Friday, June 30, 2006

If You Read Nothing Else

There is an absolutely fantastic article over at Professor Piggington's that should be read by anyone interested in the housing bubble. If you read nothing else, then you should read this.

Basically, the article makes an excellent case for why the meteoric rise in prices in the housing markets of SoCal has been due to a classic speculative "bubble" and nothing else. The same argument can easily be made for the Bay Area in general and Marin in particular -- over the months I have produced many of the same graphs for Marin that you will find in the Professor's article and they all tell the same story (please check out the Marin Real Estate Data blog). Every argument to the contrary that you might have heard is debunked.
In the past five years, it can easily be seen, people have been willing to pay more and more for an owned home as compared to a rented home. Why? Because now, much moreso than in 2000, an owned home is now considered far more than just a roof over one's head. A home is seen as a way to get rich, and people are accordingly willing to pay that much more to buy a home. Given that there is no fundamental underpinning for the price increases of recent years, it is clearly this "speculative premium" that has driven home prices to their current levels.

When prices are high only because market participants expect prices to go even higher, that's called a bubble. And Californians have bought into this bubble with great enthusiasm.

And most importantly, as anyone who has read a newspaper or gone to a party knows, it has become a widely accepted fact both in the media and among the Southern California populace that real estate A) never goes down and B) is the place to be if you want to get wealthy. This entrenched expectation of huge, risk-free equity gains has become priced into the housing market.

Home prices have been driven to current levels not by fundamentals, but by ubiquitous optimism, a complete lack of risk avoidance, a staggering amount of debt accrual, low lending standards, an enormous increase in market participation, widespread misconceptions about what drives home prices, and an utter dependency on continued price gains. Southern California is experiencing a classic speculative bubble.

Quote of the Week

As I mentioned before, I've been really busy with the stuff that pays my bills. So the stuff that doesn't pay the bills (i.e., this blog) gets put on the back burner for a time.

But anyway, here's a quickie. The Quote of the Week has to be this one made by Leslie Appleton-Young (vice president and chief economist for the California Association of Realtors) which I found via the excellent Ben Jones blog:
"Many in California have reached the dream of living in a million-dollar home without moving."

This must be either the stupidest economist quote I've ever heard or else it is the most brilliant thing I have ever heard an economist say as it concisely sums up the utter insanity and unsustainability of this housing bubble. Tragically, I think it is the former.

Where do I begin? Someone should tell Miss Appleton-Young that it is the million dollar lifestyle that some people dream of, not a million dollar house per se. Besides, in California (the most bestest place ever as everyone knows) a million dollar house is now a run-down, stucco, 2 br 1 ba tract house on a postage stamp-sized lot. Marin is full of them; just go to Tam Valley, Novato, San Rafael, Mill Valley, Terra Linda, Corte Madera to name a few (or visit the Marin POS blog for proof; yeah, we Marinites are really livin' large). The only way for most Californians to realize that million dollar dream is either by selling their million dollar POS to a Greater Fool and moving some place where houses are still affordable or HELOC themselves up to their eyeballs and become eternally indentured debt-serfs. Great.

I think the truth of the matter, and what Miss Appleton-Young really means, is that the million dollar house is the realtors' dream, not the owner's.

So you buyers: Do you really want to finance someone else's dream lifestyle that they didn't earn? Do you really want to reward and bail out someone for their profligate ways and take on their debt burden? Do you really want to enter into this Ponzi scheme at this point in time? You are in the driver's seat now. Take control, show no mercy.

Wednesday, June 28, 2006

A Metaphor phor Bubble Bloggers

If bubble bloggers were musicians, then the album Big Science by Laurie Anderson (a brilliant album, IMO) would have to be our album. I mean, most of the lyrics can be heard as metaphors for aspects of the housing bubble even though the album was published 24 years ago (either that or I am now officially obsessed).

Here are the lyrics from the first song on the album, From The Air (here is a tidbit):
Good evening. This is your Captain. We are about to attempt a crash landing. Please extinguish all cigarettes. Place your tray tables in their upright, locked position.

Your Captain says: Put your head on your knees.

Your Captain says: Put your head in your hands.

Captain says: Put your hands on your head. Put your hands on your hips. Heh heh.

This is your Captain-and we are going down. We are all going down, together.

And I said: Uh oh. This is gonna be some day.


This is the time. And this is the record of the time.
This is the time. And this is the record of the time.

Uh-this is your Captain again. You know, I've got a funny feeling I've seen this all before.


Cause I'm a caveman.


Cause I've got eyes in the back of my head.


It's the heat.


This is the time. And this is the record of the time.
This is the time. And this is the record of the time.

Put your hands over your eyes.

Jump out of the plane. There is no pilot.

You are not alone.


This is the time. And this is the record of the time.
This is the time. And this is the record of the time.
Now back to our regularly scheduled program.

Interview with John Rubino

This link was sent to me by Ken Kapple, writer for our local Home Owner's Economist site. It is an interview with John Rubino. This is well worth the approximate 28 minutes to listen to and it is worth listening to more than once. Here is what Mr. Kapple has to say about Mr. Rubino:
This guy is oh so very smart, as you’ll discern right away. I’ve read one of his books and he is, did I say, oh so very smart.

This is re real estate, moreover, how structured finance is rapidly changing the real estate profile, and, about the macro economy, easily explained, and why you need to pay close attention to what is coming for the preservation of your stuff. Whatever stuff that might be.

I’m thinking family, particularly for those of you who have people dependent on you. I’m thinking, don’t get caught holding assets that are sure to diminish in value. Maybe John will convince you.
Executive summary: People who should not have been able to get a mortgage loan were able to get such a loan (if you had a job and a pulse you could get a humongous loan with silly terms), especially on the coasts (e.g., California). Rate resets will hit us hard. In terms of its asset bubble, the US today is like Japan in the 90s. But unlike Japan, we have no one who can bail us out. A real estate crash is coming, not a correction, but a crash. All we will be able to do is to dramatically scale back our lifestyles, job losses, foreclosures, a stock market crash. Right now we are on the cusp of the turn in real estate. The next step in the cascade is that sellers will try to get out at any price in the hottest real estate markets.

The liquidity contraction that is going on right now is global in scope and will accelerate; interest rates are going up all over the world. History says a painful adjustment is unavoidable. We either get a global recession or a global currency collapse (due to a flood of fiat currency).

Tuesday, June 27, 2006

Where Are We?

What better profile to use than our beloved Mt. Tam? Inspired by this.

Sunday, June 25, 2006

Hamilton is Up for Sale

I was up in the Hamilton area today visiting and I was shocked by how many properties are for sale there. I counted 26 for sale signs on the route I drove and managed to snap this lousy camera phone pic; there are nine for sale signs in that picture.

Friday, June 23, 2006

On the Perceived Affordability of Buying, Rents, and the CPI

I thought this was an interesting and concise summary of the situation at hand:
As real estate prices spiraled upwards over the last ten years, artificially low interest rates and lax lending standards were not the only factors helping to maintain housing affordability. Just as important were the expectations of future price appreciation and the suppression of the rental market. With these two factors largely reversed, the housing market is much more vulnerable than most people understand.

Given that many people expected to extract money from future appreciation, which could help pay mortgages, taxes, maintenance, and insurance, houses actually seemed cheaper to buy, despite soaring sticker prices. On the other side of the coin, without offering the bounty of free cash, the rental market suffered a multi-year torpor. Flat rents anchored a rock-bottom core CPI, which allowed the Fed to keep rates low and the cheap mortgages flowing.

As the slowing housing market increases the perceived cost of buying, renting becomes a far more compelling option.

Rents make up 40% of the core CPI, and are by far the index' largest component. For the reasons outlined above, a softening housing market eliminates the financial advantages of buying and increases demand for rental properties. Recent data shows that national rents are increasing at a rate not seen in more than five years. This has begun to show up in the core CPI, which will continue to grow with the surging rental market. Just as rising home prices paradoxically suppressed the core CPI, falling real estate prices will now do the reverse. A more rapidly rising core CPI will force the Fed to continue raising rates, putting even more pressure on home prices, and initiating a particularly nasty spiral.

The Fed of course now has a real conundrum on its hands. It either plays down the significance of the core, possibly excluding rents entirely as they now do food and energy, or continue to raise rates even as housing prices collapse. The former, which amounts to a version of "heads I win, tails you loose", risks exposing the Fed as hypocrites. The loss of any remaining faith in the Fed will cause a run on the dollar and even more inflation. On the other hand, to continue raising rates will surely tip the economy into a recession.

My guess is that the Fed is already preparing the markets for a pause even as core consumer prices continue to rise. The spin will be that peaks in core consumer prices historically occur with a lag relative to the end of a tightening cycle. This will likely buy the Fed a little extra time until the markets finally notice that rather than peaking, core prices just keep on rising. Therefore, the greatly anticipated, highly illusive pause will not be the least bit refreshing.

New Blog

I have discovered a new (at least to me) housing bubble blog that has a lot in common with this blog. As such, I am sure it will very soon become near and dear to my heart. Please check out the Housing Doom Housing Bubble Blog. From her "My Voyage to Bubbleland" page:
As a research scientist, I tend to research whatever I do rather thoroughly. I looked for ways to determine the value of homes in my area (Phoenix Arizona- East Valley) without using a realtor. We were badly burned by the realtor who sold our home, (that’s a story for another day) and I was disinclined to work with a realtor again.

So I have researched the National Board of Realtors, the Fed, the stock market, mortgages, and all the real estate information I could get my hands on...

While there are honest and decent realtors, the NAR’s virtual monopoly on listings lends itself to abuse- and I believe that has exaserbated the current housing bubble. Laws of supply and demand won’t achieve proper balance in the market, if people don’t have the information they need to make sound choices.

Thursday, June 22, 2006

CAR Prepares for Lawsuits?

The California Association of Realtors (CAR or should that be CARtel?) is preparing a three-part strategic defense program. It seems to me that they are anticipating a legion of lawsuits. I wonder why?
In the past month, the California Association of Realtors® (CAR) has announced both the creation of a "Defense Litigation and Claims Repository" and also the association's endorsement of an error's and omissions insurance carrier and broker. These two announcements represent the second and third parts of a plan designed to enhance the ability of California Realtors® to defend themselves in the ever-increasing litigious climate of the Golden State. The overall program, of which this three-part plan is one component, is known as CAR's Strategic Defense Program.

IJ Anti-spin

The Marin IJ (Marin's main local paper) has published their response to DataQuick's May, 2006 report on Bay Area real estate. Naturally, the IJ, beholden to their RE masters, has of course put the most positive spin they could on it:
The median price for single-family homes, not including condominiums, dropped about 8 percent from $979,000 in April.

Kathy Schlegel, president of the Marin Association of Realtors, said several factors drove the median price down last month.

"Inventory has increased and more homes are staying on the market longer, so it has become more competitive," Schlegel said. "Buyers and sellers are negotiating prices down. When we have all that working together, it will tug the prices down."

Schlegel, an associate broker with LVP Marin, said the figures reflect a return to a normal market.

"It goes up and down throughout the year, so if you look at the year it balances out the increases and decreases in price," Schlegel said. "We are back to seeing more negotiating between buyers and sellers, which is healthy for a more balanced market."

Valerie Castellana, an agent with Pacific Union and association president-elect, said it was still too early to know whether a trend is taking shape.

"The changes from April to May in 2006 are a snapshot in time. It is too soon to see whether this is a trend that will continue for the year," Castellana said. "Reality may be setting into the market. We have been on a roller coaster ride and now it is more of a teeter-totter with buyers on one side, sellers on the other and statistics moving around month to month."
"It is too soon to see whether this is a trend that will continue for the year." True enough as a trend can never be positively identified until after the fact (when no one, except historians, really cares anymore). But I don't believe a word of it and I don't think you should either. I cannot foresee the future any better than you of course, but I do have records of past market behavior at my disposal to inform my decision-making process. Below you will find some charts I made and put up on this blog quite some time ago.

The following chart can be found here; it shows the ratio of mean Marin SFR price to per capita income. If you project the trend line into the future and assume that income increases only a few percent a year (as it has been), then we are looking at about a 25-30% drop in SFR price relative to income over the next few years:

The following charts can be found here; the first one shows the same sort of data as the previous graph and makes a similar prediction:

The next two charts show that Marin's SFR prices are greater than two standard deviations away from the mean. The reason why this is significant is that researchers have found that for every single financial bubble that they investigated where prices have increased by two or more standard deviations away from the mean, prices have reverted back to the mean. Please re-visit the original post to get more detailed information:

Unless you believe that incomes will increase at a fantastic rate over the next few years, history is telling us that we can expect Marin SFR prices to revert to the mean which implies at least a 25-40% drop in prices.

Lastly, there is this chart which shows Marin SFR prices expressed in terms of ounces of gold (thus nicely taking inflation into account):

Now add in the facts that mortgage rates are going higher which is far more likely to continue than not, foreclosures are rising at an alarming rate, adjustable rate mortgages are starting to reset and will only get worse, faudulent appraisals and lending is starting to be closely examined, and loose lending standards in general are being tightened.

I don't know about you but I am not terribly optimistic.

Wednesday, June 21, 2006

May, 2006 Results -- DataQuick

DataQuick has reported results for the Bay Area for May, 2006:
Sales of Bay Area homes declined for the fourteenth month in a row in May as prices continued to slowly edge up...

A total of 9,064 new and resale houses and condos were sold in the nine-county region last month. That was up 8.4 percent from 8,358 for April, and down 19.8 percent from 11,308 for May last year, according to DataQuick Information Systems.

Last month was the slowest May since 2001 when 7,864 homes were sold. The strongest months of May since 1988 were May 2004 with 12,028 sales, and last year. May sales hit bottom in 1995 with 5,779.

Adjusted for inflation, mortgage payments are 22 percent higher than they were at the peak of the prior cycle sixteen years ago.
That last sentence sounds like they are calling the peak of this cycle.

According to DataQuick, in Marin there was a -20.7% drop in sales and the median price fell -2.9% as compared to May, 2005.

I find it interesting that Napa, Sonoma, and Marin median sales price appreciation are all negative whereas all other counties are still positive. I wonder if that is confirmation of where most of the speculative/second home buying has been.

Tuesday, June 20, 2006

Boycott T-shirts

The Boycott Housing site is growing ever faster. They've attracted media attention. And they're selling T-shirts! Anyone out there want to make some stickers? You know, for bumpers.

Monday, June 19, 2006


According to this article posted over at the New Jersey Real Estate Bubble blog, the real estate industry has officially been accused of being a cartel. It's about friggin' time.
A leading consumer rights group, the Consumer Federation of America (CFA), on Monday issued a report charging that real estate industry members act as a cartel to stifle competition, resulting in higher prices and poorer service for homebuyers.

"Many traditional real estate brokerage firms, and their organizations, function as a cartel that tries to set prices and restrict service options," said Stephen Brobeck, CFA's executive director at a press conference in Washington D.C.

The CFA charges that consumers are harmed in three main ways:

* Traditional brokers charge high, uniform prices regardless of the quality of the broker involved. Even a newly licensed, inexperienced agent receives the same commission no matter what the level of service offered.

* Traditional brokers who work with both seller and buyer in a home sale almost always function as facilitators. Brokers try to make sure a sale is completed (and they get paid), rather than as fiduciary agents acting in the best interests of their clients, as the brokers claim to do.

* Brokers "double-dip," promoting their own listings or the listings of their firm over properties better suited for their clients.

Home sellers' 6-percent commissions are split between their broker (the listing agent) and the buyer's agent. That creates reluctance among sellers and their brokers to lower commissions: They depend on their homes being seen by potential buyers, and buyers agents will be more likely to show homes with full commissions than discounted ones.

Brokers will sometimes offer rebates to buyers or sellers - cash back at closing - to attract their patronage. But many state commissions have banned rebates, prohibitions that the Department of Justice has gotten overturned in some cases.

The CFA says traditional brokers dominate the unregulated multiple listing services and restrict full access to broker clients, hide commission splits from consumers, and restrict non-traditional brokers from access or full information.

Many real estate brokers also sit on state real estate commissions; they make up the majority of all state boards, according to the CFA. They regulate themselves and make rules that disadvantage competing business models.
And don't miss this attack on realtors from the New Your Times.

And you have to love it when realtors argue amongst themselves regarding the utility of their own profession.

Yet Another Overvalued Report

Yet another study looking into how overvalued real estate is in various areas. This one was published by GlobalInsight and NationalCity. The full PDF report can be found here.
A study released last week by Global Insight and National City Corporation titled House Prices in America concludes that in 71 metropolitan areas representing 39 percent of the total value of single family homes in the country those homes were extremely overvalued in the first quarter of 2006. This is an increase from the fourth quarter of 2005 when 64 markets representing 36 percent of national home value earned this designation. It is even more striking to compare the most recent data to the first quarter of 2004 when this same study deemed that overvaluation was insignificant and only three metropolitan areas and only 1 percent of all single family home values were thought to be out of line with reality. The study's designers consider that areas where home prices are in excess of 34 percent over what they determine to be real prices are excessively overvalued.
Here's the summary:

Here's a graph derived from the data in Appendix A for some California regions:

According to this report, today's $779,700 house in San Francisco, were it not overvalued, would cost $461,582.

Flipping Has Been Made More Difficult

I saw this Realty Times article posted over at the Sonoma Housing Bubble blog and couldn't pass it up (good catch Athena). It seems we might be entering into the predicted post-bubble-peak-legislation phase of this housing bubble. I mean, we've seen the escalating inventory, increasing foreclosures, and the uncovering of appraisal fraud (and other types). Now that the housing bubble is generally acknowledged to be for real we seem to be starting to see anti-flipping regulations. Next in line should be the law suits against builders and maybe lenders and realtors.
Real estate flippers got a new set of marching orders last week -- at least those flippers who want to use FHA mortgage financing.

The Federal Housing Administration issued long-awaited final regulations on property flips last Wednesday. The rules take effect nationwide July 7. Flipping involves resales of houses or other real estate shortly after acquisition, typically at a substantial price markup. Say you buy a rundown rowhouse at a bargain price, do cosmetic fixups, and then sell it a month later for twice what you paid for it.

Sounds like a high payoff short-term investment, right? It is. But the FHA found that too many property flips using its insured mortgage program involved outright fraud -- hyped appraisals, shell games where property flippers never actually took legal title to the house before selling it for huge profits, sometimes overnight.

Often the end purchaser of the flipped property was not financially qualified, and used fraudulent income, employment and assets information to obtain the FHA loan. Then the buyer quickly defaulted, leaving FHA with insurance losses and a house that was worth nowhere near its appraisal valuation. The flipper, meanwhile, pocketed all the sales proceeds financed with the FHA mortgage.
No one complained about flippers destroying affordability when taking action could have made a difference; everyone was too busy making a profit. But now that the money has been made, only now are we finally seeing some action taken. But it's too little, too late I'm afraid. Hopefully these FHA regulations will be the start of more stringent and encompassing laws and regulations for the future.

To my mind people who purchase residential real estate should be required to put at least 20% of the sale price down and be required to live in the property for at least three years before they can sell it. For real estate that is clearly intended to be rented then the period of ownership should be increased significantly while the requirement to live in it for a period of time should be dropped.

I'm sure my framework of a solution is overly simplistic. Let's hear about it in the comment section.

Saturday, June 17, 2006

Losing on Real Estate is "A Matter of Perspective"

Now realtors are telling us that losing on real estate is just "a matter of perspective". Sheesh! Talk about cognitive dissonance. This article in RealtyTimes is trying to re-educate, re-program sellers to suck it up and lower the asking price because otherwise they won't be able to sell and the poor realtors won't be able to make their commission. The problem? The seller's sense of entitlement:
When it comes to pricing your house when you're ready to sell it, keep in mind you must sell in the market you're in today. It doesn't matter what your former neighbor got six months ago, or what properties are listed for now.

The challenge is when we move from percentages to dollar amounts. If 5 percent represented $5,000, most people wouldn't blink. It’s when 5 percent represents $25,000 that sellers start to freak.

...there are stories from the field on how sellers are defending their prices as if their lives depended on it. While sellers are sitting on hundreds of thousands of dollars of equity, they can't stand the idea of dropping their sell it today. The house that was $260,000 in 1999, is now selling for $569,000 today. But some sellers now want that same type appreciation and can't imagine selling it for less than $589,000. Bringing it [the price] down...seems, well, just not fair.

What’s even scarier are the agents who are defending their prices in a correcting market. They'll be the first to let you know, ‘It won't sell for what the seller’s asking,’ but they're too afraid to tell the seller the sobering news. They've just now entered a market where prices have to be corrected, dropped; improved, as it were.
I liked this analogy:
The market is like playing Russian roulette. Sometimes you don't know what you have until you pull the trigger. Somebody needs to blink. Sellers seem to be saying to buyers, "I'll drop my price, just make an offer." While buyers are blankly replying, "I'll make an offer, just lower your price."
Buyers: Don't give in. You are now the ones in the position of power because you have the money, inventory is high, and the cost of money has increased and will continue to increase. Yes, you want a house but no one says that you must absolutely have it today. This is a business transaction and timing matters. You have been doing just fine doing whatever it is you have been doing; keep living where ever you are currently living and wait one year; prices will come down much further, the seller's sense of entitlement will have greatly weakened, and you will get the house for a much more reasonable price. And don't forget that this is business, it's not personal so don't worry about the seller's feelings; don't give in to lame attempts at emotional manipulation (for example). Feelings are irrelevant. Only the price matters. Seller's were screwing you on the way up and they had no qualms about it. Now the table is turned and you are sitting in the seat of power. Use it to your advantage.

Sellers: Even if you don't want to sell or don't have to sell now, the fact that someone down the street is selling for a X% loss relative to their house's peak value probably means that your house is worth less on paper too. Increases in value on paper were touted and bragged about ad nauseam even though they were just "paper gains"; it works both ways . You aren't entitled to a profit especially if you bought with "investment" in mind.

The perceived loss "on paper" will affect owner's perceived sense of wealth which will translate into a real world change in spending behavior which itself will work its way down to employment. The fact is that the run-up in house prices over the last few years was due to psychology ('houses always go up', 'they aren't making any more land', 'debt doesn't matter', 'it's different this time', etc.) and not fundamental economic principles:
The recent [housing] boom, however, doesn't have the same fundamental variables [population growth, increased family size, increased income] causing prices to soar, he [Shiller] said, adding that variation in such things as building costs, population and interest rates doesn't adequately explain the reason for the housing boom.
The psychology is changing. Buyers are finally starting to realize that houses are ridiculously over-priced and they are starting to question the wisdom of taking on such huge debt loads when all signs point to a declining market. Hopefully, we will return to the mind-set of the house as a place to live instead of the house as an investment and a means of making money.

Wednesday, June 14, 2006

Are You an Emotionally Manipulated Housing-Debt-Serf?

Ok, ok already. I've had half a dozen people email me with these links saying "you have GOT to put these on your blog". Uncle! At least I am glad to know there are people who value this blog.

First, watch this shamelessly emotionally manipulative realtor video:

Now listen to this person's rant on debt:

Boycott housing.

Tuesday, June 13, 2006


I've been really busy at work. I haven't had much time to post anything on my blogs. This blog is NOT abandoned; it's just taking a breather while I earn my salary.

Please consider visiting any one of these fine blogs (in no particular order):

Sonoma Housing Bubble
Sacramento Land(ing)
Ben Jones Housing Bubble Blog
Bubble Meter
Bubble Track
Housing Panic
Charles Hugh Smith Blog

Monday, June 12, 2006

"The New World Order Angels of Death"

A reader sent me this article. Because I watched Underworld this weekend (horrible, unless, perhaps, you are a teenage male) I think I was well-primed to appreciate the analogy of the Fed as being made up of 'financial-lifeblood-sucking vampires'.

Some choice quotes:
Ben is damned if he does and damned if he doesn’t – raise interests that is. If he raises interest rates to quell any signs of inflation or to strengthen the dollar against foreign currencies, he risks putting the economy into a recession.

Rising interest rates will destroy the bond market, and with the bond market the real estate market will follow. Real estate has been the backbone of the economy. If it goes the economy will go with it.

If Ben lowers interest rates, he runs the risk of inflationary pressures getting too far out of hand, causing the dollar to weaken even further, which then may cause the recent foreign bank diversification out of dollars to pick of speed.

Real estate has been the ultimate victim of the vampires of structured finance. Every drop of liquidity has been bled from the host – no more remains. You cannot get blood from a stone; no matter how hard you try.

There is no longer a readily available supply of victims to feed all the creatures thus created – the vampires of the New World Order. Housing provided a large host for quite some time, a feeding bank if you will, but its days are numbered and falling by the wayside.

Whereto will the creatures turn – for the sustenance, they need to survive? They have already gorged on all possible victims – nothing remains alive with the needed lifeblood within. Structured finance has built an economy of paper houses built upon paper promises – promises that cannot and will not be kept.

It has provided a false degree of confidence and misplaced optimism in a speculative boom in the credit and debt markets that have inflated asset prices to absurd levels. As interest rates rise – debt becomes harder and harder to service. Suddenly assets must be liquidated at much lower prices then their recent high-water marks.

Sunday, June 11, 2006

The Summer of Seller Discontent?

Given the pathetic sales and pricing (and here) in May, 2006 here in "God's country", one has to wonder if this so-called "buyer's market" is really a buyer's market. I mean, clearly a lot of sellers in Marin are still thinking it is the summer of 2005 as far as pricing is concerned even though a third of them are reducing asking prices. So is it really a buyer's market? Why buy now if prices are coming down and will continue to do so? Surely more and more Marin sellers will get a clue and start pricing more realistically:
May and June are traditionally the best months for real-estate sales, but this May and June have been ‘very, very slow,’ says Dan Scher of Ledgewood, who has been selling real estate for 25 years.”

“It’s the worst market he has seen in 10 years, for himself and other agents. The root of the problem, in his view, is that sellers are stuck in a time warp and refuse to budge from their lofty asking prices.”

“His advice for buyers: It’s not a bad time to buy, considering the large number of houses for sale. But look for a seller who’s aware that this is the summer of 2006, not last year."
As DinOR says over at (I paraphrase): "If the offer you give to a seller doesn't embarrass you, then you are offering too much".

Saturday, June 10, 2006

"Look Out Below"

A reader sent this in. The author does a nice job of delineating the various phases of the real estate cycle. I agree that we are currently sitting on top of or just past the inflection point and all paths lead down as the data for Marin and elsewhere confirm. Here is his prediction going forward:
Phase V: - The Future: Look Out Below. The problem becomes obvious and virulent when real estate values begin to fall. With debt service costs rising, real estate begins to flounder, and more risky real estate ends up on the rocks. As default rates rise, mortgages slowly become more expensive and difficult to obtain (“real estate becomes a four letter word” in the parlance of an old banker). Only brave and knowledgeable entrepreneurs venture onto the scene of real estate wreckage at the lowest tide. Only a “foolhardy lender” would venture between the rocks of the now quiet ebb tide.

The “virtuous cycle” has completed its turn into the “vicious cycle.”

It is our view that the “irrational exuberance” has transferred from stocks to housing, setting up conditions for a “housing deflation.” We expect a serious fall-off of home construction, sales and values, starting in 2006, and becoming very pronounced by 2007. A glut of new houses will accumulate in the next 12-24 months, causing a drop in price and construction of new units, and setting up a serious risk of price decline (similar to the “tech wreck” in the stock market).

More May Data for Marin

Here are some more charts updated for May, 2006. I am thinking of not doing these sorts of charts every month anymore and instead moving to every other month or so. Let me know what you think.

Keep in mind that May and June are traditionally the best months for sellers of residential real estate. If this May was as good as it gets these days, then the rest of the year should be interesting.

Friday, June 09, 2006

May, 2006 Results -- Vision RE

Here is the latest from Vision RE. I just love the way they try to spin May's results in the most positive way possible while still being honest.

Are those actually minus signs in front of some of those price "gains" in their chart? That can't be right because everyone knows that prices in Marin always go up (ok, to be fair, this is not the first time Marin house prices have gone negative). Who wants to bet that DataQuick's May report on appreciation in Marin will be down close to 0%?

Anyway, here's their low-down:
Year-over-year sales were off 21.5%.

The median price for homes fell 4.6% from April to $939,500, a year-over-year decline of 1.6%. The median price is now down 8.7% from the peak price of $1,029,250 reached in June 2005.

...on one hand we have prices dropping, on the other hand, homes are selling faster and for closer to their asking price. Another item to note is that inventory has almost doubled since January. It’s a strange market that is still in transition.
Roughly 32% of all listings are marked as "price reduced" according to ZipRealty. I'll show the chart of that as well as others in a later post.

"It’s a strange market that is still in transition". That's for sure. It's transitioning downward: percent sales way down, inventory nearly doubling, a third of sellers offering price reductions, negative year-over-year "appreciation". Does that sound like a strong Marin market? The effects of increasing interest rates are only just beginning to be felt.

The Fool's Take on the Squirming NAR

God bless the Motley Fool:
“There’s nothing funnier or more satisfying than watching the National Association of Realtors change its tune these days. The latest news release from this sunny-Jim industry group finally fesses up to its past fiction, but even when it admits the bubble’s going to pop, it can’t muster the courage to just come out and say it.”

“...the NAR is full of it and will spin the numbers any way it can to keep up the pleasant fiction that all is well....The cracks began to show in subsequent remarks from NAR ‘Chief Economist’ David Lereah. The head outfit that ridiculed the idea of a housing bubble for years is now crying for Ben Bernanke to bring it back. ‘But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable,’ Lereah said.”

“The real problem here isn’t the NAR, of course. You have to expect these people to spin the facts for their industry. No, the real problem here is the uncritical press out there, which is all too happy to pepper every contrary indicator or bearish remark with an NAR official’s informed-sounding bubble denial. Never mind if what the NAR folks are saying doesnt seem to make sense (or contradicts what they said just a few months back).”

“It should have been completely obvious to anyone with a loan calculator and a glance at wage increases that those months of industry bubble denials were just wishful thinking.”

Thursday, June 08, 2006

Attempting a Soft Landing at High Speeds

As you have probably noticed, Blogger has been having some serious problems the last couple of days. I haven't been able to post and you haven't been able to leave comments or even view the blog at times. Sorry about that. It just goes to show that not all things Google are golden.

But wow! The last few days have been rather interesting. Unlike his predecessor, Ben Bernanke is proving himself to be one who speaks his mind when asked what he thinks. He's clearly worried about inflation and Wall Street has reacted with nothing but sell-offs this week; the DOW is down nearly 500 points and is now well below the 11,000 mark. I've heard it said that the housing equities markets are leading indicators for the housing market itself; if so, there is no so-called "soft landing" in sight as real estate building stocks have lost up to half of their value over the last two or three months. David Lereah, chief economist for the National Association of Realtors, is clearly worried (despite all of his cheerleading and spin) and knows full well how vulnerable the various bubble housing markets are to interest rate hikes and has essentially begged the Fed to stop raising rates. Yeah, sure, like the Fed is really going to stand for the complete transformation of our economy to one based on real estate. Sorry folks, but the strength of the dollar takes precedence and you real estate agents had better start looking for other work; go find the next get-rich-quick scheme and if worse comes to worse I hear WalMart and fast food joints are hiring and they don't require much in the way of qualifications either.

And don't forget that the Fed has previously warned us not to expect a bail-out.

This article sums things up pretty well:
Ouch. It's getting harder and harder for real estate agents to put a happy face on the market. Sales are slowing, prices are falling, and the backlog of unsold homes is rising fast. And now it's suddenly looking like the Federal Reserve will raise interest rates again.

Bernanke's gladiator-like aggressiveness on inflation is producing scowls at the National Association of Realtors, which worries that higher mortgage rates will make the housing market even softer. The group put out a public statement on the issue this week, in which David Lereah, the Realtors' chief economist, said: "This is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable."'s clear that the Realtors' association isn't happy with the way things are unfolding. It predicts that existing-home sales will drop 6.8% this year, to 6.6 million, while new-home sales will tumble 13.4%, to 1.11 million.

"So Mr. Bernanke is 'monitoring,' all right," Rosenberg [Merrill Lynch's chief North American economist] wrote in a report on June 7. "He's monitoring the collapse of the housing market, and by the sounds of it he wants to reinforce the bear market already under way."

[Real estate stocks] have lost anywhere from one-third to more than a half of their stock market values. In a note to clients, A.G. Edwards & Sons wrote, "If it is not already painfully apparent, the soft-landing thesis for the homebuilding industry is dead."

...DeKaser points out that the market still hasn't fully adjusted to the rate hikes that have already occurred. In fact, he says, according to an analysis that he plans to release next week, some of the most overvalued markets are continuing to see some big increases in prices. That's setting them up for an even bigger fall to come, he says.

What goes up must come down. One housing bear, Ian Shepherdson, chief U.S. economist for High-Frequency Economics in Valhalla, N.Y., wrote June 6: "Ultimately, we expect the level of home sales to head down to, or even below, the long-term trend. When bubbles burst, they usually burst properly. Gentle deflations are rare."

Tuesday, June 06, 2006


The National Association of Realtors on Tuesday lowered its forecast for U.S. home sales in 2006 and called on the Federal Reserve to stop raising interest rates because parts of the housing market are "vulnerable."

"Experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability," said David Lereah, the group's chief economist, "But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable.," he said:
DL: Because I said so:

BB: Makes me:
BB: So you can kiss my you-know-what:

Hey, it's 06/06/06...the Devil made me do it.

Monday, June 05, 2006

When You're Hot, You're Hot...

...and when you're not, you're not. The weather may be hot in June in Marin, but the Marin June market heat index is anything but hot:

Keep in mind that the index works like so:
  • "High Demand" -- Index > 1.25
  • "Balanced Demand" -- Index ~= 1.0
  • "Low Demand" -- Index < 0.8
So at 0.69 Marin market demand is really low.

The realtor who is responsible for this index has this to say about today's market:
  1. Rising interest rates that are forcing significant numbers of people to rent rather than buy. This is pushing rental rates higher in Marin.
  2. Entry level homes in Marin are the most impacted in the shift to a Buyers Market. Entry level categories of property now have high levels of available inventory, and all signs of the buying frenzy of recent times has vanished.
  • All price categories below $2Mill have significantly lower HEAT Index levels than previous years.
  • On the same date two years ago (June 1, 2004), the overall Marin HEAT Index was 212% higher than the Index for today.
  • The $2Mill-$4Mill market segment is the most stable and vibrant price segment of the HEAT Index.
  • The $2-4Mill Index today is actually slightly higher than the Index for the less than $600,000 properties. This is a huge change from just a few months ago, and reflects the differentiated impacts of interest rate increases on entry level homes (high impact) and multi-million dollar homes (modest impact).
  • Condos, Novato, and San Rafael Index readings are significantly lower than their readings for this date on prior years.
So, the pricier houses are selling ok but anything under $2 mill is not selling so well. Gee, what a surprise. That explains why the median and average sales prices in Marin can increase while at the same time sales volume tanks and a third of all houses on the market are forced to reduce asking prices.

Naturally "rising interest rates... are forcing significant numbers of people to rent rather than buy". No surprise there either as renting has become much cheaper in Marin than "owning" and will likely continue to be so for a while at least (and the inventory of rentals might actually increase as some house sellers fail to sell and are forced to rent their units out so as to mitigate costs).

But what is a surprise is that interest rates have only risen a little and yet they are already hurting Marin's market. Just wait! It's only going to get worse -- Bernanke has as recently as today told us that there are more rate hikes to come:
“Although the anticipated slowdown in growth is underway, financial markets shouldn’t question the inflation-fighting credentials of the Federal Reserve Bank, Chairman Ben Bernanke said Monday. ‘There is a strong consensus’ among FOMC members to keep inflation low, Bernanke told an international banking forum here.”

“Recent core inflation readings ‘have been higher in recent months’ and ‘has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth,’ Bernanke said.”

“These core readings ‘are unwelcome developments,’ he said. ‘Therefore, the FOMC will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained,’ Bernanke said.”
And according to this the rate hikes are not ending anytime soon:
“Households’ fanciful notions of their financial health could soon awake to the reality of the longest Federal Reserve rate-hiking campaign in more than 25 years.
And then there is this which suggests that interest rate hikes are just icing on the cake:
The speculative housing craze is crashing from its own excesses, not Federal Reserve action.

This is the first nationwide housing bubble since the 1920s, and it's driven by three nationwide forces: low interest rates, loose lending practices and the desperate search for a stock substitute after the 2000--02 debacle.

A house-price collapse will be far worse than the 2000--02 bear market on Wall Street and will bring a serious global recession. Half of households own stocks or mutual funds, but 69% own homes. The resulting unemployment will kill many subprime borrowers' ability to make payments.
Strictly my opinion and not advice --> So what is your typical Marin buyer thinking given the above? If I were in the market looking to buy a house in Marin it would seem to me that holding off on buying would be the far more sensible thing to do as the deals will only get better for the buyer and the property tax that I would have to pay year after year after year after year...etc... would be less and thus the cumulative savings on property tax would be very large. And since appreciation rates are coming to a standstill, and in some cases are negative, and inventory is high there's no rush to buy. And should I need to move for whatever unforeseen reason I wouldn't want to get trapped with a huge mortgage that would be very difficult to get out of without still owing the bank after the sale. But that's just me.

Point of Maximum Financial Risk

Did anyone learn a thing from the Nascrash of 2000? If so, what? Once again, it's as if everyone seems to think they can get out at or near the top. Not only is that mathematically impossible, I get the strong feeling that most players are not even aware of the enormous rise in risks even as there are clear signs that the global liquidity ship is beginning to sink.
From Mish's Global Economic Trend Analysis.

Sunday, June 04, 2006

Boycott Bay Area Housing Site

The Boycott Housing site seems to be growing in popularity. Right on! Power to the people! There is even a forum there to discuss the Marin real estate market (and others as well). Check it out.

And it looks like the same sort of thing is trying to start up in China.

Do as I Say, Not as I Do

I saw this mentioned over at the Ben Jones blog.

Apparently, Douglas Duncan, chief economist for the Mortgage Bankers Association, is a house owner recently turned renter:
"I'm going to rent for a while," said Douglas Duncan, who expects "significant reversals" in regions that have enjoyed strong home price appreciation, including Washington, D.C., Florida and California. He plans to sell his suburban Washington home, which has tripled in value since he bought it a dozen years ago, and move into an apartment.

Acting on his gut has served him [Duncan] well before. In 1988, as the economist was moving to Washington, he went to look at a house that was for sale. Three couples were already there. They started a bidding war in the living room. "This is irrational behavior," Duncan remembers thinking. He decided to rent. Shortly afterward, the market crashed. In 1993, he decided it was a good time to own. The price he paid for his house was about a third less than the previous owner, who had lost it in a foreclosure sale.

It's a human temptation to stay in the game until the last moment. But Duncan... doesn't seem to feel it.
This is the same chief economist for the Mortgage Bankers Association who routinely publically pumps up the market and even pushes "toxic" loans on the masses including this new time bomb (check out GetStucco's comments about it).

Friday, June 02, 2006

Poetry & Song

There's a call for housing bubble poetry and song over at the Housing Panic blog. It promises to be good. I liked this one:
Is this the real life-
Is this just fantasy-
Caught in a mortgage-
With no escape from reality-
Open your eyes
Check out Kevin's site and see-
I'm just a poor boy, I need no sympathy-
Because I'm easy come,easy go,
Rates are high, turnover low,
Anyway the wind blows, doesn't really matter to me,
To me

Mama, just bought a home,
Got an ARM with nothing down,
For a McMansion out of town,
Mama, life had just begun,
But now I've gone and thrown it all away-
Greenspan ooo,
Didn't mean to make me cry-
When he said ARMs were just the way to fly-
Carry on, carry on, as if nothing really matters-

Too late, the sheriff's come,
Turned in my McMansion key-
My family thrown out on the street,
Goodbye everybody-I've got to go-
Gotta leave you all behind and face the truth-
Lerah ooo- (any way the wind blows)
I can see you lied,
You spun the truth and ruined, people's lives-

I see a little silhouetto of a man,
Ber-nan-ke, Ber-nan-ke will you do the Rate-Adjusto-
Quarter-point and lightning-very very frightening me-
Alan Greenspan, Alan Greenspan,
Alan Greenspan Alan Greenspan
Alan Greenspan figaro-WhereDidHeGo-o-o-o-o-
I'm the new Fed Chief and nobody loves me-
He's just the Fed Chief thrown into uncertainty-
Spare him his life from Greenspans monstrosity-
Easy come easy go-, will you let me go-
Ber-nan-ke! No- we will not let you go-let him go-
Ber-nan-ke!! We will not let you go-let him go
Ber-nan-ke! We will not let you go-let me go
Will not let you go-let me go
Will not let you go let me go
No, no, no, no, no, no, no-
Mama mia, mama mia, mama mia let me go-
AlanG has a devil put aside for me, for me, for me-

Thursday, June 01, 2006

Poll [Updated: Results of the Poll]

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