When the RE Music is Over...

[einreb]

Originally posted by tabs
Doesn't anybody believe in the Business Cycle anymore...

So, where's LV in the process right now tabs? I seem to recall you were pretty bullish even in the past year.

I sorta suspected things out west were getting weird when some clients in phoenix mentioned their secretaries were buying houses as 'investments' with interest only loans. sorta like the old tale about the shoeshine boy asking for stock tips just before the great depression.

we havent seen a huge rise here in chicago... i could see a 20% drop as a reasonable correction here... but what do i know.

-bernie

[dd74]

All I know is a house on our corner sold for $200,000 over asking price in a bidder's war. And that was within a week of the house going on the market. Of course, L.A. is its own world...

[jyl]

Several months ago I looked up the best available data for tracking house prices (the OFHEO data - not perfect but better than anything else) and posted here about what I saw. You might be able to find it by searching "jyl OFHEO". Anyway, it shows that in the early 1990s, California real estate declined quite severely over the course of several years. I agree w/ tabs.

Originally posted by tabs
Anybody who thinks that housing prices can't CRASH isn't playing with a full deck.....

[dd74]

jyl - how can that even begin to be accurate when prices have steadily gone up since 1990? And also, RE has declined where in California?

[techweenie]

Originally posted by dd74
jyl - how can that even begin to be accurate when prices have steadily gone up since 1990? And also, RE has declined where in California?

Depending on your neighborhood, the prior peak in L.A. was about 1991, and it took until at least 2003 to come back to those levels. The hit was as much as 25% in one year -- and lucky me, it was my neighborhood (at the time) that took the biggest hit: 90210.

[1967 R50/2]

I am going to reiterate something which seems lost on this crowd:

Originally posted by 1967 R50/2

The real estate legislation signed in 1997 allows you to take up to $250K in appreciation tax free on real estate sales provided it has been your primary residence and you have been there for more than 2 years. This is a tax advantage that no other form of investment can beat. Unless the gov steps up to the plate and taxes the appreciation on the same level as stocks or lowers the capital gains tax on stock to match real estate, expect the speculation to continue.

As I've said many times, this board has too much emotion and not enough logic or facts. Real Estate has a huge innate advantage as an investment.

You will also note that it did not develop this advantage until 1997...which puts it AFTER the previous bubbles and slumps that people have sited. Therefore, using past bubbles as an indicator of how and when this one may end is a dubious proposition. It is not likely to be a repeat. It may be worse....but it may not, if RE keeps this tax advantage.

BTW: I do not work in real estate....nor do I even OWN real estate. That's just the facts.

[dd74]

Originally posted by 1967 R50/2
Real Estate has a huge innate advantage as an investment. That's just the facts.

And that's all that needs to be said, really.

[jyl]

Originally posted by dd74
jyl - how can that even begin to be accurate when prices have steadily gone up since 1990? And also, RE has declined where in California?

I found my prior post, and will paste it in here:

People have all forgotten the CA RE downturn of 1990-1994? Only a decade ago, but it can't happen again?

Edit: a few numbers in case anyone is interested.

In Los Angeles, from 1980 to 1990, average house prices grew +130% (appx +8.7% a year, compounded). From 1990 to 1995, average house prices declined -22%.

I was a homeowner in the LA area at the time, and recall foreclosure signs on every other block, homes sitting unsold for years, and house prices going down much more than -22% in some cases.

In San Francisco the 1980 to 1990 growth was about +140% (+9.2% a year, compounded). The 1990 to 1995 decline was smaller, about -10%.

(The home price data is from the federal OFHEO agency as of 4Q04.)

During that 1980 to 1990 period, the S&P 500 rose about +210% (about +12% a year, compounded). From 1990 to 1995, the SP5 rose about +54% (+9% a year, compounded).

(The stock market data is just eyeballed from a chart).

In Los Angeles, from 1995 to present, average house prices have grown +120% (+8.2% a year, compounded). In San Francisco, average house prices have risen +125% (+8.4% a year, compounded).

During that 1995 to present period, the S&P 500 has risen +113% (7.9% a year, compounded).

The thread is Housing Bubble Blog

The data is at OFHEO's website, here http://www.ofheo.gov/HPI.asp You can download the data for a given metro area and crunch it in Excel which is what I did.

I owned a house in a nice area of Glendale, bought in 1989, sold in 1995 or 96 (can't remember exactly) at a loss, despite having done quite a lot of improvements. At the trough of the SoCal housing market, there was one foreclosure on every other block. My friends who bought in more expensive neighborhoods, or out in the Inland Empire, or who bought West LA condos got hit a lot worse. One abandoned her house, one finally sold after 2000 for a slight profit, one lost his job and couldn't sell his house for 4 years. My friends in NoCal who'd bought at the top also got hurt, though not as badly.

I can think of a lot of reasons why the early 1990s bust might have been worse than the coming bust will be. For one thing, the SoCal economy was going through a very difficult period back then.

Then again, I can think of a lot of reasons why the coming bust could be worse. For one thing, even at the height of 1990, mortgage lending was nowhere near as sketchy as it is now. As I recall, back then putting 15% down and choosing a variable rate was considered pretty aggressive; compare to today's zero-down interest-only loans. As I recall, even at the trough of the early 1990s market I still had some equity in the house, i.e. my mortgage hadn't gone upside down. With today's loans, people will be upside down pretty quickly.

Anyway, that's the old post I was referrring to.

__________________

[1967 R50/2]

JYL...read my previous post. This bubble is not likely to be a repeat of previous bubbles due to the 1997 legislation.

[dd74]

I took your post to mean 1990 to present, real estate has declined, which I can't see as true since, from around 2000, it's been steadily climbing.

[einreb]

Originally posted by 1967 R50/2
JYL...read my previous post. This bubble is not likely to be a repeat of previous bubbles due to the 1997 legislation.

Its a new paradigm.

A tax break on $250k? BFD. Fine, price in an extra $100k. The prices are still inflated. And thats for folks with some equity that will be able to find a buyer in a normal interest rate environment. That tax 'break' won't matter at all for those folks that are upside down.

[tabs]

Nothing has moved in my development in a coupla months???? but my hood has it's own special problems...

But looking in the Newspaper ads for homes...I see REDUCED, REDUCED REDUCED....like I said maybe the sellers were geting ahead of themselves...I do know Pulte lowered their prices on their Silverstone Development back in December... I would say the reduction is 5%...

Thge PMI Insurance Boyz rate LV as having a 13% chanch of decline in the next 2 years....that pretty much is in line with what I was saying before...

The Demographics are very strong 6000 people a month show up to live here....of the 78 or so Businesses that relocated to NV in 2004...45 @ were from CA....in LV believe it or not there is a shortage of land to be built on...it mostly belongs to the Federal Goverment...BLM...and is released slowly....that combined with a strong economy reduce the RISK of a RE decline of any magnitude.... so 13% is about right....Conditions in LV are the way it used to be in SO CA in the booming 60's and 70's .....prices never went down.... or to amend...not a collapse...

SO CA is largely built out now and is a more mature economy...
it is faced with illegal immigration, a Socialist government that is decidedly ANTIBUSINESS.....CA before the 60's was a pretty Conservative State....yeah I remember MoonBEam and his Dad Pat....but U also had Ronnie the Popular too....Earl Warren was a Repblican Governor...and the LAPD before Jack Webb santized it or made it into a sainthood was one of the most corrupt police forces in the nation....

[jyl]

Originally posted by 1967 R50/2
I am going to reiterate something which seems lost on this crowd:

As I've said many times, this board has too much emotion and not enough logic or facts. Real Estate has a huge innate advantage as an investment.

You will also note that it did not develop this advantage until 1997...which puts it AFTER the previous bubbles and slumps that people have sited. Therefore, using past bubbles as an indicator of how and when this one may end is a dubious proposition. It is not likely to be a repeat. It may be worse....but it may not, if RE keeps this tax advantage.

BTW: I do not work in real estate....nor do I even OWN real estate. That's just the facts.

I don't think the 1997 tax change was that significant. Even pre-1997, profits from selling a house were treated very favorably. Prior to 1997, capital gains on sale of a primary residence was untaxed if it was reinvested in another primary residence of equal or greater value within two years, and sellers over age 55 could exclude $125K of capital gains without reinvesting. http://doityourself.com/houseselling/winloser.htm Realistically, most home sellers will be purchasing a replacement home, so they would have avoided taxation under pre-1997 law as well.

Note also that both the old and new tax exclusions only apply to primary residences. "Investment houses" receive no tax break, and those have become a significant percentage of housing transactions, at least in California.

In every bubble, people come up with reasons why "things are different this time". Go back and read articles from 1999/2000 and you'll see all the reasons why that stock market bubble wasn't a bubble because things were different. I believe and I recall, though I have not gone back and verified, that similar things were being said during the late 1980s real estate bubble in California.

In the end, things are never "different". Asset prices bubble and burst, they always have and they always will. It is human nature, and cannot be changed by tweaking the tax code.

I recommend a book by Siegel, "Irrational Exuberance, 2d Edition". He correctly predicted the bursting of the stock market bubble in 2000, and I would wager that he is correct on the real estate bubble as well. Whether his timing is as good (the 1st edition was published less than a year before the stock market crashed) is anyone's guess. Edit: I'm not saying I agree w/ everything in the book, by the way, I think his diagnosis is correct but I am doubtful about his recommended cures.

[1967 R50/2]

Originally posted by einreb
Its a new paradigm.

A tax break on $250k? BFD. Fine, price in an extra $100k. The prices are still inflated. And thats for folks with some equity that will be able to find a buyer in a normal interest rate environment. That tax 'break' won't matter at all for those folks that are upside down.

As I was saying...this point is missed...again.

You can think whatever you want, but neither stocks, bonds, commodities or any other investment is going to allow you to CLEAR $250K TAX FREE ON CAPITAL GAINS.

And the speculation will likely continue until this changes.

[jyl]

1967 R50/2, my point is that those who can avoid capital gains tax under the post-1997 tax law could, in most cases, also avoid it under the pre-1997. And those who could not avoid tax under the pre-1997 law can, in most cases, not avoid it under post-1997 law either. I explained this in my post above. So this tax advantage existed, for the most part, pre-1997, when those past bubbles, that no-one can remember today, inflated and burst. Sorry if this is getting disjointed, our posts are kind of crossing each other.

SoCal911, yes all this is making me feel rather old. I must be a doddering old codger. How else can it be that no-one else (but you, another toothless old geezer it seems) remembers the financial trauma that hit so many people in California just 15 years ago? Edit: Sorry, techweenie, didn't mean to leave you out, you senile old nursing-home resident you.

[tabs]

How high can a Balloon go....till it bursts....

That 1997 Legislation...is moot....INCOMES have not risen enough to sustain the HIGH RE PRICES and Rising Interest Rates will Pop the Baloon...the extent of that creative financing is the real indication of just how shakkey this market has become....and LV is not immune from decline either, I just think it will be more muted here than say in CA....

I bought a new home in So CA in 1989 and knew a Recession was upon us...I just didn't gauge the severity of it correctly...I POURED MONEY into that home....and it took me till 2003 to BREAK EVEN...Now this home in 2 years has nearly double in vlaue without putting a dime into it....(well I had to put gates, mini blinds and garage door openers in)....also I repaired the Construciton Defect in this house...that has been 35K so far..but the Builders Ins co paid for that...

[einreb]

Originally posted by 1967 R50/2
As I was saying...this point is missed...again.

You can think whatever you want, but neither stocks, bonds, commodities or any other investment is going to allow you to CLEAR $250K TAX FREE ON CAPITAL GAINS.

And the speculation will likely continue until this changes.

I understand what you're saying (after rereading my post, i think i came across as a bit of on ars... sorry )

I would just argue that there are a lot of folks that will not see $250k in capital gains. i dont think thats enough of a catalyst to continue these annual percentage gains year after year.

ok... so U have incentives to invest in the 'house of cards'... at some point... on the supply/demand graph... you know have a fixed (or increasing debt load with adjustable rates rising) a 'house of cards' as an asset.

[dd74]

Originally posted by tabs


I bought a new home in So CA in 1989 and knew a Recession was upon us...I just didn't gauge the severity of it correctly...I POURED MONEY into that home....and it took me till 2003 to BREAK EVEN...Now this home in 2 years has nearly double in vlaue without putting a dime into it....(well I had to put gates, mini blinds and garage door openers in)....also I repaired the Construciton Defect in this house...that has been 35K so far..but the Builders Ins co paid for that...

So what is it exactly that you expect? Homes are long-term investments. Those that short sell or "flip" eventually get burned no matter what arena they invest in. If you look at the home as a long term investment, you'll be fine. Long term = 25 years.

[EdT82SC]

How many of us here are going to lose their shirts if real estate crashes? I bought a house six years ago that has trippled in value. My mortgage payment is about the same as a two bedroom apartment in the local area. I don't plan on moving. If my house loses 2/3 of it's current value, taking me back to where I started I still have a mortage payment I can easily afford, and a decent amount of equity. My life is not really affected if that happens. Am I just some wierdo with stable finances? I have trouble believing that a majority of people in similar circumstances decided they need to take $100K out of the house to spend on a nice new car and a media room for the house. Most of the people in my neigborhood have been here longer then me, and a good number over 25 years when the houses cost less then $100K. My neighbors on either side of me are both counting down the years on one hand until they pay off their mortgages.

I think that when the RE bubble bursts that it will devestate some people who have not made well thought out financial decissions. The rest of us will continue our lives as before.

[tabs]

I also remember the the RE BUST in 1980.....Interest rates BURIED MANY A BUILDER....with 16% Home Mortgages....yep that was the interest rate on my first home...the Builder bought that down for 2 years.....

Ironically I refied at 13.5% and 2 years later the Lender VOLUNTARILY reduced my interest rate to 10.3/4%....will that ever happen again..I don't think so....