Wednesday, May 18, 2005

"Narrow Group Should Be Worried": CA, NY, FL

More odd articles are coming out of the WS Journal. This piece, after the obligatory calming setup, goes on to counsel homeowners on strategy in a price correction. "A slump in property prices might hurt speculators. But if you are an ordinary homeowner, I wouldn't be overly concerned, provided you have enough money for your next down payment."

"Chris Mayer, of Columbia University. 'I think it's a very narrow group of people who should be worried. It's high-end properties in New York, Florida and a couple of California cities. Outside of that, I don't think there's a bubble.'"

"Suppose you live in one of these markets, you are convinced property prices will crash, and you want to protect yourself. What are you going to do?"

The writer recommends a handful of options, none of which are that original. He especially doesn't seem to like the idea of selling and renting. "Even if property prices tumble, you might be out of pocket, once you figure in rental and moving costs and the expense of buying and selling real estate."

The gist of it seems to be; hold on, it's going to get rough and owners don't have a lot of options. Come on WS Journal, can't you do any better than that?

22 Comments:

At 11:57 AM, Anonymous Anonymous said...

Just typical. the dot.com crash didn't give any signals before it tanked and while it was tanking people were still buying stocks. Honestly, some people deserve to be seperated of their money.

 
At 12:00 PM, Anonymous Anonymous said...

Ben -- you've got that right. I'm in Florida. Yesterday I signed the lease on a very nice brand-new condo, to which we will move in two weeks. Then we'll tidy up our oceanfront condo and put it on the market.

Best case: it sells early for just a little above previous sales.

Next best: we wait a few more months, as there are two distinct types of (and seasons for) buyers for oceanfront condos. Meanwhile, we watch the prices in the non-oceanfront condo building we want, one that is 50% owned by speculators. If someone there blinks enough, we can blink too on our selling price.

Worst case: after a year, we can move right back in this place and will have lost a total of $30K including moving costs. Relative to our selling price of almost $600K, that seems like a reasonable risk to me. Had we bought our next place first, our anxiety about selling the old place quickly would have caused us to lose that $30K in price negotion. Meanwhile, our large equity will be parked in short-term CDs or Treasuries.

The WSJ writer shouldn't fret too much -- even though we believe in the risk-minimizing strategy of renting while we sell - and before we buy our followon home - I'll bet very few people will actually do the same. Emotion will win out over common sense.

 
At 12:07 PM, Anonymous Rob said...

This has to be the best part of the article...

"Imagine that you and the elderly couple next door both own $300,000 homes. They are debt-free, but you still owe $240,000 to the bank. If the price of both homes declines to $240,000, your home equity would be wiped out. Nonetheless, your $60,000 loss is no larger than that of your neighbors.

In fact, the elderly couple may have suffered more."

So there you have it. As long as the old debt free guy next door is percieved to be worse off, then life is good.

 
At 12:20 PM, Anonymous gumby said...

( 'I think it's a very narrow group of people who should be worried. It's high-end properties in New York, Florida and a couple of California cities. Outside of that, I don't think there's a bubble.'")

Similar logic to the stock market bubble: "Don't worry, the speculative bubble may burst and shoot some of these silly dotcoms down in flames. But profitable tech leaders like Intel, Applied Materials, Microsoft and Hewlett-Packard will weather the storm."

INTC fell 80%, still 50% below 2000 high
AMAT fell 80%, still 70% below 2000 high
MSFT fell 65%, still 50% below 2000 high
HPQ fell 84%, still 66% below 2000 high

When a bubble bursts, everything goes down. Obviously some areas in housing will do better than others. But this guy says only a couple of "high-end" cities in California are susceptible. Every city in Calif is now "high-end". There will be no safe havens here.

 
At 12:21 PM, Anonymous Anonymous said...

Doesn't it feel like powers-that-be are bracing for a huge decline.

The establishment is brain washing the sheep so that they don't rush out and sell their homes after a drop.

I have a feeling this crash will be the one that invalidates the statement "real estate in the US has never dropped nationwide"

Get ready for 30-60% declines.

 
At 12:47 PM, Anonymous Anonymous said...

Tell me about, I scoffed at dot coms from day one but had exposure elsewhere in the tech sector and got nailed. One of my claims to fame is that sold INTC on the very day it peak, but I moved it into something else that tanked.

However by good stock picking in 2002-3 I am up 50% on individual stocks since 1999.

I got nailed on the mutual funds. There I am down about 50% since 1999. These assets could not be invested in individual stocks.

So a wash in all.....

Back to RE.
But I would expect markets that might seem "normal" compared to the bubbles will stagnate and thus lose real value over time.

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

("Imagine that you and the elderly couple next door both own $300,000 homes. They are debt-free, but you still owe $240,000 to the bank. If the price of both homes declines to $240,000, your home equity would be wiped out. Nonetheless, your $60,000 loss is no larger than that of your neighbors. In fact, the elderly couple may have suffered more.")

What kind of nonsense is this? Without knowing what price these two paid, it's not possible to say who would suffer more.

If a home depreciates $60K, you have a paper loss regardless of whether you own it outright or still owe on a mortgage. In fact, the elderly couple is in better shape because they have equity. They can sell their home, pay the 8% selling costs, and walk away with money. The 2nd couple has lost their equity and would have to bring a check for nearly $20K to the closing to extricate themselves from the house.

And if the second couple had purchased at $300K, they would be out an additional $60K.

Utter nonsense...

 
At 1:13 PM, Anonymous frank said...

Here's an interesting article about the top end of the Boston market:

http://www.boston.com/realestate/luxliv/articles/0518_mandarin.html

I wonder how these top of the line investments will work out. The project has sold well. 44/50.

Somewhat OT:

I remember looking at a luxury condo in Sao Paulo Brazil on the market for $350k in 2001. It was 5000 square feet and occupied an entire floor of a high-rise in the best neighboorhood. (Morubmi)

I think it was 5 years old but less than half the units had been sold! I think the realtor teleported over to show it to me after I called. The units are bought without flooring and fixturing so that the owner can customize it. It was very tempting.... (not as an investment!)

 
At 1:54 PM, Blogger John Law said...

(So there you have it. As long as the old debt free guy next door is percieved to be worse off, then life is good.)

not only that, the old couple actually OWNS their own home. if the other couple loses a job, they could lose their home.

 
At 2:23 PM, Anonymous Anonymous said...

but you are missing the important point.

the old couple "owns" their home, but they will suffer real losses against equity if prices collapse.

wheras with 99.9999% of homebuyers in the last 5 years, the worst that can happen is they drop the keys off at the bank and "walk away" from their mortgage.

sure, their credit history gets ruined, but in the event of a nationwide collapse, so will everyone elses so who cares?

to sum up- the only people who will be fucked in a housing collapse are those stupid enough to actually have positive equity (ie, real money of their own) in the property.

 
At 2:29 PM, Blogger John Law said...

that's entrely wrong. what if you need to sell to move or something else? what about the psychological costs? what if you need that equity to pay medical bills or get yourself good medical care in a nursing home. if you own your house, you OWN it.

 
At 2:34 PM, Anonymous Hellboy said...

Anon 2:23
"sure, their credit history gets ruined, but in the event of a nationwide collapse, so will everyone elses so who cares?"

Why does everyone else who owns a house have to get their credit ruined?

Seems to me like the elderly couple is way better off under almost any circumstance.

 
At 2:38 PM, Anonymous Anonymous said...

Either Chris Mayer studied too much microecon and not enough macro in graduate school, or else he has his nose stuck in the academic journal literature to the exclusion of the news. To assert that the collateral damage from the collapse of this global credit bubble will be slight stretches optimism to the outer limit.

 
At 2:45 PM, Anonymous Anonymous said...

No clue, no morals, what a way to do business. A free economy cannot sruvive if the participants aren't on the average honest and hard working. We're seeing a loss of moral capital that is leading to a big financial collapse.

 
At 2:54 PM, Anonymous Anonymous said...

"We're seeing a loss of moral capital that is leading to a big financial collapse."

I agree. Too many people getting rich by scamming others and not adding value to the systems. RE is a zero-sum game, since it does create additional value, only suffles what already exists.

 
At 2:58 PM, Blogger Thomas said...

2:54,

So true. Robert Conrad's line in "Heart of Darkness" to the effect that an economy consists of people running around filching money from each other always struck me as missing the point that much economic activity is win-win and makes everyone better off, but it sure applies to residential RE speculation.

Exterminate the brute speculators!

 
At 3:18 PM, Anonymous Anonymous said...

There is no "hold on" . As a Broker these people are going to be crying in the near future." Why I didn't take the money" The housing market is a F#%$%^ng joke right now.

 
At 3:58 PM, Anonymous Anonymous said...

I beg to differ with "people will just walk away: and only have thier credit ruinned. Don't forget the new bankrupcy bill that passed. It's not just the credit card companies who can attach you wages now. It seems to me we're being set up! But I'm a suspecious person (for some reason)!

 
At 4:57 PM, Blogger Thomas said...

3:58 -- As a lot of people have pointed out, a lot of the bubbly states (like California) have antideficiency statutes that prevent lenders, when a foreclosure sale, doesn't bring enough money to satisfy the outstanding debt, from suing a debtor for the balance. So you really can "walk away" and limit your damage to the hit on your credit score, assuming your debt is for purchase money.

 
At 9:21 PM, Anonymous Anonymous said...

4:57 Anon, many people used cash-out refi to "trade-up" while holding on to their old place for "investment" purpose. What about them?

 
At 4:34 PM, Anonymous Anonymous said...

I'm not familiar with antideficiency statutes. I have to wonder if the new federal bakrupcy laws will trump the State laws.

 
At 4:31 PM, Blogger Thomas said...

4:34 -- They don't. Totally different animals.

 

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