With a good run on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.
To play it safe you need to think about where we are in the economic cycle the same way as an important scene in the movie Titanic. This is the scene where the ship, which has been slowly sinking for about an hour, suddenly levels off when the submerged part of the boat (partially) breaks away. Everyone is relieved that they are floating level when all of a sudden they get pulled down in a rush to the bottom. The sinking part of the housing market just (partially) broke away and everyone is giving that sign of relief. Strike up the band!
Here is why we are in for that second more hellish ride straight to the bottom. In the short term the credit markets will get a swift kick when we finally have a large bank failure come to light. Give it 3-6 months and my FDIC insured money is on Bank of America (eventhough they passed their “stress” test). There goes the financing revival. Second of all housing will get another kick in the pants in two years when interest rates have to start going up again (to combat eventual inflation). We have seen the recent good news being the result of lower interest rates so what happens when those interest rates go up?
Also as any real estate agent will tell you “location, location, location”. Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula. Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year. Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median. That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median). Its only a matter of time before it finally hits here.
My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs. This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010. Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.
Impossible you say? Remember it was once said that the housing market could not possible crash the same way the NASDAQ did during our last bubble. Really?? Have a look at this graph which offsets the NASDAQ peak to correspond with the peak in Bay Area housing prices.
Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market). For a detailed analysis of these myths please point your browser here.
The Bay Area is still a highly desireable place to live so housing prices could never decline and if they did never that dramatically.
Houses take longer to sell and can’t be traded like a stock so prices can’t fall as fast.
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?
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.
An article published on March 14th by Joe Nocera of the New York Times finally called it out clearly that homeowners who got in over their head shouldn’t be helped by the government. Take this part from Mr. Nocera’s article:
I suppose you could argue that most … lacked the ability or the financial sophistication of someone like Mr. Hedges. But it shouldn’t have mattered…
“These were people with a fair amount of money, and most of them sought no professional advice,” said Bruce C. Greenwald, who teaches value investing at the Graduate School of Business at Columbia University. “It’s like trying to do your own dentistry.” Mr. Hedges said, “It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.”
And that’s the point. People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves…There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it.
And how about this snippet:
“The government should come and say, ‘We bailed out so many others, we can bail you out, and when you will do better, you can give us back the money,’ ” he (Elie Wiesel) said at the Portfolio event.
But why? What happened … is terrible. But every day in this country, people lose money due to financial fraud or negligence. Innocent investors who bought stock in Enron lost millions when that company turned out to be a fraud; nobody made them whole…People lose it all because they start a company that turns out to be misguided, or because they do something that is risky, hoping to hit the jackpot. Taxpayers don’t bail them out, and they shouldn’t start now. Did the S.E.C. foul up? You bet. But that doesn’t mean the investors themselves are off the hook. Investors blaming the S.E.C. for their decision to give every last penny to Bernie Madoff is like a child blaming his mother for letting him start a fight while she wasn’t looking.
OK, now for a little truth-telling. As you may have been able to surmise this WASN’T and article about housing bailouts but about victims ot Bernie Madoff’s Ponzi scheme but isnt’ the sentment the same? In fact its worse than that with respect to homeloaners. Here Mr. Nocera is saying that vicitms of an outright fraud and theft don’t deserve government help. The victims in the housing industry are, for the most part, NOT vicitms of fraud (yes there was some but seriously its a VERY small part of the market) and therefore should get even less help. I mean if you aren’t going to help vicitms of crime then why would you even help those that are victims of themselves and just plain bad circumstances.
Does it make any difference that the money lost was in investments as opposed to a house? Technically it shouldn’t (you spend less either way) but housing has been given a special, irrational place in society as something different. True you don’t live in your investments but you can always rent, you don’t have to actually own a house (and if you hold a mortgage you don’t “own” your house anyway, you have an option to own in 15-30 years). But renters are the invisible detritus of society but that is a topic better covered here.
HI!, yoo-hoo, over here, we are 100,000,000 men, women and children who rent and we seem to be invisible to you and the media (including NPR, New York Times and the Wall Street Journal) but clearly our numbers make us important. We are wondering why you are helping 9 million people at the expense of me and my 99,999,999 friends, neighbors and fellow countrymen. Not to mention the additional millions of former homeowners who will soon join us because they rationally decided to live within their means and rent.
But how is your plan hurting 100,000,000 renters? It is hurting them in three major ways:
By putting a floor (and debatable how stable or realistic that floor is) under housing prices above what they were before the bubble began you are continuing to price renters out of the market.
By raising the deficit you are going to be putting some of the tax burden on renters (yes some will go to homeowners as well).
Because many former owner-occupied properties have turned into rentals rental prices are actually falling. By keeping people in houses they can’t afford you will, in effect, raise rents again.
The net result is that you are charging renters, through the eventual taxes needed to pay for this, for the privilege of NOT being able to afford a house while also raising their current rents. This reminds me of the former Soviet practice of making soon-to-be-victims of execution pay for their own bullets and then charging their families for their burials.
Point #1: This plan is further eliminating renters ability to buy a home by reducing their income (through higher taxes and raising rents) and through maintaining artificially high prices (through so-called “stabilization”).
To make matter worse renters comprise those who either can’t or have decided not to overextend themselves to have the “American Dream” (which was originally “life, liberty and the pursuit of happiness” until it got co-opted by marketing experts in the real-estate industry in the last century). Renters are STILL disproportionately Hispanic and African-American and lower income. Homeowners are disproportionately white and have higher incomes.
Home Ownership by Race - (US Census Bureau)
Point #2:Helping homeowners at the expense of renters is yet another transfer of wealth from the lower class to the upper class. How Bush-league.
Oh and why would the the vast majority of homeowners (who do, truthfully, outnumber renters) care to help us ? Very simply because the survival of any market (or pyramid scheme which the housing market has proven to be) depends on a continous stream of first-time buyers to fuel growth from the bottom. By attacking renters you are attacking the first-time buyer base and, while you may temporarily save the market, you are draining the pool in the medium to long term.
Point #3: Homeowners need to watch out for renters if they want to truly protect their home values.
How can you help? Well if you can’t bring yourself to let the market work out the right price then at least provide renters with some rental income tax deductionsso they don’t wind up paying (two to three times) for the mistakes of homeowners. Additionally this will help incent those on the edge of home-ownership not to over-stretch to buy a house so they can get the equivalent mortgage income tax deduction. Its the least you can do.
Finally, of those 9 million you are helping, at the expense of 100,000,000, how many got themselves into their situations by cashing out their equity cushion for home-improvements, new cars or family vacations? I guess its comforting to know that the money we saved by renting will go to buy some nice stuff…even if it isn’t ours.
In all the financial press there has been much discussion about the shape of the recovery, always in the form of letters. Would it be a “V-shaped” recession – sharp drop followed rapidly by a sharp recovery? Or possibly “U-shaped” – sharp drop followed by a period of bottom-trawling followed by rapid recovery? Or even a “W” – two sharp drops with recoveries after each? Some have even proposed an “O” as in “O sh#t its never going to recover!”
I have found that letters cannot describe this recession. My belief is it will be a sharp drop (been there, currently doing that) followed by a long and slow climb out for stocks and house prices. Well nothing in the English alphabet can possibly account for this. So what could?
Stumped, I sat staring at my Smart Phone looking for answers and then it hit me. Looking above and to the right of the screen, not where I typcally find answers to my internet queries, I saw my cell phone carrier’s name and logo and VOILA!!!
Welcome to the official shape, logo and motto of The Great Recesssion.
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:
You can’t afford your house.
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.
I now have dug up email addresses for Obama’s top two economic advisers Timothy Geithner and Lawrence Summers. See this page to see how you can email them and make sure that irresponsible homeowners are not bailed out.
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.
