Housing bubble. This is just depressing to read - Posted by Mike

Re: The Sky is NOT falling - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 02, 2006 at 08:39:17:

Thanks for the link. Very rational. Very well (and simply) explained.

Re: Bursting the Bubble Babble - Posted by John Corey

Posted by John Corey on May 09, 2006 at 08:53:53:


How about some meat to your point about ‘HUGE’ correction. Define huge.

By correction I assume you mean that the recorded sales price for an average sale is down from last year. Is this correct?

In some press articles the term correction has meant that the rate of appreciation is lower (prices are up but not as much as they could have been). I think you are saying something different. I want to you to tell use what numbers you are seeing.

John Corey

Re: Bursting the Bubble Babble - Posted by dutch

Posted by dutch on May 02, 2006 at 15:33:15:

Have you ever met a realtor who would tell you to wait, don’t buy now, it’s not a good time? That would be like the dentist telling you that you don’t need a cleaning, come back in a couple of years.

LOL. Realtors only get paid when somebody buys. They NEVER tell anybody to not buy.


Re: Housing bubble. So what. - Posted by DaveD (WI)

Posted by DaveD (WI) on May 09, 2006 at 09:25:17:

“the early 80’s was a perfect time to buy- very low prices, but high interest rates…”

Actually, I didn’t buy low, especially my first. I pretty much paid market for the house. In fact, I thought I overpaid by a few thousand. (I think the same for every house.) But with the passage of many years, my perceived over payment looks ridiculous.

It was no deal, really. High (market) price and high interest. But I needed an entry point. And managed to hang onto it. Worth a whole bunch more now.

I say that so nobody gets hung up on the missed opportunities of yesteryear. The prices look low only because you are comparing them to todays prices. The prices look high today, only because you haven’t compared them to tomorrows prices. Regardless if some markets falter. Would I still buy it today for todays price? Probably not. But then, my buying criteria has changed over the years.

Re: Housing bubble. Where? - Posted by John Corey

Posted by John Corey on May 09, 2006 at 08:49:35:


You talk about RE as if there is one market and all house prices move as one. If you were at the CREOnline convention this past weekend you could have met multiple people who have local markets that are still waiting for the rise. It is very unlikely that their markets will go down given how low prices are now ($10,000 buys a SFR in one market and it will cash flow if rented).

I agree that buy low sell high is a way to make money. I also agree that taking a simple view of the data means one can create a doom and gloom picture.

One factor that is uniform across the US is the interest rate as set by the Fed. As that has been going up and should go up later today we can talk about interest rates and house prices. Many times a rising interest rate means soft, flat, falling prices. If rates were falling then the opposite is normally expected. So, rates are up from the 40 year lows and prices are soft, flat or falling in some markets. Note that when rates went down there are markets that did not see house prices rise.

A real investor is not trying to play the broad market. They invest in each deal separately. They buy below market so even if prices are flat or down the investor is still in the money. A speculator buys with the hope or appreciation.

John Corey

Re: depressing to read NOT - Posted by The Frisco Kid

Posted by The Frisco Kid on May 02, 2006 at 17:08:26:

Don’t need a slow down to weed out agents, it just happens naturally. In my area 5% of the agents do 95% of the business, the other 95% of agents are debating whether to give it up or not. There was an old axiom in real estate sales that 1/3 of all agents are coming, 1/3 are going, and 1/3 are making the money. The numbers may change slightly somewhat but it’s still basically the same.

Why is Donald Trump still afloat? - Posted by John Behle

Posted by John Behle on May 03, 2006 at 19:11:22:

Let’s look at another factor and begin with a question. Why is Donald Trump still afloat?

A point to think about is the banks. Those that have made the high LTV loans and adjustable rate loans are also at high risk. Even higher than the consumers. As you probably know, too much REO property or bad debt can be the immediate death of an institution. They can literally be shut down by the FDIC. They do all they can to make it look like a buyout or merger, so we usually don’t see it.

So, the institutions making the loans are at risk. They CAN’T foreclose on hundreds or thousands of properties without killing themselves in the process. They will have to lower rates, re-write loans or get creative in some manner.

How does that relate to Donald Trump. A couple years after his first book, he got over-extended. He broke many of the rules he had just written about. His casinos were not doing well and were dragging down the real estate end of the portfolio. He went from Billionaire to heavily in debt. He was sitting on what might have - and should have - been one of the biggest bankruptcies in the nation’s history.

Yet, he came out of it. He climbed back. But… he had help.

I watched a program that had many of his bankers on it discussing his situation. The bankers got together and bailed him out instead of doing what they would on anyone else, which is foreclose and/or force him into bankruptcy.

He owed so much money to the banks that they could not survive if they did not cut him a deal. Instead of shutting him down, they loaned him more money and he climbed out - with a rope made of money from the banks.

So much of the discussion about bubble bursts assumes lenders can and will ruthlessly pull properties out from under borrowers. That isn’t to say none will foreclose. It doesn’t say no one will be hurt, it’s just a factor that will mitigate the consequences to a large extent that no one discusses.

There is also the factor of the government. Actions can and probably would be taken to prevent a disaster. Just as the Government bailed out banks and other institutional lenders, they can also swing the other way.

When the “Due On Sale” clause was being struck down in court after court, the Senate stepped in with a bill to save institutions. They basically over-ruled the courts and put a law into place allowing institutions to use the DOS clause to bludgeon higher rates out of borrowers. What the courts were seeing as an un-enforceable clause was enforced by the Senate. In much the same way, the Government could and I am certain would control the interest rates. A Government cap on variable rate loans would be one option.

One final point. Almost all financial writers and their psychic friends predicting the future of real estate are making massive statistical assumptions and mistakes. They compare a market like New York with a market in Japan. They take a market like the Florida condo market or parts of California and project it over the whole nation.

The world consists of more than California, despite what they may believe. My area for example is extremely stable and growing rapidly. Others are the same. Demand for housing has NOT changed. The supply and demand is still the same factor. People are still being created. Society has not taken to living in caves, boxes or their cars. Not to disregard those few that do. But all of society is not headed that way. There are still people living in and renting houses. Money still exists. Capital from one state flows to another. People from one state flow to lower prices in another - then they flow back when a market corrects some. Money exists in other countries that would flow to our real estate in a second if bargains started happening.

Talk of gas prices affecting real estate values downward is ill-informed. The cost of oil is a large factor in the cost of NEW housing. Raise the cost of oil and new housing goes up in cost boosting the demand for existing housing.

And while a few cents, quarters or a dollar increase in gas prices may lead to hysterical panic among some, there are others in the population who are not so concerned. There are people that do not even look at the price of gas, but stop at the nearest station. Many people drive the car they want with little regard to MPG. Few people with a large house in the suburbs are going to run to put their houses up for sale to move to the inner city to save a few dollars or even hundreds of dollars of gas.

To summarize.

1 - Institutions cannot afford to NOT be flexible with homeowners.

2 - The Government will not sit by without taking steps to help.

3 - Real estate is NOT a standard market. Markets are localized and while many are running round worried about a slowdown, other areas are booming. Capital from other markets and countries would flow to pick up bargains in a market to the point where there may not be that many great bargains. Like Seattle when Boeing shut down.

4 - There are ways to profit in any type of real estate market.

5 - You should make you money when you buy anyway.

6 - To answer one person’s comments somewhere in this thread. Not every guru or real estate expert that disagrees about the doom and gloom prophecies do so to further the sales of their materials to their poor unwitting students as someone implied.

7 - I’ve probably watched as much or more of the bubble babble on TV as almost anybody. I’ve yet to see one person I consider credible that is making predictions with realistic facts, figures, data and assumptions. The logic and assumptions of most of the talking heads and writers is so flawed it is laughable.

8 - I didn’t say there won’t be corrections. I think there are some markets that are going to be flat for a while. Possible a little decline in parts of California, etc. But NO crash. No massive devastation, etc. I’ve lived though several downturns including the one in 1981. Not to say they can’t hurt. Anyone wise and anyone worried can and should take steps to protect themselves. Yet, in every downturn, I know people who made incredible profits. While one person loses their shirt in a Texas downturn, another is making incredible profits. It is about knowledge, intelligence, training, creativity and yes… Optimism.

Just some things to think about.

trillion dollar problem - Posted by Gene

Posted by Gene on May 02, 2006 at 12:58:48:

Yea, that is a problem that I am concerned about as well. I have heard the risky morages which have a teaser rate that will convert to a higher rate this year is in the 2.5 to 3 trillon $$ range.

Its no small problem. Many people are going to lose a lot. Others that are playing it right will come out ahead.


Re: One other nit - Posted by Wayne-NC

Posted by Wayne-NC on May 02, 2006 at 10:38:50:

Arm’s are the only mortgage where the interest rate can increase and the payment actually drop! The interest rate as you know is applied to the unpaid balance. I am sure a lot of the older mortgages of this type will experience this phenomenon. I personally love when that happens. This may help soften the dire statistic of these loans. Thank goodness for the periodic adjustment caps.

Re: One nit - Posted by DoubleJ

Posted by DoubleJ on May 02, 2006 at 10:29:27:

The people who take option arms at 80% LTV will still have room to refinance out of the loan in the event that they see a problem coming.

Re: One nit - Posted by dutch

Posted by dutch on May 02, 2006 at 09:23:21:

“But what happens when their payment goes up 40%?”



Re: Why is Donald Trump still afloat? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 05, 2006 at 09:38:25:


I agree with everything you have said. That is the “too big to fail” theory. Works most of the time. I don’t know how many numbers of borrowers I am talking about. I would guess it is substantially less than 100s of 1000s. The problem in SD is 2-fold: no equity, combined with rising interest rates. Either of those problems could be solved but I don’t see how some people get away from BOTH of them. And these individuals are NOT too big to fail. They WILL fail.

I also agree that there won’t be a crash, certainly not nationwide and I don’t even think SoCal will crash. But what I DO believe is that a substantial number of individuals here will be hurt badly. And there will be great opportunity for profits from those situations. Those opportunities will start popping up sooner rather than later- a year or less is my SWAG.



Great but… - Posted by TB Mel

Posted by TB Mel on May 04, 2006 at 23:57:15:

How do we capitalize on this?


I have been reading alot of your posts. Ive been impressed with your depth of understanding. Your knowledge obviously goes way beyond “transaction engineer”.

I have two questions;

How would someone. getting in now, best approach this in terms of the dos and donts. I believe that my market may take some correction as it was very hot. I live in the Tampa Bay area. It is certainly slowing VERY fast. I know one person, for instance, who has a condo listing that he has dropped the price of by 200K (from 900k to700K)and it still hasn’t sold.

I actually believe there MUST be someway to capitalize on this.

Secondly, how would you suggest that someone gain this deeper level of knowlege. It seems that everyone is beating the same drum of “nothin’ down” and “control without ownership” or “creating win-win solutions”. This is not to say that these aren’t good but these all seem tactical. It seems that to have a longer term strategy that takes advantage of the markets movement would require this deeper knowledge.

Truth is that’s only part of the reason, really I just actually enjoy learning and love to understand my world.

If you have the time to post I would certainly appreciate it.



Re: trillion dollar problem - Posted by John Corey

Posted by John Corey on May 09, 2006 at 09:20:59:


I agree that rising rates will hurt some people more than others. That people who have very low rates to start are more likely to feel pain.

Having investments in a market that has always had floating rates and teaser rates I am not sure that we will see a crash and burn situation across the board. The US is one of the only markets that has long term fixed mortgages so the street wisdom is biased compared to markets that are more sophisticated about floating or ARM products.

A melt down takes rising interest rates (to high levels), rising unemployment (10% or higher maybe) and falling house prices. While we are seeing signs of appreciation slowing I do not see the confluence of the 3 streams that are needed for a true crash. I certainly do not see any uniform indication across the US.

Go to the Midwest if you want to see markets that are doing just fine and are showing no appreciation for the last 5 years. Hence markets can survive even when dumb investors are not getting rich from rapid appreciation.

John Corey

Re: trillion dollar problem - Posted by Joe

Posted by Joe on May 02, 2006 at 14:08:17:

I read an article a month or two back… IIRC something like 40% of the loans made in CA over a certain period of recent time (recent month or recent year) were ARMs.

Re: One other nit - Posted by Joe

Posted by Joe on May 02, 2006 at 14:06:04:

Huh? Can you explain this to me?

Re: One nit - Posted by Mark (SDCA)

Posted by Mark (SDCA) on May 02, 2006 at 12:15:23:

They aren’t. These are 100% LTV loans.

Re: One nit - Posted by rick m

Posted by rick m on May 02, 2006 at 22:35:23:


Just Expanding the discussion - Posted by Joh Behle

Posted by Joh Behle on May 05, 2006 at 15:43:22:

My purpose to my post was to add important factors into the discussion. I think many of those predicting doom and gloom do not take many important factors nto account.

While I do not believe there will be anything like the severe situation that many predict, I do believe there will be temporary corrections in some areas.

Trrry Vaughan, David Butler, Michael Morrongiello were just talking about So. Cal. and other areas around the country. (I’m at the convention).

No question some people may be headed for some hard times in some markets. But not in the extremes being predicted. I think it will look much more like the slowdown and temporary value adjustment of Cal. after the quakes some years ago.

Re: Great but… - Posted by JohnK

Posted by JohnK on May 09, 2006 at 24:49:39:

“I know one person, for instance, who has a condo listing that he has dropped the price of by 200K (from 900k to700K)and it still hasn’t sold.”

This is, as all the smart money knows, the time to run for the exits. The party is obviously over. Appreciation is as dead as a doornail. Run for cover if you know what’s good for you. Invest your hard earned money in other investments. The housing market is clearly on a precipice ready to collapse. How many houses have been sitting for a year in your local market? Open your eyes! Batten down the hatches, as it’s going to be a bumpy ride, my friends. Look to buy in 3 to 4 years, when the real bargains will appear. Read the writing on the wall! Best of luck everyone!