The housing singularity and other housing oddities – more coverage on financial history in Mildred Pierce about SoCal housing bubble than all local networks combined. Geithner first to trial test his negative equity home as a rental?
Does anyone else find it remarkable how little mainstream coverage was given (is given) to the largest financial crisis since the Great Depression? Home prices have fallen deeper in this housing induced recession versus the economic despair of the 1930s. I know most readers have realized that the tube is simply a method of entertainment and modern version of soma and should be treated as such. Let us not even examine local news in regards to educating the public on what is truly going on. The reality is that so much disinformation is being thrown out that people seem financially paralyzed. For example, most Americans still don’t realize that we are making post-bubble lows when it comes to home prices. Even entertainment that incorporates previous bubbles like the mini-series Mildred Pierce centered in depression era SoCal and focuses largely on Glendale and Pasadena, seems to bring a tinge of déjà vu. To argue effectively that home values will appreciate you have to show why household incomes will increase. There are few that make a well thought out argument combing income and home prices and showing how home values will appreciate. The more data driven arguments seem to project a stagnant housing market something akin to Japan’s lost decades or further declines. What are some of the current trends in housing and more importantly, our economy?
The news isn’t talking about news
Where is the massive appreciation because of low mortgage rates? With a weak economy and most new jobs coming from lower-wage service sector positions with relatively low security, do you think many will want to saddle up with a large mortgage? And this is for the modest $150,000 US home. Let us not even discuss California with an underemployment rate above 20 percent and a budget that is held together with duct tape and a bunch of lucid dreams.
I’m happy that many readers get it as evidenced by the most recent 500+ comments. For every 50 that make the case of a stagnant or falling market with math, economics, and simply common sense, you have some cheerleading real estate with massive blinders on saying “if things go lower, we’ll be in an apocalypse dome and the government will never let that happen…especially on my precious bubble property.” I have yet to find a solid argument why prices in bubble areas will go up and the data is showing prices in these areas are still going lower. Take a look at decreasing values as a percentage for example:
To sum up the chart, we are still in a price falling mode. I doubt most even realize how devalued the dollar has become over time:
Just because you can’t imagine it, doesn’t mean it won’t happen. Always keep this thought in mind. Black Swans are swimming all around us but our human psyche fails to acknowledge the data not directly in front of us. Remember this, not since the Great Depression did we see a national decline in real estate prices. Today we have witnessed a nominal drop of 33+ percent and more adjusting for inflation. If you were to tell people in 2006 that national US home values would fall 30 percent you would have been seen as certifiably insane. Even a 10 percent drop was hardly foreseeable to many. Just because you can’t imagine it, doesn’t mean it won’t happen.
Don’t think that your absurd and obscure property is somehow on the political agenda for the heavily connected. Heck, even Timothy Geithner couldn’t unload his underwater home, remember?
“(CNN Money) The Geithners paid a premium for the house when they bought it in 2004, plunking down $1.601 million after a bidding war. The “exquisitely renovated” home was originally built in 1931, according to a listing for the 0.2 acre property.
“When the house first went on sale it was very evident that he was not going to get what he paid for it,” said Scott Stiefvater of Stiefvater Real Estate in Pelham, N.Y. “He was [bound] to lose some money.”
It’s a familiar story as the housing crisis unfolds across the country. Indeed, after Geithner’s house sat unsold for nearly 3 months, the price dropped to $1.575 million. Still there were no takers, so Geithner listed it as a rental for $7,500 a month, and has since found a tenant.
But it’s unlikely that even such a steep rent will be enough to cover the mortgage, in addition to the $27,000 in annual property taxes. Of course, no one should feel too badly about watching Geithner take a loss. As Treasury Secretary he’s earning $191,300.”
This was back in 2009 and Geithner was one of the early adopters of the “can’t sell, rent the place out” line of reasoning. By the way, the place still hasn’t sold:
Notice how they don’t bring Geithner out anymore to the current circus? Probably not good to have your U.S. Treasury Secretary as one of the 12,000,000 with negative equity announcing a negative equity refinancing plan. He rented the place out for $7,500 back in 2009. So hopefully some people will realize that unless you are part of the massively connected crony capitalist family, your little market is not on the radar hence the continuing drop in prices. I mean if the U.S. Treasury Secretary is resorting to this, and it has been over two years since he listed it, what makes so many people living in bubble area tract suburbs think that the correction won’t hit them?
Low prices and investors not enough to turbo-charge market
If you take a look at California home sales, a market dominated by investors and FHA buyers, you see that fringe buying has been the market for years:
From the late 1990s to 2009 60,000 sales per month were common at some point during the year. We have yet to see one of those months since 2009. Even during the raging mania we were seeing 70,000+ home sales a month. You’ll notice that in the last few months, the momentum of the 50,000+ months has now dwindled in the 40,000 to 50,000 range. The point? Even a near 50 percent median price drop for the state has done little to boost bubble prices or even juice up sales. This is why we have many cities seeing double-digit declines in Southern California in 2011. Very little of this makes the tube coverage because where will you find the time to report this in between the HD traffic report and the morning seven day forecast? The nightly network news? Unless it fits into a 20 second piece you can forget it. They need to make time for the pizza ads, credit card marketing, and online degrees that promise roads to riches (and the implication, more money for that dream home).
History forgotten is dangerous
I enjoyed the mini-series Mildred Pierce, based on the 1941hardboiled novel by James Cain. Mildred played by Kate Winslet lives in the bubble land of Glendale and is married to a failed home builder. I won’t give the story away but it also touches on prime Pasadena. Of course the location is simply the backdrop here but we get more information on this fictional mini-series compared to what we get from news that purports to cover “things that matter.” Like which gas station is going to save us half a cent is “breaking news” and every network covers the same story at the same time. In case the point isn’t made, Southern California has been in a massive bubble before and we would have to go back to the Great Depression to find a comparable time. Even a hardboiled genre novel writer in 1941 had a good sense of this.
I usually get a few e-mails about what good books serve as primers on bubbles and economic history. I recommend the following:
-Frederick Lewis Allen for US history is fantastic (Only Yesterday, Since Yesterday, The Big Change)
-Walter Bagehot is a must
- Charlie Kindleberger (Manias, Panics, and Crashes, The World in Depression)
I also recommend Nassem Taleb’s Black Swan and Fooled by Randomness. The good news for most of us is that we do live in a time where we can share information relatively easily and in real-time. Can you imagine if network television was your only source of information? You would think that this technology would make bubbles harder to come by but in this recent bubble, too many people online were talking about their 15, 20, and 25 percent year-over-year gains in real estate that the herding went into overdrive. If the magnitude was amplified because of information, will the pop be that more significant because of information as well?