patrick.net

oops...Realtorâ„¢ that is.

delta hedging is risk reduction, not elimination

Is there such as thing as risk elimination? :)

"oops…Realtor™ that is."

Realt-whore that is?

What do you get if you cross an elephant with a Realtorâ„¢?

Ans. I don't know, but good luck closing the sunroof on the Lexus.

I just got finished reading “When Genious Failed” by Roger Lowenstein, about the collapse of Long Term Capital Management; awesome book, very applicable to this (off-topic) discussion.

It is a very good book indeed. I got it for my birthday some years ago.

Here is why: it would seem to me, and did seem to many Wall Street pundits at the time, that the 1987 stock market crash really destroyed the Strong Form of the Efficient Markets Hypothesis.

Relying on the EMH for risk management is much worse than relying on astrology to do daytrading. It is a hypothesis, nothing more.

Randy, interesting link. I believe that many factors have caused the decline. The perceived parallel with 1929 could be one major reason. However, it is not unreasonable to speculate that program trading has interacted with that belief, forming a feedback loop that crashed the market.

I suspect that we will hear more and more past housing bubble stories from the media, causing a slow shift in psychology and belief. Rising interesting rate, tightening of credit standard and other marco factor may help form a feedback loop that burst this bubble.

I wonder if these vane buyers will actually change their mailing address and mess up their mails.

LOL! Is the address in the same school district as LG/MS though?

I believe this shooting in Texas was the only rational response to Iran's nuclear swaggering. They have a head who has religious visions while speaking at the U.N. Our (actual) president pops off rounds into his friends for kicks. Who's the baddest wild madman now? The markets rose and oil fell on the news - coincidence? At least the administration finally has a senior official with combat experience.

In desirable areas, prices always bounce back after dips and exceed previous highs, so there’s nothing to lose in the long run.

True, if you do not consider opportunity costs. However, if you do not mind paying the current price, it should be okay to buy non-investment properties anytime.

If you are not comfortable with market-timing and occasional setbacks, you probably do not stress yourself out over this bubble. Just let it be.

Face Reality, sometimes it is just best to do what you heart tells you. So long as you can do so conservatively, you cannot be much worse off.

Just continue to share your condo-hunting experience with us. :)

FR, buy the house/condo/place/hacienda/plapa/bungalow/compound

Shit, there's an idea, buy the SF compound and you MP and Mr. Right can circle jerk around a bottle of Crystal. Shhhhhhit dude, get yours, you deserve it :) You have done your homework and have determined in your oh so proficient way that RE, especially in SF, never ever goes down. Don't worry about MP and Mr. Right, just remember that the one who passes out sans condom en los culo is the winner. That and the one with the most toys! Hey man, you're half way there :)

Brokeback Hill!

Besides, it is not an investment, it's a home. Buy it before it goes beyond your reach. Oh wow, wait, ok, check it out, if you pay your slaves 2 dolla less per hour, that's two dolla more for you. 40*5*2 equallee 400 hundy more for you, remember it's not that they are making less, it's that you're making more, and you deserve it.

I lost a couple of years of appreciation when I finally bought on the peninsula in 2003 as a result of trying to time the market. If I wait a couple of years before buying in SF, I may benefit from somewhat lower prices, or I may lose a couple of years of further appreciation.

You know what, fuck you. Fuck your presumed wealth, fuck your trying to "time the market", what fucking market? Ok, Captain of industry, when you are out to dinner with Larry ask him for investment advice. Quit being such a fucking poser and quit wasting the time of folks who actually want a house to live in. Jeebus I just had a grrrrrreat fucking idea, go to the bank, get your considerable wealth out in the form of nickels, take the nickels and build a house. Should be OK, you have the house that only goes up and you'll be surrounded by what truly matter to you, the coin of the realm. Oh and they way to the 89 car garage you can stop by the bathroom and fuck yourself.

You know what, fuck you. Fuck your presumed wealth, fuck your trying to “time the market”, what fucking market?

Way to go, surfer. F*ck, f*ck, and more f*ck. You’re a real asset to all of us.

Why can't we just get along?

I went to (insert integer here) open houses today in Nob Hill and Pacific Heights, there were (insert integer here) people making offers well over (insert integer here) the asking price. I lost significant money (insert integer here) when trying to time the market. I am worth a lot (insert big number here), my time is very valuable, which is why I am here, because anonymous posting somehow influence my behavior.

I am rich. Suck my balls.

Ever watch planes, trains and automobiles FR? Have a fucking point. What exactly is the point of you coming here and posting? Is it a diversion from belittling your employee's, back slapping with your rich parents or just simply a bored fucking moron trying to humor him/herself?

I found this other blog where you might feel more at home.

imabayuppie.fuckandifeelrich.com

"I don't expect to lose in the longer term" - Face Reality

News for you, in the longer term, we are all DEAD.

Peter P,

Some of the mis-stated address belongs to the same school district, some aren't. If we open a floodgate for misstating address, before long, an Atherton property will find itself right in the middle of East Palo Alto.

What is the definition of tax lien? How long do you need to owe the county to get on such a list?

"I can bitch. I can bitch. 'Cause I'm better than you."

Lyrics by Bernie Taupin, dedicated to Surfer-X.

What is the point of life, other than eating?

Athena, thanks for the definition. I asked because I remember you don't get on the list right away if you are just a few months behind, the period is somehow, if I remember correctly, 3 years.

So? You think you don’t have enough years left to see house prices bounce back and appreciate even if a dip actually happens?

It can be a long time. But if you are not usually concerned with paper losses (or taking losses in general), it is fine.

Face Reality,

Inflation will ensure that the house can bounce back, that is 100% guaranteed. I am concerned about preserving and growing the buying power of my networth, not the nominal value. I won't buy anything knowing that it will go down for a few years or stay stagnant, I have better use with my money.

That is why I am not trading up right now (will do so when the market tanks), and hoarding gold. I expect to trade up in 5 years, all cash, and own my home outright. That is called investment.

surfer-x,
I would like to know what your opinion is of the following:

1) Do you think RE bubble will crash the whole U.S. economy?

2) What do you see as the future of the U.S. over the long term, say 30 years?

surfer-x wrote:
What exactly is the point of you coming here and posting?

Personally, I think Face rather enjoys being the rare bull on a bear blog, and posts more for sport than enlightenment these days. Though he regularly feigns insult at Surfer-X's barrage of profanity, I get the distinct impression he rather enjoys being at the center of it.* ;-)

*Not professional psychoanalysis.

Regardless, I don't mind responding to a contrarian point here and there.

As to mid-range properties, my observations are:
1) Prices increased quite a bit from last year.

They're down MoM and still slightly up YoY, but the trend is clearly downward and accelerating with each fresh sales report (see my post with CAR stats above).

2) Good units are moving pretty quickly.

This directly contradicts both regional & statewide stats showing sharply rising inventories and longer times on market, as well as a growing number of MSM articles on the subject (see Patrick's links page).

3) In desirable areas, prices always bounce back after dips and exceed previous highs, so there’s nothing to lose in the long run.

See Owneroccupier's 11:30 post on "the long run".
Yes, if you buy at a cyclic peak AND you can afford to hold on to the property long-term for many years without having or wanting to sell THEN, yes, you're pretty much guaranteed it will recover its nominal value at some point in the future. This may be a very long time, however.

Why take such a large and unnecessary risk with such a large illiquid (and nonproductive) asset when there are better, cheaper alternatives today (renting/moving)? Why not wait a few years when rents equal ownership costs and risk is mitigated?

4) I’m not good at timing the market. I screwed up in 2001 thinking that prices would go further down when they shot up quickly after a small dip. I lost a couple of years of appreciation when I finally bought on the peninsula in 2003 as a result of trying to time the market. If I wait a couple of years before buying in SF, I may benefit from somewhat lower prices, or I may lose a couple of years of further appreciation. I simply can’t tell for sure what’s going to happen. Either way, I don’t expect to lose in the longer term.

I don't know anyone who (a) can perfectly predict any market, or (b) purchases an asset "expecting" to lose money. Nonetheless, by now you'd have to be pretty dense not to acknowledge the many red flags the current market is throwing up in terms of being well above historical norms vs. rents & incomes, excessive levels of speculation, toxic loans constituting a large majority of financing, etc.

If you choose to ignore/dismiss these indicators, then that is your choice. I wish you luck, though I give you low odds of success.

Surfer-X is going to love the new cover story for Newsweek:

Sex & The Single Boomer
www.msnbc.msn.com/id/11300387/site/newsweek/

LTCM thought they were smarter than every other market participant, and then they were shocked when all the “stupid people” behaved irrationally!

They *were* smarter than everyone else. That was the problem. When engaging in grand-scale classic game theory scenarios, it pays to figure out what your opponents *will* do rather than what they *should* do. If you've ever invited your younger brother to play Risk with you and your friends you can see this in action. He'll kill himself off just to make sure that you don't win.

People move in herds because 30,000,000 years ago, if you strayed from the herd you became lunch. It's pretty hard to shake that basic instinct, even today. Worse, people despise those who dare to wander from the herd's wisdom; it violates their basic perception of fairness. For every defector, the herd becomes less effective.

When engaging in grand-scale classic game theory scenarios, it pays to figure out what your opponents *will* do rather than what they *should* do.

Exactly. If everybody does what he/she should, we will achieve utopia.

I just did some calculation, for a buyer who bought 13 years ago, and never pulled any HELOC out of the home and refinanced at a lower interest rate once, if I rented out my place today, my cashflow would have been negative!!

Even if I take into the consideration of tax savings for primary residence (which shouldn't apply for rental property), I would have barely been able to break even.

If the appreciation side of the story evaporates, there will be NIL investors interested in dealing with the grossly negative cashflow year after year.

The bounce after a dip doesn’t take THAT long, by the way. We’re not talking decades here, and the bounce always results in a recovery which is not just nominal - values end up appreciating at a rate higher than inflation.

It can be up to a decade.

Remember, a house does not produce anything, so it is not entitled to appreciation. Any reasonable expectation of future fundamental conditions would have been discounted by the market long ago. It is actually not easy to reason that future real return will be positive.

All observations of seeminly "appreciating" housing markets are based on a rather short history (200 years?) compared one lifetime (75 years?).

Are you kidding? I know of two examples in the bay area who bought in 89 and didn't see their home return to the nominal value until 1997. Think about the opportunity cost of money tied up!

Hmmm, what about not buying anything in 89, put in bonds, and then buy in 94/95, the bottom?

Looks like Owneroccupier & Peter P already beat me to the punch.

All I'd add to what they said is:
--Expect those Bay area YoY numbers to go negative (as predicted) by mid-June. Even most prime locations are likely to go negative by year's end.
--Rents are nowhere near montly ownership carrying costs virtually anywhere in CA, even factoring in the interest tax deduction.
--Beware of "dead cat" bounces" to the way down to the trough. Don't purchase until the rent vs. buy equation balances, and you'll be fine.

In Santa Clara County, inventory is rising, but not at breathtaking speed. We're above the 2001 numbers for the same date (2/14/2001: 1740 SFH, 2/14/2006: 1950 SFH), but the 2001 curve seems to be catching up.
My totally unscientific method is to get the total number of MLS-listed SFH for sale from www.mlslistings.com.

I think the psychology regarding housing appreciation in the valley is iron-clad thanks to the 2001/2002 bounce, and it will take longer here than everywhere else for the bubble to burst.
Also, some people on this blog have mentioned that these days, quite a few houses for sale are not in the MLS. Is there any good data on this?

My 2c about Google:
At CES this year, the pimple-faced Google booth personell proudly handed out a little booklet listing all the projects they're working on. I counted 46.
I hear that, in addition to those, there are a *lot* of secret projects underway.
An example of a project that wasn't in the booklet: Google Space Travel! ;-)
I hope to be wrong, but IMHO, this is all going to end in tears. Not investment advice.

In my neighborhood, ( alameda) there are bascially no houses left that are anywhere close to being in the 400-450k range, and the ones that are the next level are more like 550k. Some of these are what once was the guest house to a larger house. There was a article in the local newspaper about an older somewhat wealthy couple that bought a small former chicken coop.( I am not kidding on this) that had been turned into a 1 bedroom house. Alameda was once a working man's, blue collar shipyard town, and many of the houses are basically shacks. Thus all that is left are what people at one time considered outbuildings, sheds, garages, and in the case above- chicken coops.
When I visit my family back in TN, I always get the question: " how in the world do people afford to live out there?!" I tell them a few new stories. People in CA might think that they are pretty lucky to live here, but as far as anyone I've talked to in numbers of other states, there is definantly no jealousy. They simply think we've lost our heads.
There is also a growing anger in places like Nashville where the severe upswing in recent California and New York refugees is for the first time causing the prices to go up in the double digits. Nashville just had a 10% growth last year. Thus the tone very recently from my family has been that they too wish the bubble in CA and NY will die soon, because otherwise they are going to get affected by families moving in, which ironically will raise their cost of living if left unchecked.
Back to Alameda, as mentioned above, we see the same houses up for sale over and over again. Both small and large homes are not really selling, and the other phenmina is that it seems like half of the island is now for rent. These rentals too sit totally vacant for months and months on end. In fact, it is safe to say that of the places that I've seen for rent, hardly any of them have come down since I have lived there for the last 1.5 years. I wonder what that indicates.

HELIBEN BECOMES HAWKBEN

“Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. economy was running so close to capacity that it faced heightened risks of an outbreak in inflation that could require higher interest rates to tame. In his first extensive remarks since taking office two weeks ago, Bernanke appeared to be making an effort to establish credentials as an inflation ‘hawk’ by stressing the need to keep price pressures contained.”

Yes, Alameda does have some pretty homes, but these come at a hefty price. It is decievingly expensive here, as in 8-900k for a victorian home, and several million for one on the water on Bayfarm Island. Alameda also has one of the fiercest anti-development clause in the Bay Area. Recently, there was a proposal to refurbish the Alameda Theater, built in 1927. The refurbishment would include a new parking garage attached to the side, so that this would avoid clogging up the streets. Sounds great huh? Well the local citizens shot it down quick. The same goes for even a mention of building new homes or perhaps turning the old abandoned military base into housing. Nope. Nada. Hell- my neighbor has a sign that says" keep measure A- No overcrowding!" and when the city needed to trim a branch off of one of her trees, she balked.
Alameda is basically a microstudy of exactly why CA is so damned expensive. because this whole attitude that "we were here first, and if you wanna' live here, then you'll have to wait for us to die first.. and you'd better not pull up my rose bushes after I'm gone either!"

HELIBEN BECOMES HAWKBEN

Bernanke's real test is fast approaching. What he does to stave off the looming prospect of stagflation will be very telling. Higher rates to fight inflation, or lower rates to avoid/recover from the gathering recession? (I fully expect the latter, but I have nothing more than a hunch and deep cynicism to offer as proof).

In the case of the naval base, it is HUGE, and what's more interesting, there are literally thosands and thousands of empty former military housing units. These are all smallish, concrete, well built condo buildings, complete with parks, playgrounds, a school, church, and access to the water. Some of them have been abandoned since the late 80's. They are all in good shape and could easily be turned into affordable housing units without a lot of work.
The city does nothing about it. A few years ago, there was a condo complex full of ,mostly immigrant families near the base. The city kicked them out. What went up in place were Massive, luxo homes that start at over a million bucks. I looked inside a few of them. The houses are shoddily built, but have all stainless appliances, big bathrooms with hot tubs and walk in showers, and nice floors, but as a former hardware salesman, I reached up and touched one of the rustic ceiling beams and realized they were made of hollow plastic. They are made to look nice, but in reality they are cheaply made worthless houses, so somebody made a killing and at the expense of many displaces low income families. Nobody seems to care either. Meanwhile, the base sits vacant and chained off. The base takes up half of the island, thus the opportunity is ripe to make it a nice new place for future citizens, and to make things even more palletable to the existant citizens, the base is totally seperate from the rest of the island. Hell- they never go out there anyhow, so why should they care?
It really pisses me off. There is TONS of room to develop, but they instead develop a overpriced group of luxo-homes instead.

The rent vs. buy equation wasn’t balanced in 2003 when I bought my house on the peninsula, but buying was a good move nonetheless.

It depends.

800K vs. 3000/m in SF is not exactly balanced but is acceptable.
700K vs. 2000/m is SJ not just unbalanced, it is out of whack!

Or how about this in the South Bay - $750k condo for $1795 a month. Gee, should I buy it or rent it?