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ufojoe

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: April 25, 2007, 06:58:16 PM

http://money.cnn.com/2007/04/09/real_estate/shiller.moneymag/index.htm

Shiller: Mr. Worst-case scenario

Robert Shiller called the tech-stock crash just as the Nasdaq peaked. But he is also the expert on the real estate market. And where does he think it's headed now? Uh-oh.

Money Magazine

By Jason Zweig, Money Magazine senior writer/columnist
April 12 2007: 6:06 PM EDT

(Money Magaine) -- Robert Shiller is worried about your home's value, and that's not good. A finance and economics professor at Yale, Shiller proved he could see a crash coming with his book "Irrational Exuberance," which forecast the end of the 1990s stock bubble and hit bookstores in March 2000 - almost to the day the Nasdaq started to collapse.

Today, Shiller believes homes are roughly as overvalued as stocks were then and, once again, he's worth listening to.

A research company he co-founded, Case Shiller Weiss, created the definitive index of housing prices. A newer venture, MacroMarkets, designs ways to hedge against risks like falling home values.

In short, no one else knows the history - and perhaps the future - of U.S. real estate prices better. Shiller spoke recently with Money's Jason Zweig.

Question: What caused the stock bubble, and why did it end as it did?

Answer: Some sociologists talk about collective consciousness. We humans evolved to be very closely linked, and our minds focus on the same ideas. Those [ideas] get reinforced because we hear them all the time.

Back in the late 1990s, you kept hearing that you had to stake your claim on the Internet or you'd miss out on the future. No one cared about the present. Then something happened around March 2000. There was an acceleration of public talk about doubts. You could no longer declare at a **CENSORED**tail party that Internet stocks were going up. Such statements had become embarrassing - and just like that, word of mouth changed.

Embarrassment is a powerful emotion.

Question: Is that about to happen in real estate?

Answer: It doesn't seem like we're there quite yet. But this is the biggest boom in housing prices since, well, ever. Nothing seems to explain it, and nobody forecast it. It seems to me...wait a minute. Please don't quote me as forecasting the markets.

Question: Okay. What you're about to say is not a forecast.

Answer: Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it'll go up. It's the easiest way to get rich.

Question: So how rich can you get on real estate?

Answer: From 1890 through 1990, the return on residential real estate was just about zero after inflation.

Question: Excuse me? That's all? Hasn't it been higher lately?

Answer: Since 1987 it's been 6 percent [or about 3 percent a year after inflation].

Question: So real estate doesn't go up roughly 10 percent a year?

Answer: It can't be true that homes rise 10 percent a year. If they did, in the long run no one would be able to afford a house.

Question: Let me grab a calculator. If real estate really rose 10 percent a year, a $25,000 home in 1957 should be worth roughly $3 million now.

Answer: And that flies in the face of common sense. In fact, I'm inclined to think there's a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end.

Question: All right. We won't call that a forecast either. So how should people think about their home as an asset?

Answer: Avoid concentration of risks. You need a house, but I would avoid a second one - or at least avoid an outsize house. Over-investing in real estate now would be a recipe for disaster.

Question: You also write about the risk to human capital. What's that?

Answer: What you're trying to do is to invest in skills that somebody else will want to pay you for. Let's say you want to work at Bethlehem Steel. That would have been a good idea in the 1950s, not so good by the 1970s. The world went the wrong way on you.

Question: How can you manage that risk?

Answer: I used to coach children's soccer, and I would tell my players, "Stand away from the pack, and sooner or later the ball will come to you."

In your career choices too: Get away from the pack. Also, you associate your home country with safety. But the rest of the world is pretty peaceful too, on average, and the average is all that matters.

I think relatively few [Americans] are getting away from the pack, investing more outside the U.S. than in.

Question: How are you investing now?

Answer: I'm probably a little over 60 percent in stocks, almost all of it outside the U.S. I have a lot of cash. And I've been reducing my exposure to real estate. It may be at the end of a cycle.

JavaBuc

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#1 : April 26, 2007, 10:12:12 AM

I think everyone already realizes there will be a huge crash coming soon.

joedav01

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#2 : April 26, 2007, 11:26:49 AM

I think everyone already realizes there will be a huge crash coming soon.

Crash, no.  Continued slow down, yes.  But, the market can pick back up in a hurry.


BucsFan1976

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#3 : April 26, 2007, 12:27:48 PM

I wouldnt be surprised if there were a stock market crash in the next 6-9 months. The market cant keep hitting these highs for much longer. If that happens it could take the real estate market with it. 

mjs020294

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#4 : April 26, 2007, 01:10:08 PM

Property market crashes are fairly rare for several reasons:

1 – People need houses, you have to live somewhere.  Stocks are something for the future, a home is here and now.

2 – Supply and demand.  The population in practically every country in the world rises, and the US is not immune to that. 

3 – Builders will slow down construction and sit on the land when the market is slow.  This will effect supply and demand.

4 – Interest rates are still low and they will remain that way for the foreseeable future.

5 – Property prices are still not that high.   In the UK the average price is $380k, in the US it is around $250k, and salaries are much higher here.

6 – Building costs have risen significantly, you can’t build a house for much cheaper than the resale values. 

7 - The building industry will continue to drive prices up once the surplus stock is under control.

8 - With a weak dollar the US is also attractive to outside investors, especially Florida.  Supply and demand again.


The market will stagnate for a year or two mainly because the insurance industry is in a mess and the property taxes need adjusting.  If interest rates remain low (under 8%) and the insurance/tax issues gets resolved we could actually see prices rising within two or three years.

Sorry Java you can wish for a "huge crash" all you want but it isn’t going to happen.  If we did have a significant crash it would mean the economy was in a very bad shape and that isn’t going to help you get a decent job in Tampa.




JavaBuc

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#5 : April 26, 2007, 01:27:59 PM

Sorry Java you can wish for a "huge crash" all you want but it isn’t going to happen.  If we did have a significant crash it would mean the economy was in a very bad shape and that isn’t going to help you get a decent job in Tampa.

Who says I need a job?   If prices crash enough, I can buy a house and just kick back.  LOL!

mjs020294

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#6 : April 26, 2007, 01:35:00 PM

Sorry Java you can wish for a "huge crash" all you want but it isn’t going to happen. If we did have a significant crash it would mean the economy was in a very bad shape and that isn’t going to help you get a decent job in Tampa.

Who says I need a job? If prices crash enough, I can buy a house and just kick back. LOL!

The cost of living in Tamps is fairly high these days, I hope you have over $1 million in cash to buy your house and live for a while.   Our mortgage accounts for less that 10% of our income, and the cost of living has bitten us recently.  If you buy your home with cash you will still need $3k a month to live a meek existence.


ufojoe

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#7 : April 26, 2007, 01:41:45 PM

$3K a month? For what? Curious about that one, MJS.

Jack In The Box has 2 Tacos for $1. I can live off of them if needed.

JavaBuc

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#8 : April 26, 2007, 01:45:05 PM

[you will still need $3k a month to live a meek existence.

That's 36k a year!   Isn't that higher than the average salary in Tampa?    LOL!   

mjs020294

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#9 : April 26, 2007, 01:50:15 PM

$3K a month? For what? Curious about that one, MJS.

Jack In The Box has 2 Tacos for $1. I can live off of them if needed.

Based on the type of house Java is looking for:

Property tax = $650 ($8k a year for a $350k home)
Home owners = $250 ($3000 a year)
Electric = $200 ($2400 a year)
Phone/Internet/Cable = $150
Water = $50
Community Fees = $100 (most newer subdivisions are more)
Bug/Lawn Chemicals/Service = $100
Gas (car) = $200

That totals up to $1700.   Add the cost of buying/servicing a car, a little food and you will be pretty close to $3k.  If you want to actually do anything worthwhile like Golf or Scuba then the monthly budget really gets out of control.


ufojoe

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#10 : April 26, 2007, 01:51:28 PM

Now I don't feel so bad renting for $2K+

mjs020294

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#11 : April 26, 2007, 01:52:36 PM

[you will still need $3k a month to live a meek existence.

That's 36k a year! Isn't that higher than the average salary in Tampa? LOL!

Average salary means nada, it’s a statistic that takes account of everyone.  We have a hell of a lot of people on very low earnings that drag the average down.   The average starting salary for a graduate is over $36k, and I presume you are a skilled educated person.


ufojoe

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#12 : April 26, 2007, 01:53:13 PM

http://www.pennlive.com/newsflash/business/index.ssf?/base/business-73/117742478757210.xml&storylist=business

Existing home sales plunge in March

4/24/2007, 5:05 p.m. ET
By MARTIN CRUTSINGER
The Associated Press       

WASHINGTON (AP) — Sales of existing homes plunged in March by the largest amount in 18 years, reflecting in part rising troubles in the subprime mortgage market.

Analysts cautioned that tougher approval standards by lenders in response to the increase in mortgage delinquencies will depress sales further in coming months. They said a rebound in housing may not occur until 2008.

The National Association of Realtors reported Tuesday that sales of existing homes fell by 8.4 percent in March, the sharpest drop since a 12.6 percent plunge in January 1989.

The decline, which was three-times what had been expected, pushed sales down to a seasonally adjusted annual rate of 6.12 million units, the slowest pace in nearly three years.

The drop, which followed three straight months when sales had risen, was blamed in part on bad weather in February which depressed house hunting in much of the country after a string of warmer-than-normal months had pushed sales higher.

Existing home sales are not counted until the deal is closed though contracts signed in February do not get counted until March.

But analysts said the severity of the decline showed that factors other than weather played a part.

They said troubles in the subprime mortgage market, which supplied loans to borrowers with weak credit, was starting to have an impact on sales. Potential buyers are having more trouble getting loans as lenders tighten standards.

In addition, because of a rising number of mortgage delinquencies more homes are being dumped onto an already glutted market. RealtyTrac, which follows mortgage foreclosures, reported that foreclosures surged by 47 percent in March compared to a year ago.

The Realtors' report said that with sales faling, the amount of time it would take to exhaust the existing inventory of unsold homes at the March sales pace rose to 7.3 months, 30 percent longer than a year ago.

The glut of unsold homes depressed prices further with the median home price dropping for a record eighth straight month to $217,000 in March, down 0.3 percent from the median sales price a year ago. The median is the point where half the homes sold for more and half for less.

"The number of homeowners trying to unload their properties is still so ridiculously high that pressures on prices will likely continue," said Joel Naroff, chief economist at Naroff Economic Advisors. "How much lower the housing market can go is unclear, but it is not likely that we have seen the bottom."

Sen. Charles Schumer, chairman of Congress' Joint Economic Committee, said that the weakness in existing home sales underscored the need for action to help borrowers at risk of losing their homes.

"With a brewing storm of subprime mortgage foreclosures on the horizon, the quickest way to instill more confidence in the overall housing market is to curb the wave of foreclosures," Schumer, D-N.Y., said in a statement.

David Lereah, chief economist for the Realtors, said he didn't expect a full recovery in housing until 2008. He predicted that sales of existing homes would drop by about 3 percent this year with the decline in sales of new homes an even steeper 15 percent.

"The negative impact of subprime is considerable,' he said.

He said that the median price for homes sold in 2007 would fall by 1 percent to 3 percent, which would be the first price decline for an entire year on the Realtors' records, which go back four decades.

There was weakness in every part of the country in March. Sales fell by 10.9 percent in the Midwest. They were down 9.1 percent in the West, 8.2 percent in the Northeast and 6.2 percent in the South.

The steep slump in housing over the past year has been a major factor slowing the overall economy. It has subtracted around 1 percentage point from growth since mid-2006.

Many analysts believe the serious slump in housing is the result of a speculative bubble bursting after home sales set records for five straight years. The boom years triggered a rush of investors into the market who pushed demand higher by buying second homes in hopes of reselling them for quick profits.

Wall Street had earlier hoped that the weakness in housing might convince the Federal Reserve to start cutting interest rates, but Fed officials continue to signal that their greater worry remains that the slowing economy will not bring inflation pressures down quickly enough.

___

On the Net:

Existing home sales: http://www.realtor.org

mjs020294

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#13 : April 26, 2007, 01:55:41 PM

Now I don't feel so bad renting for $2K+

Renting is fine in the short-term but you better have a boatload of investments for your retirement.  If you buy the mortgage goes down and disappears eventually, but if you rent it just keeps rising.


mjs020294

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#14 : April 26, 2007, 02:07:40 PM

He said that the median price for homes sold in 2007 would fall by 1 percent to 3 percent, which would be the first price decline for an entire year on the Realtors' records, which go back four decades.

WOW.....that is a bad crash.   ::)

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