June 27, 2009

The Housing Boom and Bust – Thomas Sowell

The Housing Boom and Bust

This is a plain-English explanation of how we got into the current economic disaster that developed out of the economics and politics of the housing boom and bust. The “creative” financing of home mortgages and the even more “creative” marketing of financial securities based on American mortgages to countries around the world, are part of the story of how a financial house of cards was built up—and then suddenly collapsed.

The politics behind all this is another story full of strange twists. No punches are pulled when discussing politicians of either party, the financial dangers they created, or the distractions they created later to escape their own responsibility for what happened when the financial house of cards in the financial markets collapsed.

What to do, now that we are in the midst of an economic disaster, is yet another story—one whose ending we do not yet know, but one whose outlines and implications are explored to reveal some surprising and sobering lessons.

It’s Saturday and that means it is time for Burbed’s book of the week.

Thanks to Burbed reader Butzi’s for this recommendation. It’s clear why this book was suggested – we in the Real Bay Area really need to do more to learn about the areas in the rest of America. The less fortunate areas, full of blissfully ignorant people, who don’t know what sushi is, or have never been able to experience the majesty of Fry’s.

Ideally we could invite Thomas Sowell over to the Bay Area so he could write about this amazing phenomenon. Perhaps it could be a sequel to his first book (“Basic Economics”) – he could call it “Paradign shifted economics.” Let’s face it, we have an economy here that defies all expectations. Whether it be $3 cupcakes, $500k condos in Mountain View, or Teslas, the economy here is rocketing forwards. It is the classic example of a perpetually New model of economics.

Finally, speaking of economics, if you’re looking to help this site out, click this link to learn more!

Comments (37) -- Posted by: burbed @ 5:19 am

37 Responses to “The Housing Boom and Bust – Thomas Sowell”

  1. steve Says:

    Let’s face it, we have an economy here that defies all expectations.

    I was just looking at the last 3 months of sales, courtesy of redfin. it does document the carnage (los altos) and areas with no volume (atherton) but it also highlights a new example of RBA strength – central menlo. I count 12 $2M+ sales since the end of march – the exact same number as 94301. RE, looks like Carl in Menlo’s green zone may be as green.

    maybe we can have a “where do you get the least house for the most money” contest? we could even have divisions, like light heavy weight ($3.5-$4M):

    in this corner, representing the central menlo, with 14K of land on a corner, weighing in at a closing price of $3.8M, the challenger – 1618 Stanford. (fans cheer)

    and in this corner, sitting on 7350 sq ft and tipping the scales at a close of $3.75M, the reigning champion 1311 Parkinson. give it up for the 94301! (RE goes wild)

    1618 is ugly while 1311 is tasteful, but the nod goes to 94301 on lot size. can Carl’s team fight back in the middleweight division ($2.5M – $3M)?

    in a classic new verses old battle, in this corner, hailing from allied arts, 5 bedrooms 4 baths, 4064 sq ft, 7500 sq ft and sold for $3M — 324 Yale!

    and the champ, wearing Old Palo Alto white, 5 bedrroms, 4 baths, 5,112 sqft, on a massive 20012 sq ft lot and sold for $3M, 1701 Bryant St!

    are you better off with new construction and no land or 1913 craftsmenship and a 1/2 of the most expensive surburban land in the country. we’ll be back next with the judge scorecards, but Menlo may be poised for an upset.

  2. anon Says:

    nice post steveo

  3. steve Says:

    thanks anon. not invited to participate: Hillsborough. I’ve documented a few of the REOs, and, lookey, here’s another short sale (this time bank approved):

    Hillsborough, CA 94010
    Price: $1,978,000
    Beds: 4
    Baths: 2.5
    Sq. Ft.: 2,840
    $/Sq. Ft.: $696
    Lot Size: 0.53 Acres

    Sale history:
    Jun 19, 2009 Price Changed $1,978,000
    Apr 23, 2009 Listed $2,100,000
    Jun 23, 2005 Sold $2,400,000
    Jul 21, 2000 Sold $1,980,000

    back to 2000? no, it is actually worse. from the listing:

    Spanish Mediteranian home with 4 bed, 2.5 bath. Remodeled kitchen in 2002 with viking stove and granite counters. Wood beamed vaulted ceiling in living room. Remodeled bathrooms in 2001 & 2002

  4. nomadic Says:

    excellent posts, steve! and bonus points for including the links 🙂

  5. Herve Estater Says:

    Hats off to lower-case steve.

    I think I would pick 1424 Hamilton in the Palo Alto heavyweight division. Small lot for the price but at least the house has character. But let’s face it, for the same price I would go Portola Valley and get a lot 10 times bigger.

  6. steve Says:

    herve, heavyweight is over $4M. 1424 Hamilton is in the super middle weight division, so perhaps it should square off against 823 College.

    823 College’s stats:
    Price: $3,495,000
    Beds: 5
    Baths: 4
    Sq. Ft.: 4,300
    $/Sq. Ft.: $813
    Lot Size: 8,100 Sq. Ft.
    Year Built: 2009
    DOM: 5 days

    for future reference, here are all the classes:

    over 4M – heavyweight
    3.5 – 4 – light heavyweight
    3 – 3.5 – super middleweight
    2.5 – 3 – middleweight
    2.0 – 2.5 – welterweight
    1.5 – 2.0 – bantamweight
    under 1.5 – haha, that’s a good one

  7. nomadic Says:

    Of course we know the winner of the super heavyweight division (from Thursday):


  8. steve Says:

    and herve, yes, your luxury dollar (or, in this case 4M of them) buys much more in atherton, LAH, woodside, hillsborough and, my favorite as well, portola valley.

  9. steve Says:

    btw, while doing research for my middleweight bout, I came across this incredible (short) thread at patrick.net. I suppose this is why agents trott out the “it only takes one buyer” cliche.

  10. nomadic Says:

    lol, steve, that reminds me of the saying “there’s a sucker born every minute!”

  11. nomadic Says:

    Has anyone gotten their property assessment cards today? Santa Clara county is reducing the value of about 20% of the houses. So that’s all the houses bought over the last ??? years, I wonder.


    The annual report is pretty interesting too. One highlight relevant to some of the recent school discussion:

    Assessment roll growth is also important to “basic aid” school districts. A basic aid school district is a district in which the property tax revenue generated locally exceeds the state’s formula for school funding. Consequently, basic aid school districts have more funds at their disposal because of direct access to local property tax revenue. However, the revenue these school districts receive can fluctuate according to changes in the assessed value of property located within the tax rate area of each school district.

    The 12 basic aid school districts in Santa Clara County for 2007-08 are: Campbell Union High School District (5.62%); Fremont Union High School District (9.41%); Lakeside Joint Elementary School District (5.76%); Loma Prieta Joint Union Elementary (5.46%); Los Gatos Elementary School District (7.28%); Los Gatos-SaratogaHigh SchoolDistrict (6.88%);Montebello School District (3.15%);Mountain View-Los AltosHigh School District (7.50%); Palo Alto Unified School District (11.08%); Santa Clara Unified School District (9.38%); Saratoga Elementary School District (6.51%); and Sunnyvale Elementary School District (9.85%). Twelve of California’s 87 basic aid school districts are located in Santa Clara County.


  12. nomadic Says:

    A very interesting page of the link above is on page 14. It lists the reductions due to declines in market value – by city. #1 is steve’s beloved LAH, followed closely by Mountain View. Palo Alto ranks just worse than Milpitas!

  13. Herve Estater Says:

    > herve, heavyweight is over $4M.

    So? I would overbid anyway 🙂

  14. DreamT Says:

    #11 – Got mine just now 🙂 reduction from factored base year value is…. minus 17%. Also, minus 11% from last year.
    Was hoping to see more reduction, but I’ll take that.

  15. Real Estater Says:

    I got the normal increase. No downturn here.

  16. madhaus Says:

    Sorry I missed this thread today. Great series of posts, steve.

    To actually pay some lip service to today’s book, may I remind you that Sowell is yet another one of those Federalist Society neanderthals, and if his copywriter says he attacks the actions of both parties, that guarantees he’ll blame the whole bust on either Cliton (either Clinton), Obama, or both. Maybe even Carter. The nod to blaming both parties is his failure to praise Rush Limbaugh sufficiently.

    HerveEstater, overbidding is everywhere! Even in the make me laugh division where I reside.

  17. nomadic Says:

    I got the normal increase. No downturn here.

    Hmm, the usual selfish POV. According to the people doing the assessments, Palo Alto was down 18.92% – so F the new neighbors! Damn poseurs came to the party late.

  18. madEstater Says:

    Selfish POV? Not at all! I’m just concerned about the health of the neighborhood! Higher property taxes keep out the people who don’t deserve to live here, anyway.

  19. DreamT Says:

    ponytail – I interpreted page 14 differently: 18.92% of the Palo Alto properties were assessed at below their inflation(2%)-adjusted purchase price. While 18% of the properties saw a decline in their assessed value, the average decline is probably much less than 18%.

  20. nomadic Says:

    Yeah, the poseurs don’t deserve any icing either!

  21. DreamT Says:

    wow #15, I’m sorry to hear that. Maybe if you appeal you can still avoid getting screwed.

  22. nomadic Says:

    Ponytail? That’s spilled kool-aid, kitty!

    I can see how you arrived at your interpretation, but doesn’t it make sense that column 3 would be the same as column 2, expressed as a percentage? Which actually means I was off a little bit, because it would be the % by which overall assessment rolls declined.

  23. madhaus Says:

    Yeah when I saw “ponytail” I thought DreamT was referring to my old Simpsonesque avatar of the ponytailed redhead playing guitar. nomadic, you holding out on us? Are you a dude with a ponytail after all?

  24. nomadic Says:

    yeah, and I leer at “pretty” women AND men.

  25. nomadic Says:

    hehe – that shut you up. 😉

    Thread killah!

  26. DreamT Says:

    nomadic – you just never refuted being that person 🙂

  27. nomadic Says:

    refute it? I thought I just confirmed it!

    I smell like patchouli too.

  28. DreamT Says:

    That page 14 table doesn’t make that much sense anyway. 229 billions properties that declined in Palo Alto? Come on! Also is this table really based of fair market values in January 2008 i.e. 18 months ago? Before the Q4 2008 cardiac arrest?

  29. DreamT Says:

    #27 – well if the ponytail was you, at least I’m reassured that it was not RE

  30. nomadic Says:

    Good point about the ancient age of the data. But it’s only value that’s in billions, not number of properties. (See the little note in the heading.)


    That just means we should get some really cool tax reductions next year. YAY – homeownership rules!

  31. DreamT Says:

    But column 2 is “Values Declined”, so it should say “Values in billions”. Singular “value” can be interpreted to mean “any value in the columns below” esp. since the note spans all columns…
    In any case, do you really believe the 2008 isn’t just a typo? I read elsewhere that assessed values were based off Jan. 2009 market value.

  32. nomadic Says:

    Perhaps you are being a bit too literal. These are public employees after all. 😉

    The publication date of that report is August 2008 so the 1/1/08 valuation isn’t a typo. The bottom of page 37 has the date.

    The cards going out now should have their valuations as of 1/1/09 however. We’re not doing a straight apples-to-apples comparison. Sorry for the misdirection.

  33. Real Estater Says:

    >>POV. According to the people doing the assessments, Palo Alto was down 18.92%

    We’re talking about tax assessments. Majority of Palo Alto homes are still up at least 50% compared to 6 years ago (when I bought), which means there won’t be any break with property taxes.

  34. anon Says:

    lol – you are out of your mind if you that’s the case.

  35. SiO2 Says:

    Steve, interesting competition.
    One thing that will put PA above San Mateo County cities is the high schools. Menlo Elementary is very good. High schools, not so much. Perhaps the people buying $4m houses will go private anyhow, but the people buying $1-2m may not which can have an effect on the higher properties.

  36. R Says:

    “We’re talking about tax assessments. Majority of Palo Alto homes are still up at least 50% compared to 6 years ago (when I bought), which means there won’t be any break with property taxes.”

    Huh? How do you figure?

  37. zanon Says:

    RPA is certainly up 50%

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