Psychology of the Housing Bubble (and its collapse)

[justin]

Yep, my california real estate has been horrible! I only made a 615,000% return.

So what did you buy at what price and what's it worth now? How did you get a 615000% return?

 

[Alex]

I bought my first home in California with $1.00 down thanks to the VA. Do the math.

 

[justin]

I bought my first home in California with $1.00 down thanks to the VA. Do the math.

Oh, that kind of math!!! So using this system of mathematics, I've made 10000000000000000000000% returns before where my basis was zero. Example - the cisco stock I bought in 1999 on margin and then had it double. I paid zero down for it, and then it made me 10000000000000000000000%+ return on my initial investment. Or the time I made $5000 in a year from arbitraging 0% interest credit card balance transfer money. Zero invested, $5000 returns = 10000000000000000000000%+ rate of return.

Seriously, I thought maybe you had bought a teardown in a declining neighborhood for, say, $1000 30-40 years ago and then sold it recently for $6.15 million (mostly land value). Say, if some big luxury development wanted to build and your property happened to be within their desired building footprint and they bought you out.

 

[Alex]

Oh, that kind of math!!! So using this system of mathematics, I've made 10000000000000000000000% returns before where my basis was zero. Example - the cisco stock I bought in 1999 on margin and then had it double. I paid zero down for it, and then it made me 10000000000000000000000%+ return on my initial investment. Or the time I made $5000 in a year from arbitraging 0% interest credit card balance transfer money. Zero invested, $5000 returns = 10000000000000000000000%+ rate of return.

Seriously, I thought maybe you had bought a teardown in a declining neighborhood for, say, $1000 30-40 years ago and then sold it recently for $6.15 million (mostly land value). Say, if some big luxury development wanted to build and your property happened to be within their desired building footprint and they bought you out.

well, math is math. So if you have ZERO invested in an investment, you have made infinite returns as soon as you make a penny! - bravo to you. In my case, owning california real estate has made me very lucrative returns that are nothing to scoff at. There is more than one road to wealth.

 

[perinova]

well, math is math. So if you have ZERO invested in an investment, you have made infinite returns as soon as you make a penny! - bravo to you. In my case, owning california real estate has made me very lucrative returns that are nothing to scoff at. There is more than one road to wealth.

I am confused are you telling me that you didn't put any additional payments on this house? Just $1?
What you made as of today is really [today's value - all previous payments - remaining loan], not [today's value - downpayment].

But of course I think you know that.

 

[justin]

I am confused are you telling me that you didn't put any additional payments on this house? Just $1?
What you made as of today is really [today's value - all previous payments - remaining loan], not [today's value - downpayment].

But of course I think you know that.

As Alex says, "Well, math is math." As computer users know, garbage in, garbage out.

Alex also has a maintenance free house and a property tax exemption and never paid any insurance bills on this house. I've always heard California was nice, but I never knew it was this nice.

 

[Alex]

As Alex says, "Well, math is math." As computer users know, garbage in, garbage out.

Alex also has a maintenance free house and a property tax exemption and never paid any insurance bills on this house. I've always heard California was nice, but I never knew it was this nice.

You have to live somewhere, don't you? I figure that if I paid rent for an equivalent house over all these years it would have worked out to a wash at the worst case. It may have been slightly more expensive in the first few years, but over twenty years rent has increased dramatically. By contrast, my real estate taxes and mortgage payment are fixed. Maintenance has been very very minor. Oh, Did I mention I have been writing off the mortgage interest on my loan all of these years? I think that oughta more than cover the maintenance and insurance. . So yeah, I put a buck in the house.

 

[lazygood4nothinbum]

south florida reporting in...

at i believe it was justin's suggestion on another post, i'm studying the bogleheads' guide to investing and learning lots. copyrighted 2006, page 20 reads "for example, a move from newport beach, calif, to almost any florida coastal city will lower your cost of living by more than 50%". so perhaps all hope is not yet lost.

we have, however, lost some equity which i was planning to retire on. i'll know how badly i miscalculated when (if?) the inherited house sells. my worst case scenario is having learned a better lesson for less money than a different 4-year college degree would have gained me and a luxury apartment in thailand. not so terrible when your finances force into a life of adventure.

my area around fort lauderdale seems to be holding its own. sales have been going down for a while and prices are also down a few points for past two months in a row (last drop was 2%). neighbor on corner thought he had house sold for $620k but lost contract and is now trying to get $590k. the guy next door to that is trying for $550k. the house across from me will probably try to get $1mm after they finish adding 2 bedrms/2 baths. after the turndown two realtors quoted my dump at about $425k. i am certain the $550k is not worth $125k more than mine.

unless finances force, i won't be selling for about 5 years as my retirement was rather premature and the costs to live here are still very low, $844/month including even all utilities, so, while i've already put in my time here since high school, i'm rather stuck in paradise until it makes more financial sense to leave.

i've been tracking home asking prices in my area and mom's for a year now on realtor.com. in my area, in january there were 33 houses for sale with medium asking price of $680k. in november there were 41 for sale asking medium price of $590k.

in mom's area in january there were 40 houses for sale asking medium price of $4.8mm. in november there were 22 houses for sale asking medium price of $5mm. there are only three tear downs including ours for sale in that immediate area. one (owned by my neighbor who doesn't have to sell) with 80 ft of seawall asking and so far holding firm at $1.425, a flip with 40 ft of seawall (and facing a 4-story condo on the water--a tough sale) asking $1.2 and ours with 60 ft of seawall asking $1.3. we dropped price from $1.4 when the $1.2 dropped from $1.375. there's just a by owner sign on ours for now. will list with a realtor in january and see what happens. even if we sell at 1.2 i'll hardly notice the difference. if it sells under $1mm i'll consider selling my house as well and start my adventure early. (and you thought i was gonna say i'll just have to go back to work).

you'll know what happens later because by then i'll be asking you all, hey, what the hell am i supposed to do with all this cash.

 

[tryan]

The 2 markets I am closest to (North of Boston and Southern VT) are down 20% in the last year.

Realtors say the market has returned to where it was ~2 years ago. If I had my way, I'ld dump 2 of the 6 I have (I am not niave enough to think RE can't drop) .... can't seem to get a vacancy. Raising rents when I can ... tenants smile n'pay. Now with a new england winter setting in ... I'll wait till spring.

At the risk of repeating myself, it'll take a deep recession to find a real bottom. We've got time.

 

[lazygood4nothinbum]

online pic of backyard view of abovementioned house asking $1.2

 

[macdaddy]

An update... it took me by complete surprise but everything I have been following in Boston seems to have sold in the last two weeks. Even some less than perfect units in "bad" locations (in an overall nice area). Once prices hit 2003 levels they were snatched up. Maybe this is a bottom?

 

[wabmester]

Once prices hit 2003 levels they were snatched up. Maybe this is a bottom?

Or a dead cat bounce. Once wage growth catches up with housing price growth (or vice versa), we should be close to a bottom.

 

[dumpster56]

An update... it took me by complete surprise but everything I have been following in Boston seems to have sold in the last two weeks. Even some less than perfect units in "bad" locations (in an overall nice area). Once prices hit 2003 levels they were snatched up. Maybe this is a bottom?

many of those homes were taken off the market and have not sold. That has happened here in NJ.

 

[perinova]

many of those homes were taken off the market and have not sold. That has happened here in NJ.

I also noticed limited amount of for-sale signs.
IYHO why do you think this is?
I can just think of those possible reasons:
- A holiday reprieve?
- Will be rental Units?
- Did they refi?
- People will stay put?
- Do they think (wrongly or not) that the market will pick up steam?

 

[dumpster56]

I also noticed limited amount of for-sale signs.
IYHO why do you think this is?
I can just think of those possible reasons:
- A holiday reprieve?
- Will be rental Units?
- Did they refi?
- People will stay put?
- Do they think (wrongly or not) that the market will pick up steam?

People I spoke with are staying put. They all thought they were gonna make a killing last spring and then may 1 came and the market went flat, down 20 25% in NJ.

So unless they had to move which some did home prices had dropped in our old neighborhood from 520K to 440K and then there was some action, which I might add if they were the original owner they still did fine they were bought in the 250K range 10 years ago new.

I am still amazed that I timed the market right, or maybe I was just lucky. We sold the last week of april.

 

[kcowan]

Most people will not move at Christmas. Realtors head south or to visit family. So the listings expire and are not renewed until the spring.

 

[2B]

At the risk of repeating myself, it'll take a deep recession to find a real bottom. We've got time.

I'll chime in here with my experience in a couple of real estate collapses. When the market "slows," people won't sell if they don't have to move and people will do alot to avoid moving if it means eating a big home loss. The market is then made up of divorces and repos. As long as the jobs hold up, the amount of repos is small and only the froth comes out of the market. When job losses mount, it's time to watch the toilet flush. In my experience a market "readjustmet" takes about 2 to 3 years to be fully felt and then the new real estate base is formed for prices to start to move up. Full recovery may take a decade or more.

Right now we are in a boom economy despite what various political factions want to say. Employment is high and if someone gets strapped there are second jobs available to make a little extra. We'll see the bubble burst when the economy shifts. We haven't seen anything yet.

 

[Corporateburnout]

I'll chime in here with my experience in a couple of real estate collapses. When the market "slows," people won't sell if they don't have to move and people will do alot to avoid moving if it means eating a big home loss. The market is then made up of divorces and repos. As long as the jobs hold up, the amount of repos is small and only the froth comes out of the market. When job losses mount, it's time to watch the toilet flush. In my experience a market "readjustmet" takes about 2 to 3 years to be fully felt and then the new real estate base is formed for prices to start to move up. Full recovery may take a decade or more.

Right now we are in a boom economy despite what various political factions want to say. Employment is high and if someone gets strapped there are second jobs available to make a little extra. We'll see the bubble burst when the economy shifts. We haven't seen anything yet.

Do you think it will take 3 years for the RE market to get back to 2005 levels? We have been thinking about downsizing from our current single family house in the Boston suburbs to a townhouse or a condo in the same area. We are now thinking about buying the condo and wait a year or so before attempting to sell the house to get maximum value. But three years may be too long to cover expenses for two properties.

 

[tryan]

We are now thinking about buying the condo and wait a year or so before attempting to sell the house to get maximum value.

Since it's largly a lateral move (house to condo) it's more a life style change than a financial decision.... right?

As a financial move: No better time than the present. It's all down hill from here, IMHO. I don't believe we'll see the mid 2005 highs until we recover from the next recession.

 

[2B]

Do you think it will take 3 years for the RE market to get back to 2005 levels?

It all depends on the economy. What's happening now is just a little froth being taken out of the market. If that's all it is, the market will "recover" when the supply and demand get back in the same balance or building costs rise to that level.

The other possibility is that this is the peak of employment for your area and unemployment goes to 15%. Suddenly, people that are perfectly happy to stay in their homes become unemployed. They become "motivated sellers" or their mortgage company forecloses and does it for them. Then, it may take 2 or 3 years for the prices to hit bottom. Recovery may take over a decade.

 

[macdaddy]

many of those homes were taken off the market and have not sold. That has happened here in NJ.

This is what I thought at first too. However, I called to follow up on several properties, and all had actually sold. In one case, the seller had to bring a $30k check to the closing table. I thought for sure she would pull it off the market, as renting would only have put her down about $750 a month, but I guess she bit the bullet. I agree with what 2B said (wise advice). In order to really see a bottom, people need to lose their jobs and burn through their savings. They need to be unable to pay. The economy around here is still going full speed ahead.

 

[honobob]

I'm in the SF East Bay and two comparable homes have sold for $30K more than what I thought our peak value was. The news just confirmed that year over year prices are 5% up. My 20 year average annual increase in value has been 10%. I'm not inclined to call that a collapse.

I've looked at 1 bedrooms in the under $700,000 range in the city and anything good is snapped up and the thousand or so new highrise units being built are gone. Most of them were well over $700K and new towers are planned for 2008/2010/2012.

Even Honolulu prices are still on the rise and Trump sold his units in a day!

If I'd sold scared of a bubble I'd be sitting in an apartment with about $100K less in net worth waiting for a deal in SF Fresno!

 

[SteveR]

A recent newspaper article looked at the housing climate here. The average increase in house sales prices was up 25% from 2005 to 2006. Some areas as high as 38% but none were below 15%. The projection is around 10-15% for 2007.

Some of the boom was due to the increased economic picture here and a lot of it was driven by speculation with develpers buying houses long before they were even built and then flipping them for a tidy profit. Individual got into the act too adding to the flames. But, there are still some very real drivers for the market to continue to rise this year.

One of the biggest "problems" here is our unemployement rate. We are at 1.9%. Companies cannot find enough people to fill open jobs. The economy is booming but is now starting to fall off because of the open jobs and businesses have to cut back because they can't make/do more without more warm bodies.

This is starting to affect other segments of the economy. New jobs and filling exiting open jobs has created a climate of job hopping for minor changes in hourly rates or minor benefit upgrades. Overall, the effect is inflationary and there is no end in sight. Housing is also being stressed in both rental and purchased units. My house price on zillow (taken with several grains of salt) indicated a 8% increase in value in the past 30 days.

Areas like Park City are going up even faster. The develpment there has been out of control and shows no stopping. Prices are still going up 10-15% a month in some favored areas there.

Bubble? What Bubble? (spoken tongue in cheek). I only hope to skim of some capital gains from my vacation home before it all comes crashing down. But, as long as the economy keeps expanding and there is more demand for housing with the increase in jobs I don't see a reversal anytime soon.

The only negative I have seen so far is in the higher end home market where the big ticket homes are moving slower. The stuff at the mid range is moving in a few days or even hours. A couple of houses near us have been on the market for months so that says a lot about who is buying and what they are willing to pay for some of these McMansions around here. Spring will be a good indicator of how the rest of the year will go; once this place thaws out.

 

[dex]

Areas like Park City are going up even faster. The develpment there has been out of control and shows no stopping. Prices are still going up 10-15% a month in some favored areas there.

What I don't understand is: Where are all these people coming from?

 

[justin]

What I don't understand is: Where are all these people coming from?

California. They sold their 3 BR/2BA's, became instamillionaires, and now they can afford to buy the bargain basement $700,000 mcmansions in Salt Lake City. Why not double their money while they can.