Median Price for O.C. Homes Surges 10.5% E. SCOTT RECKARD; Los Angeles Times; Dec 10, 1997; pg. 1
And the rest, as they say, is history.
If you wish to repeat this search, go to the LA Times website, click on the advanced search tab. The key words I searched on were "california housing real estate" between the dates of 01/01/1985 and 12/30/1997.
The Motley Fool instructs us on how to ensure a miserable retirement:
"Don't worry about calculating how much you'll need for retirement; don't save or live below your means. After all, saving is much less fun than spending."
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"Bond yields are low, and returns on cash are staggeringly low. Don't be satisfied with a measly 3% return on your cash. Follow the herd and get in on some volatile market action. A good place to start is real estate, which is a no-brainer with prices flying so high today. You can employ all kinds of destructive instruments for a chance at better returns. Let's start with leverage. Borrow the money you need, and better yet, use an interest-only loan. Then speculate in a condo in Miami. Everybody else is doing it -- 40% to 70% of condos in the Miami area are being bought as investments. That could definitely end badly. Using large amounts of leverage in a speculative market is a fine recipe for fiscal disaster."
"There's no need to research your investments or even know exactly what business they're in."
"Asset allocation is for fuddy-duddies. Make sure you invest all of your savings in few obscure, high-risk investments. If you want to make some serious money, you've got to pick something that's difficult to understand and very technical."
"You just retired and earned yourself an extra 40 hours of free time each week. What are you going to do? Eating out and shopping are two great hobbies. We've heard a lot of stories from folks who took the lump sum and spent it in the first five years!"
Freddie Mac CEO: High-End Housing Bubble Will Burst
The CEO of Freddie Mac now admits that there is a real estate bubble in many parts of the country but the bubble is limited to "high-end" housing. And what's more, this bubble will "soon burst". Not deflate, not come in for a so-called "soft landing", but burst.
What isn't "high-end" these days? And isn't pretty much ALL of Marin "high-end" housing?
Some choice quotes:
[Richard F. Syron, Chairman and Chief Executive of Freddie Mac, said] "...the recent spike in high-end housing prices in places such as metropolitan Boston, New York City and in California constitute a bubble that will soon burst."
"He did not offer a specific forecast on how far prices in those markets could decline. But he said the drop could be big enough to affect the overall economy as owners of pricey homes see their property values decline and become reluctant to spend on other items, like cars."
""Even a modest downturn in housing would be felt throughout the economy," he said."
Million dollar houses are a non-event these days. Marin has more than its fair share which makes it a rather blasé place as far as houses are concerned. Not so long ago a million dollars was a lot of money, but not anymore.
I'm blogging this article only because after this housing bubble plays out it will be astonishing to many (but humorous to the rest of us) to look back at it.
As one commentor on a blog put it, "the price is a matter of opinion but the debt is real".
Some choice quotes:
"For the first time, there are more than 1 million owner-occupied homes in the United States worth $1 million or more, according to a Census Bureau survey published late last month."
"Once a symbol of unusual wealth, million-dollar dwellings now seem like a dime a dozen in some places. San Francisco alone has more than 20,000 of them. There are another 46,000, or so, in Orange County, Calif."
"The surge in high-end prices has happened quickly. The Census Bureau’s 2004 American Community Survey found 1,034,386 homes worth at least $1 million in 2004, compared to 595,441 in 2002 and only 394,878 in 2000."
Based on this article on CNN, is the Fed preparing the public for a bust of the housing bubble? But it's all OK because we all have nice "equity cushions" and we can absorb a decline in prices, right? But what about the cash-out refinancing craze (aka the "housing ATM")?
Some choice quotes:
"Though mortgage debt is rising, most Americans have built up so much equity in their homes that they could weather a price drop without serious harm, Federal Reserve Chairman Alan Greenspan said Monday."
"He also reiterated that he was concerned about the rapid growth in exotic home loans and that the apparent "froth" in many local housing markets was spilling over into mortgage markets."
""The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny," Greenspan said."
"He noted that, given the acceleration in recent years in buying and selling of second homes, it appeared that speculation was playing a larger role in recent home-price rises than in the past."
But Greenspan's own study shows that the vast majority of house owners have extracted equity thereby reducing their "equity cushion":
"In his remarks, Greenspan cited a study he co-authored with Fed staffer Jim Kennedy and was published separately on the Fed's Web site that found about four-fifths of the rise in mortgage debt resulted from people extracting their home equity."
""How significant and disruptive such adjustments turn out to be is an open question," Greenspan said, but the U.S. economy was flexible enough that "shocks should be largely absorbed by changes in prices, interest rates and exchange rates, rather than by wrenching declines in output and employment.""
"I'm making a killing in the housing market -- as a renter."
"After 15 years as a homeowner in the Bay Area, I've cashed out and taken advantage of a bizarre situation: Homes that sell for a fortune are available to rent for as little as $1,500 a month, less than half the cost of ownership, even after factoring in the tax benefits from the federal mortgage-interest deduction."
"Of course, homeownership remains the American Dream, but the reality is that renting is a better deal, especially in the Bay Area, where the cost gap between being an owner and being a renter is probably the largest in the country."
"The disparity stems from an unprecedented occurrence: As home prices have soared in the Bay Area over the past four years, rents have fallen an average of about 15 percent and sometimes much more."
"I could spend my proceeds, about $250,000, on a down payment for a new house, lock in sky-high property taxes and then groan under a mammoth mortgage. Plus, if the housing bubble bursts, I could watch the value of the investment fade into thin air."
"Or I could rent a house and become a premier customer at Wells Fargo."
"Landlords were happy to see me. In the rush to buy Bay Area real estate, nearly all the "good" renters -- people with cash flow and assets -- are gone, having become property owners themselves. What's left for landlords are young singles, poor families and eminently presentable folks who are, alas, recovering from a financial calamity. When I described myself to landlords and showed them some of my financial records, they threatened to become friends for life."
"From my knowledge of real estate prices, I knew I'd pay at least $500,000 to buy the place. My taxes alone would be $500 a month. My monthly payments, if I put no money down and got an ultra-attractive 5.1 percent interest rate over 30 years, would total $2,700. With $500 a month for maintenance and another $150 for insurance, my total carrying costs would be close to $4,000 a month."
"That's not bad, but I can rent the whole place for $1,600 a month. That's a cash savings of $2,400 a month."
"Even when you budget nothing for maintenance -- zero -- the carrying cost of owning a home is more than double. The same goes for a large down payment. If I put down, say, $200,000 on a house, I can no longer invest this money in T-bills or the stock market. That same $200,000 in a 4 percent certificate of deposit earns me $8,000 a year. So the lost gains and the reduced interest essentially cancel each other out."
"Whoa, say the ownership bigots. What about my federal tax deduction? Wouldn't that even the score?"
"Nope. Even if the mortgage deduction saved me $1,000 a month in taxes (and that's only possible if I paid the highest state and federal rates), I still save more than $1,400 a month by renting."
"So I am now living the American Dream -- renting a home prettier than any I ever owned."
"There's also the peace of mind I gain from watching my Wells Fargo accounts grow. I'm prone to telling my friends that they should sell their homes, too, and sometimes I don't even add the words "before the market crashes." The windfall from selling after years in the market and then renting is too good to pass up."
"Just the other day, one of my best friends succumbed to rental fever. He sold a one-bedroom apartment in Pacific Heights for an obscene amount of money and moved into an apartment in Noe Valley."
"He's literally laughing all the way to the bank. In a couple of weeks, he's coming over to try my hot tub."
This article is slanted towards the concerns of readers in oil producing nations, but it is a nice summary nonetheless -- real estate is yesterday's asset class. (Not here in Marin of course; we're special after all.) The article also ties in with the previous entertaining thread concerning what is the proper measure of the "value" of a property.
Some choice quotes:
"In the mid-1970s a global real estate bubble burst under the pressure of high oil prices and rising interest rates. Are we about to see the same thing happen again in the oil consuming nations?"
"This is not an original thesis. 'The Economist' magazine has been banging on for the best part of a year about the extent of overvaluation in global real estate markets."
"Lest we forget, global rental yields on property have fallen to record lows on the back of a long period of low interest rates. For yields to recover to normal levels either rents have to surge or property prices must fall. Given the pressures on consumer spending right now, an adjustment through real estate prices looks far more likely."
"Global real estate in the past few years has acquired all the characteristics of a classic investment bubble. For a start everyone has done well, even the dimmest investor is showing a profit; and any person that you meet will tell you that you can not loose on property, especially those with zero expertise. This is surely the classic sign of an investment boom at the top of the cycle: universal optimism."
"What people forget is that the very forces that have driven property prices to levels way beyond that justified by rental yield - which is the only true measure of value in property - also work in reverse. You get an upward spiral in property prices, and a downward spiral in property prices."
"The UK property scene, for example, is in a state of denial. The fact is, pure and simple if you want to sell a property today you will need to knock 15-20% off your imagined peak price. Otherwise, you will not get a single buyer - and indeed that is why many would be sellers report waiting months without a single enquiry."
"From the perspective of 'The Economist' it is obvious that a long period of abnormally low interest rates has gradually puffed up a house price bubble of historic proportions. Indeed, this almost certainly is the biggest investment bubble in history."
"The rational investor in oil consumer countries would sell, if possible."
In case anyone actually still doubts that real estate in Marin County is way over priced, there's this article -- apparently a house in wacky Bolinas was razed and its water meter is for sale with bids starting at $500,000 (Bolinas has prevented the building of any new houses over the last few decades by disallowing new water hookups); that's just for the meter; it doesn't even count the cost of the house or land it sits on.
There's been a lot of speculation regarding whether the Fed would increase interest rates given the devastation wrought by hurricane Katrina and the effect it will have on our economy. Well, we have our answer. And it is clear (as clear as Alan Greenspan can be anyway) that the Fed will continue to increase rates.
It seems to me that the housing bulls are being sacrificed for the greater good of the nation. I'm all in favor of that. For the Fed (by mandate) inflation is the "Great Evil" and maintaining stability, employment, corporate well-being, and the banking sector trumps housing values. Furthermore, the Fed needs ammo (fiscal stimulus in the form of being able to lower interest rates) to combat the next recession. Well, we'll see. After all, it's the long-term rates that matter to housing.
Finally, some common sense at last. This New York Times article clearly details some of the reasons why the busting of this real estate bubble is a good thing. Which really is a good thing as this RE bubble is going to bust sooner rather than later (also this at Forbes.com is worth taking a look at).
Some choice quotes:
"Now that home prices in some markets are showing signs of moderating, lamentations are rising from all sides about the many bad things that may happen as a result. These include bankruptcies, foreclosures, bank failures, unemployment and recession."
"Unfortunately, all of this hand-wringing tends to distract from the essential truth about soaring home prices, which is that they are a bad thing. So before you become carried away with mourning, let me break the news: the housing bubble never loved you. The bubble is not even your friend. In fact, the very best thing you can say about the passing of this particular bubble is "good riddance.""
"What's so bad about skyrocketing home prices? Almost everything. First, they make life awfully difficult for people who aren't already homeowners and do little for people who are, because selling one inflated house only to buy another affords little profit."
"It's true that mounting home equity makes for a nice piggy bank, but it probably also suppresses other kinds of saving and encourages excessive debt. And it has helped addict global producers to American consumerism..."
"Sky-high home prices also divert too much capital into home building from potentially more productive uses... Then there is the matter of sprawl: all those new homes will mean more driving, more fossil-fuel consumption and more pollution."
"Finally, wouldn't it be better for society, and safer for our financial system, if people could buy a home without resorting to the kinds of loans - with deferred amortization, for example, or scant down payments - that are risky for borrowers and lenders alike?"
"High home prices may contribute to social and economic inequality by making far too many places out of reach for anyone but the rich, and by making it nearly impossible for people without enormous incomes to afford homes in places with the kind of desirable school systems that can help put children onto a higher earnings trajectory."
"But if inflated home prices are bad, isn't the end of a housing bubble worse? Not necessarily. There is always pain associated with market adjustments. But as the economist Herbert Stein once dryly observed, if something cannot go on, it will stop. The Federal Reserve, through its monetary policy of low interest rates, has propped up real estate prices for years. Other government policies, from zoning to building codes, are doing likewise."
"My sense, though, is that home prices appear determined to fall, at least where they are most inflated. And having them fall sooner imposes lower costs than having them fall later, while delivering immediate benefits."
"Lower prices will clearly deter some speculators, who will put their money to work elsewhere. And some of those real estate brokers will find something else useful to do. Best of all, people at dinner parties and soccer games will have to find something more interesting to talk about."
How do we account for the fact that median and average prices have increased in a declining sales environment? What is likely happening is that "low end" houses are not selling or are selling at a discount. Some higher end houses have sold. This will cause the median and average prices to increase even though the market as a whole is declining or at best is flat. People who are buying are buying the nicest houses; apparently, just "nice" isn't good enough anymore. Furthermore, since people's buying power has not changed appreciably, people can buy more house for less money. This also has the effect of increasing the median/average price while sales volume falls. We will have to wait for something like increased borrowing costs for the median/average to drop.
According to this brief by the National Center for Policy Analysis, the housing markets in the bubble areas are accidents waiting to happen. But we in Marin don't have to worry. Right? I mean, we're special, right? This is God's country don't ya know. I mean, "housing in Marin has never gone down in price" (forget the last month or two), right? So that means it will never go down, right? Sure. Dream on Marin; keep being your inward looking self. But for the rest of us, I give you...
Some choice quotes:
"Speculative "bubbles" can appear in various sectors of the economy when the Federal Reserve eases monetary policy by lowering interest rates. Generally speaking, when the Federal Reserve tightens monetary policy, the sectors of the economy that went up the most during the easing phase will fall the hardest as the bubble bursts."
"The principal impact of the last easing phase, which began in January 2001, was on housing."
"Over the last five years, housing prices nationwide rose by an average of just over 50 percent. [See the figure.] But in some areas, prices have risen much more.
* In 13 states and the District of Columbia, home prices have climbed more than 60 percent. All of these states, except Nevada, border either the Atlantic or Pacific oceans. * Home prices in California and the District of Columbia are up more than 100 percent." "Based on the ratio of monthly rent to home sales prices, purchaseprices nationally are now almost 40 percent above where they should be. This abnormal price-to-rent ratio is driven partially by falling rents, not just rising home prices. Rents are falling because investors are purchasing many properties in hopes of rapid appreciation, increasing the supply of rental housing. And since much of this real estate has been purchased with interest-only or negative-amortization loans, investors don't need much rent to cover their payments."
"Last year, according to the National Association of Realtors, 23 percent of homes were sold as investments and another 13 percent were vacation homes. A prime motive for both types of purchases is rapid appreciation; thus, any falloff in housing prices could cause many of these properties to be dumped on the market quickly, potentially turning a housing downturn into a crash."
"Today, many of the economists who correctly predicted the stock market bubble would burst are saying that the housing market is in a bubble. If it collapses as the stock market did, the impact could be even more painful. That is because homeowners are much more leveraged than they used to be."
"Additionally, many homebuyers are making larger mortgage payments than their incomes will support."
"Furthermore, homeowners are increasingly buying and refinancing with unconventional loans, such as adjustable rate, negative amortization and interest-only mortgages, rather than traditional fixed mortgages. Such loans have lower initial payments, but rise automatically with interest rates. The Federal Reserve says that 47 percent of all residential mortgages by dollar volume are now nontraditional."
"Negative-amortization loans are especially dangerous, both for borrowers and those making such loans. This type of loan is a bit like a credit card, where the full amount need not be paid every month. As long as a small minimum payment is made, the balance can be rolled over. In this case, the unpaid balance is added to the outstanding mortgage."
"This reduces the buyer's cash flow expense, but also reduces the profit when the property is sold. Unless prices rise fairly rapidly, investors can easily end up with a mortgage that is greater than they can clear at closing. Consequently, even if prices simply level off, a lot of investors may find themselves with mortgages they cannot pay back after a sale."
Conclusion "Owning one's own home is still the best investment that anyone can make. And if you plan to stay put for a few years, you shouldn't worry about a bust in the housing market. But those buying investment properties on either coast should be very, very careful. It may take a lot longer than they think to make money and they should be sufficiently well capitalized to ride out a market dip."
"Thus far, there is little evidence that the Federal Reserve's interest rate increases have had any effect either on financial markets or the real economy. Market interest rates, especially for mortgages, remain low while economic growth continues at a steady, if unspectacular, pace. However, it takes time for the Federal Reserve's policy changes to have their full impact and these lags vary."
"Furthermore, just because the Federal Reserve is raising rates gradually doesn't mean that the impact will be gradual. It could come quite abruptly. Think of a balloon. Whether you blow it up slowly or fast, at some point it is still going to burst. The same thing oftentimes occurs with monetary policy. It may appear that nothing is going on for a long time and then, suddenly, something dramatic happens."
I saw this article on another blogger's site and decided to also reference it here because it does a good job of describing buyer psychology in a flat to declining housing market.
Many of us here in Marin like to think that Marin is "special" in some way vis-à-vis its housing market -- "It's different this time", "Marin is special/unique", "Marin is God's country", etc. Yes, Marin is pretty. Yes, Marin is special. But it was just as pretty and special 5 or so years ago before housing prices went to astronomical levels. Are we to believe that today Marin is N times as special as it was before (where N is the factor by which housing prices have increased in the last few years)? No, that's silly. Are we to believe that the psychology of buyers in Marin is somehow different from the psychology of buyers in other parts of the country even after adjusting for socioeconomic status? I seriously doubt it. To think otherwise is arrogant. Buyers are buyers, which is why this article is being posted here.
Some choice quotes:
"It's not easy being a first-time home buyer, and the number entering the property market has dropped to a record low. Sometimes renting can save you money and leave you better placed to enter the housing market at a later date."
"In a recent survey, two out of three renters said that they could not afford to buy a house, while one in three said they were waiting for prices to fall. This is because they want to avoid negative equity, where the value of the house falls so far that it is worth less than the outstanding mortgage."
"A buyers' market sounds great, but what it really means is that there are lots of homes on the market that are not selling. This is because estate agents and sellers are reluctant to drop their prices and face the fact that in many parts of the country prices are past their peak. In other words, the properties in many areas are over-priced, and if you buy now you could be paying too much."
"At the simplest level, you could say that if house prices fall by more each month than you pay in rent, you will be out of pocket if you buy now. But you must also add on all the mortgage interest you would be paying on an asset that's falling in value."
"For example, with the average first-time buyer property of £157,000, a price fall of 1% in a month would wipe £1,570 off its value. This is more than most first-time buyers would spend on a month's rent. Add to this the £600 or so mortgage interest you would be paying each month, and it's hard to see any point in buying while prices continue to fall." [Emphasis mine.]
"Over the past three months, regions that have seen price falls are: the South East, London, East Anglia, and the North. Halifax, the biggest mortgage lender in the UK, predicts that in the next six months annual house prices will fall 6% in East Anglia, 4% in the South East and London, 3% in the North and 2% in the South West."
"If these predictions prove correct, first-time buyers would save £2,900 in East Anglia if they stayed renting until January 2006, £500 in the South East, and £1,100 in London."
"If you want the flexibility of renting and are not sure when to get on the property ladder, then be patient and keep saving for that deposit."
What is "retroflation"? Good question. I found this article interesting. A bit off-topic but oh well; I'm the master of this corner of the web so why not?
Some choice quotes (sorry about the long post but this is just so articulate):
"Succinctly stated, retroflation can be defined as the tendency toward inflation within the larger scope of K-wave deflation [long-wave worldwide deflationary trend]. It’s like having an air mattress of inflatable raft with a slow leak in it. The tendency of the mattress, when left alone, is to steadily deflate until it loses all the air within. But if you have a pump you can fight this slow, steady leak by constantly pumping to make sure the air mattress keeps its form (or something that closely resembles it). Sometimes, if you pump vigorously enough, you can even keep it pretty close to the maximum allowable air limit despite the leak (although this usually doesn’t last too long). The market analogy to this would be the vigorous money pumping operations of the 1930s and, more recently, the post-9/11 reflation efforts."
"What happens when you try to overinflate an air mattress that has a hole in it? You end up making the hole even bigger. In order to avoid this you have to know when to stop pumping before you create greater damage. The Fed is involved in this game even now as it has clearly stepped off the accelerator a touch since last year since it obviously fears the impacts overinflating an economy that is still under the influence of the falling K-Wave. But if you’re crafty and time it just right, you can alternatively inflate/deflate/reflate for quite a while (not to mention some timely patch-work maneuvers here and there) before the game no longer works and implosion becomes unavoidable. This is the game the Fed and the financial powers-that-be find themselves playing."
"Is the Fed purposely "playing the game" with its interest rate policy (a policy which George Brockway contends in "The End of Economic Man" leads directly to inflation)? If you analyze the official statements made by the Fed in reference to bringing inflation under control and then note that the effects of its policy are usually the opposite of the state goals, the answer to this question must be an emphatic "yes"! Deception and camouflage, after all, are part of every serious gamesmanship."
"The tendency to constantly inflate everything (including credit) in the face of K-wave deflation is relentless all over the world, but especially here in the States. In an inflation-driven economy like ours where retroflation is the rule, the tendency toward inflation spills over even into the job market. Retroflation means inflation, followed by deflation – but only so long as needed to clear the way for further re-flation. It’s truly a vicious cycle and one that’s drawing ever closer to completion as we approach the fateful 2009-2010 timeframe."
"Then there is of course the very prominent example of housing styles. Here on Topsail Island, if you take a long stroll down the beach and observe the various houses along the way, you can always tell which ones were built in the 1950s and 60s. These structures are slightly distinct compared with the dominant architectural style and sizes of the ‘70s and 80's. But the houses built in the ‘90s begin to stand out as bigger and bolder, and the ones built in the past 3-5 years are flat out garish and inordinately huge (McMansions as they’re sometimes called)."
"But another observation that can be made about these super-sized houses of recent years is that they’re construction is much cheaper and flimsier by comparison to the low-to-the-ground, solidly built houses of the 1950s through 1970s. During the last major hurricane in 1996, the large but flimsy homes were those most likely to have been damaged or destroyed, while the old reliable, low-to-the-ground 1950s houses survived. That’s another thing that can be said about retroflation – even as it beefs everything up in size, it makes up for it in lack of quality."
"So how can you survive the endgame of retroflation? From the individual’s standpoint, one must resist every temptation toward expansion beyond one’s means, including present income and future expectations. From the standpoint of a small business it might mean resisting the expansionary impulse unless absolutely necessary and economically viable."
"Adjustments can be painful at first, especially after a protracted period of inflation. Buy they are beneficial as they are necessary in the long-run. For the individual/consumer, it may mean scaling back insalubrious appetites and excess spending in several different ways. But for many, surviving the endgame of retroflation will mean adjustment to some degree or another. It also means discerning between the words and
the actions of the "game masters" who control the outcome of this ever-changing endgame."
Check out this Marin PoS selling out in Inverness (found it on CleanOffer.com) (I won't list the address because I might get in trouble):
Original Price: $799,000 Current Price: $659,000
Description: Rare Waterfront Acreage on Tomales Bay.Cozy redone one bedroom cottage which looks out onto Bay & Black Mountain.Walk out your door to your own private beach.Own a piece of the Bay.A great getaway retreat/second home,investment opportunity or vacation rental.Approx.two flat acres are usable. A rare opportunity to own PRIME BAY FRONT REAL ESTATE!!
I see this place every time I drive out to Drakes Beach. I actually visited it a year and a half ago when my friend's car broke down and we had to knock on their door to borrow the use of their phone. From what I hear it is on the market now because the owner has passed away and is being sold by one of the owner's children.
It is a square garage. I'm guessing it was used to house a boat at one time. It has not been renovated in any significant way. It is anything but "cozy". There may be an acre or two for all I know, but this is a PoS that is barely standing. It floods during a severe rainy season. The surrounding land contains a lot of "swamp" (if you've been out to Tomales Bay, then you know exactly what I mean). The only value here is the acreage but it is like a foot above sea level so I wouldn't consider that very useful unless Inverness would allow someone to build a house on stilts.
Oh, and about eight months ago or so it was listed for more like $850K; that's quite a reduction.
I found the reference to this graphic here. The median price for a new house in July, calculated over the entire nation, was down by a staggering 7.2%. But these data seem to be contradicted by this from the same portal; so I don't know what's going on.
Assuming it's accurate, I'm not sure what the correct interpretation of this graph should be. That is, housing in more inland markets is going full tilt gonzo. So you'd think this graph would show an increasing trend. Right? But it's not; it's down. That means that the gains in the more inland frenzied housing markets are being off-set by other markets, presumably those formally hot markets on the coasts. Well, one can hope.
Some choice quotes:
"The median price of a home fell in July by a whopping 7.2%."
"And the details paint an even more alarming picture of the staggering decline in the U.S. housing market. Since April, median home prices have fallen 14% ... They fell from $236,300 in April to $203,800."
"Now is not the time to speculate in real estate. Simply put, your downside risk is greater than your upside potential right now."
Save Your Cash, Love Your Family, Take Care of One Another
I took interest in this comment (11:12 PM) left at The Housing Bubble 2 blog (a fine blog, by the way, for keeping up with the latest news on the real estate bubble). (I hope I am not violating some unstated blogger etiquette by cross-publishing this comment; and if I am, well, deal with it.) I too am an old fart who has been around the block once or twice but hasn't seen anything until "this turd [Bush] landed in the White House". It's too bad youth cannot see from the perspective of someone who has lived for more than just a handful of decades; Shaw was right.
Schmonzi ponzi - WTF!
It's over kids. Katrina put her stamp on the end times. I don't want this to be a political diatribe, but the confidence in our duly elected represntatives has vanished. Everyone now knows that "there but for the grace of God go I". We've "screwed the pooch". Lack of empathy, added to hubris, multiplied by incompentence has left us little to count on.
Those of you who have rented and maintained a cash position will have the last laugh. Well, maybe not a laugh, but at least a sigh of relief.
Some economists say we'll have hyper-inflation, followed by deflation, for others it's the converse - don't matter.
Look, I'm an old man - a War Baby - before you hyper ventilating Gen X's, Gen Y's, or Z'ers start frothing at the mouth about Baby Boomers stealing your posterity - I've seen Harry Truman resolve to liberate Quemoy and Matsu, JFK embarrassed by the Bay of Pigs, LBJ seeing all those "lights at the end of the tunnel" in Viet Nam - Hell, I was there, and I was just hope'in the lights weren't go'in out on me - Richard Nixon proclaiming he's "not a crook", Jerry Ford sporting a "WIN" button (Whip Inflation Now). Jimmy Carter wearing his sweater on TV, asking us to please turn down the thermostat, Ronnie proclaiming that the liberation of Granada is bigger than D-Day. Saw Bush 41 and the rest of the world go into the desert and do a really decent job of it. Saw Clinton weather a political storm and give us peace and prosperity. Seen it, done it, lived it - but until this turd landed in the White House, I've not seen anything like this.
So, don't despair if your priced out of a house right now - save the cash, love your family, and by all means make plans to not become someone in front of the NOLA Conventon Center.
I want the best for my country and its citizens, but prepare for some really tough times - I tell my friends and family that "once around the block is enough". You young people are going to have it really hard - please take care of one another, and remember that look'in after the "commonweal" is what will get you through. And that ain't communism - that's just common sense.
This article in SFGate points out that our fatter paychecks here in the Bay Area are a direct result of the insanely higher cost of living here (no surprise). But what is surprising is that after taking into account the higher cost of living, the average Bay Area salary is well below the nation's mean. So our standard of living is reduced on average.
Further, given that 50% of all new job growth over the last three years is related to housing (sales, construction, lending, etc.), the Bay Area's economy is precariously perched, extremely sensitive to interest rate movements, and could easily tumble.
Some choice quotes:
"Many Bay Area workers are earning paychecks far bigger than their counterparts with comparable jobs in other states."
"So why are they struggling to make ends meet?"
"It turns out that while most workers in the region earn more on paper than workers elsewhere, their purchasing power is slashed by the high cost of living, according to an analysis of Labor Department and other cost data."
"Meanwhile, on a statewide basis in California, wages have failed to keep up with inflation, UC Berkeley labor economists say. And although payrolls have been growing, job creation has become heavily dependent on the boom -- some would say bubble -- in housing."
"Yee found that San Jose topped the nation with an average annual wage of $55,830, San Francisco ranked third at $51,570 and Oakland came in seventh with a $46,490 paycheck -- all far above the national average of $37,020."
"But what kind of living standards do those fat paychecks support?"
"Once deflated for cost of living, the wage picture changes substantially. The average annual wage in San Jose fell to $32,385 after the adjustment. The East Bay ranked next in the region with an average cost-adjusted paycheck of $30,235, surpassing metropolitan San Francisco, where big salaries actually buy a mere $28,418 in cost-deflated goods and services. All three areas trail the national average annual wage of $37,020, the statisticians said."
"Erol Yildirim, who runs the council's cost-of-living analysis program, said the biggest single reason for the Bay Area's poor showing in purchasing power is obvious to anyone with a mortgage."
""Housing in San Francisco is three times as expensive as the national average," he said. Food is also more costly. A dollar's worth of groceries nationwide costs $1.50 in San Francisco, according to his figures."
"At the risk of ruining barbecues up and down the length of California, the UC Berkeley researchers offered another disturbing finding: After adjusting for inflation, wages statewide fell during the first half of 2005. According to Dube, the UC Berkeley economist, this was the second year in a row that real wages fell in California."
"The Berkeley labor economists noted that the state's economy has gotten a huge boost from housing. Construction and related fields such as real estate or lending, all related to the housing boom, accounted for half of all the net job growth in the state between 2002 and 2005."
"With job creation dependent on housing, which is in turn dependent on interest rates, that puts a question mark over the state's labor market, Dube said."
In light of the terrible devastation wrought by Hurricane Katrina, I have not been spending my time thinking about a housing bubble. So I won't be posting on that subject for a while.
It is shameful to me that we (the USA, the world's last super power, the self-proclaimed "leader of the Free World", etc.) can dump billions into a war based on lies and propaganda and ulterior motives and false pretense but we cannot help our own people in a timely manner. Where's the National Guard for crying out loud? Oh, right, they're in Iraq. Osama bin Laden must be laughing is arse off right now.
Consider making a donation to the Red Cross, I have; go ahead and take a little more out of your "home equity" and do some good with it.
The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.