patrick.net

astrid,

I'd recently read one school is no longer accepting papers from students using wiki as a "reference".

I would preface my argument on the basis that no comprehensive coverage of the bubble is complete without THE NUMBER ONE bubble site (and of course our good friend Casey!)

I don’t understand why people finance or lease cars, to tell you the truth. I have never owned a vehicle I didn’t buy outright, new or used. If you drive your car to death, you can easily save the cash for a new car.

Huh?

Leasing makes sense because you are paying mostly for the depreciation, which is going to cost you regardless.

Why would anyone ever want to drive a half-dead car? Is it even safe?

007 Says:

> Long time lurker, first time posting,

Welcome, you are probably the only poster with a “License to Kill”…

> I have a question for the group here. Why is it that people in the
> upper middle class seem to be willing to keep on buying in this
> obviously inflated market? I haven’t seen any pull back in the $1.5
> to $2.5M price range, either in the bay area, Los Angeles or North
> County of San Diego. In fact recent figures in SD N.County prove
> out that since the beginning of the year the market is better than
> it was in the same time period for 2006 in houses $1M+.

Many of the $1.5mm - $2.0mm homes selling today would have sold for $1.75mm - $2.25mm last year. If you get details on the new SF condos most are selling for less than comparable units sold for last year even with the HOA fees paid for a year and many upgrades.

Today SF gate had an article about how high end homes were holding their value and I laughed when I saw that the article had a photo of Andre Agassi and Steffi Graf’s house in Marin that sold late last year for $3mm less than they paid it for (after a long time on the market and many price cuts).

> I would make the assumption that people dealing in these price
> ranges have to be somewhat savvy buyers and aware of the
> economic and housing environment. So why would they be buying
> now?

Most people that make enough to buy $2mm homes are “smart” but most are not “savvy buyers”.

Peter P,

I'm saying that if you buy a new car for cash, drive it until it's pretty much at the end of its useful lifespan, then buy another one for cash, you're saving money over borrowing money to do the same thing. And if you can't afford to buy a new car for cash, buy a decent used car.

I've never understood making payments on cars. They drop in value the second you drive them off the lot. They drop A LOT. Yet people still pay, say, 20k for a car, promise to pay another 5k in interest charges over the next 3-4 years for a car that will be worth at most 10k. They're throwing away 5k, given that they decided that it was worth 10k to drive that car for 3-4 years.

However, for 20k, they can drive that car for 20 years. Sure, maintainance eventually catches up and it's cheaper to get a new car and start the cycle over, but certainly not every 3-5 years.

Leases were invented for people who like to do that sort of thing, but don't pay cash up front. Personally I don't like leases because I don't want to have to worry about violating a milage clause and paying extra when I turn it in, etc. But if you get a good lease it can be cheaper than 'owning' a car outright if you plan on swapping soon.

My main point was being flabbergasted that somebody in a 2.2 million dollar home could be worried about a new car tipping them over the edge.

Peter P

Leasing often does sound good, but if you buy a second hand car (1 to 2 years old), then most of the depreciation has already been paid for by the previous owner/leasee - besides if it's my car, I won't get it in the neck so much from hubby when the kids put a dent in it or spill a drink!

SP,

Definitely the "high gloss" stuff! LOL!

I guess what I was trying to say was that it wasn't some big production. A 6' ladder handled most of it. People seem to love vaulted ceilings but somehow forget that a wall of equal height must be on the exterior?

However, for 20k, they can drive that car for 20 years. Sure, maintainance eventually catches up and it’s cheaper to get a new car and start the cycle over, but certainly not every 3-5 years.

I cannot find a 10 years old car with all the must-have safety features:

1. Front airbags
2. Side airbags
3. Side curtain airbags
4. Traction control
5. Stability control
6. Good frontal and side impact scores
7. Good realibility

The closest one would be a 1997 Lexus LS400. But I believe it does not have side curtains, which are IMO more important than front airbags.

SFBubbleBuyer,

Well, we're all flabbergasted. But that doesn't mean that people aren't stretching that much to make the numbers "work"! THIS w/half down!

My hubby keeps pointing to the local BMW and Mercedes dealerships that are offering leases in the $240 pm range - however, I keep telling him he needs to bring me the small print before I'll ok one of those!

I think the next time we buy a car, we will look to see if there are any 0% finance deals, otherwise it will be another second hand car for us - I haven't done the math, but unless their financing is virtually free, I can't see any reason to buy a new car (because of the depreciation incurred just driving it off the lot).

My hubby keeps pointing to the local BMW and Mercedes dealerships that are offering leases in the $240 pm range - however, I keep telling him he needs to bring me the small print before I’ll ok one of those!

Just ask the dealership to give you a *tax-inclusive* number with

1) zero money down (cap-cost reduction does not make sense)
2) realistic mileage restrictions

$240 may jump to $400, which may or may not worth it.

DinOR - I would love to know how many people are stretched at the top end, that might give us an idea of how big the crash will be - everyone in this area says the housing won't be affected here (we're different don't you know) but if they stretched to get in their 1.5m house, then I would think that they are just as likely to have problems as the sub prime not so good areas.

Everyone says MV is different, but I just don't think it will be - maybe I'm wrong - some arguments either way would be helpful. By the way, why aren't there many decent rentals out there at the minute - and the ones that are are asking pie-in-the-sky rental prices(or so it seems to me)? I was hoping there would be a lot this year! Looks like we will have to stay put for now!

Upper-middle class wage earners is what we’re talking about. Very few of them can even count to 5M, let alone pay that much.

Upper-middle class are all "wage" earners in some sense because their own time is the real money maker. If they have enough passive income they would be in the upper class.

SP,

Excellent summation. We could write an entire book on "that" crowd and I applaud your keeping it on point.

"never even heard of M2 or the yield curve"

"one could argue that he may be better off banking the cash in a more diversified portfolio"

Recently Phil Knight (Nike) began selling out of a fair amount of his company stock. Being at the end of a truly remarkable career, it was well deserved (and necessary). My guess is that PK *wasn't the driving force behind those decisions. In fact I'm willing to bet his financial team had to beat him half to death over it! Great guy though.

The big deal was the fact that insurance companies, pension funds, and mutual funds had stakes in this venture. That’s the part which is shocking. Only silly rich people: Oil Sheiks, Trust Fund babies, Bling-Bling financiers, etc should be in such a high risk game. The conservative institutional investors are suppose to mind where they put their eggs.

The whole San Diego pension fund/Amaranth hedge fund blow-up seems to be validating my original contention that Wall Street would try to engineer ways to stick ordinary retail investors with the bill for their subprime MBS/CDO "creativity". I took a considerable amount of flack for that, with most of the finance types here saying I was flat-out wrong.

And now there is evidence my original position was right after all....

Claire,

So would I, so would I. Well the MB's that wrote those loans would certainly have a pretty good idea but they've been oddly mum here lately. Like I've always said, I'm sure there are those that can well afford and it will truly NEVER be an issue for them.

It's just funny that there's ALWAYS been such a huge turn-over in Lake Oswego, OR (the closest thing we have to Beverly Hills) b/c so many move there in the hopes that the address alone will drive business their way. Shortly there after they figure out they *can't afford it on a veternarian's/teacher's income, put it up for sale only to be bought by the next wannabes. It's so...... old.

HARM,

Sandibe (among others) assured us there was some sort of "Chinese Wall" between rank and file investors and big bad HF's. My point has always been that once the sell off in MBS begins in earnest, credit quality won't matter nearly as much as some would like to pretend. Now we're finding municipal employees are out about $85 mil. in their pension fund. Back to work fellas! :(

Great for finding all the alternate universes in the Marvel/DC Comic canon, less good for current events coverage.

hmm, I've noticed that. Why on earth have they documented every manga series, TV cartoon series and comic book character in such excruciating detail? The Britannica entry on manga or anime would probably be about 1 paragraph long in total...

Further, was wiki seeded by any particular encyclopedia text at inception, or has it all been written from scratch by enthusiasts?

Land Rovers and Range Rovers are no longer "British" - they were bought by Ford a few years ago.

Need I say more about their reliability now?

Can I have one of your creampuffs?

Jaguar was acquired by Ford, and started using the same parts. Jags even started looking like Fords, they both make large streamlined saloons...

They say that approximately 40% of the cost of everything we buy goes into advertising. It only costs about $5K or something to 'make' a car, the rest is showrooms, salespeoples' salaries, and massive amounts of advertising...

There are excellent things from Britain. For example, scones and devonshire cream. Yum.

Yorkshire pudding too!

The idea of $2M upper middle class home is just mind boggling. $2M will buy a great (non-working) life style almost anywhere in the world, why in Hades would otherwise intelligent people toil the best years of their life to own something that would cost $150,000-300,000 in most of the country?

TurboTax does pretty well for probably 70-80% of people's tax needs.

TBR,

Every time we have someone come on board in an effort to explain exactly what it is that HF's do (or did) we get an almost completely different telling of the story.

Are you trying to tell us that Vangard, Fidelity and other fund companies were buying "off ledger pink sheet stakes" in complete contrast to their printed prospectus? To my understanding in most cases "fund of funds" were created in-house within firms existing fund offerings. The trend if anything was for the wire-houses to do away with their proprietary funds as quickly as they could to distance themselves from conflict of interest.

If the idea was to "bring home the bacon" this strategy failed absolutely miserably. Have you ever worked in a registered capacity at all?

$2M will buy a great (non-working) life style almost anywhere in the world, why in Hades would otherwise intelligent people toil the best years of their life to own something that would cost $150,000-300,000 in most of the country?

It's special here. It's not special anywhere else.

It is just one data point, but I know someone who has 1.2M in cash (vested stock actually, but let’s say it’s cash). Family income is around 200K gross, with a working spouse. His realtwhore has convinced him he can ‘afford’ up to 1.8M. He thinks he can manage a 600K loan.

$600k shouldn't be hard for someone with a combined income of $200k. I know people who have $550k mortgages with ~$100k incomes.

No kids though.

$600k shouldn’t be hard for someone with a combined income of $200k. I know people who have $550k mortgages with ~$100k incomes.

Is it harder if he needs to pay the T (in PITI) for a 1.8M house, which is more than 20K/year.

In the Bay Area, at least 75 or 80% of loans would be considered “aggressive” by this definition.

Umm, no. Maybe you mean 75% of new loans, but very few loans made before 2002, which are the majority of outstanding loans in the Bay Area.

Astrid, people want to live here, as simple as that. Plenty of us could live anywhere in the world and we choose here. I don't consider myself "slaving away half my life" I consider myself living a decent, but modest, existence exactly where I want to be. I could have more "stuff" elsewhere, but it wouldn't make up for having to live there.

You could argue that Bay Area home prices will go down *more* than they will elsewhere, but if you are, I respectfully disagree. San Francisco home prices have always been 3X median US prices and they always will. It is a great place to live.

007, I think that people who own homes like that have just pulled them off the market. Most people who own a home that is worth that much can sell when they feel like it and right now they don't feel like it.

DinOR says,

Every time we have someone come on board in an effort to explain exactly what it is that HF’s do (or did) we get an almost completely different telling of the story.

That's because there are so damn many of them. Seems like every fund has some different angle on why they're smarter, stronger, fast than the rest of the world. I've heard of some pretty crazy ideas so I wouldn't doubt what TBR described happened somewhere at some point somehow.

-fast
+faster

MtViewRenter,

Well just when you think you've seen it all...... So agreed. I'm sure that may have occured in some or a few instances I just have a hard time accepting that particular explanation as being SOP (standard operating procedure)?

I agree with DinOR that some average Joes -- the few who actually do have a pension to look forward to after retirement -- have some indirect exposure, by virtue of pension fund investment in hedge funds, to high-risk tranches of MBS, but I continue to be confident that such exposure is limited.

Pension funds (as well as insurance companies, endowments and other institutional investors), on the whole, are highly sophisticated investors. They have qualified staffs as well as qualified outside consultants whose sole job is to invest billions of dollars wisely. On the whole, they show more discipline in their investing than probably most of us on this board -- and I would assume that this board is comprised of a pretty disciplined group of investors. Are pension funds immune from bad investment decisions? Of course not. Investment is not a risk-free proposition. But their portfolios, on the whole, are diversified in a manner that limits damage from a single industry.

Pension funds typically invest no more than 20% of their assets in "alternative investments," which includes hedge funds but are more often private equity funds and venture capital funds. Even if we assume that half of a pension fund's alternative investments are in hedge funds (which would be a high assumption), we are at 10% exposure. There are many types of hedge fund strategies -- most of which do not involve investing in high-risk tranches of MBS. Even if we assume that half of the pension fund's hedge fund investments are in hedge funds that focus on high-risk tranches of MBS (which again would be a high assumption), we are at 5% exposure. In other words, if all of those high-risk tranches of MBS were to become completely worthless, a pension fund is unlikely to lose more than 5% of its assets. It most likely would lose less because its exposure its unlikely to be 5% and those high-risk tranches are unlikely to be completely worthless. And this analysis does not factor in the benefit of past gains that the pension fund may have enjoyed from investing in those high-risk tranches.

If people are worried about the retired school teacher's pension, they should be worried about the systematic underfunding of pension funds by governments and employers rather than pension fund exposure to high-risk tranches of MBS.

If people are worried about the retired school teacher’s pension, they should be worried about the systematic underfunding of pension funds by governments and employers rather than pension fund exposure to high-risk tranches of MBS.

There is nothing wrong with the pension funds themselves. It is all about the aging Boomer population. No matter how you spin it, we are going to have many retirees and not so many people to support them.

DinOR,

Who knows whether it is/was SOP. While I doubt it, I'm just not surprised by any "new" financial products anymore. The human capacity for greed can't be taken lightly.

Just the other day, looking at some 2006 1099s, we noticed that the CA muni money market sweep fund we use had about 1/3 of its income from private activity bonds. They were probably so starved for yield they had to go buy private activity bonds. The interest from these things are AMT preference items!!! Kinda defeats the purpose of putting your money in a tax exempt fund.... I need to find the fund manager and rip him a new one.

Sandibe,

Aren't there a lot of smaller municipalities that don't have very sophisticated investment staffs to manage their pension funds? I swear I've read some stories about some pension funds in small towns that got taken for a ride either through outright fraud or through very high-risk investments.

Sandibe,

I'll have to agree by and large. The first question should be, will there be ANY pension funds at all! San Diego had some pretty high profile board defections and well publicized financial short falls. Now even though the management of account overall was sorely lacking, turning their remaining assets over to a manager with no known track record isn't helping matters.

My point in posting the link to FI360 was simply to exhibit that properly done there should be layers of over sight for any retirement plan with redundant fail safes in place.

For those of us that have been a party to these types of relationships sadly all too often the firm that "lands" the account has some sort of "in" 7 times out of 10. Locally, Craig Berkman lost the British Columbia Public Employees Union about 64 out of the 65 mil. they entrusted to him. The guy had a lot of "start-up" experience but had never actually managed an account. As evidenced here, there's a big difference. He's now moved to FL (presumably for their legacy of strong property rights).

Just the other day, looking at some 2006 1099s, we noticed that the CA muni money market sweep fund we use had about 1/3 of its income from private activity bonds. They were probably so starved for yield they had to go buy private activity bonds. The interest from these things are AMT preference items!!!
MtnViewRenter,
Thanks for explaining what the heck is up with my 1099 from E*Trade :-)
I kinda figured that last item had to do with AMT, but glancing at it is, like, wtf?!

PAR said:
She also gets a tiny little tax deduction.
How's that? Standard deduction should trump her mortgage interest deduction, right?

I guess I qualify as Gen X being 32, and I for one don't believe Soc Security will exit when I retire, or that any place I work will have a Pension. Right now I put money in an IRA, a 401(k) with no employer match, and try to set aside more to invest seperately.

I also don't trust pension fund managers, or Mut Fund managers. I go with straight index funds in my 401 and IRA, and invest in companies I like with my individual accounts.

If I could opt out of SS totally, I would. THAT'S what I want, not some reform that allows the government to Haliburton the SS funds.