patrick.net

"Peter P Says:
I want to look at the issue from the angle of Mundane Astrology. Too bad I do not know the stars well enough. Anyone?"

Look to Jupiter and Saturn - what signs they're in, what houses, and thier angle to each other...

Look to Jupiter and Saturn - what signs they’re in, what houses, and thier angle to each other…

Cool.

Yawn, indeed there are some amateur economists who will have complex explanations.

However, let me take the direct and simple approach. I like Steve Jobs a lot, he had a single question for Sculley that was "do you want to sell sugar water for the rest of your life, or do you want to change the world?"

Cut right to the chase. The population always has a large percentage of people who will stretch their finances right to the limit to afford their Dream Home (tm). The last 5 or so years flat out used up that asset, and some of their friends too who were suckered in with this fiction that real-estate never loses value. What's left are the people who look at their incomes and assets, look at what is a reasonable set of terms to own a house and not be "house-poor" and eating Mac&cheese for the next 30 years, and go nuh-uh!

Quite simple a large chunk of middle America is currently priced out of the housing market, due to it not being in a range they find rational. The last 5-10 years have been devastating to the middle class. Inflation will make NO difference to this population group, as the problem still remains that they look at mortgages with payments a very large fraction of their paycheck and just can't see the benefit to it. Am I victim of group-think? No, I was saying this quite a bit before finding this blog. Few people around me would listen in 2004 and 2005 when the market was booming. The market will correct when prices are more in line with salaries, it really is just that simple.

Well firstly for bearsish people to fall prey to group think that turns out to be totally inaccurate the train wreck scenario is that they will pay the price in the form of opportunity cost.

That isn't a negligible risk. You could argue that much of the local anguish comes from people who want to own a house and have experienced this very opportunity cost themselves. Keynes' "The market can remain irrational longer than you can remain solvent" doesn't apply only to bulls. Being priced out of a house today does not mean you can't be priced out of a house for 25 years. Given lifestyle and family circumstances and lifespan, dismissing it as mere "opportunity cost" is too blasé.

Don't get me wrong. I'm bearish myself. (It will cost me personally, as my own house is up an IMO unsustainable 120% in five years and now around 25% of my net worth. But it's paid off, I like the area and comfort is a non-taxable benefit. So what if the price falls? Money isn't everything.) I'm bearish enough that I don't even believe that a bout of inflation will bail out US housing.

For one thing, inflation in housing is already in current prices. Housing prices are at current levels not because of a population increase or vast increases in real incomes, but because prices are set at the margin by (a) people with little skin in the game and (b) lenders willing to fund them as if they were buying a few pieces of furniture. No money down and don't pay us a nickel for two years is not a sustainable model. The lenders know it and, in fact, the contracts reflect the fact that the lenders know it. The out year resets and the fat margins over funding rates - all in the fine print, if only borrowers could read - are evidence that the lenders know. (Lenders aren't infallible. Relying on collateral that's falling in price will bite some, but let's be serious. Once the front end teaser is done, margins like 5% over funding are plenty to cover the risk.)

Mortgage deals are not going to get better than they already have been. Never rule out the cleverness of a mortgage broker looking to protect his fee stream, but where can they go from here that would drive house prices even higher? No payments ever? I guess that would work but you have to assume that lenders would fund on that basis. That would have to rest on an assumption that lenders are very very stupid. Are there instances of lender stupidity? Sure. Is it a general rule on which you can rely? No.

Loose credit got housing to where it is today but it can't push it any further. Where else could a price push come from? Dollar collapses and foreigners flock in to bargain hunt? That's a minor phenomenon at best. Wages skyrocket? That would seem to depend on giant wage increases in places like China and India. More two salary households? That curve has peaked already. Boomers retire en masse, driving up wages for their kids? ROFL. The average boomer household balance sheet is a train wreck.

Bottom line, if you want to bet, it's my opinion that you should be on the side of waiting to buy (or cutting and running now if you're on the bleeding edge). The economic arguments are all on that side of the scale. But it's still a bet. Sometimes the flipped coin really does stand on end. If you're out of the market, sitting in cash, wanting to hedge against the black swan, there are ways to do it these days. I see a dismissal of I-bonds above (and I assume as a corollary TIPS too) but they're worth considering. Consider inflation indexed bonds in other currencies if a dollar collapse is worrying you. Consider the Case Shiller housing futures that are trading now.

I suggested that real-options-analysis is useful for making financial decisions (in the previous thread).

It is.

If Myron Scholes causes one to have some kind of knee-jerk reaction against the math theorem for which he is partially responsible, then may I suggest simply using the Binomial Model for options valuation in ROA. That way you don't have to dirty yourself with evil Mr. Myron's partial diff eqs.

Randy, both the BS modeal and the CRR model requires volatility as the input. Estimating the "correct" volatility is not much easier than estimating future underlying prices.

I only use these models to calculate implied volatilities.

Brand: Such ‘arguments’ are really just an inversion of the realtor propganda.

Well said.

Vincente,

Yawn, indeed there are some amateur economists who will have complex explanations.

And there will be those for whom "it's just that simple" is all the more reasoning they require. My uncle can show you why Dutch Dairy farmers are destroying US agriculture. His response to any challenge is, "because it's just that simple".

Inflation will make NO difference to this population group [...]

Really. If it's all just that simple, please explain it to a slow wit like myself. In fact, I'd like to see a "just that simple" definition of inflation, let alone how inflation doesn't impact an average middle class, home-owning worker.

But if you're right then we need to change the indexing method of pretty much all fixed-income pensions, funds, and labor contracts. We might want to let someone know about that revelation.

The market will correct when prices are more in line with salaries, it really is just that simple.

"It really is just that simple". Yes. "prices" become "more in line" through a magical process known as the simplicity fairy. It has absolutely nothing to do with needlessly complex economics, fraud behavioral psychology, or imagined mathematics.

Peter P

ROA is only useful when you can determine volatility with a reasonable confidence interval. That almost always means historical volatility data exists, and is market determined.

I can use ROA quite effectively to figure out where to park my dollars, like in a house or in a money market or in gold (oversimplification).

I cannot use ROA to determine whether to buy a pure Deutscher Schäferhund from a breeder in Germany or just adopt a lovable German Shepard mutt from the local shelter.

Punchbowl,

Agree with all you have said but would like to make one minor observation re: opportunity cost.

Many bulls implicitly assume that most of us bears have the option of buying a house now, but are voluntarily abstaining from doing so becuase we don't want to overpay.

This is not accurate.

Here in Los Angeles I, like many other bears, am COMPLETELY priced out of the market. There is NO decent home that I can afford without using a suicide loan.

It's not a question of buying a "fixer-upper," or a place in a neighborhood that isn't as cool or as convenient as I might like -- I am priced out, period.

Well, okay, yes, I could buy a house in a dangerous ghetto with a lot of gang activity, one where the local HS has a dropout rate of >50%. But I think you will forgive me for choosing to rent instead of buying such a place.

In this sense, I have ZERO opportunity cost -- I am priced out of everything. The median price could be $550,000, or $5,500,000 -- it makes absolutley no difference to me, both are completely out of reach.

A lot of bears are in the same boat. Anyway, I just wanted to clarify that b/c I think it is a point worth making.

Punchbowl,

Agree with all you have said but would like to make one minor observation re: opportunity cost.

Many bulls implicitly assume that most of us bears have the option of buying a house now, but are voluntarily abstaining from doing so becuase we don't want to overpay.

This is not accurate.

Here in Los Angeles I, like many other bears, am COMPLETELY priced out of the market. There is NO decent home that I can afford without using a suicide loan.

It's not a question of buying a "fixer-upper," or a place in a neighborhood that isn't as cool or as convenient as I might like -- I am priced out, period.

Well, okay, yes, I could buy a house in a dangerous ghetto with a lot of gang activity, one where the local HS has a dropout rate of >50%. But I think you will forgive me for choosing to rent instead of buying such a place.

In this sense, I have ZERO opportunity cost -- I am priced out of everything. The median price could be $550,000, or $5,500,000 -- it makes absolutley no difference to me, both are completely out of reach.

A lot of bears are in the same boat. Anyway, I just wanted to clarify that b/c I think it is a point worth making.

Max,

Hmmm, did it really play out that way in Argentina? I agree that if you want to sell your home, your purchaser will have a hard time finding the the cash at a fixed rate in a high inflation environment and thus prices should fall in current dollars. That still isn't going to entirely help we fence-sitters as it will be us who will have a hard time getting our hands on a decent loan even for the reduced price unless we're sitting on $800K, although your cash reserves will be handy.

During the inflation cycle, the fixed-rate owner who wants to sit on his mortgage has the burden lifted off his shoulders (and dumped on his lender) and thus once again, the decision to buy a house BEFORE inflation takes off is the right play if you can do it at a fixed rate.

Stagflation is another game. Have Peso wages in Argentina risen at the inflation rate during their troubles? Not a chance on their imported goods, I imagine.

--------------------

For the record, I don't dismiss I-bonds (1/3 of my cash is in them), I'm simply frustrated that they are not correlated to the inflation of the underlying good for which they are earmarked (a house).

Punchbowl,

Hush! (We don't need the gub'ment knowing the comfort and peace of mind that comes with a paid off home isn't being taxed!) I'm surprised at you!

Yeah, in ways I do hear you but the opportunity cost is something I pay everyday! Every time I step into the market and take a position that means there are 9,999 other stocks I'm not throwing money at. Opportunity cost (and the paralysis through analysis it often inflicts) can drive one quite insane if you let it.

I've found that with all of the instant access to just about any investment vehicle of your choosing, having above market returns boils down to what you DON'T own? I know that sounds perverted but just ask any junk bond portfolio manager.

It's the "overlap" that utterly KILLED Janus Funds. In the 90's if you ran an analysis of their "Top 10 Holdings" across all of their funds, they were nearly identical. In the end I'm much more concerned about the redundancy of identical and "substantially similar" investments than I am about opportunity costs.

Your's is a unique and enviable situation. For most Americans (with an avg. 401K of 29k) their primary residence/specuvestment represents about 94% of their net worth. Be glad you're you!

If you are worried how to correlate your yield to house prices, you can do it by simply investing in REITs, builders stocks, housing prices futures, and so on. In fact, set aside a portion of your money for a REIT - it is a simplest solution to participate in the bubble while fence-sitting.

Where's the damn smiley face? In the current climate? Not on your life... I definitely don't want correlation NOW! ;-)

The homeowner will enjoy lower costs of the interest, but he’ll be underwater on the principle. There is no free lunch.

So the clown who bought a 4BR in Palo Alto in 1970 for $30K was underwater on his principle when he was getting weekly raises in '78? Cry me a river.

In my personal opinion, the best strategy of someone who anticipates high inflation/USD devaluation is to keep the USD cash/MM, and avoid leveraged assets like RE. High liquidity of cash will allow one to move to other currencies at a click of the mouse.

One click... two click... three click.... +1.5%, alright! -3% Damn! -5% Damn! Damn! Damn!

Vegas has prettier lights that you'll see on your screen.

Joe Schmoe,

Hey Joe! Good to see ya! I suppose the fact that I'm driving several local realtors quite insane over my fence-sitting I never stopped to think that there might be those that really, truly are "priced-out!"

For my wife and I it's as much about wanting to see the industry go through their "great purge" or "witch hunt" as it is about price. Then we can talk about comfort, convenience, price, low-maint., taxes and lastly "prestige" in that order.

Strictly anecdotal but a really nice older place had been on the market for about 375K for the longest time. It had been reduced to 359K and no takers. Well now this Saturday they are having (get this) a "1 Hour Major Price Reduction" to 339K! WTF? What kind of gimmick is this? A 1 hour p/r? Also the listing realtor was keen to point out that the older couple that were selling had been there since 1969! As in, this is NOT a flipper abortion! Well yeah I can sure dig that (now that there next stop is a nursing home) but I wondered if there wasn't a sympathy angle in there too? If I'm not too hungover I'll go down and check it out for a goof!

Instead, I would like us to take stock of the current economic and political situation and pick out key indicators (”sea changes”, as Frify put it) that are game-changing and should necessitate a change in our bearish sentiment.

Never let it be said that it can't be fun to do this, IF you're a political and economic junkie. If not, I strenuously recommend laying off the risk and going back to (a) your day job or (b) napping on the couch.

I mentioned four possibilities above. Max mentioned a couple of other good ones, REITs and home builders' shares. Incisive analysis or group think may make you believe that REITs and home builders have to go in the crapper. Unless you're getting some entertainment value out of watching those markets gyrate - and rationalizing what the market does by reference to your own Weltanschauung - you don't need to care.

Novice investors think investing is about maximizing returns on your assets. Experienced investors think it's about maximizing risk-adjusted returns. Smart investors know that it's about minimizing the risk of being able to fund your obligations.

Be a smart investor. Every investment does not have to work out for you to be successful. If groupthink can cost you, then you can (a) develop an ulcer worrying about what to do if you're a victim or (b) invest in a way that pays off if you are.

I pick (b). Yes, I'm a junkie and love to talk/discuss/argue/post about (a) but I invest as (b). The couch is very comfy.

FormerAptBroker Says:

"...I say we stick with SF. As Fuzzy points out it will be easier to rent rooms in a SF house and in SF we have the other option of converting the home to a “medical” pot club and if that doesn’t work we can make some money using Scholes former home as a place of business for the “oldest profession in the world” (just like the 1930’s)…"
_____

There you go!

See? That's what I'm talking about.

And the important thing is that we go "all in" because you never forget rule 1: real estate ALWAYS goes up!

Well now this Saturday they are having (get this) a “1 Hour Major Price Reduction” to 339K! WTF? What kind of gimmick is this? A 1 hour p/r? Also the listing realtor was keen to point out that the older couple that were selling had been there since 1969! As in, this is NOT a flipper abortion!

It doesn't mean they'll play. They could have heloced out the equity already. The equity could be their entire net worth and they might need it to fund their retirement.

If there is no financial distress, the obvious approach is to lowball them. That pisses vendors off - they have an idea in their mind what the place is "worth" - so let me propose a better alternative. Suppose you would be interested at $250k.

Find a straw buyer and let him/her lowball under that number, say $225k, with the contract assignable before closing. Pay the straw buyer $1 for an option to force assignment to you at, say, $235k.

Only two things can happen. (1) The vendor is desperate, bites and you own a house for less than you than wanted in the first place. (2) The vendor refuses and sits around for another rainy gray winter. In February, DinOr appears with checkbook, willing to pay $25k more than the only serious looker in the last three months. I think you stand a good chance of closing.

I had this happen to me six years ago trying to buy in a soft market. Unfortunately, I wasn't smart enough to be second in line. I just paved the way for #2 by lowballing in November. I've since met the fellow who benefited from my failure to appreciate game theory and told him that he owes me fifty grand. We laughed.

But I'll know better next time.

ROA is only useful when you can determine volatility with a reasonable confidence interval. That almost always means historical volatility data exists, and is market determined.

Historical volatility data exist for stocks. Historical price data exist too. They are not very useful.

The Digital Revolution
Oh my goodness gracious,
What you can buy off the Internet
In terms of overhead photography!

A trained ape can know an awful lot
Of what is going on in this world,
Just by punching on his mouse
For a relatively modest cost!

From The Poetry of Donald Rumsfeld

SP,

I know you don't want commentary on "Groupthink," but I must say that what's mistaken for groupthink here is really a confluence of opinion about the current housing market, ie bearish. Most everyone here has thought about these issues a whole lot more than your average Joe, and they came to conclude the market is out of whack. That's why they're on this board. There are very very few (are there any in fact?) "Converts" who came here doubtful and drank the "Housing Bear Kool Aid" and were swayed into the "cult." On the contrary, there's really an underlying base assumption here about housing, not a groupthink herd kind of thing. Kind of like an "entry criteria." What happens is then some troll or newbie comes along and spouts the usual RE bull crap, or the scared FB crap, and it's all stuff that we've moved beyond over a year ago. It becomes irksome, and many posters gang up on the newbie and/or troll. This gets perceived as "groupthink."

SP,

Indicators that would change my bearish sentiments?

1) Signs of significant inflation (increasing wages, increased inflation measures, even though they are doctored, Fed out-and-out starts raising rates again, rents increasing a lot closer to mortgage payments for equivalent units) would make me worried about cash positions and inflation eating away at both cash savings and loan balances, making debt more appealing.

2) Spring inventory low enough to be comparable to levels in 2003-2004

3) Surfer-x buys a stucco $hitbox in San Jose using an NAALVP.

speedingpullet Says:
Look to Jupiter and Saturn - what signs they’re in, what houses, and their angle to each other…

Affordable houses, I presume -- they must have bought before it went up...

$ signs

their angle to each other? orientation is important to catch the sun during the day -- as long as they're not looking into each others living rooms...

"Experienced investors think it's about maximizing risk-adjusted returns"

Amen Punchbowl, amen. You have no idea how many presentations I have given where the vendor in line before me had spewed that BS. Like Randy H says "false and rigid" perceptions! It's really up hill b/c they JUST NOW got their mind wrapped around that little tidbit of misinformation.

"We realize your portfolio/defined contribution is down YTD!" But the broader market is down 12% and you're only down 9% so on a risk-adjusted basis........ yada yada. Or it's the old "upside/downside capture" schpeel.

Oh and I liked your lowball strategy too! I'm not sure what empty nesters would do with a 3,600 sq. ft. home (which you couldn't have known) but the strategy is perfect!

Max,

"It's like even the firmest RE bears have been zombified"

I'm not taking offense to that by any means but would you care to elaborate?

Perhaps after I hear your explanation I'll be offended but.....

Max,

We cool.

@ Different Sean

....LOL....sarkey bastard. :-)

As for Groupthink - at least the Groupthink here agrees with my version of reality! For me, that's much more comfortable than hanging out at the SCDIA Message Board....

Lunchtime reading from Dean Baker:

http://www.cepr.net/documents/publications/forecast_2006_11.pdf

Reminded of two old jokes:

1) Economists have correctly predicted 7 of the last 5 recessions.

2) Prediction is difficult, especially when the future is involved.

Back to work...

dryfly,

Uh, that's actually a better explanation than I could provide. Maybe you were mistaking me for that....... Soros fellow?

Actually it can be done with the "same" currency where you are borrowing at the short end of the curve and buying the long end. Since our yield curve has been flat to inverted over the last year or so that's already dried up.

I really should start spending more time at Brad's blog. MISH does a pretty good job too but fretting endlessly over the carry trade just isn't as fun as the SSOTW!

speedingpullet,

Is that the one where it starts w/ a rooster crowing and then says; "Wake up homeowner's, it's time to refinance!"

Speaking of economic indicators, what do folks make of this trend?

http://money.cnn.com/2006/11/30/real_estate/mortgage_rates/index.htm?postversion=2006113012

Both fixed long-term mtg rates and adjustable rates are down recently. The long-term rates appear to be more drastically decreasing. Could it be the bond market is starting to get a little worried about the other side of the equation (recession)? Are investors looking more favorably at fixed mtg products as opposed to adjustable/subprimes in terms of MBSs? I haven't been following the bond market too closely, but it appears long-term rates have dropped a lot more than short term rates. There have also been reports of investors (like China) trying to get out of Dollar-based investments, and we have all heard how the dollar has been tanking of late.

Aside from dollar devaluation, how will this affect the RE market, I wonder? Could this spur more homebuying if rates get low, AND we have bad inflation, in terms of folks buying into real property and taking out debt as a shelter against inflation?

in short, we're screwed...

dryfly, your spelling reveals you must a very good engineer indeed... ;)

skibum,

Rat Patrol aired a similar stinker yesterday and likened it to the smell you get when you pee on a fire. (well, not exactly that)

I happen to believe your suspicions are correct w/ one possible exception. All this will facilitate is one last round of musical chairs* to allow FB's (I'm sorry, those fine individuals that were mercilessly duped into to taking on more debt than the other wise might have done) into being able to have "one last Christmas" and or get out from under their McAlbaltross if they're lucky and downsize assuming they can find a buyer! Nothing more.

This won't likely bring about The Boom "Phase II" no matter how much the REIC might want to think so.

*Robert Cote's preferred term.

Nice thread graphic, SP!

dryfly,

I'm going to differ w/ you only slightly. While this may create some much needed transaction/volume/NAR commissions most of it will be on a downward trajectory. I don't see too many buyers foaming at the mouth to "trade up" so this will be more facilitating "defense" than anything.

@ DinOR - I believe so - all I can remember about it now is that the tag goes ' 66- Faster....You've got the GREEN LIGHT!"
(I'm wrapped up on the sofa with the last vestiges of 'flu, so have the attention span of a goldfish at the moment...)

The thing that makes it stand out from the myriad of other loan sharks circling the waters is -
a) they're pretty much saying "if you can fog a morror, we'll lend you money (not having to deal with 'complicated paperwork' is a selling point, apparently) and
b) there's seems to be some tearing hurry to do it all by sunday...why sunday?

I've read alot on this website about what could possibly cause a correction, whether it's a small or big one.

But what would a correction cause?

there's a self-taught brilliant ag machinery inventor and engineer here who still visits his clients in bare feet... ;)

Scientists decode ancient astral computer

Ian Sample in London
December 1, 2006

A MYSTERIOUS device salvaged from an ancient Roman shipwreck has astounded scientists who have finally unlocked its secrets.

After a century of study, the 2100-year-old device, known as the Antikythera Mechanism, has been shown to be a complex and uncannily accurate astronomical computer. Recovered in 82 highly corroded fragments, it could predict the positions of the sun and planets, show the location of the moon and even forecast eclipses.

Remarkably, scans showed the device uses a differential gear, which was previously believed to have been invented in the 16th century. The level of miniaturisation and complexity of its parts is comparable to that of 18th-century clocks.

Experts believe it to be the earliest-known device to use gear wheels and by far the most sophisticated object to be found from the ancient and medieval periods.

Fuzzy Math says:

Well said.

*Ahem*... the opposite of a lie is Truth, not another lie. Debunking baseless industry propaganda does not mean simply countering with equally vapid, opposing propaganda.

Gentlemen (and gentlewomen): We are at War. Like it or not, we are engaged in a battle for the hearts and minds of a math illiterate and confused public. The same public that's being fed a steady stream of lies and propaganda from a powerful and well financed REIC (I'm comfortable using this acronym, which I find completely accurate & fair --plus it's a lot faster than typing "Realtors/mortgage_brokers/banks/crooked_appraisers/speculators").

Excuse me for trying to "keep the faith" on one little itty-bitty blog. But I don't recall having $millions to spend on full-page ads in the NYTimes/LATimes/Newsweek/Time/Businessweek, like the NAR just did. Or tens of $millions to spend on prime-time TV commercials.

Many of the long-timers here originally came here because we found ourselves priced out of the market through no faults of our own (like Joe Schmoe & myself) and wanted to understand WHY? Why is the question that led us here, which quickly led us to ask other questions, like WHAT? (caused the bubble), WHO? (was responsible), HOW? (we got to where we are today), and WHERE? (do we go from here).

Together, thanks to the tireless efforts and contributions of the many (uncompensated) professionals and concerned people here from all different walks of life, we have pretty much figured out the answers to the questions above. A feat apparently beyond the abilities of most professional MSM "journalists". As SP has pointed out, the "question" of the Bubble's existence is now moot and its causes are general knowledge, even to some of the trolls.

This is largely thanks to people like us. Not too shabby for a broke, ragtag bunch of JBRs, no?

So, criticize me all you want for sounding repetitive, or for going too hard on the occasional troll or skeptical newbie. But I will never, NEVER apologize for having had the balls to ask questions most people are too afraid (or clueless) to ask. Or for coming to conclusions most people are too uncomfortable to even consider.

So, I remain a proud and unapologetic REIC contrarian. Semper Fi, bitches.