patrick.net

"Which industry still has honesty and objectivity?"

Engineering. (Not the marketing thereof.)

Nothing keeps you more honest than the threat of imminent catastrophe caused directly by your actions or neglect.

Cheers,
prat

So it really DOESNT matter if the affordability index goes to zero then, does it?

It doesn't affect the affodability index in aggregate. Wealth, no matter how it is come by, is included (at least in the indices I count as valid). Anyways, most economic treatments of home ownership equate it to a rent formula since home equity accumulation is not considered investment activity by economists.

Jack, this is why I do not talk about affordability any more. The argument is too prone to MIRAGE attacks.

P/E ratio and cap rate arguments are more robust. "Intangibles" is the only "known" attack.

I had made the argument that significant numbers of family members were buying houses for thier kids, and that these situations may not show up on some of the standard stats…

The reason RE equity is not investment activity is because it's really equivalent to savings. Moreso because Americans tend to consume their homes by selling them or dying and willing them to someone who sells them. The amount that's not reinvested into new home equity is consumed or saved elsewhere. I won't go into the reason that individuals actually rarely ever invest (as defined by economics) unless they are owner-operators of going-concern businesses. What you call investment is just a form of savings with greater risk-return.

You raise an interesting question about market stats, with the idea of homes purchased by family members for use by other family members. I doubt that this is a big factor.

I have two sisters who each have modest incomes (under $30,000) and between them 6 kids. One is divorced (with no support) and the other is a widow. I help them out by letting them live in homes that I own for almost no rent. Each lives in a 3 br home in a coastal community. In their cases the price or value to income is more than 20 to 1. My income is not in the local calculations.

Big bounce on FNM today. The stock was up 7.6%.

In one day it recovered most of what it had dropped the day before.

I guess we should have bought some Fannie yesterday.

However, I expect it will slip a little tomorrow.

Big bounce on FNM today. The stock was up 7.6%.

Yep. A bit unexpected. Day/swing traders would be very disappointed.

I expected it to bounce 3-4% only.

FNM reminds of microstrategy.

Remember what poppsed the dotcom bubble? There was a prelude before the grand play got on stage, with microstrategy being that prelude. It got some kind of accounting problems, got investigateed, lost 15% or something like that, but the investors chose to shurg it off after the stock price was a bit depressed for a while.Then came that famous Barron's article which had a summary of how many months of operating cash each dotcom has left. That was the article that sealed the deal. I offloaded all my options and stocks the day that article hit the street, and was lucky enough to get out in one piece.

We are still at the microstrategy phase right now, should be a few months away if property market acts just like the stock market.

You are a good man Zephyr, to support your sisters so.

Owneroccupier

You make some interesting points. It seems to me the housing bubble is becoming part of the public consciousness, especially since the media is now putting out so many stories about it. So while the FNM story gets the public's attention-- additional stories that weaken public perceptions about RE/mortgage industry giants might end up being the tipping point.

I think we are very close to (or have just past) the tipping point. Just a feeling.

On the other hand, FNM appears to have lots of downside momentum in it still. I will continue to watch.

(Not investment advice)

ScottC, thanks for the excellent insight.

ScottC

Thanks for so much useful information! One of the reason's I participate on this blog is to get just this kind of info.

Well, wish me luck, we're going to start moving tomorrow. I'm going to be off the blog for a few days; I'm already going through withdrawl.

Ugh:

http://tinyurl.com/a9nfl

Stagflation?

Cheers,
prat

Stagflation?

It could be the beginnings of stagflation. We'd need to see sustained inflation coupled with much worse unemployment and slow growth over a time period. This means, we can't call it stagflation until we're well into it. Right now employment is too high (nationally) to qualify as stagflation.

I personally think stagflation is the realistic worst case scenario. It would seriously impare the RE market by making the ability to service loans difficult because of (a) inflation and slow income growth eroding people's ability to service their mortgage debt; and (b) rapidly rising interest on adjustable mortgages.

Stagflation will make it hard for many highly leveraged home owners. It will also make it exceptionally difficult for others to buy-in even with falling RE nominal prices. I will keep beating this drum: it could be exceptionally hard to exploit a RE correction if the bubble-bust is coupled with stagflation.

http://tinyurl.com/93rta

This is why I’ve hedged a bit with gold.

I would agree that diversifying into gold could work for an individual's portfolio of assets. I hesitate to call it a "hedge", though. Remember that the point of hedging is to reduce risk, but comes at the price of returns. RE is exceptionally difficult to hedge because the costs of the hedge itself usually outweight the risk reduction benefit. I personally know a guy who created a complex synthetic hedge for investment properties he owned in San Diego, including taking short positions on 10-year treasuries. Unfortunately for him, his hedge worked in theory (it did reduce his risk), but he lost quite a bit of money net (he also failed to match duration properly).

From reading ScottC's in-depth writeup on foreclosed properties, it appears that making money this way can be a rather risky and difficult proposition. I suppose when the "easy money" in RE is gone, there will be far fewer players.

I suppose when the “easy money” in RE is gone, there will be far fewer players.

A general rule of thumb is that wherever economic profits are being consistently earned (profits in excess of expected market returns), there exist quite substantial barriers to entry. In the repo market it sounds as if those barriers are both in detailed knowledge of the market and transaction structure, and also in capital required to play effectively.

ScottC, you need to tell my friends that sucessful RE investment is more than loading up on as many negative cashflow properties as possible using NAAVLPs.

I can’t tell you how many people I still hear telling me that they want to get into fixing up/flipping houses!

Pretty amazing so many people consider it "easy money", considering the potential headache with contractors, inspectors, local govt. I'm guessing most people buy, improve modestly and sell vs. the a complete rebuild.

I'd love to somehow pull together stats of speculative RE activity for the SF Bay, and get a better picture of how much this has driven prices. Given the "easy money" angle, I suspect speculation has driven prices far further than portrayed by mainstream media.

I don’t understand the speculation in the Central Valley AT ALL

From the news on speculation I've read, my guess on the buyer psychology is this: many bit by the RE bug, have truly bought into "it can only go up" mantra. Therefore, they want to be one of the first to buy into untapped opportunities to realize bigger gains for a resale. Basically it's a pyramid scheme, and is a plausible explanation for the sales/price spike in places like Far north CA, Idaho, Arizona, Texas tumbleweed areas, etc. Not too surprisingly, many of these areas face a rental glut of homes--and very cheap monthlies.

Actually, I’d argue that the local economies of places like Boise and Phoenix have, historically, been far better than the Central Valley

You're probably right. In the eyes of many investors, I doubt they care about those details, only that they get in "at the bottom".

PeterP, did you take my advice?

No. I will only take a flat or short position in FNM at this point.

My MLS search list is still growing steadily. I thought this is not normal well into September.

Perhaps it is a ...

Spring soft patch
Summer slowdown
Fall pause
Winter break

Off subject slighty here... but...
I'm going to play devil's advocate here and put
in the perspective of someone not from
California, and thus perhaps shed some
alternative views of the housing "problems" in the
state. I'll start by first saying that yes, like
most of the people my age and income(
middle class) and late 20's, early 30's, I too
want to get started and own my own home.
As evidenced by the exsitence of this forum, it
is a severe problem. The problem is both
socialiogical and geo-political in nature.
I came here 5 years ago for what I percieved
would be an opportunity to develop my
creative skills and take advantage of the higher
salaries. I wasnt aware of the high
costs of housing. I grew up in Tennessee, and
have lived in Boston,MA, NYC, and now here
in the Bay area. What I've wittnessed in each and
every one of these locations, even in
TN was that the attitude of many was that they
were living in the absolute best part of
the country. New Yorkers thought NYC was the ONLY
city worth living in. Same with Boston.
My experiences there was that it was expensive
and fucking cold in the winter. If you
asked any of these people if they would consider
another part of the country, I'd get
these amazed looks. What? leave their precious NY
for some unheard of flyover state? Good
god I must be crazy for even suggesting it!
The same attitude exsists here in the Bay.
People move here because they percieve it as
a creative, forward thinking world class city
with a perfect climate. Is it? well, in
some ways it is pleasant. It has it's perks ,
don't get me wrong, but it is similiar to
just about any other city across the country. The
majority of the ethnic classes are
shoved into ghettos and the worst part of towns.
Their schools, and even the public
schools are propped up on barely neglible
budgets that make most 3rd world country schools look great in comparison. My conclusion is that California
simply has a SHITLOAD of really Uber-Wealthy
people. They are also the reason that the
prices are as heavenly as they are.
What bothers me and perhaps many others here is
that the class diffrences; the
diffrences between the poor and the rich are
extremly apparent. That's true in most
places, but here you now have severe and
noticeable diffrences between the middle and
upper class. When I moved here I was astounded at
the amount of $70,000 bimmers on the
freeways. Enter the housing market, which since
the time of Benjamin Franklin has been
the bastion of middle class and their redeeming
proof of middle class entitlements. In
select major US cities, this entitlement has been
stripped bare either for the remainder
of the boom, or perhaps for the decades it may
take, if ever, to restore that status. If
we work hard, got our educations, and make decent
wages by national standards then are we
not entitled to our piece of the pie? When you
get told no, and see that perhaps you
aren't in the same financial standings as someone
living next to you simply because they
got there 5 years ago, then of course it makes
one extremly confused and irratated, as I
surely am.
What I see on this forum is a lot of
frusturation. People, like myself, fruturated that
on some levels, we are sucessfull. We have
attained all that we have wanted, and work
hard to save our money and yet the financial
extremes needed to procure something as
simple as a tiny house in a not so great
neighborhood is out of our reach, and in some
ways makes us feel substandard. I had the same
feeling when I got here when the first
boom- the tech boom was fizzling out. I knew
people who made MILLIONS off of the dot com.
Then I knew people who lost their shirts as well.
But I'd gotten here too late for that,
and now that Ive finally gotten somewhere with my
job, I'm too late for the 2nd boom.
Sort of feels like I struck out again.
Unlike some of the people Ive heard mention
that they love california and would never
move to any of the so-called flyover states, then
perhaps the problem here is more
complicated. Is this a national housing crisis?
No. In fact, my parents just bought a 3
bedroom rental home in Knoxville( population
650,000) for 48k. My best friend who lives
in North Carolina bought his home for 82k, a breath-taking
property in the blueridge mountains. Still
another relative of mine bought a 2 story home in Austin,
TX for 136k; Austin another great creative and open minded city. You have to ask yourself a
serious question. Is owning your own home and all
it brings mean that you HAVE to live in
california or New York? If so, then you need to
realize that if this be your only option,
then house prices may ALWAYS be too high for you
to ever afford. Why? Because it is the
millions of people just like you who help fufill
this prophecy of the "perfect location".
The wages, houses, climates, and even politics
of the bay are somewhat exlusive. The
same can be said for any given number of unique,
interesting, and diversified locations
throughout the country. Thus I will step out and
say that if you want to have the life of
what many see as non-exsistent here in CA, then
you CAN have it. For me personally, I
have been giving some serious considerations to
other locations that Ive found actually
pay the same wages, thus my entire lifestyle
would be elevated immediatly. I'm sticking
around for the same reasons that perhaps many of
you are which is A: I've established
myself here and dont want to have to start over
again. B:I have a severe desire to prove
myself against the odds, and that I can beat the
current system. C: I'm getting married
and want to start a family in an area I am
familiar with.
Ironically, to conclude, I've pretty much
determined that after my travels, experiences
in these "models of progressive america", that I
would have actually been way better off
had I stayed in Knoxville, TN. Instead, I've
pretty much wasted 10 years of my life
paying way, way too much for the roof over my
head. There. thats my 2 cents worth.

If we work hard, got our educations, and make decent wages by national standards then are we not entitled to our piece of the pie?

a-fucking-hem! Well yeah, that's what I thought also.

Nomadtoons,

I concur with most of what you've said, the process gets a bit more tricky however if you've lived your whole life here, especially if you've spent your life on the Ocean. You simply, well at least in my case, can't leave and expect to be any more than miserable most of the time.

It does not matter something has potential, if that potential is already priced-in or is already overpriced. It is very important to understand what the market has already discounted. Excess return can be made only when you are in disagreement with the market and the market turns out to be wrong.

Buffett cann be more right... be fearful when others are greedy and be greedy only when others are fearful.

I'll pass this story along, because I think it's indicative how some BA investors might be sensing a market change... (Credits to Jack, I believe)

"...[SF] is full of a lot of early boomer code-monkey-tech-types who fashion themselves as real estate barons on the side...

That's very new language around here. More are "in the know" every day and there's probably some denial. It's just going

Btw, that's "news to my ears" too. That RE-investing coworker is nothing but upbeat (when questioned), but he's been gloating noticeably less of late.

Does that include buying FNM while others are selling? Nah. Just kidding. :-\

Maybe. :)

But I thought he raised concerns regarding OTC derivatives years ago. To him, an entity with such exposure is like a time bomb.

Jim A,

once the Chinese decide it’s time to stop bailing and get into the lifeboats, considering the huge current account deficit. So everything imported goes UP in price, and assets go DOWN in price when all the FEDs free money dissapears. With some prices going up, and some down, would we be suffering from inflation or deflation?

First, I insist the Chinese won't do this. They simply cannot afford to. Run a macro model for what would happen to their economy if they "bailed". In short, it would result in catastrophic slowdown of their great industrialization/modernization "the long march". And, it would hurt them way worse than us. Compare the percentage of US GDP derived from Chinese trade versus vice versa.

Second, although the initial shock would cause inflation in both economies, the effect would force capital out of China which would cause a rise in the dollar vis-a-vis the RMB, over a longer term. My guess is they'd suffer depreciation against the JPY and EUR concurrently as capital flees.

Instead, the Chinese--which are well known to practice long-term, strategic policy and planning--will very slowly diversify out of USD and into EUR and JPY. This is already happening. But they will still buy US debt, just in every slower amounts as a percent of the total.

To those waiting for China to commit economic suicide: don't hold your breath. (For reference, only roughly 20% of the total US GDP is derived from all global trade, so the US is in the best position to go-it-alone if things go to hell).

All that said, I still see a correction in RE. It just won't be because of China.

To clarify, the China-syndrome scenario assumes two things which are false:

1) That US does not have monetary control, and cannot set nominal rates regardless of real rates in the rest of the world. This is untrue. The US has extrodinary power to set nominal rates, and since our currency floats at market, monetary power.

2) That China does have monetary control. They simply do not. They have forfeited all monetary control to managing their currency. This is true for all pegged regimes. If China looseened or floated, then they'd lose control of capital in/outflows. This would free captial to search for better returns outside of China, which wouldn't be hard to find.

All that said, I still see a correction in RE. It just won’t be because of China.

Exactly. A bubble is mostly psychology. However, I do think mortgage rates will go up when the bubble is bursting. This may happen because of the sharp increase in risk premium.

When this thing turns there will be many things to reinforce a new trend. Reflexvity at work.

But Randy, China can and do implement policies that would be considered politically impossible here. So I think China has a lot more policy control.

China can and do implement policies that would be considered politically impossible here. So I think China has a lot more policy control.

Explain how these controlling policies would work if they loosen or float their currency. There is no free lunch. Either they eat it as hyper-inflation, they fix the RMB, or they allow free flow of capital. They can't just manufacture preferential trade without cost.

HZ,

You are correct about China running current account deficits. Also, this would help solve a lot of these problems naturally, particularly in the US.

Your second point assumes that the US and other countries allow China to play the FDI game asymetrically. I have at least enough faith in the policy makers to not allow this to happen. It is already apparent in the recent CFIUS activity relating to China. Again, if they appease CFIUS by opening restrictions in China, they'll lose equivalent capital controls. The EU has been particularly harsh on China, and I don't see them allowing the Chinese to buy real assets in the Eurozone unless China reciprocates.

H.Z,
I believe you missed my point. The point is that there are areas that are just as pleasant and unique as the SF bay. I feel a real sense here that most people just assume that " the bay area is the best" and therfore there is never any discussion about other potential opportunities. if I moved, I wouldnt feel that I was losing out on some great thing. I could easily invest my hard earned money somewhere where it actually goes somewhere, as in about 90% of the country. For now I rent because it's super cheap. But if the crash occurs, better count on those rents going through the roof. Then I'm outta here.