April 27, 2007

Housing Bubble is Now Not "Pssssst....." but "KABOOM!"

"Here's to you Ms. Too Much Home Buyer with a payment that eats up 60% of your gross income."

For the last several years I've been bedeviled at various times and hectored to "buy" a house. My default position has always been that the housing boom will bust on the very day I close on a house. To keep the boom booming, I've stayed out of the housing market and in the stock market. It was the least I could do for my fellow citizens.

I'm glad to say that today an enormous weight has been lifted from my shoulders. I will no longer be able to be blamed for any reversal of fortune for those who have bought houses in the last few years. The market fundamentals have evidently done my work for me: "The U.S. economy grew last quarter at the slowest pace in four years because of the housing slump and a bigger trade deficit, leaving consumer spending to keep the expansion alive. - Bloomberg

That's a shocking if flat statement, but Bloomberg is the least alarmist of news sources. A greater appreciation of just what is happening in a nation whose lenders have been handing out fantasy loans like "No income verification" loans for years -- along with other equally bizarre "financial instruments" designed to assure that those with the least credit will get the highest offerings is found in the analysts who interpret the bland statistical reporting of the Bloombergs. Mike Larson at Money and Markets is particularly blunt this morning:

"No Amount of Lipstick Can Make This Pig of a Home Sales Report Look Pretty: First, total sales fell a sharp 8.4% to a seasonally-adjusted annual pace of 6.12 million. That was the single-biggest monthly decline in 18 years, and it left sales at their lowest level since June 2003. Second, prices fell again. While the year-over-year decline was just 0.3%, it was the eighth such drop in a row … the longest losing streak on record. Third, supply remains a major problem. The total number of homes for sale was just shy of 3.75 million units — 17% higher than a year ago.

Looking at it another way, it would take 7.3 months to exhaust all the used homes on the market right now, assuming the sales pace stays constant."

Closer to home, here in Seattle where the bursting bubble hasn't bitten badly .... yet.... there's a condo boom just about everywhere you go. In neighborhood after neighborhood, condo developments anchored by the inevitable Starbucks in the corner slot are sprouting like the dubious toadstools in my damp yard. There are so many rising so quickly that you have to wonder exactly where the hundreds of thousands of people to fill them are coming from. Is there a sub-Pacific train tunnel coming in from the Asian rim that I have overlooked?

Meanwhile, on the block where I live, there are three homes on offer -- two that have been newly constructed on one lot, and one that's been bought, fixed, buffed and ready to be flipped. It was purchased about 9 months back for around $500K and given the standard flipping upgrades and is back on the market hoping for $740K. It has been filled to the brim with all the countertops and other stuff sent up in the video clip above. The sellers have hoping for over 3 months. At three quarters of a million for a house in this neighborhood they will hope much longer.

As usual when things get to this point, denial sets in with a vengance, but with "an estimated $2.5 trillion in subprimes and Alt-A loans" set implode in the next few years denial and hope are going to be ground down to stumps in short order. And the primary force for doing this is going to be, as always, the perception of value. A high price doesn't bother you on a million dollar mortgage if you perceive the value will move up at least 5% a year. If you perceive it will move down, you will want it to move down now for you.

What to do? Larson again has the short form:

"So be realistic about real estate:

If you're trying to sell, price your home right — meaning, low.

If you're looking to buy, drive a tough bargain.

And if you're looking for a place to invest, look elsewhere!"

Or you can do what the tough consumers do when the going gets tough. Shop!

"So slap down that plastic, Ms. Addicted to Big Sales Shopper, and make another purchase!"

Ah, deja vu! All over again.

Update: A small discussion has ensued in the comments over the eternal question, "Is it better to rent or buy?" As usual the answer is, "That depends." Here's a recent article from the New York Times, "A Word of Advice During a Housing Slump: Rent," plus a handy and illuminating interactive page that will let you calculate that based on where you are and what is happening in your local housing market. HERE.

Posted by Vanderleun at April 27, 2007 8:27 AM
Bookmark and Share



"It is impossible to speak in such a way that you cannot be misunderstood." -- Karl Popper N.B.: Comments are moderated and may not appear immediately. Comments that exceed the obscenity or stupidity limits will be either edited or expunged.

Oh, great! We'll be putting our house on the market in July. Just peachy. First time we've moved in 12 years. Timing is everything, eh!

Posted by: Donald Sensing at April 27, 2007 11:55 AM

I've been following the housing bubble at places like http://thehousingbubbleblog.com/ for several years now. It was a great relief to me when I first ran across these sites because there was a certain amount of feeling that somebody must be crazy in the housing industry, and they told me it wasn't me!

Any time you inject money into a system, the prices go up. Econ 101, but remember, "things are different here" and "the old rules don't apply."

If people tell you that the old rules don't apply, hold on to your pocketbook because they do— oh boy, they do. And unfortunately, a whole lot of economic illiterates are set to find that out in the next few years.

Posted by: B. Durbin at April 27, 2007 12:16 PM

In beautiful Dana Point California a development project called "Strands At The Headlands" recently sold $148 million of beach front lots with an average price of $7.5 million with 7000 square feet of California Tierra Oro.

A cash deposit of $250,000 is required to hold them. Housing bubble? Bubble....we have no stink'n bubble!!!! This housing cycle was fueled by seller's greed and buyer's fear of losing out on the American Dream.

What happened was the middle class was sqeezed even more and buyers who could not afford the dream didn't want to be left out in the cold.

What is the result of all this? A lot of grief, nashing of teeth and rage against the machine, but for those few who see the opportunities they will not wait to grab their fair share of bloody profits.

Oh well, just another day in paradise.

By the way, those lots I wrote about earlier, besides the normal property tax, all 44 property owners will pay $30,000 a year in "special assessment" fees for 30 years. Boy, if I remember correctly, $30,000 is more than the average income in the United States.

Well, the rich get rich and.... Not that there is anything wrong with that!

Posted by: Robert Hows at April 27, 2007 12:43 PM

But not at Costco, right? ;)

Posted by: Black Rabbit at April 27, 2007 3:46 PM

How much you spent on rent in the last 10 years? What's your return on it? No matter your timing, you couldn't have lost that much by owning.

Posted by: curtis kreutzberg at April 27, 2007 4:20 PM

Some hows I just knew you'd have something to say about that and would not be shy in sharing.

You are right there is seldom a bubble at the beach. Just a tsunami from time to time.

Posted by: Gerard Van der Leun at April 27, 2007 5:04 PM

The rent-vs-buy argument always surfaces and I in no way would denigrate owning a home if that's what you want to do.

There are, however, situations where renting is by and large a much better deal than owning. I would suggest that for many areas of the country that's where we are now.

As for "losing" money on rent, well that depends on what the rent vs. buy ratio of costs actually is and, if you have a savings from renting vs. buying, what you do with that savings. If you spend it on happy meals you lose, true. But if you take the savings and invest it wisely in the market you'd be seeing a nice enough return. Maybe even enough to let you buy a house.

If, for instance, you rented a house at 1,500 that would have cost you 3,000 a month to carry and took the left-over 1,500 and bought Apple and Google consistently month after month for the last ten years..... well, you'd be ahead of the curve considerably.

That said, the rent vs buy argument will always be with us. If you want to buy now, buy. If you want to sell now, sell. The bubble only breaks in the faces of those who buy too late or sell too early. And those who have mortgaged their lives to the mortgage companies. You can see tale after tale o woe at









plus my long time favorite, if not now very active,


Posted by: Gerard Van der Leun at April 27, 2007 5:15 PM

Yah. I can either pay my rent every month, eat healthy, and have some extra cash for fun or emergencies or pay a crushing mortgage for half as much space (if that), eat ramen, and do nothing aside from work two jobs for the next decade. Plus have no savings whatsoever.

Sometimes renting is a better deal, and in most of California that is now the case.

Posted by: B. Durbin at April 28, 2007 12:16 PM

Thanks for waiting to buy until after my daughter got out of her house last year.

About four years ago, after I, the financial conservative in the family, was safely out of town and on the other side of the Continental Divide for several weeks, she called to tell me she was buying a house. In fact, she had already found the house and put a contract on it. It was the second house she looked out. Seems her father had decided it was time she owned her own home and he was going to help make it happen.

And would I like to help? I ask a few probing questions like what did it cost? how many square feet? what about the inspection? and on and on. More I heard, the more queazy I became.

Since it was a fait accompli, I ended up declining investing, saying it didn't sound like a very good investment to me. It had three times the number of square feet as my home, a roof and furnace whose bilogical clocks were ticking, and was far, far beyond her financial means.

But what's a mother to do but bite her tongue? I ended the conversation something like, "better thee than me." "But it's adorable," she said. I gave her the last word. She moved in for three years. And indeed it became a money pit. But to her credit, she and her boyfriend, who's into remodelling, put some work into it, and she especially scraped and sanded, in much of her free time.

I kept my mouth shut as best I could as I continued to read and sense the housing bubble getting overblown. Okay, occasionally, I said a few subtle things.

The the phone call that every mother prays for, but never holds her breath to receive finally came last spring, a year ago, from my daughter:
"You were right mom. I have to get out of this house. Can't afford it anymore. I'm putting it on the market in two weeks."

Did she really say I had been right? I restrained myself from too much ebullience and merely responded, "Wow, that sounds like a good plan to me."

To her great credit, she sold it, made a dashing profit, paid off her debts, including the one to her father, bought and paid for a darling little condo that is well within her means.

And all before you bought into the market, and the bubble broke!

Glory be. Seeing a loved one get out of financial bondage to any and everyone is truly a gratifying experience.

Posted by: Webutante at April 29, 2007 1:04 PM