patrick.net

These guys remind of the film clips you see at “the running of the bulls”. They wait for the last bull, tap their big toe once on the sidewalk and then bolt back into the doorway! Dude, you were -not- there.

There are no end of "accidental hero" analogies. The most recent being Will Smith's "Shark Tale" character. I'll stand by my record of selling Apr 2005 and subsequent headstone birth/death dates recounting the passage of the Clinton 2/5 cap gains exemption and date my housekeeper bought a house for 3x my house.

Robert
Vice President , Pillage & Plunder Divison [pro-tem]
HARM-X Industries LLC

By Steve Gelsi
Last Update: 9:43 AM ET Aug 6, 2007

NEW YORK (MarketWatch) -- NYSE Regulation Inc. said Monday it suspended trading of American Home Mortgage Investment Corp (AHM : AHM

I have a dumb question. What if you were shorting AHM these last two weeks? Now you can't cover your short position since the stock is no longer traded. What happens now?

Check out Jim Cramer's analysis:
http://www.youtube.com/watch?v=SWksEJQEYVU

@Rob Dawg,

Nice to see you're still an active member of the Board, if only "pro-tem". ;-)

Oh, and btw, the Fed's holding steady at 5.25%. The market didn't seem to like that too much (Cramer must be beside himself).

Check this out. The "flipper in trouble?'" house I posted in the Netherlands thread ended up in a SF Chronicle article. Evidently the owner is going by the adage "there is no such thing as bad publicity" (carrying costs, what carry costs...)

Even those sellers who choose to set certain price parameters find obstacles. Jain Wager has just relisted a historic Berkeley hills home for $3.65 million. She and a business partner purchased the house in 2005 for $1.23 million and put more than $1 million into renovating it. But after trying to sell the house for $5 million earlier this year, Wager attempted to "try to create some excitement and try something unique" by auctioning it with a starting bid of $2.249 million. Wager also reserved the right to accept or reject any offer.

"I think we came out of the gate a little high (on price), and it would have been better to lower it and have people bring it up to the market," Wager said. "I don't know if this system works for luxury homes or not. I think the jury is still out on that."

As a reminder, Propertyshark.com is showing a $980,000 variable rate mortgage on the house.

Randy H Says:

"The problem is that you said the inflexion point was “directly ahead” a year ago."

There is no denying that you are right and I was wrong on timing the inflexion point. Another problem I am having with timing the inflexion point is that consumer spending is still going strong as consumers expand their use of credit card debt.

"The other problem is that rents are going up, not down...".

I expect that this will change and rents will fall when consumer spending declines which has not happened yet.

"Hiring in the Bay Area is also very brisk and employees in many professional fields are in short supply; not like 1999, but a bit like 1996."

I am happy for you. But real estate and related jobs are declining. That is beyond denial.

It's different in the bay area......seriously!! It's really a different model....

Everybody makes at least half-a-millon a year and no more houses are being built. Median home price summer of 2008.............. 5-mil.....

Well, for many of us here, the really interesting thing about the hike in jumbo mortgage rates is how this will affect the Bay Area, where even stucco $hitboxes require jumbo mortgages. Interest rates upwards of 8% will really cut into purchasing power. The possible outcomes seem to be:

(a) buyers ratchet down expectations even more (as if they could be any lower) and buy even crappier places with the amount of money they planned to spend

(b) buyers simply put off buying

(c) sellers lower prices to attract those same buyers back

(d) buying idiots are pushed even more so towards alternative loan products

(e) it doesn't matter, since all the buyers in the Bay Area are rich foreigners paying in cash, like sybrib seems to think. ;)

(f) a combination of some or all of the above

Well SP, OO (and others), that expected interest rate hike is now here - what are your thoughts?

Brand Says:

> FAB: Can you comment on some of my observations above
> (2nd from the top)? I am puzzled at how landlords can be
> selling properties that are immediately cashflow positive.
> Can you outline some situations in which that happens for
> medium-sized and large complexes?

If you make a big enough down payment almost any real estate deal will be cashflow positive.

I didn’t see any rent numbers but remember a good rule of thumb to calculate cashflow is:

Annual Rent
- Vacancy & Credit Loss (Usually 5-10% of the Annual Rent)
- Expenses (Usually ~$3,000 + Taxes per Year)
- Capital Costs (Usually ~ $300/unit Year over a 10 year hold for apts and ~$1,000/Year for single family).
- Mortgage cost per Year
= Cashflow

goober Says:

> It’s different in the bay area……seriously!! It’s
> really a different model….
> Everybody makes at least half-a-millon a year
> and no more houses are being built. Median
> home price summer of 2008………….. 5-mil…..

It's funny but I (really) just heard a Realtor tm say basically the same thing (she told me she was worried that I would never be able to buy if I kept renting and was sure that the mortgage meltdown would not lower Bay Area prices at all).

FAB: Did you thank her for her concern?

So if property always goes up in the Bay Area, why aren't realtors telling their sellers to hold their property indefinitely? But I guess it's always a good time to buy or sell a home (tm)!

Well, for many of us here, the really interesting thing about the hike in jumbo mortgage rates is how this will affect the Bay Area, where even stucco $hitboxes require jumbo mortgages.
Skibum,
I am not convinced this has happened. From what I can gather from various blogs (see Socketsite and others), the vaunted Wells Fargo 8% rate for jumbo mortgages is for mortgage broker initiated loans. See the Wells Fargo site for loans originated in house. What we may be seeing is the banks "taking back" the broker's margin and bringing it in house. In a "normal" environment, I think the MBs could make a big stink about it, but given the current state of affairs, the banks can say they are protecting the market from the shoddiness of broker processed loans. Think travel agents and paradigm shifts as we finally emerge from this mess... At any rate, things are tightening up concerning documentation and bigger downpayments, so this should have some effect in the Bay Area.

FAB, I literally meant with a 100% loan, the places appeared profitable. Obviously you can pay cash and calculate ROIC that way. How much does a bank typically require for a downpayment on an income property? Also, what is considered good operating income?

http://www.cohomefinder.com/p/80521/405119.htm

$2,450,000 for 15 units, each 3 bed, 3 bath with W/D. Complex is located one block from Colorado State University. Two bed, one bath units one block away in another condo development are leasing at $800/month. Thus I will estimate these condos at $900-1200/month. I assume that you can actually take his assumable 6% loan on $2,450,000.

So from your calculations above:

Costs: -3000 (expenses) + -13500 (taxes) + -4500 (costs) + -147000 (100% mortgage @ 6%) = -168000/year

0.9 * (12 * 15 * 900) = 145800, loss of 22200
0.9 * (12 * 15 * 1000) = 162000, loss of 6000
0.9 * (12 * 15 * 1100) = 178200, income of 10200
0.9 * (12 * 15 * 1200) = 194400, income of 26400

Assuming that the bank required 10% (245K) or 20% (490K), in the $1100 scenario and subtracting out the mortgage difference, you would be making (10200 + 14700)/245000 = 10.2% ROIC and (10200 + 29400)/490000 = 8.1% ROIC, respectively.

Now, 8.1 % or 10.1% ROIC does not seem like a huge return for the present term. That's basically just treading water in the index funds. And 15-unit apartment complexes require major work to keep running. However, assumedly inflation will push prices upwards, eroding the mortgage deduction.

Now if you could get the place for a significantly reduced capital outlay, say $2M, then the returns start to look very attractive.

DennisN,

Long about 2002, during Harvey Pitt's brief tenure (I believe) they did something that should have been done months prior. They made "positive determination" mandatory. Meaning you couldn't have some whiz kid with a 2k account on e-trade putting in an order to short 2 million shares!

You had to be able to prove you had the resources to deliver said shares in the event you were on the wrong side of the trade. It got to be a real problem b/c there were shorts stacked up well above and beyond the total number of shares outstanding! Too bad it only took two years to get it right?

AFAIK the order book specialist pairs up as many positions as he can and if there are enough longs on the other side of the trade your short will be honored. If not, you're SOL. However... I'm told they have that pretty well policed now. Peter P might be able to fill in some of the finer points.

Randy H,

DennisN had a question (that wasn't dumb at all) and my response is tied up in moderation. A little help?

I think 2 things are happening in the mortgage market, both caused by the "repricing of risk".

1. The banks are putting a larger risk premium on broker-originated loans. I'm not sure this is so much a desire by the banks to bring the business back in house. It could also be a way to force higher standards on the brokers.

2. The banks are repricing conforming loans and therefore being forced to reprice conforming loans at near where jumbos are sitting. Since the market for jumbos is very illiquid right now, no one knows what the fair price of jumbos even are, so the banks are being conservative.

For the record, I've always had a "jumbo" on my BA homes. When I fist bought anything over $250K was a jumbo. That's because the standards are set by national medians, not accounting for regional disparities.

A little help?

Done

Brand

I had to model a very similar scenario (though it was commercial real estate) in B-School. If you run that as a reasonable monte carlo simulation you'll find a lot of loss in the demand and price variability alone.

I have noticed prices are down about 10-15% in LA area.

However there are still knife catchers out there but fewer every year.

Here is an encouraging sign: in 2004 my uneducated neighbor quit his $10 an hour phone job, got a RE lic after 8 months of hard hard study and told me he wuz 'gonna be a millionaire soon'. He starts flipping homes. He did have about 400k equity to start with so a good start. I just saw a pre foreclosure sell for 740k but this guy paid 850k in 2004. He must be broke or near broke as the home was vacant, dead lawn, mail piling up.

flippers dying on the vine every day. This time next year they should mostly be worked out of the system. Im basing this on the high number of flips I still see listed (for 6+months typcially) and the fact that foreclosure takes 12 months and mostly they wont/cant hold on that long. Even rented out some of these places will eat 2k+ a month while rented.(more if ARM loan has adjusted)

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2007/08/07/financial/f140331D05.DTL&tsp=1

Sun Microsystems to Reduce Work Force

What we may be seeing is the banks “taking back” the broker’s margin and bringing it in house.

EBGuy,

On the other hand, there is a piece in bloomberg suggesting that in fact the main reason jumbo loan rates jumped so much is that all of a sudden, there is no demand for them in the secondary market. Most of the demand now is in loans that can be bailed out by Fannie or Freddie if need be, which doesn't include jumbo loans.

I believe this is one componenet of what Randy is talking about with banks, lenders, and investors "repricing" risk. They are overshooting by looking for totally bailout-able loans, imo, but that's what happens during a panic...

Brand Says:

http://www.cohomefinder.com/p/80521/405119.htm

$2,450,000 for 15 units, each 3 bed, 3 bath with W/D. Complex is located one block from Colorado State University. Two bed, one bath units one block away in another condo development are leasing at $800/month. Thus I will estimate these condos at $900-1200/month. I assume that you can actually take his assumable 6% loan on $2,450,000.

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

My goal in this downturn is to pick up a similar deal (1/3 smaller) in here in my state...

1- Long term (10-20 yrs), I am willing to bet 5-to-1 that the risk-adjusted return on similar deal initiated at 2009-2010 prices will be very very attractive....great leverage, credit still relatively cheap, much smaller pool of potential competitors on the available deals (Casey Serin who?), probable high future inflation and high volatility in the stock market...

2- The usual risk-averse suspects who are now talking about 'Monte Carlo simulation, opportunity costs' will be quick/force to drop fancy concepts like ‘ex-ante, ex-post’ in a couple of years, when the attractiveness of such deals will be plain for all to see…Don’t listen to them as they don’t seem to understand very well the concept of decision making under uncertainty and incomplete information (dynamic programming)….

My only concerns are that this deal seems quite big (time/spare cash needed) to pull off with a high probability of success:
1- Managing 15 units on your spare time is a daunting task
2- You will need to have at least a 5-10% rainy day fund (unexpected maintenance...) on top of a 10-20% downpayment/renovation fund...lots of cash...
3- The implicit assumption is that students will rent the place: is that true now and is it likely to change (new dorm, stigma, university shuttle stops nearby..)
4- Can you cope under a worst-case scenario for a couple of years...

Anyway, let us know what you find/decide

Brand Says:

> $2,450,000 for 15 units, each 3 bed, 3 bath with W/D.
> Complex is located one block from Colorado State University.
> Two bed, one bath units one block away in another condo
> development are leasing at $800/month. Thus I will estimate
> these condos at $900-1200/month.

I assume that you can actually take his assumable 6% loan on $2,450,000.

If we assume $1000 a month we get gross income of $180K

Net income after vacancy and collection loss will be ~$171K

Expenses at $3K a unit leaves us with $141K

Backing out taxes and CapX will get you a NOI of $123K (a 5% Cap Rate).

The best commercial loan you will get today will have a rate of about 6.75% and the lowest DSCR you can get is 1.20 so the biggest loan you can get will be about $1,265,000 (52% LTV) so if you buy this property at the list price you will get about a 2% cash on cash return (when the cap rate is lower than the loan rate it kills the cash on cash return). The way I read it you can assume a current loan at 6% but it does not mention the loan amount so it is probably a $1mm loan.

Randy: Is the Monte Carlo simulation goverend mostly by spreadsheet equations, or is it something that I would need software to do? In engineering, we obviously do MC simuations but it takes specialized tools and considerable computing horsepower.

TOS: I am just running the numbers as a mental exercise. I doubt that I would ever buy that place, especially at a price where breakeven was so fragile. I am looking at various opportunities now with a pool of experienced and inexperienced investors (mostly small business opportunities), but I am quite interested in learning how to do the analysis and business case myself.

Brand

You need special software for anything useful. You can find some free Excel-macro driven stuff that is OK for a simple mental exercise. The easiest accurate tools to use are things like Crystal Ball (now an Oracle product) which are Excel plugins.

It's very informative to model some variability into profit models. You can take FAB's model above verbatim, then ask him for some rules of thumb about vacancy rates, deadbeat rates, and rent-price variations. Don't worry about rigorous statistics, just do things like triangular distributions given FAB's heuristics.

The amount of variation that will inject into a profit model for say 10,000 iterations will tell you where the sensitivities are in your financial business model. And it is really the sensitivities that are useful, not the predictions. Predictions are just likelihoods based on randomness, but sensitivity analyses will tell you were your probable points of failure are.

As reference, when I developed The Bubblizer I tested it with Monte Carlo simulation in Excel. The scenario output on the second tab is a simplified version of the results of that simulation.

The Bubblizer shows clearly there is a threshold condition whereby the initial asset book value (the price you pay for your home) overloads all the other conditions and consumes over 95% of the sensitivity in the model. Below that threshold, tax-shelter, mortgage interest rate, and purchase price all have roughly even sensitivities. If you refer back maybe 25 threads to when TOS tried to respond to The Bubblizer (by proxy, she never responded with criticism to it in my forum despite the fact she insisted it was categorically flawed) with her own criticism you'll see where she makes the mistake of assuming that sensitivities remain more or less constant. I had an up on her in the argument, because I'd run the simulations and knew generally where the buy-v-rent equation broke down in absolute terms, regardless of everything else (at a 95% certainty).

Apologies to keep posting about Luminent, but the news on this is just so 'are you fu*kin kidding me?':

This time from the Associated Press:
Just a week ago, Luminent Mortgage Capital assured the market it was not exposed to the liquidity squeeze gripping much of the mortgage industry.

Luminent's markets "have deteriorated significantly and in an unprecedented fashion." Its lenders want their money back. The company suspended its dividend and said it will be late repaying some of its debt.

There is something big going on, if companies like this are getting sucked underwater in just one week. Reminds me of one of those b-grade shark movies where the chick (why is is always a chick?) is splashing around and wham, she's gone and the water starts to turn red.

SP

There's a piece on NPR re: the subprime crisis and credit tightening response:

http://www.npr.org/templates/story/story.php?storyId=12561184

It's all stuff rehashed from other sources, but nice to see it's hitting the left-wing side of the MSM (redundant?)...

Randy: Of course, the interesting thing about a Monte Carlo simulation is that it depends heavily on your initial assumptions. For instance, let's assume that I estimate that college students do a typical range of $200-400 a year in damages (+/-33% in FAB's model), but the maximum is far greater than that (say $1000 for drywall damage, cracked tubs, etc.).

As you point out, the primary MC value is to inform you which variables cause the biggest deltas under which conditions. For a college student rental complex, I'm betting that potential damages and tax changes are by far the two biggest factors. You can count on the university not getting any smaller. You can count on the state population continuing to increase. But you can't count on whether or not the city council will rule against "pre-existing" duplexes made from single family homes, or whether you'll get a bunch of keggers that earn you some fines from the kampus kops.

Off topic, and perhaps this has been discussed before, but I was just thinking about societal trends that might impact housing costs. It has been mentioned that housing costs rose after women really and truly entered the workforce in the 1970's, and suddenly "a little extra spending money" became the norm, so housing prices shot up. My understanding is that was a permanent change.

Which got me thinking about 401k's, the new self-run pension plan. Most first-time buyers seem to dip into a 401k these days--you can take out a $50,000 loan from a 401k without incurring penalties. In fact, they often have special repayment arrangements for home purchases. Add a spouse with a 401k and you're looking at couples with access to up to $100,000 toward a house or whatever. If you don't mind penalties and you have more money in your 401k, well, you could take more. This bounty comes from retirement accounts--but you never could have accessed a pension in the same way. Uncle Sam doesn't give that kind of access to Social Security funds. And 401k's are not counted in the negative savings rate, if I remember correctly.

Do you think that the advent of 401k's as the primary pension format in the US could have had an impact on the formation of this bubble? I remember starting to hear about 401k's in the early 1990's, though they may have been around longer, and it takes awhile to build up a nice retirement nest egg...does anyone here have a sense of when 401k's became prominent enough that just about everybody had one?

I was trying to figure out where those ugly jumbo at 8% rumors started. Looks like it was from this WSJ article. And then CNNMoney keeps repeating it. The reality is that Wells Fargo is not funding Alt-A mortgages originated by brokers, and has only ratcheted up their inhouse jumbo by 1/8% to 7% this past week (unless they are spreading disinformation on their own website). Yes, risk premiums are being adjusted, blood is flowing in the streets, but ARMmagedon has not yet arrived (wait for the IO resets). Looks like banks are trying to restore confidence in the markets by starving the mortgage brokers (is someone being disintermediated?):
“As one visual sign of banks’ cooling to a variety of mortgages they had introduced over the years, the broker’s morning loan rate sheet dropped to one page, versus 10 pages usually. The broker asked not to be identified.”

Randy H Says As reference, when I developed The Bubblizer I tested it with Monte Carlo simulation in Excel. The scenario output on the second tab is a simplified version of the results of that simulation.

The Bubblizer shows clearly there is a threshold condition whereby the initial asset book value (the price you pay for your home) overloads all the other conditions and consumes over 95% of the sensitivity in the model. Below that threshold, tax-shelter, mortgage interest rate, and purchase price all have roughly even sensitivities. If you refer back maybe 25 threads to when TOS tried to respond to The Bubblizer (by proxy, she never responded with criticism to it in my forum despite the fact she insisted it was categorically flawed) with her own criticism you’ll see where she makes the mistake of assuming that sensitivities remain more or less constant. I had an up on her in the argument, because I’d run the simulations and knew generally where the buy-v-rent equation broke down in absolute terms, regardless of everything else (at a 95% certainty).

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

1- Randy, for a Monte Carlo simulation (Matlab / R / C++ numerical recipes) to make sense, you need to spend a lot of time modeling/understanding the dependencies between the various input variables (correlation structure, joint likelihood and prior distributions, non-stationary effects over time…)

2- It is always the case when you use any of the fancy/complex tools out there, you simply shift the problem but are usually not better off (it is like trying to use a F-18 fighter jet to find the insurgents hiding among the inhabitants of Baghdad)….

3- What I mean is that, in practice modeling/understanding the dependencies between the various input variables is almost impossible without lots of CLEAN NUMERICAL data…

4- If you are not convinced that 99% of your 10000 or so simulations are not at all realistic scenarios (bogus), try modeling the dependencies between inflation, mortgage rates, housing prices, housing cycles, bear/bull markets, probability of bailouts plans/government interventions during presidential elections cycles and irrational behavior of the seller/buyers….

Bottom line:

5- For small financial decisions like small Real Estate investment for small players, you are always better off to use your common sense forecasts and stick to worst-case scenario analyses…

Hi Folks, it has been a while.
Just came back from a long vacation.

I agree with theotherside on the Monte Carlo Stuff.

Well, you can take either a deterministic or a stochastic approach depending on the quality of your data and the model context. The most important input factor is the relationship between your variables. Are they dependent or independent on/from each other ??
Everything else follows on from this initial very important step.

I'm betting that the Fed with sit tight till next year at 5.25%.
I think the Street is playing a game of Chicken with Bernake.

Eliza,

Unless I'm just way, way off here and things have changed radically I "believe" the "first time buyer exemption" is limited to $10,000 and while the 10% early withdrawal penalty is waived, it's still taxed as income.

If people are telling you they're taking out a combined total of 100 grand from their 401k's my guess is that they are grossly misinformed (or more likely... deluding themselves?)

Ahem, in keeping with my theme of "an un-level playing field" this too was enacted in 1997 but we can't dismiss it as a non-factor. With the advent of 100% financing this may have greased home ownership for more than just a few aiding with closing costs. Why not make the exemption applicable for "1st time boat purchases"?

Randy,

Dividends have 2 huge advantages, one of which you alluded to in passing.

1. There is no such thing as a Generally Accepted Accounting Dividend. The company has to shell out cold hard cash, which means (as AHM demonstrated so spectacularly a week or so ago) it has to have some cold hard cash in the first place.

2. You can spend your dividends without reducing your holdings.

There is moral hazard involved with the "growth therefore no dividend" argument. I would rather have a good dividend reinvestment scheme.

(Not investment advice.)

* Notice of disclosure *
I live in Australia, where dividends from tax-paying local companies are NOT double-taxed.

FED is printing money and that is why CountryWide share is going up again (now 28.85):

7-Aug-07 26.30 28.62 25.58 27.35 46,278,100 27.35
6-Aug-07 24.70 26.75 23.64 26.75 50,523,100 26.75
3-Aug-07 25.51 26.20 24.73 25.00 58,082,300 25.00

Just read the Fed’s press release. I guess I’m not as smart as my dog, after all.
What does this part mean to the average Joe?

”Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.”

Bottom line:

5- For small financial decisions like small Real Estate investment for small players, you are always better off to use your common sense forecasts and stick to worst-case scenario analyses…

tos, Is this why you failed as an IB/analyst? Were your analyses at work based on your "common sense forecasts" and "worst-case scenario analyses"??

"Mr. Managing Director, here's my report on the financial feasibility of our upcoming merger deal. I know it's only one page long, but based on my own patented "common sense forecast" analysis, I think it's a surefire bet. Yessiree, I sure do. Now when do I get my bonus?"

DinOR,
I think you are confusing Roth IRA's with 401k's.

With a Roth, a first time homebuyer can take up to 10K, you are correct. That is not a loan--that is a withdrawal. There is no 10% penalty, and if I remember right, there is no tax--because the Roth is a post-tax account. The Roth must have existed for 5 years before such a withdrawal occurs.

With a 401k, anyone can take up to 50% of their savings, up to $50,000, as a loan--for any reason. The borrower must pay back the loan with interest. The interest actually goes into the borrower's 401k. There is no tax or penalty, as this is a loan, not a withdrawal. There will be no tax or penalty so long as the loan is repaid.

I had not considered the Roth as well. That means a couple with both Roth and 401K savings could take up to $120,000 out of retirement savings and put it toward a house--50K from each spouse's 401K, plus 10K from each spouse's Roth IRA. Yikes! That could matter, I think.

So are you saying that the Roth bit was enacted in 1997?