Chuck Ponzi July 25th, 2006

I don’t like renting.

Although, considering the alternative, I don’t like owning a home (right now) either.

I dont like moving either, but to increase my income, I need to move. If I had been required to sell a home at each of the moves in the past 2 years, I would have most assuredly lost a substantial amount of money in transaction fees. In the meantime, I have almost doubled my income. (moving to a new company allows a total renegotiation of compensation, and staying in one city gives only so many options)

Besides, renting is a lot cheaper for now. It doesn’t make any sense to buy yet. To own the home I currently rent, I would need to commit more than 60% of my before-taxes income while venturing into a fairly volatile ARM and very high property taxes. While renting, it’s less than 25% (even in one of the most costly areas in California).

All of the arguments that owning is better than renting are not lost on me.

Rents can go up
Yes, but truthfully, if rents go up so will ARMs while the FED tries to strongarm any inflation out of the system. I can weather a 10-15% jump in rent. I cannot weather a 25% jump in a toxic loan.

There are fewer choices in where to live
Yes, especially compared to today’s environment of very high for-sale inventory.

I don’t get to paint my walls
Actually, I do, I just know that a $3000 security deposit is a lot cheaper than a $50K Realtor’s fee. Ditto with hanging pictures, or planting plants. My wife has a sign that she somehow acquired that states “Houses are made of bricks and beams… Homes are made of Love and Dreams”. Yes, a bit cheesy, but important to remember that the bricks and beams do not define you, your status, or wealth in life.

Neighbors look at you differently
This is difficult, but after getting to know them, there are very few people who would openly avoid you just because you rent. It’s much easier to tell them you’re in transition between buying homes for a year or 2. This only works for so long, but so far we haven’t run into any trouble using this excuse.

Long-term it’s cheaper to buy
I totally agree with this one. But, imagine your disappointment if you bought a new car and it went on sale for 20% off a few months later. For sure, houses are not going to drop 20% in a few months, but that perfect opportunity that is 20% lower than rent might actually pop up some day for us.

You miss out on the deductions
This is overplayed for me personally. First, you have to spend more money to get the deductions. Besides, with a family business on the side, renting is actually a lot cheaper and easier because I can allocate square footage specificially for the home office and calculate business rent. I would have to do a lot more work for an owned-home.

Being a renter in this environment means being a permanent renter for your whole life
It’s easy to think this in the context of the last 5 years, but there has never been a financial “paradigm shift” that didn’t revert to the mean over time. Patience is my greatest ally in waiting for the right home to find us. All of those insane sellers and insane buyers are just like participants in any market. Is Google stock really worth $500pps? Some buyers did, but the vast majority thought it was much less. The transactions always take place on the fringe, and when demand exceeds supply, prices go up. Nothing new. The opposite is also true. When supply exceeds demand, prices go down.

All in all, being a renter has been kind to me. I always pay my rent on time and maintain the home I am living in, so I get good treatment from landlords. I’m also careful not to rent from flippers so that I can stay as long as I want (if needed). Finally, I’m a good tenant, so there is no reason for a non-flipper landlord to want to get rid of me. If he/she does, it’s their loss, and there are lots of places to rent for a good renter like me.

Someday, we will buy a home (and likely in the neighborhood where we now live). We are not caught up in the frenzy of owning just to “build equity”. First time buyers may soon realize that “building equity” is not what it used to be. We believe that to buy just to make money is a poor reason to buy, but losing money is not something we are ready to do just yet.

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Chuck Ponzi July 21st, 2006

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Chuck Ponzi July 21st, 2006

Mission Viejo, CA - A thunderous clap was heard as the continental plates shifted early Friday. Some locals feared it was “the big one”, but instead we found out some hours later it was actually Satan, personally congratualting Gary “In the Bag” Watts. At first, the rumor spread that hell had actually frozen over and that Gary had admitted he was wrong, but that optimism soon faded when it was realized that Mr “In the Bag” was in actuality nonrepentant about his predictions for the local area, even after reducing his forecast by some 30% from 15% to 11-12%.

Watt’s is well known for his “on the fly” predictions that rarely last long. “His end-of-year predictions are almost always spot on,” quoted a local realtor who relies on Mr. Watt’s advice and has purchased several homes since the beginning of the year, “Hey, 11% on $3M of real estate ain’t bad. I just wish others were buying like I am so I could sell some homes to make my mortgage payments.”

Watt’s was quoted as saying:

It’s been an absolute miserable six months in terms of real estate. I think we probably are not going to see 15 (percent), but I think 11 or 12 (percent) is still realistic.

A local news agency said

Watts, who had forecast that local home prices would go up 15 percent this year, now believes that annual appreciation could be as low as 8 or 9 percent if high oil prices and Mideast tensions continue to batter the economy.

Latest news from locals is that tension over Mideast conflicts didn’t bother them the last 3 years, but Israel’s conflict with Hezbollah is really putting a damper on whether they are attending open houses and offering their firstborn children and indentured servitude for their remaining offspring just to drink from the Orange County real estate well. Local Hugh McDuff was quoted

I never really thought much about international politics until 9/11, which caused me to buy more and more houses over the ensuing 4 years. Strangely enough, with recent developments and gas for my Hummer going up, I’m suddenly bummed by Lebanon. Can’t put my finger on it, but I just don’t have the urge to buy any more homes. Maybe I’ll feel more like it in the fall.

We will keep you informed as further developments to this story unfold.

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Chuck Ponzi July 19th, 2006

Over the past few years, we have seen unbridled optimism grow so great that it’s difficult to even remember what life was like before the housing bubble. Let’s take a walk down memory lane with a local home in South Orange County…

Remember, this is only a characterization, not specific to everyone’s area although it is likely we could pick a handful of homes at random and get the same response.

Let’s start with a home that was purchased in April 2000 in Laguna Niguel. This is a beautiful home, 4000 sq ft with a pool and good landscaping. The purchase price? a cool Half-mil. $500K. Weather was great, interest rates went down, and the housing bubble went up.

Imagine what that same $500K in LN would buy you today? A 2 bed 950 sq ft condo with $400/month condo fees? A run-down shack in a 55+ community?

The house is now back up for sale. Anyone care to wager what the asking price is? OK, before we get to that, let’s do a little research…

What does Zillow have to say about this house? What estimate would it put on its value now?

How about 950K? What about 1.0M?

Here’s the answer:

Would you believe 1.18M? If that seems a bit scary to you, consider what the seller is asking for this property:

$1,395,000.

What’s even scarier is to look at the value of the home over the past 3 years as a benchmark. About 3 years ago, the home would have been valued in the $550K range. In 3 years, the “zestimate” went up over 120% The current owner believes it went up almost 200%.

Could the home sell for it’s asking price? I doubt it.

While the home is nice, it has no ocean view or ocean breezes. It does not sit on an acre lot, and is surrounded by decidedly “normal” family homes.

Worst of all, interest rates are going up.

At present jumbo California rates of 7.5%, after putting down $280K, the principal and interest would come to $7803/month. Add taxes and insurance of $1417/month, and the total payment to own this property comes to $9,220/month. Not including maintenance and upkeep or HOA dues.

Some hopeful optimists have noted that buyers typically do not put down 20% on a home anymore, so there’s no sense in focusing on the down payments needed. I would normally agree, but that would only increase the monthly payment, not help it, so this is a pretty conservative estimate.

Plugging that into our hand-dandy income calculator gives some recommended income requirements for PITI as a percentage of income as follows:

% of PITI
25%: $442,560/yr
28%: $395,143/yr
33%: $335,273/yr

Even after considering the most dire of circumstances where 50% of your income would go to housing payments (keep in mind that at this level, taxes would consume probably close to 35-40% of your income, leaving you to purchase the rest of your needs with 10-15% of your income), the happy homeowner would need to make $221,280.

Imagine a successful executive who cannot afford to buy a car, eat out, or even save for retirement to afford a home. This is what the prices are suggesting. If you see it any other way, please post it, we are all interested to know how it can work.

Boiled Frogs

The truth is, I had a friend tell me what a great deal this house was, if he could only afford it.

This is where we have all become boiled in the rising temperature of escalating housing prices.

Even though prices have moderated, and in some places fallen, many, if not most, still believe that housing will average 10-15% returns per year. There is still a pervasive fear of being left out. This will continue until it turns the other way. The question on everyone’s mind is the same (regardless of a bubble believer or not); who can afford these homes. How many people in your neighborhood could afford to buy their homes?

I believe we will find ourselves in 3 distinct phases with housing prices, reflected by interest rates.

Phase 1: Wow, I could buy more home because interest rates went down. I had better buy before my neighbor figures out the same thing and buys the house I want. Sure, my payments will be slightly higher, but the low interest rates make them bearable.

Phase 2: Wow, housing prices have escalated quickly. With rates low, I could buy my house again, given the current equity I have, but just barely. My payments would increase just to keep my home.

Phase 3: Wow, housing prices are outrageous. With current interest rates, I couldn’t even afford my own home, even with the equity I have because payments would be much, much higher.

I believe we are now firmly in phase 3, where interest rates have almost returned to a normal level (although still low), but prices have escalated such that most owners could not even buy their current home even with their current equity. This is when transactions stop because in any ponzi pyramid, new entrants are needed to pay off existing participants. Those new entrants are unable to pay a premium over prior periods. The only existing transactions are happening with those still in Phase 2 (not everyone passes at the same time).

I strongly argue that risk premiums are far too low for MBS paper holders, and that we will still see mortgage rates in the 8-9% in the next few years. This would just be a return to normalcy (and almost necessary to retain a strong currency), not a swing the other direction, or a credit event that could still occur.

We are all boiled frogs in the current scenario.

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Chuck Ponzi July 17th, 2006

Then… August 17, 1981

A word to the wise: The great Los Angeles housing boom is over. The real estate price explosion in southern California, which sparked a national boom still continuing elsewhere, has stopped. The bubble that everyone said could never burst has burst. All over Los Angeles and Orange County, home buyers can buy a property for less than it would have cost a year ago, although there are exceptions. Buyers who can pay cash can almost steal houses and real estate. The days when ordinary citizens got rich from buying houses are gone, at least for the time being and at least in southern California.
But what a bubble it was. In the 10 years from 1970 to 1980, the price of the average house in Beverly Hills went up by a factor of almost seven. The average house in West Los Angeles, a region of by no means opulent homes, rose by almost six times. Houses in Malibu routinely doubled in value every year in the late 70’s. By the end of the decade, newspapers advertisted ‘’starter houses,” for families who had never owned before, in remote desert suburbs starting at $200,000.
Any lucky person who got in on the boom in the early 70’s saw his paper profit reach about 30 times his down payment by 1980. People who had never earned more than $40,000 suddenly found that they were millionaires just from that little house with a pool in Pacific Palisades. Ronald Reagan is said to have paid $29,000 in the early 50’s for a house in Pacific Palisades that is now for sale for $1.7 million and cannot be sold, which is the whole story.
The boom went on for such a long time because the economics were right. All through the 70’s the cost of owning a house in the better neighborhoods of Los Angeles was negative. That is, the cost of servicing the mortgage plus taxes was less, usually far less, than the increase in the price of the house. Figure it out: mortgages were less than 10 percent for almost all of that decade, under 7 percent if you count the tax features, and houses were increasing in value all over the West Side of Los Angeles by a good 20 percent a year on a compounded basis. The banks, savings and loan institutions and and the economy generally were paying families to live in the better neighborhoods of Los Angeles. The economics of housing inflation were such that for a long period, lenders made mortgage loans at rates substantially below the appreciation of the houses they were loaned upon and in some years, noticeably below even the trend line for inflation. This cheap credit fueled the takeoff of the boom. As prices rose to stratospheric levels, the price history itself fed the boom. Real estate agents assured buyers that however high prices were, they would go even higher.
Wives went to work. Second mortgages were drawn up. People would do anything to get in on the boom, which looked as if it would never end. Even when prices got so high that ordinary citizens could no longer afford to get in, rich people came from all over the country and the world to get in on the one true never-ending bubble.

And Now July 17, 2006

The market also began to fade first in San Diego. The craziness seemed to peak about two years ago, when bidders routinely submitted letters saying that they and their children would be forever honored if the seller would consent to choose them.
Whatever happens here, optimists and pessimists agree, will happen later in the rest of the state.
That’s about the only thing everyone agrees on. The size of the coming hangover is a particularly contentious matter.
Most analysts and people in the real estate industry insist it will be mild. The housing bears say the bulls are either misguided, uninformed or shills.
At a Century 21 sales office in the Ocean Beach neighborhood, broker David Davis said the market had already bottomed out. The spring was weak, he acknowledged, averaging only one or two sales a month — half the office’s usual rate.
But things are already back on track, Davis said. He expects four sales this month, about normal.
The last San Diego real estate collapse, which hit in the early 1990s, was triggered by convulsions in the aerospace industry. The post-Cold War downturn caused widespread unemployment and a generalized exodus from much of Southern California. High interest rates contributed to the misery.
“Our No. 1 industry is now tourism,” Davis said. “Unless they take away the sun, we’ll be fine.”
He’s putting his money where his optimism is, spending $187,000 over the winter for a downtown condo he’ll live in. He knows other agents who are buying too. “I think they see a good thing,” he said. “Buy low, sell high.”
If Davis radiates cheer, the fliers taped to the window outside the office door tell a different story. “Huge Price Reduction,” one says. Another says both “Reduced” and “$15,000 Credit.”
In some cases, the prices are dropping faster than the fliers can be reprinted.
A two-bedroom town home has its price of $324,900 crossed out with a marking pen, replaced by $309,900. Another house, a four-bedroom in suburban La Mesa, has a printed price of $575,000.
Below that is handwritten $549,000.
Scribbled below that is a new minimum: $499,000.
What helped supercharge the San Diego boom was the spread of unconventional financing methods.
Some adjustable-rate loans allowed buyers to postpone payments on the principal. Sometimes the loans allow the buyer to pay only part of the interest, tacking the remainder onto the loan itself.
The advantage of these loans is that buyers can afford much more house. The disadvantage is that they reset quickly, which is why critics call them suicide loans. After the grace period expires, the payments can skyrocket — particularly if it is a time of rising interest rates like the present.
Holders of these loans can’t afford to see prices decline. Yet for everyone who has been shut out of the market, the only hope is a drastic slide.
“Houses really need to fall by 50% to become affordable again,” said Tom Scott, executive director of the San Diego Housing Federation, a coalition of nonprofit and advocacy groups. “It would be better for everyone if the price of housing fell.”
Buck, the homemaker, said she and her electrician husband, Andre, might start looking at foreclosures. Notices of default, the precursor to foreclosure, reached 1,533 in San Diego County in the first quarter of 2006, up 60% from the year-earlier period, according to DataQuick Information Systems. The number is still low by historical standards, however.

The most surprising thing of the second article is that Rich Toscano drives a silver Miata…. Rich? A Miata?

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Chuck Ponzi July 7th, 2006

All Readers:

Due to Patrick’s recent announcement that he will no longer be posting bubble news stories to his website without a subscription (which costs $5 for 25 days), I took it upon myself to create another blog that will highlight the most recent bubble news stories. I had been squatting on the site for some time trying to get some time and motivation to aggregate news stories there, but had been unable to find the time until now.

When I get time, I will be compiling an RSS feed group on the same blog for all of the bubble bloggers out there, and some econ bloggers as well.

I find it helpful to sort through the commentary and just see news articles. If you like the commentary, there are plenty of other sources for it out there.

I hope you enjoy, the blog’s address is:

www.housingbubbleblog.blogspot.com

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Chuck Ponzi July 2nd, 2006

Think we’re not heading into a recession because “experts” tell you the economy is doing fine?

Think housing is going to come in for a “soft landing” because everyone wishes it so?

Think again.

AJC.com tells us of an economist with a contrarian point of view… and a little of a history lesson:

The sweeping support of the best-case scenario makes Dean Baker scoff. “I went back and looked at the ‘Blue Chip’ forecast in September of 2000. Of 50 economists, six months from recession and not one of the 50 saw it. Not one predicted the recession.”
Barring an unexpected shock, whether we do slip into recession depends on two factors: whether the Federal Reserve keeps raising interest rates until growth stalls and whether the four-year housing boom is petering out.
Baker, co-director of the Center for Policy and Economic Research, puts the chances of recession at about 80 percent.

and

For five years, real estate has been critical to the economy, accounting for roughly one-third of job growth — some estimates say more — from brokers and bankers to construction workers.
More important, consumers have traded equity in their homes for trillions of dollars in cash. Now, by most measures, the housing market is slowing. Pessimists say it’s a bubble bursting —a slow-motion version of the tech stock collapse that preceded the 2001 recession.

80 Percent?

Of course, Bruce Norris is putting those numbers a bit higher. The Daily News tells us SoCal residents about it.

He just released “California Crash,” a report full of 407 looseleaf pages of heavy stuff. (It weighs 5 pounds, 8 ounces, according to our mailroom scale, and cost $997, according to his Web site.)
Norris predicts that California will see a 1,500 percent in foreclosure activity by 2010. (Newspaper articles and his press kit credit him with predicting the market boom that started in 1997.)
He notes that $1.5 trillion in adjustable loans will do just that upward between now and next year. “California has a much higher proportion of adjustables,” he said.
And buyers who refinanced over and over to take advantage of what once were sinking interest rates could find themselves in a bind.
So could late-comers to the market who bought with interest-only loans and are in for a surprise if interest rates keep rising.
And Norris maintains it won’t take a lot of stretched mortgage holders to start some bad stuff rolling downhill. “You don’t have to have more than 2 percent of owners to create a tremendous problem,” he said, “and send foreclosures rising.”

What’s the point in delivering bad news? Will it change anything?

Probably not, this voice of reason; while unwelcome several years ago has now become more of an “I told you so” voice at this point. The damage is already done.

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