In Housing We Trust
If you, like me, have a largish percentage of your "net worth" tied to the value of your house -- and make longer-term financial decisions predicated on such value, I would suggest a conservative approach in making the valuation. For giggles, I picked up a magazine over the weekend that listed "exclusive and unique" houses in various parts of the country. In particular, I looked at houses in the broad band down the coast of Southern California. What I saw is both disheartening and scary: poop-boxes in Laguna or La Jolla are offered at prices that would buy a vast spread in other parts of the US, let alone some Third World nation. That is not healthy for us, any of us, including the people that own the poop-boxes in question.
You see, the chasm between real estate prices and sound long term valuation is getting a trifle wide. We all know that the money pumped (read printed) by the Fed into the economy since the tech bubble burst has basically funneled directly to houses and the increase in prices, in turn, has allowed refinancing at the low rates caused by fed-pump freeing people to buy stuff that their incomes would otherwise never have allowed.
Shut off the pump and the cycle of expenditures caused or enabled by low rates ceases. Then people have to take stock in the value of the house, versus their actual incomes: if you have a mortgage that at higher rates would only be supportable by higher incomes ... you have a problem Houston. The natural instinct is to lock in the "gains" represented by the house by selling at the inflated prices. If you manage to do this earlier than the bulk of others in a similar position (i.e. while the greater fool theory still holds), so much the better. Pay off the mortgage, down-scale and enjoy some gains ... provided you have not already refinanced and spent the "gains." If however you are late, or hold onto the house looking to avoid the "softness" in the market -- I'll sell in the Spring -- you may be holding an "asset" that is worth considerably less that you think it is. And if you have indulged in the refinance and spend game, you may be in deep poop.
Southern California may be in deep poop. There are way too many houses at prices that imply incomes far higher that are actually supporting them. It may just work at the rates that we have seen since the tech bubble burst, but these rates are historically low, too low. Spend the "gained equity" and all you are left with are mortgages that have nothing in common with their owners. In short, watch out for too many fat men trying to squeeze through a narrow door.
Whenever circumstances create the situation where well-off young people are functionally crowded out of the market for starter houses -- unable to board the housing ladder (itself a silly notion of trading one house you can't afford for a bigger one, because someone else is always willing to buy it for more than you spent on it), you have an imbalance that will retreat to meet the available incomes.
Note also, that China and other 3rd world / developing nations have held the paper represented by the Fed's money infusions into the economy: the money found its way there in the form of the refinanced expenditures and failure to save in the US. There is no guarantee that these creditors will continue to want to hold the paper. If they decide (inscrutably) to dump it or merely stop buying (we've had our fill in our portfolio), then US rates will rise. Steeply. In that instance, growth ceases in the US, housing "shits the bed" and all these leveraged-to-the-hilt houses for silly moeny head South. Lots of fat men and a veritable slit for a door.
All the real estate people are now saying "soft landing" -- this after saying that the market remain robust at the beginning of the year. So buy now, because this is surely the bottom of the market. The only person more dishonest (or self deluded) than a real estate broker is a car salesman (what car really has "value" or is a good investment ... less than 1/1000 of 1% ... and you can't afford to buy it in the first place, anyway). But real estate is a limited asset you say. What about a shrinking population in real terms and a rapidly shrinking population of people actually able to afford million dollar property (what is a mansion in Orange County -- in Pittsburgh is called a split level)? And the Boomers are shortly to go into cash-in mode and downscale ....
One good trigger -- oil prices spike again, Chinese debt moratorium, trade (im)balance causes run on the dollar (you cannot continue to run 60 billion dollar monthly deficits indefinitely), and then rates must spike. If that happens, put your head between your knees and kiss your sweet heine good-bye.
From my point of view, I just don't see how it can be avoided.
You see, the chasm between real estate prices and sound long term valuation is getting a trifle wide. We all know that the money pumped (read printed) by the Fed into the economy since the tech bubble burst has basically funneled directly to houses and the increase in prices, in turn, has allowed refinancing at the low rates caused by fed-pump freeing people to buy stuff that their incomes would otherwise never have allowed.
Shut off the pump and the cycle of expenditures caused or enabled by low rates ceases. Then people have to take stock in the value of the house, versus their actual incomes: if you have a mortgage that at higher rates would only be supportable by higher incomes ... you have a problem Houston. The natural instinct is to lock in the "gains" represented by the house by selling at the inflated prices. If you manage to do this earlier than the bulk of others in a similar position (i.e. while the greater fool theory still holds), so much the better. Pay off the mortgage, down-scale and enjoy some gains ... provided you have not already refinanced and spent the "gains." If however you are late, or hold onto the house looking to avoid the "softness" in the market -- I'll sell in the Spring -- you may be holding an "asset" that is worth considerably less that you think it is. And if you have indulged in the refinance and spend game, you may be in deep poop.
Southern California may be in deep poop. There are way too many houses at prices that imply incomes far higher that are actually supporting them. It may just work at the rates that we have seen since the tech bubble burst, but these rates are historically low, too low. Spend the "gained equity" and all you are left with are mortgages that have nothing in common with their owners. In short, watch out for too many fat men trying to squeeze through a narrow door.
Whenever circumstances create the situation where well-off young people are functionally crowded out of the market for starter houses -- unable to board the housing ladder (itself a silly notion of trading one house you can't afford for a bigger one, because someone else is always willing to buy it for more than you spent on it), you have an imbalance that will retreat to meet the available incomes.
Note also, that China and other 3rd world / developing nations have held the paper represented by the Fed's money infusions into the economy: the money found its way there in the form of the refinanced expenditures and failure to save in the US. There is no guarantee that these creditors will continue to want to hold the paper. If they decide (inscrutably) to dump it or merely stop buying (we've had our fill in our portfolio), then US rates will rise. Steeply. In that instance, growth ceases in the US, housing "shits the bed" and all these leveraged-to-the-hilt houses for silly moeny head South. Lots of fat men and a veritable slit for a door.
All the real estate people are now saying "soft landing" -- this after saying that the market remain robust at the beginning of the year. So buy now, because this is surely the bottom of the market. The only person more dishonest (or self deluded) than a real estate broker is a car salesman (what car really has "value" or is a good investment ... less than 1/1000 of 1% ... and you can't afford to buy it in the first place, anyway). But real estate is a limited asset you say. What about a shrinking population in real terms and a rapidly shrinking population of people actually able to afford million dollar property (what is a mansion in Orange County -- in Pittsburgh is called a split level)? And the Boomers are shortly to go into cash-in mode and downscale ....
One good trigger -- oil prices spike again, Chinese debt moratorium, trade (im)balance causes run on the dollar (you cannot continue to run 60 billion dollar monthly deficits indefinitely), and then rates must spike. If that happens, put your head between your knees and kiss your sweet heine good-bye.
From my point of view, I just don't see how it can be avoided.
posted by Zaphod at Monday, November 28, 2005
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