Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
Tuesday, January 24, 2006
Skinnydipping In The Housing Bubble
Robert Kiyosaki is talking about the housing bubble again, "We all know a real estate crash coming. The problem is we don't know when. One of the more popular predictions floating around is that investors are now moving out of real estate and back into the stock market. Another prediction, which I think is valid, is that the real estate market is set to crash because of the high costs of building materials."
"But such rumors only affect those investors who, as Warren Buffett says, 'take their cues from price action rather than from values.' During such periods of high prices and volatility, it's even more important to pay attention to value, more than price."
"Buffett said: 'For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for someone else.' The sage of Omaha sums up pithily: 'The dumbest reason in the world to buy a stock is because it's going up.'"
"Personally, I would say, 'The dumbest reason to buy anything is because the price is going up.' Yet that's what people do when they invest. They generally don't buy high-priced things when they shop."
"For example, if Safeway had a sale, 25% off everything in the store, the supermarket would be swamped. Yet, when the stock market or real estate market has big discounts (often called a crash or a burst bubble), that same shopper runs away from an asset sale. Instead, they wait until prices are high and other fools are bidding them up further to finally buy."
"Take market crashes. I love them because that's the best time to buy, finding true value is a lot easier during such periods. And since so many people are selling, they're more willing to negotiate and make you a better deal."
"Now, more than ever, it's important to focus on value, not price. When prices are low, finding value is easy. When prices are high, value is a lot harder to find, which means you need to be smarter, more cautious, and resist your knee-jerk reactions. A final word from Warren Buffett: 'It's only when the tide goes out that you learn who's been swimming naked.' In my opinion, there are many naked swimmers, especially in the real estate market."
This comment has been removed by a blog administrator.
ReplyDelete'We all know a real estate crash coming'
ReplyDeleteGood to hear statements like this on Yahoo's finance page. They have a whole section on it today.
Hasn't this guy been a big RE cheerleader?
ReplyDeleteYou can be a cheerleader one day and a skeptic the next. Markets behave in boom/bust cycles. Jim Cramer, the Mad Money guy on CNBC, made a lot of money in the stock market and then put all his money in bonds 1 week before the .com crash.
Damn good description, can I put that up on my blog?
ReplyDeletegrim
Northern NJ Real Estate Bubble
Great line by Buffet about investors who 'take their cues from price action rather than from values.'
ReplyDeleteI believe the stock-market and housing bubbles were/are psychologicaly driven by people taking their cues from the herd, rather than running the numbers themselves.
Now I don't want to completely disparage the herd instinct. If you see someone staring into the sky, you'll look to. People infer meaning from the actions of others. If people run screaming from a building, it's probably better to leave the area without personal investigation.
But the herd instinct is imperfect. If you want to create a crowd, just stand on a busy corner staring intently at the sky.
Now... with the stock market, I think we see people making two mistakes. First, they followed prices up without consideration of underlying value. Now, the opposite has happened. The aftermath of the stock-market bubble has put the fear of god in some people. But that fear is primarily a consequence of the stock market's "price action" rather than independent assesments of value. Regardless of PE ratios and other indicia of value, a lot of money won't touch stocks with a ten foot pole. And yet those same people have hitched a ride onto the housing market. They haven't stopped chasing "price action", they just shifted their attention from stocks to houses.
This tendency to follow the herd is what leads me to see a "hard-landing." When the emotional underpinnings of the bubble are pricked, I can envision a rush to the door by a whole bunch of casual investors. The fall may make as much economic sense as the rise.
I agree with Mr. D - I think Kiyosaki is an oversimplifying fraud who makes more money selling books/seminars than he ever has actually investing his money.
ReplyDeleteThat may be true, he may be a fraud, yet what he said in this article is spot on correct IMO. The point about the fact that people are paying such high prices for houses when they wouldn't do the same thing if they were buying something at Safeway...hence they are speculating in the former... is a great point. The analogy works for cars (instead of Safeway items) which people also need like they need shelter.
betamax said:
ReplyDeleteUnlike mortgages, rents can't be deferred through creative financing but must be paid in full every month. That fact, combined with a competitive glut of empty housing, will keep rents low enough.
Absolutely! Especially when wages have not risen. Any specuvetors who have recently bought rental property with the expectation that it's going to be easy to have the rentors carry the freight are going to be in for a big surprise, I'm mainly speaking of areas such as Sonoma where we live.
The people who would be able to take on a huge rent equal to or close to what the "owner" has in mortgage costs are few and far between in a county where most jobs are service/tourist/aggie oriented.
Those that could rent at inflated prices either already have bought or cannot rearrange their lives and move to a small town full time. The other alternative is a "vacation rental" where people are in and out every few days or weeks and the costs of insurance , cleaning, furnishing, wear and tear and finding tenants is not going to appeal to too many folks.
The specuvestors..(love that term) are going to have to yield to the facts of life. Serves them right for buying and not looking first to see what the average wage in town is,and what the average going rent is.
They'll have to lower prices and then the locals will eat their lunch.
Also, I've noticed that the largest number of houses in foreclosure and preforclosure up here in Sonoma are in the parts of town that went from normal average working stiff affordable prices to over-inflated in a blink of an eye. Many of these distressed owners are now trying to rent their "palaces". It's amusing to watch the prices come down every week as there are no takers.
Los Angeles Investor Girl said...
ReplyDeletehow can you find "value" in the middle of a bubble?
I think small college towns may have value. Technology will enable more people to work from a distance in these areas that have culture and affordable living.
say what you will about Kiyosaki, the fact that he was far ahead of a lot of these "real estate gurus" and admitted there's a bubble means he does have some substance.
ReplyDeletequite frankly, he probably had enough wisdome for one good book. But of course, being quite the businessman, if one book sells, why not 50 and a couple of board games?
Rainman18 said...
ReplyDeleteYa know I hear this from time to time and I wonder just how many jobs fall into this 'work from home' or 'work from a distance' catagory.
Educate me.
Big fat screens and teleconferencing are coming your way:
http://www.marketwatch.com/news/story.asp?guid=%7B09EF8773-B4A0-4532-9434-B4FA6D8B2661%7D&siteid=google
I wonder just how many jobs fall into this 'work from home' or 'work from a distance' catagory.
ReplyDeleteRainman,
seems like with the rising cost of gas etc. more and more people are going to be looking into that.My best and oldest friend works for Cingular in sales setting up business systems, she's worked from home for years and only goes out on calls to the companies she serves.
I was talking to a friend down at the bakery this morning and he was telling me about a friend of his in computers, he does some sort of software design from a room in his house.
My sister works for welcome wagon, from home, with a computer.
We have to make an appearance at the studio from time to time, usually every couple of months.One advantage of living outside of LA and working at home is not having to pay the LA City tax on home based business, though I suppose seeeing at what most people pour into gas money, they'd rather pay the business tax nowadays.
melody said:
ReplyDelete"All I'm trying to say is keep your head on straight and everything will work itself out. Did you notice inventory....?"
*********
I agree in a big way with melody here with regard to the OC.
All you down there whining about not seeing price changes? C'mon - this is very early and it's going to take years. You might never see a super deal there, but prices will come down...
Have patience.
Melody, ocmax, and ocmetro,
ReplyDeleteThere has been so much appreciation in OC over the last five years that people can still endure negative cash flow for awhile longer.
Since property values have nearly tripled since 2000, even a person who bought as late as 2003 has a lot of maneuvering room. He could refinance with an option ARM -- they're still making them -- and cut his minimum monthly payment on an absolutely gigantic loan to well below what he could rent his property for.
Heck, he could even do a cash-out refinancing, and pay the minimum 1.25% payment for a couple of years out of the extracted equity, letting the property sit empty (accumulating negative equity, but there's such a big equity cushion that it won't matter for a good long time) until it sold for a reasonable price.
There's just too damn much money floating around. I'm getting more and more discouraged, because rents ARE increasing dramatically around here. Inventory is going up -- but most sellers have the resources to wait a long, long time.
It will take a pronounced, sustained downturn -- one that convinces people that good times aren't right around the corner -- to make selling at a reduced price a rational choice for most sellers.
ocmax,
ReplyDeleteit doesn't work like that. RENTS are tied to income and what people can afford with their monthly paychecks.
Just because thousands of people NEED rents to be higher, doesn't mean the market will bear it. My rent went up for the first time in 3 years...a whopping $50 (about 3%), and I think that is mostly due to the HOA's going up about that much.
Most of the places in CA will NOT be able to be rented to cover the adjusting mortgage payments of people who bought in the past few years.
Look at all these 400-600k condos. you are looking at 400-600 a month in taxes, and another 300-800 in HOA's on 1-bedroom condos. In San Diego, most of the 6 story of less buildings have HOA's in the 300's. You get over 6 stories and most have HOAs from 525-850 for 1-bedrooms. I'm sure the HOA's are similar in Irvine, long beach, etc.
People will try to rent for more, but when there are no takers, they will lower their price and find equilibrium.
SoCalMtgGuy
Another F@CKED Borrower
Thomas,
ReplyDeleteI know there is a lot of money floating around, but I think you overestimate the abilty of most of these people to burn through thousands of dollars per month on property they are not using.
Losing money every month might sound 'ok' on paper, but once it is done for several months in a row, watch what happens.
SoCalMtgGuy
Another F@CKED Borrower
Melody made an interesting statement,
ReplyDeleteI just checked Orange County's Tax Assessor's site and my landlord hasn't paid their taxes. I think it's funny. Think about the 56,000 other people who have not. Defaults are on the rise.
What happens to people when their landlords default?
We happen to be renting from a long time owner who bought the place years ago and is financially solid, in LA we had rented from a guy who was so underwater he could have been on Team Zissou. But seriously, are we going to see the day when one does a credit check on ones' prospective landlord to make sure that he/she won't default while one is leasing from them? I mean, if the guy isn't paying his property taxes....???
Prices have dropped before. How many middle class folks do you know who sold their homes when they were underwater (like in California in the early 90s)?
ReplyDeleteActually, we knew quite a few especially after the 94 quake, and throw in a recession to boot. When people have their kids and families to consider, many sold and took the hit.
Just because thousands of people NEED rents to be higher, doesn't mean the market will bear it.
ReplyDeleteproblem becomes when thousands of people NEED to rent here, then the rent will go up. The issue with OC is there's lots of jobs and people need to work here. If you can't take the traffic on the 91 and you can't afford you WILL have to rent here. and that rent therefore does go up.
now most of the rentals, esp ones bought after 2002 will be upsidedown. however, the huge appreciation in value over the last 3 years are letting the owners say to themselves: "yes I'm under, but look at my appreciation."
my feeling about OC is this: let's say values DO slide by 30%, but OC is still too expensive even with that 30% price reduction!! To build wealth, you got to keep your overhead down and gradually move up thru savings and investments. You simply cannot do that here in OC, your cost of living/overhead is just too high. And despite the value of rentals compared to owning, rents are still pricey and still continues to increase.
The only logical conclusion is if you can leave, get out of OC. That's what I'm doing in a few short months.
Melody, yours too? my landlord is behind on his property tax too. He's about $2000 underwater/month. But the flip side is he's had a gain of $300,000 in equity in 3 years. That will serve as motivation to continue down this path for him.
ReplyDeletemelody said:
ReplyDelete"Read about California Real Estate Median Prices of Existing Homes since 1968.
Interesting chart."
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Great data.
I like the deadcat bounce during the '91 recession, before the effects of that recession trickled into the housing market (you can see what that did in following years).
Also appreciate the fact that prices were the same in both '91 and '98 and that they were below that $200K level in the time between ('92 to '97).
I try to explain to people around here that it's possible SF Bay Area prices (of course, variations will occur by locale) could be the same in 2011 as in 2006 and they look at me like I'm talking out my *ss.
Of course, I think we have to have an economic downturn of some repute, but I don't think it's an unlikely occurrence - at all.
ocmax,
ReplyDeleteI agree with your statement that people will ride investments on the way down.
The difference between stocks and houses, is that once you bought the stock, you don't have to pay a monthly fee and taxes on that investment (assuming you didn't short and are getting thwaped with margin calls).
Look at the number of people in OC with ARM mortgages. 88% of Santa Ana used an ARM last year. What happens when those adjust?
Belive me, I'm also amazed at how things work in Orange County. I have lots of friends up there, and I'm up there several times per month. I talk to their families that have been there for generations. They assure me it won't come down and that the OC is different.
Sometimes I almost believe them...but then again, I also know that they are making 6-figures a MONTH...and so do many of the people they associate with. So maybe their perspective is off a little bit from the people with 40k jobs slinging an I/O or neg-am at a condo in santa ana.
Again, I don't know how it will pan out. I know that being in SoCal will ALWAYS cost more than other places in the country, but don't think they can defy the fundamentals forever.
SoCalMtgGuy
Another F@CKED Borrower
OCmetro,
ReplyDeleteBelieve me, I'm right there with you.
But what has really made the OC take off the past few years? The weather didn't change? So what was it?
You had massive development, you had historical low interest rates, you had lax lending standards, and especially in the OC, you have an area that is very dependent on real estate which employs a ton of people there.
I know this has gone on for a long time, but there has yet to be a major catalyst to force big change. You can't have an 8-10 year bull-run on real estate, and expect it to fix itself in a quarter.
This thing is going to take a while to evolve. I think it will start this spring, when things don't "take off" like everybody plans. I really think 2007 is the year when things get REALLY interesting.
I'm right there with you guys. I would love to 'own' my own place, but I'm not going to pay over 2-times my rent to 'own' a place with an I/O mortgage. I'd be looking at 3x my rent if I got a fixed rate...with taxes and hoa's.
Take the money you are saving and ENJOY life. I know it sounds hard, but lots of peole are slaves to their houses.
I just happened to be flipping through the TV last night and I stopped on Dr. 90210 as I heard the word real estate. One of the doctors is moving to a new house. He said "my montly mortgage payment is going to be MORE than what I made in a year as a resident". I continued to watch as I wanted to follow the story more. He went on to say that he won't be buying any more expensive suits, no more vacations with the wife, etc, because he was going to have a huge mortgage payment to make. In the preview of the next episode, he mentioned that he forgot what it was like to have to work like this. I also found it interesting that they got the bigger home so he could have more space to relax in when he wasn't working...then he said that he won't be able to relax because he is going to have to work even more.
SoCalMtgGuy
Another F@CKED Borrower
My scenario of bubble-denying would-be sellers doggedly holding out for ridiculous prices until someone really stupid comes along depends on one thing: Continued easy lending.
ReplyDeleteAnd that's where the collapsing bubble elsewhere in the country might come into play and finally bring the Mighty OC down: It's possible that downturns in San Diego, etc. will cause "creative lending" to be dialed back countrywide.
Once "creative lending" dries up, and people actually have to pay the full interest on their $600,000 shacks -- kaboom. Sales stop dead, except for the few "investors" still stupid enough to be buying.
thomas,
ReplyDeleteOnce the appreciation stops...so will a large part of the creative lending.
The lenders are making the loans because investors will buy the paper from them.
Once the investors either quit buying the paper, or demand much higher rates for the risk they are assuming, your scenario will start to happen.
Everybody thinks refinancing is a right, but they are about to see how hard it is to refinance when the good times are over.
Just wait until the numbers start rolling out of SoCal with 5-10% declines in prices. Watch the people in tight spots, they are going to hate their houses.
Stay tuned.
SoCalMtgGuy
Another F@CKED Borrower
linq,
ReplyDeleteThat's what happened in Texas, too. There were defaults everywhere, but the banks wanted 35% down. The big boys snatched most of it up.