Housing Bubble Correction Update: Here comes the jobs crash (Part I)

[RebbePete]

Re: Housing Bubble Correction Update: Here IS the jobs crash (Part I)

What I was hoping to get some perspective on is when and how I should buy my house given these conditions. New or existing? Pay in cash or take a mortgage?? etc. Any ideas in general on how I can maximize the money I have saved to get a nice place to live in.

Historical averages for house prices are about three times median income. They still have a long way to go to get there; they'll probably undershoot, but if you're buying to live in a house, the 3x median income is a good indicator that house prices are "about right."

Even in inflationary times, I would say paying cash is preferable. Even if your mortgage is getting cheaper since you're paying it back with depreciating dollars, you still run the risk of losing your income and defaulting on a mortgage.

As far as new vs. resale, resales will probably be a better deal IMHO due to all the foreclosures. In my case, thank God, I actually bought a new home in the last downturn during the mid-90's that was a foreclosure. How was that possible? The builder finished the house except for carpeting, painting, etc., the buyer backed out, and the builder went bankrupt before anyone ever lived in it. It sat vacant for a year, so the bank gave us all kinds of goodies. Keep your eye open for deals like that.

- Pete

[raja]

Re: Housing Bubble Correction Update: Here IS the jobs crash (Part I)

I'd like to point out a potential misunderstanding of Ka-Poom Theory.

Either way, whether prices are inflated a little or a lot, or if we are completely wrong and we get modest deflation, it's all the same thing: we are all poorer. We will have less purchasing power either way because in any case the purchasing power of income is falling.

The advantage of inflation under conditions of indebtedness is that it allows past debt to be paid down more quickly out of income and also means that more money can go to other uses than paying down debt. For this reason there is less unemployment if a debt deflation is managed down with modest inflation as part of the program.

In modest inflation home prices will continue to decline–asset price deflation vs commodity price inflation–but interest rates will rise. In terms of your purchasing power it's all the same.

If we are right about inflation then you should be able to exchange inflation hedges for inflated goods prices, but there is no net gain, only an avoidance of losses that might otherwise be experienced if deflating assets are held instead.

Growing up in an era of continuous real estate price inflation, the hardest thing for us to get our heads around is that there will be no money to be made in property for ten or twenty years. In the wake of the housing bubble residential real estate is dead as an asset class.

Fred, you're leaving out hyperinflation in your analysis . . . .

I know EJ isn't predicting hyperinflation, but he admits it's a possibility, and the feeling I get is that he thinks the likelihood is increasing.

As a side note, my wife's relatives in a middle sized-town in Ukraine are reporting that without warning to the general public, the banks there are not giving depositors their money, i.e., people's savings are frozen! We can't even send money to help, since the Debit card we sent for transferring money won't work . . . ATMs are no longer allowing transactions :eek:

[GRG55]

Re: Housing Bubble Correction Update: Here IS the jobs crash (Part I)

Thoughts welcome on this.....

Let's say I want to buy a house in TN where we expect unemployment to continue increasing and housing prices to continue falling and I have cash on the sidelines to make this purchase. Ideally, I would want to wait until the final months of Ka, right before Poom hits, right?

Let's change that and say I want to build a new house instead of purchasing an existing home. Ka would definitely be a good time for this as input prices are down and builders are desperate for work, right? Expecting poom, would it be a better idea to take out a mortgage and let dollar devaluation effectively lower the cost of my mortgage payments or pay up front in cash?

Please, anyone feel free to give me your take on this one. I'm a professional basketball player in Europe for the moment but I plan on living in TN sometime in the next 5 years and I'm trying to figure out the best way to take advantage of the current situation regarding housing.

Any ideas on timing would be great also...

Thanks!

Be very, very patient. And wait.

Several of us here witnessed first hand the spectacular housing bust in the 1980's in the oil patch jurisdictions of Alberta and Texas, and there have been a number of posts in the past on iTulip about that. Worth searching and re-reading imo, because that is probably the closest analogue to what's happening today.

1. Building new will likely cost more than buying in a distressed market. In distressed markets homes sell for below replacement cost. If you build you will end up with a home that cost more than the market price. Not necessarily the wrong thing to do, but understand the consequences.

2. Wages and raw material input costs are "sticky". They do not come down as fast as you might think. This lag means that input costs are usually the cheapest just as the market is entering the early stages of recovery of existing housing stock after a long decline [point of maximum pessimism]. We probably aren't there yet in most jurisdictions, but you'll need to research and judge that for where you want to settle.

3. No need to rush because even if the market has bottomed where you wish to reside, it is highly unlikely there will be any price increases until employment security and incomes start to rise, and confidence to take on long term debt [mortgages] returns.

[we_are_toast]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

Build your own home! I don't mean hire a contractor to build a house for you, I mean literally build your own home. Start your research now while materials are still dropping. Design it to be energy efficient and powered by the sun.

Get all the books you can on building houses (there are a ton of them) and plan on spending 5 years of weekends until you move in. After all your hard work you'll be amazed at how good you feel to be living in something you built with your own hands. You'll have exactly what you want, you'll know how to fix what needs to be repaired, the material quality will be high, and you'll save 40-50% of the price of cookie-cutter house.

[labasta]

Re: Housing Bubble Correction Update: Here IS the jobs crash (Part I)

Thank you for the replies. I do not think I made myself clear initially. I am not a housing speculator. I know that game is dead and I was too young to play it myself.

My situation is this:

I have enough cash saved to buy an average house in which I will personally reside in TN. I know two things.

(1) Housing prices and the prices of materials required to build houses are currently falling. I assume this has something to do with Ka. This bodes well for my ability to afford a home with my dollars that are accruing 3.3% in an etrade savings account.

(2) At some point Poom will occur and it will change the ballgame. At this point, housing prices and the cost of materials required to build a house will begin climbing as the dollars in my etrade account devalue in an inflationary situation, be it modest or hyper. At this point, I am able to afford less house for my saved money.

Given the above conditions, it seems to me that there is an ideal time during Ka and before Poom for a person who has saved dollars for the purpose of buying a house to go ahead and buy the house.

What I was hoping to get some perspective on is when and how I should buy my house given these conditions. New or existing? Pay in cash or take a mortgage?? etc. Any ideas in general on how I can maximize the money I have saved to get a nice place to live in.

Haha, unfortunately that is as articulately as I am able to explain my position and question. I realize there is a distinct possibility that I am missing the big picture and embarassing myself but I'll risk cyber shame for the opportunity to post this rather important personal question on this forum where I put great stock in the knowledge and intelligence of other community members.

Thanks again to all.

Amazingly, I am also on the same boat, but not quite as fortunate. At today's prices we could afford half a house outright. I was thinking of picking one up in a couple of years time (to live in till I kick the bucket).

It would have to be perfect enough for us if it was going to be second hand. Land prices are generally way too over inflated here in Ireland. The cost to build a house is 100 to 150k. Land in a good location subject to planning permission and enough to have a large vegetable patch fruit trees and kiddies play area backgarden tends to be around 150k. I'm sure there are extra costs involved like kitting out the new house just the way we like it and legal fees and stamp duty and making the house as green as possible (my dream is to have an energy self sufficient house, purely emotional reasons). This will add to it as well. We are probably looking at around 350k in total.

At the moment, I can get all that on an older house for about the same price. Land and second-hand home values are shooting down here, but when serious inflation starts, the new build price will rocket. I suppose it's swings and roundabouts, isn't it? (six and half a dozen etc.: English phrase)

Would second hand prices of houses rise even in a poom? Would incomes be raised in a poom? I suppose they would, but not by as much as everything else, as we would still be in a recession. On that note, I guess buying a second-hand home which fits our requirements would be perfect.

The question is: Is the poom caused by merely government adding zeros thereby nothing goes up relative to one another, or is poom caused by increased import prices due to sudden stop/capital controls?


I guess the only way to take advantage of an economic crap situation would be to still be employed. Everything goes out the window if income is reduced. That is gambling a bit. May be purchasing is based on chance of keeping future income.

In the end I probably wouldn't buy if the mortgage (up to 25 years) I was paying was more than what I pay now in rent (income adjusted if poom occurred). Yes, the bought house would be nicer, but still. Interest rates might be shockingly high in 2 years. I'm still confused though. I'll probably just buy in 2 or 3 years and be done with it.

Mmm, this is difficult. Let's say dream house costs 350k (end price) and I have 100k. Dream house goes down to 250k in 2 years.

I have a mortgage of 150k instead of 250k. But interest rates have shot up so I am paying the same amount per month.

[c1ue]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

Here's a rule of thumb for when it might be the time to buy a house:

When the house PITI (mortgage (principle+interest), taxes, and insurance) monthly payment is less than rent, even WITHOUT the mortgage deduction.

At that point people are actively avoiding ownership - and clearly we've reached over-reaction point.

[jtabeb]

Re: Housing Bubble Correction Update: Here IS the jobs crash (Part I)

Sold my car in August because I was already biking everywhere anyways, rain, shine, sleet or snow. My wife has one for the kids, but hardly drives it. I have always felt that cars are a very bad use of money if one can avoid them.

As for the housing, Roubini seems to think that we are looking at another 20% down in 2009. Based upon the vibe I am getting from realtwhores, I think we have a ways to go before the realization that the boom is not coming back sets in (at least in the Boston area). But it is nice to see prices falling quite a bit faster. Perhaps if I wait until 2010 I can buy with cash. The last time I bought a place, I paid cash. My realtwhore thought I was crazy, but it felt great.

I was hoping to buy with gold or silver

[bart]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

Originally Posted by mercerbear
Please, anyone feel free to give me your take on this one. I'm a professional basketball player in Europe for the moment but I plan on living in TN sometime in the next 5 years and I'm trying to figure out the best way to take advantage of the current situation regarding housing.

Any ideas on timing would be great also...

Thanks!

Food for thought:




from my real estate page, chart updated monthly.

[donalds]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

Fred,

You state:

"Cash will continue to be king until heroic monetary and fiscal stimulus finally increase inflation expectations in the economy."

I question whether the general public will see "heroic monetary and fiscal stimulus" as setting the stage for actual future inflation? What evidence leads to you this assumption?

I question whether the general public will draw such a conclusion. Seems to me they won't generally see inflation until it shows up in increasing prices. From this they will then develop the expectation of future inflation.

You see it the other way around, that the expectation for inflation will proceed the real inflation, and that this expectation will develop as a result of the "heroic monetary and fiscal stimulus". Am I correct in my understanding here? If so, on what basis do you ground your assertion?

[derelict54]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

My Two cents:

This winter is going to be a "nuclear winter" for the real estate industry. It will be the lowest transactions in a long while. The real estate sector relies on three things.

#1 long term treasuryrates, and the spread (fannie freddie) agency bonds.

#2 access to credit (loan programs, requirement by banks etc.)

#3 feeling of the market participants (friends and neighbors)

Right now spreads are at all time highs, access to credit is very tight & still tightening, friends and neighbors still think getting a foreclosue is a good deal.

I would wait until:

#1 Bush or Obama either begs the foreign governments to buy our fannie bonds, or the fed starts doing it themselves (which is most likely) something like the tarp, give us your crap and you can only buy good agency bonds with it. Meaning our underwriting guidelines are back within realm of realism and these new ones shouldn't default.

#2 unemployment is near its high, meaning that the banks are going to see less defaults, we are a two person debt paying society right now, one person in a home loses their job, the debt defaults.

#3 What Fred said, this will get so bad that friends and neighbors will say don't buy any real estate it is the worst investment ever.

Markets tend to fluctuate, and as this market was way overzealous on the way up, it is likely to overshoot on the way down. The key thing though is that housing is still affordable, people can make their payments, and that has most to do with mortgage rates. They have been trading in the same range of 5.5 to 6.5 since late 2006. I would look for the government to do all they can to stabilize these rates loe, after all once you see on CNBC that housing permits have gone up, or preexisting homes have gone substanitally higher (not just foreclosure demand) We are most likely to see the bottom. I would think Q3 2009. People will start coming out looking for bargains next spring, through the summer it will start gaining a bottom. But two things to keep an eye on:

-Renegotiating of Bretton Woods II (which could signal Poom, if not negotiated correctly by next administration)
-How mortgage spreads and the treasury bond markets react during the first few months of the next administration.

Regardless if you build or buy a home next summer, (consider our ecomonomy and currency foundations nearly the same) you should be within 5-10% of the bottom if not the bottom. I would pay cash then, (being deflationary) and when you start seeing appetites for agency and treasury bonds starting to deminish, The poom is gaining traction, I would take a cash out loan to 50-65% (guaranteeing the best rates) and use that leverage to your advantage in the inflation to follow.

Whether you build the house or buy a foreclosure, either will depend on the deal, but you may be happier in a house you build and given the commodity prices and desperate labor you may be able to get yourself a pretty cheap custom home.

[jtabeb]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

Food for thought:




from my real estate page, chart updated monthly.

Bart, I see it but what are you trying to say? (When do you think it's time for me to buy MY house?)

[bart]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

Bart, I see it but what are you trying to say?

Nothing complex, mercerbear asked about timing and that was my best answer for another timing guideline. In my opinion, we're far from a bottom... assuming "normal" patterns.

[Jay]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

Nothing complex, mercerbear asked about timing and that was my best answer for another timing guideline. In my opinion, we're far from a bottom... assuming "normal" patterns.

Bart, thanks, great chart. You have few other too don't you? ;)

[mercerbear]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

I would like to thank everyone who offered their opinions and advice to my questions. I really do appreciate it!

[Charles Mackay]

Re: Housing Bubble Correction Update: Here comes the jobs crash (Part I)

jtabeb, mercerbear, others

While the usual metrics have worked in the past (cap rates etc.) I don't think they'll work in this "greater depression". How can you measure something in a currency that will be massively devalued overnight?

Do you really think we are going to get a green light signal that the FED is re-inflating fast enough to put us back into inflation, allowing us all to move to the other side of the boat and protect ourselves? Did they warn the citizens in 1933 before the 70% devaluation? No!

Might that 70% dollar devaluation happen in 2009? That prior devaluation happened in FDR's first term. Will it happen in FDR II's first term (Obama)? FDR was inaugurated into office on March 4, 1933 during a banking panic. That is when he uttered the famous phrase "we have nothing to fear but fear itself". He then signed Executive Order 6102 confiscating American's gold on April 5, 1933 just one month after taking office! The penalty for non compliance was punishable by a fine up to $10,000 (which is $166,000 in 2008 dollars!) and up to 10 years in prison!

The hot money currently sloshing around the world trying to protect itself from the inflation/deflation whipsaw will have to be devalued overnight in order to wash out the collapsing debt laden financial system.

At the bottom of the depression in the 30's you could buy a typical US house for $3500 and after the dollar devaluation, 100 oz of gold bought that house. In 1980 during the wave IV assets/gold revaluation you could buy a typical US house for 100 oz of gold. Some time in the next few years you'll be able to buy a nice house for 100 oz of gold.

So, I suggest you accumulate 100 oz of gold and keep it overseas in a depository like GoldMoney and then buy that nice house for cash when the median existing house price in the US (published monthly) reaches 100 ounces. I have published my houses/gold chart many times here on iTulip but if it can't be found I'll post it again upon request.