When was the last time you read an article like this? You might remember commentary on this same book a few weeks back by housing cheerleader Warren Boroson (who needed to resort to insult to make his point). Just more examples of the brisk changes in psychology. This piece is by Paul Farrell of Marketwatch.
Speaking truth or crying ‘wolf’?
Back during the ’70s recession I was a real estate expert with Morgan Stanley. We helped banks and REITs work out billions of loser portfolios, reorganize, file bankruptcy, even advised the U.S. Dept of Housing & Urban Development on the collapsed Federal New Towns program. I’ve worked for developers and mortgage bankers, got degrees in architecture and city planning, taught commercial real estate at Cornell University.
But oddly, like the rest of America, most of the time I don’t think about the housing bubble that’s about to pop. We ignore the coming storm.
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My files are full of warnings from America’s top economists predicting a housing market collapse and a widespread global disaster: Gary Shilling, Bill Gross, Jeremy Grantham, Robert Shiller, Robert Rubin and others take exception to the deceptive happy-talk of self-serving spinmeisters in Washington, Wall Street, realty brokers and homebuilders.
Lately, powerful voices are challenging the happy-talk. In his latest “Investment Outlook: The Gang That Couldn’t Shoot Straight” Pimco’s Bill Gross takes direct aim at President Bush’s Economic Report prepared by ex-CEA boss and now Fed Chairman Ben Bernanke. He bluntly accuses them of outright lying: “It’s not so much that the report was a compilation of untruths or even half-truths. It’s just that it failed to tell the truth,” hiding the fact that we have “borrowed from the future to pay for today’s party.”
The party’s about over. Economist Gary Shilling recently wrote in Forbes: “The current housing weakness will develop into a full-scale rout … It’s clearly a bubble and is nationwide … The house price collapse will induce a painful recession that will send U.S. stocks into a tailspin … China will suffer a hard landing … and weakness in the U.S. and China will spread worldwide.”
Unfortunately, bubble warnings are routinely dismissed. Our brains can’t handle all the bad news. Besides we’ve been brainwashed into short-term thinkers, incapable of long-term planning. Witness the collective denial and paralysis toward mounting deficits from out-of-control federal budgets, foreign trade, war debt, state, municipal and consumer debt, under-funded pensions, Social Security and Medicare shortfalls.
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For example, assume you live in one of America’s top 40 metro areas. You bought last year for $500,000 with $450,000 in mortgages. If the market drops just 10%, your equity’s gone.
And if it drops the predicted 47.2%, your home’s worth $250,000, you really are in trouble. If you lose a job, or suddenly get hit with extraordinary expenses, or just can’t make tax and mortgage payments, or otherwise forced to sell, you could be wiped out under the tough new bankruptcy laws.
So please read Talbott’s book closely: Is your home is at risk? Then quickly decide whether you can hang on in a housing collapse, a stock market bear and another long recession. And if not, consider taking his advice to sell now.
Caveat Emptor!
Grim
Great read.
When you hearabout people spending 55% of their total income on their mortgage payment, you know somethings f^%@#ed up.
-Richie
As property taxes continue to increase and cost of daily living continues upward, many people are finding themselves struggling.
Incomes for the average person has not kept up with these increases.
If you are biddding on a house at these inflated prices, please do yourself a favor and factor in increasing expenses.
Bottomline is that house prices are to high. do not get stuck in a bad situation.
And if it drops the predicted 47.2%, your home’s worth $250,000
Who is predicting a 47% drop?
Richie said:
55% of their total income
Anonymous said:
property taxes continue to increase and cost of daily living continues upward.
I find it interesting that on Sunday’s Open discussion, quite a few people said they were looking in the range of 500K to 750K.
Who can really afford this range? 500K with 20 % down leaves you a 400K mortgage. It was a few years ago that a 250K mortgage was termed Jumbo loan.
A 400K loan? What do people have to make to afford that?
I certainly am not saying that no one can afford a 400K loan. But, seeing that many people looking in that range made me wonder people are doing really well in Northern NJ.
Or not. And we just think that we can afford those price because we did not really sit down and crunch the numbers before declaring affordibilty?
when you take a 400k loan ,, heart attacks increase. unless your really well off.
I’ve noticed Hudson City Saving’s in addition to other lenders prominently advertise “40 year mortgages” in Sunday’s Bergen Record real estate section. No bank is the least bit concerned with how much and to who they lend to.
You can hardly blame politicians for not putting in print/speeches: “there’s a pending financial disaster for millions of over-leveraged Americans.”
Doing so, would virtually guarantee it occurrs.
“A 400K loan? What do people have to make to afford that?”
We live in one of the richest areas of the country, due to proximity to NY City jobs.
But houses are still way over-priced…
The past 6 or 7 years have completely destroyed our sense of value and the worth of a dollar when it comes to real estate. It’s often hard for us to think any other way, simply because any historical references have been so drastically skewed.
grim
Grim:
People have become desensitized, brain-washed sheep.
I just ordered Talbott’s book.
This next question is a bit off the post topic, but I wonder how desperate or urgent selling a house can be? I am interested in one house that is for sale now; it orginally listed for 500,000 something, and is now at $485,000. I honestly believe it is maybe worth $350,000. Maybe! The present owners inherited it, or acquired it fairly cheaply from a relative, but put it up for sale a few years later and bought a a house for $750,000 in the same town. I imagine they thought they would sell this one fairly quickly, but it has been up for sale for about 6 months. Do you think they would ever want to get rid of it badly enough that they would take 350? Or am I dreaming?
“Do you think they would ever want to get rid of it badly enough that they would take 350? Or am I dreaming?”
Depends on the location, lot size, condition, neighborhood, and seller’s state of mind.
Did you run some comps from domania.com?
Is the land valuable enough that the house can be torn down and a new one built?
What is the MLS number of the house in Maplewood?
grim
you’d really have to be insane to pay today’s RE asking prices. seriously. i don’t care if you have the money or not. i looked at a 3 br/2.5 ba townhouse 2 years ago right on the western border of Montclair i could’ve had for $435k with $11,600 in taxes. it was nice and in a gated community right up against an old quarry. didn’t buy for a number of reasons. alas today the same unit is selling for $625k. it was high then and absurdly high now. even with us living in the richest area of the country where are all these people coming from that routinely drop money on these places? even if you could muster $125k for a downpayment your mortgage is $500k or $3100 (at 6.25%), taxes are almost $1000 and maintenance is $350 for a total monthly outlay of $4450. huh?
this is why i believe the correction on the downside is going to be very ugly. the interest rate increases and overall drying up of excess liquidity has yet to work its way into the system. $199 a month new car leases are still commonplace. the foreign central banks continue to supplement the american citizen to drive their export led economies. something’s gotta give and i think you’re going to see the wheels really start to come off starting in 2007. 2006 it’s still party time whether people want to admit it or not. sure inventory is building up but the RE bull market is still too fresh for anyone to pay a downside any mind. it’s coming folks, so please if you have to buy make sure it’s something you can COMFORTABLY afford.
Grim
Thanks again for helping us keep our feet on the ground when it comes to real estate. People who are thinking about buying a home in this market should STOP!
I agree that perceived “value” has become ridiculously skewed. For a reality check please ask your realtor to run comps that sold for 600-700K as few as three years ago.
What seem like a bargain now will still be an overpayment in two years.
I was speaking to a neighbor about a house that sold across the street at over double what I paid four years ago. We started getting on the subject of I/O ARMS and she had no idea that they were so prevelant. The more these numbers become mainstreamed- the more the rest of the country will understand the bubble and panic will ensue.
Anyobody check out these articles in the weekend WSJ?? “Home Equity Loans Level Off” on page A6 or the article on the front page “Millions Are Facing Monthly Squeeze On House Payments”.
Could it be that word is getting out and the rest of the country will soon have to face the reality of the impending housing crisis?
richie,
There are people spending much more than 55% of their combined income. Some friends of mine bought a house in Highlands for $450K (a small 1200 sqf shade) – they need his salary and 1/3 of hers to pay the mortgage and $6500 in taxes. They both expected to get raises when they were buying – it’s been 2 years already.
Grim “The past 6 or 7 years… when it comes to real estate.”
It’s not only in RE. People lost a perspective when it comes to value of almost everything. Last 10 years, despite 2000/01 market crash/slow down, were pretty good to people in a tri-state area. People are spending some much and so fast as if they had money making machines in their basements – they think they are a government – they are going to print more money if/when they need it. We are on collision course with reality – and I’m afraid it will be a “total loss” for some.
Trroll- I’ve got a story to top your poor friends……it’s all relative.
It seems there are a lot of people trying to live up to the image of a Wall St lifestyle. Many wannabes living in the “elite” towns leverage themselves to ridiculous levels just to maintain the perception of wealth. Try an I/O loan on $2.1 MM, putting down 500K of equity you built on your first house to afford that mansion for $2.6MM. Thats $144K in interest ONLY a year! (yes we personally know two couples in this situation) If you are genuinely rich you wouldn’t be getting an I/O ten year ARM on $2MM. Now look next door and remind yourself that your neighbor paid $1.5 MM for their comparable house four years ago. My point is, the skewed value of money is happening on all levels no matter what your income. Now let’s say the housing crash does slow down or more likely cripple the rest of the economy- how many $million dollar bonus years can these people expect? You might get a 7 bedroom in Chatham, Short Hills or Summit for your 500K in only a few years! It is going to be very sad for these few who stand to lose a lifetime of earnings.
How stupid do people who participate in bidding wars get? This stupid:
7 Midhurst Rd, Short Hills
Closed: Jul 2005 @ $1,050,000
Lot Size: 6,970
Year Built: 1926
Assessed Value: $602,000
8 Midhurst Rd, Short Hills
Closed: Jun 2005 @ $775,000
Lot Size: 6,970
Year Built: 1927
Assessed Value: $607,300
There are two neighboring homes, same lot size, assessed at the same value, selling one month apart.
Someone threw away $275,000 to win a bidding war…
To anonymous who just ordered Talbott’s book: Re: paying $350k for house that was originally asking $500k…I give you my story I bought a house in late 96′ for $345,000, the seller would call me on a regular basis to practically beg me to not back out etc…very strange. After I closed for $345k, I found out that the house was originally listed for $550k in 93′ and after 3 years of price reductions, sold for the $345k. ps: this transpired on the “East Hill” of Englewood, NJ the home of the North East Hollywood types.
there’s a good argument that the premium for living in the most expensive areas should widen given the increasing income inequality of the past 10-15 yrs. While most American’s income has been flat to slightly negative, the top 1% are making a lot more.
this is why I think demographics are so key. in many of the towns we’re talking about, a large percentage of the households are in the top 1% of income.
I’m not saying that some places are immune to the bubble, only that you’ve got to look at local incomes to get a sense of how inflated prices are.
apologies if this is an obvious point