Ardell called “We’re at the bottom…” in her post February 7th, 2009. We each have our idea of what the bottom is and in her area maybe we are at the bottom. From a macro stand point, I feel we are far from the bottom. As I said in my comment to Ardell, I believe the bottom will be reached when an investor could come in and buy a home and receive about a 7% return on investment from rents.
I am not claiming THIS will be a great time to become an investor, I am saying when someone can come in, buy a house at a price and then rent out that same house and receive a 7%(ish) return the bottom will be in sight. As Ardell said, maybe that is in 2016, mayb not ever.
An EXTREME example of the bottom is being reached in Detroit as seen with investors coming in and buying up 1000s of houses at once. No matter what the economy is doing, everyone needs a place to stay.
I’m with you that we have not hit bottom yet. Not yet but the bottom is coming very soon. We can always see the bottom in hindsight and sometime in 2010 we’ll realize when the bottom was.
Detroit is not only an extreme example, it’s a poor example. Gangs, crime, and lost industry have ruined that city. There is no comparable in the country to Detroit.
Here in Beaufort, SC home prices have fallen a great deal but we are no where near buying homes and making 7%. Being on the coast has slowed the drop in home prices but I do believe we are finally seeing some significant drops.
Hopefully when things do turn around I’ll be there to help myself and customers alike.
I’m with you that we have not hit bottom yet. Not yet but the bottom is coming very soon. We can always see the bottom in hindsight and sometime in 2010 we’ll realize when the bottom was.
Detroit is not only an extreme example, it’s a poor example. Gangs, crime, and lost industry have ruined that city. There is no comparable in the country to Detroit.
Here in Beaufort, SC home prices have fallen a great deal but we are no where near buying homes and making 7%. Being on the coast has slowed the drop in home prices but I do believe we are finally seeing some significant drops.
Hopefully when things do turn around I’ll be there to help myself and customers alike.
I hope we never, ever hit the “investor” bottom, Jon. Great deals should be for end users, not middlemen.
I saw this debated on several stations today. They are also buying up coastal areas in large blocks at a time.
Someone should buy the State of Florida 🙂
Ardell, I lived in Detroit for about 1 year back in 2003 and have many friends over there. I personally know couple of them move out of Detroit to go to other places to find jobs. It’s heart broken over there. Look at this link from the Detroit Free Press:
http://www.freep.com/article/20090309/BUSINESS01/903090332/0/COL06
Toward the middle of the page, it has a Then Vs. Now graph.
Basically, Downtown Detroit is in Wayne County. The median home price in Wayne county went from $79888 in 2007 to $28973 in 2008. A lot of friends over there joke that if you work for GM, you can just take a buy out from GM, and use one of their 24K voucher to purchase a car, and turn around and exchange that car for a house in Detroit. Not even the foreclosed property in Seattle would drop that much in value in one year. But the thing is if you buy these extremely depressed property, who are you going to turn around and sell it to? People are moving out of state by droves. Would you be buying these properties for 25K and just let it sit there for 10 years?
Seattle will never get to Detroit’s level, that’s for sure. I know China still needs lots of Boeing airplanes, and MSFT isn’t going any where. The backbone of the Seattle economy is still very strong. Seattle will weather this storm a lot better than the rest of the country will. But the question is when the rest of the country recovers, will Seattle recover at the same rate as well? I don’t think so. The stimulus package doesn’t have a lot of stuff that will benefit Seattle. The restrictions on H1B visa will hurt Seattle a lot more than it will help. MSFT is probably the biggest employer for H1B visa holders. Those H1B visa engineers will probably have to go back to India, Russia, Canada or China once it expires. I don’t know if those people are a big factor in the housing market anyways, but I think they affect the rental market more than the housing market. But still, it will affect the rent price in the area. We will have to wait and see, but I think the structure of the Seattle economy will weather this storm a lot better than the rest of the country.
There will not be a bottom point. It will resemble a very long L shaped curve for years to come with trendline down another 20-30%. The highend homes will be severely hit and most small banks in Washington including RPFG, BANR, COLB, and various others will fold. They will be replaced by new institutions in a few years. The malls will not look the same with many vacancies. Warehouses will be vacant and ppsft will greatly diminish.
This will be the most severe downturn we will see in our lifetime and prepare for any bumps up in the next few years which will provide a great opportunity to sell a lagard investment (rental). Educate your sellers to price accordingly because all the evidence suggest their home will be worth less in 2010-2012.
I sincerely hope we avoid an all out Depression but so far all the policies being implemented will fail miserable. People will NOT stay in their homes when they are upside down triple digits no matter what is done with their loans. Mtg cram downs cause anarchy due to its unfairness.
However, NEVER underestimate the FED. Rule # 1 of investing. I would like to say you will know we hit bottom when we see a triple bottom in the 3 horseman of the financials. But, if history serves us any guide we know there will be a bump up in the next few years that will cause delight in the markets and the masses. The students of history know that the next drop thereafter will greatly surpass the prior lows.
Prepare your familes the best you can. Work as hard as you can now and save CASH. I still say we have seen nothing yet.
There will not be a bottom point. It will resemble a very long L shaped curve for years to come with trendline down another 20-30%. The highend homes will be severely hit and most small banks in Washington including RPFG, BANR, COLB, and various others will fold. They will be replaced by new institutions in a few years. The malls will not look the same with many vacancies. Warehouses will be vacant and ppsft will greatly diminish.
This will be the most severe downturn we will see in our lifetime and prepare for any bumps up in the next few years which will provide a great opportunity to sell a lagard investment (rental). Educate your sellers to price accordingly because all the evidence suggest their home will be worth less in 2010-2012.
I sincerely hope we avoid an all out Depression but so far all the policies being implemented will fail miserable. People will NOT stay in their homes when they are upside down triple digits no matter what is done with their loans. Mtg cram downs cause anarchy due to its unfairness.
However, NEVER underestimate the FED. Rule # 1 of investing. I would like to say you will know we hit bottom when we see a triple bottom in the 3 horseman of the financials. But, if history serves us any guide we know there will be a bump up in the next few years that will cause delight in the markets and the masses. The students of history know that the next drop thereafter will greatly surpass the prior lows.
Prepare your familes the best you can. Work as hard as you can now and save CASH. I still say we have seen nothing yet.
There are so many ways to approach this, but here’s an easy one all can remember. In every recession/depression for the last 130 years unemployment has been a prompt but lagging indicator. So watch that unemployment number. When you see it start to drop you’ll know the bottom has been passed, probably during the previous quarter to 6 months, so you won’t have missed it by much. The recovery may be flat, but at least you’ll know it’s underway.
When? 2013.
“Prepare your familes the best you can. Work as hard as you can now and save CASH.”
I agree, but for a different reason. It’s the Year of the Ox 🙂 Hard work and no squandering during the Year of the Ox. ever.
brian, the stimulus package(s) dont have a lot that will be of real benefit to anyone, unless youre one of those in line to receive some political reimbursement.
and windows vista isnt exactly a ringing endorsement of the fruits of the h1b visa.
Jon,
The 7% benchmark that you mentioned, does it have a historical basis ?
The reason I bring this up is because, even within the US, 7% might be too attractive in one region, but not so in others considering taxes, future demand and growth etc.
Also, how does 7% compare with return on 3/5 yr CDs, Treasuries ? It would be interesting to research the spread between the treasuries and the rental income.
In this part of the world, the banks offer around 9.5~11.0% return on 3/5 year FD (fixed deposits) whereas the monthly return income is around 0.5-0.6% of the property value.
Jon,
The 7% benchmark that you mentioned, does it have a historical basis ?
The reason I bring this up is because, even within the US, 7% might be too attractive in one region, but not so in others considering taxes, future demand and growth etc.
Also, how does 7% compare with return on 3/5 yr CDs, Treasuries ? It would be interesting to research the spread between the treasuries and the rental income.
In this part of the world, the banks offer around 9.5~11.0% return on 3/5 year FD (fixed deposits) whereas the monthly return income is around 0.5-0.6% of the property value.
#9 : and windows vista isnt exactly a ringing endorsement of the fruits of the h1b visa.
That has more to do with bad management than H1B visa program. Apple has nearly the same number of H1Bs (percentage wise) as Microsoft.
Unfortunately, behemoths like Microsoft, AT&T, Boeing , IBM are infested with middle-management who neither have a clue about management nor technology. These “managers” couldn’t upgrade their technical skills and found themselves in managerial positions. Most of their time is spent creating PowerPoint presentations, attending countless meetings, preparing “vision” statements, building ridiculous corporate processes, team-building, seminars and conferences, etc, etc..
After 5 grueling years on H1B, three patents, a couple of “best engineer” awards, I couldn’t bear the management morons. I knew the “mother of all bubbles” was around the corner.
I quit, moved back, joined a proprietary trading firm.
Since mid 2007, we have been shorting the markets primarily for the same reasons – that assets are grossly overvalued, companies have too much management fat that is detrimental, and that the world is flat.
Now that I think about it, I don’t have to attend countless meetings, report to clueless management, memorize vision statements.
#9 : and windows vista isnt exactly a ringing endorsement of the fruits of the h1b visa.
That has more to do with bad management than H1B visa program. Apple has nearly the same number of H1Bs (percentage wise) as Microsoft.
Unfortunately, behemoths like Microsoft, AT&T, Boeing , IBM are infested with middle-management who neither have a clue about management nor technology. These “managers” couldn’t upgrade their technical skills and found themselves in managerial positions. Most of their time is spent creating PowerPoint presentations, attending countless meetings, preparing “vision” statements, building ridiculous corporate processes, team-building, seminars and conferences, etc, etc..
After 5 grueling years on H1B, three patents, a couple of “best engineer” awards, I couldn’t bear the management morons. I knew the “mother of all bubbles” was around the corner.
I quit, moved back, joined a proprietary trading firm.
Since mid 2007, we have been shorting the markets primarily for the same reasons – that assets are grossly overvalued, companies have too much management fat that is detrimental, and that the world is flat.
Now that I think about it, I don’t have to attend countless meetings, report to clueless management, memorize vision statements.
There is no such thing as a bottom unless you are talking about a very specific area since markets are so varied from one place to another. Here in the Seattle area I would expect our market to start catching some air under its wings far before other areas in the country.
As for the issue of cash, I have to disagree a little bit. While everyone should have a cash reserve, having it just sitting is a bad idea. First off, even under normal conditions you are losing money because your interest is not going to keep pace with inflation (ie. you are losing money.) In a really bad hyperinflation scenario cash is virtually worthless.
I see it as more of a balancing act, and to be really diversified people should have reasonable cash reserves and be working diligently to build cash flow. Cash may be King, but cash flow will keep the bills paid!
There is no such thing as a bottom unless you are talking about a very specific area since markets are so varied from one place to another. Here in the Seattle area I would expect our market to start catching some air under its wings far before other areas in the country.
As for the issue of cash, I have to disagree a little bit. While everyone should have a cash reserve, having it just sitting is a bad idea. First off, even under normal conditions you are losing money because your interest is not going to keep pace with inflation (ie. you are losing money.) In a really bad hyperinflation scenario cash is virtually worthless.
I see it as more of a balancing act, and to be really diversified people should have reasonable cash reserves and be working diligently to build cash flow. Cash may be King, but cash flow will keep the bills paid!
I agree with you Jon. Nowhere close to the bottom yet – and knowing how smart Ardell is, I think she’s just trying to be positive. I’ve always been of the opinion that in a balanced market, anyone – not just investors, should be able to rent their house (if they need to because of a life change) and make their mortgage payment and taxes.
We have not seen that here in the Pac NW for a long time – which is why I’ve been screaming for the past three years that the market is greatly overvalued. We still have a lot of ‘adjustment’ left to go – and it will finally bring back a lot of great opportunity!
RE: 12.
I’m curious…what are the reasons Seattle be catching air under it’s wings before other areas? Thanks for any info you can provide.
http://www.thenewstribune.com/local/story/650731.html
RE: 12.
I’m curious…what are the reasons Seattle be catching air under it’s wings before other areas? Thanks for any info you can provide.
http://www.thenewstribune.com/local/story/650731.html
Jacquie –
Ah but in deflation your money is worth MORE next year so staying in cash makes a ton of sense. I think inflation is coming but isn’t here quite yet.
Always interesting.
Bombay, love your comments.
There was a story I heard of an editorial in an Indian newspaper, providing a solution for the US housing crisis. The writer said “open up the borders to Indian immigrants, and they will buy up the vacant housing, and create jobs!”, or something like that..(can’t find the source, dang it!).
Much of the purchase business and refi business I have been doing in the past year is with foreign nationals, and their presence has much to do with the resilence of the Seattle/Bellevue economy and housing market.
I LOVE how our area is filled with an international presence, and I certainly hope it stays that way, especially if the internationals make the efforts to engage in the community.
I see much evidence of that engagement, in public schools, church, and other local community elements (like sports) that involve kids. Makes me hopeful for the future, and I think it would be a great loss for our area if these families had to go back to their home countries.
That Detroit stuff is gut wrenching. How sad for those that built a life there.
Always interesting.
Bombay, love your comments.
There was a story I heard of an editorial in an Indian newspaper, providing a solution for the US housing crisis. The writer said “open up the borders to Indian immigrants, and they will buy up the vacant housing, and create jobs!”, or something like that..(can’t find the source, dang it!).
Much of the purchase business and refi business I have been doing in the past year is with foreign nationals, and their presence has much to do with the resilence of the Seattle/Bellevue economy and housing market.
I LOVE how our area is filled with an international presence, and I certainly hope it stays that way, especially if the internationals make the efforts to engage in the community.
I see much evidence of that engagement, in public schools, church, and other local community elements (like sports) that involve kids. Makes me hopeful for the future, and I think it would be a great loss for our area if these families had to go back to their home countries.
That Detroit stuff is gut wrenching. How sad for those that built a life there.
I wish I had a crystal ball so I could jump into the “bottom of the market” game. Our prices here in Leavenworth have been pretty stable over 2007 and 2008. You won’t make money on a rental at 7% (sorry Jon) but you wouldn’t have lost money like in the stock market or in Seattle. There are some great deals in our market, and some horrible ones, but there won’t be much money made by folks waiting for the exact moment “the bottom” arrives.
Geordie-
I agree most won’t make money timing the market, but what are you talking about that you won’t make money on a rental at 7%? If I could a rental, receive 7% return per year I would be very happy… and I bet it would be tough to find many who would complain about a 7% return on investment plus the appreciate on the house… in 10 years that is great return
http://budgetandpolicy.org/documents/highcostmortgage030909_000.pdf
….33 percent of subprime adjustable-rate mortgages in Washington State are still at the original interest rate (Figure 4). This is a higher rate than all but two states (Utah and Oregon).
Can’t pass up this comment. I believe that attempting to time the bottom is a futile exercise loaded with risk IF the market is expected to rebound vigorously, causing a ‘V’ shaped bottom. Timing such breaks in price growth during economic expansions are bad plays – best to get in quickly and win on the overall growth.
This mindset is not valid in economic down times.
If we are looking at an extended bottom in real estate prices for a number of years – as almost every economist in the country is projecting (including this one) – in such a scenario there is absolutely no risk to waiting for the bottom.
On the contrary, jumping in early is the big risk. This is not opinion, this is smart advice that more sophisticated investors are recieving.
Jon wrote: “If I could a rental, receive 7% return per year I would be very happy… and I bet it would be tough to find many who would complain about a 7% return on investment plus the appreciate on the house… in 10 years that is great return”
That would definitely be nice. Unfortunately, there are a lot of assumptions in this scenario. With rents falling (as we’ve seen in the last six months), the 7% return is no certain thing. Worse, it’s quite possible that real-estate prices could be considerably lower 10 years from now. Look at Japan, they haven’t seen significant appreciation in real-estate for 20 years.
Ardell wrote: ” No matter what the economy is doing, everyone needs a place to stay.”
True, people need a place to stay, but that doesn’t mean that what that “place” is will remain constant. Already we are seeing a huge move towards doubling up with roommates, having kids share rooms, etc.
Even seniors are now trying to find cheaper roommate-type accomodations.
http://seattlebubble.com/forum/viewtopic.php?f=2&t=2150
These changes in housing requirements (i.e. with large numbers of people showing a willingness to live with LESS housing) can leave us with long-term inventory imbalances.
At the extreme end of the spectrum, we are even witnessing the rapid growth of tent cities and “homeless” motorhome residents across the nation. That too reduces over-all demand for traditional housing.
I recently took a historical tour of Olympia, and found it interesting to hear that a huge floating shanty town sprang up during the 1930s. Just because people “need” somewhere to live doesn’t mean they will be willing (or able) to pay the prices that conventional real-estate residential dwellings demand.
Sniglet:
The comparisons to Japan assume that the US economy and culture are roughly equivalent to Japan’s.
While there are similarities, there are significant differences.
Immigration, for one.
The Japanese culture does not welcome immigrants like the US culture does (or Canada and Australia, for that matter). A lot of US housing could be absorbed and usefully employed by allowing greater immigration.
What effect that would have on employment is a different matter.
Balance is everything!
Hey Dismal:
Are you related to Paul Krugman? 🙂
Didn’t he go by that moniker years ago?
Signed,
A long time fan of PK…
Hey Dismal:
Are you related to Paul Krugman? 🙂
Didn’t he go by that moniker years ago?
Signed,
A long time fan of PK…
Yes, all of those rich immigrants with tons of cash ready to buy shitty McBoxes in Ballard for 2x what they are worth. We just need to let them in, they will save the day!!
b:
It would improve the day for some, at least.
Excess vacant housing is not good for communities, no matter what kind of vacant housing it is, and where it is located.
New and better solutions are needed.
Most of the recent and current US government actions seem to be directed at saving large investors (bailouts of Wall Street, AIG, China Inc., etc.) with real dollars, while the actions to help homeowners and middle class investors (some call them sheeple) have been largely symbolic.
It’s tough everywhere. And likely to get tougher.
b:
It would improve the day for some, at least.
Excess vacant housing is not good for communities, no matter what kind of vacant housing it is, and where it is located.
New and better solutions are needed.
Most of the recent and current US government actions seem to be directed at saving large investors (bailouts of Wall Street, AIG, China Inc., etc.) with real dollars, while the actions to help homeowners and middle class investors (some call them sheeple) have been largely symbolic.
It’s tough everywhere. And likely to get tougher.
The solution is very easy Roger, prices must drop to absorb excess supply. Trying to prop up prices with attempts to game supply/demand distort the market and make it less optimal in the long run.
b:
They will go down in price, but maybe they’ll sit vacant anyways…
As the prices drop, less consumption; less consumption, less jobs, less jobs, less homeowners, ad naseum.
I’m suggesting that lower prices for housing won’t necesarily solve everything either, but it will make things better for those who don’t own houses.