Thursday, May 12, 2005

The New Housing Economy

Our friend, Steve Johnson, of the self-described "real estate think tank" (RETT), gives us an idea of the fascinating new concepts they've discovered down there. "The resale market is the most significant driver of the new housing economy, due to the trillions of dollars of equity relative to debt."

"'Conservative lending practices and a universal merchant marketing/retail approach to new home production drastically limits speculative building in this region,' Johnson said."

He fails to mention that the trillions in equity can go away, while the trillions in 'conservative' debt will not. And it's the speculative buying that's the problem.

The article does have a couple of surprises for the market. "Southern California housing starts were off 6 percent in the first quarter compared to 2004, but the area remained on pace to build 68,229 units this year."

This is puzzling as well. "Year-over-year job gains at the end of March totaled 111,500...Inventory levels remain undersupplied relative to the half a million people a year by which the metropolitan area is growing." See the value of a RETT? They invent a new economy so those newcomers without jobs will have something to do!


At 4:39 PM, Anonymous Anonymous said...


Once the bubble starts to burst, what are you going to do with this blog? Make it into a gory record of the housing market's decline, or turn it into a blog for people going through foreclosure? Ha,Ha!

At 4:44 PM, Blogger Ben Jones said...

I've got a lot of ideas. I am open to suggestions, too.

The decline blog sounds good. Donald Trump will probably have a foreclosure seminar. Thanks for commenting!

At 4:48 PM, Anonymous Anonymous said...

I say keep this blog going and go after stupidos who are/were buying during the bubble until there is blood in the streets or until the soup lines form.

Then every message could be "We told you so, we told you so you morons" Can't wait.

At 4:52 PM, Blogger desi dude said...

Convert this into a blog on financial responbility and we all could come in as counsellors!

At 5:38 PM, Anonymous Anonymous said...

I certainly don't find mean-spirited attitude on your very interesting site.

In fact, if you keep one person from making a life (at least financial life) destroying decision, you've done your job.

In keeping with the keen financial insights I've applied in all of my life, in 1989 I bought a very spacious "pre-war" 6 room apartment one block west of Central Park in the low 70s for less than the price of what a studio in the hinterlands costs today. (This was in a co-op that required 30% downpayment).I figured since prices had dropped in the wake of the '87 stock market crash I was making a good decision.

I'm an advertising guy and by the time of the recession of the early-mid ninties, I was out of work and put my apartment on the market. That's when I found that there was no, I mean no, interest by anyone in buying it. At any price.

Even ten years hence, I can only compare the stress of futilely trying to sell the place to the death of my parents. It's one thing to read that real estate is "illiquid" it's quite another to experience it first hand. You literally don't know what to do.

Of course, I got foreclosed. Which brings me to point #2. I've read here about people "walking away" from their property and attendent mortgages. Since most people are already way behind on their mortgages when their home is foreclosed, the bank wants that money. And the interest mounts. I ultimately went bankrupt after having the law firm that was trying my arrears freeze my bank account not once but twice. I fear for those in a similar situation to my own in this new punitive bankruptcy environment.

Anyway that's my sad story. After owning two home and two apartments since age 25, at age 58, I rent. Your blog is not only compulsively readable, but quite thought provoking as well. Keep up the good work.

At 5:49 PM, Blogger deb said...

anon 5:38,

"Since most people are already way behind on their mortgages when their home is foreclosed, the bank wants that money."

Hadn't thought about that. I suppose you do owe the bank for the missed payments, accrued interest and penalties, even if you can walk out on the loan balance.

As far as mean-spiritedness goes, there is not much on this site. I want prices to come down because it is what must happen eventually, the sooner, the better.

At 7:24 PM, Anonymous powerpuffgirl said...

Sort of off topic:

Has anyone noticed that when the NAR comes out with one of these reports, the homebuilder stocks tank? They were off 3.5 to 4% today, at the same time that the NAR released a report on how great the RE market is doing.

My guess is that a lot of stock investors don't like the huge appreciation and don't believe it is sustainable or even healthy at this point (R. Toll's optimistic hype not withstanding.) It's either that or they are worried that the Fed will be forced to act more aggresively before RE derails the entire economy.

At 7:49 PM, Anonymous Anonymous said...

powerpuffgirl, HB stocks seem to have topped around march. That could have been the beginning of a secular down trend. But I am just guessing...

At 7:58 PM, Blogger Ben Jones said...

(It's one thing to read that real estate is "illiquid" it's quite another to experience it first hand)

I tell readers that all the time. In the Texas bust, after years of down prices, sellers lost all psychological hope. If you weren't forced to sell, you sat there year after year fighting the tax appraisal board. It can't be overstated how devastating a long deflation is. Thanks.

At 8:08 PM, Anonymous Anonymous said...

Long deflation or not, I must emphasize the need to be cautious as a buyer in the down market.

There will be frequent bull traps. Prices can recover 10% and head down again and again.

Don't be a trend follower in the housing market.

At 8:12 PM, Anonymous Anonymous said...

Ben, you are doing a great job and providing an invaluable service for those who care to pay attention. I came to this site recently looking for validation of what I saw on my job and in my neighborhood, and found it. This bubble will make such a mess that your perspective will be needed for several years more.

What is amazing to me is the mass psychology involved, that radical changes (appreciation rates, lending standards, etc.) get to be the norm within the short time of a few years, with no critical consideration of whether these are good changes or not.

At 10:43 PM, Anonymous Anonymous said...

When I was in graduate school in Boston about 10-11 years ago my boss (the professor) was extremely ill tempered, a real asshole. I found out that he was sitting on two mortgages because he had purchased a new house and was not able to find a buyer for the old one. At the time I soon realized that this was the source of stress, which in turn made him lash out against people around him. I visited him a couple of years ago and he was like a different person and looked much younger despite being nearly a decade older. He was upbeat and friendly.

We have to realize that the downcycle in RE is characterized by illiquid conditions. The market will not drop 20-30% within a few months or year. Houses, especially, those with flaws will simply not sell at any price when the gloom sets in. The story told by the poster from NYC is important.

Speaking of Boston, I was in a hotel room last fall surfing the TV and came across a This Old House episode from circa 1993. This guy had inherited a grand old house somewhere off route 2 but it needed a lot of work. The conclusion by the crew was in the ballpark of $200,000 or some other significant sum. They asked if he was able to come up with such a large sum of money? (The guy had aura of poverty by his appearance and dress.) Well, his intention was to sell his present house in order to finance the renovation. The host then took on a pained expression, "Good luck with that. It's not going to be easy here in the Boston area." Similarly, I saw an article on by a commentator based in Boston. He wrote about his job interviews in Boston about 10 years. All the executives were distracted by underwater on their mortgages and discussed that rather than conducting a proper interview.

Then I have a friend who bought a condo in Boston for $175k in 1997. Now it is allegedly worth $700k. Guess what my advice is at this juncture since she can't afford to live there anymore....

Of course I am kicking myself for not buying that place in Brookline in 1999 for $250k. No parking! Screw that! I don't even want to know how much it is going for now....

How things change....

At 10:50 PM, Anonymous Anonymous said...

Strategy when things get really bad: buy a house full of flaws for pennies on the dollar, tear it down, and build a new home!

By then, lumber would have crashed and builders will be highly competitive.

I doubt there will still be such a thing as a construction-to-permanent loan, so cash will be essential.

At 10:52 PM, Anonymous Anonymous said...

10:43 anon, don't kick yourself for what you might have missed. I don't regret not buying and microstrategy in 1999.

At 11:42 PM, Anonymous Anonymous said...

yea, that's the way to put it; if you had bought it then for 250 you would have held it until now, felt really rich on paper, may have cashed out some 250k the later, once it crashed back to 250 or a bit under, then you would have really be cicking yourself for buying that crappy house with no parking that no one would rent from you and you now owe 500k on it to the bank instead of original 250k! why would you sell it for 700k? According to the herd mentality it'll continue running up at this speed (aka "perpetual money making machine" as one realtor put it on this blog LOL)


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