patrick.net

My response (copied from last thread):

The Bubble-myopia has induced a pollyanna-ish inability to connect reason to what they see around them. But this is the way it has always been during every asset bubble, from the Dutch Tulip Bubble, to the South Sea Bubble, to Dot.com to now. Speculative euphoria takes hold of the collective psyche in a way that mystifies non-believers.

For some good in depth analysis, I recommend “Devil Take the Hindmost: A History of Financial Speculation”, “A Short History of Financial Euphoria” and Shiller’s “Irrational Exuberance”.

Is there a sort of mental illness (in that people can’t recognize reality) that goes along with real estate transactions in California?

It is not a mental illness, it is a tendency for people to become sheople and then finally sheeple.

Human behavior pretty much stays the same through periods of greed and fear, hope and despair. It should be readily exploitable.

1) Nearly everyone always thinks in nominal terms, not real terms. This is why the "at worst, prices will level" argument is hazardous. If prices go flat (they already have in most BA markets), they are actually dropping due to inflation.

2) People don't understand inflation at a "common sense" level. They often think they're getting ahead or gaining when they are losing.

3) People don't understand finance. Be honest, most people don't even understand how a basic mortgage amortization works (or a simple-interest car loan), let alone an exotic financing instrument. They can't calculate their own exposure to risk, or total cost of ownership.

4) People don't understand cash flows and how taxes and deductions impact them. Most people don't even know the difference between how a credit and a deduction affects them, let alone the complex calculation of how future cash flows will affect their cost of ownership burden.

5) People don't understand that RE does not appreciate any faster than roughly Inflation + Population Growth (adjusted) + about 1%. Even if you disaggregate for "prime" areas like SF, RE should not appreciate over the long term faster than at most 1-1.5% over inflation.

6) People don't undestand that their home equity is only "equity" in a personal financial, stylized manner. (Do most people even know what equity is?) Home equity is merely a personal savings vehicle; it does not create any capital, like owning a [successful] business does. All home equity eventually converts to either personal savings or personal consumption, not investment (unless it ends up as invested capital in a business). Note, I am excluding speculators and investment properties; these are businesses, not homes.

For these reasons, among others, people fall prey to the arguments SFWoman enumerated. In fact, this why car salesmen ask "what do you want to pay per month?". It works.

Once labeled a “bear” it’s like everyone you work with, for, are related to or even have the slightest dealings with, are just taunting you into some kind of “discussion”.

I do want to become a professional perma-bear some day. :)

"I had to speak with a discount broker today on behalf of a client and with their recent merger things were a mess." --DinOr

Are you talking about TD/Ameritrade? Because that merger is a mess too I can assure you!

You mean you aren’t already?

I am not a professional yet. :)

All good Randy.

Randy is our resident economist. Without him, people will have to live with my propaganda. :)

About the only bit of arbitrage worth considering involves the growing gap in the high-flying markets between renting and buying. It makes no sense, as is the case in many cities, to buy a condominium for $500,000 when a similar flat can be rented for $1,800. Why the gap between rental values and mortgage payments? Thank compassionate conservatism. Rents, just like mortgage payments, are driven by salaries.

This makes no sense at all. The article states correctly that renters as a group earn less than owners as a group. However, the income relationship between owners and renters in comparable housing units is never established.

The article is a navie application of classical economics without any consideration in behavorial finance. No mention of reflexivity and credit cycles. No mention of anticipations and expectations. Just a massage of data to give a wrong message.

The only possible justification for higher mortgage vs. rent is appreciation extectations. A soft landing would kill just that expectation and should remove the ownership premium, making a soft landing itself impossible.

You will say that people are irrational. Very true. Watch out when they are fearful.

The article states correctly that renters as a group earn less than owners as a group.

Traditionally, this is because owners reside in SFHs that are not usually available for lease, renters live in cheaper multi-family units.

Nowadays, more condos are for sale and more investor-purchased SFHs are for lease, creating "grey areas" in which owners and renters co-exist "peacefully".

SFRenter,

Yeah buddy! You hit the nail on the head. It's like, Dude, where's my account? In fact never mind being able to identify the acct. they can't find the entire Inst. Svcs. Dept. I can't get too upset since I've been one of the guys hollering the loudest for the discounters to consolidate (be careful what you wish for). I'm not too concerned, in the end how can any marketplace that's operating on 1/2 the volume we had in the 90's continue to support that many players. They'll figure it out. Always do.

Peter P,

By professional do you mean you've never lost any money other than your own? Need a mentor?

By professional do you mean you’ve never lost any money other than your own?

I guess that is one way to look at it.

Need a mentor?

Always. :)

How fucking long can we beat a dead horse? Bay Area roads are not paved with gold bricks, the bay area does not have a disproportioned amount of daddy warbucks types. Yes, there are quite a few people here making bank, but I am sure there are quite a few people in Detroit making bank also. Furthermore, could the super-savvy-finacial geniuses explain how the Scrooge McDucks of the Bay Area justify a shitbox in E. San Hosebag being 750K? Oh I see, that's right, if you make 250k a year you WANT to live in E. San Hosebag.

Peter P - “rent for $1800 instead of buy for $500K” is your message and there is no problem with that.

You do not see a problem? That is a P/E of 23. In reality, many 600K condos are being rented for $1800, a P/E of nearly 28.

I did not understand most of your other points

What points? Reflexivity? Are you familar with George Soros or Karl Popper?

You do not see a problem? That is a P/E of 23. In reality, many 600K condos are being rented for $1800, a P/E of nearly 28.

Sorry, I might have misunderstood you. Do you see the high-ish P/E a problem or not? :)

About the Berstein work "Why You Can�t Afford a House in San Francisco"

I agree that most of this work is pretty sound. Even the methods aren't all that objectionable. This is a similar line of reasoning proposed by the Columbia/Wharton study we discussed yesterday.

My criticisms are:

1) As Peter P. pointed out, the rent-housing data is distorted through averaging. Rent-to-income ratios are strata, not any type of meaningful continuum. This would become more pronounced during periods of rapid RE asset inflation, as many higher income families opt to rent for fancial-prudence reasons. Aggregations average away very useful information.

2) This is a simple point: his own data proves that you were better off renting during the period of his study, and alternatively buying an S&P index. And not by a small measure; you were better by a very significant amount *not* buying RE.

He waves this away by saying we cannot expect equities to perform similarly in the future. I'd like to know how the hell he *knows* this. Here, all this time, I thought that such predictions required a crystal ball and a tarot deck.

***A simple rule of thumb: Economists who make specific predictions are actually fools in disguise. If he knows something like this about the S&P, then quit writing a friggin blog and go become the next Warren Buffet (or George Soros).

What sheeple are thinking and doing?

I talked to an engineer sheeple at an opening in Irvine, CA. He was buying a condo for his son. He said his father did this same wonderful transaction for him and he was doing it.

He waves this away by saying we cannot expect equities to perform similarly in the future. I’d like to know how the hell he *knows* this. Here, all this time, I thought that such predictions required a crystal ball and a tarot deck.

Let me guess... because stock market crashes, yet housing market *never* goes down because they are not making any more land. :)

If Patrick Kaliea’s 13 pillars have become the prevailing wisdom so be it.
Let’s do a rain dance for the fear you refer to - I am all for it.

We do not want the mass (sheeple) to agree with us.

Instead of rain dance, can we do sushi? :)

What I don’t get is why the working class “good ol boys in the middle of the country” like Bush, when those are the people that Bush does the most to disenfranchise?

I don't venture into politics here. But I understand the "why" of above. It's very apparent if you grew up in southwest rural Ohio like I did.

For the record, I vote neither (R) nor (D). (I even voted for the Natural Law party one year I was so disgusted.) The demorepublocrats can all burn, for all I care.

Peter P,

If there's a way to "botch" a trade I've done it. Entered Sell, when it should have been a Buy and vice versa, wrong CUSIP #'s, wrong account even! Stop Loss Order expired, it goes on and on. I've had people "back out" of trades and had to pay the difference myself. It's part of the biz and the only guys I know that never dropped the ball worked in admin. What particular facet of fin./tech did you want to focus on? Have you considered maybe the "Trust Dept." at one of the banks? Seems they are always looking for good people or is that just too regimented? A direction you'd prefer not take? They're always doing something different, what with all the Inst. Accts. Trusts and endowments. It's not like the "bond desk" where someone taps you on the shoulder and says it's O.K for you to go home now and all you know is bonds!

DinOR, thanks for the information. I am still looking into various fields of the industry. :)

BTW, what do you mean by "It’s not like the “bond desk” where someone taps you on the shoulder and says it’s O.K for you to go home now and all you know is bonds!"

Dear all,
People get very upset when i ask them about why real estate is stalling. In my work place i am the only renter and all others own a house, in fact some own 2-6 houses. But they dont want to see the writing on the wall.
Actually one should avoid discussing homeownership just like one avoids talking about politics at the workplace. People take this drama of housing bubble too seriously.

Any advice on other semi-liquid options for a BR like me who is just socking money away for a downpayment on a first home?

BR = Bitter Renter? :)

You can buy 13-week T-Bill. I think the yield is around 4.5% now. Some brokerages (like Fidelity) may let you participate in treasury auctions online free of charge.

Your bank may also offer a "risk-free" (no early withdrawal penalty) CD at around 3.5% to 4%.

World Savings has a 4.76 APY 8-month internet CD. Is that too long?

It is probably easier to do a CD though, unless you already have a brokerage account that is bond-friendly.

Wouldn’t you be better off with a money market fund? Vanguard’s are at 4.11% now. Or get a tax free one at 2.88% (depending on your tax situation).

MM funds may have significant MBS exposure though. I am not suggesting that this couble be problem.

Sure I sound like a bitter renter but all I’m hoping for is a small condo that I could reasonable afford.

When I was studying there (1995) some condos were significantly below 100K.

Is bank interest subjected to state tax? If it is so, then 4.75% is only less than 4.3% after state stax at the 9.3% bracket (not difficult in California).

In states with high state tax, isn't it better to buy treasury (as opposed to CD/MM)?

Davis_renter-
Have you thought of checking with payroll to see if they will automatically send part of your pay to a savings account (either with Fidelity or some other institution)? I'm not talking about a retirement account, for use pre-retirement. This would make it easier to build up the nest egg. Say about 10% of your gross? It works well for me. Out of sight, out of mind --well, not really, you still have to work on your asset allocation, but you only do that about once a year.
I'm not a finance person. I'm sure some smarty pants (said as an endearment) on this board could direct you with more sophistication than I.

Is there a sort of mental illness (in that people can’t recognize reality) that goes along with real estate transactions in California?

Well, back to the beginning question.
I was thinking about this the other day, as I spoke with family who were reminiscing on their good fortune in real estate. Their sense of satisfaction over the current situation is palpable, an impervious barrier to any word of caution by me. I don't think it's that they can't recognize reality, but their sense of reality is totally rooted in past, as familar and favorable gains in real estate. It's as if they've painted a rosy future for themselves using colors from the past. If you suggest a more complete "palette" of data, indicators, etc. that would totally ruin their pretty little picture. So, what you're saying is I'm only a multi-millionare on paper? I'm sure many of us speaking with family/friends on this subject have encountered this mental process.

I suspect speculative bubbles linger to the bitter end because people don't want to believe anything but the brightest of futures for their investments, truth be damned. It really is a remarkable person who will open their ears to bad news when the crowd around them is cheering the brilliance of their wise moves. Obvious human nature, isn't it?

So, what you’re saying is I’m only a multi-millionare on paper?

Unless you are physically holding a ton of gold. ;)

Otherwise, in God we trust.

Housing Bubble? What bubble??? Apparently, none of you has heard of this oh-so-wonderful realtors'(tm) magic. Works every time, bubble or not!

Here's how it works: as long as you price your house ending with "888", you'll be doing okay. You'll have 888 bids, and the winner will overbid your house by at least 888%.

Don't be too greedy though. Remember, you want three 8's, no more, and no less. I'm seeing a condo in Cupertino listed at $488,888. It's been listed for 88 days, still no sale. I guess it's because they're overdoing it.

Don’t be too greedy though. Remember, you want three 8’s, no more, and no less. I’m seeing a condo in Cupertino listed at $488,888. It’s been listed for 88 days, still no sale. I guess it’s because they’re overdoing it.

LOL :lol: 888

Perhaps I should offer 444,444, but hat would still be overpriced. What should I do?

Perhaps I should offer 444,444, but hat would still be overpriced. What should I do?

Oh no, you don't! There are people who'd rather buy at 666,666 than 444,444. My realtor(tm) told me so.

Is there a sort of mental illness (in that people can’t recognize reality) that goes along with real estate transactions in California?

Well, no. It's just that human beings are apparently having little brain orgasms when they are ignoring the facts.

Some people have all the fun. :-(

http://www.sciencedaily.com/releases/2006/01/060131092225.htm

The investigators hypothesize that emotionally biased reasoning leads to the "stamping in" or reinforcement of a defensive belief, associating the participant's "revisionist" account of the data with positive emotion or relief and elimination of distress. "The result is that partisan beliefs are calcified, and the person can learn very little from new data," Westen says.

The study has potentially wide implications, from politics to business, and demonstrates that emotional bias can play a strong role in decision-making, Westen says. "Everyone from executives and judges to scientists and politicians may reason to emotionally biased judgments when they have a vested interest in how to interpret 'the facts,' " Westen says.

New thread: Vallco, Condotino