Office Mate: We're making an offer on a $650K house.
Me: I know roughly what you make. Did a rich uncle die?
Office Mate: No but our lender said we can afford it.
Me: How much of your take home pay will go toward your mortgage?
Office Mate: About 60%
Me to my wife: Honey, we're cashing in our lottery ticket and leaving California.
Me to realtor: Is that a realistic price?
Realtor: I sold one just like it for that much last week.
Me to wife: Time to sell.
* - Along with a pile of other reading, it was the Robert Shiller 100 year graph of the relationship between house prices and income [0] that told me trouble was coming. Ultimately, most mortgages and rents are paid out of wage income, and there's only so much blood you can squeeze from a stone.
[0] https://archive.nytimes.com/www.nytimes.com/imagepages/2006/...
US Home Prices 1890-Present: http://www.econ.yale.edu/~shiller/data/Fig3-1.xls
Started reading short seller message boards. Got deep into the weeds with credit default swaps. Found that you could actually see prices for credit default swaps on markit.com. watched priced for BBB- credit default swaps increase dramatically in early 2007. That was the signal that it was over.
Got back in in early 2012 when the loan rate resets from the housing bubble all tapered off.
Moral of the story: in every bubble the money is coming from somewhere. Figuring out where it is coming from will let you predict the big market turn. If you don't know where it's coming from then you probably shouldn't play with bubbles.
As far as the Bay Area goes it appears to be trickle down from FANG stocks buying up VC backed companies and the associated recycling of those proceeds into new ventures. There's also a bit of China money buying up single family homes, but China has been putting steady pressure on all that trying to plug those foreign exchange leaks, so if anything that's waning.
Where's the money for the stock market coming from? It used to be quantatative easing and FED reserve bond buying. I guess the yen carry trade in part and probably lately tax cuts a bit. It's harder to see where the money is coming from in the stock market though because buyers are largely anonymous.
[1].http://www.calculatedriskblog.com/2018/02/new-home-sales-dec...
I would personally add Russia to the mix. The reason is simple: both China and Russia are sources of capital flux, where those with means are funneling funds outside their respective countries.
Because there are, or have been, capital controls in place, those who move money out of their countries are willing to pay a premium for it. Funnily enough, there is a name for the phenomenon where actors with money are willing to pay exorbitant transaction costs in order to move funds from one jurisdictional domain to another.
I took his card and said “sure”. As I closed the door he said “wait”, ran to his car and grabbed a Miami-vice style aluminum briefcase. He opened it up and said “400 thousand dollars for house, see?”
Given that my folks paid like $18k for the house about 8 years earlier, that was pretty amazing. They didn’t take it and sold in the 90s for less. A few years ago it sold for $2.5M and was torn down. The replacement condos sold for about $12M
In retrospect, it's even stranger. I couldn't fathom cold-knocking at a random house and offering the owners a suitcase of money. Double++ bizarre making the pitch to a little boy. That said, we had alot of interesting stories from that house and neighborhood, this one isn't even the strangest!
Like I said, we had an interesting neighborhood... everything from a fugitive Nazi war criminal, to a crazy man with a rocket to mafia people.
There's just something when random people who have no particular interest in investing suddenly are preaching an investment that smells like a bubble - and one close to bursting. It still took a couple of years from there, though.
Maybe it's because the pyramid has nowhere else to go from there.
And of course me pointing to previous real estate downturns was dismissed - it was still viewed as fundamentally impossible for real estate to lose value.
That's because of negative-gearing. Basically, mortgage payments are tax-deductible. So if you have a house and rent it out, then you can take the tax, use it to pay off the mortgage on the house you're renting, and not pay any tax on it at all.
This, naturally, makes investment housing a much better deal than it should be, and discourages selling a house (thereby driving up housing prices, and therefore rent prices, thereby making investment housing more lucrative).
It's broken bullshit. Blame the (main right-wing party) Liberal party.
Sometimes I wonder whether the parties in Australia are named just to screw with Americans - the Liberal party is conservative, and the Labor Party is officially spelled with the American spelling, despite "labour" normally having a U in it, here.
Right now I can’t afford a house and would love to know the conditions that would increase interest rates.
My worry would be that once prices crash two challenges will appear:
1. Once the crash starts there will be tons of attempts to stall the inevitable. It could be months before prices hit a true low point.
2. Credit is going to dry up. Domestic banks will not have the balance sheets to allow for further lending. What loans will be available will be hard to get and more expensive than is "fair".
Which speaks to how difficult it is for consumers to benefit from conservative behavior in times of folly. Unless you save enough to buy discounted assets in cash out-right consumers buying at the bottom of the market are also buying in the context of restricted credit.
For my own situation, me and my wife are buying a house here in Japan. Over here bank's balance sheets are super-healthy and banks are extending large volumes of credit easier than they would in the past. My friends and co-workers got accepted for large home loans at reasonable rates. I have studied the bank balanace sheets as part of my stock investing so I am not worried of us being in a over-credited state. In fact japanese banks home loan load has been decreasing on a percentage basis over time as old bubble era loans get paid off.
Yet it appears to me that Japan is in a phase of expanding home credit. Or atleast expanding home credit to lower/younger quality borrowers in response to fewer traditional borrowers starting families and buying homes.
The net result in Japan is that buying a home is a massive good deal. We were careful with the location and builder but I needed to put no effort to get a loan at an insanely low interest rate.
http://graphics8.nytimes.com/images/2005/06/15/business/arm3...
Also discovered around this time that subprime mortgage didn't mean a mortgage with an interest rate below the prime rate.
I'm at about 30% and it's my only debt.
I've stayed closer to %20 and it's allowed me to support a family of four for 20 years on one income while riding through two employment layoffs during that time.
Also, rather than spending our proceeds from the sale of our home in 2005 I put it back into our new home once the market was near the bottom. The net of all of it was that I was basically able to cut about 18 years off our original 30 year fixed rate mortgage.
Even if I had the money, I don't think I could bring myself to pay 2-3x a sale price from 5 years ago.