Recently in the Great Housing Bubble Category

As I have said before, I hate doing my yearly tax form because it is so complicated. Consequently I have been in favor of a much simpler tax system, ie one without all the loop holes and deductions and credits. I dont see why the federal tax is not as simple as sales tax.

Having said that, I never expected to see it change so I was surprised to see Obama even mentioning the largest tax deduction: home mortgage.

I think the mortgage tax deduction is a bad idea but I never expected anyone to be able to touch it. By saying we need the money and the rich can afford it anyway, he is able to touch it. Nice.

Think about it. Who does the mortgage deduction really help? It helps banks. It tricks you into thinking you can afford a bigger house while at the same time raising house prices. Do you really need an incentive to buy a house? This interest deduction has gotten twisted up in our debt-society brains.

Reading the comments about the article though, I am reminded of my fellow Americans and their confused thinking. People that think it is communist to cut a tax deduction and fail to recognize that they are asking the government to help them buy a house. And all the people that worry about millionaires and who clearly arent.

Ironically, if this crisis is bad enough, it could allow us to restructure the government significantly. Simplify tax laws, remove sacred cows like the farm subsidies and actually get the "small government" Republicans are so fond of saying they want. We could even revitalize American business by removing the burden of health care from companies.

There is so much potential here and common ground yet you would never know that based on the public rhetoric. As a country, we have decided we are two teams in a football game and we have to fight any change on principle, often without even thinking about it. It is silly.

It has been weeks since I watched the Sunday morning news shows.

As I listened to the crew complain about Obama, the economy and Nancy Pelosi, it just struck me. What a bunch of wealthy, Baby Boomer dreamers. George Will and Sam Donaldson? What planet do they live on?

I am sorry but the problem with the economy is not that Obama needs to be more positive and give us all hope and confidence.

The problem with the economy is that for the past 8 years, the President and the Republicans dug a titanic financial hole in the ground. As they were living it up and reveling in their own short-sighted greed, they either sat idly by or actively contributed to creating the largest financial mess in history. Before we can move forward, someone is going to have to fill that hole back up again.

Instead we are borrowing more and more. $2T for 2009 alone. We are going to be setting debt to GDP records as we match the bad 1980's and then WW2 levels.

And here we are with the professional news media on TV telling Americans that all we need is a little confidence and to start spending again. It is so shallow and brazen you almost have to laugh. There is a lot of good information out there on what has been happening but you have to seek it out because the main streamers dont seem to know much of it.

People cant start spending again because they have been spending money they dont have for the last 15 years. Before we can really start spending again, we have get past the big debts we have already accumulated.

And its not just us. We exported our debt binge to every country around the planet. The stock market and the talk show hosts dont seem to read the paper. All I see is bad news, everywhere. Russia, China, Venezuela, Mexico, Brazil, Hungary, Iceland, Cambodia, Australia...

Life goes on but there is no guarantee it will be the life we knew or the life we want. (If I was a betting man, I would say it wont be either.)

I don't know what the future will bring but it is deeply disconcerting. When lots of people are unemployed and worried, it makes people stressed, angry and ultimately irrational and violent. When countries struggle with mass unemployment and fear, extremist politicians tend to get elected and they tend to start wars.

And the worst part of all this is that we did it to ourselves. Happy Sunday to you.

I have been marveling at how resilient housing prices have been here in Seattle.

Looking at incomes, housing prices are way outside of their historical averages due to the bubble-economics so I expect them to fall. But all I see are empty properties -- a LOT of empty properties -- for sale at bubble prices.

I know this is human nature. People wont drop the price unless they are forced to. So what will force people to take a loss and when will it happen?

Although we have been looking at single-family homes, I have noticed the huge supply of condos, specifically new, luxury condos. No one is going to purchase those condos and they are too expensive to rent. Why are they still being built? What will happen to them?

Here is the first article I have seen that provides some explanation - interest reserve provisions.

Back in February of 2008, we tried to purchase a house in Bellevue. We called it the "blue house". It was an older dare I say run-down house in an older neighborhood. The seller thought it was worth a lot more than I did so we didnt get the house.

The thing that stuck with me though was the neighbors. We met a few of the neighbors and I think about one of the couples from time to time. They thought the asking price was a fair one because they had just paid the same amount for a smaller house a few blocks away as an investment property.

The husband was an engineer. They were well educated and had steady jobs and were raising kids. These were people who were fully capable of doing math and showing some common sense. I get very nervous when I meet people like this who just bought "investment" properties.

I tried to delicately ask: Is the rent on that house enough to cover the mortgage?

They were happy to talk about it. The rent was not covering the mortgage but that was ok with them. "It would pay off in the long term."

I think about them from time to time.

I wonder if they have figured out by now that a short-term loss is never a long-term gain in real estate.

If you are starting a business, you invest money up front and expect a loss until your revenue grows enough to make your money back. But that model only works win a business where you get revenue growth which is not how real estate works.

With real estate, you pretty much know from the start what your revenue will be and if it is less than your expenses there will never be a long-term gain. You are basically buying a bankruptcy which is why its so important to stick with properties that are priced to cash flow.

Yes, from time to time I think about that family and the thousands like them.

How long can they keep it going?
How long before they want to get out and cant?
How long before they are forced to get out or go bankrupt?

And it wasnt just individuals. Lots of "professionals" got caught up in the same problems with their own investments.

what do you do when income is less than expenses?

First you try to raise your income but that is hard to do in rental property.

Generally there is a lot of supply out there. If you jack up prices on your tenants, you a) piss them off and b) push them into moving. (That's what happened to us.)

If there are a lot of rental choices out there, the tenants leave and it will be hard for you to replace them. So you drop your prices or offer intro rates to fill your unit. That is the time when you decide ANY money is better than no money.

If you cannot solve the problem by raising income, you cut expenses. You take your rent checks and you spend as little as humanly possible. The first thing you cut is the stuff people wont notice immediately - maintenance and repairs. Then you cut management and staff.

The result for renters is more problems and less service.

A friend of mine is renting the bottom unit in a "luxury" building. Her unit has been flooded twice. First time a toilette backed up in the unit above her. The second time the unit two levels above had a pipe freeze and burst. Instead of wrapping the pipes, management had to deal with damage to two apartments and storage units.

I would expect to see a lot of problems like this at larger apartment complexes as well as a lot of desperation to fill units because there are a lot of new units coming on the market.

If things are REALLY bad, you cut your biggest expense: your creditors. You take the rent checks and you stop paying your mortgage.

Its been a few months now and there is a steady stream of stories about renters who paid their rent and end up getting evicted because their landlord didnt. It is sad but I would expect to see even more of it in 2009.

And I expect to see problems in commercial property too. Just this last week the WSJ warned of a huge wave of commercial property defaults on the horizon. I would expect to see problems with any property that changed hands in the past 2 to 5 years.

Its funny to think back 6 to 9 months ago and look at what people were saying about investing in real estate and economy in general. What a different world it will be in 2009.

One of the most frustrating things about this financial "crisis" is that there appears to be no one responsible. It seemed like a day after 9/11 we were invading someone's country and smoking them out of caves.

But now we are in the throes of the worst global financial meltdown in history and no one saw it coming or could have prevented it?

Well plenty of people saw this coming and there are plenty of people to blame, some of them very public. This NYT article is a start although the comments on Big Picture may be more informative.

Taking Hard New Look at a Greenspan Legacy

By PETER S. GOODMAN

October 8, 2008

New York Times

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

For many years the auto industry has had more manufacturing capacity than it needs to meet demand and that situation has only increased as other countries (Germany, Japan, Korea, India, China) create their own domestic industries. With overcapacity, the industry has pushed sales through advertising, fashion and creative financing. That “must have” SUV for safety kind of thing.

With this financial crisis, things are changed.

Car manufacturers can no longer afford to finance the system we were used to, in particular car leases. The end of car leases is huge. It’s a bombshell. Car financing was just about the only thing in the industry that was profitable and now its gone too.

Demand for cars is going to plumet. If American’s are forced to actually purchase cars, there will be fewer new car sales and more used car sales. There will also be fewer sales overall as people realize that the car they already have is good enough.

Car dealers are already going poof so when will we see the first American car manufacturer declare bankruptcy and which one will it be? Chrysler? Ford? GM?

Frankly, the world can live without any of them. Our lives would be fine if all cars came from Toyota, Honda, VW or BMW. All those companies can make small cars profitably and most of them have hybrid technologies. Moreover there just isn’t enough food to go around; we are all better off with fewer healthy companies than more sickly ones.

But this is an election year and Democrats are about to control the White House and the Congress. The only things Democrats like more than Fannie Mae is the UAW and labor unions.

The Big Three are begging for money. First they needed billions to invest in cleaner car technology. Now they need billions to stay alive.

We threw hundreds of billions of tax dollars at the banking industry. Will we throw another hundred or two at the auto industry? To save American jobs? To save our pride?

Will we throw a Socialist lifeline to our once proud symbol of American Industry or will we ask what they did with 50 years of huge profits and why they didn’t prepare for this obvious outcome? My guess is they will get the lifeline.