Why the Housing Market Has Failed You. 5 Major Failures of the Housing Market
I’m sure many of you already read the article about The Real Estate Prayer Luncheon in
There are 5 major failures with the current housing market. There are more, but 5 large items that need to be addressed immediately since they will impact the market in the next few months. Anyone buying a home in this market is tempting fate; it is reminiscent of the woman who stuck her arm in a Siberian tiger’s cage and had it ripped from the socket. Nature does what it will always do. And housing economics and bubble psychology will always do what it always does. All market indicators are blinking red. By reviewing MLS data, nearly every large metro market in the
Major Foreclosures Will Hurt the Public
Losing your home royally sucks. I’m not sure if we can find anything positive about foreclosures. It hurts families. It also displaces families and forces new inventory on the market via REOs. Sometimes foreclosures happen because a person loses a job or a family emergency. In usual housing markets, this was the majority of cases. Now, the majority of foreclosures are due to buying more than you can afford. Are you going to feel sorry about the person that bought a $700,000 home on a $14,000 a year income only to realize that maybe $6,000 a month is too much when you net $1,000? Maybe the blame should fall a little bit on the agent hungry for their commission check wouldn’t you think? Even a back of the napkin calculation will show you this wouldn’t work.
The demise of many sub-prime outlets is justified. They created their undoing for instant gratification and fast money. Easy come, easy go. When I worked as an agent, I would constantly hit heads with brokers that laughed about creative financing they were able to pull on buyers. I would look at financial statements and shake my head as buyers fudged numbers encouraged by brokers to get into overpriced homes. “Don’t worry, banks never check especially if we go stated income. All we need is your signature here stating you make $100,000.” I would hear statements like this constantly and this was a few years ago. God only knows what has been going on in the shady underbelly of housing since I left the industry. Oh yeah, we are already seeing what is going on. Ridiculous loans on massively overpriced homes with folks unable to afford the monthly payment.
Now foreclosures also hurt the market because it adds further inventory to a market that is reaching epic numbers. Prices are falling in many regions already. Many in
So we have plenty of data showing that many zip codes in
And notice of defaults are up a record 148% statewide. What this means is more foreclosures coming online in the next few months and growing inventory further pushing the median price down. And this isn’t just for
Mortgage Debt Largest Debt in the
Consumer spending makes up 70% of the $13.7 trillion dollar US economy. Mortgage debt has increased at a radical pace due to underwriting standards and the lax monetary policy taken by the Federal Reserve. Take a look below at the growth of mortgage debt in the
You’ll notice that in a matter of 5 years, we practically doubled the outstanding amount of mortgage debt. Mortgage debt outstanding rivals the amount of consumer spending that makes up 70% of our economy. Now you can understand why a spook in the mortgage market will send the market into a tailspin. The interesting thing to note is that as mortgage debt increases each year by double-digit figures, according to our government plutocrats we are facing very minor inflation. Too bad for most middle-class Americans, housing payments are the largest line-item payment each month. Oh yeah, and based on ridiculous hedonics used at the Bureau of Labor and Statistics, we are facing moderate 3 to 4 percent inflation according to the Ministry of Truth. Keep in mind they use owner’s equivalent of rent, take out energy and food prices, and pretty much anything useful for a daily life. As a consolation they’ll adjust for electronics since we buy computers and HDTVs on a weekly basis. Good job government.
We know how scared the market is right now. Remember long ago (in March 2007) with the sub-prime implosion and the stock market dropping 400+ points in one day? Fears of mortgage implosions sent the market down hard. The market recovered quickly because all the talking head pundits would have you believe that it was contained principally to the sub-prime market. They also discussed in great detail the legend of the summer housing easter bunny and how the market will come roaring back. Summer is here and no bouncing bunnies are to be found. We now have Bear Sterns issuing warnings about Merrill Lynch pulling assets out of a mortgage hedge fund that made idiotic bets. Bear Sterns and Merrill Lynch are not New Century Financial. This is as prime as it gets. Bear is throwing money to keep this afloat because it is a major embarrassment to their asset management. The market got hit once again and bad money is chasing more bad money to keep the party going a little bit longer.
Keep in mind that we are only entering the first stages of trillions of dollars in mortgage resets. Nothing is contained. The main question everyone should be asking is can the American public sustain monthly payment jumps while real estate prices fall? If the answer is no, how long can the market withstand jumping resets and foreclosures before a panic arises? Ronald Reagan had one thing right when he said a “Recession is when a neighbor loses his job. Depression is when you lose yours.”
Public Infatuation with all Things Real Estate
Never has the industrial world been so infatuated with real estate. Turn on your television and you’ll see shows such as Flip this House and Extreme Makeover. If you are up passed 1am or stay home on a weekday from 10-2pm, you’ll see infomercials with tanned Hawaiian shirt wearing gurus showing you how no money down is the key to financial success. Robert Allen actually was a pioneer of the no money down technique. The funny thing is that his ideas were geared toward sophisticated investors that were able to get sellers to buy/create notes, assume mortgages, and find short-term carry over loans. Not easy at all for anyone that has tried it. Reading his books, I learned a lot but it was not simple like the title implied. Fast forward to now. No money down is institutionalized. Forget no money down, we have lenders giving you cash-back at closing! By the way, cash back at closing is illegal but so is lying on a mortgage application but apparently what is illegal in one area of justice, is perfectly okay in another.
Then we have the boom of Home Depot and Lowes. Stores that cater to the housing infatuation. Ceramic tiles, granite countertops, pseudo-rock pool fountains, stainless steel stovetops, and everything that would arouse a housing enthusiast. These things don’t come cheap. They are expensive and for practical purposes, don’t do anything else than visually make your home look better; a boob job for your house or a tummy tuck for your condo. But wages haven’t increased in relation to other cost of living items. How can Americans afford this? Come in American Express and Visa to the rescue. Americans carry an amazing amount of credit card debt. Debt that usually has rates of 20%+ and has so many penalties, you’d think you were at a Detroit Red Wings hockey game. Yet home prices kept climbing and Americans needed more credit for their growing consumption appetite. Welcome home equity withdrawals.
*Source: The Economist
To keep up with the hunger of spending, folks decided to slap a virtual Diebold ATM to their house, and start pumping out equity at amazing rates. The sun was bright again and grass was greener on your
Redefining Failure and Success
We’ve all heard about the 25 year old mortgage broker making $15,000 a month. Or the 22 year old agent with a high school diploma raking in six-figures a year simply for showing houses. We’ve also heard about a 24 year old investor that went $2.2 million in debt with an income of less than $40,000 a year. The theme? Getting rich quick isn’t enough. Getting rich young became the new standard. Forget about education because school is for elites who care about issues surrounding the world. Street knowledge and the love for the almighty dollar became the new Mammon.
We obviously live in a capitalist society. Yet this ideal breaks down when you have a system flooding the market with easy credit and encourages frivolous and downright idiotic spending. The public subsidizes this spending on the back of false inflation numbers and a higher cost of living. Think this isn’t the case? Go to Europe and see how far your dollar goes. You have a market telling you that saving is pointless. Why save when bank rates are giving you 1% and real estate is making you 20%? Interesting to note that historically real estate trends with inflation, which we already mentioned by the government’s own data, is hovering around 3 to 4 percent. So if we are to use logical thinking, this would imply that either inflation is amazingly understated or housing is incredibly overpriced. I knew basic college logic and philosophy would come in handy at some point in life.
But I have a news flash for you. Failure is wealth. Amazingly, we have folks to be proven bad at what they do, claiming to be experts! They are passing on their real estate horror stories as a method of investing. Call it what it is. An idiot with a fascinating story garnering massive attention and creating a social epidemic; like Paris Hilton going to jail. But no way can you call these people gurus or investors. Last time I looked at a dictionary investing meant making money, not losing it. To go further with this,
You should be a guru too! Your voice has as much weight as others. Here is the recipe for success. Do everything possible to fail; gamble, cheat, commit fraud, and smoke weed because we all love a good joint. If you can, do these things all at once. I haven’t had any luck combining all four but maybe you can succeed where I failed. Then, make it all public. Get the paparazzi to follow you or chronicle it online. Don’t commit crimes that’ll put you away for life, that’ll defeat the purpose. Mortgage fraud seems to be okay so go for that one. Then, decide to write a book and ride the gravy train to Tuscany. See! And you wonder why I’m writing a book? It is the key to riches in this country baby!
Destroying the Middle Class Psychology
Hard to believe we are only entering the first stage of this bubble. Bubbles follow a systematic pattern. Below you can see the typical cycle of any bubble:
*Source: Real Estate Decline
Currently we are between denial and fear. You still have your delusional sellers pining for yesteryear prices but a market with growing inventory from builders and REOs is quickly changing the pace of things. As far as bubbles are documented, data going back to the 1600s, this pattern is typical and rarely fails to follow through. Timing is always an issue but the stages seem to hold true.
So what does this do to the middle-class? What is the middle-class after all? We always hear political pundits using this term. Well in terms of median income for the
*Source: CNN Money
And 70% of all households own their home. Keep in mind that the net worth statistics include a large portion of equity in home. So even though the numbers may look high, it is because we are in a nationally distorted housing market. So you can see that a national decline in housing will impact a large portion of Americans. I’m fascinated with the 70% number. 70% of our economy is based on consumption and 70% of Americans own their home. Coincidence? I think not. What say you dear public?
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June 23rd, 2007 at 1:36 pm
It pretty much is immoral how good your blog is…
June 23rd, 2007 at 4:14 pm
Bravo! Very well written. Excellent graphs. The only thing wrong with it is that it isn’t on the front page of the LA Times and USA Today!
I appreciated your thoughtful summary.
June 23rd, 2007 at 7:47 pm
I am a real estate appraiser and have seen several boom and bust cycles. However, I have never seen anything like this one. I don’t think the average person really understands where we are heading. Right now, approximately 80% of my business is foreclosure appraisals and a expect that percentage will increase. It’s a shame the lemmings have been misled to the cliff of insovency just to make a buck. (mortgage brokers). Good luck to those who thought the increase in home values would go on into infinity.
June 23rd, 2007 at 8:00 pm
Nice post Doctor!
You are right about the high end still selling. A nice home with good curb appeal and the inside done up nice will sell at the “lunatic” pricing.
I am talking about homes in the 800k range in the San Gabriel Valley(Alhambra, San Gabriel, Walnut, Diamond Bar etc). I don’t know where these people are getting the income to pay for this, though I would love to know what type of financing was used. And lets not forget property taxes and upkeep.
Most buying now will be added to the foreclosed heap in a few years I suppose. Or maybe not…I just dont know what to make of this.
Time will tell.
June 23rd, 2007 at 8:01 pm
I had the most dishaertening conversation today. I’m a banking industry regulator and very few people i know have any idea of what I do. I ran into a casual aquaintance today. he proceeded to tell me of the two homes he was having built in Tucson and how he was going to make a killing on them. Here’s the poop; this turd is a wire twister for aliving. No talent, simply pulls wires through conduit. he makes 36k a year max. He has 700k tied up in two loser houses. he said, ‘no big deal, if it fails I didn’t put any money down’ How can you even begin to punish someone like this? Yout ake away his wealth, income or pride, he has none. Some bank somewhere is going to get shtooped and he’s one of millions. Who in the world told a human mule [his job absically. Mules are just too big to get into the workspace] that he can invest? I have LOADS of inside info and I don’t invest in housing! I heate them all. A strong word, but damn, how stupid can your average mule be? My only hope is that they drive rates up to 15% or so. I made a killing during the Carter years by paying attention, I sure plan on doing it again
June 23rd, 2007 at 9:46 pm
I too am an appraiser. It never fails to amaze me how borrowers don’t even have the money to pay my appraisal fee (therefore I have huge surcharges for COE payment). You know, you can serve 20 years in prison and then go be a mortgage broker, I have dealt with characters I cannot even begin to describe. However, the biggest tragedy of all in regards to appraising is the rise of these so called AMC’s Appraisal Management Companies, and they service some HUGE banks. Is it really ok that Countrywide OWNS Landsafe, an AMC? Is that really appropriate? One big AMC, who will remain nameless, only asks that you fill out a form so they can send you discount work. They do NOT even ask for a sample/ demo appraisal, can you imagine? It is the appraiser who really sees the underside of this toilet industry.
June 23rd, 2007 at 10:24 pm
Yeah, a quite excellent read: I think it’s your best essay yet!
I like how you tie the cultural fascination with photogenic losers (like CS and PH) who fail so spectacularly, and then attempt to monetize their ‘nada’ notoriety afterwards (I see Casey supposedly has been offered $100k for his blog! If so, he should create 22 websites and sell them: at least he’d break even on the $2.2 Mil he’s lost).
Of course, Paris is famous for absolutely nothing, except her family name (i.e. nepotism). In this day and age, who knew nepotism and royal lineage mattered? Who cares if you have no talent or skills, just as long as you have a famous pedigree? Can you say Bush?
@@@@
Just one comment on a typo: isn’t that supposed to be Horatio Alger (not Alder)?
June 23rd, 2007 at 10:44 pm
“Keep in mind that the net worth statistics include a large portion of equity in home. “
Why only a “large portion of equity in home”?
I thought the networth excludes any portion of equity in primary home. Can you double check this point?
June 23rd, 2007 at 11:15 pm
Mr Vincent said:
Most buying now will be added to the foreclosed heap in a few years I suppose. Or maybe not…I just dont know what to make of this.
Time will tell.
Time HAS told. Only look at the real estate rush in South Florida in the 1920’s, and we had all the same ingredients: speculative buyers using leveraged funds, thinking that the real estate frenzy could go on forever.
You had shady buyers who simply were greedy (not brilliant financial managers), who felt they were geniuses when the road to success simply boiled down to being at the right place at the right time.
Many of the mansions in Florida were palacial, costing millions of dollars. Amazing, when you realize these amounts did NOT correct for inflation! We’re talking about $2.5 Mil in 1920’s dollars!!
After the market crash/depression, prices were maybe 2-5% of what the peak buyers paid. Easy come, easy go. Prices remained depressed, taking maybe 50-60 years to slowly appreciate.
Here’s some very interesting reading for those who don’t recall the history. As the old saying goes, those who forget history are bound to repeat it.
Rags to riches real estate developer in the 1920’s:
http://tinyurl.com/ytr8lk
Anatomy (postmortem) of a real estate crash:
http://tinyurl.com/2ahh9j
An article from the SSA’s employee’s newsletter (1979), explaining how we could NOT have another depression:
http://tinyurl.com/yoog36
Love the article’s conclusion:
What had caused the Crash? The
main reason was excessive specula-
tion. People were able to buy stocks on as much as 90 percent margin (which meant that they only had to pay 10 percent of the stock’s value).
The market was also subject to a
great deal of insider manipulation,
pyramid schemes, etc., which added
to the instability of the market.
Another reason for the Crash was
the psychology of the market. The
bull market had prospered in wild
dreams, while the bear market that
followed was consumed by its own
nightmares. Selling led to more selling, and the process fed upon itself.
The causes of the Great Depres-
sion of the 1930s included the wipe-out of individual savings and business profits in the Crash, the rapid drop in production that followed, and the banking crisis mentioned above.
Most economists believe that we
will never have another Great De-
pression. Paul Samuelson, in his
basic text, Economics, states that
“economic science knows how to
use monetary and fiscal policy to
keep any recession that breaks out
from snowballing into a lasting
chronic slump.”
Federal regulatory agencies such
as the Securities and Exchange
Commission (SEC), the Federal
Trade Commission (FTC), and the
Federal Deposit Insurance Corpora-
tion (FDIC) have the authority to
combat excessive speculation and
unsound business and banking prac-
tices. The FDIC also assures savers
that they will get their money back
if federally regulated financial institutions fail.
Samuelson and other economists
cite certain built-in stabilizers in the economy as preventing any depression. These stabilizers are Government payments that increase during recessions when unemployment increases.
Social security, welfare payments,
and unemployment compensation
are the three main automatic sta-
bilizers. Nonautomatic stabilizers-
that is, those requiring legislative action, such as lowered taxes and public works projects- could also be used to prevent a recession from turning into a depression.
We may have economic crises in
the future, but another Great De-
pression is as unlikely as another
era like the Roaring Twenties.
Wow, comforting to know that we’ll never see anything like the Roaring Twenties, huh?
June 24th, 2007 at 12:45 am
Anon 4:14 & Matthew,
The sheeple were led to the slaughter. Take some expert witness education. This thing is going to get really really ugly. Do all the review work you can, even though the fees sometimes suck, its been my pleasure to turn in all the skippy boys n girls I can. I actually saw on the OREA website that one of my scummy compatriots had his license revoked. That said, if they revoked it I know that OREA had a lot more in his file than my cherry picked appraisal of his with falsified closing doc #’s.
COD at the door, for anyone you don’t know and for those you do do 14 and 28 day terms with increasing fees.
Cheers and assume crash positions!
June 24th, 2007 at 6:49 am
Someone needs to investigate the massive fraud being done by new home builders and their mortgage company off-shoots (so called in house lenders).
We all seem to forget that when you buy a new house the UPGRADES are included into the mortgage, gone are the times when you had to come with at least 10-50% money down on upgrades like flooring, appliances, blinds and shutters and such. Now, even the dumbest home buyer with 80/20 loans, zero down, adjustable balloon can add almost $100,000 in worthless “upgrades” to their “castle”.
I have several examples in my immediate neighborhood and know these people. Not a pot to piss in but managed to add $90,000 in paved drive ways, disgusting bronze ceiling fans, rubbed kitchen cabinets, bronze fixtures, pool…and so on. I know that this was all rolled into their stupid mortgage. Your guess where they will end up in couple of years, back in the trailer park where they belong, and our idiotic politicians want to bail this kind of human garbage out! These people are not unedjucated, master degrees and good jobs but completely caught up in the “I deserve it” frenzy.
One prime example: base prise 440k, after a spending spree the mortage deed is 750k, and of course the usual zero doen and liar stuff like that, just appeard in the foreclosure listings!
Nobody wants to know about this, I wrote a letter to HUD, I called state agencies and so on. Nobody cares.
June 24th, 2007 at 7:10 am
Hooray for Dr. HB!
One of your best posts. Fitting that it should begin with the REIC players assembling in FLORIDA to pray for the RE market not to crash any more!
I, like a few on this blog, profited from this insanity by buying a new house in San Diego in 1999 and selling in 2005 for quite a windfall. I had no idea during most of it what was driving up prices to insane levels. Too bad, too, because I really liked that house…but I had bought it to sell.
I found the reference to Bear Stearns intriguing. I’ve been wondering who was gonna get stuck holding this hot potato bag called MBS’s and CDO’o. One tale I heard Friday was that Merrill Lynch is coming with a band-aid bailout of 3.2 billion (for a fee, of course) and selling the package to whom? Teacher’s retirement trusts. Yep, you heard right. I saw a quote from a North Carolina “Trustee” saying “Merrill assures us we are getting quite a discount.” Uh, huh.
I was around for the S&L blowup of the late 80’s and early 90’s and it got pretty ugly then. This time around, it looks to me like it’s gonna run a lot longer and deeper.
Again, great post.
June 24th, 2007 at 7:12 am
Turdly said:
Who in the world told a human mule [his job absically. Mules are just too big to get into the workspace] that he can invest? I have LOADS of inside info and I don’t invest in housing! I heate them all. A strong word, but damn, how stupid can your average mule be?
So suppose you told everyone what YOUR secrets to investing are? It actually might benefit YOU, but SOMEONE (the latecomers) would be screwed by following the trend at the wrong time.
It’s official now: we have entered an economic era of “Ponzinomics”, where a series of get-rich and pyramid scheme have been normalized as acceptable for the common citizen, as this is their only chance. Are you good at Texas Hold’ Em, per chance? Then head to Vegas, and see what you can make of it….
What is a real estate agent, a mortgage/stock broker, except the 21st Century’s equivalent of a carpet bagger or riverboat gambler? Sure, the “uniform” has been updated, but the modus operandi is basically the same: these are people who attempt to separate you from your money in the name of helping you and your family.
You asked who told the brokers, agents, etc, that it was OK to let the average Joe become a big-whig investor? Sounds familiar, like 1929, where elevator operators and shoe-shine boys were passing on stock tips, heavily over-leveraged on stocks? Look at China, where the average person is selling their bicycle to play the stock market now! A bubble? What do YOU think?
As far as who encouraged it, I’d say the Feds, the Fed Chair, right up to the President said that it was not only acceptable for people to game the system; they actually ENCOURAGED it by lowering borrowing costs to nil, imposing windfall tax exemptions on capital gains, etc.
The public was basically told that rampant speculation on stock market and housing was the new norm, and here we are AFTER it goes awry. How could it NOT go bad? Hasn’t history told anyone that market manias end poorly, EXCEPT those who set up the pyramid scheme themselves who are at the TOP of the pyramid? Do you think the NAR didn’t make TONS of money here? OR the banks who pushed mortgages down everyone’s throat, well past sustainability? Of course they did….
U.S. citizens were basically told that “it’s every man for themselves” when they soberly realized that the government programs mentioned in that article from 1979 (e.g. Social Security, Medicare, etc.) were going to collapse, and the message was that sheeple will need to cover themselves, by hook or by crook.
As usual, many will be ruined financially, but many will profit from the misfortune and ignorance of others. In other words, this coming era will be business as usual, only on a less subtle basis, as there’s no concern to cover the corruption nowadays.
‘Conspicuous consumption’ was the rule during the Roaring 20’s and Roaring 90’s, and ‘conspicuous corruption’ signals the tail-end of that phase. We were there 4 years ago, IMO.
June 24th, 2007 at 7:16 am
Great comments from the appraisers, and I so badly want to talk with one of these honest appraisers, to get the lowdown on everything that is wrong in the appraisal industry. Could you email me at schberkland@sbcglobal.net?
Yes, it’s the homes that are NOT selling that are causing the median to rise.
The junk doesn’t sell, so it sits and sits. The beautiful ones sell, keeping the median up.
That brings up another question: how low do you have to price the junk to get it to sell. And further, how low would the median be if all homes were marked to market?
June 24th, 2007 at 7:32 am
Just one point:
The large entities that have gamed the system for their own advantage have pillaged the country, while the regulators (FDIC and SEC; heck, that includes the Border Patrol and INS) who are SUPPOSED to protect the country for the sake of the common good have turned their backs on their duties, at the order of the Oval Office. All parties have completely LOST their sense of patriotism, IMO, and have sold the United States of America out to the highest bid, under the color of authority. The country has been co-opted, and there’s nothing left but the shouting.
Why do citizens refrain from vandalism, or robbing banks? I think many do so, since they realize they might go to jail for it, but many refrain since they fundamentally realize it’s WRONG, and not good for the greater good. Some remember their civics lessons, and know that such personal excesses and greed will DAMAGE and HARM our country.
Problem is, many of the large multi-national conglomerates now have NO allegiance to ANY country, and they pledge allegiance to the stock holders, not any country. Paying taxes to any country is laughable: the goal is to minimize taxes, NOT to pay their fair share Ever would why corporations like Halliburton and Exxon operate out of Dubai? Hmmm….
And people wonder what fueled the growth of communism and socialism in the 1930’s and 1940’s? Perhaps it was the unregulated rampant greed and corruption on the part of a small group of individuals?
The more things change, the more it seems we’re living in a re-run of a bad episode of history.
June 24th, 2007 at 7:49 am
Doctor,
Incredible summation of where we are today. Can you imagine, what the landscape will look like in 6 months? The picture I get is a snowball getting bigger and bigger until it has reached bottom. Unfortunately, it is about 1/20th of the way down the mountain.
The longer this farce goes on, the greater chances we could see GD2 (Great Depression #2)……
June 24th, 2007 at 8:23 am
@bob from brooklyn,
Cheers to you on the east coast.
@anon 4:14,
Can you see this article in a mainstream paper like the Wall Street Journal? Their biggest backers are the people who created derivatives and are pumping the system. Of course they may pay lip service to the market but they know who pays their bottom line. Never bite the hand that feeds you.
@anon 7:47,
Drop me an e-mail. Love to get the perspective from someone with appraisal history in the market.
@mr vincent,
Most people do understate the price in keeping up a house. Repairs, taxes, and insurance come to mind. And you can rest assured that foreclosures and REOs only have one way to go and that is up. Someone just turned out the lights in California.
@turdly,
Shoeshine boy giving you tips in the housing industry? I think you bring up a great point that literally everyone was given access to this credit bubble. Drop me an e-mail.
@matthew,
I’m going to put together an insiders post and it seems many have great information regarding the market. Drop me an e-mail.
@adam,
Great commentary. Thanks for looking out, updated. Interesting regarding our fascination with lovable losers. Or even notorious losers that we hate. Either way, dropping a name or a brand gets you far with many circles. Dolce you say? Gucci? What about all these McMansion with every upgrade you can imagine?
The interconnected nature of this credit bubble is key here. We have a form of corporate welfare and our government is running under the guise of a plutocracy. That is financial resources are being aggregated in the hands of a few at the cost of the majority. People remain content because they have the illusion of wealth. You think you own that house or car? Miss one payment and find out how much ownership you really have. If we are so wealthy, why are we actually poorer than the previous generation adjusting for inflation? Why is our dollar falling so precipitously?
Could it be because of irresponsible lending that is going on? I hate to draw the parallel here, but look at the Japan land bubble collapse of last decade. I know we aren’t Japan and they aren’t making anymore land, but there are tremendous amounts of similarities. And then we have bankruptcy laws favoring the issuers of credit cards. Very easily, they can control the spigot of credit and be more diligent on who they lend credit to. Why don’t they do this? Because these customers give them the largest profit margin. Think about it, once you claim bankruptcy, with new legislation passed in October of 2005 you now have to wait a longer period before filing. So companies know they’re going to get there’s from these people that are addicted (slaves) to credit. No where to run except living the life of an American Express serf.
@anon 10:44,
These stats are accurate. You can check for yourself at www.census.gov which considers equity in home as part of your net worth. Net worth is assets – liabilities and equity for what its worth, is considered an asset. Excluding equity the numbers would drop significantly.
@socalappraiser,
The roaches scurry when the light is put on them. I’m pleased to see smart and ethical appraisers come to arms about this. Drop me an e-mail.
@anon 6:49,
The problem is, many of the so-called regulators are just as bad as those providing irresponsible credit products. The government radically under funds the OFHEO. Housing is practically the lifeblood of the American economy and you would think that the OFHEO would garner more support. They don’t. But look at the IRS. The government is going to get theirs no matter what. When you buy a home of your own builders, agents, brokers, Wall Street, government, and everyone wins. The small caveat is you are covered in debt.
Glad to see you write a letter to HUD. I would recommend calling or sending a letter to your local Congressmen letting them know how frustrated you are with their lack of enforcement. You can find your local Congress person Here
@covered,
Glad to hear you got out in time. It had to come to a pinnacle and praying for another real estate revival pretty much sums it all up. This is much more pervasive than the S&L crises. Everyone to a certain extent will feel the impact of this bubble bursting.
@schahrzad,
You need to remember banks are not landlords. They will unload REOs at any price the market will bear. This, in my opinion, is the final piece needed to bring the market down. Fitting and somehow poetically just since these are the same geniuses who funded a person with a massive mortgage knowing full well they wouldn’t be able to afford the payment down the line. What do they care? Ship off to Wall Street, cut it up in mortgage back securities, and feed the beast for decent yields.
@ben franklin,
A quote of Benjamin Franklin comes to mind:
“He does not possess wealth; it possesses him”
Debt is not wealth. And another quote from the great Mr. Franklin:
“It is the eye of other people that ruin us. If I were blind I would want, neither fine clothes, fine houses or fine furniture.”
Great insight. And this is 250+ years ago. You might as well take some of his insight into economics, politics, and human nature and place them in 2007. As Mark Twain once said, “history doesn’t repeat itself - at best it sometimes rhymes.”
June 24th, 2007 at 8:52 am
Wow, after reading “Dr. Housing Bubble” and his fellows “doomers” comments, it’s hard to even think of a smile about today’s world. It’s probably true that there are some significant short term difficulties that will need to be over come in the housing market, but the long term prospects are excellent for those that seize the opportunity to buy now and can hold for 5 years and longer.
As to who to blame, I think those individuals who made the decision to buy were probably over the age of 21. As to sub prime mortgages, no doubt there were abuses, but they allowed 2 million people to have a chance at owning their own home that would never have had that opportunity. By the way, many of those loans are still current. Lenders are taking steps to reset the loans to lessen the blow on the borrower. You will see lenders take proactive steps as they certainly do not want to own homes nor can they afford to have these bad loans on their books. By 2009 this will be substantially behind us.
June 24th, 2007 at 2:32 pm
Cool, I am under age 35 and have a net worth significantly higher than my peers and zero debt. YAY!
Great post, Dr. HB. At least you did not rip off a well known fiction book like our foreclosure buddy did with his “book”.
June 24th, 2007 at 4:26 pm
Scott wrote:
As to sub prime mortgages, no doubt there were abuses, but they allowed 2 million people to have a chance at owning their own home that would never have had that opportunity.
Two questions for you:
(1) Why couldn’t 2 million people afford homes? What was the cause?
(2) Why should 2 million people be able to afford homes that far exceed their earning potential?
There is a problem with both of these statements. The apologist spirit of your post toward the real estate market and lenders seems a tad biased (and unrealistic).
June 24th, 2007 at 6:46 pm
Banks are NOT unloading at any price. They are holding on for top dollar. I just got an email from a short sale listing agent - Countrywide is refusing offers on two different homes that are just 5% below appraisal. Instead, they will spend the extra money and go to auction, which will cost them more, no?
Just go through the MLS, and see how many REOs are on the MLS, and how long they’ve been on the market.
I think builders are the most realistic right now. They are the ones who must sell.
Countrywide is just the servicer, so who knows what their ultimate goal even is?
The whole thing is very confusing, because we often don’t know who the decision maker is on these defaulted loans.
Under the Pooling and Servicing Agreement, the servicer MUST protect the investor collateral - perhaps that is why they are not selling at reasonable prices. If the offer is below appraisal, the servicer is not interested, from the stories I have heard.
Also, the lenders can sit on hundreds of homes for years, if they want. In the 1980s American Savings spun off their homes to a holding company. My friend managed 560 of those homes for several years, until the market turned around. They refused to sell while the market was down.
June 24th, 2007 at 8:56 pm
@scott,
You said…
“It’s probably true that there are some significant short term difficulties that will need to be over come in the housing market, but the long term prospects are excellent for those that seize the opportunity to buy now and can hold for 5 years and longer.”
So are you actually recommending that people buy right now at current prices? And this 5 year number sounds familiar. Something about 2012 is special. Oh yeah, it is the Mayan calendar end-date. Is it because the world will reset and all past debts will be erased? And you’re calling us doomsdayers? Fascinating.
Actually, I’ve seen this 5 year figure come up often. Pretty much from all the propaganda being sent to my home from multiple housing agencies especially the new National Association of Realtors’ party line. So what will keep the market afloat and keep real estate chugging along until 2012? Some evidence will be nice.
You also mention that by 2009, all this will be behind us. Why 2009? Any thoughts on 2020?
@socalwatcher,
Under 35 with no debt? Living in California? Congratulations. Honestly, you must be in a select group of people that can claim this. Each year it is harder not to go on without getting into debt. FICO scores are now used for discounts on car insurance. So you’re at a disadvantage if you have no credit. Goes to show that credit is becoming a larger part of our lives.
@anon 4:26,
I’m curious to the answer/evidence to those questions as well…
@schahrzad,
I think California is behind the national curve by a few years. We really are in a surreal environment. For anyone that travels to the middle of the country or even certain areas of the east coast, $500,000 is incomprehensible. Whenever I talk to people in other states and explain our situation, a quizzical look takes over their face. It just doesn’t compute. And bank REOs and builders are slashing prices in other states and cities like Detroit, Las Vegas, Miami, Fort Lauderdale, Indianapolis, and Denver deals are to be found. Again, REO was not in the California lexicon until early 2007. Short-sale conjured up visions of long lines at Macy’s. Practically any home in California would sell during the foreclosure process up until 2007 (need we point out the examples?). We’re entering stage one of a very long and drawn out real estate trough.
The S&L crises ultimately cost the country $150 billion. Currently we are seeing resets of $1 trillion a year staged for the next few years. The mortgage market in the U.S. is now worth $12 trillion+ dollars. I’m not sure how useful comparing the S&L crises is to our current mortgage and credit bubble aside from the fact of issues of irresponsible lending. One is an off-shore current while the other is a category 5 hurricane coming to shore very soon. It is vastly larger and affects a larger portion of society. According to the Bureau of Economic Analysis, from 1980 to 1989 12% of all employment growth was attributed to the real estate industry. This is during the S&L crises mind you. Now? From 2000 to 2006 29% of employment growth is attributed to real estate. There are some additional factors to consider:
1. Negative savings rate
2. Massive mortgage equity withdrawals via HELOC and Home Loans
3. Mortgage Backed Securities and Collateralized Debt Obligations
4. Global Credit Bubble – From London to Sydney to Los Angeles
It is a brave new world we are approaching. I’ve made a guess that Q4of2007 and Q1of2008 will see the first major shifts in the real estate market for California. Why? Because we still have delusional sellers, banks, builders, in California thinking that July and August will somehow inject a new sense of optimism in the market. Inventory is at record highs. Prices are no longer going up. And market psychology is starting to break like countless previous bubbles in history. Once you realize there is no greater fool the cards start collapsing. Not tomorrow or next week but over the next few years. I hate to bring the memo, but the rest of the country is already up on the news that real estate is so passé (at least at the prices in California).
June 24th, 2007 at 10:02 pm
I’m sure many of you already read the article about The Real Estate Prayer Luncheon in Florida where a group of hopeful agents prayed that the housing slump will end.
Great article. The people at the prayer meeting are being pathetic. I wonder what “their” God would say about greed. Maybe they should not stray from their ‘Our Father’s and ‘Hail Mary’s. If they were real Christians, they would be praying for/helping the “poor” fellow who can not afford to buy their custom built shacks at their greedy mansion prices.
The other thing is their lust for wealth and the gluttony of living high on their home based ATM’s.
When these prodigals return to Daddy gov’t for a hand out, there will be no more fatted cattle to slaughter.
The overleveraged are no longer the home flippers but the flipees.
June 24th, 2007 at 10:31 pm
Yep, did anyone notice today’s Daily Bulletin. In the Real Estate section, they don’t even list Alta Loma because nothing sold. In Rancho Cucamonga, the number of homes closed this week over 600k = zero.
So, umm, I just don’t see how this is going to “be largely behind us” any time in the foreseeable future.
I would like to own my own home, but I’m going to sign another lease on my rental and continue to gain wealth. I think I’ll
“seize the opportunity” to rent right now. I just don’t know how long I’ll rent, maybe into 2009 or 2010. My biggest risk right now is my landlord losing his property!
June 24th, 2007 at 10:37 pm
wow, the median net worth chart is really sad (for the future of america) I’m turning 33 in July, and my networth is more then 2x then the 55-64 range, yet I’m living in a modest 1bd room apt in northern cali.
Socking away 2/3 of my income waiting for the inevitable crash to buy my dream home. I make pretty average salary as an engineer but I’ve been good at managing my money while still enjoying life, going out with friends/dates and traveling when I can.
June 24th, 2007 at 10:59 pm
“It is a brave new world we are approaching. I’ve made a guess that Q4of2007 and Q1of2008 will see the first major shifts in the real estate market for California. Why? Because we still have delusional sellers, banks, builders, in California thinking that July and August will somehow inject a new sense of optimism in the market. Inventory is at record highs. Prices are no longer going up. And market psychology is starting to break like countless previous bubbles in history. Once you realize there is no greater fool the cards start collapsing. Not tomorrow or next week but over the next few years. I hate to bring the memo, but the rest of the country is already up on the news that real estate is so passé (at least at the prices in California).”
Dr. HB, you raise an interesting issue that I have, and I would appreciate any advice you or your readers might have. I have a wife and two small kids, and an income of 125K. We have been renting, but our place is going to be converted to condos by 7/1/08, so we gotta move in the medium term (no interest in buying this roach motel).
There is a gigantic emotional pull towards trying to buy a place. We are tired of renting high priced hovels in the San Fernando Valley, with the prospect of parochial school tutition in the future b/c of substandard public schools. Our kids need a good place to grow up, and it seems that in the SFV there is only room for the very rich and the poor, the middle class be damned.
My questions:
Is buying in the first half of 2008 too early? Suicidally early, or just “haven’t gotten as cheap as it could get but it’s okay”? I plan on only buying a house that I can afford to buy via a 30-year fixed. Plus, we are hoping to get a place in a new development (townhome), so perhaps the builders are already feeling the pinch and are much further down the line in cutting prices? We figure to stay there for at three to four years. Too short a stay?
I’d like to hear your thoughts on whether buying even in 2008 would be tantamount to slitting my own financial throat in the long run.
THANKS FOR HELPING US MAKE AN INFORMED DECISION!
June 24th, 2007 at 11:25 pm
Interesting comments. I have a different approach to the housing/credit crisis. I rent! I save 100% of my net income after I maximmize my 401K and other tax deferred investments. My wife does similarly but we only invest/save 65-70% of aftertax income. We eat beans and rice and pay cash for everything. No credit cards and NO debt. we also have NO FICO scores. So theoreticlaly we are dead beadbeats. Ha! We do all the frugal stuff, and what keeps us going is not the putrid LOW interest we get on our conservative investments, but the knowledge that bankers, and others are not getting to touch our money. Here is my rhetorical question. If I go to a bank to get any measily loan (even if I back it with CD or other deposit) They know what I am worth but the want to stick it to me hard with extremely high interest. Knowoing this all I want to do is share in these obscene profits. They won’t have anything to do with it. WHY DON’T THEY want my money? All I want is a decent interest rate. No, I have to chase interest rates from these thieves. Cut me in on the action? No!I speculate that savers would pop up all over the place if banks paid any decent interest rates. If banks were only allowed to loan what was on deposit, we would all be happy. No, the banks are greedy and lie. FICO scores only show the tenedency of a DEBTOR to repay a debt. I am not a debtor. I have sold several houses a;llpaid as agreed, but never on my credit reports do to over 7 years. I think FICO is a scam to get higher rates for mortgage companies. And they are in on it. I am saving and watching and laughing. Just pay me some interest.
June 24th, 2007 at 11:36 pm
Just like the people who bought because everyone was doing it, buy now because no one is.
SELL WHEN IT IS THE TIME TO BUY
BUY WHEN EVERYONE IS SELLING
Economics 101
I am glad I have the degree. I expect all the sheeps to now attack.