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"The Real Estate Bubble Won't Re-Inflate"

Profile picture for Spleng
Contributions: 4633
ele"Over time, homes track with inflation and bubbles rarely re-inflate. In fact, some housing markets will break below historic averages. "

"Now ... real estate overshot it for a long time. If it's going to get back to the average it will undershoot it for a long time."

"The Real Estate Bubble Won't Re-Inflate"
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May 19 - Berkeley

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Profile picture for Spleng
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May 19
Profile picture for nvchaz
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From the same article:

"Ken Shubin Stein: This is Ken, and I think that it is impossible to know where housing truly bottoms. And it's going to be regional, not national. Real estate is local. We had diverse incentives that drove a national, and then global, bubble. Real estate for most of us is just turning into a local business, not a national business. And certainly national policies will [impact] local affordability. "

True: Next bubble will be around 2021-2022, based on demographics. I'm buying a house now and don't expect to see significant equity increase until 2015. Greed made the bubble.

Memo to the Splooge: should also think when you link.
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May 19
Profile picture for jal74
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Nvchaz

Please list for me any general investment class (real estate, equities, commodities etc) that once subject to a bubble, which then popped ever showed significant equity increase in less than 2 generations (ie 40 years) once the bubble popped.

For the life of me, I can't find one and I am going back to the 1600's.

I think you might have a lot longer to wait

Regards
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May 19
Profile picture for azrob
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WRONG WRONG WRONG!!!

I'll bet my pets.com stock shares you are wrong!
I'll bet great grand dad's super expensive tulip bulbs you are wrong!
I'll bet my south seas trading company stocks you are wrong!!!
I'll bet my tech stocks you are wrong!!!
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May 19
Profile picture for nvchaz
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A good deal of my current thinking is influenced by Harry S. Dent whose analysis of business cycles is based on stretched out demographics correlated with commodity and world terrorism indices.
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May 19
-jal 74
Tech stocks are probably the most obvious example. I would argue that after a bubble bursts is the absolute best time to buy. Because of the contagiousness of fear in markets that can artificially devalue assets, purchases would most likely be at a discount and values would be more likely to follow, or  beat, long term averages.
-Mike
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May 19
Profile picture for nvchaz
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Oil: 1979 to 2007.

The embargo would hit the world terrorism index.
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May 19
Profile picture for Lady Chattel
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The "bottom" has not occurred, no matter what the call to arms is.   So until there is a stagnation in markets and prices rebound can one to even fathom making a prediction as to when equity increases will take place.  Birth rates are starting to slow down.......when the economy sours people either put famiy planning on hold or have fewer children......as it is we don't have enough bodies to support our aging population of boomers.......the coming period of time is faced with factors that previous bubbles never had to deal with.....the dominos will continue to fall.  
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May 19
Profile picture for PMSoldier
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Soon, Anarchy will prevail!  The government will fold and mass hysteria will be on us.  Go to your store, buy provisions and get in the bomb shelters.

Oh wait this government has been around for how long?  We will survive this crisis as we have survived other crisis.  The American will and spirit will prevail.  Yes your house won't be worth what it could have been.  Yes you won't be in that new Mercedes and yes you will have to work to 65 years old but this country will survive.  The people of the United States of America will get through this.  I have faith not in our government but in us, the American People.  We are strong together.
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May 19
Profile picture for SoCal BubbleBrain
'' Yes your house won't be worth what it could have been.''

Don't worry fellow citizens. The good old gubment will step in with part 2 of 'save the responsible homeowner' act : PRINCIPLE REDUCTIONS.
Yes that's right, by the end of the year you will see banks/investors reducing the principles to current values. 
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May 19
Profile picture for CHUTTA
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Why is there so much focus on "re-inflated" pricing.   If the questions is value in a purchase.  Then the focus should be on the purchase price now and your projected valuation (or in the case of rental, net income generated). 

In some areas I think there are safe valuation estimates that can be made that would justify purchase now, and those estimates do not even need to come close to peak bubble pricing to still make the purchase a good value.

Of course there is some risk, but the higher risk the higher the perceived return.  If risk were low then your expected return shouldn't be to much either.  correct?
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May 19
Profile picture for daveyjones2007
Well to be fair, I'd say houses are a little different than most of the famous bubbles.  Houses are useful.  During the bubble they maybe reached 2-3x fair value.

Tulips are not good for much yet sold for prices that are beyond analyzable. 

South Seas stock was almost a ten-bagger in the first six months of trading, with a pretty dodgy business premise underlying it.

Pets.com and most tech stocks were stupid business ideas that burned through mountains of cash without generating any revenues.  So they were valued on multiples of "eyeballs".  That money is gone forever.  Even real companies like Cisco saw their stocks peak at 150x earnings.  Tough to get that back anytime soon, even if Cisco keeps growing fast.
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May 19
Profile picture for Hamp Yonce
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Hamp Yonce

Rock Hill, SC

Real Estate Agent
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It's against my principals, to reduce my principle  That's anti gubment.

I think there is actually an economic principle that would mandate reduction of principal, after collateralizing long term loans, with sketchy collateral. It's the sumpin' is better'n nuttin' principle. Gubment ain't gonna haf to make em.
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May 19
Profile picture for nvchaz
Contributions: 1617
In the pee-pip program the skin for the investor is 7 cents on the dollar. That's a lot of our kid's money they've got left to jack around with.

I think there may be some principle reductions, fancy fraud loans and who knows what else, especially on properties where cash flow is difficult or impossible.

That's really gonna p*ss off the responsible people who are upright and pay on time. But the government will have cleverly shifted the trash loans to the public sector so the "Dems" can act outraged as well.

Really, when you squint your eyes and take a look at this pee-pip travesty, it looks like a strictly asset management deal with a 7% take and maybe the big boys won't give a hoot about the underlying asset or maybe just skim the cream and flush the rest. Me and a whole lot of other people are uncertain as to how this will play out.

One thing I do know: the banks ain't about to dump 500 billion worth of REOs on the market. That would be like DeBeers dumping all its stock of diamonds.
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May 19
Profile picture for space_acer
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Wonderful Spleng.  Your sources are top notch. 
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May 19
Profile picture for space_acer
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Pets.com and most tech stocks were stupid business ideas that burned through mountains of cash without generating any revenues.  So they were valued on multiples of "eyeballs".  That money is gone forever. 

Nope its not gone!  The employees who sold their stock options in the open market back in late 90s at high valuations turned around and blew it overpriced real estate. They in turned paid the seller, who moved out of the California due to early retirement and escape high California taxes.  


The former pets.com employee is now holding on to overpriced homes which no one can afford to pay.


The money has left California but isnt gone forever.  


Millionaires Cash Out Of California



http://blogs.forbes.com/digitalrules/2007/07/millionaires-ca.html



"The Bay Area's wealth boom is producing an explosion of millionaires–in Nevada, Wyoming and perhaps Canada. Wealth managers and other advisers to the well-heeled say "wealth migration"–taking the money and running–is behind a surprising drop in the number of Bay Area millionaires."



Where does that leave the million dollar homes in SF Bay Area ?
In the dust!  
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May 19
Profile picture for Spleng
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Hat tip to:

The Mortgage Lender Implode-O-Meter

for the Forbes article.

"Where does that leave the million dollar homes in SF Bay Area ?
In the dust!"

Yeah, and very very many of these were purchased by the Realtors (tm) themselves when the times were so so good.


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May 19
Profile picture for garypkill
Riddle me this Batman: What will it inflate on? On what income from what job market will it get its air? Government can buy down rates to a point, but the borrower will still be a "service economy worker" ( 10-18 bucks an hr, no benefits. 250-450 weekly post tax won't buy much with rising inflation.
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May 19
Profile picture for Spleng
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"On what income from what job market will it get its air?"

Damn good question.  Seems like we are still losing jobs at a furious pace + overall incomes are declining.

A recipe for the opposite of House Price Inflation.
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May 19
Profile picture for Randy_H
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The second wave of job cuts is just getting started in earnest.  Fasten your seat belts.  No, not in manufacturing.  Not in retail or hourly-wage service workers.  This is the second wave of higher-income, upper-end knowledge worker and professional worker reductions.

There was a great article recently on SFGate about $1mm + homes in the gilded Bay Area.  The fact is, there just aren't that many people who can really, or should really, afford a house over a million bucks.

And yesterday I get this in my inbox:
MLS#: 20904898
Kentfield, CA
Original Price:  $1,895,000
Reduced Price: $1,395,000

That's a -26% reduction folks, in just a single ratchet down.  At least 2 other comparable homes sold close to $2mm in the same neighborhood in the past couple months.  Sure does suck to be one of those buyers, eh? 

The moral:  determine your own price, and ignore what the seller is asking.  Do a bottom-up calculation to determine the true value and price.  A good place to start is simply using price-per-square-foot, and ignoring all the normal sales pitch.
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May 20
Profile picture for Randy_H
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And by the way, millionaires cashing out of the Bay Area is a generations old story at this point.  This area has always (meaning after the 70s) thrived on a conveyor belt of new, ambitious, hungry, smart workers, ideas, and money.  Once people hit it, most of them leave, and a very few stay and recycle their money as investments into the next wave. 

What broke was that people started becoming too comfortable, staying too long, and trying to build too many empires.  LOWER house prices in the Bay Area will be GOOD NEWS for the area's future, not bad news.
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May 20
Profile picture for sunnyview
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I think the sales pitch is buy now before the market rockets back up especially in the Bay Area and other desirable areas like it. I am hoping that people consider value instead of pressure to buy. I love the Bay Area and feel that it will come back just fine to normal levels, but not where it was in the bubble. Things have been out of whack for so long, I am not sure that anyone who isn't a long time resident will recognize that level when it comes though. I hope they will.
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May 20
Profile picture for nvchaz
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"Once people hit it, most of them leave, and a very few stay and recycle their money as investments into the next wave." 

Many moved to the foothills of South West Reno - hundreds of million dollar homes that obviously cannot be supported by local incomes. There is a huge ridge in South West Reno where a development called Arrowhead went in. It was sage brush 15 years ago and now it is totally saturated with 1/3 acre parcels with a hideous Tuscan styled mini-mansions plopped down and a CA plate intially in the driveway.

These are experiencing a little foreclosure action but values haven't dropped far enough yet. The time to get these will be 2012 - 30 cents on the dollar because the economic base of Reno cannot possibly support them.
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May 20
Profile picture for jal74
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Tech stocks are probably the most obvious example. I would argue that after a bubble bursts is the absolute best time to buy. Because of the contagiousness of fear in markets that can artificially devalue assets, purchases would most likely be at a discount and values would be more likely to follow, or  beat, long term averages.

Michael - name me one tech stock that traded in Dec 1999 to February 2000 that is higher today?  I found only 1.

QQQQ (ticker change- back in the day it was the QQQ)?  feb 14, 2000 traded at 98.14 - today?  35. 
MSFT? INTC? ORCL? They all trade at 30% of their 2000 price.  The list goes on and on.  The only player with a higher stock price is Apple, which was such a bad company back than it never enjoyed a run-up during the bubble - say thank you to steve jobs.
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May 20
Profile picture for daveyjones2007
Space you missed my point and went off on another tangent.  Owners of Pets.com stock will never see their money again.  Just like owners tulip bulbs and South Seas stock.  Houses have much higher utility than any of those stupid assets and did not get anywhere near as overvalued.  You can't even talk about them in the same sentence.

That said, I don't think houses have fallen to fair value yet and the negative momentum is just awful.
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May 20
Profile picture for sunnyview
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I agree that there is negative momentum in some markets that were overheated. They seem to have given up more than I would have thought at first glance due to the sheer volume in the market.
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May 20
Profile picture for Lady Chattel
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Well Daveyjones, the way I see it millions of Americans "felt" wealthy based on the equity in their homes, and based on that equity either bought a new car, a boat, or sent Suzy Q. to the University to study.....and now that same homeowner owes waaaay more on his house thanks to this current wave of depressed prices, and even if he sells the car or the boat he can't get above the water line......and heaven help them if they loose a job or end up in a situation where they have to sell the house and therefore loose huge amounts of money in the short term and long term (credit score hit).  
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May 20
Profile picture for daveyjones2007
Yes that is the problem with the housing bubble - it affects so many people and is such a large asset category.  My only point was that "tulip bulbs and dot.com stocks never came back" does not tell you much about housing's prospects because the former were useless assets whose valuations reached heights that houses will never see.
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May 20
Profile picture for Spleng
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"The newer chart pushes that peak about one year into the future into late 2011/beginning 2012."

"Loan reset threat looms till 2012"




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May 21
Profile picture for dacolan
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Thank you, Spleng! Nice find. I have been looking for an updated version of that Credit Suisse chart for months.
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May 21

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