patrick.net

"The Price of Admission"

How disgusting. What paranoia. "If my kid doesn't go to a top tier school and get hooked up for life how can my financial empire/legacy live from beyond the grave?" What useless pr!cks. Just what the world needs more of.

I especially like the kid that took a swing at a defenseless GIRL with a BASEBALL BAT! Classy guy. Look for this @sspray on "The Smoking Gun" mugshots in the near future. Ya think this "switch hitter" has issues? Entitlement issues? Nah...

@SQT,

I expect regular updates on that "situation". Weekly reports would be nice. No guilty pleasures here.

How in God's name can anyone employed there claim they were "blind sided"? Try blind. Sorry, when Patrick (St. Patrick, excuse me) first started grappling with "is it bigger than a breadbox" Yeah... it may have been premature to short subprime lenders. 2007? C'mon, that's just laughable. Add that to the already bustin' at the seams SAC inventory.

Randy, very well stated.

DinOr

Yeah, it's not exactly a strong market out here.

We drove through one of the more "exclusive" neighborhoods today and boy was that interesting. The homes are on a golf course so everyone thinks their homes are friggin' priceless. But there are literally 2-3 models that are prevalent throughout and every one's home looks exactly the same. The lots aren't even that big.

And there are tons of homes for sale in there. Several appear to be in foreclosure as they are totally untended and the lawns are brown and overgrown. There are even great big 'open house' banners on some of the fences. It's amazing. And yet some idiots think they can ask 1million for these homes and they are not nearly worth that in our market. I can go to a nearby neighborhood and get a house the same size with a bigger lot for less than $500k, so why on earth would I pay a million to be on a second rate golf course?

I think my area is going to literally be a bloodbath by the end of the year.

NIMBYism is the perversion of democracy.

Uh, it's democracy at its best. Local citizens participating in their local governments.

"pay a million to be on a second rate golf course?"

Good question! I remember as the "tech wreck" wore on, brokers were walking away from their "exclusive club" memberships in droves. Many had waited years to get an opening or approval only to have to bail when times got tough. I think what we're seeing now will dwarf that! Good-bye gated, "upscale" community, we'll miss you.

Here is an article in the nytimes illustrating how the highly desireable markets are still strong even while the bottom weakens
http://tinyurl.com/32vyf6

* Rental markets are not _perfect_markets.
* Rental units are not perfect substitutes
* Rental units are not commodities
* Rental markets have timed price-contracts that cause price frictions
* Rental markets experience information asymmetry

Agree whole-heartedly with all but #2, and I think #3 is missing the point.

How is renting a whole house identical to your FB neighbor's house not a "perfect substitute"? You both have an identical house with identical (or near-identical) amenities, your kids go to the same school, you both have the same-sized yard, garage, etc., etc. If you are comparing an apartment to a house, that is simply not a valid comparison --apples to oranges. Rent-vs-buy cost comparisons must be comparable properties or the comparison is useless.

Randy, were you being smart with that "rentals aren't commodities" comment? Please, of course they're not *exactly* interchangeable commodities, and neither are for-sale houses, or cars, clothing, etc... There will always be quality, size and geographic differences, no matter how "liquid" or transparent the housing market is in a given area.

It still doesn't mean LLs can demand any arbitrary price they want, or that the basic pricing mechanism of supply & demand has been repealed. As has been pointed out here countless times (most recently by vagrant), the Fed & Wall Street cannot artificially pump up rental costs with cheap debt as easily as they can house prices ("yet").

Again, it sounds like Marin has a very *inelastic* supply and ridiculous NIMBY/Boomer/Trustafarian restrictions that prevent any new stock being built, which naturally gives anyone who lives there (you) the impression that it's like that everywhere. It's not --really and truly. You say it "isn't that bad" and I totally understand the need to minimize your wife's commute, but I honestly think you'll be much happier and better off once you're out of there.

Pretty scenery + nasty, greedbag Boomers & NIMBY Trustafarians = no quality of life for working class Gen-X or Gen-Y.

HARM

I wasn't referring to Marin exclusively. Rents are going up on the Peninsula, in the City, and South Bay too.

Commodities refers to the glib "simple microeconomics" stuff people throw out there to sound smart. There are almost always referring to college econ 101 stuff where all analyses are assumed for *perfect* markets, where products are *perfect* commodities. Like stocks or wheat futures. For things like cars, apartments, houses and milkshakes that "simple microeconomics" ain't so simple.

The price curve isn't straight, the slope isn't constant, the effects aren't linear. Everything you say is true, but as a gravitational constraint, not as an absolute constraint. Rents will tend to orbit around the fundamentals you describe, not ride directly on them.

And, I was referring to apartments not being perfect substitutes for other apartments, not betwixt housing.

But now that you mention it...

A rental SFH home which is rent-able at a good value (not a FB need-my-mortgage-payment price) is practically _never_ an equal substitute for the same size, location, school district and neighborhood house. The reason is simple. If you want an example why I invite you to my rented McCrapsion for a beer (seriously) and to take a tour of the oldest, cheapest, least efficient, leakiest and loudest appliances ever manufactured by mankind. Seriously, you cannot generally rent equivalent quality from equity-rich reasonable rental (professional or long-time) landlords.

Again, man, I'm not saying housing won't come down. It will. It is. Even here in Marin, despite media reports to the contrary. *But*, rents are going up too. They won't double. They might not even grow 50%. But they are going up at a healthy pace. Just be prepared for realtors and the REIC to use that to try to scare up a band of buyers this fall.

*They are almost always referring to ...

@HARM--
I do rent, and I plan to rent for awhile, but renting is not the same as buying. You know, intangibles. Typically you cannot make major modifications to a rental house--no cat door, no painting the outside orange, and if you don't like the electric stove it doesn't make much sense to run a gas line and buy a new gas range. You probably wouldn't invest time/$ in major yard and garden projects, which may mean you don't live with the yard you want. And if there are not a lot of comparable rentals in your area, there is a slight risk that your kids might have to change schools suddenly if the landlords decide to sell or move back or die or whatever. So, you know, you do give up something in order to rent. It is not a perfect substitute for a house you own with the bank--the difference is the right to make decisions about the house itself, and we each get to decide how much those decision-making rights are worth to us.

On the flip side, renters can move on a month's notice, generally. Not so if you own your house with the bank.

Randy, despite your observations - all of which I agree are sound - I will not be surprised to see rentals to fall where you are within a year or eighteen months. I've noticed that when available rental inventory swells to about three times historic norms, the prices come unstuck. It took a four-fold increase here, but it's showing up now.

Which is not to say rentals didn't rise in the interim. They did.

For me, the easy part of renting a great place was finding it - always late in a downturn. The tough part theoretically is JBR status which of course I'm just fine with.

Eliza & Randy,

Ok, I guess I've been unusually lucky with finding decent rentals and above average LLs. Or, perhaps I should say I'm good at finding them, as I usually spend 1-2 months of careful looking and I never settle for just "ok" when I have the option of taking my own sweet time.

My last LL (12 years in the property):
--Over the years has installed a new AC unit, new stove, new carpeting, new bathroom, kitchen tile & fixtures, and rarely delayed in fixing stuff, or gave me guff about it. In return, I paid on time, took excellent care of the place, even made a few modest upgrades, and didn't create any unnecessary problems for him.

My current LL (going on year 1):
--Before I saw the place had upgraded most of the light fixtures and major appliances, refinished the hardwood floors, and did a beautiful job with the landscaping. While I've been here he has replaced a broken window pane (previous tenant) and replaced a broken kitchen faucet (wear 'n tear) without hassle. I re-painted and redecorated the bathroom to my liking, and he has told me I can paint whatever room whatever color I like.

I know, I know, you can't *choose* the major appliances supplied by Mr. LL, and you can't take them (or any other upgrades) with you. This much is true. Ditto for people with school-age children. Being forced to change school districts is a hassle, I agree. However, as Eliza pointed out, as a renter you get:

--greater physical mobility
--greater financial flexibility (not being 100% invested in one illiquid asset)
--no resale or rate-reset risks (being underwater and unable to sell and/or being imprisoned in a suicide mortgage)
--fewer responsibilities & downside risks ("So the house is sliding off its foundation and your insurance doesn't cover it? Sure sucks to be you --I'm outta here.")

I never said there were *no* advantages to owning vs. renting. Just that some people tend to grossly *over*estimate the "ownership premium" while *under*estimating the comparative advantages of renting.

I think it all boils down to that fundamental bias in favor of "ownership" we've so often discussed. The need to "own" (whatever that's really supposed to mean) is so powerful in American society, it often blinds us to the alternatives.

And what do we really "own" in the long run? Does "owning" a mortgage on a bank-owned property make you better than someone who "owns" a rental agreement? Do you get to take the place with you when you move, or just the memories you have of living there?

Maybe I'm getting a little too Zen here, but I think sometimes it helps to step back and take stock of our priorities and the assumptions behind why we do what we do.

Casey S. mentioned to me in his travels that he'd heard the bank actually owned your house when you mortgaged in Oz -- I said I think not, a mortgage is a mortgage wherever you are, it's just one of those offhand remarks or misconceptions people have... 'Shared equity schemes' with the banks, on the other hand, are one of the proposals on the table akin to 50 year mortgages and other delightful solutions the banks have come up with to help you into home ownership after offering easy credit for the past few years thus triggering the housing boom and a record foreclosure rate... So effectively the bank might end up owning a fair chunk of your house and you're really just renting the property from the bank for the rest of your life -- oh well, can't help markets...

I wasn’t referring to Marin exclusively. Rents are going up on the Peninsula, in the City, and South Bay too.

Interesting that rents appear to be going up, even in a time of apparent over-supply of rental housing. This tends to predicate away from the 'supply-demand' model of pricing, to the 'landlord desperation' and price-fixing model that I suspect is closer to the reality, much like in the owner-occupier real estate market. And I would endorse the cluster effect mentioned earlier in the micro textbook as outlined below...

Rents started to creep up here a few months ago, and I fought a 25% (35% over 12 months) increase in my last place through a court Tribunal process, engaging a barrister and a solicitor in the end -- more on this exciting process later if you want to find out how the system protects your tenancy rights. The state-based REIs (peak bodies for LLs and REAs) sent out notices to all their members managing properties encouraging them to push up rents as 'vacancies are historically low' -- around 1.7%, apparently. I'm not sure I even believe the reported vacancy statistic -- I think it's more likely we are seeing too many recent property investors being burnt as the market turns -- the expected capital gains aren't there, so in desperation they have to up rents -- and the RE agents who conned them into buying at the top of the market are only too willing to assist in achieving it to save face and gain even more revenues in management fees. So we see booming housing prices followed by a bust -- and as the bust occurs, rents ineluctably increase.

Randy H says:

Actually, the Fed doesn’t calculate home equity ownership at all, nor does home equity ownership count directly in the US GDP figures, in contrast with methods used in places like the UK. The Fed uses an inputed rent formula, which you can look up on the web, that is not quite so simple as you suggest.

Visit www.federalreserve.com and look at the Z1 report, balance sheet section. %equity is defined in the B.100 table as: (market_value - debt) / market_value. There is nothing about imputed rents.

The Fed does not calculate market_value of residential real-estate, but either the BEA or Census Bureau does.

Imputed rents are discussed by the Fed Governor at every single meeting.

http://www.federalreserve.gov/BOARDDOCS/HH/2006/july/testimony.htm

I turn now to the inflation situation. As I noted, inflation has been higher than we expected at the time of our last report. Much of the upward pressure on overall inflation this year has been due to increases in the prices of energy and other commodities and, in particular, to the higher prices of products derived from crude oil. Gasoline prices have increased notably as a result of the rise in petroleum prices as well as factors specific to the market for ethanol. The pickup in inflation so far this year has also been reflected in the prices of a range of non-energy goods and services, as strengthening demand may have given firms more ability to pass energy and other costs through to consumers. In addition, increases in residential rents, as well as in the imputed rent on owner-occupied homes, have recently contributed to higher core inflation.

zeke,

Get with the program. We discussed that article already.

Inflation is up here on a range of fronts also - and I believe the Treasurer and Bureau of Statistics find ways to under-report true inflation, by pricing out so-called 'volatile' things like fuel, and various foodstuffs, and possibly by just plain-out cheating the figures or modifying measures. However, I believe real inflation is 8-9% p.a. as the American shadow govt statistics website www.shadowstats.com indicates. Ditto for real unemployment and underemployment. GDP figures and the notion of 'economic growth' are just misused and abused to falsely report a 'successful' economy.

Some pensioners here kept receipts for a number of years and basically proved 8% inflation per year for the past 2 years on their own 'basket of goods'.

The reality here is that people are not sharing equally in the wealth of the commodities boom either, a few people at the top are keeping all the profits and bidding expensive RE up even higher as one outlet, while wage workers are forced to take 2-3% wage increases every year and can barely make ends meet -- it's for this reason that people don't believe the good news stories, and John Howard is currently on the ropes in the polls coming into the next election.

Randy H said:

Imputed rents are discussed by the Fed Governor at every single meeting.

Whether or not they are discussed by the Fed, imputed rents are NOT how the Fed calculates % equity and the Fed DOES calculate % equity. Go to www.federalreserve.gov and look at the Z1 report, specifically the b.100 balance sheet table. There you will see the %equity figure and also footnotes explaining how it is calculated, and the calculation is just as I explained above.

Imputed rents are used in a number of contexts, such as the national income accounts at the BEA and also to estimate CPI inflation, which is done by the BLS. Obviously, the Fed uses this information computed by other federal agencies. But neither the Fed nor anyone else can use imputed rents to calculate %equity. It makes no sense whatsoever.

The Z1 %equity figures is the source for the calculatedrisk graph of %equity dropping over the years. An even more shocking chart of %equity can be made by assuming market values of residential real-estate gradually return to the trend line of the last 30 years. The result is %equity dropping down to about 30%, depending on how fast the return to the trend line occurs. Given that many homeowners have 100% equity (no debt), this implies that many or most homeowners would have essentially no equity in the event of such a return to the trend line. More likely, there will be a wave of bankruptcies combined with a consumer savings spree, to bring the %equity back up to near 50%. That bodes very ill for the future of a consumer-based economy, unless the Federal government runs deficities the likes of which we have never seen before.

NIA are the principles and measures by which GDP is computed. Refer to Mankiw et. al. for definitions.

But more to the point, I let this debate stand as yet another example of how the rational perspective that housing is in a price bubble so often becomes a competition of "who can be more doom and gloom".

I entered into this because it was uttered above that "it's simple microeconomics 101". OK, now we're arguing about what constitutes aggregate GDP within the framework of national income accounts, which is neither simple nor is it microeconoimcs.

Just because there's about 20% more equity owned by home-owners than the scarier bear blogs claim doesn't mean that house prices won't correct. Similarly, just because rents are starting to rise healthily in some markets doesn't mean that house prices won't correct.

Over a year ago I was having the same kind of argument about house-price stickiness. I seem to recall a particular blog bully named "Allah" who authoritatively proclaimed that there could not ever be any house price stickiness, and anyone who thought otherwise must be a 'sheeple'. When I disagreed he called me a Realtor. Hey Allah, is it not-sticky yet?

To point: Foreclosure does not equal Bankruptcy. You realize that nearly all states have laws that protect non-house assets from foreclosure action, right? A wave of foreclosures would suck. It will hurt lots of consumers. It will destroy creditworthiness. It may even cause a recession.

Just not the end of the US consumer economy. Despite what Peter Schiff may say. He's entertaining though. Kind of the Ed Yourdon of finance.

Over a year ago I was having the same kind of argument about house-price stickiness. I seem to recall a particular blog bully named “Allah” who authoritatively proclaimed that there could not ever be any house price stickiness, and anyone who thought otherwise must be a ’sheeple’. When I disagreed he called me a Realtor. Hey Allah, is it not-sticky yet?

No Randy; I am not a blog bully; it's just that you are not above me.

....and yes, I believe in your own mind I proclaimed that "there could not ever be any house price stickiness and anyone who thought otherwise must be a sheeple."

However, in reality as anyone knows how to read can see if they search out what I wrote that I said at first there will be stickiness (just like there is in a normal housing market cycle downturn) and then there will be no stickiness (like I expect to be in an unprecedented abnormal housing market downturn such as this one) and from what I am observing in many places, it appears to be exactly what I said it would be.

...but thank you for being man enough to make a post on a forum that I regularly visit so I am able to defend myself.