A bunch of recession-proof yahoos like me who’ve been saving to get into (or back into in my case) the real estate market? I just don’t see today’s global market having depressions short of despotic government control.
Looks to me like it has affected you (by reducing your net worth by some $60,000.00). That’s $60,000 you (and others similarly situated) can no longer access in the event of, say, a medical emergency.
For others, that loss of equity may prevent refinancing credit card debt. Which could lead to credit card default. Which could lead to bankruptcy. And also put a stop to any spending by such consumers. Etc.
To be sure. Just like the money I’ve ‘lost’ in my investments this year (which is probably more). However, when you are in a bubble you have to expect it to pop at some point. Frankly my house wasn’t worth what it was being appraised at last year…it was inflated due to the market. So…I would have been a complete fool to count on that bubble going on indefinitely.
Luckily I didn’t sell my house at the inflated rate and then go out and buy another house (or several) as investments to attempt to quickly turn them around and make MORE money (I have a friend who, unfortunately, has tried to do just that in the Phoenix area…and HE is going to be hurting big time from all of this).
I knew the bubble was going to break at some point in the dot com era…I had been predicting it to friends for a couple of years before it happened. Unfortunately, knowing that, I was still heavily invested in Williams Communications stock (they bought out the company, CNG, that I had worked for previously and in which I had a ton of stock). When their IPO initially started it looked like a really good thing…I was vested in my stock from CNG and it carried over to Williams when they bought us out. Additionally because I was vested from CNG they allowed us to buy a ton more stock at below the IPO price…and initially at least I became ‘rich’ almost over night (my CNG stock was already worth a tidy sum. A smart man would have sold out when CNG was originally sold). Unfortunately things changed in the blink of an eye and my stock went from something like 49/share to (a final bottom price of) something like .25/share when Williams Communications ceased to exist. I think I ended up with a fire sale check of something like $60k…you can do the math.
So…I got burned. Despite knowing it was coming. Well…same thing with the current housing bubble bursting. A lot of people have been predicting for a long time that this bubble would burst. And now it has. It will effect those folks who took a risk and now are going to pay the price. It will have an impact on others who just wanted a house but knew they couldn’t afford what they were buying. As with the dot com bubble burst it will ALSO have an impact on the economy as a whole…which means it will affect a wider circle than just those at the pointy end of the bursting bubble. Myself, I’m not really affected. Oh, the value of my house has dropped $60k as you say…but consider.
Is it reasonable that a house should go up in value $100k in less than 5 years? I’m perfectly happy with the $40k it is currently valued at…in fact, I wouldn’t be surprised if THAT readjusts to $20k or even $10k this year. Hopefully by the time I go to sell the place the ACTUAL (as opposed to the inflated) value of the house will be more than I paid for it. By that time I will have enough equity in the place (hell, it SHOULD be paid off in 10 more years) that even if the house sells for no more than I bought it for I’ll have a pretty nice chunk of change out of the deal. That’s how housing is SUPPOSED to work. Sort of like the market…you don’t expect that it’s always going to go up, that your investments are always going to increase. Sometimes they go down and you lose money…but in the long run my smart investments should some day equal my paper riches from the 90’s…in theory at least.
-XT
Right, and the tech stock wasn’t “worth” what it was “worth,” either. But you’re sidestepping my point, which is that a much broader swath of people are directly impacted by a loss of home value than were directly impacted by loss of dot-com stock value.
Well, unless you can predict the next 12 months or so, we don’t know that. From a purely housing perspective most people will simply ride it out. The values of their houses today will either flatten out or go down. That won’t really effect most people unless they plan to sell now. Unlike the stock thingy I mentioned in my own anecdote most people who haven’t gone out on a limb will still HAVE their homes when the prices start to go back up. So, in the long run they won’t be as affected by this aspect of it at least.
The cascading effects where people actually lose jobs and such…that is hard to predict. When the dot com bubble burst a lot of high paid IT folks lost jobs. This had a cascade effect to other related industries where there were also layoffs. Additionally businesses cut back on their budgets, especially their IT budgets. They drew down on their internal stores instead of buying or designing new network systems. And then it spread to other, unrelated industries. A recession is a recession. Most people were affected to a lesser or greater degree.
Well…same here. We don’t know what effect this one will have. We don’t know if more Americans will be affected…yet. It may be so. It may not be so. There is simply no way to tell atm. We still aren’t SURE that we are in a recession (though as I said I think we are right at the beginning of one)…we won’t know until we have 2 quarters of negative GDP (probably know next month or maybe the month after for sure). And we don’t know how this recession will progress.
-XT
Well, we can probably do this mathematically. Total losses in real estate wealth are projected to range between $2 Trillion and $4 Trillion, depending on how much values decline.
How much total “wealth” was lost in the dot-com crash? I’m looking for figures, but haven’t found them yet.
The real estate market has planty of “cascading” effects, too. Mortgage brokers, real estate agents, builders, carpenters, electricians, roofers, bankers, closing attorneys, etc., etc.
(Incidentally, it seems to me that our loss of wealth this time around is being compounded by the crash of the dollar on world markets.)
To elaborate, in 2000 we were getting 1.21 euros per dollar. Now we get 0.68 euros. So We are getting a double whammy in the world economy. While my home value and net worth go down, the cost of imported goods is rising. And fuel costs are adding to the inflationary pressure.
The US as a nation is losing a lot of comparative wealth.
:smack: Well, if I’d just read a bit further, the article says $7 trillion was lost in the market collapse of 2000.
Actually I see this as a good thing…though again, in the short term it’s likely to be painful. The dollar, as with the housing market, was inflated. Everyone knew that…and knew it needed to be adjusted downward.
Here is the thing…yes, imported goods costs are rising. And…that’s good. Because that means that our own goods will now be more competitive not just here but abroad. More jobs here in the good ole USA and all that.
Perhaps. But it was adjustments that HAD to happen. They now have and some of those chickens are coming home to roost. In the short term this will probably be bad. Long term though I think it will be a GOOD thing. And, it’s possible that this recession won’t be nearly as long or as bad as you seem to think it will be. Time will tell on that, but some of the things you are pointing to as bad things I actually see as potential good things down the road.
-XT
I’m at work so having had time to do more than just skim. Is that in adjusted dollars or actual? And is your figure for the housing in todays dollars or adjusted? It could still be as you say depending on that.
-XT
Yeah, but those people who lose their homes still have jobs. They just have to move someplace cheaper. Losing your job in a bad market IMHO is a lot worse as the next thing to happen is you lose the house too with no way to afford a new one.
Some people DID lose their homes during the dot-com bubble burstathon. I was working in Boston at the time (a big tech hub) and there were plenty of folks who heavily leveraged themselves with stock options and whatnot in order to buy expensive homes. By the time I graduated business school in 2001, the bubble was already bursting. Since the dot-com consulting firm I had worked for before B-school shed about 50% of their work force, I wisely decided to go work for a traditional Big-5 accounting and consulting firm. Of course then the whole Arthur Andersen thing happened a few months later (now it’s the Big-4). But basically a lot of my classmates had trouble finding jobs in 2001. I remember reading articles about laid off dot-com workers having “405” parties ($405 is the max unemployment benefit in NY). I myself was laid off a year later in 2002 and it took about a year before I found a steady company to work for.
Well, I do see the upsides. I’m no economist, and no prophet, so I guess I’ll sit back and watch what happens.
Some do, some don’t. A real estate crash directly causes job losses just the same as a dot-com crash. Mortgage brokers, real estate agents, builders, carpenters, electricians, roofers, bankers, closing attorneys, etc., etc.
As far as people “losing” all that wealth that their homes were “worth” last year, they haven’t lost a thing.
Fact is, their homes were never really worth that inflated bubble price. It’s true that they could have sold their home to the proverbial bigger fool, and taken that money and rented until after the bubble popped. But there are costs to that as well.
If someone bought their house at $200,000, and last year it was worth $400,000, and this year it’s worth $300,000, have they lost $100,000 or gained $100,000, or neither?
The people who bought at $400,000 and now have to sell at $300,000 have indeed lost $100,000. But the people who bought at $200,000 and are selling at $300,000 have gained $100,000. And the people who bought at $200,000 and aren’t selling have gained and lost nothing, expect perhaps a higher property tax bill.
You can’t add up the total value of all houses in the US in 2007 and add up the total value of all houses in 2008 and conclude that wealth has been destroyed. Especially since the 2008 value is still higher than it was in 2004, 2005, or 2006…just not as high as it was at the top in 2007. You can’t just look at the slump from the very highest peak to the very lowest valley and call that the loss. You’ve got to look at purchase value vs current value.
You can make that same argument about the stock market crash of 1929. Didn’t make it any less disastrous.
That’s not really true. A lot of the ‘wealth’ generated pre-stock market crash was completely fictitious. Additionally people were leveraging buying stock (that was hugely over inflated) on margin…which meant they were buying hugely over inflated stock (or stock where there really was no value in the companies they were buying it in) using assets that didn’t exist. Using stock as an asset to buy more stock…and again and again. A true house of cards.
In this case the ‘wealth’ still exists…it has just been devalued during a readjustment to the market. The houses are still there after all…they are just worth less than they were during the bubble. Property still has an intrinsic value in and of itself though…people are always going to need houses and eventually the market will readjust and find a new balance point.
-XT
As I said, the important part is the purchase price vs the current price plus various frictional costs, taxes, and so on.
If you bought the house at $400,000 and it’s now worth $300,000, that’s disasterous.
But if you bought the house at $200,000 and it’s now worth $300,000, that’s not disasterous.
The people who experienced disaster in the dot-com bubble were those who bought stocks at $100 a share and a year later those shares were worth pennies. The people who REALLY experienced disaster were those who margined themselves to buy $100/share stocks, and when those shares were worth pennies they were negative.
And so it is with the housing bubble. Even a guy who bought at $400,000 and the house is now worth $300,000 isn’t really screwed, because the house is still worth something. Except almost everyone buys houses with a mortgage, the don’t plunk down cash. So if they sold the house they’d owe $100,000, and they don’t have $100,000. So they are forced to default. And the people who took all the equity out of their home to buy second homes, and took out all interest mortgages with adjustable rates and prepayment penalties and balloon payments and so on are doubly and triply screwed.
But the guy who bought a house, saw the price run up but now the price is lower but still higher than their purchase price? That guy’s not screwed. He’s fine. He lost nothing, just like the guy who finds a violin in the attic with “Stradivarius” written on it, but when he takes it to the appraiser he’s told that “Stradivarius” was written on it with a sharpie has lost nothing. Sure, if he’d found an idiot willing to buy a violin for a million dollars just because someone wrote Stradivarius on it, then he would have made a million dollars. But he hasn’t lost a million dollars because he didn’t.
Now, if he had thown a huge party, and quit his job, and maxed out his credit cards, all in anticipation of all the money he’d be making when he sold that Strad, then he’s screwed himself. And lots of people did exactly that based on the bubble value of their homes, and they screwed themselves. But most people just continued living in their houses, and today they find that they couldn’t sell their homes for nearly as much as they could have, if only they had sold in 2007. But that’s not a loss!
I find myself wondering how much of the rise in property values was due to the dot-com bubble. People had money to spend, so you had a classic inflationary situation. And then, even when the dot-com bubble burst, many people thought of real estate as a safe harbor, investment-wise, further reinforcing prices.
If your mortgage is based on a 500 thou price and it drops to 200 ,000 .You have lost. You are making payments for a house that is not worth the former assessed value. Your payment and total payout would be much more than worth.