patrick.net

FAB, Randy,

I really enjoy the back and forth, and I'm sure others do as well.

FAB said: I don’t see any value in using data that is correlated, but not really comparable to come up with a ratio when it is possible to dig a little deeper and find numbers that is really comparable (say comparing the PITI payment when you bought your home on the Peninsula with the rent someone was paying on the same street, or even better looking at the rent for a 2br condo next to an identical condo that sold the same complex).

Randy said: Many times he and I debate something like the HSBC data, only to find out we aren’t really disagreeing — like in this case.

It may be that you've completely resolved your differences, but I'm not sure I follow completely. FAB's comments imply that HSBC's data is comparing apples (nice for sale stock) and oranges (crappy rental stock), thus inflating the PITO/rent ratio. (FAB--I hope I'm not putting words in your mouth).

Randy, would you agree with this interpretation of the HSBC data, or is your opinion that HSBC normalized (turned their oranges into apples so to speak) by adding the 30% fudge factor I saw quoted?

I understand the warning that my home may not be representative of HSBC's average. This is why I value FAB's experience that PITI/rent can approach 1 even in nice neighborhoods. This has extremely practical implications when choosing when to buy...

The funny thing to me about holding the "HSBC Data" as the gold standard is that HSBC themselves got caught with their pants down in this subprime mess just as much as everyone else!

Boston Transplant Says:

> Randy, would you agree with this interpretation of the
> HSBC data, or is your opinion that HSBC normalized
> (turned their oranges into apples so to speak) by adding
> the 30% fudge factor I saw quoted?

Since there is no good source of single family home rents across the country the HSBC data took 2 br apartment rent data and adjusted to come up with the rents on homes that are usually 3 br (and also usually have garages and backyards). If you want to come up with a report for all markets across the country you need to do something like this.

> I understand the warning that my home may not be
> representative of HSBC’s average. This is why I value
> FAB’s experience that PITI/rent can approach 1 even
> in nice neighborhoods. This has extremely practical
> implications when choosing when to buy…

Most people will remember the rent they paid 5 or even10 years ago so unlike HSBC you can talk to people who have been renting in a neighborhood you are interested in and pull the sale information of similar homes over time from Zillow or the title records. If you plug in the average rate on a 30 year loan at the time of sale and know a little bit about tax rates and insurance cost you can get very close to the actual PITI number with a sale price and a sale date.

Looking at Craigslist on the neighborhoods I have been interested in, I can rent for under 2k a house that would cost north of 650k, rent for 2-2.5k houses in the 700k-800k, and 2.5-3k in the 800-900k, and 3-4k in the 900k-1.2M, and 4-5k in the 1.2-1.5M areas.

*NOT INVESTMENY ADVICE*

(Psst) I got an e-mail for a Reverse Convertible. It happened to be for CFC. Nothing particularly odd there (other than the timing).

15% YIELD!

I suppose THAT answers where they are going to seek funding NOW doesn't it! I guess that's to "sex up" the yld. for the retail crowd. Barclays is the lead underwriter in the syndicate for those w/the stomach for it.

Opinions? :)

Boston Transplant,

Adding on to FAB's explanation, think of the HSBC data as more theoretical and macro, and FAB's recommendations as more micro and practical. The whole reason I brought it up was because we were talking about own-to-rent ratio at a macro level, which I contend you need a method like HSBC used to talk about rationally. But I wouldn't recommend trying to interpolate HSBC's data to specific situations.

What I tried to do with The Bubblizer was maybe more what you're looking for. I took HSBC's methods and conceptual model and adjusted them to help make a more individual buy -v- rent decision. My approach was *not* to compare to this or that macro trend, but instead to simply show you just how much _you_ could afford, how much you gain or lose versus renting, and then how much the _next guy_ would need to buy your home for in X years in order for you to come out break-even as if you had rented over X instead.

The beauty of that, in my opinion, is you can make your own practical judgment about whether you think Mr. Nextbuyer will be making a salary high enough to afford your house in your neighborhood, of if he will even want to. This approach allows you to take in FAB's type of data because you can find out how specific neighborhoods have held up over time, and use that to determine if your purchase is reasonable.

Even though the Bubblizer is fairly generous to the ownership case it still is fairly clear that *house prices are way too high*. It's all about cost basis. Once prices come down maybe 20-25% in more prime areas, over 50% in less prime areas, then the ownership case starts becoming very powerful -- long before PITI is cheaper than renting.

And that was my main point. Don't necessarily try to wait until the decision is automatic. Most folks here would buy tomorrow if renting were clearly and objectively more expensive than owning. Peter P might say that it is this reflective psychology itself that keeps rent from dropping below owning for very long in desirable areas.

Saw a house go on the market and off the market in my neighborhood. So I emailed the realtor rep'ing that property. Take a look at this response:
---------------------------------

Baby is due next month. Also, they may not sell after all.

If you have not bought a unit by May, let me know if you are still interested then. Good luck. With the subprime lending going away, there will be fewer buyers on the market and foreclosures coming. Be patient before purchasing and gather your downpayment. At least 20% if you can.

Let me know if I can assist you in any way.

--Realtor

NewtoBA,

Funny! Good stuff.

I'm curious though. What exactly about having a baby hasn't this couple figured out yet?

I’m curious though. What exactly about having a baby hasn’t this couple figured out yet?

Which end the food goes in.

Very few people I know use buying agents. Those that do use discount agencies like Zip realty, mainly as paperwork processors.

My recommendation, whether you use a buying agent or not, is to always use a real estate attorney. If you have an agent, and (s)he complains or balks at your using an attorney, then fire him/her immediately. It is impractical for normal people to try to read, understand and stay on top of all the technicalities of the transaction. Realtors(tm) don't do much besides fill out the standard forms for your area. The mortgage broker and/or lender give you giant agreements which are longer and more complicated than the Magna Carta. And this is the biggest investment of your life and will most likely determine your future wealth outcome.

A couple thousand bucks for an attorney to actually read it all and talk to you about the real risks hardly seems inappropriate.

And if you use a discount broker or just go to the listing agent yourself, you can easily offset the cost of your lawyer's billings.

I'm also worried about rising "funny business" risks. We've all heard stories about hidden rent-back clauses or conditional vacate clauses that buyers miss because they just don't bother to read and trust their buying agent is protecting them. As the correction gets worse, sellers might try to get away with ever more crap.

Randy :

Good advice on using an RE attorney. When I decide to buy, I will definitely ask you for recommending an attorney.

Randy H,

I'm not sure just how much more the atty. is going to "pour" over the material either? The big difference is, now you have someone you CAN actually hold accountable. If you're like me you've heard of more than ONE atty. that's gotten his boo-boo in a wringer over that!

But you're right, some of the posts sellers have on C/L are "loaded".

SFBB,

I just can't deal w/the bad karma that comes from saying anything but the truth for wriggling out of a business deal. I don't know how much of NewtoBA's realtor "friend" fabricated or how much of it the couple came up w/but either way, it's BAD JU-JU!

HK,
I think what FAB is saying is that the selling agents fiduciary responsibility is to -- guess what -- their comission! Would you rather get 2% of the sale kicked back as the buyers agent, or 5% off the total price of the property? A 4% commission will tend to focus the selling agent on what is important: making the sale (to YOU) happen. Obviously, you would still be performing the due diligence of the buyers agent (so that re license would not be for nought).
Or maybe I am misrepresenting FABs point?

HelloKitty Says:

> FAB- When you say “The main reason is that on the buy side
> you should always work with the listing agent since they sell
> almost all their good listings.”
> I’m not sure what you mean. Most people only buy three
> homes or so in their whole life so representing themselves
> is probably not a good idea.

If you are looking to buy real estate most of the property available for purchase will be listed for sale with a real estate agent.

Every real estate agent wants to get the full brokerage fee and will usually do anything they can to get it.

Let’s say Broker X has a nice eight unit building listed for sale in Simi Valley asking $1mm. If I buy it for $900K (and let him take the buy side fee even though I am a licensed broker) he makes $54K (6%). If you buy it for $1mm (acting as your own agent) he makes $30K.

When you represent yourself on the buy side the only deals you will be able to buy are the overpriced piles of crap that the listing agents could not find anyone to buy…

It's been nearly 10 years now, but a colleague I was working with at a SF startup got royally screwed when he bought a SFH with a rented out inlaw unit in Bernal Heights. He was a very smart guy, UM EE/MSE, and he was the type who actually read a lot of his papwerwork before signing, and asked questions. Still, he somehow ended up with a rent-controlled transfer renter he couldn't evict, and sellers of the primary residence who didn't vacate for about 7 months after closing, rent free (well, for $1 a month for some reason). He took them to court, won a judgment against them (long after finally moving in), but alas, they were nowhere to be found by that point.

It was from his experience, actually, that I first learned that winning a lawsuit doesn't mean you won a thing. It's all about having someone to collect from.

. It’s all about having someone to collect from.

It's all about having somone with assets to collect from.

The story is yet another proof that rent-control is evil.

Randy H,

I've heard of rent-back clauses (which have become quite common these days, as sellers naturally seek to avoid either bridge-loans or having to rent for short periods), but I'm not familiar with "conditional vacate". Do you have any links?

Randy,
Tying in your RE attorney advice with your horror story of that friend who bought in Bernal Heights, the good thing about having a RE attorney is that they presumably would be able to pick up on those "glitches" that screwed him over. Almost as importantly, if the attorney doesn't, they may be liable for malpractice - you'd be more likely to recoup at least something.

I have a couple of friends now involved in a lawsuit because they purchased a house that they discovered had $1m worth of dry rot and termite damage. They used the selling agent as a buying agent, and he used the inspector's report that some previous people who had look at the property had arranged for. Of course it was the report that showed no problems.

I think using the selling agent as the buyers agent is a blatant conflict of interests. It would be like a couple both using the same divorce attorney.

I just had a Realtor(TM) encounter at Whole Foods. The Pierced Guy at the check out was making small talk with the customer ahead of me. She mentioned that she was a Realtor(TM) and he said 'Bummer about the market, huh? I keep seeing news about how bad real estate is now.' To which she replied, 'Oh no, it's actually doing very, very well here. Maybe it's a problem in other parts of the nation.' I had to chime in, 'Yes, look at Sacramento, it's absolutely just collapsed over there, and they said that can't happen in California.'
She then looks at the cashier and says 'It's different here. There is little inventory in the city. That can't happen here.' So I said. 'It's amazing, it went up 2.4% year over year.' She smiled and said 'I know, it's doing so well.' Then I said 'But the inflation rate is higher than that, so it is actually a real decrease in value.' Of course she said 'No, it went UP 2.4%', to which Pierced Guy said 'Oh yeah, that would be a real decrease.'

I think part of the Realtor(TM) boosterism might be incomprehension of basic math or economics.

And did you guys pass this along to your friends who says real estate never goes down?

http://money.cnn.com/blogs/generationrisk/2007/03/real-estate-can-only-fall-10-to-20.html

Harm

I'm not sure "conditional vacate" is any kind of term of art. If I recall the situation, the sellers were required to complete some kind of contingencies, but they managed to make those contingents contingent on him doing something like approving the work in progress.

He was very upset he missed the gotcha. It wasn't secretly buried in a footnote. It's just that no one read/understood what some clause somewhere meant. When it first happened he was saying his realtor was telling him there was "nothing to worry about, they can't do that". But, after some weeks, he learned they indeed could and were. And, he signed it attesting that he read and understood, so shame on him.

It would probably be harder to pull this off today with the more standardized forms, now that I think of it. But even our last purchase in 2002 had something like 15 pages of attached contingencies and other junk we and they added, that wasn't on any form.

SFWoman

I commented in the maelstrom below that article (and plugged Patrick.net).

skibum

That is my understanding regarding your attorney's role and obligation. With all the standard forms today, a decent attorney should be able to very quickly parse through to anything exceptional. If they're experienced, they know where the trouble spots are. And not only do they risk liability, but more importantly, they risk referrals. To this type of attorney, referrals and client satisfaction is gold.

Nothing should be bailed out. Liquate everyone as Andrew mellon prescribed!

OK, I posted as 'Tabitha'.

Brad DeLong’s blog had a discussion of why all the subprime lenders and borrowers should be bailed out.

I never thought I would say this, but I think it might be reasonable to engineer some kind of mass "workout" or global settlement which would permit FBs with stupid loans to keep their homes under new loan terms. The lenders would still take a hit, as would homedebtors, but the bubble could be deflated slowly and in an orderly fashion (sort of like LTCM). The alternative is a chaotic, destructive wave of foreclosures, bank failures, hedge fund blow-ups, possibly a currency crisis, massive wasteful class-action lawsuits, etc., etc... Not good for anyone, really.

You would still have the moral hazard problem that others have raised, but I'm not sure this is avoidable. Besides, moral hazard has its limits. Look what happened after the Great Depression. Sure, the WWII generation learned not to take on too much debt in order to speculate, but eventually the lesson wore off.

The bigger problem is that such a global solution would require massive coordination among regulators, lenders, intermediaries, hedge funds, millions of homeowners, etc.. Somehow, I don't think that our best and brightest in Washington are up to the task.

Glen,

Look at the upside. The overly aggressive (and under educated) typical MB licking his chops just waiting to re-re-re-finance the mess they've created won't be there to collect on the back-end! If their firm hasn't gone out of business yet, it's about to!

Just the fact that a bail-out is even being discussed should tell even the most ardent bulls that this thing is over. Like I say, I got an e-mail for CFC Rev. Conv. paying 15%. If that isn't a red flag, I don't know what is?

Where's SP?

ubermonkey,

Not a bad idea. The problem is that now that no mortgages are being written, the banks don't have jobs for all those indentured servants. I guess they could put them to work in collections or the workout dept.

RANDY H. QUESTION:

Randy what do you think of a California Police salary/pension vs. getting a decent Silicon Valley job/salary and getting the 401K package, sans pension, since most pensions are going the way of the dinosaurs.

I know there's a lot of factors to consider. I'm a state school MBA guy working at a defense contractor in AZ as a program analyst.

I'm not sure if you've thought of the pros and cons, but I'm considering taking my chances in the BA again but not sure if I should go corporate, say Lockheed, etc. or try law enforcement.

Thanks bro!

Residential lots in Gilroy has already gone down 66%.

I have been tracking acre+ residential lots in South Bay for the last couple of years. The core areas are going down slightly, not much, some developers / owners are still holding their wishful price of $1.5-2M per acre in Los Gatos or $750K per acre in foothill San Jose with no takers for last couple of years.

Gilroy, in December, had a glut supply of residential lots in western foothills, seemingly offered by some desperate developer, offered at $400-500K per 1/3 acre. I didn't check back until today, suddenly all these lots (100s of them) got lumped together and are offered at $500K per acre, which is still way too high IMHO, given that Almaden land is only going for $750K a flat acre.

But it demonstrates how fast fringe areas are dropping, in a matter of 3 months, before the whole property crash even comes close to the real climax. Residential lots are the most sensitive asset to downturn because lot loan and construction loan are the first to shut down.

I predict that these western foothill land in Gilroy will go for $250K a flat acre by year end.

I just need 1/8 acre. Can I get that for 100K in Almaden? :)

Unfortunately most of these lots are in areas where subdivision is not allowed by zoning. Sometimes it is possible for you to buy an acre and go through the painful process of dividing it up into several pieces if the current zoning code allows.

City lots (.25 acre or less) go for a higher price on a per acre basis. But, when things go bad in real estate, residential lots are the first thing to go bust. Back in 94, nobody was able to get a loan on lots, unless you have established a real good relationship with your bank throughout the years and you are in the business of developing and managing real estate (pros like FAB). You had to pay all-cash for a lot. Construction loan was a bit easier to come by because once a house is built, at least the bank is more assured of the rental cash flow. Lots generate 0 cash flow.

In the last downturn, residential lots crashed as much as 5/6 of their peak value. That is my yardstick. Since this bubble is a lot bigger, I won't take any action until a residential lot has crashed that much from 06 value.

Man, I'd love to get a sweet lot at a decent price and build a non-mcmansion on it.

You guys remember the periodic SSOTW (Sob Story of the Week) postings? Well, cnn has been gracious enough to give us some follow up. It looks as though zero of the five families here have sold their places:

http://money.cnn.com/galleries/2007/real_estate/0703/gallery.help__updates/index.html

How about this part of one of the stories:

It's especially frustrating for them because they thought they had the three-bedroom, American foursquare sold a few months ago. Then, just last week, they learned that the buyer was backing out because of failure to find financing.

"The lender wound up refusing to make the loan" says Karen.

HMMM, can we say, subprime fallout?

Peter P says:
The story is yet another proof that rent-control is evil.

Don't be silly...

My following comments may sound offending and politically incorrect to someone a bit chubby, so please skip if you are uncomfortable.

Re: the 5 profiles skibum posted, except for the last couple, all of them look super-sized. Just based on statistically insignificant personal observation, I found that people who are very blatantly overweight, not those who have a few extra vanity pounds or genetically predisposed to be a bit on the chubby side, usually have a hard time managing other aspects of life, most importantly, personal finance.

Perhaps it is just an indication of one's resolve to let his stomach or impulse override the brain. Or, could it be that some of our industrially processed food cause people to become stupid?

And the winners of the best postings on this thread are

1–michael holliday with his description of the cookie crumbs and hi-c thru the blinds

2–oo for his catch all phrase–let’s not start...quite yet,

3- sf bubblebuyer—Which end the food goes in–as a response to the baby question

honorable mention is given to
FAB —Sorry if I came off as “snarky”,
RandyH—@FAB, no need to get snarky.
_____

Crumbs wins.

Definitly the Hi-C fruit punch, freakout McDebtor neighbors, and crumbs story...

There is a statute of limitations. If they don't sue you within a certain period of time the debt is uncollectible.

Then it becomes harrassment, and you can sue them. Here is a summary from the Fair Debt Collection Practices Act from the FTC site.

http://www.ftc.gov/bcp/conline/pubs/credit/fdc.htm

Can you stop a debt collector from contacting you?

You can stop a debt collector from contacting you by writing a letter to the collector telling them to stop. Once the collector receives your letter, they may not contact you again except to say there will be no further contact or to notify you that the debt collector or the creditor intends to take some specific action. Please note, however, that sending such a letter to a collector does not make the debt go away if you actually owe it. You could still be sued by the debt collector or your original creditor.