It's not every day that a San Francisco area real estate investor, here in the jolly ol' land of we're-too-special-we're-immune, actually gives you the full monty on what he thinks is going down in the world of real estate. Credit for this link goes to the most excellent Charles Hugh Smith blog (and if you value his blog as much as I do, please consider making a donation).Some choice quotes:
I sell investment real estate in the San Francisco Bay Area. Have been for 25 years. It's a nice business. I've enjoyed it, and I value my clients. My pappy's a realtor. My grandpappy was a realtor. My uncle's a realtor; so is my brother. Heck, some of my best friends are realtors (and it takes a big man to admit that).
That's why it pains me to give you the bad news, to wit: Real estate in America is officially dead. But only for a generation or so.
In other words, it is time to sell all of your real estate, save for possibly your home. If you don't, you will likely regret it. You will gradually watch all of your equity disappear into thin air. And then, unless you have little debt against it, you will likely lose your property to foreclosure. It's as simple as that.
The far better strategy is to sell now, even if you are disappointed with the selling price, take your equity... and put it into safe, interest-bearing cash-equivalents for a while. Do not put it into the stock market. Do not fiddle with bonds. Don't buy gold (for now, anyway). Stay away from the other metals. Just sit there. Don't be cute. Stop annoying your brother. And try not to be smug. Exercise that virtue known to Job as patience.
In case you haven't noticed, or choose to stick your head in the sand, or don't know much about investment manias and credit bubbles, or think that real estate values "always go up in the long run," or believe that just because Ben Bernanke's Fed has a printing press, they can compel ordinary Americans to borrow increasingly reckless amounts of money, allow me to be the one to pour a big bucket of ice water over your head. The fact is, we have officially entered the frightening, post-NASDAQ-bubble, post-subsequent-real estate-double-bubble, credit-contracting, asset-deflationary portion of the 75 year cycle.
Foreclosures are up 79% in California; in Florida they've nearly doubled compared to the same period last year. Nevada's foreclosure rate is up 77%. Colorado, Georgia and Michigan report the same tales of woe. Ohio's Cuyohoga County, where folks have abandoned neighborhoods and thieves steal cabinets and copper pipe from vacated homes, has seen its foreclosure rate increase sixfold since 1995. 2,100,000 households in America were said to be in default as of year-end, 2006. Teaser loan payments are rising, home values are falling, and "greater fools" are no longer stepping into the breech to save anyone's financial day.
We're still in the early stages of Foreclosure Mania and nowhere near the point of full recognition, but even at this point, lenders and homebuilders have begun walking away from their obligations just as quickly as those poor, unsuspecting subprime and zero-equity borrowers.
The first-wave victims of the housing bubble implosion are tapped out and must begin their lives anew with statistically no savings. I suppose that means they will no longer be buying flat-screen TV's, new trucks or trinkets from the "Things You Don't Need On Any Basis" store for a while. And you know those Mercedes-driving, $700 purse-toting realtors, loan brokers, appraisers and title company folks? They'll be hunkering down for the foreseeable future, too. How about the subprime, predatory and other assorted, irresponsible lenders and mortgage "securities" dealers? I imagine they've stopped buying original Monets and Picassos at this point but, hey, I'm just guessin'.
Eventually, everyone will come to the realization that 1) just like when the NASDAQ bubble burst back in 2000, real estate values are going down, down, down, then 2) that this time it's not a "normal real estate cycle" but instead a relentless, post-bubble and post-bubble-bubble real estate deflation that we expect will have no historical rival.
That realization will pervade the consciousness of real estate buyers across the board, as they hear about ever-more distressed and foreclosed inventory competing with already-languishing housing stock. Buyers will conclude that, just like computers, "prices will be lower next year" and they will demand significantly discounted prices; sellers who resist selling now will find an even weaker market and a greater dearth of buyers with each passing year. Nightly news reports will further the psychology, and that dampening mind-set will spread to all real estate types: office and retail buildings, industrial and income property, single lots and land. The implosion of the real estate bubble will quickly translate to snap-the-pocketbook-shut consumer spending, declining rents, more bankruptcies, a moribund job market and fire-sale drops in real estate prices. Fannie Mae, Freddie Mac, bank and lending crises are sure to be sprinkled on top of that soggy cereal at some point, too.
Surviving lenders, under constant pressure due to rampant foreclosures, will make lending standards increasingly more stringent and loans more difficult to procure, meaning more equity will be required to buy property. But Americans have been living on borrowed money and have no such equity; they've been conditioned to borrow to buy things because they assumed that the value of their homes would continue to bail their finances out forever. Another segment of the buying marketplace will therefore be lopped off.
As time goes by, those in a position to buy will consider real estate not worth the headaches and a bad investment, to boot.
In my opinion, the ultimate affect of the real estate bubble -- and its mostly unanticipated implosion -- is that the entire asset class will fall out of favor for many years, possibly for a generation. Only a select few will benefit -- those who had the foresight to sell now and squirrel away the money safely before the real anguish begins.
Sheesh! And you thought I was gloomy.
The only trouble with this is that in order to sell, you have to find an ever more clueless buyer. And we're sure to run out of those as time goes by. I mean, there comes a point in every (apocryphal) lemming's decent into greatness where that big flat dirty-looking looming thing becomes painfully obvious.
32 comments:
Sheesh. All I gotta worry about is making my monthly rent payment, and paying off my student loan. Don't seem so bad after reading that.
Pretty gloomy assessment, but it rings true to me.
I will keep putting my money away and save it for a nice house when things get real.
I think this post is dead on. People have so much wrapped up in this mania...how smart they are for buying, how they're set for life, how their retirement is assured, how college & vacations are paid for...the more painful this is, the harder it is for FB's to really face the music.
Can you imagine having to say "I made a $700,000" mistake on a $75,000 salary? I live in a home that is not worth what I paid for it? I am in debt for the next 30 years of my life with nothing to show for it?"
Marin realtors are conducting a propaganda campaign:
http://tinyurl.com/2p255d
Damn but they must be getting desperate.
I'll probably blog it tonight.
interesting read, but there is no data that they author puts forth to support his widespread meltdown theory. Clearly things are headed down in many parts of the country, even here, but to what degree is pure speculation.
Citing a large spike in foreclosure rates is sensational, but putting it in historical context is educational. Anyone know what the average foreclosure rate has been for the last few decades and how we compare now? I don't, but I'd like to know.
Idiot! Comparing real estate pricing to computer pricing is ridiculous; that’s like comparing freedom in the US versus freedom in Iraq. First of all I don’t care where my computer comes from, but I do care where my real estate is. Second, supply and demand factors are drastically different for real estat versus stock, computers, etc.
Somebody needs to take Economics 101 over again.
Here's the quote "Buyers will conclude that, just like computers, "prices will be lower next year" and they will demand significantly discounted prices."
Either it is a computer or house, consumer psychology always plays a significant part in supply and demand. If a consumer is reluctant to pay few hundred dollars more for a computer and willing to wait, would he or she wait even more patiently for a $1 million house price to come down?
The worst case scenario is a sucker bet. Just sayin'.
"Idiot! Comparing real estate pricing to computer pricing is ridiculous"
Um, the dude is talking about buyer psychology not a literal comparison. So don't be too quick with calling people names.
"I don’t care where my computer comes from"
Do you care where the linoleum in your house came from? Do you care where the steel came from? Do you care where the nails came from?
Where the components came from is irrelevant. The point is about buyer psychology. If buyers see prices flattening then weakening then the thinking goes "...if I wait a little longer, prices will be cheapers, sellers more desperate and willing to deal,..." etc. The same psychology that is in play with retail items like computers.
This writer has been in the business a long time and seems to have wide connections in the industry. I think people should not be so quick to dismiss his point. The real question that needs to be asked is why is he coming clean now? What (if anything) is he selling? Is he now going to find a different line of work?
You want a comment about psychology and money, here you go.
“The key to making money [in stocks] is not to get scared out of them.”
~Peter Lynch
Recent market volatility has led to media speculation about possible causes: China's late February market plunge, the precarious financial straights of subprime mortgage lenders, and the biggest baddest reason of all .... Recession.
My earlier point about comparing computers to RE, is that not all markets behave the same. Psychology definitely affects liquid markets rapidly, but markets where supplies are limited versus demand and transactions require significant time and fees to complete, the whims of buyers will not be able to influence prices as much (if at all over the long-term). RE should be a long term investment anyway.
If the market goes down, why would I want to sell my house. Why would I have to? I still like where I live. I still need a home. I still benefit from the tax shield. R.E. should be a significant part of any good investment portfolio. What if inflation is significant in the future? Good for RE. Fear from buyers does not change these fundamentals.
Certainly over leveraged buyers may need to liquidate, but washing them out of the market would only cause a blip on the radar screen of home prices. Who cares, trying to take advantage of such a short-term affect is like trying to time the stock market.
Perhaps I am writing this to a bunch of "Market Timers;" good for you if you know when to buy and when not to.
From that IJ piece:
"[recent news is] not a true measure of the market's rock-solid history in Marin as a steady climber."
In other words, whatever you believe to be true about local RE is more important than developing trends against the current economic backdrop. Don't let those news people scare you!
Too funny, but what angle are the realtors playing here, besides keeping seller expectations too high in a declining market? Perhaps they're simply reassuring the county that sales will pick up again--or that speculators have nothing to fear and should get back to flipping homes?
They sound a lot like Baghdad Bob.
The IJ piece smacked of desperation to me. RE does tend to do well over the long, long term, that is absolutely true. But it's not a straight line up, and how well you do completely depends on what point in the cycle you buy in and whether you can afford to hang on.
The first time I refinanced, 1997, my mortgage broker (who owned in Ross) said it took 10 years for her house to be worth what she paid for it at the top of the last cycle. Ross! You know, that lovely little town where everyone aspires to live when they strike it rich -);
People who bought a long time ago are fine, unless they "liberated" all their equity. It's everyone else who's been piling in that's in trouble. Not a lot of gains to show for big mortgages.
And we're back to blame the media for the change in psychology. Not flattening appreciation. Not tighter standards. Not sellers hanging on to peak pricing.
Marin realtors are conducting a propaganda campaign:
http://tinyurl.com/2p255d
Damn but they must be getting desperate.
I'll probably blog it tonight.
I saw your response. A bit disingenous to dismiss raw data in favor of "inflation-adjusted" data.
If I see raw data, I might conclude that at a price of $500K, my house is worth five times my income of $100K.
Adjusting for inflation is fine. What that is essentially saying is that my $500K house has a "real" value of say $250K due to inflation.
But for a fair comparison, you have to adjust my income, down to say $50K. So on a nominal basis, my house is worth five times my income and on an inflation-adjusted basis, my house is worth five times my income.
Either way is fine with me. Just pick one or the other.
"I saw your response"...
you do realize dont you that real wage growth has been flat for about 30 years? so your simplistic model is bogus. somewher eon this site is a graph showing inflation adjusted house prices as a ratio of inflation adjusted per capita income and the plot gradually rises then declines two or three times. so unless you think wages are going to suddently jump 100-200% to save marin housing I think you have a big surprise in store for you.
you do realize dont you that real wage growth has been flat for about 30 years? so your simplistic model is bogus.
If my wage growth has been flat all these years, then in real terms, my house is worth a hell of lot more than I thought.
Thanks!
The IJ piece fails to recognize that some of those sales were from foreclosures. I'll get the number tomorrow...
Hey Pothead...There is a historical picture ( or graph ) I'd be happy to send it to you.
~Caddis.
The previous commentor is assuming that wages, when adjusted for inflation, rise and fall in sync with house prices which is clearly not the case.
Besides, comparing inflation adjusted house prices to inflation adjusted wages/income is irrelevant. What matters is comparing what you paid for a house to what you sell for. And when adjusted for inflation that comparison has been at times negative.
What matters is comparing what you paid for a house to what you sell for. And when adjusted for inflation that comparison has been at times negative [in Marin].
Quite right.
I was going to blog that IJ article but interestingly, I notice that they no longer allow people to leave comments. Neither I nor another reader was able to post a reply to the comment where wages are used as a basis to determine the worth of a house. Other articles that have been similarly demoted to less prominant areas on the web site still allow comments. So why not this one? Perhaps they will open it back up for comments later. Or perhaps they are afraid that a group or Marin RE watchers might burst their bubble?
Seven Reasons to Own Your Own Home
Here are 7 reasons why it is better to rent now than "own":
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7.
Seven more reasons not to buy a home now or in the foreseeable future..
1. Because you will lose a bunch of money and be miserable if you do.
2. Because you will waste half your day watching real estate sales or interest rate data and worrying about how much equity you are losing each day as this massive bubble market continues to deflate if you do.
3. Because you will be a debtor to your home and end up resenting it if you do.
4. Because who really gives a sh_t what the Realtor, lender or broker next door thinks is good for you. Let them wallow in their own misery for helping fuel this bloody mess.
5. Because you can take your savings and buy your grandparents a trip to the Grand Canyon and join them with your kids or friends.
6. Because people who make money off of you when you buy a home are trying desperately to convince you that you should buy now and common sense has finally (finally) caused you to rethink this crappy, self-serving advice.
7. Because that home you are dreaming of will be cheaper, much cheaper, in about 2-3 years and all these clowns in the RE industry know it.
And seven more..
1. Because any hiccup in our debt ridden, consumer driven economy and the house of cards will tumble quickly.
2. Because the yield curve is inverted, which is really scaring the piss out of most economists.
3. Because Sir Allen, the ultimate insider, bailed like a rat while the going was good.
4. Because every major housing downturn in this past century was followed by an economic recession.
5. Because 20-25% of the potential buyers were ripped out fo the market with the recent sub-prime meltdown. And, oh by the way, this number was more like 60% in most of CA, including here in Marin due to the extreme costs of homes. And, Alt-A is next.
6. Because wages have been relatively stagnate over the past 10-20 years and housing cannot stay disconnected indefinitely from wages. Short term (bubble term) yes; however, so sorry, they just can't stay disconnected over the long term and they won't this time either.
7. Because, in the end, education, hard work and real skills matter and those things will, once again, matter and be the real key, as they should to a rewarding and fulfilling life. A lesson we all need to relearn and, by golly, just in time for our kids. Thank bloody god.
"In other words, it is time to sell all of your real estate, save for possibly your home. If you don't, you will likely regret it."
I'm glad to hear a rising consensus dispelling the myth that real estate investing is easy money. Robert Shiller's been saying that for a few years now, but it's finally sinking in.
In a larger sense, real estate was just another milestone in the pop-culture "investing" phenomenon of the last 25 years. In particular, those nearing retirement without any real experience in fine art, collectibles, coins/metals, stocks, and real estate were easy targets for these scams. One wonders how many times this will repeat before people get it?
yay! the marin bubble blog is back. I was always a fan. Anyhow, in the intervening time, I've done a little more research regarding migration and development patterns which I think is important when looking at RE in both regional and national terms.
For one, the relocation and state and city info sites have gotten very popular fairly quick. Unsurprisingly, the most popular sites are for cities in TX,NC, TN, GA, and much of the Southeast. Raleigh's site is insanely busy. Also not surprising to see is that the majority of people relocating there are from these areas in descending order: MI,FL,OH,NY,CA, and NJ. The reasons are surprisingly diverse. In MI, the job market is tanking and the propety taxes are very high. In FL, RE got too high for many and the new imposed home insurance, post-katrina created a double-whamy. In OH, much the same as MI. for the rest- CA, NY, NJ... anywhere in the Northeast and West Coast, high costs of living were cited.
There are thousands of posts too. My take on the situation is that while many tried where they lived for awhile, the fact that prices have still not trended down enough to make a difference post-bubble burst has caused many to throw in the towel and make the decision to relocate.
This is having a ( for now) positive impact on the regions they are moving to in the form of a diversified economy and a growing infrastructure. The only bad thing I see is that quite a few retirees from up North seem to be choosing the region too, which means a lot of people moving in with no contribution to the worforce.
What this means to me for places like the Bay Area is that amoung all the factors that are starting to come into play, the fact that many are moving out could mean lower prices simply by reducing overall demand.
I also think that this sort off reverse dustbowl will mean a leveling off and perhaps degradation of prices in many " classic" expensive areas. Just a thought.
I also think that this sort off reverse dustbowl will mean a leveling off and perhaps degradation of prices in many " classic" expensive areas. Just a thought.
It seems to me to certainly mean a change in the character of our beloved Bay Area and Marin in particular. It may also mean, as others have stated, that our pre-eminance as a business leader may wane some as the workforce leaves for greener pastures. Maybe Marin becomes a county of old retirees and trustafarians, at least more so than it already is. Well, if that's what people want. All in the name of RE profit, Marin's idol of worship.
HI!
RC and others that do not need anti-depressents:
It is nice to see we have other level headed people that read this blog. I have been saying the same things to the same crowd for almost two years now! I had catergorized the type of posters that continue to trump "economic armageddon", I think they fall into the following categories.
1. Are upset because in 2003(or whatever year after 00) they said they were waiting because there was a huge bubble, just like the NASDAQ (you know because it is smart to compare stocks to RE). They are still waiting(hoping)...
2. Marinites that fancy themselves "natives" (not like real Native Americans, you know the people our ancestors screwed out of their land), that cannot afford to live here(or there kids/grandkids), and if they can't then those that are buying can't really either, because that would mean they aren't special. "Mountain biking and hiking really aren't careers? wtf?". These are my favorite, the same people that claim Marin isn't different feel some kind of entitlement(typical American).
3. Developers that will do anything for a 1$.
/hug Darwin
Side note: Snow sucked this year in Tahoe, the one time it was good, I couldnt go. I played golf 8x this year already. Sunburn 2x.
I missed this blog, glad it is active again!
Fred Tobik
By the way, I found this on the news this morning. What's stupid about the whole report is that there seemed to be a lot of confusion amongst specialists as to why cities like NYC, Boston, LA, and so on were losing population. The basic findings are that tons of 'native' Americans are leaving major cities in massive numbers but the number of immigrants coming in replace them- primarily from Mexico. The real issue is the cost of living and nothing else. Why this should be confusing to anyone is a mystery to me.
ASHINGTON - Without immigrants pouring into the nation's big metro areas, places such as New York, Los Angeles and Boston would be shrinking as native-born Americans move farther out.
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Many smaller areas, including Battle Creek, Mich., Ames, Iowa, and Corvallis, Ore., would shrink as well, according to population estimates to be released Thursday by the
Census Bureau.
"Immigrants are filling the void as domestic migrants are seeking opportunities in other places," said Mark Mather, a demographer at the Population Reference Bureau, a private research organization.
Immigrants long have flocked to major metropolitan areas and helped them grow. But increasingly, native-born Americans are moving from those areas and leaving immigrants to provide the only source of growth.
The New York metro area, which includes the suburbs, added 1 million immigrants from 2000 to 2006. Without those immigrants, the region would have lost nearly 600,000 people.
Without immigration, the Los Angeles metro area would have lost more than 200,000, the San Francisco area would have lost 188,000 and the Boston area would have lost 101,000.
The Census Bureau estimates annual population totals as of July 1, using local records of births and deaths,
Internal Revenue Service records of people moving within the United States and census statistics on immigrants. The estimates released Thursday were for metropolitan areas, which generally include cities and their surrounding suburbs.
Among the findings:
_Atlanta added more people than any other metro area from 2000 to 2006. The Atlanta area, which includes Sandy Springs and Marietta, Ga., added 890,000 people, putting its population at about 5.1 million. Gaining the most after Atlanta were Dallas-Fort Worth, Houston, Phoenix and Riverside, Calif.
_On a percentage basis, St. George in southwest Utah was the fastest growing metro area from 2000 to 2006. St. George's population jumped by 40 percent, to 126,000. The next highest percentage increases were in Greeley, Colo., Cape Coral, Fla., Bend, Ore., and Las Vegas.
_The New Orleans area, still recovering from Hurricane Katrina, lost nearly 290,000 people from 2005 to 2006, reducing its population to just over 1 million. The Gulfport-Biloxi area in Mississippi, also hit hard by Katrina, lost nearly 27,000 people, dropping its population to 227,900.
_Parts of the Rust Belt also had large declines. The Pittsburgh metro area led the way, losing 60,000 people from 2000 to 2006. Its population loss was followed by declines in Cleveland, Buffalo, N.Y., Youngstown, Ohio, and Scranton, Pa.
_Houston edged past Miami to become the sixth largest metro area, with about 5.5 million people. Miami slipped to seventh.
There are about 36 million immigrants in the U.S. About one-third are in the country illegally. The Census Bureau, however, does not distinguish between legal and illegal immigrants.
The White House floated a plan last month that would grant work visas to illegal immigrants, but they would have to return home and pay hefty fines to become legal U.S. residents.
Lawmakers were unable to reach an agreement last year on how best to stem the flow of illegal immigrants. Immigration was a contentious issue in many congressional races in November.
Many demographers associate shrinking populations with economic problems, typically poor job markets or prohibitive housing prices.
"A lot of cities rely on immigration to prop up their housing market and prop up their economies," said William Frey, a demographer at the Brookings Institution, a Washington think tank.
Advocates for stricter immigration laws question whether a stable, or even a shrinking population, is bad.
"Don't we have concerns about congestion and sprawl and pollution?" asked Steven A. Camarota, director of research at the Center for Immigration Studies, which advocates for stricter immigration policies.
"Maybe those metro areas should think about what it would take to make Americans want to live there," Camarota said.
Haggis, can you post a link to the graph?
Hey, this IS the same Marin Country that gave us Taliban Johnny...
Freddy...
How about one more category.. (4) Guys like me who don't care what guys like you think..
According to today's Yahoo Finance headline:
"Treasury Bond Prices Fall, Dollar Rises After Strong Jobs Report Fuels Optimism About Economy - The yield on the benchmark 10-year Treasury note surged to 4.75 percent -- its highest level since mid-February --from 4.68 percent late Thursday."
Are we embracing a stagflation environment now? The economy is slowing but prices are rising. All this job number does is to keep the Fed on hold and money tight. Those ARM borrowers won't be seeing any relief for a while now..
Why so gloomy? Real estate has historically been cyclical and the cycles tend to last from 3-5 years from peak to trough.
Most everyone is so eager to buy whe real estate prices are on their way down. But there's a lot of money to be made in these cyclical markets.
I agree that it's not such a good thing to buy as the market is declining, and there's no way to prediect whe the market bottoms out.
However, once we reach the bottom and things start going up again, you can be sure that many people will be extremely eager to purchase real estate again.
One more thing to consider - as the baby bomers age they are increasingly thinking of second homes. This is a real strong area of the market and I think demographics are going to keep this market strong for 20 years to come.
"Why so gloomy?...This is a real strong area of the market and I think demographics are going to keep this market strong for 20 years to come..."
There's a lot of hopefulness going around. Market psychology has its downside too.
Prices cannot come down if houses don't sell.
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