Friday, April 22, 2005

"Complacency Would Be Ill-Advised

Federal Reserve Board Gov. Donald Kohn had some bad news for the housing bulls today. "We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices, just as we were willing to keep rates unusually low as house prices rose rapidly."

Mr. Kohn isn't sure if there is a housing bubble, but this is what he predicts if there is. "If current expectations are badly distorted, then the way forward may not be so smooth. Eventually, reality always asserts itself over wishful thinking, and such realignments are sometimes abrupt, as illustrated by the collapse of the high-tech bubble a few years ago. In such circumstances, asset prices can adjust sharply."

"We have little experience to call on in judging when and how they will be corrected. We cannot rule out sudden shifts in expectations, whether or not they are unreasonable to begin with, and asset prices may change suddenly. Investors may recognize the unsustainability of some flows and prices, but believe they can adjust in advance of the market, as apparently many thought they could in the tech-stock bubble, and their reactions when prices move could add to volatility."

The risk "spread" represents a complacent market, Kohn said. "Although premiums on private bonds relative to Treasury yields have risen somewhat of late, they are still at the low end of their historical range, suggesting that investors are sanguine about default risk and other types of uncertainty."

Everyone should know by now, that there may be a bubble. "Given the widespread press coverage of this issue, from my expectation that people should now be aware of the risks in the real estate market. Complacency would be ill-advised."


At 1:01 PM, Anonymous Anonymous said...

WOW ! Finally. Maybe this will wake up the market, both housing and bonds. Maybe now we can start to stop living in an illusion.

At 1:12 PM, Anonymous Anonymous said...

If even the Fed is starting to talk like
this then the housing bubble has got to end soon.

At 1:14 PM, Anonymous Anonymous said...

AMAZING! It seems the central bankers had decided to burst the housing bubble.

And yet, Greenspam said there was not housing bubble. Better not to listen to that man. Was he not the one encouraging ARMs a while back?

On the bright side, a 30% drop in housing in next couple of years might just do this country some good.

Let's run some numbers. In my area, decent single family homes are priced at about $450K. So a 30% drop would give $315K.

The median household income about $87K, and three times that is about $ even after a 30% drop in home prices, we still would not be at 3x household income.

Hence a 30% drop is quite possible.
And to be honest, it would actually take a 40% drop to hit the 3x income point.

At 1:20 PM, Anonymous Don said...

Holy Crap! That's a sell rating if I ever saw one.

At 1:21 PM, Blogger Ben Jones said...

I thought the most interesting topic in the speech was timing. He said flat out that the correction could be abrupt, especially if people have "unreasonable" expectations.

All in all, it is a shocker. He clearly sees a bubble and while he has hopes for a soft landing, the Fed looks set to drive housing prices down. Wow.

At 1:23 PM, Anonymous Anonymous said...

Hi, everyone... fyi... this is a totally scripted announcement by the fed... on a slow friday afternoon... after the market is closed... and they're calling it a "retrenchment"... that's pretty funny...

At 1:28 PM, Anonymous BoyInTheBubble said...

You guys beat me to it. This is Fed-speak for "You better believe there's a housing bubble and we're going to do something about it, but not so abruptly that it's immediately obvious to everyone that it's what we're trying to do."

It had to be one of the branch governors, as Greenspan couldn't have gotten away with saying this. As it is, CNBC hasn't said too much about it yet (they're obsessed with Google and which exchange will merge next). But this will go down as the "irrational exuberance" speech of the housing bubble, except with much better timing.

At 1:37 PM, Blogger CalculatedRisk said...

Ben, this is a very important speech for housing, but that last quote seems to be incorrect. I checked the speech, and those two sentences are not connected.

When Kohn said "Complacency would be ill-advised," he was talking about the global imbalances, not Real Estate.

Great site. Keep up the good work.

At 1:38 PM, Anonymous Anonymous said...

But Greenspan said...

Question now is not

"is there a housing bubble", nor
"will housing decrease in price", but rather

"how fast will housing prices decline?" and
"where is the bottom?"

I'm thinking 10% per year for a long time. Where is the bottom? Maybe half the current level, or maybe even lower if we enter Japan mode.

At 1:38 PM, Anonymous Anonymous said...

Hold on to your hats! A statement is not always a statement until a few days later.(Concerning the border, Calif. Gov. Swartzniggeer retracted and changed his words a day later.)

Will Mr. Kohn retract his statement?
Will Mr. Greenspan overspeak Mr. Kohn?
Will another Fed. Board Gov. correct Mr Kohn?
Let's wait a few days and see if the statement stays true and if the media picks up on it?

At 1:40 PM, Anonymous BoyInTheBubble said...

this is a totally scripted announcement by the fed... on a slow friday afternoon... after the market is closed

Agree that it was scripted, but this was one of the busier Fridays in recent weeks, what with the exchange mergers and all the earnings reports (GOOG and several others). Also, it came across Bloomberg at 12.45pm Central.

But that was the point: with so much else going on maybe it would slip under the radar. From what happened during the last hour of trading, it didn't.

At 1:42 PM, Blogger CalculatedRisk said...

To the question of "how fast", I tried to answer that with my post on Angry Bear last Monday. (I'm a guest poster on Angry Bear)

This coming Monday I'm going to write about the possible impact on the general economy.

At 1:44 PM, Anonymous BoyInTheBubble said...

I wrote: Also, [the speech] came across Bloomberg at 12.45pm Central.

Hate to be such a dweeb about my own posts, but I meant 11.45am Central, 12.45pm Eastern.

At 1:47 PM, Blogger PunKtilious said...

Monday, existing home sales numbers released. This number will dictate the direction the market takes, if really bad (as I predict)....look out below.....


At 1:59 PM, Anonymous e- said...

My ARM is like a ship upon the seas
It is easily moved
Hindsight will not help it

At 2:22 PM, Blogger Nayrab said...

I just hope that if it pops soon, I won't get bubble goo all over me. That's gross :)

Yes, this is a new one for the housing market. The latest statement from the Fed must make some people more nervous than they already are.

At 2:37 PM, Anonymous Anonymous said...

This is a link to an article in MSNBC website talking about "stagflation".

This is from the article:

“It is worth noting that these sorts of imbalances are not new,” Fed Gov. Donald Kohn said in a speech Friday. “But the magnitude of these imbalances is increasingly moving into unfamiliar territory.”

He said the Fed intends to continue raising interest rates, in part to dampen the “upward momentum in housing prices” and encourage Americans to increase their personal savings.

And Kohn warned of potentially sudden changes in asset prices, much like the tech-stock bubble that collapsed in 2000. “Although the odds seem favorable for an orderly adjustment, the current imbalances are large and — importantly for gauging risks — unusual from a historical perspective,” Kohn said.

His comments echoed a warning recently issued by former Fed Chairman Paul Volcker, who warned that record trade deficits mean “we are skating on increasingly thin ice.”

At 2:43 PM, Anonymous Anonymous said...

I know this is long, but it's so well-written and so right that I felt I had to share it with the group:

Gary North - The Daily Reckoning

Modern economic theory rests on the insight that what
takes place between a buyer and a seller at the margin --
one of these in exchange for two of that -- is the central
economic fact of pricing. The price of some item at the
margin is imputed to all other goods of the same class.

Every mania is therefore an imputed-price mania. It
cannot be sustained beyond the ability and willingness of
the last marginal buyer to pay an equity-raising price to
the last marginal seller.


At the tail end of any asset bubble, people who have
watched the bubble grow from its inception kick themselves
for having missed out. While it may be true that for them,
they stayed on the sidelines too long in a truly once-in-a-
lifetime opportunity, they don't shrug it off and say,
"Lots of other people missed out, too. So what? Something
else will come along." Instead, they climb aboard on what
they think is the last train out.

In manias, a few people buy in at the top. They buy
an asset that will fall like a stone from astronomical
levels. People who would not normally have been willing to
roll the dice on such a high-risk venture buy in and
gratefully sign the mortgage papers. Normally, no lender
would have loaned to them. But the mania affects lenders,
too. Both participants make a once-in-a-lifetime contract.
Both will pay a heavy price when the mania ends. It is a
once-in-a-lifetime opportunity to lose money.

This is true of all housing manias. We see these
manias from time to time. The sign that the end is near is
when people line up to bid, auction fashion, on properties
that, five years earlier, would have been on the market for
six months. The mania is revealed by the presence of
above-asking-price prices. People bid frantically against
each other to buy a property that they would not have
considered buying two years before, or even a year earlier.

There are never many of these people. At the top or
the bottom of any asset market's big move, there are few
participants. Every mania ends when the last remaining
group of potential buyers is finally unable to afford to
buy. Then the market turns down.

The people who were the last ones to buy are left
holding the bag. They committed themselves to huge monthly
payments. They bought in at no money down or close to it.
A month later, they are owners of a depreciating asset that
may be worth 20% less after the sales commission than the
day they bought it. But they owe full sticker price to the
mortgage company.

The once-in-a-lifetime boom was not used by most
owners as a way to sell at a huge profit. Why not?
Because most families don't want to move out of the mania
region. Also, wives don't want to rent. The nesting
instinct is ownership-biased among humans. So, most people
hang onto their homes. Then come the property tax hikes,
which are based loosely on market value, which has risen.
The mania giveth. The tax man taketh away.


Housing prices have been driven up to manic levels in
California, Las Vegas, and east coast urban centers. Where
brains congregate, where the division of labor is high, and
where businesses pay for talent, housing prices are
astronomical. I define "astronomical" as follows:
"Whenever the monthly payments on a no-money-down home are
twice or more than the rental price of a comparable home."

Into these markets come the Johnny-come-latelies --
the people who thought they could not afford to buy when
prices were merely stratospheric. They see the last train
out leaving the station. "I'll never be able to buy a
home!" they wail. This cry of despair has unstated

1. In this region
2. In my present job
3. At today's interest rates
4. At today's property tax rates

They can move. They can find lots of places to live
where home prices are half as high, and wages are only 25%

They can invest in occupational skills improvement the
money that the mortgage/tax/upkeep will cost them. They
can capitalize themselves rather than paying off the lender
for 30 years. Within a decade, they could double their
income. Then they could afford a home.

They don't. They buy the house.

Mortgage interest rates will rise. But when they do,
selling prices will fall and home equity will disappear.

Property taxes will rise, which will force late-comers
to sell at a loss. Wait. Be patient. Shop.

But people in the last stage of a mania are impatient.
Waiting is what they wish they had not done earlier.

Meanwhile, the lenders are offering them deals.
Renters want to become owners.

Why? Because they want to be part of a never-ending
boom. Because they forget about rising property taxes.
Because they want to know that they will not suffer rent
increases -- as if property tax hikes were not rent

Serfs in the Middle Ages were locked into their
family's land. They could not leave. They were immobile.
They owned their land, but the land-owner owned their
services. They were owners, but, in effect, the land owned

A person who lives in a mortgaged home that he cannot
afford to sell because he owes too much on the loan is like
that serf. The home owns him. The mortgage company owns

Yet, unlike the serf, he can lose the home. He can be
evicted if he misses payments. He can lose his property if
he cannot pay his taxes. Yet he thinks of himself as way
ahead of renters, who can shop for lower rents, and move at
any time, and do not have their credit rating at risk for
mortgage payments.

Today, the recent first-time buyer in mania regions is
now at great risk. He stayed out of the market. He may
have bought in at the top -- way above rental costs. He is
locked into the loan contract. He is stuck. The equity in
his home -- if any -- is dependent on a stream of buyers:
other late-comers whose credit ratings are so low that they
would not have been eligible for mortgage loans five years
ago. But credit standards have dropped as long-term rates
have fallen.

In short, late-comers' net worth is dependent on even
poorer credit risks than they are. This is not the basis
of long-term capital gains.


Today, interest-only loans with variable interest
rates are available to middle-income people. People can
buy for no money down. All they need to do is sign on the
once-dotted line. These people have spent their adult
lives as renters. As renters, they have been unaware of
the following:

1. Mortgage rates can (and probably will) rise.
2. Property taxes can (and probably will) rise.
3. Equity can (and probably will) become negative.
4. Maintenance costs are born by owners.

These people have had such low credit ratings that the
lowering of their credit rating for non-payment poses no
immediate threat to them. They can walk. They can leave
an empty house behind. They can become renters again.

In a story run in the "Los Angeles Times" and picked
up by other papers, the situation of one woman is described
in considerable detail. The lady consented to be
interviewed by a reporter. He, in turn, offered an
assessment of her seemingly precarious financial situation.

She is a police dispatcher. She just paid $211,000
for a one-bedroom condo in Oakland, California. If you
have ever been to Oakland, the thought of paying $211,000
for a condo may come as a shock.

She had sat on the sidelines for years. But then a
mortgage company offered her a chance to buy for no money
down. It is an adjustable-rate mortgage (ARM). If
mortgage rates rise, her monthly payments will rise.

On Nov. 1, 2007, she will have to start paying off
principal. "I don't know what I'll do," she said. "I'm
already working overtime to pay my bills."

The reporter got the story correct. He has assessed
the risk to lenders and borrowers. What happens when
mortgage/tax/maintenance costs rise faster than wages,
which are not rising at anything approaching the rising
cost of homes?

In the most dire scenario, if they owe more on
the home than it's worth, they'll walk away.
Abundant foreclosures could spark a downturn in
the entire housing market, leading to the
long-feared bursting of what some call a housing

Interest-only loans, and other forms of so-called
creative financing that are far riskier than the
traditional 30-year fixed-rate mortgages, have
allowed more people to afford homes even as
prices skyrocketed.

Under normal, non-mania conditions, as home prices
rise, fewer people buy. But in housing manias, the reverse
is true, assuming lenders can be found to fiance the

When the price of houses in California soared 17
percent in 2003 and 22 percent in 2004, a curious
thing happened: Instead of home ownership
decreasing because fewer people could afford
houses, it rose to record levels.

During the last two years, according to U.S.
Census Bureau data, home ownership in the state
rose to 59.7 percent from 57.7 percent. The
previous record was 58.4 percent, measured during
the 1960 Census.

While home ownership in California traditionally
lags behind the rest of the nation, the 2-point
increase during the last two years was greater
than in all but a dozen states.

The mania is being funded. The buyers must have
lenders to make the market boom. We can readily understand
buyer's motivation in a housing mania. What is not easily
understood is the lender's motivation.

Rather than closing the door, lenders have
apparently been opening it wider, inviting in
people . . . who would not have qualified for a
mortgage under the more rigorous standards of an
earlier generation. "If you can fog a mirror, you
can get a home loan," said mortgage analyst Ralph

An interest-only loan offers the ability to defer
for three, five or seven years any payment for
the house itself. That allows a potential buyer
to stretch to afford a place that would be
otherwise out of reach.

Of course, everyone else using an interest-only
loan can stretch too. The result is that prices
keep rising. That encourages still more people to
use interest-only mortgages, which fuels still
more appreciation.

How extensive is mortgage lending based on interest-
only contracts? This is where things get dicey.

In 2001, as the current housing boom got under
way, fewer than 2 percent of California homes
were bought with interest-only loans, according
to an analysis done for the Los Angeles Times by
LoanPerformance, a San Francisco mortgage
research firm.

By last year, the level had risen to 48 percent.
Nationally, interest-only loans were used in
about a third of all purchases.

When things get tight, a percentage of these people
will default. Nobody knows what this percentage will be.
Remember this: These people have been renters. They have
no equity. They have walked away from housing in the past.
What is to keep them from doing it again?

The new federal law on bankruptcy is tighter, but it
is not so tight that lenders will be able to squeeze blood
out of turnips.


We think of buyers as participants in a mania. But it
takes two to tango. Lenders are equally maniacal.

Lenders seem reluctant to turn away any potential
borrowers, no matter how few their
qualifications. At the moment, at least, this is
a profitable venture, although by their own
admission it is becoming a riskier one too.

In the midst of what is a mania in certain large,
influential real estate markets, the voice of Alan
Greenspan calms mortgage lenders.

Federal Reserve Chairman Alan Greenspan has a
different point of view. "I do believe it is
conceivable we will get some reduction in prices,
as we've had in the past," he said in February.
But he added this wouldn't be a problem because
housing prices have gone up so much, providing
homeowners with "a fairly large buffer."

To which the reporter -- who gets my vote for economic
rationality -- responds:

People who buy at the peak, however, aren't going
to have that buffer -- or, if they have an
interest-only loan, much room to maneuver.

The reporter understands the fundamental principle of
economics: decisions made at the margin. Today, as always,
it is the marginal buyer who determines the price of
housing. Today's buyers are more marginal than at any time
in history.

I cannot get the words of Groucho Marx out of my mind.
In "The Coconuts," the first Marx Brothers movie, Groucho
is selling Florida real estate. He tells a crowd of mania-
driven buyers about the homes available. "You can have any
kind of home you want. You can even get stucco. Oh, how
you can get stucco."

It keeps getting worse. We would expect lenders to
come to their senses. They don't.

The Federal Reserve regularly queries banks
whether they're tightening or loosening credit
standards for home mortgages. In four of the last
five quarters, standards were loosened. The
combined drop was the biggest in more than a

Meanwhile, the range of home mortgage products
keeps expanding. Some lenders offer mortgages
that are spread over four decades rather than
three. Others extend the interest-only period to
10 or 15 years.

"A few years ago, you would have had to go to an
infomercial to get the kind of deals we're
offering now,"Wells Fargo home mortgage
consultant Jimmy Kang recently told a group of
new real estate agents.

The interest-only loan is being matched by the
adjustable rate loan.

In California, the traditional fixed-rate loan is
in danger of becoming extinct. According to
recent LoanPerformance data, the percentage of
new loans that are adjustable in Santa Rosa was
85 percent; in Oakland, 84 percent; in San Diego
and Santa Cruz, 83 percent; in Los Angeles, 74

About two-thirds of these loans are also
interest-only, compounding borrowers' risk of
"payment shock."

Those at the margin want to buy. They are emotionally
committed to buying. So, they seek rational justification
in the musical chairs aspect of the mania.

Amy Matz and her fiance, Chris, a restaurant
manager, are closing this month on their first
house, a three-bedroom in Palm Springs that cost
$495,000. They're borrowing $60,000 from their
parents for a down payment, and financing the
rest with an adjustable-rate loan that is
interest-only for the first three years.

"We will be extremely nervous if we decide to
stay longer than three years in that house and
interest rates skyrocket," Matz said. "We are
just banking on the hope that the home will gain
enough equity by the time we sell."

In every mania, there are late comers who buy in at
the top. Manias end when the late-comers cannot afford to
buy in. That marks the top.

Credit ratings will fall with equity. How much money
would you loan to a person with an interest-only ARM who
lives in a $400,000 home for which he owes $465,000? This
is the median price of a home in California today:


There is nothing wrong with renting. It is wiser to
buy with a fixed-rate loan than an ARM. It is wiser to buy
where rental income will pay for mortgage/taxes/upkeep.
But there is nothing wrong with renting. In a mania, it is
the wise thing to do.

Today, mortgage loans are made by local lending
institutions and short-term national mortgage brokers.
These mortgages are immediately re-packaged and sold to
investors in Fannie Mae and Freddy Mac.

When homes are abandoned, there will be no local
lender to take care of them, or price them rationally, and
get them sold. They will sit there, empty -- the target of

That day is coming. There will be motivated sellers.
When you are an investors, always buy from a motivated

Buy the other guy's disaster. I refer to the
foreclosing lender. The overextended buyer is long gone.
There is nothing like a house sitting empty for six months
to motivate a lending institution.

At 2:54 PM, Anonymous john in seattle said...

-- Finally Reality Sets In --

My fair market calculations in the Seattle area put the market between 20% and 40% over-priced (based on average price to rent ratios over the past 30 years). However, speculative markets often over-correct.

You'll probably be able to buy a newer home for less than replacement value before this is said and done.

I've put off buying up to a bigger home for 2 years now because of the frothy prices. I'll wait a couple more years if I have to. Hopefully my patience will have paid off by then.

At 3:03 PM, Blogger goleta said...

For housing bubble, soft landing is not necessarily better than a crash.
A Japanese style 17-year drop is likely the worst case. If the average price drops 10% a year for 17 year, eventually we'll see 83% drop.
But who wants to buy a house and continue to see the value drops and no one is certain where the bottom is?

If you buy a million dollar house and sell it for 900k a year later, you're losing more than just the 100K. You have to pay property tax and most of the mortgage payments are for the interest. So you lose 100K + adjusted property tax + adjusted mortgage interest - the rent to live in the same kind of house.

At 3:14 PM, Anonymous Anonymous said...

There are a number of problems with that speach:

a) unless the FED backs it up with ACTION at the next meeting ie 50+ bps, it doesn't mean a damn thing.

b) nobody believes the FED is going to get tough. Alan Greenspan took over in 1987 and rates have been falling ever since. Don't believe me ? The 10 year bond rate is still at 4.25%

c) nobody is going to read that statement except us. Do you think CNN is going to run a segment on that speech and explain what it means to Joe sixpack.

I know there is a bubble. You know there is a bubble. But until either the homeowners or the debt and equity markets acknowledge it, it will be business as usual in the housing market. How many over priced house deals do you think will get done this weekend ?

At 3:19 PM, Anonymous Anonymous said...

After reading the article by Gary above, I almost feel like running on the street tomorrow near the open houses and give the buyers a print out.

I've stayed out of the market for two years with 70K in cash/short term investment waiting for the market to come down. I thank my wife for her understanding, since she listened to me all these days even when I'm wrong (so far).
I hope the day of revealation (or is it redemption) is not too far.

At 3:24 PM, Anonymous Anonymous said...

To Anon,

I am sitting on $350 in the bank and a Fully paid off condo "$300" and I am battling my wife like a lion tamer with a chair. This market is absurd and I refuse to part with our lifetime's savings thus far for some 3/4 of amillion dollar piece of junk. I know my limits though: As much as I want to, I cannot aske her and my 3-year old son to move so we can rent for a year. I would love to monetize the condo's current "worth." but that battle ain't gonna be fought.

At 3:39 PM, Anonymous Anonymous said...

-- Fed Doesn't Control Rates --

Most of the posters here attribute way too much power to the Fed. How can a federal government that runs a 500 billion trade and fiscal deficit be in control of its own destiny? The short answer is that it can't.

This statement from governor Kohn is just a rationalization for continued rate increases. The fed will raise rates because the Bank of Japan and China will force them to pay a larger risk premium.

Asian central banks are the ones supplying the money to keep the government solvent. IMO short rates will continue to rise and all assets (stocks, bonds, RE, commodities) will be slaughtered because the federal government will choose to remain solvent.

I don't begrudge Asian central banks because this is really the only way to rebalance global markets. Americans must start saving more and spending less. Asians must start spending more and saving less. A basic and inevitable rebalance formula facing us today.

At 3:59 PM, Anonymous Anonymous said...

As much as I want to, I cannot ask her and my 3-year old son to move so we can rent for a year

It may also take longer for the prices to reach bottom. An IMF report studied a number of past real estate bubbles, and determined it took 4 years on average to bottom out. (see

This one could be more brutal, but I wouldn't bet on it. You have cash in the bank, and have paid off your condo. You're in a great situation.

At 4:18 PM, Blogger desi dude said...

from one of the analyses I read on this blog, this time it is diferent!

Prev drop in home prices was in lowering interest environment, fewer leveraged buyers.

This time it is likely to be the opposite. If economy/income/jobs goes not improve, inflation and interest rates increase, multipler effect will be HUGE.

In any case , here is a good reading for the weekend.

At 4:19 PM, Blogger desi dude said...

from one of the analyses I read on this blog, this time it is diferent!

Prev drop in home prices was in lowering interest environment, fewer leveraged buyers.

This time it is likely to be the opposite. If economy/income/jobs goes not improve, inflation and interest rates increase, multipler effect will be HUGE.

In any case , here is a good reading for the weekend.

At 6:03 PM, Anonymous Anonymous said...

Here is another interesting paper on the bubble and the Fed

At 6:04 PM, Anonymous Anonymous said...

You can't get your wife and son to rent for $300K ???

Here is an idea: send them on a trip for a week and do the moving yourself. Don't tell me you can't find a place to rent. From what I can tell, there is at least one house on every block.

Maybe you need to get your wife to read this blog for a couple hours.

At 8:06 PM, Anonymous Anonymous said...

To Anon with 350K in bank plus condo,


I too feel your pain, I purchased a 3 bdr 1400sq ft.home built in 1935 in the San Gabriel Valley (Southern California) in 1999 for 230K and today, smaller comps in the area are going for 490-500K. In addition to my paper equity, I have around 200K in liquid/cash that I’ve been sitting on for about 2 years waiting to take advantage of the market “fall”.

My wife and I have a 2 yr old with another on the way and we really do need more space, but the bigger homes in the nicer areas around here run 900-1.2M easy and there’s no way I’m willing to be strapped with such a huge mortgage, all the while worrying about job losses, finances etc.

My wife wants to get a bigger place and I keep telling her that change is just around the corner, but it’s getting harder and harder to hold her off. I know she understands, but at the same time I also know she won’t be too happy here for the next couple of years.

I’ve pitched the idea of selling our place and renting for a while but she’s not too thrilled about the idea of not “owning” a place not to mention the loss of our only big tax shelter.

I’ve crunched the numbers and the way I see it, even with just a 10% drop in housing within a year, selling now would still pencil out for us even after factoring in the loss of tax write off.

This whole housing BS has to come to an end at some point, I’m just praying that it happens sooner, rather than much later.

Good Luck.

At 8:20 PM, Blogger Ben Jones said...

(You can't get your wife and son to rent for $300K ??? Here is an idea: send them on a trip for a week and do the moving yourself)

I laughed until I cried when I read this.


At 9:16 PM, Anonymous Anonymous said...

This just confirms that the Fed is, has been and will continue to do exactly what they should be doing, which is to target the core consumer price index and not asset prices. If the CPI goes up in the next year or two while asset prices (real-estate, stocks, bonds) go down, then pity the fools who bought those assets, because the Fed doesn't appear ready to show any mercy. Eventually, of course, the CPI may level off or even decline, in response to a housing bubble crash, at which time the Fed will again lower rates. But by that time enough people will have lost enough money that it is unlikely we will see yet another bubble. Then again, stupidity is a hard thing to eradicate completely.

At 5:41 AM, Anonymous Anonymous said...

At 8:20 PM, Ben Jones said...
(You can't get your wife and son to rent for $300K ??? Here is an idea: send them on a trip for a week and do the moving yourself)

I laughed until I cried when I read this.

Hahahahhaha - OK what about convincing a house-hungry man that it's time to sell your nyc apartment and wait things out awhile in his cheap rent stablized apt? We have been looking in not so trendy neighborhoods for a year and I just can't stomach the shambles we're seeing priced at half a mil and up

At 8:19 AM, Anonymous Anonymous said...

I'm having trouble reconciling this blog with "reality".

I come on here every day and read very compelling arguments about why RE is over priced, how consumers are drowning in debt, how people can't really afford their homes, etc. and yet hundreds of houses are selling in my area every day and the 10 year Fed interest rate is still at 4.25%.

Last night we visited our friends in their (expensive) new home, not quite finished and they spoke of how much it has already increased in price.

You and I might think there is a correction coming, but 99% of people out there sure don't.

Sometimes I get the feeling that this group is extremely right wing and that there isn't going to be a significant correction in house prices.

As far as I can tell, as long as consumers have access to money they will spend it on housing. Has anyone seen any evidence that consumers are having trouble getting money ?

Everyone talks about a credit crisis, but the US dollar still trades well, interest rates aren't rising, mortgage rates are falling and nothing seems to be changing. The homebuilder stocks haven't even fallen that much in spite of a record decline in house starts.

I guess I need to ask: what event or events is really going to spur a change from what we are seeing now ? (A continuation of the housing boom).

At 8:40 AM, Blogger Ben Jones said...

(I'm having trouble reconciling this blog with "reality")

I understand. The question is can the price boom continue, or not? And as to the loans, will they be repaid? When even Fed gov.s are saying there is a problem, I expect the 99% are in for a rude awakening.

I don't believe in right or left. The posters are anonymous. I don't even talk about politics.

At 10:06 AM, Anonymous Anonymous said...

(I'm having trouble reconciling this blog with "reality")

People have the choice to think rationally or run with the herd mentality. The herd only sees the rump of the sheep in front of them, not the slaughterhouse in the distance. 99% of the people have not learned the lessons of history. One thing history teaches us is that when the herd is running, you can be sure that the slaughterhouse is ahead.

At 10:49 AM, Anonymous Anonymous said...

Yes, there is a strong right-wing slant to this blog. There is a pervasive notion among all these Austrian/Goldbug/liberatarian types that life is supposed to be filled with suffering and that nothing is supposed to be easy in this world, etc. A depression is thus something to look forward to in these right-wingers's minds, which is why you have all these posters, as well as Ben, condemning the Fed for having lowered interest rates in response to the stock market bubble collapse, thereby sparing us from a depression. Note that the Fed did nothing to bail out the NASDAQ investors. But no, it isn't suffiencient that only the fools lost money in the dot-bomb collapse. The right-wingers want everyone to pay and suffer for the supposed "sins of the 90's". Now they are looking forward eagerly to a housing bubble collapse and depression afterwards that lasts forever. It's a really sick view of the world and unfortunately it appears to be more and more common. (I was just looking through the comments sections for economics books at and I was amazed at the number of the self-proclaimed Austrians denouncing all of modern economics as a giant fraud. You hardly hear a peep from the equally fanatical Marxists anymore, whereas these Austrians are everywhere.)

Of course, the statements above don't mean there isn't a housing bubble on the coasts. There is, and it will collapse when the bubble psychology changes, and that will happen eventually, as sure as night follows day. And when it does, lots of people will lose lots of money. Those of us who avoided buying overpriced assets will not suffer. Provided, that is, that right-wingers, in their madness, don't do something crazy to throw us into a depression, like prohibiting the Fed from lowering interest rates again and demanding a balanced Federal budget while simultaneously scaring people with talk of Social Security going bankrupt.

At 1:25 PM, Anonymous wil said...

to the 10:49 Anonymous - hurrah! a declaration for the housing bubble moderates! I'm skeptical too of the more strongly goldbug/anti-fed strains in the all this discussion.
But, in Ben's & this blog's defense, it isn't held captive by ideologues on either side, and that's what makes me enjoy it so much. It is a discussion, a clearing house for great articles (many of them in the mainstream press or Fed speeches) that Ben finds on the web so I don't have to.
I'm not hoping for the end of the world or for global warming Super-Typhoons to come and blow away the overpriced houses I didn't have the money to buy, but I am looking for a place that takes a skeptics view of the bubble - and a place where day by day that view actually seems less and less radical.

At 9:38 PM, Anonymous Anonymous said...

to 10:49 Anonymous:

Personally, I just want to know the truth about what is going on so I can position myself correctly for the given market circumstances. I was drawn to this board to validate the fundamental financial calculations I have personally made regarding the state of the RE market. Additionally, I want to avoid making a mistake by buying into this frenzy.

The Fed lowered rates in response to the recession - fine. However, the cause is another bubble that probably is just putting off a day of reckoning. The financial imbalances are causing all sorts of distortions.

So, what do you do? Money market accounts were not even keeping up with inflation for over 2 years. Stocks are still way over-valued. RE is most definetely a bubble by any historical measurement. Ditto for bonds.

The Fed is the root cause of this speculation by keeping rates below inflation. Period. No doubt in my mind. Now that interest rates are about the same level as inflation people have a safe place to put their savings without having it eaten up by inflation or lost to dollar depreciation. Hopefully the Fed will act responsibly and keep raising rates to protect savers.

So, yeah, like you I'm one of those who is avoiding over-priced assets. But I think your post is somewhat akin to a "shoot the messenger" mentality. The fact is that we are in a massive debt bubble that has evolved over decades and it is likely to end very badly. Does my saying that make me a fear monger or right winger? Do I like the situation that we are in? No. I just want to know what to do given the cards that are presently dealt to me.

At 6:47 PM, Blogger Sunny said...

From 10:49 anon: "There is a pervasive notion ...that life is supposed to be filled with suffering and that nothing is supposed to be easy in this world, etc. A depression is thus something to look forward to in these right-wingers's minds..."

Thank you for that dose of cynicism to counter the cynicism.

I came to this blog searching for a reconciliation of why real estate was a solid investment two years ago and now its crap for an investor (unless you want to feed a property hoping to see large short term gains, NOT ME!). I have deep, deep real estate roots and I 've made some chunks of money in real estate. Believe me, I want it to continue; I've been poised to pounce on anything that remotely has a chance of turning a positive cash flow in a couple of years, but NADA.


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