Comments on Doctor Housing Bubble Blog: $5 Trillion in Housing Wealth Gone: The Impact of...

Hello!!You need a home based business, and get a t...

2007-07-08T22:57:00.000-07:00

Hello!!

You need a home based business, and get a ton of your tax money back...read anything by Robert Kiyosaki. Earned income is the worst type of income to be working for; the gub-ment takes 50%. 401K is next worst; the GM takes 20% at least, and B-quadrant business is THE best, because you pay taxes after you buy the stuff you need to run your business. I have learned a ton about financial mindset in the last month!! Good luck, everyone:)

My situation is something that tells me the market...

2007-07-07T19:59:00.000-07:00

My situation is something that tells me the market is still far away from a fair price as well in the Northeast:

I live in NY (outside Manhattan) and have a great income. I am looking to upgrade from my current 800 sf co-op but this is what I'm facing:

Manhattan (where I work):
an avg. 2 bedroom condo with a bit more than 1000 sf costs about 1.2MM (of course you can find cheaper, but there are tons for over 2MM). In addition the taxes and mtc. adds another 1500 $ or so.

Even with a 30y mortgage (putting up a boatload of equity just for the 20% downpayment!!) you get to total costs of about 8k/month!!

And everyone is convinced that it'll not go down.. It's insane, you've got to compete with investment bankers making millions, CEOs, professionals, investors and wealthy internationals who want to have a piece of the city. Some of these folks making millions don't know where to stick their money anymore, so they buy up one apt. after the other... that keeps the prices of property in nyc high (at least as long as the market booms and bonuses are paid the way they currently are).

So even if you make good bucks, you can barely afford to live in anything decent. Someone making half of what I make in a place like NC can live in a nice house with a good piece of land.

And keep in mind that the American tax system isn't quite fair either. Living in a high income, high expense city such as NYC has the disadvantage that it brings you to the top tax rate (in addition to that you've got over 3 % city tax and 7 % NY State tax, giving a total top tax rate of 45 %).

Now with the tax man eating that much money away from you, suddenly the salary doesn't look that great anymore when you have to look at the housing prices that we're facing here...

Look at this example:
An assumed 250k gross income would probably leave you with about 150k net income.

Now you'd like to live in a 2 bedroom in the city you work in and have to fork over 96k p.a. for that!

That is 64 % of the net income just for living in a 2 bedroom apt.????

I am wondering how anyone can live here with the median income (which is somewhere around 60k).

Even looking at new places just outside Manhattan but with a short commute, you still see 1MM for a 2 bedroom.

It's insane..

When Americans return to the time tested policy of...

2007-07-06T23:05:00.000-07:00

When Americans return to the time tested policy of buying a home to live in for enjoyment and raising a family the foolish speculative buying will stop. If you can afford to buy a home in any area of the country and plan on living in that home for at least the next 5-10 years than buy it. Home appreciation at the very least will end up keeping pace with inflation, you will have a dependable annual tax write off and the bank you are sleeping in will provide an excellent souce of revenue when it is time to trade down and/or retire. Unfortunately a large per centage of the population is living beyond their means and will end up taking substantial losses due to overextending themselves on many types of credit, interest only mortgages and wild, speculative buying. There will not be a nationwide housing crash, however the east and west coasts along with a few other overvalued metro areas will certainly see corrections of 10-20 percent over the next 18-24 months before inventories decline and the market stabilizes.

@son of brock landers,Yes, Boomsday by Christopher...

2007-07-06T14:19:00.000-07:00

@son of brock landers,

Yes, Boomsday by Christopher Buckley. It was recommended by a reader on the site and I must say that even though it is fiction, the author has a strong sense of the current culture in America including the blogger world.

I try to read one book per week. The last few that I've read are:

Evolutionary Psychology: Robin Dunbar

100 People Who are Screwing up America: Bernard Goldberg

Audacity of Hope: Barrack Obama

I try to read books from all vantage points. Although I don't agree with everything I read, it helps to get a perspective from all sides. Boomsday in many ways reminds me of a modern day Catch-22. I'll make a final comment once I complete the book.

Dr HB, Are you reading Boomsday? That's on my Chri...

2007-07-06T13:48:00.000-07:00

Dr HB, Are you reading Boomsday? That's on my Christmas list once it gets to paperback. While it is a satire, I would not be surprised if some mild forms of protest or financial punishment are directed at the BB generation in 10-20 years.

@ Dabankerdavee,The mainstream media is now pickin...

2007-07-06T13:15:00.000-07:00

@ Dabankerdavee,

The mainstream media is now picking up the message that housing is overpriced in certain areas. There are many subprime lenders going down so something was amiss with all this easy credit. You are welcome to hang around the asylum as long as you want.

@mr Vincent and socalwatcher,

Mortgage equity withdrawals have fallen off a cliff in 2007. People can refinance only if the property has increased or if they have any further equity left in their home to tap out. In addition, rates have gone up dramatically for HELOC and home loans over the past 3 years.

@ mmab,

I was reading about a home in Arkansas that was infested with possums and pigs (literally). Some areas were overbuilt but hey, you can double it up as a barn.

@ warren,

We may be at a peak here, or the end of a super cycle according to the Elliot Wave theory. However, there may be a bounce in the foreclosure market and services in these areas. I think oil will be strong in the next decade. It is a limited resource and with China and India booming, they are requiring a lot of oil to expand and putting pressure on the supply.

@anon 10:27,

Appreciate the comment. Timing the inland empire? At a bare minimum I would wait until Q2 of 2008 to put in any offers. If anything, you’ll need to do a market analysis by looking at rental rates and factoring this into a property that will probably have zero appreciation for 3 to 5 years. So in effect, you are buying for tax benefits and equity build up. You should use online rental resources and gather market information and do a comparative analysis. Run some simple calculations and if buying makes more sense, you should buy. Fortunately, there are many good “rent-vs-buy” calculators online free of charge.

@brian b,

Smart move. Good car that you’ll be able to run into the ground. The maintenance on a BMW is extremely high. You can purchase Honda parts anywhere since they are ubiquitous. And again, people have this misconception that home equity is somehow free money. Not true. After all, they are still paying their BMW while you are close to paying off your car.

@mrslovelly,

Thank you for pointing out the error. I have corrected it.

@bob from Brooklyn,

I’m reading this book about the 20 to 30 year old generation having a hard time digesting the fact that the baby boomer generation is putting a lot of pressure on the new working class. The book is a novel and hits on so many points. I’ll actually write a post on it once I’m done reading it.

The overall point is that many of the younger generation feel that they are being saddled with debt even though they themselves try to live financially prudent. After all, I have no doubt that Social Security will not give me a cent when I retire yet a big chunk of my paycheck goes into paying for this. Why not let us keep the money and invest for ourselves or at least have a system that will be intact long-term? However, SS is a ponzi scheme waiting to explode. We are hitting our first wave of boomers retiring and putting the system to the test.

@the north coast,

The average has gone up and of course that is why they use median income instead of average income. Again the wealthier in the US are richer than they have ever been. Measured by the Gini coefficient, which measures income inequality in a nation, we are lagging many 1st world countries. It seems like many dispute the income numbers. I recommend people read the brief article at Wikipedia and follow the references for further details:

Household Income: Wikipedia

Your point about the economy being carried by debt is well taken. Hence the $5 trillion in pseudo-wealth that has kept us afloat since 2001. But the smoke is clearing and as Warren Buffet states:

“Only when the tide goes out do you discover who's been swimming naked”

@dr. bingo,

There is always risk in life. You are doing the smart thing by maxing out your 401k. From recent stats I’ve seen, the overall nest egg for the average American entering retirement is only $50,000. How long can someone live off of $50,000? Many of these people cite Social Security as their haven for support. SS was not intended to be a retirement income but a safety net for the less fortunate.

Back to your point, it is hard to question your sanity when everyone around you is running around with dilated eyes and looking like mad max. But you are doing the right thing. It is very simple to do a market analysis. Simply check local rental rates, use a easy rent-vs-buy calculator online, and assess your tax benefits if you bought. If it makes sense, buy. Don’t listen to the emotional ploys of those in the industry, they only make money when you buy. So of course they will try to convince you to buy. Those that own want to believe housing will always go up because guess who it benefits? Either way, the economics of housing in certain areas is clearly overpriced.

All,

Great comments. The housing market is facing some hard times this summer. Credit being more stringent. Appreciation going negative. Rates resetting to the tune of $1 trillion dollars. This is not the time to buy in many overpriced metro areas.

In regards to the next bubble, I’m not sure we will see one. This is the same mentality that led us from the tech boom/bust to the current real estate boom/bust. Housing has a stronger impact on the overall economy than the technology boom we had in the 90s because everyone is impacted by housing and so much of our wealth is rolled up in home equity. And with the massive boom, folks got accustomed to the inflated prices. I’ve talked about this in the Duesenberry Effect where a $1 increase in wealth does not translate exactly to a $1 decrease in wealth when the economy shifts gears; the reason being people have a hard time scaling back when the economy contracts.

when the bail out comes do they have to give all t...

2007-07-06T13:09:00.000-07:00

when the bail out comes do they have to give all the toys..i.e. atv's boats big ol trucks to the people who didnt re finance

Perhaps the the next bubble will show itself in th...

2007-07-06T11:47:00.000-07:00

Perhaps the the next bubble will show itself in the commodities markets, such as the PMs. It will be interesting to see what happens when the herd mentality collectively realizes the value of their fiat dollars is shrinking even faster than their home values. A mass run for the golden hills?

One of the things to also consider is that the gov...

2007-07-06T09:03:00.000-07:00

One of the things to also consider is that the government in effect sets the prices of housing...not the market.

In some areas of the country you are capped as to the percentage of a property tax you pay. So instead of increasing the rate the towns simply increase the assesment. So a house that's say 240K in 1994 is 285 in 1997 is 340K in 2000 is 385 in 2001 is 430 in 2007....these are all accurate numbers in my area.

But here's the problem....people do not get anything extra for having that...instead it takes longer to sell and people might assume that something is wrong when a house sells for less than assessement.

We have lower taxes, lower interest rates, higher housing values, higher governmental spending vs. ten years ago. Obviously no one will run in office and say they want to raise taxes and neither party will cut spending...leaving the interest rates to go up and up and up. Congress can't touch the reserve if they do so and international rates are now getting higher than the USA. I'm predicting the fed raises rates a few more times but typically overshoots.

Meanwhile you are correct with the reguards that people assume their houses will go up in value and they'll sell it to move to a cheaper area...well if it does NOT sell then what? I encourage anyone to go to housing sites and look at to what price brackets yield what houses.

Form Anal Retentive..."Although, if the sands of t...

2007-07-06T05:15:00.000-07:00

Form Anal Retentive...

"Although, if the sands of time slipped through our fingers, we would have less than before. Some would argure that the Florida Everglades is a single entity in need of conservation. In which case if we lost part of it, we would have less Everglades than before."

What nonsense! nobody would ever say the things you claim. You would, for example, say: "We would have less OF THE Everglades than before."

What's your point? Sloppy language is OK? Let's be good Americans and find something else (the language) to dumb down?

I just don't understand you people.

Ms Lovelly,Since we're being pedantic. Less vs. f...

2007-07-06T00:10:00.000-07:00

Ms Lovelly,

Since we're being pedantic. Less vs. fewer is related to countable vs. non countable nouns. This is not quite the same as singular vs. plural.

It is only a slight distinction but it might help people make fewer mistakes. For example, if we had 2 sheep, then sold one to leave only 1 sheep. It would still be fewer sheep than before.

Although, if the sands of time slipped through our fingers, we would have less than before. Some would argure that the Florida Everglades is a single entity in need of conservation. In which case if we lost part of it, we would have less Everglades than before....even though everlade is a proper singluar noun, and Everglades is the plural form.

Signed,

anal-retentive

I'll confess that I have struggled and struggled w...

2007-07-05T22:37:00.000-07:00

I'll confess that I have struggled and struggled with the decision to rent or to buy for the past few months. We live in a wealthy housing market in Colorado, where the impact of the coastal bubbles will probably not be felt that hard, but where the outlying townships and counties are taking it on the nose with subprime defaults and foreclosures. I assume, but cannot say for sure, that that will eventually have an impact on our local housing. To make a long story short, after weeks of torture poring over these blogs and the numbers, we finally decided to rent.

But because of this, I question my sanity. I'm terrified of being locked out of the housing market in our town. It's hard to face the big facts when the little ones just flip their noses at you, as if to say: "You lose."

Sigh. At least we can now max out our 401Ks. Which is an interesting question, and one I think you should cover:

Given the option of paying a larger house payment or maxing out (or just contributing to) your 401K, which is smarter, and why? (I'm sure I know your answer, but it might be another way to make the point you've been hammering.)

"My guess is that the housing bubble will be follo...

2007-07-05T21:22:00.000-07:00

"My guess is that the housing bubble will be followed by fill-in-the-blank bubble for the common man in 2 to 3 years."

You have observed that we have a Casino Economy, and I could add that we have had such an economy since the early 80s, when we ceased to be a manufacturing economy.

We have witnessed more bouts of "financial euphoria" since the mid-70s than occurred in the previous 75 years. Speculative rampages have replaced true economic activity, which is the production of real goods and services.

We've gone from the first stage of deterioration, that of "taking in each other's laundry" to buying each other's bad loan paper.

I agree income has not gone up. Perhaps this is p...

2007-07-05T19:46:00.000-07:00

I agree income has not gone up. Perhaps this is part of the reason people are "bubble prone" and looking to accumulate wealth in ways that defy basic economics. My guess is that the housing bubble will be followed by fill-in-the-blank bubble for the common man in 2 to 3 years.

As another poster noted, income increases are not ...

2007-07-05T18:20:00.000-07:00

As another poster noted, income increases are not what the statistics portray. Actually, since inflation is much higher than the CPA says, actual income has been declining over the last ten years. People, however, did not feel it, because their main "asset" (a house is NOT an asset, it gets consumed over time), was increasing in "value", they spent the "equity" by borrowing against it.

One little thing:Incomes have not gone up among mo...

2007-07-05T18:08:00.000-07:00

One little thing:

Incomes have not gone up among most of the population.

According to one article I recently read, median incomes for the nation have dropped 1% since 1999.

Could it be that the "average" has been skewed by the extraordinary compensation of the top one tenth of 1%- the $140MM/year Bonus Boys of Wall Street and other CEOs whose comp is in the hundreds of millions? One superhigh earner averaged in with 100 who make the average could really skew that number.

This economy has been carried by debt, not earnings.

When they come up with a Nobel Prize for Internet ...

2007-07-05T17:20:00.000-07:00

When they come up with a Nobel Prize for Internet Content, expect a call from Sweden...

You're on a roll, and just to add to your Housing Psychological Shift piece, what do you mean "will see" a two-tier system...precious few understand that the elimination of rent regulations in the last few years (NYC as a prime example) has meant the actual eviction of countless real people, replaced by those at market (read "luxury") rents and mortgages...

I left the comment above about the near perfect gr...

2007-07-05T16:27:00.000-07:00

I left the comment above about the near perfect grammar. Actually the only error I found was the less/fewer thing. I agree you used it incorrectly. However, there is not a whole lot of content to argue about. Keep up the great work. I check back for cogent thoughts daily, too.

Dr. HB,I love your blog and I read it everyday. I...

2007-07-05T14:03:00.000-07:00

Dr. HB,
I love your blog and I read it everyday. I have to agree with anonymous about your grammar being "near" perfect. ".... families choosing to have less children" should read, "families choosing to have fewer children." If the noun following is plural you use the word fewer, not the word less.

BrianB, I saw alot of home equity checks when I so...

2007-07-05T12:50:00.000-07:00

BrianB, I saw alot of home equity checks when I sold both Honda and Audi's for a while. The is here in the Chicago area. The funny thing is instead of a 3,4,5 year loan...I asked a few how long the HELOC is and some said 10,15,etc years.

So, to get a wonderful tax writeoff you just took a 5 year loan to two or three times that on a CAR? Stupid stupid stupid stupid....

A few years ago I was looking for a new car and bo...

2007-07-05T12:25:00.000-07:00

A few years ago I was looking for a new car and bought a Honda CRV. My friends all have nice cars and were telling me I should buy a BMW using the equity in my house. They made this sound like such a great idea. When I responded, "But I'm still going to have to pay it back" they would respond, "Yeah, but the interest is deductible so it doesn't matter." I was like "Huh?". Needless to say, I decided that this wasn't as great of an idea that they made it out to be and I still have all the equity in my home and my car loan is close to being paid off now.

Warren... It's great that you are doing it right. ...

2007-07-05T10:27:00.000-07:00

Warren... It's great that you are doing it right. Nice things are just that, nice things. What you really want is a nice LIFE. A nice life has health and health is directly related to less stress. Financial freedom from excessive debt (there is "good debt" such as low interest educational loans to better yourself and increase your salary and that's ok) leads to peace of mind and a decrease stress in an organism (ie, you.) So, keep up the good work, it'll keep you off Paxil.

Dr. HB, I enjoyed your educational article. You are entertaining and a your grammar is near perfect.

Look, why is it that we don't just see even a few people putting their houses on the market for say, 100K lower than the most recent comp to get them sold? When basically nothing is selling, I'm just so surprised we haven't seen more downward movement quicker than we are seeing it. It is hard for me to swallow such a mass delusion. Do you have any thoughts on timing in the Inland Empire? Things seem to be stuck.

Any guesses what the next bubble will be? Seems l...

2007-07-05T10:03:00.000-07:00

Any guesses what the next bubble will be? Seems like we transitioned from the dot com bubble to the real estate bubble quite quickly. In my opinion, the general public is obsessed with "getting rich quick" to the point where the masses will jump into something without really understanding it or respecting the fundamentals. What happened to working hard, living within your means, and saving/investing for retirement? What about american individualism and thinking for yourself? Many people would rather lease BMW, carry a Loius Vuitton purse, and be up to their eyeballs in debt than have the peace of mind of living within their means. I think BMWs are nice too, but I'll buy one only after I've saved enough for my kids' education. Just seems like people's values and priorities are really out of wack. This makes americans great consumers, but extremely "bubble prone".

Ewwwwww....This article is yucky, and sad for the ...

2007-07-05T09:21:00.000-07:00

Ewwwwww....

This article is yucky, and sad for the poor animals.

http://tinyurl.com/yvhn2w

I smell desperation (among other things),
MMAB

This almost like trading on margains. Borrowing to...

2007-07-05T08:45:00.000-07:00

This almost like trading on margains. Borrowing to predict future gains. (like taking a HELOC thinking the home value is only going to increase)

One thing I have learned from the pros: If you do not know what you are doing, NEVER trade with margains.

Like a home, all it takes is for the market to fall and a margain call to come in. Then, you are screwed.