Saturday, December 17, 2005

Deep Thoughts.

I have been profoundly depressed lately. As I do more and more thinking, I have come to the conclusion that the whole concept of a "housing bubble" has been very costly to me. When I decided two and half years ago that I should rent, because the cost of ownership became too expensive, I had no idea that it would become so much more expensive. All the financial books I have read which told you to save as much as you can, don't go into debt, buy on the cheap, etc....they have all served me poorly up to date. The more I think about it, the more I realize that there has been a tremendous tranfer of wealth in America, from savers to borrowers. From the deleveraged to the leveraged. Those of us who are uncomfortable with high debt loads have been crushed by people who have no such fears. I now believe there will be no "bust" in real estate. The only thing that will happen is inflation eating away at the gains. Perhaps there will be a 10-15% "correction". So much money has been made in the last 5 years, that people can last for another 5 years without having to drop prices. It seems to me the government will do everything in it's power not to allow asset prices to fall, as we are now an asset based economy. One could argue it is a matter of national security, since our wealth is on of the two things that separates us from the rest of the world (the other being our military). And, our wealth now is largely asset based as we really have a very weakened manufacturing sector. Furthermore, even if the value of housing erodes over 3-5 years, is one really prepared to wait it out? Well, if you are in your 20's, perhaps it's possible. But, those of us with kids can't really wait that long. What is the point of buying a house once your kids are in college? It is extraordinarily sad that many of us will have to grossly overpay for our house, and watch it's value erode, even though we didn't enjoy any of the so called "equity cushion". I don't know if Greenspan was right, and I don't know if he was wrong, but he did what he felt was necessary to save the economy. Massive asset inflation obviously ensued, and those of us who live in expensive areas of the country, who were caught on the wrong side of this avalanche will have to pay a dear price. I don't see any winning strategy at this point. We will all have to pay a heavy burden for the unwinding of this rediculous exercise in Keynsean inflation, but not all of us enjoyed it equally. I hope we will all learn valuable lessons from this debacle.


Blogger Alan Greenspend said...

Hang in there, things are horribly imbalanced and rebalancing will be painful. Be creative and proactive with the knowledge you have, you predicted the future, just on the early side.

Be thankful that you are not saddled with the terrible personal debt burden, and the new Dickensian debtor laws as much of middle and lower class America will soon find themselves in.

"It seems to me the government will do everything in it's power not to allow asset prices to fall, as we are now an asset based economy. " You are right about that, but it won't matter how much money they print or if they lower interst rates to zero. But it will prolong the problem and make for an even harder landing.

I feel for your kids, my colleague Anya has a book out on their debt burden-

If we had children, my wife and I would be looking at expatriot life in a country with excellent healthcare and fiscal restraint. Life is an adventure, fraught with peril!

11:16 AM  
Blogger Out at the peak said...

Yeah, you were just early with your prediction. I did not get out until I saw clear signs of trouble. Looking at purely fundamentals removes the emotional and herd aspect of the market.

There will be a market drop after we experience a lot of stagnation. Too bad we won't see serious numbers until 2007.

7:30 PM  
Blogger NJREFUGEE said...

I don't think you should be depressed. Real Estate values aren't based on anything particularly fundamental, but have been driven by easy credit and creative mortgage financing. If the average person had to come up with 20% down or had to make payments on a mortgage at a higher interest rate, demand would dry up immediately. The fact of the matter is that real estate prices aren't being driven my real increases in wages and aren't sustainable unless the fuel of easy credit is continued. That particular spigot is starting to get shut off.

You may find yourself in a favorable position at some point. If one just has to buy at this point, I think it's wise to do so in a market other than NJ/NY/CT/DC/CA.

7:32 PM  
Blogger Chip said...

I'm assuming that you used to own, sold out and then rented. If so, sure, you might have been early, but you just as easily might have been late. Even at the point you began renting, I'd guess the rent ratio was pretty favorable to you.

Without all these blogs, I might not have been able to convince my wife to agree on selling and renting. Now she loves renting, as we are living better for less. We thank all of you, collectively.

4:26 PM  
Blogger Metroplexual said...

42. (hitchhikers joke) The article in the SL 12/22 showed lagging growth in NJ is due to housing costs. I disagree, if it is an asset bubble these Gov't free marketers will let it ride unitil it affects the banks, but the new bankruptcy laws are going to fix that, right?

12:40 PM  
Blogger xSparta said...

As a former Sparta, NJ resident, I just found this RE blog today and decided to read it.. I have been following many other blogs for the last 6 months. I think the blog author will get his wish. I thought the housing market was going to crash 5 years ago. Sold a big house and bought a smaller house. I do think it is in for a rough ride, especially in the Northeast, CA, SW, and Florida where I now live. Naples has been pegged as being 80% evervalued by more than one study. Why?? Of couse low interest rates spurred a lot of the speculation in condos and new houses and greed. . However, I just read an article in a San Diego newspaper concerning dishonest appraisers. Thay were pressured by the lenders to trump up the prices. One disgrunted appraiser in CA claims 9 out of 10 "deals" were corrupt. Another nail in the housing market.

As Jim Cramer said, bulls make money, bears make money pigs get slaugthered. He might be right!

12:38 PM  
Blogger njpineygal said...

I sure hope you didn't give this up!

I sold in 2002 after my 5 bedroom haunted house in West Orange doubled in value over its purchase price 8 years before. In retrospect, had I stayed in until 2005, I would have had free college tuition for my kids and a Mercedes in the driveway of the house I now happily rent in the pines.

It's nice to think I could have had all that in my pocket. All things considered, though, I would rather have gotten out when I did and not made a six figure profit than still been stuck there watching prices come down again.

7:16 AM  
Blogger Roadtripboy said...

NJ Doc, I have just logged onto your blog after spending a lot of time reading Grim's Norhtern NJ Housing Bubble Blog and SoCalMtgGuy's "Another F'd Borrower Blog. These blogs have been tremendously helpful to me in understanding the run-up in real estate prices over the past 5 years and the potentially dangerous financial situations that lenders and realtors are all too happy to push you toward. A realtor was pushing me toward a similar bad situation a couple of years ago and I stopped looking for a condo---I refused to spend my "future income" on an interest only loan.

From what I've read on your collective blogs, the "transfer in wealth from the savers to the debtors" I think is largely illusory. That so-called wealth is in the form of equity which is meaningless unless you sell your house and capture those gains. And unfortunately, too many people have leveraged that very equity to fund upscale lifestyles. When people have little to no equity left they could be in position of owing more on their house than it is worth---and god help them if they have to sell. The speculators who have driven up this market should really be called "gamblers" because that is what they are really doing.

Cheer up (please??). I don't envy these individuals and I hope that yo u aren't kicking yourself for not joining them. Like others have said, it seems like you did the right thing a few years back by getting out and renting. When this bubble bursts over the next few years, people like you and I will be able to get in. Personally, I need to wait since I am one of those people who is "priced out" right now. Hope this helps.

1:08 AM  

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