Surviving the RE bust.

It seems like just a year ago the US media was filled with positive stories about the housing market boom. It seemed like all you had to do was buy a house or a condo in a hot US market and you’d be on the road to riches. It’s looking so much gloomier now.

MSNBC has their top business stories of 2006, with the housing slump coming in at #2 (just after Wall Street surges).

CNN Money has an investors guide for 2007 with 6 strategies to survive the housing bust where they predict that 2007 will be bad, but 2008 will be worse.

“Last year the question was whether the housing boom would slow down. Now its how bad will it get.”

1) Sellers: lower your expectations.
“As painful as it might be to realize that your house isn’t worth what you thought, asking too much in a slow market is a mistake. “Trying to get last year’s price is wishful thinking,” says Hessam Nadji, managing director with real estate advisory firm Marcus & Millichap. “Often you’re unable to sell your house, which compounds itself, and you keep chasing the market down.”

2) Buyers: Drive a hard bargain.
“North of Sacramento, Pulte Homes recently agreed to part with a 2,700-square-foot four-bedroom home for almost 18 percent off the $497,000 list price, plus an additional $8,500 in credits. “I’ve never seen anything like it,” says Lance Pagel, the realtor on the deal. “I recently point-blank asked one developer’s agent what incentives she was offering, and she point-blank answered $80,000.”

3) Consider renting.
“Economist John Talbott, author of Sell Now!, applauds the notion of renting in a market like this – even if it isn’t part of the classic American dream of owning your own home. “Maybe you don’t live to the same standards, but don’t worry about it,” he says. “If we’re talking about the chance to bank $1 million, that’s real money.”

4) Step away from the exotic mortgage.
“ARMs have traditionally been the province of wealthy and sophisticated homebuyers. During the boom, however, banks went after anyone with a wallet. As a result, a lot of homeowners out there are living under a roof they soon won’t be able to afford.”

5) shop for a rate drop
.
“In 2003 the mortgage industry originated $3.8 trillion worth of loans, according to the Mortgage Bankers Association. Next year it will hand out an estimated $2.1 trillion. “That’s nearly a 50 percent drop in volume, which means there’s tremendous pressure on company earnings,” says Doug Duncan, chief economist with the MBA. “They’re going to negotiate to get your business.”

6) Keep an eye on your equity.
“The good news, of course, is that reckless spending has kept the American economy chugging. But it has also saddled many American families with some major debt, which is particularly dangerous in a declining real estate market.”

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stucco-slushy
stucco-slushy
13 years ago

Why is the west coast getting the most negative forecast from that CNN money article? And how come they report it as if the entire country of the USA is in a housing market collapse?Isn't it much narrowly focused than that?

Freako
Freako
13 years ago

Or, as automation becomes more refined, as my previous example, it would be just as cheap for a robot to make widgets in an industrial park 10 miles away from a Walmart in Seattle as it would be to make widgets Shanghai.Automation is nothing new. While Western productivity blows away that of China in the aggregate, do not assume that their manufacturing infrastructure is manual. The benefits of vertical integration are not remotely large enough to overcome the cost structures related to manufacturing.Second, let's not get blinded by nationalistic aspects and assume that it is nation versus. That nice water proof hiking jacket may have been designed in Oregon, manufactured in China by a factory that is co-owned by an American company. The raw materials may be produced through licensed technology in Malaysia in a plant owned by a Canadian… Read more »

china hype
china hype
13 years ago

Freako, Fair questions, I was thinking in terms of vertical integration in places such as Brazil where they could mine aluminum and instead of sending ingots to China the Brazilians themselves could extrude the aluminum and further make widgets to export to Walmart type retailers, and by-pass China altogether.Or, as automation becomes more refined, as my previous example, it would be just as cheap for a robot to make widgets in an industrial park 10 miles away from a Walmart in Seattle as it would be to make widgets Shanghai.In summary, I think China’s current low wage, low cost, advantage will be challenged by advances in technology by many of its current customers.

Freako
Freako
13 years ago

Oops, forgot one.5. Exchange rates: Again, what do exchange rates have to with it. If the Yuan goes down, raw materials become more expensive locally in China, but then Chinese goods become cheaper. Since we are mostly interested in the value added manufacturing occuring in China, I don't see exchange rates having any impact on China's access to competitively priced raw materials.

Freako
Freako
13 years ago

Languge, trade barriers, exchange rates, efficiencies realized by raw material producers engaging in vertical and horizontal integration,just to name a few.1. What does language have to do with buying resources in the open market?2. What do trade barriers have to do with raw materials costs?3. I can see a case for vertical integration, but seriously where do you see it? Generally countries who are rich in resources are not great places to manufacture and vice versa. For example, Canada has ample resources and a some manufacture. Where is the vertical integration. Japan has manufacturing but no resources. Saudi Arabia has ample resources but little manufacturing. Russia is loaded with resources, but not a great producer of manufactured goods. Where is this vertical integration which will put China at a competitive disadvantage.4. Horizontal integration. I am having trouble seeing how it… Read more »

Freako
Freako
13 years ago

"Chinese" is actually about 6 different languages which are as distinct as French, Italian, etc.Yes, but unlike, say Europe, they mostly share written language. Do not underestimate the significance of this fact. Second, the central government is in my ways potent to act in ways that would make any Western world leader red with envy. But that is not to say that central authority extends into every nook and cranny. Local corruption and related discontent is definitely a problem.

betamax
betamax
13 years ago

"Chinese" is actually about 6 different languages which are as distinct as French, Italian, etc.Exactly. See link for details:http://tinyurl.com/yk7gny

betamax
betamax
13 years ago

Remember, Chinese people living in those regions were once from China.Texas was once Mexico. So what?Now, what is China missing from these 2 places?You tell us; you're the one who made the claim it would be an easy transition. Don't offer facile rhetorical questions as some kind of answer.

Anonymous
Anonymous
13 years ago

Citizens of Taiwan and China speak the same language (Mandarin dialect) whereas, citizens of Hong Kong speaks the Cantonese dialectGross oversimplification. There are many more Cantonese speakers in China proper than in HK. Mandarin is the native tongue of about 1/2 of the Chinese, although most know it as a second language to some degree."Chinese" is actually about 6 different languages which are as distinct as French, Italian, etc.There is also a division in Taiwan between the Mandarin speakers (post 1949) and the Taiwanese (Fujian) speakers (earlier), although most of the latter can speak Mandarin as well.

TheVanMan
TheVanMan
13 years ago

China facile hype said… The China factor is overplayed. Low cost producers can only cut the cost of production to a point.Currently, most of the stuff I buy is made in China. Who knows, in the near future if North Korea opens up like China does, things may well then be made there!?!

TheVanMan
TheVanMan
13 years ago

Betamax,So why haven't they sold them to their own already? It's easy to say, harder to happen when most people there are still 3rd-world poor,You only need to see how Taiwan and Hong Kong are doing compared to China. Remember, Chinese people living in those regions were once from China.Now, what is China missing from these 2 places?

TheVanMan
TheVanMan
13 years ago

realestatenevergoesdown said… The China “miracle” is an old black and white movie, in a loop re-run.That's because, many many moons ago, there was only 1 China. After that, they were split into 3. The Republic of China, Taiwan and Hong Kong. You were probably seeing 3 re-runs, but they are not the same. Hong Kong was annexed to the British for 99 years as repatriation for the Opium war.Taiwan was created because, Cheng Kai Shek's army and supporters got booted out by the People's Army in a civil war.For many years, the wealth from China actually came from Hong Kong. HK was then used as a primary gateway for trades into China before the handover in 1997 and so did Taiwan. Nowadays, Shanghai is gradually replacing its place. It's not too surprising that foreigners confuse Hong Kong or Taiwan as… Read more »

china facile hype
china facile hype
13 years ago

Freako:Why? Logistical reasons?Languge, trade barriers, exchange rates, efficiencies realized by raw material producers engaging in vertical and horizontal integration,just to name a few.

Freako
Freako
13 years ago

"But the other countries will have cheaper raw material costs."Why? Logistical reasons? Other than for transportation factors, the location of resource extraction need not be the location of processing need not be the location of manufacturing finished goods.

Anonymous
Anonymous
13 years ago

Forgive me, but I'm starting to get sick of china this, china that. This is not directed at the posters on this blog, but at everyone who thinks that china is going to save us from our profligacy. For the last few years, more debt has equaled more wealth. Take out the largest loan you can on the nicest house in the best neighborhood and YOU WILL BE RICH. We are the US of the north, a debtor province with absolutely no industry. A negative savings rate is not sustainable- who is going to bail these people out? We rely on Asian investment to keep this charade going and when the music stops it's going to hurt us all.

China facile hype
China facile hype
13 years ago

The China factor is overplayed. Low cost producers can only cut the cost of production to a point. China will do fine for a while yet, but eventually a robot producing door hinges, in an industrial park in Russia, Brazil, Peru, or Mexico, can produce door hinges, and underwear, just as cheaply as a robot in China.But the other countries will have cheaper raw material costs.(yes the tooling can be switched very easily to produce underwear or door hinges, depending on demand)

betamax
betamax
13 years ago

There is still an untapped consumer market in China. If China can't sell toys to Americans in mass numbers, then they'll start selling them to their own.So why haven't they sold them to their own already? It's easy to say, harder to happen when most people there are still 3rd-world poor, and those with disposable income have yet to convert to the financial profligacy of Western culture. Less sure of a brighter tomorrow than Canadian/US consumers, they remain inveterate savers who disdain personal debt. That situation is unlikely to change any time soon – especially if they see a downturn in the US.

digi
digi
13 years ago

When kids say, they won't get a good Christmas present, it means they didn't get what they want.I think this kind of misses the original point, and that is (as I see it) how do you get rich buying multiple houses in this environment? You need to sell to get money out, or you need to rent to get cashflow. Prices in vancouver are dropping right now, which means it may be a looong time before you can ever sell for a profit if you buy in at todays prices.At the same time rents right now wont cover a standard mortgage with 25% down. If you're rental income isn't covering your mortgage you're losing money, not gaining it.

digi
digi
13 years ago

But most importantly, we are the California of the North.Do you think so? Unfortunately parts of california are predicted to have some of the biggest drop in values over the next couple of years.

rentah
rentah
13 years ago

vanman, freako, thanks for the China discussion.Do you guys know ted.com yet? Some great brief talks (3-20minutes) on various topics, global demographics/economics included. Try the 'tedtalks' link.

realestatenevergoesd
realestatenevergoesd
13 years ago

The China “miracle” is an old black and white movie, in a loop re-run.If you can get an outdated mutual fund guide like Gordon Pape’s Guide, you will see that just before the big correction, some of the Asian mutual funds had gone up as much as 800% , and the Pros reasoned it had nowhere to go but up, China this and China that, and Canada has the natural resources it needed and on and on the spin went.

kityy korner
kityy korner
13 years ago

im glad prices are back to normal now its been krazy the past years. i see alot of 4sale prices now and it feels good.

Freako
Freako
13 years ago

Vanman, I like your excellent grasp of the big picture in your posts.I have a similar views, but differ in some respects.Paraphrasing your post:1. Manufacturing of consumer goods is outsourced to Asia.2. The retail environment became much more competitive once Walmart entered the scene, forcing wide reaching price concessions.3. The price pressure led to consumers demanding the latest in order to keep up (for perspective, my parent's first color TV was used for 30 years, 15 as a primary TV).4. Chinese labour and factory owners AND resource extractors worldwide depend on continued U.S. consumption.,,, (skipping a few)5. In the long term, the Chinese domestic market will increase demand for consumer goods, and therefore raw materials.Nice chain of events. I don't think the cause and effect between the events is as clear as you state. Offshore production of consumer goods has… Read more »

TheVanMan
TheVanMan
13 years ago

"I Love Canada" — Well, I do too..The problem is, we are influenced by foreign factors that are beyond our control. Prices are paid for what the market can bear. Currently, the housing market may face a slight to severe correction, depending upon many factors. As demonstrated in Thailand, Hong Kong and in Japan, when things turn sour, prices do fall. What I fear that this time could be quite interesting than in the past is that, China is involved. In the decades earlier, most of the consumer products manufacturing were done in the domestic market (be it in the US and Canada). When companies started off-shoring products to Asia, they meant to keep increasing profits by improving shareholder's returns while maintaining price. That all changed when discounters like Wal-Mart started demanding that those prices go down, and down they… Read more »

TheVanMan
TheVanMan
13 years ago

Garth,Have you seen the movie "Borat" where in one scene in the subway, he asked the guy sitting what's his name. He replied — my name is "mind you own business!".That's right. What you've heard on the bus is probably just 1/4 of what the girl was telling her friend. If you heard the whole entire story, you might have a differing opinion. I deduce that you don't have kids. Kids are very expensive items to have, especially during Christmas. Kids' wants are always more expensive then your wants. While you can wait and shop for the cheapest price, kids do not have that concept yet, since they haven't earned a living to appreciate how difficult it can be to make good money in this city and pay expensive rent here. The girl is probably still living with her parents.… Read more »