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"Rummage $ale Chic: Why We're Going Gaga Over Pinching Pennies"


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2005 Dec 21, 3:49am   21,306 views  134 comments

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I was intensely curious to see how the looming housing crash would play out in the MSM in years to come, so I fired up the ole' Time Machine and jumped ahead to December, 2010, where I picked up the latest holographic edition of Time Magazine. You will be amazed at the cover story:

"Rummage $ale Chic: Why We're Going Gaga Over Pinching Pennies"

A new trend is sweeping the nation. The signs are unmistakeable: legions of people turning in the keys to their I/O purchased 4,000 sft exurban McMansions to rent a modest townhome within walking distance to work, others trading in the H2 for a Prius/Insight --or even a bicycle. The neighbor who just unloaded his six negative cash-flow Las Vegas condos to "scale back". Everywhere you look, there are signs of a powerful drive to cut back, scale down and simplify. An almost Japanese ethic of thrift has captivated the nation, and nowhere is this trend more pronounced than among America's largest demographic cohort: The Baby Boomers.

"After housing prices kept falling 10-20% a year and our rents didn't even cover the taxes owed, we figured it was time to reassess our financial situation", says Joe McLemming. Joe, 58, is just one of the millions of Boomer investors who participated in the real estate bull market of 2000-2005. "Now that we're renting again, we're not hemorrhaging money like crazy and we can even go out to McDonalds once in a while. I got so damned sick of always eating Top Ramen!" He let out a raspy cough before continuing, "Besides, renting nowadays is cool! Everyone's doing it --even Hollywood actors."

"Yes, it's true," his wife, Marge, agrees. "It's such a relief to be able to go to dinner parties and not have to avoid embarrassing questions about all the money-losing properties we owed on. It's getting so you're practically a pariah if you're a homedebtor now."

"Yeah, " Joe chips in, "nowadays all people want to talk about is how much they're saving by walking to work, or buying clothes at thrift stores. Anyone who shows up bragging about some condoflip Ponzi scheme is just asking for trouble."

The McLemmings anti-homeownership sentiments are echoed by a series of national consumer polls on the subject. In the wake of the housing market collapse (and the Fed's disastrous attempts to revive it by reinflation), over 90% of Americans remain convinced that real estate is a bad investment. Five-year cumulative losses of up to 70% percent in the worst bubble-infested markets seem to have permanently tarnished RE's image in the minds of the consumer.

Former NAR spokesman, David Lehreah (now chief advisor to Consumer Credit Counselors) had this to say:
"If you haven't paid your mortgage off, it means you probably did not manage your funds efficiently over the years. It's as if you were putting a match to 500,000 dollar bills."

He called it "very unsophisticated."

The new thrift-is-chic mantra has even permeated popular culture, with "grunge" bands making a big comeback and D-I-Y shows earning top prime-time ratings. Versace has even premiered a new homeless-inspired fashion line dubbed Derelicte.

"Clearly, anyone not getting with the program and scaling back is missing the boat," says Rolling Stones trend-spotter Shane Browner. "Setting the thermostat to 50F is cool --I mean really cool!"

#housing

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1   surfer-x   2005 Dec 21, 5:56am  

http://tinyurl.com/avnp4

Man I love the Maple leaf Nation. Always on the cutting edge.

2   San Francisco RENTER   2005 Dec 21, 6:42am  

Although it is true that the masses soured on whatever asset class happenned to crash in past historical bubbles, I doubt that will be entirely the same this time around. I do think that housing is a unique class of financial asset, because you can live it, and so the primary residence in particular is not much of a speculative vehicle. What I think will change a lot post-bubble (for the short term only of course) is people's attitude toward huge mortgage debt and creative financing. They will realize just how risky this kind of thing is, and real estate values will normalize as the majority is unwilling to take on massive debt to get in. Then the stupid cows will forget and all pile into the next asset bubble in gold or whatever. And so the broken record turns...

3   Peter P   2005 Dec 21, 7:54am  

Want to fight inflation? Buy a house.

Not necessarily.

Want to fight inflation? Borrow money to buy an appreciating asset.

4   Peter P   2005 Dec 21, 7:56am  

Is it ok to wait out the bubble and rent, even though i’m over 30 years old?

Yes. Why not?

What do you think if I move back in with my parents to save money for a down payment?

If you, your spouse, and your parents are fine with it, why not?

Anybody else in this situation or think about this?

Anyone? (I am only 29.)

5   ric   2005 Dec 21, 7:56am  

Lulu, it is as ok as saying in 2000 "I don't think I'll buy this pets.com stock everyone's raving about".

Moving back in with your 'rents is a personal decision that depends on how you look at it, not others. Personally, as much as I love mine, I would never move back in with them.

6   KurtS   2005 Dec 21, 7:58am  

who always finds a way to disagree with me, YET STILL remains gracious and polite, and always makes ME feel stupid for being so obnoxious in my tone when I didnt have to be– is the only one who remained civil, and interestingly enough, is the only one whos points made the most to me,

Jack-
Thanks...I appreciate hearing that I struck a balance. While I may be rather skeptical towards the current real estate situation, I also need to turn that skepticism inward to my own arguments. What do I know anyways? Otherwise, I run the risk of being just another guy with "needs-based" expectations, venting ad infinitum online. However, I don't lump you in that category. Your comments strike me more as good arguments for the reasons California has drawn creative, artistic, and visionary types to our shores for decades. Certainly, the "get rich" crowd has been here since the gold rush, and that myth has continued into this present age. I just hope California has not become too popular from the myth, that the reality of living here becomes less inviting to those creative types who make this state interesting. As Jamie pointed out, other areas of the US can easily out do here if economic factors become far more favorable.

Whatever the future brings, let's just say we'll all be there together.

7   Peter P   2005 Dec 21, 8:54am  

If inflation is the next scare, do you think it pays to setup a leveraged inflation fund that aims to out-run inflation 2x to 3x using derivatives?

8   ric   2005 Dec 21, 9:07am  

SQT...

update on my brother that moved to SAC... In the last two weeks I kept sending him craigslist rental ads for 1,400-1,600/mo for brand new or never lived in houses that were listed for sale or for which domania showed them as being sold in the last year or so for 600K plus. There are TONS of them in SAC. I must have sent him more than 20 with just a few hours of research on line. He also drove around a bit and said every other house for sale has PRICE REDUCED on it, and that what I sent him is just the tip of the iceberg based on what he saw out there. He can do math, so he found himself a nice fully furnished 3 bedroom SFH rental 5 minutes from work for 1,250/mo.

He's makes plenty, so he's gonna wait it out, live like he makes half of what he does, bank as much as he can, and reconsider in the summertime.

Thanks again for your advice on neighborhoods. It helped. See, all these months of reading this blog paid off. :)

Thanks to all.
RIC

9   San Francisco RENTER   2005 Dec 21, 10:18am  

Speaking of pinching pennies, my land-lady just told me I could take FIVE DOLLARS off the rent this month and have a Merry Christmas! FIVE DOLLARS! Down to the pub I go to get ONE BEER with my FIVE DOLLARS!

10   ScottJ   2005 Dec 21, 10:20am  

Hey,

Just a note. It isn't just Ric that all of you regular posters have disuaded re: buying property right now. I have put my plans on hold and so have some others who I pointed to this site. Lurkers like me just learn from reading and being made more aware. I was already scared of the housing bubble, but this site totally took me off the fence. So thanks to all of you, I am watching SF bay area home prices decline. And I feel like I made the right decision since they are declining faster than interest rates are rising.

Now how does that feel for power/influence?! =)

Scott J.

11   Allah   2005 Dec 21, 10:36am  

Want to fight inflation? Buy a house.

Better to just burn all your money........either way it will be gone, but if you burn it, at least you won't owe anything.

12   San Francisco RENTER   2005 Dec 21, 11:18am  

Real Estate IS an inflation hedge, but it's not going to help you if it's over-valued. Stocks are an inflation hedge too. Rationale being companies are able to increase prices in an inflationary environment which increases earnings which (should) increase stock price. Anyway, you shouldn't buy over-valued stocks just like you shouldn't buy over-valued property.

13   DeoVindice   2005 Dec 21, 11:52am  

Buy Gold. It is a great inflation hedge and the next speculative bubble. Also energy. Check out Fording Canadian Coal for its 16% dividend and CDN dollar exposure. It would be a great thing to put in a non-taxable account (IRA).

14   Allah   2005 Dec 21, 11:54am  

OK allah, I will sell my house, and THEN burn all the money. Then I will have attained nirvana, allah style. Was that an argument allah? or are you just glad to see me?

Jack.....What you said was ridiculous. What I mean is that it's better to burn your money, then to put it down on a $200K house with a mortgage of $600k. To put it another way, i'd rather be flat broke then be broke and upside down on an overpriced starter house....but some how I think you were smart enough to figure that out. ;)

15   Michael Holliday   2005 Dec 21, 12:22pm  

Ha, ha!

Hilarious topic...

16   San Francisco RENTER   2005 Dec 21, 12:23pm  

"Also buy energy."

I agree Deo, I've been buying up all the oil I can afford since the energy companies share prices have come post Katrina/Rita. I like Chevron (CVX) for domestic oil, and ENI (E) out of Italy.

17   San Francisco RENTER   2005 Dec 21, 12:26pm  

Above, I was attempting to type "since the energy companies' share prices have come DOWN post Katrina/Rita."

18   San Francisco RENTER   2005 Dec 21, 12:35pm  

"Is it ok to wait out the bubble and rent, even though i’m over 30 years old?" -Lulu

Not only is it okay, it's actually the smart and fiscally responsible thing to do. It may just FEEL scary to you because you're not following the crowd and jumping on the bandwagon. And there's the whole culturally ingrained thing about "the landed elite" and all that, so you might feel like you're being "left behind" if you're "still" renting. If you read anything by the great investors--Warren Buffett, Peter Lynch, Marty Whitman, Burton Malkiel, etc., they all stress the importance of NOT following the herd. It takes courage and confidence to stand apart and on your own two feet, but once you've missed the bus on the "it" asset class, that bus is gone, and there will be value in other asset classes that the herd has neglected in their frenzy to get in on "the really big show."

However, all that being said, you better be disciplined and be saving a good deal of money that you would otherwise be spending on paying down the mortgage. And you need to know what to do with that money. Put it in an online FDIC insured money market account like ING Direct or Emigrant Direct to start with, and mebbe hire an advisor if you know nothing of investing.

19   DeoVindice   2005 Dec 21, 12:41pm  

How do you feel about Uranium? CCJ? How do you feel about the services companies? Ever invest on the Toronto exchange? There are a lot of small companies out of Calgary; A buddy of mine is the CEO of a driller out of Calgary, and I plan to invest with him in Jan. CVX has a good dividend yield and a good PE too. Have you looked at PGH? 11% yield. I have CDs coming due in Jan, so I'm doing my homework now. Right now, I'm mostly cash. The S&P at these valuations looks like a sure way to lose money. I'll check out ENI. Thanks for the tip.

20   Michael Holliday   2005 Dec 21, 12:42pm  

Hey Seenthisb4, your topic was not funny, it was good.

I just read your interesting post and look forward to reading more. Thanks for coming.

What I meant was that the satirical thread topic was funny.

No offense meant.

21   Peter P   2005 Dec 21, 12:42pm  

Buy Gold. It is a great inflation hedge and the next speculative bubble. Also energy. Check out Fording Canadian Coal for its 16% dividend and CDN dollar exposure. It would be a great thing to put in a non-taxable account (IRA).

How about gold futures? Carrying cost is less than 5% per year, less than mortgage rate. This may be a good way to leverage. :)

NOT INVESTMENT ADVICE

22   DeoVindice   2005 Dec 21, 12:50pm  

ENI has a great yield! Have you checked out NHY? They have a great Aluminum business as part of the deal. How about Fording Canadian Coal (FDG)? Thanks for your input.

23   DeoVindice   2005 Dec 21, 12:59pm  

I own IAU and a mutual fund that is weighted towards the seniors. A lot of talk about them buying up the juniors. That may also be a great way to get leverage as well. Most mines have a recovery cost between $250 and $400, so if gold gets moving, the stocks will really see rapid earnings growth. I've never ventured into futures.

SF Renter, I don't know if you read any of my lengthy rants, but I'll repeat one fact. I read recently in "Beating the street" by Peter Lynch that he was buying stocks when PEs were 5, 6, 7, 8. People get rich buying stocks when they're cheap, not over valued.

24   San Francisco RENTER   2005 Dec 21, 1:35pm  

I had never heard of NHY, but I just went and checked them out at your suggestion and they're definitely on my watch list now. Like the dividend, like the valuation, like the margins, like the balance sheet--assets goin' up, liabilities goin' down! They're even paying down debt. Me likey.

25   Peter P   2005 Dec 21, 3:11pm  

So $200,000 is the lowest possible price for this kind of home? Not really - nothing stops a desperate owner selling below construction cost - right?

In a severe downturn, prices can fall below replacement costs. However, this is unlikely for regular homes in places with higher land value. ("Luxury" McMansions in Fresno? Maybe.)

26   DeoVindice   2005 Dec 22, 12:48am  

John Mauldin had a great newsletter about the "Rationality" of investors. He quoted these two characters who recently got a nobel prize in economics for their work in "Behavioral finance". In a nutshell, these guys said that investors are irrational, but predictably irrational. In other words, people never learn. They make the same mistakes over and over again. Just as the sent prices too high, they will send them too low. Fundamental analysis is great to figure out where that point is. Warren Buffet and Ben Graham had it right: Buy with a margin of safety. I plan to begin looking at real estate when the fundamentals work, and I am confident that they will. I'm not going to buy until I can STEAL the property. I'm also interested in the buy-renovate-flip method to riches. I did it once (by accident) and I have a friend who has a great methodolgy. The chumps with suicide loans (who I refuse to compete with) have given flipping a bad name. It's just like day trading. Everyone is a genius and gets rewarded for taking enormous risk, until the music stops. Once the bottom is in, there will be oppty for savvy investors who know value when they see it and bring a property to a higher and better use.

For the meantime, fundamental analysis tells me not to compete against the flood of mis-allocated baby boomer money in the S&P, NASDAQ, and DOW. Until I see dow 6000, I want stocks with low PEs, high dividends, and the ability to perform in a sinking economy. Call me old fashion. Thanks for the analysis above.

BTW, Its not going to be a crash, it's going to be a reckoning.

27   DinOR   2005 Dec 22, 1:01am  

Deo,

I'm not looking to go toe to toe with anyone on the whole 401K/Herd Mentality issue. I just felt things had gotten more than little ridiculous with blue collar and middle management types obssesing about their 401K selections and having to drag people out of their cubicles to attend a meeting. Tell them I'll be there in a minute! I just want to see if my Stop Loss Order gets filled! Clearly this was not the intent of offering employees a retirement plan.

If we look at the sentiment on Capitol Hill we can reasonably conclude that in the near future we will all be responsible for our own "benefits package". That's why I've always advocated people contribute to their own accounts (IRA or taxable) in addition to participating in the "Company Plan". I'm not a spokesman for the Mutual Fund Industry but if we were to take you at your word than no one should save for retirement because they won't let you daytrade in the "Plan". Bad idea. If you're not a fan of Mutuals, great just keep it in cash. But while we're in the workforce it does reduce pre-tax income and when we ultimately leave (or are forced out) at least we'll walk away with something, (vesting schedule not withstanding).

Many of the investment vehicles you talk about simply aren't allowed in retirement accounts, period. Company sponsored or otherwise. Even if you took your rollover to E-Trade you can't margin it. Covering a call would constitute an excess contribution. Can't short either, downside can be unlimited. I'm not unaware of the alternatives you discuss it's just that there is a reason they're not allowed in retirement accounts. Back to the crash!

28   Peter P   2005 Dec 22, 3:04am  

BTW, Its not going to be a crash, it’s going to be a reckoning.

I love that term.

Bay Are Housing Crash Continues. A *reckoning* expected soon. :)

I am always against the idea of retirement accounts. I think the government should cancel such programs AND cancel capital gain taxes and dividend tax altogether.

29   Peter P   2005 Dec 22, 3:19am  

John Mauldin had a great newsletter about the “Rationality” of investors. He quoted these two characters who recently got a nobel prize in economics for their work in “Behavioral finance”.

I am very happy that behavioral finance is being recognized by the Nobel committee.

I love the market efficiency theory though. It should be taught at every university to every finance or engineering student. It should be as the universal truth with no possibility of fault.

The market will be a much better place for traders if smarter, "more informed" people believe in the market efficiency and refrain from entering. :)

30   Peter P   2005 Dec 22, 4:00am  

Market efficiency is simple tautology. Outside of market how could you price anything?

Of course. :)

By assuming market is efficient it makes you aware of what brings you your gain and therefore better manage exposure.

I agree.

31   San Francisco RENTER   2005 Dec 22, 4:01am  

H.Z. -- the market can only be efficient IF there are a large number of participants actively attempting to find arbitrage opportunities and execute them. Then by the acts of these players engaging in said trading activity, supply/demand shifts to a new (efficient) equilibrium point.

So in my mind it is kind of funny when people have a fanatical devotion to the strong form of the efficient markets hypothesis--they say, "don't even bother to do any active investing, just go passive and index only." See, if EVERYONE decided to go passive, then the market could no longer be reasonably efficient, because no one would be actively seeking arbitrage opportunities and shifting the market to efficiency!

I have also done a lot of research on asset bubbles in general because I wrote a thesis on them, and I tend to believe that the very fact that asset bubbles continue to form so prevalently in markets (see: current RE bubble) kind of disproves the strong form of the efficent markets theory as well.

So I guess I fall into the weak form of the efficient markets school of thought.

32   San Francisco RENTER   2005 Dec 22, 4:03am  

P.S.--Clarification: I'm not saying that everyone should do their own active investing--just that active investing is necessary to CREATE a reasonably efficient market.

33   Peter P   2005 Dec 22, 4:04am  

So in my mind it is kind of funny when people have a fanatical devotion to the strong form of the efficient markets hypothesis–they say, “don’t even bother to do any active investing, just go passive and index only.” See, if EVERYONE decided to go passive, then the market could no longer be reasonably efficient, because no one would be actively seeking arbitrage opportunities and shifting the market to efficiency!

So market efficiency is a paradox.

34   Peter P   2005 Dec 22, 4:07am  

P.S.–Clarification: I’m not saying that everyone should do their own active investing–just that active investing is necessary to CREATE a reasonably efficient market.

This is why market efficiency is being taught to university students and day-trading seminars are being helding for the under-educated.

The market needs a constant supply of new losers. It needs people who have no clue of what they are doing. It needs analytical people to stay out or it will be too efficient. It is a conspiracy in a zero sum game. :)

35   Peter P   2005 Dec 22, 4:08am  

I’m not saying that everyone should do their own active investing–just that active investing is necessary to CREATE a reasonably efficient market.

BTW, you are exactly correct. Right on!

36   San Francisco RENTER   2005 Dec 22, 4:32am  

"still most average joe are better served just sticking with indexing because they don’t know how to discover price abnormality."

I do agree.

37   Peter P   2005 Dec 22, 4:39am  

still most average joe are better served just sticking with indexing because they don’t know how to discover price abnormality.

Prices are always abnormal because of human emotion.

38   San Francisco RENTER   2005 Dec 22, 6:33am  

Hey Peter P, I just read an editorial over lunch that exactly validates what you said before:

"The market needs a constant supply of new losers. It needs people who have no clue of what they are doing. It needs analytical people to stay out or it will be too efficient. It is a conspiracy in a zero sum game."

Check this out, it's written by a shark professional trader who's just begging for some chum to be thrown in the water:

http://www.financialsense.com/editorials/odonnell/2005/1220.html

And here's the kicker for those who don't have time to read that: guess where the author thinks all the "amaeturs lemming gamblers" went? You guessed it: real estate.

39   San Francisco RENTER   2005 Dec 22, 7:02am  

Those Goddamn stupid boomers. If they destroy the stock market as well when this whole house of cards built on debt that is our economy goes down, I'm gonna be wicked hella pissed off.

40   KurtS   2005 Dec 22, 8:17am  

it held the promise of being the Boomers Salvation at a time when they needed to hear it the most

Personally, I see this as more symptomatic of American culture than specifically "Boomers". Far too many people have adopted such a careless attitude towards spending and finances, that no long-term financial plan can possibly cover their ass. Conservative fiscal policy is for losers, because it doesn't feed their short-term impulse to fill their homes with more distracting, but pleasantly affirming, crap. Therefore, "investments" need to be impulsive and dare I say: ludicrous: worthless dot-com stocks, Kinkade painting, beanie babies: seemingly inane kitch that fuels fads. Perhaps even real estate fits that bill, if you flip it fast enough; fuel that impulse baby!

Now, I've got to wonder: when credit-fueled spending comes crashing to the ground, what will be left to our economy--and what new business opportunities will there be? Unless you believe we're going to continue offshoring everything, while purchasing cheap goods on borrowed dollars, certainly there's some potential in the US that could be realized....

Just goes to prove I can sound angry on this blog as well---but hopefully to a point! :)

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