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

[Slimprofits]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

My mother, in a desirable, suburban Massachusetts town, is just a few months away from paying off her mortgage. I've been trying to convince her to sell while some of the idiots in Massachusetts are still buying. Hopefully it is not to late and for her sake, she'll listen to E.J., if not me.

[CanuckinTX]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

My mother, in a desirable, suburban Massachusetts town, is just a few months away from paying off her mortgage. I've been trying to convince her to sell while some of the idiots in Massachusetts are still buying. Hopefully it is not to late and for her sake, she'll listen to E.J., if not me.

And there certainly are some idiots still buying. I just spoke to my friend last night who is renting in Huntington Beach, CA after selling his house well over a year ago where they made a very tidy profit. Amazingly, after being so fortunate to dump a house last year, they're getting the itch to buy again and are looking for an ever MORE expensive home than they had because prices are down so they think it's bargain time.

They even got outbid on a house just recently! I tried to tell him once he's way early but you can only say so much before they have to live with their consequences.

[RebbePete]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

One kind of state you left out was a "Government Pork Barrel State." Here in central Maryland, 99.44% of the economy seems to revolve around US Government workers and contractors. Outlying areas of Maryland are, instead, agricultural.

How in the world can you estimate the US Governments expenditures going forwards? Will we see a fire hose of money injected into the state economy as US Government-oriented employment spikes up, or will they cut back in the face of rising deficits?

The only other state I can think of that might be significantly dependent on US Government funding would be Colorado.

- Pete

[raja]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

EJ or anyone, some advice/opinions please . . . .

My wife and I are retired, and we've got most of our savings in short-term T-bills and gold. We've got enough to support ourselves for the rest of our lives . . . as long as the value of our savings does not decrease dramatically.

Unfortunately, we expect that our dollars in T-bills will be eaten away by inflation, and we're using gold to partially hedge against that. But we want to diversify and invest in something "real" to reduce losses to our retirement nest egg. We fear putting it all in gold -- too risky to put all our eggs in one basket.

We've considered buying rental real estate, figuring that people will always need a place to live, and that rental rates will remain "real", that is, will probably go up as inflation rises. But we are confused by what seem to be opposing factors . . . housing prices are going down, yet the value of our dollars used to purchase that property is also being eaten away by inflation. So, my question is, will real estate prices will drop faster than the value of the dollar? If this were the case, it would seem to be better to wait a few years, and buy later . . . even though our dollars would have less purchasing power.

Another conundrum is that we can get low interest rate loans now . . . and we can keep enough cash socked away in T-bills to insure that we can pay these loans off over their term. So, if inflation is going to eat away the value of the dollar, wouldn't it be wise to buy now with a mortgage, and pay back the mortgage over the next 30 years with dollars that are continually decreasing in value?

Thanks for your input . . . .

[sn1p3r]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

How does this situation balance out with the "good to be a borrower" inflation scenario where my crappy bonars pay for huge pieces of my mortgage? I thought sometimes inflation was good for the borrower? :rolleyes:

[LargoWinch]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

Hmm Raja. If I may give you my 2 cents on this:

Real Estate is declining and will do so for the short and medium term (2-7 years). As such, the rent income will not be enough to offset the decline in value of your property. So RE is out.

The way I see it, is that you can do a combination of the following:

1- PMs (mostly gold/silver)

2- High-Dividends paying stocks outside the US in Canada, Australia, Brasil or Russia (currently Canada and Russia are the only two net oil exporter of the G8). Make sure you have no exposure to $USD

3- Buying some currencies (RMB, SF, YEN)

4- Buying energy ETF (Natural Gas, Oil)

5- Buying Agricultural Commodities both Hard and Softs via ETF

6- Have 6 Months of expenses in cash


... and that is my 2cents.

[hasbeenblocktrader]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

I am only a washed up old trader but it seems to me that in light of the developments in FNM/FRE it seems like an ideal time to discuss the massive derivatives exposure....perhaps a re-visit to the Forbes 2003 article re: Warren Buffett and the "The Great Derivatives Smackdown"...It is too big for our current bought and sold government to really turn this....

[RebbePete]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

EJ or anyone, some advice/opinions please . . . .

My wife and I are retired, and we've got most of our savings in short-term T-bills and gold. We've got enough to support ourselves for the rest of our lives . . . as long as the value of our savings does not decrease dramatically.

Unfortunately, we expect that our dollars in T-bills will be eaten away by inflation, and we're using gold to partially hedge against that. But we want to diversify and invest in something "real" to reduce losses to our retirement nest egg. We fear putting it all in gold -- too risky to put all our eggs in one basket.

We've considered buying rental real estate, figuring that people will always need a place to live, and that rental rates will remain "real", that is, will probably go up as inflation rises. But we are confused by what seem to be opposing factors . . . housing prices are going down, yet the value of our dollars used to purchase that property is also being eaten away by inflation. So, my question is, will real estate prices will drop faster than the value of the dollar? If this were the case, it would seem to be better to wait a few years, and buy later . . . even though our dollars would have less purchasing power.

Another conundrum is that we can get low interest rate loans now . . . and we can keep enough cash socked away in T-bills to insure that we can pay these loans off over their term. So, if inflation is going to eat away the value of the dollar, wouldn't it be wise to buy now with a mortgage, and pay back the mortgage over the next 30 years with dollars that are continually decreasing in value?

Thanks for your input . . . .

First a disclaimer: I am not an investment advisor, so if you take my advice and lose all your money, it's your own darn fault.

I would not buy investment properties until the traditional measures of return on investment (ROI) make sense again, i.e., that you are taking in 10% or better from rent than you are paying for the upkeep, mortgage, etc. on it.

When the time comes, I might be buying commercial real estate, but only when the ROI works. Commercial is much easier since you're not getting called at 3 in the morning because a tenant got drunk, wrenched the toilet out of the floor and flung it through the glass window injuring a passer-by (who is now suing you). My grandfather had several apartment buildings, and, believe me, that's not much of an exaggeration.

Let's say you buy real estate for $200k, and have $200k in treasuries to cover it. You suffer a loss of $10k/year because the rents don't cover the mortgage, but it's partially offset by the $8k you're getting from the treasury interest. You're still losing $2K a year. Then the economy suffers a deeper downturn, no one can afford the rents, so you have to lower them. Now you're losing more money on it.

Right now, I'm keeping my money in ultra-short term treasuries (13 week), money market funds (be careful, some money market funds are better called "mortgage market funds"), gold (both a mutual fund and physical), silver (ETF and physical), Canadian junior mining stocks (for a boost both from currency differential and gold price) and miscellaneous other stocks. My house is paid off and I have no other debts. It's called "batten down the hatches, there's a storm coming."

- Pete

[zoog]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

I've said this before but I'll say it again. I read the 2005 housing peak piece sometime in late 2006, after lurking around various bubble blogs and starting to believe those guys might be right. The iTulip analysis was thorough and convincing. It took a while longer for me to decide that Portland was very much part of the bubble as well. Fortunately, we were late to crest.

At any rate, once I decided that 1) Portland housing was in a bubble and prices would decline 2) I estimated prices would decline more than I had equity [including imaginary] in the home 3) I didn't like my neighborhood enough to just ride it out; I prepared to sell.

The thing is, it took me months to finish (and in some cases start and finish) various projects to get the house in shape to sell. I got it on the market just as subprime suddenly hit the brakes, and just as Portland was peaking. It took seven months on the market before I found a buyer and sold.

In retrospect, I should have taken a month or two leave of absence from work to get the house ready and on the market. The difference in what I could have sold it for would have easily covered the salary loss.

My point is to say that if, after reading this, you think the best course of action might be selling your house, please do not hesitate. The real estate industry always says It's A Great Time To Buy!. Today is not a great time to buy. Unfortunately, it's not a great time to sell either. However, now is a better time to sell than later. Be prepared to sit on the market for a long time, and/or sell for less than you think the house is worth. In a falling market, you have to make your house more appealing than comperable houses, and the most important way to do this IMO is to drop your price low enough below the comps that your house appears to be a bargain. While I was still trying to sell, and I looked at listings in my price range and area and most of the other houses were something I would not want to live in... I knew I was getting close. YMMV.

You have to maintain some detachment during this process too. Chances are, you really like your house and are sad to be letting it go. Don't let fondness and nostalgia get in the way of cutting your losses and bailing out. You also have to detach yourself from your buyer and the likelihood that further down the road they are going to be in trouble. In some ways, I still feel bad about selling my home to the people who eventually bought it. I think they will regret the purchase, if they don't already. But I am so happy to be done with it.


netdance expressed skepticism about the future employment prospects in California, relative to alternative energy. I looked at the chart and summary for Oregon and have some doubts as well. Secretly, EJ is a raging optimist!:eek: I have no idea if I might lose my job or not. I don't really feel adequately prepared for such an event, but I'm better prepared than most people out there. Certainly I am relieved to not have the mortgage hanging over my head, or any other debts.

A couple days ago I read an article about this year's upcoming Street of Dreams homes here in Portland. I assume most cities have a similar annual gig where builders construct a collection of enormous, gaudy houses with all the bells and whistles, let the public come tour them for "design inspiration", and then offer them for sale. They are going ahead with this year's houses, even though none of the 2007 Street of Dreams homes have sold!

[Ed]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

raja,

Put everything in TIPS, of maturities you figure out. If you are not familiar with TIPS, it’s because they don’t make much money for middlemen! TIPS are very high merit. To start, you can link from here:
http://homepage.mac.com/ttsmyf/recDJIAtoRD.html
and current real yields are here:
http://www.bloomberg.com/markets/rates/index.html

For homes’ pricing guessing-the-future, look at the past shown soundly:
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
and
http://homepage.mac.com/ttsmyf/Freds...ght_Lines.html

Ed

[World Traveler]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

For most people, it only pays to assume debt in inflationary times if their wages and income can keep up with inflation. That hasn't happened so far.

That's the difference between today and the '70's. I was a young working adult in the '70's and the common wisdom in mid to late '70's was to buy more house than you need, because you'll pay mortage back in cheaper dollars. At that time, U.S. was still a domestic-focused economy, unions were still fairly strong and widespread, and wages were going up with inflation. I went to work at a large corporation in late 1978, and in fall, 1979, we all got an across the board 5% salary increase because, we were told, our standard raises had not kept up with inflation.

That hasn't been happening this go-round, if anything, corporate America is using layoffs to solve their problems. As Michael Hudson and Eric have said, if wage inflation happens this time around, it will be due primarily to political factors and government policy.

My opinion is that it's to early to call. Maybe after the fall elections and in 2009, we'll have a clearer picture if wages will be allowed to rise.

[Chris Coles]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

This has just come in on Channel 4 News this evening.

MORE US BANK WOES

Also tonight more financial woes unravelling Stateside that could eventually come our way. The big, state-backed Freddie Mac and Fannie Mae are in deep trouble - they own or guarantee about a half of the mortgages across America. Share prices plummeting and the US treasury holding off from stepping in just yet. We're on the case as to where the ripples coming across the Atlantic could end.

http://www.channel4.com/news/article...dicted/2332297

[jtabeb]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

They even got outbid on a house just recently! I tried to tell him once he's way early but you can only say so much before they have to live with their consequences.

This Just happened to a buddy of mine trying to buy a forclosure in citrus hills (north of Sac, CA) He bid $5KL over list and was out bid several times with the final offer $30K over his initial offer (Cash OFFER BTW). That happend to him several times, so now he's just going to rent.

Form his perspective, there were ALOT of people (ivestors with deep pockets) running around buying up foreclosures with cash.

Wonder what that means?

[dbarberic]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

Revelation #2:

The spike in unemployment in this P/C town is unlike anything on record, at least since the birth of the FIRE Econonomy 35 years ago :eek:

I current live in Northern Ohio and comparing this chart to overall Ohio one, as well as my own person experience, seems to indicate that Ohio could be split more into two regions; North & Centeral/South.

Nothern Ohio is manufacturing heavy with large amounts of businsses supplying the American auto industry. The only sector that is probably still holding is heathcare (the world-class Cleveland Clinic), but with a shrinking population, I'm not sure how much longer that will hold too. I would expect that if you did a chart for Detriot and the surrounding areas, it would be very similar to the one above.

The Central/Southern part of the state is more diversified accross multiple sectors: technology, military/government (Dayton), consumer staples (P&G), banking, retail, as well as the entire state having a strong agriculture industry. The greater weighting of these parts of the state are probably what gave the suprising rating of "fair" for the overall State of Ohio.

It would be interesting to compare the chart above to Detriot, as well as the Columbus, Dayton, and Cincinnatti areas of Ohio. I'm curious if what I suspect holds true.

[c1ue]

Re: Housing Bubble Correction Update: Fasten your seat belts, here comes the jobs cra

Buying rental property may not be a bad investment, but I would very closely monitor the cap rate: i.e. rent divided by purchase price plus ongoing expenses.

I've talked previously about the little old lady in Fresno who was buying foreclosed unwanted houses for $10K and $20K in the mid to late '80s; these houses were fixed up for between $5K and $15K then rented out for $500/month. The worse case cap rate was then: $6K/($35K * 1.05) = 16%.

The 5% because the purchase prices were much lower than replacement value - for full replacement value 1% would be ok. But note that since she had so many, she didn't both paying fire insurance. After you own 50 or so houses, the fire insurance payment equals replacement cost of 1 house every year!

So, can you get a 10% cap rate with your rental property? This does not include any mortgage interest deductions - a straight cash proposition.

Every 1% below that magic number - your risk increases.

That's why even with the drops we've had, most major markets are still WAY too expensive to buy rentals in.

Just as Internet stock in 2002 were cheaper, did not mean they did not get even more cheap afterwards.

The point we're at - it is very conceivable that we end up with lower real wages. This in turn almost always means lower prices for everything. That would suck bad if you bought a bunch of rental properties.