Please don't take my comments as calling a top, residential real estate could easily keep current valuations for another year or 18 months (although I think Bay Area housing is starting to fall). What does make me think we're at a top, is the mood of all my friends (and many people at my age, 30). Everyone wants to buy a house. A house is seen as a great investment. When the crowd can see the castles in the sky, that's when you need to stay on the ground.
Matt, Here is one that I know is going on in So Cal. People with extreme levels of equity are refinancing and pulling out the cash. They plan to keep the cash and walk away from the property if need be when the bubble burst. One person I know did this, pulled 600K out of his home. Who needs a mortgage when you get 600K and can buy another house for cash. then do a refinance after the purchase @ 80% LTV. Greenspan knows housing is the one area of the economy that has kept it afloat. You want 'irrational exuberence'? When houses are listed and sell in less than an hour at prices higher than the asking price, that's it in my book. Just like all the rate cut to keep the market propped up, the same reality is going to hit the housing market when they do what needs to be done with interest rates.
I read one report 3 months ago that the US economy grew in 2001 by the exact same amount that people took out of the market in home equity loans. While I think it's a little crazy to equate things on this level (anybody can make numbers say anything they want), it is an interesting thought that the housing market is the only thing making our economy grow. The real estate market is a difficult egg to crack, mostly because investing in real estate is far less liquid than any other investment. In fact, if a person stopped making their mortgage payments on their house 1 year ago today, there is still a very high chance the bank will not have foreclosed on the home by now (due to legalese). I think its very easy to believe that there are a lot of people out there with either a big house payment and no job or a bigger house payment than they can afford. This could all begin to fall like a house of cards (pun intended) I could be totally overreacting. Newatthis has a point when he says that Greenspan won't let the housing market fall. I'm sure he is far more aware of the situation than any of us could begin to know. All I know is what I see. In San Francisco (where I live) there are "for rent" signs everywhere. I mean everywhere. The same story is true of "for sale" signs. 2 years there were no apartments to rent and no houses to buy (at any price). I know SF has had the hardest hit economy of the entire country, and I realize I may be overstating something that may not be true in the rest of the country. As far as I can tell the only thing that's keeping the prices up is perception. People believe that buying a house is a good investment because of recent history. Once people see through that perception there will be a very painful reality.
getting ready to witness yet <i>another</i> massive redistribution of wealth...from the hands of individuals to corporate and government institutions, who will then start the whole cycle again... bubble markets are the ultimate head fake.
Chas, I agree with the spirity fo this thread, but could you elaborate? In what way are you implying that the government/corporations are going to seize the wealth of the masses and then create another environment of consumer demand?
There are several arguments that I could make for housing prices starting to fall at some point. Incomes are heading down, several people I know have recently sold their house very quickly for top dollar. Every apartment in my area is practically begging for tenants. In fact, my rent was reduced $100 per month without my asking just to renew. On and On. But here is something that I have not seen touched on. Several people I know have taken early retirement in the past 5 years. One lady in 97-98 was planning on drawing 9% per year from her mutual funds to pay for her retirement. At the time I thought this was way out of line, but never in my wildest dreams did I imagine we would be here. So what will she do to stay retired? My bet is sell her house and move into an apartment or smaller house. The new capital gains rules for residential real estate make this a no brainier. What happens when all of the TYC, LU, ENE, GE, NT, etc retirees need funds?? Supply takes Demand in a bloody 13th round knock-out.
vulture...im sort of tired...don't know how deep I can get into this... every debt contract has some sort of foreclosure clause...in a crisis the asset is transferred to the lender (redistribution to a corp or govt' entity) who then dumps it to an investor (corp, gov't, or individual) who then remortgages it to someone else... that's the cycle. Its success depends on succeeding generations of wage earners with doable credit ratings...(implications of the economic impact of population depletion owing to 30 million aborted babies in a generation might make an interesting study). When it happens on a mass scale, it is epochal event...when the average Joe loses his home because he didn't realize he was in an easy money bubble, the fruit of his labor is redistributed... should he have known better? Maybe... Even property owned outright has a repossession clause imposed by some taxing authority...a right to redistribute. Must stay on the treadmill to keep your stuff...or mark up someone else's time and talents...either way, it's an awful racket... Then there is the whole notion of redistrubution of assets by liens owing to civil and legal actions, and we all know how fair lawsuits are...(I remember reading a long time ago that the EPA settled a lawsuit against Goodrich by taking an equity stake in the company--Ayn Rand called it 'force and fraud' -- write the laws to suit you and give yourself the authority to seize assets or revoke rights). Private property is a precious thing indeed -- absolutely inseperable from liberty and dignity for every individual --and sometimes it's just an illusion. As the management of society shifts to 'aggregates' instead of individual personal relationships the whole beautiful concept gets perverted. I'm not arguing against government or the rule of law but things have gone quite abit astray from the spirit of the founders and their God. Someone said that the success of the Republic depends on the God-fearingness of its citizens. When people don't fear God, they become irresponsible. When they become irresponsible, the government grows into a grotesque, smothering nanny with a bad temper (often staffed by those who resent the successes of the responsible). And the thrift and industry of the responsible is confiscated to support the irresponsible. I have alot to say about the socialization of assets and risk but haven't had time articulate it.... I'm definitely painting an ugly side of it here...
That's dark!!!! Trader? I don't know; I think your true calling is as a writer. Give us some more!!!!
Top ten list on how to hedge against this upcoming collapse. in order of preference? 10. short homebuilders 9. short banks-not as fallible since rising interest rates, which is the strongest factor in the RE market, makes banks more $ 8. short agency stocks Fannie Mae, Freddie mac but uncle sam won't let them fail? 7. short bonds to protect against interest rate hike 6. short home depot, lowes,etc 5. long inflation insensitive intruments since only reason for interest to go up is if inlation rears its ugly head. 4. rent and hope you are right but in the meantime watch as the RE prices keep going up 5% a year so when the bubble collapses you were right about the same level when you first rented less the tax benefits. 3. Live w/ Mommy 2. Live in a van down by the river until the houses collapses. 1. Live with In-laws and pay them $250 monthly plus do the dishes and lawn. Disclaimer: I am a homeowner in N New Jersey where bidding wars are commonplace. I just hopethey are still here when I sell my house! Anyone care to add to my list? Hopefully more insightful ones Have a great weekend!