Friday, March 30, 2007

literally nickels on the dollar

Man, and you think I'm somewhat negative on the prospects of the housing market? Check out this guy:

"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."

64 comments:

R-Boy said...

First?

R-Boy said...

YEAAAAHHHHHHHHHHHhhhh

TWO 4 TWO~!

Today's my lucky day!

Rob Dawg said...

Umm, you supposed to at least pretend you are reading my crap or should i set up a random bot to issue a new post 3-4 times a day? Besides, you got a jump on us left coasters. Go econometric something or whatever it is you guys do but when you get a chance really, read this guy. Wow, talk about claiming the low ground. Even I am not that cynical.

The Wicked Nigey of the West said...

4th. Damn, R-boy has schooled me yet again. I'll get you my pretty, and your little dawg too.

Peripheral Visionary said...

That's some sweet real estate there. I'd flip it. Actually, some of those very old, very dilapidated structures can be valuable for the building materials, it's often profitable to buy very old buildings and dismantle for timber, bricks, and especially cut stone, if there's any.

But I digress. I'm not sure what's meant by real estate "falling out of favor" as an asset class--it's always been a mediocre one, not good for much more than holding value. Recent studies have confirmed that buildings tend to do little more than maintain value, even be a losing proposition with carrying costs taken into account. Only land is valuable as a speculative (whoops, I mean investment!) asset class--it appreciates much more often, albeit very inconsistently, so it's fairly risky.

Rob Dawg said...

pv,
yes but in the context of the last 6-8 years where there has been appreciation any reversion to mean will be brutal. I do have one thing I disagree with most on. I think housing is a productive assest class. You can live in it and that seems as vital as farmland producing food you can eat.

Anonymous said...

Okay, so while the other loosers were screaming first (jk R-Boy), I read the article. I personally think the truth is somewhere between that author and the Realtors saying "look for a rebound this spring."

He doesn't really give a lot of info to back up his claim.

Some Guy From Colorado said...

Obviously this guy has never been to the Western Slope of Colorado. It's booming here. Some of it due to the huge increase in natural gas drilling activity. The Front Range of Colorado is sucking it bad, though. And they just keep building more homes. It's insane.

Nigeypoo said...

You haterz forgot about SLC. Booming, I tell ya. Up 15% and still going strong.

Read about it on my award winning blog - HERE, HERE, HERE, HERE, HERE, HERE, HERE, HERE, HERE, HERE, HERE, HERE, HERE, and HERE.

Oops, forgot about HERE and HERE.

Loosers!

Sprezzatura said...

Some of the folks on Ben's and Patrick's blogs are that bearish too. I tend towards the bearish side much of the time, but even I think that they're a bit over the top.

Anonymous said...

And he sure hasn't been to SLC. We're experiencing double digit growth with no signs of a slow down!

NoVa Sideliner said...

Regarding I'm not sure what's meant by real estate "falling out of favor" as an asset class...

Amongst people who do the math, it's certainly NOT been in favor the last few years, at least from my point of view. I was actively looking to buy rental properties back in 2003, and any reasonable run of the numbers in the DC suburbs showed nothing but red ink. I am still sitting on the sidelines, ,much more patient now than I was then (thanks to Ben!).

Yet housing was indeed (and perhaps still is) "in favor" -- but by those who bought into the speculative aspect of it, which seems to be most of the people. When that majority turns, as may be happening now, then we'll see.

Thing about the math: personally, I think financial math is important. I have a sinking feeling that I am in a small minority.

I've got friends in the workplace who are renting out places, selling places, buying places, and many come to me to ask questions (I guess because I know a bit about economics and investing and always seem to have money). When I try to sit them down to do the math, as soon as we start estimating maintenance and talking about depreciation schedules and especially opportunity cost of money, their eyes glaze over. Most actually insist on stopping any financial analysis and insist that "even if I'm losing money now, it will make up for it later". Well, all I can assure them is that they certainly WILL lose money now. And next year, and the year after that...

In fact, some of their losses are so great that I wish *I* was one of their renters! And yes, I do tell them that. Seriously. And yet they still do not lose the faith in RE as an investment!

aaron said...
This comment has been removed by the author.
aaron said...

sorry i got ahead of myself. housing will continue to decline and level off in 3-4 years. it will reach the peak of 06' in perhaps 10 years.

Rob Dawg said...

Good save aaron. I was ready to rip off a bit'o'hatin' on you.

I'm 2-3 years to the ugly bottom because unlike past declines this time those most at risk are all front loaded for default because of ARMs and low equity.

When price return to those of Oct 6th, 2006 7:43 PST well that depends on inflation to erode value and just how far the problems extend.

Anonymous said...

"And yet they still do not lose the faith in RE as an investment!"

Which raises the sociological question, why do people put such stock in real estate as an investment? We're talking about a mistake in financial thinking that millions of people make, and not just during bubble periods. It's the same place that the phrase, "don't throw away money on rent" comes from, where there's no thought that you pay for housing through some combination of rent, mortgage interest or the opportunity cost of tying up cash.

Given that it's such a prevalent and long-enduring mistake, why does it happen? Some part of our caveman brain that puts a high premium on claiming that particular rock is ours?

aaron said...

question for you rob, others.
for those that have job security and are staying put. if the house goes into negative equity....how many if any would choose to walk away and save their cash? of course your credit rating takes a hit but if you are 100k underwater....why stay in the house. why not walk and then rent for a few years. then buy when the credit rating goes back up and you have saved enough for a downpayment.

or can lenders go after more than the house?

aaron said...

anon,
If you have a fixed 30 year mortgage...within a few years your mortgage payment will be less than the cost to rent. At least it will be for me here in the DC area. plus no one tells you what to do. no surprise rent increases or getting thrown out b/c the owner wants to sell. yes i have house repairs but can anticipate most of those based on the age of appliances, AC, heater etc. The beauty of ownership for me is knowing that the only increases will be in taxes and insurance. rent increases more than that at least around here.

Rob Dawg said...

...have job security and are staying put. if the house goes into negative equity....how many if any would choose to walk away and save their cash?

"Boiling Frog Syndrome." for one.

Then remember there is value to transaction costs. If you are going to lose another 6-8% in purchasing again and pay another 2-3% in higher rates because of dinged credit it may not make sense. Oh and while you know this, I'll reitterate; people are not always rational actors.

Rob Dawg said...

If you have a fixed 30 year mortgage...within a few years your mortgage payment will be less than the cost to rent.

It used to be like that. You fall for the fallacy of past performance indicating future behavior. Maybe, maybe not as to rent versus buy but even then if the decision is rent now to buy later at lower prices then ...

Anonymous said...

@rob dawg:

The situation in DC is weird and scary. Right now, I live in an older community surrounded by a cavern of brand-new high-rise condos.

Many of which are already going FSBO, and the damn places have been barely finished!

aaron said...

Rob I am discussing that as already have purchased the house and locked in the rate. I figure in 5-6 years I will not be able to rent a house like mine with this location for what my mortgage, taxes and insurance add up to on a monthly basis. Since we plan on staying here perhaps until retirement it will become an even better buy. we are lucky in that our salaries have increased at 3-4 times inflation over the past several years. I expect it will continue to beat inflation by 2-3 fold.

I guess I just changed the subject somewhat.

aaron said...

anon. that would be the condo market here getting ready to take a dive. way to many condos around in some places. Near my house i see buildings that say 'all new appliances and updated bathrooms'. If i was in the market..even here in the DC area i would not be buying a house right now.

Nigeypoo said...

Buy in SLC or you will be priced out of the market. Heed the words of an award winning blogger.

BTW, I can do you a sweet deal on a mortgage. Integrity is my middle name (except when I'm hating/outing/bashing). But until I see fit to delete, post without fear of retribution.

R-Boy said...

with doing the home addition where we live in del ray, were feeling okay, because of the locational properties of the area and the fact that we arent moving from our primary residence...ever

i am not worried about physical property in the dc area...but condos should dive like japanese bombers in ww2

Mozatta said...

Is it just me or is it clear to everyone that Casey isn't writing anything on his blog anymore. There's such a contrast in his style of writing and the new person's (I assume it's swabnuts)

Anonymous said...

@aaron and r-boy

You bring remind me of a tragic situation in NoVa. It's a shame what they're doing in Shirlington--4 or 5 new condos--that crap's going to go all rental, because no one will be able to afford it; traffic is going to be insane, and they're cramming a supermarket in the shopping area, besides. The people living in that area are going to hate it. They are trying to turn it into Clarenden (another hip, high-priced area chockablock with restaurants and shops)but I don't see the infrastructure to support this psudeo-urban junk they are putting there. They should have gotten a clue when they tore the green space out to put in two ugly office buildings--and lo and behold, 4 years or so later the damn things are still not full to capacity.

Now DelRay--that's a cool place. Love it.

Ogg the Caveman said...

This guy has no idea what he's talking about.

Everyone who does not buy, now, will be priced out forever. Those who do buy will enjoy a lifetime of riches, as their property will continue appreciating 10% or more per year, forever, no matter how far the price increases outrun incomes, population growth, and centuries-long historical averages.

Renters, and those born in future generations, will be unable to afford a $10 million starter home in 10 years. They will live in tent cities and Hondas.

This asset bubble is unlike all others in history, because it will...

Oh hell, I can't do it.

Anonymous said...

LOL at Ogg.

NoVa Sideliner said...

Which raises the sociological question, why do people put such stock in real estate as an investment? We're talking about a mistake in financial thinking that millions of people make, and not just during bubble periods.

Part of could be the scattered nature of the expenses associated with owning your own house. It's like a typical cell phone bill, where you see a headline rate, and then once you've signed on, you see tax-this, tax-that, fee-this, etc. It all works out to where the sum total is far more than the headline rate, but the headline rate is what gets you in. And then you're stuck.

The biggest mistakes I see in people's estimates of their future housing costs are these:

(1) Opportunity cost. People refuse to consider that there is a cost in tying up your money (assuming you did make a down payment, that is).

(2) Big ticket maintenance. The roof, and HVAC system, the septic. All those things have a limited life, but the costs can hit in a random fashion, and thus people often don't even account for them (or vastly underestimate). Most people I know act as if they are totally surprised when a $4,000 bill hits them. Every year.

(3) Tax benefits. In states with low or no income taxes (er, not here in VA, or MD, or DC!) medium income people often don't even get much above the standard deduction with owning a house. The benefits are nil or close to nil, yet they only calculate this AFTER buying -- and sometimes even then refuse to accept it!

There are even more cost items in owning a house, of course, but these above are specific ones I see people putting out of their minds when making the decision. And by putting this out of their mind, they "simplify" the decision, but they can easily come to the wrong financial decision.

Peripheral Visionary said...

Shirlington is on my avoid list. What exactly does it have to offer? Same with Reston, whose very existence raises the one word question, "why?" At least Manassas has history. I'm indifferent on Ballston and Clarendon, although they're SO EXPENSIVE (we'll see how long that lasts.) I actually like Courthouse, it's a little more open and walk-able. I know a lot of people hate Rosslyn, but it has great views and is walking distance to Georgetown, I'm actually considering moving back there.

NoVa Sideliner said...

Ah, another example of real estate investing nonsense:

Friend of mine purchased two empty, wooded lots in Florida about two or three years ago. He's planning to either hold them for "investment" or retire on them in decades ahead.

The problem he is now finding (and was warned about) is this: Even open land is no better than a very high-load mutual fund. The costs accrue year after year.

His lots for $15k purchase are costing him about $800/year in property taxes and local fees . Fortunately, he's got wooded lots, so there's no other maintenance per se. Well, not quite...

Unfortunately, his wooded lots are somehow attracting old washer, dryers, refrigerators, and car parts, which miraculously appear out of thin air at night. So he has to pay the local yokel every year or so to haul it away (to another sucker's lot at night?).

At least he decided to save himself a little bit of money by not getting liability insurance on those properties. :-O

Melatonin Eater said...

I believe there is a big cost of ownership for a house that has to be considered.

1. If it's a big house it must be furnished, cleaned regularly (hopefully) and many parts of the unused house is heated and cooled because of the foolish use of central air & heating unlike most of the rest of the world where local controls do just fine. (end rant)

2. Taxes can be obscene. Normal insurance.

3. Maintenance of the yard, lawn etc (not much for y'all in CA though)

4. This all assumes the house is already paid for, otherwise a big payment is interest charges.

Interest can be so significant that it eats up most of your lifetime net worth. Assume you average $125,000 per year during your 40 career of earning... in 2007 dollars. Maybe a stretch but maybe true if you can make a nice career.

OK- you make $5,000,000 in income. Real tax rate including federal, state, local, FICA, mediscare etc is 40% from most studies that doesn't amazingly change much with income level... unfortunately I don't have the link... anyway that leaves $3,000,000

Suppose you buy a $600,000 house on a 30 year fixed mortgage with 6.5%... I know this is a shitbox in CA but bear with me. If you calculate your interest payment over the 30 years it's about $1,100,000 approximately. So you have spent roughly 1/3 or your lifetime after tax income servicing debt. That is very significant... I realize interest income can partially deduct from federal tax but it's not a big savings.

Has anyone ever thought of it this way?

Melatonin Eater

Casey Fannnnn said...

RE:
>>is it clear to everyone that Casey isn't writing anything on his blog anymore<<

IAFF does seem to be in even-zombier mode. Casey neglects things that belong to other people. Now that the blog is no longer his, it can fall into ruin for all he cares.

Whew, all you guys talking about high-powered ownership of this and that - I feel as if I'm visiting the growed-ups' table to get more Thanksgiving butter. My rent is $580 a month, and the landlord covers the gas heating and lawn care fee. Sometimes I indulge the urge to take a few consecutive months off from my self-employment as a in-demand audio-video production guy, so I only got comfy subsistence money, and nothing more. Work pays so damn well, it's hard to keep the work ethic up when the next few years' monthlies are sitting in the bank. I'd have to work more often to keep a house. Casey says work is bad. Sometimes the boy gets it right.

Legion said...

@Nova Sideliner
"Unfortunately, his wooded lots are somehow attracting old washer, dryers, refrigerators, and car parts, which miraculously appear out of thin air at night"

Are you sure he isn't using "The Secret?" In the DVD people just think something and it magically appears. I think subconscioulsy he is thinking of these things and the universe is answering his prayers. Remember, "The Secret" was recommended by Casey as it jives with his NO work and become fabulously rich mentality, so you know it's gotta be good!

I practice the same thing, I have a refridgerator which magically produces food, and I've also noticed that my toilet paper is magically replenished!

Ogg the Caveman said...

Spotted on IAFF (#30):

Any loan application with the name “Casey Serin” on it is going to keep the lenders at bay like sitting in a hot tub full of Holy Water would repel vampires, see?

@ Casey Fannnn:

My rent is currently a hair south of $400. I'll be moving into a much bigger, nicer, and somewhat more expensive cave soon, and while I won't miss my current place I will miss paying such a small portion of my income toward rent.

I'm not looking to buy at this point. Market issues aside -- and market issues would be enough to stop me -- there's nothing in my neck of the woods that makes sense for a single caveman. Houses mostly start at 3 bedrooms, and most of the local condos are less desirable than the available apartments.

Punchbowl said...

Ummm, Rob, why don't you end this "first" nonsense by deleting the damn things down to the first real substantive post? You're being followed around by the equivalent of clueless 14 year old groupies.

I tried to post this over at patrick's but it got hung up in moderation. Take a look at these tables and tell me how it's even possible for anyone to be enjoying this asset class in a few years time.

http://www.economist.com/images/20070324/CSF937.gif

http://www.economist.com/images/20070324/CSF117.gif

The first says half of ARM borrowers are upside down if prices fall 10%. The second says 16% of all homeowners, which is probably about a quarter of all homeloaners, are upside down if prices fall a mere 10%.

Ugliness is coming.

Casey Fannnnn said...

Re Ogg-den's utterance:
>>I'm not looking to buy at this point<<

Me neither. But girlfriend/future spouse is, and seems maniacally compelled to follow that doomed dream, despite any number of smart-person articles I show her, and despite the fact that many of our friends are so upside down I can smell things on them that bespeak an inappropriate familiarity. I am lying low, postponing as much as possible, and waiting for the credit crunch to make it massively unattractive or completely impractical to borrow for a house. Then we'll simply get a nicer apartment. It's all good!

Ogg the Caveman said...

As for the "first"ing, if Rob wants to combat it the Fark solution is worth considering.

That probably can't happen until EN moves off of Blogger though.

Rob Dawg said...

Punchbowl said...
Ummm, Rob, why don't you end this "first" nonsense by deleting the damn things down to the first real substantive post?

Snarky answer; it think it's cute.

Seriously, you are under the mistaken impression that this is my blog. Were it "my" blog, if i even tried to extert ownership, it wouldn't be half the place its grown to be.

But you ask another important set of questions: ...half of ARM borrowers are upside down if prices fall 10%. The second says 16% of all homeowners, which is probably about a quarter of all homeloaners, are upside down if prices fall a mere 10%.

Ugliness is coming.


Ohhh yes. Much ugliness and worse; intergenerational schisms and class friction.

We talked about the Economist article a few days ago and it was a big deal at Calaculated Risk as well. A solid 10% decline actually wipes out equity for more than another 25% because REOs start becoming common enough to be considered comps. A death spiral of valuation ensues. Now, not all 25% will lose their homes, people will make great sacrafices to keep their house. By the same token those with investment class properties are in for a vicious Perfect Storm II. Boomers will need cash as their retirement plans get wiped out in the coming years nad those with the most cushion will be those retiring first setting prices at levels recent aquisitors cannot hope to match. That second group then faces a prospect of pouring their investable cash into a declining asset. Vacation homes in Big Bear; buy one get one free.

Anonymous said...

WOW! I just talked with a mortgage broker about getting pre-approved for a loan and asked if it would be possible to get a very small amount of cashback at close ($3000 on a $125,000 loan) to do some minor repairs before moving in. He very quickly let me know that the lending industry doesn't do that anymore AT ALL.

I said, "Because of people like Casey Serin?" and his response was, "You have heard of him too, huh? Yeah, him and ALOT others like him."

So I asked him what he thought of the whole Casey Serin thing and he said, "Mr. Serin needs to forget about real estate because his name is mud in the industry and no one will EVER deal with him again"

This is from a locally owned mortgage company here in Oklahoma! So I just can't believe all of the major mortgage companies don't have him and his family black listed as well.

Kerriella

Investing Not Speculating said...

How soon does one think this cataclysmic event will be taking place? I am not being snarky here.

I have a primary home purchased in 1995 which has appreciated considerably. This is not fake bubble appreciation. A comparable home down the street just sold in 6 days and the price point moved higher from the previous sale. Of course this is only one instance but seems reasonable for our area. I have several vacation homes/investment properties purchased around 1995, 1998, 2003. One is paid off, the 2nd has an ltv of about 33%, even after dismissing some of the bubble appreciation of the last 2 years and the 3rd was purchased at auction. Cash flow is mostly positive depending on snow and hurricanes but there are some tax increases due to the bubble. It if was up to me only, I'd sell the primary, pay off the others and hop around from season to season. Being as I have low fixed rate mortgages and no need or desire to sell, I'm only mildly concerned. My primary could drop 25% and I wouldn't give a hoot. I suppose if this really turns into something horrific, some people will stop going on vacations and renting those properties but it would have to be awfully bad for the USA to stop going to the beach.

Tony Soprano said...

Man, these guys are on the ball with the firsts.. I was out getting a listing and missed two! sheesh..

Man, all the doom and gloom around here on a Friday?? sheesh, any more depressing and I'll go over to Housing Panic and start drinking:)

I agree completely that we are looking at a Perfect Storm of fuckedom regarding housing. Boomers are basically giving Gen X the shaft and there isn't a damn thing we can do about it except put Gen Y over the barrel harder. This is one Realtor that is running scared. I keep my game tight, lots of cash in the bank, no Rolex, lots of ammo, and just keep my head down. My only hope is that is doesn't get too bad here in the PNW. People still have to buy and sell. And I for one am happy to see all of these Gen Y flippers get their asses handed to them. I can't count how many 23 year olds I've sold houses to who were driving Hummers or a Benz while the wife has a Dooney bag bought on credit. Arugh..

Finally someone else notices that IAFF is no longer written by Casey. RIP IAFF!

Ogg the Caveman said...

What concerns me is the effect on the larger economy. I can ride out the impact on housing, but if this triggers a major recession it's going to hurt just about everyone. Maybe I ought to look into some nice cushy recession-proof gov't job.

Anonymous said...

I like all of the variations on "first." Tony Soprano, you're slacking and getting your ass handed to you on "Firsts." I used to respect you.

Anonymous said...

Let's assume that a house costs $200,000 in anywhere USA. What do you think the cost of that house will be in 2010?

Tony Soprano said...

Actually, I've been working my ass off earning instead of sitting around whacking off online like most of my fellow Realtors. I see the storm coming and I'm reefing sail and battening down. I do like a good "first" though..:)

Tony Soprano said...

PNW $230-240
Merced/Modesto $150-180

Ogg the Caveman said...

You know, the latest IAFF *does* read a bit like Nigel's writing. It's not quite a match though. It almost reads like Cornflake trying to sound like Snowflake.

Anonymous said...

Atl - 220-230k.

The Anti Nigel said...

There are three ways to weather this storm:
1. Buy in SLC where trees grow to the sky.
2. Become an award winning blogger (3rd in a carnival for 4 people) and attract 2759 views.
3. Move to the island for misfit toys.

Anonymous said...

So Tony, why would I want to cash out if I'm at least breaking even on my investment property, while paying my debt down, etc? I know you aren't suggesting that but I keep reading, get out, get out!

I think we are definitely still heading south but I don't follow the doom and gloom.

I'm in a similar boat to "investing not speculating."

Rob Dawg said...

You might consider selling your very nice real estate investments with lots of appreciation and very low costs for the same reason you might have considered selling your very nice NASDQ technology investments with lots of appreciation and very low costs in Feb of 2000.

Investing Not Speculating said...

I like my real estate places and visit them often. As an award winning blogger once said in what quite possibly was an award winning post, you can live in them.

In addition, I plan to make one or more (at some time or another) my primary residence. I really do not feel smart enough to try and sell one or more and then buy them back after prices have dropped.

walt526 said...

"Let's assume that a house costs $200,000 in anywhere USA. What do you think the cost of that house will be in 2010?"

In real 2007 dollars? My guess is about $150k.

I have no idea what the nominal price will be in 2010. As a result of the Fed's mismanagement of monetary policy in last five years along with the trade deficit and boomer retirements, at some point in the near future we're going to head into a period of stagflation that will make the Carter years seem like an economic boom.

Whether or not it happens before 2010, I'm not sure. It could, or Wall Street could find a way to defer the reckoning for a little while longer. But its inevitable, IMHO. And it's going to be brutal, merciless, and very painful.

-walt526

Anonymous said...

Rob, fair enough.

I think they'll be worth more when I'm ready to sell (2015ish). And if they cash flow, with money to spare, I feel I can ride a downturn out. But unlike some of the flippers, I always bought with using some basic fundamentals.

I'm just something closer to what actually may happen. And that author probably bought a years supply of goods to weather the Y2K disaster.

Tony Soprano said...

If your comfortable, by all means, hang on and ride out the storm. Most people who sell now just do stupid shit anyways and take a vacation to Hawaii or buy a Doony bag at Nordstrom. Plus, I feel that location has a lot to do with it. If you're in a fucked area SELL NOW! lol..If you're in one of those sweet spots that is hanging in there, well, why sell if you aren't ready? That old adage "Location Location Location" rings a bell to me.

I so remember margin calls on Intel.....fuck fuck fuck!

Fear the Murse said...

You guys wish you had a cool murse with electronic thingys inside.

Anonymous said...

A new thread is up.

T said...

Rob Dawg said...
Snarky answer; it think it's cute.


You're super groovy. <3

R-Boy said...

i rent a 3 bdr home on wilson blvd near ballston for 1600.

=) renting has its perks, but ill be happier with the place with the mrs.

aaron said...

r-boy.
i go right by there every day on my commute(i take the long way in so i can get mileage in and cruise the mount vernon trail into oldtown). i assume though you are on the portion that operates both ways(as in after the metro stop).

R-Boy said...

I think the other thing that folks need to keep in mind is that if youre already living below your means and enjoy your home and your rate is fixed, then it really doesnt matter

me n the future mrs will be prepaying (using the renter we'll have), and be done with the home equity loan in 6 years. 3 years afterwards the 1st position gets paid off, because we keep living like were paying off two positions

FlyingMonkeyWarrior said...

Great Thread R. Dawg, and I am impressed, as everyone stayed on topic!
Nice.
iw