The Dark Years

Why Did Housing Go into a Bubble?

j dub:

A really great post. I think that we need more posts and observations from the ground level and ordinary people who have insight that is often far beyond the numbers and proofs generated by empty suits and real estate hawkers. I have seen many artful real estate investment brochures full of convincing grafts and pie charts that come from the minds of developers which are really based on wishful thinking, if not completely false basis. With rapidly ascending prices, cheap easy credit, human desire to own their own home and great promotion of the virtues of home ownership the mania can be understood. It is just that the vital facts observed by little guys (like you and I) are easy to overlooked and everyone jumps in.


On Dec 06 10:17 AM j-dub wrote:

> I believe there are numerous factors that went into creating the
> housing bubble and I'd like to think the mob mentality was a large
> one.
> The way it fed on itself was a site to behold. I took a step back,
> looked at the situation an based on all the available information,
> shook my head in disbelief
>
> It was 2005 and a company from Georgia was coming into St. Petersburg,
> FL to buy up a apartment complex. It's an above average complex with
> nice grounds and a good location. I was upset that I had found a
> nice, affordable place to live and these guys were gonna come in,
> make the apartments and grounds much nicer and then turn it into
> a condominium community. Renters, because of Florida law, had six
> months after your converted apartment was purchased to find a new
> place to live.
> NOW, I could not believe the panic in some people's eyes. The 10,
> 15 people I talked to were very concerned about finding a new place
> to rent as fast as possible before someone else found that same place.
> I likened it to a level 5 hurricane coming and they're trying to
> get out of dodge.
> What is the point of my story?
> That nobody took the five minutes necessary to stand back and think.
> The average person in Pinellas County, FL makes around 35k a year,
> give or take. My apartment, a studio with 600 square feet of living
> space would be up for sale for around 135k. HUH?
> I saw the price list for all the models and realized that this business
> plan of the Georgians was unsustainable. Aparments built in the 80's,
> interiors redone, going for over 200k. And all of a sudden it hit
> me-no one in the world would buy these things. My apartment would
> NEVER sell at these prices. They were catering to a certain group
> of people that DID NOT EXIST.
> So while 95% of the renters fled to find another place to rent before
> their (they believed) apartments would be sold, I hung back and enjoyed
> the newly minted grounds all to myself. Yep- they beautified the
> landscape, everyone fled, no one bought and I had the run of the
> place, with a few others, all to myself. It was like my own resort.
> If anyone, for some ridiculous reason, were to buy my place at that
> time and try to negotiate the lease with me, I would simply contact
> them, go over some simple math and tell them to do everything in
> their power to get out of the purchase contract if they can.
> The mob mentality has to be a big consideration because these business
> people who bought the place never once sat down to realize that NO
> ONE living in Pinellas County could afford the condos they were trying
> to sell. This is not 4 or 5 times the average salary. but 8 or 9.
> They received anecdotal evidence (I assume) of this model being sustainable
> Potential buyers (renters) assumed that this was the new normal and
> that was that. Everyone was living in the fantasy world and for a
> time, no one questioned what reality really looked like. Those that
> did, kept their cool. A lesson that will stay with me for a while.

Energy Impoverishment: Heading Back to Coal?

I for one think most of the comments about Gregor Macdonald's post are over reactive. He is trying to point out that the prospects for a transition to a viable energy source sufficient to support the world are new and coal is the most likely source. Does that imply he thinks coal is best way to go irrespective of it's negative aspects? I do not think so. His views, I may not like, but he presents a logical argument which should give us all pause.

Peak Oil Demand

Your thoughts are right on about adaptation, but your time line may be flawed. An otherwise insightful comment that is appreciated.

As long as a product like oil (vs. NG, Wind, Solar, Geothermal, etc.) retains the most favorable ratio of energy provided to energy invested it will be the world's choice. The move away from oil dependence will be painful and cause great suffering. It will be a long time coming, much to my regret.


On Dec 04 12:04 PM jerrydd wrote:

>
> The IEA 2030 est are pipe dreams. Conventional Oil plus NGL which
> I consider oil will never get above 86mmbbls/day again. Why is basic
> geology, physics and economics. The investment to even keep that
> rate up is not being made.
>
> In the US oil hasn't been an indicator of growth for 3 decades as
> we now put out double the GNP/gal in constant $.
>
> Facts are we are getting far more eff and will over the next decade,
> drop our energy needs/GNP by 50% again.
>
> From transport to buildings our energy needs are dropping with no
> loss in living standards, in fact it is making them better.
>
> NG and many other forms of energy are replacing oil as well as eff.
> As fossil energy rises in costs, the other forms are dropping like
> RE is 50% of what it once was. And as RE increases into rewall mass
> production, it will drop like a rock. I'm now buying retail PV panels
> at just $2k/kw and wind has dropped to $1.5k/kw including inverter
> plus tower and install.
>
> Nissan is about to start selling next yr a 5 seat EV for the same
> cost as an ICE as will Ford. These go 3x's as far on the same energy.
> My personal EV gets far better than that, costing under 25% of an
> ICE's running cost including fuel and battery.
>
> There is no reason most homes, buildings will need outside power
> for the same cost as present buildings before now . And no reason
> the home, building can't even power the car, transport.
>
> There is no shortage of energy, just the equipment to catch, make
> or use it eff. The only reason it's not already wide spread is the
> subsidies on fossil fuels. If their real, full price was in them
> instead of in our income taxes, health costs, etc, they would be
> here now.
>
> Back to oil. It will go up to $150bbl early 2011, cause another recession,
> drop back down, go up again higher, drop, etc until we stop importing
> oil. But in about 6-8 yrs, the tables will turn, oil price flattening
> out at about $10.gal as it is replaced with RE, NG. So don't go too
> long on oil!!

The World's Largest Guilt Trip

Let us all remember when you default on your HOME, mail the keys back to the bank, or whatever, you still may be on the hook with the IRS for the amount of the loan forgiven. Say you borrowed $400k to buy a house worth $500k and you went underwater when the value dropped to $300k so you returned the keys to the bank. Exclusive of any remedies that the bank has, the detriment to your credit, or having lost the original 100k you put down the IRS (and perhaps some states) views the forgiven (if that is the proper word) amount as a "windfall" and it is taxed as ordinary income. No you cannot as some believe use the $200k as a capital loss as far as I know. Corporations, however may have other options and they can hire better lawyers.

Why I'm (Cautiously) Optimistic About the Future

So many optimists with "faith" and "hope" for a bright future based on the expectation that America (and the rest of the world) can innovate out of the looming reality of peak cheap (read affordable) energy, primarily oil. Your thoughts about the future are uplifting, bright, cheerful, and yes, really optimistic, but you do not temper them with other views of a darker prospect. All that is necessary to unhinge everything is a supply disruption of oil, say a modest 5% due to recognized depletion in world production, or perhaps a "Black Swan" event causing a 15% supply reduction overnight.

As an astute investor I am sure to take into account the reality that we have a mere 300 million citizens', yet consume nearly 20% of the daily supply of oil and we are in competition with the rest of the world for that product. China's thirst for energy (coal and oil) is growing, and China has the financial clout to secure what it needs without regard or deference to America. Surely this gives you pause, and must inflict your soul with just a bit of pessimism.

I do not see how America, or the world can innovate out of the problem as everything is so connected to oil, and the supply of which is the driver for our economy. If one is disrupted, so is the other, and the time lines to deal with the problem are short, while the solutions unless applied soon and in mass will take many years we do not have. So I guess I am a pessimist and seek to do what I can with my investments to bolster the prospects for my family, and other generations on down the line. That means a simpler life style, smaller more energy efficient homes, less reliance on oil based transportation systems, and stashing away at least some money in physical gold. What's in your wallet?

Case-Shiller: Home Prices Continue to Rise

Living here in Orange County I am in agreement with you. We live next to the Irvine Company development of Orchard Hills which was pegged to open in 2007, but remains empty with not a home of the 4000 to 4500 planned. The upscale Italian country looking shopping center goes begging for tenants, and those in place are dying on the vine so to speak. All of the primary roads and facilities are in place as are some of the Italian looking guard towers at the entrance to empty sites. A lot of money was spent on initial development of this area and the debt service must be significant. I have no idea when things will improve, if ever, and the project will get moving, but whenever it does I would not expect it to happen before 2012. Our upscale home in a gated community nearby was worth about 1.5 million for a while, but realistically today it is worth about an even one million. No things are not great in Orange County, nor the rest of California. Perhaps they are better in the Dakotas.


On Nov 25 11:09 PM Nettligent wrote:

> Housing is not a buble until it busted. The worst has yet to come
> yet. If you have noticed, the above posts indicated that customers
> are more intelligent and smart enough to understand the world around.
>
> We living in California and know exactly how painful it is for housing
> industry.
> Watch out for media spins, especially from Realtors, Dirk van Dijk,
> Zacks Research

How to Trade the Rest of the Year - Goldman Sachs

As I read this on Thanksgiving morning here in California I note that the markets in the UK, France, and Germany are down North of 3% per a check with E Trade as of 945am, PST. So what does GS think is going to happen on Friday morning, assuming, of course there is not a mad rush to spend till it hurts? GS executives may have a great Christmas season while the rest of America contends with functional (or constructive) unemployment North of 20%, continued declines in housing values and dollar purchasing power. No matter how GS, or the government (which may well be one and the same) juggle numbers to show an economy is on the mend, the real world for everyday America is bleak.

A Golden Thanksgiving

Exactly where is the institutional money going to go: residential housing, commercial real estate, off shore, banks, agriculture land, oil , natural gas, shipping, or thin air?

Of course it "could" happen because of the holdings of ETFs assets being found to be non existent, but even if this were the case I doubt physical gold value would be long impacted.


On Nov 26 10:34 AM DeepValueLover wrote:

> FAIR WARNING:
>
> Gold is a great hedge against economic freefall in normal times.
>
>
> But gold is currently in a "psychological" bubble.
>
> Gold has now become the "cab driver" topic of conversation like dot
> com stocks in '99 and house flipping in '05!
>
> Prepare yourself for a major collapse in gold prices within the next
> six months not due to fundamentals but due to panic selling by newcomers
> when the institutional money begins to diversify elsewhere.
>
> The long term trend for gold continues to be up.
>
> Hope for the best...prepare for the worst.

The Truth Behind the U.S Government's Stealth Stimulus Plan

Your post is appreciated for it's originality of thought. Seeking Alpha is a wonderful form for contemplating investing strategies based on personal evaluation of analysis and your insights are always appreciated. Normally investors rely on the media talking heads, periodical pundits, and guru newsletters to grasp the complexities of forecasting how and where to place bets in the greater economic pool. Those voices in the wilderness of non compensated, sponsored, or biased information always give me pause to think, and think again what is the most logical way to move forward.

Yes, the great reckoning is coming as the stealth stimulus flickers out and the country approaches default on the back of bank failures, and grossly inflated housing prices. Our problem, my problem, and likely everyone's problem is complacency. We all go along hoping (and some praying) that somehow, someway, the government will solve this crisis. I am not optimistic that will happen and so articles like this help me decide what to do, when to do it, and how to get it done. For the present I will continue to hold what I own (rental real estate largely not under mortgage burden, but significantly depreciated from 2006) and live with lower rents and a more frugal life style. I will buy physical gold as a hedge against further dollar down drafts and keep to cash, except in my retirement accounts that have already fallen on average about half of their acquisition cost even though they are invested in hard commodity firms like coal, oil, and natural gas (ugh) I will pay no attention to Cramer, talking heads, nor news letter gurus, however will seek my own council and those of others here in Seeking Alpha.

25 Reasons We Will Not Have a Depression

I have several E Trade accounts including Roths for my children and have been concerned for some time now about what happens to those accounts if E Trade fails. Each account carries long investments that are down twenty to eight percent. I have recovered in short term trading, perhaps half of what was lost since early 2008. So what to do now. Continue to play the short term trend and try to get back to parity before the fall. When to withdraw the cash and what to do with those dollars once in hand remains the question. Physical gold and silver seems a good bet, but what if it is a bubble? Where does one go for cover?

Your insightful thoughts about the fragility of E Trade (and by extension TDAmeritrade and others) gives me much needed pause for sober reflection. When you stir into the mix governmental ineptitude, corruption, and the arrogance of leadership the mix thickens. Add the cost of two unnecessary occupations, and the full measure of the world wide economic crisis and you have a mess in the kitchen which will be almost impossible to clean up. Of course you can try adding a dash of peak oil price as a kicker and who knows where it will go? I know that I will be paying close attention to my E Trade, and other trading accounts based on your informative assessment. Thank you.


On Nov 21 04:45 AM COPY&PASTE wrote:

> Nobody is going to buy "your account at E*Trade"
> E*Trade Financial Corp. is really, really close to major bankruptcy
> filling of 2009.
> The daily trading volume in ETFC is close to 10% of it's market cap,
> which is all negative as for every share priced at $1.64 your broker
> is losing almost $2, because your account is also losing and you
> trade less. Most E*Trade accounts are NON TRADING accounts, there
> are some equities in there, with 50-90% losses and no trading.<br/>E*T...
> has debt levels that they will never be able to repay.
> FDIC doesn't insure your ETF, ETN, stocks or option positions.<br/>SIPC
> has only $1 billion fund to cover for losses held by customers of
> all US brokerage companies.
> This is what I found on SIPC website!!!
> " With a reserve of slightly more than $1 billion, SIPC could not
> keep its doors open for long if its purpose was to compensate all
> victims in the event of loss due to investment fraud. "
> E*Trade is not a fraud, it is a super scam, because management sees
> that there is no one who is willing to buy them out and instead of
> filling for Chapter 11 bankruptcy immediately they continue to count
> their losses grow and begging for TARP funds. They lie to their customers
> and shareholders.
> The bust of E*Trade will have very serious implications to millions
> of investors who will bail out even from solid brokers.
> FDIC will have a difficulty to repay all FDIC insured accounts at
> E*Trade and it will be paid in small amounts for decade or longer.
>
> SIPC will not be able to refund most customers of E*Trade and will
> look for a way to transfer all E*Trade accounts (think of all the
> positions like long/short stocks, mini futures, options expirations
> that will expire when ETFC will be already officially bankrupt, option
> strategies) to another broker, this will be not possible as without
> further guarantees from the government no broker will want losing
> accounts and non trading customers. Most ETFC customers are buy&amp;hold
> types.
> ETFC is run like a Madoff pyramide scam, where new customers are
> offered up to 100 free trades and other perks.
> This is illegal as ETFC insiders know they can't handle this losses
> but they hope the new customers to pay for their losses.
> I urge all those happy and loyal SA readers to stop dreaming and
> start thinking, the bankruptcy of E*Trade will be the big hit for
> the markets and this event alone can bring DJIA to 6800 in a short
> time.
> This will be a snowball, are you ready? snipurl.com/tcjce

Don't Believe Long-Term Oil Forecasts

This is one of the most relevant and salient observations I have seen in Seeking Alpha as it deals with an inconvenient reality that one day there just will not be enough oil to drive the world economy. Guessing, estimating, forecasting, or prognosticating exactly when or why that will happen defers the issue to an uncertain future.

We argue about short term issues of supply and demand, price adjustments up or down, and what impact those forces will have on the economy without adequate attention to what happens when there is no oil, or substitute energy to maintain the world. We ignore, or fail to include in our contemplation that our 300 million or so population consume twenty or so percent of the daily WORLD supply. Although we have great military strength and reach it cannot last forever because it is based on a continued supply of cheap oil, just as our growth driven economy is, and the cheap stuff is disappearing. If we do not as individuals, or as a nation focus on muddling through toward frugality and conservation in energy consumption my oldest daughter will experience a very different and unpleasant future. Human nature is to deal with the here and now and immediately evident future. If we continue down this path for the next twenty to forty years we just might be scre235. What do you think?

Are We Becoming a Nation of Renters? Investing for the New Housing Dynamic

Without cheap oil there never would have been an explosive growth in housing, but we did have cheap oil for a very long time. Suburbia grew and with it home ownership. It was desirable to move into the inexpensive hinder lands of major cities because with cheap gas and a good road system it was cost effective to get to a far away job. We would all do well to remember that American society, and it's great wealth has been, and remains based on cheap oil.

Underlying the economic turmoil of recent years is the dawning reality of peak cheap oil and the impact of raising costs for the product. As availability of oil declines and demand increases prices will climb and BRIC countries will outbid us for the resource we need to maintain growth. If the economy does not grow we will likely not be building huge tracts of new homes, and neither the working class, nor the middle class will be able to afford to buy much of anything. Credit worthiness for many has been destroyed and clearly the situation is not improving so where will the credit come from? More than likely it will be a long road back to climbing wages (and employment at more than minimum wages) with consumers being able to rebuild their shattered FICO scores. It could also be a long time before banks again lend. So I just do not see a very rosy future, especially since no one seems to factor in the Black Swan of oil price shocks resulting from a decline in world production. Such an event would have a very profound impact on builder's development plans, prices for homes built, and rental values such that there "may" not be any wise strategy to follow.

The New Economy and Canadian Housing's Bubble Status

One of the things that drove the bubble in the US was favorable tax policies. The 1997 Clinton Administration introduction of a 250k/500k exemption from long term profit on sale of your personal residence that certainly helped. With rapid price increases a family could gain quick wealth every two years by buying and selling (and of course moving) into a new home. Those who could took their gain and turned the previous residence into a rental and then began taking deductions for depreciation, taxes, association dues, mortgage interest and repairs. The gain got them into another residence and their fortunes seemed to take off. My point is that the favorable effect of these tax breaks helped fuel our bubble, but I doubt that is the case in Canada since presumably Canada does not offer such incentives. As I understand it taxes are significantly higher in Canada and less complicated as there are fewer loopholes and credits. Canadians pay high taxes but receive more from their government in the form of quality medical services which has some off setting benefit in dollars available to buy housing with. What all this leads to is the conclusion that it is very difficult to make like kind comparisons.

How Bloomberg Fabricates U.S. Housing Numbers

The housing market is dismal and despite the many commentators, pundits, forecasters, insightful gurus, and talking heads hinting at recovery I am not optimistic. They use dubious statistics based on false premises that are more wishful thinking than akin to reality. It is not getting better soon.

I do live in what could be called ground zero. Here in Orange County the boom was just great, until it was not. Our home was purchased in November 2001 for around 700K and rose to around 1.450k in fair market value in late 2006. It is 3400 square feet in a great gated community, but were we to sell today I would market it for 1.150, and take 1 million. If you could get the cash together today to buy a new home in Woodbury, a close proximity new community, 600-700k would buy you a 1900 to 2300 square foot home that was almost a zero lot line and encumbered with dual association fees as well as hefty taxes of 1% to the state, and another .08% in Mello Roos bond expense. We are staying the course, but many of our friends and neighbors have not been able to do so. Some had jobs with the mortgage and banking industry at excessively high compensation levels and lost much of the wealth they had acquired as they over invested in homes and rental units that were heavily geared. Some moved to the mid west and and began a new life with much less expectation of acquiring wealth through real estate ownership. Most do not discuss their personal situation, but you can sense their fears about the future. Looking around they appear to be justified.

We live near an Irvine Company development called "Orchard Hills" which WAS projected to have around 4000 or so homes and was anchored to a very upscale Shopping Center which was built. None of the houses have even been started although they could have been ready in late 2007. Signs announcing the project said they would be available in 2008, then 2009, then 2010, and then the signs disappeared. All of the paved primary roads are in place, as are the underground utilities and landscaping. Some of the communities entrances even have their fake Italian guard towers in place. The various builders who have committed to construct homes there and paid premiums as advances for rights to build must be in great fiscal pain. The anchor shopping center has many vacant building and the shops that are open are not doing well. The upscale, and expensive Von's Grocery is usually empty, and almost no one uses the CVS drugstore. It is no problem to get a table at the expensive and trendy Zavs' Restaurant. I would guess it could be several years before construction is restarted, if it ever is and all the while there are great carrying costs by the developer, and the home builders to participate in a project that might not come into being. The shopping center tenants are stuck with hard leases and have little recourse except to stay the course and tough it out.

These observations from the ground level, rather than from some cloud on which sit the anointed cognoscente leave me believing that we have not seen the worst of the great housing bust. Those who claim a recovery are just fooling themselves and those who believe them.

Don't Argue with Paul Tudor Jones About Gold

I think that in a turbulent world rational people search for anything that offers a sense of stability. Gold has always had a value and will in the future. The only real question is what will the value be. Gold is unlike any other asset in that over the longer term it will always be worth something in exchange for currency (and other mediums of exchange), or barter for the necessities of life. It seems to me reasonable that we all would be wise to keep some physical gold in our safety deposit box as a hedge against an uncertain future. Prognosticators, pundits, news letter promoters, futurists, hedge fund managers, etc., will argue, forecast, contemplate, suggest, evaluate, promote, and endlessly address the question about the direction of gold prices. Some will be correct, some sort of in the grove, and some just wrong. If the world we know today were to end, or be drastically changed gold would still have some value. I personally will continue to own physical gold, and hold some small positions in gold mines as a hedge against an uncertain future because I know at the least physical gold will have some type of value.