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Bill Virgin: We are all real-estate speculators

Here’s yet another gem from P-I columnist Bill Virgin: We’re all guilty of speculating in real estate

Greetings, fellow real-estate speculators. How ya’ feeling about your gamble on the real estate market these days?

Who, me? Not us, you protest. Our purchase of a home is meant to provide shelter for our families, not as an investment vehicle. If we do benefit financially from the tax breaks and an eventual gain on sale, so much the better, but that’s not our motivation in buying a home.

Ah, but indeed it is a major motivation, and those who claim to have no participation in real-estate speculation doth protest too much. We are all real-estate speculators to some degree. What we’re quibbling about is how much of a degree.

I think the easiest way to get someone to realize that their home purchase was more about financial speculation than they admit is to ask them how they would feel if tomorrow their home was worth just 25% less (which happened recently in California) than they paid, or heaven forbid, 50% less (which happened in Florida). I imagine that most people would be pretty upset. If it’s just “a place to live,” what’s the big deal? Oh wait, you bought into the “equity ladder” myth.

In a way, it’s difficult to blame people for stretching to buy homes in a speculative fever when every single media outlet has constantly pushed the “buy now or be priced out forever” message at every opportunity.

On the other hand, I’m a pretty old-fashioned kind of guy, in that I believe you are responsible for your own decisions. You bought a house that you could barely afford, using a risky loan, and now the interest rate has been jacked up and you can’t make payments? Well, it’s not like the terms of the loan were a mysterious secret, shrouded from the view of the hapless home buyer. And whose fault is it that you didn’t bother doing critical research, choosing instead to blindly accept the cliché that “real estate always goes up,” fed to you from people whose income depends on you buying what they’re selling?

Nobody’s but yours.

(Bill Virgin, Seattle P-I, 08.06.2007)

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About The Tim

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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

59 comments:

  1. 1
    SunTzu says:

    Can’t say I’m always a fan of our President but he’s got this one right!!

    Bush against lifting Fannie, Freddie mortgage cap

  2. 2
    Rob Dawg says:

    I’m fine. Thanks for asking. My home is worth about 25% less than the peak. BFD. Oh, and I sold the last of all my non personal use RE in April 2006. Thanks for asking.

    My point is that you overreach with your generalizations. Yours is best described as a desperate bid to get those of us who are not guilty on board with a “we’re ll in this together” plea to bail you suckers out.

  3. 3
    LotharBot says:

    I’m not guilty of real-estate speculation. Nor do I expect I’ll ever be.

  4. 4
    The Tim says:

    Rob Dawg,

    You should take notice of the fact that Bill Virgin was the one making the sweeping “all” statements. I said “most people would be pretty upset.” If you’re not one of those, then great. Good for you.

    Also, I’m not interested in anyone “bailing” me out, nor am I “desperate” about anything. What on earth do I have to be bailed out from? I’m living 100% debt-free, building my assets, just enjoying the show.

  5. 5
    The Tim says:

    Har har, LotharBot. I think the “we” in Bill’s “we are all real estate speculators” was referring to home buyers only. Specifically, home buyers in the last few years. But that part is just my personal interpretation of Mr. Virgin’s column.

  6. 6
    Rob Dawg says:

    The Tm,
    I was speaking through to address Mr. V. directly. Apologies if you took that to mean criticism of you personally.

  7. 7
    Nude says:

    Count on the “personal responsibilty” factor to be completely ignored by the MSM when the Notices of Default start clogging up the post offices. The political opportunity to keep people from losing “their” homes will be too large for candidates to pass up. In an election year people are going to vote in their own best interests, regardless of how short-sighted and selfish those interests are in reality. Candidates with a political disposition to rescue people from their own folly will naturally announce proposals to “fix the problem”. This necessitates further demonization of “the rich” and corporate greed, regulatory action to “punish” corporations, and justification of higher taxes to “save” people from a fate they brought on themselves.

    After watching a similar situation unfold prior to the 1992 elections, I think it’s a safe bet that current political topics will fall by the wayside as more and more people pay the price for their own personal irresponsibilty. In short, as James Carville pointed out, “It’s the economy, stupid!” Whomever wins the Presidency will be left with a problem that is simply too large for the government to fix, but that won’t stop them from trying. The kind of changes made will no doubt be idealogical in nature, and not do much more than shut the barn door and blame the bank for underwriting the purchase of the horse that had a history of escaping.

    What will not happen is blame being properly laid at the feet of those people that are truly responsible for this mess. While it’s obvious to you Tim, and most anyone who reads bubble blogs, no politician is going to win elections by telling their constituents “you made you own bed, now lie in it”.

  8. 8
    The Tim says:

    No problem Rob. Just a miscommunication. My bad. The bail out comment makes a lot more sense now :^)

  9. 9
    greater context says:

    if we keep in mind that we are talking about a credit bubble rather than a housing bubble, then the statement that buyers (investers) are prospecting becomes obvious and difficult to deny.

    the greater context of this is that everywhere in the world that uses loans to buy houses, has seen the same bubble over the last 5 years

    even Auckland, NZ, identical to Seattle in every way except that they have lower unemployment and small pink flightless birds instead of ponies is heading for the same “correction”:

    http://www.nzherald.co.nz/category/story.cfm?c_id=34&objectid=10454593

    I’m not suggesting that this will be the world’s first global depression, but a more alarmist individual might note that the instability from excessive overextension combined with a loss in confidence could spell trouble on a worldwide scale

  10. 10
    rose-colored-coolaid says:

    Tim, I would modify your hypothetical slightly. Rather than if you lost 50% of todays valuations, I would ask this. How would you feel if your home value fell to your original purchase price (or Y2K price for long time owners), and appreciated at 0.5% for the next 30 years.

    Anyone upset about that scenario is likely a speculator, and anyone not upset clearly isn’t (because 0.5% is not an investment). This helps separate people who are speculating from those who just bought recently instead of trying to time the market. After all, timing the market by not buying is also a form of speculation.

  11. 11
    rose-colored-coolaid says:

    greater context, It’s good you asserting this will be the first global depression, because if I remember correctly, something like that happened in 1930ish.

  12. 12
    Ouch says:

    Did any of you see Jim Cramer on the Colbert Report last night “explaining” his Bernanke meltdown video? He said it was because he felt so bad about all the people who will be losing their homes. Yeah, sure that’s a good reason to lower interest rates, increase inflation and pump some more air into this bubble. MSM frets about those greedy, I mean, ambitious people who will lose houses when the loans reset. The “we’re all in this together” spin makes flippers sympathetic – almost heroic – figures.

  13. 13
    MisterBubble says:

    SunTzu,

    George got that one right, but in the same breath, the scumbag refused to support taxing carried interest at the income tax rate (as opposed to the current, lower, capital-gains rate).

    Consequence? Hedge fund managers make the bulk of their income as interest on the management of other peoples’ money (i.e. “carried” interest). Taxing this as income would force some very rich people to pay taxes at a rate on par with the rest of us working stiffs.

    George’s excuse for such blatant pandering to the rich? “It would hurt small business” to tax carried interest as income, because carried interest is a tax tool for limited partnerships. Never mind that the practically the only partnerships who use the tool are hedge-fund managers, and the only reason that they do it is to escape income tax….no…if the law could theoretically apply to one small business, it simply must be bad.

    Corrupt, corrupt, corrupt….

  14. 14
    redmondjp says:

    Rob Dawg,

    Good to see you up in our neck of the woods! I read your blog and enjoy it, but just this week I’m finally down to one stick of Caseyderm gum per day, heh heh!

  15. 15
    TJ_98370 says:

    Off topic-

    King County / Seattle Times and Thurston County / Olympian mentioned in Ben Jones HBB today.

    Seeing A Significant Slowdown

  16. 16
    Alan says:

    In a sense, those of us who are not buying right now are speculating too. I’m speculating that I will be able to buy a house for less in the future than I can today. And I am putting money at risk doing so.

  17. 17
    RG says:

    Even for those of us who may never want to purchase a house, we’re still speculating that not purchasing a house will provide a better return on our money than purchasing one. If more money were to be made in the long run purchasing a house, I’d drop my money on one in a heartbeat.

    As a side note, my 1200 sq ft (2BR/1.5BA/1 car garage) rental in West Seattle is going condo. I pay $1100/mo now to rent, but the purchase price is $294K, which equates to $2500/mo if I take out a 30yr fixed 2nd HELOC 80/20 at 6.625% (that includes taxes and HOA dues). Why would I want to pay $1300/mo more to live in basically the same place (they will renovate and put in better appliances and fixtures upon condo conversion)? If I invest my extra $1300/mo and get an okay 5% CD return over 10 years, I’d have $200K in cold cash. Hard to believe that investing in my crappy soon-to-be-condo or a SFH will yield that same return.

  18. 18
    rose-colored-coolaid says:

    Alan, agreed. The ones not speculating are people like my grandfather who has owned his house for 40 years, and will never be moving. He would probably prefer a 50% drop in price. It might reduce his property taxes.

  19. 19
    deejayoh says:

    RG said,
    As a side note, my 1200 sq ft (2BR/1.5BA/1 car garage) rental in West Seattle is going condo. I pay $1100/mo now to rent, but the purchase price is $294K, which equates to $2500/mo if I take out a 30yr fixed 2nd HELOC 80/20 at 6.625% (that includes taxes and HOA dues).

    I think your new building owner will find that he’s arrived very late to the party. even with better appliances.

  20. 20
    Meshugy says:

    If I invest my extra $1300/mo and get an okay 5% CD return over 10 years, I’d have $200K in cold cash. Hard to believe that investing in my crappy soon-to-be-condo or a SFH will yield that same return.

    You never know…if you had bought two years ago you’d have nearly $200K more in equity right now.

  21. 21
    Steve says:

    Amen, Alan. I too am speculating that I will be able to buy a house for less in the future than I can today. And I too am putting money at risk doing so.

  22. 22
    Steve says:

    I don’t think there’s anything wrong with speculating. However, I would like to see acknowledgement from those who were/are speculating but claim not to be. More importantly, let’s acknowledge how leverage will further impact the extent of negative returns. Only fair since so many crowed about the genius of leverage when values were going up.

  23. 23
    urban exile says:

    As a renter waiting out the market, I suppose I too am “speculating”.

    However, I honestly think my money is no more at risk diversely invested in the market than it would be sunk into a recently purchased house.

  24. 24
    Andrew says:

    Are you kidding me!?!? Quite the reverse is true, actually (and congratulations if you were being disingenuous – you got me!). If I were speculating and negative about things, I’d be somehow trying to short the real estate market, which folks have been talking about doing here for quite some time. That’s speculating the other way ~ the contrast you were trying to draw. Please don’t cast me in a pejorative light for pursuing sound personal goals, part of which is to not take on ridiculous debt. No, waiting for fundamentals to restore themselves, based on sound logic and informed historical perspective is about as far from speculation as one can be. Nice try.

  25. 25
    Andrew says:

    oops, lost this part —

    rose-colored-coolaid said,

    After all, timing the market by not buying is also a form of speculation.

  26. 26
    explorer says:

    I submit you are not speculating if you are not even in the market because you are priced out. And you know you will never be in the market as long as that situaton exists. I can live with the fact that I may never be able to buy a SFH on the median income with conventional financing, and keep to the fundumentals. Saying that timing is speculation is a stretch in that case.

    Now a decent condo is a different matter. That’s being hopefull that will come down harder, faster, and better. If they don’t they don’t. If that is speculation, then it is more like wating for things to revert to the mean, IMO.

    Both are different than just waiting for a better deal. I also got my conversion notice last week for my Apt. No way will I buy my apartment and pay 2.5 times the “rent.” No one else in this smallish building is either.

  27. 27
    Buceri says:

    If you missed Colbert; we’ve all seen the Cramer bit; but Colbert’s commentary of how the mortgage crisis started is too good.
    http://www.comedycentral.com/shows/the_colbert_report/index.jhtml

  28. 28
    Buceri says:

    I have not seen the standard daily early morning inventory assault/chop for a couple of days now.
    As of 7am – 10273. August is supposed to go down (historically).

  29. 29
    Alan says:

    You never know…if you had bought two years ago you’d have nearly $200K more in equity right now.

    Or I could have gone to Vegas put my $30k down playment on black 18 and have $1,050,000 right now. Your $200k is looking pretty paltry compared to that.

  30. 30
    greater context says:

    yes, I understand the great depression was also caused by real estate speculation and had worldwide impact. but that was primarily speculation in the US.

    today, every nation that uses credit is in the same boat that we are.

    I wonder what percentage of the world’s debt is caught up in houses. how does that compare to gross product? how does that compare to Japan 1980?

  31. 31
    deejayoh says:

    Meshugy said,

    on August 9th, 2007 at 8:08 pm

    If I invest my extra $1300/mo and get an okay 5% CD return over 10 years, I’d have $200K in cold cash. Hard to believe that investing in my crappy soon-to-be-condo or a SFH will yield that same return.

    You never know…if you had bought two years ago you’d have nearly $200K more in equity right now.

    I don’t think anyone who bought a low-end, $249k condo conversion like RG gave the specifics on has made $200k in the last two years. 80% appreciation?

  32. 32
    MisterBubble says:

    After all, timing the market by not buying is also a form of speculation.

    Oh no…you’re right! Now that I think about it, everything that I don’t do is a form of speculation!

    I didn’t buy a lottery ticket last night. D’oh!

    I haven’t been to Vegas in a while. Crap!

    I haven’t converted all of my money to gold bullion and stuffed it in a Scrooge-McDuck-style vault in which I will be able to swim! Dammit!

    Boy howdy…I need to get on top of all of these things that I’m not doing, and fast!

  33. 33
    mikek says:

    You never know…if you had bought two years ago you’d have nearly $200K more in equity right now.

    Equity is not money until the house is sold. And the sales price is determined by current market conditions. Easy financing increased demand. Supply was fairly stable. Easy financing going away, and ARM purchasers unable to refinance or handle their loan reset will both reduce demand and increase supply. Prices should go down, and so will equity, unless you time the market and sell at the peak.

  34. 34
    betamax says:

    MarketWatch: Wamu having problems, cuts back on loans.

    http://tinyurl.com/ynqhnc

  35. 35
    deejayoh says:

    After all, timing the market by not buying is also a form of speculation.

    I don’t know that I disagree with that. I sold my house in 2006, could have bought something immediately – but decided to wait. So I’d say that I am definitely speculating that the market will go down. And I’m fine with that description. I don’t think there’s anything wrong with speculation – you just have to be a big boy if you get it wrong and not ask for a bail out (or welch on your loan).

    If you’re priced out, I don’t think you can call it speculation. Hard to speculate when you don’t have any assets. Oops… scratch that. I guess it’s hard NOW to speculate with no assets – now that the zero-LTV loans are gone ;^)

  36. 36
    Alan says:

    Technically, I am not priced out of the market. I could buy but not with a debt and payment system that I would find responsible. I see a huge potential downside by buying that does not outweight the potential upside. By not buying, I see a small potential downside and a small potential upside.

    Is being risk averse the opposite of speculation?

  37. 37
    MisterBubble says:

    Is being risk averse the opposite of speculation?

    No. This is a bone-headed debate. How many fairies can dance on the head of a pin? If a tree falls in the forest, and nobody is there to hear it, did it squish a squirrel? If you don’t buy a home, are you speculating?

    If you adopt the mentality that not taking action is speculation, then everything that you do is speculation, and the word becomes meaningless. But the definition of the word is clear:

    “Engagement in business transactions involving considerable risk but offering the chance of large gains, esp. trading in commodities, stocks, etc., in the hope of profit from changes in the market price.”

  38. 38
    finance says:

    The arguement that if housing prices decline so will property taxes is wrong (in how you are charged in many ways). First of all property taxes isnt just one single tax, its a bunch of them all combined and the city sorts out who gets what of the 5 cents per $1000 for each project. In some instances they prorate the taxes charged to what they need…so if property taxes declined by 10% and the city needed more money they would just pass a property tax increase to pick up the deficit the next election cycle…thus when property values increased again I seriously doubt they would lower the rate (catch-22).

  39. 39
    finance says:

    I just looked at my assessment valuation and realized that the value of my property from the City of Seattle declined by $4K (only due to how they had the condo conversion set up last yr) and my property taxes increased by $80 bucks per month…thus a perfect example of what I just wrote above.

    My actual appraised value increased by 10.4% (since I just signed the refi docs on Tues).

    FYI: I actually put more money down when doing my refi and now saving $300 bucks a month.

  40. 40
    deejayoh says:

    greater context, It’s good you asserting this will be the first global depression, because if I remember correctly, something like that happened in 1930ish.

    Interesting to note: home prices seem to have risen during the great depression. who knew that?

  41. 41
    Lukasz says:

    > Interesting to note: home prices seem to have risen during the great depression. who knew that?

    From 70 in 1930 to 80 in 1940 = about 14% in 10 years – not that much

  42. 42
    deejayoh says:

    >From 70 in 1930 to 80 in 1940 = about 14% in 10 years – not that much

    Yeah – but before I looked it up, I’d have bet they lost value. and I bet most other posters would have too.

  43. 43
    Alan says:

    Texas property taxes are 2-3%. Like WA there is no income tax so the property tax rate should be comparable. The difference is that houses there cost half to a third of what they do here.

  44. 44
    neoCon says:

    First,

    If you cant afford to get in the market you cant be considered a speculator.

    Second,

    Alan the reason prices are lower in Texas is because jobs in Texas pay a lot less then in WA. Plus the price of land in Texas is very inexpensive. There is so much vacant land there they just keep developing more communities. This non stop development just kills the resell market. In the Puget sound area land is not flat nor is readily available.

  45. 45
    John says:

    Hello out there bubble watchers. There’s a house in Montlake at 1860 24th Ave E with a hole in the front window….it’s been left unrepaired for at least a week now. Also a “for sale” sign to which the words “BRING OFFERS” has been added. All caps theirs, not mine. Thoughts?

  46. 46
    Alan says:

    Texas has oil and a fair amount of technical companies. They pay just fine, if not more, than the technical companies here.

  47. 47
    explorer says:

    “> Interesting to note: home prices seem to have risen during the great depression. who knew that?
    From 70 in 1930 to 80 in 1940 = about 14% in 10 years – not that much”

    Er, and in comparison to other things, e.g. inflation, a loaf of bread, which went up a lot more than that, how does that 14% of 10 years hold up? Methinks it does not prove the suggested bright side when taken in context.

    And Alan, even if I was not priced out of the current condo market (even a 1BD apartment convert), I would look at it the same way as you do. I am not that far away with FHA financing and 3% down. In fact, I have had several “well meaning” finance people tell me I actually could “afford” a crackerbox. NOT

    I also agree that the dictionary definition of “speculation” is being ignored by Mr. Bill to gain sympathy.

  48. 48
    deejayoh says:

    >Er, and in comparison to other things, e.g. inflation, a loaf of bread, which went up a lot more than that, how does that 14% of 10 years hold up? Methinks it does not prove the suggested bright side when taken in context.

    your point? who suggested it was the bright side? i pointed it out because it was surprising. but I guess you already knew everything. give me a break

  49. 49
    crashcadia says:

    Next week we will all be real-estate spectators.

    Are you ready for the next leg down?

  50. 50
    George says:

    Hm. Not really sure I agree with your assertion that being upset over a decline in price means you are a “speculator.” I don’t care if the paper gains we’ve had here in Austin in the last 18 months evaporate…but if we drop below the flat market level of 1999-2004 then I’d be a little bit annoyed.

    Doesn’t make me a speculator!

  51. 51
    disgruntledengineer says:

    John, my wife and I drive by the same house frequently. In fact, we’ve been keeping watch on all the houses on 23rd/24th/Montlake between Madison and UW for the last 2 years, ever since I became a Seattle bubblehead. That house has been on sale for AT LEAST a year and has gone through 2 different realtors. I too noticed the “BRING OFFERS” sign and am quite curious as to what the offers, if any, have been. That length of street has multiple houses for sale that have been on the market for many months. A couple have sold, but most have not. We’ve stopped at a few of them, and prices have been been 600-800K. Ree-dik-yoo-luss. My wife grew up in this area (as well as many of our friends) and they just can’t believe the greediness of these people. Looks like other houses are about to get flipped and put up on the block as I see yards getting redone and lots of renovations. I also see couches and mattresses along the sidewalk sometimes. How much would you offer? I’d offer about 350K…maybe.

  52. 52
    explorer says:

    No offense intended Deejoyoh. I was just being facetous. I could see some who WOULD see that as a bright spot for their marketing…. Lemons from lemonade…Not.

  53. 53
    David McManus says:

    “Alan the reason prices are lower in Texas is because jobs in Texas pay a lot less then in WA.”

    I’ll call bullshit on that as someone who left WA for Texas and received a 20% increase in salary and 1500 more square feet of house (3500 sf) for the same price that a 1200 square feet shit box gets here. I’m not a special case either. Salaries in Seattle, especially for IT workers, f–king suck compared to elsewhere!

  54. 54
    Buceri says:

    David, I agree. But the difference it’s the amount of professional jobs, the supply of housing, and the California factor. Financially, my move to FL also worked out. But in general, TX just like FL, has a lower income level; it’s the size of a freaking continent, mostly flat, and you can build pretty much anywhere. I drove from Dallas to Mckinney and it’s packed (saturated) with new developments; not too many trees or beauty, for that matter. Most of the growth in population is agricultural Mexican immigrants (back in the late 90s, the most popular baby names in Texas hospitals were Jose and María). While most of the growth in Western WA is job transfers (not the sunshine).
    By the way, I am hispanic; my intention is not to get in a ethnicity/race argument.

  55. 55
    finance says:

    explorer – You are incorrect! There was actually deflation during the Great Depression (thus why it lasted so long b/c the fed kept on reducing the money supply, doh).

    I typed in 1929 to 1940 into an online inflation calculator and got a -18.71% inflation rate…the tax rate also increased to 91% for the upper tax bracket (since the president thought raising taxes increased revenue, lol)

  56. 56
    finance says:

    It seems to me most people here think that buying real estate is speculative. It is more on a personal level of why you buy something as an investment, speculation or gambling (or a combination of the three).

  57. 57
    deejayoh says:

    >I typed in 1929 to 1940 into an online inflation calculator and got a -18.71% inflation rate

    So 14% real housing appreciation = 5% nominal home value decline. Now it makes more sense.

  58. 58
    Buceri says:

    Zip realty is showing 10037 SFH/Condo inventory in King; 4526 show price reduction.

  59. 59
    Lake Hills Renter says:

    Looks like Seattle made the 8th most unaffordable market.

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