Monday, March 10, 2008

Over the falls

I didn't post much last week, partly from feeling in shock at events unfolding. We in the world of bubble blogs have seen the future coming for the last couple of years, with graphs and cute roller coaster analogies, but now it seems to be really happening. That's a lot heavier.

We know the narrative, as the MSM is reporting the symptoms. But the reality is frightening, standing at the lip of the waterfall, peering into the void.

Mish encapsulated it vividly in last Thursday's Financial System Broken - Markets 'Utterly Unhinged' subheads:

Home Foreclosures Hit Record High
Homeowner Equity Is Lowest Since 1945
Owners Give Up
Overleveraged Hedge Funds Are Blowing up
The worst Is Yet To Come

So what to we do to cope near-term? A bad recession will impact lots of us. Investment losses. Job losses. Obviously don't buy a house; the Westside is part of the river too, even if in the slower current near shore. Although some people obliviously are.

Keep your head down, spend less, save more. Put your savings where? Run to safety in Treasuries - at 1.5%, half of inflation? Buy a bear fund, and hope you get the timing right (a week ago would have been better)? Buy gold or oil - in a commodities bubble? Insured bank CD rates aren't bad - they need the money! What are your suggestions?

On that subject, be sure to read Market Ticker today, about bull and bear trends and preserving capital.


Anonymous said...

A question about buying a condo on the Westside.

I know you say don't buy, but what if:

1) You are a renter.

2) You need to move. Construction starting on the lot next door, literally outside our bedroom window.

3) You find a nice condo, in a very good buiding, and the seller is very motivated, and you can get it for considerably under asking, and also less then the seller paid for the unit 3 years ago.

4) You have 20% down, so even if market goes down some, you still have equity.

5) You plan to live there for at least 7-8 years.

Is it still a terrible idea to think about buying?

Anonymous said...


I'm assuming we're talking about a fixed mortgage here. Now that that's out of the way, do a little more math:

Will the cost of ownership (HOA dues plus your mortgage payment each month) be less than or equal to the cost of renting a similar place?

You've got time to research this. At least take a look at rentals in neighborhood to see what's out there. If the answer to the above question is no, I wouldn't do it, and the reason is actually pretty simple. Despite their best intentions, people do sometimes have to move unexpectedly, and sometimes the market for real estate just freezes up -- not a matter of what you can get for a place, but that nothing is selling for any price. In that kind of a market, it's imperative that you be able to recoup your monthly expenses by renting out your place.

Anonymous said...

Anonymous #1-

When think ing about this myself, I consider the following:

Total cost to "own" including mortgage, taxes, condo fees, assessments, and lost revenue on the down payment. Compare that to the amount of rent you would pay.

Finally, you may want to consider that prices could well be below what you pay 7-8 years from now. It happened in the last downturn. If it were down by the amount of your downpayment, how would you feel bringing money to the closing?

Unless this is a riciulously cheap place, I think you will do better by renting for 2-3 years before buying. Yes, it is conjecture, but prices certainly won't go up, and with rents generally runing at about 50% of mortgage payments, you should be able to increase your down payment.

Anonymous said...

Is it still a terrible idea to think about buying?

It's never a terrible idea to *think* about buying. Ask yourself this. Would it be OK with you if, say in the next year or so, the place you bought was worth 20 percent less than you paid, and it was going to take 5 years or so for you to get back to even? If you're OK with that, you really like the place and can afford it with a fixed rate loan, go for it.

That's the question I ask myself and, FWIW I'm waiting a little longer. :-)

WarChestSM said...

"Is it still a terrible idea to think about buying?"

Yes. Condos are getting destroyed right now with no signs of relief. 3 years ago pricing would be a 2005 rollback. I have shown a few 2004 rollbacks already on my blog and there are many more coming. If you run the numbers and take into account EVERYTHING, and it still lines up...then drive an even harder bargain than you think is fair. The sellers have no power right now and there are plenty of units to choose from. You will need to get what you think is an absolute steal to be able to be above water over the next few years...and even then I don't know if you will be happy with your purchase when you look back on it.

Anonymous said...

Interesting story from ABC7. USC experts say poor housing market will continue for 20 years.

Westside Safari said...

Hey all,

Love the comments and I agree with most of them. I bought in SM in June 2004 and have thought for a while that the price would, at worst, go back down to what I paid. Now I think it probably will. If you can get it for 2004 value you are probably fairly safe.

I just wanted to point out though that if Anonymous rents for 3 years then buys, all that rent money is 100% guarunteed to be lost.

If he buys and gets a steal, it's conceivable he'll have some equity at the end of those three years.

Just something to factor in as an estimate when you are calculating the total cost to own vs renting.

Still, be ready for your home value to disappear for a few years.

Good luck.


Anonymous said...

"... if Anonymous rents for 3 years then buys, all that rent money is 100% guarunteed to be lost."

For the first years of a mortgage, almost all of the payment is interest, not principal, so it is essentially thrown away as well. It only makes sense to do this if you expect prices to go up and are leveraging the increased equity. Otherwise, renting is a fine option, and you are not wasting money, especially if the rent is less than the cost to own.

Westside Bubble said...

I'm with WarchestSM, Anon #1.

Also see this graph of what happened last time and where we may be now.

It's a while to wait, but it looks like I'm going to be renting for some time to come. (Which makes following new listings like window-shopping.)

Epsilon said...

First anon:

Also consider your tax bracket. If your income is high, and you can use the full mortgage interest deduction, it starts to make more sense.

Also, don't listen to this garbage about "throwing money away" on rent. Most of the cost of owning is also throwing money away. The only exception is money paid towards equity. But 1) in a declining market, it's unclear that principal payments will go towards equity, and 2) principal payments are very low in the first few years of a mortgage (just the way the amortization works).

The only advantage to buying now is that all the macroeconomic factors suggest that interest rates will be going up, perhaps considerably, very soon. If you can get a steal (and I mean a STEAL... and it sounds like you're just looking at paying less than a guy paid in 2005, which probably isn't that great of a deal) on a place, it might be worth it to guarantee the interest rates.

Anonymous said...

Give away the money! Just give each of the commentators $10,000 and an extra $50,000 to Westside bubble and santa monica distress monitor.

Giving away real money would be a much better use of your money than buying a condo on the Westside. I am not kidding. IT is just plain stubborn or dim witted to buy now.

Giving money away is much better than just burning it, or throwing it in the trash, or paying straight interest on a rapidly depreciating asset that has no resale market.

Better yet. Keep it. Thank them in 3 years, when you can buy something for 50% less than today's prices.

DLP said...


I think you know I have been following your blog for over a year and have been grateful for your efforts to educate and warn.

I think today's blog was particularly poignant - it is clear that you understand the devastation we may be facing. There have been so many crazy schemes with all the cheap money (god, the banks were out of their minds), and yet why was it obvious to so few that this was not sustainable?

How extraordinary to watch Carlyle and Blackstone tank. Even I couldn't have dreamed up that one. It makes me wonder, given how we have over-extended our military lines, a classic blunder, whether this nation will survive as a world power.

So basically, thanks again for taking the moment to show your compassion. I really appreciate it and it makes me wonder - what should we be thinking about doing to help the many who are going to get dragged under by it all?

westwood said...

Get the hell out of the US dollar, although last year would have been better, and the year before that would have been better still. The dollar devaluation is your number one problem. What you buy doesn't really matter so long as it somewhere else.

Anonymous said...

Westside bubble-
How can you on the one hand blog about staring into the abyss, and then agree that there might be a scenario in which it might make sense to buy a POS condo right now!?

So because construction is starting next door you decide to buy? That's showing some real intelligence. Did you think about RENTING ANOTHER PLACE SOMEWHERE ELSE!?

"You have 20% down, so even if market goes down some, you still have equity."

Yeah, for the first 12 months or so you might have some equity left.

Anonymous said...

westside safari-
"I bought in SM in June 2004 and have thought for a while that the price would, at worst, go back down to what I paid. Now I think it probably will. If you can get it for 2004 value you are probably fairly safe."

You purchased a place within approx. 12 months of the absolute peak of the largest housing bubble of all time, and you think you're safe? Thanks for the laugh!

Anonymous said...

Sigh, the rampant schadenfreude and nasty know-it-alls here can make this place really ugly.

Anonymous said...

Thanks Anon 7:27pm. I am following the words of wisdom from USC and will probably not a buy house in SoCal for the next 20 years. Renting makes so much more sense and owning a home in a declining 20 year market is just idiotic.

Anon 10:27pm is correct "IT is just plain stubborn or dim witted to buy now"....for the next 20 years.

Anonymous said...

"Sigh, the rampant schadenfreude and nasty know-it-alls here can make this place really ugly."

Sigh, this country is so incredibly full of cry babies who whine about their feewings being hurt.

Try this: don't go to BUBBLE blogs if all you want to hear how everything will be ok and that POS condo you bought in 2005 for $650K won't drop in value very much.

kate said...

So, hate to be rude, but now that we've settled the Don't-Buy-Now "controversy ... where are y'all parking your investments (especially 401ks) during this storm?

Anonymous said...

"where are y'all parking your investments (especially 401ks) during this storm?"

SRS, SKF, et al. (today might be a good day to get in based on this fake rally).

Anonymous said...

Try this: don't go to BUBBLE blogs if all you want to hear how everything will be ok and that POS condo you bought in 2005 for $650K won't drop in value very much.

I'm the one who sad the schadenfreude was ugly and no, I am not the poster who bought a condo in 2005, or ever bought a condo for that matter. Shocking that know-it-alls get things wrong. I am not debating what will happen with prices, my crystal ball says they will go down, but don't understand the need to be a jerk. Being civil isn't a sign a weakness. Why not just be benevolent from up there on top of your pile of money?

Epsilon said...

I would NOT go putting your whole savings into ultrashort ETFs (SRS and SKF), particularly retirement savings.

Assuming you're younger than 35, retirement is still 30+ years away, and so any diversified equity fund is likely to be a good bet. Sure, you might go down another 20% from here, but you also won't be taking it out until 2040 or so...

If the housing bubble teaches you anything, let it be that ignoring fundamentals is a bad idea. If housing costs are out of line with income and rent, and way above historical values, they can't be sustained... same goes with every other investment. Short positions on real estate and financials were a great play 6-10 months ago, but now you're talking about something that's doubled in the past 8 months or so. Chasing past performance is generally not the best investment. I'd stay away from oil and other commodities too... that's already starting to look like the next bubble.

If your retirement is 20+ years away, buy as diversified a portfolio of the global equity market as possible. If it's 10+ years away, add about 20% in fixed income to the mix. If it's fewer than 5 years away, I pray you already had a significant cash position, and if not, it's too late to help you.

Now if you're just saving for a downpayment in a year or two? Tax free munis have never looked better... and CDs are also paying well at the moment, given generally low interest rates. Don't take risks with exotic investments if you need the money soon, or you're just like the idiots who bought a house in 2005 because they were worried about being "priced out forever."

Anonymous said...

you sound like a young lawyer.

Arti said...

Geoff said "I bought in SM in June 2004 and have thought for a while that the price would, at worst, go back down to what I paid. Now I think it probably will. If you can get it for 2004 value you are probably fairly safe."

I must disagree with Geoff here. The most insightful explanation I have ever read on the housing bubble deflation, which was posted on this very blog (and copied on the LA Times blog), was that this collapse is following the stages of shock.

Right now most people have finally moved on past the "denial" stage, and are conceding that real estate prices can and are falling. Most are now in the "negotiation" stage, saying things like okay we've had recent sales in Santa Monica at 2004 prices, but it's not going to go lower than that . . . Except they will, since the prices disengaged from fundamentals and into the realm of rank speculation as far back as 2002.

Next will come the anger stage. This is the one the politicians fear the most, they will try hard to find scapegoats so that they're not blamed for being asleep at the switch along with the fed. So they will pressure Bailout Ben to keep cutting rates (even though it is hurting the dollar, pumping up oil prices and inflation, and might accelerate the recession). They will even come up with bailout plans of their own, where taxpayer money is used to buy up mortgages (this is already starting indirectly with the FHA limits).

Fortunately these attempts will not work, as this bubble is so massive it cannot be bailed out; any attempt to do so will only waste taxpayer money and then slow down the real estate recover. Only when people stop talking about real estate altogether, either going up or down, will we have reached the "acceptance" and "capitulation" phases, and that's when prices will finally be supported by economics again.

For now, rent something reasonable, make yourself nice and comfortable there. Capitulation and price discovery is not going to happen overnight in West LA; forget about housing in that area for now and check in again in 18 months.

Robbie Fields said...

So long as you're in a non recourse jurisdiction such as California, buying now can make a lot of sense.

But only if ...

Your down payment is no more than 20% of YOUR liquid assets and you can afford to lose it.

If you have reasonable expectation that your income is recession proof.

You get a nice, fixed 15 year mortgage and let inflation take care of the debt.

But buying a condo rather than a house remains an extremely risky proposition. You're going to be at the mercy of the HOA and within a few years your HOA fees may dwarf your mortgage repayments.

In summary, going 80% cash may be a strong enough defensive position.

But if condo living is what you prefer, wait a few years for values to drop 80% from the peak and then buy for cash.

Epsilon said...

I think the real sign of how early we are in this recession/contraction/downturn/etc is that there still haven't been any business failures to this point. This was the biggest inflation of housing in history, and not one major bank, insurer, hedge fund, etc., has failed yet. Even the historically mild downturn at the beginning of the decade led to Enron, World Com, etc., collapses. Does anyone really going to think that every major US company is going to come out of this just a little poorer?

We really haven't seen a major economic downturn since the late 70s/early 80s, and so everyone seems to think this will be mild too. Maybe they're even right. But even by mild recession standards, there hasn't been any real pain yet. We're just getting pumped full of more monetary and fiscal stimulus, while the powers-that-be seem either ignorant or unconcerned that this is what caused the problem in the first place...

Epsilon said...

ick. ignore the typos.

Anonymous said...

Epsilon - You are totally full of crap, on this blog, and the others on which I have seen you post. You seem to be showing your age, which must be young.

I would love to pick apart most of what you have said, but this thread is old and I'll catch up to you on another one. ONe thing, however, please don't advise people to diversify into funds with the chance of losing 20% in the hopes of getting it back in 30years. They can sit on a crappy market in cash and only lose a few points on the inflation. They then wouldn't have to see a 25% rise just to get back to even. You are not a financial advisor. Stick to reviewing endless redlined docs in your first year as an attorney.

Anonymous said...

I'm buying heroin, cocaine, and other illegal narcotics. They will hold thier value against a decline in USD and are tax free - because they are illegal in the USA - I store them across the street under the playground in the public school for safe keeping.

-George W. Bush.