Sunday, April 30, 2006

Novato Blvd. Index

Driving up to Novato today (Sunday) to see a friend and get some sun I saw a ton of open house signs.

This one shows eight for sale signs:

This one from somewhere on Novato Blvd shows a cluster of seven signs:

The Novato Blvd. Index (NBI), where I drive the entire length of Novato Blvd., resulted in a total of 61 for sale signs.

Also, I counted nine for sale signs in the Inverness and Inverness Park area.

And yes, for those of you who have been wondering, "Dude, Where's the Car?" (aka "The Boat Garage") is still for sale as a house.

"In California, the Starter Home Market has Really Disappeared"

"In California, the starter home market has really disappeared".

That statement definitely rings true in the Bay Area. How sad is that? How long can that continue? It implies that the starter home market, which is the first rung of the 'move-up' ladder, is now totally dependent on debt for its existence.

Like this article says, the thing that has been saving people time and time again in recent years, and that has allowed them to take on such massive amounts of debt and feel like they don't have to worry about it, is the market itself. As soon as the market turns flat to negative people will learn the hard lesson of debt. And now that the bankruptcy laws have been tightened that will be a very hard lesson indeed. What happens to the Bay Area housing market as a whole when the 'starter home market' totally disappears because either no one in that market can get a loan or they're too afraid of debt?

This whole thing is so out of control it isn't even funny.

Some choice quotes:
"In California, the starter home market has really disappeared," said Tamara Draut, author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead."

Younger adults are struggling to make ends meet, Draut said, because many have student loans and start with low wages, which make it hard for them to save and build wealth.

"Definitely, this generation has resigned itself to live in debt to live in a middle-class lifestyle," she said. Many consumers are comfortable with debt, but too much debt leaves people vulnerable, living paycheck to paycheck.

Some homeowners take advantage of rising property values to take on more debt and use the influx of cash to pay other debts, such as credit cards.

"The market keeps bailing people out of trouble," Lawson said. "Because people don't really get in too bad of position, they never really learn the lesson, and a year later they turn around and get themselves in the exact same spot."

"The concern is how do we keep our middle class with the housing costs going so high?" Gruen said. "Will people move from California if they have the option? Yes they will."

"The only thing that's keeping me here is my family," he [Peabody] said.

Peabody would consider moving to another part of the country where living is more affordable if he could land an appealing job.

Other people are wedded to living here regardless of the price.
A significant market decline is the only healthy way IMO to restore normalcy and long term prosperity. Anything less than that is likely to be an artificial and ultimately ineffective intervention that will only make matters worse. Let's hope the 'man behind the curtain' can see that. And yes, for the record, I will be hurt just as much as anyone else but it's still the truth as far as I'm concerned.

Friday, April 28, 2006

It's Official

I've noticed some new, repeating visitors to this blog and who are worthy of mention:
  • Executive Office of Asset Forfeiture, US Treasury Dept.
  • Social Security Administration
  • Internal Revenue Service
  • Bureau of the Census
  • Information Resources Management Administration
  • Admin OFC US Courts
  • Information Systems, U.S. House of Representative
Welcome. Such esteemed visitors are strongly encouraged to post comments.

Oh, and the Ameritech Electronic Commerce visitors, you can post too.

Losers Not Welcome in San Francisco

In San Francisco you are considered "low income" if you earn less than $95,000 per year:
In San Francisco, the income limits for resale homes (for one or two people) is $135,720 for moderate units, and $81,432 for low income units, and for new construction (read: South Beach High Rises) $135,720 is the moderate limit and $95,004 is the low income limit.

How crazy is that? You're low income in San Francisco if you make less than $95,000 per year. Looks like the lines for affordable unit lotteries are going to grow exponentially now...
Thank you Mr. Housing Bubble!


Welcome to NIMBY Northern California! Now go home before it's too late.

Liquefaction in Marin

The Bay Area recently "celebrated" (although "commemorated" might be a better term) the centennial of the infamous 1906 earthquake that devastated San Francisco and rocked the fledgling Marin County. REskeptic sent me a lot of great info about fault lines and such in Marin (did you know there is a fault line that runs right through Mill Valley?). Hopefully, he will post an in-depth article (hint, hint) about earthquake risk in Marin as it turns out that he is quite knowledgeable in that subject.

However, I found a nice USGS site showing the risk of liquefaction in various areas of the Bay Area. I pieced together bits of the map specific to Marin and show it below (click on it to enlarge it). If you must buy into the Marin POS lifestyle then at the very least you can use this map to assess your risk of losing it all to liquefaction as well as to help you decide whether paying for earthquake insurance is a good idea.

Thursday, April 27, 2006

Useless Marin Factoid of the Day

So I was wondering how many realtors there are per person in Marin County.

I asked these people if they would tell me for free how many realtors there are in Marin and they kindly did so; there are 1,677 realtors in Marin as of today.

According to the U.S. Census Bureau data, in 2005 Marin's total population was about 246,960 people. The U.S. Census Bureau says that in the year 2000 20.3% of the county's total population was 18 years of age or younger. So assuming that percentage was the same in 2005 as it was in 2000, that puts Marin's total adult population in 2005 at roughly 196,827 bodies (and one arm in change).

That means in 2005 there was about one realtor per 117 adults in Marin.

If we assume that all of those adults are "coupled" to a Marin adult resident (e.g., married, living with, whatever -- basically, buying a house as a couple), then there is one realtor for every 59 adult couples in Marin.

What does it mean? Nothing. It is a useless factoid.

Update: The Marin Assessor's office says that a total of 4,304 SFR sales occurred in Marin in 2005. So that would be one realtor per 2.6 SFR sales. Again, meaningless.

Wednesday, April 26, 2006

Marin Heat Index

The "Marin Heat Index" is currently lower than where we've seen it in a very long time. My thanks go out to a reader for the "heads up".

Here is that realtor's write-up of what it means to him (minus the speculative stuff):

Recently, Marin real estate experts have been saying that our local market is again becoming a Sellers Market. This is not true.

In recent days new sellers have entered the market in large numbers, while buyer activity levels have dropped. The Marin real estate market has made a very sudden and very sharp course adjustment. The Marin Market HEAT Index (MMHI)has declined by 21% in just eight days. It now stands at 0.76. This MMHI level indicates a Buyers not a Balanced, and certainly not a Sellers Market.

In eight days:

  • The MMHI has declined from 0.96 to 0.76;
  • The number of available homes for sale rose by 14%;
  • The number of homes in contract to be sold declined by 9%; and
  • The number of closed sales declined by 2%.

Simply put, this means the number of sellers is increasing, while buyer purchases are declining.

It's nice to see a Marin realtor actually call it the way it is.

And then there is this gem (referring to the report (warning - PDF) that indicates an increase in new-home sales):
Let me get this straight: Mortgage and interest rates are on the rise. Household finances are also being pinched by record gasoline prices. Yet somehow, Americans have all of a sudden decided to go out and buy a whole slew of new homes?...

[Why? It's because of price reductions.]

...What does this mean? While demand for new homes may be up, this is clearly turning into a buyer's market.

So if you're in the market to purchase a new home, wait. If you show some patience, chances are home sellers will be putting their properties in the discount bin.

Are You an RE Zombie?

How could I pass this one up?
“‘New home sales sprang back to life like a vampire in a cheap horror flick,’ said economist Bob Brusca. ‘And like that zombie in the movies, housing really is dead. Don’t let all that twitching fool you.’”
And check out this zombie simulator.

Tuesday, April 25, 2006

DataQuick March, 2006 Graph

Yeah, Right!

According to the National Association of Realtors (NAR):
Sales of previously owned homes edged up slightly in March but not enough to keep the inventory of unsold homes from hitting a record high as the once-booming housing market continued to flash signals of a slowdown.

The National Association of Realtors said Tuesday that sales of existing homes edged up a tiny 0.3 percent last month to a seasonally adjusted annual rate of 6.92 million units.

The March increase followed a bigger 5.1 percent jump in February with the two months representing the first advances since five consecutive monthly declines.
And also this:
Total housing inventory levels rose 7.0 percent at the end of March to 3.19 million existing homes available for sale. The national median existing-home price for all housing types was $218,000 in March, up 7.4 percent from March 2005 when the median was $203,000.
I call BS on the NAR and their heavily revised numbers. As pointed out on Ben Jones' blog, that 7% increase in inventory figure is a monthly figure; inventory is actually up a breath-taking 39% year-over-year (and the condo market is up a whopping 85% year-over-year).

The fact is that on a national basis, this so-called "Spring bounce" is turning out to be a pathetic dud which is to be expected at the start of the pop of the bubble. And given that mortgage applications are down it is only going to get worse. The NAR is trying to stave off a potential panic by spinning the data. Other bloggers are calling the NAR on their deception (i.e., here, here, here, here, here). Even the bond market is signaling its skepticism.

Monday, April 24, 2006

"A Harvest of Financial Despair" or "The Most Calamitous Clustering of Financial Error in U.S. History"

...the common American does not understand he is being manipulated and impoverished by the Federal Reserve. When money is no longer real (i.e. fiat currency vs. gold and silver), then people may come to believe in the surreal, and a hyperreality emerges. In particular, during the reign of Alan Greenspan, money and credit – created out of thin air – rained upon Americans as if to assure us that crop failures and misfortune had been banished from U.S. soil. Hence, we came to live in a world of plenty where one may become wealthy by simply purchasing a house – with lots of borrowed money – and by "investing" in stocks for the long run. What a dream it is to become wealthy without effort. This mass delusion is only one step away from collectively believing that cotton candy is a cash crop. Alas, Americans will soon discover that housing values don’t grow to the sky and that heavy mortgage debt leads to a harvest of financial despair.

Because of the housing bubble, as engineered by the Federal Reserve, Americans are now drowning in mortgage debt while naïvely believing that living in a house is the path to wealth creation via long-term capital appreciation. Thus I am just going to come out and say it: countless American homeowners are already insolvent and simply don’t know it; and many of them continue to make ends meet by borrowing against credit cards and ever-shrinking home equity.

It is commonplace for me to see married couples with mortgage-debt-to-income ratios that are wildly askew. The hyperreality conjured by the Federal Reserve’s relentless inflation of the money supply is characterized by a populace which believes that a permanent plateau of prosperity has been attained. This is the boom phase of the trade cycle.

Let’s face it: highly leveraged Americans have little to no chance of ever paying back their enormous mortgage debts. All it will take is for a husband or a wife to lose a job, or for interest rates to go higher, in order for mortgage debt to become unmanageable. In the bust phase, mortgage defaults will become a deluge.

Earlier, I mentioned that the Federal Reserve "engineered" America’s housing bubble. To be sure, there are those who deny a housing bubble exists. Hence, such deniers argue there is no correlation between aggressive growth in M3 and the spectacular rise in housing prices across the United States – as if the Federal Reserve’s pounding down of interest rates occurred in a vacuum. To this I respond with a quote from page 1 of a September 2005 study sponsored by the Board of Governors of the Federal Reserve System titled House Prices and Monetary Policy: A Cross-Country Study [warning: PDF]. Here is the smoking-gun quote: "Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."

As surely as night follows day, a credit-induced boom is followed by a bust.

This mortgage-debt bubble, as engendered by the Federal Reserve, is leading millions of Americans to financial ruin. This may become the most calamitous clustering of financial error in U.S. history. If anything positive comes out of this economic mess, perhaps it will be the demise of the Federal Reserve itself. Regrettably, the Fed’s failure will have come at an enormous price, including the possibility of volatile social unrest.
You can read the entire article here.

Oh, and Bill Fleckenstein declares the bubble as officially popped.

Friday, April 21, 2006

Thought Process of a Housing True-believer?

The thought process of a housing true-believer?

passthebubbly said:
There is no housing bubble because it’s impossible to have housing bubbles and real estate never goes down and there’s never ever been a housing bubble so why should there be one now and everyone needs to live somewhere and look at all the immigrants coming in and they’re not making any more land and the baby boomers are all buying second homes and we have entered an entirely new valuation model and this is the ownership society and there are all kinds of innovative financing methods that help people buy houses and renting is throwing money away and people who don’t buy now will be priced out forever and real estate has always been the best investment ever so therefore there is no housing bubble. And even if there is a housing bubble which is a stupid thing to think in the first place it will pop in other places but not where MY house is because where MY house is is the absolutely PERFECT place to live and MY house will keep going up just not as fast.


california has no housing bubble because california is special and everyone wants to live in california and texas has no housing bubble because texas is special and everyone wants to live in texas and utah has no housing bubble because utah is special and everyone wants to live in utah and new york has no housing bubble because new york is special and everyone wants to live in new york and new jersey has no housing bubble because although new jersey isn’t that special at least it’s next to new york and some of new york’s specialness rubs off on new jersey and everyone wants to live in new jersey and chicago has no housing bubble because chicago is special and the economist said chicago was cool and no one is smarter than them and now everyone will really really want to live in chicago and western nebraska has no housing bubble because well um western nebraska is at least equidistant from new york and california and that has to count for something

Bubble Migration

One of the things that fascinates me most about this housing bubble is the whole psychology of the people involved (e.g., get rich quick, changing attitudes regarding debt, Ponzi thinking, denial, self-justification, rationalization, etc.) and the fact that the lessons of the very recent stock bubble seem not to have been learned (ok, that's two things).

Another interesting aspect is the bubble's effect on population movements. I don't know quite how to feel about this one. Sure, people relocate all the time for all sorts of reasons some of which are due to economic needs (e.g., a better job). But as I've said before (and here and here and here) on this blog, moving because of the housing bubble does not feel right to me. I mean, sure, moving because of job loss, retirement, earning more somewhere else, war, plague, etc. is just what you have to do sometimes. But moving because your house is ludicrously expensive and/or just to find something affordable and that isn't a POS? That just doesn't seem right. I guess I could just be callous and say "whatever". What do you think?

But given that migration due to the bubble is happening, there is the question of who are buying the houses that these out-migrants are selling? It does not seem likely that the bubble immigrants are buying houses in the bubble areas because of the presence of better/higher paying jobs (relative to the cost of living). What proportion are "greater fools" financially stretching themselves to the maximum hoping to be able to make a quick wind-fall by doing nothing other than occupying a house? That would only make the current bubbles all the more precarious. What proportion are folks who are sufficiently wealthy to afford our crazy-priced houses (and why would they even want them for that price)? They would make the bubble situation less worrisome. So maybe whether this bubble busts or not and how bad it will be for the economy at large depends on the mix of folks who are moving to the bubble areas.

And how do the locals feel about an "invasion" of equity-rich bubblites coming in and inflating their housing markets to unaffordable levels? And will that cause them to migrate away from their homes too resulting in a cascading bubble migration?

Will the net effect of all this mass bubble migration be the redefinition of vast regions such that some are reserved for just the "upper class elite" and everywhere else is for everyone else? This is America, isn't it? Doesn't this make you mad?

A reader directed my attention to this article:
The movement of Americans from north to south is trending as strong as ever, according to the latest report on net domestic migration released today from the Census Bureau.

And, it seems, housing prices are driving the trend. The net out-migration of residents is from high-priced northeastern and West Coast cities to more affordable housing markets in the Sun Belt.

"Many are surmising that housing values are so different around the country that it's impacting migration," says Marc Perry, a demographer with the Census Bureau. "Some people are cashing out housing and moving to cheaper areas. Others who don't own homes are moving so they can afford to buy one."

The net out-migration from the San Francisco metro area ($718,700) was even stronger [than Los Angeles], averaging 14.7 per year for a total of 60,984.

Migration seems to be at least somewhat independent of economic conditions. In Massachusetts, for example, out-migration has occurred at more than a 50 percent higher rate the past few years than in the decade before, according to Perry. Yet the state suffered much more economic distress in the 1990s than it has in the 2000s.
What states/districts are they leaving?

Much of New England
New York
Washington D.C.

And where are they going to that is so much better than where they left?

Riverside-San Bernardino-Ontario
San Joaquin valley

Thursday, April 20, 2006

Marin Foreclosures

Just for fun I went here and checked to see how many houses in Marin are currently in some stage of foreclosure. I didn't register for the free account (to get more detailed info) because they ask for too much personal information. But this is what I found; I am sure it's not complete or exhaustive:

  • 55 in Novato (31 in pre-forclosure, 11 in auction, 8 bank owned, 2 FSBO, 3 new)
  • 28 in San Rafael (18 pre-forclosure, 8 auction, 2 bank owned)
  • 15 in Sausalito (7 pre-forclusure, 3 auction, 5 bank owned)
  • 12 in Mill Valley (10 pre-forclosure, 2 resale)
  • 10 in San Anselmo (6 pre-forclosure, 3 auction, 1 bank owned)
  • 4 in Bolinas (3 pre-forclosure, 1 bank owned)
  • 4 in Corte Madera (2 pre-forclosure, 1 auction, 1 bank owned)
  • 2 in Fairfax (2 pre-forclosure)
  • 1 in Greenbrae (1 pre-forclosure)
  • 1 in Larkspur (1 pre-forclosure)
And because some people like to compare Marin County to Santa Barbara or Carmel-by-the-Sea:
  • 70 in Santa Barbara (33 pre-foreclosure, 6 auction, 5 bank owned, 4 FSBO, 22 new)
  • 9 in Carmel-by-the-Sea (5 pre-foreclosure, 3 auction, 1 bank owned)

Wednesday, April 19, 2006

DataQuick's March, 2006 Results

Here's DataQuick's take on the March, 2006 sales results for the Bay Area; markets continue to erode. DataQuick's March report for Marin County is consistent with that found elsewhere on this blog -- year-over-year, prices remain essentially flat and sales volume continues to be negative.

Special Request

Ok, ok, I give in already. UNCLE! Sheesh.

For now on, please do not publish comments as "Anonymous" any longer. Signing in as "Anonymous" makes it impossible for the rest of us to know who is saying what in a comment thread or across comment threads.

If you want to remain anonymous and still allow us to know who is saying what, either create a Blogger account and use it (you don't really need to have an actual blog to use this option), or select "Other" and type in some name (please just use it consistently).



Foreclosure Meltdown

It looks like the foreclosure meltdown might have begun -- "Foreclosures Soar 63 Percent over Last Year" -- and will probably only get worse given that as much as $2.5 trillion in hybrid ARMs will reset.

Some choice quotes:
RealtyTrac(TM) (, the leading online marketplace for foreclosure properties, today released its March 2006 U.S. Foreclosure Market Report, which shows 101,597 properties nationwide entered some stage of foreclosure in March, a 13 percent decrease from the previous month but a 63 percent increase from March 2005. The report shows a March national foreclosure rate of one new foreclosure for every 1,138 U.S. households.

California reported 11,073 properties entering some stage of foreclosure in March, the second most of any state, and the state's foreclosure rate registered slightly above the national average thanks to a 22 percent increase from the previous month.

The Secret Thoughts of Realtors

Some realtors (not all of course) are such hypocrites. Publicly they will tell you 'all is fine; we're returning to a normal market; now is a great time to buy', etc., etc. But according to this article, privately, they're scared to death.

I asked one realtor (who contacted my by email and who reads this blog) if I started a thread just for her would she be willing to respond to potentially very direct and pointed reader questions? When she replied that she was favorable to the idea but would have to think about it because of 'concerns over how it might affect her business' I dropped the whole idea.

Some choice quotes:
If the secret worries of real estate professionals are any indication, home prices could be heading for a swoon.

When Brad Inman of Inman News, which tracks the real estate industry and is widely read by industry insiders, recently gave real estate agents the opportunity to blog about market conditions, they almost uniformly described them as bad – and getting worse.

"Normally, brokers and agents tend to sugarcoat the news; they don't want to affect consumer confidence," says Inman.

Tuesday, April 18, 2006

This Land is My Land

This ditty was supposed to accompany reskeptic's post on MALT. So here it is. Moo.
(Apologies to Woody Guthrie)

This land is your land, this land is my land
From Sausalito, to north Novato
From the county border, to the Marin headlands
This land was made for mostly me

As I was grazing a ribbon of pasture
I saw above me an endless skyway
I saw below me your pricey homesteads
This land was made for mostly me


I've mooed and munched and I've followed my hoofsteps
To the sparkling sands of her diamond beaches
And all around me a voice was sounding
This land was made for mostly me


The sun comes shining as I was strolling
The wheat fields waving and the dust clouds rolling
The fog was lifting a voice come chanting
This land was made for mostly me


As I was grazin' - I saw a sign there
And that sign said - you can't buy here
But on the other side .... it said in foreclosure
Now that side was made for mostly you!


In the squares of the city - In the shadow of the steeple
Near the relief office - I see your people
And some are grumblin' and some are wonderin'
If this land's still made for mostly you.

Monday, April 17, 2006

It's Faster This Time?

I found this post here and felt that it needed repeating. In case you don't already know, "REO" is short for "real estate owned" -- the amount of real estate repossessed from borrowers by banks.

I know, I know this can't happen in Marin. In San Diego, sure, but not Marin. We're immune -- too rich, too sophisticated, too so-much-better-than-everyone-else, too whatever. But the rest of the state is just so f***ed.

Or maybe it's just apocryphal; you decide:
I'm the former RTC REO Marketing Analyst, but prefer to be Anonymous because I know some people are going to become very alarmed and very angry when I discuss what happened the last time.

When I left the RTC at HomeFed Bank in 1991, the RTC was in the process of closing down. It was the tail end of that cycle.

While at the RTC, I personally sold bank REO for 20%-30% of what it appraised for just two and three years earlier. Not for 20-30% less, but 20-30% of that real estate's former value from just 2-3 years earlier.

Mortgage defaults and bank REO are increasing rapidly already as of today. Keep in mind that banking regulators will never give lenders leeway to play the market so to speak, or hold on to REO in the hope of an improving market to get a better price or to cover their nut (i.e., mortgage). They HAVE to get those non-performing assets OFF their books. I have lots of stories about those days and I'm convinced this time it will be far worse because back then we didn't have any of the Geo-Political crises we have now (rampant illegal immigration, wars, we're a bigger debtor nation, we have a bigger trade imbalance with China than we ever had with Japan I'm sure, etc., etc.), interest rates that were artificially depressed to levels not seen in 40 years, dangerous and irresponsible lending products, and because the advent of the internet now facilitates the free flow of information much faster. Look at all the housing bubble blogs there are with all the reliable data they are providing. It's almost an avalanche of data supporting why all but the most ill-informed should not be looking to buy for at least 2 years.

I remember telling people in 1989-1990 that the writing was on the wall and nobody listened because there was no publicly available data (brokers like me knew based on MLS data only available to members) to cite in support of the impending crash, and the media, especially newspapers, weren't going to report it because their largest advertising constituency is Realtors/brokers.

With the internet and the info that is available on it, you'll soon see the amount of time it takes for real estate to crash significantly compacted this time. Just look how fast things have turned bad since just before the holiday season started last year.

Homeowners are now increasingly starting to put their homes up for sale to get an early start on the summer home buying season, and some are just now realizing how inventories on their local MLS's have tripled, quadrupled and worse. As of today, ZipRealty reports that San Diego is just about 4 weeks away (based on the average daily increase in inventory I have been monitoring since late last summer) from breaking the old record of 19,250 during the last down cycle.
I know some have said that you can't use that figure because San Diego has a larger population today, but I disagree and here's why. There are far more FSBO related companies today than 15 years ago because of the Internet and collectively, many of their their thousands of listings are not included in the ZipRealty figures. Also keep in mind that last year population in the County went down, and don't be surprised when it goes down again after this year finishes up.

Look how the tone of articles from mainstream media in the last 2 months alone have changed. Panic has already set in for many, but they have no idea how ugly it will get.

The one thing I'm always amazed to find out is how many borrowers think that when their home goes back to the bank, that's the end of their problems. What they don't realize is that if the lender writes off or forgives any debt to them (i.e., short sale, etc.) the former borrower will get a 1099 for the amount of that forgiven debt as though they had received it as income. If they sold their home through a short sale at the begining of the year and they got a 1099 by January 30th of the following year, they not only have to pay taxes on that forgiven debt, but now penalties and interest too, because it was due (unless you pay estimated quarterly taxes) at the time the debt was forgiven. I personally knew a borrower who had 11 rental properties and after he lost the first one to foreclosure, he got hit with a huge IRS penalty. He started selling off the others, but had huge tax hits because of depreciation recapture, and because the market was getting worse, he could not sell some for what he owed. I was an underwriter at the time and on paper, just prior to losing his first property he had equity of over $1,000,000; but in the end he lost it all because he couldn't sell in a market where bank REO dominated, and when he tried, the tax hit from depreciation recapture buried him further.

The same sheeple psychology that drove everyone to ignore cash flow fundamentals by flipping condos and homes based on the greater fool theory, will invert like it did in 1990, and for the next few years you'll hear nothing about real estate except how terrible of an investment it is, and it will be true for those who either bought with high leverage or refinanced with max cash out based on the value of their homes in the last 2 years.

And anyone who says rents will catch up to all the adjusting I.O. and ARM loans is in fantasy land. Between 1990 & 1994, I had my landlord reduce my rent three times by simply giving notice that I could rent a better condo at the beach for less. And you know why that's possible? Because of all the bank REO that was (and will be again) unloaded on the market. Owners who buy REO can easily compete on price alone. Market rent is meaningless to them. I rent a $750K place now and have been renting since we sold our residence in 2002 and our rent is under $2,000 and in the 5 years we'll have been here, the rent will have only increased by 3% from 2002 through 2007.

To those who ask how long to wait and how low will it get, here's my answer. Even though the Internet will compact the time it takes to crash, I still say don't even think about buying for at least another 18 months. Don't be fooled by ocassional news or market conditions that lead you to think things have turned better because that always happens on the way down, just as it does with stocks on companies you know are "Dead Man Walking".

As far as the percentage, don't think in terms of what percentage it will go down relative to the overall market, but what discount you can get on hardship situations, like bank REO. I think you will be able to get property for 20-30% of what it appraised for in 2005. Trust me. Even if you don't for whatever reason, others who are diligent will.

Exurban Nation

Please check out Robert Coté's blog, exurban nation. Excellent. 'Nuff said.

Beware Angry Sellers

In addition to the expected increase in sob stories about people who are finding themselves underwater on their exotic loans (it's only going to get a lot worse folks), we are now starting to see angry pro-seller articles like this one -- sellers are angry because it is, or becoming, more of a buyer's market; sellers are having to jump through all sorts of hoops and make all sorts of concessions to sell a house.

Although this article doesn't focus on Marin, it still just so resonated with me given what I've seen of the Marin real estate market where it is now hard to walk into an open house that hasn't been staged, doesn't contain granite counter tops, industrial strength kitchen appliances (stainless steel of course), fake Tuscan wall paintings, cherry wood cabinets, designer faucets, tiles that come all the way from some exotic sounding Italian village, bags of French herbs, etc., etc.

Some choice quotes:
The housing market used to be so hot that buyers began writing offers before real estate agents even entered a new listing. And then agents advised buyers to improve their bids by writing personal letters to the seller, explaining where they planned to put the nursery and gushing over the owner's wonderful taste in decor.

Now with last month's real estate listings up by 23 percent since the same time last year, Twin Cities sellers might want to try writing a personalized letter of their own:

"Dear Buyer: Make us an offer. Puh-leese."

The long-predicted real estate bubble hasn't proved out, but you can tell by the number of "For Sale" signs on your block that the tide has definitely turned. Cable television channels, once overcrowded with programs showing how to sponge paint your walls to resemble a Tuscan villa, now are teeming with programs like "Designed to Sell," "Sell This House" and the ever more desperate "Buy Me."

In all of these programs, sellers are advised to paint over their sponged Tuscan walls with something inoffensive that buyers will like. Not that anyone really knows what buyers want, there being more than 26,000 homes for them to choose from in the Twin Cities — a record high.

Similarly frustrating to sellers is the current trend for "staging" a home, creating a kind of still life of single-family living with none of the books or personal knick-knacks but a constant supply of fresh flowers, scented candles and other gimcrack no real family could stand for five minutes. Buyers have become so accustomed to these faux tableaux — the angled couch, the arranged tea service with cozy, cashmere throw — they seem not to notice the actual architecture surrounding it.

Sunday, April 16, 2006

Advice to Buyers: Concessions

I've communicated with a number of Marin realtors who visit this blog and they have told me about the concessions that some Marin sellers are having to cough up to attract buyers. You know, things like cash back, paying closing costs, pay X amount of the insurance for Y number of years, etc. Even ZipRealty pays out some small fraction of the selling price if you buy through them.

But it seems to me that these concessions are rather empty come-ons. A buyer would be far better off, in my opinion, reducing the sale price by at least whatever those concessions add up to. You are better off because your property tax is fixed based on the sales price. If the seller is really desperate, then push for some concessions to sweeten the deal.

So buyers: don't fall for these concessions. Press for what really matters.

Saturday, April 15, 2006

More March Results for Marin

Here are some more year-over-year results for Marin from this realtor's web site.
"Active" -- all non-contingent properties currently listed as 'for sale'.
"In Contract" -- anything that is currently in escrow.
"Total" -- 'Active' plus 'In Contract'.
The total number of active 'for sale' listings nearly doubled (+96%) in Marin in February, 2006 as compared to February, 2005; it is presently up 70% as compared to this time last year. The number of properties that are in contract has been negative year-over-year (with the exception of February, 2006).

Friday, April 14, 2006

No Duh!

No surprise here -- now that he is no longer sitting in the big chair, Greenspan is telling it the way it is...expect asset (e.g., house) price declines in a big way:
Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices.

He said the market value of assets worldwide had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates over the years and a significant fall in real equity premiums.

"A good part of this expansion is a direct function of the decline in real equity premiums," Greenspan said. "That cannot go on indefinitely."

He said asset prices would begin to fall, but did not predict when that would happen.

"I am reasonably certain that what we are looking at today is an abnormal situation," he said.
But apparently Boobus Americanus doesn't pay any attention to the news as we are hearing more and more stories about folks who still believe that they can get bubblicious prices for their POSs, are now having to reduce their asking prices after sitting on the market for months and months, and overheard muttering things to themselves like "I wish I had priced it lower from the beginning". Well Boobus, you had better act fast before the resetting of ARMageddon arrives.

Thursday, April 13, 2006

Marinites Getting Desperate?

Make an offer!!!!!!!!!!!!!!!Horse property!!!Just reduced again!!!! $300,000.00 price reduction, must see! [Realtor BS] Property could be made into an estate or a possibility of subdividing,but must check with county.
Massive price reduction? Realtor begging buyers to make an offer? It's been on the market for 212 days! Are some sellers in Marin getting desperate or what? And then there is this plea too. Cry me a river.

Tuesday, April 11, 2006

Shiller Interview

Here is a brief interview with Robert Shiller.

Some choice quotes:

What's the most important mental mistake that people make as buyers or sellers of homes?
At the present time, it is the mistake of thinking that homes will generally be a terrific investment. People typically think that home prices will go up at something like the return on the stock market. If home prices had done this for the last century then their real value today would be roughly a thousand-fold higher, while our real per-capita incomes are only about 6-fold higher. That is clearly not what happened -- it would mean that practically none of us could afford homes today. Quite the contrary, we are able to afford much bigger and better homes. Homes are a manufactured good, and in the long run construction keeps prices down.

What do you think is the strongest evidence that we're in a housing bubble?
Speculative booms and busts have been in the housing market from time immemorial; the only thing that is new now is the national -- and international -- character of this boom. The pattern of speculation should be well known to people who read history, though most people don't.

We see immense public excitement, scrambles to invest in homes amidst rising prices and rising construction activity. The excitement is sure to fade, just as supply comes on line. Of course, speculative booms have not always ended in busts. There have been soft landings as well as busts, and no one can be sure what will happen this time. That is why we need new markets that will help us by delivering market expectations for future dates.

You've written that consumption doesn't fall as much in a housing bust as it rises in an up market. Does that mean we don't have to worry about a big hit to the economy if a housing bubble bursts?
It is true that people will try to maintain their standard of consumption even if home prices fall. This time, however, they are starting out with a personal saving rate that has been very low -- negative in 2005. So, there may be bigger contractions in consumption this time. There is cause for some worry: Housing busts have been a leading indicator of recessions. Monetary policy has improved, though, and with [Fed Chairman] Ben Bernanke at the helm, maybe the economy won't take a big hit even if there is a housing bust.

March, 2006 Results for Marin

Here are some charts (in no particular order) for you all that includes the most recent March, 2006 sales results. The data for the first, third, and fourth charts come from Vision RE; the data for the second chart comes from here.

Click on any chart to enlarge it.

This first chart shows the year-over-year (YoY) percent change in the number of SFR sold from September, 2003 to March, 2006:

This next graph shows the YoY percent change in total inventory in Marin (unlike the other charts, the data for this chart came from here):

This next chart shows the YoY percent change in the median sales price for all sales in Marin from January, 2005 to March, 2006:

This final chart is the weirdest. It shows the mean and median sales prices for all sales in Marin from January, 2004 to March, 2006. It's weird because the March, 2006 data point looks so aberrant. Vision RE explains the aberration as being due to an abnormally large number of multi-million dollar houses sold in March:

Simply Unbelievable

Nope. There is no (mortgage) bubble:
The St. Petersburg Times found a homeless man who had bought a few houses. “After struggling much of his adult life with unemployment, homelessness and drug addiction, Johnny Moon Sr. died last year on a dirty mattress on the floor of a small home near Tampa’s College Hill district. Moon left behind a watch, a flashlight and a wallet containing a solitary dollar bill. And more than a half-million dollars worth of real estate.”

The St. Petersburg Times (inquired) about how the elder Moon had qualified for the mortgage loans. A high school dropout with no job history who got by on food stamps, Moon morphed into a real estate investor. Within a year, he bought five properties and signed for mortgages in excess of $614,000.
Now back to our regularly scheduled program.

Monday, April 10, 2006

Spring Fever

As suspected, the party continues according to Vision RE (was West Bay RE). Is Marin getting its Spring bounce? Year-over-year, the median sales price of SFR is down -0.2% (so let's call it "flat") but the average sales price surged over 7%. Dang! Vision RE assures us that the reason for the surge in the average sales price is due to an abnormally large number of multi-million dollar houses selling (which makes a lot of sense given that the calculation of an average is hugely sensitive to outliers). So is it a fluke? Sales volume is down -18.4% year over year; that makes for five straight months of negative YoY sales. Also,YoY inventory over the last three months in Marin is about 46% greater on average (I'll post that chart later; it is based on a different realtor's data).

I'll try to chart all of this up tonight so as to put it in recent historical context.

It's odd because I've been communicating by email with a realtor (who prefers to remain anonymous) who tells me that most of her clients have not been out house shopping because of the rain (especially those with kids) and that many buyers are having to buy houses that are significantly smaller than what they wanted due to the rising interest rates (suggests people are stretching to get in to a house, any house). As interest rates continue to rise and so-called "exotic" loans get phased out the market should turn interesting. We'll see...

Marin Land: How Much is Out There?

The following is a submission by REskeptic. Blogger has been having troubles so I am posting it on his behalf:

Marin land: how much is out there? Despite talk about the exclusivity of Marin real estate, this composite satellite image should allow readers to visually compare those areas which are densely developed to the remaining open land. Please note: in the interest of space, Pt. Reyes and the Tomales coast are truncated in this image. Out of a total of 521 square miles, how much land is actually used for housing? Sofar, I've read that about 48% is undeveloped, but whatever the exact figure is, it's pretty obvious Marin has plenty of land to accomodate future growth. Is our best option a more heavily urbanized 101 corridor, while much of land remains undeveloped and unaccessible to future families? Even if a better-managed development approach is taken in the future, Marin should be able to provide for future growth, especially given the flat to negative population rate. So, how does current population stats and land resources reflect on the notion that Marin prices are based on normal supply and demand? Regarding MALT, which priorities should take precedence in Marin's future? Should a few Marin dairy farms, whose land use actually harms* the environment, determine the future availability of housing?

Granted, we need more information and ideas to suggest what should be done with Marin's land. In the meantime, take a look at this image and decide for yourself where Marin stands in terms of land availability.

*Agricultural land use masquerading as environmentalism actually harms the environment because land converted for grazing denudes the natural biodiversity, introduces alien feed plants that displace native species, and runoff from fertilizer and waste contributes to aquifer contamination, coastal pollution, and red tide effects on marine life and toxicity in shellfish and other seafood.

Some "Humor" to Lighten This Place Up

Is this the future of California housing as affordability continues to plummet?; as our $1 million PoSs approach $1 billion in 15 years or so (because you know, houses only go up in value):

Sunday, April 09, 2006

Open Houses

I went looking at open houses while I visited a friend in Novato just for the heck of it. The picture below is from there (sorry about the image quality, it was made using my cell phone). There was another group of six 'for sale' signs down the street about a quarter of a mile. And I counted 58 'for sale' signs while driving the entire length of Novato Blvd. Wow!

If you have any such photos that you would like to share, send 'em.

Affordability, Then and Now

There are some serious discussions going on in some of the comment sections. That's great! Here is the article that accompanies the above picture and is something that is also serious.

Thursday, April 06, 2006

What's the Solution?

So in the previous post some of the problems of this housing bubble (caveat: I see them as problems anyway) as it relates to Marin were pointed out. But that post only touched on a small fraction of the problems this housing bubble has created IMO. In fact, in case you haven't noticed, the ills of this housing bubble have been investigated during the course of the entire life span of this blog! For those of you who have been wondering what my motivation is, well, that would be it.

So the next step is: What are the solutions? What has been suggested on other blogs? Here is a partial list of things that I have seen:
  • "Further relaxed lending standards". No good. That only propagates the problem.
  • "40-, 50-, 100-year loan terms". No good. That only propagates the problem.
  • "Restrain the Fed from irresponsibly pumping the system with liquidity". Not bad, but the Fed had to do that for some arguably good reasons. But there are other blogs where people are far more knowledgeable about those sorts of things and have far better thoughts on the subject. At a minimum I refer you to here and here.
  • "Regulate realtors". Given that buyers take so seriously what they say I think regulation would not be such a bad idea. But doing so won't address the main problem in my opinion.
  • "Replace realtor commissions with a flat fee". That only makes good sense to me, but it does not address the core problem.
  • "Regulate lenders and/or make them again financially accountable for the loans they make". That seems to me to be a very sensible idea but it doesn't go far enough.
It seems to me that, with the exception of maybe that last item, none of the above proposals really addresses the core issue: price inflation due to out of control speculation. I mean, we have just recently had our suspicions confirmed: 40% of all house purchases last year were speculative in nature (I include vacation homes under that rubric since when the people who recently bought vacation homes are asked why they bought them they give reasons involving expected price appreciation in one form or another). Wow! David Lereah is, of course, shocked. Shocked!

Financial bubbles will always exist and I doubt that they can be completely eliminated. But I think there are some steps that could be followed to limit the extent of speculation in an asset that is as important to people's lives as housing. Here are some just as a start; I am sure the intelligent readership who grace this blog can add to the list (this list is not intended to be interpreted as being specific to Marin, it is general to real estate in California; Marin has it's own issues):
  1. Eliminate the mortgage interest tax deduction for all properties other than the primary residence.
  2. Eliminate the Proposition 13 assessment freeze on houses other than the primary residence.
  3. Houses other than the primary residence should be subject to capital gains tax just like anything else.
Update: I just found this referenced over at The Boy in the Housing Bubble blog. Apparently, two respected economists are calling for the government to make a deliberate, preemptive strike against the housing bubble (to play off Lereah's analogy that the housing bubble is in fact a "ship", the preemptive strike would be a "torpedo"). Their argument is that the housing bubble will invariably collapse under its own weight and that collapse will cause significant economic harm. The larger the bubble gets, the greater the harm. They say the government should prick the bubble before it gets too big thereby minimizing the eventual and unavoidable damage. I totally agree. I got flamed for saying that in the past so it is comforting to see that I am not alone.

Wednesday, April 05, 2006

Marin Transportation, Sprawl, Provincialism, NIMBYism

So you want more Marin-specific posts do you? Well, some of you do but most seem to be happy with the blog the way it is thank you very much. I'm not going to change based on the opinions of a minority, but here is one anyway just to make you happy. It is deliberately a bit inflammatory just to get the "thinking juices" flowing.

This is a letter I found in the Marin IJ today. It was written by a Mill Valley resident. I reproduce it below:
Beware of proponents who promote their own surveys. I have no doubt that the majority of Marin and Sonoma residents who were polled by SMART about a sales tax increase to fund a rail transit system did so because they think it will solve the Highway 101 traffic problems.

A mass transit system sounds nice and the zero-sum equation of 4,800 rail riders equals 4,800 fewer cars on the road is attractive.

Such thinking is an urban legend unsupported by history. No urban or suburban county in this country that has deployed a rail or bus system has ever experienced a reduction in traffic congestion.

Mass transit and other commute improvements, such as adding highway lanes, simply add capacity to the transportation system, which fuels additional residential development on the outer edge, which adds more cars. Many of the same environmentalists who support a mass transit system for a corridor that does not have the population density to support such a system will ironically oppose the infill residential and commercial development that is necessary to create the required density of conveniently located jobs and housing.

Many of us are hoping the "other guy" will get out of his car and take the train.

A final fact: No mass transit system has ever been self-supporting based on rider fees (and maintained a frequency schedule that is useful).

So when it comes time to vote whether or not to tax ourselves for a boutique transit system, understand that the initial tax rate is only a fraction of what will be eventually required.
The writer makes some good points. It is difficult for a public transportation system to be profitable, but not impossible. And, all things being equal, if all you do is increase the capacity of the transportation system then more houses will tend to be built thereby nulling the increased transportation capacity.

But what struck me as being just "so Marin" was the time-honored and unquestioned Marin provincial assumption that building housing is a Bad Thing. Why must that be a bad thing?

Marin has conducted this experiment (i.e., not improving transportation capacity) in tandem with draconian zoning rules (e.g., the Marin Agricultural Land Trust) for the last 30 years or so. It has resulted in the following highly visible consequences:
  • Pathetically unaffordable housing (and all the problems it spawns)
  • Crushing levels of traffic congestion (at least down the Hwy 101 corridor)
  • A shameful offloading of the responsibility of housing our workforce to neighboring counties
  • Tremendously long commute distances and times
And yet, people still move to Marin! New houses still get built in Marin and in neighboring counties although at a reduced (non-zero) rate. I submit that "the experiment" has only benefited long-time land owners and their real estate profits and has otherwise been an utter failure. In fact, I think profits are what it was really all about from the very beginning. I know for a fact that my Marin boomer parent who voted for MALT way-back-when admits that increasing real estate valuations was "definately a part of the equation". Flame away if you must but it's true all the same.

Some of the uglier and less tangible consequences of this failure is how Marinites have assumed an air of arrogance and superiority and a seemingly deliberate indifference towards the social consequences of unaffordable housing (of which much has been said on this blog and so I won't enumerate them here). We tend to turn a blind eye to the problems and claim it's someone else's responsibility.

I admit that this is a really gnarly and convoluted problem. But it has to be addressed. So what should be done? What do you suggest? Let's toss some ideas around in the comments section.

It seems to me that a part of the solution will have to involve an admission that people are still getting born and that they will need to live someplace near employment centers; some place other than their cars. This is especially true if you believe in Peak Oil.

Another part of the solution will have to involve taking responsibility for the mess that we find ourselves in and taking some real, meaningful action and not just lip-service. Exclusionary practices and NIMBYism are not the answer; we've tried that and it doesn't work.

Part of the fear Marinites have about building new houses is that they believe that it would result in urban sprawl akin to what can be seen in Southern California (which everyone in Marin loves to hate). I submit that there can be a happy medium between out of control sprawl on the one hand and no new building on the other. But to accomplish that will require revising MALT.

Well, have at it if you want.

Tuesday, April 04, 2006

66% of Lenders Say We Are In a Housing Bubble

A survey finds that two-thirds of lenders think we are in a housing bubble and the aftermath will not be pretty. They predict that the nation-wide drop in house prices could be as high as 20%. One can only imagine how much larger the drop could be in bubbly areas like the Bay Area. Why would anyone buy a house now, especially an over-priced and rather ordinary Marin POS?

Some choice quotes:
Two-thirds of lenders nationwide believe a real estate bubble currently exists in the United States - and half of them believe it has already begun to burst or will burst in the next six months, according to the results of this quarter’s Phoenix Management ‘Lending Climate in America’ Survey.

A significant 93 percent of lenders surveyed expect an anticipated housing correction to result in real estate prices declining 10 to 20 percent across the country. ‘In the minds of lenders, the housing bubble has moved from ‘Loch Ness monster’ myth status to an economic reality that could have a significant, negative impact on the lives of many Americans,’ said Michael E. Jacoby.

A year ago, 46 percent of lenders believed we were in a housing bubble. Today, that number has climbed to 66 percent, and many of them believe a correction is imminent and could lead to a drop in housing prices of up to 20 percent.

When asked when they believed the housing bubble would burst, thirty percent of lenders said it has already begun to happen. Twenty percent predicted it would occur in the next one to six months, and 27 percent thought it would happen seven to 12 months from now. Nine percent said it would occur in 2007.

Among the 92 lenders who participated in this quarter’s survey, only nine percent said they did not believe a housing bubble existed. When asked which area of the country was likely to be most affected by a housing correction, 30 percent of respondents named the Northeast, followed closely by 27 percent who predicted the West Coast. Fourteen percent named the Southeast, and five percent, each, named: the Mid-Atlantic, the Mid-West, or said all regions will be affected equally.

Half of all lenders believe a housing correction will result in real estate prices dropping up to ten percent. Forty-three percent of lenders said the decline would be as high as 20 percent.

Monday, April 03, 2006

How Strong is Your Market?

I found the following data here; I just plotted some of it so as to put it in a visual context (I excluded New Orleans' data).

The graph shows for various metropolitan areas:
  • Cost of renting (smaller numbers mean renting is more affordable vs. owning).
  • Housing opportunity index (affordability, smaller numbers mean less affordable).
  • Total percentage of loans that are ARM or negative amortizing.
Click on the graph for a larger view.


Update: According to this article, if ARMs, Neg Ams, etc. are removed or curtailed, then the result for the housing market would be to "precipitate a disaster of epic proportions". Looking at the above graph, the Bay Area (including Marin) is far from immune to such a disaster.

Expect a 32% Drop

It's been argued here and elsewhere ad nauseam that you can expect a 30-40% decline in house prices post-bubble. Here it is argued that the correct expected value is a 32% drop:

If the housing bubble follows the historic pattern of other bubbles--and there is no reason to suspect it will deflate any differently than other bubbles--we can forecast a rapid decline to the underlying trendline. And what is that trendline? If we draw a simple line from 1970 to the present through the median home price in the U.S. (not adjusted for inflation), we see that the 25-year period from 1970 to 1995 follows a very regular trendline, despite the soaring inflation of the early 1980s.
We can see that the appreciation of housing was already above the trendline in 2000, reflecting the general euphoria and asset-appreciation of the go-go late 90s. But the real violation of the trendline has occurred since 2000. The trendline suggests that the median price of a house will fall from $214,000 to about $145,000 in the next few years--a 32% decline.

There is other evidence to support this valuation target. If you consult the inflation calculator on the Bureau of Labor Statistics page, you'll find that inflation has risen from 1990 to 2006 by 52%. That is, $1 in 1990 is worth $1.52 in today's currency. (Never mind inflation has been understated for years--that's another story I've covered elsewhere.) That means the median house price of $95,500 in 1990 would equal $145,160 in today's money--remarkably close to the trendline prediction of $145,000.

Since the median price of a house in California is $535,000, we can extrapolate a 32% decline to $365,000 as a post-bubble target.

This isn't what the real estate industry wants to hear, but the charts are rather persuasive.

Sunday, April 02, 2006

Ignore Your 'Lizard Brain'

It's just so gratifying to read a magazine that used to be so "rah-rah, go housing; housing never goes down" now saying many of the things we bubble bloggers have been saying for so long now. The bubble really must be bursting. And the seller's amygdalas must really be working overtime now.

Anyway, here are some more "New Rules" care of Business Week (these are just so obvious but better late than never):
No matter how smart you are, it's easy to fall into certain mental traps that can cost big bucks. Instead of concentrating on the fundamentals, people tend to be ruled by their feelings and the compulsion to compare themselves with their neighbors. If your brother-in-law made a killing in real estate, you're determined to do the same. "So much of what drives the housing market is human interpersonal dynamics," says Yale University economist Robert J. Shiller.
1. Avoid the Herd
A first rule of thumb is to avoid herd behavior, which is what lured a lot of people into overpriced houses in the first place. The expectation of rising prices became a self-fulfilling prophecy as office mates and in-laws tried to leapfrog each other. The prevailing mindset: "You see people who aren't particularly talented, who aren't hard-working, who buy a house with nothing down, and they've been getting rich doing it. If they're getting richer, then you're falling behind," says Robert H. Frank, a Cornell University economist and author of Luxury Fever. Another attraction of herd behavior is safety in numbers. Millions of buyers can't all be wrong, can they? ...The rewards of thinking independently can be high.
2. A Small Loss Today is Much More Preferable to a Greater Loss Tomorrow
In a softening real estate market, one of the most dangerous mental mistakes is what behavioral economists call "loss aversion," which is the tendency to do dumb things to avoid, at all costs, recording a loss. Some sellers are so averse, they gamble the market will bounce back rather than cut their prices. Even owners who stand to make a big profit on a sale often set the price too high. In this case the mental error isn't loss aversion but outdated thinking.
3. Avoid Chasing the Market Down
The gravest danger of dragging your heels on price cuts in a sinking market is that you can "follow the market down," never managing to sell because your price is always just a little too high, says Christopher J. Mayer, a Columbia Business School economist. He and David Genesove of Hebrew University in Jerusalem found that when prices were falling in Boston in the early 1990s, two-thirds of the houses that came on the market were eventually withdrawn without a sale.
4. Don't Be Overconfident
In parts of the country where the market is still strong, a common sin continues to be overconfidence. Owners typically don't seriously consider a wide enough range of potential housing market outcomes, including the possibility of a steep decline. That leads people to take more risks than they should.
5. Don't Fall into the Trap of Thinking that Renting Makes You a 'Second-Class Citizen'
Rent-vs.-buy decisions are a perfect example of what the housing market can learn from behavioral economics. If financial efficiency were all that mattered, more people would be renting nice houses instead of buying them, even taking into account the home mortgage-interest deduction.

Especially in upscale communities, social pressure to buy is intense. Jonathan Miller, CEO of real estate appraiser Miller Samuel Inc., recalls that when he and his family moved to upper-crust Darien, Conn., 15 years ago and rented for a year, "we were absolutely second-class citizens. It was very unpleasant."

In many markets the total monthly costs of renting are far below the total monthly costs of owning the same property -- 62% cheaper in San Diego, for example, according to Boston-based Torto Wheaton Research, a unit of property manager CB Richard Ellis Group Inc. So you owe it to yourself to be aware that your castle thinking can be a costly predilection.
6. Don't Rely on Your Lizard Brain
Neuroscientists have even discovered the place in your brain that makes you spend too much on a house. Far from behaving perfectly rationally, real people are pushed and pulled by signals emanating from below the neocortex -- the primitive "lizard brain." That may be why there are so many homes with empty marble foyers, faux Roman columns, dust-collecting Jacuzzis, and exotic drooping conifers on the lawn.
7. Re-think the Whole Marin Wannabe Aristocracy Thing
What people can do is be aware of their human tendency toward status-seeking.
8. Avoid the Tangibles vs. Intangibles Fallacy
A foible that helps account for America's obsession with real estate is what you might call the tangibility fallacy. It's the all-too-human tendency to regard tangible things like houses as more stable and trustworthy than intangible ones like stocks and bonds. It's true that a house provides more comfort than a book entry in a stockbroking account. But that doesn't mean it's a better investment...To find your moorings, try to focus on the fundamental factors that determine value.

Saturday, April 01, 2006

Blogger PSA

I just wanted to formally announce and warmly welcome REskeptic as a new contributing (and this blog's first) team member on the Marin Real Estate Bubble blog. He and I have had some extremely insightful and interesting email exchanges in the past and his comments are always on topic and informative and so I look forward to his contributions to this blog. Welcome and thank you.

On How Housing Bubbles Form and Pop

I found this old article over at iTulip. It makes some interesting points regarding the housing bubble. It discusses where housing bubbles tend to occur and what we can expect over the next few, short years. It just goes to show how insightful these folks are (they correctly identified the tech bubble burst early by the way).

1. Housing bubbles are concentrated in areas where buildable land is scarce, on waterfronts, and/or from where people commute to their jobs (e.g., Marin County):
How does it end? On the way up, housing bubbles grow differently than stock bubbles. They're regional, because folks buy homes near where they get their income, usually withing a 40 minute drive. Now I realize that in Northern California that could be two miles away on Rt. 101, but bear with me. That means prices fueled by too low interest rates will manifest where people and the jobs they drive, take a bus or train, or walk to are concentrated. Also, they happen in areas where land is scarce, such as waterfront property; speculation is encouraged by the reality of land limitations.

Popular belief today is that prices won't decline much in the future because land is limited relative to the number of people who want on it. Tell that the the Japanese who have seen real estate prices decline for more than 12 years. Too much land and not enough people in Japan? No. Even though interest rates have been near zero for years, the problem is that their incomes have been declining.

Low rates are the input of a housing bubble, areas of concentration of population or scarce land are where they happen, but low interest rates will not sustain the bubble forever. Just as housing bubbles are unlike stock bubbles on the way up, they're different on the way down, too.
2. Housing market bubbles don't "pop" according to the same time course as stock market bubbles. Instead, they gouge you piece by piece over an excruciatingly lengthy period of time. This makes them more insidious than stock market bubbles because there is so much more available time to talk yourself out of thinking that there is a bubble and that you might lose your shirt:
Unlike stock market bubbles, real estate bubbles don't pop. Collapsing stock market bubbles are characterized by a sudden collapse in prices because stock markets are highly liquid. You see huge volumes of transactions at ever lower prices during a stock market collapse. Collapsing housing bubbles, on the other hand, are characterized by illiquidity, a sudden collapse in transactions. Buyers and sellers seem to disappear.

The reason is a reversal in the psychology of buyers that developed at the top of a speculative housing market. Buyers had been buying at prices they knew were too high but on the assumption that they'd be able to sell if they needed to. The thought was: "Ok, maybe it's overpriced, but at least I'll be able to sell it later for at least what I paid for it, but likely more." What happens on the way down is that houses go on the market and just about no one shows up to look. That's because buyers weren't buying earlier primarily because they needed a place to live, but because they thought the price would likely rise [oh, do you mean like this?] and that, in any case, they'd be able to get out when they wanted with all of their money or more. On the way down, neither condition is true. So buyers stay home, so to speak.

Can't buyers be enticed by declining prices, by bargain hunting, you ask? No. Once housing sale transactions suddenly fall from, say, several hundred a month in a large community to, say, one or two a month, this creates fear and loathing about prices. Long periods of time pass when there are no transactions at all. Think of it this way. What's the comparable on your 3000 square foot home in San Mateo when the last sale was, say, seven months ago? Is it 10% less than the last sale of a similar home on the area? 30% less? This happened in Japan, and prices nationally are still more than 60% below peak prices in 1992, where real estate prices continued to climb for several years after their stock market bubble popped. Sound familiar?
Marin sellers who now find themselves on the down side of this speculative housing mania just have to remember one simple rule -- price sells.

And for Marin buyers -- don't catch the falling knife.

Uber-conservatives Admit to a Bubble

I found this over at the relatively new Bubble Track blog. When the Weekly Standard, the "bastion of conservatism," admits there is a housing bubble, then it must be true. I won't quote the juicy parts because Bubble Track does it for you.

And I'm glad to see that the POS idea has been taken up by that blog too. What better way to demonstrate the existence of the bubble?
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