Apr232013
Faith in home price appreciation is religion in California
Kool aid is flowing again. Last week, I read the following comment that encapsulates the religious faith of most Californians,
Besides, OC real estate has been and will continue to be desirable. It’s also very cyclical and I knew there would be another cycle coming much sooner than the bears predicted. This place has never had “flat” home prices… ever.
Apparently this commenter had faith in the successful efforts of market manipulators and the herd behavior of California buyers. The last year has done much to reaffirm the faith that was sternly tested by a 40% decline.
The problem with blind faith is that it doesn’t ask “why.” Faith just accepts things as is and doesn’t demand an explanation. Unfortunately, with financial markets, the “why” matters.
California had a housing bubble in the 1970s because lenders adjusted to a high-inflation environment by abandoning long held debt-to-income ratio standards. They allowed borrowers to take on debts much larger than they could afford based on the belief the borrower would get 10% raises every year which would make the house payment affordable after a year or two of extreme austerity.
The bubble in the late 80s was inflated by a combination of high debt-to-income ratios and early affordability products stoked by a false fear of being priced out.
The bubble in the 00s was inflated by a proliferation of affordability products, most notably Option ARMs, and a complete abandonment of underwriting standards. And over the last 30 years, mortgage interest rates declined from 18% to 3.5% allowing people to leverage their incomes to ever-larger mortgage balances.
The causes of the previous three bubbles were all recently banned by new qualified mortgage regulations, and since we are at the bottom of the interest rate cycle, mortgage rates are likely to rise. If these regulations remain in place, and if interest rates rise, the “why” that inflated previous bubbles won’t recur again (we hope). Further, with a large overhang of properties in cloud inventory, a long period of flat prices once we reach the previous peak seems more likely than not.
So why do people cling to their beliefs about boundless home price appreciation in California? Rapidly rising prices makes homeowners wealthy and it gives Ponzis boatloads of free spending money. People believe because they want to believe.
Faith in home price appreciation
Wikipedia defines faith as “a belief in the trustworthiness of an idea that has not been proven.” Religious faith is a collection of beliefs based on ideas which are neither testable or provable. If you accept the core beliefs of a religion on faith, you generally get a feeling of peace and well being that serves to reinforce the “correctness” of the acceptance of faith. Most religions build on these core beliefs and assemble a series of ancillary beliefs for guiding human behavior known as religious dogma. California has a major cultural “religion” that cuts across traditional denominational lines — the religion of real estate.
Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the “higher power” of market forces — real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can.
Since real estate always goes up, it doesn’t matter how much you pay because you can always sell later for more money. Value has no meaning.
Also, since you can pay back any borrowed sums when you sell, it doesn’t matter how much you borrow or under what terms. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice.
The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.
People who accept religious tenets often face a crisis of faith at some point in their lives. Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble proved that real estate values do not always go up, and in fact, real estate values can decline significantly.
John Spong wrote a book titled “Why Christianity Must Change or Die” in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California’s religion of real estate faced a similar crisis. The fundamental belief in endless house price appreciation was challenged, and all the associated beliefs were similarly called into question. If not for the moral hazard of market intervention, the false beliefs of California’s real estate religion would have been snuffed out. Unfortunately, to everyone’s long-term detriment, manipulations rekindled the flame.
Right now with prices rising rapidly, people wonder why they ever lost their faith in permanent and rapid house price appreciation. Loanowners put too much faith in house price appreciation. Many lamented the Day the Market Died, many continue to cling to Southern California’s Cultural Pathology, and many are signing up for a renewal of the The California Social Contract. Has kool-aid intoxication survived? It appears so. The armies of realtor missionaries has set out to convert a new generation.
God help us.
It really does boggle the mind what I hear at parties these days. I bought last April expecting another 10-20 percent down, but the price was way below rental parity and has secured my family a far better residence and a 5 percent tax free return on a very large down payment (with maintenance losses included in the calculation).
I magically got appreciation. Now within the past few months everyone is buying. One of the buyers told me recently that I was wrong all along he literally said, “Prices never go down in places like Beverly hills or even places like Irvine”.
It’s crazy psychology out there right now. Feels like 2005 but with a hint of “I told you so” from the RE buyers.
“Feels like 2005 but with a hint of “I told you so” from the RE buyers.”
That’s the most shocking aspect of what I’m seeing. Prices crashed really hard. Even the better areas saw 30% drops, and the fringe markets saw declines of 50% to 60%, but somehow this fact completely eludes people. Their need to reaffirm their own faith has caused them to ignore this obvious fact. That’s exactly what religious people do when facts don’t match their dogma. That’s why I see California real estate appreciation as a religious faith.
People are rationalizing the 30%-50% drops as “temporary blips” that were aberrations.
They have it completely backward. The 30% to 50% drop was a necessary correction back to stable price levels. The rapid appreciation and market manipulations are the aberrations.
I dunno. I have lived in California all my life, and it all seems pretty normal to me. Even extremes are “normal”.
There is a fair weather premium, but gravity exists everywhere.
Lemmings herded by unsustainable QE, ZIRP sending hedge funds into SFRs, and the allure of appreciation riches. Affordability factor exists, but is dwarfed by all others.
One of my moron friends recently bought in the LBC. His mommy gave him the downpayment because he wastes all his money on booze and dvds. House is 60+ years old, total project, and Moron cant even turn a wrench. On a meager teacher salary it will eat him alive. But………… he claims he is ‘makin’ money’ because one down the street just sold for higher. Lemmings.
If you saw the Sunday OC Register article praising the “Real Estate Boom in Lancaster”, it should remind you of 1990. It’s “the lemming effect”. When prices and volume are rising in Lancaster (the last frontier) you KNOW you are in a BIG BUBBLE…..
That is a troubling sign. When inventory runs low because of strong job and wage growth, perhaps building in Lancaster makes sense, but when we start building out there simply because the MLS inventory is frozen by the banks, this will end badly for the builders getting excited about these fringe markets.
Enjoy the OC Reg while you can. Hiding behind a pay-wall ensures their rapid demise.
2008 2.0 looms. They are ensuring it will be uglier. At least if will wipe the smile off the RE bulls and their cyclical “timing”. bullshit.
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‘Belief’ systems are the currency of subjection/control.
I hear people telling me that I got priced out already. I then ask them why did prices up go up? 9 times out of 10 I don’t get answer with mortgage rates, rental parity, or lack of supply. It’s the return of the low information buyer.
Also, OC is now the sodom and gomorrah of housing appreciation.
The whole move is manufactured.
Evidently, it’s easy to fool the public via paid disinformation dispensed thru select mainstream media outlets, or by the ‘sell-side’ simply cajoling the public into fooling themselves.
After six years of trying, the federal reserve and the cadre of banks finally improved their “manufacturing” process.
CTRL P. No paper/cotton needed to print currency units these days.
What’s another Zero, eh?
Mellow Ruse says:
April 22, 2013 at 4:42 pm
My avocado tree is about ready to produce fruit. I’ll keep you apprised of the status.
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Well, you mentioned last years total yield was 1, so as it was with OC housing, beating YoY comps will be a cake-walk.
Existing-Home Sales Down Sharply in March
With a sharp jump in prices, existing-home sales fell 0.6 percent in March—the steepest drop since December—to 4.92 million units, the National Association of Realtors (NAR) reported Monday. Economists had expected a 1.0 percent increase to 5.03 million from February’s original report of 4.98 million sales.
February sales were revised downward to 4.95 million.
The median price of an existing single-family home jumped $11,100—the strongest monthly gain in almost eight years—to $184,300, the highest level in seven months.
The inventory of homes for sale edged up to 1.93 million units—a 4.7 month supply, both the highest level since November.
The drop off in sales came despite a sharp increase two months ago in the NAR’s pending home sales index, which tracks contracts for sale, but is consistent with other hints of a weakening housing market, principally the drop in builder confidence reported by the National Association of Home Builders last week. Homebuilders reported a fall-off in buyer traffic, meaning fewer people were shopping for homes.
The sales dip was also consistent with recent reports from the Bureau of Labor Statistics, which showed a decline in the number of mortgage loan underwriters and mortgage brokers, as well as appraisers.
Despite the disappointing month-over-month sales numbers, the NAR found encouragement in the year-over-year comparisons for both sales and prices.
That’s because the NAr will spin any data point any way it can to find “encouragement.” They are lying manipulative bullshitters.
But the lower mortgage payments were going to spur buying in consumer goods. This supports yesterday’s article.
Consumption falls as consumers break free of mortgage debt
By Kerri Ann Panchuk April 22, 2013 • 3:31pm
In five years time, U.S. households reduced their total outstanding debt by $1.3 trillion as mortgage debts either paid off or were written down, researchers with the Federal Reserve Bank of New York claim in a new report.
But all this credit wariness comes at a cost, according to the Fed study, which is titled ‘The Financial Crisis at the Kitchen Table: Trends in Household Debt and Credit.’
“While household debt pay-down has helped improve household balance sheets, it has also likely contributed to slow consumption growth since the beginning of the recession,” the Fed researchers asserted.
Some of the more notable improvements occurred on the mortgage side of the lending spectrum. Fresh mortgage delinquencies reached a new low of $140 billion in the third-quarter of 2012. However, a large amount of mortgage debt was also cleared through the foreclosure process and other transactions such as short sales in the five-year period following the financial crisis.
Still, the NY Fed Bank says mortgage-related debt accounts for 76% of all household debt, with credit cards, auto loans, student loans and other consumer accounts making up the rest.
As for how consumers are reducing their debt levels, the report says they’re either demanding less credit, dealing with a falling supply of credit or benefiting from nonperforming debt being written off by lenders after a spike in default rates.
The report claims consumers reduced a portion of their overall household debt voluntary.
“Holding aside defaults, from 2007 through 2011, consumers reduced their debt at a pace not seen over the last ten years,” the study concluded. “A remaining issue is whether this reduced reliance on debt is a result of borrowers being forced to pay down debt as credit standards tightened, or a more voluntary change in saving behavior?”
The answer to that question is both. The Fed researchers noted that “both borrowers and lenders have acted to curtail consumers existing credit in the face of growing delinquencies and broader financial market uncertainty.”
Despite 4 long yrs and $trillions pumped into macro, and $trillions in .gov subsidies pumped into housing (while simultaneously inflating prices on food, gas and daily needs of the citizens, and hammering seniors living on fixed income and everyone else who has any savings) the average March ’13 price of a new home still tanks from $310,000 to $279,990.
You’re right I do have faith. Not in endless appreciation, but in market cycles.
It’s the reason I liquidated my physical gold last summer, even as matt138, awgee, and el O have lost, in combination, hundreds of thousands of dollars. (That’s some store of value.)
It’s the reason I was buying stock during the spring of ’09, and advising el O and Lee in Irvine to do the same by July ’09. (BTW, they instead shorted the market and lost.)
It’s the reason I was warning people not to buy RE in ’08, when a lot of knife catchers were jumping into the market believing “the bottom was in”. I was smacking Janet around on a daily basis back then, trying to knock some sense into her and the other perma bulls.
It’s also the reason I bought a house in late 2010. Not only because it was close to the RE cyclical bottom, but because I thought it was close to the interest rate cyclical bottom. Admittedly, I was little early on both calls, but close enough.
My belief in rising prices is rooted in my belief in the real estate cycle. I knew there would come a day where demand would outstrip supply. The Federal Reserve and government have sped the process up somewhat, but most of the foreclosures were on track to be dried up by the end of 2014 without market manipulation. I also knew the demand from millions of echo-boomers as first time home buyers would be ramping up. Meanwhile, I never believed baby boomers would be downsizing in droves to offset this demand.
I’ve been making these arguments for years and it’s fascinating to see the lengths perma bears will go to discredit the “other side” even to this day. It’s an attempt to save the last remnants of THEIR dying faith.
The bottom line speaks for itself.
I also believe in real estate cycles. When I first went out to Las Vegas to start buying, I was a little early too, but I knew I needed time to load the boat, so I wasn’t worried about being a little early.
The manipulation of inventory to end this cycle doesn’t bode well for the future. If we had the expected clearance of inventory and bottomed in 2014 like we should have, there would have been no overhanging inventory to burden the market. The fact that the supply disappeared prior to market clearing capitulation simply means this supply will appear at a later date, and based on current bank policy, at a higher price.
This up cycle will be different that previous ones due to the failure to clear overhead inventory. The banks will likely be successful reflating the old bubble, but the cloud inventory is real, and when we hit those price levels, a combination of increased inventory and likely increasing rates will make prices flatten, probably in a volatile manner with air pockets of low volume and price drops.
It has been a good time to buy since late 2011. My reports went bullish based on housing affordability back in September of 2011. I wasn’t convinced until September of 2012. People who bought prior to the fall of 2011 were early, and people who buy in the future will be late. For now, housing affordability is still good, but it doesn’t look like it will stay that way.
I foresee many years of overpriced real estate and flat prices as the cloud inventory disappears.
Not quite sure how I lost “dollars”. Still have the same number of kilos as before. Or, are dollars forever? It may be different this time?
What would one dollar buy you in 1913 and what will it buy it now? What would one ounce of gold buy you in 1913 and what will it buy you now?
Mellow – What percentage of the world’s population uses dollars? How long has the dollar been around, compared to other currencies? How long will the dollar be of value? And the most important question, since we don’t live for centuries; what are the signs that a currency is about to fail?
Nice back patting over short term calls – which have only come true due to massive market manipulation via money printing. I am not a short term trader and I admittedly have terrible timing. I am long macro fundamentals. If I leave a little money on the table short term, BFD. There are much bigger problems looming which you conveniently ignore and will pay dearly for.
This is not the cyclical bottom in real estate, even though it appears so from an affordability standpoint. You are parading around on 100% artificiality. I could sit here and beat my chest about how ammunition has gone up 2-3X recently, but I understand it is artificial. I’m not a genius, just lucky. I think owning a property right now makes sense because it is tangible, but you’re way off base with your cyclical call.
I am warning of the effects of all this money printing. It will manifest in 2008 Part Deux. It may take a while. It will make lehman look like afternoon tea with the queen. Reality bats last. Buy tangibles.
MellowRuse:
Well, you bought an OC condo back in 06 (right at the peak) so clearly, you must have a ton of faith in the RE cycle. Problem is, buying at the peak does not validate the ‘toot your own horn’ part of your post that followed. just say’n.
Cheers!
el O says:
March 22, 2013 at 8:20 am
Only the dumbest of dumb-money would equate a consumption item (house lived-in) to investment
Seems like IrvineRenter has misread that comment. Not only did they not mention “faith” initially but just merely the knowledge that real estate (among many other things) is cyclical.
Taking the whole religion angle is hyperbolic but I understand the need to create polarizing content.
If I recall correctly, IR was incorrect in his % of drop for Irvine real estate and even corrected himself with a % rise in prices while others were saying it would drop more or remain flat. What drove his “faith” when he made that call?
As far as I can tell (at least in the range I am shopping), prices are going up and that’s due to record low inventory and record low interest rates… not religion.
IrvineRenter says himself that “we are at the bottom of the interest rate cycle, mortgage rates are likely to rise” (sounds familiar)… is that “faith”?
we are at the bottom of the interest rate cycle, mortgage rates are likely to rise” (sounds familiar)… is that “faith”?
I think that using the historical average for mortgage rates of 6% to 9%, rates are low. No way in free market system would an investor accept that rate of return over the extend time period, these low rates are artificial. In addition, in if Fed keeps printing after January 2014 the difficulty of clean Fed exit increases. There is a real probably that rates will return to historic norms.
Using analysis is one thing and basing an opinion on that analysis is not faith But buyers are stating that home values will increase without using analysis. “It’s Southern California so real estate values only go up”. Now that statement is faith and that what you are seeing right now.
Mike said:
“Using analysis is one thing and basing an opinion on that analysis is not faith But buyers are stating that home values will increase without using analysis. “It’s Southern California so real estate values only go up”. Now that statement is faith and that what you are seeing right now.”
I agree with you… but that’s not what the quoted comment IR is basing today’s post on is saying. Saying that “OC real estate is desirable” is based on historical analysis if you compare prices to surrounding counties like the Inland Empire. It’s just like saying “beach properties are desirable” or “Irvine is desirable”… that’s not faith… that’s truth.
If you look at the last 3 bubbles, in the OC, wherever the bottom settles, it’s usually higher than the previous one. Inflation alone will guarantee that prices will not remain “flat”. So for someone to say that real estate values only go up… that’s really not far from the truth (as it does rise and ebb… but usually rises higher)… you don’t need faith to see that… just facts.
True, but in think in the 21 Century OC is going to be worse off than last 100 years.
*Global Warming tax will increase energy prices. $6 gas prices by 2020 with doesn’t include changes in the market prices.
*Huge California welfare rolls
*increasing medical costs (although every state will experience this)
*$200 billion funded pension liabilities
*Hostile business environment
*Lack of middle class
*Many cash businesses. (IRS will stop this, task force is forming in Arcadia)
Maybe I’m just too negative but other states are seeing this and trying to business away from CA. Some properties at the beach will always be expensive, but I just don’t know about the rest. There might be some downside we have never seen.
irvinehomeowner,
I have faith in careful analysis and sound reasoning. If the analysis points to rising prices, I say so (like I do now). If it points to falling prices, I say so (like I did in 2007). It’s not faith; It’s analysis.
I’ve had six years of daily writing on this blog and the IHB. You can’t revise history when Google is your friend. I was right, and you were wrong. Never forget the bulls and bubble deniers were completely and totally wrong. Sorry, but it is what it is.
Your attempts to undermine me are laughable. I’m sure will you will have more success over at Talk Irvine. You should go run me down over there. It will probably increase my reader base.
You just proved my point.
Who is to say that the comment you are quoting isn’t based on analysis? For all you know, the person who wrote that is in the same business as you are and that is his/her take on it. I didn’t read anywhere in that comment that they had “faith” that “real estate always goes up”… just that it doesn’t stay “flat”, which you seem to agree with.
So for you to claim that the comment is based on faith is a leap of your own… not theirs.
And I’m not sure what you are talking about when you say that you are right and I am wrong, your article you linked to deals in absolutes which you can’t possibly be immune to. I’d like to believe I’m more neutral than you are and from where I’m standing you’ve been just as “wrong” about rising interest rates, government intervention, tsunami of shadow inventory, crash of OARMs as the bulls have been about price retention. You’ve even admitted your estimated drops did not come to fruition due to government manipulation. Google is my friend too, are you now claiming that you have been “completely ant totally” right? Now that’s revisionist history.
And with all due respect… I am not trying to undermine you… I’m trying to provide another point of view. That’s what spurs discussion… when there are opposing opinions. No one is trying to “run you down”… everyone still has the highest respect for you and the years of work you have put into the old IHB. So please don’t try to disguise honest dialogue as something else… not everyone HAS to agree with your opinion (and I do agree with most of yours).
I like a vibrant discussion, and I apologize if I misinterpreted your statements as an attempt to undermine me. I’ll let others read your comment and decide for themselves.
I don’t claim I was completely and totally right about everything. But I was right about the big picture of why home prices would fall, I was right about the timing of when home prices would fall, and I was right about how far home prices would fall to within a small margin of error. Contrast that with what the bulls believed from 2004 to 2007.
Further, your contention that I was wrong about a tsunami of shadow inventory or the crash of Option ARMs is incorrect. The Option ARMs did blow up in large numbers. Default rates on those loans are in excess of 40% even today. We did see a tsunami of shadow inventory thanks in large part to the Option ARMs. In fact, it was so bad they had to change the accounting rules to stop the flood. The crash would have been far worse than I predicted if not for a completely unprecedented and unpredictable change in the rules that NOBODY saw coming more than six months before it was implemented.
And just for the record, that inventory is still out there, but now it’s being held in the clouds. No further inventory floods are forthcoming, but pushing through this inventory in the clouds will slow if not completely halt appreciation once prices reach the bubble peak.
@IrvineRenter:
To be clear, my contention was that the tsunami of shadow inventory hitting MLS inventory didn’t happen. It doesn’t matter if someone changed the rules that NOBODY could foresee… the point is that the flood of distressed homes that have hit the market didn’t occur… held in the clouds or not.
As for OARMs, same thing… it would have exploded if interest rates rose like you predicted, but instead they dropped by a large margin. Teaser rates that people could afford to pay had become that actual rate and thus affordable. And with all the HARP, TARP, CRAP plans… distressed owners were able to get into affordable loans. The effect of recasted OARMs was not as large as they should have been.
Again, the bears claim that they could not foresee what lengths the government would intervene… but if I recall correctly whenever a bull would say “The government would not let that happen”, the bear response was “They can’t prevent it”. Somehow… they did.
It is through that analysis that I disagree with your contention that the bulls were completely and totally wrong. They were wrong about many things but not absolutely… and both sides had their share.
There’s more to the raising prices than just hope and faith.
Look at the trend on housing in CA from 1850 to present.
Market forces are at work. Good soil, Gold rush, railroad, WWII for western ocean ports, areospace industry, movie and entertainment, etc. During all these booms, the federal government financially support the markets. Some smaller gold rush town house prices have skyrocketed and fallen to desert land prices. Fannie and Fredie expanded the market with VA loans, 30 year loans with 20% down, then ARM, 10% down, 5% down, 0% down, 5% cash back, 10% cash back loans. It’s like going into a casino and the government leanding you money, if you win pay back, if you lose walk away with CA non-recourse and single action laws.
You can substitute any product instead of “home” and get raising prices when the rest of the country is footing the bill.
Non-current loans reach a 5 year low, declining 2% from February to March
http://www.dsnews.com/articles/total-for-outstanding-mortgages-below-5-million-mark-first-time-in-years-2013-04-23
I was eagerly waiting that data point. There was a serious risk that March’s number would have been above last March’s number because lenders have made almost no progress on bringing down delinquency rates over the last year. They just brought it down by a very tiny margin. It wouldn’t surprise me if the number was juiced a bit to be below last year. They need to make sure nobody realizes how much delinquency is still a huge market overhang.
The government imposed foreclosure delays were shifting a lot of loans from the foreclosure bucket to the delinquency bucket, which is why foreclosures are down nearly 20%, with delinquency down only 3%. That is starting to reverse now, so there should be a bigger drop in delinquencies and a smaller drop in foreclosures in future months.
The overall non-current number will continue to trend down regardless of which bucket the loans fall into. In doing some back-of-the-napkin calculations, it appears the total non-current count is down 9% from last year.
You have to admit that a 2% drop in delinquency rates over the last year is pretty pitiful.
Whether that trend continues will depend a lot on redefault rates. If borrowers are more motivated to pay on their loan modifications because they believe they will have equity again, then the trend may continue. If the sky-high redefault rates continue to remain high, only the slow grind of foreclosure will lower the rate further, and only if they raise the foreclosure rate to exceed the rate of redefault.
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[…] last piece of the puzzle is whether or not people’s attitudes change. Real estate is religion in California, and the resurgence of kool-aid intoxication is an ever-present threat, but if people start to […]