By The Tim on March 4, 2009
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Posted in Open Thread | Tagged open_thread
Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.
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Need some advice:
I have two sets of friends that are looking to “buy” a place of their own. I say “buy” because in one situation their parents are buying the house and letting them live there. They are looking to spend “Probably $600k+ in Magnolia or somewhere really upscale, we just can’t see our(24 year-old)selves living anywhere but a select few blah blah rich blah blah…”. The others are looking at a $400k Greenlake/Wallingford townhouse with some help from their parents because their realtor tells them “NOW is the best yada yada market yada interest rates yada yada…”
Questions:
1. How do I advise them that in my humble opinion this is a horrible financial mistake without them taking it as me slapping them (and their parents) in the face?
2. Is it easier to just physically slap them in the face to make my point? Their parents too?
3. Should I even care and just chalk it up to redistribution of wealth away from their wealthy parents?
4. Honestly, who (besides these fools) is actually buying a house in Seattle right now? Seriously. Who?
Thanks for any input.
EVEN DR. DOOM (ROUBINI) IS SCARED RIGHT NOW
The stock market is collapsing faster than the Titanic, what is it 60% down? Is there a bottom by 2010, 2011? Never?
At least during the 1929 crash we had salmon, water, trees; and a manufaturing base with significantly lower population to feed. Now what do we have? Ticket stubs from Emerald Downs telling us we lost our life’s savings to a last place horse?
When Dr. Doom is trying to brighten things up and purposely exagerates about how really bad it is…..God help us.
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Mr Quinn tells it like it is ………….
Stairway To Retail Heaven
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………For decades, homeowners had a ridiculous notion that they should slowly but surely pay off their mortgages. Why pay off your mortgage when your home value is guaranteed to increase 10% per year for infinity? After the greatest housing boom in history, Americans are left with 45% equity in their homes versus 68% in 1985. With home prices destined to fall another 20% to 30%, equity will fall to 35%. One in seven homeowners across the country has negative equity, and of homeowners who bought in the last five years, 29.5% are under water.
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Reversion to the mean is a concept that government bureaucrats refuse to accept. They are willing to spend as much of your money as they can get their hands on to reverse a non-reversible trend. Home prices must fall another 30% to reach the long-term mean value. Taking money from prudent homeowners and giving it to deadbeat homeowners and allowing politically motivated judges to decide who deserves a lower mortgage will not reverse the downward trajectory of home prices. It will just prolong the pain and create unintended consequences.
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The number of homes for sale is still at record levels. With foreclosures accelerating, more houses will come onto the market and prices will fall. Unemployment will reach 10% next year. There are 2.1 million vacant homes in the U.S. today. This is 1 million more than the historical trend. No one is going to buy these homes at current asking prices. If you wait until foreclosure, you may get a house 50% cheaper than today’s asking price. This is a rational approach and will lead to lower prices. All the facts point to a significant further decline in home prices. The government’s efforts to mitigate foreclosures and prop up home prices with our tax dollars will fail. With prices falling for another two years and jobs disappearing at a 500,000 per month clip, consumers will stay on the sidelines for years………..
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RE: NoMoreWork @ 2 –
1) Tell them your opinion. The parents paying $600k could get a lot more house or save $50-100k by waiting a year. If they still think “renting is flushing money down the tubes” then let them flush $50k down the tubes. $400k for a green lake townhouse is just fuggin stupid, but whatever. If they are hell bent on buying, nothing you say will change their mind. I’ve talked to a lot of smart people the last year who ignore trends, data, facts, logic, math… the mantra of the last 5-6 years is still stuck.
2) Fun, but won’t accomplish anything.
3) Not really. Unless it’s likely they’ll end up on your couch after they get evicted.
4) People with more dollars than sense.
RE: softwarengineer @ 3:
Jeez man, wont you think of the children?
RE: NoMoreWork @ 2 – Out of curiosity, how much money do you have and are you willing to pay them if you’re wrong? And what expertise to you have to make these predictions such that they wouldn’t be fools for listening to you.
I would say just let your friends make their own decisions. They have their reasons for buying, and not everyone’s thought processes or expectations are the same.
In that regard I think new car purchases are often silly or even stupid. But when someone is considering that, or has actually done that, I’ll not rain on their parade (except maybe in the Internet forum context where they haven’t already bought). Related to that, I remember a few years ago I had to pick up one of my mom’s cars from the shop while she was out of town, and when I drove up to my house two people came up all excited asking if I’d bought a new car. I wondered why they were all excited, because I would have considered that a bad thing. To each his own.
By NoMoreWork @ 2:
no more work,
You don’t have to make it sound like a negative…It could be more along the lines of ” I hear there are going to be really good buys out there in a couple of years.”
Ira makes a good point.
Try to frame it in the context that they’ll get a more awesome house next year, or that the second example will be able to get a nice SFH instead of a condo for the same price.
That said, some people just won’t care or have pressing reasons they want to “own”. I had a couple friends buy recently and after hearing their story I didn’t bother trying to change their mind.
RE: Kary L. Krismer @ 7 – By this logic shouldn’t most realtors pay their clients for being wrong and giving bad advice? Many of the clients have purchased a house over the past 2.5 years based on the realtor’s “expert advice” only to watch it decline in value dramatically…
Thanks all for the input. I know there are reasonable ways to bring it up, but everytime I mention declining home values to homeowners/realtors/people looking to buy etc… they give me a look like I just slapped them. Anybody else experience this amazing hypersensitivity?
Keep in mind I did say that these are, in fact, my friends. I really don’t want to see them (their parents) lose a bunch of money. Best thing I can do is send them a link to seattlebubble.com and let them decide what they will with the evidence presented to them.
FYI: I rent.
RE: NoMoreWork @ 11 – I would have made the same argument two years ago to someone saying to buy because prices would be higher in two years. I don’t think much of predictions, no matter who is making them or what they are.
RE: NoMoreWork @ 11 –
The correction in housing prices is more than I expected, but have expected a correction since 2005, and more so in 2006. It was just scarey how oblivious the buying public was. I did sell properties and refinance to take on as much debt as I could. My thinking was that as the housing prices collapsed that investment dollars would go to inflating the price of all goods. When oil started going up for no good reason I thought we were on our way to hyper inflation.
Those were my thoughts at the time. Now I have to pay off debt with earned dollars rather than being able to capitalize on investments I thought were a sure thing. My thinking was that the foreclosure market would produce a steady stream of small returns. That market collapsed along with credit.
What I would talk with your friends about would be the lack of credit in the future. both consumer credit and mortgages in the future will have to be based on common sense. Sure they can qualify for a loan, but when it’s time to sell what will the buyer pool be like? A shrinking buyer pool will lower demand. Prices will fall, but your friends will be on the hook for the money they borrowed.
Blame the credit markets. It’s the thing no one is really looking at. Credit has run it’s course. It’s just not as profitable today as it was a year ago and will be less profitable two years from now. Who will be lending money two years from now and where is the money going to come from. If we do go back to having savers providing the money to lend that will be a very shallow pool of resources.
RE: softwarengineer @ 3 –
Dude.