patrick.net

Some real estate bears will show non-logarithmic charts and then use that as evidence as to real estate’s unrealistic growth over the last 5 years.

The past 5 years of RE asset inflation are out of line even assuming geometric growth. Further, RE is subject to exponential decay every bit as much as exponential growth. Expect the correction to be just as astounding as the run-up.

@NO_BUBBLE_AFTER_ALL

I look all time, house only go up, then me watch Tarzan movie, like movie, tantor unk, me think like you huse only goes up. I buys now, you shoulds buys now also, bees sure to buys lots of spoons so you can eat my fucking ass.

Dick.

This Jack is not The Jack.

I did respond before reading his previous articles though; it seems his point is that the economy grew at 1% a couple hundred years ago, though I do wonder how that was measured?

Historical Finance is a big academic field. They use historical records and archeological techniques to estimate things like the GDP of Ancient Rome. It's a quite serious field of study, if a bit entertaining.

Looks like one of my favorite commentators has something to say on our little blog topic:

Contrarian Chronicles - Bernanke is no inflation fighter
The new Fed boss is most scared about deflation, not inflation. And when the markets figure that out, precious metals prices will scream.

By Bill Fleckenstein

H.Z. Says:

"And if one is not convinced of risk subsidy on home loans, just look at the rates that builders have to pay. Now what makes home builders so much more risky than home owners? Esp. if one takes into account of the proportion of the value that is the land instead of the structure. "

There are two reasons that construction loans are a lot more risky than typical home loans:

1. If the construction is not complete the lender just has land and a pile of wood to sell after they forclose (with a typical home loan they just evict the former owners in forclosure and have a complete home to sell).

2. The other reason is that with a construction loan the developer will not usually have the cash flow to service the debt after the construction loan debt service reserve runs out (while with a typical home loan an owner should be able to service the debt until maturity as long as they keep working).

The new Fed boss is most scared about deflation, not inflation. And when the markets figure that out, precious metals prices will scream.

Alternative theory: Ben was giving the "helicopter speech" just to get attention, in a period of deflation scare. People, especially public figures, are rarely what they appear to be.

Heli Ben is first and foremost a boomer, this means all his actions will be delivered with arrogance, the desire to get high and have sex, and having little or no culpability. He will bankrupt the country while enriching his cronies, every single one of his actions will be delivered with outright lies and data manipulation. His only desire is to make himself and the other boomer hogs on wall st. rich. Watch out, boomer in charge, turn up the Zep and lube up. Remember everything they do is better than you, every action is for them not you and everything they say is for the most part lies.

DinOr,

You made some interesting comments about institutional investors. I know many institutional investors and venture capitalists. I have had their money before, but I have no interest in that anymore.

You mentioned selling. There are times when selling is easy and times when it is difficult. In the last few years it was very easy to sell. Buyers were falling over each other to outbid each other. You are correct to observe that when the music stops it will be very difficult for me to sell - at least at a favorable price.

However, why would I want to sell during the down part of the cycle? That would be foolish. I buy during the lower points in the cycle. If I choose to sell, I will not do it when the market is weak - I would sell at the top. But selling is not in my plans. I have been accumulating these income producing assets for nearly 30 years. I intend to retire and live off the net income. To some extent I see rental properties as the ultimate inflation-indexed bond. Not only does the income grow with inflation, but the principal grows as well.

Of course, the cycle is important. Although selling is not a basic part of my strategy, I did sell some property at the peak in 1989 – but only because I was so convinced that the 1990s were going to be a bloodbath. I do expect prices to decline in the next few years, and I will wait for the bottom before buying again. If you don’t have to buy now you shouldn’t.

Not only does the income grow with inflation, but the principal grows as well.

Isn't this true even for TIPS? On the other hand, I do see that the principle growth for RE is tax-deferred.

Of course, the cycle is important. Although selling is not a basic part of my strategy, I did sell some property at the peak in 1989 – but only because I was so convinced that the 1990s were going to be a bloodbath. I do expect prices to decline in the next few years, and I will wait for the bottom before buying again. If you don’t have to buy now you shouldn’t.

But are you more convinced in 1989 than now?

Randy H,

You seem to be very focused on theory, and you make a lot of interesting points. I applaud your studiousness and awareness of theory. And I find your comments to be interesting, even on the points where we disagree.

You seem to be saying that those theories suggest that RE essentially cannot be a good investment. You mention zero sustainable growth. The problem with these theory-based assertions is that reality contradicts them. Theory is a great place to start. However, at some point the textbooks just don’t explain it all, and empirical data needs to be evaluated. The limitations of the condition-setting assumptions must also be understood. The real world rarely matches those assumptions in full. It often requires hands-on experience to see how it really works in the real world. I am sure you found this to be the case when you ran your software company. BTW, what ultimately happened with that company?

Trying to explain reality away with theories is not a good formula for success (unless you are a college professor, in which case reality might not interest you). I think it is more productive to start with reality and find the theory that fits. As I have aged I have become increasingly pragmatic. I no longer worry much about what reality should be (as I once did). Instead, I focus my energy on understanding what actually does exist, does happen or is likely to happen. Utopia is fun to contemplate, but it doesn’t really exist.

You seem to be very focused on theory, and you make a lot of interesting points. I applaud your studiousness and awareness of theory. And I find your comments to be interesting, even on the points where we disagree.

Zephyr, at least Randy agrees that the market is not completely efficient. :)

You seem to be saying that those theories suggest that RE essentially cannot be a good investment.

It really depends on the definition of RE as an investment. Is plain villa homeownership a form of investment? Is land development a type of RE investment? How about building? In each case, what is creating value? Is the particular value creation exactly RE investment, or is it just related?

I was more convinced of the danger then. The damage was already bad long before the peak last time. We had savings banks, builders and developers in bankruptcy several years before the peak last time. Their were so many bankrupt Savings and Loans that the S&L insurance corporation was insolvent well before the cycle peak.

As exuberant as the buyers have been, that level of pain has not happened yet. And I believe we are past the price peak, and already in corrective decline. No signs of systemic financial collapse. No Resolution Trust Corp. needed this time.

No signs of systemic financial collapse. No Resolution Trust Corp. needed this time.

Let's hope so.

But prices will fall significantly where the markets have been the hottest. Many novice investors will bleed their way into default. But this will take a few years because each of them have differing levels of resources and differing degrees to which they are overextended.

Those who can hold out the longest will sell at the lowest price (at or after the bottom). I will buy from them - the last to fold.

Zephyr,

I ultimately sold my business to SBC, retained the valuable software IP to preserve royalty revenue, and decided to go back to school for a while to figure out why I kept getting screwed by VCs, IBs and such. (I sold when the "nuclear winter" of telecom was just starting). I managed to get myself into a top B-School; thus my theoretical bias. What I came away with is that theory doesn't explain reality, but it's very tough to bet against it and win consistently.

Like you said, it's all in the market timing. And market timing is ultimately an intuitive endeavor. This is my argument against the notion that "common folks" should be following such a strategy. Timing any market is hazardous and difficult even for those steeped in theory and experience, let alone the workaday man.

btw, I've since started two more companies. I'm convinced, like you, that onwership of FCFs is the only way to accumulate wealth over time. I just don't have that "gut feel" to trust my ability to succeed in RE, being that I respect RE is a tough game.

Jewel Diamond,

Who are the "real culprits" to which you allude? Are you talking about the Federal Reserve system? Are you talking conspiracy theory? Maybe Alex Spanos? Warren Buffet? I'd really like to know.

Zephyr,

Thanks for sharing your comments on frugality. One of my favorite subjects.

I have to admit that I enjoy almost anybody's rants on any subject.

Wow in the last week, s.san jose inventory shot up 40% (to 680) and, after a holiday season dip, has now surpassed the Fall peak level (654), which occurred November 3. Seems to me we're just getting started, too.

Oh, yeah, inflation & deflation suck, too.

Does the "new economy" create cheaper prices and inflation? Again, this is a totally localized matter. Once again, I was amazed at just how cheap it gets as soon as you leave the immediate Bay Area. Me and my wife took a trip to Red Bluff, CA. It is about 2 hours outside of SF. Not much there- just old victorian houses, farms, and a main street. The area is completely non-yuppified, meaning the barber shop is still a barber shop. The diner sells eggs and bacon on plastic plates, and the coffee shop is joined to a gas station.
In every aspect, the area was perhaps more than twice as cheap as anything in the bay. Decent homes were up for sale in the 200k range. I went to the local Tractor Supply Company store and bought an entire set of wrenches, a set of drill bits, and a torque wrench. They were $3, $2.65, and $3.89 respectivly. Yes, they were all Chinese made tools, but so are the same tools at the local hardware store near my house in Alameda that sell for $25, and the homes for 800k. As you can see, location, location, location.
I know that is a really blatent cliche', but no matter how you cut it, where you live has everything to do with how you percieve your neighbors, and your own wealth.If everyone drives Audis and BMWs, then your Camry is going to look shabby and you will feel poor. If you live somewhere that has a population that primarily drives Ford trucks, as they do in Red Bluff, then you'll feel diffrently. Wealth,inflation, and percieved wealth are all tied to localized areas, and since the Bay area is a red hot spot for wealth, then naturally, you might feel very poor indeed. Change the scene and that changes really quick.
Coming back from Red Bluff made me realize that everyone in the Bay has been taken for a long ride, and there is tremendous pressure to keep up with the Joneses next door, an imaginary couple that nobody can get to.The sad part is that the level of comfort most bay Area residents seek are what most in the rest of the country consider the bare minumum and take it for granted. It is so fake here. Maybe people aught to take a road trip and see what about 98% of the country is like.

Surfer-X politically correct? Am I still in the twilight blog?

I was wondering about that too. A well placed "Huh?" might have been in order. :-)

I guess what Jewel Diamond (btw, props to your brother, Neil) was trying to say (satirically) is that anti-Boomerism is so prevalent that it's becoming the "new PC". I don't completely agree with that point if view --IMO, the MSM will continue to kiss wealthy Boomer ass until the last one keels over-- but I think that's what she was trying to say.

nomadtoons2 Says:

> Me and my wife took a trip to Red Bluff, CA. It is about 2 hours
> outside of SF. Not much there- just old victorian houses, farms,
> and a main street.

You guys must have been really moving on the freeway to get there in 2 hours since Red Bluff is almost 200 miles from my place in SF (it is about the same distance to Squaw Valley). It usually takes me about 4 hours to get there when I'm towing the boat to Shasta and it's tought to make it in under 3 hours (even when I had the M5 and pushed it at double the speed limit for a while)...

> The area is completely non-yuppified, meaning the barber shop
> is still a barber shop. The diner sells eggs and bacon on plastic
> plates, and the coffee shop is joined to a gas station.

If you want to get away from yuppies why stop at Red Bluff when you can find a place in Eastern OR oe WA for half the price of Red Bluff.

And market timing is ultimately an intuitive endeavor.

Very true. Technical analysis is about feeling the emotion of the market. I was very misguided, thinking that it is about number crunching, so wrong.

A well placed “Huh?” might have been in order.

HARM, Huh? does not need to be well placed. It can come whenever. Huh?

Wow in the last week, s.san jose inventory shot up 40% (to 680) and, after a holiday season dip, has now surpassed the Fall peak level (654), which occurred November 3. Seems to me we’re just getting started, too.

Finally. Spring bounce indeed.

Surfer-X:

"Heli Ben is first and foremost a boomer, this means all his actions will be delivered with arrogance, the desire to get high and have sex, and having little or no culpability."

Yes. The "Me" generation in action. They like their Coke commercials that romaticise Woodstock thirty years later, and how they "changed the world."

Buth they never take responsibility for giving everyone the middle finger, then joining the establishment and pimping it all to high heaven.

What about the excesses of the 60s which lead to where we are now: i.e. AIDS epidemic, drug epidemic, Housing Bubble epidemic, divorce epidemic, your-college-degree-ain't-worth-shit epidemic, the cartel of hippy-ass Boomers that own the academic department of most universities epidemic, etc.

"He will bankrupt the country while enriching his cronies, every single one of his actions will be delivered with outright lies and data manipulation. His only desire is to make himself and the other boomer hogs on wall st. rich."

Yup. Nice $250,000 per speech fee Alan Greenspan "earned" the other day! Must be friggen' sweet. The dust hasn't even settled from his disastrous tenure and he's pimping the situtation for all it's worth, while I scrounge for more temp jobs at $16.00 an hour and no benefits but with a Masters degree.

"Watch out, boomer in charge, turn up the Zep and lube up. Remember everything they do is better than you, every action is for them not you and everything they say is for the most part lies."

Tune, turn on, drop out & drop cid. Crank up Jimmy Hendrix and zone out. WTF, you're a Boomer that has it all. After all, you're hippy-ass generation can never will never do anything wrong.

Anything you do is cool when there aren't repercussions from your actions and zero accountability: You wanna protest Vietnam? Cool. You wanna smoke pot? Cool. You wanna screw around with 100 chicks? Cool. Smoke a joint at break at IBM as your nice pension grows fatter and you've got that sweet 1970s retirement package? Cool. Divorce? Cool. Buy a house in Silicon Valley? Cool. Go to the Middle East like Bill Clinton and Al Gore and bad mouth your country for money? Cool. Rape the middle class? Cool. Raise interest rates to 6% and put the brakes on the Nasdaq collapsing it and raping stock holders? Cool. Enron-style financial gymnastics? Cool as long as you get yours. Lower interest rates and kill the ability of Gen-Xers to afford a house in Cali? Cool. Then go give a $250,000, $25k a plate dinner? Cool.

Just keep on pimping it! Jerry Garcia did. Nice Greatful Dead wine Jerry. Nice antiestablishment Ties and line of clothes Jerry. Really cool giving it to the establishment in words but pimping the whole capitalist Greatful Dead thing to the drugged out LSD clones.

Gotta love it!

I think I need a spell checker...

@MichaelHolliday,

'X' couldn't have said it any better... *sniff*

Sorry to be so off topic, but this is appalling.

This marks the end. Do not worry for the "unwary", they should know better. Caveat Emptor.

I put quotation marks " " around X's comments.

The others are mine.

Either way, we're of the same spirit when it comes to Boomers.

Didn't mean to appear to put words in anyone's mouth.

Etc., etc., etc...

From that seminar's ad:
"You'll learn how to analyze and structure any Real Estate deal, tips and tricks when negotiating Real Estate, how to buy foreclosures, and much more!"

In other words, if our seminar won't help you get into yet untapped markets (such as the Yukon or Greenland), get ready for the lucrative field of forclosed properties!

"Ads for this untimely Real Estate booster event have been popping up on local TV in the Bay Area."

LOL, unfortunately (or not so unfortunately) I can see some of my coworkers attending that convention.

Well, snake oil is always lucrative.

Sunnyvale_Renter Says:
"...Surfer X ain’t saying ‘em, you guys are imagining them! Good stuff though!"

Sunnyvale, for the most part I like your posts.

Here's the quote. It's on this link.

surfer-x says:
February 20th, 2006 at 11:13 pm

"Heli Ben is first and foremost a boomer, this means all his actions will be delivered with arrogance, the desire to get high and have sex, and having little or no culpability. He will bankrupt the country while enriching his cronies, every single one of his actions will be delivered with outright lies and data manipulation. His only desire is to make himself and the other boomer hogs on wall st. rich. Watch out, boomer in charge, turn up the Zep and lube up. Remember everything they do is better than you, every action is for them not you and everything they say is for the most part lies."

Well, snake oil is always lucrative.

Yes, and if I didn't have any self-respect I'd broadcast my own home shopping channel, selling gold-plated, cubic zirconium encrusted tschotskies, "investment-grade" kitchen appliances, or tiny gilded statues of St. Francis, promising "financial security and unlimited real estate appreciationâ„¢".
:twisted:

Yes, and if I didn’t have any self-respect I’d broadcast my own home shopping channel, selling gold-plated, cubic zirconium encrusted tschotskies, “investment-grade” kitchen appliances, or tiny gilded statues of St. Francis, promising “financial security and unlimited real estate appreciation™”.

I can sell you pills that can remove any self-respect. ;)

Shit, Jewel, take it easy there. Is someone off her meds or something?

Don't take the 'X' rants so personally. We already covered this in a previous thread. No one here hates anyone because they were born between 19xx-19xx (well, "almost" no one ;-) ). Anti-boomer rants are more a reaction to the culture of myopic greed and Me-ism than an indictment of all memebers of a generation. Yes there are plenty of selfish A-hole Gen-X & Yers as well.

Relax, deep breaths, please.

H.Z. Asks a Few Questions:

> 1) Relative value of land and structure — most of the rise in
> home value are in the land. This means the collateral of home
> builders are just as good if not better relative to the borrowing.

Undeveloped land is not very liquid and not many people want to buy undeveloped land (even lees people want to buy land that was owned by adeveloper who lost it to forclosure) while lots of people want to buy a complete home.

> 2) As for lack of cash flow, what is the term of construction
> loans? A couple of years? Not 30 years for sure.

If anything goes wrong and it takes longer than planned to build a property a developer can run out of cash and default on the loan.

> 3) Do home builders default more often than home owners?

Yes, far more often...