The housing market has reached a tipping point where additional supply will overwhelm the number of active buyers and cause prices to move lower.
Irvine Home Address … 184 RHAPSODY Irvine, CA 92620
Resale Home Price …… $709,000
I`m standing on this cold, thin ice
And I`m about to crack
I`m over
I`m over
Over the edge
L.A. Guns — Over the Edge
We all watched the housing market go over the edge in late 2007 when rising inventory was greeted with a tremendous credit crunch. For the next 18 months, we watched prices fall until lenders reduced the supply on the market to match the weakened recessionary demand. The banking cartel's unwritten policy of restricting supply in combination with a plethora of government props has stabilized home prices temporarily; however, with the ongoing failure of loan modifications, the distressed properties must be sold, and the burgeoning inventory threatens to undermine market stability.
Housing Market Sees Widespread Price-Cutting
By Janet Morrissey Wednesday, July. 14, 2010
In a sign that the housing market has taken another turn for the worse, a new report shows almost a quarter of all home listings in the U.S. had at least one price reduction in June.
The price cutting is widespread too. The report, released Wednesday by residential real estate tracking firm Trulia, shows 21 of the country's 50 largest markets cut prices on at least 30% of their listings, up from 10 markets in May. (See pictures of Americans in their homes.)
Minneapolis led the way, with 40% of its listings registering at least one price reduction. This was followed by Milwaukee, Dallas, Boston, Baltimore, Phoenix and Memphis, which all slashed prices on more than 32% of their listings.
"Sellers are feeling the heat this summer as the economic recovery simmers down and home inventory levels climb," said Pete Flint, co-founder and chief executive of Trulia, in a statement. "We're seeing more sellers reduce their home listing prices to attract potential buyers." Housing inventory rose 5% between April and July.
In case you missed it Monday, Irvine's inventory just hit a 23-month high:
Moreover, waning consumer confidence, continued high unemployment, fears about a double-dip recession and a volatile stock market are all shaking buyer confidence in a possible housing-market recovery. "It's the perfect storm for creating less demand," says Ken Shuman, a spokesman for Trulia. "People are nervous." Recent housing data, including sharp drops in pending home sales, housing starts and mortgage applications for new home purchases, have all served to fan those fears. (See a PDF of housing price reductions.)
Probably the biggest factor influencing sales recently has been the federal homebuyer tax credit. The credit was particularly effective in bringing first-time homebuyers into the market. But now that it's over, move-up buyers are having a tougher time selling their existing homes, since the entry-level buyers have all but disappeared, says Alex Barron, founder and senior research analyst at Housing Research Center LLC. Under the federal tax-credit program, a home had to be purchased by April 30 in order to close by the June 30 deadline. "The whole market has slowed down anywhere from 30% to 40% across the country," says Barron. "When supply exceeds demand, you have to lower the prices."
Although the average price cut, according to the Trulia report, was 10%, some markets saw significantly bigger reductions: Detroit slashed prices by 26% on average, Las Vegas dropped prices by 15%, and both Miami and Phoenix saw average cuts of 13%. The total dollar amount slashed from home prices in June was $27.3 billion, the report said. (See high-end homes that won't sell.) …
Read "The Fed Sees a Slower Recovery, but No Need to Change Course."
Read "With More Foreclosures, Housing Market Far From Recovery."
I got this email recently from a reader describing their experience buying a home in LA:
We've spent the last months helping my son buy a house in LA, focusing on specific micro-neighborhoods ….
We paid cash…. The details of what we bought aren't important, but what surprised me was how broken the entire market is.
Very large quantity of houses at some stage of foreclosure not proceeding to any resolution.
Very few listings are real listings anywhere close to market prices. Short sales at prices that are absurdly low (trying to solicit bids) or too high ( lender-approved but above market ).
The relatively small number of properties priced at market in the under 400K price range sell very, very quickly if they don't have real issues like foundation, drainage, substandard unpermitted construction.
Lenders are horribly inept at disposing of properties and the agents they hire do a crappy job. We saw a couple of houses where the stuff they had done to fix the house had substantially reduced the value ( covering up wood floors with crappy carpet or pergo, installing crappy appliances, painting over beautiful wood. )
Most agents are floundering badly and are clueless about what's going on.
… Buying with cash allowed us to close on a property about 10% under market when we found an anxious seller.
It's my gut feeling that everything above the entry level market ( under 450K) is due for another step down. Imbalance between supply and demand.
Double dip looks doubly certain
Commentary: The economic recovery is just an illusion
July 20, 2010 — Robert P. Murphy
NASHVILLE, Tenn. (MarketWatch) — Economists and financial analysts are currently arguing whether the economy will experience a "double dip," a recession followed by a short recovery, followed by another recession.
Some think the worst is behind us, and that output and employment will slowly but steadily increase during the next few years. Others believe we are headed for another crash. The lessons from the last business cycle favor the case for pessimism.
It has been said that if one laid all the world's economists end to end, they wouldn't reach a conclusion. Even so, a surprisingly large number of economists now agree that then-Federal Reserve Chairman Alan Greenspan made a tragic mistake. After the dot-com bubble burst in 2000, Greenspan opened the monetary floodgates.
Specifically, Greenspan allowed the "monetary base" to increase 22% from June 2000 through June 2003. The monetary base, also called "high-powered money," is the base upon which bank loans are pyramided, expanding the total amount of money held by the public.
During the same three-year period, Greenspan cut the federal funds rate — the interest rate commercial banks charge each other for overnight loans — from 6.5% down to 1%, the lowest federal funds rate in more than 40 years.
The rationale for Greenspan's easy-credit policy was to provide a "soft landing" for the economy in the wake of the dot-com crash and Sept. 11 attacks. And for a while, it seemed he had succeeded. People marveled that housing prices continued to rise, even amidst the recession of 2001. Indeed, people referred to Greenspan as "the Maestro."
I Pity Alan Greenspan. He has offered feeble defenses of his choices, but I think he is a fool and history will remember him as such.
In retrospect, economists across the political spectrum recognize the role Greenspan's Fed played in fueling the housing bubble. The more cynical analysts argue that Greenspan's policies weren't "easy" at all and merely postponed the inevitable day of reckoning for the economy. Rather than gritting its teeth and suffering through the necessary adjustments in the early 2000s, the nation got an injection of artificial credit that masked the underlying problems with a euphoric boom.
The housing market eventually collapsed, as all bubbles do. At this point, Ben Bernanke was at the helm of the Fed. Unfortunately, he got his policies out of Greenspan's playbook, except Bernanke doubled down.
Rather than pushing short-term interest rates down to 1% as Greenspan did, Bernanke has pushed them down to almost zero percent. And in contrast to Greenspan's 22% increase in the monetary base during a three-year period, Bernanke increased it by 94% in one year.
The unprecedented monetary stimulus from the Fed, in conjunction with the massive deficits of the federal government, did succeed in partially re-flating the stock market and stabilizing home prices. Time magazine named Bernanke its 2009 Person of the Year, and Obama administration officials are taking credit for nipping the Great Recession in the bud. Yet the parallels with the Greenspan episode are clear.
It makes no sense to "rescue" the economy by having politicians borrow and spend trillions of dollars. It also makes no sense to fix the horrible mistakes of the housing-bubble years by having the Fed create electronic money out of thin air to buy "toxic assets" from investment banks that would otherwise be insolvent.
The alleged economic recovery is unfortunately just as illusory as the prosperity of the housing-bubble years. It is disturbing to consider that if this is the calm before the storm, then the pending crash will be painful indeed. In the current debate on the direction of the economy, those predicting a "double dip" have the stronger — if more depressing — case.
Robert P. Murphy is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute.
I don't have much to add to that brilliant synopsis.
When you add it all up, it certainly looks as if the housing market is in for a rocky fall and winter. But Irvine is different, right?
Another peak buyer and another Palladio Properties LLC flip 
This property was purchased on 8/22/2005 for $740,000. The owner used a $592,088 first mortgage and a $147,912 down payment. He obtained a $100,000 HELOC on 7/11/2006, but it isn't clear if the owner ever used that money. He stopped paying last spring, and after about 12 months, the foreclosure went forward.
Foreclosure Record
Recording Date: 11/17/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.
Foreclosure Record
Recording Date: 08/14/2009
Document Type: Notice of Default
The operators of the Palladio Properties LLC investment fund appear to know what they are doing. They have been consistently been targeting 10% to 15% profit margins depending on renovation expenses, and their resale pricing is within market comps. Their property turnover is probably good. I have seen many of their flips recently.
If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.
Irvine Home Address … 184 RHAPSODY Irvine, CA 92620 
Resale Home Price … $709,000
Home Purchase Price … $596,000
Home Purchase Date …. 4/30/2010
Net Gain (Loss) ………. $70,460
Percent Change ………. 11.8%
Annual Appreciation … 71.5%
Cost of Ownership
————————————————-
$709,000 ………. Asking Price
$141,800 ………. 20% Down Conventional
4.59% …………… Mortgage Interest Rate
$567,200 ………. 30-Year Mortgage
$140,030 ………. Income Requirement
$2,904 ………. Monthly Mortgage Payment
$614 ………. Property Tax
$333 ………. Special Taxes and Levies (Mello Roos)
$59 ………. Homeowners Insurance
$203 ………. Homeowners Association Fees
============================================
$4,114 ………. Monthly Cash Outlays
-$696 ………. Tax Savings (% of Interest and Property Tax)
-$735 ………. Equity Hidden in Payment
$243 ………. Lost Income to Down Payment (net of taxes)
$89 ………. Maintenance and Replacement Reserves
============================================
$3,015 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$7,090 ………. Furnishing and Move In @1%
$7,090 ………. Closing Costs @1%
$5,672 ………… Interest Points @1% of Loan
$141,800 ………. Down Payment
============================================
$161,652 ………. Total Cash Costs
$46,200 ………… Emergency Cash Reserves
============================================
$207,852 ………. Total Savings Needed
Property Details for 184 RHAPSODY Irvine, CA 92620
——————————————————————————
Beds: 4
Baths: 2 full 1 part baths
Home size: 2,000 sq ft
($355 / sq ft)
Lot Size: n/a
Year Built: 2005
Days on Market: 46
Listing Updated: 40329
MLS Number: S619238
Property Type: Condominium, Residential
Community: Woodbury
Tract: Wdch
——————————————————————————
Gorgeous Detached Home in Woodbury. Main floor Bedroom & Bath. Mater Bedroom with Retreat area & Balcony. Recessed lighting & pre-wired Surrounding Sound Speakers in Living room. Planation Window Shutters. Move-in ready.
Could you overlay some sort of price history on top of the inventory history? if 750 to 950 is “normal” as you say, how high did the inventory have to go in 2007 before price declines were seen?
Is there an argument to be made that inventory doesn’t have to go above 950 this time around, i.e. based on months of inventory, or there being lower sales volume now?
In a market where so few houses are priced to sell, we may actually have a lot more room for growth in sales without closed prices actually dropping, but rather by having more good condition homes available at market price that can close quickly. So, even if closed sales are lower than 2007 (which might or might not be the case) inventories might still need to rise to the same heights as before in order to see prices decline. — IF the limiting factor is well-priced homes, not qualifying willing buyers.
OTOH simply having more homes list at comps would probably be an improvement and represent a drop in list prices…
Hi Cara;
You bring up some great points. I would also like to see the chart you outlined above. Although rising inventory is a step in the right direction, the percentage of inventory that can actually transact is still low because a majority of what’s coming on the market is distressed or the sellers are unrealistic, with homes that are priced right and/or show well still selling fast often with multiple offers in nice areas. A large portion of the inventory, even if not listed as a short sale should be because the market value on many of these “standard sales” is often much less than the price it will take to be a regular sale.
That being said, demand is low for this time of the year and specifically after the tax credit went away. I feel strongly that as the tax credit deadline approached many people were paying 30-40k more to save $8,000 in taxes and the effect of that is already taking shape. We told our clients that this was happening and many chose to wait it out and it’s paying off for them now and we are already starting to see price drops and seller motivation overall appears to be rising.
Most IHB readers are being patient right now, of course for some their life and other circumstances effect their motivation. However, with buyers that can be patient we have had success lately setting the right expectations regarding short sales by submitting offers on short sales that meet their needs and criteria with the expectation that it will take some time. We have a system to stay on the top of listing agents minds, so even if we are not in first position, when the offer that is submitted to the bank goes away (which it often does) and the agent has forgotten about the other buyers we are still there. Moreover, because of the volume of transactions we are doing we have great relationships with a number of the top short sale, reo, and other listing agents.
Just a couple of weeks ago we acquired a short sale that took just over 3 months for an investor client for $186,000, this week I’m closing an a similar property in the same complex for the same investor, he resold it to another cash buyer for $250,000.
Of course, most properties in Irvine are still above rental parity and with rising inventory and the eventual need to raise interest rates we are likely in for a long haul before we see prices bottom.
The dead cat has bounced. Obama HAMP program has failed miserably. Obama jobs stimulus has failed miserably. The Federal Reserve has failed miserably. Federal govnt now control 60% of mortgages. The Constitution has been suspended. The end game is upon us. Get ready.
Jim, hate to break it to you but the storm is brewing since the Regan era.
You need to lay off the Tea-cool-aid.
Dave, you’re obviously a product of the failed California school system and a Obama apologist. Hope you’ve saved your devalued Federal reserve paper. You’re gonna need it when your government backed ARM blows up.
Ad hominem attacks are generally not helpful. In addition to being a logical fallacy, of course.
-Darth
At least Dave sounds like he got an education. Seriously Slim, where were you when we got sucked into a war based on lies? You still believing that Hussein was in cahoots with bin Laden? Where are those WMDs?
Sounds like you’re a product of some good old Jim Crow favoritism (or southern inbreeding).
See how I can play your game as well???
I clicked thru the Time article and looked at
their PDF on reductions. City with the least price reductions? Vegas baby! They’re trying to link price reductions to market weakness, but is there really a market weaker than Vegas? Is it just that Vegas’s prices were so low to start that reductions weren’t needed?
The price reductions signal something, but I’m not sure it’s what Time is pointing towards.
It should not be a surprise that sales & signed contracts have slowed. People who chose to keep their price high before the credit expired, and are just now reducing made a huge error. Why would someone do that? If you’re prepared to lower your price, why not do it early and try to get someone cashing in on the credit?
I am not surprised that Vegas isn’t showing more price reductions. When homes are trading at a significant discount to rental parity, further price reductions don’t improve buyer motivation. They problem in Vegas right now is a lack of qualified buyers because most of the residents of the city have gone through foreclosure or don’t have a job. The only thing that is going to clean up the mess there is investor money acquiring these properties and renting them back to people who used to be owners.
Vegas’s problem is worse than you say because, I would guess, they have more homes than occupant households, even if employment improves. So Fla is like this, especially with the glut of condos, but a condo in Miami is useful as a part-time/vacation residence, while I don’t see the same thing being true for Vegas.
If you look at the other cities in the bottom 10, you’ve got a mix. Miami, Detroit, NYC, Denver – all vastly differing circumstances. People dismissed the housing bubble by deferring to the ‘national market’, and they shouldn’t be looking at all markets the same way today.
I was looking for Greenspan’s “signs of froth in some local markets” speech (http://www.federalreserve.gov/BOARDDOCS/TESTIMONY/2005/200506092/default.htm) and saw this nugget:
“For homeowners to realize accumulated capital gains on a residence–a precondition of a speculative market–they must move. ”
Had Greenspan never heard of a cash-out refi? HELOC? How could he write something so objectively incorrect?
Reading the whole speech, Greenspan was close to realizing what was going on, but didn’t take the last step or just didn’t want to.
I haven’t read the whole article, but I do agree that the only way to access (realized) capital gains is to sell the property. Helocs and cash-outs access unrealized gains…which can become unrealized losses pretty quickly.
His point was that selling was a precondition to reaping speculative benefits to owner-occupied properties. IR’s documentation of Heloc & refi abuse should show that idea to be false. You could access the value from price appreciation without selling.
I don’t think Irvine will be different this time. There are just too many distressed properties out there to contend with. That chart showing inventory for the past 4 years says it all…inventory is going up and prices will likely go down.
Alan Greenspan and Ben Bernanke are complete idiots, they will be a case study of what NOT to do. Greenspan was lucky that he oversaw the prosperous 1990s which included the big stock market bubble, and then he helped engineer the great housing bubble before hitting the ejection seat. He still takes no blame for the damage he has done. The other idiot, “the Time man of the year” isn’t doing any better, his policies are no different than Mr. Magoo. We are to the point now where the entire economy needs zero fed funds rates to function…and it will need this for years to come. Abolish the Fed.
Abolish the Fed.
Yes, abolish the FED and make the private banks who own the FED to absorb all the federal deficit. After all, they were the ones who helped to engineer all these fiasco.
That would never happen! That would break the time-tested model of “Privatize Profits, Socialize Losses” that the banking system is based on.
Please let me know when you run for public office. I will vote for you.
Finally
We received the OC Tax Assessor’s revised value of our home yesterday: +18%! The increase is due to strong sales in our neighborhood, but also due to the low sale prices in late 2008 which created a very low assessed value for 2009.
I have mixed emotions about this. It’ll cost us hundreds more dollars in property tax, but the alternative is less appealing…
are you selling the property?
No, hopefully the townhouse meets our needs for a few more years. That’s the plan at least…
Although, if the high-end of Irvine (92603) were to come down a decent percentage (25%?), we could absorb any underwater amount on the current house and move. We’re aggressively building the reserves should such a thing occur in the next few years.
I guess I’m missing something. Prop 13 limits the increase to 2% per year.
Did your assessed value drop like 215% before? Is that not covered by Prop 13?
Many peak buyers got downward property tax re-assessments from the county. Unfortunately, the Proposition 13 limits only apply to the original purchase price. Once his valuation gets back to the peak, it will then be subject to the 2% per year limitation on the increase.
Yes, however the OC Assessor keeps track of your Prop 13 annual increase. So the assessed value dropped 25% a year ago and increased 18% this year, but my assessment continues to show the cap that grows at 2% every year:
e.g. $600K purchase price
+ $12K (2% in 2008)
+ $12,240 (2% in 2009)
= $624,000
If the assessed value increased to $700K next year, the Assessor could tax me on $636,480.
I remember seeing LA Guns at the Scream back in the day.
Memories…
I’ve said this before, and no one’s given me an adequate response: What would the American public had done if the government had put some Canadian style brakes on the housing bubble; i.e. requiring even 10-15% down payment, banning stated income loans, etc.?
I’ll tell you what:
COMMUNISTS! FASCISTS! THEY’RE TAKIN MA PROPER-TIE! I WANT MA FIRDOM! THEY’RE TAKIN MA FIRDOM!
Think about it- they can’t even pass common sense regulations *NOW* after we have seen the direct effects if reckless credit. Even mentioning regulation gets old white men at podiums saying “There is no need for a government takeover or nationalization of the banks” or something to that effect.
Alan Greenspan did what he could. If anyone even suggested there would be a housing bubble and crash and that we had to move on new regulations, they would have been shown the door. Greenspan at least figured he would keep his job.
Canada has the same problem as the US. A few weeks ago I read a long article in Fortune magazine about 2BRs in Vancouver selling for US$1m. Seems like they have valuations up there close to Manhattan’s, not sure whether that is sustainable :-). They are following the same fallacy as SoCal to explain the bubble, not enough land, surrounded by mountains and the Sea, etc etc
OF COURSE IT’S SUSTAINABLE! Vancouver is different than anywhere else; just like Irvine it’s all the cash-rich Asian buyers, or extremely wealthy people who are snapping up properties. This is the New Reality. There will be no price weakness in Vancouver or Irvine – everything is fine!!!
From Calculated Risk:
Existing Homes: Months of Supply and House Prices
Earlier I mentioned that a normal housing market usually has under 6 months of supply. The NAR reported that months of supply was at 8.3 months in May, and the months of supply was probably be higher in June (to be reported tomorrow).
A quick estimate: If sales are 5.3 million (SAAR) in June, and inventory stays the same at 3.9 million units, the months of supply will rise to 8.8 months in June.
This is calculated as: 3.9 divided by 5.3 * 12 (months) = 8.8 months of supply.
For July, if sales fall to 4.5 million (it could be lower) and inventory is still at 3.9 million units, months of supply will rise to 10.4 months.
I think these estimates are conservative (actual will probably be higher). For reference, the all time record high was 11.2 months of supply in 2008.
This level of supply will put additional downward pressure on house prices.
Dave is right. If you think this problem is a new one, or Obama’s, you’re ignorant.
As of July 16, RealtyTrac listed 6,270 repossessed properties. Although 3,200 of them have been taken back by banks within the last six months, 650 have been in the inventory of banks for more than two years without having been placed on the market. As with Cook County and Miami-Dade County, very few foreclosed homes in Orange County are listed for sale – 227.
http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-home-buyer-tax-credit-federal-housing-administration-loan-guarantees-fha-realtytrac-home-foreclosures-highend-home-repossessions-bank-reo-sales-2868.php
I wonder what Planet Realty’s take on this will be? Irvine-is-immune or some such, probably.
-Darth
Irvine is different. The developer has almost no book costs on the land. He is free to just pull all the cash he wants from his land. Building more units than are needed in the marketplace. He will spend tons of cash keeping his PR machine rolling strong. Move some property that will devalue instantly after purchase and go on about his business. Just sit tight. The next leg down is going to be epic for Irvine RE. Commercial will go to the dogs first.
My commercial lease in Orange was just lowered after we started shopping for cheaper rent.
I am down near .35 Cents a foot now. Vacancy rate locally is about 35% here in North County for Commercial. Landlords are doing anything to keep their properties leased.
Congratulations on the cheaper rent. The multitude of “for lease” signs on commercial property astonds me.
I think that cheap money certainly is one precondition for the bubble in housing, but that is only the supply side of things. You still have to have demand and a way to drive that up. If you figure that everyone “wants” a part of the American dream, and that includes buying a house, then there is a built in demand that is in the wings waiting for some way to get out of control. If you still had the 20% down and limits on the debt to equity on the borrower, you would not really be able to blow up a housing bubble. You would then have a case where if you rationally qualified for a house, you would be able to get a good deal on the money you needed for the financing. No problem there at all.
So I would not blame the guy for the cheap money as much as I would blame him (and the financial policies he supported) for the irrational belief that any controls over the financial system are somehow against god and nature. The creation of some pretty shaky ways of selling the housing debt allowed the thing to get out of control in a big way. If the bank did not have a way to dump the loan on someone else and hide the risky nature of it, then they would not have any incentive to make those loans.
Sure, there would have likely been some other place for that money to go and create another bubble of some sort, but how about a bubble in something useful, like alternative energy plants or some better infrastructure? At least you get a revenue producing asset. A lot of cheap energy would be a nice problem to have. Now we have a bunch of single family houses that are not assets and produce no return and we have wasted a huge amount of capital in the process. That waste will continue as long as they are out there. In many cases they are in suburbs far from jobs or retail centers that will consume transportation dollars not to mention services like sewer and water in a really inefficient ways forever. Such are the glorious achievements of “real” capitalism.
The bubble was not created by the opposite of “real” capitalism. It was created by central bank manipulated interest rates for the profit by a few large banks. That is facism, not capitalism.
People really need to start reading about financial history and thinking critically instead of just repeating whatever they read or hear on TV.
Sorry, I meant either. “The bubble was created by the opposite of ‘real’ capitalism”, or “The bubble was not created by ‘real’ capitalism”.
Capitalism and free markets are not possible with a monetary system based on fiat currency, fractional reserve banking, and interest rates manipulated by a central bank or gevernment.
The basic premise of capitalism is that satisfying my own desires is going to benefit society in the long run. So I do my best to get rich and the rest of society benefits in the process. Not a bad idea, but there are a lot of ways in which you can simply screw over the rest of society and make yourself rich in the process. So Greenspan and his accolades simply ignored the downside in favor of the upside and removed all the controls. Not a problem since they tend to be the ones that benefit from the upside and the rest pays for it. So bubbles have happened throughout history, even without the fed. It is pretty hard to blame the tulip mania on the fed and cheap money policies. Greed is forever, simply enshrining it in your economic system without decent controls is foolhardy.
You propose the gold standard or something similar as a cure (not sure how that remove greed from the picture or eliminated needs for controls), but that has its own serious problems. How do you propose to finance the capital needs of a modern economy on Gold? The US has the largest reserves in the world:
http://en.wikipedia.org/wiki/Gold_reserve
68% of the worlds reserves at 8,133.5 tones. This is about 260,256,000 oz and at $1,000 per oz = 260 billion and change. Not a lot of gold there. So now you have to take in the “dollars” are give back gold shares to make everything work. So what is the redemption rate? I have no idea how many dollars there are out there, but conservatively a reverse split that gives you 1 gold share for each 1000 dollars seems to be on the conservative side. So the average person that used to make $50,000 dollars now makes 50 gold shares a year (Don’t forget to revalue all your assets, like your house as well…). What are you going to buy with that? Might be able to make one trip to WalMart, but it would be a pretty lean year after that. If you really want a total US depression, this is probably the best way to get your wish.
Currency, whether dollars, Euros or Gold is simply a placeholder that represents a share in the economy of the issuing country. Its value changes based on that economy and its performance in relation to every other country. Gold is good for a primitive society simply because it is rare and easy to use, and it is kind of pretty and it is easy to stamp your kings face on it, so what the heck might as well.
I doubt this argument changes your mind, but answer me these questions:
If you go to the gold standard here, what happens with trade to other countries? It seems like you have to have to export gold to get their products, so what happens to your gold supply? Will they pay gold for US exports to balance things out? Not likely. What is the conversion rate? Will other countries be willing to give you lots of stuff for your gold? They are not likely to value it as much as you do, you’re on the wrong end of the 1000 to 1 conversion. Trade will simply stop. Of course since the economy in general will crash, there is probably no demand for anything anyway so maybe that is not an issue.
How are you going to raise capital for any investment projects? Talk about tight money, there is simply no way to get money, it is all sitting out in circulation just to pay for the single trip to WalMart. I figure if you are serious about gold, then you must also hate the fractional reserve banking system as it also creates money out of thin air, so there is no way to get the capital to invest in anything. Business will love that.
First, thank you for taking the time with your well thought out, detailed, and cogent response. Sincerely. And I am sorry that I will not be able to take the same amount of time to answer.
Your response is full of assumptions and speculation with no evidence for the conclusions. If you truly want answers to your questions, read Antal Fekete as a start. He and others have answered all your questions.
I have occasionally ran across various gold standard arguments and they all seem to have one thing in common, they look back to a period in the past and claim that the conditions then are applicable today. Thus the arguments that Fekete makes appear to be based on the stability of the British banking system in the 100 years prior to around 1900. Then people stopped doing the right thing and it all broke down. Because of this, you should return to those standards and everything will be better. Now if you can replicate the economic/social conditions of that period, I have no doubt that his theories have merit. The problem is that the last 100 years have significantly changed all those assumptions and you can’t go back. At the very least, 70% of the population was employed in agriculture then, it is 2 to 3 % now. We have much greater and more complex financial requirements than the old nation of farmers…
You can’t always go back, despite a natural desire to resolve issues that way you have in the past. While some of the concepts are fine, be conservative with your debt etc., the implementation has to change as the environment you are in is different. This applies to every other human activity so why would banking be any different? Even in that time period, there were notable exceptions to the hard money beliefs due to the problems they caused:
http://books.google.com/books?id=IcFHAAAAIAAJ&printsec=frontcover&dq=thomas+attwood&hl=en&ei=DGVFTOLMEoS0lQeNq-XEBA&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEEQ6AEwBA#v=onepage&q&f;=false
It would be interesting to watch some country adapt a true hard money approach, just to see what happened. The countries that move in that direction by going for the balanced budget simply create major unemployment and dramatically lower growth as they shrink the economy. Then your bond rating goes down because folks are not sure if you are going to be able to pay off the debit you already have because of the shrinking economy and you are stuck in recession to depression territory. See Ireland for example. Sure some countries have to reduce excessive debt, like Greece, but you get diminishing returns from those actions.
Personally I see a lot of old time Moralizing implicit in some of the arguments. We really have to punish these bad people. I get that, but you are unlikely to punish the right people with those actions and with everything all interconnected, you are likely to find that punishment returned to you at the same level or worse.
Irvine already is different.
1. What other city in Orange County has had THREE SFR projects almost sell through their initial home count in 7 months? Not to mention the other condo projects they have sold through.
2. Irvine has had to open up additional projects and phases, fast track Stonegate East and is building again in Portola Springs.
3. Even Tustin is getting into it with the upcoming opening of Ainsley Park.
Maybe it’s just new homes that sell in Irvine. And while inventory is high, what’s the other number missing here? Price per square foot for many homes is almost unchanged since the peak. So, yes, I do hope it creates downward pressure on prices… because they aren’t much lower than 2 years ago… but it’s not going to be 40-50% off peak city-wide as predicted by the now silent bears.
Your estimation of current home prices is a bit optimistic. We are not at peak pricing. If we are, the flipper who paid $1,164,000 for 24 Pismo Beach just made about $700,000 as that house sold for $1,825,000 in 2005. Most of Irvine is still 20% off the peak. The higher end properties have not fallen as much as low-end properties because fewer of the necessary foreclosures have taken place.
I did not say “all” homes… there are drops at the low end and at the ultra-high end… but there is segment in the middle that is the same pricing as it was 2 to 4 years ago (which is why I said “many”).
I’m not sure if I could say even “most” of Irvine is 20% off peak. And even so… that is a far way from 40% and I don’t think we are ever going to get there. Most of the SFRs in QH that sold in 03-05 won’t go for those same prices again (which would be 40%+ off).
I agree that we probably won’t see the 40% off that I first predicted. Interest rates are too low and affordability is much improved.
@IR:
Unlike some others, you have adjusted and explained why. There are still some who cling to a 40%+ drop in Irvine yet I have a hard time seeing it.
I do think the new home sales are slowing but for them to sell out this quickly is remarkable. Everyone claimed that by end of summer/fall, that The Irvine Company would have a hard time selling these homes… which is true… because they will have sold them all by then.
And if not, because they have been raising prices every phase, it would be easy enough for them to either discount, throw in incentives for financing or design studio, or even offer broker co-op to get rid of the last of their inventory.
I can pay $780k now for a new 3/2.5 bedroom SFR with no formal dining/living or an upstairs loft that I won’t be able to occupy until Jan 2011, or I could have paid $745k back in January to move in a few months ago (and get tax credits). Insane.
Or I can wait for the ever coming forecosure wave and rising interest rates and hope to buy one cheaper in 2012… when they are no longer selling these homes new.
What are the odds in 2012/2013 that a similar new home from Irvine Pacific (TIC’s own builder arm) will cost me more than $800k?
Irvine_home_owner,
I think you are right that we won’t see the 40% off peak pricing in Irvine. Many of these predictions were made during the crash period and NOBODY had any clue of the insane, desperate measures the US government would take to keep the housing market from collapsing.
I’ll try to name some, I’m sure I’ll forget a few: TARP program that bailed out the idiotic banks with taxpayer money, lowest mortgage rates in 40+ years, the Fed buying 1.5T in mortgage backed securities, the government becoming the mortgage industry and guaranteeing home loans, unlimited credit lines for Freddie and Fannie even though they lose billions each quarter, the return of little or no down loans, loan modifications, foreclosure moratoriums, principle reductions, homebuyer tax credits at federal and state levels, banks in no hurry to take back houses after owners quit paying, two plus years of squating, etc.
Even yourself and people like Planet Reality have to agree that there were unprecedented actions taken to curb further housing declines. There are many prudent, patient people who sat on the sidelines during the housing bubble because they knew things were out of whack. Anybody who would have suggested the way things played out in the end would have been ridiculed to no end.
Irvine is nice place, buy even you must agree that prices would have dropped much further if it weren’t for the drastic measures taken. And we’re not out of the woods just yet. I wouldn’t advise any proud home owners to break out the bubbly just yet!
@wtb:
Yes… but it did drop 40%+ elsewhere.
During the crash everyone said that Irvine is no different than anywhere else and it will crash the same. What I contended back then is that because Irvine did not crash as hard in the past and due to its “premium” (largely in part to FCB perception) that it may not drop as much as other cities.
The answer was that this time it was so bad that none of that mattered and it would still come falling down.
So why have all those things you named not prevented similar downward spirals in places like Riverside, Apple Valley or even Ladera Ranch? Or are you telling me it would be much worse in those areas if not for all the intervention?
I think it’s hard for me to agree it would be much worse in Irvine only because it has been much worse in other cities. Why is Irvine different? Because when people say it isn’t… then why has it not dropped as much?
And don’t get me wrong… I’m not happy about it… I lost quite a bit hoping Irvine would drop more. But hope isn’t worth anything to The Irvine Company and their constantly moving upward prices.
i_h_o,
We all know NOTHING would have saved places like Riverside. Comparing Riverside to Irvine isn’t really fair. Likewise, comparing Ladera Ranch (mostly built in the 2000s) to Irvine isn’t really apples to apples either.
I will still hold to my opinion that Irvine prices would have definitely went lower (I would guess by 15% or so) if there was no massive intervention. You could have given everybody in Riverside a 30% principle reduction and it wouldn’t have helped, that is how dire that area was.
We’ll just have to wait and see what happens. Crossing my fingers for the next big implosion.
Let’s stop calling Irvine different.
Let’s call Riverside different and be done with it already.
You’d have to be a complete idiot to think a prime location with high paying jobs, the best density of good schools, low crime and perfect weather was different.
Anyone who understood the complexity of the housing bubble should have been able to predict quantitative easing and banking policy that was clearly imminent. Furthermore anyone who has participated in a single game of monopoly should have understood the end result for prime areas and sub prime areas.
wtb,
“We all know NOTHING would have saved places like Riverside. Comparing Riverside to Irvine isn’t really fair. Likewise, comparing Ladera Ranch (mostly built in the 2000s) to Irvine isn’t really apples to apples either.”
But there is a bit of revisionist history being played out here (not by you particularly). I don’t have the time to look it up but I distinctly remember people saying that Irvine is NO DIFFERENT from Riverside and those prices will drop just the same, REGARDLESS of gov intervention.
I agree with you, you can’t compare Irvine to Riverside or Ladera Ranch… but that was my point… because of those differences, that is WHY Irvine has a bit more kevlar than those other areas.
But I will admit that the rising number of homes on the market is creating some downward pressure on pricing… however, those original list prices are too high even for Irvine. I follow the SFR market in Irvine closely (particular the 3-car garage products… heh) and I do notice more inventory and prices reducing. But as I said, the latter half is a bit misleading because since the reductions are basically taking them down where they “should” be, which is still as high as they were a few years ago (in some cases).
And I appreciate the discourse, it seems others ignore my comments because they sound bullish in nature or maybe because there is some truth to what I’m saying and they can’t refute it. In either case, I’m not trying to play a game of “toldyaso” but I do want frequent commenters to recognize the difference of Irvine because more often than not, I see comments contending otherwise (and this applies to other areas like Tustin Ranch, Newport Beach etc etc).
Good point. It’s always nice to have a rational discussion. Irvine is definitely a premium area and massive house price declines aren’t in the cards. Most of Irvine was built before the bubble, this alone insulating it from losses. Added in proximity to high paying jobs, great schools, low crime, great weather and a draw to affluent foreigners…and you have hosue prices that are pretty sticky.
Nobody on this planet realized the lengths the government would go to in order to save the housing market. Irvine definitely benefitted from this, there is no denying this. We’ll see what happens in the future. Based on the past 3 years, nobody has a crystal ball and predictions are just that…an educated guess.
Yeah man, everyone is moving into Irvine now :).
I wonder what that is going to do to the schools and the neighborhood? I walk around Irvine all the time between Jeffery/Irvine Blvd, UCI, and the District Area. Nothing is as clean as it used to be.
Irvine is going to have to employ more manicurists, or the place is going to deteriorate. Maybe some more police too at this rate.
800+ (811 as I’m typing this). Do I hear 900? 900? 900?