[OPE-L] Bay Area Housing Crash Continues, Bubble Pops

From: glevy@PRATT.EDU
Date: Mon Mar 13 2006 - 09:41:31 EST

The bubble may have popped in SF but not nationally. If/When the housing
bubble pops nationally, what consequence will that have for the US
economy?  On different classes and class segments in the US? On different
regions and groups?  On the global capitalist economy?

In solidarity, Jerry

From <http://patrick.net/housing/crash.html>




       1.. Prices disconnected from fundamentals. House prices are far
beyond any historically known relationship to rents or salaries.
Rents are less than half of mortgage payments. Salaries cannot
cover mortgages except in the very short term, by using adjustable
interest-only loans.

        2.. Interest rates going back up. When rates go from 5% to 7%,
that's a 40% increase in the amount of interest a buyer has to
pay. House prices must drop proportionately to compensate.
        82% of recent Bay Area loans are adjustable, not fixed. This means
a big hit to the finances of many owners every time interest rates
go up, and this will only get worse as more adjustable rate
mortgages (ARMs) get adjusted upward.

        3.. A flood of risky "home equity loans". An adjustable-interest
home equity loan is often a serious mistake. These loans do not
have defined limits on interest demands. When the interest rate
adjusts upward, it can double monthly payments.

        4.. Massive job loss. More than 300,000 jobs are gone from Bay
Area since the dot-com bubble popped. This is the worst percentage
job loss in the last 60 years. It's worse than Detroit car
problems or Houston's oil bust. People without jobs do not buy
houses and owners without jobs may lose the house they are in.
Even the threat of losing a job inhibits house purchases. Santa
Clara County posted its fourth straight year of job losses in
2005, so it's not over yet.

        5.. Salary declines. From
http://www.mccallstaffing.com/need/needsal.html we hear that
"salaries have in fact returned to 1997 and 1998 levels." Local
incomes are not even half of what they need to be to sustain
current house prices.

        6.. Population loss. San Francisco continues to lose population at
the fastest rate of any city in the US and most of those are
professional jobs. The problem is not only the dot-com crash, but
also the outsourcing technical jobs to India, which continues at a
frantic pace as corporations realize they can pay an Indian only
20% of what they must pay a similarly qualified employee in the
Bay Area. Fewer people in the Bay Area means less demand for
housing. It recently (Aug 2005) cost $3623 to rent a UHaul from
San Jose to the midwest, but only $1800 to move the other way.
This is because far more people are moving out of the Bay Area
than are moving in.

        7.. Stock market crash. The NASDAQ at about 2000 is still only 40%
of the 5000 it was at the peak of the recent stock market bubble.
The crash in the NASDAQ probably hit the Bay Area harder than
anywhere else because of all the stock held by employees of tech
companies. That money would have been spent on housing, but is now

        8.. Extreme use of leverage. Leverage means using debt to amplify
gain. Most people forget that losses get amplified as well. If a
buyer puts 10% down and the house goes down 10%, he has lost 100%
of his money on paper. If he has to sell due to job loss, he's
bankrupt in the real world. Even a small price decline will
bankrupt buyers with small equity. Buyers foolish enough to buy
with no money down are already bankrupt, but still unaware of the

        9.. Shortage of first-time buyers. According to the California
Association of Realtors, the percentage of Bay Area buyers who
could afford a median-price house in the region plunged from 20
percent in July 2003 to 14 percent in July 2004. Strangely, the
CAR then reported that affordability fell another 4 percent in
2005, yet claims affordability is still at 14%.

        10.. Surplus of speculators. Nationally, 25% of houses bought in
2005 were pure speculation, not houses to live in. It is now
possible to buy a house with 103% financing. The extra 3% is to
cover closing costs, so the buyer needs no money down. All this is
on the unwise assumption that housing will rise ever higher,
covering interest payments through appreciation. Even the National
Association of House Builders admits that "Investor-driven price
appreciation looms over some housing markets."

        11.. Lightbulbs going on in many brains in the Bay Area: "Hey, I
can just go to New Mexico or Oregon, buy a gorgeous house
outright, and comfortably retire on the price difference. My
neighbors just did it, so I'll have friends there too."

        12.. Trouble at Fannie Mae and Freddie Mac. They are now being
forced to tighten up sloppy lending. This means they are not going
to keep buying very low-quality loans from banks, and the total
money available for buying houses is falling.

        13.. The best summary explanation, from Business Week: "Today's
housing prices are predicated on an impossible combination: the
strong growth in income and asset values of a strong economy, plus
the ultra-low rates of a weak economy. Either the economy's
long-term prospects will get worse or rates will rise. In either
scenario, housing will weaken. Caveat emptor."


      that house prices will continue to fall? Real estate related
businesses disagree, because they don't make money if buyers do not
buy. These businesses have a large financial interest in misleading
the public about the foolishness of buying a house now.
        1.. Buyers' agents get nothing if there is no sale, so they want
their clients to wildly overbid, the exact opposite of the buyer's
best interest.
        2.. Mortgage brokers take a percentage of the loan, so they want
buyers to take out the biggest loan possible.
        3.. Appraisers need mortgage brokers for their business, so they
are going to give the appraisals that brokers and agents want to
see, not the truth.
        4.. Banks get origination fees but have been selling most
mortgages, so they take no risk on those loans. They do not care
about the potential bankruptcy of borrowers, so they will lend far
beyond what buyers can afford. Banks sell most loans to Fannie Mae
or Freddie Mac. The conversion of low-quality housing debt into
"high" quality Fannie Mae debt with the implicit backing of the
federal government is the main support for the housing bubble.
That is going to end as Fannie Mae shrinks.
        Even for loans that banks keep, they have a motive to lend beyond
what buyers can afford. Banks designate interest as "income"
whether they receive it or not. As long as borrowers do not
actually default, additional borrower debt is counted as bank
income, and banks can claim higher "earnings". That is going to
end when those borrowers cannot even make the principal payments.

        5.. Newspapers earn money from advertising placed by Realtors®, so
papers have a strong motive to publish the Realtors'® unrealistic
forecasts. The San Jose Mercury News has stopped publishing the
usual colored map showing areas where the median prices have been
up or down. It would be too embarrassing to the Realtors® to show
what's really happening right now.
        6.. Owners themselves do not want to believe they are going to
lose huge amounts of money.
      What are their arguments?

        1.. "There are great tax advantages to owning."
        FALSE. It is now far cheaper to rent a house in the San Francisco
Bay Area than it is to own that same house, even with the
deductibility of mortgage interest figured in. It is possible to
rent a good house for $1800/month. That same house would cost at
least $700,000. Assume 6% interest we can see that a buyer loses
at least $4,936 per month by buying. Renting is a loss of course,
but buying is a much bigger loss.
    Rent:           $1,800
    Monthly Loss:   $1,800

    Property Tax:     $486 ($729 per month at 1.25% before deduction, $486
lost after deduction.)
    Interest:       $2,333 ($3500 per month at 6% before deduction, $2333
lost after deduction.)
    Other Costs:      $450 (Insurance, maintenance, long commute, etc.)
    Principle loss: $1,667 (Modest 3% yearly loss on $700,000. Reality
will be much worse.)
    Monthly Loss:   $4,936

        This is a very conservative estimate of the loss from owning per
month. If you include a realistic decline in house prices, as in
this rent-vs-own calculator, you'll see that owning right now is a
very poor choice.

        Remember that buyers don't deduct interest from income tax; they
deduct interest from taxable income. Interest is paid in real
pre-tax dollars that buyers suffered to earn. That money is really
entirely gone, even if the buyer didn't pay income tax on those
dollars before spending them.

        Buyers do not get interest back at tax time. If a buyer gets an
income tax refund, that's just because he overpaid his taxes,
giving the government an interest-free loan. The rest of us are

        Under current conditions, a renter would be able to live in a
house for 30 years, then buy that $700,000 house outright with the
saved principal payments and have avoided $810,846 in interest
payments. Rent would be only $648,000 over those 30 years, so the
renter comes out at least $162,846 ahead. See an "amortization
table" if you don't believe that interest will cost more than the
house. This doesn't even count the huge losses the owner will
suffer as the value of his house falls year after year for the
next decade or more, just as in Japan, nor property taxes,
insurance, and maintenance.

        There is no need to wait 30 years to buy a house. As this crash
accelerates, prices will fall to the point where it is cheaper to
buy than to rent, though that could take five years or more.

        If you don't own a house but want to live in one, your choice now
is to rent a house or rent money to buy a house. To rent money is
to take out a loan. A mortgage is a money-rental agreement. House
renters take no risk at all, but money-renting owners take on the
huge risk of falling house prices, as well as all the costs of
repairs, insurance, property taxes, etc. It is much cheaper to
rent the house than to rent the money.

        2.. "A rental house provides good income."
        FALSE. Rental houses provide very poor income in the Bay Area and
certainly cannot cover mortgage payments. A $1,000,000 house can
be rented out for 25K maximum per year after expenses. The return
is therefore 2.5% with zero liquidity and a huge risk of loss.
        If you actually have a million dollars, you can get 4.5% with no
risk, no work, and no state income tax by buying a US Treasury
Bond. And your money will be liquid and secure.

        3.. "OK, owning is a loss in monthly cash flow, but appreciation
will make up for it."
        FALSE. Appreciation is negative. Prices are going down, which just
adds insult to the monthly injury of crushing mortgage payments.

        4.. "House prices don't fall to zero like stock prices, so it's
safer to invest in real estate."
        FALSE. House prices do not fall to zero, but the value of your
equity in a house can easily fall to zero, and then way past zero
into the red. Even a fall of only 10% completely wipes out
everyone who has only 10% equity in their house. This means that
house price crashes are actually worse than stock crashes. Most
people have most of their money in their house, and that money is
highly leveraged.

        5.. "We know it will be a soft landing, since it says so in the
        FALSE. Prices could fall off a cliff. No one knows exactly what
will happen, but the risk of an massive crash in prices is severe.
As Yale professor Robert Shiller has pointed out, this housing
bubble is the biggest bubble in history, ever. Predictions of a
"soft landing" are just more manipulation of buyer emotions, to
get them to buy even while prices are falling.
        Most newspaper articles on housing are not news at all. They are
advertisements that are disguised to look like news. They quote
heavily from people like Realtors®, whose income depends on
separating you from your money. Their purpose is not to inform,
but rather to get you to buy.

        6.. "If you buy, at least you have a house, but if you rent, you
end up with nothing."
        FALSE. Renters in the Bay Area end up with much more money, while
living in the same quality house as an owner. At the end of 30
years, a renter would have enough principal saved to buy the $700K
house mentioned above and would have spent $162,846 less on rent
than he would have spent in interest payments. And he would have
lived in an equivalent house all that time. Owners frequently end
up with nothing because they lose the house to foreclosure.

        7.. "Prices have been driven by supply and demand."
        FALSE. Supply is increasing rapidly as building continues, and
demand is falling as the population of the Bay Area decreases and
the salaries of those who remain decreases. Prices have been
driven by low interest rates and increasingly risky loans. The
dramatic drop in rents and widespread rental vacancies prove that
demand for housing is actually much lower now than a few years
        The www.census.gov site has data for Santa Clara County for the
years 2000-2003 which shows that the number of housing units went
up at the same time that the population decreased:

year  units   people
2000 580868 / 1686474 = 0.344 housing units per person
2001 587013 / 1692299 = 0.346
2002 592494 / 1677426 = 0.353
2003 596526 / 1678421 = 0.355

        So housing supply in Santa Clara County increased 3% per person
during those years. There is an oversupply compared to a few years
ago. In a sane market, prices should fall 3% to compensate for the
extra supply of housing.
        At a national level, there is a similar story in the years 2000 to

2000 115.9M / 281M = 0.412 housing units per person
2005 124.6M / 295M = 0.422

        At a national level, there is 2.4% more housing per person now
than in 2000. So national prices should have fallen as well.
        Banks caculated that risky loans are offset by rising prices,
allowing them to recover their money from bad borrowers through
foreclosure. Now that prices are falling, those risky loans cannot
be justified. If the borrower does not pay, the sale price of the
house will not cover the loan. Banks now have a real incentive to
improve lending standards, and that will lower house prices more
because fewer people will qualify for loans.

        8.. "Nobody is making land."
        TRUE, but they are making houses at a record rate, which is
increasing supply dramatically at a time when new houses are not
needed. We have the highest rental vacancy rates since the 1950's.

        9.. "There's an under-supply of housing. That's why prices will
        FALSE. There is a large oversupply of housing. To repeat: builders
are making houses at a record rate, which is increasing supply
dramatically at a time when new houses are not needed. The Bay
Area has the highest rental vacancy rates since the 1950's.

        10.. "Population increase will fuel housing price increases."
        FALSE. The Bay Area is losing population the fastest of any area
in the US right now - worse than Buffalo, worse than Detroit.
Immigration won't change this because jobs are emigrating even
faster. Rents are falling in part because so many recent
immigrants are leaving, with some going back to China because
opportunities are so much better there.
        Nationally, there is going to be a huge glut of housing as old
baby-boomers sell their houses to use the cash for retirement,
putting 20% of houses onto the market for that reason alone. An
additional 25% of houses are owned by speculators, who will soon
sell because they are losing money. Birth rates are declining in
all industrialized countries, with the US birth rate barely
replacing the citizens who die.

        11.. "As a renter, you have no opportunity to build equity."
        FALSE. Renters are actually in a better position to build equity
          a.. Owners are losing every month on a cash flow basis. The tax
deduction does not come close to making owning competitive with
          b.. Owers are losing principal in a leveraged way as prices
decline. A 20% decline completely wipes out all the equity of
"owners" who actually own only 20% of their house.
          c.. Owers must pay taxes simply to own a house. That is not true
of stocks, bonds, or any other asset that can build equity. Only
houses are such a guaranteed drain on cash.
          d.. You must insure a house, but not most other investments.
          e.. You must pay to repair a house, but not a stock or a bond.

        12.. "If you rent you are a buyer. You are just buying it for
someone else."
        FALSE. It may be true that rent covers mortgage payments in other
places, but not in the Bay Area. No one buys with the intention to
rent out in the Bay Area because that's not viable. The owner is
generously subsidizing the renter, a wonderful thing for renters
during this crash.

        13.. "If you don't own, you'll live in a dump in a bad neighborhood."
        FALSE. For the any given monthly payment, you can rent a far
better house than you can buy. Renters live better, not worse. All
the best neighborhoods have rental vacancies. There are downsides
to renting, but since there are thousands of vacant rentals, you
can take your pick and be quite happy renting during the crash.
        You may worry about being forced to move, but the law says the
landlord has to offer you a one year lease at a minimum, and
they'll probably be delighted to offer you a two year lease and
give you a discount for that. Other people want the mobility that
renting affords. Renters can usually get out of a lease and move
anywhere they want within one month, with no real estate

        It is far easier and cheaper to rent a house in a good school
district in the Bay Area than to buy a house in the same place.

        The biggest upside is hardly ever mentioned: renters can choose a
short commute by living very close to work or to the train line.
An extra two hours every day of free time not wasted commuting is
the best bonus you can ever get.

        14.. "Owners can change their houses to suit their tastes."
        FALSE. Even single family detached housing is often restricted by
CC&Rs and House Owner's Associations (HOAs). Imagine having to get
the approval of some picky neighbor on the "Architectural Review
Board" every time you want to change the color of your trim. Yet
that's how most houses are sold these days.
        In California, the HOA can and will foreclose on your house
without a judicial hearing. They can fine you $100/day for leaving
your garage door open, and then take your house away if you refuse
to pay. There's a good HOA blog here.

        15.. "People buy a house for the long term, so things can't crash
        FALSE. People are now buying houses for the very short term. This
is how they justify interest-only adjustable mortgages to
themselves. The thinking is, "I will own this just long enough to
make a profit, maybe a year or two, so there's no need to get a
long term loan at a higher interest rate." The distinction between
the long-term owner and the short-term flipper has gone away.

        16.. "If and when the market goes south, you can walk away."
        FALSE. If you have a single loan with just the house as
collateral, it may be a "non-recourse" loan, meaning you could
indeed walk and not lose anything other than your house and any
equity in it (along with your credit record). But if you refinance
or take a "home equity loan", the new loan is probably a recourse
loan, and the bank can get very aggressive, not to mention what
the IRS can do. A reader who lived through the 1989 housing crash
in LA pointed out the following nasty situation that can happen:
          a.. Let's say you buy a house for $600,000, with a $500,000
          b.. Then the house drops in value to $400,000, you lose your
job, or otherwise must move.
          c.. If you can't make your payments, the bank forecloses on you
and nets $350,000 on the sale of your house.
          d.. The bank's $150,000 loss on the mortgage is "forgiveness of
debt" in the eyes of the IRS, and effectively becomes $150,000
of reportable income you must pay tax on.
        It is true that buyers who put zero down and have nothing invested
in the house are much more likely to walk away. The large number
of new uninvested buyers increases the risk of a horrifying crash
in prices rather than a "soft landing".

        17.. "The house down the street sold for 25% over asking, and that
proves the market is still hot."
        FALSE. Realtors® try to create the false impression of a hot
market by deliberately "underpricing" a house. Say a seller's
agent knows that house will probably go for $500,000. He places
ads asking $400,000 instead. (Bait-and-switch is illegal when
selling appliances, but apparently not when selling houses.) The
goal is to first of all prevent buyers from knowing what a
realistic price is, and secondly to get buyers to blindly bid
against each other. There are four players in this game and three
of them are against the buyer: the seller, the seller's agent, and
the buyer's agent. Yes, the buyer's own agent works against the
buyer, because there is no commission if there is no sale. There's
a saying in Las Vegas: "There's a patsy in every game, and if you
don't know who the patsy is, you're it."
        If you want to prove your agent is not on your side, ask to see
houses "for sale by owner" or houses listed by discount brokers.

        18.. "I was lucky that my Realtor® told me to increase my bid by
$100,000. Otherwise I would have lost, because my Realtor® knew
about a secret bid $90,000 above mine."
        FALSE. Your agent gets paid nothing if you don't buy the house,
and he gets more if you waste more money by bidding too high.
Those are two big motives to invent false bids.

        19.. "The MLS proves things are great."
        FALSE. All sorts of funny things happen in the MLS (Multiple
Listing Service, a private database controlled by real estate
agents). For example, if a house just doesn't sell, Realtors® can
remove its record in the MLS so that you cannot see that it failed
to sell. Then the house comes back on the market at a lower price,
and unsuspecting buyers think it's on the market for the first
time. Their Realtor® can "prove" it's a new listing by showing the
MLS record to the buyer: "See, here's the listing date, just came
on the market. Better hurry and buy it, this one is hot."
        There is nobody checking that the MLS shows true selling prices.
The MLS prices are often just wrong.

        Furthermore, the MLS will not list any house for sale by owner or
for sale through a discount broker, except perhaps those listed by
Help u Sell. Those cheaper prices are just not in the system,
because if you save money, they lose money.

        20.. "The Bay Area is a special place that will always be expensive."
        TRUE, but it was just as special ten years ago, so that does not
account for the current housing bubble. Even at half of current
prices, it will still be expensive.
        Many people are confused about the difference between high prices
and increasing prices. Prices are high, but they are not
increasing. They are falling. This makes housing a bad investment.

        21.. "There's always someone predicting a Bay Area real estate
        TRUE, yet irrelevant. There are very real crashes every decade or
so. Even a broken clock is right twice a day.

        22.. "But housing was high when interest rates were 21%."
        FALSE. Inflation was much higher then, so fixed debt was easier to
pay off with increasing salaries. Now we have stagnant salaries
and adjustible mortgages.
        House price increases exactly mirror the increase in mortgage
debt. According to the Washington Times: "Consumers have doubled
their mortgage debt from $3.5 trillion to $7 trillion since 1996,
borrowing and spending profusely on the assumption that house
prices will keep rising." So the increase in house prices is not
backed by assets. It's backed by debt. The debt in turn is backed
by the houses. It's just smoke and mirrors.

        23.. "My dad made money on his house, and it will work for me too."
        FALSE. Your dad bought his house when houses were cheap compared
to salaries, maybe 3 or 4 times annual salaries. Go ask him.
Things are different now. Here is a chart of median house price vs
median income in Palo Alto:
Year  Median House Price    Median Income   Multiple
1980        148900              24743        6.0
1990        457800              55333        8.3
2000        910000              90377       10.0

        Most bankers use a multiple of 3 as a "safe" price to income
ratio. We are well beyond the danger zone, into the twilight zone.
Another rule of thumb is that a fair house price is between 100
and 200 times the monthly rent. If a house rents for $2000 per
month, then a fair price is from $200,000 to $400,000.

        24.. "The government will make sure housing prices don't fall,
because all the powerful people in the government have houses and
want to keep values up."
        FALSE. There have been many local crashes, and the government
can't stop them. Nor would they necessarily want to; the current
Republican administration would probably be happy to see blue
states like California, New York, and Massachusetts crash and
burn, and those states are where the worst bubbles are.

        25.. "Look, housing continued to rise after the dot-com crash, so
it will always rise."
        FALSE, consider the turkey in the farmer's barnyard. He thinks the
farmer will always come feed him and not ask for anything. Then
Thanksgiving comes. Whack. Past performance is no indication of
future results.

        26.. "Rent can go up, but a 30-year fixed mortgage payment cannot."
        TRUE, but irrelevant. House owners lose even with a fixed
mortgage, because the price of a house falls as interest rates go
up. Most people want to sell within 7 years of moving in, and many
have to sell because of job loss, illness, or divorce. No one can
afford what the owner paid for it, so the owner has to take a
large loss. Renting it out will not come close to covering the
mortgage. Bay Area rents have fallen 23% in the last 4 years.

        27.. "You have to live somewhere."
        TRUE, but that doesn't mean you should waste your life savings on
a poor investment. You can live in the same kind of house by
renting during the crash. A renter could save hundreds of
thousands of dollars, not only by paying less every month, but by
avoiding the devastating loss of his downpayment. In fact, it's
currently cheaper to live in a nice hotel in most parts of the US
than it is to make mortgage payments in the Bay Area.

        28.. "Newspaper articles prove prices are going up."
        FALSE. The numbers in the papers are not complete and have murky
origins. Those prices are "estimated" from the county transfer tax
and making that tax public record is optional. A buyer who does
not want you to see how little he paid has only to ask to put the
transfer tax on the back of the deed and it will not show up on
computer searches of the deed, which show only the front. Others
voluntarily pay more tax than they have to, in order to inflate
the apparent price to fool the next buyer. At a tax rate of about
$1 per thousand of sale price, as in San Mateo county, you have to
pay only $100 extra tax to make your purchase price look $100,000
higher. Another common occurrence is for the buyer to get a large
cash payment back from the seller. So the house price looks high
in the paper, but in reality the buyer got a huge rebate.
        Even though you can in theory go to your county building and get
selling price information, in reality they will give it to you in
a painfully slow and inconvenient way. For example, in Redwood
City's county building there are PC's where you can look at data
for any particular house, but you cannot print, you cannot save to
a floppy disk, you cannot email data out. All you can do is write
things down manually, one at a time. And that's how real estate
interests like it. Your elected representatives are serving them,
not you. Please vote against County Clerk Warren Slocum in San
Mateo County unless he fixes the Redwood City computers to allow
you to save data.

        29.. "My appraisal proves what my house is worth."
        FALSE. "An appraisal in its typical residential real estate form
is little more than a comparative analysis conducted by someone
with no skin in the game offering confirmation that other lemmings
are paying too much for their houses as well." -from an article on
        Anyway, as transaction volumes decline, the first few low sales
will have a large and sudden impact on appraisals.

        30.. "If one house sells for a million dollars, a million houses
are worth a trillion dollars!"
        FALSE. If all of those million houses were all on the market they
would sell for far less. Less than 5% of all existing houses were
sold last year. The other 95% are merely assuming they can get the
same prices.

        31.. "It's not a house, it's a home."
        FALSE. It's a house. Wherever one lives is home, be it apartment,
condo, or house. Calling a house a "home" is a manipulation of
your emotions for profit.
        Also, Realtor® is a commercial term, not a real word. Note the "®"

        32.. "If you don't buy now, you'll never get another chance."
        FALSE. This argument was also popular more than a century ago in
1889 in Los Angeles, just before a huge crash. There are always
sellers and there are always buyers. Prices are always corrected
when they get beyond what buyers can pay. In fact, they're being
corrected right now.

        33.. "Property in the Bay Area is a luxury good, and so will be
less affected by economic downturns."
        FALSE. 82% of last year's Bay Area mortgages were ARMs, and ARM
loans are not taken out by the rich. People on the border of
bankruptcy take out ARMs because they can't afford fixed rate
loans. The rich don't have loans at all.

        34.. "Housing will be permanently higher since downpayments are
now obsolete."
        FALSE. The first big wave of default will cause downpayments to
suddenly seem like a good idea again.

        35.. "House ownership is at a record high, proving things are
        FALSE. The percentage of their house that most Americans actually
own is at a record low, not a high. We do have a record number of
people who have title to a house because they have dangerous
levels of mortgage debt, but that is no cause to celebrate.

        36.. "Long term rates are still at historic lows!"
        TRUE, but irrelevant. Most new mortgages and refinancings are now
short term, and those will definitely be affected by rising short
term rates.

        37.. "The limited land in the Bay Area means prices will always go
        FALSE. Japan has a very severe land shortage, but that hasn't
stopped prices from falling for 14 years straight. Prices there
are now at the same level they were 23 years ago. If we really had
a housing shortage, rents would be going up, but they're going
down instead.

        38.. "It would take another 911 terrorist attack or a major
earthquake that wipes out this area in order for the price to fall
by 50%."
        FALSE. Even with a 50% decline in prices to $350,000 or so, the
median price in the Bay Area will still be roughly double the
median price in most of America, and the median Bay Area household
income of about $70,000 will still not be sufficient to buy a
house. So a 50% decline is well justified by the fundamentals.

        39.. "Housing is an excellent hedge against inflation, so you
should buy now anyway."
        FALSE. Interest rates go up with inflation, and higher interest
will be the last straw for ARM mortgages in the Bay Area. Their
defaults and foreclosures will drive down the cost of housing for
everyone else around here. Remember that 82% of recent Bay Area
mortgages were adjustable. There is little chance that salaries of
ARM owners can keep up with inflation because of two billion
people in India and China who would be happy to do their jobs for
much less money.

        40.. "Houses always increase in value in the long run."
        FALSE. House values are actually constant. Adjusted for inflation,
prices in Holland, for example, rose less than one quarter of one
percent annually in the 350 years since their tulip bubble. Warren
Buffett and Charles Schwab have both pointed out that houses don't
produce anything. They do not increase in intrinsic value. Unless
there's a bubble, house prices simply reflect current salaries and
interest rates. Consider a 100 year old house. Its value in
sheltering you is exactly the same as it was 100 years ago. It did
not increase in value at all. It did not spontaneously get bigger,
or renovate itself. Quite the opposite - it drained cash from its
owners for 100 years of maintenance and taxes. Its price went up
about as much as salaries went up.
        My grandmother always used to complain about the cost of milk.
"Why, when I was a girl, a gallon of milk cost a dime! Just look
at how much people are overcharging for milk now." I asked her how
much people got paid back then. "Oh, about $15 a week", came the
reply. Hmmm, sounds very much like the reasoning people use now
when they talk about how much their father's house appreciated "in
the long run."

        41.. "Maybe we should just accept that we missed out on a great
opportunity to get into the real estate in the past N years."
        FALSE. Did we all miss out on a great opportunity to get into the
stock of pets.com or other Internet companies with no business
model? The question is what is likely to happen in the next few
years according to fundamental economics. The last guy to buy into
the bubble will get hurt the most.

        42.. "I just want to own my own house."
        TRUE, most people do and that's fine. Buyers will get their chance
when housing costs half as much and they have saved a fortune by
renting. House ownership is great - unless you ruin your life
paying for it.


      If you own, consider selling so can actually keep some of that funny
money that appeared out of thin air. It would be a pity to watch it
vaporize back into thin air. There is no real profit until you sell.

      If you want to buy, look around and see that house prices are
falling. Why hurry to buy now? Save your cash and buy for much less
in the future. Find a nice cheap rental, sit back, and enjoy the
show till then.

          Comments? Mail p@patrick.net. Please send me good links about
the housing bubble and I'll include them here. I prefer links
that do not require any registration.

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