That was Awesome! First lets have a look at his points in the context of 8 years later, what happened?
#1 This author misses that house fundamentals in the bay area are tied to wealth generation, not income levels. A place like Facebook goes public and several thousand people are in a position to buy a million dollar house for cash. Depending on who you ask Google pays their top performing engineers in option adjusted terms between $300 and $400K/year.
#2 Interest rates are a function of economic activity, a crappy economy and you get low interest rates. At least now the Fed has stopped "promising" to keep them low.
#3 Adjustable rate loans can force the unprepared to sell their houses, that has always been true.
#4 The 'massive job loss' has been completely eradicated, the bay area is employing more people than it did in 2000.
#5 The salary declines must not be in tech, it used to be you had to be management to make $100K now you just need to be a senior engineer.
#6 The population loss from the dot com bust exodus was pretty impressive, but its also history.[1]
#7 The stock market has recovered, the NASDAQ had been adjusted, its over 4400 today.
#8 The leverage argument I didn't get. If you own a house you can't pay for you aren't "bankrupt" you are "out of a house" (that is the thing about secured no-recourse loans) and that sucks, but its not the end of the world. Lately prices have been crazy again.
#9 Shortage of first time buyers. The weird thing is that somebody is buying those houses. A lot of them are buying for the first time, so where did they come from?
#10 Speculation - I'd love to see real numbers on this today, in 2006 I could see the problem but I think the mortgage meltdown took a lot of those people out.
#11 Moving and 'retiring' is fun, and the older I get the more folks I know have taken this route. Those folks are leaving behind houses which are being bought up.
#12 Trouble at Fannie and Freddie. Boy was that spot on. I am still wondering what will be the final resolution of that mess.
#13 Love the business week quote, it was made without an understanding of the underlying mortgage mechanism that was about to embroil the world in the greatest financial meltdown since the Depression.
So it is helpful to compare this authors fears and their outlook with what actually happened in the 8 years since they wrote this. Yes there was something amiss in the housing market (the unholy love child between derivatives and sub-prime mortgages) and that did come to roost and did blow up. But once it blew up, the system has adapted. If you believe that the economy was "too good to be true" because it was being manipulated in this way, is it now more true? Less true? We will continue to see reverberations of that event in finance going forward, we appear to have avoided for now a similar melt down in commercial real estate, and many trillions of dollars have been "lost" back to the future where they belong. Good things have happened too, and eventually your grand children will read about this in their history books like we've read about the Great Depression. The tragedy would be if we failed to learn anything useful from the experience.
I know this sounds crazy, but I don't want to buy in CA because we're running out of water. There seems to be no long-term solution besides the desalination of ocean water.
There are towns[2] in California here people have paid off their mortgage, yet might not have running water in a year.
Super-expensive and massive energy requirements. Its the least efficient way to produce water. Also produces brine-salt waste which is nasty to process or dispose of.
Even these costs pale in comparison to the annihilation of the Colorado River watershed. Desalination would make California produce much more expensive; it might severely hurt the lettuce industry. But it would save the environment of Arizona and northern Baja. Also the energy required to desalinate all the water in a LA house is less than that to heat one in Detroit.
Especially since the rise of solar energy (and tokamak fusion and geothermal) means that electricity is going to mostly get cheaper and cleaner in the foreseeable future.
Exactly! And as "natural" water becomes more scarce, prices will rise, incentivizing investment and innovation in desalination, making it more and more efficient over time.
Desalination has a fixed energy cost that can't be "innovated" away. It requires at minimum, 1kwH/m^3, in a completely 100% energy efficient system (such a perfect system does not exist).
That is the base energy required to boil the water away. Chemistry isn't like software, you can't innovate away the laws of physics.
I don't think our statements are incompatible (there's plenty of room for optimizing capex, even if opex has clear physical limits), but that reminds me of one of my favorite Simpsons quotes: https://www.youtube.com/watch?v=6vxHkAQRQUQ
Speaking of water, I came across an interesting post that talks about how much water is consumed to produce common food items. For instance, to produce one banana, approximately 160 litres of water are required.
It's something few people probably ever think about these days, but when you consider not only the food consumed, but also the food wasted every-day and extrapolate these figures onto the amount of water required to produce that food it really awakens you to the extreme demands placed on the world's water supply.
Articles like this should have "expiration dates." Everything in there was true at the time, but past performance is not always an indicator of future performance.
Right. It only becomes true when prices soar very very quickly. It's been my experience that rents stabilize with buying cost over the course of a couple years. For example, in the article:
> It is possible to rent a good house for $1800/month. That same house would cost about $700,000.
That situation is no longer true. That situation only became true in the mid-2000s because that $700k house cost $350k the year before. The landlord is in no hurry to bump his rent to $4,500/month because it's not costing him $4,500/mo like it would if he was buying today.
The rent-vs-buy calculation is dead simple: you will never, ever pay less for your rental than it costs the landlord to own it. [Edit: but it will cost less than if you bought that same house today, generally. That's why you can typically rent in a better neighborhood than you can buy in]. That means as sales prices increase, rents increase. Then add demand on top of that, as demand increases so does price.
(Obviously there are other things to consider to determine if owning is right for you, but I'm talking in an theoretical world).
Interesting that two years before the main crash was triggered, this article went down and identified almost all of points that led to it from a housing perspective by looking at one of the more extreme housing markets in the US.
- Prices disconnected from fundamentals
- Risky "home equity loans"
- Extreme use of leverage
- Surplus of speculators
- Trouble at Fannie Mae and Freddie Mac
I wonder whether similar "canary in the coal mine" approaches could be used for other large market or societal shifts in the US?
Agree with most points, except Fannie Mae and Freddie Mac had their smallest market share at that time, as private lending was taking market share (and as we later found out, was driving the subprime lending).
Not sure why you're focussing on "whites," but salaries for those who would normally be working jobs at more stable companies (companies that would survive a tech downturn, and/or companies more than 5 years old) are still high enough for them to afford living in SF.
Interesting to note that Zoning is never mentioned.
In 2006, housing was constrained by "Nobody is making land." (#8 in the Who Disagrees section). Now it is somehow "zoning" that prevents housing from being built, and availability of land is not an issue but rather ability to use it. A pretty amazing perception/rationale change.
#1 This author misses that house fundamentals in the bay area are tied to wealth generation, not income levels. A place like Facebook goes public and several thousand people are in a position to buy a million dollar house for cash. Depending on who you ask Google pays their top performing engineers in option adjusted terms between $300 and $400K/year.
#2 Interest rates are a function of economic activity, a crappy economy and you get low interest rates. At least now the Fed has stopped "promising" to keep them low.
#3 Adjustable rate loans can force the unprepared to sell their houses, that has always been true.
#4 The 'massive job loss' has been completely eradicated, the bay area is employing more people than it did in 2000.
#5 The salary declines must not be in tech, it used to be you had to be management to make $100K now you just need to be a senior engineer.
#6 The population loss from the dot com bust exodus was pretty impressive, but its also history.[1]
#7 The stock market has recovered, the NASDAQ had been adjusted, its over 4400 today.
#8 The leverage argument I didn't get. If you own a house you can't pay for you aren't "bankrupt" you are "out of a house" (that is the thing about secured no-recourse loans) and that sucks, but its not the end of the world. Lately prices have been crazy again.
#9 Shortage of first time buyers. The weird thing is that somebody is buying those houses. A lot of them are buying for the first time, so where did they come from?
#10 Speculation - I'd love to see real numbers on this today, in 2006 I could see the problem but I think the mortgage meltdown took a lot of those people out.
#11 Moving and 'retiring' is fun, and the older I get the more folks I know have taken this route. Those folks are leaving behind houses which are being bought up.
#12 Trouble at Fannie and Freddie. Boy was that spot on. I am still wondering what will be the final resolution of that mess.
#13 Love the business week quote, it was made without an understanding of the underlying mortgage mechanism that was about to embroil the world in the greatest financial meltdown since the Depression.
So it is helpful to compare this authors fears and their outlook with what actually happened in the 8 years since they wrote this. Yes there was something amiss in the housing market (the unholy love child between derivatives and sub-prime mortgages) and that did come to roost and did blow up. But once it blew up, the system has adapted. If you believe that the economy was "too good to be true" because it was being manipulated in this way, is it now more true? Less true? We will continue to see reverberations of that event in finance going forward, we appear to have avoided for now a similar melt down in commercial real estate, and many trillions of dollars have been "lost" back to the future where they belong. Good things have happened too, and eventually your grand children will read about this in their history books like we've read about the Great Depression. The tragedy would be if we failed to learn anything useful from the experience.
[1] http://www.sfgate.com/news/article/Bay-Area-is-fastest-growi...