patrick.net

"You should check if you can afford a 15 yr. fixed"

StuckinBA,

Well there you go! Isn't advocating people in their 40's at least consider a 15 yr. FRM vice a 30 yr. part of the radical thinking that put Patrick.net in the "Extreme Category" for blog awards?

No wonder every realtwhore in the BA takes a cheap shot at us! Here is yet another cornerstone of traditional financial planning cast aside all in the gamble to have a "free" house at 50, not a paid in full home by retirement age.

You gotta love it!

http://www.consumeraffairs.com/news04/2007/01/mln_subprime.html

"The last few months have seen a flurry of subprime lenders shut their doors, declare bankruptcy, or engage in mass layoffs as the housing market freezes up.

Ameriquest, formerly the country's largest subprime lender, collapsed quickly after its former CEO, Ronald Arnall, was appointed by President Bush to be ambassador to the Netherlands"

the other side,

Spoken like a true realtor (tm)!

Inflation and housing prices - are they tied together?

I’m increasingly of belief that we will see dramatic inflation in the near future. The perpetual fall of the dollar. The massive government debts. Continued upwards trend of the price of raw materials.

I’m too young to know - but what happens to housing prices if inflation say… hits something moderate like 5-6%?

Does it tend to match?

I’ve been futzing a lot with this calculator recently: http://www.dinkytown.com/java/MortgageRentvsBuy.html and I’m perpetually surprised at how close the break even point is… especially when I tweak the inflation knob.

Frank,

Is Ameriquest already gone? I thought any company that can get their name on a blip would be around forever! The name always reminded me of Ameritrade = Let's light this candle, dude!

@eburbed -

I found my current residence via craigslist. You can also find listings in the small publications (Palo Alto Daily) or regular newspapers like the SJ Mercury. Another thing that works on occasion is to drive through a neighborhood you like and check the "for rent" signs.

jbunniii Says:

> OK, I’ll bite. What else would you do
> with an old refrigerator?

When I was a kid my Dad used to make me take apart old refrigerators and save all the old parts in the hope that we might some day save a few dollars by using the old parts to fix another refrigerator. My Dad would not just take apart the old refrigerators he would bring home almost anything our tenants threw in to the dumpsters with “perfectly good hardware” still on it. When the water bed fad ended in the late 70’s I bet I took apart about a dozen water beds saving the nuts, bolts, screws and drawer hardware from the (more often not) “black lacquer” pedestal drawers. I swear I’m not making this up, but I just remembered that my Dad used to make me cut up the shell of the old fridges with the Sawzall so we could throw them in the dumpster and save the couple dollar dump fee at the old Burlingame dump…

Bay Area real estate will NOT appreciate 3% + inflation, because it is already discovered.

30 years ago, Bay Area was an orchard, a huge orchard. My wife who grew up here never thought of this place as the "silicon valley", to her, it is just Santa Clara Valley. As Santa Clara Valley grows into the Silicon Valley, you get 3% + inflation over the last 30 years, which is a very strong appreciation if you compound the 3% over 30-year period.

However, now that it is already the Silicon Valley, where else can it go? Many places on the west coast has been growing faster than inflation due to the "discovery" factor. When it is already discovered, the most it can grow will be pretty much tracking the inflation.

Look for 3% + inflation somewhere else, particularly in the unsung regions of the west coast like Oregon, after the bubble pops.

SFWoman said:
No private developer is going to build houses where you lose money on 64% of them.

Well, I think that interpretation is quite wrong, isn't it? They are saying *below market rate*, not making a loss. i.e. sell it for less than the current 'generally agreed' market price. Developers often have a 25-30% profit margin built into their retail price, to begin with. I'm certainly not asking any developer to 'lose money'. The fact is, the cost of construction is not that high at the development end, it's the attributed cost of land that blows out the price. Hence, I would try to control asking prices for land somehow, as per the rest of my post. (And there are 'not for profit' developers out there who don't walk away with massive markups, as per Bridge Housing e.g. the Fisherman's Wharf project) It can still be win-win for everyone, just not quite so much win for the original land vendor. The point is, if prices crash everywhere as so many posters here predict (and fervently hope and pray) then the cost of land will go down in the market anyhow! i.e. the concept of value of land will be reduced back in line to something reasonable, which then flows into the developed asking price for a place... What went up came back down... I'm just saying go back a step and try to control the asking price for land, probably by govt fiat... is that any clearer?

When I was a kid my Dad used to make me take apart old refrigerators and save all the old parts in the hope that we might some day save a few dollars by using the old parts to fix another refrigerator.

Beware escaping refrigerant!! :o Actually, your father sounds like me -- a bit of a scavenger 'just in case' the part can be used again...

"Ameriquest, formerly the country’s largest subprime lender, collapsed quickly after its former CEO, Ronald Arnall, was appointed by President Bush to be ambassador to the Netherlands”

surprise surprise... the republican establishment guy at the top gets a plum job to escape to... a defence minister here 'retired' after a phone card scandal, went straight to a job chairing a billion dollar defence contract bid, which he surprisingly won, then went on to become a Euro ambassador on $400K paid for by the EU...

Threadmasters,

Is there an Email address that us proles can send thread suggestions to?

I have a couple of ideas, but I don't think I would be able to adequately control them. I'm in the wrong time zone for to-ing and fro-ing during my evening (this is 10:15pm for me), and I can't send from my work PC any more (firewall restrictions).

theotherside,

Before concerning yourself with "how" this blog is administered perhaps you would have at least some credibility if you addressed the following:

1. Why the collapse of sub prime lenders doesn't matter.

2. Why rising delinquent payments, Notice of Defaults and foreclosures are of no consequence.

3. Why it is perfectly ethical for the Santa Barbara CA and Danville, IL realtors associations to withhold their data from NAR.

4. How there is no mortgage or appraisal fraud.

5. Explain Leslie Appleton-Young's new affordability index for CA.

6. Why MID and cap gains exemptions played no part in all of this and that there is "no national RE market" or rolling bubble.

No, you won't address any of that. You're too busy defending your own poor investment choices rather than own up to the mistake that you made. Besides, didn't you promise us you were back to work doing open houses for non-existent buyers?

Different Sean Says:

> And there are ‘not for profit’ developers out there who
> don’t walk away with massive markups, as per Bridge
> Housing e.g. the Fisherman’s Wharf project) It can still
> be win-win for everyone, just not quite so much win for
> the original land vendor.

> “Ameriquest, formerly the country’s largest subprime
> lender, collapsed quickly after its former CEO, Ronald
> Arnall, was appointed by President Bush to be ambassador
> to the Netherlands” surprise surprise… the republican
> establishment guy at the top gets a plum job to escape
> to… a defense minister here ‘retired’ after a phone card
> scandal, went straight to a job chairing a billion dollar
> defense contract bid, which he surprisingly won, then
> went on to become a Euro ambassador on $400K paid
> for by the EU…

Most of the “not for profit” developers (including Bridge) are just shell companies that allow politicians to pump money back to campaign contributors. On average “not for profit” housing costs at least twice as much to build as “for profit housing”.

I’m not partisan like DS and I have no problem saying that Ron Arnall is a scumbag, but not talk bad about a dead guy it’s interesting to note that Don Terner former CEO of Bridge Housing died in a plane crash with Ron Brown about 10 years ago. Ron got started in politics registering dead African Americans for Teddy Kennedy (this is according to life long Democratic Brookline relatives that still support Kennedy). I have many “Democratic” friends that think that Terner and Brown were killed by members of their own party since both were under investigation when their plane went down…

Many liberals think that developing real estate is a license to print money. It is not, it is a very risky line of work that has put a lot of smart guys in to bankruptcy. When a “not for profit” develops property the costs just keep going up and up since the government will pay for all the “costs”, just not any of the “profit”. Let’s not forget that a “cost” to a “not for profit” developer includes a lot of “profit” that goes to the contractor and all the subs…

I suppose there are people freezing to death every August because they are outdoors in Scotland.

More like starving to death beacause all they have to eat is haggis.

I came across these guys, Contrary Investor - DinOR, RandyH, FRIFY, or anyone else - heard of them? Their monthly market outlook is free to the public:

http://contraryinvestor.com/mo.htm

This month's report is on housing, and they are extremely bearish. I don't know if these guys are any good, or if they are just small-time. But I will say their analysis seems reasonably good. It's a long read, but it's written rather colloquially.

skibum,

Oh sure, I've heard of them before. It was pretty solid analysis but didn't Liz Ann Sonders (Charles Schwab) do a very similar piece some months ago?

I seem to remember it raised some eyebrows b/c that bearish a sentiment coming from a firm as mainstream as CS was something of a bombshell. Either way, it definitely gives the "we've stabilized" spin a death blow!

MtViewRenter

Most of my after tax returns are related to tax position. To be honest, I don't pretend to understand all the tax stuff; I just do what my tax acct advises, then balance the portfolio going from there. Currently, tax-exempt munis and mmkts have the best after-tax return for risk for me (related to "debt arb" only).

DinOR,Skibum

Same impression. They seem to just aggregate, reformat and comment on other works. But that's what most of the blog-o-sphere is all about. I try to add a tad bit more original thought or analysis when I regurgitate someone else's work; but in the end most blog econ stuff comes from the same dozen or so original sources. CS, HSBC, etc. and the academic sources.

tannenbaum,

”Because there’s excess inventory, there are still significant concessions,” he said. “We expect that will drop considerably later in the year. In other words, now is a great time to buy.”

If you have the time to read the link I posted, you will see how ridiculous this statement is. Based on multiple indicators (housing permits, housing starts, inventory), we are nowhere near the "bottom" of this housing cycle. There will be realtors (TM) and MSM calling the bottom periodically all the way down. By the time we reach the true bottom, the cheerleaders and pundits will have long stopped calling the bottom, because frankly, at that time, housing will not be a "hot" investment.

SFWoman,

As I understand it, there was massive fraud and loose lending standards in the late '80s, particularly in Boston. They suffured during that housing crash more than most other places. What's "humorous" is this Boston realtor's web site and his "market analysis" reassuring us that the '80s disaster won't be repeated:

http://www.richhaen.com/market_update.php

Conversely, the debacle of the late 1980s was unfortunately fueled by speculation with Boston's occupancy rate at an all time low of ±60/40 heavily laden with "investors" versus "homeowners". In addition, mortgage lenders at that time were allowed to offer these same investors little or no cash down financing, appraisals were not required and the validity of the Purchase and Sales Agreements were not verified. Many transactions went unregulated with falsified documents and inflated cash down payments. When the real estate market crashed in 1988, these same investors bailed out of the market, allowing their units to be foreclosed upon by numerous lien holders. In the condominium market, this surely had a major impact on the City of Boston's real estate values. Unfortunately, these foreclosure numbers became the most recent "comparable sales figures", leaving the homeowners in a very precarious situation with devalued properties. The first thing to be sacrificed in a downward spiraling economy is speculative real estate investments. Again, the laws of supply and demand could not be more clearly outlined! Ask any financial advisor, tax accountant or lending institution, the last thing people walk away from is their primary home mortgage.

Doesn't this sound familiar? Hmmm.... "investors" rather than "homeowners" in the market, little or no down payment required, little or no documentation required for loans, investors bailing out of the market...

Surely that's not the situation we're in today! I guess we won't see foreclosures increase, comp sales prices decrease, and devalued properties this time around!

Randy H,

True, sometimes we wonder just how many financial web sites we really need? One of the few things I HAVE enjoyed about this bubble is the birth of a bear voice in RE! Prior to this, only bulls had any rights.

This weekend I intend to pick up Sell Now! It wasn't that long ago a publication of this sort was unthinkable! It's the equivalent to "The Satinic Verses" that got that Rushdie fellow into so much trouble. Ha Ha inspired me to fork over the coin.

This weekend I intend to pick up Sell Now! It wasn’t that long ago a publication of this sort was unthinkable! It’s the equivalent to “The Satinic Verses” that got that Rushdie fellow into so much trouble. Ha Ha inspired me to fork over the coin.

Maybe the NAR will issue a fatwa calling for the death of the author of "Sell Now!"

SFWoman Says:

> FAB, I remember there was a large condo and apartment
> below market and subsidized development built in Boston
> when I was in college (late 1980s). At the time it ended up
> costing $600,000 per unit to build. I had friends who were
> buying condos in Back Bay for about $350,000 at the time.
> The whole thing was a giant boondoggle for someone.

The “someone” are the “campaign contributors” who get paid back for their donations with government contracts. I met a Bay Area real estate developer once who tracked his campaign contributions like his other investments and said that no other “investment” has as high a “return” as his campaign contributions. If you dig down to the key principals who have made millions on the Third Street Rail project/boondoggle (and who will make money on the SF “Big Dig” if the Chinatown subway starts this year) almost all the names will be on the friends and donors to Willie and Gavin list…

What percentage increase is 1.6% to 5.6%? The actual percentage might still be low, but it looks like there is an almost 200% increase in the number of people who are losing money nominally (not even inflation adjusted or counting Realtor(TM) fees) when selling their houses in Marin in the past couple of months.
Is this drop enough for Randy to start writing more "This-is-my-final-offer" Offers? I got the feeling from reading his latest Shiller analysis that he may be sitting tight for a while longer. I am also curious to reconcile this statement:
Long term, in the Bay Area and Southern California, housing appreciates only 3.5 percentage points a year over the rate of inflation with Shiller's numbers (even with inflation). Anybody know if Shiller broke out the numbers for CA?

"The law, if passed, would make France the second European country to guarantee the right to housing, after Scotland which adopted similar measures with its 2003 Homeless Act.”

The Soviet Union had this right guaranteed in their constitution.

Does this mean there are no homeless in Scotland? If you own a home, are you required to take in strays? Or just those owners with spare bedrooms?

Is this drop enough for Randy to start writing more “This-is-my-final-offer” Offers?

We're planning to start trying again in February. *But* we're skeptical enough so as to hold onto our rights to keep renting here for another year.

A lot of stuff here in South Marin (in our price range at least) seems to have been pulled for the winter. *Quality* inventory has shrunk considerably. The crapola that's languished for months is starting to sell for what I consider healthy price reductions. For example, a $1.9m in Corte Madera seems to have sold in November for $1.7m. That's not huge, but it is $200K, which is real money. Just not enough real money to get me to bite.

I don't know who's still buying. Well, actually I do in some cases. Colleagues of my wife -- executive types generally making $200k minimum base -- were buzzing around at their xmas party about how this is "the opportunity of a lifetime". Crap like "I grew up in Marin and this is the first time prices have ever gone down! Better buy fast!".

I didn't bother to point out any data, out of respect for my better half's career.

I do see stuff movin' that I thought wouldn't budge. Two knock-down McCraftsam rebuilds down the hill from me in Mill Valley, one started at $2.8something and the other $1.6m, both sold in December after over half a year on the market. I have no idea for how much or if the sales were even legit or just some tax-transfer hoohaa.

The Soviet Union had this right guaranteed in their constitution.

As did many other old-line Social1st and Commun1st countries from the previous era. It was a "constitutional" right in the DDR. Probably so in most other Soviet satellites. I'm pretty sure there were some in SE Asia and Latin America as well.

...actually, I happen to be working with "Kati", who grew up in the DDR, today. She says they taught her in school that the fences & walls were to keep out all the oppressed homeless from the West who knew that in the East they had a people's constitution that guaranteed things like food and shelter to all people. There were so many the guards often had to "unfortunately" shoot them to keep them out.

She also said by her generation no one believed it either.

She says they taught her in school that the fences & walls were to keep out all the oppressed homeless from the West who knew that in the East they had a people’s constitution that guaranteed things like food and shelter to all people. There were so many the guards often had to “unfortunately” shoot them to keep them out.

Interesting... so they were teaching them about Malibu, CA and Sugarland, TX?

don’t know who’s still buying. Well, actually I do in some cases. Colleagues of my wife — executive types generally making $200k minimum base — were buzzing around at their xmas party about how this is “the opportunity of a lifetime”. Crap like “I grew up in Marin and this is the first time prices have ever gone down! Better buy fast!”.

Exactly. This is why jumping in too early would be foolish.

As RC often reminds us, the only buyers during the first few years of the dowturn will be clueless knife-catchers and capitulating bears. You don't want to be either one. However, we must be grateful to these (lesser?) fools because they are the ones setting the market comps... all the way down to the bottom. Without SOME sales, there would be no sales DATA proving the market is actually falling.

We should light a candle for the knife-catchers and include them in our nightly prayers.

Totally OT, but I'm considering getting Vonage (because I despise my local phone co., Verizon). Anyone out there currently using it?

“Well, if you buy a house, you’re still throwing away money, it’s just called “interest” and “property taxes” instead of “rent”. Even the principal, while nominally going right back to you, can’t be realized until you sell or borrow against it at high rates. Real estate over the long term underpeforms the stock market, and that’s even dismissing that you should demand a premium for investing in an illiquid asset.

I tell that to my parents who keep insisting I buy now that it's a buyer's market.

Unfortunately, there's two things they say that really weaken my argument:

1. "At least after 30 years you own something."
2. "Lucent, 1998" (ouch.)

I've been futzing with the Rent vs Buy calculator on Dinkytown - and I just don't get it. If you expect inflation to be high moving forwards like I do, then the breakeven point on renting vs buy isn't that bad.

Right now on Burbed.com I have a house that's $2000 a month to rent, or $699,000 to buy.

Using this calculator:
http://www.dinkytown.com/java/MortgageRentvsBuy.html

Price of home: $699,000
Interest Rate: 6.50%
Property Tax: 1%
Loan Origination: 1%
Other Closing Costs: $800

Cash on hand: $140,000 (20%)
Term: 30 years
Home Insurance: .25%
Points paid: 1

Monthly rent: $2000
Income tax rate: 35%
Home appreciation: 3%

After-Tax investment return: 5%
Inflation Rate: 4%
Future Sales commission: 6%

Calculate:
Your home purchase breaks even after 8.0 years.

That doesn't seem awful. I don't see rent going down. I don't see a huge Job Bust in the Peninsula/South Bay. Granted the monthly payment is $4576 which would be a bit tough.

Heck, even if home appreciation were only 2%, then the break even would be 16 years. Still not deadly.

Am I worrying too much about inflation?

eburbed

I thought property tax was actually 1.25%?

Also, not included in your calculations is the cost of upkeep, renovation or fixing of the home that we do not have to worry about as renters.

eburbed,

Questions:

-Is the 3% home appreciation rate on top of inflation, or nominal?

-What is meant by "breaks even" exactly per this model? That "ROI" for the down payment cash surpasses that of investing it in other vehicles?

-Does this model include the monthly cash differential between $2000 rent and $4576 in PITI that can be invested?

I guess one thing we do not calculate is that in fact that most people would be more likely to spend the $2576 difference rather than save it - or perhaps a portion of it. So, it is not completely realistic to calculate the lost return on investing it instead of ploughing it into a mortgage.

el HARMO I have Vonage, I would rate it just about as good as regular phone. Email me if you would like more info.

Also, not included in your calculations is the cost of upkeep, renovation or fixing of the home that we do not have to worry about as renters.

When I run my models, I use 1% of the cost of the house per year for upkeep. Does that change the number of years?

You didn't mention how that $4576/mon affects your standard of living. After the monthly nut, will you still be able to adequately save for retirement, college for your children, vacation, car, etc?

HARM, let me know if you do the Vonage thingy as there are some "special" deals if a current customer refers you.

I went to Vonage because I too despise Verizon.

MtViewRenter -

That's what the bank gives you a HELOC for? :-)