You’re face to face With the Man who Sold the World
I have been working on expanding the reach of The Great Housing Bubble, and I would like to tell you more about what is going on. As many of you have probably noticed, we have a new eCourse offering in the sidebar of the IHB. This is a no-cost eCourse that you may opt out of at any time. If you choose to sign up, you will receive the entire text of The Great Housing Bubble over the course of 16 emails. There is nothing to lose.
Like all free offers, there is a catch. There are some emails asking you to buy the book, and there is an ad at the bottom of each email. The emails come frequently at first, but then they slow down to one per week. It takes 3 full months to obtain all the text emails. However, if you are patient, and if you want to read the whole book in small, bursts to help you get through it, this is a good way to do it. And of course the best part is that it is totally free.
I am still offering the full-text eBook for $4.95. It is a great way to review the whole text of The Great Housing Bubble without spending much money. However, this ebook cannot be printed, so to complete the book, you will be reading 250 pages of text from a computer screen.
The new offering I am most excited about is the self-taught eCourse. This is the format best suited to really learning about the housing bubble. When you sign up, you will receive a link to a printable version of the eBook. You can print this out to read and review at your leisure. Then over the course of 16 days, you will receive the full text of The Great Housing Bubble in email form. This will remind you to read the material and it breaks it down into small pieces you can easily get through. Also, the emails contain the useful end notes where I provide more depth on the subject matter.
Of course, everyone who wants an attractive reference on the subject should obtain the book itself. Amazon now has the book on sale for $13.57, a full 32% discount off the $19.95 retail price.
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Paperback on Amazon.com
The paperback version of this book is available for sale at
Amazon.com. This book is destined to become the authoritative reference
for one of the most dramatic events of our times.
This book is available for only $19.95! $13.57!
Amazon has gone crazy.
Buy now!
This price will not last.
We passed upon the stair, we spoke in was and when Although I wasn’t there, he said I was his friend Which came as a surprise, I spoke into his eyes I thought you died alone, a long long time ago
Oh no, not me We never lost control You’re face to face With The Man Who Sold The World
I laughed and shook his hand, and made my way back home I searched for a foreign land, for years and years I roamed I gazed a gazeless stair, we walked a million hills I must have died alone, a long long time ago
Who knows? Not me I never lost control You’re face to face With the Man who Sold the World The Man Who Sold the World — Nirvana
On the day I was born The nurses all gathered ’round And they gazed in wide wonder At the joy they had found The head nurse spoke up Said “leave this one alone” She could tell right away That I was bad to the bone
No particular theme for this weekend’s post. Sometimes you just want a little testosterone rush…
I know some of you have been waiting for some sponsored posts. We have still been looking for the right property. Quite honestly, prices are still too high, and there are not many truly good deals in the marketplace.
In a normal real estate market (i.e. anywhere other than California), there are two types of properties: 1. Those properties desirable for owner-occupants that trade near rental parity, and 2. Those undesirable properties that trade at prices where cashflow investors can obtain a 10% – 12% return on their downpayment investment. Those are the properties we are looking for.
Right now in the market, there are many properties trading at or below rental parity. These are not hard to find. However, there are no desirable properties trading at rental parity, and the undesirable ones have not fallen far enough below rental parity to be a good rental investment. That only leaves one kind of “investment” property available: the speculative bet with positive cashflow.
One of the least intelligent investment decisions people made during the bubble was paying so much for their speculative bets that the property could not generate enough cashflow to cover the cost of ownership. An investment that consumes more cash than it generates is what Robert Kiyosaki calls an “alligator.” It is a great method for losing a lot of money. Our current crop of floplords is finding this out right now.
Prices in many markets are low enough that properties at least do not lose money each month, and some even generate a positive cashflow. The rate of return on these properties is very small, and you can probably earn as much money from a high-yield CD as you can from some of these rentals. However, if there is another bubble, you could make money on appreciation, and in the meantime, you can hold these properties indefinitely waiting for prices to go up.
Personally, I think properties that do not cashflow enough to be a valid investment without appreciation is a foolish way to invest. But then again, I have every confidence my fellow Californian’s will create another real estate bubble if given the chance. The bet an “investor” in these properties is making is that the lenders will be stupid enough to loosen credit and create another unsustainable Ponzi Scheme that will cost them a trillion dollars. I just don’t see that happening again soon.
We may put up some sponsored posts of properties in this grey area that have positive cashflow and are candidates for future appreciation. It may be a while before we see cap rates in excess of 8%, and with interest rates being very low, it may be a very long time before we see 10% to 12% cap rates in residential real estate. Despite how much prices have crashed in many areas, they are still too high.
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There are some properties that are trading at prices that are so low that they do make sense as rentals. However, they are in such undesirable neighborhoods that it may be difficult to keep them rented. We do not want to profile these properties because we do not want to suggest a property that would require the buyer to be a slumlord.
And just so I am not accused of only profiling really awful properties…
35756 Trevino Beaumont, CA92223: $492,000 new in 2006, asking $122,850 today. That is a property just over 2 years old (December 2006 to January 2009) selling at a 75% discount.
I may add some more properties to the list this weekend. I only looked for 10 minutes on Redfin to find these. Look in any fringe market, and you will see devastation that is almost hard to imagine. Many almost-new houses are selling for less than their replacement costs
Here is some fan mail I received this morning:
“ Roberts assumes too much without any knowledge of the facts.
Like most writers, he takes facts from the garbage can of other writers and
feeds it to the ignorant masses. I am a realtor and this makes me mad. Nothing
could be farther from the truth. A realtor, unlike a writer, has to research the
market in order to place a value on a listing that sells. A home that is
overpriced gets shown with other houses in the same price range. The average
buyer looks a 10 homes before choosing one among them. An overpriced home would
not show well among the 10 other homes the buyer has examined.
A realtor can earn more money by pricing a house low. All
top agents will attest to this. A well price or home will sell twice as fast.
The real estate agent can sell twice as many homes per year by pricing his
listings at a fair price. Only a pen head writer would not have discovered this
fact if he were researching for the truth instead of hoping for a
Pulitzer.“
Does anyone else think I am factually challenged?
I must have something left in my Reservoir of Schadenfreude because winding up a realtor does not upset me. I wish I knew what this message was in response to so I could comment further.
Stuck inside these four walls, sent inside forever, Never seeing no one nice again like you, Mama you, mama you. If I ever get out of here, Thought of giving it all away To a registered charity. All I need is a pint a day If I ever get out of here.
My passage with the Credit Siren
I want to share with you a personal experience today: my passage with the Credit Siren.
For those who remember their Greek mythology, the Sirens were singing seductresses who with their beautiful songs lured sailors to their deaths by crashing their boats on the rocks. The Siren Song has become a metaphor for pleasure or vice that leads people to their own destruction. On this blog, I write frequently about the Siren Song of HELOCs that caused so many homeowners to crash on the foreclosure rocks.
Any time someone writes about a behavior like that, there is the risk of the message sounding preachy or coming across as if the author is above falling victim to such things. I write about this issue in hopes that others will learn from it and recognize the folly for what it is. It isn’t about morality, a statement of right and wrong; it is about wisdom, recognition of what is prudent and what is foolish. I am certainly not immune to the Siren Song about which I write.
I have not always been wise about how I have managed my own financial affairs. I don’t know if I am even now. One thing I am proud of is the fact that I have no debt. I have been recently reminded about how difficult a discipline staying out of debt really is.
During December, I had too much activity in my savings account, and I began getting “excessive use” fees. Like many people, I was overspending. When I saw what was happening, I didn’t want to get any more of these fees, so I quit using my checking account until the bank cycle for December had past. I used my credit card for almost 10 days.
I felt like I was spending free money.
I went out to eat with family, bought a few presents for my son, and generally had a great time. Neither my checking account nor my savings account changed. It was really cool. It brought up all the old feelings I used to have when I used (and sometimes abused) credit years ago.
When the first of January rolled around, and I was able to get access to my checking and savings accounts without further bank fees, I knew it was time to pay the piper for my 10 days of fiscal irresponsibility. When I paused to reflect on what I did and how I felt while doing it, I was quite astonished to see how easy it was for me to fall back into old habits. I guess it is like being an alcoholic or drug addict. Once you stop, you better not ever start again.
I won’t be doing much in January. I spent all my discretionary income for January in December. I know where the rocks are, and I know how the Credit Sirens lead me there. Fortunately, I am at a stage in my life where I have the self-discipline not to listen to those Sirens and keep the family boat from crashing and sinking. Unfortunately, it means January is going to be quite boring…
While looking around YouTube, I came across this three part lecture series from former UCLA economist Christopher Thornberg now with Beacon Economics. He is one economist who correctly predicted the housing bubble. This series is excellent.
Real Estate Bubbles and California’s Economic Growth, Part 1
Real Estate Bubbles and California’s Economic Growth, Part 2
Real Estate Bubbles and California’s Economic Growth, Part 3
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If you like academic reviews of bubbles in general and the housing bubble in particular, here are two more videos for you:
I would like to remind everyone that we are having another IHB party on Wednesday, January 7, 2009, from 6:30-10:00 at JT Schmids at the District.
Last time was a great gathering, so we are doing it again. Here is your chance to meet many of the regulars of the IHB. Everyone is welcome, so please stop by.
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Heart of stone — I tried to reach you Of the altar stone — I tried to warn you But you were not alone — you wouldn’t take the call You wear brimstone — I tried to warm you
On January 1, 2008, I wrote a post titled Predictions for 2008. You can go back and review it to see how well I did.
As a recap, I would like to share with you a couple of charts from 2008 for Irvine and OC:
Click for larger image
Most of the macroeconomic conditions I made in 2008 are still operative, and several of the predictions I made which came true will likely repeat in 2009. These are:
2008 will see the worst single-year decline in the median house price ever recorded
One or more of our major financial institutions and one or more of our major homebuilders will fail
A severe local recession
I predict we will see many more angry homedebtor’s troll the blog
I do not believe 2009 will see median house prices decline as much as 2008, but I do believe they will drop significantly, particularly in high-end neighborhoods. The low-end neighborhoods are closer to the bottom than to the top, so 30%+ declines in these neighborhoods are not likely. The high end neighborhoods will experience big drops. Most did not drop 30% last year, so they have more room to drop. The unemployment rate is high, and the economy is in recession which will put pressures on home prices. The dreaded ARM problem is not going away, and these loans will start blowing up this year and on through 2011.
However, there is one bright spot for the housing market that will blunt the declines in 2009: ultra-low mortgage interest rates. We will see properties at rental parity in 2009. The low interest rates are going to reduce the cost of borrowing to the point that many properties will reach rental parity this year. This does not mean we will be at the bottom. These interest rates are artificially low due to the “quantitative easing” by the Federal Reserve. This policy may persist for some time, but it is not likely that sub 5% interest rates will be around for buyers 7-10 years from now when 2009 buyers go to sell their property. That creates the issue with Your Buyer’s Loan Terms.
With the low interest rates, and with the foreclosures resulting from this year’s loan resets being a year away, we are in a good position to see our first bear market rally. This summer, we might see two or three months of sustained appreciation. This will bring out all the bottom callers. Everyone will be cheering the Federal Reserve, and many will believe the worst is over for the housing market. This will cause some major emotional gyrations for desperate homedebtors. Those who had moved from denial to fear will likely move back to denial for a time.
Remember, the loans that reset this year will take a year or more to become foreclosures. The real problems caused by all the resets will not be apparent this summer. We will likely see a large number of short sale listings, but as we all know, these rarely consummate a transaction. It is only the presence of these short sales listings that will remind us of the impending disaster when the ARM reset problem becomes a tsunami of foreclosures. When these foreclosures start hitting the market in larger numbers, and the market rally is reversed, all of those who call the bottom this summer will act surprised. Ignorance is bliss.
Not to get too far ahead of ourselves, but 2009s bear rally will be wiped out by the first wave of foreclosures. I foresee 2010s bear rally being knocked back by continuing foreclosures and the much-anticipated rise in interest rates when the FED stops quantitative easing as the recession abates. The rally in 2011 will be tepid, but at least it will be for real. For 2012-2015, appreciation will be less than 5% each year as the overhang of foreclosures and a sputtering California economy keep prices in check until Californian’s lose their minds again and inflate another housing bubble.
In my opinion, these artificially low interest rates will simply guarantee that house prices overshoot fundamentals to the downside because the fundamentals in this instance are illusory. The low interest rates will prompt some people to buy, and this increased buying activity will stop prices from falling as much as they would have without the subsidized interest rates. However, very few people currently qualify for these loans. Loan terms are getting tighter all the time, and the buyer pool is very restricted. People talk about the conservative lending terms as if they are too tight. This is nonsense. We are still not at pre-bubble loan terms (20% down, 28% DTI, high FICO, etc.) and until we get there, loan terms will continue to tighten. The diminished buyer pool when combined with increased foreclosures creates an imbalance between supply and demand which will push prices lower.
Many people erroneously believe that low interest rates are going to save the housing market because the loan resets are not going to lead to foreclosures. As I outlined in the ARM problem, the payments are going to increase even if the interest rate remains the same due to the amortization recast. If you want a more detailed explanation from Mr. Mortgage, I suggest you read Pay Option ARMs – The Implosion Is Still Coming Despite Low Rates and Low Mortgage Rates to Spur New Wave of Defaults. The idea that low interest rates are going to save the housing market is another in our ongoing series of denial fixes being fed to a weary populace. It is all bull$hit.
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Last year I predicted that we would see banks and homebuilders go under. We did see several banks including WAMU bite the dust. This trend will continue. All of our banks are basically insolvent. Only creative accounting practices and huge amounts of borrowing from the Federal Reserve is keeping them afloat. Even the huge infusion of money through the TARP program is not going to save them. There will be many more failures and consolidations in 2009.
One surprise from 2008 was the lack of bankruptcies and consolidations in the homebuilding industry. Ordinarily, during a recession, the weak companies go out of business or are absorbed by stronger ones. In my opinion, the reason we have not seen this yet in the homebuilding industry is because there are no strong ones, and there is no reason to consolidate or expand while housing starts and sales continue to decline. I think 2009 will be different. In the second half of 2009, the homebuilders will start to rebound. If past history is any guide, the recession will bottom when housing starts bottoms. This is when the industry will begin to consolidate.
I believe we will see massive consolidation in the homebuilding industry. During the 80s and 90s the homebuilding industry was dominated by small, private builders. Many of the small fry were wiped out during the recession of the 90s. During the 00s, we witnessed the rise of the national homebuilders as the dominant market force. I believe we will see consolidation into an industry dominated by a few big names with a few small privates picking up the scraps in various markets.
Last year I predicted a severe local recession. I did not have the courage to predict a severe national recession. Perhaps I should have…
I do not have a prediction about angry homedebtors. As the market shifts from denial into fear, there is a widespread acceptance of the reality of a housing bubble. Most trolling comes from people trying to maintain their denial (if you want to study this phenomenon, I suggest you read this forum thread). With acceptance comes less anger and trolling. However, I have recently launched an article marketing campaign that likely will catch the attention of realtors across the country. We may see a few of them stop by to explain to us why we don’t know what we are talking about. That should be amusing.
Today’s featured property was brought to my attention from a reader. It is a typical Irvine property struggling with a typical Irvine debt load. I predict we will see this house for sale as REO in a year.
entertainment home with one bedroom and one bath on the main floor. All
upgraded kitchen, bathrooms, flooring throughout, and great master
bedroom w/upgraded bath. 5-year-old tile roof new furnace, newer water
heater, newer kitchen appliances, newer French doors, all new windows,
great size yard and side yard, (back yard that feels like a park).
Walking distance to a great part, all shopping and restaurants off
Culver. Close to schools. Living room w/vaulted ceilings and fireplace.
Family room w/built-in wine cooler, formal dining room, breakfast bar.
Great Cull-De-Sac location. Inside laundry with plenty of storage for a
big family. Just a great house to live in with lots of windows that
bright up the house. Walking distance to a great park. Great schools
have made this neighborhood very popular.
bright up the house?
At least this description tells us where some of the HELOC money went.
Today’s featured property was purchased on 10/15/2003 for $475,000. The owners used a $380,000 first mortgage and a $95,000 downpayment.
On 11/5/2004 they refinanced with a $530,000 Option ARM.
On 5/3/2006 they opened a HELOC for $150,000.
Total property debt $680,000 plus negative amortization.
Total mortgage equity withdrawal is $300,000 including their downpayment.
This house is typical of the entire Irvine housing market. The owners doubled their debt (which is about average from what I see with houses for sale), they are overextended, and they are listing their house for a wishing price that will bail them out of their financial dilemma. It looks as if they have solicited a relative to sell their house for them, probably for a discounted commission. Based on their asking price (which the market is telling them is too high), they are priced to cover their loan obligations. They will hold to this fantasy as long as possible, but when the payments overwhelm them — probably when their Option ARM recasts — they will give up and lose the house in a foreclosure. Properties like this one represent “overhead supply” that must be cleared out before there is any possibility of price appreciation.
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No more champagne And the fireworks are through Here we are, me and you Feeling lost and feeling blue It’s the end of the party And the morning seems so grey So unlike yesterday Now’s the time for us to say…
Happy new year Happy new year May we all have a vision now and then Of a world where every neighbour is a friend Happy new year Happy new year May we all have our hopes, our will to try If we don’t we might as well lay down and die You and I
Sometimes I see How the brave new world arrives And I see how it thrives In the ashes of our lives Oh yes, man is a fool And he thinks he’ll be okay Dragging on, feet of clay Never knowing he’s astray Keeps on going anyway…
Unsold in 90+ days