patrick.net

thenuttyneutron,

The FBs wish! North America is unsuited for tulip reproduction (wet summers, deer, moles, whatnot) and any effort at tulipmania will end very quickly.

I guess it might work for the dutch...

I wrote:

> For the last 300 years (going back 100 years before
> the US was founded using records from GB) the cost
> to rent has always been close to the cost to buy
> (after making a down payment).

Then Randy H. posted:

> The fact: once adjusting for regional inflation factors,
> owning has *always* been significantly more expensive
> than renting, especially when plotted against income-
> affordability. The notable exceptions are *always*
> during periods of sustained credit-crunches, which
> are rare, not common.

I have no idea where the data on Randy’s link came from but I have a feeling that is plotting what the average renters in an area pay vs. what the average owners pay. This may come as a shock to Randy, but the housing stock that is owned is almost always much nicer (and bigger) than the rental stock. If someone was to compare the cost to own vs. rent in my zip code (94118) it has always been “significantly” higher since most “owners” in my zip code live in home worth over $2mm (with many over $10mm) while most renters live in crappy apartments renting on the open market for under $2K a month (with some studios renting for under $1K a month).

As a kid when my parents started buying homes with under 10% down the homes had positive cash flow and I’ve read over 100 books on real estate investing over the past 30 years and it is very rare to find a time (other than the past few years) when you could not make a 20% down payment and get in to the rental business owning a home (or apartment building) with positive cash flow.

I’m not sure what Randy means by “adjusting for regional inflation factors” since when I say that “the cost to rent has always been close to the cost to buy (after making a down payment)” it is without any fancy adjustments and it means that throughout modern history the cost to rent a home on a particular street will be very close to the cost to own a similar home on the same street after you make a 20% down payment…

I wrote:

> Rents are related to one thing… “supply and demand”

Then Randy H wrote:

> This statement is *always* false as a practical matter.
> That is because there are no *perfect* markets, which
> are the only types of markets in which supply & demand
> are the *only* factor.

I challenge Randy to name a market with low vacancy (low rental unit supply) where rents were not going up and a market with a high vacancy (high number of rental units on the market) where (effective) rents (net of concessions) were not going down…

SFGuy Says:

> Any way we can get data on how these
> purchases are financed?

The amount of (recorded) debt is public record for all property (only the amount, not the terms). I can pull the data for most real estate in the US.

Randy H wrote:

>Wives (he happens to know) have joined forces and are running
> around buying up beater condos in the Marina and other prime
> SF neighborhoods, and a few neglected SFHs in good S Marin
> neighborhoods. They’re making all cash, instant close offers for
> 25%+ off asking, and apparently have over a dozen now. I’m not
> completely sure what the plan is, but something along the lines
> of rent them out (all managed of course) and put zero into them.
> After some time — they think 1-3 years — they’ll kick out the
> tenants, do major rehabs and sell them for a premium.

The worst actual condo (not a TIC) will be about 750K and doing a search of the MLS I found the cheapest 1 Bedroom condo in 94123 is up the hill from the Marina at 2342 Franklin listed for $625K (the most expensive condo in 94123 is the big place at 2347 Vallejo listed for $3.6mm).

World Savings has a 6.01% CD that would pay $37,526 a year on $625K. If I bought the 1br condo 2342 Franklin I could get about $24,000 in rent backing out a vacancy factor would leave me $22,800, backing out HOA fees (that usually include insurance) would leave me $16,800, backing out the property taxes would leave me $9,550, backing out a property management fee would leave me $7,150. With maintenance, repair and HOA assessments averaging about $1,000 a year it looks like the cash on cash return will just top 1%....

it looks like the cash on cash return will just top 1%….

I'd guess free cash returns of more like -3% to -5%. But after tax returns will be net positive because they can write off losses against AMT passive income.

I challenge Randy to name a market with low vacancy (low rental unit supply) where rents were not going up and a market with a high vacancy (high number of rental units on the market) where (effective) rents (net of concessions) were not going down…

I challenge FAB to show me one economics text that asserts "supply and demand are the only factor" for anything other than purely perfect theoretical commodity markets.

I did not make the inclusive, absolute statement invoking (incorrectly) economic theory. He did. Nonetheless, I'm sure that his personal experience will be adequate evidence to convince himself that 400 years of economics are worthless and he has some divine insight into "the laws of supply and demand".

Note, he could have easily said, "supply and demand are the *primary* factor in rental markets", or "supply and demand seem to be the most important factor...". But he instead chose to make a definitive, authoritative statement of an academic nature -- I assume for effect of shock and awe. The only problem is that the statement he made also happens to be categorically false.

FAB muses:

I have no idea where the data on Randy’s link came from

Clicking the link is difficult, I agree. "Randy's" link is actually a link to a massive body of research by HSBC.

As a kid when my parents started buying homes

...but this is much more convincing to him, apparently.

I’m not sure what Randy means by “adjusting for regional inflation factors” since

It is difficult to follow through the reference footnotes to the web site, on which you can download a 600+ page HSBC research methodology report, detailing the related formulae, models, criticism, and empirical studies both in favor and in opposition to their findings.

But again, it sure sounds so much better to make a nice clever statement like "I'm not sure what Randy means".

I accept your compliment that you think I am smart enough to have come up with those models. Now if only I could have the various grants, Nobels, and prestigious posts that went along with such fame.

Skibum,

Yes, VCs are in a different category. There are a goodly number of them up here in S Marin, though. Mainly, they earn carried interest over a period of 8-10 years coordinate with the lives of their fund cycles. This carried interest for a GP of even a small VC fund can easily be 15+M total over those years. The problem for 30-40 year old VC guys is that the first 1-2 funds create a real tax headache. So they are in fact rewarded net of taxes by the kind of activity I described. All that much the better if these "adventures" earn a return as that basically pays the tax bills due now on unearned cash profits.

I have no idea as to the authenticity of their claimed "25%+" discount offers. Only that they have about a dozen such properties now. It could well be they are overpaying and simply bragging and fudging the numbers to show off. It wouldn't surprise me. I would be surprised if they are fibbing about it all though, but one never knows.

...and don't forget also there are a healthy number of quiet little hedge funds sitting over in Larkspur by the Ferry. One of those "little" funds recently blew up when GM went double down. Only a couple billion lost, lol. Nonetheless, these guys aren't hurting for $ either. I have a couple friends who work in that industry in quant research/modeling/programming. Even a quant programmer who earns about $150K/yr can pull a bonus of 100%-200% in a good return year. This year is *not* a good return year, though, so no worry these guys are spoiling the housing market right now. But last year they made some serious cash.

SF Guy:

>Any way we can get data on how these
purchases are financed?

The amount of (recorded) debt is public record for all property (only the amount, not the terms). I can pull the data for most real estate in the US.

So the answer, SFGuy, to your specific question is NO. You can find out how much was financed, but not *HOW* it was financed. If FAB has some way of finding out the _terms_ of specific financings then he is either (a) breaking privacy laws, (b) an insider with access that he is prohibited from sharing, or (c) full of it.

You could make assumptions about equity %, but that again wouldn't provide enough accuracy to yield any predictions with a decent confidence interval.

astrid,

It is a shame that I cant grow tulips here. Maybe I can grow "special" crops in my basement:)

"Maybe I can grow “special” crops in my basement:)"

Ha! Yes you can. As it happens, I'm contemplating getting some growing lights of my own - for wintering tender plants (that have no medicinal uses).

There is "good news" for BA FBs. Tulipmania the book notes that after tulipmania came dahliamania and cliviamania. Both of those plants will do very well in Northern California.

The housing bubble party continues, praise Greenspan!

venture capitalist

HF = hedge fund
IB = investment banking or international baccalaureate
ETF = exchange traded fund

When you are talking about $1.5M+ market, they are usually not bought with a big mortgage, because the carrying cost of the property will already be close to 20K a year on property tax alone. People with that kind of family income or asset buy for capital gains, until capital gains turn out to be capital loss.

I don't have the data for Tokyo, but I was watching the luxury market in Hong Kong as it sank. A particular area (South of Island) I was watching in Hong Kong has the same characteristic as S. Marin, tons of Ibankers, VCs, etc. the high finance type, so money is not an issue, the potential of making even more bucks is.

In the first couple of years after the crash in 1997, that area held up very well, lost far less value than the rest of the market, because lots of money jumped in on the way down in the hope of holding out for a couple of years to generate capital gains later.

However, the general market didn't turn around in 99, nor in 00, nor in 01. Then that premium market started panicking. The reason was nobody could make a positive cashflow on luxury properties, the only way you could make money was through capital gains. But the rich people have a particular disdain for losing money. By the time SARS hit in 2003, that luxury segment lost just as much % as the rest of the market, a total 60-65% off the top.

I am kicking myself for not picking up a good deal back in 2003 (my lowball offer was accepted but I pulled out for the fear of another SARS comeback), because the price now has headed back to around 220% of 2003's bottom price in only 3 years.

The lesson I learnt from watching luxury realty segment's performance in a recession is, they are momentum stocks that bear no relationship to rental income or cashflow. It is a way to PARK your money.

What's next?

It is a patience game. If you have waited that long, don't jump in till at least 2009. In fact I am now adjusting my timeline to target 2011. I will really kick myself hard if I don't at least make an effort to capture the bottom having seen two previous bubble bursts in my life.

I guess a couple moderate (5.5-6.5) size earthquakes in 2010 will be very handy for creating that lifetime buying opportunity.

Would be extra nice if the lending market goes crazy tight (relative to now) in 2009.

Randy H Says:

> Don’t forget also there are a healthy number of quiet
> little hedge funds sitting over in Larkspur by the Ferry.

Years ago kids from Ross used to rent office space in Larkspur and “manage the family investments” when they were not drinking in the city or playing golf at the Meadow Club.

About four years ago it seems like all these kids (and kids like them from Presidio Heights that rent office space in SF and play golf at the SFGC) all started “running hedge funds”.

I’ve seen recent articles that say “the number of hedge funds has doubled in the last five years” and I’m wondering if this big increase is primarily from people just starting to refer to their investments as a “hedge fund”.

I know in theory that a hedge fund is supposed to “hedge”, but I have heard people say our fund only has long equity positions and cash right now. I’m wondering if Randy knows if there is anything stopping a “day trader” from calling himself a “hedge fund manager”…

A couple of fantasy articles were written in 2005 telling what would happen next.

One was published in the Atlantic Monthly in the summer, "Countdown to a Meltdown". http://www.theatlantic.com/doc/200507/fallows

The other was published online, "The Day After Tommorrow". http://www.theatlantic.com/doc/200507/fallows

Both of them are plausible (likely, I think) fictionalized scenarios of a positive feedback loop between a deterioration in the value of the dollar, fed policy, longterm interest rates, "mortgage resets", foreclosures, stock market crash, credit collapse, liquidity implosion.

Probably the best we can hope for is a Paul Volcker type correction. Those of you who were around to remember, this was a very painful process, official unemployment reached 11 or 12% in 1982. Other outcomes are more likely, and more painful.

You can also read about similar such aftermaths to asset bubbles in Edward Chancellor's book "Devil Take the Hindmost". They all ended badly.

Both those fantasies I mention were published more than a year ago. Elements of both of them are coming to fruition.

That's what's next.

Sorry about the last entry, the link to Day After Tommorrow, http://www.financialsense.com/stormwatch/2005/0222.html

FAB,

Good point. Th term "hedge fund" has been broadened over the last several years to include plain vanilla mutual funds that have elected to skirt traditional registration guidelines. Anyone that can come up with 20-40k can form an LLC/LP/? that "qualifies" as a hedge fund for regulatory purposes. I can't buy a round without that including 2-3 "hedge fund" managers! Another issue is that most HF's are NOT AIMR compliant. In many cases these are simply "blind trusts" that are unencumbered by securities law.

If a manager approaches myself/clients and says we're buying apt. bldgs. (or whatever) and at the end of 3-10 years we're going to sell them at the market, well fine. At least we've defined terms. We're all big boys here and know the risks/rewards. When someone says "Spot me 100k and let's see what happens, that's a different story.

When HF's had a $1 mil. entry point the investors truly were sophisticated and could dispense w/the formalities. Now that it's a 5k min? Go figure.

Ha Ha,

That's why regardless of what happened lately, I am still firmly in commodity, gold and foreign currency.

I don't trust paper currency, period.

DinOR,

the HF limit is lowered to 5K only? That's like a retail fund of the lower end.

FAB said:
An unidentified threadmaster posted What’s Next?

Sorry, that was me. It was late past midnight by the time I posted the topic. I was working out various scenarios on the ride back from an after-work party, which is what gave me the idea for the thread.

Thanks for everyone's excellent contributions so far. Just one comment though - I didn't mean to start a discussion on whether rents were going to continue going up. The example was just to illustrate a chain of cause-and-effects to lead from a premise to a conclusion.

Almost every premise I could think of seemed to lead (at least logically) to a fairly steep correction. So I wanted to see if the blog could collectively brainstorm a few more of these.

SP

Randy H Says:
Threadmasters should try to remember to sign their articles as many readers like to know who the author is.

As I said, it was an oversight, probably caused by a preoccupied, sleep-deprived (and perhaps mildly inebriated) mind. :-)

I agree it is a good idea to sign threads - however, I have seen other threads in the past that did not specify an author.

SP

God damn I'm on my deck right now ass packing Confused Renter's Mom, and I must say that the summer corn looks good on my little buddy. I'm no longer confused as I went to Craigslist and found out Confused Renter posts there as LittledickSFonhiskneespieceofshitcocksucker, yes quite a title but hey at least the troll is still giving a go.

I’m not sure what Randy means by “adjusting for regional inflation factors”

I think what he means is that on a cost adjusted basis that the bias always shifts towards the spread in such that the holding buyers who adjust the carry trade given the float on the Euro dollar Vs. Yen market on the London exchange any given day minus of course any transactions floated across the bond yield divided by the cost of money times the Fed charge in reverse. If you factor in the cost of money divided by the absolute value of M3 times 4 then you come to the conclusion that it is as it has always been, you lose.

I hope this helps.

- "of course" my commision.

"VC" = Ventura Communist

I always thought Tahoe was a Chevy?

here's 2 links on recent OT topics that just showed up, somewhat belatedly -- hypoallergenic cats in CA, and GM crops. maybe the Allerca site triggered the earlier discussion anyhow... just FYI, not trying to spark any new discussion:

High-tech cat won't cause allergies

just about the whole dam story on GM politics - lots of good links in this article - like the 'instant expert' ref, we're good at that...

Instant Expert: GM Organisms - 04 September 2006 - New Scientist

@Suman,

How do you become a quant programmer? Is a programming background good enough or do they look for a financial background as well? Would a lot of motivation and a good grounding in financial concepts do, without a degree?

And, if you can name a few quant companies that are in the bay area, that would help a lot…Am thinking of pursuing the financial engineering program at berkeley, but not sure yet.

In many ways quant programmers are similar to game programmers. Parts of it are truly unique from regular business software work, but at least as much isn't unique. The problem is that those inside the industry think it's unique.

Getting into most HFs as a QP is tough. They like to pick the top .01% academics, but they also want people with lots of real experience. I'm not sure if there is an average profile for a QP, but most will have an advanced degree, many have a Phd, and some kind of math-centric academic background is common. The guys I personally know have backgrounds like: BS-(Math or Physics or Business or Econ or CS) with either outstanding grades or some good years of experience. MS-(CS, Finance or Econ; much less commonly a MBA) grades much more important for grad studies.

As to work experience, any experience you can get with a HF or in the HF service industry is extremely valuable and will help you get considered for other jobs. A lot of times a QP might find his first HF job only lasts 6-12mos, because the fund is small and either fails or cuts costs in a bad year. But that experience will find you another job pretty quickly.

The only other thing I can think of is that only the really big HFs have a "career path" for QPs. At smaller HFs you may be expected to do programming, modeling, and research.

Things they look for:
* Solid coding. Prove you're "too smart to be coding Oracle apps for some corporate IT department".
* Experience or familiarity with math tools, usually Matlab, less often Mathematica.
* Often stats programming/tools, usually SAS.
* Heavy Excel. Often VBA.
* Superstar credentials, work and academic.

There are hundreds of HFs in SF and Larkspur. Most are small and you'll have trouble finding out who they are. There are a couple big shops that you can target and try to land an interview with:

- BGI (Barclays Global Investors). Look in their alternative investments division. These guys run probably the largest global macro fund in the world, and do all their dev out of SF.

- DE Shaw. Very hard to get into, but if you can you can get a job anywhere after a couple years there.

Finally, I'd say go to vault.com and buy their $30 career guide on Hedge Funds. Probably you should also spring for the general career guide for jobs in Finance. These guides will help you talk the right jargon, understand how compensation works, and get inside the heads of how HFs operate, hire, and promote.

bonus link - IMF's long, hard look at itself might be too late

plenty of material in that article for anti-globalists AND econometricians...

Prove you’re “too smart to be coding Oracle apps for some corporate IT department”.

hey!

I’m wondering if Randy knows if there is anything stopping a “day trader” from calling himself a “hedge fund manager”…

I'm wondering if FAB knows of any "day traders" with a Prime Brokerage, SEC registration requirements, and Series licensed traders?

There are plenty of bad HFs, but these aren't generally Junior Richy running around "managing" the family jewels. Much more often they are bad-boy IB traders -- usually top traders, often from modest backgrounds, who are out to prove their IB bosses were jackoffs. They get into trouble because they take winning trading strategies from one area, like equities, and try to replicate them in other area, like commodities. For example, there are a couple HF managers running around doing long/short pair trades in natural gas. We should start a dead pool on how long until those blow up.

Assuming I am an apologist for the HF industry would be wrong. I have become extremely critical of their supposed "uncorrelated returns", which have proven to not really hold up well over time.

Am thinking of pursuing the financial engineering program at berkeley, but not sure yet.

Don’t bother, there will be an Indian waiting to take that job for about what they will pay you to pick up trash in a park. Better off getting a job in the service sector or if you really want to do that kind of work, move to India.

I wouldn't worry about offshoring/outsourcing as a real threat to a MFE degree. I've seen no evidence this is likely to occur anytime soon. The real risk of an MFE is that the degree is relatively new.

Erc,

Good question. One of the misunderstandings regarding AAA rated munis is that while it's true they are insured it simply means the insurer steps in to make int. payments while the issuer sorts things out. There have been cases (particularly w/ revenue backed bonds) where redemption wasn't possible. At least to the liking of bond holders. Serial redemptions mean you may have to wait in line OR hold until maturity.

Since you're in what sounds like a fund most of this is more the managers problem than it is yours. My 2 cents? If you're not in an AMT situation you can look at funds that have not been "scrubbed" of non-AMT holdings or even a "national muni" BF for better diversification. Also (b/c we're such big fans of ETF's here) there are several that yield 8-9+%, pay monthly and are fully liquid. One that I've used is EVV. Everyone here has taken their turn flogging MBS (yours truly included) and while EVV is leveraged and contains MBS, they are "seasoned" w/avg. duration of 12-16 years so the downside is more prepayment of the loan rather than default of the loan. Randy H can explain that better than I but you get the idea. www.investinginbonds.com has a great "Taxable Equivelant Yield" calculator and a LOT of great general information.

NIA

Oh just a quick correction!

Serial Redemptions can also occur when the issuer has the window to refinance at lower rates in which case Murphy's Law dicatates that your bonds will be recalled first! Sir, your CUSIP Number is up!

Can anyone else think of a scenario where you get "re-called"? In know there are others, just can't think of 'em now.

Since Suman brought up financial engineering, I'd like to report this tiny data point.

I spoke to my cousin (the one looking at US finance and accounting programs) this Friday and apparently, financial engineering is all the rage in the cream of China's education system. My cousin said that the people who have a seriously shot at getting in are those with math or physics masters or were undergraduate stars at China's MIT/Harvard equivalents. She said that finance undergrads cannot compete, either to get in or with the coursework once they are in.

The ostentible reason for this "super hot" status (apparently this is the hottest area in finance for the average Chinese student) is that good paying jobs are currently easy to come by. However, the degree has zero application in China right now.

We yakked on a bit more and two other somewhat interesting points came up.

1. All Chinese applicants to foreign finance programs focus on writing their career goals in their personal statement. My cousin and I agreed this was a patently absurd approach for a 20 year old with no working experience away from a couple summer internships.

I suggested a more realistic and softer sell by emphasizing that she's a great person who will be an asset to the school and go far. I also recommended requesting phone/face to face interviews, which will hopefully help her stand out a bit more from the crowd of 20-50% anonymous Chinese applicants.

2. The finance students start looking for work as soon as they arrive. This is because most finance programs only run for a year. So this all seems more like a "get the US/UK job" approach and not at all like an attempt to get some education.

She's taking the November GMAT and then we'll do some strategizing for application and so on. She's looking at 2 year finance and 2 year accounting programs. As always, any tips on this matter would be much appreciated.

She's a smart girl and she did her homework. I think she'll do alright whereever she ends up.