patrick.net

Well, maybe it was subconcsious. Those buying now are certainly buying the hose.

Thanks Jack for the support, and thanks to SoldAtthePeak for the non-investment advice. :-)

I think $hitbox is defined by the neighborhood, then by the house itself. I have seen some new developments in high-crime neighborhoods selling at a price that is only reasonable in a nice, safe neighborhood. I don't care how big the lot is, or how big the home is, you can buy your home, you can't buy your neighbors. A house in an undesirable neighborhood with frequent drive-by shootings is most certainly a $hitbox.

Then the Monster homes in a neighborhood with smaller lots. The funniest thing is a fenced off, 4,500 sft homes on a 6,500 sft lot, who do you think you want to show off to? Your neighbors who paid 50,000 for their shack 30 years ago and paying 1/10 of your property tax? But I usually have no complaints about these new buyers, hats off to their property tax contribution to our school system.

I don't usually call an old 1950-home, if nicely built with out-of-date decor, on at least a 1/4 acre lot a $hitbox. Interior deco is easy to fix, if I don't like the house, I can always preserve a few walls for property tax reasons and rebuild. The key is location, location, lot size.

Randy,

if it is not too intrusive, [...]
1) Where to park my cash. USD is obviously heading for the toilet, but when it does, how safe are the banks/brokerages where I parked my euro/yen/gold certificate?
2) What if there is a rampant inflaton (not yet hyperinflation) couple of mild correction of USD, a likely scenario, so that my home will retain its nominal value in USD, and USD is only heading downwards at 5% per annum.
3) If you bought early(~10 years ago), you are locked in a nice prop 13 property tax treatment, only 50% of what you recent neighbors pay. Also, the gain is above the $500K per couple so that you’ll need to pay tax. You’ll also lose the mortgage interest deduction on top of that. The number may not work out if scenario 2) happens.

These are great questions, and I spent a great deal of time modeling (with a statistical simulator) before we made the decision.

::3) We traded up twice between the early 90s and 2005, so we locked in gains at every round and avoided cap gains by coincidence; so this wasn't an issue...we gained far less than 500K on the last sale.

::2,3) We parked our cash, which turns out to be quite a lump, in a diversified portfolio of CA/Fed tax exempt muni bonds, commercial paper, and STRIPs. This was a temporary measure to offset most, if not all of inflation while we figure out our liquidity needs. Originally, we thought we'd be parking the money for 1-1.5 years, and we wanted the flexibility to pull it on demand when we'd buy back in.

Now, we're looking at some better return devices which have the option to take a secured loan around 1.5% against the principle to have buy-in liquidity. This option is only available if you have enough cash you can utilize an investment bank. Still, I'm not convinced of this approach, but I'm modeling it to see.

To date we've beaten the SF Fed CPI regional data by about 1/4%, with 12% exposed to taxation...so probably a wash to a small loss vis-a-vis inflation.

I don't care about the USD vis-a-vis other currencies because I'll repurchase in nominal USD. I'd only care if I were investing the proceeds internationally, which I'm not. If I were, then it would only help as the USD eroded because I'd be earning returns in a stronger currency.

I'm not convinced that RE value will weather a correction at any less of a rate than inflation erodes nominal dollars. It's just as likely that your worries will play out to the opposite. This is why I'm not betting either direction. I'm just trying to preserve my real-dollars.

Finally, if inflation ticks up and interest rates don't rise, then you may be right. But I am assuming that nominal rates will rise with inflation, thereby naturally hedging me against inflation. If hyperinflation hits, then RE will be better (assuming a mild RE correction), but I'm not worried about hyperinflation as much as stagflation. In that case, RE will get hit harder in the early phases at least, giving me a buy-in opportunity before my real-dollars erode too much.

---

I'd be enormously grateful for any advice on this, my comments aside. I do worry--as anyone would--with so much of my net worth now out of RE and tied up in the devices I described. Right now I'm 100% liquid and can move my assets to a better portfolio either en masse or dollar-cost-averaged.

Has anybody heard the French guy's comments on Greenspan.

Says that Greenspan told him that the U.S. has "lost control" of its deficit. Said he was quoting Greenspan verbatim.

I set the under/over on Greenspan denying he said it at noon tomorrow - that's how long it'll take before Bush's boys get to him and let him know that that kind of honest will not be tolerated.

Yeah, OK, call yourself an Objectivist and not a libertarian. You’re Howard Roarke man, I’m John Galt. As long as we hate the golden handcuffs and the Man’s tax noose, we’re brothers in arms.

lol. I loathe both with a passion and I am a serial tax avoider (keyword note to government filters: avoider != evader).

Randy H,

thanks for the candid comments.

I think the answer depends on a couple of things:
1) What neighborhood do you plan to buy into? Do you plan to buy into ONE home in an upscale neighborhood, or buy into 2 homes in an upper-middle-class neighborhoods? Over the past 10 years, it seems like this country has seen a fairly rapid polarization of income and wealth, so I believe the really upscale zip codes can weather a correction quite well, while those middle-class neighborhoods will probably do poorly.

Therefore, if you want to protect your REAL dollar, and assuming you are aiming the former, perhaps you need to take a bit more risk by betting on the USD erosion too. If you are aiming the later, I am quite sure that the RE correction will be larger.

2) How long is your planned wait time? You indicated that you are thinking about 1 to 1.5 year time frame, I personally think the correction at that point may not justify your cost of transaction. If you are looking at such a short time frame, then you current strategy should suffice. However, if you want to make your transaction worthwhile, perhaps you need wait a bit longer, and hence you probably need to look at something that REALLY hedges against longer-term inflation (I won't trust our CPI as an objective measure). As we discussed before, what if we really hit stagflation, and the Fed chooses to deal with unemployment by lowering interest rate than dealing with inflation (a likely choice)?

Not an investment advice. Just my 0.02 Euro.

Not an investment advice. Just my 0.02 Euro.

Appreciated nonetheless, especially given the preferential EUR/USD conversion rate.

How long is your planned wait time? You indicated that you are thinking about 1 to 1.5 year time frame, I personally think the correction at that point may not justify your cost of transaction.

I was originally thinking 1-2 years, not for rational reasons but more because I had just finished participating in an econometric study by UC Berkeley and USF on regional RE data. That exercise had me feeling the end was neigh. But now, I'm a bit more clear-headed and I think the RE correction will take 6-10 years to run its course. We can wait it out in rental for a portion of that, but I want to be ready when the intangible costs of renting (inconvenience, stress, not having wheel-chair access for my mom) exceed the likelihood of losses in the remainder of the downturn. Also, I need to be ready to secure my longer-term rental situation so as to ensure we don't have to move every year.

Randy H,

If you are confident about the inflation scenario, it may not hurt to prepay your rent 1-2 years up front negotiating for a better rate, and locking in a longer rental contract. I don't know if you have already rented, but if you haven't, try to look for a recently bought landlord who is desperate for rental cashflow.

Fyi: I will be mostly MIA for at least the next month, due to celebrating my 10-year anniversary/extended vacation and not being near a computer most of the time.

Congrats. Computers are evil anyway. Have fun!

Over the years Americans have been willing and able to afford homes of ever increasing size and amenities. This is best evidenced by what the builders build each year. Here are some facts about new home construction comparing 1950 to 2003:

In 1950 the average size of a new home was 983 sq ft.
By 2003 the median size of a new home was 2,123 sq ft.

In 1950 only 34% of all new homes had more than two bedrooms. By By 2003, 89% of all new homes had more than two bedrooms.

In 1950, only 4% of new homes had two or more full baths.
By 2003, fully 95% of new homes had two or more full baths

In 1950, 53% had no garage.
By 2003, only 8% had no garage.

These are countrywide averages.

Wow Zephyr, those are some stats. I only said there were tons of smaller homes here because I've been looking for a house to rent, and in our price range there were so many new 1300-1500sf homes around. But I don't know the stats on what percentage they make up of the market. I will say this though, most of the homes I looked at in the sf range I mentioned had at least 3 bedrooms and 2 bathrooms and all had garages.

From Escaped:
"Has anybody heard the French guy’s comments on Greenspan."

Hmmm...seems like one of those things that could become really big news & blown out of all proportion, or really no news....
Just found this brief story on it:
http://tinyurl.com/aa9pw

lol A senior official from the Treasury responded:
“Things can get lost in translation.”
Pretty quick (if futile) damage control, I'd say.

If you are confident about the inflation scenario, it may not hurt to prepay your rent 1-2 years up front negotiating for a better rate, and locking in a longer rental contract. I don’t know if you have already rented, but if you haven’t, try to look for a recently bought landlord who is desperate for rental cashflow.

I'm renting from such a landlord now who built a new "investment home" in Mill Valley (unincorporated) and thought he'd rent it out for a nice cashflow in excess of his mortgage. I rented it in April after he'd gone over 24 months with only 1 rentor, who skipped town after 2 months. I prepaid 1 year and negotiated him down so hard that he whines every time I see him ("you aren't paying half my mortgage!", etc.).

Maybe prepaying another year or even 2 would be wise in this environment, but the downside is that, once prepaid, it takes nothing short of Our Lady of Fatima to get any repairs done. A bigger question is whether I could sub-lease if necessary, thereby increasing my flexibility options.

Also, having not been a rentor for almost 20 years and never having rented in CA, what risk am I exposed to if he sells during my lease? I have a friend who warns me that many leases are notoriously full of loop-holes which can allow a new owner to boot the tenants, especially in unincorporated districts where there are few to no rentor protections. Can this guy sell and a new owner nullify or otherwise criple our lease?

One easy flag to tell if a home is the proverbial $hitbox:

If there are metal window frames set directly against a stucco wall, and water has begun to cause brown rust stains to run down the side of the wall at the corners of the window. Nothing infuriates me more than seeing this. It is the aesthetic equivalent of child-abuse.

When I am made emperor-lord-protector, I can assure you that the people responsible for these monstrosities will be the first ones up against the wall.

cheers,
prat

In other news...

http://tinyurl.com/ctael

D'OH!

Cheers,
prat

the $hitbox defined:

Something like this, you go to look at a rental and as you're walking through it you think "my god what a piece of shit". Now imagine that rental selling for $750K. $hitbox can also extend to new boomer McMansions with crappy construction, these are in a special class of $hitbox. The "I can't believe you paid 1.2 mil for that" $hitbox. These are typically defined by a "great room", French doors, a gigantic bathroom (I guess to accommodate their gigantic asses), at least a 3 car garage and/or a gigantic staircase. Other tells on this class of $hitbox are the zero plot line, that is, the house extends right to the fence. Expect your neighbors $hitbox to just about touch yours. I often wonder what those in this class of $hitbox do with their matching corgi’s? Do they have Pinar walk them after she gives Kaitlyn and Aidan their Ritalin?

"I have a friend who warns me that many leases are notoriously full of loop-holes which can allow a new owner to boot the tenants, especially in unincorporated districts where there are few to no rentor protections. Can this guy sell and a new owner nullify or otherwise criple our lease?"

Off hand, without seeing your agreement, I'd say the new Landlord cannot change a preexisting agreement if that agreement "runs with the land," (see assignments by landlords).

The general rule and how it works (I think) is:

Right to assign - L/L may assign rents and other covenants that run with the land, which is usually done by deed from the L/L to the new owner. A covenant is an agreement on how the land will be used, and usually includes what manner rents will be paid.

Rights of assignee (new owner) against Tenants (T) - once T is given reasonable notice of an assignment, T is now legally obligated to pay rent to the new owner, (attornment).

Liabilities of Assignee (new owner) to T - The assignee is liable to T for performance of all covenants that run with the land. A covenant will run with the land if it "touches and concerns" the land, meaning that each party shares a burden concerning the land for which the agreement has been made. In other words, you have a duty to pay rent, L/L gives immediate right to possession. Each side has a burden, and the agreement concerns the land. Therefore, the burdens of those covenants run with the landlord's estate and become the burdens of the new landlord. The original landlord also remains liable on all covenants made on the lease.

I think the only way these rules don't apply is if T agrees that upon assignment (sale of the property), the covenants or agreements between the original parties will become null and void with respect to the new owner. At such time, new covenants and agreemenst shall be made. Also, these agreements that last longer then a year and concern property need to be in WRITTING, (see Satute of Frauds) in order to be enforceable, but there are exceptions.

Again, this just my understanding of the general law. Hope this helps though.

Marinite, I concur with all your comments. There is definitely a lot of monkey business going on in Marin--South Marin at least; I don't know if these practices are so common in Novato, which appears to really be coming down right now.

Adding to the problem is that there are a lot of empty houses and "rental" houses (which are often empty) sitting around. These are often not listed for sale and are being sold by Realtors(tm) on a word-of-mouth basis apparently to maintain price stability. I don't know how you could get that data short of comprehensively studying County records over a long-term period.

I'd be very happy to pool data resources in a public forum. The only hitch I see is that this would encompass a lot of work, and we'd be at risk of being accused of skewing our data. It's a tough mission to counter the incumbant "official" data, even though we both know it's being manipulated. But that is hard to prove short of doing our own, massive, transparent survey based on an independent source like title transfer records.

In my own "folder" of 12 homes I can testifiy that no less than 5 of those have become empty, unlisted homes; one after being relisted 3 times at a lower price. It was in Corte Madera, had easment problems, a ton of land, and out-of-code improvements. This thing started at 1.5, was relisted over and over down to 1.15, and is now empty and unlisted. This is my worry about Marin: lots of owners can sit on empty, unproductive properties for some time because they are wealthy enough to try to wait out the cycle (or they think this at least). This makes prices sticky, at least in Marin.

And my own experiences with agents echos yours. We were working with an agent a couple months ago who was "plugged in" to the game in South Marin. She was only showing us unlisted properties, all of which I passed on because they're obscenely overpriced. All but 1 were empty and the owners rarely even lived in CA (according to her, at least).

Thanks Raiderjeff! That is all very helpful.

I also have a friend who is a realtor in Marin and she tells me, privately and sworn to secrecy of course, that some realtors swap like-priced houses to keep prices stable. I don’t know how well that works; I guess it depends on the scope of this practice. But it is dispicable IMO.

This practice, if it is indeed going on, would be extremely effective at manipulating prices in the smaller micromarkets where there is narrow inventory even in normal times. Take >1M homes in Larkspur, for example. There are so few of these on the market at any given time that just 1 or 2 swaps would be effective at fixing prices. This would also be true in Ross, Kentfield, Fairfax, etc. I'm a bit more skeptical about how effective swapping would be in Mill Valley or San Rafael, but if there's enough collusion, anything is possible.

BTW, if this could be proven it is explicitly illegal, as is all form of price fixing. Not that hard to prove either if direct-communication collusion is going on. I wonder what it would take to get the state Attorney General to take an interest. Anyone know if this has ever been looked into or prosecuted in an CA county before?

You know, I hate monopolies and skullduggery.

Somebody needs to sue the Realtors to compel them to release their prices and to make the whole process more open. I don't know what the cause of action would be, but I'm sure a clever lawyer could come up with a half dozen grounds.

NOT LEGAL ADVICE

With regard to the lease, be cautious. The law is a very tricky thing. While I agree with one poster that many attorneys are worthless, many are not. If you have a lot to lose by getting booted by a new landlord, then I'd be cautious about making any legal conclusions unless you are versed in the law. That might seem obvious, but don't be tempted to trust what you read online. Further, just because it's written in the lease doesn't make it so. There are some rights, both landlord and tenant, that I'd guess cannot be waived. Good luck with that.

NOT LEGAL ADVICE.

Now this my friends purty much sums it all up.....

http://tinyurl.com/9fgom

I just caught this item on Bloomberg:

Greenspan Says Speculation Having `Greater Role' in Home Prices
Sept. 26 (Bloomberg) --The jump in sales of second homes suggests the recent surge in housing prices is being driven more by speculation than it has in the past, Federal Reserve Chairman Alan Greenspan said.

Sales of vacation houses, or homes that aren't always occupied by owners, are ``arguably at historically unprecedented levels,'' Greenspan said in the text of his remarks to the American Bankers Association annual convention in Palm Desert, California. ``This suggests that speculative activity may have had a greater role in generating the recent price increases than it customarily has had in the past.''

http://tinyurl.com/dtd4r

Randy, you should find somebody to run this down . . .
"Anyone know if this has ever been looked into or prosecuted in an CA county before?"

What is "swapping?" A sale from one Realtor to another at a set price to artificially boost numbers?

This will be evident in the deed record, no? That's public. If you suspect a property has been subjected to this, go to town hall and pull the deed records. If you see a recent swap from a Realtor to a Realtor, that, to me, is a prima facie conspiracy to defraud, suppress competition, Sherman Act, and so on and so forth, the party of the third part.

"Thanks Raiderjeff! That is all very helpful."

No problem Randy. And thanks for your posts, they've been really insightful, even though it's been very tough for me to keep up with you guys and gals, (I'm not very knowledgeable on most of the topics covered on this board). But I'm trying to learn.

Escaped from DC, surely you can't be suggesting that realtors have been engaging in less that ethical behavior. I thought that their code of conduct prohibited this. The data from the realtor boards clearly suggests a robust housing market buoyed by historically low interest rates and a vigorously rebounding, job creating, economy. Sir, I suggest you review your data before you slander a group with such an outstanding history of public service as the realtors.

I am so full of crap I make myself sick, I should be shot ;)

Surfer-X, is this what caught your eye in that article?

For most families, the best borrowing for emergencies comes in two forms: credit cards and home equity lines of credit (HELOC). That's because these two kinds of credit are:

• Readily accessible. ...If you've already got your HELOC in place, you can start writing checks against it immediately.
• Unlikely to disappear overnight. Stocks or bonds can quickly lose value, but you'll typically only lose access to your credit if you misuse it.
• Relatively inexpensive to have and to use. HELOCs typically cost nothing to set up, and most have relatively low annual fees ($50 to $75 is typical). The interest rate is low, and you don't have to pay any principal during the first 10 years or so you have the line. So if your interest rate is 7%, you can take about $70 of every $1,000 you borrow and use it to make your payments until the crunch passes.

First, she gives the reader a false sense of security, then attempts to "cash out"
This reads like a thinly-disquised sales pitch from the credit industry.

Escaped from DC,

I'm not sure what they're ALLEGEDLY doing is prima facie collusion and price fixing. If I were to HYPOTHETICALLY try to construct a mechanism to do swaps to fix prices:

* It would work best with 100% owned properties, or properties financed unconventially (like callable loans, or non-bank "mortgages", etc.)
* It would involve the owners, who aren't the Realtors(tm) doing 1031 exchanges at a non-market bearing high price...the ALLEGED price fixing...arranged by the Realtors(tm)
* The Realtors(tm) wouldn't earn their commission on this transaction, but would receive other consideration, like the trading of agent contract assignments. Maybe they'd get other quid pro quo, but not cash commission.
* There would need to be a business justification that was plausible. I can see agents and owners arguing that they are simply swapping because "our agent is an expert in West Corte Madera, and we only trust our agent, so we're willing to reinvest from East Corte Madera to West...or something like that.

After a couple of these swaps in narrow markets, the data would reveal sales that were not market bearing, skewing prices higher. The owners would gain/lose nothing but the transaction costs, assumedly made up for in the higher drift of prices, and the agents keep themselves busy and employed.

Unfortunately, probably the only way to prove collusion and conspiracy is to actually catch agents committing the collusive acts, probably by wire-tapping, etc. I'm guessing this is why they could ALLEGEDLY get away with the practice: it's pretty tough to initiate that degree of investigation by authorities because it involves a lot of resources, time, and personnel.

***NOT ADVICE ON HOW TO COLLUDE OR OTHERWISE VIOLATE THE SHERMAN ACT OF 1890, OR OTHER RELEVANT LAWS***

Kurt S, exactly. I love it when the media does this bull$hit, borrow fools borrow more, buy more, don't worry about saving, saving is so old hat.

It would be really nice if we Marin residents pooled our resources/data together and shared it via a web site. Not to prove the current real estate establishment wrong or anything, but to just put some valid data out there for public consumption. Let the reader decide.

Marinite, great idea. When things slow down for me too, I'll consider how I can contribute.

I often wonder what those in this class of $hitbox do with their matching corgi’s? Do they have Pinar walk them after she gives Kaitlyn and Aidan their Ritalin?

LMAO!
This almost perfectly describes more than few McMansion-dwelling Boomer couples I know.

***NOT ADVICE ON HOW TO COLLUDE OR OTHERWISE VIOLATE THE SHERMAN ACT OF 1890, OR OTHER RELEVANT LAWS***

Randy H --nice disclaimer!

Reason, as stated prior, it's a combination of a robust, job creating, economy, historically low interest rates, profoundly good service by the realtors, and just a plain lack of enough housing. Pure market economics at their finest.

LOL surfer-x.

Reason,

That data is national data. No one (at least most of us here) do not contend that there is a mega-nationwide RE bubble. But, even the Fed (reference sr218, Federal Reserve Bank of New York Staff Reports, Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions. Charles Himmelberg et. al.; September 2005) acknowledges regional bubbles, the Bay Area being one.

So, "all the datapoints" do not "continue to prove otherwise". Didn't someone once say that 'all real-estate is local'?

I’m confused, b/c this board is so negative, and all the datapoints continue to prove otherwise.

Just curious--why does the "negativity" bother you? Does all this bubble talk put your RE investments in peril? If the market is sound, then no worries!

Could someone discuss today’s surprising 2% rise in home re-sales today for August? It looks like the number was unexpected, and the median price rose 15.8% to a record $220,000.

Hello MarinaPrime.

Peter P, who is MarinaPrime?

Just someone I would like to have sushi with.

TWIT is back!

Surveys are lies compounded by statistics

Surveys are lies made half-truths by statistics.

The average human has about one breast and one testicle

LOL! The average human is half the man of what I am. ;)