To everything (turn, turn, turn)

There is a season (turn, turn, turn)

And a time for every purpose, under heaven

A time to be born, a time to die

A time to plant, a time to reap

A time to kill, a time to heal

A time to laugh, a time to weep

A time to build up,a time to break down

A time to dance, a time to mourn

A time to cast away stones, a time to gather stones together

A time of love, a time of hate

A time of war, a time of peace

A time you may embrace, a time to refrain from embracing

A time to gain, a time to lose

A time to rend, a time to sew

A time to love, a time to hate

A time for peace, I swear its not too late

To everything (turn, turn, turn)

There is a season (turn, turn, turn)

And a time for every purpose, under heaven

Turn, Turn, Turn — Pete Seeger / The Byrds / Bible (Ecclesiastes 3, verses 1–8)

Link to Music Video

Recent Concert Video

Like the change of seasons, real estate markets move in cycles. During the last cycle, the real estate market peaked in 1990, and the market bottomed in 1997. The primary reason the bottom formed was because incomes and rents finally caught up to housing prices.

They say a picture is worth a thousand words. These two images posted in our forums by Bubblegum speak volumes. These images are both from 1997. The first appears to be from a condo development in Orange. The actual pricing is not important: the relationship between the cost of a rental and the cost of ownership is very important. This is why the bottom formed.

The next time someone tries to convince you the cost of ownership is near the cost of rental, remember the simple calculation above. If someone has to apply rental increase rates, inflation rates, appreciation rates, tax benefits and other complicated nonsense to make the numbers work, the numbers really don't work. (Notice the simple numbers above work without the tax benefits figured in.)

As a rule, the use of advanced math to justify a house purchase is mental masturbation designed to make someone feel good about an emotional decision they already made. When the calculation above works, it will be time to buy, and not until then.

Since I began writing on this blog, I have stated I will buy when the cost of ownership equals the cost of rental. An advertisement like this — when it reflects reality — would motivate me to buy. How about you?

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It has been suggested as prices drop people will perceive a bargain and start buying. This is true. This is where all the knife catchers come from. There are simply not enough of these people to support the market, particularly a market dominated by foreclosures like ours is going to be shortly.

Why aren't there enough knife catchers to support the market? Knife catchers are not buying because of the numbers, they are buying because of their emotions. Everyone is not going to get emotional at the same price point; thus, no support zone will form at any particular price point.

However, everyone who can do math will see when it is cheaper to own than to rent, and many rational people will act at the same time and at the same price levels. The collective actions of you, me and other like-minded individuals responding to these market conditions provides the market activity and transaction volume necessary to form a market bottom. It will not form before then.

So how much were properties in Irvine going for in 1997?

For all of you number crunchers out there that want to find the bottom of our current bubble, start with the pricing in 1997, and add 4% per year for inflation and wage growth (although wage growth has only been 3% per year.) Since I really like quick multipliers to simplify the math, below is a table to help:

1997 1.00

1998 1.04

1999 1.08

2000 1.12

2001 1.17

2002 1.22

2003 1.27

2004 1.32

2005 1.37

2006 1.42

2007 1.48

2008 1.54

2009 1.60

2010 1.67

2011 1.73

2012 1.80

2013 1.87

2014 1.95

2015 2.03

2016 2.11

2017 2.19

From this table you can see how much more a 1997 house should cost projected into the future. In 2007, a house purchased in 1997 should be 48% (1.48 times) higher. Pricing will intersect these values at some point, and when it does, we will be at the bottom.

I created the chart above in March for the post: Predictions for the Irvine Housing Market. I thought I was being somewhat aggressive in my predictions of such large quarterly losses. Such large declines are unprecedented. If the credit market is as challenging as it appears, the drop to fundamental valuations may be faster and more violent than anyone could have guessed. We will see.

In the end, the bottom will form because it will be less expensive to own than to rent, and everyone who watched houses depreciate from the peak will find the motivation to buy. We might overshoot fundamental valuations based on rental equivalent (which seems to be where the credit crunch may take us) and drop down to levels where properties produce a positive cashflow for investors. That chart is really ugly…

From How Bad Could Bad Get?

If any of you want to play with the numbers, below is a link to the spreadsheet I used to create the charts above:

Market Decline Extreme Spreadsheet

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Where do you think the median will bottom out and when?

It’s the end of the world as we know it.

It’s the end of the world as we know it.

It’s the end of the world as we know it and I feel fine.

End of the World — R.E.M.

Link to Music Video

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Do you remember in Houses Should Not Be a Commodity, there was a long discussion on the stages of grief as they relate to the housing market? The market is shifting from denial into bargaining.

Jim Cramer has made news lately with his antics. The links below are to videos where he has demonstrated for us the following progression as it relates to the chart above:

Denial — On housing, November 2006

Anger — He is always angry. His show is Mad Money…

Depression and Detachment — Plow under the Inland Empire

Dialogue and Bargaining — Lobbying for a Rate Cut

When you think about it, isn’t the whole discussion about a bail-out bargaining? We all know the government is not going to save the millions of overextended homeowners. They couldn’t if they wanted to. Isn’t this one last gasp before the market capitulates? I think so.

Empathy and compassion are at the core of my spiritual life. I feel the pain of all the effed borrowers (FBs) out there. To prove it, I want to share with you my meditation on the emotional bargaining of FBs everywhere: The FB Plea…

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You fence-sitters are failing to fulfill your part of the California Social Contract. Your failure to continue buying homes is disrupting the social order, and it is causing those of us who bought before you psychological, emotional and financial damage. It is time for you to get off the fence and buy — NOW!!!

In any social contract, you give up something personally for the greater good. When those of us who bought before you purchased our homes, we had to commit unrealistic percentages of our income to housing, lie on mortgage applications, and take out financing on unstable mortgage terms in order to do our part for the continuing social good. We made these sacrifices willingly because the benefits of maintaining the social contract are worth the price we paid. Look what those who bought before us received in return:

1. Dramatic increases in wealth through home equity. I think we can all agree this is desirable. You want to be rich, don’t you?
2. The ability to spend more than what is earned through productive activities like work. Think of all the BMWs, Mercedes, vacations to Maui, Coach bags, designer jeans, Rolex watches and other items purchased with home equity lines of credit. Don’t you want to double your spending power?
3. The ability to buy furniture and home improvements without saving or spending income. Your house should be a self-sustaining asset which provides the ability to maintain itself with perpetual appreciation. Who wouldn’t want that?

We provided all of this to the buyers who came before us, and all we ask is that you do the same for us. Isn’t this a fair bargain? Don’t you want the same for yourself? Won’t the next generation of buyers we willing to do the same?

Some have argued it is our fault that the social contract is falling apart. If we recent homebuyers had simply made our payments, the contract would not have been broken. This is rubbish. The lenders failed us. They knew we couldn’t make those payments when we took out the loans. They knew we were lying on our loan applications. They knew they were going to have to provide opportunities for serial refinancing of ever increasing amounts of debt. They failed us. They are the ones who broke the social contract, not us.

The tightening of credit just means you will have to make more significant sacrifices to keep the social contract. You may need to borrow money from family members or solicit larger gifts. You may need to become more creative in your attempts to inflate your income or assets. All we had to do was sign some fraudulent paperwork, but you may have to forge some documents or buy a seasoned credit line or find a hard-money lender who doesn’t record the debt (loan sharks.) It is going to be tough, but look at the benefits listed above. Isn’t it worth the sacrifice?

It is time for you to buy now. Trees really can grow to the sky; prices really can go up forever — if you hold up your end of the California Social Contract. To paraphrase Winston Churchill,

Let us therefore brace ourselves to our duties, and so bear ourselves that if the {California Social Contract} last for a thousand years, men will still say, ‘This was their finest hour.’

This is your chance to stand up for what is right and perpetuate a system that is beneficial to our society. History will remember what you do. Will you be the generation that lived up to its duties, or will this be the end of the world as we know it?

You decide.

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If you don’t know what an FB is, try this link.

When I wrote Houses Should Not Be a Commodity, I wrote extensively about the psychology of the market and the dynamics which cause prices to rise and fall. Nothing I wrote was new or original.

I have been reading The Disciplined Trader by Mark Douglas. I came across the passage below on pages 199-200:

The reason why a bull market is ready to tum into a bear market when the general public gets involved is because the general public has the least tolerance for risk and consequently needs the most reassurance and confirmation that what they are doing is a sure thing. As a result, they will be the last to be convinced that the rising market represents an opportunity. If a bull market has lasted for any length of time, the general public will feel compelled to jump on the bandwagon so to speak, because of their perception that everyone else is doing it and making money. They will pick up on any reason that sounds the most rational to justify their participation, when in reality, they will know very little about what they are doing, but since everyone else is doing it, how can they go wrong.

A continuing bull market requires the continual infusion of new traders who are willing to pay higher and higher prices. The longer a bull market lasts, the greater the number of people who are already participating as buyers, leaving fewer and fewer traders who haven’t already bought and fewer and fewer traders who are willing to bid the price up. These older buyers obviously want to see the market keep on going up, but they also don’t want to get caught holding the bag, if the market stops going up. As their profits accumulate from the higher prices, they start to get nervous about taking their profits.

By the time the general public starts buying en masse, the professional traders knows the end is near. How does the professional know this? Because the professional knows that there is a practical limit to the number of people who will participate to bid the price up. There will come a point where everyone who is likely to be a buyer will have already bought, quite literally leaving no one else to buy. The professional trader would like the market to continue to go up indefinitely just like all the other buyers. However, he also understands the impracticality of that happening, so he starts taking his profits while there are still some buyers available to sell to. When the last buyer has bought, the market has no place to go but down.

The public gets stuck because they weren’t willing to take the risk when there was still potential for the market to move. For the market to sustain itself, it needs to attract more and more people. As big as this country is or the world for that matter, there are only so many people who will buy. Eventually the supply of buyers runs out, and when it does the market falls like a rock.

The professionals have been selling out their positions before this happens, but once the supply of buyers runs out, the professionals start to compete among one another for the available supply of buyers which is dwindling fast, so they offer lower and lower prices to attract someone into the market so they can get out. At some point, instead of the lower prices being attractive to people, it panics them. The public didn’t anticipate losing. Their expectations are very high with very little toleration for disappointment. The only reason they got in was because it was a sure thing. When the public starts to sell, it starts a stampede.

Again, people will ascribe their actions to some rational reason because nobody wants to be thought of as irrational and panic stricken. The real reason why people panicked and the prices fell is simply because prices didn’t keep on going up.

Do you see the parallels between the behavior of our housing market and the description above?