patrick.net

what do you guys think about Zillow.com?

Very interesting. But it is more of a lagging indicator, isn't it?

People are selling their google stocks because they need the money to pay their ever rising monthly payments.

"I think that it makes the market more transparent, and will put presure on the Realators to reduce transaction costs"

It is a nice toy for now. But it's making its debut in what many of us feel is a transitional market; a very tough environment to prove its worth. As of now, many people have questioned its valuations, and it will take much time for it to prove how much of a "real time" indicator it is. I'd say only about 10-15% of the comments I've read (numberig probably 25 or so) have indicated that the zillow zestimate is accurate.

@Peter P

Well, I thought “program trading” (delta hedging) was suspected to have caused the 10-sigma+ 1987 stock crash.

I never bought into the program trading explanation. I don't know how much program trading was dedicated to delta hedging either. I think a lot of it was pure arbitrage programs (delta hedging is risk reduction, not elimination).

There are many economists and behavioral finance types that put forth more of a psychological theory now:

http://www.lope.ca/markets/1987crash/

I think there are lessons here relating to how the housing market will crash. It will, of course, be slower and more localized than a stock market crash (due to liquidity and transactional friction), but it will still gain most of the downward momentum from mass psychology.

I believe Zillow is a lagging indicator. I also think it has sporadic valuation issues. It seems pretty accurate when there are factual sales on a property and enough nearby properties for the dimensional averaging to work. When there is shallow data, it seems to get valuations way way way off.

Assuming Zillow is lagging, then we should be comfortable in our "crash is underway" sentiment. I'm flying through many neighborhoods in Mill Valley I've been watching for the past year or so. Zillow is showing pretty much a 15% drop in the past 30 days in all those areas. I see one home down from 2.62M to 1.79M; which seems pretty common for similar McMansion new construction homes.

"There are many economists and behavioral finance types that put forth more of a psychological theory now:
http://www.lope.ca/markets/1987crash/"
--Randy H

Cool link. 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. 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.

However, strangely enough, LTCM formed not too long after the crash of '87 and LTCM's entire investment strategy and all of their models were based on an almost absolute faith in the infallability of the Efficient Markets Theory. Namely, they bet and bet big that markets would become less volatile over time (so they shorted equity volatility), and that bond spreads would converge over time (so they shorted more liquid bonds and bought more illiquid bonds on the belief that prices would converge). And they were so confident that they leveraged all of these bets 30 to 1! Frickin' Harvard Economists thought this was a good idea! Leverage killed them when all those bets went against them after Russia's currency default spooked the markets and caused the herd to behave IRRATIONALLY and sell everything that was remotely risky or illiquid. And this SHOCKED the "geniuses." LTCM thought they were smarter than every other market participant, and then they were shocked when all the "stupid people" behaved irrationally!

So I ask anyone who has a possible answer: why on Earth would anyone bet big on totally efficient markets just a few years after the crash of '87 would seem to have discredited that theory?! And why leverage your bet 30 to 1?!

Our current housing bubble is yet another example in a long historical line of examples of markets becoming wildly out of synch with fundamental values. But go ahead, step right up and make a leveraged bet that the bull run in housing will continue indefinitely. This time it's different! In this day and age your leveraged bet is an I/O no-doc mortgage. Have fun!

"All that article proves is the best time to buy a house in the BA is 30+ years ago." --Sunnyvale

And Google on its' IPO!!

Face Reality,

Saying open houses or RE events are “well attended” and saying there was a stampede to get their checkbooks out are two different things. My wife has been dragging me to open houses for a year and a half and while she may be looking at homes, I’m just there for the “wine and cheese”.

Come assbite's name tells all FACE REALITY. He's a well heel'd biznance owner, a PhD holder (who by the fucking way knows every fucking thing about graduate school and research, turns out all research done anywhere is computer science, PS FR FU)

Ok, FR, if you are so fucking kill missile, buy that fucking SF piece of shit over priced hovel, call MP, buy some lube and a one sided coin and get freeeeaky.

What's the difference between an elephant and a Reatorâ„¢?

Ans. Elephants don't lease BMW's.

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?