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Not investment advice!


By Peter P   Follow   Thu, 16 Feb 2006, 12:26pm PST   5,364 views   150 comments   Watch (0)   Share   Quote   Permalink   Like   Dislike  

Let's talk about what we can do to anticipate for the housing bubble burst.

Again, nothing discussed in this thread should be construed as investment advice. Consult a professional before making investment decisions.

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Randy H   befriend   ignore   Sat, 18 Feb 2006, 3:54am PST   Share   Quote   Like (1)   Dislike     Comment 111

Zephyr,

I wasn't intending to imply that markets accurately forecast future events. Only that professional investors, hedge funds, et al don't share ScottC's Business Week inspired prognosticating.

jeffolie   befriend   ignore   Sat, 18 Feb 2006, 4:03am PST   Share   Quote   Like   Dislike     Comment 112

Exporting countries rely on countries to buy their goods. If we cannot buy, they eat the big one. Their currencies will die a horrible death.

US M3 LOOKS TAME COMPARED TO CHINA’S

February 14 – Bloomberg (Lee Spears): “China’s money supply expanded at the fastest pace in two years in January, exceeding the central bank’s official target for an eighth straight month. M2…grew 19.2 percent from a year earlier to 30.4 trillion yuan ($3.8 trillion) after expanding 17.6 percent in December, the People’s Bank of China said…”

Randy H   befriend   ignore   Sat, 18 Feb 2006, 4:11am PST   Share   Quote   Like   Dislike     Comment 113

And for the record, I agree with your opinion regarding the economy. I think there is undeniable evidence that the US economy has been quite healthy the past few years. This has largely been because of both strong fundamentals and widespread economic restructuring. The gloom and doom many people are drawn towards is a direct effect of this restructuring, which causes many casualties, but is good for the aggregate economy.

The question now is how the divergence in observed prices of real-assets, residential RE being the largest portion, will regress to mean theoretical prices. Observed prices *always* regress towards mean theoretical prices except when there has been a shift in the underlying fundamentals, of which there is little evidence today. I am ambivalent as to whether prices will correct as a sharp crash, or as a "soft landing". There seems to be some evidence of a soft landing scenario, which would mean that nearly everyone loses on a personal level, but the economy as a whole wins.

The problems with the "knowledge worker" economy stuff is that there is little evidence to support the "theory". Few deny that we are in the latter stages of a move towards a services-based economy, but the knowledge economy proponents are talking about something even more significant. By far most US GDP comes from agriculture, manufacturing, and local services. Even if we assumed that *all* new GDP *growth* came from knowledge work, it would take over a century of restructuring for it to become a primary GDP driver. We also lack a very serious fundamental for a knowledge economy: a coherent, established, quality, mandatory education system. You can't have an economy built upon knowledge work when your college graduates can't read at an 8th grade level, let alone figure out basic algebra or analytical geometry.

Peter P   befriend   ignore   Sat, 18 Feb 2006, 4:45am PST   Share   Quote   Like (1)   Dislike     Comment 114

Higher housing start can only mean higher housing prices. There is no housing bubble!

Peter P   befriend   ignore   Sat, 18 Feb 2006, 4:45am PST   Share   Quote   Like   Dislike     Comment 115

Oops, wrong thread.

Zephyr   befriend   ignore   Sat, 18 Feb 2006, 5:29am PST   Share   Quote   Like   Dislike     Comment 116

Fewlesh,

Las Vegas is an example of how rising wealth leads to rising excess.

Garth Farkley   befriend   ignore   Sat, 18 Feb 2006, 9:52am PST   Share   Quote   Like   Dislike     Comment 117

Don't count your bubbles until they're popped. Latest FHFB stats. Average Sales price by Metro area.

http://www.fhfb.gov/GetFile.aspx?FileID=4437

San Jose-San Francisco-Oakland CA*

4th Qtr '04.........568.9
3rd Qtr '05.........649.3
4th Qtr '05.........679.9

Randy H   befriend   ignore   Sat, 18 Feb 2006, 9:59am PST   Share   Quote   Like   Dislike (1)     Comment 118

I was told that the negative savings rate was simply money earned vs. money spent within the US and doesn’t take into account unearned income.

This is true, but there is still dissaving occurring. It isn't a big problem unless it persists for too long. In fact, occassional low/negative savings is what spares the US economy from secular deflation ala Japan. Savings rates in the US are volatile, much more so than Japan or Europe.

KurtS   befriend   ignore   Sat, 18 Feb 2006, 10:40am PST   Share   Quote   Like   Dislike     Comment 119

But I have never seen so many ugly people congregated in one place in my life. It is the weirdest place I have ever been in my life.

Totally off-topic op-ed: I passed through that place on a recent climbing trip to Red Rock. Agreed: it's a temple to consumption, or one could say: Sartre's No Exit meets Mall of America. Quite a menagerie of characters.

OO   befriend   ignore   Sat, 18 Feb 2006, 12:06pm PST   Share   Quote   Like (1)   Dislike     Comment 120

BW is such a laughable magazine that I stopped subscription years ago, the only good business magazines that don't spin words or try to make Americans feel good about our messed up situation are Barron's and Economist (oh, they are British, must be schadenfreude at work).

KurtS   befriend   ignore   Sat, 18 Feb 2006, 4:36pm PST   Share   Quote   Like   Dislike     Comment 121

BW is such a laughable magazine that I stopped subscription years ago

--Who does takes that rag seriously? Yet, there's just enough buzzwords and CW for the average half-baked exec to sit a little taller in their chair. Creds to my ex-employer; they do mediocrity so well. :twisted:

Doug   befriend   ignore   Sat, 18 Feb 2006, 4:42pm PST   Share   Quote   Like   Dislike     Comment 122

You want investment advice? The Marin IJ published these great quotes by the President of the Marin Assc. of Realtors. This was yesterday's front page article:

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

Kathy Schlegel, president of the Marin Association of Realtors, said the numbers indicate softening of the market and a return to "more normal rates of growth."

"Over the last few years, real estate has been like a train racing down the track making it difficult for buyers to hop on," Schlegel said. "Over the last few months, the train has slowed down and is coming into the station. Now is the time for buyers to think about hopping on because the train will go forward with prices continuing to increase over the long term."

"Now is the time when home ownership is still a lucrative investment with less risk of loss of appreciation compared to other investments," Schlegel said. "In Marin County, we do not have a lot of extra space for growth and when you don't have new homes being built, the value of the homes in the county still retain their worth."

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

She said this in a month where sales were down like 22% and the Median price was flat year over year. I read this and wondered if the Realtor association paid to get that quote printed - kind of like an infomercial - perhaps it should go back with the "open house" section? This kind of stuff does lend credibility to Patrick's opinion on the media having their hand in all this...

I like how when you see commentary on stocks these days how papers say 'this person does not currently own Home Depot stock'. It seems like the Marin IJ needs to start printing disclaimers if they are going to quote parties that have a financial interest in driving real estate transactions - especially when they are giving investment advice of real estate being better than all other investment catagories!

OO   befriend   ignore   Sat, 18 Feb 2006, 4:48pm PST   Share   Quote   Like (1)   Dislike     Comment 123

I am getting mixed signals. Just talked to a friend who is looking for a home up in the Peninsula, he said inventory is going down while buying is up, and many seller raised price after their houses have been sitting for the last few months. Anyone from the Peninsula?

I see sellers cutting price down in South/West valley and nice homes are seeling ok. But overall, there is no excessive inventory or bidding war either, undesirable homes just sit and sit even after price reductions.

brightc   befriend   ignore   Sat, 18 Feb 2006, 5:01pm PST   Share   Quote   Like (1)   Dislike (1)     Comment 124

It seems like the Marin IJ needs to start printing disclaimers if they are going to quote parties that have a financial interest in driving real estate transactions

Newspapers and magazines' income comes solely from advertisement. Even when the market is turning for the worst, they don't want to offend and chase away the Realtors, who are (and will continue to be) their main sponsors.

I'd say the media should take some guts and ditch that defensive attitude. When the bubble bursts, and there are many homes on sale, Realtors will need the media to list their listings anyway. Sooner or later, the media will figure that out, and we'll have the fair and balanced news once again, maybe not on Fox, but on real estates in general.

brightc   befriend   ignore   Sat, 18 Feb 2006, 5:06pm PST   Share   Quote   Like (1)   Dislike     Comment 125

many seller raised price after their houses have been sitting for the last few months

The question is would that make those houses move sooner? If not, then it's possible sellers are trying to change their strategies, and resort to the used car sale tactic: raising the price so high, even the bravest bargain hunter can only negotiate down to a price that's still 10% higher than what the seller wants.

I'm looking at a townhome in the South Bay that actually went up from $858k to $956k. 45 days have gone by, and no one bites the bait.

OO   befriend   ignore   Sat, 18 Feb 2006, 5:13pm PST   Share   Quote   Like   Dislike     Comment 126

Actually I was told that only homes below 1M on the Peninsula seems to be moving. 1M is the psychological barrier, anything above that seems to be sitting forever. Some listings were pulled without getting sold.

Perhaps these are the long-time owners who would like to cash out at the top, they don't really have a need to sell, if they can get that price, fine, if not, they just stay.

Peter P   befriend   ignore   Sat, 18 Feb 2006, 5:42pm PST   Share   Quote   Like   Dislike     Comment 127

I have no mortgage. Does this mean that if I had a mortgage, I would essentially be unable to deduct the interest?

I believe your mortgage is deductible under AMT. However, property tax is not deductible. Furthermore, if you make a lot of money, you may be hit by itemized deduction phaseout.

NOT TAX ADVICE

brightc   befriend   ignore   Sat, 18 Feb 2006, 5:44pm PST   Share   Quote   Like (1)   Dislike (1)     Comment 128

I'm hit by AMT, too, and so are some other colleagues of mine. Yes, that means you wouldn't get to deduct your mortgage interest. I do have a house in Houston, Texas, and yes, I couldn't deduct that money.

I think the government is letting more people getting hit by AMT so that they can make a point, and get their measures to abolish the AMT pass Congress.

Since abolishing the AMT means the government will have to get back the money somehow, if you read the news, the plan is to limit mortgage interest deduction to the first $300,000 owed. I say go for it! It'll deflate this stupid housing bubble in the coasts faster, and we can solve that pesky AMT problem once and for all.

It looks to me that everyone making six-figure salaries will get hit by AMT this year.

OO   befriend   ignore   Sat, 18 Feb 2006, 5:45pm PST   Share   Quote   Like (1)   Dislike     Comment 129

I have a suggestion for topic, flipper properties.

Here is one
http://www.mlslistings.com/common/properties/propertyDetail.asp?open=0&page=1&mls_number=608171&type=property&name=

Checked on Zillow, purchased in Oct 2005 for 1,495,000
Asking now for 1,630,000, comparables around him sold for 1.1-1.2M.

Buyers beware, make sure this guy lose his shirt. He is a flipper and he has a carrying cost, if you really want this home, buy at no higher than 1M.

Zillow is useful for digging up previous transactions, giving you an idea how much the current owner paid for his place. Information is power. If someone bought a home at 1.495M 4 months ago and wants out now, you know you are in a better position to nail him hard.

brightc   befriend   ignore   Sat, 18 Feb 2006, 5:47pm PST   Share   Quote   Like (1)   Dislike     Comment 130

I believe your mortgage is deductible under AMT

Actually, no. I looked at my Turbo Tax summary, and it did wipe out my Houston mortgage interest.

I plan to settle down in the Bay Area, but with such an imbalance housing market, I'm sure if I can do that ever. That's why I still keep my Houston house, just in case I have to go back :-)

brightc   befriend   ignore   Sat, 18 Feb 2006, 5:48pm PST   Share   Quote   Like   Dislike     Comment 131

I’m sure if I can do that ever.
Make it "not sure".

Peter P   befriend   ignore   Sat, 18 Feb 2006, 5:50pm PST   Share   Quote   Like   Dislike     Comment 132

Yes, that means you wouldn’t get to deduct your mortgage interest. I do have a house in Houston, Texas, and yes, I couldn’t deduct that money.

Are you sure? IRS has a clarification here:

http://tinyurl.com/anpmf

Peter P   befriend   ignore   Sat, 18 Feb 2006, 5:54pm PST   Share   Quote   Like   Dislike     Comment 133

However, with AMT, mortgage interest deduction will reduce your tax by your AMT rate, not your ordinary tax marginal rate. So AMT does hurt.

Peter P   befriend   ignore   Sat, 18 Feb 2006, 5:56pm PST   Share   Quote   Like (1)   Dislike     Comment 134

Certain mortgage interest -- Interest on loans used to build, buy, or improve your principal residence is permitted under the AMT. Mortgage interest used for any other purpose -- such as a home equity loan -- is not allowed.

http://www.tiaa-cref.org/siteline/popups/amt_notallowed.html

Your Houston house is not your primary residence, so mortgage interest there may not be deductible under AMT.

Peter P   befriend   ignore   Sat, 18 Feb 2006, 5:58pm PST   Share   Quote   Like   Dislike     Comment 135

I think there will be further disappointments from flippers when they learn that mortgage interest on their investment properties are not deductible under AMT. :)

Peter P   befriend   ignore   Sat, 18 Feb 2006, 6:01pm PST   Share   Quote   Like (1)   Dislike (1)     Comment 136

Since abolishing the AMT means the government will have to get back the money somehow, if you read the news, the plan is to limit mortgage interest deduction to the first $300,000 owed. I say go for it! It’ll deflate this stupid housing bubble in the coasts faster, and we can solve that pesky AMT problem once and for all.

Tax reform, banzai!

brightc   befriend   ignore   Sat, 18 Feb 2006, 6:03pm PST   Share   Quote   Like   Dislike     Comment 137

I think Peter P is right. From reading the IRS publication, primary mortgage interest can be deductible under AMT after all. I'll have to revise my tax form. It's a good thing I haven't submitted it yet. I think I'll need professional help this year :-)

OO   befriend   ignore   Sat, 18 Feb 2006, 6:39pm PST   Share   Quote   Like   Dislike     Comment 138

You can claim if you have one mortgage on your primary residence (second one disallowed, HELOC disallowed), no mortgage interest deduction for vacation home (I believe). If you own a home and did not occupy it fully (up to definition), you MAY be able to claim deduction.

The two parts that will kill long-time realty investors are:
1) no deduction for interest on mortgage for investment properties
2) no deduction for property tax

So high-income earners really should stay away from property flipping, taking advantage of the long-term capital gains by investing in stocks and mutual funds is a much better idea. Capital gains tax rate is the same under AMT.

Garth Farkley   befriend   ignore   Sun, 19 Feb 2006, 1:18am PST   Share   Quote   Like   Dislike     Comment 139

Scott C.,

Man you are really cool. When I grow up I want to be cool and happy like you.

frank649   befriend   ignore   Sun, 19 Feb 2006, 2:19am PST   Share   Quote   Like   Dislike     Comment 140

ScottC says, "This economy is growing. Innovation is all around. Money is being made. January just saw the highest number of new home starts in 32 years. It’s a great time to be an American."

Talk about flawed statistics! Don't rely on headlines - always get the whole story behind the numbers. Read 'Seasonally Mal-Adjusted' by Morgan Stanley's Head Global Economist Steven Roach for an interesting insight into that housing starts number...

http://tinyurl.com/dv5j

Randy H   befriend   ignore   Sun, 19 Feb 2006, 2:25am PST   Share   Quote   Like   Dislike (1)     Comment 141

The Financial Times? Please. I had to subscribe to FT for an economics course I took several years ago. I read it, and I let my subscription expire. I didn’t read anything in FT that impressed me, then or online now.

The optimist and the pessimist / The difference to extoll / The optimist sees the doughnut / The pessimist sees the hole.

The economy is strong. Anyone but the most simplistic economist whose mind is locked in flawed statistics and out-dated models can see that. Growth and development abound. Jobs are being created, money is being made, and houses are being built. What’s not to love about America?

I almost pity you people, perpetual pessimists you are. But I’m to busy working, making money, having fun, and making love to care. --ScottC

So many statements in your diatribe are false that it's hardly worth responding. I never attacked Bernake, thinking him quite capable of the job before him. He is a neo-classic economist, and many accomplished, credentialed, more experienced economists disagree with him--quite a few with Nobel designations. You do know, ScottC, that he was 2nd choice for the job don't you? Perhaps if you'd actually read FT, WSJ or Economist you'd know who was the first pick and why he turned down the post.

And if you cannot find anything worth while in the FT then that speaks more to your failures, not theirs. Somehow it doesn't suprise me that you mistake free-market libertarians with progressives. Perhaps it is the fact that both camps are capable of open minded debate and exchange that confounds you so.

On second thought, don't change a thing. It will be better for the rest of us if you just blindly march on in your self-made dystopia while the FTC and DoJ remove the anticompetitve barriers that your industry has created protecting your undeserved profits and opening you up to the true face of free market competition that the rest of us face on a daily basis.

(I think at some point I'm going to parse the past threads and compile a tome of all ScottC's self-contridictions, ignorant misstatements, and factual errors. I remind others that it is he who incites these arguments because it is *always* he who resorts to attacks ad hominem and non sequiturs when he can't defend his position factually.)

Randy H   befriend   ignore   Sun, 19 Feb 2006, 2:35am PST   Share   Quote   Like   Dislike     Comment 142

On why food and energy are omitted from CPI:

I agree that *for an individual*, the CPI isn't very useful because essentials are left out, like food and energy.

But the problem is that CPI has morphed into an aggregate indicator used to index inflation for things like pensions, labor contracts, and government obligations. There was a legitimate issue with including inelastic/sticky things along with elastic/non-sticky things. There was another problem with "supply chain" effect.

The problem is that we've overloaded CPI with multiple meanings today. There are better indicators to use personally, though, which an easy Google search will reveal.

Peter P   befriend   ignore   Sun, 19 Feb 2006, 3:30am PST   Share   Quote   Like   Dislike     Comment 143

“find the trend whose premise is false and bet against it” George Soros.

Soros is my childhood and current hero. However, I do not necessarily agree with his political views. His quest to dethrone Bush was way over the top, I have to say.

Nevertheless, he is my favorite speculator role model.

Peter P   befriend   ignore   Sun, 19 Feb 2006, 3:31am PST   Share   Quote   Like   Dislike     Comment 144

The Financial Times? Please. I had to subscribe to FT for an economics course I took several years ago. I read it, and I let my subscription expire. I didn’t read anything in FT that impressed me, then or online now.

How could you resist pink?

Peter P   befriend   ignore   Sun, 19 Feb 2006, 3:46am PST   Share   Quote   Like (1)   Dislike     Comment 145

New thread: Death of inflation?

Randy H   befriend   ignore   Sun, 19 Feb 2006, 7:04am PST   Share   Quote   Like   Dislike (1)     Comment 146

auger-inn,

I don't disagree with most of your observations. In fact, since they are personal observations, they are to be taken at face value. What many economists are trying to do is figure out how to explain these very real phenomena with models and emperical econometrics. We all know gravity makes things fall, but it is still useful to understand the mathematics and physics responsible for the fall, so that we might avoid falling when unnecessary.

The global and national economies are orders of magnitude more complex today than even 30 years ago, and they're only getting moreso with time. As with all complex systems--especially those we endeavor to manipulate like the economy--it is very important to suffer through all the discovery of models and emperical testing, as well as the failures, if we are to ever have any degree of sustainable success.

FormerAptBroker   befriend   ignore   Sun, 19 Feb 2006, 7:16am PST   Share   Quote   Like (2)   Dislike     Comment 147

Peter P wrote:

> I am eagerly looking forward to 100-year mortgage in Bay Area soon.
> Quick fact: I was pre-qualified for a 40-year loan just for the fun of it.
> Honestly, I doubt a 50-year loan can save much over a 30-year loan.

If you borrow $750,000 the monthly payments at 6.5% will be:

30 year am $4,740
40 year am $4,390
75 year am $4,094
100 year am $4,068
Interest Only $4,063

FormerAptBroker

KurtS   befriend   ignore   Sun, 19 Feb 2006, 1:13pm PST   Share   Quote   Like   Dislike (1)     Comment 148

I am getting mixed signals. Just talked to a friend who is looking for a home up in the Peninsula, he said inventory is going down while buying is up, and many seller raised price after their houses have been sitting for the last few months. Anyone from the Peninsula?

Well, I used to live in Los Altos/work in Palo Alto, and this is purely anecdotal, but I've thought many pen. towns have the highest amount of exuberant optimism in all the SF Bay. Think of all those dot-com seed companies and VCs. Scads of self-delusional entrepreneurial genius, now transfered to real estate. They'll be the last ones holding the bag (IMO).

Peter P   befriend   ignore   Sun, 19 Feb 2006, 3:40pm PST   Share   Quote   Like   Dislike     Comment 149

I am getting mixed signals. Just talked to a friend who is looking for a home up in the Peninsula, he said inventory is going down while buying is up, and many seller raised price after their houses have been sitting for the last few months.

He is probably just giving in to fear. Just go to viewfromsiliconvalley.com, they have weekly sale stats for San Mateo county.

jtfrankl   befriend   ignore   Tue, 21 Feb 2006, 11:56am PST   Share   Quote   Like   Dislike (1)     Comment 150

I am not from the Peninsula, but South Bay (Sunnyvale). Prices seem to be holding up well so far, much better than I would have thought. A comparable house just sold within 5k of asking, and asking price was not what I would call low. The asking price was only 6% less than what a much nicer home on the street sold for at the "peak" in October. The nicer home had been almost completely gutted and redone whereas the latest sale was an "as-is" with over $30k in plumbing repairs needed. Floorplans and square footage were the exact same- these are cracker jack 1950's ranch places, as is mine.

I just put my house on the market last week and had the first open house over the weekend. Something over 35 groups came through. I will report what develops. Wish me luck. Hopefully, I will be looking for a rental soon.

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