The Reservoir of Schadenfreude

Why do we get so much pleasure from failed flips? I can think of no other human endeavor which has engendered so much pleasure in the misfortune of others. In my opinion, the outpouring of schadenfreude we are seeing as the housing bubble deflates is a mixture of Greek tragedy and bad karma. In short, bubble participants should have seen it coming, and they are getting what they deserve.

Schadenfreude is not a spiritually uplifting response. Most religious traditions would counsel us against it. In Buddhist teaching, people are taught to cultivate feelings of compassion for the misfortune of others — feeling empathy and sadness for the slings and arrows of outrageous fortune when they impact another. The near enemy of compassion is pity: it masquerades as compassion, but it has an element of separateness which detracts from the sense of Oneness with all things. Joy is good: Sypathetic joy, the joy in the happiness of another, is another pillar of a spiritual existence. However, joy in the misfortune of another — schadenfreude — is not a skillful behavior leading to happiness. Even knowing that, many of us feel this joy anyway. Why is that?

BuddhaI recognized financing terms were creating artificially high prices early on. By 2004, I was telling people I knew this was a problem which would cause a market crash. I can’t tell you how many people looked at me like I was crazy. “Real estate always goes up,” I was told. “The government would never allow prices to crash,” I was told. “If you don’t buy now you will be priced out forever,” I was told. You know the intoxicated language of those who imbibed the kool aid. If these statements had been offered in a defensive manner of someone who is being made to realize they made a serious mistake, I could have felt sympathy for them. I would have been able to disarm their defensiveness and helped them see the light. However, what I generally got was a smug assuredness of someone who truly believed they were right and I was wrong; not just was I wrong, I was a stupid, cowardly fool who did not have the brains or the courage to take the free money being given out.

didright_large.jpgDuring the bubble rally, those of us who chose not to participate were labeled as “bitter renters.” We were labeled as envious of the good fortune of homeowners as their property values rose, as they took on insane amounts of debt, and as they learned to finance a lifestyle well beyond their means. This was undoubtedly true for some, but in my opinion, this is not the primary reason so many derive so much pleasure from the misfortune of those now suffering from declining property values.

These same people who chided us for being envious actually wanted us to be envious: they wanted us to know they were the winners in our competitive society; they wanted us to view them as superior. This need to feel superior is undoubtedly a manifestation of Southern California’s Cultural Pathology, but it more than that. This act of putting themselves above us created a separation which prevented us from feeling sympathetic joy for their good fortune, and it will prevent us from feeling compassion for them when they fall.

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In our collective unconscious which manifests in our dreams and our mythology, water is often symbolic of our emotions or our emotional state. Have you noticed people are often categorized as deep or shallow? If you are in debt you often feel “underwater,” etc.

Anger is much like water: if not given an outlet, it will fill a reservoir until it reaches a breaking point and is expressed in a flood of emotional rage. Each encounter with a pathologic, kool-aid drinking housing bull over the last few years has added to this reservoir, and reveling in failed flips is an outlet for this pool of toxic emotional waste.

Waterdrop

There is an element of tragedy in every disaster, but financial bubbles are some of the most interesting because they are completely man made. They are created by the individual decisions of buyers who are motivated by greed, foolish pride, and a false sense of security. Each of these people should have known better. Many of them were warned of their impending doom and chose to go down the path to the Dark Side.

Darth VaderNewton’s Third Law states, “For every action, there is an equal and opposite reaction.” The Law of Karma states, “For every event that occurs, there will follow another event whose existence was caused by the first, and this second event will be pleasant or unpleasant according as its cause was skillful or unskillful.” Do you believe the behavior of buyers over the last 4 years has been skillful?

Whether it is Newton’s Third Law, Karma, or a Calvinist form of retributive justice, as this bubble deflates, all the participants in this bubble are about to experience a great deal of hardship. Like many of you, I will enjoy their suffering until my reservoir of schadenfreude is emptied. For the sake of my own personal spiritual well being, I hope this happens soon so I can get back to feeling compassion for my fellow man.

61 thoughts on “The Reservoir of Schadenfreude

  1. Recovering Homeowner

    Well said. I think many of us don’t wish bad fortune on those who bought during the run-up or at the peak, but only want the smug look wiped off some faces. It’s the same look those who invested in tech stocks during the late 1990s had – the attitude that “I am a financial wizard and you are a fool and cowardly” that needs to be smacked down HARD.
    —–

  2. lee in irvine

    I couldn’t agree more.

    This housing bubble has created anger in my life the last several years. In 2003 & 2004, I thought I was too smart to participate in The OC housing ponzi scheme. I became angry as family, friends and clients continued to proudly boast of their gains from something I knew was unsustainable. I would catch myself boiling over after leaving a family event where the main topic of discussion was the “fabulous” gains in housing. I became angrier as my wife put more pressure on me to buy a home for our growing family. I became even angrier as my income blossomed during those years, and I realized that I was now renting a home in a community where I very likely made more money than most of my homeowner neighbors.

    Now that the scheme has (finally) been exposed for what it is; A BIG LIE! I find myself shaking my fist at the perma-RE-bulls on TV and in print. My anger towards the jackasses like Gary Watts is truly off the charts.

    What have we all learned about the last 5-6 years; it is possible for stupidity to be financially rewarded for an extended period of time, and logic and reason can be deferred for an extended period of time.

    Ultimately, the bursting of the local housing bubble will undoubtedly hurt my business, but I don’t care at this point! I cherish every second of this collapse. It is truly bitter-bitter sweet.

    As for the real estate agents, mortgage brokers, housing flippers, etc … LET THEM EAT CAKE!

  3. Sue

    Housing expectations

    I think a large part of the housing angst is believing in the housing dream (ie. if I just had my dream, custom house, things would be different and so much better with granite counter tops and sitting rooms, etc.) . If you’ve never lived it and always wanted it, then the housing bubble is enough to drive you mad.

    But having tried it (in a cheaper market before moving here to rent a 1,164 sq. ft. 2 bedroom white tile kitchen place with 4 kids) – it just doesn’t make any difference. We still do the same things. The house is still a mess like it’s always been as I just don’t like cleaning much. Actually, I like it better because they’re less stuff to clean – it’s great having the Irvine rental company do a lot of the work (ex. clean pool, plant care, repairs – no more unclogging filthy drains for me! I don’t even have to buy lightbulbs – the repair guy just shows up light bulb in hand and puts the new one in).

    So for those with housing angst – relax, the house really isn’t going to make any difference in your day to day lives anyhow. It’s like that reality show the Ozbournes – there’s Ozzy with the huge house and all the money, but what does he do all the time? He draws pictures with felts in a little notebook. You can do that in a rental unit no problem.

    So go take a fraction of that housing tax payment and eat a nice dinner and forget about it.

    -Sue

    P.S. another interesting off-topic link

    Who’s most at risk for foreclosure?
    http://realestate.msn.com/buying/Article_bankrate.aspx?cp-documentid=4946646&GT1=10130

  4. NanoWest

    Lee in Irvine, I feel your pain……….as a life long entrepeneur in the Silicon Valley during the 1990’s I had the same anger. My company was in the nuts and bolts business and struggling selling products and making a profit. In the meantime all of these fools were making millions of dollars. I remember many times the “fools” telling me I was stupid for being in the nuts and bolts. In the end, they lost everything and I still have my nuts and bolts.

    Lee, I hope that you are able to save enough money and get a great deal on a home for your family. When it comes time to buy, be relentless in your purchase. Squeeze every penny out of the seller.

  5. awgee

    I don’t have any good feelings for someone else’s bad judgement. And I truly see it as bad judgement and not bad luck. I don’t celebrate watching the flippers lose money. I would like to see the fraudulent flippers/100% financers do some jail time. I do feel somewhat guilty for being indifferent to the folks who will lose money and their homes. When you realize it was bad judgement and not bad luck, it seems like some will have a tough lesson, but an important one. I had to learn my previous bad judgement, and now I plan to profit from that lesson. It is too bad that pain has to accompany life’s lessons, but most of the time, it does.
    The lies told by the realtors sitting at the open houses doesn’t even tick me off any more. It is now expected and just more information to be learned from. It is even great learning from those trying to call the bottom or those thinking they have to buy.

  6. bitterLArenter

    Amen my brothers!

    I couldn’t have said it better myself.

    The smug arrogance, *THAT’S* what I’m going to enjoy disappearing. The pity owners had for lowly renters that were just too stupid to buy and therefore hopeless.

    I just didn’t “get it” when friends were in bidding wars above the asking price of the house(700k+), or when my friend told me his shitbox 70’s condo in a crap part of Huntington Beach CA went up 25k in value while it was in escrow.

    Or how my friends 950 sq ft house in the ‘hood is worth 800k or more, when he paid 220 for it in 2001.

    Everybody was such an fing genius, making a killing in real estate.

    The new cars, the multiple refis, the paying off of credit cards, why save for retirement when your house will be worth millions?!? And just run up those cards again, you’re going to refinance again anyway!

    Property only goes up in value in socal, and they’re not making any more of it!

    When my coworker told me about how everybody at his (immigrant) family reunion was talking about their rental houses, I knew the market was really screwed up(2004 ish).

    450k for that horrible condo conversion in santa monica only *miles* from the beach, huh? great deal! Too bad you needed an I/O loan to get it, and could only afford THAT even with lots of overtime that of course immediately disappeared. Went into late payments within 6 months of getting the loan, still saying how great it was he got in when he did.

    But I’m not bitter.

    😉

  7. No_Such_Reality

    I sold my place and got out less by skill than by disgust. When I went to looking to buy, everything was gone the day it went on the market. If it didn’t it was a bloody wreck wanting massive dollars. Then the coup de grace came. The selling realtor told my realtor (with me present), that I should write a letter explaining why we should be allowed to buy the home.

    I will not waste time expecting sellers to write a letter why I should buy their home. It’s tempting, but I suspect, once prices start taking a beating, I’m start putting in offers. To me, they’ll be valid, good offers from a qualified buyer with the financial means to finance the purchase in a tough credit market, in a market where depreciation is occurring.

    To the sellers, I’m confident they will find them insultingly low. Possibly unworkable. I suspect I will end up with a Repo, not because I want repo, nor because I think I’ll make money with a repo, but because, in the end, when it comes time to buy, I suspect the banks and maybe 5% of the homes out there will be the ones willing to look the market in the eye and realize they aren’t giving the home away and they aren’t being insulted.

    In the meantime, like Sue, I’ll stay renting the rather nice townhome for about $500/month more than just the taxes on the homes we’ve been looking at. And like Sue, when the special assessment showed up, I just forwarded it along with my monthly rent to the landlord.

  8. bitterLArenter

    Ah yes, the letter saying why you should get the house. I remember a friend had to do stuff like that to rent in San Francisco in the 90’s anyway. I also can’t wait to see these model/actors turned realtors leave the biz and get a real job.

    Man, that Kool-Aid must have been damn good, because so many people drank it. Amazing.

  9. Boomer

    You’re no more rational than the so-called bubble enablers if you allow their smugness to have such a profound effect on your mental well being. If you were truly comfortable with your assessment of the housing market, you wouldn’t be angry, you’d be content.

  10. lee in irvine

    Thanks for you concern, but I have more than enough money to buy a home at this stage of the game. My financial condition has never been better than it is right now. HOWEVER, it needs to be said; my financial condition became that way as a result of me not making stupid decisions like so many of my peers. I have a friend who works in the medical field, making over a quarter million dollars a year … yet he still lives month to month. It’s amazing.

  11. lee in irvine

    WRONG!

    I am angry about the current housing situation because I knew this was ultimately going happen, and it didn’t have to happen. I am angry because a lot of suckers with innocent children will be losing their homes in the coming years. I am angry because the clouds of despair over my hometown as a result of this ponzi scheme will be much worse than most people understand.

    Despite what you may think, I am not a selfish POS who only cares about my own interests. With that said, I am very pleased that RE values are declining, however, I am not happy by the ramifications of a gigantic asset bubble.

  12. Darin

    Boomer,

    Way to snap off a judgement. I suppose Martin Luther King should have been content to be verbally abused too?

  13. IrvineRenter

    Boomer,

    There is truth in what you are saying. I don’t let any of this madness keep me up at night, but it is very difficult not to let those with that special combination of ignorance and arrogance get under your skin. In a perfect world, if we were all monastics, we would not be bothered by the thoughts and actions of others. In the real world, even when we know we shouldn’t let it bother us, we do, and it does.

  14. IrvineRenter

    After the seller has accepted your insultingly low offer, you should withdraw it and tell them you have found another property but you could be persuaded to go through with the transaction if they wrote you a nice letter.

  15. Purplehaze

    Well let me introduce 131 Talmade, Irvine CA 92602

    Property sold 3/2/04 for $554,900 and sold again 12/15/06 for $760,000

    And now the above property is foreclosed and being offered for $599,000 by the bank. Irvine Renter, be my guest to rip this one up!

  16. Darin

    Ever ask someone how they broke their arm or their leg?

    In truth, we are asking that person “Please relive this painful experience for me.” Each person has their own reason for asking, morbid curiousity, fear of it happening to them, wanting to hear a crazy story, etc.

    Funny thing about the real estate market, it’s like watching someone break their arm, but you know the punchline already. “Really, taking that bike off that ramp over that ditch is not such a hot idea,” we say or think. Then, we watch our friends, family, even financial advisors go and get a 10 year IO, neg-arm, smoking crack mortage to pay for some fixer 1200sf for 700K.

    Should we be mad because we couldn’t communicate effectively? No, they are grown ups who read the paperwork and made three-quarter of a million dollar decisions without thinking or consulting. Should we feel pity? No, pity is for those who did and meant well, but failed. Buying real estate is not an event that has moral value nor is any investment for that matter, and that is what they were called “investments”. I could go on, but I think the point is made.

    No other emotion for this situation is more apropos than schadenfreude.

  17. NanoWest

    Anyone on this blog want to head over to 131 Talmadge and make a reasonable offer…like $350,000

    Poor banks…..gonna feel the pain.

  18. lendingmaestro

    I know what it’s like sitting in room full of people talking about “the riches in real estate” that they’ve accumulated. You want so bad to shake them back to their senses, and part of you is a little jealous of the money they made. But you find solice in the fact the they will receive their retribution if they haven’t cashed out yet

    I can tell you that our bank is doing less business than any of the previous 8 quarters. It is funny when I think about the situation I am in vs. my opinions about the market. I am an absolute housing bear without question. I was able to make a very good income for the last 3 years here. I was nowhere near what some loan officers at brokerage firms were making selling dirty 12 MTA/LIBOR fully adjustable neg ams, but I’ll still be making a wage that I can live on during a down cycle while they are working for Vons. I’ve been lucky to work for a reputable, highly regulated bank. I can’t lie to borrowers even if I wanted to, and that is a fact in retrospect that I am sincerely grateful for.

    I often wonder what happens to people that did not take a guaranteed fixed rate offer that my bank had for them, in hopes that a broker will get them a much better program. Some of them call me back almost in tears. “I thought my rate was fixed!” The dark side of me takes pleasure in their misfortune but I catch myself before I laugh out loud. It’s only human nature to want to be right. When our predictions come true we get gratification from that, which is ok. It definitely is hard not to get caught up in the emotional ride.

    People desperately want to believe that they are rich, or can afford a bigger home, or that they can qualify for a lower rate. There are still suckers out there that believe they can get a fixed rate mortgage for 1.25%. They want it to be true, so to them it becomes truth.

  19. William Jones

    Great point, Susan…I think living in the OC encourages this type of thinking, and it is hard to get out of it. “If I just had that new house my life would be perfect….” of “If I had that new convertible hardtom B-mer THEN my life would be perfect” or “If I could buy some of the cool stuff in the malls THEN my life would be perfect.”

    Maybe people EVERYWHERE think this way, but there’s something in the air in the OC that makes this type of thinking more likely or more seductive.

    I am temporarily working in the OC (Irvine) but I still go back to Pasadena on the week-ends. I once thought I wanted to move down here…now I am not so sure. I don’t feel like I can live in a place that is this perfect…it all seems so perfect here…every blade of grass is exactly where it should be.

    Pasadena has it’s problems…much hotter than Irvine in the summer, but I like that I can walk there to coffee shops, bookstores, markets, etc., from my living place. It is not nearly so smug.

  20. Sue

    Yeah, I think that’s true. I was so surprised when the school had a special Xmas shopping fair so kids could buy Xmas presents. No school I’ve ever seen before does that – the kids make their little art things in class instead. True, the school didn’t make any markkup on the items, but still, it’s a lesson in consumerism is good.

    The kids like the Totally Spies cartoon, and I could never figure out why the heroines liked the mall so much before I moved here. Now that I’ve seen Spectrum Center, I get it.

  21. Boomer

    Oooohhh the injustices that you face when others tell you that you missed out on the housing boom. It’s like having to sit in the back of the bus, right?

    Only a true ignoramus would attempt to compare housing bears with the plight of Martin Luther King.

  22. Boomer

    Sue, great comment. The hedonic treadmill that you refer to is nowhere more apparent than in the OC. Housing bulls and bears alike are both guilty of thinking that having more “stuff” will lead to an increase in happiness. Twenty years ago people thought of their home as primarily a place to live, and the investment potential was nothing more than an afterthought. Now, first and foremost it seems that people think of their home as an investment. That fact that it is also a place to live is almost an afterthought.

  23. No_Such_Reality

    A lot depends if they were smart or dumb with their refi’s and purchases.

    Keep in mind, someone could buy a $800,000 home in 2005, and potentially get it reappaised and take cash out at $1,000,000. That $200K will pay the entire mortage for 36 months, that’s provided they didn’t get a long teaser on it.

    A smart person, literally, could have bought, refi’d, parked the cash and funded their payments for several years. I doubt many did that. There was a reason Best Buy attributed their record earnings to big screen LCDs and ipods.

  24. No_Such_Reality

    The investment in a home used to be that your “rent” quit rising. It also was that in 15 or 30 years, about the grand old age fo 40 or 55 if you ‘couldn’t afford’ your place and took a 30 year fixed loan, you’d be paid off. No more mortgage payments. No more rent, just the annual tax bill and maintenance.

    That was the investment, little future housing expense and a place of your own to take care of the way you wanted.

  25. Major Schadenfreude

    Well said IR!

    Reading this blog and posting to it helps me drain my toxic reservoir of schadenfreude.

    No one but an ascetic saint detached from worldly concerns could tolerate being characterized as “the fool” for the past 5+ years and not enjoy being a witness to the dispensations of just punishment.

    However, enjoying it too much is bad and so it is with some shame too that I bear my blog name.

    Hopefully the reservoir will drain quickly.

  26. IrvineRenter

    Now, everyone just wants to take a position on the equity train. Reserve a spot with an I/O loan, ride for a while, and get off richer. Works great until the train goes backward.

  27. buster

    Sorry IR, you’re off the mark on this one. Let me confess that I’m an owner (actually own two) that’s doing just fine with them. But I still REALLY enjoy watching the bubble explode but for my own selfish reason.

    I plan to buy another house at some point in the not so distant future. So every $100,000 price drop is $100,000 I put in my pocket. So just as owners bragged about “making” an easy 100k for doing nothing, future buyers are “making” 100k for doing nothing but watching the prices drop. I care not a bit about the seller – he can make money, lose money, break even. It’s none of my concern. But I DO enjoy watching more money be put into my pocket every month as my future purchase price plummets.

    It’s like last week at Lone Star Steakhouse in Tustin. Just as we were finishing, a nice couple asked if we wanted a “Buy one, get on free” Entertainment Book coupon. They had two and could only use one. So we happily paid half price for our meal. That brought me happiness. The fact that Lone Star “lost” half the amount of our bill brought me neither joy nor sorrow — I couldn’t care less. I was happy for me.

    The crushing the sellers are suffering brings me joy only because it has a positive impact on me and my family. Their loss or suffering does not affect me or my family, so I don’t care one way or another. Selfish? Maybe. Or maybe I’m just being more concerned about myself and my family than some seller with whom I have no connection whatsoever.

  28. Mexifornia Mortgage Broker

    There is a lot to be said about the current state of affairs. For once I will be happy that I will not have to deal with the arrogance of sellers who tough their house was made out of gold. I remember that once I saw a transaction in which the seller was countering to all the potential buyers with the condition for the buyer to release the escrow deposit money from the get-go to the seller. This means that if the transaction did not close and it was consequently cancelled, regardless of the reason, the seller would keep the escrow deposit. Such incidents rubbed me the wrong way so much that now when I see houses sitting on the market for months I am extremely grad that common sense is coming back to this nut house called the housing market.

    Within the last two years I am sure there was a time when more than one of us here at the blog felt like Joseph P. Kennedy when he made the decision to get out of the stock market before the 1928 crash with those famous words, “You know it is time to sell when the shoe-shine boy tries to give you stock tips.”

  29. Joe

    Buster,
    I would like to do the same in a couple of years as prices bottom out. I was curious how you go about not putting yourself in a big negative cash flow position with an investment home? Do you just put down a huge downpayment? Or are you willing to deal with a few years of negative cash flow as rents increase enough to get you to breakeven? Or do you just buy outside of California?

    Thanks.

  30. Biscuitninja

    I don’t feel too bad, I saw what was coming and cashed out in 2005. I’ve sinced moved on to commercial property. What I don’t understand is that I do have a few dollars in real estate and most of them are income producing, but people say should I should just stop working. Alot of people just don’t understand that not working for 50ish or so years is a VERY long time. I’m happy to wait for a few years and let the money grow.

    My wife is finally coming around to the idea, but its been an uphill battle. Oh well take it easy
    -bix

  31. lee in irvine

    “But I DO enjoy watching more money be put into my pocket every month as my future purchase price plummets.”

    You’re full of crap! LoL! I bet you don’t have much money.

    Your nonsense is just that … nonsense.

  32. buster

    Joe –

    It’s simple in concept and difficult in practice. Most importantly, run the numbers. I broke even on a month-to-month cash flow basis, but was slightly negative after taxes, insurance, maintenance and vacancy. After eight years or so, the rents rose enough to swing positive on a year-over-year basis. But I just followed the basics – buy in the worst neighborhood of a nice city. In this case the “Willows” in Irvine. The key is to look to the VERY long term and, while you can expect negative cash flow in the beginning, you’ll do fine in the long term. Get a fixed loan so you can have some degree of confidence in your projections. Take your time and find the right property (3-4 bedrooms, 2-bath) at the right price. No association and no mello roos. View what you purchase from a tenat’s point of view. The tenants want decent space, a safe neighborhood and Irvine schools. The Willows, College Park and California Homes is where you will find the most promising prospects for property that you can rent now and have a negative cash flow that you can handle. Your most important skill will be patience. Best of luck!

  33. graphrix

    If anyone decides to do this please let me know. I want to be there to take a picture of the broker when he reads the letter. It would make a great post.

    “WTF are these buyers thinking insulting me like this? Don’t they know that the home is already priced below market? So what if the last comp was from a 2005 sale and three foreclosures are on the same culdesac. I sold those homes and I know the value. How was I supposed to know they would never make a payment?”

  34. graphrix

    Better yet 2002 it sold for $360k. I think that would be a fair offer since the current title/bag holder owns a lot of property these days.

  35. graphrix

    The arrogance of owners is one of the primary reasons why I started to believe in the bubble. “When the wise leave, only the fools are left.” Warren Buffett.

    I witnessed too many fools think they were special because they were able to buy a home. I know that we have only seen the begining of the fallout of these fools. Many are hanging on by a thread or just accepting that it is unwinding. Their belief that RE can only go up will be there undoing. They didn’t realize that if you treat it like an asset it will perform like an asset up or down.

    I am labeled a doom and gloomer but I ask if I warned them about the tech bubble before it burst how would they feel. The response is always this is different and you can’t compare the two. But what about the 90s housing bust I say and the response is it was about the jobs and economy. Even though the economy improved well before housing did they fail to realize if people can’t afford/qualify to buy they won’t and that prices will suffer.

    I am not bitter or even feel joy in the failed flips but I think it is more of a lesson for us all not to fall for the lies we have been told. If the economics were more reality based we wouldn’t be here right now. What is worse is the flippers we make fun of can and will hurt the people who bought on a more sane reason.

    Do I feel empathy for the failed flips? No. Do they feel empathy for my failed investments? No. When they talk down to me because they think I am doom and gloomer or bitter renters is when they have pushed the limits. A home a place to live not your home depot credit card or your retirement fund.

  36. Adam Smith

    I broke even on a month-to-month cash flow basis, but was slightly negative after taxes, insurance, maintenance and vacancy.

    Screw the month-to-month cash flow rationale: the upshot is you’re LOSING money on your “investment” and HAVE been losing money.

    Now that prices are guaranteed to depreciate, your “investment” is only getting worse. And now you’re looking to get in deeper with MORE property?

    Sounds like you’re paying alot to be able to feed your ego, simply so you can dispense your “wisdom” as yet another great real estate investment guru, LOL.

  37. Adam Smith

    People desperately want to believe that they are rich, or can afford a bigger home, or that they can qualify for a lower rate. There are still suckers out there that believe they can get a fixed rate mortgage for 1.25%. They want it to be true, so to them it becomes truth.

    Like the old saying goes, the most dangerous lie is one that people WANT to believe, as it fits in with their pre-conceived notions and desires. Tell people they’re actually growing rich by the housing bubble (but failing to mention that equity is effecting the owner-occupied home owner, and is NOT realized until they SELL the house to rent) is one such lie.

    Never-mind pointing out that their skyrocketing home appreciation is actually working AGAINST them in the meantime, as they’ll pay higher property taxes, higher home insurance rates. Nevermind that they’ll also end up paying more in higher transaction costs if they decide to sell and buy another house, as they’ll be paying more to the real estate agent and mortgage brokers ,who pocket commissions based on % of sales price.

    No, people just LOVE to feel like they’re rich big-wigs, better than everyone else, when they fail to realize that they’re not gaining anything when EVERYONE is enjoying the same.

  38. Live And Work In Irvine

    Articulate, depth, rational, wisdom, vision. This blog has it all!

    Lee you nailed my sentiments.

    My personal tipping point was when I read about the need to write a letter to a seller that you were worthy of their home about 2.5 years ago.

    No way…that is mania.

    My kids are moving out of the area because of costs, and I am beginning to wonder if I ever want to purchase around here unless it makes total financial sense.

    I think I’ll just keep renting a very nice house for less than half the cost of owning it and invest whatever is left over in U.S and International ETF’s, then in 15 years pay cash for a place somewhere else in the U.S. and retire.

  39. SoCalwatcher

    Even if you use the half off coupon, the Steakhouse still made a proft. Markup on dine-out food is unreal.

    When the bank takes over a house they are carrying for $500K on a short sale or REO sale, they lose money and lots of it.

    When this happens many times over to many banks (as it will happen in almost epic proportions after the ARM resets taper off) the damage is going to be severe and will affect everyone. The ripple effect this will cause on interest rates and other financial sectors is going to be painful. Bond prices are already starting to rise, which means the smart investors are bracing themselves for a fallout.

    Good luck getting any kind of mortgages on those future flips, buster.

  40. momopi

    To: Biscuitninja

    I read somewhere that retired men tend to die sooner, so it’s probably a good idea to keep yourself busy and active!

    If I wanted to, I could retire today, move overseas, and live off rental income. I’m not rich, but it’s easy to live on few thousand dollars/month in Philippines, Costa Rica, Panama, etc. I could be fishing and drinking beer every day.

    But that’s taking the easy way out, and I suspect I’d die quickly from being a bum with no goals, motivation, or ambition in life. 😉

  41. SoCalWatcher

    Here is my letter:

    “Dear seller,

    I wanted to purchase your home and save you from further equity drainage, but you asked me to write a letter to beg you on why I should get to buy your home.

    Well, take your over priced stucco-palace and shove it up your LV lined ass.

    Good luck on the sale!

    Regards,
    SoCalWatcher”

  42. lendingmaestro

    1.) Anything with an initial negative cash flow is not an investment, it is speculation or business venture. Those two things are subject to high fatality rates.

    2.) Unless you “short-sold” the house and “covered” your short, which you can’t do with a house, then you didn’t make any money by prices falling.

    3.)If home prices are dropping across the board, and you currently own one, then you will be losing equity as well.

    Please explain how you are making money???

  43. Laura Louzader

    Greetings from a Chicago renter.

    Love your great blog, and spent last night pouring over all the posts, that say what I’ve been thinking since 2002, when prices in my “up and coming” and “rapidly gentrifying” lakefront nabe had doubled over those in 1999, even tripled:

    I told you so, I told you so, I told you so.

    I said that Chicago wages and salaries would not support these prices, that 4X average income for a one bed in a shaky nabe was over the top, that people were going in over their heads.

    I put in low-ball offers on places I liked and was rejected. I am buying for a home to love and commit to, not to flip or lose to foreclosure.

    What I got in reply was a lot of smug attitude. The smugness of one local flipper, who was leveraging about 4 condos overpriced at $300K each on an income of $65K a year, was incredible: He said, I’m successful because I have more skills than you and you are losing out because you are not as smart. I wonder where this guy is now.

    I was damned if I was going to give some flipper or schlock rehabber a 400% profit over what he spent in 2000. I also wasn’t game for a mortgage of 5X my income.

    So am I taking joy in the misfortunes of others? Am I ever. 2 conversions on the auction block so far, yet stuff in the permit pipeline is still coming on the market, priced 20% above the top prices of 2005. Some morons are buying. Most people aren’t.

    The prices aren’t falling fast enough. Most stuff is still overpriced, by which I mean it is still way over 2001 levels, where I believe it should be.

    In the meantime, folks who should be hundreds of thousands of $$$ ahead on places they bought in 1978 are being put out on the sidewalk by the sheriff. How’d that happen? They took the cash out to buy $75K cars and big-screen TVs and timeshares at Hilton Head. Somehow, I don’t feel sorry for someone who makes over $100K a year, has never had a big disaster or drop in income, who lets this happen to her.

    Thank you for reminding me that the rout is by no means over. I want to buy into the falling prices, but after reading your blog, I believe I will wait a few minutes more.

  44. sui generis

    bought our house in 01 for $700K, put about $100K into it, listed it for $1.895M in February, dropped the price and sold it for $1.535M in May. Poor us.

    Can you eat schadenfreude? Do you need ketchup to get it down your gullet?

  45. IrvineRenter

    Come back in a few years and tell us how much you lose on your next purchase.

    BTW, did you feel good about that $350K price reduction? Tastes good to me…

  46. sui generis

    not happy with the price redux at all, but hey, a win is a win and a windfall is a windfall.

    We will make tons on our current purchase, rest assured. It’s a generational purchase – we won’t sell until our kids our out of the house. There are ups and downs of course, but over a long time horizon, SoCal real estate is pretty close to a sure thing.

  47. reason

    sui generis,

    Everyone here agrees that over the long haul real estate is a good investment. At issue though, are the speculators whom have taken advantage of the recent real estate market. Whether that be abusing the relaxed lending practice, buying multiple properties then dumping them, etc.

    I am actually glad for your recent “windfall” but I am sure there are lots of other poor souls who didn’t. Best of luck to you.

  48. Major Schadenfreude

    If you pumped your windfall into another inflated asset, then your “win” is a dubious one.

    Hope your kids aren’t too much over 3 years old, as your won’t see these prices for quite some time, IMO.

  49. biscuitninja

    Mainly we’re trying to reach a goal of 50k a month in cash flow. It sounds like a HUGE amount now, but give it a while and it won’t be. I’m about halfway there, but that is still a very long way off.

    As for doing something, well i love being an engineer, so i’ll always tinker and do stuff for people. I just won’t kill myself trying to deliver the impossible in a short amount of time.

    anyway good luck
    -bix

  50. biscuitninja

    Sounds like you timed it right. Mad? No, but I do wonder what you’re going to do with the profit. Another house? I’m sure you could buy a nice place that would devalue quickly or buy a solid investment that will stagnate or evaluate very slowly, but those are still 2-5M. FAR and away more expensive than the little 1.5M.
    It would be intersting to find out, but i doubt you will come back here.
    -bix

  51. No_Such_Reality

    There was obscene amounts of money to be made from 1996 to 2006. Anybody holding from before 2004 can still make windfall profits. More importantly, anybody holding from before 2002 likely has comparable rent beat too. That’s the advantage of owning.

    However today, right now, buying a nine hundred thousand dollar tract home in Irvine looks more questionable. Comparable rent is much lower than the cost of owning. That’s today. Likely tomorrow. Probably now through 2009 maybe longer. Possibly less if certain economic things occur.

    Long term I’ll own, for now, renting is much more affordable and more importantly, fits much better with my stage of life and changes occuring in it.

  52. Laura Louzader

    I’ll buy if I find a place that is substantially similar to my rental, for the same or close to the same monthly cost, inclusive of everything.

  53. patience2007

    My main motivations for owning my own house someday are:

    1) The security of knowing my rent is not going to increase, or my landlord is going to sell my house out from under me. I’ve been renting my current house for 4 years now. I never know if I am still going to be living there beyond the current 12-month lease. It makes planning tough. But mostly it’s just a mindset thing.

    2) The ability to modify my house as I see fit. Paint the walls whatever color I want. Add a window. Put in better appliances, etc.

  54. patience2007

    I forgot:

    3) The ability to hopefully have a paid-off house at about the time I would want to retire. My mother-in-law is nearing that age and is just a renter. She’s having a tough time figuring out how to make ends meet. It would be much easier for her if she had a nearly paid-off home. I don’t want to be in that boat.

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