An Utterly Serious Warning

[ecosophia]

There's an old Wall Street legend that came to mind today...

"In 1929, at the height of an economic boom in America, Joseph Kennedy Sr. (father of JFK) was working as a stockbroker on Wall Street. As the story goes, Joseph was walking around when he decided to sit down for a shoeshine. While polishing his shoes, the young worker gave Joseph some of his favorite stock picks. When Joseph heard the shoeshine boy giving out stock tips, he figured the party was about to end, and it was time to get out of the market. Joseph proceeded to exit his positions in the market and bought short positions that bet on the market going down. Shortly after that, the stock market entered a free fall." (Source)

The reason this came to mind is that I get therapeutic massage regularly these days, and my massage therapist mentioned today that she is getting into real estate investing. She's an extremely capable massage therapist -- but then I'm sure the shoeshine boy who did old Joe Kennedy's shoes was good at his trade, too. The rule remains the same: when people who have no previous background in investing start piling into some investment vehicle, a speculative bubble is in full swing, and will collapse catastrophically in the not too distant future.

I watched this same thing happen in real estate about a year before the 2008 real estate bust hit. When that arrived, everyone I knew who'd gone piling into real estate ended up in the bankruptcy courts. I also watched it in the stock market about a year and a half before the 2000-2001 internet bust hit, and a lot of people who'd put everything they had into interrnet stocks lost it all.

So, dear readers, if you find you're suddenly thinking about putting a lot of money into real estate investment, may I offer a piece of advice? You'd be better off shredding it all and flushing it down the toilet. Don't let yourself get suckered, because the market will sucker punch you.

Oh, and while you're at it, get ready for a whopping economic crisis, possibly as soon as this fall. The Dow Jones just hit an all time record, btw, and speculative investments are soaring while the productive economy lurches further and further into dysfunction. We're probably going to be in for a world of hurt within a year or so. Brace yourselves...

Comments

[jenniferkobernik]

It’s sad. My read is that many people think of real estate as the only substantive investment out there right now, and the thing most likely to hold its value, just because it seems less fake than the witches’ brew of dodgy financial instruments currently on offer—and they are about to get hosed. It hasn’t sunk in yet that there really isn’t anywhere very promising for an investor to park their money right now. Unfortunately that includes cash at the moment, which just pushes people into doomed speculative investments. Although you’d think 2008 might have debunked the idea of real estate as a risk-free money-maker; it really wasn’t that long ago!

Thanks.

[cs2]

Thanks for this warning. We have a mortgage but otherwise no real estate investments. We'll sit tight and keep paying the mortgage and stocking up on savings.

[degringolade]

https://youtu.be/Ta5hPRmxo8k?si=e-9_Z5gdYekyIB8f

[ecosophia]

That'll definitely do as an anthem for this post!

[open_space]

Hmm, I saw this while at the Library and my eyes caught a book meant for checkout: "Investing for Dummies"

[jruss]

I have a feeling the Dems are trying to delay things so they can blame it on Trump.

[(Anonymous)]

A snowflake chance in hell.

I fail to remember or find that Bush quote about the sucker going down.

[tritumi]

I see nothing better or safer than Treasury Direct. 5% is nothing to sneeze at.

The rest is tracking Joe Biden's medicine cabinet.

[(Anonymous)]

Ahem. Inflation is running in the double digits. The only debate is whether the first number is a 1 or a 2. So, just to stay even, you have to be making at least that much off your investment. Just to stay in place.

There's a reason they called bonds in the late 70s "Guaranteed certificates of confiscation".

[prayergardens]

I'm following real estate right now. We want to move out of the city and to a smaller commuter town. We've had an agent since Fall 2022 and have been waiting for the bubble to pop. In the last 3 weeks, inventory started piling up like it hasn't in the last 18 months and is building fast, especially single family homes. Condos still move, I guess boomers are downsizing?

I think I recall someone asking you previously when you'd know the bubble was deflated and IIRC, you said "When there is a For Sale sign on every street". So I've been watching the inventory count for our county.

Do you still think that's a marker of when the bubble is done? We don't want to do anything dumb but after 2020-2021, we don't want to be a part of our city anymore and are motivated to change our situation. I'm hoping the emotion won't lead us to a bad decision, trying to be rational and patient....

[ecosophia]

Patience is a very good idea at this point. Now that inventory is piling up, there's a very real chance prices will crash in the months ahead, and if you wait a year or so after the crash you'll have your pick of properties -- everyone will be trying to get rid of them and will accept a much lower bid than usual. Waiting is your friend!

[ecosophian]

A stock market crash and economic collapse could be the real October surprise for this election year.
I must say though, I've been noticing intrusive thoughts about the need to invest money for the last year or so. I acknowledged these thoughts and did not heed them (since I knew a crash was coming). But, I guess, many people have had the same thoughts and couldn't resist them.

[(Anonymous)]

I should have known to come here for synchronicity. My wife and I saw some old friends last night, great people, but the real estate bug has caught them badly, and they consistently insist on buying bigger and better houses. In seeing them last night I detected something off, I think they knew they'd gone too far, but still not willing to back down and downsize, it's a sort of quiet terror, but an unwillingess to talk about anything other than endless growth. So yes, I think you may very well be right.

I on the other hand am no paragon of virtue, I am just no good at making money other than providing for my family, so I proved successful at collapsing ahead of time by default :)

[(Anonymous)]

Your last paragraph pretty well describes my relationship with money. Our investing apathy may well prove to be a blessing. - Croatoan

[(Anonymous)]

This implies that the USD is going to remain useful as a store of value - for the real estate bubble to truly collapse, the price of a house in a metric other than dollars, for instance, cheeseburgers, has to decrease.

Where I live in Canada, I used to be able to get a double cheeseburger and a large coffee from McDonalds for $5. Small houses cost about $150,000 then. Now that same meal - which I rarely eat these days, because the quality has declined significantly and I don't want to patronize that establishment - costs $9, and would probably be $12 if the quality was kept up. Now the same houses cost $400,000. The house price has not changed much in cheeseburger terms - a house only costs about 11% more cheeseburgers and coffee than it used to, and that's using my imagined price where the cheeseburgers hadn't been debased along with the currency.

Justin

[(Anonymous)]

Not to derail, but I've noticed just about every burger joint has silently cut their portion sizes down. A burger today is quite smaller than the burger of yesterday. Even the better burger joints have downsized their burgers, rather than put up the price.

Back to real estate, most of it is driven by credit conditions and when those wobble, so does the price. A lot of that credit is state directed, not market directed and the state has had an interest in keeping house prices artificially high.

What we should be asking is has the state's interest in high prices changed and/or has their ability to rig markets degraded? And to answer those questions you need political connections. And if you have those kinds of connections, you're probably keeping your mouth shut.

[(Anonymous)]

I lived in south Florida close to 20 years ago. One day at a street festival, I'd say in 2006, there were several teams of attractive young women handing our brochures for zero-down mortgage loans.

I'd been made the offer to buy homes several times in the preceding year, despite having an unstable low-wage job at the time and no savings to speak of.

Even back then, when I didn't pay nearly as much attention to this stuff, I knew the market was not far from collapse. Sure enough...

[(Anonymous)]

I manage a team and know a women’s salary as she reports into me. A few weeks ago ago she told me she had bought a house in the greater toronto area. 1.3 million. It took all my composure to not say, but how??? She has a good salary, I assume her partner does too, but if they did what most people do here they are easily looking at $6000/month mortgage.

Eventually our converation swung to a point where she was discussing how long they had looked and she joked about needing bigger raises and said, well we are also viewing it as an investment. I know I feel it for a house a fraction of the cost and wonder if it was a mistake.

In my early 30s up in Canada and without doubt a large portion of millenial young “professionals” are in this already house poor boat.

My question for people here is what happens in the case of bubble popping?

[bofur_the_dwarf]

Thanks for the great question and comment.

I marveled at the REQ (real estate question) in this country (Canada) for years. I said circa 2015 that "the bubble can't last much longer".

It used to be that I couldn't grasp how regular people were affording these prices. I am a physician and I wouldn't want to buy a 400k home, let alone... the obscenities they are paying in the major metros.

Eventually, it occurred to me that it comes down to this: people are justifying it to themselves by saying, pshaw, don't worry, yes the price is insane but "real estate always goes up so eventually it will turn out ok". It really is that simple, that is how people are thinking about it.

And the answer to the question: what happens, how does it end? Very, very badly, terribly and tragically for a lot of people, when the bubble finally bursts. Many, many folks will endure financial hardship for the rest of their lives, be underwater, have to declare bankruptcy, etc, etc., with ripple effects on the broader economy, banks, etc.

That really is what is going to happen, unfortunately.

No politician wants to touch the issue because there's no solution.

[(Anonymous)]

I work as a cook, and a few of the waitresses have decided to put money into NVIDIA, because of AI. I know enough about how the internet works to realize this is absurd, but it's another massive bubble, and if it pops too, this could become very messy for the tech world....

[(Anonymous)]

It has already become messy. Don't get me started with tech, but all those people they forced into taking those sketchy injectables? They're now drop kicking them right out the door and the way the tech industry works, they're going to find out that nobody wants them back in another tech job.

They do this every 20 years or so, hire a bunch of fresh faced naive college grads, flog them and punt them for a field goal after 20 years. Then they lie low and hire another batch of fresh faced college grads.

[drhooves]

My nephew here in downstate Illinois graduated from college this past December, and now closed on a home three weeks ago listed for over $300K. He'd just found a job and made an offer about two months ago. He was married last summer, and apparently is anxious to get on with "the road of life", even willing to pay PMI since he didn't have 20% to put down on the new crib.

My brother thought his loan approval was somewhat desperate by the bank, at least compared to lending standards back when we were fresh out of college. IF my nephew stays gainfully employed (currently in IT) and IF the economy doesn't completely fall apart and IF he doesn't move for the next 7 to 10 years, he should come out okay.

That's three too many IFs for me. Yeah, it's a bubble.

[open_space]

If this happens the Seattle housing market is going to be a digested food show. Everyone, and I mean everyone, that came with me for work "owns" a "house" upwards of $750K (how someone thinks paying that amount of money for a cheaply made house is way out of my capacity for understanding) that expects of them to work for the rest of their productive lives at the same pace, in the same growth market they bought it at. Ouch. I did a tarot reading about a year ago when someone I know just bought his place. The card for the market? The Knight of Wands, and I think its likely the knight is about to fall off that horse.

synchronicity..

[(Anonymous)]

Andrei Martyanov is one of the people I follow with my RSS reader and right after your warning I read this:
https://smoothiex12.blogspot.com/2024/05/kent-rollins-advice.html

Maybe he has the same massage therapist? ;)


bk.

Re: synchronicity..

[robertmathiesen]

I follow him, too. As a Russian ex-military man (now in the USA), he has helpful insights into Russian military (and geostrategic) thinking. And I was really struck by this new post of his, which is very much out of character for his blog.

FWIW, Kent Rollins' simple "cowboy cooking" advice is right on target. It's basically how I cook for us these days. (As far as fancier sorts of cookery go, my wife and I are both all "cooked out" now, after more than five decades of marriage. I do all the cooking these days.

[(Anonymous)]

I don't really like making predictions on markets, because of the massive amount of state interference I've seen over the past 20 years or so.

The real estate market is definitely a bubble. That shoeshine boy indicator is almost the definition of one. Usually paired with sketchy credit used to buy whatever. However, there are parts of the real estate market that are actively crashing, commercial real estate comes to mind. No tenants and interest rates that have gone higher than they planned for. I zoom out and I just see a picture of utter imbalance. Too much real estate where it's not needed and too little where it is. State interference. And you can bet (and this is about the only prediction I'll make) that the state will interfere when the bubble pops. They did last time.

The stock market? There's several scenarios I'd point out. One of them is Venezuela/Zimbabwe. Just take a look at a historical chart and sit and think about it. The other would be the Dow historical through the 70s. Up and down and up and down between 1000 and 500, going essentially nowhere (didn't the BeeGees sing about that?) as cars (and a bunch of other things) quadrupled in price. In any case, you don't trade constant dollar prices, you only trade what's on the ticker and nothing else.

Predictions are dicey things

[degringolade]

I agree with your distaste about making "predictions". I gave up on them years ago. Now I just kinda try and compute the odds. And even then I hedge as much as possible.

Right now, I would guess that we have around a 30% chance of a "bad moon a-risin'". This particular SWAG (Scientific Wild Ass Guess) value has been rising of late, but now I am trying to analyze whether this is a valid analysis or I am letting the silliness of the political world get to me.

Who knows for sure. I think that the best you can do is better calibrate your expectations to the reality unfolding.

Just leave yourself an out in case you misjudge.

Savings

[(Anonymous)]

I've been wondering when the real estate market is going to crash. Nice to see more people reading the signs.

I have a fair amount of money in a standard savings account right now. It feels silly because my savings are eroding as the value of the US dollar diminishes. Can any of you recommend something better to do with my savings? Even a high yield savings account seems like it might not be the best course.

- B

Re: Savings

[charlieobert]

This next little bit isn't advice; this is me thinking out loud to myself.

My situation isn't too different from yours - house paid for, a decent amount in savings - but I've given up on the whole notion that my money is supposed to make me more money, or even supposed to be a stable source of security - there is something cockeyed about that notion that is part of how we got ourselves into this mess. The old writings which warned against usury were really onto something - it is a great way to erode and evaporate the value of what passes for money.

All I can really do usefully is to be careful and to be very grateful for what I have.

There really is only one safe place to lay up treasure - where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also.

[methylethyl]

Denninger over at market ticker agrees with you on the timing, and Charles Hugh Smith on the overall shape of things.

It's been a total drag not being able to get my family out of rentals and into a house where we're allowed to install window screens and dig up the yard and plant food. But every day it looks more and more like it would be an even bigger drag if we had succeeded.

When we found out how much the bank was willing to lend us, it kind of took our breath away. Really? On our income? We could barely make the mortgage payments on that (and we'd be over seventy before paying it off!), and we'd be in the soup the first time the roof needed replacing. It has been sobering to realize that the reason we can't buy a house right now, is because everybody else has been in an absolute frenzy of... doing exactly that. Mortgaged to the eyeballs, and borrowing more for routine maintenance. How much of the country right now is riding the knife edge of no savings, overwhelming debt, and one or two missed payments away from insolvency and homelessness, because a realtor and a banker told them "Oh yeah! You can totally afford a house! You've got this!"? You know, plus all the investor vulture types.

The town we live in right now... as much as we love the job and the church community, in a sharp economic decline it's probably for the best that we haven't been able to put down roots. We're already overrun with meth zombies thanks to an ACLU lawsuit a few years back that forced the city to stop enforcing panhandling laws (how the eff does the ACLU, who don't live here, get to overrule our elected government?). Throw in a sharp decline in employment and a sharp increase in foreclosures and evictions, and it's gonna look like a postapocalyptic wasteland... and we'll be throwing the kids in the truck and heading back to the family compound. And the fact that I think about this a lot says we're better off not buying here so it's just as well we can't afford to.

What remains the same is, whether we want it or not, God looks after us and puts us where we *need* to be. His mercy is not always comfortable, but it's always good. Thanks be to God.

[(Anonymous)]

"What remains the same is, whether we want it or not, God looks after us and puts us where we *need* to be. His mercy is not always comfortable, but it's always good. Thanks be to God."

Dearest Methylethyl, that's exactly where I'm at right now.

X

Erika

[(Anonymous)]

A realtor recently shouted at a friend of mine for daring to point out the market is not looking good... I think the smart ones know the winds are changing and are getting nervous.

Are there any traditional signs of economic collapse in mundane astrology?

[(Anonymous)]

When we could have bought a house (downtown very big city) for next to nothing (in our 20s!) I balked and had no vision for planning ahead. I 'did my art.' When the ex wife said, 'This is our last chance. We can get a house on _________ Street for 90,000. It's going out of control from here on.' I balked and had no vision for planning ahead. I 'did my art.' Years later she bought one way way way higher.. Prices were still rising.

Long story short. Sold her house and bought in a small town. i'm old and 'do my art.'

[(Anonymous)]

Real Estate, huh ? *SIGH*

Somebody ought to look at what Rhonda's up to these days. Maybe she perpetrated (sic) another book : 𝘊𝘰𝘯𝘴𝘱𝘪𝘳𝘢𝘵𝘰𝘳𝘪𝘢𝘭 𝘞𝘩𝘪𝘴𝘱𝘦𝘳𝘴 : 𝘛𝘩𝘦 𝘙𝘦𝘵𝘶𝘳𝘯 𝘰𝘧 𝘛𝘩𝘦 𝘚𝘦𝘤𝘳𝘦𝘵 (a.k.a. 𝘛𝘩𝘦 𝘚𝘦𝘤𝘳𝘦𝘵 2)

[(Anonymous)]

I've been buying market garden equipment but our absentee landlords changed their mind and won't let us use it here. Instead of selling the walking tractor and screen house parts I decided to push the limits and grow what we need for subsistence using caterpillar tunnels. Now the neighbors have started moving in and planting in the back of the lot that I had cleared out for the larger structure, basically trespassing. It's a tricky situation because if we rat out the neighbors they will return the favor since this is all zoned residential. So far I've decided to make our presence known by planting a few things and cutting sight lines through the brush. Honestly though we're waiting for an opportunity to move farther away from the city since the gangs in the dueling low income housing projects down the street are killing each other about once a week now. Unfortunately the market is still brutal at the moment and our current deal is amazing compared to what's out there.

So far it's been all about muddling through. No easy answers, just try and work with the shifting conditions and prepare to jump on the right opportunity. I'm grateful every time I go to my cushy day job, but it would feel a whole lot better if I was making money on my side gig without getting hassled by the frothy by-products of the real estate frenzy.

KVD

[methylethyl]

Similar here.

Giant side-yard on our rental. But reduced to gardening on the sly because landlords are not a fan of urban agriculture. And desperate to move somewhere I could have, say, goats or rabbits without having them stolen. Or where I could enjoy agricultural luxuries like an outdoor spigot (which, mysteriously, our rental house lacks-- can't even wash the car in the driveway!).

But land prices... Jiminy Cricket! Only the gods could afford a whole acre around here. And it's not like it's a nice town.

Grim Synchronicity

[(Anonymous)]

Thanks for this heads up. I saw this yesterday but didn't take the time to comment, but you posted this right about the same time and day my family was having our annual picnic and my millenial nephew brought up the topic of real estate, talking about all that was wrong with the situation now. He also works in the solar industry FWIW and I think some of this came from working with home "owners," also his age group... Anyway, even as he talked about all the bad practices going on, someone else said, "oh, you should get into real estate." (I don't think that was his idea or point from what I gathered of the conversation.) Anyway, interesting synchronicity, if a grim one. (It was a real nice gathering though...)

It's good to be on the fringe, when that means you don't buy a bunch of adult toys and rack up the debt. If having nothing to "show" for your work means you aren't afraid of "having" things leveraged by loans.

Bracing...

JPM

Re: Grim Synchronicity

[methylethyl]

re: solar and real estate: One underappreciated aspect of the mania for solar, is that there's a lot of weird financing going on with it. We don't even *look* at houses with solar panels on them, no matter how cheap, because it's nearly impossible to tell up front who owns the panels, and whether or not you'll be stuck with the bill for them. At least with a mobile home there's an established process for checking the separate titles on the land and the trailer. Solar panels... that stuff's very obscure and hard to find out, AFAICT.

[(Anonymous)]

Navigating a divorce, my wife and I close on the sale of our former house tomorrow. We are receiving a premium price for it which covers all the investments we've made in the fairly short time we owned it. I am not too upset to be able to sell into the craziness while the music is still going, but I'm quite satisfied with my very modest apartment. My share of the proceeds will put my emergency living expense fund in good order.

Local Taxes

[(Anonymous)]

For those of you who were paying attention last time. What happens to local government when real estate prices and the property taxes that support them crash?

I have argued so many times with them because my property taxes keep going up because someone else paid too much for a house. Its not like I improved the property! I showed them all the deferred maintenance and they did at least bring it back from the 30% increase this year. No one in their right mind would pay that for my house and even if they would it isn't like they will loan the money for taxes while I live in it. (Sorry rant over there, at least California got that partly right with all kinds of other consequences)

Anyway the original question is back to lenocrats because it isn't like they would accept less than what they have been getting just cause the money isn't real.

Re: Local Taxes

[(Anonymous)]

In my area, the property taxes didnt fall that much for alot of houses as CA limits how much property taxes are allowed to rise each year, so in their minds, our taxes were undervalued already for houses that have been owned for a number of years. They did a small adjustment, as that made people feel better, and then cut libraries open hours, smaller branches not open at all or once a week, cut class offerings at high schools to only "core" classes needed to meet graduation requirements, this included band and some sports in places, cut some bus routes, like mine. Close all government offices on fridays and give a 20% pay decrease ( which was soon back to what it was (pay) after some years but still with the 4 day work week to this day for some departments) and stopped fixing the roads and other infrastructure, the state version of medicaid, medi-cal, stopped funding dentists and vision -- that is what I can remember for the moment

Atmospheric River