patrick.net

The problem with narrow derivative markets on commodity assets is that reasonably sized players can move the market, and fast.

It is very difficult for any player to move the underlying housing index though, given that it is based on repeating sales.

Btw, what are the minimums and what’s the leverage?

I think a contract is $250 x index value. So each contract is worth about 70K. Given the low volatility, I do not know what is the performance bond requirement. We will see next week.

They can't move the underlying asset price, of course (in this case it's a computed index based on repeating sales). But they can move the market price of the derivative and drive up (or down) the IV.

We can track a "paper position" over on my blog, if you guys want to. I'm not going to throw $70K at nuthin until I see just how quickly I'll lose it ;)

O.K Randy, you're on! That would be fun. No, I'm not throwing 70K around either but given the amount of effort we've all expended trying to understand this bubble it would be worth it to me to see how these things trade.

Just to have fun, let's have several "model" portfolios.

One simulates a straight hedge on a particular SF house. We will see how well the index tracks over time. This represents a typical homeowner scenario.

One simulates a hedge on monthly mortgage cost of a particular SF house. This reparesents a typical prospective buyer scenario. We probably need to use a combination of housing futures, TY futures and/or swap futures.

Other suggestions?

We can use zillow prices to simulate the actual prices.

CME Housing Derivatives: I'll start a thread on my blog to so we can set out the specifics sometime in the next day or two. Watch there. Then we can use our findings after a few weeks to feed some discussions here on Patrick.net.

(or actually, DinOR and Peter P, you both can start threads there too)

RE: CL, 2 points to make. First, the segregation of CL vs. patrick.net or other "bearish" blogs is probably a reflection of human tendency towards tribalism. We all (bears and bulls) like to be affirmed in views and beliefs, so we gravitate towards like-minded folks. One could argue organized religion serves this purpose as well (along with other purposes, of course). Second, trolling, bullying, bravado, etc. to me all signify one thing - insecurity. If you have to hyper-defend your position, particularly with name-calling, anger, or vitriol, you are likely insecure about your position. This is particularly evident with trolls that feel the need to come on boards like patrick.net to do their troll-thing. A valid question is, how often do bears go on CL and the like to troll or flame-bait? Not nearly as often, as far as I can see!

Nomad
Yeah, I lurked on CL for about 10 min. today. That was all I could stand. I don't want to engage any of those low class numbskulls. I wonder, however, since psychology is so important these days,if it would benefit the decline to post there occasionally.
I Like Randy's idea of posting a previous thread on CL...we'd get our point across and mess with them at the same time.
It's hard to tell who'd win in a clash of the bears vs. bulls. We'd have our facts and charts and they'd have their chickenshit lowbrow tactics. They'd probably run home crying to mommy. Nitwits.

FaceReality was stirring it up on CL recently.

Sometimes you get so tired of their self-righteous BS that ya just need to speak up. I haven't thusfar.

Bhiptis
Doubting the crash is a normal way to feel just before the crash actually happens. Look at the tables and charts and be patient...see how you feel by end of summer. UNSUSTAINABLE

A major correction. Common sense tells me that prices are out of whack and most folks can't afford to buy. Experience tells me that real estate is cyclical. We are at the top of a prolonged cycle.

Linda,

don't bother replying, just checked Bhiptis's IP address and it's that of a troll.

Randy,

Please erase.

This guy’s IP is 69.25.106.2

AKA KG, Liberals are Dumb, GK, Tester, “Jack” Juku, KooKoo, Boomshakalacka, and Jason.

SFWoman Says:

> San Francisco has too many golf courses. They take a lot of
> resources to maintain and fewer and fewer San Franciscans
> are golfing at them.

San Francisco does not have that many golf courses and with the exception of the SFGC that almost nobody uses (since all the old rich blue blooded WASPs don't play much golf any more and the membership is shrinking since they won't let a Catholics, Jew or other minority join) the golf courses in town get a lot of use.

Golf courses don't take much to maintain, it's just that the SF gardeners work less probably anyone in the world so it "costs" a lot to maintain SF golf courses. A cousin recently retired from the SF parks dept. (with a huge pension) and said that it is common for guys to go weeks on end without showing up for work (but still getting paid).

Linda,

I'd say just let go of those CL coots. If they didn't have CL to troll, they might target us more.

The worst case of trolling I've ever encountered was on car and driver's BBoard. It was the fwd v. rwd, American v. Japanese v. German v. other, Corvette/Pontiac people v. ricers. Basicallym these people had managed to divide their car niches into such tiny segments that everybody could be completely disdainful of everybody else.

@astrid,

Thanks for the heads up. Since Juku hasn't been explicitly banned, and has complied with warnings I've given him/her in the past (regarding Trolling after cross-promoting the Futurist), I'm not going to moderate him out. His posting was reasonable enough, and he linked a site to defend his position which anyone here is free to debate.

@Juku,

You are free to post here semi-anonymously, so just go ahead and register. You can then post your opinion, debate it if you wish, and link interesting articles you find anywhere else, including the Futurist (even if I don't personally like the site, I don't censor on content I disagree with). Dissenting opinions are welcome here so long as you don't Troll or call someone anti-American because they disagree with you.

DinOR,

Five to One baby

gets out alive!

So true.

I can’t see a return to median valuations as anything more than a 10-15 year flattening without massive volatility, due to the chicken-and-egg cycle of interest rates, recession, and RE prices.

A 10-15 year flattening is a decline in real term.

On the other hand, if lowering interest rate will prop up the market, increasing interest rate will depress the market, right?

On the other hand, much of the country is in relative good shape. A crash in a few heated regions may not lead to a recession.

Golf courses………..what a waste of space…..

They are good open space though. Low-rise building is a waste of space.

People waiting for valuations to become fair will have to wait a very long time.

Perhaps not. IF the economy strengthens and rent goes up rapidly, fair valuation may be attained without price decline.

I agree with Peter P. I am not *necessarily* looking for significant nominal price declines. The reason I created the Bubblizer was so that people could see their own sensitivity to the various inputs. Any combination of interest rates, inflation, tax rates/treatment, rent levels, your own income level, and of course home prices can dramatically change your buy-v-rent decision.

I fear that lots of people only think in nominal, non present-value terms. For example, the present-value of paying rent goes up dramatically faster than the present value cost of paying mortgage, because of the rates + tax shield. This means that rents don't even have to go up by a huge amount, just enough to push people into a reasonable zone where buying a home isn't simply insane.

It may be a decline in real terms, but is not a crash or even a nominal decline.

huh? So a decline in real terms isn't a crash? So what do you call buying a house expecting a return of at least 10% a year, and actually getting nothing for 15 years? What about all the fucking asshole debtors that bought with NAAVLPs and are already underwater? From all the information I can gather the brunt of loans in the BA are these types? What are the underlying reasons for your myopic veiwpoint.

Oh shit, that's right shouldn't feed the trolls. you are correct Mr. Troll, real estate never goes down, the very worse that ever happens is it goes flat for a while before resuming its normal 10% min per year advance. I say get in early, but more now. Via con dios cavrone.

So maybe the current distorted rent-price ratio is remarkable not because home prices are unusually high, but rents are unusually low, and rents have a higher chance of rising than hope prices do of declining.

But if my PV of paying rent - the value of alternate investment (invest the difference of PITI) is significantly greater than the PV of the holding costs if I buy now, then your statement is false.

Right now, for someone looking at a standard "Ha Ha" scenario and planning to stay in the home for 5 years, the PV difference is about a quarter million. That's a lot of intangibles to stomach. As a hedge, it's a loser by any measure.

IF the economy strengthens and rent goes up rapidly

Huh? Why would the economy strengthen? What new products or services would serve as the basis for this?

Randy and Peter P.,

If rent in the BA goes up significantly in real terms, what's likely to happen is a lot of young people and renters of all ages will move out. Relatively cheap rent is the only thing that makes living in BA viable now. If rent goes up significantly but is not followed by wages, there will be a large second wave of out migration.

has anyone ever seen the Easter Bunny, Superman, and Santa Claus in the same room? See, this proves they are the same person.

Rent is what a property is worth. Rents cannot skyrocket because there aren't enough high salary individuals in the bay area for this to occur. Yes, HaHa, you make a lot of money. I'm just not buying the new paradigm bullshit. Wasn't the dot.com "revolution" a new paradigm also, one in which all that mattered was growth? Oh that's right, profits matter after all.

Do you have a particular prediction of what nominal prices will be over the next 5 years, relative to today.

I don't make specific predictions because I'd only be asking to be wrong. I think in general there will be either slow, flat to moderate nominal gains or losses, but real losses either way -- if it's a soft landing; or it will be a psychology driven hard-landing where people think in nominal terms (nearly everyone does) and we see sharp nominal declines. I can tell you this, it will be a neighborhood by neighborhood battle. There will be small pockets that come out very well and others, perhaps right next door, that get clobbered, relatively.

astrid,

If rent goes up significantly but is not followed by wages, there will be a large second wave of out migration.

That's the if. Rent couldn't go up by enough alone, because of what you say. But, rent could go up faster than real wages go up. But if both go up just slightly out of proportion, then the rent-v-buy decision becomes much different without a lot (or maybe not any) nominal decline in home prices. We would have to see an increase in wages though (or theoretically, a massive cut in taxes).

Surfer-X, you are right that something's gotta give. Either companies make more and pay more, or people get to keep more, or home prices decline. Without something happening there, rents aren't going anywhere soon except perhaps down. And the more rents go down, the less likely anyone should ever buy a home unless they paying factors of millions in present-value to someone else to bank as gains.

I love this counter to the Realtor(tm) sales tactic: "Paying Rent just makes someone else rich" / "...pays someone else's mortgage".

How about, "at least a serious rental property business owner works for their income and gains. after all, being a landlord ain't exactly easy work, especially with a$$holes like me as renters".

Well.. if that ends up being the case, people buying now are not ultimately making a bad move at all.

If that ends up being the case.

We will be very perceptive of any change in conditions.

I’d love to see this bubble plotted out with a couple of other past real estate bubbles just to see how similarly/dissimilarly they behave. What is the average percent drive-up, the slope, the time frame, the denoument (is that what the post peak would be called?), the regression to or below mean.

SFWoman, you should probably be working at a Hedge Fund.

Randy,

"How about, 'at least a serious rental property business owner works for their income and gains. after all, being a landlord ain’t exactly easy work, especially with a$$holes like me as renters'."

LOL! Why just be a bear when I can be a boor!

Huh? Why would the economy strengthen? What new products or services would serve as the basis for this?

Don't know. But the reality is not always reasonable.

If rent in the BA goes up significantly in real terms, what’s likely to happen is a lot of young people and renters of all ages will move out.

Using the 1/3 gross guideline for rental affordability, people can pay a lot more.

For example, someone making 1 HaHa, which is about 13K a month, can afford to pay more than 4400/month.

SFWoman,

I'd feel more comfortable with someone like you working at a HF than many of the types who inhabit those dark depths.

Using the 1/3 gross guideline for rental affordability, people can pay a lot more.

And to further amplify Peter P's point, if you move somewhere like Evansville, IN, then you will be paying significantly more for rent than PITI, which is even worse than it appears because wages are so much lower there.

If people were to do a present value calculation (I know, in my dreams) and really consider their options then fleeing the BA because of rents is not going to be a winner except for a very few select areas in the SE or perhaps Texas.

Peter P,

Yeah, I'm still looking forward to the day of guaranteed 1 Ha Ha per capita income :P Maybe Different Sean can start a worker's revolution around that slogan...