Friday, March 27, 2009

South Park: How the Financial System Really Works

43 Comments:

Blogger Marinite said...

Thanks to a South Park fan for sending me this.

Mar 27, 2009, 1:54:00 PM  
Blogger mountainwatcher said...

I'm relieved to see that there is some logic to all of these bailouts.

Phew, I thought those guys were messing with us.

The logic is indisputable.

Thanks for the post.

Mar 28, 2009, 1:22:00 AM  
Blogger Marinite said...

I have another anecdote for the person who asked what is going on with prices.

Another friend of mine just made an offer (accepted) for a really nice 3br, 1850 sqft (2200 if you include the garage... yes, it has a garage and not a carport) Mill Valley house up on a hill with a decent view up on Panoramic Hwy. Originally purchased ~2.5 years ago for $1.2 mill. They originally asked $1.2 mill and have since dropped the price to $1mill. He offered and is buying for $800k now. Also, the sellers are lending him $275k over four years because he does not have a sufficient down payment and could not otherwise afford it.

Never mind whether his is a wise decision or not. The point is that there are decent deals to be had, even in trendy Mill Valley, and some sellers, who haven't needed to sell before but who do need to sell now, are willing to sacrfice to unload their debt shackles.

I'm mostly glad this lower price (33% discount from last known peak) is locked in and the comps for that area reset.

Add on top of that the many Marin sellers who have taken their crap off the market, the "shadow inventory"; figure it out yourself.

Mar 28, 2009, 1:58:00 PM  
Blogger Lisa said...

Matthew - "Debt Shackles" is the perfect term for the super-sized Marin mortgages that so many people lined up for. And can you imagine the property taxes and maintenance and insurance and utilities on top of the monthly mortgage nut? Yikes.

I still believe we're still in the early stages in Marin. As unemployment creeps up, and FB's lose interest in servicing huge debt levels on a declining asset, then I think we'll start to see some serious price declines.

Pride only goes so far, after all. If you're looking at $1M, $2M+ of principle + interest, without any payout to finance retirement, kids going to college, etc., I think the jingle mail is coming to our "special" corner of the world.

Mar 28, 2009, 3:01:00 PM  
Blogger mountainwatcher said...

I'm happy to hear that there are some buyer-friendly deals being made.

We keep looking at homes and still see so many sellers locked in to the pre-burst prices.

The new RE agent spin seems to be about the interest rates.
I'm trying to sort out the reality of the situation.
They are saying that even if home prices continue to fall, the interest rates will rise.
So, obviously, now is the best time to buy.

Has anybody done the math on this?

I know nobody knows how much farther the home prices will fall.
It seems logical that interest rates will rise and inflation will also rise.
Is it a good thing to lock in to a loan at a low rate even if the asset continues to depreciate?

Mar 29, 2009, 12:15:00 AM  
Blogger Matthew said...

Oh, so many juicy annecdotes and stories to talk about regarding home prices here in Marin ..

Let me first discuss the new Realtor spin on "interest rates" vs "home prices" that mountainwatcher noted.. I stopped in at an open house at a neighborhood I sort of like in Novato just to take a look around (no intention on buying)... I have not done this in several years by the way, and it was just a spur of the moment kind of thing.. at the end of my looksee spin around the house (great staging by the way), the Realtor asked: "So, what do you think?".. I responded, "I think residential real estate prices here in Marin have lots more downside left in them..".. to which she responded, "but interest rates are at an all-time low and will be moving up soon, so even if prices come down a little more, your monthly mortgage cost will be the same, so why not act now?".. to which I said, "that's funny, we've seen historic low interest rates twice now in just a 5 year period, so I supect we're not done seeing them... besides, we both know it's really the house price that matters, now, don't we?"...

of course, she just smiled and gave me an icy stare (the house has been on the market for 4+ months)... I'm sure she realized she wasn't dealing with the average dipshit buyer they like to take advantage of with their spin and BS..

A good friend of mine bought a year ago in an adjacent (nice) neighborhood here in Novato and is underwater already after putting down $100K or so as a down... he bit on the same house price / interest rate spin.. he asked me back then what I thought... I din't give him specific numbers, but told him what I've been saying all along here which is we'll se prices go back to 1999 or earlier levels before this is all said and done with here in Novato anyhow... I think they have better BS juice down there in Mill Valley.. or, probably, the locals just want to continue believing longer as it's deeply tied into their sense of worth and value...

Mar 29, 2009, 5:33:00 AM  
Blogger Matthew said...

I'm quite, quite sure the curret spin that all the RE brokers here in Marin have agreed to is to keep list prices inflated a bit (to avoid the panic, which would freeze the market up), but to be open to negotiating lower prices with any interested buyers...

Another friend of mine put an offer in on a house that sold fo $940K at the peak a few years ago for $700K... after chatting w/me several months ago and doing some research, he withdrew his offer... he told me the other day (about 4 months later) that he put in another offer on the same house for $610K (REO property)... he still is nervous, but not as nervouse as he was at $700k... he told me that "there are several bids in".. I advised him to tell his realtor to "show me" on the other bids, or to stick them where the sun don't shine as they are probably BS..

Personally, I wouldn't buy (or would buy a lot lower), as I think the house will revert to the low 500's or high 400's when this is all said and done.. about where they were when they built them (or perhaps a bit cheaper).. that's still an expensive house in 99% of this country, by the way..

Mar 29, 2009, 5:49:00 AM  
Blogger Lisa said...

Higher interest rates will mean lower prices, as people will qualify for "less" house at the higher rate.

It's way, way better to buy in a rising interest rate environment. And the next cycle when rates drop, you can re-finance. Who knows, rates could start to move up next year given the Fed's printing presses are running 24/7.

I agree, it's all about the house price and less about the rates, which come and go. And property taxes are based on your purchase price, so the less you pay, the better.

Mar 29, 2009, 7:45:00 AM  
Blogger Lisa said...

Forgot to add, I do some looking every now and then in Marin and West Petaluma. I sold my house in 2004, and am sitting on the cash. I could buy now, but what I want would be a stretch for me, and I don't want to do that for the next house. Next house is a 15 year loan, 10 year if I can swing it.

I don't think it will be all that difficult to catch the bottom. And I think once we get there, prices will hover there for a while. Incomes aren't going up and lending standards are getting looser anytime soon.

I agree we'll be back to 98, 99, '00 pricing. Those year were pre lending-bubble, but there was certainly tech money being thrown around.

We all know Alt A and Pay Option and Prime resets have yet to crest, so wait for that. Then the nicer neighborhoods will finally start to see some serious price drops, as few buyers will qualify for mortgages at inflated prices.

Mar 29, 2009, 7:54:00 AM  
Blogger sf jack said...

Re: South Park

That was the most entertaining thing that's been on television in years!

A few days ago I went back and watched that segment thrice - laughing every single time.

What "leaders" we have in this country!

Is there a "Fire Geithner Now!" group organizing somewhere?

Mar 30, 2009, 9:19:00 PM  
Blogger marine_explorer said...

"but interest rates are at an all-time low and will be moving up soon, so even if prices come down a little more, your monthly mortgage cost will be the same, so why not act now?...yada, yada, yada"

"a little more?"...OMG, that's so 2006. Uh...I think we can do the math--do realtors really think people buy homes on impulse, like cars? Beyond belief.

Note to realtor gals: be careful with those icy stares; someday your face may just freeze that way.

Mar 31, 2009, 8:54:00 AM  
Blogger HHB said...

Mountainwatcher-

You already recieved serveral great replies here, but if you want my take I just posted this on my site as a reply to your question:

http://healdsburgbubble.blogspot.com/2009/04/why-low-rates-are-not-reason-to-buy.html

Apr 1, 2009, 9:14:00 AM  
Blogger marinite2 said...

Excellent. Thanks HBB.

Apr 1, 2009, 4:40:00 PM  
Blogger mountainwatcher said...

That makes sense to me.
Thanks for all of the insightful replies.
I think I will wait a while before jumping in.

Apr 2, 2009, 12:42:00 AM  
Blogger Chris said...

Love this blog and totally agree prices are still tumbling. Spring season will be an eye opener for wishful sellers. A few knuckleheads are still over paying for the POS’ in my coveted Corte Madera neighborhood. That said I was just at the local RE office presenting an aggressive offer on a rental purchase and the listing agents Aston Martin was parked right out front. A very nice ride! However, you’d think they'd have enough brains to park it out back considering everyone bringing offers through the front door is paying for it. How do they continue to justify the full 5% plus commission ($50K)? For what, filling out a few documents after taking a cheesy 40 hour RE license class. Thankfully I took the cheesy class too and have a license so I’ve always only paid 2.5% max. to the sellers agent. Remember the commission is always negotiable and you don’t need a license to buy for yourself!! Work directly with the listing agent or seller!

Apr 3, 2009, 8:09:00 PM  
Blogger CAccountant said...

I love this blog, have been reading it for some time. I think prices still have quite a way to fall.

About interest rates: I read this somewhere else, but the basic idea is as follows: prices relate inversely to rates. If you are buying a house in a high interest rate time period, and the price is lower, then a fixed down payment will go a LOT further. You can get substantial equity instantly, and if interest rates fall and the price of your home increases, that is your equity increase. If you buy an expensive home at low rates, and the rate increases, then your home price goes down, and you LOSE equity. Basically, there is a major "equity upside" by buying a house with high rates in the event that the rate falls, and a downside by buying with low interest rates.

That said: INTEREST RATES ARE GOING UP! The fed has an almost 0% rate right now. Matthew, who confronted a RE agent and said that we haven't seen the lowest rates yet, is WRONG. It's almost impossible for rates to fall lower, as the fed can't lower the rate any more, they already have. Plus, the fed is printing money, which leads to inflation. Inflation increases the risk for banks, and therefore the interest rate. So rates will surely go up if we maintain the current inflationary policy, and if we avoid deflation.

That leads to another of my impressions of this blog: EVERYTHING will eventually make homes less expensive. That is simply not true. For example, inflation and the falling dollar should increase home prices in real terms, especially in Marin. A low dollar, which looks to be in our future, will lead to lots of foreigners buying nice homes in Marin. A weaker dollar may actually be good for home prices in Marin, especially as compared to less desirable places. Second, RE does better in inflationary periods because the return on owning a home (basically the price you would pay to rent a comparable home plus the tax savings on that "income"), increases with inflation. Inflation makes RE a better asset relative to other assets, all other things equal.

On another topic, the US governments' debt has not really increased much since the 50s in terms of our GDP. The sky is not falling, yet. The real big thing isn't government spending, the financial crisis, or John McCain's beloved "pork." It's social security and medicare. To get on a strong financial footing, we need to slash those drastically, plus probably raising taxes. The financial crisis is a drop in the bucket compared to Medicare liabilities plus Social Security. It's almost negligible really. See "The Coming Generational Storm" by Kotlikoff. Save the hand-wringing for the important stuff.

Finally, please give Geithner, Bernanke, and Obama a break. The banks are the lifeblood of our economy, like it or not. They need to be bailed out by taxpayers, and Geithner's plan is reasonable. The government has already tried letting the bankers fail. They did that from 1929-1930, and look what happened. Systemic bank failure=Depression. The fed gov is right to throw money at the banks (which is what they would be doing with nationalization, anyway). This blog is wrong to criticize that so vehemently.

Apr 4, 2009, 1:16:00 PM  
Blogger mountainwatcher said...

Mr. CAccountant...et al
With all of that info,
What is the best time for me to buy a home?
Now? One year later? Never?
It sounds like a very complex equation.
You see the prices dropping but the dollar is too.
You warn of higher interest rates, but say it is better to buy with higher rates.
No wonder we seek RE advice.

Apr 5, 2009, 4:48:00 AM  
Blogger Matthew said...

I posted this over on the Healdsburb blog as well, but I think the comment is worht repeating over here in Marin..

On the argument of whether home prices or interest rates matter the most for stimulating RE sales..

IMO, the RE machine (and country) already tried the "interest rate" argument as being most or equally important, and lost.. all those "interest only and ARM type" loans pumped and pushed during the bubble where just another way the RE machine was able to allow the buyer to ignore the real cost of the home on a temp basis... their half-baked scheme only worked on a temp basis because the market was heading up and very few people were actually paying off their homes.. they only paid them off when they sold them.. as soon as the market stopped heading up, the whole house of cards crumbled and home prices mattered again... yes, in the end, it was home prices that really mattered not anything else except the security of the job and the wages of the person holding the mortgage... that's what mattered.... that's why we're sticking our children with trillions of dollars in debt, because we ignored the relationship between home prices and the jobs/wages (or the financial health of the buyers)... god help us if we (esp Congress) don't learn this simple lesson..

That relationship needs to always exist.. if it did, we all wouldn't be sitting on the sidelines waiting for things to settle out to historic norms and we'd be stimulating the economy instead of saving all our nickles and dimes.. ignoring that relationship makes no sense in a capitalistic economy, either..

If Congress doesn't learn this lesson... well, as I said, god help us, but I know the math will eventually take hold, as it did in 2006/07 or so, and start to drive prices to their historic norms with wages.. sorry, can't ignore that in the end, which is why I'm waiting for the rest of the hot air in the market to seep out.. there's much more seeping to go here in Marin..

Apr 5, 2009, 6:54:00 AM  
Blogger Matthew said...

To CAaccountant.. I'll take your comments one at a time, so relatively long response here, sorry.. "Matthew, who confronted a RE agent and said that we haven't seen the lowest rates yet, is WRONG." Sorry, you are WRONG as that's not what I said.. go read again.. I said we've seen historic low interest rates twice in the last 5 years and we'll likely see them again.. yes, we will, if Congress wants to go along with the NAR and keep RE artificially inflated.. seems you have not read your own reply on the relationship..

That leads to another of my impressions of this blog: EVERYTHING will eventually make homes less expensive. That is simply not true

Funny, I've read this blog for a while and never recalled reading that... sorry if you just bought your Mill Valley home, sir..

A low dollar, which looks to be in our future, will lead to lots of foreigners buying nice homes in Marin. A weaker dollar may actually be good for home prices in Marin, especially as compared to less desirable places.

Interesting... there's that "foreign buyer sapping up all our excesses argument" I've heard elsewhere... maybe those foreigners think that home prices are a good deal now and increased 3fold from 97 or so on fundamentals... or prices don't matter to foreigners... or their currency is not tied to our currency... I'll need to find out what juice they're drinking, and go get me some..

On another topic, the US governments' debt has not really increased much since the 50s in terms of our GDP. The sky is not falling, yet. The real big thing isn't government spending, the financial crisis, or John McCain's beloved "pork."

Boy, I'd love to spend more time on this one with you... you need to look at the Congressional budget and see what is the #3 line item on that budget and see if you can tie what's happening nationally with what has happened in many households across the country... interest on the debt is now the #4 expense behind SS, Medicare and DOD... that's right, paying interest on our national debt is more expensive than the Departments of Education, Agriculture, Homeland Security, Transportation combined... it's increasing (by a loooong shot) faster than all the other line items in the budget including SS and Medicare.. within 5 years, it will likely be the #1 or #2 expense on the budget eclipsing DOD and SS.. what do we get for that cost ? zip..

Also, your GDP argument falls apart quickly when GDP contracts, as it's doing now.. interest on the debt will soon overtake DOD as the #2 expense.. perhaps as early as next year... still doesn't matter ? oh yes, what percent of our GDP was public vs private ? .... what percent was RE investment ? what percent was based on trading paper on Wall Street ? ignoring our balance sheet as a country, which is what you are inferring, is a terrible idea and exactly EXACTLY why we're in the pickle we are in at the moment..

The financial crisis is a drop in the bucket compared to Medicare liabilities plus Social Security. It's almost negligible really. See "The Coming Generational Storm" by Kotlikoff. Save the hand-wringing for the important stuff.

Diagree... I'm not saying SS and Medicare are not major concerns, I'm saying cutting a check for $2T or more to bale out a failed system of systematic greed and fraud and sticking our children with the bill is not a small thing.. the SS and medicate deficits will not require a $2T immediate monetary injection to fix.. those fixes can be spread out over many years..

Fed throwing money at Wall Street and Banks.. This blog is wrong to criticize that so vehemently.

Disagree.. sounds like some disagreement and debate on this subject in Congress prevented some bad bale out polciies when Paulson put a gun to the head of everyone last fall.. guess we should have just cut him and his buds a quick check then... there are many economists and capitalists who disagree with you this one as well.. not just this blog..

Apr 5, 2009, 7:34:00 AM  
Blogger Matthew said...

didn't proof check before posting.. to clarify.. interest on debt is #4 line item currently in the budget #3 if you ingore SS which is often listed seperately)... it will overtake DOD as the #3 item within a few years and overtake Medicate at the pace we're going within 8 years probably as the #2 or #1 line item ... Damn right it matters !! just like home prices matter...

Apr 5, 2009, 7:41:00 AM  
Blogger Matthew said...

last post then I'm hitting the trails... I predict we'll see a generation uproar in the near future for the failures of our generation to spend and govern within our limits.. I told my kids the other day, that "I'd be furious if I was in their generation"... not only is our generation trying to stick them with high home prices on the front side (and all the propping up BS policies we need to keep that so), but we're also sticking their generation with the bill for those BS policies on the backside.... so, yes, they are getting it from both ends from our generation..

Until home prices reset to historic norms, they'll be the first generation who won't be able to afford an average home on an average wage... and, by the way, here is the bill, from we the boomers to you Gen Xer's, for just that privilege... I'd be outraged if I were them... I'm outraged on their behalf, esp because I have kids..

Apr 5, 2009, 8:26:00 AM  
Blogger Lisa said...

Foreigners buying here in Marin, LOL. Yeah, like of all the places in the world they could be, they'd come here. The IJ tried that piece of fluff a couple of years ago, but conveniently couldn't quote an actual statistic about what % of sales were really coming from foreign buyers.

There's always some carrot being dangled....if you can just hold out a bit longer, the foreigners will come and "save" our market. Lower interest rates will "save" our market. Pent up demand will "save" our market.

Next myth, please.

Buy a house you truly love and can afford, pay it off as quickly as you can, and it doesn't matter what it's "worth."

Apr 5, 2009, 9:07:00 AM  
Blogger CAccountant said...

To Matthew and Lisa:

I will also address your points one by one.

First, I do not own a home in Marin or anywhere. I am actually about to graduate college; indeed, I am one of the people stuck with you baby boomers' debt. My parents bought their home 15 or 20 years ago, refinanced only to get a shorter time period of the loan, did no other ATM-style refinancing, don't live in Marin, and didn't count on it as retirement. Actually, I would be better off with lower home prices. I have no other stake in the value of a home in Marin per se, only as it relates to other economic factors.

"Foreign buyer point"- I do not think that the bottom will fall out of the dollar tomorrow, and tons of foreign buyers will prevent any decline in Marin county RE. However, I do think that the dollar will fall in the future, as the financial crisis shakes out. I think that a falling dollar will lead foreign investors to buy ALL kinds of assets in the US - stock, businesses, land, and housing. We saw this before the financial crisis shut this down, but I think that this is the long-term trend. Lots of foreign private equity funds were buying up assets, and I see no reason to believe that they will not do so in the future. So, relative to a strong dollar only, I believe that housing prices will be higher in the future, not higher than they are now.

I believe that some areas of the country will probably benefit more from this than others, such as the Bay Area, Los Angeles, Washington DC, Seattle, and many others. I think Marin is one of those areas, due to its proximity to SF and its location on the pacific rim.

"Debt" point- I believe that the government should fund banks and AIG because if banks collapse, our entire financial system and economy WILL collapse. I think it is worth the $2-3T extra government debt to save the banks and major financial institutions, or to mitigate the damage of their failures.

Contrary to what you implied, this debt will be useful to Americans of all ages. You should have seen college recruiting in Fall, before the worst of the crisis had really hit: it was miserable. You can talk until you are blue in the face about how the next generation will have to pay the debt back, and it will be miserable. However, saving the financial system, irresponsible as it was, is good for that generation. There is a case to be made that Generation Y has come out the worst from whatever we're in, because we are looking for jobs, have no savings, and even less economic security than other generations. A depression would be the worst thing for us, and I'm quite happy to see the government spend $3T that I will have to pay back to avert such a scenario. You say sticking us with the bill is no small thing, but we will benefit from averting a depression.

The gov shouldn't have let such a situation develop in the first place, obviously. But that's what you get from deregulation: privatized gains, socialized risks. What I'm arguing about is what we should do now, not ten years ago when the bubble developed.

"Debt is line item #3 on the budget" - This only proves that debt payback has surpassed other line items. That statement doesn't even prove that debt has actually grown: other line items could have decreased. I know that isn't the case, but such a statement is meaningless without knowing the numbers behind the other line items!

That debt servicing will surpass line item X and line item Z in the future is obviously a comment on the debt we will have in the future, not now. I was talking about current debt, which is not the same thing as what you are talking about. Of course debt is set to explode in the future. Why is that? Well...Social Security, Medicare, and defense. You are 100% correct when you forecast generational warfare. Generation Y is actually larger than baby boomers, and there is no way we are going to pay your social security and medicare. It's just not going to happen. It would require absurd payroll tax levels, something like 60 or 70% last time I read about it, although I'm sure that number has changed by now. You have ruined this country for too long. It is an impossible burden, and ultimately your generation will pay the lion's share in reduced benefits. I assure you of that.

I'm not worried about our debt right now, because its in dollars and its manageable. What I'm worried about is entitlement spending, that's the key to everything. It needs to be cut drastically.

Perhaps our main disagreement is over the government's handling of the crisis. I think you are focused too much on the costs of what we are doing, and not on the costs of NOT doing anything. If the banks fail, there is a depression. Another Great Depression is far worse than another $3T in debt, and would probably create more than that in debt because of less tax dollars. Obviously, reasonable people can disagree, but I stick by that argument.

To mountainwatcher: I don't know when you should buy a house. Probably the most practical advice is to wait until the prices stop falling. Or just wait until they are in the '97 ballpark (but a little higher because of the other factors I said), real dollars.

Apr 6, 2009, 9:12:00 AM  
Blogger marinite2 said...

CAccountant,

Thank you for keeping the discussion civil.

For what it's worth, I tend to agree with your points. But I disagree that focusing on the (recent) past is less important than focusing on the present.

What's missing from the $3T (or whatever it is now) is the brutally honest assessment and self-reflection of how we got into this mess in the first place. Only then can a viable, workable re-engineering of the financial system take place and only then would the $3T be worthwhile. It would mean a lot of people would lose a lot of money, at least on paper, but so be it. It would be better than a depression and we would be better off for it. Even a depression, what you seem to fear so much, would be preferable if we came out of it stronger and healthier. But certainly, spending money to re-engineer the system, if done honestly, would be the best route.

But what we have today is $3T being spent to prop up a broken and corrupt system; prolonging the problem and delaying the inevitable. The mindset seems to be to "prop up the system long enough so that I am no longer in office and I can get out more or less intact".

Apr 6, 2009, 11:00:00 AM  
Blogger marinite2 said...

And to elaborate a little:

One thing that has been missing from the financial system (used in its most generalized sense...from banks to borrowers) has been a near-complete lack of personal accountability fueled in part by a mistaken belief in an absense of all risk, whether by design (e.g., "sliced and diced" debt obligations, etc) or by a "it's different this time" mentality.

The single most effective way to "regulate" the system so that this mess is not likely to occur again is to revert to a system where risk-takers are held accountable for the risks they take. If you "bet the house" on a gamble and lose, then YOU LOSE. Too bad for you. The damage is contained to you and your business. You do not make someone else lose for you, and then move along with business as usual. And you sure as hell don't reward bad behavior or bail them out. This just reinforces bad, destructive behavior.

And we don't need an elaborate system of laws or regulations. The single greatest regulator is self-preservation. If bankers knew their necks, not someone else's, were on the line for the financial decisions they make, then I think they would have been more risk averse. The same applies all the way down the "food chain" of finance down to the lowly home loan borrower who could pay absurd prices for houses with little "skin in the game".

Apr 6, 2009, 11:21:00 AM  
Blogger Lisa said...

CA Accountant:

"Foreign buyer point"- I do not think that the bottom will fall out of the dollar tomorrow, and tons of foreign buyers will prevent any decline in Marin county RE."

If you can quantify that, I'd love to hear it. And Marin County RE has already declined, so I'm not sure what foreign buyers can prevent.

Apr 6, 2009, 8:14:00 PM  
Blogger Alarming said...

Jim Rogers just posted on his blog stating that the best time to buy properties in the US was in 1907. Now it is time to live in Asia.

Plus there was an organized RE trip formed by wealthy Chinese people to come to the US to buy properties couple months ago. That event was well advertized in China and these wealthy people who signed up for the trip have to pay fees to join and reach certain income/wealth level. They chose Boston as their first priority because they were looking for properties for their children in case they come to the US for education. They had MIT or Harvard in mind. However, the result was no one bought a property in the US. Plus, a second RE trip is being organized now. The Chinese people who signed up are a lot less than the first one. That just shows you how much foreign interests are out there.

Sometimes a wishful thinking does not translate into reality. Plus, with high unemployment rate running in the bay area, high RE prices have not reflect the reality yet.

Apr 6, 2009, 10:22:00 PM  
Blogger Lisa said...

Alarming - Yes, I have to believe foreign investors would gravitate to education cities, business cities and vacation spots (e.g. Vegas) long before they'd think about coming to the suburbs (e.g. Marin County).

It's wishful thinking on the part of The Chronicle (almost out of business, BTW) and the Marin IJ to think rich foreigners are going to somehow save the FB's in the Bay Area.

Apr 7, 2009, 10:19:00 AM  
Blogger Thus Spake Z said...

This is a price/interest rate study. Although you may have different opinions about the appropriate ratio of price decline to interest rate increase, I believe the simple conclusion is that it makes much more sense to pay less and pay a higher interest rate.

Price versus Interest Rate Study

Price 800k 750k 700k 700k

Interest Rate
5.00% 6.00% 7.00% 8.00%
Term 30 30 30 30
Payment
$3,414 3,792 4,105 4,678

Delta $378 $690 1,264

Period to Equal Price Delta
Months 132 145 79
Years 11 12 7

Sorry about the alignment, but I can only spend so much time on the post :-)

Apr 7, 2009, 1:51:00 PM  
Blogger Holland said...

Quote from Jim Rogers:

300 Million Americans are Propping Up a Few Guys

"We had automobile companies, airlines, retailers going bankrupt for hundreds of years. We still have cars, we still have planes, we still have shops. What do you expect them to say? Off course they say there is systemic risk, then they panic Washington and say 'give us more money' And they keep their Lamborghinis and their houses.

That is not the way is supposed to work. 300 million americans are propping up a few guys so that they can keep their Lamborghinis. Its outragous economics and morality."

Apr 7, 2009, 7:18:00 PM  
Blogger Matthew said...

CAaccountant.. I appreciate the civilized dialogue; however, I disagree with you completely on the deficit and debt issue and marginally disagree with you on a few others.. Any business or government that does not know the source of it's funding (really know it) is an incompetent fool and will soon be out of business or will be forced to push lousy policies to compensate...

US deficit is out of hand no matter how you look at it, including historically (except for a brief period around WWII)... It is projected to be 9% GDP this year with some lofty projections still for the economy and deficit itself... I suspect when it’s all said and done w/the bailouts and recession over the next few years, it will eclipse 12-14% of our GDP..

I liken our national deficit and debt and the comment that we can ignore it to all that just transpired across the country with individual spending (and corresponding debt ) far exceeding personal income... it’s as if income is guaranteed on either an individual basis or national basis… what we’re seeing now is that’s not the case for either w/unemployment and contracting economy…

The devil is in the details even more so when one looks under the hood of the US economy... In WWII we made stuff and continued to make stuff the world wanted and needed after the war… our GDP was real and was healthy because our economy was built around manufacturing... Today, it is estimated that the financial industry makes up as much as 40% of our GDP as a nation... imagine that… now, that’s a stable denominator for you… Also, in addition to the out of control deficit and debt, our trade deficit is another measure of the US selling the farm to overseas buyers... between the two, we're headed on exactly down the wrong path as a nation… very wrong path and our pace is quickening…

That's the case with GM... the source of their funding over the past 5-8 years was real estate, not savings or wage inflation. They should have foreseen what was going to happen and retooled well ahead of time. However, it was easier to go along with the illusion that all was well because sales were up. That's the same GDP argument you are making IMO. All is well until it isn't, then it's holy sh__ batman !!

What's the source of the tax revenue in this country ? What industries make up our GDP, that all you spenders think will continue to grow forever ? When in our history did the interest of the debt eclipse all other Departments in terms of cost ?

I'm much, much more skeptical over the simple deficit to GDP comparison.. that's the stuff Greenspan was spouting and he's been wrong for 5 years now.... remember, he was bragging about low CPI indexes when real inflation was somewhere around 20-25% as he dropped the discount rates before this last go… he’s a defict / GDP ratio guy himself, but he’s total clueless (and I really, really mean that by the way)..

Chinese or no Chinese, I know house prices here in Marin are heading much lower because that's what the math and historic relationships say...

Apr 7, 2009, 8:13:00 PM  
Blogger CAccountant said...

Comments about civil dialogue- Makes me wonder what you guys usually see on this blog...a little scary to wonder about that...

Lisa (and also Matthew): I cannot quantify what effects a falling dollar and inflation will have on home prices in Marin County. If I could, I definitely wouldn't tell you or anyone else aside from the investors I'd be pitching my real estate deals to. However, I assure you that if there is any significant change in inflation or the dollar's value, and it looks very probably that they will, the historical income/home price ratio that this blog uses WILL change.

Remember, the value of any asset is the sum of the net cash flows you will receive from it, adjusted to present value (google discounted cash flows if you want more info on asset pricing theory.) For homes, this means the rent you avoid paying by owning a home, net of maintenance and property taxes, as well as some complex tax adjustments. Few consider that the "rent" you get from living in your own home is untaxed, so you have to adjust the cash flow for that too. Inflation, falling dollar, and even tax rates have major effects on rent prices. Rent prices usually keep pace with inflation; so if inflation increases rents in the future, the "cash flow" you get from your home increases with it. The income/home price ratio isn't set in stone, and isn't the primary factor in valuing a home. It's only tangentially important. The primary factor is cash flow, or rent, and if macroeconomic conditions change the cash flows from any asset, including real estate, the price of that asset will change. By the same theory, if inflation or economic downturn hurts stocks or bonds long-term, RE will look more appealing given the weaker substitutes, and prices will increase. That is normal and in keeping with economic asset price models.

My point is that you cannot only rely on historical factors such as income/price ratios, historical appreciation, etc. Rent, tax rates, inflation, suitable investment substitutes, and other general macroeconomic factors generally determine asset prices. If those things change, your ratios will change too, so the obsession with those ratios is pointless, as they don't determine things. I do not know enough to quantify those factors I cited, as such a quantification would require super detailed calculations, projections, and economic knowledge, and would really only be guesswork. You can't get that for free.

To Matthew: I do not know where you got your financial industry statistic. I assure you it is wrong. The Bureau of Economic Analysis publishes a breakdown of US output by industry. It is generally thought reliable by economists, and I believe it is the best to go by. The latest data is from 2007. Total Output: $25,808.9 Trillion. Finance and Insurance: $2012.2 Trillion. What percent is financial services and insurance of our total output? About 7.8%, rounded up. Hardly 40%. Construction? $1245.9 Trillion. Real estate, including rents? $2517.3 Trillion. This is out of $25 trillion. Not insignificant figures, but not more than 23% of our economy. And that was in 2007, after the housing bubble began to burst.

It's also important to note that those sectors aren't going away. There will still be banks and insurance companies and loans in 10 years, construction has always been cyclical, and businesses and residents will always need to rent space.

"We don't make anything"
Our biggest sector? Manufacturing. In fact, in 2007, the US was the world's biggest manufacturer, in dollars. Manufacturing output has increased every year for the last 5 years! I won't go through everything, but our economy may be more diversified than you give it credit for. Perhaps living in Marin you don't see those other sectors; they certainly haven't been hyped as much recently!

Debt v. GDP ignores falls in GDP argument:
Well, in the 4th quarter of 2008 GDP fell 6.3% on an annualized basis, so if it fell at that pace for a year it would fall 6.3%. Predicted to fall 5% and 1.8% in the first and second quarter of this year by today's WSJ economic projection, probably as good or bad as any projection. So, it appears that the wholesale destruction of American GDP may not come to pass, and our debt to GDP ratio may not get out of whack. I disagree with your argument that debt/GDP is not a valuable indicator, and I don't quite understand your reasoning. The US savings rate is increasing, credit card debt is being paid down, our foreign trade balance is shrinking, and even Obama recognizes that the current world economic model based on endless US consumption is donezo.

Our spending on bailouts of all types, "pork" projects, and all the things that people attack the government for spending money on are small compared to how large our economy is, and will not significantly hurt us. What hurts is social security, medicare, and defense spending, the most popular types of spending. That needs to be cut to the bone, no matter what. No more money for wars, less money for defending ourselves, less money for the elderly, less health care for the elderly. That's the only thing I'm bearish about, our political will to get that done, and our ability to survive if we do not.

To Holland:
I noticed that banking is not included in that quote. I wonder if there's a reason, or just an oversight of the author? (Heavy sarcasm).

CAccountant

Apr 10, 2009, 11:38:00 AM  
Blogger CAccountant said...

To Marinite:

I disagree with you. The people at those big banks and insurance companies, they really aren't managing their own company. They are managing the shareholders' company. They aren't screwed if they lose even without a bailout: their shareholders are screwed. By the way, this is different than how banking was 50 years ago, when the bankers were partners in a partnership, and were gambling their own money. Guess what led to a corporate structure for investment banks? Yep, less regulation of bankers actually led to a system in which they were gambling other peoples' money, not their own.

What you see in banking, managing and taking risks for the short term, not the long term, is one regrettable side effect of a publicly held corporation, as opposed to a business managed by its owners. There is a great body of literature about the incentives for individual bankers to take greater risks than are economically optimal. It's an instance of market failure, and government regulation of such risk taking is the most effective way to solve that problem. The free market does not always lead to the most efficient behaviors by bankers. If you wish I will cite the literature for you.

Take a step back and think about what you are really advocating: massive bank failures of all major financial institutions. That led to depression in the 1930s, and there is no reason to think it won't do so again. Really think you'd escape unscathed from something like that? Is that really what you want, just so the bankers and FB's can get slammed??? I mean, you are advocating for true economic catastrophe. Think about the consequences. It's like wanting to watch the whole city burn down because your neighbor was careless and started a cooking fire. Regardless of all other arguments, do you and other s on this blog really understand what you are asking for, and do you really want that?

Government regulations could have ensured that borrowers took sufficient risk (20% down), and that the bankers/insurance guys were playing with their own money. They also could have limited the risk that blew up in our face. Reasonable, effective government regulations on the financial sector could have prevented our current crisis, and are the best answer in the future.

Apr 10, 2009, 11:59:00 AM  
Blogger Matthew said...

Mr Accountant... okay, no worries on civility... You are dead wrong... I suggest you break open your accounting books again..

$25T US GDP ? Since when ? Remember, the US GDP is measured in US dollars not Yen.. I could post ~ 2 dozens links showing the US GDP at about $14.2T (includng your BEA link)... that number is before the impact of the recession by the way..

I was wrong on my percent of defict to GDP however... should have researched that more as I read 9% in some paper.. the actural projections (already) for FY09 are about 12.5%... so, I suspect we'll end up closer to 15-18%, as I have yet to see an economic projection through this debacle play out on the low side..

Here's a little graph showing debt vs GDP and the current slope of that graph... sounds like you don't see a problem with it... we disagree then...

http://zfacts.com/p/318.html

That percent defict to GDP that you're touting is the highest level since WWII, by the way, and my comment about pulling out of that tail spin with the make up of our current economy still stands.. yes, we make stuff now and always will, but our best manufacturing days are well, well behind us (except for weapons)... Germany, Japan, China are the prime makers of stuff now.. we consume stuff... of course, you realize this.. still not a believer? then you'll need to explain why one of our major industries (auto manufacturing) is all but dead right now..

Now, with respect to "finance industry" making up about 40% of our GDP, I've read the BEA site and looked at the s-sheet on the current makeup of our GDP.. straight finance products and RE leases make up 21% of our GDP right now.. one would need to factor in the percent of "Construction", "Professional Services", and "Government" spending that is tied to financial services / products and real estate to get the true contribution from finance.. I read my 40% figure in a business article and did not research it further (the article said 41% by he way).. so, it's much more than 21% and probably closer to 40%than you think, esp after you consider all the "Consumption" we do that is actually directly fed from trading homes to each other and leveraging outselves deeper and deeper into debt.. for that, I will refer you to Detroit US as my case and point..

So, my comments stand.. you remain well off base and need to dig a little deeper in your research..

Apr 11, 2009, 7:17:00 AM  
Blogger Matthew said...

Here's the deal on the US dollar Mr Accountant...

Unless we collectively don't learn any lessons from the current debt crash and housing bubble crash, the only way that housing prices will resume their previous march to the heavens is if wages increase corresponding to dollar inflation.. I don't see that happening.. that's why we are seeing deflation right now and will continue to see deflation until we're back in balance..

It is simply amazing to me that an accountant can't figure out that if your monthly take home pay is "X", that you can only afford "X" worth of stuff, unless, of course, you borrow and go into debt.. That seems to be a simple concept or relationship to me... that concept or relationship was ignored by all parties from 98 or so to 2007 or so.. if we don't ignore that relationship and learn the basic lesson from this debacle, than housing can't run away from wages as you are suggesting.. dollar inflation or no inflation.. (at least not on a permanent basis).

Yes, there will always be a premium for "location" when it comes to real estate.. the questions are; "What is the base value of the property?" and "What is the market's premium for that properly for the particular location in question?"...

It's sounds like for the previous 100 or so years here in Marin, that nobody had the base value or premium value numbers figured out for residential real estate, then... that, all of a sudden, we jumped into a new paradigm (which, by the way, happened to correspond w/the largest amount of financial fraud uncovered in US history)... that those $250K 3BR homes in 97 were not priced correctly... that they really should have been $600K-$800K homes, because the market was out of whack..

Well, we disagree then...

The only wild card in this is the US Government and their will to prop up housing prices.. absent their efforts that we've seen already, housing prices would already be another 20% lower... I suspect we'll get there in more sooner or later because "X" income can only afford "X" stuff..

Apr 11, 2009, 7:32:00 AM  
Blogger Lisa said...

Hello All,

I can give you all an example of how absurd home prices got in Marin during the bubble years, using my own experience as an example.

In 1996, I bought a brand new, SFH in a darling little development in Fairfax. 2 stories, 1700 sf, great construction. $280K. Sold in 2004 for an insane amount of money and am still happily renting for a fraction of the cost of "owning" where I live now.

The chap who bought my house sold it 3 years later at a loss, after you factor in commission, 3 years of house payments + taxes, and the $60K in HELOC financed "improvements" he put into it. He used the same selling agent I did, so we had a discussion about this at the open house.

The current "owners" will probably never net a profit on that house either.

I saw that happen time and time again on my little street. The only people who made money were the original owners who bought pre-bubble and sold during the bubble. Subsequent owners, who paid high prices to begin with, haven't seen a profit when they've sold when you factor in their costs of owning & commission to sell.

When I bought, there were plenty of options for first time buyers in Fairfax and San Anselmo for under $300K. Now, it's tough to find anything listed for under $700K. Did incomes go up 2.33x since then? Of course not. Voodoo lending showed up.

So now there are plenty of short sales and the occasional foreclosure showing up in new listings here. And with the next wave of resets coming, that trend should only accelerate. And there aren't a lot of sales, even though we're in "peak" selling season. Hmm....not too many folks able to document incomes of $225K+ to qualify for that $700K starter home, I guess.

Conventional lending standards = conventional relationship between income and home prices. Something tells me we all know which way this is headed.

Apr 11, 2009, 9:24:00 AM  
Blogger CAccountant said...

To Matthew: In total outputs on the BEA site, there is significant double counting. However, that means that both the total is over counted, as well as the individual sectors. So you can't revise the total down to 14T without also revising downwards the component industries, including RE, finance, etc. That would be apples and oranges.

Besides, it's not like we are going to stop buying financial products or making RE leases. We will always need basic things like insurance policies, investments of all types, investment advice, bank loans, credit cards (hopefully not as much), and foreclosure processing. Obama has given his blessing to securitization (scary). How much of this sector was made up by basically mundane activities, and how much by truly complex finance? How much of this finance stuff will disappear now? Awful hard to say.

Obviously our debt is large (but I'm not too worried about what we currently have- another point of disagreement). But why? What is the true cause? Mostly the entitlement programs I have mentioned, plus defense. Why do your projections continue to show huge deficits? Entitlement programs. Projected future deficits don't have much to do with housing at all, it's all about the entitlements.

We cannot pay for them, we cannot continue to borrow the money, and we lack the will to cut them. Based on those opinions, I believe that the most politically expedient way for the gov to solve the entitlement problem is the inflation tax. Traditionally, RE holds up well in inflationary periods. I see no reason why wages won't increase with inflation to at least some extent. I think the fact that RE will in the future withstand inflation and a falling dollar while some other traditional investments do not may change how much someone is willing to pay for real estate.

It's true that people can only afford so much stuff. I just think these other things are stuff that you should factor into account. It is quite possible that the amount people are willing to spend on housing in an era of inflation and economic distress is more than in bull stock markets, such as the one since 1982. If people perceive housing as a safe inflation hedge, and if we really are in for a lost decade or whatever, housing may be more attractive as an investment than it was 20 years ago, which would change how much people are willing to pay. Again, I would recommend some version of investment analysis/discounted cash flows to analyze this instead of income/price. I could be wrong about the future, but that's the chance you take predicting.

How much will it change RE values? I don't know. Is it enough to keep Marin housing prices where they are now? I don't know, but I personally suspect not. People can only pay so much, as you said. I said I didn't know the best time to buy a house specifically because I cannot quantify that.

I think I may have to simply disagree with you. Our future expectations for the economy are opposed, our methods of analysis are different, we disagree about the source of future US debt, we seem to be discussing different time horizons, and we disagree about the reasonableness of current debt. Fair enough, enjoyed the discussion.

I am in school to become an accountant, and have worked in accounts payable and bookkeeping. I am not a CPA, and anything on this blog is obviously not professional advice.

Apr 11, 2009, 10:20:00 AM  
Blogger Matthew said...

Thank you for that example Lisa... exactly...

Now, take that profit you made from your house and multiply it across this country from all house trading done during the bubble in all the bubble locals... then think about how much more "consuming" was done as a result across this country... how many more durable goods were bought because of all that bubble profit... that's why Congress is cutting trillion dollar checks right now to keep that massive gorila we created fed and alive...

You sound much more pragmatic than the average citizen in this country and actually managed to save it... well done... you are in the prime driver's seat as you know..

Apr 11, 2009, 10:55:00 AM  
Blogger Lisa said...

Matthew, Yep, my first home purchase was with 10% down. Next home purchase will be at least 50% down and a 10 or 15 year loan, thanks to getting out when I did and waiting to buy again.

The Fed won't be able to keep interest rates this low for long, not with the printing presses running 24/7, so I'll wait for rates to tick up, as that should be the next leg down for prices....after the immediate next leg down, which is the tsunami of Alt A/ Option ARM and Prime resets coming in 2009 and 2010.

Given I won't be borrowing very much, higher rates won't have a big impact on my payment. But for everyone else trying to get in with 10% or 20% down, higher rates will cause a pinch.

And my point about conventional lending standards is this...what people are "willing" to pay for RE (inflation hedge, whatever) and what people are qualified to pay, is rapidly turning out to be 2 very different things. Even in Marin, every month foreclosures represent a bigger % of sales, because these homes are marked to real income levels. Imagine that.

Apr 11, 2009, 11:13:00 AM  
Blogger Matthew said...

I posted something like this a long time ago on this blog... perhaps it would be a good discussion item...

If you had to write an algorithm for house prices during the peak bubble years (say 98-2005) vs before the bubble, what would the algorithms look like..

Pre-Bubble: House prices (H) are:
.35(L) - Location
.30(D) - Design / Size / Quality
.20(W) - Wage / Rents for Area in Q
.10(T) - Tax Write Off / Investment
.05(I) - A Factor of Interest Rates

So H = .35L+.30D+.20W+.10T+.05I

Pre Bubble: A normal market where houses were priced based on size/location/quality/rents with some factor for investment etc. Houses were not built and sold if the local wages (and corresponding rents) could not afford them.. Also, this notion of "better buy now before interest rates go up" was not a prime factor at all, as this is a recent ploy by the NAR to hide the fact that house prices really are too high, so they need some other hook to goad you into buying..

Prime-Bubble Years:
.30(L) - Location
.30(F) - Fraud/Spec/Greed/Fear
.15(T) - Tax Write Off / Investment
.15(D) - Design / Size / Quality
.10(I) - A Factor of Interest Rates
.00(W) – Wage / Rents for Area in Q

So H = .3L+.3F+.15T+.15D+.10I

Bubble Years: We see a new factor now in the equation and a powerful one at that.. the (F) factor, which is the voodoo financing Lisa notes and all the shenanigans that went on in millions of households, mortgage sweatshops, RE companies and investment banks across the country. It also factors in the "fear" of being priced out forever (a brilliant marketing campaign and truly a wonderful contribution to this country courtesy of the NAR/CAR pigs, by the way... ). During this time as we know, wages no longer mattered and are not a factor (if you can fog a mirror, you can bid on this house and drive the prices and my commission higher ).. Interest rates are more of a factor now since house prices de-coupled from wages.. I'm probably giving too much to Design/Size/Quality during this period since I've seen complete POSs sold for $800K when they would not have fetched $150K during pre-bubble years, but I recognize it's still a factor..

Anyhow, just some quick random thoughts on this subject.. others have their own thoughts.. now the question is, "What will the post bubble factors look like?"
I posted something like this a long time ago on this blog... perhaps it would be a good discussion item...

If you had to write an algorithm for house prices during the peak bubble years (say 98-2005) vs before the bubble, what would the algorithms look like..

Pre-Bubble: House prices (H) are:
.35(L) - Location
.30(D) - Design / Size / Quality
.20(W) - Wage / Rents for Area in Q
.10(T) - Tax Write Off / Investment
.05(I) - A Factor of Interest Rates

So H = .35L+.30D+.20W+.10T+.05I

Pre Bubble: A normal market where houses were priced based on size/location/quality/rents with some factor for investment etc. Houses were not built and sold if the local wages (and corresponding rents) could not afford them.. Also, this notion of "better buy now before interest rates go up" was not a prime factor at all, as this is a recent ploy by the NAR to hide the fact that house prices really are too high, so they need some other hook to goad you into buying..

Prime-Bubble Years:
.30(L) - Location
.30(F) - Fraud/Spec/Greed/Fear
.15(T) - Tax Write Off / Investment
.15(D) - Design / Size / Quality
.10(I) - A Factor of Interest Rates
.00(W) – Wage / Rents for Area in Q

So H = .3L+.3F+.15T+.15D+.10I

Bubble Years: We see a new factor now in the equation and a powerful one at that.. the (F) factor, which is the voodoo financing Lisa notes and all the shenanigans that went on in millions of households, mortgage sweatshops, RE companies and investment banks across the country. It also factors in the "fear" of being priced out forever (a brilliant marketing campaign and truly a wonderful contribution to this country courtesy of the NAR/CAR pigs, by the way... ). During this time as we know, wages no longer mattered and are not a factor (if you can fog a mirror, you can bid on this house and drive the prices and my commission higher ).. Interest rates are more of a factor now since house prices de-coupled from wages.. I'm probably giving too much to Design/Size/Quality during this period since I've seen complete POSs sold for $800K when they would not have fetched $150K during pre-bubble years, but I recognize it's still a factor..

Anyhow, just some quick random thoughts on this subject.. others have their own thoughts.. now the question is, "What will the post bubble factors look like?"

Apr 12, 2009, 6:03:00 AM  
Blogger Lisa said...

Matthew,

A big pre-bubble difference is the banks would NOT give you enough rope to hang yourself because most loans were kept in their portfolio or sold to another bank, versus packaging loans to the "shadow market" created by WS. You had to document your income, have 6 months cash in the bank, and they didn't want you with any other debt than the mortgage. It took most people several years to be in good enough financial shape to qualify for a home loan. And the banks wouldn't let you buy at more than 3x gross income. Period. End of story.

With down payments and DTI ratios back in full swing, prices will correct down to their historical ratios between local incomes and home prices. Barron's had a great piece last weekend that the shadow banking system is dead, and voodoo lending with it.

Foreclosures are driving the market more and more because those have been reduced sufficiently to align with local incomes, versus existing home sellers hoping (or needing) to get bubble money for their homes to make the numbers work out.

Apr 12, 2009, 8:03:00 AM  
Blogger Charles McDonald said...

LOL!!!
Gotta love South Park!

Apr 17, 2009, 2:14:00 PM  
Blogger Minakshee said...

This is really veru good sight

Jul 13, 2009, 6:31:00 AM  

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