War

[Cal]

Originally posted by TheProudDuck@Oct 5 2004, 10:10 AM

Cal,

There may be, but, under Clinton the rise in the stock market was not ALL hype. There was a real increase in productivity during the latter 90's that generated real wealth. To the extent that that wealth was first accumulated in the stock market and then into real estate, we may not see as drastic a real estate crash as you seem to be predicting. A lot of it depends on public psychology--where do people THINK their wealth belongs--where can they make the most money. In real estate there is a supply and demand issue that plays into it in some areas. A lot of it will have to do with interest rates, that everyone is predicting will rise thanks to a large Fed deficit.

True, the 1990s run-up in the equities markets wasn't all hype. The Dow peaked at about 14,000 before correcting back to the 10,000 range, which still represents a huge increase. Even the NASDAQ, at about 2,000 now as opposed to 5,000 at its peak, showed a huge increase. It's the paper wealth represented by the difference between those peaks and the fundamental values that went into real estate, and set off a speculative frenzy. People are buying homes, holding them for a year, and selling them for up to 60% more than what they bought them for. In some areas (like mine -- wonderful) it looks like about half the home sales are speculative.

The supply and demand issues, while significant, aren't driving the massive runups in prices in LA, OC, San Diego, Boston, etc. True, we've had lots of population growth, and we're starting to run low on land. (Although the pace of new home construction isn't significantly different from what it was a decade ago; while new land isn't being manufactured, new homes are added through higher-density development.) But the biggest run-up in prices has occurred since 2001, with prices more than doubling in coastal OC. The supply-and-demand fundamentals haven't changed so much in a mere three years as to justify anything near that level of appreciation.

Demand involves not only people wanting to buy houses; it's also required that people are able to buy houses. Fewer than 20% of Southern Californians have the income to buy a median-priced house. The result is that with a family income in the six figures, I can't buy a house. The only people buying are (1) people trading up, using their own massive equity increases to make giant down payments; (2) people getting tons of help from parents; (3) the genuinely wealthy; and (4) people who are stretching to make payments using ARM or interest-only loans, who will get absolutely killed when interest rates finally do rise.

A lot of it will have to do with interest rates, that everyone is predicting will rise thanks to a large Fed deficit.

That's the theory of Clinton's former Treasury secretary Robert Rubin -- that high federal deficits will cause high interest rates. Trouble is, the empirical evidence doesn't support that theory. We're running record federal deficits (in absolute terms), yet interest rates are at forty-year lows. I think the answer to this disconnect between Rubin's predictions and experience is that even very large federal deficits constitute such a small percentage of global borrowing that they don't have the "crowding-out" effect Rubin posited. Even if the government borrows $400 billion, so much more money is moving in capital markets around the world that the deficit has the effect of a drop in the bucket, theoretically significant but easily overshadowed by other market forces.

A person who, in 2001, followed Rubinomics in deciding whether to buy a home would be kicking himself this year. According to Rubinomics, interest rates should have risen, thus depressing housing markets; therefore, 2001, when deficits returned, would have been the absolute worst time to get into those markets. Instead, that person would have missed out on hundreds of thousands of dollars of equity appreciation -- a good deal of which will remain even in the event of an unprecedented 50% correction in real estate prices.

I hope you are right about interest rates, as I have some RP holdings that will do better if they don't.

One big factor here in southern Cal and Ventura county where I live is one that is overlooked by many of the analysts. That is, the effect of hispanic rp buyers. Hispanics typically favor real estate over other types of investments. In this area hispanics have risen in economic status over the last few years. I see it in the kids they are sending to my classes--much bigger percentage of my honors and college classes are made up of hispanic kids than ever before with a similar demographic. Bottomline, hispanics are making more money than say 10 years ago. They tend to want to buy homes, not invest in the stock market or other securities investments. This has put a lot of pressure on the market in this area that wasn't there even 5 years ago. Coupled with the difficulty in freeing up land for construction (with all the Coastal Commission rules, environmental hurdles and licensing difficulties) it is not hard to see that rp will probably continue to go up, perhaps at a slower rate. I agree with you that the spike of the last 3 years is the exception, not the rule.

In the metro Phoenix area, though it is growing even faster than socal, the rp values have risen only moderately. The main reason is an almost inexhaustable amount of land. The only restrictive factor is water. But, housing uses less water per acre than homes, so I don't think that is going to be a factor. (The phoenix area is strongly agricultural but there is no shortage of land.) My son tells me that a lot of people have moved into his neighborhood from California, cashing out here and buying homes outright. The typical family home in say, Gilbert or Mesa is about 1/3 the cost it is here.

Quite a departure from the title of the thread!

[Guest TheProudDuck]

Cal,

Quite a departure from the title of the thread!

No kidding. Although we're probably about due for a return full circle to the original topic, since real estate disputes have probably caused more wars historically than anything else.

Interesting thoughts on Hispanic entry into the RE market. I wasn't aware of their preference for real property over equities, but given Mexico's endemic corruption, I suppose it makes perfect sense for people from there to prefer investments you can kick.

The large-scale Hispanic entry into the market may well mean that at least some of California's real estate appreciation is sustainable. On the other hand, maybe not; as Hispanics/Latinos move in, there are an awful lot of people picking up stakes and moving to Nevada or Arizona, as you mentioned, so the entry of upper-class Latinos into the real estate market may be offset in large part.

What makes me reluctant to stretch myself to jump in the market today (even if I could, which is doubtful) is that I'm seeing recent immigrants enter the market, who aren't financially sophisticated at all. Looking at the prices they're paying for homes even in traditionally down-market locations like Westside Costa Mesa and south Santa Ana, it's clear that they must be heavily leveraged, using the more exotic financing arrangements like ARMs and interest-only. It's like when J.P. Morgan (I think) decided it was time to get out of the 1920s stock market, when his shoe-shine boy gave him a stock tip. He figured when the shoe-shine boys (who presumably aren't sophisticated investors) are driving the market, it was time to get out, because decisions weren't being made rationally and were likely to crash.

I think a lot of relatively unsophisticated folks are going to get seriously hurt when the market corrects -- and I think it will, even if the trigger (higher interest rates) won't necessarily be caused by high federal deficits. (Just my luck -- the one time I hope a liberal -- Rubin -- was right (i.e., I hope interest rates rise long enough to pop the speculative bubble), he turns out to be wrong, or seriously off in his timing.)

[john doe]

Originally posted by Traci+Oct 5 2004, 08:36 AM--></span><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td>QUOTE (Traci @ Oct 5 2004, 08:36 AM)</td></tr><tr><td id='QUOTE'> <!--QuoteBegin--john doe@Oct 4 2004, 05:26 PM

keep repeating it, eventually you will start believing it.

I think I've heard this comment before. I think it was in regards to bearing testimonies.

Ahaaaahaaaaahaaaaahaaaaahaaaaahaaaaahaaaaahaaaaaaa!!!!!

[Snow]

Originally posted by TheProudDuck@Oct 5 2004, 07:06 PM

It's like when J.P. Morgan (I think) decided it was time to get out of the 1920s stock market, when his shoe-shine boy gave him a stock tip. He figured when the shoe-shine boys (who presumably aren't sophisticated investors) are driving the market, it was time to get out, because decisions weren't being made rationally and were likely to crash.

I have never much believed that the stock market was "efficient;" that the market price is accurately set through knowledgeable buyers and sellers operating in their own self interest. Seems to me that many prices are set on the basis of wishful dreaming - not real information and analysis, like the tech boom of the late 90's. In the penny stock market, the stocks that produced the greatest increase in stock price, upon initial offerings, were those that raised capital with no expressed or revealed business plan in place. Like a game show offering either $1000 in cash or "what's behind door number one." The unknown is more attractive.

There was a question to this Sunday's Parade magazine column asking how much of each stock sold on Wall Street (not NPOs) went to the corporation. Can people be that clueless. The answer of course is none. The money goes to the seller of the stock. Which makes us ask: What is the purpose of the market - all the buying and selling of stock, when the corporation doesn't benefit from it? To give liquidity to the stock - the stock is more valuable to the holder is he can easily sell it. A stock that can't be easily sold is worth less money. Okay, so stock needs to be liquid but how much liquidity is necessary and how much simply fuels unproductive volativity where some get richer and some get poorer on the transactions while in reality, no real wealth is being created, it is just being transferred from the dumb or unlucky to the clever or lucky? And how much better would we be if we took some of the money tied up in churning the stock market and plowed it into industry and real wealth creation? Why not tax capital gains earned on an investment at a high rate for anything held under a year, or whatever. It would give the needed liquidity, in aggregate but discourage harmful transfer of wealth.

[Guest TheProudDuck]

Snow,

First, keep in mind that a corporation doesn't just issue stock with an IPO, turn the stock loose among the milling speculative herds, and then forget about it. Corporations can issue additional stock later, too.

One reason I'd be against the kind of tax you're proposing would be that a corporation's stock price is the only effective measure of its total (as opposed to book) value, and a special tax on stock transactions would have the effect of introducing a major distortion into that valuation process. A corporation's value is comprised essentially of two components: book value (the value of its net assets), and the discounted present value of its anticipated growth.

It was the latter of those two factors that people got so wrong in the late 1990s. Any pricing mechanism is fallible, because it's set by fallible people, either directly or by collective behavior. As it turned out, people in the late '90s incorrectly thought there was more potential for economic growth in the Internet than there actually was. This was no different from what occasionally happens in commodities markets, where people calculate how many pork bellies or barrels of oil will be available next month and bid on them accordingly, only to see their calculations upset by a swine flu outbreak or a Gulf hurricane.

Keep in mind that the money "tied up" in equities is largely paper wealth: A company's stock value is really just the price tag on the company, should a buyer ever come along. Relatively little of the total value of equities on the market has ever been paid for in cash. And value of a company's equities isn't really "tied up," either: it represents an asset, which can be (and is) used to generate funds for capital investments, by standing as collateral for loans, or as a reservoir of value that can be tapped for additional stock offerings.

In addition, distorting the equities market would be a bad idea because a company's stock price can indicate whether it's underperforming its potential. Low stock prices act as a signal that a corporation is being run inefficiently, and can cause stockholders to demand a change -- either by replacing management, or by encouraging other companies, who might be able to make better use of the corporation's assets, to move in, take over, and bring the underperforming corporation up to its potential. That happened a lot in the 1980s, after corporations had made irrational acquisitions just for the sake of being big: smart investors recognized that the corporations were worth more for their parts than as a whole, bought the corporations out, broke them up, and wound up with multiple high-performing companies instead of one big sluggish one.

Bottom line is that a tax on stock transactions would make the equities market less efficient.

Now, one market where I do wonder whether speculation is a good thing is the housing market. With stocks, people's purchases are pretty much discretionary. With housing, people buy to invest, but mostly to have a place to live. When a market gets seriously entered by speculators (as has happened in the past three years in the coastal markets), the price gets jacked up and people who just want a place to live get priced out.

Usually, economic inequality doesn't bother me much -- I care much more that the people on the bottom have a decent living and opportunity than that some people have more than others. (If I have sufficient for my needs, it shouldn't bother me that Bill Gates has more.) One person's wealth generally doesn't affect me; their consumption of essentials generally isn't much higher, and whatever pressure their demands place on the luxuries market generally doesn't affect me, since I'm not in that market.

But when a speculative housing market develops, the rich and the ordinary ARE competing for the same goods, although for different reasons. Rich people buy houses as investments, crowding out ordinary people who buy houses to live in. This strikes me as a genuine case of the rich enriching themselves at the expense of others -- a charge liberals make that is rarely true, but may be in this particular case.

Or maybe it just seems that way to me because it's my particular ox that's getting gored.

[Cal]

Originally posted by TheProudDuck@Oct 5 2004, 07:06 PM

Cal,

Quite a departure from the title of the thread!

No kidding. Although we're probably about due for a return full circle to the original topic, since real estate disputes have probably caused more wars historically than anything else.

Interesting thoughts on Hispanic entry into the RE market. I wasn't aware of their preference for real property over equities, but given Mexico's endemic corruption, I suppose it makes perfect sense for people from there to prefer investments you can kick.

The large-scale Hispanic entry into the market may well mean that at least some of California's real estate appreciation is sustainable. On the other hand, maybe not; as Hispanics/Latinos move in, there are an awful lot of people picking up stakes and moving to Nevada or Arizona, as you mentioned, so the entry of upper-class Latinos into the real estate market may be offset in large part.

What makes me reluctant to stretch myself to jump in the market today (even if I could, which is doubtful) is that I'm seeing recent immigrants enter the market, who aren't financially sophisticated at all. Looking at the prices they're paying for homes even in traditionally down-market locations like Westside Costa Mesa and south Santa Ana, it's clear that they must be heavily leveraged, using the more exotic financing arrangements like ARMs and interest-only. It's like when J.P. Morgan (I think) decided it was time to get out of the 1920s stock market, when his shoe-shine boy gave him a stock tip. He figured when the shoe-shine boys (who presumably aren't sophisticated investors) are driving the market, it was time to get out, because decisions weren't being made rationally and were likely to crash.

I think a lot of relatively unsophisticated folks are going to get seriously hurt when the market corrects -- and I think it will, even if the trigger (higher interest rates) won't necessarily be caused by high federal deficits. (Just my luck -- the one time I hope a liberal -- Rubin -- was right (i.e., I hope interest rates rise long enough to pop the speculative bubble), he turns out to be wrong, or seriously off in his timing.)

Well, if the last 35 years is any indication, California is prone to real estate bubbles and bursts of greater or lesser degrees. An increase betweeen 1972 and 1974 was followed by a year of leveling off. There was a run up between 1976 and 1980, followed by 2 years of level off. A moderate increase between 1985 and 1985. Then there was a run up between 1985 and 1989, followed by a fairly long decrease, and then the recent run up.

I can understand your consternation about prices. Historically real estate has actually, more or less, followed general inflation. Since 1972, inflation has increased by a factor of about 10. Housing right now, is about 15 on that scale. It will probably slacken a bit in the next couple of years, unless supply and demand skew that trend. In the early part of a career it seems hard to imagine getting a mortgage (TD in California), but hang in there you may be surprised at how soon you will actually manage it.

By the way, interest only ARMs can be a very good way to go, if you can put a sizable amount on the principal every month outside the contract. But it depends on how long you are going to hold the property. If you can pay down the principal by, say 1/3 in 5 years, and are lucky with interest rates, you can save a ton in interest over a 30 year fixed. The worst kind of financing is actually the 30 year fixed, that you then sell in 5 to 7 years. Then the actual interest rate you pay can be staggering because of the way the payments are structured. It gets pretty complex--you have to know your long range goals. If you are going to stay in the property for the term of the 30 year fixed, then that is probably a good loan at present.

No one knows what interest rates and prices will do so there is always something of a gamble. But, long term, real estate in California will probably always be good investment, but not necessarily short term.

[Cal]

Originally posted by TheProudDuck@Oct 6 2004, 11:21 AM

Snow,

First, keep in mind that a corporation doesn't just issue stock with an IPO, turn the stock loose among the milling speculative herds, and then forget about it. Corporations can issue additional stock later, too.

One reason I'd be against the kind of tax you're proposing would be that a corporation's stock price is the only effective measure of its total (as opposed to book) value, and a special tax on stock transactions would have the effect of introducing a major distortion into that valuation process. A corporation's value is comprised essentially of two components: book value (the value of its net assets), and the discounted present value of its anticipated growth.

It was the latter of those two factors that people got so wrong in the late 1990s. Any pricing mechanism is fallible, because it's set by fallible people, either directly or by collective behavior. As it turned out, people in the late '90s incorrectly thought there was more potential for economic growth in the Internet than there actually was. This was no different from what occasionally happens in commodities markets, where people calculate how many pork bellies or barrels of oil will be available next month and bid on them accordingly, only to see their calculations upset by a swine flu outbreak or a Gulf hurricane.

Keep in mind that the money "tied up" in equities is largely paper wealth: A company's stock value is really just the price tag on the company, should a buyer ever come along. Relatively little of the total value of equities on the market has ever been paid for in cash. And value of a company's equities isn't really "tied up," either: it represents an asset, which can be (and is) used to generate funds for capital investments, by standing as collateral for loans, or as a reservoir of value that can be tapped for additional stock offerings.

In addition, distorting the equities market would be a bad idea because a company's stock price can indicate whether it's underperforming its potential. Low stock prices act as a signal that a corporation is being run inefficiently, and can cause stockholders to demand a change -- either by replacing management, or by encouraging other companies, who might be able to make better use of the corporation's assets, to move in, take over, and bring the underperforming corporation up to its potential. That happened a lot in the 1980s, after corporations had made irrational acquisitions just for the sake of being big: smart investors recognized that the corporations were worth more for their parts than as a whole, bought the corporations out, broke them up, and wound up with multiple high-performing companies instead of one big sluggish one.

Bottom line is that a tax on stock transactions would make the equities market less efficient.

Now, one market where I do wonder whether speculation is a good thing is the housing market. With stocks, people's purchases are pretty much discretionary. With housing, people buy to invest, but mostly to have a place to live. When a market gets seriously entered by speculators (as has happened in the past three years in the coastal markets), the price gets jacked up and people who just want a place to live get priced out.

Usually, economic inequality doesn't bother me much -- I care much more that the people on the bottom have a decent living and opportunity than that some people have more than others. (If I have sufficient for my needs, it shouldn't bother me that Bill Gates has more.) One person's wealth generally doesn't affect me; their consumption of essentials generally isn't much higher, and whatever pressure their demands place on the luxuries market generally doesn't affect me, since I'm not in that market.

But when a speculative housing market develops, the rich and the ordinary ARE competing for the same goods, although for different reasons. Rich people buy houses as investments, crowding out ordinary people who buy houses to live in. This strikes me as a genuine case of the rich enriching themselves at the expense of others -- a charge liberals make that is rarely true, but may be in this particular case.

Or maybe it just seems that way to me because it's my particular ox that's getting gored.

PD--if it is any comfort to you, in the last turn down, between 1989 and 1999 or so, I lost 1/3 of the value in some real estate I bought in 1988. Essentially I lost (temporarily) all my down payment. But, I hung on to it anyway. Eventually it came back and is now worth 4 times what is was in 1993. If the present market doesn't come down, it will at least not rise at the rate it did for the last 3-4 years. In the mean time, you will continue to increase your income, and will get the house you want, I have no doubt.