Of course that didn't stop the rise in the market and it didn't prevent me from buying into it (after selling out). My thinking was sound - we are in a bubble, housing is going to drop significantly (even though every one says it can't happen) and even though I could get a loan to buy in Orange County, I'd be crazy to do so. I decided to look around and found Murrieta, a community not to far away from anything in SoCal, but with clean air, good schools and reasonable housing prices. We wanted to have another child, but wanted to be in a home that we weren't going to move out of for a long time. I thought that prices would fall about 20%, but didn't know when and couldn't be sure I was right. I figured I could handle a 20% drop, it would eventually be made up. So, instead of a payment of $10,000 per month if we bought in the OC, we settled for about $3k in Murrieta.
Prices continued to climb. I remember after selling my townhome and renting being in a meeting of financial planners (colleagues) and one of them quoting me from the bloomberg artice - he began laughing at me (and invited everyone else) and inferred I was stupid - housing never goes down. Was I really that far out on a limb?
A few years after I moved into my Murrieta home I saw people refinancing to pull cash out at even higher home prices, yet homes were not selling for what the appraisers certified as the value of the home. I figured prices were 20% below what the appraisers were telling the lenders. Then I began to learn what many of the borrowers used to qualify for their loans, essentially nothing and I began to become very concerned about my decision to buy a home anywhere in California.
I continued to tell clients that housing had more downside than upside and they should be very careful. My only wish is that I had thought through more clearly the consequences of a housing bubble and understood how it bursting would affect all other asset classes. While most of my clients were well positioned, we could have been MUCH better positioned had I pushed my thinking on housing further. Of course I still wasn't sure I was right, it had been three years since the Bloomberg article and housing was still going up, albeit much slower and it was driven purely by fraud (which I was just beginning to catch on to).
2007 is when things began to fall apart for housing. While Orange County eventually fell around 20% (more or less depending on the area) the outlying communities like Murrieta fell by considerably more, nearly 70% from peak to trough (ironically, about the same dollar amount I would have lost by purchasing an OC home, with the exception that my payment was still $7,000 cheaper per month). This fall would have end with a complete devastation of the world economy, which was then propped up by massive amounts of liquidity and balance sheet doctoring (mark to market).
So what is my point?
I have a few:
First, sometimes you can be right and still not get the next actions correct
Second, the experts aren't always right and sometimes simple, common sense is what should rule.
I could list for you many, many experts - including both heads of the Federal Reserve who publicly stated there is no bubble in housing. Yet, a financial planner with a degree in finance and a Masters in Financial Planning (not economics) was able to deduce that housing was in a massive bubble. Not only that, I wrote to the Wall Street Journal in early 2008 warning that the banks were hiding gigantic losses....right again, but that didn't stop me from taking it to the next correct action - being right doesn't translate to making money - you have to be right AND know the correct next step.
Here is that article from so many moons ago, for your reading pleasure. This article both encourages me and haunts me:
Is U.S. Housing Boom Nearing the End of the Line?: John Wasik
June 14 (Bloomberg) -- Is the long, ascending march in U.S. home prices reaching a summit?
Scott Dauenhauer, a fee-only financial planner in Laguna Hills, California, for one, isn't sanguine about home prices in Southern California, where double-digit increases are common.
Having sold his 1,000-square-foot, two-bedroom home six months ago for $350,000 -- he paid $170,000 in 2000 -- Dauenhauer says he's not really timing the market, yet found home prices in his area ``ridiculous.'' He's looking for a three-bedroom home with a yard for his wife and three-year-old son home in Orange County. For now, he's renting while prices continue to soar.
As rising mortgage rates chasten the housing boom, it's time to consider whether you should buy new property or borrow against your home based on the presumption that home prices will ascend endlessly.
``A friend who lives about mile away who has a four-bedroom, 2,500-square-foot home said a home similar to his just sold for over $900,000,'' Dauenhauer said. ``I think there's a bubble. It's similar to the Nasdaq (stock market) several years ago. I tell any clients who come to me who want to buy a house that there's more downside than upside now to the home market.''
Home Prices Slowing
Home price increases are easing throughout the U.S., according to the Office of Housing Enterprise Oversight (OFHEO), a U.S. government agency that monitors government-sponsored housing enterprises.
While prices averaged a 7.71 percent increase from the first quarter of 2003 through the first quarter of 2004, the 0.96 percent first-quarter rise is ``nearly 3 percentage points lower than the 3.71 percent jump in the fourth quarter of 2003,'' OFHEO said.
One forward indicator of home sales -- the Bloomberg U.S. Homebuilders Index of leading home construction stocks -- is off 2 percent year to date through June 8. The index hit its 52-week high on March 8. Mortgage applications also fell for the fifth straight week in the week ending June 4, down 8.9 percent, according to the Mortgage Bankers Association, a trade group.
Slackening of home prices is actually good news for property owners, since it may lessen the possibility of a drastic bubble bursting in the Northeast and Southern California.
What Happened to the Bubble?
While there have been pronounced regional declines in Boston, Southern California and Houston over the past two decades, is it possible that for most homeowners, real estate is the ultimate no-brainer, long-term purchase?
Going back to 1980, in the frothiest markets, prices appreciated most in Massachusetts (up 516 percent), New York (399 percent), Rhode Island (361 percent), New Jersey (316 percent), and California (315 percent) through March 31, OFHEO reported.
You could have done better. Let's say you took a buy-and- hold approach with stocks represented by the Standard & Poor's 500 index of the largest U.S. companies over the same period. With dividends reinvested, your nominal return would have been 1,317 percent, or about 11 percent a year.
Although it's unfair to compare large-company stocks to homes -- stocks annually average 20 percent variance in prices (standard deviation since 1926 or risk) -- there's typically no 6 percent commission to buy a no-load stock index, no taxes to pay (if held in a tax-deferred account) and certainly no maintenance costs. If owned through a mutual fund, you could pay about 0.20 percent a year to own the stock index.
Evaluating Risks
Real estate is hardly risk free. It's an economic shibboleth that home prices can't outpace local job and income growth forever. This idea runs contrary to the housing industry's contention that demand and demographic factors are driving the boom and not speculation.
Like tech stocks, homes can also be wildly overvalued. A recent study by the Economist magazine of the $50 trillion worldwide property market found that ``home prices look seriously overvalued in Australia, Ireland, Netherlands, Spain, the U.K. and U.S.''
Pam Woodall, economics editor of the British magazine, said at a London conference sponsored by the U.K. research firm Investment Property Databank that ``house prices will fall by at least 20 percent in many economies over the next four years.''
While it's hotly debated whether a dramatic decline is coming for the most inflated markets, the least-discussed risk is that being overleveraged in real estate can negatively crimp your cash flow and financial goals.
Biggest Risk Factor
The commonly accepted wisdom that you should buy as much house as you can afford is perhaps the most dangerous residential risk factor. Higher housing debt can backfire.
Mike Dubis, a fee-only financial planner with Touchstone Financial LLC in Madison, Wisconsin, said Americans are spending about a third of their disposable income on housing, twice what they were spending 30 years ago. That means a reduction in cash flow and a sixth less money available to finance retirement and other financial goals.
Spurred by low consumer interest rates, the crushing burden of household debt also contributed to 1.6 million personal bankruptcy filings for the year ended March 31. So no real-estate investment is worthwhile if it cripples your cash flow.
``One-sixth less disposable income for a family earning $120,000 a year would leave them with $20,000 less in real dollars per year,'' Dubis said. ``So many are putting money into their home with the misperception that it's an investment,'' Dubis said.
Should You Worry?
It's a good time to be vigilant only if you're an active investor, considering tapping the equity in your home or planning a move. Selling investment properties may be a good idea if you need to take a gain.
Also, examine renting if moving into a pricey new area. Just don't expect any bargains when buying in torrid markets. In Manhattan, where demand is strong, apartment prices climbed to a record average $998,905 in the first quarter of this year from $903,259 the previous three months, according to residential appraiser Miller Samuel Inc. and Douglas Elliman, a real estate brokerage.
``If you think there's a bubble (in your local market), sell your property,'' said John Henry McDonald, a fee-only financial planner with Austin Asset Management in Austin, Texas. ``That's putting your money where your mouth is.''
``When home prices start to soften, we'll see a greater downdraft in prices on both coasts,'' said Sidney Blum, a fee- only planner with Leonetti Associates in Buffalo Grove, Illinois. ``In other places, they (prices) will either go sideways or down slightly. It may not be the best time to buy based on huge potential appreciation in your home. A home is a place to live.''
To contact the writer of this column:
John F. Wasik in Chicago at jwasik@bloomberg.net.
To contact the editor responsible for this column:
Bill Ahearn at bahearn@bloomberg.net.
Last Updated: June 14, 2004 00:09 EDT
