Tuesday, April 19, 2005

Riots In The Street, Is The Government Listening?

This LA Times story explores just how anxious people have become in the housing bubble. "While a police captain barked orders through a bullhorn, an angry crowd of 3,000 people shouted back expletives. 'You had some very desperate people who had a mob mentality. It was as if people were trying to get the last piece of bread.'"

"The bread-riot allusion was apt, although the crowd was in fact clamoring for the last crumbs of affordable housing in a city where rents and mortgages have been soaring."


At 9:59 AM, Anonymous Anonymous said...

Are rents really increasing or is that editorial fiction ?

At 10:13 AM, Anonymous Jim in Venice said...

Editorial fiction. We've lived in LA for four years and are paying the same rent as when we moved here. Also, 2 units in our complex are on the rental market for the same amount - 2001 prices.

At 10:18 AM, Anonymous Anonymous said...

Thanks, Jim.

It is just incredible that the market has sustained incredible increases in home prices when rents haven't kept pace.

Obviously people purchasing rental properties aren't banking on making money from their tenants.

At 10:37 AM, Blogger deb said...

There is a home in my old neighborhood which has come up for rent several times over the last few years. This is one of the nicest suburbs of LA, outside LA unified school district, very desirable.

2002: $2800/mo
2003: $3000/mo
feb 2005: listed for rent for $3300
present: still available reduced to $2900

In this same area, we recently (7/04) sold our home, purchased in 2000 for $399,000, for $910,000. Rents flat- homes up over 100% in 4 years. Bubble? nah!

At 10:59 AM, Anonymous Anonymous said...

What city is that? I rent in Rancho Palos Verdes for $3000 and our landlord is trying to bump us up to $3200 OR $3400 (they haven't told us yet) after 6 months. It's more than we were hoping to pay while we wait the bubble out.

At 11:00 AM, Blogger deb said...


At 11:17 AM, Anonymous powerofthepyramid said...

The LA Times commentator hit the nail on the head:

"The great American housing bubble is a classic zero-sum game. Without generating an atom of new wealth, housing inflation ruthlessly redistributes wealth from asset-seekers to asset-holders, reinforcing divisions within — as well as between — social classes."

This is a point very few are making. There is no net wealth gain. It is merely a transfer of wealth from those who wish to own homes to those who already own homes.

The owners get windfall profits. They may use these profits to enhance their standards of living. Or they may "trade up" to a bigger home and put more money down, thereby improving their lifestyles while still paying the same or less per month for housing.

The buyers are subsidizing this by taking on debt and/or draining their savings and/or the savings of their relatives.

If this process weren't happening in the sacrosanct residential housing market, we would call it a pyramind scheme. The game ends when it is no longer able to attract new players. And with homeownership now at 70% (by far an all-time high), where will these new players come from?

At 11:27 AM, Blogger deb said...

That's why the new buyers coming in at the bottom are weaker and weaker, requiring ever more lax & creative financing. It is a pyramid scheme.

Even though we have profited nicely, I do feel badly about it. It is not "fair".

At 11:51 AM, Anonymous Anonymous said...

Actually, I see the wealth distribution a bit differently. The only people who are making money are those that sell and either rent or downsize and they seem to be few and far between. The real wealth distribution is going to be with the MBS bondholders. They are going to lose a lot of wealth. The other losers will be the home owners who moved up to a more expensive home or bought for investment purposes. The winner in all this will be the people who built homes and sold them.

At 11:59 AM, Anonymous Anonymous said...

"And with homeownership now at 70% (by far an all-time high), where will these new players come from?"

powerofthepyramid: excellent post. Besides the 70% home ownership, let's not forget the incredibly low affordability index in the bubble states. At 10% or less in many parts of Ca., very few can now enter into the market.

As deb pointed out, the hungry mortgage finance machine will dip further and further into sub-prime to keep this thing going, and these people (most of whom shouldn't be homeowners in the first place) will get royally screwed when the bottom falls out.

Here's a sad story about how a non-profit thinks that bills aimed at hemming in Fannie Mae is going to hurt Latino and Blacks. The writer doesn't realize that the folks entering into a bubble right when it's going into blow-off will get left with nothing but a lifetime debt saddle.


At 12:11 PM, Anonymous Anonymous said...

Even now there is alimit on the kind of mortgage being bought by these agencies isnt it?

I understand from a friend who works in that industry, that there is a min credit score and upper limit on the amt that these agencies could buy.

arent the minorities already screwd by this, being one of the least educated(financially) and economicall weaker sections?

At 1:05 PM, Anonymous Anonymous said...

I'm curious about the author's comment that San Francisco real estate has hit the wall. Has anyone seen any evidence of that?

At 2:19 PM, Blogger Ben Jones said...

(Even now there is alimit on the kind of mortgage being bought by these agencies isnt it?)

That's true, and I had a post about how the CA mortgage firms/banks were having to hold more and more of the risky loans because the GSE's can't buy them. More risk for the local economy.

At 2:40 PM, Blogger Thomas said...

I am convinced that California is experiencing a housing bubble (evidence -- I'm renting a house in Costa Mesa for $2300/mo which would cost me a mortgage payment of $3,400 on a 5.5% interest-only mortgage with 10% down). But I'm nervous about sharing Mike Davis' opinion, never having been terribly impressed by Marxist economic analysts.

At 3:17 PM, Anonymous partyon said...

Seems like a rash of stories out there detailing bubblicious behavior. The home price boom is now netting the small fry...no one's too overstretched or too financially strapped to escape the net.

Here's one from Sacramento where median home prices have tripled since 1998:


"Fearing rapid appreciation will continue, many renters are doing whatever it takes to get into the market before prices can move higher. Interest-only, variable-rate, zero-down and "subprime" loans - all carrying higher risks than conventional fixed-rate mortgages - are popular.

"Michelle Blackwell, and her husband, Brian, just went from renting an apartment for less than $500 a month, a special deal because she manages the complex, to a mortgage payment exceeding $2,000. This week they'll take possession of a 1,000-square-foot ranch-style home they bought for just more than $300,000 - amid multiple offers - in Rancho Cordova.

"She was eager to purchase before summer, when she expects the market to really heat up, and borrowed against her retirement savings to come up with a 5 percent down payment. "We were afraid if we waited too much longer, we wouldn't be able to get into anything," Blackwell said."

Wow. She made the decision to quadruple her housing costs because she thought the market would run away without her. Earth to Michelle: It already has. Bubble behavior.

Here's another one from Minneapolis:


"Ayla Recel is only 31, but she's busy shopping for her retirement nest egg. For several months Recel has been scouting downtown Minneapolis condos in the $200,000 to $400,000 range to buy as a long-term investment.

Recel, a sales manager for a medical company who has a house in southwest Minneapolis, bought her first condominium shortly after college. It nearly tripled in value in five years. "It'll never go away," she said of the condo's value.

Hey, why not. It worked once, let's do it again. It's only debt. Just keep repeating that housing never goes down. Of course, it has never tripled in five years before either. But let's not worry ourselves about that. Party on.

At 3:26 PM, Anonymous delusional said...

I think lots of these people who are getting involved in multiple bidding think it must be OK because everyone's doing it. It's a herd mentality.

They don't think about overpaying because there are so many others lining up to do likewise. Then there are all those "professionals" around to comfort them: realtors, appraisers, mortgage brokers, etc. This is known as positive reinforcement.

Why else would Michelle in Sacramento and Ayla in Minnesota be so willing to throw themselves deep in debt, increase their housing costs multifold and be forced to forego lots of other pleasures simply to get in on the housing boom?

I'm reminded of that quote from Charles Mackay who wrote a book 100 years ago, "Extraordinary Popular Delusions and the Madness of Crowds", on bubbles and Manias: "People go mad in herds. They come to their senses one at a time." Very applicable today....yet again.

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

(winner in all this will be the people who built homes and sold them.)

Another very big winner so for is the hedge-fund operators and executives on wall street who've been raking in enormous bonuses these past few years by running leveraged carry-trades between borrowing short at near fed funds rate and lending long on mortgages. The investors in these hedge funds and wall street firms may eventually lose everything, when these mortgages go into foreclosure, but the multi-million dollar bonuses have already been paid out and moved beyond the reach of creditors, thus creating a new generation of wealthy "robber-barons".

Another loser will be the US taxpayer, to the extent that FDIC insured banks and Fannie/Freddie have to be bailed out. The old story of take from the middle class and give to the rich and privileged elites who have political connections.

At 4:01 PM, Anonymous Anonymous said...

People go mad in herds. They come to their senses one at a time.

Wow, what a great quote! And so true today. Human nature never really changes.

Fear and greed. Keep repeating that phrase if you wonder why this insanity continues. Fear and greed. That's all that's driving home prices today. Fear of being left behind, and greed to make a killing.

I really feel sorry for anybody who's bought a house in the last few months, especially in one of these crazy bubble markets on the coasts.

At 4:01 PM, Anonymous Anonymous said...

I've heard a lot of people on this blog recently mention government bailouts of one form or another.

How is the government going to bail out anything? With what money? The current account and trade deficits are already sky high. If the Great Credit Bubble does indeed collapse, as appears imminent, Uncle Sam won't be able to borrow more money for a massive bailout.

Assuming a recession accompanies this (a likely scenario) tax revenues will also be in the toilet. I'd like to see someone present a logical case of how the government would be able to perform these gigantic bailouts.

At 4:11 PM, Anonymous Anonymous said...

(How is the government going to bail out anything? With what money?)

My friend, you need take a course in basic economics. The government can borrow as much as it wants. If private investors won't buy the government bonds, using money previously created by the government, then the Federal Reserve can buy them, using money newly created by the Federal Reserve. That's right, the Federal Reserve can create as much money as it wants and then lend that money to the government. Of course, running the electronic printing presses like this may cause severe inflation. And therein is the great risk of a government bailout.

At 4:17 PM, Anonymous Anonymous said...

I would buy a stock of a manufacturer of green ink who is supplying Fed :-)

At 4:24 PM, Blogger Ben Jones said...

(If the Great Credit Bubble does indeed collapse, as appears imminent, Uncle Sam won't be able to borrow more money for a massive bailout)

That's a good point and I have a couple of items to consider. Who is holding the MBS's? Surely the Japanese and Chinese central banks have a large amount. Won't it be in their interest to attempt to stop a panic?. I'm not saying it will be successful, but they may try.

There is an indication the Fed may be running an offshore fund to buy US treasuries. I think they would risk hyper-inflation to counter a full-on deflation in housing. The average citizen will get crushed, either way.

At 4:44 PM, Anonymous Anonymous said...

"Of course, running the electronic printing presses like this may cause severe inflation. And therein is the great risk of a government bailout."

Then you and I are basically in agreement. A gigantic government bailout is a dangerous proposition that will ultimately fail miserably. Will the fed entertain the concept of hyper-inflation (as Ben mentioned)? Is this even an option as it has worked so well for so many other countries over the years? :-)

Of course, with the leadership at the Fed, who knows?

At 4:59 PM, Blogger Mike Linksvayer said...

Mike Davis is the author of that LA Times opinion piece. His City of Quartz was a good read, but I gather that he's a frequent exaggerater.

So the bubble in SF has burst? Could've fooled me. I'm waiting, and in the meantime it seems that rents are less unreasonable than they have been since 1999.

At 5:47 PM, Anonymous BoyInTheBubble said...

Bidders rioting in the streets of LA? What will they do, build houses in the middle of the street instead of break windows and burn stuff down?

At 6:38 AM, Blogger deb said...

The US Gov will protect its ability to borrow (to sell its bonds/notes) at all costs. I think that will be primary if things start really getting ugly. If they can't issue bonds/notes, they can't do anything else.

At 9:07 AM, Anonymous Anonymous said...

Well this means it is a good time for George W. Bush to declare war to Iran and invade it. A little of arms of mass distractions will be needed in the coming months. June will be just fine.


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