I nominate today's featured song as the ode to The Great Housing Bubble. If you drank the kool aid, I mean really drank the kool aid (like today's owner), life must have been very good. All this free money allowing you to do whatever you want whenever you want. Life must have been very good to those who lived off their houses. There is nothing wrong with living well, and there is nothing wrong with becoming accustomed to a certain style of life, it just isn't very wise to build this life on an unsustainable foundation of Ponzi Scheme financing -- it will collapse, and you will lose the life to which you have become accustomed.
Perhaps I should nominate Tequila Sunrise by the Eagles? The hangover must be a killer...
Wikipedia defines faith as "a belief in the trustworthiness of an idea that has not been proven." Religious faith is a collection of beliefs based on ideas which are neither testable or provable. If you accept the core beliefs of a religion on faith, you generally get a feeling of peace and well being that serves to reinforce the "correctness" of the acceptance of faith. Most religions build on these core beliefs and assemble a series of ancillary beliefs for guiding human behavior known as religious dogma. California has a major cultural "religion" that cuts across traditional denominational lines -- the religion of real estate.
Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the "higher power" of market forces -- real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn't matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn't matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "Why Christianity Must Change or Die" in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California's religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California's Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.
Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.
Figuratively, today's featured property is a church (just like all other houses in California.) The fact that it is located on Church Street is testament to the faith the buyer had in its continuing appreciation. Based on the resale history, there was reason to believe prices would always go up. Our faithful owner borrowed 100% of the money necessary to worship here.
Our market is experiencing wave after wave of pain. Will the owners endure, or will they give in and sell? It depends on the circumstances and the constitution of each owner, but those with little to lose are giving up without much of a fight, and they are passing the pain on to the lenders. Today's featured property is a classic illustration of kool aid intoxication and bubble behavior. The owner bought with 100% financing late in the rally, she managed to pull out a bit of spending money, and now that prices are crashing she is bailing out and leaving the losses to someone else. The losses to the lenders are accelerating along with the decline in prices. This one is gonna hurt...
Three weeks ago in the open thread of 6-28-2008, I suggested that maybe oil would top and the market would bottom. It is too early to tell if this weeks market action saw both of those occurences, but both of these markets have certainly put in a short-term top and bottom. Only time will tell if it lasts longer. Calculated Risk had an interesting post this week on the economy. In it, he suggests that the difference between a moderate recession and a severe recession is going to be the price of oil. If the price of oil drops, inflation will subside, the FED can keep interest rates lower for longer, and the recession will not be as severe. I think he is right. I also think this is what the stock market is betting on. As long as oil does not rally to new highs and stay at elevated levels, the stock market will probably rally -- this isn't investment advice, just an observation... BTW, I also believe the bullish action of the last few days in financials and homebuilders was short covering and both of these groups will make fresh lows -- but I could easily be wrong...
There is no particular theme for the music today, I was just in the mood for Paul McCartney.
What are your observations of the housing market? Are there any interesting properties you are watching? Tell us what you see.
Declining home values are a source of great aggravation to homeowners, but it is even more aggravating to the lenders. The lenders are the ones really losing in the deal. At one time, I had believed that the pain of loss might actually put and end to the crazy beliefs of kool aid intoxication. Unfortunately, since it the lenders who are enduring most of the pain, the general populace may continue to believe these crazy notions. The fact that the lenders are absorbing these losses rather than the people will create a massive moral hazard. All of the gains went to the individuals while all of the losses were absorbed by someone else. The seeds of the next bubble are being sown today. Perhaps the enablers at the lending institutions will not allow another bubble to be built, but I rather doubt it. Institutional memory is short, and as long as the infrastructure is in place without any significant regulatory reform, we will create another bubble as large and as painful as the one we have just witnessed. I suppose I am OK with that as long as I buy at the bottom and sell to some fool at the next peak...
Today's featured property is a large condo in Woodbury breaking down below $300/SF. This is the next tier of the housing market showing distress. It will get worse.
Filtering out the bad that holds us back... Take hold of what is true to your hunger A hunger that will not go away Plans for tomorrow, they will remain
I have a parable for you today:
A weary traveler was on a
quest to satisfy his deepest longings and desires. He traveled from
place to place, but no matter where he went or what he tried, nothing
would quite satisfy him. One day, exhausted from his search, he
happened to sit beneath a magical wish-fulfilling tree. He thought to
himself, "Perhaps it is not so good to desire so much. It has not
brought me any lasting satisfaction, but I am tired, and I could use
something to eat and drink..." No sooner had he thought this when
delicious food and drink appeared for him to enjoy. "Wow," he
exclaimed, "this is fantastic, but it would be nice to have someone to
share this bounty with." As soon as the thought occurred, a companion
appeared to enjoy the feast. His desires replete for the moment, he
thought to himself, "This is very strange. Everywhere I have traveled I
have wanted and found no satisfaction, and here at this tree, I can
have anything I desire. I wonder if there is something magic in this
tree? I wonder if it is inhabited by some spirit? I wonder if it is a
goblin that will consume me?" And, as soon he had this thought, a goblin
appeared, and consumed him.
HELOCs enabled people to satisfy
their hunger for vacations, consumer goods and the like and live well
beyond their means. This went on for an astonishingly long time. Many
of these people became accustomed to living off the extra "income"
coming from their houses. Like the goblin in the parable, the magic
wish-fulfilling house consumed them, and now they have lost their
house, their credit and themselves.
Whenever I hear the Beatles song, Penny Lane, I think of Irvine. An idyllic little world of perfectly manicured landscapes, and perfect little houses beneath the blue suburban skies. I have written before about the English neighborhood in Northwood that is a particular favorite of mine. If there is a "Penny Lane" environment in Irvine, you will find it here. Today's featured property is located in this little enclave, and it now the private Hell of Washington Mutual.
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People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled "
