Housing bubble ?

Good idea, Debbie! Give some landlord your money every month and save what is leftover for retirement. Have you ever heard of the home mortgage interest deduction?

It's fantastic! I get the government and morons who rent to subsidize my monthly mortgage payment. The tax savings then get put into my retirement portfolio. That write-off then also allows me to put more pre-tax income into my 401K plan. Throw in some other big deductions like partial reimbursement of my kid's daycare costs and, voila! I pay virtually no income taxes and have more to spend as well as more to save!

Only an idiot would trade their house in Ohio to move to a high cost-of-living state like California. The smart money is now buying retirement property in Mexico, Costa Rica, The Dominican Republic, and Nicaraugua. You can enjoy warm weather, cheap living, and the sound of Spanish being spoken without the costs and aggravations of Florida and California.

I don't know what sources your inflation calculator uses, but if you use any of the three common measures of inflation: CPI, PCE & GDP Deflator, you see that the recent boom is not much stronger than the one of the late 1970s

GDP Defaltor

Year Homes Inflation Real

1976 8.2% 5.8% 2.4

1977 13.5% 6.3% 7.2

1978 15.9% 7.0% 8.9

1979 15.7% 8.3% 7.4

1980 12.1% 9.1% 3

In real terms, homes increased 32% during this period.

Year Homes Inflation Real

2001 5.2% 2.4% 2.8

2002 8.8% 1.7% 7.1

2003 7.2% 2.0% 5.2

2004 9.3% 2.6% 6.7

2005 13.1% 2.8% 10.3

In real terms, homes increased 32% during this period.

PCE

Year Homes Inflation Real

1976 8.2% 5.6% 2.6

1977 13.5% 6.5% 7

1978 15.9% 7.0% 8.9

1979 15.7% 8.8% 6.9

1980 12.1% 10.7% 1.4

In real terms, homes increased 29% during this period.

Year Homes Inflation Real

2001 5.2% 2.1% 3.1

2002 8.8% 1.4% 7.4

2003 7.2% 1.9% 5.3

2004 9.3% 2.6% 6.7

2005 13.1% 2.6% 10.5

In real terms, homes increased 37% during this period.

CPI

Year Homes Inflation Real

1976 8.2% 5.8% 2.4

1977 13.5% 6.5% 7

1978 15.9% 7.6% 8.3

1979 15.7% 11.2% 4.5

1980 12.1% 13.5% -1.4

In real terms, homes increased 22% during this period.

Year Homes Inflation Real

2001 5.2% 2.8% 2.4

2002 8.8% 1.6% 7.2

2003 7.2% 2.1% 5.1

2004 9.3% 2.6% 6.7

2005 13.1% 3.2% 9.9

In real terms, homes increased 35% during this period.

So in summary,

GDP Deflator shows that the real increase in home prices was the same from 1976-80 as it was from 2001-05

PCE shows a 37% real increase in home prices from 2001-2005, versus a 29% real increase from 1976-80

CPI shows a 35% real increase in home prices from 2001-2005, versus a 22% real increase from 1976-80.

If you average out the three indicators, it shows that the recent boom in home prices resulted in a real gain that was 7% higher over 5 years, versus the boom of the late 1970s.

I would argue that the recent boom is not as much out of whack with past experiences as some have indicated in this thread.

1) So, in effect, you are conceding that maybe some local neigborhoods might see 50% declines in price, but no major markets will and certainally not nationwide.

2) Yes the Fed dropped rates quickly in '82, which softened the blow to the housing market. Who's to say they wouldn't cut quickly in 2007 if we had a recession? And keep in mind that a few months after they finished cutting rates in Feb '83, they started jacking them up again in June '83 and by the summer of '84, the Fed Funds Rate was at 13%, up from 9% in 83, and mortgage rates rose from 12% to 14% during that period. And the housing market actually improved.

Don't start with the "tax write-off" argument. Using that argument is tantamount to saying, "Hey, I just got f***ed in the ass, but at least I got a reach-around!!!!"

Every dollar you spend on property taxes is deductable, so you may get 30 cents back on the dollar. So you're saying that spending a buck to get 70 cents back is a good idea? I don't think so. You pay virtually less in income taxes because you already paid through the nose on your property taxes! Those other deductions are great if you can get them, but really have nothing to do with whether real-estate is as good of an investment as most people think.

The smart money doesn't live in the property they buy. That's why they are the smart money. Smart money sells the property to the dumb money, and even lets them have the priveledge of borrowing the money to do it. The rich get richer, and the poor......well, not so much.

Yawn. Snore.

Interesting. Let's see...I pay no income tax thanks to our nation's byzantine tax codes. My annual property taxes are only $2200 a year. I live in a state with no sales tax. The house that I do own is a real asset and the fixed rate mortgage gives me a predictable monthly cost of housing that cannot be magically increased by "market demands" or because the landlord has a mistress/gambling problem/coke habit. It won't go condo or be turned into a parking deck and the interest that I will end up paying to the bank will mainly be paid by others thanks to our tax codes.

So my wife and I enjoy six figures for roughly $1600 a year in taxes? Damn! I am getting hosed. I feel like such a loser right about now. I'm going to drive home, grab a double Glenlivet, slip into the hot tub and think about my bad lot in life.

You should see my beach place in Mexico - beautiful!

i applaud your effort, californian, but you and i both know that home values in the hot markets went up a hell of a lot more than that between 2001 and 2005. you are using nationwide data to hide the senseless, rapid increases in several hot markets. you've already cited solid numbers for the cumulative increases in those markets, and they are much higher than the numbers you have in this most recent post.

i still maintain that we have never seen something like we have seen in places like miami, dc, vegas and san diego over the last 4 or so years. and i stil can't figure out why someone would look at the data released in the last 2 days and assume that we have reached the beginning of a stable plateau as opposed to the beginning of the downslope of a bell-shaped curve. what law of economics and/or common sense allows for a rapid increase in the price of an item that is not tethered to an increase in demand and/or a decrease in relative supply to avoid reversal?

maybe i should go buy dow 30,000 or other books from the late '90s explaining how tech stocks were "different".

maybe real estate was different when nearly all single family home owners were occupying the houses themselves. but now many are owned by investors, including "flippers", and many are owned by people in financially unstable positions who are relying on increased appreciation at rates that we are just not going to see.

You make some very good points. I don't doubt that many hot local markets like Miami, Las Vegas, etc rose much more than the national average over the past five years. However, even 100-140% price increases within 5 years are not necessarily unheard of in this country. I don't know much about RE history in Miami & DC or Vegas, but I know in California for example, medium home prices in LA & SF rose an average of 20% a year for five years during the late 70s. You do the math on what the aggregate increase would be, but using the rule of 70, home prices double in 3.5 years at that rate of increase. The LA & SF markets did not crash in the early 80s. They fell 1% in '82, increased at a rate slower than inflation in '81 & '83 and by '84 were rising faster than inflation. Even after the late 1980s boom, home prices in SF declined 10% peak to trough and in LA declined 20% (which as I pointed out earlier owed partly to the job losses in the defense industry in socal). I would not be suprised to see a 10% drop in home prices over 4 years in over-heated markets. Even 20% wouldn't totally shock me. But I just see no way that any market (outside of a local neighborhood with a population of 5,000) would decline 50% - in nominal or even in real terms.

I'm sure your place in Mexico is beautiful. Enjoy! However, please explain how the interest you pay on your mortgage is paid by others thanks to our tax codes? You are the one with the mortgage, so you are the one responsible for the interest on the principal amount. Every dollar in interest you pay to the bank over the life of a 30-year fixed rate loan (more than the purchase price of the house) is a dollar out of your pocket, only to return as a 30 cent (or so) tax credit to you. You are still down 70% (or so) on every last dollar of mortgage interest you pay. This necessarily must be deducted from the inflation-adjusted appreciation you may receive from holding the house to calculate your net ROI, adjusted for inflation. You'll find that figure to be surprisingly small on an annualized basis, if not grossly negative. On top of that you still have a myriad of carrying costs associated with owning a home - from painting the porch to replacing the roof to re-doing the kitchen, to buying a lawn mower to mow the grass and on and on and on. Its a money-losing proposition.

That's great that you pay so little in taxes but the reason is because you already paid what you otherwise would have in taxes to the bank in the form of interest on your home. The government structures the tax code this way to give people a shabby economic incentive to purchase real-estate. Most people fall for it, I don't.

Your post makes it sound like you are living comfortably and for that I applaud you. Your house is something you live in, NOT an investment. If you buy a house, understand that it is a lifestyle choice, and NOT an investment. Buying a house for the right reasons, i.e. as a lifestyle choice, to raise a family etc.... is just fine. Just don't think you are making some sort of financially saavy move - you aren't.

fair points, californian. as long as you are not in the real-estate-prices-can't-fall camp, which, from your posts, it is clear that you are not, we're basically on the same page. 10% drop, 25% drop, in either case, some good people who drank the kool-aid are going to get hurt.

the sad thing is it will be the buyers who can least afford to get hurt that do. the ones who shouldn't have even qualified for a mortgage, and definitely shouldn't have been encouraged to use an interest-only or a "negative amortization" loan.

my biggest beef in the real estate arena is how many in the mainstream media write articles that basically say you can never go wrong buying real estate. some basic number crunching, taking into account the opportunity cost of tying up your money in a stagnant asset and taking into account transaction costs, will demonstrate that in the 3-5 year time frame, you will only be in a better position financially as a result of owning if prices go up a fair amount, probably around 3% per year (assuming today's rents vs. home prices).

Don't Blame the Market for Housing Bubble

March 19, 2007

"The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions. Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%. Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages.

When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and “predatory” mortgages. We’ll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.

But capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy-- through the manipulation of interest rates and the creation of money-- caused the artificial boom in mortgage lending.

The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly.

This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fed’s easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed.

The actions of lenders are directly attributable to the policies of the Fed: when credit is cheap, why not loan money more recklessly to individuals who normally would not qualify? Even with higher default rates, lenders could make huge profits simply through volume. Subprime lending is a symptom of the housing bubble, not the cause of it.

Fed credit also distorts mortgage lending through Fannie Mae and Freddie Mac, two government schemes created by Congress supposedly to help poor people. Fannie and Freddie enjoy an implicit guarantee of a bailout by the federal government if their loans default, and thus are insulated from market forces. This insulation spurred investors to make funds available to Fannie and Freddie that otherwise would have been invested in other securities or more productive endeavors, thereby fueling the housing boom.

The Federal Reserve provides the mother’s milk for the booms and busts wrongly associated with a mythical “business cycle.” Imagine a Brinks truck driving down a busy street with the doors wide open, and money flying out everywhere, and you’ll have a pretty good analogy for Fed policies over the last two decades. Unless and until we get the Federal Reserve out of the business of creating money at will and setting interest rates, we will remain vulnerable to market bubbles and painful corrections. If housing prices plummet and millions of Americans find themselves owing more than their homes are worth, the blame lies squarely with Alan Greenspan and Ben Bernanke. "

Thoughts?

After 9 straight years of appreciation, my area of California has flattened out and lost .4 percent value in year over year numbers.

I wouldn't call that a bubble bursting.

The median prices of homes in Los Angeles has continued to increase but there is more inventory on the market.

From the LA TIMES.

L.A. housing market holds its ground Never mind a sales slump and now sub-prime uncertainty, prices are on the rise. By Diane Wedner, Times Staff Writer March 18, 2007

Whom do you believe? Last week came the gloomy news that the number of U.S. homes entering foreclosure is rising, and with it, more experts are predicting a meltdown of the sub-prime lending market.

But that stares in the face of median home prices in Southern California still climbing the first two months of 2007, compared with 2006. In L.A. County, the median rose 8.2% in the two-month period, to $525,000. Yes, fewer houses were sold, but the number remains well above the mid-'90s slump.

Conventional wisdom late last year was that a downturn would stretch across the board by now and most segments have seen appreciation declines and sales drop-offs but the high-priced market, usually the first to head south, still is "doing just fine," said John Karevoll, chief analyst at La Jolla-based DataQuick Information Systems, a research firm. The low- and mid-ranges, he added, are performing satisfactorily.

Experts are not sure why the L.A. market is doing better than expected. One explanation is that sellers have been pricing their homes more realistically, and buyers get that sellers aren't giving away their homes in a fire sale, said Leslie Appleton-Young, chief economist for the California Assn. of Realtors. As a result, the sales dropoff has slowed, giving everyone a breather.

"The year 2006 was a steep learning curve for buyers and sellers, but we didn't plunge into the abyss," Appleton-Young said. "Buyers who were on the sideline in 2006 are back in."

In the six counties of Southern California, the median price of a home the point at which half the homes sell for more and half for less was $489,500 in January and February combined, up 5.5% from the same period a year ago, according to DataQuick. San Diego County reported the steepest decline: 5.9%, to $475,000.

"Prices are still cooking," Karevoll said. They hit a record for L.A. County in February, rising to $528,000, up 7.8% from a year ago. Orange County's median price, however, dipped 0.4%, to $620,000.

Sales continued to fall the first two months of this year, but at a less torrid pace than in mid-2006. Sales in the Southland's six counties fell 18% from a year ago. The Inland Empire posted the steepest decline, at 33.1%.

Some housing experts believe the market may be nearing the bottom. This spring and the next six months will be "very informative," said Delores Conway, director of the Casden Real Estate Economics Forecast at USC.

"Much depends on how much the supply of existing homes go up, which could push prices down," Conway said. "If there are sufficient buyers out there, though, that won't happen."

All of this is small comfort to the borrowers with bad credit who jumped at the chance for easy money and signed up for mortgages much larger than they could handle. They figured their homes would appreciate and D-day (due day) wouldn't come. Well, it did.

The big question swirling around the water cooler today is how big an effect the sub-prime lending industry's burgeoning meltdown will have on home buying and Wall Street. First-time buyers, especially, will have difficulty pulling together the 20% down payment required for conventional loans, experts say.

The percentage of U.S. mortgages entering foreclosure during the fourth quarter last year rose to 0.54%, according to the Mortgage Bankers Assn., the highest since the group began issuing reports in 1972. Of California's 5.6 million mortgages, 0.15% entered foreclosure and 3.25% were delinquent.

Among California's 806,022 sub-prime home loans, nearly 11% were delinquent, compared with 13% nationally. To put this into perspective, a small percentage of homeowners who are late with their payments end up in foreclosure. The majority refinance or sell.

Not all experts are worried.

"The fact is, the vast majority of those who buy homes do it with straightforward mortgages," Karevoll said. "Sub-prime lending is a sub-category of a sub-category. There is a ton of mortgage money out there."

Fears prompted by the rising numbers of homeowners entering the foreclosure process a glut of such homes could spark price declines also are overblown, Conway said. Although there are more today than during the 2004-05 boom, she said, delinquencies are at historically normal levels.

The bottom line, experts say, is that no one can predict exactly which way the market will go this spring, traditionally the top season for buying and selling.

"There's a lot of uncertainty floating out there," DataQuick analyst Andrew LePage said. "It's hard to be bullish or bearish at this point."

You used an article that quotes Leslie Appleton-Young as something other than catch paper for rabbit dropings?

She's nothing more than a corporate mouthpiece. She's an "economist" for the Californian Assoc. of Realtors. There's a bit of bias to her words.

Totally agree with you Debbie Downer. You are leaving out another important factor though. Selling your house costs money. A lot of it. Most people pay real estate agents to list there house. That is 3% of your home's sale price. Then you have to pay the agent that brought you the buyers. That is another 3%. In the current market conditions, it is likely that the seller pays all or most of the closing costs. Sometimes you even see further incentives, especially in times like these (HOA fees, money for upgrades, Plasma TVs). Unfortunately for most, they stay on the hedonistic treadmill even longer.

Sometimes it's better to own; sometimes it's better to rent. There are great reasons to do both -- depending on circumstances. This is clearly not a great time to buy. It's still a very good time to sell if you can make your place stand out among the massive glut on the market.

This is the most telling chart of seen showing about a 0.1% inflation-adjusted return on housing over 100+ years, followed by an astronomical spike over the past decade.

http://graphics10.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

debbie downer wrote:

[quote]hayward102 wrote:

If you downsize and stay in the same area of the country, then yes I agree. However, the equity realized through this method has been received through an exceptionally poor rate of return above inflation (real return on investment). Real-estate historically has avereged only 2% above inflation, and the bank charged you 6,7,8% on your mortgage.

That's only part of the story, though. Assuming inflation is 4%, even if your annual appreciation is only 2% above inflation, or 6%, that's 6% of the value of the house, not just the 6% of the amount that you put down on the house. As the financial advisors like to say, your investment is "leveraged." Say you put down 50,000 on a 400,000 house. The 6% appreciation applies to the $400,000, not just to the $50,000 you put down. I think you'll have a hard time finding anyone who will lend you 350,000 to invest in, say, stocks.

Also, the mortage interest rate applies only to the amount of the loan, not to the entire value of the house.

Aiyayaiyayai wrote:

I think you'll have a hard time finding anyone who will lend you 350,000 to invest in, say, stocks.

Also, the mortage interest rate applies only to the amount of the loan, not to the entire value of the house.

Well said. You'll also get to sell your house without being taxed, and you'll deduct a lot of the interest from the taxes you pay on ordinary income, usually. It's a coup in a rising market.

In a falling market, however, you pay interest on a dwindling asset, and the costs of buying/maintaining/repairing/selling are tantamount to paying 10% commissions stock trades (i.e., you wouldn't dream of it).

Ask Alberto Gonzales about it, he won't be under oath any time soon though. Just as with the Oil Company CEO's.

F*ck the Senate.

I've given up on our government (both sides) and watch it all for the entertainment.

What makes a person respond to a thread that is over 5 months old?