Tag Archives: american dream

Houses Can’t Possibly Behave Like a Stock…

Posted on March 19, 2009 | 2 Comments

Around March 2006 I started to theorize that housing prices in the San Francisco Bay Area might be this decade’s bubble.  It followed that we could see a collapse in housing prices to the same dramatic proportion as we saw in the NASDAQ.  When discussing this concept with friends, relatives and even a tax accountant I was presented repeatedly with these arguments of why that was impossible:

  1. The Bay Area is still a highly desireable place to live so housing prices could never decline and if they did never that dramatically.
  2. Houses take longer to sell and can’t be traded like a stock so prices can’t fall as fast.
  3. Also since you can always live in your house (and you can’t live in your stock) there is no reason for a fire-sale so prices can’t fall as far.

At that same time I saw a chart of house prices in which the curve was shifting to the point where it was almost going straight up.  That reminded me of what the NASDAQ looked like in March of 2000 and we all know what happened in April of 2000.  So could this happen again?   Were all bubbles fundamentally the same (eventhough the assets were dramatically different)?

Well clearly we are in the midst of a price adjustment but evenso it can’t be as bad as the NASDAQ, or can it?

So the other night I decided to do a little data-diving and found two key pieces of information:

  • Month-end NASDAQ prices from 1981 to the present.
  • Month-end median housing prices for the Bay Area back to 1987.

I then overlaid the data on top of one another after shifting the NASDAQ data up by 6 years.  Why 6 years?  Simply put the NASDAQ bubble popped in 2000.  The housing bubble, it is currently agreed, popped in 2006.   By shifting the NASDAQ data by 6 years we could see how well the curves aligned.

So what you see graphed below are month-ending NASDAQ prices starting in 1981 and month-end median house prices for the Bay Area starting in 1987.  See anything interesting?

housing-vs-nasdaq

So there you have it.  All three arguments as to why the housing prices wouldn’t collapse like the NASDAQ were COMPLETELY WRONG and now we see that no matter what the asset the dynamics of the bubble are the same.  Yes it is true that the run-up in housing prices is not as fast BUT the fall was just about as fast and there is a good chance that it will go as far.

So next time someone says “this time its different” make sure to laugh discretely and sell quickly. 

Now the next question is when do you buy?  Certainly not now. 

I wouldn’t advise using the chart above as a way to peg a specific date and I would go back to fundamentals.   The key fundamentals you need to check are:

  • Is owning now cheaper than renting?
  • Are prices equal to or less than 3 times the median of incomes in the area?

If you answer “no” to either of these questions then  DO NOT BUY.

Now what if the fundamentals do check out but the market is still falling?  This is where the trend information in the chart can come in handy.  To find a bottom wait until prices move upward for about 3 consecutive months (make sure they are prices for your city and NOT the county or region).  If they do and the fundamentals still check out then its time to buy.  While its true you will miss the absolute bottom its much better to buy on the upswing than to “catch a falling knife”.  Until it turns you have no idea how much more its going to fall so its worth paying a small premium for some certainty.  As you can see from the chart waiting a little bit won’t result in you missing a big upswing.  It took the NASDAQ about 6 years to reach HALF of what it was worth at the peak.  Missing three months of house price gains isn’t going to break the bank.


Oh and according to this article house prices are in for another fall and there is an interesting analogy to the sinking of the Titanic you might find interesting (with video)

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Posted in Housing Bailout, Market Cycles, Recession

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Don’t Negotiate with Real Estate Terrorists

Posted on February 6, 2009 | 1 Comment

Finally a lower cost way (from a taxpayer perspective) to keep many people in their homes and to prevent foreclosures.  Lets start with the only two reasons for foreclosure:

  1. You can’t afford your house.
  2. You can afford your house but choose not to (e.g. because its “under water”).

The thing is that there is a big difference between the two.  The first are unlucky or irresponsible.   The latter are engaging in common extortion by threatening to help trash the economy if they don’t get paid off through debt restructuring (even though they can afford their homes without help).  Simply put they are real estate terrorists and we shouldn’t negotiate with terrorists

So how do you differentiate the between the two?  Very simple, instead of using a carrot (restructurings) to keep #2 in their houses use a stick (more severe penalties for leaving).  Carrots are expensive and we  all have to pay for them, sticks are cheap and don’t cost taxpayers a dime.

Foreclosures look bad on your record but we should make them look worse than if you declare bankruptcy.  If you abandon your house we should double the time it stays on your credit report, put a lien on any future tax refunds that then gets paid into a foreclosure fund to pay banks at least part of the debt lost from those who abandoned their houses (that might also help relieve the negative downward pressure on banks’ desire to lend).  Even tax, as income, the amount left behind on the loan as if it were a forgiven loan.  Oh, I’m open to other punishments from people who know better.

Now what about those that truly can’t afford their homes, should they be punished as severely? Well they can be offered a trade-off.  Simply put if you declare bankruptcy (which if you are truly under financial water is a viable option) you don’t suffer the enhanced punishment for those who don’t declare bankruptcy.  As stated above this may even be a better option with less severe penalties.  Granted there are still penalties but now bankruptcy is the more attractive option.

Why favor bankruptcy as opposed to foreclosure out of bankruptcy?  In bankruptcy you have to report to a bankruptcy judge that helps you make the tough decisions to become financially solvent again and the burden is on you.  In bankruptcy you learn how to get back on your feet and stay on them.  If you just walk away from your house in a standard abandonment you learn nothing, the burden is mostly on others, and may very well find yourself in this situation again (and so will all those around you who pay to bail you out).

So now you have a choice.  If you are truly bankrupt you declare bankruptcy.  If you aren’t you may have to think twice about walking away because you either face even more severe penalities than you would have in bankruptcy.   You certainly won’t declare bankruptcy because well, uh, you’re not really bankrupt.  You’ll just have to stay in that house and tough it out at no cost to the taxpayer.  Oh and we just prevented a foreclosure.

(Make sure to email the Treasury Secretary Timothy Geithner to make sure he doesn’t negotiate with Terrorists)

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Posted in Housing Bailout

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Waking Up from the “American Dream” – With a Hangover

Posted on October 18, 2008 | Leave a comment

In America home ownership (or is that “loanership” as Americans own less than 50% of equity in their houses according too USA Today) and spending make you cool.  Renting and saving is un-American and suspect.  Its time to realize that home loanership is not the ideal but just one option of being American that is right for some people and wrong for others.

Shame should not fall to those that don’t own a home but to those that don’t properly live within their means.  The heroes that we should celebrate aren’t the ones with the most toys but the ones who are happy with their lives no matter their economic level.

Lets look at the middle-class peers of my parents in the Inland Empire in Southern California (yup, ground zero for the housing meltdown) who took out their home equity to buy new cars, large screen TVs, etc and are now foreclosing with abandon.  To put matters in perspective if you bought a house in 2000 and sold it in 2006 in that area you would have seen a 250% appreciation in value.  If you waited until 2008 you would have seen a 50% appreciation in value because of the collapse of housing values.  So its all about perspective.  If you didn’t know about the 250% option you would think you were doing pretty good and wouldn’t be upset about your current situation.  However no one takes the long view and is now UPSET about only getting a 50% appreciation in that time frame (having spent the other 200% of appreciation on disposable assets)

Lest one thinks I’m heartless I would rather have seen this $1 trillion NOT have to go to a bailout (although as an economic realist I realize its now a necessary evil) but to have gone to a safety net so all could participate in the economy and earn the honor of living happily within their means.

With apologies to Mr T, don’t pity the fool, lionize the smart.

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Posted in Sense & Sensibility

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