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How I predicted the housing market crash in 2005... Office Mate: We're making an offer on a $650K house. Me: I know roughly what you make. Did a rich uncle di

How I predicted the housing market crash in 2005... Office Mate: We're making an offer on a $650K house. Me: I know roughly what you make. Did a rich uncle die? Office Mate: No but our lender said we can afford it. Me: How much of your take home pay will go toward your mortgage? Office Mate: About 60% Me to my wife: Honey, we're cashing in our lottery ticket and leaving California.

nstart 9y ago
Happening here in Sri Lanka. Still waiting for the market crash to happen. People are spending upwards of 70% on all their leasing across housing, expensive cars, and luxury items like 65 inch TVs not to mention CC bills. Banks have started buying up debts and offering refinancing plans. Meanwhile I'm hunkering down and saving cash wondering if I'll get lucky
- Danieru 9y ago
  Sounds like the kind of situation which will crash once interest rates rise. I hope your cash is in USD or another solid currency. At this point I do not think it is a question of getting lucky, if anything you want it to keep going. Longer it goes on the more cash you have and the higher the discount rates. My worry would be that once prices crash two challenges will appear: 1. Once the crash starts there will be tons of attempts to stall the inevitable. It could be months before prices hit a true low point. 2. Credit is going to dry up. Domestic banks will not have the balance sheets to allow for further lending. What loans will be available will be hard to get and more expensive than is "fair". Which speaks to how difficult it is for consumers to benefit from conservative behavior in times of folly. Unless you save enough to buy discounted assets in cash out-right consumers buying at the bottom of the market are also buying in the context of restricted credit. For my own situation, me and my wife are buying a house here in Japan. Over here bank's balance sheets are super-healthy and banks are extending large volumes of credit easier than they would in the past. My friends and co-workers got accepted for large home loans at reasonable rates. I have studied the bank balanace sheets as part of my stock investing so I am not worried of us being in a over-credited state. In fact japanese banks home loan load has been decreasing on a percentage basis over time as old bubble era loans get paid off. Yet it appears to me that Japan is in a phase of expanding home credit. Or atleast expanding home credit to lower/younger quality borrowers in response to fewer traditional borrowers starting families and buying homes. The net result in Japan is that buying a home is a massive good deal. We were careful with the location and builder but I needed to put no effort to get a loan at an insanely low interest rate.
  - DamnYuppie 9y ago
    Problem with Japan's housing, last I checked, is that there is no resale market. This is due to their culture were they want it new so they usually don't buy used houses. Not sure if that has changed but it would be something I would want clarity on.
- nikanj 9y ago
  Hope you’re saving cash in a foreign currency.
- FreekNortier 9y ago
  Here in South Africa I am also hunkering down and saving money. People are getting behind on repaying unsecured debt at an alarming rate. I'm just concerned that the value of cash will become useless if the economy crashes. I also keep some in Etherium, physical silver and a little bit of USD.
- AlexCoventry 9y ago
  You could be waiting a while. If a government with good control over a sovereign currency doesn't want a housing crash to happen, it can forestall it for a long, long time by keeping interest rates low. People were predicting a housing crash in the US starting in 2003, and people have been predicting one in Australia for a decade.
  - brad0 9y ago
    What can force an interest rate rise? Right now I can’t afford a house and would love to know the conditions that would increase interest rates.
    - lotsofpulp 9y ago
      Defaults can cause interest rates to rise, which happen when expectations aren't met. Such as labor costs rising more than expected, causing businesses to default on their loans or shortage of a natural resource causing it's price to spike. It can then cause a chain reaction of defaults and interest rates rise to reflect the increased risk premium. Unfortunately, due to lags in the feedback loop, this is inevitable as you can never accurately predict the future.
    - AlexCoventry 9y ago
      If inflation gets too high, the government needs to find a way to take money out of the system, and raising interest rates can help to do that. Raising taxes can, too.
  - Qwertious 9y ago
    >People were predicting a housing crash in the US starting in 2003, and people have been predicting one in Australia for a decade. That's because of negative-gearing. Basically, mortgage payments are tax-deductible. So if you have a house and rent it out, then you can take the tax, use it to pay off the mortgage on the house you're renting, and not pay any tax on it at all. This, naturally, makes investment housing a much better deal than it should be, and discourages selling a house (thereby driving up housing prices, and therefore rent prices, thereby making investment housing more lucrative). It's broken bullshit. Blame the (main right-wing party) Liberal party. Sometimes I wonder whether the parties in Australia are named just to screw with Americans - the Liberal party is conservative, and the Labor Party is officially spelled with the American spelling, despite "labour" normally having a U in it, here.
pjmorris 9y ago
Similar story: Card from realtor, offering a townhouse just like mine, but for over 2X what I'd paid four years before, and 3X what they'd originally sold for six years before. Me to realtor: Is that a realistic price? Realtor: I sold one just like it for that much last week. Me to wife: Time to sell. * - Along with a pile of other reading, it was the Robert Shiller 100 year graph of the relationship between house prices and income [0] that told me trouble was coming. Ultimately, most mortgages and rents are paid out of wage income, and there's only so much blood you can squeeze from a stone. [0] https://archive.nytimes.com/www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html https://archive.nytimes.com/www.nytimes.com/imagepages/2006/...
- rubidium 9y ago
  So what do you think of where we are now in 2018 (as we creep nearer to the nearing peak of 13 years ago)? US Home Prices 1890-Present: http://www.econ.yale.edu/~shiller/data/Fig3-1.xls http://www.econ.yale.edu/~shiller/data/Fig3-1.xls
  - pjmorris 9y ago
    The intervening years have colored my perceptions. I'm uncomfortable with prices as high as they are... but it is clear from the interventions of the last ten years that the US government will pull out all the stops to keep the mortgage debt load in place. I don't know what breaks next - the 2016 election is an example of something that broke - but it probably won't first be the overall mortgage debt load.
    - SimbaOnSteroids 9y ago
      Problem is we just bailed out the ones that will need bailing out, in the form of the tax break.
    - deleted 9y ago
      [deleted]
Spooky23 9y ago
Similar story. During summer vacation in the mid 80s, a Chinese guy from Hong Kong came to our door in NYC and ask me to tell my dad that he wanted to buy our house. I took his card and said “sure”. As I closed the door he said “wait”, ran to his car and grabbed a Miami-vice style aluminum briefcase. He opened it up and said “400 thousand dollars for house, see?” Given that my folks paid like $18k for the house about 8 years earlier, that was pretty amazing. They didn’t take it and sold in the 90s for less. A few years ago it sold for $2.5M and was torn down. The replacement condos sold for about $12M
- slimsag 9y ago
  He brought a briefcase full of cash? 400 thousand dollars of cash?
  - bencollier49 9y ago
    Your question made me google the question of how much money will go into a briefcase, with this result: http://geekbeat.tv/how-much-money-will-fit-in-a-briefcase/ http://geekbeat.tv/how-much-money-will-fit-in-a-briefcase/
  - Spooky23 9y ago
    I didn't count it... I was probably 9-10 years old. It was a pretty surreal experience, honestly. I do remember that it was real, my parents talked to him, i guess he was a reasonably well known real estate guy in our area. In retrospect, it's even stranger. I couldn't fathom cold-knocking at a random house and offering the owners a suitcase of money. Double++ bizarre making the pitch to a little boy. That said, we had alot of interesting stories from that house and neighborhood, this one isn't even the strangest!
    - downrightmike 9y ago
      This is exactly what the Purple Man did in the Jessica Jones Netflix series.
      - 9y ago
JimboOmega 9y ago
Sort of similar here. A coworker said I should buy real-estate - any amount, any way I possibly could. It has to go up 20% a year, he told me. There's just something when random people who have no particular interest in investing suddenly are preaching an investment that smells like a bubble - and one close to bursting. It still took a couple of years from there, though. Maybe it's because the pyramid has nowhere else to go from there. And of course me pointing to previous real estate downturns was dismissed - it was still viewed as fundamentally impossible for real estate to lose value.
- taneq 9y ago
  Wise men do at the beginning what fools do at the end? Combine that with Sturgeon's law and if more than, say, 20% of people are doing something, it's a fad at best or a bubble at worst.
  - deevolution 9y ago
    Everything goes in cycles. Bitcoin bubble already burst, now time for the next cycle.
- tinytim69 9y ago
  Enter Bitcoin.
problems 9y ago
How much is a normal % of take home pay to go to your mortgage? I'm at about 30% and it's my only debt.
- FireBeyond 9y ago
  That is the usual number given as "responsible". And these days? A reputable bank would not even consider approaching 50, let alone 60, per cent.
  - closeparen 9y ago
    The metric is DTI (debt to income), and the magic number is 36%. However, this is pretax income, not take home pay.
    - dmichulke 9y ago
      Can you tell me why DTI should be <= 36%? Is it a fixed value of some regulation or is there a formula behind it?
      - closeparen 9y ago
        It’s a standard used by mortgage underwriters, presumably based on analysis of decades of past mortgages they’ve written and calibrated to balance their risks and rewards for maximum profit.
- 0x445442 9y ago
  The conservative rule of thumb is %25. I've stayed closer to %20 and it's allowed me to support a family of four for 20 years on one income while riding through two employment layoffs during that time. Also, rather than spending our proceeds from the sale of our home in 2005 I put it back into our new home once the market was near the bottom. The net of all of it was that I was basically able to cut about 18 years off our original 30 year fixed rate mortgage.
narrator 9y ago
How I predicted it: Started reading short seller message boards. Got deep into the weeds with credit default swaps. Found that you could actually see prices for credit default swaps on markit.com. watched priced for BBB- credit default swaps increase dramatically in early 2007. That was the signal that it was over. Got back in in early 2012 when the loan rate resets from the housing bubble all tapered off. Moral of the story: in every bubble the money is coming from somewhere. Figuring out where it is coming from will let you predict the big market turn. If you don't know where it's coming from then you probably shouldn't play with bubbles.
- vadym909 9y ago
  Where do you think its coming from now?
  - corey_moncure 9y ago
    China.
    - deleted 9y ago
      [deleted]
    - bostik 9y ago
      You may be right but without context or the background for your educated guess that comes off as a snarky flip. I would personally add Russia to the mix. The reason is simple: both China and Russia are sources of capital flux, where those with means are funneling funds outside their respective countries. Because there are, or have been, capital controls in place, those who move money out of their countries are willing to pay a premium for it. Funnily enough, there is a name for the phenomenon where actors with money are willing to pay exorbitant transaction costs in order to move funds from one jurisdictional domain to another.
      - wsinks 9y ago
        There's some sort of wit in that last comment, but it's late and I didn't get it. Capital flight?
klenwell 9y ago
This was my crystal ball: http://graphics8.nytimes.com/images/2005/06/15/business/arm3.gif http://graphics8.nytimes.com/images/2005/06/15/business/arm3... Also discovered around this time that subprime mortgage didn't mean a mortgage with an interest rate below the prime rate.
closeparen 9y ago
Only 60% of your take home for a $650k house sounds like an amazing deal in the Bay Area today... Even if I had the money, I don't think I could bring myself to pay 2-3x a sale price from 5 years ago.
aavotins 9y ago
Not US, but my wake-up call was my sister purchasing a small apartment for just 8000$ in 2002, in an industrial part of the city, surrounded by beat-up apartment houses and humungous acetone storage units. Whole place reeked of chemicals and the low price was justifiable, as "nobody wants to live there". She sold that very same flat for 80 000$ in 2006. Bought by a young couple, who's combined income was enough for 110% financing with no down payment and some extra cash left to spend. Suddenly a lot of people wanted to live there, because it was the only thing they could afford, or it was one of the last areas in the city with somewhat lower prices, thus giving way better profits when speculating. Then came 2008 and the rest is history. Taught me another lesson - never rely on savings too much, they dwindle way too fast
tiredwired 9y ago
Similar thing for me except I did it late 2004. I moved back in 2010 and now trying to decide when to sell and hit the road with the profits.

nstart 9y ago

Happening here in Sri Lanka. Still waiting for the market crash to happen. People are spending upwards of 70% on all their leasing across housing, expensive cars, and luxury items like 65 inch TVs not to mention CC bills. Banks have started buying up debts and offering refinancing plans. Meanwhile I'm hunkering down and saving cash wondering if I'll get lucky

Danieru 9y ago
Sounds like the kind of situation which will crash once interest rates rise. I hope your cash is in USD or another solid currency. At this point I do not think it is a question of getting lucky, if anything you want it to keep going. Longer it goes on the more cash you have and the higher the discount rates. My worry would be that once prices crash two challenges will appear: 1. Once the crash starts there will be tons of attempts to stall the inevitable. It could be months before prices hit a true low point. 2. Credit is going to dry up. Domestic banks will not have the balance sheets to allow for further lending. What loans will be available will be hard to get and more expensive than is "fair". Which speaks to how difficult it is for consumers to benefit from conservative behavior in times of folly. Unless you save enough to buy discounted assets in cash out-right consumers buying at the bottom of the market are also buying in the context of restricted credit. For my own situation, me and my wife are buying a house here in Japan. Over here bank's balance sheets are super-healthy and banks are extending large volumes of credit easier than they would in the past. My friends and co-workers got accepted for large home loans at reasonable rates. I have studied the bank balanace sheets as part of my stock investing so I am not worried of us being in a over-credited state. In fact japanese banks home loan load has been decreasing on a percentage basis over time as old bubble era loans get paid off. Yet it appears to me that Japan is in a phase of expanding home credit. Or atleast expanding home credit to lower/younger quality borrowers in response to fewer traditional borrowers starting families and buying homes. The net result in Japan is that buying a home is a massive good deal. We were careful with the location and builder but I needed to put no effort to get a loan at an insanely low interest rate.
- DamnYuppie 9y ago
  Problem with Japan's housing, last I checked, is that there is no resale market. This is due to their culture were they want it new so they usually don't buy used houses. Not sure if that has changed but it would be something I would want clarity on.
nikanj 9y ago
Hope you’re saving cash in a foreign currency.
FreekNortier 9y ago
Here in South Africa I am also hunkering down and saving money. People are getting behind on repaying unsecured debt at an alarming rate. I'm just concerned that the value of cash will become useless if the economy crashes. I also keep some in Etherium, physical silver and a little bit of USD.
AlexCoventry 9y ago
You could be waiting a while. If a government with good control over a sovereign currency doesn't want a housing crash to happen, it can forestall it for a long, long time by keeping interest rates low. People were predicting a housing crash in the US starting in 2003, and people have been predicting one in Australia for a decade.
- brad0 9y ago
  What can force an interest rate rise? Right now I can’t afford a house and would love to know the conditions that would increase interest rates.
  - lotsofpulp 9y ago
    Defaults can cause interest rates to rise, which happen when expectations aren't met. Such as labor costs rising more than expected, causing businesses to default on their loans or shortage of a natural resource causing it's price to spike. It can then cause a chain reaction of defaults and interest rates rise to reflect the increased risk premium. Unfortunately, due to lags in the feedback loop, this is inevitable as you can never accurately predict the future.
  - AlexCoventry 9y ago
    If inflation gets too high, the government needs to find a way to take money out of the system, and raising interest rates can help to do that. Raising taxes can, too.
- Qwertious 9y ago
  >People were predicting a housing crash in the US starting in 2003, and people have been predicting one in Australia for a decade. That's because of negative-gearing. Basically, mortgage payments are tax-deductible. So if you have a house and rent it out, then you can take the tax, use it to pay off the mortgage on the house you're renting, and not pay any tax on it at all. This, naturally, makes investment housing a much better deal than it should be, and discourages selling a house (thereby driving up housing prices, and therefore rent prices, thereby making investment housing more lucrative). It's broken bullshit. Blame the (main right-wing party) Liberal party. Sometimes I wonder whether the parties in Australia are named just to screw with Americans - the Liberal party is conservative, and the Labor Party is officially spelled with the American spelling, despite "labour" normally having a U in it, here.

pjmorris 9y ago

Similar story: Card from realtor, offering a townhouse just like mine, but for over 2X what I'd paid four years before, and 3X what they'd originally sold for six years before. Me to realtor: Is that a realistic price? Realtor: I sold one just like it for that much last week. Me to wife: Time to sell. * - Along with a pile of other reading, it was the Robert Shiller 100 year graph of the relationship between house prices and income [0] that told me trouble was coming. Ultimately, most mortgages and rents are paid out of wage income, and there's only so much blood you can squeeze from a stone. [0] https://archive.nytimes.com/www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html https://archive.nytimes.com/www.nytimes.com/imagepages/2006/...

rubidium 9y ago
So what do you think of where we are now in 2018 (as we creep nearer to the nearing peak of 13 years ago)? US Home Prices 1890-Present: http://www.econ.yale.edu/~shiller/data/Fig3-1.xls http://www.econ.yale.edu/~shiller/data/Fig3-1.xls
- pjmorris 9y ago
  The intervening years have colored my perceptions. I'm uncomfortable with prices as high as they are... but it is clear from the interventions of the last ten years that the US government will pull out all the stops to keep the mortgage debt load in place. I don't know what breaks next - the 2016 election is an example of something that broke - but it probably won't first be the overall mortgage debt load.
  - SimbaOnSteroids 9y ago
    Problem is we just bailed out the ones that will need bailing out, in the form of the tax break.
  - deleted 9y ago
    [deleted]

Spooky23 9y ago

Similar story. During summer vacation in the mid 80s, a Chinese guy from Hong Kong came to our door in NYC and ask me to tell my dad that he wanted to buy our house. I took his card and said “sure”. As I closed the door he said “wait”, ran to his car and grabbed a Miami-vice style aluminum briefcase. He opened it up and said “400 thousand dollars for house, see?” Given that my folks paid like $18k for the house about 8 years earlier, that was pretty amazing. They didn’t take it and sold in the 90s for less. A few years ago it sold for $2.5M and was torn down. The replacement condos sold for about $12M

slimsag 9y ago
He brought a briefcase full of cash? 400 thousand dollars of cash?
- bencollier49 9y ago
  Your question made me google the question of how much money will go into a briefcase, with this result: http://geekbeat.tv/how-much-money-will-fit-in-a-briefcase/ http://geekbeat.tv/how-much-money-will-fit-in-a-briefcase/
- Spooky23 9y ago
  I didn't count it... I was probably 9-10 years old. It was a pretty surreal experience, honestly. I do remember that it was real, my parents talked to him, i guess he was a reasonably well known real estate guy in our area. In retrospect, it's even stranger. I couldn't fathom cold-knocking at a random house and offering the owners a suitcase of money. Double++ bizarre making the pitch to a little boy. That said, we had alot of interesting stories from that house and neighborhood, this one isn't even the strangest!
  - downrightmike 9y ago
    This is exactly what the Purple Man did in the Jessica Jones Netflix series.
    - 9y ago

JimboOmega 9y ago

Sort of similar here. A coworker said I should buy real-estate - any amount, any way I possibly could. It has to go up 20% a year, he told me. There's just something when random people who have no particular interest in investing suddenly are preaching an investment that smells like a bubble - and one close to bursting. It still took a couple of years from there, though. Maybe it's because the pyramid has nowhere else to go from there. And of course me pointing to previous real estate downturns was dismissed - it was still viewed as fundamentally impossible for real estate to lose value.

taneq 9y ago
Wise men do at the beginning what fools do at the end? Combine that with Sturgeon's law and if more than, say, 20% of people are doing something, it's a fad at best or a bubble at worst.
- deevolution 9y ago
  Everything goes in cycles. Bitcoin bubble already burst, now time for the next cycle.
tinytim69 9y ago
Enter Bitcoin.

problems 9y ago

How much is a normal % of take home pay to go to your mortgage? I'm at about 30% and it's my only debt.

FireBeyond 9y ago
That is the usual number given as "responsible". And these days? A reputable bank would not even consider approaching 50, let alone 60, per cent.
- closeparen 9y ago
  The metric is DTI (debt to income), and the magic number is 36%. However, this is pretax income, not take home pay.
  - dmichulke 9y ago
    Can you tell me why DTI should be <= 36%? Is it a fixed value of some regulation or is there a formula behind it?
    - closeparen 9y ago
      It’s a standard used by mortgage underwriters, presumably based on analysis of decades of past mortgages they’ve written and calibrated to balance their risks and rewards for maximum profit.
0x445442 9y ago
The conservative rule of thumb is %25. I've stayed closer to %20 and it's allowed me to support a family of four for 20 years on one income while riding through two employment layoffs during that time. Also, rather than spending our proceeds from the sale of our home in 2005 I put it back into our new home once the market was near the bottom. The net of all of it was that I was basically able to cut about 18 years off our original 30 year fixed rate mortgage.

narrator 9y ago

How I predicted it: Started reading short seller message boards. Got deep into the weeds with credit default swaps. Found that you could actually see prices for credit default swaps on markit.com. watched priced for BBB- credit default swaps increase dramatically in early 2007. That was the signal that it was over. Got back in in early 2012 when the loan rate resets from the housing bubble all tapered off. Moral of the story: in every bubble the money is coming from somewhere. Figuring out where it is coming from will let you predict the big market turn. If you don't know where it's coming from then you probably shouldn't play with bubbles.

vadym909 9y ago
Where do you think its coming from now?
- corey_moncure 9y ago
  China.
  - deleted 9y ago
    [deleted]
  - bostik 9y ago
    You may be right but without context or the background for your educated guess that comes off as a snarky flip. I would personally add Russia to the mix. The reason is simple: both China and Russia are sources of capital flux, where those with means are funneling funds outside their respective countries. Because there are, or have been, capital controls in place, those who move money out of their countries are willing to pay a premium for it. Funnily enough, there is a name for the phenomenon where actors with money are willing to pay exorbitant transaction costs in order to move funds from one jurisdictional domain to another.
    - wsinks 9y ago
      There's some sort of wit in that last comment, but it's late and I didn't get it. Capital flight?

klenwell 9y ago

This was my crystal ball: http://graphics8.nytimes.com/images/2005/06/15/business/arm3.gif http://graphics8.nytimes.com/images/2005/06/15/business/arm3... Also discovered around this time that subprime mortgage didn't mean a mortgage with an interest rate below the prime rate.

closeparen 9y ago

Only 60% of your take home for a $650k house sounds like an amazing deal in the Bay Area today... Even if I had the money, I don't think I could bring myself to pay 2-3x a sale price from 5 years ago.

aavotins 9y ago

Not US, but my wake-up call was my sister purchasing a small apartment for just 8000$ in 2002, in an industrial part of the city, surrounded by beat-up apartment houses and humungous acetone storage units. Whole place reeked of chemicals and the low price was justifiable, as "nobody wants to live there". She sold that very same flat for 80 000$ in 2006. Bought by a young couple, who's combined income was enough for 110% financing with no down payment and some extra cash left to spend. Suddenly a lot of people wanted to live there, because it was the only thing they could afford, or it was one of the last areas in the city with somewhat lower prices, thus giving way better profits when speculating. Then came 2008 and the rest is history. Taught me another lesson - never rely on savings too much, they dwindle way too fast

tiredwired 9y ago

Similar thing for me except I did it late 2004. I moved back in 2010 and now trying to decide when to sell and hit the road with the profits.