Thursday, December 08, 2005

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).


Anonymous Anonymous said...

"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."

Can you take a guess where all your Marin public servants live? Used to be Sonoma county, and now even that's too expensive. Where can they buy now? Windsor? Nope, that's too expensive. Same with Healdsburg and even Cloverdale is insane these days. Clearlake? Maybe.

Just think of the commutes! Can you imagine all the hours these people are spending in stand-still traffic at the 12 interchange? Or the Petaluma Narrows if they live farther south? Hours they're not spending with their spouses and children, visiting with neighbors, or even doing something as simple as mowing the lawn. Maybe you don't have to imagine, because it's your daily reality.


Life is short and we spend it sitting in our cars waiting... waiting...waiting... for traffic to move so we can spend 15 minutes with our children before they go to bed in our barely affordable houses 60 or more miles from our jobs as public servants.

Yes, friends, something is seriously out of whack. RE speculation hurts everyone!

Dec 9, 2005, 5:30:00 AM  
Anonymous Anonymous said...

Don't forget that renting is an option and currently relatively cheap. Those on incomes that cannot pay the freight to purchase always have the option to rent at a substantial discount. If you are someone earning around the $100k it takes to buy a modest condo in Marin, realize that you qualify to rent a $2500/month home (which in Novato anyway, can be quite nice) and spend that quality time with your family.

5 years ago, the crisis was in high rents and that was much more important that high prices because if you cannot afford the rent, your truly have no options. But a 10% slide in rents in absolute terms (probably more like 20% with inflation factored in) over the past 5 years means that more people today can afford to rent here then at any time in the past 5-7 years. So there is a silver lining here.

People who feel the overwhelming (and somewhat illogical given prices) need to own in this climate and commute 60 miles are to some extent, inflicting the damage upon themselves.

Cycles repeat. We were in this boat in 1990 and by 1997, Marin was looking relatively cheap. There will be other opportunities to buy in the next 10 years.

Dec 9, 2005, 10:01:00 AM  
Blogger sf jack said...

anon -

No quarrel with all that you say except... "If you are someone earning around the $100k it takes to buy a modest condo in Marin..".

I would replace "modest" with "sh**box."

That's the reality today.

Dec 9, 2005, 11:11:00 AM  
Blogger Marinite said...

Most home owners I know do not admit that there is a problem. That is sad. Their attidude is along the lines "I've got mine and so it's not my problem". That's the problem -- far too little public discussion and public action (everyone is too busy trying to make their RE fortune).

Dec 9, 2005, 11:32:00 AM  
Blogger Karen said...

And, still people rush in, whipped into a feeding frenzy over the potential for gain. Even people who should know better are getting sucked in. For an eye-opening read, check out the fascinating thread entitled,
"Let's play 'Should I buy...or wait?'" at

Good stuff!

Dec 9, 2005, 1:33:00 PM  
Blogger marine_explorer said...

"more people today can afford to rent here then at any time in the past 5-7 years"

Sure, it's relatively cheap, but still by far cheaper in most other locations. And, what amount of that is due to too many rental properties on the market? Some, I bet.

5 years ago, the crisis was in high rents
Ah, the dot-com job rush, and corresponding housing shortage. It's a little different now.

"If you are someone earning around the $100k it takes to buy a modest condo in Marin.."

Funny what that same salary (or slightly less), would buy in '98!

Guess which direction the economy is moving? Far, far, away from here! Welcome to the New Reality™.

Dec 9, 2005, 3:16:00 PM  
Anonymous Anonymous said...


I agree that recent rapid price rises are not healthy for anyone, including current homeowners since the "i've got mine" attitude means that you must plan never to move in Marin. After all, everything else being equal, at the very least your property taxes would get jacked up. No one really benefits from rapid appreciation in the long term and only speculators benefit in the short term.

Having said that, what action do you propose? What has happened in the past few years is simply supply and demand, right? However, you could mitigate this using the following levers:
1. Raise interest rates (already happening)
2. Reduce people's appetite for risk which usually involves threatening their paycheck (via a recession) or lowering their expectations on capital gain and easy property disposal (again, already happening, given price stagnation and long times to sell)
3. Regulate the lenders to tighten money supply.
4. Change tax rules to make home ownership less attractive and slow real estate activity. You could take away interest deduction, making everyone's real cost higher; Take away $250k/$500k capital gains exclusion which would discourage people from selling their homes; Raise capital gains tax, which would not only discourage home sales but would curtail investor speculation and flipping (As a side note, a lot of the price rises in the last 10 years are spurred not only be slack lending and low interest, but lest we forget that before 1997 the home owners exclusion was $125k and you could use it only once in your lifetime)
5. Create more supply by converting apartments to condos and encouraging new construction.

#1 and #2 are hard to do through policy, #3 and #4 could be done through federal policy but would be politically unpopular. #5 could be achieved through local policy though is improbable given the NIMBY climate in Marin and the dogged determination to not allow anyone else in.

So, while I have seen a lot of finger pointing at lenders, borrowers, speculators, existing homeowners, the Federal Reserve, etc., I have not seen alot of discussion on tax policy which has definitely encouraged this bubble and is probably the most logical thing to change.

Is there something else that we could change structurally to slow down the appreciation that I have not raised?

Dec 9, 2005, 3:37:00 PM  
Anonymous Anonymous said...

Here are some more:

(6) eliminate the tax deduction for property taxes (although the AMT is doing this to a certain extent already);

(7) eliminate § 1031 exchanges;

(8) repeal Proposition 13 such that property taxes reflect current market values.

Dec 10, 2005, 9:25:00 AM  
Anonymous Anonymous said...


All excellent points. So, we could then expand our sphere of blame to include politicians who don't have the political will to encourage these changes to the tax code?

No doubt that tax policy drives behavior -- without the various deductions I get being a landlord including:
-The phantom depreciation write-off which is really not a write-off at all since it assumes property values decline to 0 after 27.5 years
-The deferred gains via the 1031 exchange cash flow would be much worse, and I might not be a landlord. One a larger scale, this would dissuade many from investing in real estate unless they saw an ACTUAL positive cash flow, instead of the after tax boost they get from Uncle Sam.

Dec 14, 2005, 3:03:00 PM  

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