This post ought to be required reading for every lawmaker in the country.  And every presidential candidate.  Excellent job, IR.  Thank you for another wonderful example of an articulate, fact-based, rational examination of the current credit disaster.
-----

Wow

As someone who was obliterated in the dot-bomb era, I can tell you your “Who Cares” section is dead on.

The marketplace will be punishing them for many, many years in ways you can’t imagine.

This post was almost “boring” (which I mean as a compliment) as it is so common sense and obvious.  Yet, so many foolish people flat-out stuck their heads in the sand.

Many highly educated people and those whom most would consider to be above average intelligence were all parroting these fallacies.

IrvineRenter - another one that I would add to the list is:

“If you are renting then you are throwing your money away”.

When I opted to sell my home and start renting, I had to listen to all this garbage about how I am just “throwing money away” and not “building equity”.

When I moved into an apartment, I would get solicitors leaving flyers on my door on an almost weekly basis that said things like “Are you ready for the NEXT STEP” (Home Ownership) as though I was some lower class citizen for not being an “owner”.

Looks like I had the last laugh on that one.  I don’t get those flyers anymore either.

Can this logic be applied to cars?  I have heard people say the same thing about cars (why would you lease it…, you are just throwing money away.  Better to buy it, and at least retain some equity).  But cars lose equity literally the second you purchase it, and drive it off the lot.  Houses don’t do this, raw land doesn’t do this. 

Great post IR.  I’m a longtime reader, but changed my name because of some undue harrassment.

For the “Who Cares?” section, don’t forget that knowledge of a bubble can be a very big help to noninvestors.  In 1999 there were many colleges and grad schools where 1/3 of their graduates were going to internet and new media companies.  The majority of those companies weren’t making profits.  The exit strategy was to go public.

Both the dot com bubble and the housing bubble had a lot of people make career choices assuming the bubble would go on for a long time.  From late 2000 through about 2003, I saw huge numbers of people trying to switch careers out of dot com-related jobs.  The same is now happening for real estate agents, mortgage brokers, and construction workers. 

The dot com bubble caused tremendous problems with state and local budgets.  On the way up, revenue collections grew very strongly.  More govt employees were hired. Large raises were given out. Nonessential projects were started.  Then it went bust, and the State and local governments had a real budget crisis.

Here is a real gem of an explanation of Santa Clara County’s finances in 2002, when the dot com bubble was deflating and jobs were leaving the County in droves:

“The various economic data points we have seen and reviewed over the past two months have not been positive. As most people are well aware, the financial markets have experienced a precipitous decline due to a variety of corporate accounting scandals and misappropriation of funds by corporate executive officers to the detriment of investors. The technology and telecommunication sectors have been particularly hard hit with significant layoffs continuing to occure in these industries. Unfortunately, this has affected the Santa Clara Valley. The first quarter sales tax collections for
Santa Clara County fell by 21% when compared to the prior year. This is the second consecutive quarter of dismal results in this area. This result could have a negative impact on our public safety sales tax collections in FY 2003 if Santa Clara County continues to contribute less to the statewide sales tax totals.

Other economic trends have also lagged expectations as consumer confidence has dropped substantially over the past month. Economists are concerned that if consumers stop spending the meager recovery we are now experiencing could be reversed and we could see additional economic reverals.

On the positive side of the ledger, the housing markets continue to do well. The Assessor’s affidavit, released on July 1, 2002, confirms that Santa Clara County is still enjoying moderate growth in assessed value with secured values increasing by 6.68 percent.” http://www.sccgov.org/SCC/docs/SCC Public Portal/attachments/keyboard/535272KeyboardTransmittal-0031613.PDF

Translation: “Our dot com bubble is ripping apart.  Companies are vanishing.  Sales tax revenue is dropping like a rock because fewer people live here and have less to spend.

However, on a positive note, despite some of the worst job market changes you could imagine from last year, housing prices and number of home sales are going up!”

I appreciate the time you spent on authoring this piece.  Unfortunately, I must differ with you on both the concept and support for several of your key points.  I have done so below organized using the topic heading from your essay.  I look forward to your responses.

Real Estate Only Goes Up/Buy Now or Be Priced Out Forever…

Housing prices rise with inflation.  Inflation is rampant (though not fully reflected in CPI). Using hedged finance over a sufficiently long period of time with ALWAYS provide a lower aggregate cost of housing.  Prop 13 tax rules only serve to enhance this aspect.  I have reminded you of the 70’s several times where housing cost increased 6x to 8x over an decade… I know you don’t think it can happen again, but you are wrong.  It has happened, it will happen again, and when it does anyone who has owned for a sufficient time-period using a fixed rate mortgage will be sitting pretty.

The Fed is going to continue to stimulate the economy through aggressive rate easing combined with injections of liquidity.  Ultimately these policy actions will have a firming effect on the overall economy and stave off the full brunt of this mess.  Ahem, IR, we disagreed on recent Fed actions and you were wrong wrong wrong.  You have a blindspot when it come to macro-related policy and the overall effect on the economy.  Ceteris Peribus - your forecast would be accurate, however as the macro-related variables change you MUST account for them in you predictions.

THEY AREN’T BUILDING ANYMORE LAND!  It kills me that you would use a “strawman” argument to diffuse one of the central drivers of SC property.  In summation your argument is that there is no shortage of land because “people don’t live on land, they live in houses, and land can always be redeveloped to increase the number of housing units.” Now you are assuming that houses and MDUs (or worse yet HDMDUs) are perfect substitutes.  They are not.  Most people would much rather have as much land as they can get, and prefer a detached SFR from a condo or and apartment.  All available price data supports this claim.  Yes when prices get high enough people begin to sacrifice space in order to stay close to something (e.g. Manahattan: Work), this is a sacrifice.  There may be a lot of land in California, Hell, all you have to do is get on plane to see that.  But there are number of factors that support higher priced areas (Anyone drive on the 91 anytime in the past decade?)

Everyone Wants to Live Here.  Ah, yes, the desireability of land and real estate changes over time.  How do you think a place like Vegas works?  Infrastructure is created, supported by local business, jobs combine with recreation, and voila, land prices go up.  I guess everyone forgot that this was just desert and the land should be FREE!?!  No, failing to recognize that land value do change over time is among your weakest claims yet IR.  You know better.

Its Different this Time.  I agree with the sentiment, no it is never different.

For cars and homes...it is the cost of ownership that matters. In the end we will have a car and a place to live from the time we are young adults until the time when we die. The question is: what is the “cost” for having these assets? Sometimes it costs less to rent and sometimes it costs less to own?

I appreciate this article. However we must all keep an open mind to the developing situation and not live the same ‘we know all’ fallacy that people lived during the ‘bubble years’. There is no anti-dote to ‘due diligence’ and making ‘informed’ decisions based off developing situations. In fact this is what saved me from buying a home during the bubble.

I gather from your response you believe in most of the above fallacies. I suggest you read Robert Shiller’s Irrational Exhuberance. It will provide the detailed research studies backing up the claims made in this post.

As for inflation, I don’t disagree with any of the points you raised. If nominal prices are saved by sacrificing real prices, I don’t see how homeowners benefit from this.

“Ahem, IR, we disagreed on recent Fed actions and you were wrong wrong wrong.”

Was that really necessary?

“You have a blindspot when it come to macro-related policy and the overall effect on the economy.”

If you say so…

The FED policy was wrong, and it continues to be wrong. You may perceive a benefit from inflation as it may serve to prop up the nominal price of your depreciating asset, but that does not make it sound policy. Perhaps you are too young to remember the problems of inflation in the 70’s, but there was a reason we plunged the country into a severe recession in the early 1980s to stamp out inflation. I never thought I would see that genie let out of the bottle again in my lifetime, and I wish I hadn’t.

“THEY AREN’T BUILDING ANYMORE LAND! It kills me that you would use a “strawman” argument to diffuse one of the central drivers of SC property.”

This isn’t a strawman argument. It is made by ignorant homedebtors all the time. The argument made is that there is a permanent shortage of dwelling units. This is not true, and it never is true. Your argument about substitutions and quality is a different argument entirely. Your points are correct, but they do not address the fallacious argument made by many.

“I guess everyone forgot that this was just desert and the land should be FREE!?!”

How can you make a silly statement like this after accusing me of strawman arguments?

Are you actually going to make the argument that land prices in OC went up 150% during the real estate bubble because OC became that much more desirable during that timeframe?

Improvements to land over time do add to the desirability of a location. It does not do so at the rate of appreciation we witnessed during the bubble.

Buy the car 3 years old, drive it till it dies… hard to lose with that one.

FWIW, I agree with CW’s argument.  There is a price that one pays to have land, and it is the weakest point in IR’s article.

The premium one pays is due to the limited land, and the housing shortage in Japan and parts of Europe is reflected in the lifestyle they have.  Unlike Japan and Europe, they don’t have high birth rate, and uncontrolled illegal immigration.  This helped them a lot.

In a way, the Mello Roos in newer community is also a premium that ones pay due to the limited land.  Land is relatively cheap, but it cost money if you want to have city sewer/DSL/phone/electrity and close to walking distance from school/shopping ctr./beach/ski/work.

the ‘no more land’ point IS true in some cases.  san francisco and manhattan have felt little or none of this pullback so far, the same could perhaps be said of the premium OC beach towns, santa monica, etc.  of course, this is largely a political function in most cases, but the market mechanism is the same as if there were physical limitations.  why can areas like the 15 corridor, or irvine, get smacked around more in a weak market?  because there IS plenty of land.  el toro could be redeveloped into enough housing stock to equal a quarter of the units in all of irvine if they wanted to develop it that way.  similarly, they could stick another quarter million SFRs in tracts on the 15 in riverside county.

I’m not sure if any of the posters are missing a particular point about land.

There is definitely plenty of land that is not developed.  However, one of the prime causes of the perceived shortage of land is development regulation.  This makes land which could have been developed, or developed at a higher intensity, have little or no housing on it. 

This is also another major contributor to bubbles in CA: long, expensive, and uncertain timelines for approval.  In a rising market, the value of entitled land goes up more rapidly in highly regulated areas.  Because of the long timeline for approval, the perceived high-value entitlement loses value quickly. 

Because many such entitlements require construction within a particular timeframe (usually something like commenced in 6 months, finished in 2 years), this encourages builders to finish projects for which there is no longer demand.  Sitting on empty entitled land doesn’t help much either.  Perhaps IR can add comments on this part of the discussion.

For more background on this, try “The The Impact of Building
Restrictions on Housing Affordability” http://www.newyorkfed.org/research/epr/03v09n2/0306glae.pdf

The cumbersome nature of the entitlement process certainly does create short-term shortages of dwelling units. This is one of the precipitating factors that provides bubbles with the initial price velocity to generate the “buzz” which takes over to inflate the bubble. This supply will make its way to the market eventually. At the end of every bubble, there is a massive inventory overhang just like we are witnessing now. When a perceived shortage suddenly becomes a massive inventory overhang, what does that say about the perception of scarcity?

As a matter of fact, housing in Western Europe and Japan is actually out of reach for the middle class.  Unless, of course, you want to move out to the sticks, which in those places usually means more than 20 miles from work!! 

Most folks in Western Europe and Japan rent, do not own.  Only folks with money buy and the flats tend to stay in the family, handed down from parents to the oldest son.

Japan “running out of land” did not stop their real estate market from dropping 64% over 15 years.

CapitalismWorks, you are forgetting something. When an area becomes very popular and there is little or no more room to build outward, they then start to build UPWARDS. This is one of the reasons for San Francisco’s seriously expensive home prices because they will not allow this. Notice all the freshly completed high-rise condo buildings that went up in the last 5 years and now many sit empty or 1/3 or less occupancy.

Interesting article, IR. You need to add a paragragh titled “Common sense isn’t so common”. Amazing how a mentality fueled by intense competition to keep up with the Joneses when the Joneses don’t have any money to float the facade either! The “everyone is rich” thing is interesting in psychological
sense because people just ignore the hard data that belies their belief. They lie to themselves in order to justify paying $800/sq ft because they think that someone else will and therefor they bite the bullett and start digging their own financial grave.

California and it’s economic-psychological attitudes and idealisms are fascinating from chilly Chicago!

Excellent article IR!

BTW some economists have studied how much housing goes up on real terms over 100s of years (since the mid 1800s, links in the Marin house bubble blog) and after adjusting for inflation it was less than 0.5% per year.
The analyses of those economist indicated that in real terms houses do not increase in value in a significant way and excessive house prices eventually even out to be around 3.5x median incomes, whether that happens over a short period because prices crash (when people are forced to sell, foreclosures etc) or because real value drops as inflation eats on the value of stagnant house prices.

Thanks for the great blog and the intelligent arguments you put forth.

http://money.cnn.com/2007/12/03/real_estate/Paulson_on_housing/index.htm?cnn=yes

Will the bailout affect housing prices?

California is fascinating to this Floridian because California is in housing Florida doubled.

Of course, in other types of weirdness, we are no. one.

The running out of land thing is actually sorta true in Miami-Dade
County.  However, as IR points out, when you can’t expand horizontally, you expand vertically, and we have been doing that.
Boy, have we been doing that.  We have been building highrises past the point of no return.  Will these things rot away before they’re sold?  Trouble is, what people really want is a house with land all the way around it.

If these highrises were built to sell in the 250-300 range, all, if not well, would become well rather quickly.  But they were built to sell for twice that.  Here in the land of Low Salaries, there are no customers for the product, and I don’t know what the contruction lenders were thinking.

Or the county.  (Except that perhaps, it could be that money changed hands. . . )

where in Europe?
In certain cities in Italy where the property prices have been increasing consistently over the past 10 years (after the last price crash) the % of vacant homes is > because people invest in “bricks & mortar”.  All this while development of new houses goes on and on.

And Europe is not immune to housing bubbles, case in point the UK, Ireland and Spain. Prices are currently falling in these three nations. In Spain oversupply is the number 1 culprit though of course lax lending standards and all the rest has played a major role there as well.

I’ll eat my hat if more than a handful of people respond to those letters warning of resets a few months before the resets hit.

They will be thrown away as junk mail I betcha.

A “responsible-looking” government should “show” that it is doing “damage control”. Like any other government reform trickle down to the bottom is going to be hard and most people afflicted by the housing crash may not be able to hold their breath under water that long.

This is just going to be something for the National Assciation of Realtors to pitch to gullibe buyers.

Now I don’t blame the government for doing what it is doing. But like any epic battle of good v/s evil, this makes the evil side look even more tainted and likely to fail in stopping a market correction. Go Market forces! Go!

While I agree there are still a lot of land available in OC, but basically there are all be terminated. Guess who is the biggest fund donator for govern Arnold Schwarzenegger.
That right it is the owner of TIC. If you are ever working for TIC you know even the coffee is limited to one cup a day, then you will start wondering the reason behind of the donation. 
I always think this is a invisible hand behind the land restrictions in OC.

Great and well reasoned.  And every bit true, although I would add a couple of modifiers.  Of course So. Cal. will be far more expensive than Iowa.  The weather is better and the jobs more plentiful.  But will it be 1.5x, 2.0x or 5.0x for the same or similar property?  Right now a $200,000 property in middle America is $1,000,000 here in So.Cal.  They’re not making any more land, but there’s plenty of developable land in the USA.  And at 5x the average, plenty of people will pick up and move to Idaho or Colorado or even Ohio rather than become serfs to their mortgage company.

Am I the only one here who is surprised that government entities aren’t buying up lots of land to use for schools and parks?  It could actually be a good opportunity for them.  A builder could make a graceful exit, get some cashflow. 

I am unsure of the tax implications, but I’m guessing you can’t take tax credit for the higher of cost or market for a donation of land by builders.  Otherwise, I suspect we would have seen large-scale donations by builders.

I don’t believe that all families want house with land around it. For example in Singapore, Hong Kong there are very nice, family oriented high rise condo towers in so called suburbs (not in city business district but 30-40 min away by subway). Going price around $300-$400USD per sq ft. Now I lived in SF Bay Area so I think I can do comparison however subjective it is and if I could get my Singapore accommodation in CA, I’ll swap typical suburban stucco box for it in heart beat. It goes without saying that crime rate, accessibility to amenities, transportation cost and convenience are the factors in deciding where to live. Right now in CA and almost everywhere in US except perhaps Manhattan all those factors favor SFH. However I observed first hand when these factors can favor high rise condos.

Excellent piece of work, and so right on.

If only homedebtors would have followed the fundamentals of buying real estate - 20% down, 3-4 times annual income, we would have avoided this whole mess. 

I agree with you on the Fed.  Ben Bernanke hates the middle class and will always choose Wall Street over us.  He and Greenie have destroyed the dollar, and we are all paying for it. 

The devaluaiton of the dollar = the invisible tax that we all pay.

Doubtful, first nobody knows how they’ll actually do it. Second, they instantly grind to a halt with lawsuits. Third, the last talking head, I think a BofA analyst, said with swift action they could probably “save” 1/3rd of the foreclosures.

Let’s face it, 2/3rds of the foreclosures will still crush the market.

All that will happen is people locked into debt-servitude fora few more years before they give up or bust out.  Much like many that get saddled with a payment restructuring trying to work out a deal to avoid bankruptcy, it grinds them, grinds them, grinds them, and eventually, they all still give up the ghost.

It is very good and important that there are multiple views on this post. Overall, we tend to all and too often agree with IR, but universal consensus doesn’t lead to reality nor truth. (and we-the Irvine renters- are biased !)
So we have to be careful ...

- One comment about:
“Ahem, IR, we disagreed on recent Fed actions and you were wrong wrong wrong.”
Yes, little too tough, but indeed, I was surprised IR was expecting Ben to increase rates short term:
a) over all history, when US had to choose between risk of growth vs risk of inflation, they have always taken inflation path, whatever Greensman was saying. And this time is no different (...), if not stronger in favor of inflation.
But I don’t believe it’ll for for ever. So IR, soon (Q109 at latest) you’ll be “right right right”.  Indeed, our friend Ben has another fear than Inflation.  He’s also scare about deflation:
>
This is VERY good news, because if you look at today’s situation with this fallen assets (=houses) that IR perfectly describes in today’s post, and also looking at other economical dynamics like fear about financial companies exposure, we share some of the conditions which lead Japan to deflation in the 90’.
If you think about it: house pirce will continue to go down, but up to a certain limit anyway. What’s guaranteed is lots and lots of people in the US will try to pay back their mortgage, devoting more and more of their revenue to this mortgage rather than consumming other goods. And they won’t be able too, ‘cause credit conditions will get very tide.
So when people are busy paying back their debt, this is close to deflation circle.
You can of course argue with that because as the USD will be so weak, imported goods prices will increase, so not really in favor of deflation.  But this will prevent people to consume even stronger, so if TIMING is aligned, situation can be very nasty.
So Ben and the Fed will try to avoid this because these guys are old enough to know the dramatic effect of such a deflation loop.
And to some extend, I trust them. We’ll have tough time, and house bubble will deflate. Prices will definitely go down, maybe not as much (unfortunatly) as what IR is projecting (I believe because rent will increase more than inflation in coming months/years) , and for sure not as fast (because not everyone will reach foreclosure in OC, and people are not eager to give away their home with a couple of hundreds thousands loss).
I also do believe SoCal is a place where people (still) want to move in. To argue with this, you need to spend some time in Seoul, Taipei, Beijing, Shanghai, and other places (including Europe) where quality of life is terrible.  Not that it justifies a bubble, and beyond the fact Californian indeeds tend to smoke crack too much and be so naive about where world reality is (there I’m 100% aligned with the post). But still, it does justifies a little premium (like maybe a 18-20 Price/Rent(year)) and not back to 13-14.

Good to see that this post sometimes moves from local house market trend to ecomony chat. Probably good as I think debating about the fundamentals of the house prices has become less meaningfull now that everyone is aligned with at least this one. Even no real estage agent has tried to argue in there. Have you noticed !?
(We need to remember that “economists have been invented so that astrologists looks serious” though ).

for some reason the Ben Bernanke reference didn’t go through:
>

When I was much much younger, and dinosaurs ruled the earth and there was no internet at all, even with the military, the rule of thumb was 2 1/2 times income.

From National Economist club, Nov 21, 2002:
Ben Bernanke: “ Deflation: Making sure IT doesn’t happen Here”

http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf

Bernanke is a believer in currency devaluation and inflation to stimulate demand. It will be interesting to see how he reacts when the inflation data starts to show the inevitable results of currency devaluation on our import consumer society.

I vividly remember the problems with inflation and the pain of the early 80s recession. There was a collective sense of relief and accomplishment when we did what was necessary to slay that dragon. I do not want to see that Phoenix rise from the ashes.

Our government is reactionary.

Their view is that we must maintain our asset prices. Any price drop is viewed as deflation and bad.  Frankly, I’d rather oil be at $40/barrel than $90/barrel, even though $90 better for the environment.

So we will inflate the currency to maintain prices until we all capitulate and scream about the inflation.  Gas at $4/gallon next spring for Memorial day will be a big test heading into the election.  Maybe it’ll take $5/gas and a $6 gallon of milk, maybe more, maybe less.

Part of this will be mitigated by the neutered CPI data.  CPI has little left in it that reacts.  Housing is out, gas is out, fuel is out, energy is out, food…

Made up numbers to maintain lower mandatory increases in welfare state payments.

“Made up numbers to maintain lower mandatory increases in welfare state payments.”

That is exactly what it is.

The major metropolitan centers.  This, of course, ignores most of the countryside farther than 20 miles from the center.

However, note that I did not say that Japan and Western Europe are immune to bubbles and speculation.  Only that what is their “normal” price is relatively much higher than in US.

And, if you want land in Pamplona or someplace in the middle of France, Sicily or Wales, well you can buy it… but just like you can cheaply buy land in Palmdale, good luck getting to work in the city.

I believe in capitalism as well, it is a fine system.  But look at the NY Times article today about the national debt:  9.13 trillion.  That is such a gargantuan number it boggles the mind.  And so much of that debt directly benefited SoCal through massive defense spending.  So again I stand my ground that what “capitalism works” thinks is normal: watching homes quintuple or whatever in value is due to unsustainable policies.  You can only live on credit card (whether as a consumer or as Uncle Sam) for so long before you can’t even meet your minimums.  Then the game stops.  This bubble is not just about real estate—it is the way we keep our economy humming:  we borrow money and call that prosperity.  But don’t let me rain on your parade:  buy OC real estate, you can’t go wrong, or so you think.

Well, if one wanted to know what land is worth, Lennar is finding out.  40 cents on the dollar.  Ouch!
IHB, how does that price translate into finished homes?
And does anyone know how much of this land is in SoCal?

“MIAMI - Home builder Lennar Corp. formed a land investment venture with Morgan Stanley Real Estate to acquire, develop, manage and sell residential real estate, with Lennar selling properties valued at US$1.3 billion to the venture for $525 million.

The acquired properties include about 11,000 homesites in 32 communities throughout the United States, consisting of raw land as well as partially and fully developed homesites in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.

As of Sept. 30, the acquired properties had a book value of about $1.3 billion for one of the country’s largest home builders.”

$16,000/160=$100. Does your lease cost more than $100 a month? I know the math ain’t the same, but it seems that almost everybody has “high mileage” and “excessive wear and tear”. If leasing wasn’t more profitable, car dealers wouldn’t push it so hard.
I am sure there are cases where leasing makes more sense. From what I can tell, leasing costs almost as much as buying and you don’t have a car at the end of it.

CW where’d you find that good ganj, man? UCI? Care to share some of it?

IR: Another landmark post. I enjoyed it all the more knowing that, unlike earlier posts made when bulls roamed the Earth, these same ideas you have brought up before are now irrefutable in the light of recent data. There really was a housing bubble and it really popped.

So, moving forward, what can this bubble and the “early fallout” tell us about the future?

Unlike foreign investors, corporate executives and wall street bankers, you and I have seen the enemy face to face (our neighbors) and I have to tell you, if the economy is dependent upon Americans continuing to pay a mortgage in the face of declining home values, we are all in for some serious hurt.

These are the same people who bought houses because it was the thing to do. Are we expecting them to stay in their houses when everyone else is skipping out on paying the bill? Oh, that America had such responsible citizens.

No, with 100% financing, a consumer lifestyle based upon borrowed income, and no shame about walking away from responsibility, I think we can safely assume (as you do) foreclosures will soon be off the chart.

Normally, I would consider the following comments to be better suited to the CR website (to which I confess I am now addicted). However, seeing as you put up that video contrasting the housing bubbles quotes to famous quotes from The Great Depression, I think it is fair to ask if The Great (U.S.) Housing Bubble is the precursor to TGD II?

I don’t mean people jumping out of windows and runs on the banks (we have FDIC now, right?). I mean economic downturn that puts people on the streets. After all, when was the last time the country averaged a negative savings rate? How much wealth does the average American have in the bank? (IHB participants excluded, since you must by definition be financially responsible or you would have been sucked in by TGHB).

If the economy has been driven by the consumer and the consumer has been driven by borrowed money, and the money tree has been driven by mortgage backed securities driven by house appreciation, what must take place for that unsustainable cycle to unwind?

Has Lansner taken a poll yet on how many underwater buyers plan to stay and pay off their mortgages? How many would try to hang on to the house if they suddenly become unemployed?

I am reminded of a friend who claimed to know “how to handle the credit card companies”. He had racked up $15,000 in bills. “Just don’t pay them,” he said. “They’ll call, and call and call. Just get a different phone line or ignore them. Eventually somebody offers you to only pay half the bill. That’s when you should take action. I went without paying anything for about two years before it got to that point, and I got rid of half my debt with that one phone call.”

Apparently, he didn’t remember I was the same guy he talked to when they originally called him. He wasn’t sure at the time if he should make such a deal. He also to this day probably does not realize his FICO is worthless. He now only pays with cash (he has no choice) yet doesn’t save at all (and so is simply awaiting disaster).

The point is, when I look around, especially in the light of the recent housing madness, I don’t see people like me (the guy who reads the fine print on the back of the credit card application and breaks into laughter as though there were actually a joke somewhere in there, or shrieks as if there were something unearthly in there, or yells in outrage as if there were something ungodly in there).

No, instead I see thousands and thousands of people like this guy. People who have no understanding of the agreements they signed, no feeling of responsibility beyond keeping out of jail, and no willingness to do what is right.

To be fair, I feel I must mention this guy was renting (like me, he couldn’t afford to buy reasonable housing). And I have to admit I don’t know your friends or your neighbors. Still, if there are others like him who bought, what does the future hold?

Is it perhaps fair to say The Great (U.S.) Housing Bubble is but a symptom of the cultural mindset you have described and attributed to Southern California? What if this mindset exists across the country?

Beyond the flood of foreclosures and accompanying price declines, what can the bubble (and early indicators of the fallout) tell us about the future of the US economy?

My wife and I are intent on saving up that 20% down payment, but now I’m wondering if we won’t need that money as an emergency fund when the full magnitude of this fallout is felt.

unless you buy :mrgreen:

I agree it costs about the same.

so I have learned to get a good deal on the lease, then at the end of three years(like stupid suggested above) I buy the car in excellent condition, drive till death do us apart (the car of course)

If the market participants in the run-up were not rational what is going to make them rational now?  Uh - oh the streets of Woodbury were packed with families being lead around by realtors this past Sunday.  Bargain hunting fools?  Of course we’ll see if this increased activity leads to an increase in sales - and at what price.  I’ll be watching the 92620 data while I keep renting.  Should I hand out copies of today’s deeply insightful IHB to save them from themselves?  Maybe if someone could translate it into Korean…

The no more land line is the same lame line used in the 90s, and every time I read it, I roll my eyes. Funny, they kept building houses after they said that then and they keep building houses now. I personally know of over 60k units in the pipeline for OC, and I know there are more that I don’t know of. The OCBC did a study, that shows that there is enough infill land for 70k units. If people had the ability to pay any price for a home with land, then why are those homes not selling and the homebuilders dropping the prices faster than Wal-Mart? Seriously, get a new line that isn’t nearly 20 years old. It wasn’t true then and it isn’t true today. Look what happened to those who believed that BS then?

I am sure everyone in Ohio etc. wants to live here. One problem… Jobs! According to Chapman’s financial executive survey the number one barrier to do business in OC is… you got it, housing. On a scale of 1-5 it was a 4.6. This is despite the fact that OC is a “desirable place to live” as the most significant reason for doing business in OC. Now, when for the last 15+ years OC has had a net-migration of 25-35 year olds, and year over year the employment has decreased, means there is a problem. So, if you like living in a place where all you have are a bunch of retired baby boomers driving their Buick’s, and spiked haired kids driving their Civic’s, then we should just rename OC; Maricopa County.

Lets do the math… A possible 130k homes, an optimistic job growth of 10% in 10 years, 60% of those jobs being dual income households. That is around 150k jobs, 60% would be 90k households, and an oversupply of 40k homes. Yup, not a problem, because all the foreigners will come and buy these homes. My other favorite BS myth.

So, you are right, it really isn’t all that different this time. Hopefully we don’t see the job losses like the 90s. But, if we do, then hold on tight, because this will be a housing crash that will make the 90s crash look pleasant.

BTW, if you bought at the peak in 91, in what year would it be before you recovered the loss in SoCal inflation rate adjusted terms?

lawyerliz, I remember when 2.5X your income was the rule.

Actually, most people without too much cc debt or car debt could go little or no-down at this multiple of their incomes and easily pay for their places.

With a 10% down and 2.5X your income and little other debt, you are mostly in good shape.

Loans of 3 and 4X your income did not become prevalent until the 80s, and I remember that it was during this period that people began to carry much more debt, and that foreclosures and bankruptcies became more common than previously.

This bailout, or freeze of interest on adjustable loans, will do incredible harm, for , as one famous blogger pointed out elsewhere, it means that contracts are meaningless, that you cannot make a contract without fear that government action will render it worthless.

My guess is that if this proposal becomes law, that credit will become incredibly tight, permanently, as the risk of lending money on any terms will be vastly increased in a climate where obligations can be cancelled en masse by legislation. This is much different than granting people bankruptcy protection on an individual basis. Bankruptcy law recognizes the legitimacy of the contract, but this proposal makes contracts meaningless.

All around, this bailout proposal is one of the most destructive pieces of legislation ever proposed.

Although they are not making more land, government (local, state and federal) does have the ability to make land available for the development they deem to be desirable. When I moved to Orange County in 1991, El Toro and Tustin were still operating air bases. Aliso Viejo was in nascent development. The land on Jamboree between Campus and Michaelson was vacant (and stayed so for many years). There were tons of active farms; Segerstrom’s Lima Beans, Sakioka farms near South Coast and all the land between I-5 and the mountains from El Toro NAS and Jeffrey Road. For the right price, they all become housing (or retail/commercial).

So were will the next land to be “made” come from? There is still farmland to be had. All of the former Tustin and El Toro airbases. Seal Beach Naval Weapons Station? East to the Saddleback mountains? Or the biggie, Camp Pendleton? I think in 20 years we will look back and be surprised at where all this land came from. Or as earlier pointed out, the new phrase may be, “Go vertical, young man!”.

IMHO, the Bernanke and AG’s interest rate’s decision always a political and not an economic decision. AG creates housing bubble to exchange one more term as Fed chairman.
Next year this time around, Bernanke will make interest rates stay around 3.25% to3.5%, so the economic not too good and no to bad but leave enough room for more rate cut so the next President can save the economic and hence he can be re-nominated.

Get a good deal on a new car that doesn’t depreciate and you’ll be better off buying.  I have a civic i bought new in 03.  In 4 years it has depreciated $4k from the selling price.  Not bad cost of ownership, eh?  It helped to get $2.2k off the sticker, but still…

Good points; El Toro has a large amount of land there, and there is still plenty of land in Irvine. The Irvine Co holds onto the land and then will piece it out over long periods of time in order to develop slowly and hopefully get more demand. But trust me, I’ve lived in Irvine for 22 years and seen it get very developed, but (unfortunately) there is still plenty of room for more development. (I say ‘unfortunately’ because the traffic is horrible, people aren’t as nice, and honestly, I feel like I’m in Beverly Hills with all the pretentious luxury cars around)

There is an appraiser down the hall, a young guy, who between his mortgage and his maxed out credit cards, owes about half a million dollars.  He is walking away from his 100% mortgage on his Fla home.  he feels no guilt or shame.  I tried to guilt him out, and succeeded only a tiny bit.  Yes, he should be ashamed.  But wtf was anyone doing, loaning him that much money in the first place.  He still has a business, by the way.  He’s learning FHA and REO appraisals.

He’s squatting in his house, until he gets foreclosed out.  He has a nice place picked out to rent, and doesn’t feel that qualifying for renting will be a problem.

by the way, he can’t file bankrupcy, because he filed once already a couple of years ago.  So he accumulated his debt AFTER the bankruptcy.  He’s 27 years old.  Altho I believe people should pay their debts, I have a hard time feeling any sympathy towards the people who lent him money.  They are getting what they deserve.

Heeheeheehee!!!!

Single-family new house construction building permits:
1996: 205 buildings, average cost: $254,700
1997: 242 buildings, average cost: $305,400
1998: 425 buildings, average cost: $312,800
1999: 326 buildings, average cost: $320,400
2000: 161 buildings, average cost: $353,800
2001: 163 buildings, average cost: $347,900
2002: 129 buildings, average cost: $500,400
2003: 140 buildings, average cost: $458,500
2004: 112 buildings, average cost: $538,100
2005: 111 buildings, average cost: $616,200
2006: 103 buildings, average cost: $705,900

These are the land development statistics for Newport Beach over the past decade.
Here is the link: http://www.city-data.com/city/Newport-Beach-California.html

If builders were making so much money over the past several years, why were so few houses being built, in this highly desireable area?

My guess is that they started RUNNING OUT OF LAND! Hello?

It could also be that there were running out of buildable lots, or that they began running out of buyers at those price points.

When prices continue to drop and inventories continue to surge, you will see that running out of land did not create a shortage of dwelling units available for sale.

Here are the Irvine numbers.
Single-family new house construction building permits:
1996: 773 buildings, average cost: $143,800
1997: 986 buildings, average cost: $186,700
1998: 1247 buildings, average cost: $173,900
1999: 1276 buildings, average cost: $167,700
2000: 1138 buildings, average cost: $167,600
2001: 1338 buildings, average cost: $167,600
2002: 1006 buildings, average cost: $174,400
2003: 1062 buildings, average cost: $197,700
2004: 943 buildings, average cost: $215,900
2005: 1164 buildings, average cost: $215,400
2006: 600 buildings, average cost: $269,700

Notice the difference between he and MB in both scale and trend?  Irvine is huge, but just like NB,LB(hell any B) the land is filling up.  Prime land, with ocean views, short commutes, no traffic noise, close shopping, top quality recreation, etc. etc. is of LIMITED supply.

P.S. You asked the question what happened to those people who bought at the peak 20 years ago?  If they purchased something they liked and could afford and kept it, they KILLED IT.  They now have one of two things (1) Super low housing costs relative to the current market, including ridiculously low property tax, (2) a rental property that generates huge positive cash flow.

Real Estate is a local market. How does that .5% real growth figure match up against SF, LA, NY, and Chicago.  My bet is not even close.  Secondly using 100 year figures may be wholly useless considering changes over time (see conditional heterokedasticity for further explanation). 

One thing that had occurred to me the impact of traffic congestion on housing prices as function of distance to employment centers.  I have found little in the way of research, however it is certainly an important driver of overall prices.  It may also help to explain why prices rise, even if there is and endless supply of land, because the cost of time spent commuting. 

I suspect, though have no data to back it up, that price impact on housing of increasing congestion is geometric over time with respect to proximity to employment centers.  Read: since everyone works in Irvine, Irvine R/E will do a whole hell of a lot better over time than any city south of the Y.

Robert Shiller’s study of appreciation nationally and in major metropolitan centers shows the 0.7% real growth was consistent for over 100 years—that is prior to the bubble. The reason is simple: you pay for housing from income, and incomes tend to rise with inflation (in fact, rising income tends to lead to inflation.) When housing prices rise without a commensurate rise in incomes, as was the case over the last several years, then the rise in prices must be attributable to something else—in this case expansion of credit. The only way for prices to sustain themselves is for lenders to continue loaning out money to people at double the historic price-to-income ratio as they did during the bubble. Since this is obviously not happening (per the credit crunch), prices will fall to the new level of lending. The only real question is, “how tight will credit get?” IMO, the answer is 28% DTI and 20% down on 30-year mortgages. It is the only form of lending proven to be stable.

Uh.... he filed only two years ago and he’s racked up $500K debt that he is now delinquent on?

Does he know that he could be nailed for fraud for doing that?

You had better be a very good little doobee after you file BK, especially now that BK laws have been tightened. If you file and then run up unpayable bills immediately after being cleared, you could be looking at jail time, from what I’ve been told.

But perhaps he figures that there are so many people just like him out here, that the authorities are overwhelmed and he’ll get lost in the shuffle.

Bravo Bravo Bravo

I agree with irvinesinglemom. Such a post is with so much real world information is a must read for everyone!

Great job as always!