Tuesday, November 6, 2007

Heavy week

This is starting as a very heavy week. If even some of this continues to devolve, I can't believe Westside prices could hold. And really, you should be thinking about more than housing prices ahead, and focus on your financial security in hard times. I encourage you to read the whole original posts. Two more added at the bottom.

The Independent's (via Housing Panic) "Markets fear banks have $1 trillion in toxic debt":

A new phase in the credit crunch, one of "$1 trillion losses" seems to be dawning.

Charles Hugh Smith's "Empire of Debt I: The Great Unraveling Begins":

I sense the Great Unraveling of the Empire of Debt is finally upon us, and breathtaking losses could be revealed any day now.

You cannot properly anticipate the coming wealth destruction unless you understand that the entire model rests on financial instruments (derivatives) which mask and distort risk.

Market Ticker's "Mirage Monday":

In short, the entire "Real Estate boom" that "powered our economy" over the last five years is one giant ball of fraud.

A ball of fraud that turns out to have a nuclear core, and it is now starting to "rapidly disassemble."

LA Times's "Record U.S. price for diesel fuel hits trucking companies hard":

"Diesel is 30% of our operating costs, and we don't have any options," she said. "We can't share trucks. The freight has to move, and we have to pass as much of the increase as we can on to our customers."

James Howard Kunstler's "Ignoring the Obvious":

Many Americans will have to start choosing whether to pay their mortgage, fill the tank of the Chevy Suburban, buy that brick of Velveeta, or pay the heating oil guy. It looks like China will be spending more of its accumulated dollars bidding up the price of oil (or making favorable contracts with foreign suppliers) instead of buying Freddie Mac bonds. The USA could not find itself in a less favorable position among all these forces roiling the scene. It certainly can't afford to continue its pathetic pose of cluelessness.

Paul B. Farrell's "What will World War IV cost?":

So what will WWIV cost you and me personally? This is crucial, folks, because every dollar spent on expanding our global "wars on terror" will be one less dollar for your retirement nest egg, your health care, your kids education, your grandkids lifestyle -- all of which are being outsourced to a free market system that's forcing you to take personal responsibility rather than get benefits from government or Corporate America.

LA Times's "Writers work picket lines as TV shows shut down" (not like TV people live in Santa Monica or anything):

the last WGA strike in 1988 lasted 22 weeks and cost the industry an estimated $500 million

LA Times's "Schwarzenegger orders plan for 10% budget cuts" (when most recent new jobs have seemed to be in the government):

Gov. Arnold Schwarzenegger on Monday ordered all state departments to draft plans for deep spending cuts after receiving word that California's budget is plunging further into the red -- largely because of the troubled housing market.

State officials have warned the governor that the likely deficit for next year has jumped from a few billion dollars to as much as $10 billion, threatening to wipe out the progress Schwarzenegger has claimed in getting the state's accounts in order.


Anonymous said...

Worry, am I worried? Nah...

90402 and Santa Monica are different. They won't be affected by a worldwide crash of financial institutions.

Google stocks will never come down.

All will be wonderful with the Chinese economy since Americans will continue spending money like drunken sailors!

It's all going to be okay. Those articles are just coming from disgruntled people who don't own a home in 90402! What do they know....

WarChestSM said...

FYI, 506 Palisades just re-listed for $1.7 million less. I just did a post on it and I remember it being posted here about 6 months ago.

Anonymous said...

Ummm. They know that in the 1990s 90402 priced declined. And that was before things exploded because of bogus loans. Time will tell.

Anonymous said...

Westside - thanks as ever. "Heavy Week" gives me chills but perhaps only because it seems to agree with my assessment about our finanical future. I keep hoping that I am wrong but after I read the Wall Street Journal piece on the big fib that was structured investment vehicles now bringing down Citigroup and that companies were BORROWING money to buy back their stocks and having personally witnessed loan officers handing out mortgages like they were candy and wall street ignoring the fact that oil has nearly doubled in price and Caterpillar saying a recession is looming (yes, Caterpillar the compnay), and the dollar has practically sunk beneath the Canadian currency, well, I guess I can say that I am very very worried. The strike - yep, that too. Friends in the guild tell me both sides are entrenched and they expect to be in it for a long haul. Warchest, you've got some of the best financial smarts hanging around - please tell me that I am completely off base.


Anonymous said...

The writers' guild say that they are going to strike for as long as it takes. They are shutting down the "industry" in this town and the strike could last a very long time.

The State government is broke and running a huge deficit.

Gasoline prices are climbing through the roof. The housing meltdown as only started.

Citigroup and the rest of our financial and mortgage institutions are running on air. The dollar is sinking to new lows everyday.

And none of this is going to affect Westside real estate?

This looks extremely bad. The last strike in Hollywood cost hundreds of millions of dollars to the local economy. This strike has the potential to do even more damage.

It is the PERFECT STORM!!!!! No one should be surprised. I'm just glad that I could pay off my house tomorrow even though it is in a very undesirable part of L.A. County. It beats sleeping in a cardboard box.

Anonymous said...

Thanks, Westdie Bubble, for stoking everyone's fears even further and doing your part to bring the market down. There is something ghoulish and giddy about this blog. I see it as an inversion of the foolish giddiness of the RE boosters, and just as prone to irrational (in this case negative) exhuberance.

Yes, we are in a down market. No, the world is not ending. Yes, the age of flipper delusions is over, but long-term investors in places like SM will be fine.

Anonymous said...

Reel it in, you make a good point - a great point actually

The "bears" on this board are entitled to their views and do us all a favor by sharing them. Thank you bears, you are appreciated.

But there are a shortage of bulls here and i am sure all the bears honestly want to hear both sides of the story.

here is a little piece of the bull case:

The bears have always always been looking on the Santa Monica real estate market and crying about how it can't keep going up and up.

I have just read a wonderful article from 1984 (1984!) talking in passing about the run up in prices in Santa Monica and how it couldn't possibly continue.

The article talked about bungalows in Santa Monica going up from $40,000 to $400,000 and implied that the people buying for $400,000 were stupid.

Think about it - bears talking about how the middle class was priced out of the market. always talking about how if prices go above what the middle class can afford they always have to come back down.

I've got news for the bears - some middle class person is always getting squeezed out of Santa Monica. And usually he is being squeezed out by someone else whose grandparents were middle class, someone who just happened to be harder working or luckier.

The argument that Santa Monica prices have to fall because x person who works in y job can no longer afford Santa Monica has been made over and over again.

It wasn't true in 1984 and is not true now.

Read the arguments of the bears over the past 30 years.

First it was
"can you believe that hard working unionized factory workers can no longer afford santa monica? those prices have to come down"

then it was
"can you believe that university professors can no longer afford santa monica? those prices have to come down"

then it was
"can you believe that pediatricians can no longer afford santa monica those prices have to come down"

then it was
"can you believe that surgeons can no longer afford santa monica those prices have to come down"

The track record of the bears is abysmal. Absolutely abysmal. they have been smacking their heads in disbelief as Santa Monica prices have gone up TWENTY FOLD

Bears have a mental block called anchoring - they form a mental picture of a neighborhood at a certain point in time and the people living there and they can't accept that the composition of the neighborhood changes.

Just because you in your mind remember Santa Monica filled with college professors and the college professors are all being violently booted out by the pediatricians who can pay more, doesn't mean that prices are not sustainable. This is the USA. Neighborhoods can move up in value.

If these folks were living in another part of the country we would be having a similar crazy but opposite argument based on "anchoring". In Buffalo, neighborhoods that used to be filled with surgeons are now being filled up by teachers, firemen, and cops. Houses are plummeting in price. I am sure if this blog was written in Buffalo we would hear "this is not sustainable, that neighborhood's natural level is to be priced for surgeons - prices have to come back up" they have a mental picture of the neighborhood with surgeons in it and can't adopt to the new reality

Sometimes a neighborhood that contained surgeons falls in value so much that the salt of the earth kind folks like teachers, firemen, policemen - the people that really add value to our society and deserve a taste of the good life - finally get to move in. this is happening in many shrinking cities all over the USA. Look it up. Believe it. Things change. Do not "anchor" on the past.

And sometimes a neighborhood that contained people in a certain profession goes up in value and keeps going up in value and people of that profession can never move in again. There are plenty of neighborhoods in the USA where doctors can't afford to buy a house. In Aspen the city government had to build public subsidized ("welfare" / "housing projects") housing so that doctors could afford to live there.

No one has a god given right to live anywhere just because they went to a certain school, got a certain degree or are in a certain profession.

I've got news for you- if enough good honest hardworking people figure out how to make $50 million bucks, they can and will kick the nerdy professionals that feel "entitled" to live in Santa Monica way the hell out.

Just like the nerdy professionals kicked the factory workers out years ago. What goes around comes around.

Anonymous said...

Here's the article.

LA real estate always moves in violent up and down cycles. If you are leveraged you can be completley blown out of the water.

But the bears arguing that SM prices have to go down so much that people they socialize with can afford to move in to Santa Monica may be fooling themselves.

Take a look at the evidence of history.

Published: December 8, 1984
My pal Jerry P. just bought a condominium in Century City, in Beverly Hills, for 60 percent of what it sold for in 1980. Down the street from me here in the Hollywood hills, four houses have been on the market since 1981. The asking prices now are about one-third less than they were three years ago. Up and down Sunset Boulevard in West Hollywood, apartment houses that were converted to condos lie empty, boarded up, not one unit sold, in bankruptcy, with banks holding title.

New Yorkers do not like to believe they could learn anything from California, but perhaps in this one case they might try.

The Southern California residential real estate boom began in about 1974. It was not just a boom. It was a superboom, with miserable bungalows in Santa Monica running up from $40,000 in 1974 to $400,000 by 1980. Two-story colonials in Beverly Hills went from $200,000 to $800,000 and then over a million. One-bedroom condos in Hollywood were built and sold for $100,000 - what a house in Beverly Hills had been five years before. Every day, home buyers would look at the prices and say, ''It can't go on.'' But every day, for five years, it did go on. Middle-class families were priced out of the market, and the brokers said, ''But the rich will always be able to buy.'' Ordinary rich people were squeezed out of the market in some areas, but the brokers said, ''Never mind, the music business people will buy anything.'' The music business fell into a depression in 1979, and the brokers said, ''The

foreigners are buying. Compared with Paris or Teheran, real estate in Holmby Hills is a bargain.''

Everyone wanted to get in to the game, get the down payment on a house, somehow struggle with the payments for a year, then sell out and get rich quick. Inflation pushed housing prices into the stratosphere. But even when inflation stopped, brokers said, ''The prices have nothing to do with inflation. Everyone on earth wants to live in L.A. The price will go up forever here, no matter what else happens in the rest of the country.''

Then the music stopped, some afternoon in 1980. As if a spell had fallen over the city, suddenly things began to stay on the market for three months, six months, a year, two years. Buyers disappeared. Asking prices stayed high, but nothing sold.

The great Southern California real estate boom was over. Prices had gotten so high that they could no longer be justified by inflationary expectations, or the influx of foreigners, or the climate, or for any other reason.

Now, four years later, those brokers who are still in the game tell sellers to expect that their houses will be on the market for two years. Other brokers have sold their BMW's and are now working as ''financial planners'' or public-relations people, dreaming of the days when they worked for 6 percent of infinity.

Anonymous said...

Isn't the over-riding theory on this blog that prices are in a temporary downward cycle, but not that they are going to plummet back to historically low levels? Clearly SM is a high-end area and that's not going to change...and it won't be affordable to the average Joe except for renting...but even within that framework, the high-end can work in cycles, too. It might not cycle enough to open a neighborhood to the working or even middle class, but it very well could cycle enough to make it a poor time to buy, even if you are wealthy. So maybe the down cycle isn't going to realign LA's neighborhoods, but whatever you're income/wealth/neighborhood may be, no one wants to make a losing investment. On the other hand, if you're loaded and plan on living in SM for the next 30 years and don't want the hassle of renting for a couple years and then having to move again, then go ahead and buy. Every house in SM will appreciate if you wait long enough...I don't think anyone is disputing that.

Anonymous said...

If just one of you real estate clerks could point out exactly what changed between 2000 and 2006 on the westside, maybe all the bears would go away. But the truth is, you can't point to anything, and you know it.

Hey anon, did you even read the article from Ben Stein?

"Middle-class families were priced out of the market, and the brokers said, ''But the rich will always be able to buy.'' Ordinary rich people were squeezed out of the market in some areas, but the brokers said, ''Never mind, the music business people will buy anything.'' The music business fell into a depression in 1979, and the brokers said, ''The foreigners are buying. Compared with Paris or Teheran, real estate in Holmby Hills is a bargain.''

Sounds familiar.

Westside Bubble said...

Quick response to reel it in (more later for others' comments):

Yes, the age of flipper delusions is over, but long-term investors in places like SM will be fine.

Yes, but if prices are first going to fall 30-50% in 6-10 years, wouldn't I do better waiting to buy that long-term investment? That's real money saved now.

Anonymous said...

You are delusional if you believe that the bubble in Santa Monica will not pop and fall to earth just like real estate is in the rest of the country.

To suggest that Santa Monica is detached from the rest of the nation is idiotic. Using the bulls logic, the price for a shack in Santa Monica will be $20,000,000 in 10 years. Guess what, it ain't going to happen.

Also, I'm not fixated on Santa Monica or the Westside. The prices in L.A. have ALL reached unsustainable heights. Something will have to give since everything is crashing all around.

Anonymous said...

BTW, no one is making the assertion that they DESERVE to live in Santa Monica or any other neighborhood. In this country nobody is entitled to anything. Westside real estate will always be valuable and expensive. It isn't EVER going to be "affordable" like Lancaster/Palmdale is.

That is not the point.

The issue is that Westside real estate prices have soared on the bubble just like all other real estate has in this country. And the prices are not sustainable and there will be a correction.

And since we live in a capitalist society, the speculators and others who helped fuel this runaway train will get their just rewards.

Face it, people just LOVE watching a train wreck!

WarChestSM said...

dlp, you are completely off base (thats what you wanted to hear, right?). Here is something for you to think about from Routers:

NEW YORK, Nov 7 (Reuters) - U.S. taxable money market fund assets rose by $34 billion to a record $2.52 trillion in the latest week, and tax-free assets grew by $140 million to an all-time high of $442 billon, the Money Fund Report said on Wednesday.

Anon with bullish case,
I agree with the other anon who said, "Hey anon, did you even read the article from Ben Stein?"

It would seem to be contradictory to base a bullish case off of his dated comments because the irony is that all the "facts" about why the market will hold up were/are being touted today. They haven't prevented cycles from bringing values down in the past and it will be no different this time.

I think almost everyone here is very very bullish on the long term fundamentals of the westside...we just can't help noticing the small fact that we just went through one of the biggest real estate bubbles in history.

Westside Bubble said...

A little more. From Reel it In:

There is something ghoulish and giddy about this blog. ... Yes, we are in a down market. No, the world is not ending.

Hey, it is a bubble blog. Although I'm getting interested in the next phase after things fall. You can only talk about falling so long.

Anon 9:20, don't forget Santa Monica did fall 25%+ from 1990 to 1996, and we've had a bigger run-up this time. But no, I'm not looking for north of Montana to ever get cheap.

Anonymous said...


I'm not quite willing to throw in the towel yet - I know I've been griping about this for awhile. But then the same day you get your Reuters post (Nov 7) comes this headline from the Wall Street Journal section Money and Investing:

"Next Fear: Corporate Debt"

It feels kind of chilly from here.

(And I agree with any who says if you hold on to the property than you'll do fine in the long run. But if you can't make the nut - or nuts with so many 'investors' going into real estate - then long term isn't an option. I saw a very very smart developer get badly spanked during the last downturn. He was worth a fortune but ended up losing his shirt on McMansions in Malibu. Now he's living in his brother's condo on a meager retirement income.)

Anonymous said...

It's true- many speculators got wiped out last time and were never able to get back in.

This blog seems focused on single family units and not on multi family

any evidence that multi family is going down?

let me put it another way - if i bought a ten unit building south of montana / north of wilshire two years ago what would my gross rental yield have been ? if i bought it today what would it be

Westside Bubble said...

Good question, Anon, and I don't have data for that. Cap rates are quite low in Santa Monica, partly because lower-end properties are valued more by lot-value for building condos than by net income.