Sunday, April 24, 2005

You Are So Beautiful. Can I Buy Your House?

The CS Monitor reports that buyers are getting chummy with sellers to snag a house. "In some neighborhoods of Los Angeles where, in addition to offering as much as $75,000 over the asking price, buyers are sending flowery bios, pictures, and letters to sellers."

"'I just oohed and ahhed my way from room to room,' read one letter to Jane Centofante, who was selling her 2,000 square-foot home in Westwood, a tony L.A. suburb, for a cool $1.49 million. 'I gather from your [house] that you are warm and smart and bring incredibly beautiful detail to your world.'"

"'They've had to kiss a lot of frogs before they find their prince,' says Ms. Jacobson, a native New Yorker. 'But those other frogs will find their palaces, too. There are still plenty of opportunities.'"

Despite the overconfidence, sellers do appear to be nervous. "Unfortunately, Jane Centofante has yet to sell her home in Los Angeles. An inspector found traces of potentially toxic chemicals. Since the finding, she has lost four potential buyers."

"'I'm ready to sell. And I want to sell. But now I can't,' says Centofante, who hopes to have the creosote problem remedied before the market sours."

28 Comments:

At 2:43 PM, Blogger stockmania said...

There is an old saying, "Buy your straw hats in January." Sounds, like they are in the dead heat of the summer in CA and there has been a run on straw hats. Oh yeah, the weather is always beautiful there.

 
At 3:01 PM, Anonymous Anonymous said...

Dear Ben,

If, and that is a BIG IF, I am "forced" (i.e., wife wants a house and a yard) to buy a house in this environment, rest assured that the LAST thing I will do is kiss the ass of some seller who stands to make a fortune off of me. I have always had the attitude that I do NOT need to buy their house but and that the seller MUST need to sell their home as they listed it voluntary. I am in Fairfield County, CT and the last thing I need to do is to contribute to the ridiculous wealth of another person around here.

TheGuru

 
At 3:50 PM, Anonymous Anonymous said...

The only thing I want to know yet is WHEN and HOW severe the crash is going to be.

I have no doubt that housing is an unsustainable bubble. I find it very interesting that the stock markets are highly unstable and that the analysts are having a hard time explaining why.

1.5M$ for 2,000 ft^2 is absolutely ridiculous. $750/ft^2 ! That is as much or more than retail space sells for in some places and retail space makes a profit ! When was the last time (prior to this bubble) that a house made anyone any money ! All a house is is shelter. It isn't an investment.

How much do luxury hotel rooms cost in LA ? 1.5M$ x 6% = $90,000 = $250 per night !

I just shake my head every time I read another story about a stupid, stupid buyer, mostly because I think it is pretty commonplace.

I can't wait until interest rates go up to about 10%. I figure they'll have to if the Fed is serious about getting people to start saving again.

 
At 4:00 PM, Blogger Ben Jones said...

Guru,
I have a friend who moved to AZ and is trying to sell a house in CT. What's the market like out there?

 
At 4:10 PM, Anonymous Anonymous said...

Ben,

Regarding your friend -- where in CT did he live? The market still seems somewhat active but inventory is building in the 3 or 4 towns in which I am looking. The problem is the occasional moron who continues to buy at an inflated price (probably a transplant from NYC going to a single income) which screws everything up. Fairfield County has a lot of cash as every clown hedge fund manager and their brothers live here. There have been price reductions and some slower movement but if it's going to crash, let's get on with it already.

TheGuru

 
At 4:23 PM, Blogger Ben Jones said...

Guru,
Sorry, I forgot where. I will ask and bring it up with you later. It has been on the market for 9 months.

Those hedge fund guys are a joke. They have underperformed this past quarter, so get ready to by their Mercedes! Thanks.

 
At 4:38 PM, Anonymous Bill said...

Economist John Kenneth Galbrath state that bubbles burst when there is a "triggering event". Well, it seems to me that the triggering event to finally end this boom will, in future, be seen to be the high price of gas at the pumps. People will be stretched far too thin.

He also stated, "Bubbles don't end with a whimper, they end with a bang".

 
At 4:45 PM, Anonymous Anonymous said...

I don't think oil will be the triggering point, although it has the potential to be one.

I think the triggering point will be financial or currency in nature. Lets not forget that we have $7.4B worth of debt held largely by foreign investors (banks) and any hesitation on their part in buying US debt would send interest rates skyward. That would trigger a crash.

 
At 5:23 PM, Blogger John Law said...

consumers could just become exhausted and stop spending.

 
At 5:42 PM, Anonymous Anonymous said...

The stock market bubble began its precipitous decline on March 17, 2000. I remember where I was standing when I heard of the large sell off that day. What I don't remember is the triggering event? What was it that time?

 
At 5:45 PM, Blogger Andrew said...

I spotted a gem last week here at a DC open house. $600/square foot what I describe as a starter condo at best. $600k does gets you a 2br/2 bath, and about 1000 sq/ft, but bear in mind the second BR doesn't have a window..and all the finishes in this new construction is low-grade Home Depot crap.
Pity the sucker who buys this place.

 
At 5:52 PM, Anonymous Anonymous said...

Perhaps not the best place for this comment but here goes anyhow...

Last summer I had the (mis?)fortune to find myself in St. Louis on a business trip. While there, I noticed that the downtown hotel I was staying at was apparently selling condos within the hotel. Nothing at all appealing to most human senses, but I didn't think much of it at the time.

Later during the same trip, I wandered with my business associate into a downtown mall only to notice the high vacancy rate. I actually stopped to ask a vendor "why the closings?" They actually had not been told anything by the mall owner. Interesting...

In parallel, back in my town two of my neighbors had put up their home for sale. Contrary to the heady days of 2003, the summer of 2004 actually saw these listings drag on for a couple months (rather than the expected days)

Last fall, I began to wonder whether this was the telecom bust all over again. I started to run the numbers on selling now and renting or waiting till a potential 5%, 10%, 20%...decline sucked away all my equity.

Winter came and I shelved my fears. A neighbor though actually listed through the winter...not the best time here to be selling a home. Their price dropped and dropped again. Two weeks ago they finally closed on a deal and moved on to a single family.

Earlier this month, I saw an article in the local paper about fewer and fewer people moving into the area. That planted some seeds in my brain.

Subsequently, I stumbled upon your blog. I don't usually give credence to opinions of others...especially those "anonymous" tidbits delived on this blog or any. However, the links to mainstream media storys...over and over again...sounding the same drumbeat. A little too unnerving.

So a couple weeks back, I threw in the towel. We put up our place for sale and will rent after we sell it. I priced it right and it moved, so now we just have to await closing. We'll tap back into the market when things cool.

I'm a fairly rational, married fellow with two kids. I cannot fathom what is going on in the minds of those who continue to throw money at their banks.

I want to scream: YOU DON'T OWN A DAMNED THING!!!! THE BANK OWNS YOU!!!

The market is absolutely absurd. Easy credit is just nuts. I'm well paid, but I found it incredible that I was given a $40,000 credit limit on an UNSECURED borrowing account. It's prime + 1.25%.

Can you believe what's going on?

The US has gone from one of the world's superpowers with manufacturing might that matched our innovative brilliance to the service provider of the knowlege economy. Come on, get real. Pushing paper just doesn't get anybody anywhere. It's a sad states of affairs and the housing bubble is just part of the bigger picture.

I am not a religious fellow, but may God help us all.

 
At 7:12 PM, Anonymous Anonymous said...

"The US has gone from one of the world's superpowers with manufacturing might that matched our innovative brilliance to the service provider of the knowlege economy. Come on, get real. Pushing paper just doesn't get anybody anywhere. It's a sad states of affairs and the housing bubble is just part of the bigger picture.

You are so right. The U.S. has a large and growing trade deficit because we don't make things the rest of the world wants to buy. Our government is living on borrowed money provided mostly by foreign governments who are trying to prop up the dollar as a way of protecting their own currencies. And consumers are also living on borrowed money, with the average household carrying a credit card debt of about $8,000 and plenty of homeowners tapping into their home equity as well.

In other words, the U.S. is slowly turning into a third-world country without even realizing it. We are living in a state of denial. We have huge problems - health care, social security, medicare, medicaid - that we're either totally ignoring or else using gimmicks to fix ("personal accounts"). The clowns running Washington are clueless, unable to do anything but cut taxes on the wealthy while passing bankruptcy legislation that will only squeeze the middle class.

The sad fact, ladies and gentlemen, is that the U.S. is in decline. Not only do the powers-that-be not have a clue about how to turn things around, they are unwilling or unable to acknowledge the crisis.

Fasten your seatbelts.

 
At 7:35 PM, Anonymous Anonymous said...

Was reading a book on prior bubbles today. None of them end well. Case in point, back in the 40s the bubble was in aeronautical stocks (airlines, etc.). Huge sums were dumped into aeronautical mutual funds and the losses were equally as grand. As of to date, the airline industry over the decades has generated an aggregate net loss. Not to worry though, the US government and its taxpayers (you and me) always pick up the tab in the end:

UAL discharging pension plan liabilities, we're picking up the tab on this btw:

http://www.thestreet.com/markets/rosssnel/10219405.html

Point is, while there may well be many who lose their shirts on the current real estate bubble, everyone pays in the end.

 
At 7:52 PM, Blogger goleta said...

http://www.bloomberg.com/apps/news?pid=71000001&refer=columnist_pesek&sid=aEBBmwvtNuxA

As we speak, they are doing it now. They can't dump US assets all at once, or the dollars would fall too much in a short time
and they will lose big with
1, the remaining of their holdings and
2, their export business to the US
at the same time.

I believe there must be some kind of agreement among Japan, China, and others on how much US dollars they can unload each quarter and how much dollar depreciation they are willing to take.
They all plan to reduce their US assets from 50% or more( some numbers I read last year) to less than 20% and replace it with mostly Euros. They are also using the dollars they have to fill their new oil reservoirs, and that's one of the reasons oil price has gone up so much.



I think what will happen to the US is a 3-stage process

We're currently at Stage 1 that foreign central banks are getting rid of their US dollars and bonds.
As more foreign money moves away from buying US bonds, eventually
FED has to raise rate. Cities or States that rely on bonds to operate will likely go bankrupt.


Stage 2, when they reach their goals on their holdings, things can get very interesting.
IMO, some of the followings can happen:

1. China will comply with the US' demand to unpeg yuan to dollar and we'll see an instant hyper inflation of over 20% a year in the US. Many goods China exports have no competition in price that even a 20% price hike still may not hurt their business much if the alternatives are all more expensive. Moreover, If China uses that opportunity to improve productivity and quality control to justify the price hike like Japan did after WWII with the leap from making cheap stuffs to the country that makes the state-of-the-art machines, they can become the next economical super power in much shorter time.

2. Once it's evident that the US real estate market is not going to see more than 10% year-to-year appreciation, the depreciation of dollar will outpace the appreciation of RE holdings that international investors have in the US. The Chinese companies that have been using the dollars they make here to buy US RE for more gains will pull their money out of the market. A 10% RE appreciation might mean a lot to Americans, but to international traders that see a 30% dollar depreciation coming, it's a loser.
This might turn out to be the trigger of US RE market crash.


Stage 3 The RE bubble finally bursts.
This will dash any hope foreign investors still have left in our RE market and they will sell their holdings at a huge loss, if they can still find buyers. When that day comes, the bottom of RE market should not be far away.

 
At 8:16 PM, Anonymous Anonymous said...

goleta,

How long (best guess) until we hit Stage 3?

TheGuru

 
At 9:15 PM, Anonymous Anonymous said...

Wackier by the day. It really ressemble Japan in the early 90's.
They should offer Airmiles for buying a house. Do they ?

 
At 9:53 PM, Anonymous Anonymous said...

The value of a family's house only affects them if they have to sell. I've been hearing that prices are 'overvalued' for a long time. When I bought my first house, a two-flat building in San Francisco with a small apartment in the basement, my parents were horrified. They said I should wait for prices to be more reasonable and for interest rates to drop.

That house may have dropped in value but I just lived in it and collected rent. In today's San Francisco, I could probably get a bit more than the $19,900.00 I paid for it (probably about a million dollars more) but it means nothing. I'm not selling. So who cares?

 
At 9:54 PM, Anonymous Anonymous said...

Supply and Demand.
Location,Location,Location....
In areas of properity the party charges on. As long as rates are low, demand will continue. And in areas like LA there is not much more supply. Argue for a pop all you want, but while doomsdayers jumped off the wagon, the buyers aren't listening. WHy? Real Estate is not a stock. It is a home first and foremost. And sure people do take burps into consideration, however homebuyers look at the long term and do not day trade their home.

Case in point is that to buy a home in 1992 in LOs Angeles was foolish when considering that in many markets lost a 30% value in one year. The non existant day trader lost big. The homeowner won hugely.

 
At 10:01 PM, Anonymous Anonymous said...

The Mortgage Bankers Association released positive three-year predictions for the housing market

"We see housing as being strong over the next three years within a strong economy," said Douglas Duncan, chief economist for the MBA, the national association representing the real estate finance industry."

 
At 11:29 PM, Anonymous Anonymous said...

"The stock market bubble began its precipitous decline on March 17, 2000. I remember where I was standing when I heard of the large sell off that day. What I don't remember is the triggering event? What was it that time? "

Many people attributed the start of the decline to the antitrust judgment against Microsoft. It may not have been at the exact peak, but the trial set the mood. I remember some financial talking head saying "people will look back and blame this for the bear market."

-Generic

 
At 11:34 PM, Anonymous Anonymous said...

"...I believe there must be some kind of agreement among Japan, China, and others on how much US dollars they can unload each quarter and how much dollar depreciation they are willing to take.
They all plan to reduce their US assets from 50% or more( some numbers I read last year) to less than 20% and replace it with mostly Euros. They are also using the dollars they have to fill their new oil reservoirs, and that's one of the reasons oil price has gone up so much."

What exactly will those Euros do? Stagnate for the next 20 years as Europe sits around with zero growth due to excessive social benefits?

What exactly will happen if CHINA has a crash--for recessions are natural events?

Talk about a one-sided analysis! A decline in housing is likely to happen on its own. All pyramids collapse when prices get too high or new blood can't be found.

 
At 11:46 PM, Blogger goleta said...

What will happen if there is no bust and the inflation adjusted prices stay flat or continue the current course for the next 10 years or longer?

1. No more than 15% of population in LA, SD, or SF can afford a median price home. The majority of the people will have to settle for something lesser for years to come. Only the top 15% of the population can afford and own the top 50% of the houses. There is no social justice and really bad for productivity of the society as a whole, as the bottom 85 % of the population have to live in noisier and less ideal environment. More people have to share less space. Is that really good for the country at all?

2. Even those who bought their homes 10 years ago can't afford to upgrade as their families grow. A colleague who bought his home last year is seeing 25 to 30% gain, but over 80% of his after tax income goes to home payments. His family now have to dine at home all the time and there is no margin for extra expenses. The burden on housing is going to hurt consumer spending, as 85% of the population who can hardly afford a home don't have extra money to spend if they ever buy a home.

 
At 12:02 AM, Anonymous sayhey said...

Had to comment on the anonymous post quoted here:

"The value of a family's house only affects them if they have to sell. I've been hearing that prices are 'overvalued' for a long time. When I bought my first house, a two-flat building in San Francisco with a small apartment in the basement, my parents were horrified. They said I should wait for prices to be more reasonable and for interest rates to drop.
That house may have dropped in value but I just lived in it and collected rent. In today's San Francisco, I could probably get a bit more than the $19,900.00 I paid for it (probably about a million dollars more) but it means nothing. I'm not selling. So who cares?"

Since you paid $19K for a pair of flats in SF now worth over $1M, i assume you didn't buy it last week.

But put yourself in the position of a buyer today in SF looking at your $1M building. I don't know of any homes, condos or flats in SF that have the rent potential to come anywhere close to the costs of carrying ownership.

I've bought homes and apt bldgs in SF over the years. I lived in some, rented others. But in each case (and this goes back to the 70s, 80s and 90s), the rental potential was either close to or exceeded the ownership burden. Today, buyers in SF are paying a minimum of double the rent potential, i.e., a $1M home rents for $2,800, a $2M home rents for $5,000, etc.

This is a big deal. It means that anyone who buys in SF today and who, for whatever reason, needs to rent out their flat/home/condo will be able to recoup no more than half the carrying costs.

You may say that it doesn't matter what the home is worth until you sell. I guess that's true. But what if you need to sell? What if you need to rent it and can only cover half your costs? What if you borrow against it and it loses value and you find yourself owing more than the home is worth?

Think this can't happen? Think again. It happened in Calif (most esp. SoCal) in the early '90s when the majority of homes sold in 93, 94 and 95 were sold at a loss. The majority!

So it's easy for someone to say, "Hey, folks here always think real estate is overpriced." Well, I've owned NorCal property for the past 30 years. And the fundamentals have never gotten to this level. Never even close. And i've seen a couple of pretty maniacal periods (late 70s, late 80s). Those were a walk in the park compared to today.

 
At 12:12 AM, Blogger goleta said...

"What exactly will those Euros do? Stagnate for the next 20 years as Europe sits around with zero growth due to excessive social benefits?

What exactly will happen if CHINA has a crash--for recessions are natural events?

Talk about a one-sided analysis! "


You just need to read more news about how much money those central banks have lost in the dollars they held.
For traders, they move their money from one country to another all the time and they know trade balance is the key. With the growing trade deficit, the dollar has no way to go but down. Keeping Euros with no interest is better than keeping dollars with 5% interest but depreciated 20% a year later.

 
At 6:42 AM, Anonymous Anonymous said...

Here is the most recent data on reserve holdings

Country tot(BN) mom% yoy%

Japan $818 -0.2% 1.6%
China $659 2.6% 49.9%
Taiwan $251 1.8% 10.9%
Korea $205 1.6% 25.7%
Euroland $176 -3.1% -1.9%
India $135 2.9% 26.5%
HK $124 -0.6% 0.3%
Russia $121 0.3% 51.1%
Sing. $113 -0.8% 9.9%

As all can see they are still buying. Given that the U.S. bond market is by far the deepest and most liquid debt market in the world, they still have an incentive to purchase securities. It is interesting that the sellers over the past year have been the Europeans.

 
At 8:10 AM, Anonymous Anonymous said...

Blogger Lockhart Steele reports on all the RE madness in NYC (Ben, I think I found your blog through his site some time ago).

Interesting detail -- he rents:

http://www.businessweek.com/magazine/content/05_18/b3931006_mz001.htm

 
At 8:29 AM, Blogger John Law said...

http://www.washingtonpost.com/wp-dyn/content/article/2005/04/24/AR2005042400565.html

good article about REITs. if I'm not mistaken, REITs got killed in the 70s.

 

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