patrick.net

Chan, It might be madness but I don’t think it’s fishy… it’s a cyclical peak. It happens after a while. Eventually we will have cyclical bottom…

Good luck with your shorting. I will look forward to hearing from you on your results.

Chan, there is a big difference between accuracy of accounting for derivatives, and sophisticated embezzling.

MP, I believe that the 1980s were worse. Which is not to say that all is well now.

The real estate bust of the 1990s followed upon excesses in the 1980s, many of which we have not yet seen this time. Remember that the Savings and Loan Crisis of the 1980s started about four years before the real estate market peaked. We had many savings banks already going insolvent at least three years before the real estate market peaked. The RE Bubble was so bad in the 1980s that the Federal S&L Insurance Corp. was declared insolvent – TWO YEARS BEFORE the RE market peaked. And the bubble marched on.

After four years of financial collapses by banks, builders and property owners, the Federal Gov. created the Resolution Trust Corporation to engage in an orderly disposition of all the troubled assets. The last of the major bubble markets peaked in that same year (1989).

Zephyr, I'm not so sure that things will necessarily play out exactly the same way this time around. I do see the prospect of institutional bankruptcies and financial collapses, especially for holders of large amounts of sub-prime NAAVLP paper, but it I believe --like Chan-- that the banks and S&Ls have learned a very important lesson this time around: privatize profits, but share ("public-ize"?) risk.

What's different to me this time is how many lenders don't even hold much (if any) of the mortgage paper they're generating. Not when they can easily sell it to the GSEs or some private outfit to repackage and re-sell as MBSs. I realize that not all banks operate like this and not all of them are huge into the NAAVLP game, but the ones that do are pretty much running the show right now. When the sh*t really hits the fan 2-3 years from now (when that $2.4 Trillion of IOs adjust to fully amortizing loans - in a higher interest-rate environment to boot), it's not going to be pretty for individual and institutional hoders of residential MBS paper.... IMO

The banks and S&Ls may not fail en masse, but recent buyers and investors sure will.

Btw, MP, you'll notice I've not been predicting huge immediate drops in prices for most areas --especially those "prime" locations you talk so much about. I've long believed --and you're welcome to trawl the archives to check on this-- that the corrections will play out over a long period of time. Perhaps 5-7 years, as a wild guess.

Where we disagree is that broad substantial prices declines are possible (you seem to disagree) and on size. Yes prices are sticky on the way down, and prime locations hold their value better than non-prime. We agree on this much. However, corrections can and do happen.

part of my passion for counteracting the ‘bubbleheads’ and bubble pundits is my intense dislike for people who’ve been calling for the crash for 3 years, and who never admit they are wrong, and never apologize to people they are giving advice to.

I am fighting for all the people out there who listened to him over the years, and put off buying b/c of his advice. These good people now have an even longer wait, or a more difficult struggle to own. It’s for these people that I put up this balanced fight. I was almost one of them, and I know i would be outright outraged I had listened to Ed.

Ok, now I kind of see why you were initially resistant to a give-and-take debate with us. It's true that many economists saw the bubble for what it was early on, and some may have even called the peak too soon. Another prominent early-bear that comes to mind is Dean Baker of CEPR.

Yes, I agree we should all balance and challenge our viewpoints by listening to the other side. However, I would not fall into the trap of buying into the "broken clock" theory, or blaming someone for being too prescient. After all, didn't Greenspan himself call the NASDAQ bubble 4 years too early with that "irrational exhuberance" speech? Imagine if people had actually listened to him then, instead of cowing him into submission?

Calling the exact top to any asset bubble it difficult at best, impossible at worst, because (all together now!): Asset bubbles tend to last much longer and grow far bigger than any reasonable person at the time would have thought possible. Missing the exact peak doesn't mean there's no bubble, any more than missing the exact trough proves there was no correction.

Yes, if you put off a buying decision 100% because of listening to the "early birds" you missed out on some juicy paper gains. On the other hand, if you bought recently using an NAAVLP and overextended to the hilt, you'll soon come to wish you had listened to the early birds instead. And as to those recent paper gains... "What the market giveth, the market taketh away."

Kurt - I have no idea about that market. Those ‘prime’ Mt. Tam view condos in Marin are probably ‘prime’ for Mountain climbers and nature lovers, but I believe that demand curve is low and limited.
It sure sounds like you don't--and yet you downgrade the value--how does that work towards your argument (other than a straw-man approach). Btw, if it's waterfront property with a dock, it's probably not located on some rocky crag on Mt. Tam. A "low and limited" demand curve on a Marin waterfront? Jack, what say you?

HARM: "Btw, MP, you’ll notice I’ve not been predicting huge immediate drops in prices for most areas"

Sissy.

50% correction, in *PACIFIC* *EFFIN* *HEIGHTS*, by the end of this month.

I look forward to picking up a mansion at the top of the hill for a mere 4 million dollars...

Cheerio,
prat

Off the debate path for a moment, I wanted to take the time to thank all the "non-regulars" here who have shared their personal stories, some of you posting here for the first time.

I salute you: vayeyatch, laverty, SoldatThePeak, HighSierraGuy, Kurt S, pbass, SacRenter, Jamie, Josh, NewAttorney, WillItCrash, G P, CntrlValleyRenter, Paul_from_Oz, NewbieBear, Zeta, Yakim, Kim and anyone else I managed to miss.

Your stories have not only helped to make this thread a smashing success, but more importantly, have added context and personality to the entire blog.

MP: "I am fighting for all the people out there who listened to him over the years, and put off buying b/c of his advice. These good people now have an even longer wait, or a more difficult struggle to own. It’s for these people that I put up this balanced fight. I was almost one of them, and I know i would be outright outraged I had listened to Ed."

_applauds politely_

Cheerio,
prat

HARM, do not forget to thank yourself for creating this highly sucessful thread. :)

Thanks!

Thanks, Peter!

*sigh*

I'm having thread envy. ;)

Don't sell yourself short, SactoQt --you should only short sell homebuilders, REITs & MBSs!

Don’t sell yourself short

If I short myself my face will get ripped off. ;)

Marin County consistantly kicks ass on median San Francisco home prices, and has for years...due to the “prime” relationship to one of the truly pristine (”world class” I might add) natural environments....while being minutes from San Francisco, (and all that MP enjoys.)

Yeah--given how far 'in the sticks' we are, the Marina is about a 25 minute drive for us--and during morning rush hour! Also, fantastic view here this morning, the sunrise casting light on the fog, water, and profile of Tam.

Morning Jack!
I think I can place the area. On my lunch break, I often bike up through Kentfield into Fairfax. We're in a 2BR condo on Corte Madera creek, overlooking Piper park...if you can place that. I know...pretty dumpy digs, but that's all we can afford
This morning I've been watching the rowing crews, egrets, and herons out my LR window.

Ok, I'd post this in "bubble stories", but this is where the activity is.

My last egregious "bubble" example was a 2BR/2BA 1000 sqft bungalo in Marin--for $800K (and on a busy road)...

Now, consider a 2BR/2BA--and a spacious 1200 sqft!--only for $1.3 Million.
This is in St. Helena (allegedy a "prime" Napa location). Damn...I better buy that before it goes up!
http://tinyurl.com/9tj3m

It doesn’t seem unreasonable. It has 1 acre of land!
Ah--over an acre..missed that detail, thanks

Ok, here's a few others--I guess this one's for land value:
roughly 1/2 acre St. Helena: $1.3M: http://tinyurl.com/9rxfv
"Prime" for that McMansion --and resale (hopefully)

So, what does $1.2M get you in St. Helena?
Here's a 2BR/2BA (1300 sqft) on .26 acre:
http://tinyurl.com/88gd5
I suppose a McMansion will fit there too!

2BR/1BA (1300sqft) Yountville (Napa) .26 acre: $1.1M
http://tinyurl.com/8nwul

There's lots of examples. Bubble, nahhh...that's Valueâ„¢

If they HADN’T said anything about it when they saw how it was going, they would have been roundly criticized later. Can’t win, I guess.

No kidding! (see my post on this above) Another thing that gets me is how quick bulls are to pounce on anyone who questions the "wisdom" of gambling on bubble-inflated assets, while uber-bulls are NEVER criticized, no matter how horribly wrong they are.

Take those two idiots who wrote "Dow 36,000" right before the tech bubble burst -- James K. Glassman & Kevin Hassett. You might think they'd be hiding out, hanging their heads in shame/ignominy. But, you'd be wrong! Guess where they are now? A: still writing for the Washington Post, National Review, etc. and shilling their clueless bull$hit to the unsuspecting public.

Jack - It feels weird to not have anybody put me down anymore. It’s actually no fun. So Jack, I am designating you as my arch-nemesis.

No more arch-nemesis please... :(

MP, I do know a lady who used to own homes in China and SF. She sold her Shanghai apartment right before "governmental intervention" because of gut feel. She is using the proceed to buy commercial properties in southern China.

She sold her SF house recently and is renting though.

Take those two idiots who wrote “Dow 36,000″ right before the tech bubble burst — James K. Glassman & Kevin Hassett. You might think they’d be hiding out, hanging their heads in shame/ignominy. But, you’d be wrong!

Perhaps I will write a book about Dow 360. :)

I heard those idiots were publicly bullish on housing recently. How can they have any credibility left??? The fact that THEY’RE bullish on housing should give anyone pause…

Why anyone still listens to these morons, much less pays them for their worthless advice is beyond me.

Take those two idiots who wrote “Dow 36,000″ right before the tech bubble burst — James K. Glassman & Kevin Hassett. You might think they’d be hiding out, hanging their heads in shame/ignominy. But, you’d be wrong! Guess where they are now? A: still writing for the Washington Post, National Review, etc. and shilling their clueless bull$hit to the unsuspecting public.

Those guys still claim the market is going to go to 36,000 or higher. I guess you can't win on either side of the fence. If your predictions don't come true sooner than later, you're gonna take a pounding by the other side. I'm not saying they're right btw, just that predictions are a tricky business.

I am so glad that I shored TROLL brothers and Fannie Mae last week. I am going to ride these stocks down into the abyss!

Be careful who you have shorted...

If everybody shorts the stock, then there will be somebody else that will theoretically that will be losing. (Their loss your win.)
HOWEVER, if those losers have deep pockets, they might start supporting the stock to make you the loser.

Watch out for the number of short contracts out.......Be careful of greed.

Be careful who you have shorted…

Watch out for the number of short contracts out…….Be careful of greed.

Good advice, AntiTroll -thanks. I guess that's what they call a "short squeeze" (aka, margin call). It sounds like put options are a better bet, with much less downside risk.

I am fighting for all the people out there who listened to him over the years, and put off buying b/c of his advice. These good people now have an even longer wait, or a more difficult struggle to own. It’s for these people that I put up this balanced fight. I was almost one of them, and I know i would be outright outraged I had listened to Ed.

You make one assumption about those people.

The advice was about property bubble.
HOWEVER, there are other investments around that would have returns similar to property. Maybe these other people are not as badly off as you assume?

Zephyr,
Did some research on K-wave. Interesting stuff.
Your opinion was that we may have started new cycle already. Is it possible that generational change may have stretched last cycle
(i.e. people living longer, starting families later in life).
What do you think?

Good advice, AntiTroll -thanks. I guess that’s what they call a “short squeeze” (aka, margin call). It sounds like put options are a better bet, with much less downside risk.

Both types of contracts may require ownership of fundamental equity.

MP,
that’s why we need more than anecdotes, more than one example on how rich Indonesian (or other Asian, foreigners etc) can hold up real estate price, even in Prime Areas.

This is why I think prime locations have their own set of behaviors. They are beyond assets. More like rare arts.

But Jack, he is now your arch-nemesis. At least mine (Fake P) is on vacation. ;)

@long time lurker,

Patrick himself rarely reads/replies to the blog postings (he's too busy running his rental properties & maintaining this site, I guess). I'm glad you and your husband were able to purchase a reasonably priced home you're both happy with, without having to resort to risky/exotic financing.

It's a pity that most Californians cannot say the same thing. :-(

MP you simply cannot raise your rents 9.9% in San Francisco unless the place was built before 1982.

The Rent Board determines how much landlords are allowed to raise rent, and currently it is the CPI times .6, which is 1.2% right now.

http://www.sfgov.org/site/rentboard_page.asp?id=3683

The only exception is if you put in capital improvements since the place was rented and even in that case there are complicated rules about how much you are allowed to pass through. How do I know? I put in a forced air heating system in the downstairs unit, which cost me $7k. I am allowed to raise rent about $65/mo for fifteen years to recover the cost.

Fake P will definitely come back in November to see what I have to say.

AntiTroll, Regarding K wave. Yes I do think it’s very possible that the K wave cycle could be stretched as you suggest. However, I believe that we have already seen the low point in this long cycle. When I look at the worldwide asset declines of the 1990s and the commodity declines including oil dropping to about $10 a barrel, the picture fits with the K wave collapse and low point. However, the US held up pretty well, and the stock market (after some pause) did climb strongly, and then we had the tech stock bubble. But I have heard so many say that the stock market bubble and the economy were sustained by easy money. That Greenspan caused all that and the current housing bubble as well. So, if that is true then the US was an exception and the predominant condition was that the 60 year cycle has had it’s low point in the 1990s. We just pumped our way out of it with easy money.

I'm a little late to this rant as I've been travelling. I was a week in Tokyo, a week in Bangalore and a weeks holiday between Thailand and Cambodia. All good fun.

About me:
I'm a 36 y.o female, married with a 21 month old son (sounds like a Russian bride catalogue already:)

I'm originally from New Zealand, then lived in Sydney, Aus. for 12 years, then NYC for a little under a year, then to San Francisco. I won a greencard in the lottery (thanks to Clinton for introducing it) and work in SV as a director of Agile development (pretty good process all about empowering people, high collaboration etc).

I found this site through searching for bubble related articles then happened upon the blog after that. I used to read more books until this blog came along! We own two houses currently. One in the East Bay and one in Brisbane Australia. Both were bought when the markets were low - the one in the BA has doubled - even though it's still a modest prices for this area. We are holding onto it for now while we measure the market. We plan on child #2 so we have to decide where we will move at some stage as our house won't cut it, hence the market and RE blog watching.

Interests, travel (obviously) - especially slightly more adventurous trips like travelling from Finland into Russia, catching helicopters across the baltic etc. I feel I missed my calling as a secret agent ala female James Bond but the fantasy is surely better than the reality. I read a lot, like yoga and meditation without being new-agey about it. Play music, well did until my son appeared - guitar mainly. I like taking photographs and used to do it for a living but am pretty amateur nowadays.

@Knkums,

Patrick hasn't posted here for a long time. He mainly updates the links and maintains the site, blocks trolls, etc. If you really need to contact him, his email is listed on the links page.

Knkums, sorry for the confusion. Perhaps I am talking too much. Hopefully Patrick is not mad at me.

BTW, I changed sometime ago my screen name from "P" to "Peter P" to avoid just that.

Okay. I get it MP. You own a condo, and are therefore exempt from rent control, just like a single family home.