Thursday, December 15, 2005

Was I sleeping during this part of "ECON 101"???

I'm not one that usually posts articles from other places, but this article has waaaay too many priceless quotes in it, to NOT share with you.

The logic behind some of these quotes come close to topping the logic of the "we count our equity loans as income" quote I wrote about.

The problem is, I don't even know where to start with all of these choice quotes...but here goes.

The article I am referring to is from the San Diego Union Tribune ( titled "Pros see no doom, gloom in slowdown"

Here goes....let's look at this economic wisdom first:

Despite rising interest rates, a growing for-sale inventory and a slowing sales pace, the county's shortage of housing will prevent prices from dropping steeply, speakers asserted.

"It's Economics 101," said Leslie Appleton-Young, chief economist for the California Association of Realtors. "It's demand and supply."

I guess I slept through the part where RISING inventory and SLOWING sales means that there is a "shortage" and that prices won't drop. In the economics class I took in college, they said that supplies grew as demand went down...not the other way around. Let's not even take into account the fact that rates ARE rising, and as you can see in the post below this one, it does affect the amount of money you can borrow.

Let's see what else we can find:

The fundamentals of the housing economy remain sound, said Louis A. Galuppo, director of USD's Burnham-Moores Center for Real Estate. "We may see a decline in sales but not prices."

Again, inventories have grown dramatically the past several months, and there are decreased sales. In the class I took, that means that prices will have to come down so that an equilibrium level is reached. You cannot continue to have inventories grow with sales slowing, and NOT have prices go down.

Another reason homeowners are staying put is Proposition 13, the landmark property-tax-cutting initiative. Passed in 1978, the measure limits tax increases on properties until they are sold. Many owners are reluctant to sell and give up their tax breaks, Appleton-Young said. If they buy a new home at a higher price, "they look at doubling and tripling their taxes."

So let me get this straight, the people that own a home already will be reluctant to "move up" because of higher property taxes. So...does that mean the property taxes aren't just as high if you don't already own a home?!?!? $500 to $1000 bucks a month in property taxes is big increase no matter if you own already or not. BUT, by looking at the rising inventories, it seems that many homeowners aren't so reluctant so sell, but what do I know. See this site for inventory tracking of various "bubble areas" and see for yourself.

Next we have one of my favorite topics...the use of "creative" financing to help borrowers 'afford' the high housing prices. Let's see what the 'experts' say:

Several speakers at the conference addressed the use of new lending products that had enabled middle-wage consumers to attain financing for high-priced homes. Many "creative" mortgage loans have low, introductory payments that adjust upward with prevailing interest rates after several years. In general, they shift risk from the lender to the borrower.

Anfuso said fears that such loans would trigger defaults were misplaced. Many borrowers "are going up the wage scale" and will be able to handle rising payments, he said.

Look at my post below. I know the numbers are for fixed rate loans, but just look at the difference in payments at 1% and 2% increases. I just have a hard time believing that a lot of people will be making an extra $1000 a month over the next 1-3 years to be able to afford the jump in their payments. If you look at California Association of Realtors report numbers, they say that:

"California households, with a median household income of $53,840, are $70,480 short of the $124,320 qualifying income needed to purchase a median-priced home at $530,430 in California..."

Do you really think that most people are going to have their incomes more than double in the next few years to keep up with adjusting ARMs and rising interest rates??? These people couldn't afford fixed rates when they were at all time historic lows, what are they going to do when their adjustible rates and fixed rates are higher?!?!?

Here is a prediction from one of the 'experts':

In her forecast, Appleton-Young predicted a 2 percent statewide decrease in single-family home resales next year. She anticipates a 10 percent statewide increase in the cost of a median-priced resale home.

So there you have it. Sales are going to decrease 2%, but prices are going to increase 10%. With the inventories growing like they are, the cost to borrow money increasing, and affordability at an all time low, I don't see how property can appreciate at 10%.

I'll leave you with this final comment that should put your minds to rest:

Appleton-Young called California real estate a market in transition. "I think we're in for a soft landing," she said.

Well, there you have it. The experts say there is nothing to worry about. I tend to think differently, but what do I know. I just look at the math behind what they are saying and make my own conclusions.

Either way, we will have to revisit this at a later date to see who is right. Who do you believe, and if you had to place a bet, where whould you put YOUR money, on their analysis, or mine?!?!?



Blogger Silver Lightning said...

You see it's different this time. :>)With more idiots in the market they're proclaiming a new era that they've discovered. Yeah right. These bubbleheads will be out of business soon. Sorry the old dogs will survive this nonsense and be patiently waiting to capture sound investments in the future. Until then boycott the bubble. I fought the FED before and lost and it won't happen again.

12/15/2005 11:59 AM  
Blogger Metroplexual said...

I thought it was supply and demand?

Great picture! I think that was my micro class only they seem a little more lively.

These are just death throes, they are in denial. Many of the other experts seem to be saying flat sales and prices or worse. Hell businessweek has the after the bubble as a cover for crying out loud.

12/15/2005 1:03 PM  
Blogger Econ_101 said...

I'd love to see the much bandied about term "soft landing" defined somewhere. It sounds pretty tame. I guess it means something like prices will flatten or rise at the rate of inflation.

At this point, I think such an outcome is almost (logically) impossible. Here's why:

Let's say price appreciation did fall to 0 (the best case), and many people changed their expectations of future gains from 20% returns to 0%. What would be the result? A sharp drop in prices. Why?

Because it is the price appreciation itself that is creating much of the demand.

Said another way, it is the virtuous (or not) feedback of higher prices increasing demand leading to higher prices leading to more demand. So if the expectations of higher prices is reset in the minds of many market participants (the "soft landing"), the feedback cycle breaks down and demand decreases.

Which participants are buying based on the expectation of recent high returns. Many, but to name a few:

1. Any short term (flipper). The only way flipping can work is if prices are appreciating quickly. With the high transaction costs in RE, flipping makes no sense in a "soft landing" world.

2. people who buy more house than they need or would otherwise do. This is sort of like people putting more of their portfolio in mutual fund sectors that have performed well recently. As long as the expectation of higher returns (vis-a-vis other investment opportunities) exists, this makes sense. If expected returns decrease, it no longer makes sense to overinvest in an asset class.

3. Buyers who fear being frozen out of the market unless they buy now, before prices keep them out of the market. If you can barely get in now and expect prices to climb at 20% for the next 5 years (which Shiller points out many LA residents actually believe), then buying a crappy house at an overinflated price makes some economic sense. However, if the expectation becomes 0 or low appreciation, this motivation ceases (or the reaction might even become "Why buy now when prices are falling and I can get more house if I wait 3 more months").

So, in short, a soft landing is almost a logical impossiblilty at this time. Where we to get a "soft landing", it would almost certainly be followed by a "hard landing" as much of the recent demand disappears.

But a "soft landing" sounds, well, soft and fuzzy.

12/15/2005 1:09 PM  
Blogger Walter Sobchak said...

If that's her definition of Econ 101, then here's a partial definition of COGNITIVE DISSONANCE: "a psychological phenomenon which refers to the discomfort felt at a discrepancy between what you already know or believe, and new information or interpretation."

In other words, these people actually believe this crap and don't see reality.

Another point: The underlying theme to what alot of these blowhards are saying deals with housing shortage, everyone wanting to live there, blah, blah blah.... Why did this all start a few years ago then? Hasn't all of these characteristics been in place for years and years? The main difference b/w years past and now is how easy it is to borrow (and gamble) money. The psychology of this market is eerily similar to the dot com market psychology, which is fascinating since it only happened a few years ago.

12/15/2005 1:35 PM  
Blogger SoCalMtgGuy said...

I agree with you. People talk of housing prices going the sun coming up. It is just a "given" now.

So yes, ALL of the experts comments are correct IF homes prices go up forever. But since that can't happen...

It is just a matter of time...

Thanks for the posts!


12/15/2005 1:48 PM  
Anonymous Anonymous said...

All the numbers say the these particular "experts" quoted in the article are dead wrong. I tend to wonder if they are being purposely untruthful in their "analysis" because I don't understand how anyone can be so stupid--as you say, this is really just Econ 101. If you look at it from the perspective of these folks, it probably doesn't make a lot of sense for them to be saying "we're all fuc$ed." An earlier poster mentioned the positive feedback loop that can help cause escalating RE prices when the sentiment for RE is positive--obviously this can and will shift as it always has in the past until a lot of people sour on RE and the prices start going the other way in a negative feedback loop. None of these "experts" want to be responsible for contributing to or causing that. Better to soothe the sheeple with kind words and let them know that everything will be all right--even if it won't be.

12/15/2005 2:09 PM  
Blogger SD_suntaxed said...

"Alex Zikakis, president and founder of Capstone Advisors, said he didn't see a strong presence of speculators in the local residential real estate market. Jill Morrow, president and chief operating officer of Coldwell Banker San Diego, said the local housing market was not driven by investors."

Best laugh I've had all day. Something is driving 15,000+ properties here in SD to sit on the market, and if it isn't people speculating that we have hit a peak, I'd love to hear what it is!

12/15/2005 2:29 PM  
Blogger ChillinIntheOC said...

Maybe it's me but I notice whenever I read an article or listen to a radio show about RE these days, the RE "experts" are using the key terms "normal market" and "Shortage of Inventory" more than at any other time before. It almost sounds like they all went to the same motivational session.

12/15/2005 2:39 PM  
Blogger SoCalMtgGuy said...

Here is part of the problem. You have people in a business that is pretty much 100% commission, where (the past few years) you could make a lot of money, fairly quickly, with not much work for the pay.

Some of these people took their lifestyles to a point where they NEED to continue to make money at that pace to keep their lifestyle going.

The smart ones saved enough money to last them a lifetime, albiet at a "lesser" lifestyle than some of their counterparts have been living.

I have broker shops where the owner drives an older honda civic or pick-up truck...and the newer loan officers are driving 745's, 500 series benzes, range rovers, hummers, etc.

The owner is getting rich, the others are living that way.

Not representative of everybody...but there are people living beyond their means in this business.


12/15/2005 3:03 PM  
Blogger Econ_101 said...

One other thing I learned about in my college Econ 101 course: incentives.

Incentives: economic actors will do more of what they are incentivized to do and less of what they are incentivized not to do.

What are the incentives for a CAR or NAR economist? Well, they are paid by realtors who presumably want some benefit from their work. How are RE agents paid? By commissions when they sell houses. Thus, NAR and CAR economists are incentivized to issue reports, write press releases, talk to media, etc. in ways that will increase housing transactions.

Industry/Trade ecomonists, like other paid professionals, get paid to put a positive spin on their client and promote their wellbeing.

If you ask OJ's lawyer, "Do you think OJ is guilty", what answer do you expect? If you ask WalMart's PR firm if WalMart is a nice company, what do you expect them to say. The same goes for industry economists.

I'm not saying these folks are evil or anything like that, simply that their paycheck comes from realtors and they have a very strong incentive to say only things that will benefit their employers.

The same logic applies to the incentives of other "experts" in the industry who have very stong incentives to keep the ball rolling.

While the internal thoughts of many of these paid mouthpieces rarely come to light, think of Blodget at Merrill Lynch who was an analyst who was supposed to offer advice on future valuation of companies he followed. While he issued his stock reports to the public pumping various companies his incentives were stongly biased in favor of making those firms happy. The end result was that he pumped stocks publically which he personally described as "crap".

I doubt that any sort of smoking guns will emerge from the CAR or NAR economists, but they have exactly the same incentives for the RE industry as Blodget had for the firms he analyzed.

I would thus put a lot more faith in more impartial sources such as the recent UCLA Anderson study or Robert Shiller.

12/15/2005 3:07 PM  
Blogger Econ_101 said...

One poster said: "It almost sounds like they (the "experts") all went to the same motivational session."

Actually they sort of did. NAR has published talking points this fall to soothe the media and buyers: They are called:

Housing Market Reports Dispel Bubble Myths

and they are available at:

and (under heading above).

12/15/2005 3:20 PM  
Anonymous Anonymous said...


Where do you put your money? Just curious.

I've shorted most of the home builder stocks, went long on energy and gold.

If I had more $, I would short the retail sector especially, nordstrom, coach, and luxury item retailers/manufactures.

Also I think that in 2006, alot of the I/O arms will reset since so many people refi and bought property in 2005 with the 1 yr fixed arm I/O loans where the teaser rate is 1.35%

what's your take?

12/15/2005 3:24 PM  
Blogger Former LA Homeowner said...


How much does an average mortgage broker make? My wife has a co-worker whose daughter works for Countrywide in Calabasas who claims that she makes ~$20K a month. I bet these people would say anything (stupid things included) to keep this kind of income coming.

12/15/2005 3:29 PM  
Blogger SoCalMtgGuy said...

Rent Boy

At the moment, I am mostly in cash in various fixed income type accounts. Since I don't know exactly where things are headed, I'll take my ballpark 4% returns right now.

Btw, I have a friend tha manages at Nordstrom, and their store is doing very well. Don't know if that is much of an indicator or not, but be careful shorting stocks if you are doing it uncovered.

12/15/2005 3:35 PM  
Blogger SoCalMtgGuy said...

LA homeowner,

I don't know what the average broker makes, but 20k is entirely believable.

I was talking to one broker this week who has consistently hit 25-28k per month the past few years. The last 3 paychecks have been 16-18 per month as they have been "slacking" some.

I know one broker who had a YTD gross of over 800k in october. Broker had been in the business for years and worked hard at it.

I also know lots of people making 3-8k a month as well.

WIth so many people running into the business the past few years,there is a LOT more desparity now.

But, yes, 20k a month is not out of the question at all. Especially in that area and for that company.

I hope that helps some..


12/15/2005 3:58 PM  
Blogger 277.18 Hz said...

>> Many borrowers "are going up the wage scale" and will be able to handle rising payments, he said.

How can they possibly have this information?

Someone help me out.

12/15/2005 4:26 PM  
Blogger need 2 leave CA said...

Don't forget for the Bay area - that one of the largest employers, SBC, will be laying people by the thousands in this area following the merger with AT&T. Many of the employees are highly levereged homedebtors. What will many of them do when they can't afford their I/O, Neg Amort, big car payments for SUVs, etc. I should know. I have been working there and am always asked when I am going to buy a house, and get a new car. The difference between me and many of my colleagues is that I believe in savings and refuse to go into debt for something that I think will decline. I actually have a savings account and no debt. I guess that makes the minority. I make about the same amount as me, and I don't picture making a payment on any McMansion in the Bay area. Any comments?

12/15/2005 8:53 PM  
Blogger Unknown said...


Apologies in advance as I'm a somewhat neophyte blogger but is there an appropriate acronym for peeing my pants while lol?

I am SO glad I stumbled upon your site (from either Bay Area Housing or Housing Bubble 2). Your's, shall I say, has a little more edge and even some hard data and anecdotes to back it up.

This particular diatribe earns a Gold Medal. Well done!

12/15/2005 9:10 PM  
Blogger SoCalMtgGuy said...


Thank you for your comments!

Talking mortgage data can get very boring, so I try to lighten it up a little bit and make it interesting. Ben's blog is the best out there for news articles and content, plus you can learn a lot from the comments.

After much commenting over there I decided to start my own blog where I can share my experiences. Many people have said it is a nice compliment. I try my best to do 1 good post per day not including the weekends. I'm glad people are getting benefit from my blog and that they keep checking back.

Thanks again...


12/15/2005 9:41 PM  
Blogger blogger said...

A most excellent post - nicely done.

I wish we could fast-forward a year to see how this all ends up. I'm pretty sure this whole supply and demand thing, even though, boy, it's soooo confusing isn't it - might have some relationship, some tiny relationship, to prices

12/15/2005 10:50 PM  
Blogger Out at the peak said...

Rent Boy: In my post-bubble blog, I talk about where I put my money. I wouldn't directly attack the stock market. You have more risk, but you could end up with more reward. I'm exposing my self with some moderate risk along with some 4%-7% fixed income.

12/16/2005 1:48 AM  
Blogger 41cadillac said...

The credit card debt. The car payment. The mortgage payment. The health costs. The school tuition. The gas in the car. The groceries.

Just wait for tax increases on property and income. Seems to me a big head ache is coming for USA citizens.

12/16/2005 4:23 AM  
Blogger Jim A said...

Soft landing (noun, transitory) Feb 2005:slackened appreciation 10% yoy.
Jun 2005: continued appreciation, 1-2% per year.
Dec 2005: Price decreases of 10-12% in bubbly areas (not here)

Jun 2006: ?

12/16/2005 5:05 AM  
Blogger mtnrunner2 said...

It baffles me that realtors, who should be MORE attuned than the rest of us about the cyclical nature of the market, are blinded by the upcoming slide. My realtor, who just sold my house, owns a house and rental property in SD. Last week, I talked with a realtor while he was showing me a rental house. He owns many properties, and just bought a condo in Miami, and a condo in Oceanside!!! He has been a realtor since 1976. Hasn't he learned anything from the last 2 bubbles? I told him about the ARMs that are adjusting over the next 2 years, and he didn't know what to say. He said he was on the other side of the bet from me.

12/16/2005 6:33 AM  
Anonymous Anonymous said...

"So let me get this straight, the people that own a home already will be reluctant to "move up" because of higher property taxes. So...does that mean the property taxes aren't just as high if you don't already own a home?!?!? $500 to $1000 bucks a month in property taxes is big increase no matter if you own already or not."

Actually, I think this argument makes some sense. According to Wikipedia:

Under Proposition 13, the real estate tax on a parcel of property is limited to 1% of its purchase price, adjusted for inflation, until the property is resold. There is a maximum 2% increase allowed in the assessed value per year, and property is reassessed when additions or new construction occur.

If you own a home that has had its property taxes capped by the 1% rule, or assessment held down by the 2% rule, you face a considerable tax increase if you buy a new home ...even for the same price. The new cap would be 1% of the new purchase price, which could be several times the old cap if you've owned for many years. Then you would pay taxes based on the purchase price rather than the old 1% cap, and could go up significantly.

If you live in a house whose assessment has been kept down by the 2% rule, and you buy a new house assessed at purchase price, again you can see a significant increase in tax rate, not just taxes. If you sell a $600,000 house which is assessed for tax purposes at $300,000 - because of the Prop 13 limits - and buy a $900,000 house assessed at $900,000, (in the same tax district), rather than seeing a 50% increase in taxes you would see a tripling of taxes.

I see this effect with my father's house in Pennsylvania. He pays much less in real estate taxes than neighbors with much smaller houses on less property because his is assessed at the value in 1970 when an addition was added, and theirs are assessed at their 1990s-2000's build or purchase price. If he sold and rebought his house, the taxes would increase by a couple hundred percent.

12/16/2005 7:24 AM  
Blogger Walter Sobchak said...

41cadillac said:

"The credit card debt. The car payment. The mortgage payment. The health costs. The school tuition. The gas in the car. The groceries."

I can't remember which post, or even which blog (Another FB or Ben Jones') where someone mentioned the married guy with 2 kids bragging about his $1m home, BMW and Benz......though no healthcare coverage for the family. See, some of these people are being a little cost-conscious ;-)

12/16/2005 8:08 AM  
Anonymous Anonymous said...


I thoroughly enjoy reading your blogs and your writing style gives me a big laugh.

Yeah. Cash is always king. If you want to play it conservatively, you might want consider diverting some of that cash into gold, which has been appreciating 15% yoy.

Yeah.. past performance doesn't guaratee the same outcome in the future but looking out to 2006, I see the dollar weakening and less flexiblity in the US economy.

If the FED stops raising interest rates, the dollar won't be so strong as before and the currency traders will sell dollars.

If the FED continues raising interest rates, the economy will slow down and may go to a spiraling recession and investors will find a safe haven to park their money.

Thanks for tip about Nordstrom. I'll see how they perform in 2006 before I take the plunge.

12/16/2005 11:19 AM  

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