Real estate

Top 2. Jul 31, 1999 7:05 PM

» Roger_Babson - Bay Area real estate prices...

Kirk, you will agree that real estate prices are rising to massive bubble levels due to persons exercising stock options and then bidding up the price of homes. The conventional wisdom is that the market in the Bay Area is reflecting robust demand and the tremendous wealth being generated in the Valley by the Internuts boom.

I take issue with the latter point. The "perceived wealth" in the form of wildly overvalued stock prices with which individuals in the Valley are using to purchase homes IS NOT BEING CREATED IN THE SILICON VALLEY, PER SE.

Instead, the wealth is being created by little old ladies in Topeka, retirees in Tucson, postal workers in Encino, and Billy Bob in Waco, all of who are virtually fully invested in mutual funds via 401Ks, IRAs, etc.

The wealth has occurred as a result of tens of millions of households emptying their bank and credit union accounts in the past 4-9 years and flooding Wall Street with hundreds of billions of dollars of savings during this time.

The credit thereafter created atop the value of the stock market is now legendary and the stuff of a spine-chilling horror classic.

The collapse in the value of the homes in the Bay Area in the next bear market will be the crash heard 'round the solar system. It threatens to utterly bankrupt counties, cities, and tens of thousands of individuals and households, making the Orange County problems of the early 1980s seem in comparison like a slow Sunday afternoon garage sale.

The mania in the late 1980s was nothing compared to the utter insanity that abounds at present. The 20%-30% loss in home values (more?) in some areas of the Bay Area and in Southern CA in the late 1980s and early 1990s will seem like a bargain in the aftermath of the crash to come.

When the massively overvalued stock market collapses (as occurred in Hong Kong and Japan), the overnight loss of home value and equity will result in the greatest real estate market bubble crash in U.S. history.

Again, contrary to the delusion that the "wealth" is being created in the Silicon Valley and thus real estate prices are justified, when Aunt Nellie and Mr. and Mrs. Jones pull their money in panic of a stock market crash, the perceived paper wealth will evaporate.

In response to the oft-posed question, "Where else should you put your money? CDs at 5%?" There won't be money to put anywhere, as it will disappear. In the case of Internuts stocks, the stock certificates will make great conversation pieces to buy for pennies in the coming years and to hang on the wall to show your grandchildren.

-- posted by Roger_Babson

Top 3. Aug 1, 1999 7:31 AM

» BillR_5 - Roger

I understand the "paper loss" that would occur in a crash, however for the crash to occur, massive selling would have to take place. My question is, where will this money go? Or perhaps, where is YOUR money going now? It seems there is no good place to park money in a crash, as even money market interest would be lower.

-- posted by BillR_5

Top 4. Aug 1, 1999 2:39 PM

» Oaktoad - where to park funds

I don't agree with RB as we have had these real estate runups in price quite a few times over the last 25 years in the Bay Area. Location is still very important in real estate, but timing is becoming an issue as well. We will see a slump, but I don't think that we well see the massive loss that RB sees. The Bay Area has been a place with high real estate prices for years due to the quality of life and the high incomes that are generated even without all the stock options.

If you believe RB then you park your money in MM funds or shorter term CDs and wait. When the prices drop as he believes they will then you scoop in and buy when the blood is running in the streets and speculators in real estate are shooting up the penisula with automatic rifles, etc.

One problem could be that RB is wrong and that if you sit on cash for the next few years you may miss out on the continuation of the great money making 90s as it goes into the "naughties" (I like this for our next decade as naught is zero and I would like to live in "naughtie one, etc).

This is one of those "you takes your chances" situations.

RB has been preaching doom and gloom for some time now. Had you been out of the market you would have lost money. He may be right at some time, the question is when... and if ever??

-- posted by Oaktoad

Top 5. Aug 1, 1999 7:42 PM

» Roger_Babson - Paul...

..., had one followed my advice, one would not have "lost" anything! One would not have participated in the greatest stock market frenzy in human history, accept that one would have been selling on strength (SOS as opposed to the mindless nonsense "WAGS"). There is a big difference between averaging out at the top to go to cash and selling stocks and going to assets that lose value. Please, get you facts straight.

As to preaching gloom and doom for a while, it is called articulating the obvious during a period of mass social manic bubble rationalization.

Stocks are discounting earnings for years to come, perhaps a decade or more, given the fundamentals for the next 5-10 years. Please don't tell me you actually believe that a NASD 100 P/E of 140+ a couple of weeks ago was/is justified by fundamentals.

Real Estate

As to the other gentlemen, who commented about Bay Area real estate prices, this is the greatest real estate bubble since the Japanese bubble in the late 1980s, prior to their demographically-induced depression, which was fed by stock market bubble values and the credit that was created atop the massive bubble. Do not kid yourself that it is just like the other real estate slowdowns. This one is coming to the end of a 35-year post-WW II, baby-boom-led boom the likes of which the U.S. may never experience again, at least not in our lifetimes.

You'll be pleased to know that I am closing on the sale of a home in Pleasanton, after selling a house in San Mateo in June.

Cash is king in a deflationary bear market and depression.

-- posted by Roger_Babson

Top 6. Aug 2, 1999 7:44 AM

» tele - See Friday's WSJ

which had an article about younger investors diversifying into bonds (most of the people profiled were internet insiders who had cashed out and wanted to be sure about not losing their newly acquired fortune ie they were also nervous about the high valuations accorded their stocks. The same argument could be made for high priced real estate. You gotta live somewhere, and if your job is in a high priced market, well that's life, but I would also be nervous about paying current prices in SF Bay Area (or in my Florida town for that matter) unless the home were not a significant chunk of my net worth ie less than 20 pct. But to each his own. Somebody posted that home prices in SF are higher because of high incomes and quality of life. Quality of life is subjective, but when only 22 pct of SF area residents have enough income to qualify to buy median priced home, this sounds more like the mania that Roger is describing (ie if you don't scrape to buy now, you'll never get in!). The priciest town in Marin County is Belvedere with median household income of about 120K and median home price of about 1.5 million. Somebody help me make the math work. I suspect the numbers are similar all over SF area. Tough for the average new home buyer to enjoy that quality of life everyone talks about when virtually every cent they make has to go into the house (down payment, mortgage, taxes, insurance, upkeep). Congratulations on your home sales, Roger!

-- posted by tele