patrick.net

Linda in LALA,

The flipper will get much less net of taxes than the gross return. With that smaller payoff, he/she is undertaking tremendous risk for the return. It's all fun and games until the teacher takes the needle off the record. Then said flipper will get stuck with financing costs, diminishing equity, and a lot of sleepless nights. Most of us are too smart to get into a situation where we have to pray every night that the music keeps playing only for a relatively small payoff.

I operate off the theory that if these flippers were really all that smart (meaning they could accurately time the market and make the financial leverage proposition work), then they'd be running a RE income business or working at a LBO or somewhere like that earning nearly the same coin for much less risk and for much greater forward career investment. What will a flipper put on his resume in a couple years? Probably the same thing professional day-traders put on their resumes in 2002: independent consultant (thus tarnishing the reputation of all those actual independent consultants).

As far as your lost HaHas, remember that this is only a "mental accounting" bias. You made a gain, and that is now history. What happens after that to the property is irrelevant from your perspective. It's not like you knew the future.

Thanks guys. I knew you'd understand. I'll keep you abreast of the situation. With $ in the bank, I can't really complain. I've got several Hahas to play with so the world is my oyster in a coupla years after this crash. Right? ;)

Garth Farkley,

Speculators are generally good for markets because they add liquidity. Simply, the create buyers and sellers allowing non-speculators (people who hold long) to get in and out when they want to.

I'm not sure this holds in residential RE, where there is not much liquidity to begin with. The value they add in additional liquidity probably doesn't compensate for the effect they have on prices, especially in local bubbles.

You guys are right...poof...anger gone!
We saw our accountant for taxes last week and my husband was unhappy because we had to pay significant taxes on our capital gains. For me, any time you make more than the 500K deduction....that's something to celebrate! So, nevermind about the flipper.We got most of the equity...and that's what counts.

Randy H,

After hearing your explanation I'd have to say that Linda's "flipper" would have to sell at the 1.4 mil level just break even. And you're right again, this would be a STCG. Eight months would be a long time in a hotel room, and a pain for an apartment but in the end this guy may wish that is what he did. Great strategy! Pay 8-10K per month for 8 months then sell using full service realtor at what, 5%?

Randy H,

Liquidity may be what I was groping for. I assume that the existence of speculators makes it easier for owner occupiers to get in or out by providing inventory and comparable sales prices for what is otherwise an extremely illiquid commodity (RE).

On the other hand, I suppose speculators add momentum on the way up or down in a free market. That is, they push the market up or down past the mean point that fundamental conditions would otherwise dictate.

If so, what are the fundamentals that have led California to such high traditional ratios of price to median income. (Or is it the other way around?) Finally, why are the ratio so exaggerated in the last few years? And what about other inflated markets. I assume that relaxed credit is a big factor but that can't be the only impetus, right?

It's not really your job to give us free lessons in economics, but if these questions are interesting to you, I'm all ears.

LLiL,

Okay, if you have to worry about excess capital gains you should be kissing that guy.

By the way, I'm sure you already know that if you made any improvements you get to deduct those from your profit.

Garth Farkley,

I'm not sure I'm up to the challenge of really explaining in defensible economic terms the pervasiveness of regional differences. I like to defer to Easterley, "The Elusive Quest for Growth" in answering this question. Although Easterly covers an international perspective, I think it equally applies to regions in the US. Simply, some regions enjoy very long lived "virtuous circle" economies. These economies become engines of commerce, producing far greater economic growth than the cost to keep it all going. They spill their affluence out into other regions, as investors try to search for higher returns elsewhere, but these local economies are able to maintain a premium over the "median" for a very long time.

The inverse is the "poverty trap", where certain regions become so depressed that they suffer an opposite vicious circle economy. The risk in these areas is too high for capital to dare chasing returns, even very high returns. These areas suffer long-lived discounts to the median.

There are a lot of forces that keep these differences in equilibrium for long periods of time. Not the least of which is inflation. When things inflate, they inflate unevenly and inflation rises faster in the high-cost areas and stagnates in the low-cost areas. Another force is demographic. High-cost areas become magnets for optimism and entrepreneurialism. They also have higher turn-over. All this makes it more rational to pay the premium because people tend to be younger, expect more wage growth, anticipate higher inflation and often plan to stay for a shorter period.

Eventually employers leave in search of lower costs (mainly wages and taxes). But this may not happen fast enough to cause enough rise in inflation in low-cost areas to cause them to catch up to high-cost areas. Often, the high-cost areas shed established industry in favor of emerging industry, further perpetuating the cycles on both sides.

All this changes over time, but usually over a very long time. And then there are the intangibles, like weather. But, I don't personally give intangibles much credibility except in very specific circumstances. Overall, fundamentals drive this phenomenon.

ps...you're funny :)

Garth...Yes, I love to add on..Sarah Winchester here...build, build, build...and yes we deducted every penny.

astrid
Actually, the broker has been a friend of mine for 2 decades...so I don't wnt to f@ck with him...but I am asking him for a referral fee! He's our big, black, bald realtor and he's a really good guy! When the NC thing fell through for us...he's the one that said"It's a terrible time to buy now...rent for a few years'
Otherwise...I'd love to mess with them. BTW, how do you guys make the devil face...I can only make smlieys and frownies???

astrid,

That's actually a perfectly legitimate question. Ha-Ha asked the same thing. My answer to "fluffed up" home pricing is simply taking out the trash and cutting the lawn once in awile doesn't constitute "home improvement". I wish more people would press this issue.

Randy,
Not sure if your model of low cost and high cost comparisons holds up in this day in age. Forbes and a number of other economic publications recently posted the top 50 places to do business. Most at the top of the list were in the southeast and midwest. My whole family still lives in the south. The job situation is good, infrastructure is rapidly growing, modernization is rampant, and certain things like public transportattion, research facilities, and colleges are all experiencing nothing short of a cultural and economic rennaisance.Even in my lifetime- and I'm only 28, there has been enormous changes occuring up and down the entire region, in places one would thought would never crawl out of their hole.We've never seen this before.If you look at the pattern of growth in these regions, it is coming from fairly stable foundation of industries. Manufactoring, research, education, entertainment, and medical related fields are all experiencing double-digit growth. Basically, the south in particular was in the past fairly seperate and isolated from the rest of the country. It had been this way since the end of the cival war. So in modern times, the south has never been associated with progress, growth, diversification, and entrepreneurship.
This rennaisance has been going on since the mid 1990's- long before the infamous exodus being caused by housing prices in the last 5 years from CA and NY, thus it is not relying on any infusion of "outside" influence to carry the girth of its economic well-being.
If the world can be tailored to fit the model of the US, then California is turning into a service industry only state, while other chunks of the country are becoming what California was. That could very well mean that the middle class will basically not exsist in CA anymore. It will only be the wealthy, and the poor- with poor being an ever changing definition as inflation goes out of control.
The entire country is under immense change, and I would put money on the south and parts of the midwest having pheonominal success in traditional, non RE related fields for the foreseeable future, regardless if CA and NY falter due to their lack of residential planning.

Clearly California has been a huge economic engine for the last fifty years. So that has helped the fundamentals here.

I also suspect that the national and international mythology of California has helped inflate prices. Our real estate values (fundamental values) have benefited from a strong national and international perception that California is a special, magical place. I wonder if a substantial downturn in real estate could change that mythology and make California a symbol of something else.

What won't change is our agricultural base. We will continue to be world power in agriculture for a long, long time. Nor would I expect a dramatic drop in tourism or high tech.

Otherwise, how will California fare in comparision to the rest of the country in a recession?

Michael Says:

"What is someone who is going to be forclosed on do? All the recent laws have been written against them, bankruptcy, credit card etc. What they should do is stop paying all bills except, utilities. Cash all paychecks. Hold off forclouser as long as possible. Deposit extra money in Swiss bank accounts. After they take everything, at least you might have something to start over with."

Ah, the "pity parade" I spoke of in previous thread. The bubble blowers are now "victims" of bankruptcy laws as well as evil lenders pushing loans down their throats. I can feel compassion for a non-bubble inflater with a medical emergency or an unexpected job loss, but not for those who added air to the bubble by leveraging to live the high life facade. Screw, em, the bubbble blowers just raise home prices and home taxes for the rest of us.

Garth,
As mentioned before, the I80 Tech corridor that runs from Raleigh to Atlanta is one of the fastest growing tech meccas in the country. Most major national chip makers and research firms have or are planning to set up shop there. The diffrence between California then and now was that in the past, Ca had an almost exclusive dominance on technology of all sorts. Now that this exclusivity has been somewhat dilluted- making the neccesity to pay california engineers huge salaries less the case, I think the 50 years prior to now are just that- 50 years. Perhaps california will find some magical new technology, but again, most of the tech that got the state in the rosey position it was in for a few decades was from military research.Most came from cold war era. That was in the 80's, and it floated the state throughout the 90's and partially through this decade. Basically, just about any state can easily replicate the same research, and in fact, there are states, like NC for instance spending millions on developing favorable locations and operating conditions for companies that do such work. Thus I expect to see california being more of a role player along with the rest of the country, not neccesarily as the out front player it has been for the last 50 years.

One observation: rent is Mountain View appears to be rising considerably, although other rental markets in the silly valley are showing little more than an uptick.

George Says:

Apparently, men are spineless and cave in the face of a full frontal N.A.G (No Ass for you Gentlemen) Assault.

SCENE OPENS WITH JILL & JOE RENTER SITTING ON SOFA IN SQUALID APARTMENT WITH REALT-WHORE ON THE PHONE

JILL: "I just don't see what you're so worried about, Joe. Real estate never goes down! It's gone up 300% in the last 6 years and if we don't get on board now, we'll be priced out forever."

JOE: "I don't know, Jill, the house looks pretty nice, but is a 40-year-old two-bedroom ranch in the Valley really worth $1.2 million? Plus that loan our broker got us just doesn't seem on the level. What the heck is a "neg-am" anyway?"

JILL: "Look, buster, I've put up with a lot from you renting these last two years. I didn't know I was taking a vow of poverty when I married your sorry, loser ass! And need I remind you my biological clock is ticking? "

JOE: "I'm sorry, sweetheart, it's just that we're saving a lot of money renting and I just don't want to jeopardize our future by making a mistake on the biggest purchase of our lives."

JILL: "The only "mistake" you can make is to give up and not buy! It's impossible to lose in real estate --a no-brainer. Besides, have you forgotten what happened the LAST time you tried to make an important decision without my approval? You lost your "cuddle" privileges for six months, as I recall!"

JOE (LOOKING SHEEPISH): "Yes, dear..."

JILL: "Now pull yourself together and be a man for a change!"

JOE: "OK, I... guess we'll be alright."

REALT-WHORE: "You guys can do this! I ran the numbers, and everything looks super!"

JILL: "There, there, that's more like it! Keep it up and maybe I'll let you have your testicles back for the weekend. No promises or anything, but if you keep being a good boy..."

FADE TO CENTURY 21 LOGO.
PLAY TAGLINE:
"Century 21, it's not just a home, it's an ATM!"

Probably a large part of this is due to Google.

It would seem so. I am looking for a new rental and nice units are getting quite pricey. They appear to cost at least 25% to 30% higher than two years ago.

Should I avoid Mountain View? Or am I just too picky?

Haven’t you seen that Century 21 Commercal with the nagging wife bullying her husband into submission?

I haven't seen this (I watch very little TV, and all of that is Tivo'd, so I never see commercials unless I seek them out). Anyone have a link to the commercial on the web perchance?

astrid,
This ought to help you get started:

www.strawbuilding.org/
mha-net.org/html/sblinks.htm
www.buildinggreen.com/features/straw/straw.cfm
www.dsaarch.com/
www.skillful-means.com/menupages/strawbaletips.html

nomadtoons,

I fully agree with your observations (with the exception of the rust-belt Midwest, which is still mired in decline). The question is whether this trend will hold up long enough to permanently shift the equilibrium. We won't know this for a while, unfortunately. It's very hard to spot such major shifts while they're occurring. Lots of people get it wrong on all sides because, buried within the big shifts, there are lots of smaller cycles, some of which send out "false signals". You can't tell a cycle from a trend often until after the fact.

Right now though, the Southeast is doing much (economically) right, whereas I'm less appreciative of what the Midwest is doing to power the improvements there (the Southeast is doing it "the old fashioned way" while the Midwest is doing it with more artificial subsidies and barriers). Also, there is no reason that CA and NY have to decline in order for the South to rise. There is plenty of room for CA and NY to restructure and maintain their economic power base while the South rises. Similarly, there is also a chance that the whole shootin' match goes down the tubes, coasts and inland alike. One of the big questions I keep reading about is what the future of Florida, for example, holds over the next 50 years. A lot of economists are worried that FL is likely to come under growing risk of stagnation because of demographic reasons. Again, no one knows even though lots of people have complicated, well reasoned hunches.

Economic models don't really predict anything, they just help to understand the forces and process of changes.

Astrid,
Try going to craigslist Nashville, type in Minumum 50k and maxiumum 150k. There are pages of homes. Of course there's also lots of million dollar homes in the southeast, bu the key diffrence here is that none of those million dollar homes are 2 bedroom stucco bungalows next to the freeway. Many of these 150k homes are million dollar homes in CA. It isn't neccesarily the cost, but what you get for the price. Then go to just about anywhere else in that region on CL. The results are the same. My dad bought a rental last year- a 3 bedroom for 40k.

I haven’t seen this (I watch very little TV, and all of that is Tivo’d, so I never see commercials unless I seek them out). Anyone have a link to the commercial on the web perchance?

Randy H,

I wasn't able to find any links to the actual commercials, just press releases. Perhaps it's because it's so new. Btw, the multi-commercial campaign is called "Agents of Change".

Randy,
The biggest economic forces right now in the SE is manufactoring and healthcare. Cities like Nashville and Atlanta have some entertainment industry (CNN,Scripps,Food network, TNN, CMT, and turner networks) but by and large, the rest of the region is manufactoring, mainly in automotive and automotive parts. The majority is from foreign makers, like toyota, nissan, Mercedes, BMW, Hyundai and Kia- newcomers, and then some of the domestic makers. My father has been working as an HR manager for years. He was head of a regional HR research firm for a few years, and the number of startup manufactoring companies is pretty high. So in reality, the economy of the new south could look like what california did 50 years ago- small towns that grow up around manufactoring sectors, and average middle class citizens in average homes with normal single digit appreciation. basically- middleclassdom. The research sectors are the areas that could come and go. Right now the severe diffrence in costs between California and NC might as well be the diffrences between China and the US. But if more engineers move in, the prices will go up and the sweetness of the deal will be soured. You are right- if enough influence moves into these regions, then it could jump start a new section of the country to start infringing on California's heels. But that could take years, and the time it takes for the bubble to cool may not be enough.

Bap33,

I was at Castle AFB in 1990 for a few months. Sounds like Atwater and Merced have gone dowhill since then. Sad.

I have been a landlord of good working class homes (3-4 bed, 2 or 2.5 bath, garage, 1500 sq ft) for almost 20 years (I have sold all but one during this absurd bubble). I refused to do any Section 8, as my houses were all in owner-occupied areas and I was not going to put a scumball in amongst people who had pride in and earned thier houses. In fact, I was surprised when I found out that Section 8 allowed them to rent houses that nice. Welfare is supposed to be a safety net, not a method of living comparably to a foreman or manager.

George
Sounds like you've got a smart solution and a smart woman! :P

Astrid
There are parts of the SE that are quite nice and quite cheap. I go onto realtor.com and type in the zip(the area I was looking at was S Charlotte 28277)and you'll find 2,800 sq ft lovely homes in good areas for btw $250K to 350K. They are really overbuilding the area so I believe it will stay cheap for years to come.

I couldn't find the "Agents of Change" ads anywhere on the google video, but I did find this entertaining piece (not at all related to RE, but related to how wrong predictions can be):

Question for Harm and/or Linda in LA-LA Land:

How were Los Angeles rents affected by the early 90s real estate collapse? Did they decrease as much as real estate prices, stay the same or even increase? Just curious.

tannenbaum
I wasn't tracking rents back then...so off the top of my head rents did drop, though I'm not sure by how much...my guess is about 10% for SFH. But that's only a guess.
Remember,we also had the quake which caused people to flee. I have friends that own apt. bldgs that were looking for ANYBODY to rent their units. ..not good renters, ANY renter.

astrid
I, for one, am absolutly intrigued with straw bale building. Thick walls, eco friendly, etc. It's kind of a dream of mine that perhaps I can build one someday. Maybe when this baby crashes I'll buy a little piece of land so that when I retire I can design the coolest straw bale house ever!( and build it myself)

@tannenbaum,

I wasn't systematically tracking rents back then either, but I'll second Linda and guesstimate that they fell modestly (10-15%) during the recession, which btw was very protracted in CA vs. other parts of the country. By the mid-90s rents had definitely levelled off and restarted rising at a rate close to inflation. Generally they had held up better than house prices during the same period. There certainly wasn't any big increase (from increased demand by former owners turned renters), as bulls like to believe.

Re: RE in the Southeast

Beware! Do you have any idea how bad the summers are? Do not even CONSIDER moving there for at least the next 2 years. By that time I should be well settled in my sub-300k 100% cash transacted home.

My wife & I visited Raleigh, NC over XMAS and made a game out of guessing the prices of home listings based on descriptions/pics alone. Laughably low compared to here, and last time I checked, engineering salaries were not laughably low compared to here.

Haha,

the GLD management fee (as well as that of IAU) is long known to us gold hoarders, if gold price doesn't go up at least .4% a year, the value of GLD will eventually go to 0.

However, for those people who already know that they need to seek refuge in precious metal, there is no better choice. Hoard gold yourself? Well, to buy physical gold, you are looking at an average of 1.5%-2% shipping and handling fee, plus annual insurance and storage cost. Well, you can skip on the storage cost if you are going to bury it in the backyard, but if you are betting a significant portion of your HaHas on the precious metals, you'd better have an insurance coverage. The standard shipping and handling charge for silver is 3%.

I am not arguing that gold and silver are good investments. They are hedges, not investments. But if one does decide to get into gold and silver, then ETFs are probably the most cost efficient way to do it, even factoring in the annual management fee.

astrid and HARM,

thanks for the links.

George,

congratulations on finding a good keeper. She is the one.

My wife occasionally nags me about a big stone, but then I gave her some investment articles on diamond and she happily agreed to divert her attention to making more Hahas instead of spending them.

She is more of a number cruncher and savvy investor than myself, if I dare to upgrade in this environment, she will make sure I get no corpoal pleasure for god knows how long.

Did someone see a Century 21 ad featuring a Mandarin speaking couple being picked up by the agent at the airport?

WTF is that about? We are running out of idiots in this country so we need to import some non-English speaking idiots from somewhere else?

@Hokies

I met someone back in 1989 who was buying everything he could get hands on. He said "real estate never goes down". He was 31 then. I met that same guy seven years later and he was being evicted from his 3 condos, thanks to the market tanking and him losing all his equity and then some. That was 1996 and he was 38 years old. Meanwhile, he’s lost his entire net worth, and had to start over from scratch. It’s now 2006 and he's just finally getting back to where he started 17 years ago. Sad.

How do you destroy your life, with family and kids if you just buy a house without even researching the market first or considering consequences of buying at the top?

Point is, if you time it right.. that’s fine. But if you don't, you could be screwed for a loooong time.

Pop!,

I think Fidelity freedom fund is such a sloppy product, it is just a packaged up USD fixed income fund, worse return than a CD. I can confidently do much better than this fund just by putting money into short-term USD treasury.

Do you have to stick with Fidelity? If not, there are plenty other choices. If you have to stick to Fidelity, then the closest thing I can find is Fidelity Gold Select Portfolio, Natural Resources and Energy.

Hokies is just another maggot here to annoy. He does this when he is not jacking off with his frat boy buddies with a bottle of bud light watching VT fucking lose.