Echo bubble in California real estate
Posted by Frugal on August 10th, 2009
From several of my friends, I’ve heard that people are bidding the homes again like crazy for the last four months. Many properties sold at the asking prices or above, receiving multiple bids. Home prices actually have gone up by up to 10% versus prices from last year. People just never learn (especially about history). Human greed and fear is always with us, and therefore there will always be bubbles.
Frankly I am totally disgusted by the “get-rick-quick” crowd and their mentality. Nobody wants to work & save diligently. Instead people are afraid of missing the next stratospheric real estate boom, afraid of missing the bottom in stock markets, and afraid of missing the next generational boom in emerging & BRIC markets. Just sit down and think a little bit. If all of these people will get rich, retiring with more than a million in net worth in inflation-adjusted dollars at the age of 55, who is going to serve the table when you go to restaurant? Who is going to be nurse taking care of elders? Who is going to be the hotel cleaning lady when you go and travel? Robots or imported cheap labor from African countries? I don’t mean to disparage the above jobs at all. For the society to function at all, everyone needs to perform their duty and job function. Everyone is indispensible (at least in a collective sense). And so, it just happens that NOT everyone is going to retire on the beach, enjoying the sunshine. That is just a fact, until robots can replace all human labor.
The recent bubble in (international) real estate has been the biggest ever in size in human history, driven by massive credit liquidity multiplication. There was a paradigm change and the credit liquidity is not going to be the same possibly for decades to come. Just remember that if real estate in Japan of just four main islands can go down in prices for 20+ years, then there are more reasons for real estate to go down in prices in bigger continents.
I’m not saying that home prices cannot go up. There are two main drivers for home prices:
1. Persistent increase in wages: I seriously doubt that it’s going to happen anytime soon. The unemployment rates are going up. There is no pressure to increase wages. Furthermore, in order to reverse outsourcing trends, either US wages go down, or US dollar goes down.
2. Long term interest rate drops more: I have doubts that the condition of low long term interest rate in US dollar can persist. Due to all the Wallstreet bailouts and fiscal deficit at Washington, at some point, the liquidity crisis will hit US bond markets again. Foreign central banks are shunning away from US bonds now. I believe long term interest rates will trend up rather than trend down. That does not bode well for home prices.
Of course, if the above two factors change to favoring home price increase, then my opinion will change. Until then, I wish those home buyers and real estate “investors” good luck. Our generation doesn’t really understand the word investing anymore. Calling speculation as investing does not reduce the risk of speculation by any tiny bit. Rather it just pampers your own greed.
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August 10th, 2009 at 12:33 pm
Very true…In my opinion, unequal wealth distribution is the cornerstone to economic progress. There will always be poor people willing to work and rich people willing to take risks and innovate. This combination is required for the growth of any economy. It’s heartening to see that this is already happenning. Also silicon valley is a rich area where there are shortages of hi tech workers, albeit we are in a recession
August 10th, 2009 at 2:42 pm
This is just a cause of the Fed interfering into the mortgage markets. Right now, the only thing propping up the real estate market is interest rates. The Fed is buying mortgage bonds directly by printing money to do so. Now the press is talking about the affordability of homes…even Shiller talks of it. Of course, this is all based on low mortgage rates. If they increase to 6 or 7% then affordability goes out the window.
Most people don’t understand macro issues. They hear of affordability or just assume because housing has dropped it is a screaming buy. The beautiful thing about the market is it provides all investors with lessons – both good and bad.
Real estate may not be a bad long term investment if one can buy a property that creates real cash flow. However, most homes still can’t be bought and have ample rents to cover the costs of ownership. Negative cash flow will eat them alive. If real estate ends up like most markets, there will be a lot of folks purchasing after the first decline only to be whacked at the second decline.
August 10th, 2009 at 5:37 pm
I disagree with the information that prices are up 10 percent in California. There are certain wealthier and coastal areas where prices are up moderately, but doubt it is 10 percent on the 2 million dollar type of houses. Sales activity is up and many foreclosures may be over bid or bid up, but the sales prices are normally well under prices of a year ago. Keep in mind these foreclosures open bidding at a big discount, many need TLC as well. Short sales too, list for cheaper.
http://www.dqnews.com/Articles/2009/News/California/Southern-CA/RRSCA090715.aspx
http://www.dqnews.com/Articles/2009/News/California/Bay-Area/RRBay090716.aspx
August 12th, 2009 at 2:05 am
What about inflation?
August 14th, 2009 at 3:52 pm
Don’t forget about inflation driving up price which will happen soon… Along with taxes to payback our national debt…
August 17th, 2009 at 11:46 am
I have an idea…why don’t you clean up my table next time I go to a restaurant and take care of my grandparents? You seem like a good candidate for the job.
September 9th, 2009 at 2:12 am
Increasing population has helped in increasing the demand for real estate. I agree that market is a place where you get to learn both good and bad.
September 25th, 2009 at 5:25 am
great post. very informative. real estate market is now recovering but will still take much time to fully recover.
February 9th, 2010 at 4:32 pm
“Frankly I am totally disgusted by the “get-rick-quick” crowd and their mentality.” …. says the guy day-trading in the stock market. WOW.