One of my guilty pleasures lately has been reading a few of the many so-called “housing bubble blogs”. These are web sites dedicated to tracking the carnage — excuse me, I mean “adjustment” — in the real estate market.

Until recently there were only a few of these sites on the Web. Now there are so many that a person can barely keep track of them all. Some are city-specific, like the Irvine Housing Blog. Others are regional or even national. I’m partial to the Irvine site because that’s where I live. The site has even featured a property right next to mine.

One of my favorites is the concisely named Housing Bubble Blog. Unlike the Irvine-based site, which analyzes specific properties within the city, this one consists primarily of quotes taken directly from traditional media throughout the country: financial reports, newspaper articles, periodicals, etc.

So why do I call this a “guilty” pleasure? Because the worse real estate gets, the more I enjoy it. OK, I could do without all the snarky comments left by grumpy renters and those who can’t afford to buy. But overall, I’m enjoying the return of sanity and balance to at least one part of the world.

I’ll admit it’s a bit callous to get a sense of satisfaction out of other people’s misfortune, but why shouldn’t I? I’m no genius, yet I saw the handwriting on the wall before it even started. Here’s something I wrote four years ago. And I’d been harping on it for at least a couple of years prior to that.

The math is simple and hasn’t changed one iota: income growth is 3-4%, so real estate cannot sustain annual gains much beyond that.

Not that anyone asked, but if you want my prognosis for the next few years, I’ll take exception to those expecting a quick recovery and cast my lot with Mr. T.

My prediction: pain.

I hate to say “I told you so”, but I did.  Again and again.  And again.  And… well, you get the idea.

2006 may well go down as the year Pluto was suddenly just another big rock, Brad and Angelina had a baby and the real estate market slid from great to miserable in a few short months.

In data released Tuesday, prices declined in more than 61 of the 275 cities tracked by the Office of Federal Housing Enterprise Oversight. And the deceleration has been fast: The agency reported that the decline in quarterly appreciation was steepest in more than three decades.

Everywhere you turn, articles abound with titles like “When Homeowners Are Desperate to Sell”, “What To Do If Your House Isn’t Selling”, and “Sharp Home Price Pullback”.  Agents are trying new gimmicks like “free” leases on a new BMW with a successful close of escrow.  Short sales and bankruptcies are at all time highs.

Were I a betting man, I’d expect that we’re nearing the time when some suckers — er, I mean bargain hunters – will come out of the woodwork to purchase real estate.  But if the price appreciation has been as overblown as I believe, they’ll soon end up owning more than the place is worth, too.  Speculators in this kind of real estate market aren’t going to fare any better than those who tried the same thing with day trading.  I wonder how many of those guys are still playing the market.

I hope real estate continues to fall for quite some time.  It’s actually healthy, despite the pain.  Much like the stock market in 2000, the longer the insanity went on, the worse the fall was going to be.  When people are happily skydiving without a parachute, something’s amiss.

It’s time to flush out the idiots who think real estate can never depreciate, that interest rates are at historic highs (they may be right — as long as your definition of “history” doesn’t go any further back than the 1990s), or that a $395 a month payment on an $850,000 loan is perfectly normal.

In the words of George Costanza:  flame on!

Think it’s expensive to fill up your car?  According to AirNav, aviation fuel is now running as high as $6.79 a gallon.

Yes, you read that right.  We’re pushing seven dollars per gallon.

Anyone want to take a guess about how high it will go?  Eight dollars?  Ten?  Assuming a fuel flow of 30 gallons per hour on takeoff, an SR22 would be burning nearly $300 an hour just in gas.  Filling up an 80 gallon tank would cost $800.

I’d love to open an FBO just so I could take pride in having the most expensive fuel on the planet.  And you know what?  People would still line up to buy it.  I don’t see any of these FBOs suffering.

Good times, my friends.  Very good times.

NEW YORK (FORTUNE) - If you want to know where real estate prices are headed in California’s Orange County, the man to talk to is Gary Watts. The Mission Viejo broker has 35 years of experience and doubles as a spokesman for the O.C.’s Association of Realtors.

But it’s his track record more than his resume that has won him serious credibility with his peers. In 1989 he earned the nickname “Scary Gary” by correctly predicting that the housing market in Southern California was headed for a tumble. Then, in 1996, he was one of the first to call the area’s rebound. Since 1997, Orange County home prices have seen a 195 percent rise. Will the good times last another year? Gary doesn’t hesitate. “Fifteen percent is pretty much in the bag for Orange County in 2006,” he says. “It’s impossible for prices to go down this year.”

Nothing’s impossible, Gary.  The very same article notes that single family home inventory in Boston has increased 79% over last year.  Foreclosures up by a whopping 45%.  Boston finds itself in one of only three states whose population declined in 2005.  Interest rates are higher, while real wage growth has lagged far behind real estate appreciation.

Perhaps Boston and Orange County are just in different time zones.

California may not be suffering from Boston’s woes, but we do have serious problems stemming from overcrowding.  No job market is going to fix the infrastructure problems we’ve got around here.  There just aren’t enough homes, roads, hospitals, or schools to deal with this many people.  It’s only unfortunate that no one thought about this when they elected to build homes 18″ from one another.

Maybe the real estate sector is just hyping itself.  Can you trust a real estate agent to provide an honest assessment of the market? There is an inherent conflict of interest, especially since this guy is a spokesman for the local realtors assocation.

I hear you saying, “Perhaps the average homeowner can be relied upon for a dose of sanity.”

Yale’s Shiller surveyed Orange County residents last year on what they expected home prices to do over the next ten years. The average expectation was a 23 percent return — per year!

My first thought was, “Has Schiller double checked his math?  Maybe they meant 2.3%.”  My second was that O.C. residents have been watching too many episodes of that dreadful TV show.

Twenty three percent!  Mr. Watts’ 15% prediction sounds like a comparative doomsday scenario.

The median home price in Orange County is currently $800,000.  If the market returns 23% per year, by 2016 the median price would be just over $6.3 million.  That’s a total return of 786% over 10 years.  From current levels.

Sadly, since I own a condominium, my place would probably only be worth $3 million.  But that’s a fair price to pay for a tiny 2 bedroom, 1 bath apartment, don’t you think?

It’s getting to the point where I turn to the real estate section for my humor fix.  Seinfeld was never this funny.  I just wish someone had told me that multi-level marketing schemes were legal again — I could have made a bundle.

Seriously, though, if you want reality, it’s encapsulated in the midst of the Fortune article with two salient points:

• Southern California has become a hotbed for “exotic” mortgages, such as interest-only and negative amortization loans
• the strength of the local economy is simply delaying the inevitable slowdown — for now

It’s as simple as that.

To my eyes, the signs of a market frenzy are undeniable.  High prices, weird mortgages, record forecosures, and of course high levels of speculation.

Last year more than a quarter of all residential home sales in the U.S. were for investment purposes, and 18% fell into the vacation/second home category.  That was the national trend — keep in mind that in California it’s much higher.

In other words, one of every three homes purchased last year was not for a primary residence.  The buyer never intended to live in the home, so they were not investing for long-term longevity, but for short-term appreciation that would allow a quick gain, or as a rental in which they’d be able to make immediate positive cash flow.

I haven’t hear this talked about too much, but it seems to me that California’s Proposition 13 is doing a lot to sustain the frenzy.  It locks in a relatively fixed basis for property tax computation.  While high prices mean high tax rates, Prop 13 eliminates a big “unknown” in real estate ownership.  Homeowners in other states have no such protection, so they are at the whim of politicans to decide their tax rates.  Their tax might be $2,000 this year and $4,000 next year.  Markets hate uncertainty, so Prop 13 gives investors a perceived edge in this state.

Sometimes I wonder if I’m the only one that sees the “big picture” the way I do. Recently, a fellow pilot in Arizona took the time to write about the escalating fuel prices and what this rise in energy costs is doing to the economy

Groceries are already going up in price here, it’s in small increments but if you think back to last year it’s clear many items are up 30% or more.

Ron, this fuel cost is going to change our country completely. I go through about 20 gallons of gas a week in my car. Not long ago that cost about $25, now it’s $60. Multiply that by 52 weeks a year and it’s now costing roughly $2000 more a year for one car. That’s about what my C310 insurance costs.My 100LL cost has doubled in the last 2 years, and flying is soon to become the private club of the seriously rich.

If you aren’t a multi-millionaire with a million coming in each year that adds up fast. I used to not even give it a second thought when I wanted to pull into a restaurant and buy a meal for me and my kids. Now I think 3 times before deciding. This gas price is pulling money out of areas that once were a routine part of my life and others. Everyone is going to suffer, the restaurant owners I used to visit 3 times a week aren’t going to see me but once every 2 weeks maybe. It just keeps being passed down the chain.

Hope springs eternal, let’s hope prices fall quickly before it wrecks this economy for years and changes a way of life we’ve known since the 1950’s.

Indeed. The fuel prices are really out of control. As I work in the transportation industry, there’s no choice but to pass the cost on to the customer. The Extra 300 we rented for $200 in the mid-late 90’s goes for $311 now. And unless you’re flying it solo, tack on another $55 an hour for the CFI. The Super Decathlon that was recently $130 or so is now $140, and it’s sure to go up again within days.

I wonder if the Chinese are paying through the nose like we are. Or the Europeans. If their gas was $8 a gallon a couple of years ago, does that mean they’re paying $12-15 a gallon now?

I couldn’t agree more about flying becoming a domain of the wealthy. It’s not just the gas prices or insurance. Landing fees are being instituted at more and more places. Santa Monica, for example. We’re totally priced out of airports like McCarran and San Francisco Int’l. And the airports that are cheap are either being closed (Rialto), are overcrowded (John Wayne), or are in such out of the way places that there’s no reason to go there (San Bernardino). The government is now openly discussing user fees, which would discourage pilots from using safety services.

I think that inflation is not only high, but rapidly accelerating. There was an article on CEO pay on CNN.com today which showed how the rich are getting richer. The top 10 CEOs have, over the past ten years, made something like $15,000,000,000. In case the zeros are making you dizzy, that’s fifteen billion dollars.

That’s not how much they’ve made for their companies, it’s how much they’ve been paid by their companies.

This I can at least understand, if not condone. Actually, I take that back. I don’t understand it. But the real estate mania leads me to believe that either a) the average Californian really can afford a $1 million home, or b) there’s something seriously out of whack.

Money aside, the usefulness of the general aviation system is being destroyed and no one seems particularly bothered by it. Except, perhaps, those of us who can’t do much about it. I’ve tried writing letters. A lot of them. I’ve commented on NPRMs, written to newspapers, legislators, and bureacrats. If I’m lucky, a pasty form letter will be my reward, and it will come 3-4 months after I’ve written, so whatever issue or vote was on the radar has long since vanished. You can almost hear the novice voice of the 4th string flunky who printed out this mealy form letter, which by the way doesn’t even address the issue on which I’ve written, but is so generic in nature as to cover anything related to the committee or panel on which he/she sits.

Sure, I like to fly. But it goes beyond that. We are rapidly catching up to the Europeans in socialization. And we’re adding our own pathetic twist in the form of homogenization. We all eat at the same chain restaurants, drive the same cars, shop at the same chain stores, and live in the same cookie cutter homes. You’re not a person anymore, you’re just a number.

This is no way to be. The last refuge of individuality and real character seems to be things like general aviation, which far too many people already see as the pervue of some rich white guys.

Sad to say, the price of things makes them a little more right as each day passes.

The July 25th edition of Fortune magazine features a pretty good analysis of the emerging challenges America faces from the likes of India and China. And, frankly, from our own affluence.

The article is particularly noteworthy because globalization is making it harder to seperate the wheat from the chaff when attempting to define causes and solutions. It’s not an “us vs. them” situation anymore.

Not that it ever was. But American companies now assemble American-designed products using parts manufactured offshore. Or vice versa. A foreign company will assemble their products here in the United States using parts that were manufactured by American. The Honda Accord is a good example. Is it a foreign product, or a domestic one? And while you’re pondering that one, perhaps you can tell me whether the chicken or the egg came first.

It’s tough to even define what it means to be “an American worker” anymore. Does it include only citizens? What about green card holders? And which camp do American citizens working offshore for foreign companies fall into?

I thought the Fortune article was a good read. Most analyses show either a strong bias toward protectionism or delve into some sort of connection to how the World Bank is exploiting the average worker and all governments are evil.

I’ve always felt that our main advantage over the likes of India and China comes from the fact that we have greater freedom and diversity than any emerging economy on the planet. While they didn’t come out and say it quite that way, Fortune touched on it peripherally:

If it all sounds terribly gloomy, it’s important to remember that gloominess has a very poor record in predicting the U.S. economy. Many traits that have helped us meet previous challenges are still with us: flexible labor markets, the world’s most highly developed capital markets, and a culture that moves on from failure and embraces new ideas.

No one out there thinks our diversity is going to go away. But our freedom…. that’s another story. Since 9/11, we’re less free. Ironically, economic success seems to be pushing communist China in the opposite direction. It’s this simple metric that portends the eventual top dog in the struggle for 21st century economic dominance.

Talking heads in the financial sector seem quite fond of crowing about how well the economy is doing. One metric they never fail to point to is the Consumer Price Index, a primary indicator of inflation. It invariably shows that we’ve got the perfect amount: approximately 3% per year.

Does that make sense to you? Now keep in mind I’m not a doomsday guy. I think the long terms prospects for our country are bright. But the focus seems to be on the short term right now, and that might lead to some serious pain in between.

From where I sit, it seems the vast majority of an average American’s income goes toward housing. Home prices have been on an exponential rise for half a decade. The cost of higher learning has outpaced the mythical inflation figure for more than 20 years. How about health care? Have your costs been rising faster than 3% per year? Mine sure have. And the energy sector — been to the gas pump lately? I rest my case.

So the question is, why aren’t these hard cold facts reflected in the CPI? Answer: because the CPI doesn’t measure these things properly. In some cases, it doesn’t measure them at all. As Fortune puts it:

What’s more, real-life inflation may be much worse than the official statistics indicate. Take a look at the CPI’s methodology. Its statisticians make use of “hedonics,” a method of attaching a value to the increase in the quality of new goods. Here’s an example: If your new computer cost $500 more than your old one but had more than $500 worth of improvements (according to Treasury wonks), the CPI says it actually cost less. The sticker price for a car bought in the U.S. has risen 338% since 1979, according to the Leuthold Group, an economic consultancy. But because of hedonic adjustments, the CPI reflects only a 62% rise.

Another curious thing about the CPI is that it does not calculate changes in housing costs by the sales prices. Instead it uses a figure that estimates what homeowners would get if they rented out their homes. In 2004, national housing prices rose more than 11%, but the CPI calculates that they rose about 2%.

For a long time this was just a funny factoid. Now it’s a real problem. Incomes are not rising nearly as quickly as expenses, which means many of us are getting poorer without realizing it. Or perhaps we simply refuse to admit it. Either way, it’s clear that something is out of whack. It’s even stumping the Federal Reserve, whose governors are scratching their heads over a yield curve inversion that now has short term rates above long term ones. To me, the inversion’s cause is clear: the market is trying to return to equilibrium but it can’t because the low cost mortages are keeping long term rates artificially low.

Once the true scope of inflation becomes clear, long term rates will have to adjust upward as investors demand higher returns on their money to account for the dollar’s decreased buying power. Higher rates will crush the housing market and lead many with what I generously refer to as ‘questionable’ loan products to the sellers table. Even if they don’t want to sell, dramatically higher rates combined with high principal balance adjustable mortages will make it inevitable.

Lest you think “ah–buying opportunity!”, by this point underwriting standards will have tightened and buyers without large down payments (remember the days when 30% was customary?) won’t be able to get a loan, especially if the property in question is not a primary residence.

The government-backed mortgage holders like Fannie May will be stuck with a sagging multi-trillion dollar portfolio of underwater mortages and outright defaults. And it’s at this point that lawmakers will realize that perhaps allowing anyone and their grandmother to dump subpar loans on the government might have been detrimental to underwriting standards. Laws will change, but it won’t be enough to keep the economy afloat since the home equity cash cow will have long since shriveled up, taking consumer spending along with it.

The stock market tanks, job losses balloon, home prices fall, consumer sentiment sinks, and you have all the makings of what could be the next Great Depression. At best, we’re in for a recession which will make the 2001-2004 malaise look like a picnic.

Think I’m crazy? Go ahead, make your case.

I stumbled upon something interesting on the web the other day, the Lifetime Savings Account.

The LSA is a Bush administration proposal for a new kind of retirement account that might best be described as a Roth IRA on steroids. The discovery of the LSA proposal was exciting to me, because as a sole-proprietor with “variable” income, my only regular avenue for tax-advantaged retirement saving has been the Roth IRA. The problem with Roths is that the contribution limits are extremely low, maxing out at $3,000 per year. Obviously, unlike the 401k, there is no employer matching my contributions, not to mention no discounted stock purchasing, no options, no perks of any kind to sweeten the pot.

I established a Roth IRA because it has one big advantage over other retirement accounts. Your Roth IRA contributions are made “after tax”, so they don’t give you any tax break today like you’d get with a traditional IRA or 401k. But when you retire in 40 years or so, the money can be withdrawn from a Roth IRA tax-free.

At least, that’s the way it stands today. One never knows when a future cash-strapped Congress will turn on those of us who have built our retirements around the tax-free withdrawals promised by that very same body and start taxing the withdrawals.

I also like the Roth IRA because the long term trend over the past century has been toward higher taxes, larger government, and wider deficits. This suggests that taxes in the future will be higher than they are today, and any strategy that minimizes them at that point will be well worth the minor pain one endures today by losing the tax break on retirement account contributions.

The Lifetime Savings Account is an improvement on the Roth IRA because it increases the annual contribution limit to $5,000 while still allowing contributions to an expanded Roth IRA at $5,000 per year. That allows up to $10,000 of after-tax income to be placed in a future tax-advantaged retirement account. LSAs — as proposed, at least — would also remove many of the restrictions on withdrawals and contributions. This translates into greater freedom for Americans to use their own money as they choose. Freedom is a good thing.

LSAs were proposed by the Bush administration in January, 2003 and reached Congress in 2004 (S2263 in the Senate and HR4078 in the House). Both bills were referred to their respective finance committees where, as far as I can tell, they simply sat on the desk for the remainder of the 108th Congress.

With Keogh, 401k, SEP-IRA, and other retirement accounts typically having far higher contribution limits, I applaud the Bush administration for filling this hole and expanding the options for self-employed Americans. Now all the Congress needs to do is pass the legislation. It’s a shame the bills were stuck in a drawer this year. Hopefully the 109th Congress will display a little more moxie.

A decent rebuttal to some common arguements against LSAs can be found here.

I’ve already sent in my absentee ballot, but if I hadn’t, this is the kind of thing that would tilt the table in favor of the President.

I had no idea that eBay was a topic on the presidential campaign trail.

Earlier this month, Vice President Dick Cheney was stumping in Cincinnati when he brought up eBay as an example of why economic data isn’t fully factoring in a robust recovery. “That’s a source that didn’t even exist 10 years ago,” he said, pointing out that the data munchers aren’t accounting for the fact that “400,000 people make some money trading on eBay.”

Sensing that it was something worth pouncing on, the person angling to replace Cheney as the country’s VP took aim. “He said people are selling a lot of stuff on eBay,” John Edwards said. “When we count the bake sales and lemonade stands, we’ll have a roaring economy.”

Nice sound bite, Senator. I can almost hear James Carville in the background, madly scribbling away on little yellow post-its and shoving them to the guy running the teleprompter.

Unfortunately, it’s a very inaccurate sound bite (again, Carville comes to mind). Bake sales and lemonade stands are run by PTA members and children. eBay, on the other hand, has moved $30 billion in merchandise over the past twelve months. It boasts more than 114 million registered users, 48 million of whom have been active in the past year. The Motley Fool also reports that sole proprietors and small companies have opened up more than 121,000 domestic eBay stores.

But wait, there’s more.

Let’s not forget to sing the praises of eBay’s PayPal, either. The financial-transaction specialist claims 50.4 million accounts, and this past quarter it helped speed up $4.4 billion in payments. Closing on deals and transferring funds faster and safer mean that the proceeds are being made available sooner. Do you think that kind of monetary turnover is helping the economy? You bet.

Yet one of eBay’s greatest contributions to this country is that it is such an efficient high-margin machine that it will pay out more than $300 million in income taxes this year.

If that’s Sen. Edwards’ equivalent of a bake sale, perhaps he should take a hint from Dan Rather and use the internet instead of just mocking it.

CNN/Money has published a list of the nation’s top housing markets for the second quarter of 2004. The list is… interesting.

For one thing, they’re apparently referring to Orange County as “Anaheim-Santa Ana”. An odd choice to say the least. I’ve got nothing against either town, but it’s beyond the pale to suggest that Anaheim or Santa Ana is representative of an area with the highest median home prices in the country.

Orange County’s real estate values are skewed northward because of places like Newport Beach, Laguna Beach, and Irvine where even miniscule condominiums sell for more than $650,000. Anaheim and Santa Ana are the cheapest places to buy a home in Orange County. They push the median down, not up. Whoever put together this list for CNN/Money doesn’t know know the area very well.

It looks especially odd when you see the Santa Ana median above San Francisco. Not to mention outpacing Honolulu’s price 50%, Boston by 90%, and metropolitan New York by more than 80%.

The commentary attached to the CNN/Money list is somewhat deceiving. The article’s bolded header states, “If you thought the housing boom had to slow down, think again.” Sorry to burst your bubble, but the housing market has slowed down. CNN/Money reported that very fact a couple of weeks ago, noting that “real-estate tracker DataQuick said home sales in Orange County, Calif., the No. 2 U.S. market, slumped 17 percent from a year ago”. So sales numbers are way down but median prices are way up? I don’t think so.

Keep an eye out for the third quarter numbers. They’ll tell a different story, especially if the Fed hikes interest rates.

I hope Ken Lay, Dennis Kozlowski, Bernie Ebbers, and others of their ilk are reading this.

BEIJING (Reuters) - China executed four people, including employees of two of its Big Four state-owned banks, for fraud totaling $15 million, the state Xinhua news agency said Tuesday. The executions occurred in the midst a high-profile government campaign against financial crime. They followed a string of arrests in white-collar crime as China prepares to sell shares publicly in its big banks.

The story goes on to detail the method of execution: a gunshot to the back of the head. Now, if this is the punishment for $15 million in fraud, what kind of penalty would Kenneth Lay — who saw more than $1 billion worth of securities and wire fraud on his watch — be facing in China? It would clearly have to be a fate worse than death. Something really inhumane, like forcing him to watch Judge Judy or Homeboys from Outer Space for all eternity.

A CEO gets tens of millions of dollars each year to helm a company and claims all the glory when times are good. When the firm goes belly up, however, they are the first to claim they had no idea what was going on and bear no responsibility. Well, I know we don’t want to be more like China. But there are times when it’s awfully tempting. For example, when you think about the millions in taxpayer funds that are being spent to put these guys on trial.

So here’s a modest proposal: let’s take a page out of their playbook. Since our CEOs tend to favor outsourcing if it saves money, let’s outsource our high-dollar white collar criminal justice proceedings to China. Something tells me it might be more effective than Sarbanes-Oxley at curbing those annoying cases of multi-billion dollar fraud.

CNN/Money posted a great article today on the state of the housing market. Though it looks at the market on a nationwide basis, Orange County gets a special mention:

Last week, real-estate tracker DataQuick said home sales in Orange County, Calif., the No. 2 U.S. market, slumped 17 percent from a year ago. The No. 3 market, Riverside-San Bernardino, Calif., was holding up very well, thank you, but sales fell in San Diego and Los Angeles, No. 4 and 5, respectively.

The article also notes that home sales in Las Vegas, previously the hottest market in the nation with a 52.4% increase in a single year, are “suddenly dead in the water“.
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Visitors to the Golden State like to joke about “The Big One” turning Las Vegas into oceanfront property. But what if the “Big One” was an economic earthquake rather than a physical one?

Like a salmon swimming upstream, I figured I was the only person to raise an eyebrow when Alan Greenspan stoked the flames of adjustable rate mortages by suggesting that Americans were making a mistake in selecting fixed-rate loans over ARMs.

Since I panned one of Washington Monthly’s columnists recently, I thought it might be worth noting that I don’t always disagree with them. In fact, Benjamin Wallace-Wells’ article is one I could have written myself. I’ll save you the time and myself the effort by just linking to his excellent analysis of Greenspan’s comments and predictions on the fallout.
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The money mavens at CNN seem to think so.

I’m not sure I’d classify a 6.6% year-over-year increase as “cooling off”, especially when inflation is less than 3%. No, I’d put it more into the category of another irrational jump in a real estate market that’s already every bit as crazed as the NASDAQ composite at the turn of the century.

The inflation number is something I’d take issue with, actually. This 3% nonsense is insulting. There are so many caveats, exclusions, and astrisks attached to the Consumer Price Index that it might as well be tracking prices on Fantasy Island. It doesn’t include real estate, energy, food, college tuition, certain taxes, and automobiles. Think about how much of your income goes toward those items.

The CNN article was accompanied by a fascinating chart entitled “Hot Housing Markets”. Orange County was number five on the list, with a 21.2% year-over-year gain. It doesn’t look as extreme when compared to the nearly 30% gain experienced by those living in the nine-oh-nine.
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I recently came across an excellent study by the Center for Economic and Policy Research. It’s fifteen months old, but I think it’s just as valid now. Maybe more so, because real estate prices have continued to escalate since that time.

Mr. Baker and I are in violent agreement about quite a few things. His study gives hard numbers to back up what I wrote here and here.

And how was your Thanksgiving? No knock-down, drag-out family arguements, I hope? Lesley and I spent a simple but pleasant day together. We didn’t even cook–we ate out!

Scandalous.

It’s the first time I’d ever done that, and it was actually fun. Leaving the kitchen duties to someone else allowed us time to relax, laugh, and think about what were thankful for. Sounds hokey. But with all the cooking, preparing, decorating, and traveling that most folks do, the “core” of Thanksgiving can get lost in the static. So it was refreshing to spend Thanksgiving just being Thankful.

Earlier in the day we had a light brunch in Costa Mesa, then walked around Balboa Island and admired the holiday decorations. Lesley pointed out that this is a weird time of year for that sort of thing. The laggards still haven’t taken down their Halloween stuff, while some have Thanksgiving decorations up, and still other homes are already adorned for Christmas or Hanukkah.

There’s one house right on the water that we’ve always admired. The architecture is a fascinating amalgam of glass, copper, and concrete. When we took the Newport Harbor Tour last year, the guide told us this was his favorite home.

Anyway, as we sauntered down the sidewalk today, Lesley said, “Hey–that’s the one the tour guide loved so much.” A kindly old lady trimming plants in front of the property said, “You like this one, eh? Go on in and take a look!”

After confirming that she was the owner and not just some stranger egging us on, we looked at each other and thought, “Why not?”. So in we went. Margie gave us some insight into the fascinating choice of materials. The walls are plain concrete. Ceilings are Douglas fir, and the steel beams that support the structure are exposed throughout the house. She also showed us how the famous motorized glass facade worked. With the push of a button, an entire wall of the house retracts into the side of the building. It’s like putting the top down on a Ford Mustang. But instead of a $15,000 car, this was a $4 million island home.

Margie was very kind and we didn’t want to impose, but bless her heart–she insisted we take our time and really look around. Add people like that to the list of things I’m thankful for!

I did a Google search this evening, trying to find a photo of some Balboa Island real estate to give you an idea of what the houses down there look like. Lo and behold, Google turned up an entire L.A. Times article dedicated to this very home! Apparently the architect was a well-known student of Frank Lloyd Wright.

Anyway, now that the turkey day is behind us, the Christmas season can officially begin. Sure, it’s been going on in the malls, catalogues, and stores for months now. But I don’t do any holiday shopping, decorating, or singing until after Thanksgiving. I know we’re supposed to celebrate Christmas in our hearts all year long, but when the twelve days last twelve months, I can’t help but think “when is this gonna end?”.

To celebrate the start of the holiday season, I’ve created a new skin for the House of Rapp. I’m not thrilled with the greyish colors for the content and menu containers, but oh well. If any of you have suggestions for better colors, let me know.

Now let’s get out there and shop, shop, SHOP!

A few days ago I wrote about the growing imbalance in many residential real estate markets and theorized that housing prices were going to have to decline sooner or later.

But I couldn’t figure out exactly what would cause this “irrational exuberance” to snap. Obviously a huge spike in interest rates would do it, but how would such a thing come about?

I think I found my answer in a Reuters article about foreign money coming into U.S. financial markets. Unfortunately I can’t find the article now–it was on my Palm VII PDA–but others have voiced basically the same thought.

The United States accounts for about 30% of the world’s wealth, but we consume about 80% of global capital. This makes sense, because not only has the U.S. historically been a good place to invest, but it’s also been relatively safe and stable. For most of the 20th century, there was simply no better place to put your money.

But that seems to be changing. First, U.S. markets are experiencing increased volatility. Second, the appreciation of domestic investments over the past couple of decades points toward a need for foreign investors to rebalance their portfolios. And third, new international markets are emerging as an viable alternative to the U.S.

The significance is that foreign investors are getting nervous about their sizable investments in Treasury notes and the U.S. dollar. They simply have too much of their net worth riding on the U.S. economy. If they take their money elsewhere, it might prove difficult to find buyers for American dollars and bonds. If we can’t sell those bonds, the Treasury Department will have to raise interest rates to make the bonds more attractive.

Now you’ve got higher interest rates, which means home buyers will have to pay more for that overpriced $500,000 ranch house. That should push prices down.

The only question is how severe the spike in interest rates will be. The key metrics are likely to be the amount of debt the U.S. needs to finance (at this rate, a hell of a lot) and the performance of the dollar, which has been poor.

Individually and as a nation, we’ve been financing our comfortably lifestyle for 40 years using foreign capital. Just think what would happen if the rest of the world suddenly wasn’t interested in investing here anymore.

On the other hand, it’s possible foreign investors could get burned while the U.S. economy comes away scot-free. This happened in the 1980s and 90s when Japan invested heavily in U.S. commercial real estate and bought out many large American companies like Universal only to sell them a few years later at a huge loss.

I’m not predicting doomsday. Americans are a free and diverse people; this translates into supreme resiliency for our economy. There’s never any telling just how it will reinvent itself. Who would have predicted the demise of the manufacturing base, the efficiency of the service sector that would supplant it, or how things like the internet would pop out of nowhere to revolutionize business?

Final message: it may not be smooth sailing for the housing market over the next few years, but don’t bet against the U.S. economy in the long term.

Mathew Emmert’s commentary Housing Still Frenzied is a good read. I agree with most of what he says, but there were two glaring omissions.

First, in the “Equity Schmequity” section, he misses the point of people’s argument when they say owning is superior to renting because you build equity. There are two ways to build equity in a home. One is by paying down the principal balance. As he noted, that doesn’t happen until many years after inception. The other way is through price appreciation of the home itself. In the last few years, most major metropolitan areas have seen unprecedented price spikes. That’s where most people’s equity comes has come from.

While I don’t believe this can continue, over the long term home ownership has been like equity ownership–they’ve both trended upward at a good clip, especially if you live in the right area.

That brings me to the second thought. At the end of the article he mentions several housing markets he has concerns about. Boston, New York, Washington DC, etc. I was astounded to see that Southern California wasn’t on the list!

I live in Irvine. Certainly a nice area. But let me tell you my story. I bought my condo in 1993 for $121,000. For that I got 978 sq ft, 2 bedroom, 1 bath, no garage, no a/c, no heat, and no yard. (see photos) In 1997 it was appraised at $90,000. Today an exact comp sells for more than $300,000. I paid my original $90,000 loan down to $85,000 then refinanced at $130,000 to pay a big tax bill. This means I’ve lived in my house for free for a decade. My mortgage payment, property tax payments, and HOA dues have all come back to me in increased equity.

My friend who lives just a few miles down the road bought his home there in 1978 for something like $23,000. He sold it recently for more than $700,000. He said the same thing–”hey, I’ve lived here for free for a quarter of a century!” He is not unique in any sense of the word.

The Southern California real estate market is truly out of control. Prices in my area have gone up as much as 300% in the past six years (sound like any other market we know?). During that time, traffic gridlock has increased dramatically. The schools are worse than ever. The state deficit is worse than ever. The business climate is worse than ever. So what accounts for the huge increases?

Yes, a lot of people are moving to Southern California, but it’s mostly poor immigrants and workers from areas where homes don’t cost half a million dollars. So who’s buying all these homes? Low interest rates can’t account for all of it. I just don’t understand how people can afford these home prices. Frankly, the property tax on a typical detached home these days is enough to give me nightmares. 1.25% of $500,000? No thanks.

I predict a major reduction in home prices in places like this. Personal bankruptcies and consumer debt at an all time high. Housing outlays at at an all time high when considered as a percentage of income. Savings at an all time low. It doesn’t take a genius to see what’s in the crystal ball.

I’m surprised the other shoe hasn’t already dropped. On the other hand, with the economy improving, the worst should have already happened. But I’ve noticed that prices in the housing market don’t move in lock-step with the rest of the economy. Prices in California bottomed out in 1997, and the economy was healthy at that time. They also hit a high back in the early 1990s when George H.W. Bush was losing the election to Bill Clinton over the economy.

Anyway, back to today. This market is a goldmine for some people. Those moving from Socal to Iowa, for example. Or older folks who are moving downward in the market now that the kids are out of the house. Retirees moving to less expensive areas. That sort of thing.

The good news is that for those who are observant and patient, when the market does turn, they’ll gain a lot of leverage and have their pick of many fine homes simply by virtue of being on the buyer’s side of the table. My advice (not that anyone asked for it) would be to keep cash on the sidelines, keep your debt low, and wait. Markets go up and they go down. When you’re purchasing an asset of such high value, a little market timing makes sense. Especially when the signs of excess are so clear.