patrick.net

Fewlesh,

Currently, everything is honky dory, except when we mention things like the Icelandic Kroner Hiting 11% (”How can a country have a high intrest rate?”, was the lunch time discussion).

Remind them that Iceland, New Zealand and the others in this boat fall in the IS-LM "Small Open Economy" model in a macro sense. Countries such as this have little or no effective control over their nominal rates (at least not for long), and thus their rates can rise dramatically, and very quickly. This is because they don't manipulate their currency (at least not much or effectively), they have open capital markets and therefore are real-rate takers, and they do not have economic scale or locally generated GDP sufficient to have divergent nominal rates (as the US, Japan and the EU do -- especially the US by a huge margin).

...oh, and these countries in the news all have one fatal problem in this context: they are all carry-trade currencies vis-a-vis the USD. They are all "American-Anglican" economies and are tied very closely to the USD making them great for carry-trades. The amount of capital the likes of BGI and the big Hedges were pumping through their currency was massive on a scale few comprehend. Since that pump is grinding to a halt, it's interest rate hiking time.

astrid Says:

“I find this RE boom actually brings in a lot of inexperienced investors while more experienced and more successful investors stay put.”

The wealthy experienced investors “all” know this is a bubble and many have been profit talking and selling property to inexperienced investors who are too naïve to know that they are buying at the top of a cycle. Most of the borrower sponsors of loans I have originated for investment property purchases over the past couple years have been so inexperienced investors buying the property from experienced investors…

Owneroccupier Says:

“FormerApt, if you are lurking, do you care to share your perspective on what the watershed % of investors is in a total housing stock to make the general housing vulnerable to a fall?”

It depends on how you define “investor”. I define an investor is someone who makes an investment and gets an actual “return” on that investment. A “speculator” or “gambler” is someone who makes an investment and hopes or prays that they will get a return on their investment. There is a big difference between real estate investors like my parents and their friends who own million dollar single family homes with little or no debt and the real estate speculators that buy million dollar homes with no money down and rent them for $50,000 to $75,000 less than it costs to own and maintain them hoping and praying that they will continue to appreciate by at least $100,000 a year…

“I don’t have a number here. Back in Hong Kong, we typically used 20/80 as a safety line. If 80% of a development are taken by owner-occupiers, then it’s fine. If you have more than 20% investors speculating on a development, then it could get bubblish.”

There are many reasons why people get nervous when the percentage of renters gets above 20% (in a condo complex, neighborhood or PUD). Owners tend to be committed to the area while renters come and go. As I mentioned in a previous post If I’m an investor and own a condo I can get more rent from eight hard working immigrant guys than I can get from an old lady and her cat or a nice young couple …

Algorithm for Real Estate Success with Haiku Thrown in for Aesthetics:

Stated Income + No Doc ARM + Min. Wage Job x 10 houses = Big Pimpin'

No mon' big fun with
Monopoly housing bucks:
Back up the truck...fools...

FormerApt,

thanks for the clarification.

astrid,

go for it, I think it is a huge opportunity, if I could deal with the air, I would have done it myself. You will be surprised, even Carrefour carries knock offs, they have been publicly caught at least a couple of times when I was there, selling knock-off imported wines that were actually manufactured locally, or watered-down whiskies.

Here are some feedback from my expat friends, and some opinions I've heard constantly from my HK/Taiwan friends working in China.

1) Highly prefer all flown-in products from countries with high agricultural standards like US, Australia, New Zealand, France esp veggies. China has organic farms, but in a country with rampant fraud, how do you know that it is REALLY organic? So fly them in, people will pay up. California is a huge brand there, so any food made in California is considered of good quality.

2) Start with babyfood. When I was there in China, all the expat wives have their babyfood directly flown in from US, Canada or whatever country they came from. They don't trust local manufacturing facilities of foreign brands. Nestlee, KFC, McDonald's were all caught in food pollution scandals in China. Even the locals want flown-in babyfood entirely manufactured and packaged outside of China.

3) You have to be extremely strict in your QC. If someone finds out you substitute local food for flown-in stuff, your shop will close down overnight. The problem is not you, it's your buyer. Carrefour and Walmart buyers in China's retail operation all take in kickbacks. Typically the local food vendors offer a kick-back of 10-15% of the total invoice value to the buyers, that can add up to several times of the buyer's salary. So you need to control your buyers and employees well. The work ethics is not the greatest over there, employees often find ways to benefits themselves at the expense of the company, so you need to put in lots of check and balance, and a well-devised incentive system so you don't get screwed.

4) Copycat. Copycats spring up overnight on virtually anything. Think hard about how to raise the barrier of entry. Perhaps strike some exclusive contract with select brands.

astrid,

the general attitude of nouveau riches in China is, they want everything foreign. Foreign = good quality, so everything foreign goes for a hefty premium. Hagaan Daaz is marketed at a premium and sold at a price higher than here, Starbucks can get away with charging the same amount they do here.

For groceries, you want to follow the model of an extremely successful supermarket in Hong Kong called the Great Supermarket, very high margin business with primarily stuff flown in from developed countries. the price point is even higher than Wholefoods. All the rich and famous shop there, it also enjoys a very solid support from the middle to middle upper class.

If you were going to hoard alcohol, why not whiskey? Or better yet, everclear (200 proof). It's more valuable per unit of weight and volume than wine. It will always be saleable because people love to drink. And, you can use it for fuel if you don't.

Interesting thread. More light than heat.

The weeping and wailing and gnashing of teeth gets old quick.

I don't understand this exchange between Ha Ha and Peter P:

1. In a expanding credit is it not MOST prudent action to make GREATEST use of that credit — is that correct?

It depends. The trend is your friend… until it ends.

Ha Ha,

I fear the market. But then I have Hobbesian leanings: "Fear and I were born twins."

I owned/renovated my home in Pacific Grove for seven years and sold last Fall. I wasn't trying to catch the wave, but I was mindful of the run up.

I still and always believe that long term homeownership is the answer for working class professionals like me. But I did push the ball up the court on the sale. I’m not stupid.

I also bet that PG/Carmel/Monterey will fare comparatively well in any downturn. They really aren't making any more here. And the value/demand is inherent because it's a wonderful home if you don't mind some fog and have a good job. I’m just planning to move soon, and I don’t mind renting a while.

Bottom line, after working my ass off in the army, college and law school, I finally have two nickels to rub together. But I do fear the market. And inflation. Scylla and Charibdis.

I’m going to wait and watch and shop for value. I know my next home could drop a bit after I buy, but I’ll own it a long, long time. The mortgage deduction and Prop 13 push strong wage earners to own their own homes. And I believe that stocks are for experts and insiders. Or suckers. I’m none of those.

BTW, I don’t hoard anything, but if you are really desperate, hoard guns. As for me, I’m all in on our government and our economy. For America, “we pledge our lives, our fortunes, and our sacred honor.”

More on topic, I am wondering what fundamental economic forces have pushed up residential RE the last few years.

The most obvious reasons I see are

1) relaxed lending standards
2) low mortgage rates
3) fear of the stock market
4) fear of inflation

Ingredients for a perfect storm?

I've always heard that RE is counter-cyclical. Especially at the start of the recent run-up the stock market looked bleak to an outsider.

And bottom line for you hoarders, run down to Billy Joe Bob's "Guns & Booze." Don't forget to stock up on ammo. Better invest in some shooting lessons for your wife and kids, too.

Bap33,

Yes. The end is near.

Eat the rich.

Ha-Ha,

I read the "Phoenix Management Survey" and what was really shocking was that 38% of the lenders said they were most concerned with the fed. budget deficit and rated the RE bubble dead last at only 9% of those surveyed. Hello? I checked out their website and these guys are some hard ball players. Did you see their list of services? Loss Mitigation, Turnarounds, Default Management etc. etc. I don't want to tout their position but it strikes me that these folks are well qualified to render an opinion on when things don't work.

I agree that fear and greed have accellerated the run up. But you'd have to ask Harm or Randy H. I'm no economist.

SF Woman,

I agree that fear and greed have accellerated the run up. But you’d have to ask Harm or Randy H. I’m no economist.

I hope it's obvious that I'm being sarcastic when I agree with Bap33. My end sarcasm markup didn't work.

I see DinOr is here. He'd know too.

Garth,

I love ya like a brother but PLEASE don't make me say this again.

NUMBER 1 cause for bubble?

1997 Legislation that allowed up to 500K in cap gain FREE money! (250K) for singles. All of the other issues are important but if rank and file Americans had to pay 15, 28 or 35% capital gains when they sold their homes (or extracted equity) would we have this problem?

Mmmm, rich people.

DinOr

I believe you. But it's funny, as a licensed atturney I didn't know the old rollover rules had changed when I sold.

My Realtor team, one is a CPA, had to explain it to me. I talked to several other lawyers and judges I know. None of them knew about the new exclusion rules.

So for the masses of poor slobs like me I wonder about the impact on decision making. Also I note that the speculators will have STCG, so they wouldn't get the exclusion, no?

SF Woman, Garth,

We can make this real simple. Randy H always hammers me/us on "reversion to the mean". We can take say 5 year increments and look at the appreciation in the median home price in America/CA (your preference) and any deviation above that is fluff and hot air.

Garth,

The fact that you weren't aware of it is my witness. If you had been surrounded by grumbling malcontents that begin their conversations with the "those damn cap gains" you may have thought long and hard before selling.

Garth,

I have to believe that alot of specuvestors had quit their dayjobs to flip homes. Unlike folks like ourselves in professional services where we struggle to come up with legitimate deductions the STCG is specuvestors only real tax. B/c they have a paper trail for the $'s spent on the renovations they may have been able to offset alot of the gains anyway. My guess though is that alot of these folks didn't bother with the quarterlies and many may not have bothered with a return!

This is amazing to me that an institution can count unearned wealth as profit so soon after the Enron Scandel that was based on similiar practices. As far as 40% of homes being investments, I'd believe it. The fact is that the 2 or 3 homes that have sold on my street in the last year have nobody living in them, and ever so often, a truck comes by with a crew to spruce up the yard is proof that they are all indeed investments. I am willing to put money on it that at least 50% of the homes sold in California, and maybe higher in the Bay Area were investments. They will all likely be put up for sale this spring. Can you imagine the inventory? Of course I would think that RE agents and investors wouldn't be stupid enough to place their homes up all at once. That would be far too obvious of a mistake, but then again, I imagine these people are going to panick if they aren't already.
A sad story- One of my neighbors lives in a large, run down, crummy victorian that his father bought. He inherited it and now he himself is in his 60's. He had a beat up old truck and lots of carvings out in the yard. Pretty unique local guy. Anyway, within 3 weeks, the old truck gets sold, he buys a new truck, and starts making trips back and forth, throwing his stuff into the back of the truck. The place was cleaned out in a week and now there it sits for sale, for 720k. Sad really. I can't help but feel that what character many of these places had, where average people once lived will be replaced with office cubicle monkeys and upper executives.

DinOr,

Point taken.

When I found out about the $500 exclusion I wanted to start all over. Then I found Patrick.

SF Woman,

Many in New England as well as the Capitol were able to take "full advantage" of the exclusion. While many in the mid-west and more affordable markets may not have flirted w/500K free ride, they may have gotten it in "bites". Let's not kid ourselves. When we have 50K or 500K in tax free money dangled in front us we can fabricate alot of reasons as to why our current house just isn't right for us!

SF Woman,

I'm not sure but I think the rollover rules are still there in the background for the very rich who want to stay in real estate. Or maybe take a short breather. Unfortunately, that wasn't an issue for me.

You should check with a qualified CPA. Or even a qualified Realtor you trust.

Garth, SFWoman,

The fact that you were both long time residents makes you "dead money" to a realtor. They need "money in motion" so they tend to focus on the "players". Believe me, mortgage brokers look at their book of clients and they know EXACTLY where all the loans are at. Their FICO's etc. They know they can go back to those clients they put into ill-fitting loans (and some do so intentionally) so they can go back and harvest fees again. Realtors did/will try to do the same thing! They will start bugging everybody they sold to 18 months ago so they can go back and "flip" the client into another property knowing full well that taxes are not an issue.

Again, this above all other "bubble factors". It's commission driven.

SF Woman,

Now I'M confused. Prior to 1997 you HAD to roll your profits from the sale of the previous home into a residence of equal or greater value to be excluded from cap gains. After 1997, ORGY! Married couples could take up to 500K in tax free money out and do as they please. Thus the explosion in second homes. If it worked good once, why not take advantage of the multiplier effect? (Mind you in 1997 the median price of a home was substantially lower than today). Linda in La La Land had to pay ONLY on the excess amount OVER 500K. Even at that, she was able to offset to a degree b/c of some improvements they had done. The discussion now is that the cap gains exclusion should be moved out to 3 or even 5 or 10 years. About time. Also there is talk that the deductibility of mort. int should begin to evaporate above the median price in your area. About time. Also a word to the wise; a little birdie at the IRS told me that they are going to begin looking long and hard at 1031 Exchanges.

John M,

The guy I spoke was in the Chicago Office and was about to retire. A "short timer" has nothing to fear, I mean c'mon what are they going to do? Take away his birthday? Anyway, he explained that 1031's had become so perverted that the IRS has been forced to take a dim view. Before the 1997 legislation this was very necessary. Now? He explained that the "service" is now aware that developers actively seek out property owners that have developable land and are using the 1031 as a means to circumvent the law. But you're not selling your land (or sub-divideable land) to a developer? Why me? Thank all of those that abused the honor right out of the honor system.

i'm intrigued to juxtapose these two different observations - no criticism of either. one is talking about the individual psychology of 'keeping up with the joneses', or what david levine calls 'meeting esteem needs', and the other blaming greenspan for the fact that households are up to the wahoozy in debt...when greenspan didn't force them to go into debt, it's a decision they made. (note from my blog, a few articles down, that australian households are in exactly the same position vis-a-vis debt...)

i think these are two sides to the same coin - personal psychology and the 'me too' factor creates the market conditions; on the other hand, a lot of younger people are forced to take on more and more debt just to try to get into housing... however, my point is that owneroccupier's guy did not have to start flipping to make a buck, he could've had a comfortable life without it - so it's invidious comparison, not quite 'competition'...

Owneroccupier Says: April 5th, 2006 at 5:58 pm
how did we end up with so many amateur “investors”?

I believe that they are not compelled by greed. Instead, they are compelled by fear and competitiveness. A friend of mine who took on more than 1.2M mortgage, flipping 3 homes. He has a kid and another one was on the way, till his wife had a miscarriage, due to pressure, I guess, because they absolutely need dual salary to make it through every month.

Last year, when he was contemplating buying his last “investment property”, I asked him why he wanted to be so aggressive. He was a bit insecure so I never dared to tell him that he was totally setting himself up for failure. He noted that he was “lagging” in building his wealth as compared to his friends, and he felt pressured to catch up. Flipping homes seemed to be the only route to quick bucks. He missed out on the dotcom lottery (a close friend of his who has almost the identical background and skill sets lucked out and bought a home in Los Altos all-cash), so he didn’t want to miss out on the next get-rich-fast scheme.

I wonder how many “investors” were sharing the same mindset.

Ha Ha Says: April 5th, 2006 at 6:59 pm
For me, Greenspan is the savings saboteur, par excellence. There are two sorry tales of savings. On his watch, first we have seen the steady erosion of personal saving as a percentage of disposable income; and second, the eventual devastation of net national saving after the bursting of the equity-market bubble in technology, media and telecommunications shares in 2000.

Ha-Ha,

You are the devil sir!

John M,

I hope the person that desreves the credit steps forward on this one. A participant on this blog mentioned that buying a home is not the fun that it used to be! A happy, gleeful time full of anticipation and excitement. Yeah, right. I don't want to beat it to death (it's probably too late for that) but this is exactly what happened when the "exclusion" passed into law. That's how we wound up with so many "investors".

Question:

I'd like to know people's thoughts on how to make money as housing market crashes or after the crash.

Any strategies?

Die Torschlusspanik? Natürlich kommt die Zeit.

Ich bin mit meinem shadenfreude glücklich.

Michael,

One simple, non-speculative way to benefit as the market crashes is to buy a home. As prices come down, and sellers start to panic, you have the maximum leverage as a buyer. Assuming you've saved your HaHas, you can get a good old fashioned fixed-rate loan, be ready to put down 20%+, and then go around low-balling sellers until you find one desperate enough to take your solid bid.

Just my opinion, but unless you're really a pro like FAB or Zephyr, I wouldn't try to time the absolute bottom of the market. My reasoning is that you have more buyer-negotiating power on the way down than on the way back up. For most regular folks negotiating has more of an effect on their outcomes than ultra-precise-timing.

SF Woman,

I don't speak German either (like Randy H isn't hard enough to understand sometimes)!

Prior to 1997 the "deal" was actually pretty good. If you were over 55 years old you could take a *ONE TIME* exemption! Meaning you could sell your home as "empty nesters" and downsize without it being punitive. But Nooooo........

Your friends that moved to Shaker Heights were so typical of the time. This is the very situation that precipitated the passage of the 1997 legislation that btw also ushered in the Roth IRA. You could begin to see the "ground swell" gaining traction almost immediately.

How am I going to time the bottom? I'm not really going to try. I'm just going to seek out homes which fit all of our needs and some of our desires. When these homes are around 20% more than I want to pay I'm going to start writing offers for them at about 30% less than asking. Actually, I started doing this very thing last week. I don't expect any takers anytime soon, but I am encouraged that the sellers aren't just ignoring the offers, they're taking them seriously and countering (usually about halfway...which you sales-types will appreciate as the sellers falling right into negotiating 101 and the reason to anchor very low). Now I have not intention of buying one of these at halfway or 10-15% off, because I think that's still overpriced. But, I'm also not in a hurry so I have time to plant lots of seeds.

As time goes on and the market comes down so will the relative price of my offers, but the absolute dollar range will narrow. Since sellers tend to think in absolute $, not in %, our "zone of possible agreement" will converge and eventually I'll get a home I want for a price I'm happy paying.

This won't time the bottom of the market, but I'm not buying a home with the misconception it is an investment. A home is (1) a place for my family to live; (2) a form of forced savings vis-a-vis equity; (3) a way to avoid the annoyances of renting. I'll worry about hedging inflation, securing against the USD, hiding from oil prices and fretting about the current account deficit in my E-Trade account, not in my house.

*Investment advise? My advise is that all advise is worth what you paid for it. Use your own judgement.

Die Torschlusspanik? Natürlich kommt die Zeit.

Ich bin mit meinem shadenfreude glücklich.

[...]

I don’t speak German

Torschlusspanik: "Rush for the door", or a more precise definition. Literally: Door-closing-panic.

I said: Rush for the door? But, of course the time is coming. [Until then] I'm happy with my schadenfreude.

(I thought I was cute using one Englished German word in German sentence based upon another Englished German word. I guess this is the closest I come to poetry these days. *sigh*)

Randy H,

Your explanation to Michael should be "the playbook" going forward. And it wasn't too hard to understand either! That will be the next wave of financial self help books. "How to profit from the RE Crash" In fact I believe there are already a few out there. Hey, I was going to ask you, Patrick has recently linked daily articles from a certain Charles Hugh Smith lately and I can't really find anything about this individuals credentials. He seems sensible enough but I find myself wondering if he too hasn't jumped on the "crash bandwagon" of late as well.