You know why you are so anxious? Same reason I am. Society has for the last several years whipped itself into a tizzy over real estate. We get anxious as we see prices spiral out of control and out of what we know is a reasonably sustainable price range. We see little sign of prices coming back to earth (that is, until the last year or so, and until especially recently). So it frustrates us.

It’s a little bit like that psychological experiment where the “patsy” had to witness 7 other people (working for the researcher) declare obviously wrong conclusions on things like which line drawn on a poster was the longest, or which curve was the curliest. The wrong conclusions of the “group” were drawn over and over again, and finally many of the “patsies” caved in and started to conclude the obviously wrong statements of the others were right after all. However, while the patsies sat and watched these people conclude the wrong thing time after time, they exhibited clear signs of stress and anxiety. According to researchers, it even went so far as to look like physical pain. That was the patsy agonizing over the possibility that perhaps their reasoning or even their basic perceptions were totally wrong. Like they were crazy. But the correct conclusion was to conclude that everyone else was crazy.

People who know real estate values are out of control suffer in this fashion. That’s likely the source of much of your angst and anxiety. Don’t worry about it - it will pass. Blogs like this are an outlet for such anxious feelings. There have been times when people didn’t even really talk about real estate because it was considered boring. Remember that? Those happen to be the same times when real estate was priced much more rationally. Who was talking about RE 10 years ago? Very few. Well, it will for sure be boring once again, exactly when I don’t know. But when the mass hysteria over real estate dies down you will probably be glad you didn’t join in when everyone else was losing their marbles. And losing their marbles is exactly what many people buying residential real estate have been doing for some time. It will be within one of two extremes: a quick drop in real estate (say 2 years), or a very long dragged-out drop (perhaps 10 years), perhaps depreciation largely through inflation.

My suggestion: enjoy your rental as I do and let the owner get all the headaches of ownership for little to no reward! Have a barbecue at your rental and invite your friends over for some beers!

California has its cycles. What goes up must come down (historically speaking). Although, this time will most likely be very painful because people have out-stretched their budgets, the new bankruptcy laws, and the mood of the economy shifting, after the market has fully “normalized”, we could experience the same cycle we have in the last five years.

If you do buy, just don’t do it thinking you’re going to walk away in a year with an extra 100K in your pocket. There is something very American in owning your own home. And let’s face it, if you can afford a fixed-rate mortgage right now while mortgage rates are still historically low, it might be good to buy your dream home. If you plan on living in it and it’s your home, it becomes a long-term investment.

When Bruce debated UBS analyst Ms. Whelan earlier this month at the Building Industry Association (OC and IE chapters), we heard further confirmation that builders are really gearing up for the buyers market. Builders will ramp up incentives (cars, vacations, plasmas) and are fully expecting to work much harder to earn your dollar. Not to mention, those “reduced price” riders are going like hotcakes.

Friends don’t let friends get adjustable mortgages (or 50-year for that matter).

Look, we can all accelerate the coming real estate crash, and we all know the sooner the better because it’s already gotten so out of hand already, and here’s how:

Despite our amazement about it, there are still prospective homebuyers out there still looking to buy a home, who are unaware that they are being led to financial slaughter, and it’s these people who are postponing the inevitable, so here’s what we do:

Post links to this housing bubble site and a dozen others “ONLY” where prospective homebuyers are looking because that’s the only way they’ll find out. Post all over Craigslist and every other real estate listing site you can get into and use tinyurl.com links so they won’t know where they are being referred to. Explanations to those links should be preceded by caveat emptor warnings like “Don’t buy any real estate until you’ve read what’s happening to the real estate market” or “Here’s why you’ll be able to buy real estate for 25% to 60% less in the next 12-36 months”.

The few idiot buyers still out there (I know they deserve it, but let’s get this over with already) will disappear and then we’ll have a pricing freefall, initiated by lender REOs.

I’ve been told lately by many people how surprised they are at how many REOs they are seeing or how many neighbors they now know are in trouble for having bought in the last 3 years and who HELOC’d on top of an exotic or no down payment loan.

People, this giant boulder of a coming crash is just teetering on the edge of a cliff. If we all join together and give it a big push, we can make it happen sooner and get our economy back on track - What do you say? Heave Hoooooo!

So what is the projection for LA and Orange Counties? I haven’t seen much happening in the way of lower prices especially in areas of South Orange County like San Clemente(Talega Area). Prices still seem to be very high. As for San Diego County, there are visible signs of lower prices. The builder of a townhome community in the Carlsbad area has dropped 10% in just the last few months. How much more of a drop is the San Diego County area going to see?

For anyone interested in the UCLA Anderson forecast on Real Estate by Thornberg here is the video..it’s a good watch, about an hour:

http://video.google.com/videop.....9877885520

That is an interesting video but I take it with a grain of salt. These same guys are the ones that describe economic valuations with fancy wording and tweaked statistics…

We’re spending over $8B/month on the war yet our economy is strong??

Also, the biggest fallacy in all this is the link between payroll and jobs and strong market. Perhaps that’s a true link in terms of revenue for the states that tax individuals. But when the salaries of individuals is not enough for savings, for growth, it’s totally unfounded. You can make over 1 million jobs in McDonalds but that’s not going to help anyone.

Let’s face it, most of us rentors are very jealous of the people who bought a $350K home that is now worth $1M. I know I am, but at this point there is nothing that can be done. That home isn’t going back to $350K anytime soon and my income isn’t going up by 3X to afford that home.

So it looks like SoCal has a problem. Some people say 10% others say 20%. No one knows. But California is not going to be able to afford to recruit talent to the state in the future. So if you aren’t getting a hand-me-down home, you will need to rent or move.

This cycle is just beginning. But as business moves out of state it will take the needed income to support these home prices.

SoCal currently is a very STRONG market with many good jobs, but they can’t last when an exec making $120K can’t afford a nice home. The pain won’t be felt for 5-10 years. I see it now in my company. College kids can’t afford to move here. We don’t even like to interview someone who isn’t living here because they go into shock when they see what they can afford and they most often don’t take the job after one day with a realtor.

What is the answer? There is only one answer. SoCal needs more housing. The catch, not enough water, not enough power, not enough roads, etc… And one good earthquake will shut SoCal down.

So when you pay rent remember, when everything goes bust, you can walk away. If you own you need to ride out the cycle which could be another 10-15 years.

I must agree with the last Anon, though to be fair, there are a few new execs who make over 200K here who do not feel comfortable buying a home; they moved here prior to looking for a home assuming that prices could not “really” be that high. I am not an exec, but make far in excess of 120K and still could not afford anything near my current standard of living.

I have argued all along that what Cali will soon be experiencing is a fairly large exodus; both by equity locusts and by priced-out talent who can take their dollars elsewhere. Many people assume that talent will simply stay here and take it in the shorts, but I believe that not to be the case; good talent knows they can go elsewhere and will if needed to get what they want.

If anyone is interested, I sent this email to Mr. Thornberg a few days ago after I watched his video. I doubt he’ll write back but I wanted to anyway…it is a democracy right?

———————————-
Dear Dr. Thornberg.

I recently watched your video of the Economics Roundtable on Google regarding housing and the general state of the economy.

I found it very interesting and quite informative. I’ve been following the housing market closely out of interest but also because my wife and I were not one of the lucky ones that jumped into the housing frenzy as you called it.

I had a couple of questions regarding your lecture.

A) You had stated that you believe there will be no real downtown in housing prices…rather a flattening.

My personal belief (and hope) is that home prices go down substantially. The levels of monthly mortgages that people need to get themselves into to buy a home in my current area (Glendale/Pasadena/Burbank)) is ludicrously high. Well over $3000/month + taxes with 20% down. I doubt it’s very different (if not worse) in most places in Southern California. That’s a huge amount of money to commit to every single month.

Therefore, the only way I see for home prices to just flatten is:

1) First time home buyers must be either very wealthy to have huge down payments to have reasonable monthly mortgages OR they can forget getting into housing in California without being stretched WAY PAST their limits. You stated towards the end of the video that people need to buy reasonable homes…I’m not sure if that exists anymore in California.

2) External buyers are coming in and keeping prices stable. For example, there has been a large increase in Korean families buying homes in these areas…many times with large cash payments or ALL cash purchases. As a working couple, my wife and I simply cannot compete with people like that.

3) Only current home owners will be able to exchange homes and move up.

I simply cannot see how, given the current rise in rates, home prices will stay flat given that already prices are out of reach for many of us. Can you shed light on the matter?

B) Many people state that the strength of housing is based on jobs.

While the graphs and charts are there to show a matching trend, how is this possible when the types of jobs available do not match inflation rates while also considering that we’re actually making less money now than we were a few years ago? At least it seems this way in this region of the country. We’re spending alot more money per month of the same goods and services without any raise in income.

Also, given the ratio of home prices to incomes on average has gone up drastically, how can housing strength being linked to jobs? Are more people pooling their monies together to live under the same roof? I tend to believe that’s the only way since I see more consistently that more than just a couple live together these days. Parents, grandparents, children cousins…etc….all living together. Again, a regular couple like us cannot compete.

It would be great if you could address these two questions I have. Perhaps if future talks you could raise these questions for the audience as I do think they have some legitimacy.

Sincerely,

Noz

——————————–

We should see about 5-6% appreciation in SoCal from now on. We cannot expect the double digit gains of the past. Prices falling is very unlikely. Rents are also set to go up a lot in the near future to equalize with home prices.

These economists have been predicting a crash for the last 4 years and it’s been totally the opposite. 4 years is not a timing error, it’s more like a flaw in their analysis, they should go back to the drawing board and change their models because the run up in prices this time around is due to demand vs supply, Southern California Real Estate has finally corrected to reflect it’s true value which is a whole lot!!

The people that got in before the boom are lucky, the others oh well…life is not fair, you can always buy a big place in Mississippi or something Don’t waste your time thinking prices will come down because they will not.

Hi neighbors!

I just updated the July charts for the south bay beach cities area. Enjoy!

South Bay Beach Bubble Blog

Hey Anon who says “We cannot expect the double digit gains of the past. Prices falling is very unlikely.” You are completely wrong. Many places in San Diego have fallen 5-10% already. What the heck you talking about? Bunch of BS!

Hello All,

Anon August 5 is typical Joe sixpack… they are not economists or for that matter, not really interested in financial analysis.

However, it is increasingly an “ownership society” where one only gets ahead by properly predicting and acting upon economic analysis. While he/she/it/troll is correct that those who bought before are “lucky”, never in the history of the world has “luck” had so much to do with a great shift in wealth, and I suppose that it is unlikely to change in the forseeable future.

Because nearly every well-renowned impartial economist has within the last year announced the presence of a housing bubble in selected areas (most notably Southern California), to deny them merit would be to assume that “it’s different this time.”

I doubt it.

“Anon August 5 is typical Joe sixpack…”

Nah — Anon August 5 is a typical real estate agent. Though these days there are so many of them that they could very well be called Joe Sixpack. And they will need that sixpack in a year or too when they’re out of work and find that the kind of thing they’ve been doing the last few years would be illegal in most fields, like selling a client stock that’s a total mismatch for them and a financial disaster waiting to happen. In the securities trade that’s illegal; in the real estate profession that’s their job. Of course I could be wrong, and Anon August 5 could be just another deluded homeowner thinking there’s such a thing as a free lunch. In fact, since the market’s only going up, why don’t you tap the rest of your equity Anon and buy another Mercedes or a bigger boat. At least then you’ll have something to live in next year.

Hello, this is “Anon Aug 5″ responding. First of, I am not a real estate agent but I am indeed a homeowner in Aliso Viejo. You guys are totally clueless. Have you been to Orange County? There isn’t any more land left, infact now they are trying to build highrises because there is just no land. Aliso Viejo itself has turned from undeveloped land to almost 100% development in just a few years!!! Demand vs Supply, it’s the basic principle of economics my friend.

As for equity, why are you so jealous? Sure, I would love for prices to come down a bit so that more people could make their dreams come true but as I said LIFE IS NOT FAIR!! so deal with it!

“There isn’t any more land left.” Hey Anon Aug 5, i’ve been wondering how people with low income can pay $1.5 million for a house, and now you’ve told me the answer: it’s because there isn’t any more land left! Thanks, you’re a genius. Do you think Japan has a lot of land left? They had a real estate bubble that wasn’t even as big as the O.C.’s. Prices went down 50 percent in Japan and stayed down 50 percent for TWENTY YEARS. So ponder that the next time you’re polishin’ your Nobel in economics.

To the one in Aliso Viejo using the old “no land left” routine, have you seen inventories in the last five months? If someone wants to maintain that there’s no land left, yet there’s countless for sale and empty houses on that “no land left”. Besides, Aliso Viejo is far from the places where they used to say, “no land left”, and yet those prices crashed in the mid 90’s hard. There’s a lot of land still around Irvine, San Juan Capistrano, and parts of San Clemente, and that’s with the enormous inventories that every city have.

BTW, did anyone see the big development going in in Aliso for 500+ homes over the next 2 years? They tore out 9 of the holes of the (very redundant) Aliso golf course on Glenwood. I’d like someone to comment on how there is no more room.

Ah, the apathy.

Anon Aug 5 again… first read this report:

http://publicpolicy.pepperdine.....ding5.html

This is written by economists themselves. The shortage is very real and most bubble theorists are just in denial. My brother is a mortgage broker and you know what, he tells me how low income families afford $600,000 homes… it’s called pooling in, 5-6 family members, usually from the latino community, pool in and buy homes with joint income. That is how they afford it. And dual or even triple income families are not that uncommon, pooled together their income certainly qualifies to buy homes at this price level.

There is a huge influx of these types of purchasers into the market. You may speculate about demand or lack thereof but my bro actually is the one doing the loans for these people.

Another factor is the rental vacancy rate. Even though purchase of homes has been skyrocketing over the last few years the rental vacancy rate has been less than 5% in OC. Infact, in Aliso it’s been about 4%.

Think about it… this is perhaps the most desirable place to live in the country and that fact means there is always going to be HUGE demand to live in this region

When no one can sell their houses next year there will be PLENTY of places to rent. Have you spoken to your brother lately? Can you really tell me that he’s not afraid of losing his job? In LA County the mortgage business is drying up and offices are closing or scaling back. I wish your brother well. If he’s been in the business a while he’ll probably be fine, but the newer among them will not be able to navigate the rocky shoals that are finally upon us. Just curious, did you also think the dot-com bubble would never burst?

do you guys realize that it takes adverse conditions for prices to come down like a serious depression in the job market? There has to be a big catalyst for prices to come down. Right now that is missing. Job growth is strong and wages are increasing. In addition Bernake has stopped the interest rate hikes.

I predict when all the people who have paused to wait out the decline realize that prices are not coming down they will either just go ahead and buy if they want to stay here or leave the state and buy somewhere else.

“There has to be a big catalyst for prices to come down. Right now that is missing.”

Missing? The Fed raised interest rates 17 meetings in a row. Lenders gave mortgages to millions of people who shouldn’t have gotten them. So foreclosure rates are on the rise, as are inventories, to record levels. Want more? The price of oil is at a record high. Not only does this seep into core inflation which will lead to higher rates, but so many of the new housing developments are fifty miles or more from the workplace, leading to crippling gasoline costs.

Further, you state that the economy is strong and wages are rising. Sure, in Europe maybe. Housing prices in SoCal have risen something like 20 percent a year for the past five years. You think wages have kept up with that? Ha! I guess you don’t read a newspaper, but there are many economic surveys out lately showing that job growth in SoCal is WEAK. And why do you think the Fed stopped raising rates? Because they said they’re afraid of a recession, that’s why.

You are pretty uninformed!

Here is my viewpoint…

Even if prices come down 10% which is quite a DRASTIC downturn and officially qualifies as a crash.. does it really matter? Nope, it doesn’t. That is just a loss of the past 1 years appreciation that’s about it. If the median price “crashes” from $700,000 to $600,000 it is still unaffordable by a long shot for most.

So this whole bubble debate is rather pointless.

“Even if prices come down 10% which is quite a DRASTIC downturn and officially qualifies as a crash.”

ok, now i realize you’re just kidding. sorry, i didn’t get that before. because you have to know that people are talking about a 50-70 percent drop in real estate values, which is very possible. i live in LA — prices have ALREADY fallen 10 percent from 2 months ago and that’s hardly a crash. the only ones who give it more than a shrug are the unfortuante ones who bought this past year.

I want to know when the fear really sets into peoples psyche?.. I am sitting on the side lines expecting stuff to come on down in price (bloodbath style). I want that cheap property that everyone keeps talking about.. Where is it??

m.. thank you