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Feedback on Pop Goes the Bubble II



I had to laugh when I caught up to your second 'Bubble' installment... the condos that you have pictured in Bubble item #2 look just like the ones they're building down the street from me!! But not in Seattle... I live in the suburbs of Columbus, Ohio. In fact, buildings like the ones shown are unprecedented in my area, and yet now they're popping up in several places nearby. The one nearest me is the first of a planned *5* of these buildings... never mind that the necessary infrastructure was never put in place for such a development.

And re: item #4, strong sellers/weak buyers, at my job (which recently disappeared), we had a running joke that whoever bought a house would be the next one to get laid off. The correlation was eerily direct, one by one the home buyers got laid off... and as you describe, most of the unlucky buyers were young optimists with no down payment and/or no extra cash on hand. Too true, but when I bring these things up in conversation, no one wants to hear it ... "real estate prices never go down". Whatever.

Thanks again for the column.

- C.T.


Back in October my wife and I back-out a real-estate deal at the Jersey shore after I had initially put down a deposit; basically it was a condo (1200 sq ft), a block and a half from the beach at $245k (new construction). After I did some homework, I found out the weekly rentals were only about 1400 to 1550 a week. I would have had to carry a pretty steep negative cash flow. Based on your insights, my potential reward would have been negative appreciation.

I work in the energy field for a major utility and I can tell you we are postponing or canceling projects left and right. Lay-offs are actually occurring in utilities, which a few years ago didnít seem possible. Anything to cut costs.

- J.P.


Agreed 100% re your take for this housing market---which is now absolutely insane in the greater Denver area where I lived for 34 years.

My 28 year old daughter manages a Denver mortgage branch--says "Dad, we're making many deals now that make no sense to me".

Crackerbox old bungaloes around Wash Park one could have bought for 15k 25 years ago now bring 350k plus! Your photos of those condos look just like Aurora/Castle Rock/etc---pieces of dung!

Unloaded our Douglas County place mid 2000 to a guy and his fiance who got a 300k mortgage with 1.5% down,qualifying w/ two incomes! Since retiring have a paid for efficient new mfg home on 360 remote treed acres with finished basement,woodstove,shop/barn,and good well. Regretfully expecting kids and relatives living here as this whole thing inevitably folds up.

- K.D.


I'm generally in tune with the subj. article and the prior one, but in my life I've noticed numerous anomalies in real world economics. I lived in the Seattle area from '66 to '96 and through the Boeing bust beginning in late '71. There were lots of mortgage defaults and a number of people just left town and sent the house keys back to the lender. Local unemployment peaked at 20%. Houses quit selling, but prices didn't drop significantly.

Apparently this phenomenon is similar to farm forclosures after WW I, when land prices didn't drop very much. Though commodity prices hit the skids. And, of course, since farms have to be farmed to be maintained, the farms deteriorated. Still lenders held out waiting for prices to recover. And massive liquidation of the gone to weed forclosed farms didn't occur until the '30's. - See GOLD and PRICES, by Warren & Pearson. In Seattle, '73 & '74 before recovery began, apartment complexes were liquidated at distress prices, but even then the liquidation was not pervasive.

J.G. - Abilene, Texas


The condos pictured in "Pop Goes the Bubble II" look eerily similar to ones here in Hampton, NH! Yes, some of the condos I am referring to do have nice views, but who will be able to afford them? There is so much unemployment around here and so many retirees saw the value of their "nest egg" evaporate.

I believe your claim that the real estate market is the present-day equivalent of the "dot com" madness is right on. Articles on other sites point out how rotten the whole mortgage/refinancing industry has become: so-called loan officers act as middlemen; they bring together lenders and potential borrowers. Every time a deal is struck, they make their cut and get out of the picture. If a borrower later defaults, the middleman who arranged the deal does not suffer any consequences. It is to the best interest of the loan middleman to maximize the amount loaned (i.e. get the borrower deeper into debt). The same applies to realtors. Because of that unaccountability, I think the mortgage/"refi" industry is sicker than the stock market has ever been.

One of the reasons the stock market got so sick was blatant disregard for risk: just because investors fantasized that their stocks would continue to appreciate (i.e. that there was minimal, if any, risk), the reality was much different. But those investors always had to account for risk, whether they were aware of it or not. The mortgage/"refi" industry is even sicker in this respect because the reward of realtors and loan middlemen is not even related to risk!

This can give rise to even more sickness. Just like creative accounting was used during the stock bubble days to boost the value of stocks (another reason the stock market was so sick), "creative appreciating" can be used to artificially boost the value of real estate. (Here I am just reiterating what I read on other sites; I have no personal experience on this.) If an assessor does not inflate the value of a property, he may soon have trouble finding work (as realtors will tend to avoid doing business with him). Assessors, loan middlemen, realtors, and local and state bureaucracies --the latter through increased tax revenues from real estate-- all stand to gain from inflated real estate prices. (By the way, since New Hampshire depends heavily on real estate taxes as it has no sales or income taxes, a collapse of the real estate market would be catastrophic for this state.) Isn't this the telltale sign of a bubble?

I am currently renting and see no reason to buy...

Keep up the good work. Your articles offer a lot of insight.

- CF




As a 20-year bankruptcy attorney, I believe we are on the verge of a real estate depression of catastrophic proportions. I have seen dozens of clients over the past year who have been happy to play along with the systemic fraud that a cottage industry of "professionals" have perpetrated upon unsuspecting buyers of mortgage-backed securities. Mortgage brokers, appraisers, wholesalers and real estate sales agents have all joined in a conspiracy of interests --- their monetary interests -- to perpetuate the refinance game just as long as they can. These professionals are no different that the stock brokers, analysts and media celebrities who hawked stocks until the last buyer was found. The "it always goes up" and "they're not making any more of it" remarks you quote are no different than "Dow 35,000" and "Stocks for the Long Run". When even Sir Alan encourages the happless homeowner to "extract equity" as if it's the patriotic thing to do, we are almost certainly near the top.

I would take your advice were I not married. Need I say more? Fortunately, we have almost paid off the mortgage and, as a bankruptcy attorney, my business is busting at the seams. But I have stopped buying forclosure opportunities, another sign of the top. Most trustee's sales are now going for over 90% of fair value, with many going for 95% or more. This leaves no room for profit unless the market rises further -- proof of your statement that people are speculating on the "greater fool" theory of investing. By the way, I believe the so-called "demand" that many professionals cite as proof that there is no bubble could collapse almost overnight. There is widespread fraud taking place where brokers and other speculators are buying homes to "flip" in two years but claiming them as personal residences to take advantage of the tax advantages upon a sale. So the statistics do not show that perhaps a third of all purchases are highly leverages speculative plays -- your "weak hands." That is why I think the end could come rather abruptly and without much warning, other than from people such as you.

Keep up the warnings. If only one person acts, you will have done them a great favor....

- J, California.

I just finished reading your Bio. Contrary to your opinion I believe the next depression will be televised; after all, it is a perfect corollary to all the interactive TV shows at this time. You'll know that the depression is ending (e.g., read: the bear market is ending) when CNBC goes off the air.

It's going to be a reporter's dream scenario covering all of the anger (and acts thereof) that spews forth as a result of the frustrations, disgust, disillusionment, fear, and losses of the majority who were suckered into the buy and hold mantra.

Although, in my view, the depression will be televised, there will be an increasing need for sites such as your own because interactive TV is too much in it's infancy to provide an adequate source of venting; dialogue/discourse, such as that which you and others can provide, will fill the gap in communication and lead to a new dawn of investing --- but don't look for enthusiastic participation by a huge number of investors until the next top is approached a decade or more down the road.

Best regards,

12-10-2002 Joseph Interprets Pharaoh's Dream
Pharaoh had a dream: He was standing by the Nile, when out of the river there came up seven cows, sleek and fat, and they grazed among the reeds. After them, seven other cows, ugly and gaunt, came up out of the Nile and stood beside those on the riverbank. And the cows that were ugly and gaunt ate up the seven sleek, fat cows. Then Pharaoh woke up.

He fell asleep again and had a second dream: Seven heads of grain, healthy and good, were growing on a single stalk. After them, seven other heads of grain sprouted-thin and scorched by the east wind. The thin heads of grain swallowed up the seven healthy, full heads. Then Pharaoh woke up; it had been a dream.

In the morning his mind was troubled, so he sent for all the magicians and wise men of Egypt. Pharaoh told them his dreams, but no one could interpret them for him.......

So Pharaoh sent for Joseph, and he was quickly brought from the dungeon. When he had shaved and changed his clothes, he came before Pharaoh. Pharaoh said to Joseph, "I had a dream, and no one can interpret it. But I have heard it said of you that when you hear a dream you can interpret it." "I cannot do it," Joseph replied to Pharaoh, "but God will give Pharaoh the answer he desires." ......

Joseph said to Pharaoh, "The dreams of Pharaoh are one and the same. God has revealed to Pharaoh what he is about to do. The seven good cows are seven years, and the seven good heads of grain are seven years; it is one and the same dream. The seven lean, ugly cows that came up afterward are seven years, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.

"It is just as I said to Pharaoh: God has shown Pharaoh what he is about to do. Seven years of great abundance are coming throughout the land of Egypt, but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. The abundance in the land will not be remembered, because the famine that follows it will be so severe.

From Genesis 41
12-2-2002 Pop goes the bubble

Uh oh.


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