patrick.net

Does anyone know of a "retail" way to profit from the widening spread of MBS and the treasury without having to short MBS directly?

Waiting in Vegas Says, the time to "LA LA LA LA LA with ears covered" has come for the housing bulls.

btw-does anyone think they will bring back the push for purchasing items Made in USA like they did last time?

Outside of flimsy, overpriced stucco shitboxes, I wasn't aware that we still made anything here.

HARM: You said "Outside of flimsy, overpriced stucco shitboxes, I wasn’t aware that we still made anything here."

You should gain a better familiarity with the U. S. economy before knocking it. Manufacturing production, while diminished in many sectors, is at an all time high. We no longer make as much of the labor intensive goods, but we still manufacture a massive quantity of goods. Unfortunately for our worker bees the domestic demand for low skilled manufacturing labor is greatly reduced as such production moves to other countries.

You should also learn something about the building industry if you want to provide competent comment. The homes being build today for the masses are of a quality level that surpasses what was generally built in prior decades.

Your satire on Greenspeak is humorous but takes huge license on accuracy.

Your post from Shiller points out a very real fact, that housing (on average) has only outpaced inflation by about 1% per year. Interestingly, when looked at as an investment, the total return (including net rent) on rental housing (with no debt leverage) has been about 1% below the total return of the stock market over the last 50 years. Of course, most real estate investors use debt, and with modest leverage the ROE for real estate blows the stock market away over the same 50 years. Of course, past results are no guarantee of future performance.

Of course, most real estate investors use debt, and with modest leverage the ROE for real estate blows the stock market away over the same 50 years. Of course, past results are no guarantee of future performance.

Leverage presence in the stock market too. With derivatives one can easily synthesize a leverage of 5X to 10X.

(Warning, leverage is a double-edged sword. But this is the same for all aset classes.)

To avoid margin calls, one can use options or option spreads to leverage without large losses.

(Not investment advice.)

PeterP:

Stocks are far more volatile than residential real estate. Much higher debt can be used used with RE while remaining at a lower risk level than stocks pose. The techniques you mention mitigate risk under most scenarios but can leverage you to the risk of ruin. They also cost money reducing your profit. I am not saying these techniques are inappropriate, only that they are less than perfect.

I have been investing in the stock market for almost 30 years and will likely continue to do so. I have done very well, and was fortunate enough to sell in 1998 before the first decline. I stayed out until March of 2003. I am still in.

Berkshire Hathaway has indeed been a great investment for such a long time. However, over the last 10 years the bloom has been off. It has been fine but nothing like the prior performance that is driving the numbers you cite. But it’s very difficult indeed to make great numbers when you are so big. I still own some BRK, but it has been among the lowest performers in my portfolio during the last 10 years. It is also the only stock that I held through the entire 10 years. Hope springs eternal...

Zephyr, I am just saying that leverage is also possible in the stock market. One can also get ruined in the real estate market if leverage is too high, occupancy is too low, and negative cashflow is sustained.

Also, when RE is great stocks are lousy, when stocks are great RE is lousy. They complement each other pretty well under most circumstances.

Much higher debt can be used used with RE while remaining at a lower risk level than stocks pose.

I agree, and it is easier to use leverage in RE because values are not marked to market. (i.e. no margin calls)

Also, don't get me wrong, RE investment is excellent when the P/E ratio (or cap rate) is reasonable. But if invest in RE, I will see it as a stream of future cashflow, nothing more.

HARM: You said “Outside of flimsy, overpriced stucco shitboxes, I wasn’t aware that we still made anything here.”

You should gain a better familiarity with the U. S. economy before knocking it.

Zephyr,

I was using sarcasm and exaggerating for the sake of emphasis, not trying to knock everything that's American made. Yes, we still make things of good quality (as Fake mentioned) and I'm glad to own some.

You should also learn something about the building industry if you want to provide competent comment. The homes being build today for the masses are of a quality level that surpasses what was generally built in prior decades.

As far as building quality goes, I'm no expert and my limited personal experience is mainly with CA housing. but if you mean homes today are generally of better quality than recent decades (1970s, 1980s), then I agree with you. However, compared to older Craftsmen (1900's - 1940's) there's no comparison. IMO they were better built back then.

PeterP: Margin calls are a huge risk because you can be forced to sell when it might be best to be buying. I never use direct margin. I do occasionally borrow against my real estate to buy stocks. No margin calls that way. I did this in 2003 when I jumped back in as big as I could.

I would like to see more and more "outsourcing" in the building industry. Pre-fab modules can be constructed in lower-cost states or even Mexico and then trucked to the home site 90% finished.

Margin calls are a huge risk because you can be forced to sell when it might be best to be buying.

Of course.

I only use margin for hedging occasionally. One good thing about stocks is that you can hold good stocks through a downturn, using the long equity to short cyclical stocks as a hedge. I have yet to do this in large scale though. Any comment?

I always image pre-fab homes being trucked from Mexico to the Sun Belt states. Can't we do this with NAFTA?

HARM: It is a difficult comparison to the Pre-war product. The materials were definitely more substantial then, but the defect rates were higher than today. Today’s materials use significant technological and engineering advancements to build a better product. The construction of the 1970s and 1980s was the low point in quality for both materials and craftsmanship. The 1960s were not so great either but mixed. Most homes today are built in a very controlled process that relies more on the process and engineering than the individual craftsmanship. The pre-war homes had the best craftsmanship -- when it was good. However, there is a survivor’s bias in the remaining homes from those pre-war decades.

PeterP: I prefer to sell and shift to bonds (or cash)when I expect a downturn. The Dow was around 9600 when I sold in 1998. I sat in cash from 1998 to 2000, and missed the big final up-tick, and the collapse. In early 2000 I put that money in bonds when the yield curve when flat. I stayed there until about Halloween of 2002.

I prefer to sell and shift to bonds (or cash)when I expect a downturn.

That works too. :)

Fake P, why am I evil? Are you suggesting that it is heartless to provide job opportunities to workers in Mexico (or China/India)?

Are we more entitled to opportunities simply because we have had them?

No, I do not want to see poor families get hurt. But in the tide of globalization, it is hard to avoid.

Peter P: You are so evil. What is going to happen to our construction workers when we outsource even the construction of our houses?

Fake P: I thought you were a champion of Free Enterprise, warts and all? ;-). Are you being ironic here?

Y'know, come to think of it most of the construction in Cali is done by illegal immigrants getting paid under the table. No doubt their families (here and back home) will be negatively impacted in the short run, but I imagine they'll just migrate to the next industry or location where low-skill labor is needed.

Fake P will use any opportunity to discredit me. :(

TROLL WARNING STILL IN EFFECT... NO FEEDING!

Fake P, I do not remember seeing blood in people stabbed/slashed by light sabers. Shouldn't the high heat sear and seal the wound immediately.

"San Francisco. The high price of land and tough restrictions on what may be built on that land are major factors. PMI sees a 40% chance of falling property values over the next two years."

"Sacramento, Cal.
Affordability is a key issue in the hottest market in northern California, where prices have climbed 27% in the past year and an annualized 19% over the past five. A state-budget crisis puts jobs at risk in the Golden State's capital. Odds of a price decline: 40%."

When PMI says 40%, it probably means 80%. They do not want to set off a panic that causes more defaults.

If we cant feed trolls, then all that is for me and Fake P for fun is bubblehead bashing.

We can talk about pre-fab designs. ;)

Fake P,

Thanks for trying, but it looks like this Troll is indestructible.

"Thanks for trying, but it looks like this Troll is indestructible."

Is it that difficult to ignore some comments? I can certainly ignore my inner voice which says, "eat more food".

Fake P, do you actually have a problem with me? :)

I have access to MLS (loaded on my computer from a friend) and have not seen prices dropping nor inventory really much different from a year ago. I feel paralized with what I should do and frustrated with trying to predict the market.

LeCas,

Since you've been lurking for a while, then you probably already know what I'm going to say, but here goes anyway:

--If you're buying long-term (not "investment" property/flipping)
--If you're NOT currently overstretching to make your mortgage payments
--If you did NOT get a NAAVLP(tm) which is in danger of adjusting upward by a large % in the near future
--If you can accept (psychologically/financially) the likelihood of losing some of your current "paper equity" assuming you have to relocate (again) in the next few years

...then enjoy your house and don't worry about it.

@HARM:

All my exact thoughts are belong to you.

Chewbacca,
prat

Prat -

Right back at'cha, bro!

LeCas,

It's tough fighting the herd mentality, but Keep the Faith! Remember, NAAVLP(tm) Kool-Aid = The Dark Side

Show her the Dinkytown Buy vs. Rent calculator: tinyurl.com/dfccg

All,

We're well past the "magic 200" threshhold, so time for new thread:
"Right Said Fed"

LeCas: If the majority of a whole generation gets priced out of homeownership then the subsequent generations will also be unable to pay. So who will the sellers sell to? Who will pay the prices for the houses?

This idea that nobody will be able to afford a house is as old as housing markets. I remember being told this in the 1970s and 1980s. The problem is always temporary.

Housing prices will peak in some places very soon. Others will peak later. Usually it takes about two years for every cyclical market to reach its peak. I believe that the fundamentals are such that this cycle will spread its peaks over only one year, maybe 18 months. Then prices will decline until 2009.

Jack: We will never have 100% of the population owning their own home. Some people will just never get there. But on average the market reverts toward the mean. Prices decline and incomes rise. This has happened over and over. It will happen again.

However, some areas are not for starter home buyers, and never will be.

I would not stretch at all right now. Prices should be lower or comparable in a few years. Why stretch now?

Style, spending and anti-style

Well that was a scintillating last post if I do say so myself - sorry hit enter accidentally. This is a great thread, I'm only just trawling through it all.

When I was in Sydney earlier this year I actually got really sick of how glam and cool everyone was. It was pretty boring as everyone was the same. I used to be the worst perpetrator of style, but a dose of having a child and living in the 'burbs seems to have worked some magic. I now see a lot of this spending as mindless waste. It is interesting tracking fashion though as it moves through the slick glam to the anti-fashionista statements where brands are pretty uncool now, but even the anti-brands cost a fortune.

The thing that is worrisome and makes the forces of anti-thrift pertinent is that companies spend an absolute fortune on working out the spending triggers. There was a great show called 'The persauders' - did anyone see it? It talked about specialists that worked with companies to find the prime motivators to get people to buy their goods. A conglomerate of luxury good companies had apparently used these techniques with amazing results. So, although I think people do need to get a clue and save some money it is hard when you are surrounded by trends and enough people and legitimate companies pushing the same message that you might not realize it's not a good thing to do. It seems 'normal'.

We are very near the top of the market cycle.

Does it make sense to buy now? That depends on your circumstances including your purpose or needs, where you are, your time horizons, and your finances. There is no single right answer for everybody.

I do not believe we will have a major decline in prices, so buying now or waiting a few years will probably make very little difference.

I personally don't want to buy but my husband hates the idea of renting and we can't stay in our current house. I'm actually hoping he does get a job in LA and I can convince him to rent for a while to let us look around. Then the market will be so depressing we won't buy for a long time (this has been going on for the last two years so it's likely it will continue). I think this is called a subversive wife maneuver:)