patrick.net

Agree that At the Rise is in fairly decent shape. I might quibble over the amount that he would be able to rent the place out for, but the analysis is fairly sound.

I also think that his 2003 purchase price was a little high. Most SoCal homeowners aren't really in a position to purchase a $215k home. If one of the members of a two-income, blue collar family loses their job, $1300 per month can be a real stretch. Not impossible, but a stretch just the same. Arrearages are a real possibility. And if lending practices were sane, such a couple would never be able to come up with a $43,000 20% down payment; they might be able to scrape together $10,000 or $20,000 after many years of disciplined frugality, but that is it IMO. In light of this, I would say that the average Riverside County SFH should ideally go for around $150-$175k tops, and probably a little lower.

But at $215k, At the Rise himself is in good shape. He should be in a position to survive any downturn. Even if prices do fall, he shouldn't be affected. If I could somehow turn back the clock to 2003, I'd do exactly the same thing that he did. He is in an enviable positition.

I agree that there is a strong bias towards owning as opposed to renting, most of which have been well reasoned by others. I would add that before the most recent bubble, simply owning wasn't enough to establish social credibility. In fact, buying in a transitional area often met as much or more resistence from peers and family than renting in a good area (implying saving up enough down payment to buy a 'proper' home). I encountered this on the North Side of Chicago when I first transitioned from renter to buyer. Friends and family were dead set against buying anything "so near the projects". Today, this has shifted to "buy anything you can [or can't quite] afford, damned be the location".

There are some very strong qualities to owning over renting. As SQT said, stability. I'd extend this to knowing you can keep your kids in the same school, knowing when you pay the plumber to root the sewer at 2:00am that you're fixing your own pipes (not begging a landlord for recomp, risking he'll claim you must have broke it by having it fixed), and being able to adjust to family changes like having an elderly mother move in, installing wheel-chair ramps, etc.

The sheeple are illiterate regarding the history of housing in the 1900s. Housing was a "it only goes up" proposition from the end of the deflationary depression in 1897 to the 1929 crash. I/O suicide loans were the "only way to go" in the 1920s. It took a generation of renting during the depression to get the sheeple to forget how housing was risky. WWII vets were give nothing down loans and a new "it only goes up" generation was born. 60 years of going up almost continuosly is hard to fight.

60 years of going up almost continuosly is hard to fight.

60 years is less than one lifetime.

Here's a personal example of the biggest problem with renting:

(My wife and I are renting, after having been long time owners in the BA, due to a job move that brought us up to Marin from the Peninsula)

ME: (calls landlord) There is a pipe leaking and water is leaking into our son's bedroom, and since it's small it's dripping on his bed.

LANDLORD: Did you overflow a sink or toilet?

ME: There's no bathroom above his room (this is a house, btw, not a complex)

LANDLORD: Ok I'll send someone over to look tomorrow.

(2 weeks later)

ME: No one came to fix the leak, now the ceiling is severely damaged.

LL: Georje never came? I'll come tomorrow.

(a week later, he comes with Georje)

LL: Is there anything else wrong?

ME: Yes, the toilet runs, the microwave has never worked, the thermostat is broken [and so on]

(next morning)

ME: Hello, yes. You shut off the water to the upstairs bathroom. We couldn't take a shower. My wife had to use the gym shower at her health club to get ready for work.

LL: You guys must have kept overflowing water in the shower. This is a new house, the pipes can't be leaking.

ME: !#*(!@?! The bathroom is 40 feet on the other side of the house!

LL: Exactly. That's how the water's getting in. I'll have to asses the damage you guys caused and talk to you about it later.

ME: (hangs up phone, opens CL looking for other houses to rent. contemplates how much time i'll have to waste in small claims court with this bozo to get my hefty deposit back)

@PS,
well said.

@newsfreak,
one of your best poems so far.

Hedging is going to get easier in April 2006. The Chicago Mercantile Exchange is going to start trading House-Price Futures for 10 major cities in the United States. Three cities are in CA - San Diego, Los Angeles, and San Francisco.

Futures? I bet the liquidity will be very thin, considering that market makers cannot hedge their positions easily. We will see.

I will say that as far as homeowning goes, I don't feel any peer pressure from anyone I know, because everyone I know is around my age( 25-30) and none of them can now afford. So we are all in the same boat, so it doesn't feel that lonely. On the other hand, I see one of our neighbors, a 30-something guy with a kid and wife toiling out in the front yard of his tiny, crappy little house. He wear a cut lil' cowboy hat and all.. he's sooo proud that he bought the crappy shack someone built in the 40's, hoping someday they could move out and buy a real house. The above statement is dead on.. Young families these days are fighting just to get what yesteryear's generation considered lower class housing.

I do see creative mortgage products with equity protection features though.

Using index (housing price index) futures to hedge one particular asset is very dangerous. Options may be better, if the IV is not absurd.

Will the MACROs futures be binary, or have a standard future payoff? I've just started reading about them in detail recently.

Will the MACROs futures be binary, or have a standard future payoff? I’ve just started reading about them in detail recently.

Look up US Patent 5,987,435.

"Maybe you should lay off the Schlitz a bit and try a Martini or something a bit stronger."

All right Randy H: I'm sick of your irrelevant fact distorting ways! I'm taking you up on your offer! I challenge you to a duel! Tequila shots to the death! I demand satisfaction! Just name the bar, pal! Name the bar!

--DV

Any housing hedging instrument with digital payout is pretty much useless.

All right Randy H: I’m sick of your irrelevant fact distorting ways! I’m taking you up on your offer! I challenge you to a duel! Tequila shots to the death! I demand satisfaction! Just name the bar, pal! Name the bar!

How about Toro sashimi duel instead? Can I watch? Can I have the last piece?

Paint? IS the whole buying a house Vs renting really all about a bucket of semigloss home Depot acrylic? I swear, that's like the most common answer I ever hear from people who buy, or want to buy.. because they "wanted to be able to paint the walls any color they wanted." Every place I've ever rented, you could paint the walls anyway you wanted.. as long as you painted it back, which you'd have to do if you sell your place anyhow- including the outside and not to mention new carpets, fixtures, and who knows what else. In most place I rent, you could alter things as long as you got the landlord in on it, and since it was usually some sort of improvement, there wasn't a problem.
So in the end, that little can of paint becomes a 600k can of paint. Pretty expensive if you ask me.

There was a great description of the "I rent dance" over on Ben's blog. I haven't done it myself, but I'm tempted.

My wife frequently hosts play group at our house. When the moms see our 500 sq/ft great room and look out at our enormous back yard and huge pool/spa, they have to ask, "How much did you pay for this house?" When we answer, "We rent it for $2000/month" you can see the smoke come out of their ears trying to compare to what they pay a month. The light bulb goes off and they figure out that they should have rented instead of giving into their nesting instinct. A look of shock comes on their face. They suddenly think about everything that they are giving up, for LESS HOUSE. It's as predictable as the sun rise every time we get a new mom come through.

These are single income families in my neighborhood that pay $4000/mo or more for LESS HOUSE. On that single income, that tax deduction just doesn't mean as much. You could put away 401K and 529 money if you need the tax shelter.

Oh yeah, if you lose the one income due to outsourcing/layoffs/a housing driven recession, you're gonna be so screwed! I actually feel bad for these people. I've been there. That tax deductibility doesn't mean SQUAT when your income is limited to unemployment insurance. Very, very sad.

The job losses here haven't even got started. I was lucky that appreciation bailed me out nicely when I got in over my head (thank you, Jesus), not so for these folks. It's a damn shame. At least they may learn to appreciate the good things in life, which are all free.

No one has disdained me for renting in a loooooooooooong time! Did I mention the "I rent dance" on Ben's blog? It's nice not to have to worry about debt or how to make it through a recession.

--DV

I think many landlords will let you change color schemes, provided that you restore the walls to their original color when you leave.

I even talked to one that will allow us install central A/C, and they will even split the cost with us.

The point is that flexibility is possible with renting, if you find good landlords and are willing to be generous with them. Trust me, it will still be much cheaper than owning.

Sushi, hmmmmmmm, yes, sushi. Maybe not Toro. You could only eat like 3 pieces of that stuff. Too fatty. Sushi AND Tequila? Hmmmmm.

--DV

Maybe not Toro. You could only eat like 3 pieces of that stuff.

How about sea urchin? The first to gross out loses.

(Don't get me wrong, I love Uni. But large quantity of it will make you sick)

Hey DV,
Same thing with us. My wife's family is coming over next month along with her 2 brothers and their kids because out of all her family that lives here, we have the only house with a yard,and the living room big enough to host them. It's a 3 bedroom place with 2 stories, an office, 2 bathrooms, a balcony and deck, front porch, 2 car garage, garden and front and back yards.. all for 1700, which given the fact that 4 of us rent it means we pay $450 each. The real kicker is that 2 of the housemates are always gone, so it's like we rent the whole house to ourselves. People are amazed beyond belief that I tell them I rent a whole freakin' house for less than half of what they rent for in the city( we live in alameda) and less than 1/4 what someone would pay to buy this place. Cheap livin!

@Deo & Peter P,

How about Fugu (as in, prepare your own meal)? That would make it a "real" duel. :twisted:

ABG:

If we find the right sushi/tequila bar, I'll tell you a no shit honest to goodness true story. Only if you promise not to wear a wire. You can still be retried if your momma bought off the jury.

--DV

nomadtoons2:

Smart. Very smart.

But the freedom to change a place more dramatically, say, knocking out a wall, adding a bathroom, etc., is very appealing to many people. I think that “paint” is often code for “whatever change I can think of and execute.”

After paying for the mortgage, not many new homeowners can afford to do dramatic changes any more. :)

Adding a bathroom is not cheap, and you will have to put up with contractors.

Peter P, you pussy, I have personally ate over 4 orders of Uni with nary an ill effect, oh wait, it has made me even more profain.

:)

In At the Rise,

I don't think most of us would consider 215K or a $1300/mo FRM a bad deal at all. However, your case is not representative of the no-price-is-too-high easy-money credit orgy and living-way-beyond-your-means mentality that we're trying to analyse here.

The question is, would buying your home *still* be a good deal at TODAY's prices?

Does anybody follow a stock that goes by the symbol DSX? Help appreciated.

--DV

Peter P, you pussy, I have personally ate over 4 orders of Uni with nary an ill effect, oh wait, it has made me even more profain.

4 orders or 4 boxes?

All right Randy H: I’m sick of your irrelevant fact distorting ways! I’m taking you up on your offer! I challenge you to a duel! Tequila shots to the death! I demand satisfaction! Just name the bar, pal! Name the bar!

It's a duel! I can't handle Tequila, so I cede that to you. Either whiskey in a proper roadhouse (you can choose either kind of proper malt, Kentucky or Tennessee), or Sushi with proper sake-bombs. I don't like the idea of mixing Ikura and Tequila...

First one to see the ghosts of Lee or Gen. Sherman loses. Anyone figuring out a new momentum arbitrage hedge-play exploiting the residential RE fall automatically wins.

Debt can be used to your advantage, either to finance future expectations
...I’m quite happy to use their cash while mine earns more in CDs. If anything were to go wrong, we’ll just pay it off. I always use other people’s money when it’s cheaper than mine.

Randy H,

This is very true ASSUMING the borrower: (a) understands time value of money and opportunity costs, and (b) understands that in order to come out ahead, your finance costs cannot exceed ROI on money invested elsewhere. Oh yeah, and (c) has the discipline to actually pay it off someday and not go into permanent hock.

For Joe & Jill McDebtor, these are tall assumptions indeed.

BTW, sea urchin tastes even better steamed.

Randy H:

How bout McHallan? What is your general direction? SF, SJ, Peninsula, Ebay, or Sac? Personally, I get around.

Can you train your math skills on DSX? The yield looks great.

--DV

BTW, anyone have an opinion on Southern Copper (PCU)?

I'm into this notion of a long term secular bear for stocks coupled with a long term secular bull for commodities. I'm impressed with David Tice's power point over at prudent bear that shows the 15-18 year cycles.

No doubt, the commodities are volatile as heck, but there are a lot of companies paying great yields (12% plus). And what does volatility matter, if the long term trend is up over the next decade? Would a US housing collapse = a global collapse in the price of commodities? Will the growth of newly industrializing economies inevitably place insatiable demands on resources? Will China crash if the US does? Indonesia? Vietnam? Brazil? Russia? India?

If past patterns of industrialization repeat, then newly industrializing economies will require vast hinterlands of raw materials. Look at the chunk of the Congo that the Belgians needed to keep its tiny little country supplied with resources. Look at the British empire: one tiny little island, vast expanses of resource-rich colonies throughout the world. Can billions of people raise themselves to the standards of the OECD over the coming 15 years without causing commodities and related investments to soar? Also, the population in the developing world is the opposite of the OECD: more young people entering prime consuming/producing years versus aging populations that will tax OECD economies for decades to come.

Won't everybody in India/China/Indonesia/Brazil/Russia/Malaysia/Vietnam want houses, cars, and plasma TVs too?

I’m into this notion of a long term secular bear for stocks coupled with a long term secular bull for commodities. I’m impressed with David Tice’s power point over at prudent bear that shows the 15-18 year cycles.

If you are interested in commodities, take a look at DBC.

DV,

I'm in the North Bay, Marin, so SF is really my only option for getting home without risk of driving sideways off a bridge afterwards.

I'll look into DSX. I don't follow the transport sector at all, so others can probably offer more useful insights. I did see that there is some price momentum building since December, but that's just an eyeball reaction.

--Randy

BTW, DBC is the first derivative-based ETF. It uses futures contracts on commodities to track prices. It should be a good alternative to relatively illiquid CRB and GSCI contracts.

I work in SF. I can meet you by the Ferry building, so you can just stumble to the boat. I like Sinbads. It's right on the water, and it has good food/bar.

Next Thurs? Happy-hour-ish?

--DV

DBC isn't for me. Not to put myself in the same company as the great one, but Warren Buffet says that diversification is for suckers. (Actually Mr. Buffet, I don't know him well enough to call him Warren). On second thought, I better sleep on that one and get back to you. I'm not that good at investing yet. I do consider the lessons part of the return. I want to get away from additional funds, and move more toward individual picks.

Seriously, my strategy is to hedge dollars with hard currency, precious and base metals, and energy. I much prefer high dividend paying stocks, because I tend to hold them in my IRA. DSX ships commodites, so it is an indirect play. The banter on the board is that it should drop after the dividend date. I may buy it then.

For the record, I own BGEIX, IAU, PWI, FDG, CCJ, MERKX, PCU, HSGFX, WMT (Gonna be big in China, small position). I also own UCBH and an International Equity fund. Mostly I have laddered CDs. I would like to increasingly accumulate resources that cash flow high dividends. If the thesis in my previous post is correct (not that it necessarily is) then the future will bring much greater demand for resources. If commerical/apartment REITS crash 50% to yield north of 10%, I will buy some of those. My bet is that I will get my chance in 2 years.

In fact, I think I have the future figured out, and it involves a slow dollar and general US decline, and a developing world that uses US dollars to move into natual resources across the globe. What else can our creditors do but slowly allow a controlled inflation while quietly(as they can) moving into hard assets. If the only viable reserve currency is fading slowly, then why not move into hard assets that your industrializing economy will need? Energy, copper, other base metals, and gold and silver for its traditional role as honest money. You could add timber, suppliers to commodity producers (CAT?), and shippers of bulk commodities to the trend.

THE ABOVE SCENARIO IS ALSO THE ONLY WAY POLITICALLY TO FIX THE BUDGET DEFICIT / BABY BOOMER CHALLENGE. IT IS A MUTUAL ADVANTAGE TO OUR CREDITORS AND US.

I think that if you overlay David Tice's work on market cycles with the other set of facts about the "flat" world that is emerging, that the scenario that I describe is THE investable mega trend. In 1982 it was buy the DOW and S&P and NASDAQ and hold until 2000. In 1998 it was buy Real Estate and hold until July 2005. Next I think it will be buy hard currency until the dollar drops 20-30% and buy commodities demanded by the decline of US hegemony and rise of the newly developing world. It can be that simple again, right? Maybe this is just the light going on for me. I'd be interested to hear from others that have already gone down this path.

--DV

I do not disagree with the logic presented by most people on this blog regarding how renting is much cheaper than buying at these atrocious prices. But what I am trying to understand is how the bubble will deflate, how long, how much etc. Because eventually, I like most, want to own a home.

Hence I started focusing on how the bubble formed, hoping it would help me make informed guesses about the eventual downturn. And this blog (and Ben's blog) helped me tremndously in understanding that.

But I still felt all the explanation did not explain why my friends, and their friends, and their friends's friends bought the houses that were 50+ years old, looked decidedly lower middle class, required lot of changes (roof, kitchen etc), paid lot over the asking price, and then felt tremendous relief when the house was finally their "own".

None of these, AFAIK, chose I/O mortgaes. Most have 5 year ARM. Some smart ones have now converted to 30 year fixed. So cheap credit helped, but was not the only reason. Peer pressure, fear of being priced out forever and strong income also played significant role. They live frugally, and (kind of) know the risk they have taken. They have stretched themselves to a limit, but if their dual income continues, they will be able to weather the storm. If prices drop, they would loose equity, but not more, depending on how bad the drop is. In short these are the last people to go the forclosure route. When they loose their home, it will really be the bottom.

I have admitted before, and do it agin now, this is a narrow sample. The million $ question is, what % of BA homeowners is "such" people ? That will decide the speed and the depth of the bust. I think it's going to be slow and shallow, but would definitely love to be wrong on that ;-) Unless there is loss of jobs, which might happen due to bust in nationwide RE causing significant economic problems. The moment dual income stops, it will be excruciatingly tough on this group.

The next question is, in that case, even my job opprtunities will be in trouble. So even if the median price in Santa Clara county corrects from 700K to 500K (a big drop), I still won't be able to afford a home here. Unless there is lot of inflation, half a million will remain a "big debt" even after couple of years. Maybe it's not a bad thing. Being forced to move to other areas of the country might be a blessing in disguise.

None of these, AFAIK, chose I/O mortgaes.

You have just proven the point that your sample is NOT representative of the typical CA buyer, 82% of whom in 2005 chose I/O or optio-ARMs (it was around 70% last year, if I remember correctly).

I agree that they may be "the last people to go the forclosure route." Many others (highly leveraged flippers) will fold long before that.

The million $ question is, what % of BA homeowners is “such” people ?

See above.