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Tales from the Housing Bubble (August 28, 2006) 
Herewith are two stories of the Great Housing Bubble Pop, which we are
witnessing in a weird, slow-motion implosion sort of way. The first story comes from a Comcast
cable installer, who works as a subcontractor for Comcast.
In the course of a leisurely chat (no, we're not getting cable TV, or DishTV, thank you very much-- recall that I am a poor writer), this hardworking gentleman mentioned that he and his wife were backing out of the purchase of a 5-bedroom "mansion" (his word) outside of Marysville, CA, which lies far to the northeast of the San Francisco Bay Area and about 40 miles north of Sacramento. They had re-financed their North Bay home and had about $100,000 sitting in the bank, when a "helpful" relative had convinced him that the money was not doing him any good in a bank and should be "put to work" in real estate. The couple already owned a home in the North Bay, and had signed up for the new mansion when the prices dropped from $450,000 down to $350,000--a recent price reduction which occurred even before the home was completed. Upon further reflection, however, the subcontractor had decided to exit the deal before closing escrow for this simple reason: hundreds upon hundreds of nearly identical "mansions" are sitting for sale, or are under construction in the vast "desolate" (again, his word) plains surrounding Sacramento. This fellow (working six days a week by his account, and since it was Sunday, I had no reason to doubt him) had grasped the nettle, i.e. that such an astounding oversupply could only engender further price drops. His realtor, rather unsurprisingly, had suggested closing on the house and renting it out. But our man had enough moxie to know that rents--based on the lower wages--in such a distant exurb would be far below his carrying costs. His wife had cautioned him that she wouldn't rent to families with children, at which point the gentleman observed 1) this was discrimination (another sign this guy knew the realities of landlording/renting) and 2) "who else but a family with children would rent a 5-bedroom house?" To top it off, our source had been informed in a sort of legalese aside that he would be saddled with a $200/month payment for levee improvements on a nearby river. Upon being re-assured by the salesperson that "there hasn't been a flood in 100 years," our source replied, "Then it's about time, isn't it?" When I wondered aloud who had built these levees, he replied, "Exactly. I'm not doing a Katrina." This gentlemen had also pondered their initial reason for buying the house--as their retirement dream home--and concluded that the lack of nearby amenities and amusements (i.e. the subdivision was plopped in the middle of nowhere) that he and his wife would be reduced to sitting in this giant house with nothing to do but get on each others' nerves. Now here is a wise man! Our source concluded by noting that he'd told his wife that the purchase of this second home could end up costing them both of their homes. I did not think it proper to inquire if he would lose his earnest money deposit, but regardless of that loss (if any), he had clearly reached the right and proper conclusion--closing on the second-home "mansion" would be a financial catastrophe. Our second story comes from a friend who moved from the dot-bomb wreckage of Silicon Valley in 2001 to the warmer climes of Florida. He and his wife had purchased a recently built home in an upscale coastal community for about $340,000. On a recent visit to California to explore moving back (public schools were inferior, even in his community, the private school his son was attending in Florida was hideously expensive, job opportunities were thin, etc.), he mentioned that they'd pulled out $150,000 in equity over the past five years, and that the money was gone--family medical expenses, replacement vehicle, private school, etc.). A quick search on zillow.com revealed that his house was valued at about $600,000--based, of course, on recent bubblicious sales--but he reckoned $550,000 was a more accurate number. (Zillow fiends, beware.) With the $150,000 re-fi equity extraction, his mortgage was now around $450,000 (they'd only put 10% down). Our friend claimed the eastern seaboard had been largely unaffected by the big price declines hitting Florida real estate (a claim I can neither confirm nor deny), but if the value of his house were to decline to $500,000, it seemed that he was, after paying a 6% commission and closing costs, rather dangerously near the value of his mortgage. In other words, a sale of his home in the $500,000 range would net him perhaps his original 10% down payment of $34,000. Here we have two common threads: massive equity withdrawals which have either been spent or "invested" in risky real estate wheeling-and-dealing, and would-be landlords realizing that local rents cannot pay their carrying costs. Neither homeowner mentioned the elephant in the room: with prices in decline, equity extraction is a thing of the past. A lifestyle which absorbed $150,000 over five years in "free money" (the equity extracted and spent) will now have to downsize to mere income. Multiply this by millions of homeowners, and then ask: what will happen to the "healthy" U.S. economy when people can no longer freely borrow and spend huge amounts of equity? As a lagniappe, we have the looming issue of inadequate levees, not just in the Gulf states but in California. The "hasn't been a flood in 100 years" salesperson is either ignorant or confused; there have been many instances of flooding in the Sacramento River basin, up to and including collapsing levees. It is well-known in Sacramento that thousands of recently constructed homes sit in flood plains. As to whether the new owners are aware of the flooding risks--they sure give you a lot of forms to sign in escrow, don't they? For more on this subject and a wide array of other topics, please visit my weblog. 
copyright © 2006 Charles Hugh Smith. All rights reserved in all media. I would be honored if you linked this wEssay to your site, or printed a copy for your own use.
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