Wednesday, January 11, 2006

Do the Math: Why Real Estate Will Get Cut By At Least 50%, and more likely 75%

Q: How do you know how much a Bainbridge Island house is worth?

A: The owner will tell you.

I keep hearing about how real estate will "only" lose 10% - 15% in the coming "correction." This is in conflict with my predictions of a 50% to 80% drop in prices in the more bubbly areas of the nation. Perhaps the best way to look at this is by studying the underlying mathmatics at work in purchasing residential real estate.

First, our assumptions:

1. The economy is generally considered to be healthy, and could slip into recession. While bulls and bears disagree on the general health of the economy, the assumption is that the economy can shift into recession in the next few years. Bulls believe the economy is underpinned by sound fundamentals, and we are in a new paradigm of expanding credit and service oriented jobs. Bears would believe that what is passing for a good economy is nothing more than a government funded, FEDERAL RESERVE sanctioned, sugar high, and when it wears off, the economy will suffer until the debt bubble is worked off.

2. Interest rates will rise to historical norms or even higher. This will be necessary to keep foreign investment in the US as the dollar continues to lose value.

3. There is a general euphoria about real estate that is bringing in more money than would be necessary just to provide shelter. This is what I call "hot" money - the money that is diverted from other assets to capture the upside of a raging bull market in real estate. Think back to 1998-99 and all the money people were setting aside to chase the .com era stocks.

4. People are stretched to afford mortgages under present conditions. The plethora of interest-only, negative amortization (IONA) loans being written is proof-positive that monthly payments are as high as they can be, given the present job conditons.

5. Inflation will continue to increase in energy, medicine, education, and food.

6. Local governments are, even in these times of plenty, stretched to the limits on their bloated budgets.

7. Houses are purchased in one of two ways. First, there is the "List Price" method of valuation. This is the number you think of when someone asks you what your house is worth. It is what someone would pay if they were paying cash, and not using a mortgage. It is the method you use when you buy a loaf of bread or a new suit. The second is the "monthly payment" method, which is what 99% of buyers use to see if they can get into the house. Creative financing lowers the monthly payment, and allows the total value to increase. Keep in mind, buyers only use the total payment as a benchmark for what they can afford each month, but really look at monthly payment when buying a house. As interest rates decline, the same monthly payment buys more house, and the converse is also true.

OK, now the math part. Let us use a typical home in my city.

This home lists for $628,500, and was purchased in August of 2001 for $439,000. It is assessed by the county at $362,780 for 2006. For the year 2005, it was assessed at $311,760. If you put 20% down, and take out a loan for 5.875%, your monthly payment will be $2930 per month. You can get a 5/1 interest only ARM for 4.95%, which is the route most buyers will go. I didn't look at interest only loans with negative amortization for this example.

At 4.95% (IO), that payment drops to $2074. If you add taxes ($297) and insurance ($75) to this, that brings the entire principal, interest, tax, and insurance (PITI) to $2446/mo. In August '01, the owners took out two loans in the amount of $351,200 and $43,900. They later refinanced in August of 2002.

Assuming you have $125K to sloshing around in your savings account, or if you managed to keep that much equity in your house after a "correction," you can live in this house for $2446/mo. For the overwhelming majority of Americans that won't save $125K in three lifetimes, some creative financing will be necessary.

Let us just stick to the folks that have the money for the down payment. If my predictions come true, banks will, once again, concern themselves with down payments, loan-to-value, and the creditwortiness of borrowers (like they did less than a decade ago).

Our hypothetical buyers, Joe Hippen and Mary Trendy, sell their two bedroom rat trap in Orange County and move north for peace, quiet, and Gore-Tex. They pony up their $125K in equity and life savings, and sign on for $2446/mo in payments for the next 3 years, after which, it will adjust down with the reduction in interest rates (at least that is what they believe will happen). They are now the proud owners of a Bainbridge farm house, that needs a lot of work. Their heating system is oil, and the eight decades of Northwest weather and ambitious renovation projects gone sour have made the place quite a money-pit.

Joe Hippen-Trendy is a mortgage broker for a sub-prime lender. He gets a small salary but is paid on commissions and works in a high pressure environment. Mary Hippen-Trendy gets her Washington Real Estate license and starts schlepping Bainbridge Island real estate. Life is good. They take out an additional $75K home equity line of credit (HELOC) for some basic home improvements, such as new carpets, seismic upgrade, renovating the tiny, closet-sized bedrooms, and the installing the perfunctory granite countertops and stainless appliances. Credit cards were paid off by a home equity loan, which means their new plasma TV is now being collateralized by their Bainbridge home.

Then...the bubble breaks. Sales drop through the floor, as sellers fail to come to terms with the drop in demand, and buyers dig in and wait for more reasonable prices. Suddenly, Mary is spending a fortune on gasoline and advertisements trying to move her burgeoning list of homes for sale, while at the same time, she and the other bazillion Bainbridge Island RE agents can't get any sales.

Joe's career is also stalling. The refi boom is a distant memory, and the folks in the lower income bracket just are not buying homes, as they did back in the bubble.

A cash crunch hits our hip-n-trendy couple. The his/her Escalades in the driveway are putting a major hole in their monthly budget. The oil heater, in combination with the drafty, older home isn't helping either. Ferry tolls, at $600/mo, and the 4 hours of commute time per day are beginning to lose their power to charm Joe.

Quality of life also begins to suffer. Joe is up at 4:30am every weekday in order to make it to his job on the Eastside by 7:30, and he isn't back home until after 7pm. His work day is now work, rather than the easy money of the go-go days during the housing bubble. His wife, Mary, is now more of a roommate, as her evenings and weekends are spent playing tour guide for Bainbridge Island Looky-loos. Her frustration mounts at both seller and buyer. Sellers have dug-in and won't budge on their price, as they believe they are entitled to 15% appreciation every year. Buyers look and look and look. They send up low-ball offers, which are rejected by sellers. Nothing moves, and RE agents get paid on the movement.

Life sucks, and the amount of money coming in every month shrinks, while expenses creep up. Stresses mount, and with the lack of familiarity due to job demands, the marital spats become fights. The Bainbridge life is not what it used to be.

The lock-in period on the Hippen-Trendy's mortgage expires, and now jumps to 7% on its way to 9%. Uh-oh. The county has also hiked their taxes 15% for the last two years, and this year it only goes up 10%. That $297/mo in taxes is now $432/mo, as Washington does not have a Prop 13 protection for homeowners. Their payment to the bank is now $3462/mo. Couple this with their taxes and insurance and the payment is now $3969/mo. That is only a $1523/mo increase or $18,276 annual bite from their already diminished income. Now, they look at next year's tax assessment and possible rate hike from their mortgage holder with dread.

They can't refinance, as they are paying on their second mortgage as well as their first, and the appraisals just are not cooperating. Their savings is zero, and their credit cards swell every month, just to make ends meet. Year-end bonuses and commissions vanish, and a round of layoffs was just announced at Fly-by-Night Mortgage Inc. The stock market is also not playing along. The bears are carrying the day on Wall Street. The Hippen-Trendys just don't have any access to additional funding, and are now wondering how they are going to keep things afloat.

The His and Hers Escalades are sent back to the leasing company. Uber-Chic Leasing Corporation demands money for excess mileage, damage from the combo of the soggy Bainbridge climate and lack of a garage, lease termination fee, etc.

They decide to throw the house on the market, as they don't see how they can make the payments much longer. Given that Mary is in the business, they decide to try $725K (to cover their mortgage and HELOC). They are confident they will get their price, as they have lived in the house for three years, and real estate, ESPECIALLY BAINBRIDGE ISLAND REAL ESTATE never loses value in the "long run."

Their are no takers.

Why? Well, the Hippen-Trendys are asking someone to take out either a $725K loan at 7%, or a $580K loan with $145K cash. No one has $145K to throw around, as they are all on the same real estate "escalator" as the Hippen-Trendys. Both Mary and Joe know this, but have not yet come to terms with the present market. Finding someone with a spare $145K and $3993/mo + tax and insurance, for a total of $4500/mo is just not going to happen. Those people are not buying in this market, or are buying any of the other homes that crowd the MLS.

The no-document income sub-prime buyer trying to finance $725K isn't any easier. $4995/mo + the $500/mo in taxes and insurance bring their monthly nut to $5500, and that is without PMI.

The Hippen-Trendys were asking that someone pay a monthly payment for their home in excess of what they (the highest bidder 3 years ago) could not pay. That $4500/mo, back when they bought the house would have fetched $1.21M, at 4.95%.

In order to attract the same buyer they were three years prior, the buyer would need the same monthly payment of $2446/mo. Back out the current tax and insurance, and you have $1930/mo in interest. That interest is at 7% today, which fetches $413,500 in an interest only environment. Given that I-O mortgages have been shown to be very dangerous, the new buyer would need to originate a 30 year fixed mortgage, to lock in their payments. Now, that $1930/mo buys a $350K house.

But we are not done. This is not realistic.

Remember three years ago, when the Hippen-Trendys bought the house? The mood at the time was that housing was a fail-safe investment. Money. Gold. Cant-lose. Get-on-the-train. The Hippen-Trendys committed an extra 15% to the purchase price in the form of "investment" or "hot" money. Today's buyers, Jason Munn and Jennifer Danes, are not interested in chasing a falling investment. The Munn-Danes pull out the 15% hot money, and reserve another 5% for caution. That $1930 is now $1544, and that $350K house is now $280K.

$280K is now the price of the very same thing that was $625K, just three years ago. Why? Because house prices are driven by peoples' ability to pay.

We have not assumed that the job environment for the Munn-Danes has deteriorated, or that interest rates have climbed. Pull another 10% out for a crappy job environment, and crank the rates up to 9% (where they were at the height of the Internet Bubble), and that house is now worth $211K. That is assuming the Munn-Danes have $42,200 in down payment, and banks are only requiring a 20% equity stake from the buyer.

There is NO WAY the Hippen-Trendys are going to sell to the Munn-Danes for a $489K loss + fees amd closing costs. They will default.

Their neighbors will too.

Now, the Sheriff is selling homes on the courthouse steps. If they don't retail for $211K, with all the advertising, marketing, and personal attention of the phalanx of Bainbridge Island realtors, what would make the Sheriff sell them for anywhere near that amount? These properties will sell at a discount to retail.

There goes the neighborhood. Comps get crushed. Appraisals are also aware of this. Lawyers took out their knives after the bubble broke, and went after inflated and fraudulant appraisals. Appraisers are scared, and conservative. They want to get in front of the trend and appraise even lower than the numbers show.

Property taxes go up to compensate for declining sales taxes, and interest rates continue to climb. Jobs are much harder to find (you can't sell real estate, bundle mortgages or build spec homes), and money becomes scared. Sources of funding continue to evaporate as banks get religion. That $211K house is now even less.

By the way, when the mortgage defaults, the IRS attaches that as income to your tax form. $500K worth of taxable income, without the income continues to drain the pockets of buyers. Equity is almost universally negative.

Remember all those rentals and vacation homes purchased in 2004? (39% of the total) Remember all those IO loans in California in 2005? (80% of the total) Remember all that frenzied building by the home builders in the past two years? Does anyone have any idea how many spec homes and homes under contract the builders are generating? All of this will have to be worked off before we stabilize the owner-occupied, traditional loan segment of the market. This means the bottom will be a long time in the future, and a lot lower than we could have possibly imagined.

That is how we could lose 2/3 to 3/4 of the market value of homes in the aftermath of the Hippen-Trendy's bubble.

Bye-bye Escalade. Bye-bye Volvo. McMansion? Buh-bye. Making $6K/mo at the daily grind, while losing that much in the housing market stinks. Paying off the debt accumulated extracting equity thinking your house would never lose value stinks even more. Having your primary retirement vehicle crater just as you step into retirement is positively horrid.


Anonymous said...

I dont think it will be quite this bad, but close... I also think you may be overestimating how much time this is going to take to play out. I think you begin to see the fear set in the middle of this year, but the real price drops dont come till 2007. Long term puts against the home lenders/builders right now seems like it might be a money maker. If you can believe it they are all at or near 52 week/all time highs!

Out at the peak said...

To add to your point that people are careless about debt, I saw this CL post.
The guy has a lot of debt and ran into some money. Sounds like he wants to do anything except pay down that debt.

Anon: I hope you are right about the puts. I already have a bunch of money riding on it. :)

Bill Mccoy said...

I commented on this here.

If BI's bubble is going to burst (more so than surrounding areas) you should present some data to show why. Bainbridge Island not being #1, #2, or #3 in WA income level is a meaningless statistic in isolation. Among other things you don't say where we rank in WA home prices - AFAIK it's not #1, #2, or #3 there either.

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Privatebanker said...

Very good example! I think you are probably right on with this one! And to add to Anon's comments, long term puts should be a good play as long as you understand options well enough. Not only homebuilders but also but look at other Co.s that have realy benefited from this boom i.e. Home Depot, Auto makers, etc.

Eleua said...

Nice response and nice site.

Sorry about my delay in responding to you. I have to make a living.

I plan to give a more detailed response, when I get the time.

Just a few comments...

The fact that BI ranks #24 out of 522 ranked areas of Washington in terms of income IS a meaningless stat when it comes to the bubble (if taken on its own). The context of that stat was that BI is not as wealthy as the local P-R would have you believe. Remember, the purpose of my blog is twofold. I want to deflate the self-congratulatory mystique that permeates the island, as well as discuss the local housing bubble (which I believe is a big part of the arrogance you encounter when out-and-about on the island.)

When it comes to income, it does relate to the deflation of the housing bubble. If houses are trading at 9X income, they will have to fall a greater distance to catch a bid than if prices were 2X income. This is a generic statement and local conditions weigh on this.

Example: If Coronado, CA (San Diego 'burb) is selling at 15X income, and Highland Village, TX (Dallas 'burb) is selling at 1.8X income, and Highland Village incomes are 55% higher than Coronado's, which housing market is primed for a greater fall? Which one would catch a bid first?

Both can fall. One will fall harder.

BI does not have the income to keep prices at present levels, and it is ripe for a fall. Don't get me wrong - when the bubble breaks, all areas in Washington will get gutted. When you see new housing developments in SILVERDALE trading at $450K+, you have to ask, WTF?

I am curious about all my "bashing." To notice that the single biggest player in the BI housing run-up has been X-Cal equity money is hardly bashing. It is the moral equivalent of saying that the biggest factor in our rainfall is our proximity to the Aleutian Islands and the corresponding jet stream. Is that "bashing" the Aleutian Islands?

As far as "liberal bashing"...I believe I confined my responses to noticing that the hippies/moon-bats got crowded out of California and moved north. While my choice of labeling them hippies may be a pejorative that hardly qualifies as "bashing." It is just an establish fact that when a species gets its habitat destroyed by development (prime dope growing regions and breeding ground for crappy music in this example), the species will relocate or start to die off.

Bainbridge, by any standard, is pretty far-Left. This has been more the case over the past 25 years, than prior. Builders may be a "Republican-ish" bunch, in generic, but that is not necessarily the case here. It is also irrelevant. I believe the most "Republican-ish" area of BI is Wing Point, and it voted for GB2 with 30% of the vote +/-. BTW, I did not vote for GB2.

My example of the Hipsters losing their his/her Escalades and their BI "dream house" is a lot more realistic than most care to believe. In order for real estate, in this example, not to lose the 60-80% I am predicting, something has to ameliorate the damage. This would include:

Paying MORE per month than people do now. This would have to occur in a declining market.

Jobs becoming more plentiful and higher paid. Unrealistic in our present environment.

Interest rates dropping. Given the massive debt bubble in trade, government, personal and corporate, this is just not realistic. To defend the dollar, rates will have to rise.

Taxes going down. Get real.

Deflating oil, medicine, education, food, etc. Not realistic.

California not rolling over. When 97% of California households can't afford the median hunk-o-junk in the Golden State that is not realistic. I will say that when California is losing population, while accepting every Third-world peasant they can possibly find, that means there is White Flight. Those people can keep prices on BI aloft, provided they can sell with their equity in tact. That's a BIG "if."

Thanks for the response. I still stand by my prediction of a general real estate crash, and a complete disembowelment of both BI real estate and BI egos.

Chip Gibbons said...

Many of your concerns are legitimate. I have written a number of articles about the housing bubble on my own blog.

I do, however, detect more than a hint of wishful thinking on your part.

There is a lot of money in California and other places that is not tied up in real estate and lots of boomers ready for retirement. BI, as you know, is an attractive place for retirees. This demand will mitigate some of the price declines.

Microsoft is planning a $1 billion expansion over the next three years. They will be adding something like 16,000 new jobs. Some of those people will be buying homes on BI.

Also, never underestimate the Federal Reserve's ability to print up more money to prop up a falling market. Essentially, they've been doing that the past few years and all that easy money has inflated real estate values and deflated the purchasing power of the dollar in comparison.

People see the value of their houses going up and ignore the fact that their dollar is going down.

You are correct, however, that those who have borrowed recklessly are in for a rude awakening.

Real estate markets are local and some, as you have stated, are more prone to a collapse than others. Many Californians move here because they are moving from a more over-priced market to one that is less over-priced.

Eleua said...


Your points are well taken. However, the underlying premise of your argument boils down to "it's different up here/this time," which is the calling card of an impending bust.

Wishful thinking? Do I want to lose $400K in paper value? Do I want my good neighbors (the ones with kids) to lose their homes? I will say that it would be nice for my neighbors to discuss ANYTHING other than the value of their house, but my scenario would just substitute epic whining for the bragadocious rants that I now endure - they will still bloviate on and on about the value of their houses.

X-Cal money will still be the biggest driver of BI real estate. Boomers will only be able to relocate if they are not upside down on their California rat-trap. That is wishful thinking. When 80%+ of mortgages originated in California are IONA, the chances of anyone having any equity left when this blows is very remote.

You can't buy your "Bainbridge Dream House" when you have to short-sale/forclose your California Brady-bunch tri-level. Also, I doubt the stock market will hold up, and there goes the other source of Boomer cash. As a group, they have the worst savings rate in US history, and the only financial play they have used has been the cash-out/reinvestment play. That will end in tears.

Microsoft may hire 16K or 160K, but it is still a 90-120 minute commute each way (under good conditions) from our pretentious, bucolic wonderland to the Microsoft campus. Some do it, but it is very fatiguing. If you were making the case for the North End, you would have a great point. Commute from BI to Seattle is 45 minutes, and that is if you work at Pier 52, and live next to the Bainbridge Island ferry, and jump on the ferry as it departs. Add the commute time on both ends and most commutes are at least one hour.

The FED WILL PRINT!!! Fear not (or fear a bunch), B-52 Ben will print like none other. Mr. Magoo will appear to be an inflation hawk compared to this bozo. We will be carpet bombed with dollars. This will drive interest rates well into the double digits, and unless incomes rise with the dollars (unlikely with the India/China labor arbitrage), house prices will continue to fall with rising interest rates.

Remember, this is a bubble, and it will pop like any other bubble in history. It is almost impossible to reinflate a bubble once the air starts to leak.

Never dismiss the idea that California may experience a property crash like none other. For 50 years, Californians have only had to buy and hold. With white-flight, that may be history.

If California sneezes, Bainbridge will catch the flu.

It is not different up here. Bainbridge can not support $600K homes on $71K incomes. When all those condos come for sale in the downtown, many will be no-sale. That will cause prices to tumble - even in the SFH market. Why spend $600K for a house, when I can have a condo for under $200K.

Anonymous said...

Big drops in nominal real estate prices only occur when there is large unemployment, which your example includes. As long as you can afford you place, you keep it, the market drys up with very low volume but prices stay about the same. However, in real terms, housing prices can have a huge drop even without unemployment. In fact, it is the most painless way to work a large number of people out from under a huge amount of debt. Print money, infaltion sky rockets, the house price stays the same but the dollar gets cut in half. In real terms, the house is worth 1/2 as much but you can still sell the house at arond the price you paid for it and pay off the mortgage. It sucks for who ever hold the mortgage but it is good for the people who are in debt. Majority rules and in a democracy where the vast majority of people are deep in debt, it is a given this will happen.

Eleua said...



If the dollar gets whacked (and it is in that process), interest rates will skyrocket, which puts pressure on prices.

Your example ONLY works if incomes inflate enough to offset the much higher interest rates, and inflation in the rest of the economy (food, energy, medicine, education, viagra, rogaine, botox, etc...) I would bet the incomes of Americans will, at best, stagnate, while inflation eats up the rest of their paycheck. The end result is less money being poured into PITI, and with a much larger I, the P has to get much smaller. P is leveraged, so we are doing some cliff diving on RE prices.

Keep in mind, that wages are stagnant, and outsourcing/offshoring/illegal immigrant substitution is putting a VERY tight lid on wage pressure.

Also, approximately 50% of the new jobs created in the US, and especially Western Washington, center around the RE bubble. RE agents, builders, loan sharks, surveyers, loggers, home improvement, blah, blah, blah... When the bubble goes "kablooie," these people are out of work overnight, and the remainder that were in the workforce prior to the bubble are going to feel a very hard pinch.

Then you have the home equity extraction gimmick that has kept the US economy humming along. That game is virtually over, so when the lack of $2T/y in home equity extraction coming on the scene becomes reality, much of the consumer economy will vanish with it.

BTW, how much ARM money will adjust this year?

It is not going to be fun. This is not wishful thinking on my part. This is a sobering reality of what happens when the government has spent our future trying to get the "babyboom" generation into retirement.

The FED came out and said they will not try to rescue homeowners with monetary policy. Therefore, we can safely assume they will print money to rescue homeowners. Never believe a rumor until it is officially denied.

They will print, and it will cause even more problems with the RE market. Bank on it.

Mikhail said...

I think massive price drops, in the 80% range, are not out of the question in the Puget Sound area. Our region has seen huge run-ups in dodgy mortgages (options ARMs, 100% interest loans), just like the bubbliest parts of the nation. Moreover, the spill-over effect from the super-bubble regions will be susbstantial, since lending has really become a national business, and serious pain in the banking business will hurt everyone.

Just watch what happens when the market for Asset Backed Securities refuses to buy any mortgage tranches with less than perfect credit, or exotic loans. That will send a chill across the whole country.

As far as jobs go, I don't see why the Puget Sound would be immune to a nation-wide recession. Aircraft orders are notoriously fickle. Cancelled orders would be streaming in if the Asian economy catches a cold. Even tech-behemoths like Microsoft can get the wind knocked out of them. It was only a few years ago that Microsoft had hiring freezes. If the PC market slows down substantially (which is likely in a recession), any current Microsoft growth projections would go out the window.

Eleua said...

I think the part that the RE perma-bulls overlook is the jeopardy facing the mortgage finance sector. What will loans look like if the lenders have to keep their risk close to home, and just suffered an enormous wave of defaults?

How many people, even on Bainbridge Island, can afford to throw $100K at a house for a down payment? How about $40K? $20K? Can the amount of people with six figures of free cash continue to popluate all the bubbly areas?

The banks will be giving away homes to people with:

20 - 30% down (in free cash, not some exotic, wink-wink loan)
a stable, well paying source of income.
Great credit (carrying little or no debt)
willingness to take out a double-digit interest rate.

Do the math. This spells a 3/4 reduction - on a good day.

My spouse wants to know when we can go back into the market, and I said, "When you hear casual conversation about what a dumb investment RE is, that's when you buy."

Think gold/silver in 1999.

Anonymous said...

I just want to address some of the whinny complaints I read above. This comes from someone outside of the left coast, so, you can read this and take it in, or close your eyes and argue:

You left coast people are without a doubt the most glossy-eyed, financially illiterate people in the country. You will ignore basic common sense to a much greater extent that anyone else. It’s as if you don’t understand, or just ignore, basic math and ratio analysis. You people are purely speculating on land in the desert, for God sake. The desert.

You ARE also, for the most part, a bunch of pinko leftists. In general, you reject everything the USA stands for (except greed). Yet, you embody the things you hate about the USA, like thinking you are so great. So, stop whining over it when someone calls you a hippy. That's what you are, and everyone knows it. Maybe when you market tanks, you’ll read a real financial book this time, and not those get rich quick schemes you love to read in your cars on your 5 hour commutes..

Anonymous said...

What are you on?
Have you ever even been to the west coast, or do you just get all your information from Fox?
People on the West Coast are absolutely as intelligent as anybody from the East Coast or elsewhere, the only difference is in cultural style. The west is a newer place, and people are not as locked in to preconceived wisdom as elsewhere. This means that yes, some people will make stupid decisions; but others will come up with new ways of doing things. I have lived on the west coast for 14 years (I am originally from New England and New York) and have met far fewer "pinkie communists" than I ever met back east. I have also met fewer hippies. People on the west coast also move forward more quickly (remember, they are less traditional and backward looking as a general cultural style). I have founf that people here are less communal and more individual-responsibility oriented as a result.
The dessert, by the way, is a very nice place. It might look like a vacant lot to you, but that is because you don't know a damned thing about it, it seems. Speculating on desert property is no different than speculating on forest property is back east, escept that the weather is better. Yes, the weather is better! For several months it's hot, but still pleasant for most of the day, and then it is fantastic for the rest of the year.
This west is merely a newer place, and this means more freedom for all ideas and kinds of people, for better or for worse.
As for commuting, west caost commutes are not particularly different than anywhere else. It's up to people how far they want to live from work. I live 10 minutes from mine, and I had a 1 1/2 hour commute back east.
So turn off Fox, take a visit to the west coast and meet some actual people, take a trip to the dessert outside of the summer, and enjoy watching the Republicans get crushed this coming November

Anonymous said...

Oh yeah, and as for rejecting American values and everything the US stands for- what kind of BS is that? West coast people are every bit as American as elsweher, and I would say more so. How is acting like a blind sheep American? People think for themselves on the West coast and are less prone, it seems, to believing propoganda. Remember those "unamerican" protest several years ago against the Iraq war? The protesters thought the White House was full of doodoo in its claims about Iraq, and it turns out that they were right. If the country had listened to what they were saying then our country would be stronger and better respected, our society would be in better shape, and a lot fewer people would be dead. Having a brain is American.
You have been listening to way too much far-right propoganda whose job it is to instill fear and to crush American self-determination via crushing dissent.

Anonymous said...

I don’t think we can pin that guy on the east coast. You can probably narrow him down to Texas (or there about). If you’re not in Texas, they just called and said they miss you and want you to come home!

Gee, has anyone here ever been to West Texas? Talk about a freaking desert! Ugliest chunk of earth you've ever seen (that and western Oklahoma, I mean honestly… who wants red dirt covering everything you own?!!). It’s no wonder they don’t have a housing boom issue. Who’d want to live there?!!

Anyway, nice job taking a heady discussion about real estate and putting a worthless and ridiculous political spin on it. I guess you have forgotten the MANY RE problems the South and Midwest have had over the past few decades. I remember in the 80's when people in Houston and many other Texas towns were walking into the bank and just plopping the keys down on the banker's desk and walking away. (Something to do with the "stupid" financial situations they put themselves into).

Foreclosure rates are historically many times higher in the North, Midwest, and South than on either coast. That takes some great financial planning to get yourself into that situation decade after decade. I'm personally very glad that you've taken your head out of Rush Limbaugh’s hindquarters long enough to offer your truly insightful input (that was not an actual complement, by the way. I know this can all be very confusing).

Since you’ve graced us with your Anonymous post, I’ll return the favor. Wouldn’t want you thinking you’ve done something wrong by voicing an opinion in this free country of ours (even if you didn’t think of it all by yourself). Don’t worry, we won’t accuse you of being unpatriotic for using that first amendment. That’s a Republican thing.

Eleua said...

OK, OK, OK!!!

Enough political discussion!!

For the record: I am a conservative, that is a native Left Coaster, and who spent 7 years in Texas, and another 3 in Florida.

I hate the GOP, GWB, and the whole Wall Street Industrial Complex. I think the US economy is about to collapse into a debt hell, and that is the responsibility of an absolutely incompetant FED, and a cowardly series of presidents, of which GWB is the worst.

I also blame the liberal Congress from the 1930s to 1995, and the "conservative" Congress from that point. How much welfare do we need in this country.

Welfare and peasant immigration has dumbed down our schools to the point where most can't understand simple math and basic history. Forget about economics.

The Hippie generation "Boomers" and the grommet-heads in "GenX" are racing to see who can commit economic suicide the fastest, and in the most grotesque fashion.

I see Amurikuh's financial condition as the grotesque offspring of a Republican father and Democrat mother. Both are to blame, and in equal, infinite portions.

I live on the most smug, hip-n-trendy, uber-chic, see-and-be-seen, pie-in-the-sky, braindead wonderland you can imagine. It is liberal beyond what you can fathom. My neighbors are political morons - and economic morons. The bi-coastal housing bubble is most apparent in the most liberal areas of the country.

Not to be outdone, the "conservatives" actually believe government numbers on the economy. They are seriously gullible. I remember in the '80s when the Dems wanted to tax-spend and create a huge social safety net, while appealing to the peasant immigrants. Now the GOP does that, but even bigger.

Morons as consumers (liberals) and grossly mismanaged economic policy (neo-con GOP) are going to kill us.

Thanks Leftists, and thanks Neo-con Republicans.

End immigration (legal and illegal)
Deport illegals.
Vote out EVERY member of Congress (term limits at one term)
Crank interest rates up to 1982 standards.
Save money.
Stop free trade with peasant/slave nations.
Unionize workers
End welfare
End affirmative action
Send Alan Greenspan to Camp GITMO.
Be heavy-handed with Middle Eastern Islamic nations. A gross display of US military might would end problems with that region for 3 generations(fission weapons).

Craig said...

Ha Ha Ha!!!

I loved that post Eleua. Sorry your thread skewed political. Funny how things always seem to end up there.

No matter which side of the political fence you sit on, it's pretty hard to find fault with your points (I'm also quite sure somone will). Yes, many people have had a hand in leading up to our current financial situation and the housing issues resulting from it.

In the end though, many of the ones who are slaves to the greed will end up crushed under their own misunderstanding of how the market works. It will be sad as I've already seen it happening to friends of mine and their famlies down here in San Diego. I love them, but they were stupid. I had more than one argument with my wife as to why we should NOT get into the housing market over the past year or so, even though we were ready mentally to do it. Only an exotic loan would have gotten us into a reasonably sized home down here, and I just wasn't willing to risk our entire financial future to do it. I think I will be proven correct in my thinking very soon. As I said, it's already happening and thankfully my wife sees that now (life is more peaceful!).

Many friends used to tell us about all the equity they had and all the plans they were making with their new found "wealth". They are now telling us about how scared they are that they could be losing it all very soon and how they can't get out of the situation and are pissed that "someone" didn't explain better that this situation could happen (I did try to tell them, but what do I know). Homes are not liquid (they seemed that way back when you could sell one in just 3 hours during a Sunday open house). When you NEED to get out of one in a market that is very slow, it just will not happen on your timetable and you can take a serious loss. Someone who makes less than $100k/yr should not be messing around with an asset worth over $600k. Just a 5% loss in equity is $30k! If you're on a no-down, interest only loan (as many, many people are) and you need to get out of the house for ANY reason, can you handle that kind of loss? Not to mention the commissions on the sale, upgrades to sell, etc, etc,.

It's going to be a VERY ugly 5 years and (I believe) a very painful 10+ years for the left coast housing market.

Thanks for all the easy credit guys!!

P.S. I just had to chuckle a little that you started off your post with "Enough political discussion!!", then went on a wild (yet well thought out and written) political tirad slamming both sides of the fence! Hey, it's your thread... do what you want! I Love It! :)

Eleua said...


I agree with all of your points. Houses ARE liquid when you don't need to get out of them, and they ARE NOT liquid when you do.

About the politics...

I was just trying to keep everyone on point, and then attempting to "settle" the issue by putting in my own cathartic screed.

We got screwed by both sides. The GOP will pay for it this November.

Poshboy said...

As for the politics, as seen by someone who lives and works in the Washington, DC GOP political game:

This won't affect the GOP this fall. None of this will be painfully apparent in the next five months.

2008 is a different creature all together. If it gets bad, the average voter will take it out on the sitting party. That's us, fair or not.

Remember, that's how Roosevelt got into office in '32. It'll be the same economic situation. A hard Left candidate like Hillary might just make it to the White House on the ruins of the U.S. real estate market.

Anonymous said...

Maybe we should start a third party? True fiscal conservatives who believe that living off credit cards (whether persons or governmental entities) is NOT economically stable and productive. Get rid of any politician who doesn't believe in living at or below their (those who they represent) means. Can you imagine the government actually saving money for a rainy day? :)

BTW, I am a social liberal and a fiscal conservative. Do anything you want but don't make me pay for it. And I think it's time we demanded a new party!

Eleua said...


Absent a complete cratering in the next few months, you are right. The Pubbies dodged a huge bullet.

'08? Well, I doubt the economy can go deep enough to get HRC into office. In Amurhikuh, you need to look good on TV. This is a physical impossibility for HRC. Even I would vote GOP if she was on the DNC ticket.

That's one scary bitch.

Anonymous said...

I am also a refugee of the east (left) coast, and a conservative. I also spent 4 years in Florida up to my ears in crime and spanish... (The crime is from native born americans!) I vote republican since its the best chance I have....

Aleua I agree with most of what you said, but why Unions? It is kind of a contradiction to say end welfare (agree with this), but to provide another form by having trade Unions. Unions will clog up our companies and cause another form of welfare.

100 years ago, unions helped workers from being exploited, but now witness the GM situation in which the unions are exploiting us the shareholders, in which anyone with a 401k, pension, etc. is a shareholder.

Eleua said...

A pro-union conservative? I know there are only a dozen of us out there, but I believe unions are good for the US. Here is why.

First, unions allow individual laborers to gain the same advantage that corporate owners have - collective bargaining. Owners have collective bargaining? Yes, they are called corporations. When 10000 machinists want a contract with the corporation, they go with one voice, just as the 1,000,000 owners do. Owners (shareholders) hire a professional management team to do what is in the collective best interest. Individual owners do not hold themselves out to negotiate with individual employees.

Corporations (and I am pro-corp, btw) have shown they will steal every dime they can in order to meet their financial goals. They sacrifice worker safety, provided their actuaries tell them it is cheaper than enhancing safety.

Government protection? NFW! Government is in the pockets of corporations.

Unions really can't flourish in a free-trade-with-peasants-and-slaves environment. True, unions will price us out in that environment, but the gaping maw of Third-World labor will ALWAYS be able to undercut us. US unions vs. Australian or European unions is a fair fight. US unions vs. Indian, Chinese, or Mexican labor is a losing proposition.

Higher wages for Americans is good for America. If people can't collectively bargain for a better standard of living, they will turn to the ballot box. That is what we do not need.

With regard to GM, I would invite you to read a recent WSJ article on EXECUTIVE PENSIONS, and see how the UAW pensions are completely solvent and CONTRIBUTE to GM's bottom line, but executive pension are a complete liability. Keep in mind, this is a WSJ article, and they are a corporate mouthpiece.

Employee pensions, as a whole, are dragging down GM, but it is the EXECUTIVE PENSIONS that are doing it. You really have to delve deeply into the financials of GM to get this info.

A society of a large and robust middle class is far preferable to one of a few lords and a bunch of serfs. Unions allow the average J6P to have the same bargaining advantages as your average shareholder.

I wish it was not that way.

BGal said...

You people exhaust me....which is why Bainbridge will always hold its re value, stangely enough.
So far, the bucolic nature of this beautiful island has attracted low blood pressure but extremely creative types (unlike yourselves) and this is reflected in our everyday lives. This "quality of life" is what will bring our values back after whatever burst bubble takes place. I'll eat crow if I am wrong, but I'll bet my instincts/intuitions about Bainbridge (nothing you can calculate with that fab calculator of yours) are far superior to all the numbers and scary scenarios you can drum up.

Eleua said...

Yep, at $71K per household, Bainbridge can support $650K homes. Homes on Bainbridge sell for 9.5X income, which is about 3-4X overvalued.

Fortunately, all you $71K/yr creative types have suspended the laws of economics on Bainbridge.

I only wish the rest of us were as smart as you.

bobbyj0708 said...

This post becomes more and more prophetic each time I come back and revisit. The 9% interest rate may not happen but everything else seems to be baked in.

Look out below.

Anonymous said...

Fabulous call on the abs markets. So when does the stock market crash, anyone care to speculate? I am thinking when mainland Chinas PE hits 85-100 it will be time to duck and cover.

Eleua said...

I have us at CRASH-CON 2, and could go to CC-1 at any moment. I'd say that a crash by the end of the year is a 50/50, with the big New York banks leading the charge to the downside.

When you lend long (lend out money at low rates for a long time), but you have to borrow short (borrow money even cheaper to lend out), that's risky.

If your borrowing rate goes up, you find yourself in a position that your income is at 6%, but your borrowing expenses are at 7%, you are screwed, and you can't make it up on volume. If the stuff that you offer as collateral tanks in value, you have to pay higher interest rates to get money.

CDOs are what these banks are using as collateral, and since these are just financial toxic waste, nobody wants it. That's why the FED is cutting the Discount Rate - allowing the banks to fund their operations by rolling their paper at the FED, because the free market won't take it at a rate that allows them to make a profit.

If this crap is properly valued, many of the big banks will become insolvent overnight. That is a nuclear event in finance. That is why the guilty banks are creating the 'Mother of All SIVs.' They want to aviod full disclosure of what the market will bear.

It's over. We are just working out the timing. Bainbridge homes will not survive this mess, and will be valued according to local incomes (which will be impaired by the banking crisis/recession/depression).

A 2.5X valuation of BI homes in that scenario puts your median home in the $200K range, if you can find a buyer with enough down payment and solvency to get a loan in the smoldering aftermath of the lending bubble.

Good luck with that.

Anonymous said...

What a prediction...its happening left-and-right all over the country. nice article!

Eleua said...

I just had a conversation with a trusted friend who has been selling BI real estate for over two decades. She told me that the X-Cal money dried up in October and it has hit the top half of the market pretty hard. The buyers are people relocating from King County, because they can still sell their homes.

When Southern California loses 17% of its value in 5 months, you know that is going to leave a mark.

Absent a miracle, we will see an absolute panic by mid-late summer.

Bainbridge is still in deep denial.

20 cents on the dollar. It's closer than you think.

Anonymous said...

Elau, can we get a synopsis of what has happened since 2/18/08 and now concerning the BI? I will read the rest of your blog, but it would be nice to have something more up to date on this thread to show how your predictions have done.

BTW, I appreciate your comments. I don't think I have your knowledge, but I did see a huge credit related dump happening around the same time. I had six figures in the stock market that I sold before the talking heads began discussing another depression. I'm very glad I did.

At this point, however, I'm not sure where to put my money to protect it. Everywhere I look seems a bubble to me. And I've been interested in the BI property for years, but won't buy yet.