A "Perfect Economic Storm"

According to this opinion piece, we are seeing the formation of the "perfect economic storm" and we are heading straight for it:

...I have met many people who are renting here in the Palm Springs area, many are young couples who have bemoaned the fact that they have been unable to afford anything here in our city and despair that they never will.

There is hope on the horizon. I have urged those folks to save their money and maintain good credit, because 2007 will be the year of the "perfect economic storm."

It is the year that $1 trillion of adjustable rate mortgages and interest only mortgage loans come due for conversion to fixed rate mortgages.

The victims will be those who could not have managed to make monthly loan payments on fixed rate loans so they opted for lower rate loans.

How many will be able to afford a loan payment when their interest goes from a 2.7 percent ARM to a 7 percent fixed?

Consider this:

There never has been a number like the $1 trillion to hit our banking system. Never - not even close.

Personal savings are at the lowest rate since the Great Depression. Most people have no backup for emergencies.

During the past five years, 42 percent of the loans in the Coachella Valley have been ARMs or interest only loans. In Orange County, the number is 78 percent.

So when these people attempt to sell those "getaway" places they bought here, the market will be inundated with "For Sale" signs.

Add those whose primary residence is here and who are unable to make their new, higher payments, and prices will fall precipitously. There will be foreclosures and, yes, bank-ruptcy sales. There then will be a lot of affordable housing ("Valley Insights: Affordable Housing," Dec. 11).

This will present a major opportunity for those who "missed the boat," and like the real estate recession of the early 1990s, this will prevail for several years.

The bad news for the banking system is that, unlike the collapse of the savings and loans, and the massive government bailout in the name of the Resolution Trust Corporation, there will be no "bailout" this time. The budget deficits have ensured that.

So, yes, be patient and prudent, and an affordable home will be yours.

Do SFH Prices Drop in Marin?

So I asked myself the question "Is it really true that single family house (SFH) prices in Marin don't drop?" The existence of inflation makes answering this question difficult -- something today will cost more in terms of the absolute number of dollar bills you have to pay for it than what that same something cost during a previous year. So what I did was to take each year's mean house price in Marin County, adjust it for inflation to what it would be in terms of 1969 dollars (the earliest year for which I have SFH price data), and then normalized all of the resulting adjusted SFH prices to the 1969 price level. Unfortunately, the government-reported core inflation rate is highly suspect of late (if you want to read about how wonky is the calculation of the Consumer Price Index, then search this blog for the relevant articles as it does a most excellent deconstruction of the CPI). Also, I am not a financial analyst or anything like that so if what I've done is conceptually flawed in some way, please forgive me and please tell me how to do it right. But this seems to make sense. Below is the result:

(Click on the graph for a larger view.)

If what I've done is correct, then as you can see from the above graph, prices in Marin do in fact fall and have done so in a big way on at least four occasions since 1969. The largest price fall was roughly 20% and the quickest price fall was within a single year.

Most Overvalued Housing Markets

Just for fun... CNN has a tabulation of various housing markets and how over/under priced they are. How did they do it?

National City arrives at its estimates of what the typical house in these markets should cost by examining the town's population densities, local interest rates, and income levels. It also factors in historical premiums and discounts for each area.

For some inexplicable reason Marin towns were overlooked by this analysis. Some of the closest are as follows (a positive percentage means overpriced):

Salinas, CA +75%
Napa, CA +65%
Santa Rosa, CA +56%
Oakland, CA +47%
Santa Cruz, CA +44%
San Francisco, CA +35%.

Is the Writing on the Wall?

Gee, let's see if I got this right (in no particular order):

1. Roughly 40% of houses sold were for speculative reasons.
   
2. November sales fell 22% in the West. Existing home sales fell and the number of existing houses put on the market in November was the highest it has been in the last 21 years.
   
3. "Investors are prepared to buy houses they will rent out at a loss; just because they think prices will keep rising -- the very definition of a financial bubble."
   
4. Housing affordability is abysmally low.
   
5. Housing starts nose dive.
   
6. The housing bubble is bigger than the tech bubble of recent memory.
7. Two-fifths of all private-sector jobs are housing related.
8. 90% of GDP is accounted for by consumer spending and residential construction.
9. Traditional, conservative loans have been replaced by "creative" financing and account for about 40% of today's market.
10. New steps will be taken to regulate low-interest, high-risk loans.
11. Mortgage applications are now at a three year low.
12. Gold prices are very high.
    
13. The yield curve is inverting.
14. Marin's real estate is now in "two-sigma" territory.
    
15. And a crappy old PoS-of-a-house in Marin will cost you two-thirds to three-quarters of a million dollars.
    

Did I miss anything? Feel free to complete the list.

Bigger than Tech

The housing bubble is bigger (in terms of the percentage of GDP) than the technology run-up that everyone now admits was a speculative bubble.

It's official: The housing bubble is now bigger than the tech bubble.

The dark blue line is consumer and business spending on technology (hardware and software), as a share of GDP. The light purple line is residential investment, as a share of GDP.

In the third quarter of 2005, Americans spent 6.1% of GDP on building new homes or renovating existing ones. That's a bigger share of the economic pie than tech got at the height of the boom

To me, this has become a no-brainer. These levels of residential spending are not sustainable, guaranteeing a housing downturn in 2006 (incidentally, as far as I can remember, this is the first time I've made this forecast). And the downturn will likely be sharper than most people expect, including a drop in median home prices nationwide.

An Interesting Twist

There is yet another letter to the editor in the Marin IJ regarding their initial article about this blog. But this letter is actually interesting. The writer condemns the IJ for publishing the original article (I agree) and seems to be accusing the IJ of trying to cause the Marin housing market to decline -- "Or is this part of an intentional IJ propaganda to help skew the local housing market?" I find that rather ironic to say the least.

The writer then goes on to point out how painful a decline in the Marin housing market will be for both house owners and non-owners alike... job losses, reduced economic activity, lost homes, etc. I totally agree and sympathise with the writer. This blog and most other blogs that discuss the housing bubble point out the difficulties that will arise if the housing market declines. No one wants to see nor experience the pain that will result from a declining, post-bubble market, especially this blogger. But that's the whole point. This bubble is a bad thing on many levels and it is the middle class and the poor who will have to take the initial hit and it will likely be the taxpayer who will have to pay to clean up the aftermath. The bubble is the result of a number of factors (e.g., misleading information, a speculative mania, greed, relaxed lending standards, fear, an overly expanded money supply, to name a few) all of which could have been avoided or at least constrained (I absolutely refuse to believe that we are helpless and doomed to aimlessly blow around like leaves in the wind). If the housing market had remained tied to certain economic fundamentals or at least had not been allowed to stray too far from the fundamentals, then it is likely that none of the "bubble blogs" would exist.

There are only two likely outcomes -- either 1) the housing market will continue more or less as it has been, in which case unaffordability and the debt burden will only increase, or 2) the market will retreat back to something akin to being supported by economic fundamentals. If history is any guide and the market retreats (as this blogger and others thinks is the more likely outcome for the immediate future) then we can either pretend that it won't happen or we can deal with it as proactively as possible. If we choose to deal with the possibility of a market decline, then all we can do now is to prepare ourselves as best we can for the unwinding of the market. But how can anyone prepare for that-which-we-don't-want-to-think-about if all we ever hear is that everything is great, everything will be fine, and the only data that we are exposed to is selected so as to support that conclusion? That's one reason why blogs exist...to tenaciously present the other side of the argument, to express opinions and data that are difficult to consider and that maybe are not politically correct but are nevertheless important to reflect upon. Some blogs choose to show data. Some blogs collect the news from around the country vis-à-vis the housing bubble. Some do both. Most make the argument that there is a bubble or at least that the market is so out of whack that a decline is likely. How else to prepare for a potential downturn? By putting our collective heads in the sand and wishing it would go away? Not me, thank you very much.

A Baby Bust?

Well, there is so much to talk about today. What a difference a couple of days off, total isolation from the news, can make. I guess the big news is that the yield curve inverted today; and it looks like "exotic" loans are going to be a thing of the past (again) except for the wealthy for whom these loan types were primarily designed. Guess what happens when first-time buyers and even many move-up buyers can no longer squeeze into a house that they could not really afford in the first place when access to the most generous lending vehicles are restricted. Who knows, maybe instead of having to endure the pain inherent in a healthy solution we'll be forced into a "band aid solution" like 100 year loans.

But what really got me thinking was this post over at The Boy in the Housing Bubble blog (an excellent blog by the way and one I encourage people to visit from time to time). In his December 24, 2005 post he mentions that he has not started the family he and his partner want because they cannot afford the sort of house they think is appropriate for raising a family. One of his readers asked why it is he (and anyone else) thinks he needs a mortgage to start a family? Furthermore, many articles I read in the traditional media interview recent home buyers who say things like the reason why they got that IO neg-am loan (or whatever) to "buy" a house, claiming to know full well how crazy these things are, is so that they can raise a family. I don't mean to debate here the merits of having a mortgage or not before starting a family. Rather, what I am wondering about is how many folks are in the situation of the above mentioned blogger -- how many people are delaying having a family because of this ludicrous housing bubble? In my opinion, this is yet another negative social consequence of this housing bubble that has gone overlooked by the traditional, mainstream media. Sure, every so often we hear about schools closing because of a lack of enrollment and this might be due in part to folks not having children because they cannot afford a mortgage for the sort of house that they think is appropriate for raising children. But I wonder how wide-spread this phenomena is and what the impact will be? I wonder if when the next census is done if there will be a noticeable dip in the birth rate centering around the 2002-2006 time period? Sort of the opposite of the "baby boom"... a miniature "baby bust"?

"But who cares...I have mine." "We're making money from our houses, right?" "If these people don't or can't buy a house they're just envious losers or people who lost in a bidding war, right?"

What a sad time this is.

Christmas Break

In case you hadn't noticed, I am taking a few days off from this and my other blogs. I am not sure what day I will resume but it won't be but a few days. I will be monitoring comments off and on.

Update on the letter to the Marin IJ: It's been about a week; more than enough time to allow for even the basic courtesy of a reply. However, I have received no response from the IJ indicating that they so much as received our letter. Needless to say, it hasn't been published as far as I am aware. I am not surprised by that fact given that it is the IJ's policy only to publish letters and opinions written by people who identify themselves by name and the town they reside in. But given that they broke their own rules to publish my comments in their original article I had hoped that they would make another "exception" for our letter to the editor.

Some End of the Year News

Catching up on some news here. Nationally, new house sales plunge and the West coast has been hit the hardest:

New-home sales fell as mortgage rates reached three-year highs during November, reversing a surprise surge in another sign of housing sector cooling. Sales of single-family homes decreased 11.3% to a seasonally adjusted annual rate of 1.245 million, the Commerce Department said Friday. That was the largest drop since a 23.8% plunge in January 1994.

Commerce's report Friday showed new-home sales rose by 13.4% in the Northeast, but fell elsewhere, down 18.3% in the Midwest, 5.5% in the South and 22.1% in the West. The average price of a home decreased to $283,300, down from a revised $290,600 in October. The median price sank to $225,200 from a revised $234,800.

There were an estimated 503,000 homes for sale at the end of November, a record high. That represented a 4.9 months' supply at the current sales rate - the highest since 5.0 in December 1996. In October, an estimated 487,000 were for sale, a 4.2 months' inventor

And also here. Apparently the national price appreciation is only 0.3% which is much less than the rate of inflation (Fed stated or otherwise):

...analysts are forecasting sales will decline in 2006 as the housing boom quiets down. Analysts are looking for home sales to dip by around 6 percent next year under the impact of rising mortgage rates.

Some economists are worried that housing prices in some areas have been driven higher by a speculative frenzy that could see prices plunging as sales slow in the hottest markets. That scenario would evoke memories of the sharp declines that occurred when the stock market bubble burst in early 2000. But other economists contend that housing is unlikely to exhibit the same collapse that the stock market did although they believe that the declines in sales expected next year will act as a drag on the overall economy.

Some of that price moderation was evidenced in the November report, which showed that the median price of a new home sold was $225,200 last month. That was up just 0.3 percent from November 2004, the weakest year-over-year price change in two years.

By area of the country, sales were actually up by 13.4 percent in the Northeast, the biggest percentage increase in this region since January 1994. However, sales fell in all other areas, led by a 22.1 percent drop in the West, the biggest decline in this region since February 1995. Sales were down 18.3 percent in the Midwest and fell 5.5 percent in the South.

And the situation in California?

The median price of an existing home in California in November increased 16.2 percent and sales decreased 11.2 percent compared with the same period a year ago, the California Association of Realtors trade group reported today.

CAR's Unsold Inventory Index for existing, single-family detached homes in November 2005 was 3.9 months, compared with 2.8 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.

And why is the housing market beginning its decline? Because no matter how you cut it, no matter how you write it off or otherwise try to explain it away, affordability is abysmally low which is a state of affairs that cannot be sustained even with "New Economy" or "New Era" thinking. If the supply of first-time buyers dries up then the market freezes up and even Marin cannot be immune to that.

Soaring house prices and higher mortgage rates have put homeownership out of reach for more people than at any time in more than a decade.

Housing affordability in October sank to its lowest levels since 1991, according to the National Association of Realtors' Affordability Index, a widely followed measure of the average household's ability to buy a home at current interest rates. In some areas, including New York City, Los Angeles, San Diego, San Francisco and Miami, housing affordability has dropped to levels not seen since the early to mid-1980s, according to mortgage giant Fannie Mae.

Affordability has long been a problem for low-income home buyers. But as home prices have marched steadily higher in recent years, many buyers with healthier incomes also are being squeezed. Declining affordability mainly affects whether first-time home buyers will enter the market, but in some markets people who already own a home are finding it tough to trade up.

Mortgage rates, though edging higher, are still relatively low by historical standards. And lenders have helped to offset declines in home affordability with creative mortgage products, such as interest-only loans, that allow borrowers to stretch into a more expensive home, while keeping their monthly payments down. Many borrowers have embraced creative mortgage products, such as interest-only loans, mortgages with teaser rates of as low as 1 percent and "piggyback" loans aimed at buyers who don't have the money for a down payment. In the third quarter, borrowers could boost their purchasing power by 26 percent by taking out an interest-only mortgage, which allows a home buyer to put off repaying principal for several years, instead of a standard mortgage, according to Moody's Economy.com.

But rising short-term interest rates are eroding the effectiveness of many such mortgages....and...have made many affordability mortgage products more expensive and the flow of new, creative mortgage products has begun to lose steam. On Tuesday, bank regulators proposed controls that would limit the mass marketing of some creative mortgage products.

Gosh! So the reason why people have been able to pay ridiculous prices is because the lenders are offering "exotic" loans? What happens when these things essentially go away (and here and here)?

Marin's "Church of the Soft Landing"

According to this post over at Professor Piggington's Econo-Almanac for the Landed Poor (and you really should read that post before continuing):

Legendary investor Jeremy Grantham recently had his research staff compile info on all the historical stock, currency, and commodity bubbles they could find. A "bubble" was defined here as a two-sigma event: an asset price that got more than two standard deviations away from its historical trend. Grantham and company identified 28 financial bubbles, of which every one—every single one—saw prices revert back to the mean.

Since I already had the base data shown here, I decided to perform the professor's analysis for Marin County (see that previous post for an explanation of how this data was collected and calculated). I normalized all of the Marin data to that of 1969 and calculated a best-fitting trend line (green) to the data minima:

(Click on the image for a larger view.)

I then calculated the percent deviation of each of the blue data points in the above graph from the base trend line. These percent deviations are shown in the following graph (along with the average, and both the first and second standard deviations):

(Click on the image for a larger view.)

What does this mean? If Jeremy Grantham and his team are correct, it probably means no so-called "soft landing" for Marin County.

And in the words of the professor:

Of course, there is more to any story than deviations from the mean, but the point here is that history is telling us something. People can make all the excuses and rationalizations they want, but the fact is that markets revert to the mean. Bubbles burst.

People continue to tell themselves (and anyone else who will listen) that San Diego [and Marin County] real estate will be the history's first asset to rise so far, so fast, and never come back down to earth. They will eventually be relieved of this misconception. For now, though, faith in the Soft Landing holds sway.

Well, we'll see... Based on the data shown here, things aren't as extreme in Marin as they seem to be in San Diego.

Survey Says...

A survey was conducted over at the Housing Panic blog. The majority of the 191 respondents (17%) voted SFO/Marin/San Jose as the most bubbly of the bubble markets. We are special!

Days on Market for December, 2005

The following graph shows by town the average number of days unsold SFH listings have been on the market (DOM). The red line shows the grand average. The sample sizes are the same as in the previous post. This is just informational but will make for an interesting comparison when I repeat this analysis in the Spring.

Note 1: as can be seen at West Bay Realty, the average DOM for sold homes this year is more like 50 days.

Note 2: this analysis only records the DOM based on the current listing date as shown on a MLS. If a house was put on the market at some price, didn't sell, was taken off the market for a week or two and then relisted at a new, reduced price, the new listing date is what was used here. So treat this as a conservative analysis.

(Click on the image for a larger view.)

Price Reductions in Marin

In the following graph I show, for selected towns in Marin County, the percentage of SFHs that are for sale and that have posted price reductions and the mean percentage price reduction as of today, December 18, 2005. This is not an exhaustive analysis but I was as complete and as accurate as possible. This analysis also does not include houses that are under construction and only shows the most recent reduction from the price that the MLS claims is the "original" asking price*. Also keep in mind that this is traditionally a slow time in the market; in the Spring I will again perform this laborious exercise so that we can compare it to the end of this year.

(Click on the image for a larger view.)

Sample sizes:

Belvedere - 18
Tiburon - 35
Mill Valley - 50
Corte Madera - 8
Larkspur - 8
Kentfield - 14
Ross - 10
Sausalito - 19
San Rafael - 55
Novato - 99

*I cannot know what "original" asking price means. Does it mean the first asking price when this property first went on the market? Is it the last asking price before the current asking price?

Letter to the Editor

The wiki letter was sent today to the editor of the Marin IJ. I seriously doubt they will publish it as they seem to be favoring a more one-sided, dismissive approach utilizing ad hominems. But we'll see as I don't want to dismiss the IJ just yet. Below I reprint the letter that was sent so that we can compare it word-for-word with whatever (if anything) the IJ publishes:

Dear Marin IJ editor:

This letter is in response to the two Letters to the Editor in your Sunday Readers' Forum (http://www.marinij.com/letters/ci_3299992 ), one by Jack McLaughlin and the other by Jim Taylor, as well as your article entitled "Blog jabs at Marin real estate 'bubble'" by Keri Brenner (http://www.marinij.com/marin/ci_3283644).

Despite the well-intentioned yet nevertheless modest donations made towards affordable housing by realty groups and others, the negative social implications of this housing bubble for many families in Marin and the greater Bay Area (and not just those of the poor) are very real, persist, and have escalated with each passing month. In fact, the California Association of Realtors estimates home affordability at an all-time low. Despite the claims of so-called "experts", we find it very dubious to connect today's housing prices with the supposed strength of our local economy or phantom demand. With the median-priced home in Marin doubling since 2000, have we seen a corresponding increase in wages among Marin residents? Is speculation the sort of "demand" that realtors refer to when they speak of "supply and demand"? Has Marin become twice as nice as it was just a few short years ago? Nevertheless, if we are to believe what we are told that Marin housing prices will only rocket (inexplicably) upwards, ad infinitum, who will buy these homes? Certainly not our adult children!

If Marin becomes a progressively less attractive home to working professionals, how will that change the demographics and the future of our community? In a future Marin, where many professionals and families have left for a better quality of life elsewhere, who will remain? Is that the future we want for our community? Is that going to be our legacy? Our concern is that people who have been scared into buying now "before it's too late", may face long-term financial instability especially if they have taken on risky mortgages. For those individuals who have advised home buyers to take on risky debt, speculating on the future, and/or being reliant on future appreciation, do they bear any responsibility at all to their community? Or is it simply "profits come first, people come second"?

Many of us believe that housing prices have been pushed well beyond any semblance of reasonableness and the dictates of healthy market fundamentals due to excessive liquidity, extremely relaxed lending standards, a speculative mania, and the increasingly irresponsible "cheerleading" of vested interests. After the dust settles and people look back upon this extraordinary period of history, who will be vindicated, who will be vilified, and how will we appear to our children? Certainly those who have their community's best interests in mind and who seek to inform the community will be remembered well. That has been and will continue to be the intent of this blog.

Sincerely,

Marinite, Marin County
Robert Daumier, San Rafael

Housing ATM

So you hear about the "housing ATM" and people putting "their money" into vacations, Hummers, huge flat-panel TVs, other toys and sometimes, every once and a while, prudently back into their houses or their kid's education (although the current issue of Business Week [print edition, p. 120] argues that putting money into things like granite counter tops, high-end appliances, new kitchens, etc. are not investments per se, but rather they are "lifestyle upgrades" which quickly go out of style and rapidly depreciate). Well, here is a story in the SacBee about a couple that took out $100,000 in equity (which of course got rolled back into their mortgage) in order to do what? Pay for an über backyard entertainment "complex". How common is this I wonder? Does anyone have any stories of people who have done something like the Arnolds?

Some choice quotes:

During baseball season, Bill Arnold sometimes watches his beloved Dodgers from a private luxury box: the backyard of his Rocklin home. Covered patio, 32-inch television, beer tap, grill and swimming pool - all paid for by borrowing $100,000 against his ever-increasing home equity.

"We continue to be amazed about the value of our house," Arnold says. Three years ago they paid $460,000. A recent appraisal came in at $780,000. Sitting on a gold mine, the Arnolds decided a year ago to build a backyard entertainment complex. Jan, a tech consultant, was nervous about borrowing $100,000 against their equity, but Bill said it was a no-brainer.

It seems everyone in Arnold's Coppervale Ridge subdivision has a stake in the great American real estate boom. It's made them wealthier. It's created jobs. It provided security when big employers downsized.

But that dependence, some say, is a problem in the making.

The economy has been relying on real estate to an extent rarely seen, coasting on an intoxicating wave of rising prices and nonstop construction.

Now the boom is fading. "When you scratch the surface about this recovery we're in right now, it doesn't look very pretty," said Chris Thornberg, who tracks the California economy for the UCLA Anderson Forecast. "We're in an economy that's being driven by this real estate bubble. ... I'm not saying it's going to collapse around our ears, but we definitely have this issue."

Statewide, the real estate sector created 40 percent of all new jobs last year. The year before, real estate created 40,000 jobs while the rest of the economy lost 105,000 jobs.

Nationally, the real estate sector generated 465,000 new jobs from 2001 to 2004, according to consulting firm Economy.com. The rest of the economy lost 821,000 jobs.

In Come the Waves

There is an excellent article at The Economist. It's from June, 2005 (I missed it as I started blogging in July, 2005). It makes all the same points that you have seen here and on other blogs. I highly recommend reading it. I quote a lot of it (too much, really), below.

Here is a graph from the article I found shocking:


Some choice quotes:

The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops

NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.

The global boom in house prices has been driven by two common factors: historically low interest rates have encouraged home buyers to borrow more money; and households have lost faith in equities after stockmarkets plunged, making property look attractive. Will prices now fall, or simply flatten off? And in either case, what will be the consequences for economies around the globe? The likely answers to all these questions are not comforting.

...some housing booms have now fizzled out. In Australia, according to official figures, the 12-month rate of increase in house prices slowed sharply to only 0.4% in the first quarter of this year, down from almost 20% in late 2003. Wishful thinkers call this a soft landing...

Britain's housing market has also cooled rapidly. The Nationwide index, which we use, rose by 5.5% in the year to May, down from 20% growth in July 2004...House-price inflation has also slowed significantly in Ireland, the Netherlands and New Zealand over the past year.

The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents. The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier.

Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.

America's ratio of prices to rents is 35% above its average level during 1975-2000 (see chart 1)...Rental yields have fallen to well below current mortgage rates, making it impossible for many landlords to make money.

A common objection to this analysis is that low interest rates make buying a home cheaper and so justify higher prices in relation to rents. But this argument is incorrectly based on nominal, not real, interest rates and so ignores the impact of inflation in eroding the real burden of mortgage debt.

America's housing market heated up later than those in other countries, such as Britain and Australia, but it is now looking more and more similar. Even the Federal Reserve is at last starting to fret about what is happening. Prices are being driven by speculative demand...Investors are prepared to buy houses they will rent out at a loss, just because they think prices will keep rising—the very definition of a financial bubble.

Indeed, a drop in nominal prices is today more likely than after previous booms for three reasons: homes are more overvalued; inflation is much lower; and many more people have been buying houses as an investment...over the next five years, several countries are likely to experience price falls of 20% or more.

...contrary to conventional wisdom, it does not require a trigger, such as a big rise in interest rates or unemployment, for house prices to decline.

British experience also undermines a popular argument in America that house prices must keeping rising because there is a limited supply of land and a growing number of households...Economists at Goldman Sachs point out that residential investment is at a 40-year high in America, yet the number of households is growing at its slowest pace for 40 years. This will create excess supply.

Another mantra of housing bulls in America is that national average house prices have never fallen for a full year since modern statistics began. Yet outside America, many countries have at some time experienced a drop in average house prices, such as Britain and Sweden in the early 1990s and Japan over the past decade. So why should America be immune? Alan Greenspan, chairman of America's Federal Reserve, accepts that there are some local bubbles, but dismisses the idea of a national housing bubble that could harm the whole economy if it bursts. America has in the past seen sharp regional price declines, for example in Boston, Manhattan and San Francisco in the early 1990s.

The housing market has played such a big role in propping up America's economy that a sharp slowdown in house prices is likely to have severe consequences. Over the past four years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking.

"Anonymous Jerk"

The fun never ends; there is yet another letter to the editor in the Marin IJ (scroll halfway down) written by an angered realtor. According to the writer, I am an "anonymous jerk" for making that one statement, the one they are all crying about. But at least the writer puts the shame on the IJ for even publishing that article given that I never gave permission to be quoted nor gave my identification. The writer also shames the Marin Association of Realtors for their childish response. But the best part is that she asks for "a fair and reasonable discussion of the economic factors related to the meteoric rise in house prices" so at least some good might come out of all this.

November Market Update

Well, according to this Marin IJ article (written by this blog's now favorite IJ reporter...wink, wink, nudge, nudge) the median priced SFH in Marin in November, 2005 was $920,000. (Yay for us, we are now even more unaffordable!) According to the IJ this is a 9.9% increase from a year earlier and is up a pathetic 0.6% from this October, 2005 (the IJ actually used the words "climbed" and "jumped" to describe this 0.6% increase if you can believe that). Sales volume is down 13% as compared to November, 2004.

However, using the more reliable data from the Marin Assessor's office, we learn that in fact November, 2005's $920,000 price tag is really up only 7% from a year earlier (still respectable) and is down (not up as according to the IJ) a meager 0.3% from this October, 2005's $923,000 median price. But according to the data at West Bay Realty, the $920,000 median price tag for November is down 3% from this past October, 2005.

It's still too preliminary for this blogger to make much of all this (but of course the IJ is all over it as they can still write a positive article) as it usually takes a couple months for the data to settle. More graphs to come.

How to Spot a Flip or "Lipstick and Rouge on a Pig"

Just for fun...apparently, the Marin PoS blog has spawned some offspring. I especially appreciate their guidelines on how to spot a house that is being "flipped" (item 12 sure sounds like a lot of houses I've seen in Marin and blogged about):

1. house will usually be empty.
   
2. if not empty, the house will be staged - look for decoration that is too perfect (a tray arranged artfully on the bed with an open book and reading glasses), new furnishing, nothing in the closets. One staged house I visited was perfect and looked lived in -- until you saw the cobwebs in the unused bathtub that the staging missed.
3. crown molding
4. new appliances
   
5. the words "travertine" or "granite counter tops".
6. Often the selling agent will push creative financing. I actually walked into one open house where the agent gave us the loan terms before the sheet descibing the home. The loan terms will always be the worst sort of suicide financing - I/O, Option ARMs, etc. The loan sheet will usually not describe them as such. They must figure that anyone stupid enough to $150-200K markup is also stupid enough to pay the thousands in extra fees and intrest for one of these loans.
   
7. new baseboards
8. new windows
9. new door trim
10. freshly painted interior
11. Ask a little about why the seller is selling. When they bought it and why they are "moving" (of course they never lived there). The agent will never (my experience) tell you the home is being flipped. The answer will be something like "the owner just bought it, fixed it up and loves it, but had to move for a job."
12. All this crown molding, granite countertops, etc. will be added to a crappy 1940's - 1960's tract house or a poorly built 1970's-1980's condo. Basically, lipstick and rouge on a pig.

Placer County Weakness

Well, it looks like there's trouble brewing in one of Marin's vacation housing hot-spots: Placer County. Naturally, the realtors are all saying 'things are just fine', 'the downward slide is healthy', 'it's a more balanced market', 'we're cruising in to a soft landing', 'we saw this coming all along', and other soothing and placating phrases. Whenever a realtor uses phrases like "it's Economics 101" you know they are not telling you the whole story.

Some choice quotes:

After reaching a 12-year high in October, the inventory of homes for sale in Placer County remained high in November - a 137 percent increase over last year at this time, according to PCAR statistics.

The real estate market is seeing more houses for sale, but fewer purchases being made, and that's leaving some sellers in a bind.

Homes are also staying on the market longer before being sold, with the number of homes that sell within 30 days or less steadily decreasing since June. About 45 percent of homes sold in November were on the market for 30 days or less; only about 10 percent of the homes sold had been listed for more than 90 days.

"It's frustrating. We've had several people who want (our house), but they have to sell their place before they can make an offer on ours," said Kari Vollmer, 43, of Auburn. "And we keep finding places that we like, but we have to sell ours first." Vollmer has seen her three-bedroom home drop $200,000 in asking price.

"The market sort of all of a sudden slowed down," Vollmer said. "What I keep hearing is right now it's a buyers' market. It's like, 'OK, I'm a buyer, but I have to sell too.'"

One thing that real estate agents seem to agree on is that the market is neither a buyers' nor a sellers' market at the moment. Instead, they describe the market as leveling out or becoming more balanced.

"On the national level, they call it the market coming in for a soft landing"

Mary Jane Mahoney, Realtor with HomeTown Realtors, calls it Economics 101.

"There's a decreased buyer pool and increased inventory, which spells out not being in a sellers' market anymore," she said. "We're leveling out, that's all."

Mahoney described the current market as more realistic.

"People are going to be selling because they have a desire to sell," she said. "And buyers are not going to be buying out of fear anymore. I think it makes for a great market."

Newton said that Placer County buyers are still pausing to see where exactly the market is turning, and he said that many buyers are "optimistically" waiting for lower prices. But not all purchases are made solely as strategic moves with an eye on the market.

"Buying is still an emotional experience," he said. "You still have the human aspect of what's happening on the market, but you also have that logic that's starting to take over."

Must a Housing Correction Reestablish Affordability?

Although this article focuses on Cape Cod and not Marin, it really strikes home for me as it sounds so much like what we've heard here in Marin. At present, talk of affordable housing in Marin is mostly lip service as there just isn't the will to meaningfully address the implications of diminishing affordability. Why is that? Don't we pride ourselves on our liberalism and social activism? Isn't that part of what makes us so much more "special" than our perpetual "nemesis", Southern California? Maybe most Marin residents are complacent because they "have theirs" and prefer the riches of the status quo. Do we really have to rely on a market correction to reestablish affordability? We passed Proposition 13 didn't we? Wasn't that a desperate act to forcefully control rising property taxes so that people wouldn't suddenly get hit with a larger property tax bill than they could afford? How about a Prop 13A where the "A" stands for affordability and is directed squarely on house prices?

Some choice quotes:

Ask anyone involved in tackling the issue of creating more affordable housing on the Cape and the general response is that not enough is being done on a scale and speed needed to permanently make a difference.

A report in the University of Massachusetts publication MassBenchmarks showed 18- to 34-year-olds are leaving the Cape in large numbers. The reason is their inability to find affordably priced homes and rental units...

"Increasing affordable housing is not just about compassion, but you need skilled and intelligent workers," says Rick Presbrey, executive director of the Housing Assistance Corporation...

"What stands in the way [of creating affordable housing] is the slow-footedness in communities in realizing these are regional issues."

While the focus of affordable housing is for people who earn 80 percent or less of the median income, people who earn an average wage and higher still can't afford to buy a home...

"It's no longer the population that falls into the categories the subsidies support," says Gwen Pelletier, executive director of the Lower Cape Cod Development Corporation, noting that within this population are police officers, firefighters, schoolteachers and other municipal employees.

Yet the challenges to creating affordable housing on the Cape are more than just monetary, infrastructure or zoning restraints. "A political will...Everyone is willing to say they want affordable housing, but there are people who do not want to see affordable housing."

"The single biggest problem the state has is the real estate prices...The biggest help would come with a correction in the real estate market."

Wiki Letter Update

The wiki letter to the Marin IJ is coming along. Unfortunately, only two of us have contributed. You can read it here. Please post your thoughts. Better yet, please contribute (see a previous post to learn how).

I Don't Know What To Title This Post

I'm glad to know that the Marin and California Associations of Realtors and various local real estate agencies have donated, after being matched by the county and the Marin Community Foundation, a total of $600,000 in financing towards housing affordability. Wow! It's too bad, as one reader pointed out, that amount won't even buy a barely refurbished garage in the boondocks of Marin (e.g., like this one). Still, something is better than nothing and I (not that what I think matters) am all for that. So kudos go out to them. However, it strikes me more as PR than anything else but maybe I am just being too cynical. But what can be done, really? Market forces are at work and it's market forces that are first and foremost out of whack (I include irresponsibly lax lending standards and probably an out of control Fed printing press in that as well).

But in addition to market forces (which are sometimes referred to as though they are like the "cold" and "soulless" forces of Nature but in fact are nothing more than human psychology in action) there is also the human representation of the market, and for all practical matters, real estate agents are the public face of the market; they are the interface between the buyer and the seller and so, in aggregate, they have a significant psychological influence over the behavior of the people who comprise the market (lenders are the other human face of the market and I am going to avoid going into that, but for a discussion of that industry I suggest you visit this blog). They are not just sales people; for many buyers and sellers real estate agents are viewed as The Experts, "human proxies" to the market, and so hold "the public trust"; for many they are their primary if not their only source of market information. Therefore, whether they like it or not real estate agents have a certain public responsibility which is conflicted by differing motivations. And therein lies a problem in my opinion -- they are both "the experts" and the sales people.

So what can we make of statements like "real estate only goes up", "buy now before you are priced out of the market", "they aren't making any more land", "houses aren't like stocks, people live in houses"*, etc., just to list of few of the more sensational statements?

Sales people do things like make exaggerated claims to make the sale; they emphasize the pros and downplay the cons. That's just the way it is and the way it has always been; it may not be the ideal, but we don't live in an ideal world. But it seems to me that a part of what it means to be "an expert" is to strive for a balance between discussion of the pros and cons and certainly avoidance of making irresponsibly one-sided statements (of which I am guilty, but then I don't profess to be an expert on anything either). I think real estate agents need to decide whether they are to represent themselves as experts or as sales people. I'm sure some agents do but I think the general perception is that many do not.

Experts, in my opinion, are more like "gas station owners" who don't say things like "better buy gas now before you are priced out of the gas market", "they aren't making any more petroleum so buy now", "gas isn't like stocks, people burn gas", "gas is always a great 'investment'", etc.

I know from personal experience that some real estate agents present themselves more like the experts that they are and are balanced, cautionary, and realistic in their statements to buyers and sellers. They are to be praised. They should be put in the spotlight, given a trophy, and showered with accolades. Three cheers to them as they are a credit to their industry. But unfortunately, some of the more publicly visible folks are not so candid. So is there a problem with wearing two hats -- the expert and the sales person? Should the real estate industry be regulated and held accountable in the same way that stock brokers and financial advisors are held accountable? I don't know; I'm just throwing it out there for public discussion. Personally, I think agents need to decide as a group whether they are going to be experts or just sales people and then let the nation know of their decision so that we can act accordingly.

That's just my opinion and so take it for what it's worth.

Anyway, getting back on to what was originally intended to be the general topic of this post (sorry) -- the social costs of this housing bubble -- here is an article from Bloomberg which indicates that Marin is not alone in having trouble dealing with its pitifully low affordability (and here).

Some choice quotes:

The five-year real estate boom is straining the nation's largest homebuilding charity, slowing its pace of building in the U.S. and forcing it to abandon its ideal of home ownership in the most expensive cities, where it will rent condominiums instead. Soaring land prices have led to divisions within Habitat over its mission and accusations that it's focusing on upscale projects at the expense of basic homes for the poor.

"I call it Lottery for Humanity: A few nice houses for a few nice families,'' says Habitat founder Millard Fuller, 70, who started the Americus, Georgia-based charity in 1976.

Some condos that Habitat is building in California will be worth as much as $800,000. Lots in Minneapolis that cost the group $5,000 a few years ago now run as high as $50,000, according to Stephen Seidel, director of Habitat's urban programs. Karen Cleveland, head of the Northern Virginia branch, won't say what she paid for properties bought recently near Washington. ``It would upset people to know how much,'' she says.

Soaring property prices in the U.S. have exacerbated a shortage of adequate housing. In the 1990s the number of people living in crowded households, defined as more than one person to a room, grew by one-third to 6.1 million, the largest number since 1960, according to 2000 U.S. Census data.

Meanwhile, the median price of existing homes has jumped 47 percent since the end of 2001, reaching $218,000 in this year's third quarter, according to a Nov. 28 report by the National Association of Realtors. The Chicago-based group said housing affordability, which takes interest rates into account, touched a 14-year low.

*Since the inception of the Fed it is a truism to say that real estate always goes up, but that does not imply that one will always make a profit; real estate always goes up due to inflation. And why is there almost never any corollary statement about the additional carrying costs of real estate ownership (e.g., property taxes, insurance, interest payments, maintenance, etc.) and how that has to be factored in to the "housing always goes up" statement? And "supply vs. demand"? What demand? Are there now twice to three times as many people pressing to buy in Marin than there were three years or so ago? The majority of the demand has been speculator driven. Is that the sort of "demand" that realtors refer to when stating that prices in Marin are driven by supply and demand? I don't think so. Look at what happened to Japan, and in particular, Tokyo. There's a "glamour" city where buildable land is even more scarce (in fact, buildable land in pretty much all of Japan is scarce, so scarce in fact that they rely in large part on landfills) yet that fact did not stop their real estate market from tanking like 80% or so. So clearly "supply and demand" is not the whole story.

A Quote

Someone sent me this quote from the book Manias, Panics, and Crashes by Charles Kindleberger that is next on my reading list:

"In the ruin of all collapsed booms is to be found the work of men who bought property at prices they knew perfectly well were fictitious, but who were willing to pay such prices simply because they knew that some greater fool could be depended on to take the property off their hands and leave them with a profit."

Sound familiar? Has Marin run out of 'greater fools' yet?

Wiki Letter to the Marin IJ

It was suggested by a reader that we write our own letter to the editor of the Marin IJ. I think that is a very good idea.

I have created a wiki (a web service where members can collaborate on a document). The beginnings of the wiki letter can be found here. If you would like to contribute to the letter, please send me an email saying that you want to contribute and I will have the wiki service send you an email inviting you to join in on the fun. If you accept the invitation you should be able to edit the letter at will. A lot of excellent points were raised in the comment section of the previous post and I'd like to see them show up in the letter.

Some things to note:

1. Other wiki members might be able to see your email address. I am not sure if that will be the case and if it is I don't think it should be a big deal to anyone, but just be aware of it.
2. I do not want the letter to be defamatory, just a reasoned critique and/or commentary regarding what has been published (e.g., ad hominems, fallacious arguments (e.g., that gas station owner argument...like how many gas station owners say things like "you better buy gas now before you are priced out of the gas market", "they aren't making any more petroleum", etc.)).
3. I'll moderate the process and will contribute some, but I'd rather this be a community effort; I'm still too worked up about this whole thing. Let's take this opportunity to demonstrate the power of the Internet.
   
4. If this little experiment works, we should plan to have the letter finished in a few days.
5. I doubt the letter will actually get published in the IJ without at least one person using their real name and mailing address but we can try anyway. At the very least we can publish the letter here on this blog for all the world to see.
6. Be sure to "sign" the letter however you want.
   

Letters to the Editor, an Apology, and a Question

Well, there are a couple of letters to the editor in the Marin IJ in response to this write up of my blog (scroll down about half way to read the letters). I am going to keep my mouth shut this time (and my keyboard idle) and see what my readers have to say.

Please post your thoughts.

* * *

However, I will say this before shutting up: I would like to publically apologize to anyone who was offended by my comments about realtors. I am sorry and please accept my apologies. I was too cavalier with my words. I know there are many honest realtors out there, many of them in Marin. I was wrong and I admit it.

It all started like this: I was just having an email exchange with the reporter who said she was interested in exploring who I am and why I decided to do the blog on Marin County real estate. I thought she was just gathering background information about me and my motivation for writing a blog about Marin real estate and I was never made aware that what I was writing could (and would) get quoted without my permission. I was expecting her to write at some point "ok, from this point forward anything you say might be quoted in an article" but such a statement never arrived. The email exchange made it sound like my blog would only get mentioned in passing in some larger article rather than actually being the subject of an article. At no time was I asked for my permission to be quoted. In fact, during the email exchange the reporter made it abundantly clear that she could not go ahead with writing about my blog without me first identifying myself. As I never did identify myself, I concluded that my blog would not get written up in an IJ article nor my words quoted in an article.

This does not excuse my behavior, but it is relevant for understanding the context of the exchange. Again, I apologize to anyone who was offended.

* * *

It's the end of the year and I am wondering whether I should continue with this blog. Although I have received no negative email from anyone, the comments from the realtors in the letters to the editor mentioned above have in truth rattled me a little. On the other hand, I have received a tremendous amount of support for this blog. For example, here are some comments people have sent me: "right on brother!", "Thank you for creating your website", "Good Job!", "Great service to us all, Thank you so much, you are a god!", "I love your site...you're the Che of the Marin housing blogs!", "Thanks for creating such a great blog!", "keep up the good work" to list a few.

Please post your thoughts.

Californians Infest Nevada

This article in the SF Chronicle further extends one of this blog's themes -- the eroding quality of life caused by the housing bubble.

Simply not content with destroying their own state, Californians are descending on Nevada and destroying their quality of life. And why not? We've been doing it to Oregon, Washington, Arizona, Idaho. I know it's not "politically correct" to say it and I'm not making any friends by doing so. Here's an idea, one we should have learned in kindergarten: clean up your own mess.

Some choice quotes:

Nevada...has long been a magnet for Golden State refugees fleeing what they see as an eroding quality of life amid growing congestion, burdensome business regulations and high costs. But increasing numbers of Bay Area residents like the Dunns and the Barbers have had an extra incentive to head east: large sums of real estate equity.

"The California housing market diaspora has transformed the West, and it's moving to different midtier and even larger metro areas," says Robert Lang, an urban planning expert at the Metropolitan Institute at Virginia Tech.

Reno stands on the front lines of a migration of affluence that has also affected such places as Boise, Idaho; Phoenix; and Portland, Ore., where home prices are rocketing and new ideas and businesses are taking root as newcomers buy houses that are bargains by Bay Area standards.

Although much of the windfall from rising house prices has been spent on everything from college educations and cars to kitchen renovations and European vacations, many people have simply cashed out and started over.

While couples like the Allisons seem content to retreat from the Bay Area to live in dream mansions, for others the migration to Reno represents a fantasy of a different sort: the first rung of the homeownership ladder that is all but unreachable in the Bay Area for middle-class families without sizable assets for a down payment.

A recent study by the Public Policy Institute of California found that high housing costs are forcing one-third of state residents between the ages of 18 and 34 to ponder a move from their region or out of the state.

Many of the reasons newcomers enjoy Reno sound familiar to anyone attracted to the Bay Area: the natural beauty, proximity to great hiking and skiing, good airport service. Others sound less familiar: kind people, good schools, a slower pace of life, low or nonexistent taxes, the state's conservative political bent and, of course, less expensive homes.

Some complain that there are few good wine stores, places to buy organic meats and vegetables, and even fewer dining choices. Shopping is hardly a strong suit, either: Earlier this year, Bay Area transplants were abuzz about the mere possibility that Nordstroms would open its first store in the area.

..some longtime Reno residents have bemoaned the "Californication" of their city, a vague notion that wherever California refugees mass, they bring unwanted attention and traffic, wacky political ideas and, on some level, an in-your-face affluence that spoils a pristine area.

A reader of another blog left this comment in response to this article:

I am a chemical engineering graduate of the University of Nevada, Reno so I feel I have to say something here.

These California migrants are bringing increased housing costs with them, but they are not bringing increased job opportunities for middle class people. A common complaint of young people in Reno is that the area has dramatically increasing housing costs but the job opportunities and pay levels have not improved enough to match. The real reason for anti-California sentiment is this: they increase housing costs but do not increase job opportunites and thereby reduce the standard of living of local young people.

I expect that Reno is especially vulnerable to a price crash because local wages simply do not support the $399K median house price than Reno now has. Without the continuous flow of California bubble equity, I expect that Reno cannot support house prices much above $250K.

Just another perspective. This housing boom screws us young people.

They Ran Out of Stupid People

Well, if Business Week has stopped referring to the housing bubble as a hypothetical, then it must be real.

Some choice quotes:

Psssssfffffft. That's the sound of the air finally leaking from the real estate bubble in Loudoun County, Va.

What's happening in Loudoun is a rapid shift in psychology -- a classic sign of a market turn. The buoyant optimism that fueled speculation and expectations of ever-rising prices is now succumbing to the fear of being left standing when the music stops. Real estate, the hottest play of the century in Loudoun, is rapidly cooling.

The same signs of a slowing market can be seen in hot spots across the country...

Loudoun's real estate community insists the market is merely reverting to a more normal state. "We're coming back to more of a balance," says Karen Overheu, a Long & Foster Realtor with listings in Loudoun County.

"There's another explanation", says insurance agent Joe Kelly... "They ran out of stupid people."

40% Drop in Price for High End Marin House

Just a quick post:

Here is a listing for a high-end house in Kentfield (rather, a house that will be built) whose price has dropped 40% in one month if you can believe the realtor's November, 2005 appraisal claim that is (makes one think twice about the possibility of appraisal fraud in Marin County). I've already entered it into the Marin Address Pricing History thread for future reference.

(Click on the image for a larger view)

GDP and the "Healthy" Economy

Some people (especially realtors) like to argue that the worst case scenario now for the housing market is a so-called "soft landing" or stagnant pricing power. The support for their argument is usually along the lines that the economy is healthy. Personally, I don't know what planet they are talking about because here in my corner of Earth I don't see many signs that the economy is particularly healthy; I see a lot of people who either work for significantly less money than they did a few short years ago or who in some way or another are dependent on a continually expanding housing bubble. Maybe it depends on what one means by "healthy".

Well, over at CalculatedRisk there is a nice graph and article that illustrates what "healthy" means; the graph is reproduced here, below. In the graph, "MEW" stands for "Mortgage Equity Withdrawl".

Hard Landing Now Seems Likely on East Coast

According to this article, price cuts of 20% are now commonplace in the East Coast housing market and analysts are saying that a "hard landing" (i.e., a crash) is far more likely. And foreclosures are up 35% It seems that they are entering a downward price spiral that will be difficult to reverse. Just a month or two ago it was all "oh, prices will soften and appreciation will only be the normal 5% or so...it will be a 'soft landing'". Is the East Coast a harbinger for the West Coast? How are their amygdalas doing I wonder?

Some choice quotes:

"Boston-area homeowners trying to sell their houses are sharply reducing asking prices -- in some cases, by $100,000 or more -- in response to the sudden slowdown in the real estate market."

"Demand for single-family homes has declined as prices have risen in recent years and interest rates have begun to climb, causing the number of properties on the market to pile up."

"...reductions in asking prices of 10 percent or 20 percent are now common in both high and moderately priced neighborhoods..."

"''The evidence -- both early data and the anecdotes -- are pointing more toward a hard rather than a soft landing" in the housing market, said Nicholas Perna, an economic consultant in Ridgefield, Conn. ''Prices could come down. Could it be 10 to 15 percent? There's no way of knowing, but what we're getting is more clues that you've got a decline in prices underway."

"Some houses are now listed below what buyers paid a few months ago for a similar house, making it very difficult for real estate agents to estimate an asking price for clients."

Get Ready for a Storm of Law Suits?

This article made me shake my head and sigh. There are a ton of people out there "buying" houses using only IO or NegAm (or other "exotic") loans because it is the only way that they can afford to buy. Then they find out that their monthly payments skyrocketed after a year or so and now they can no longer afford their mortgage. So like any good American citizen these days, they call a lawyer and sue the lender.

I'm sorry, but if the only way you can "afford" to "buy" a house is by using one of these "exotic" loans, then you really couldn't afford to buy it in the first place. Ignorance of the terms of the loan is no excuse as it is your responsibility to read the loan agreement. Am I wrong? If so, let me know and put me in my place.

And rumor has it that here in Marin something like 80% of all loans are of the "exotic" type and probably more than half of those are not to the über-wealthy who just want the tax benefits. As people's monthly mortgage rates begin to change over, get ready for a lot more of these sorts of stories in the news.

Some choice quotes:

"One reader wants to know what to do if his mortgage payments skyrocket next year. That's because he has an adjustable rate mortgage with negative amortization -- the monthly payments aren't enough to cover the monthly interest owed, the result being that the additional interest gets tacked on to the principal due."

"Under such a scenario, even if mortgage rates don't change, his monthly payments likely will rise. Many adjustable-rate loans with such a negative-amortization option -- meant to help borrowers qualify for the loans -- eventually adjust the payments to recapture the lost interest."

""This is the only way I could afford to buy a house...""

"A lot of people are in the same boat. They've signed onto an interest-only payment mortgage or a mortgage with negative amortization because it was the only way they could qualify for a home loan."

"To be sure, initially, monthly payments with these mortgages are significantly lower than monthly rent. But unless the home price appreciates greatly and the buyer is thinking about selling fast, such loans rarely make a lot of sense."

Surreal Estate

A reader brought my attention to this article in the SF Chronicle. Here is an otherwise unremarkable person who has no job, no steady income, and yet who chose to go $2.3 million into mortgage debt, with an average negative cash flow of $10,000 per month. On paper she and her partner are very wealthy. In truth, they are dependent on debt extraction. This degree of leverage reminds me of the Long Term Capitol Management business model and we all know (or should know) how that ended (and those guys were all Ph.D.s for crying out loud!). But the thing is, this is not an isolated case; it is going on all around us. It is vigorously encouraged by the RE industry, lenders, the Fed (remember Greenspan touting the goodness of ARMs at one time?), "the Jones", and others. Here in Marin real estate investing is of epidemic proportions as it is something of a hobby and really has become our only industry.

So what happens when the RE cycle changes as it seems to be doing now and as it has always done in the past? Should lenders be allowed to lend to people in this position? If their house of cards blows away, who should be held accountable? The borrower? The lender? Someone else? For my part, I don't begrudge anyone financial success in the real estate market; but irresponsible lending (and that is what I think is at the heart of it) needs to be significantly reigned in. And the only way to effectively reign it in is to make the lenders personally liable for the consequences of poor lending decisions -- use people's self-interest for positive social change.

What can YOU do? Share your thoughts.

Some choice quotes:

"In the three years since Sacco and McCook put their faith in real estate, the couple have embarked on what might conservatively be called an E-ticket ride, pulling equity from appreciating properties to provide down payments for the next investment. They have bought eight vacation properties - four homes in Florida, three in California and 100 raw acres on top of a mountain in Lake County."

"They don't have jobs, but their lives appear to be a whirlwind of work. They don't have incomes either, though they maintain middle-class lifestyles."

"Sacco estimates that along with McCook's mother, who has been a silent partner, they've made $1.3 million since they began their buying spree, but all of this is still in equity on their properties. Their monthly reality is more sobering. They have $2.3 million in mortgage debt and negative cash flow that ranges from $5,000 to $15,000 monthly depending on the season."

"So how do they pay the bills?"

""We sort of count our equity loans as our income," she says, with the slightest wince. "If we had real jobs, we'd be fine, but we just need to get some money in. Some people call it a pyramid, but I don't like to think about it that way.""

"Surreal financing? Bubble economics? Perhaps. But it's also the way people are increasingly approaching real estate: as a bet..."

"Whether it's first-time buyers who take out interest-only loans or investors who extract equity from one property to fund the next, real estate is an industry that is being buoyed by a belief in continued appreciation."

Short-Sighted New Era Speculation

This article from Sonoma got me thinking. Part of the answer to why this housing bubble has formed must reside in the increasingly short-term thinking of buyers and sellers. Vast numbers of people are taking out these hugely risky adjustable rate mortgages, with or without money down, in an environment where interest rates can only go up in the foreseeable future. Why do they do it? It does not seem prudent. Some claim it is because they only want to live in the purchased house for three or four years. Yet at the same time they speak of raising a family which, I can say from personal experience, requires more than three or four years. Have people always been so short-sighted or has the sheer unaffordability of California's houses (and those elsewhere) these days forced short-term thinking on people? To me, no matter how you look at it, anyone who buys a house with these terms is speculating, whether they intend it or not.

What is the cost to our society? To our community? And what happens to these people when prices come down? It seems arrogant to presume that the lessons of the past do not apply to the present, but if you think prices won't come down, then be prepared to explain why historical patterns no longer apply? Is it because "it is different this time" aka it's a "New Era," a "Brave New World"? Let's review some New Eras of the past. There was the "New Era" of the 1920s (technological innovations -- automobiles, electrification, vacuum machines, washing machines, radio, etc.); that ended badly and has been forever burned into our collective consciousness as The Great Depression. Then there was the "New Era" of the mid-1950s (victory in the Pacific and Europe was still a fresh memory, increasing peace as post-WWII tensions subsided, more technological innovation (e.g., television), the baby boom and the resultant spending, increased consumer credit, the announcement in 1961 of the intended moon landings); that ended badly too with the 1972 stock market crash. Then of course there was the "New Era" of the 1990s which we are still living through in some ways (development of the PC, the Internet, the breakup of the Soviet Union, the high-tech industry, cell phones, Alan Greenspan and his cheap money); we all should know how that one both ended (NASDAQ crash) and lives on (housing boom).

Well, that was some tangent.

Some choice quotes:

"During the mid- to late-'90s, home buyers in Sonoma County could sign their escrow papers with the smug feeling that at least they weren't paying Marin County prices. But with the median home price in Sonoma County having reached $616,000 as of September, that smug bubble has burst, though the housing bubble has not."

"Since, according to the Bay Area census, the median income of Sonoma County households ranges from $50,000 to $63,000, where are people coming up with the money to buy these $616,000 homes? They're not, exact-ly."

""Sixty-five to 70 percent of all the loans I do are interest-only options," says Daniel Barwick of Benchmark Lending in Santa Rosa."

"With interest-only loans, money paid monthly toward a mortgage does not reduce the principle owed, but it's a gamble that many new homeowners seem willing to take."

"According to Barwick, many homeowners opt for these loans because they intend to sell their homes in three to four years and are banking on their property value to increase exponentially; often, it is the only way they can afford a mortgage."

""Most people want the lowest payment possible, because they know their equity will grow," Barwick says. "I have some clients who actually live off the equity in their home. They refinance every three years and take out two to three hundred thousand and live on it.""

"But let's look at who gets priced out of the housing market: the teachers, policemen and other civic and civil employees who live here."

""People are being forced to buy houses way outside of their means because there are few alternatives," he says. "Who wants to be in debt for 30 years or spend a lifetime making house payments?""

""I was born in Marin and think of Sonoma County as my home. I can't imagine being an expatriate year-round. It seems somewhat unreal that I can't [afford to] stay here, but as a poet, and really an artist my entire life, I can't imagine paying a $2,000 to $3,000 mortgage during my last 20 years of great energy and creativity. This gives me great sadness. I was a naturalist for Pt. Reyes years ago and so much of my writing comes from the land here, is integrated here and born of it.""

"She shakes her head. "Never being able to settle here is devastating.""

And be sure to read on and check out the "creative" lengths people will go to feel like they "own" a house: helping to actually build it, shared housing (communing), land share (co-ownership), apartment condo conversions, really tiny "homes" (70 to 750 sq ft).

Concerning the Marin Real Estate Industry

I have received a tremendous volume of email from readers of this blog. Thank you for all your kind words. I am so relieved that this blog provides some service to our community. Our COMMUNITY!

Quite a few of the emails I received were from Marin realtors or ex-Marin realtors who have said some rather surprising things (some being "jaw-dropping" and "eye-popping") about that industry. Instead of quoting excerpts from those emails and given the recent increase in reader participation, I am opening up this post to anyone who has anything they want to say about the Marin real estate industry. "Insiders" are strongly encouraged to participate.

Topics of interest include, but are not limited to, industry practices, realtor personalities, realtor qualifications, the sorts of loans the typical Marin buyers take out these days vs. days past, the typical motivation of Marin buyers (e.g., the frequency of those buying to live in a home, raise a family, etc. vs. buying to invest), etc. I leave it up to you the direction taken in this thread. I hope you will participate as I know there is a lot of interesting information in your collective heads. Basically, I am looking for any information that will shed light on Marin's real estate market vis-à-vis the industry itself.

This topic is something of an "experiment" for me as a new blogger.

Rule 1: Play fair, play nice, be truthful.

Rule 2: Do not refer to anyone or any organization by name or by any means of identification. Doing so will get your post deleted.