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HARM to Peter P and Randy H: I find your lack of faith disturbing.


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2006 Jun 4, 7:50pm   16,912 views  238 comments

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Darth Bubblehead

Seriously, guys, just when public psychology and the market is finally starting to turn to such an extent that --even the brain-dead, NAR-bought MSM has to acknowledge it-- NOW you guys have decided to puss out and capitulate??

Yes, the recent uptick in asking rents since March is significant (and as Surfer-X continues to point out, that's ASKING rents, not ACCEPTED rents, boys). Even so, didn't Mr. H himself predict this very phenomenon several threads ago, when he (accurately) applied the "escalation of commitment" theory to increasingly desperate FBs? Aren't the many testimonials by renters in the previous thread (while not statisticially significant) evidence enough that landlords have not repealed the law of Supply and Demand and can dictate rents at will? Not only that, but we've only just begun to see the barest start of apartment-to-condo conversions that are slowly reverting back to apartments. This alone will help flood the rental market with new inventory, right as Joe Homedebtor begins to give up on the concept of house = sure-fire investment.

As John Haverty FRIFY, To BA Or Not To BA and countless others have pointed out, there is just not going to be much in the way of real rent inflation UNLESS WAGES ALSO GO UP. This is for a very good reason: you cannot pay your rent with an NAAVLP. And what's more, rent-to-income ratios for most major metro areas of California are already hugely above the median/mean for practically every other state. It's already not unusual for CA working class households (or what's left of the middle class) to pay over 50% of take-home pay on rent. Exactly how much more can people possibly devote to rent --are they going to pay 90%? How about 100%? If this is true, I think I'm going to invest in the companies that make Ramen Noodles and peanut butter, becuase that's all people are going to be able to afford to eat after paying the rent. Or better yet, I'm going to heavily invest in housing OUTSIDE California --because that's where people will be headed in droves if this really comes to pass.

Peter P, tsk, tsk, tsk... Aren't you the guy who Face Reality used to call "Darth Bubblehead"? For shame.

Look, I'll be the first to admit that in my early phases of Bubble investigation, I was far from certain, and that I've experienced occasional bouts of self doubt. We all do, and it's really quite natural for sane people (only megalomaniacs, zealots and idiots lack the capacity for self doubt). Even so, I would recommend taking a moment to set aside all your complicated NPV/cash-flow discount models for a minute and reconsider the current situation in terms of old-fashioned COMMON SENSE. There is such a thing as being "too smart by half" and missing the forest for the trees, my overeducated gentlemen!

Now, suppose the perma-bulls' ultimate wet-dream "soft landing" scenario actually happens: price/rent correction ENTIRELY through wage & non-housing inflation. So what?? We all just got a 100-200% pay raise, boys --woo-hoo! And now we can all afford to buy a decent home for our families without taking out an insanely toxic loan. Is this an outcome I'm supposed to be afraid of? Hardly.

Personally, I don't care whether prices correct entirely through wage inflation (while nominal RE prices stay flat) or through big, nominal price drops --or some combination of the two. Either way, I win. I get the opportunity to purchase a depreciated asset tomorrow at a much lower real cost.

Have a little faith, gentlemen. The housing market moves excruciatingly, glacially slowly --but move it will.

#housing

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177   edvard   2006 Jun 6, 1:40am  

newbietobayarea,
The whole asian rennaisance is something that many in the BA are only too painfully aware of. Reason being is that the only reason people get paid those big wages here is because of the tech industry. I'm sure that there are some nervous folks out there who fully realize that the fact that China has over 700,000 engineers graduating every year means those high wages in california will eventually become an achile's heel. I can't think of a more vulnurable position to be in that the BA is now getting into, which is a job market that costs more that 60% more than the next closest state, and 100 times more than anywhere in Asia. A company that tries to compete against a Chinese R & D firm in 5 years will lose every time, and the first priority will be getting rid of the jobs. Adios high paying jobs!
That's one more reason I'm eyeing other regions of the country. While not neccesarily true now, I am putting my bets on the cheaper parts of the country for future development and good job markets. There's already tons of outside investment coming into these regions, they don't have sticky development, environmental laws, or high business tax. The writing to me at least seems on the wall, and if timed right, the prospect is a nice area with good schools, a growing job market, and affordable housing. It's a gamble and one that could go sour. But I don't see how buying an overpriced house is better, especially when what I think will happen to the BA economy will happen in the next decade.

178   saurin13   2006 Jun 6, 1:45am  

WW2,

Good points. Instead of off-shoring, I am all for cloneshoring... make an army of clones and have them do all the work!

Seriously though, the BA and the rest of the country have one advantage over the world - that is the US attracts the best and brightest. But ridiculous immigration laws (thank you GW) are making it more attractive for Asians that want to emmigrate to want to go to Australia, UK or Canada instead.

I do think wthere will be some labor moving to other parts of the countries - but having the intellectual assets in place will still make Cali competitive, but more specialized. I say keep immigration policy open and offer tax benefits to companies to keep R&D here. Use the same weapons others are. And most importantly stop graduating English and Liberal Arts majors by the gazillions, focus on what the wolrd has said is important - math & science. That is a job for the parents... one I think the Indian and Chinese parents seem to understand much better than anyone else. In the long run, its the nerds that rule...

179   Randy H   2006 Jun 6, 1:46am  

DinOR,

We are in agreement with IO loans, not disagreement. My point was that mere mortals probably should not attempt to do-it-yourself what the software you are talking about will do unerringly. It is "rocket science" for most people if you try to do it yourself.

But I am a big believer in financial engineering, and I agree IO loans have been perverted and given an unfairly bad name because of the bubble and unscrupulous lenders.

180   Randy H   2006 Jun 6, 1:55am  

RC,

27% of CPI called Owners Equivalent Rent which has said that for the past half decade the price of housing has remained flat.

Not necessarily disagreeing with you but just wondering, what NIA methodology would you propose to be more accurate? After all, OER is a NIA mechanism, and one which is consistent across 18 of the 20 largest world economies, only excluding Japan and UK. And, the UK does a direct home-price to debt (imputed equity) measure which they add to aggregate savings, and which is widely believed to be far less accurate of a metric than OER (because of all the nastiness involved in matching debt terms).

181   DinOR   2006 Jun 6, 1:57am  

Robert Cote'

My sentiments exactly. Had this thing stopped at a point just shy of completely and utterly insane we could have made do with a minor correction (10-20%) and gone on about our lives. That time has come and gone and now it's going to be painful. Lerah is clearly on the defensive now and he very obviously flailing for someone to blame. Why not Ben? Again though any assertion that int. rates and int. rates alone were the catalyst for the bubble strike me as odd. While many other factors were at play to create the bubble we only need one to burst it.

182   edvard   2006 Jun 6, 2:08am  

newbietobayarea,
The intellectual argument is a fairly classic one that is an effort to segregate California from the rest of the country due to the perception that it is somehow the chosen state where the highly intelligent, creative, and gifted people migrate to. I've been studying the shifting changes across the country, and all you have to do is look at some basis facts.
Clear Channel, CNN, Sprint, Alltel, HSN, HGTV,CMT, Food Network, DIY, Cingular, TX Intruments, Datasouth, NASCAR, and the zillion other non-Californian companies are some of the biggest, most sucessful companies in the country. The majority are in the SE and midwest. Surely you noticed many I mentioned were from TX.I Can't think of many recent companies of note in Cali.
I agree- there are smart people here. But there are also smart people in the "the other" parts of the country. Having a : everybody is smarter N gifted in Cali" is somewhat unhealthy for the state because not only is it somewhat outdated, but continues on with the perception that it casts onto the rest of the country, which is that Californians are obnoxious.I find it obnoxious also. Nobody in my family is uneducated, and most of my friends still there can easily do the same work people in this state do. They'll do it even cheaper for that matter. So the argument that California is expensive because all the smart people are drawn like flies here is kind of silly in my humble opinion.
If the cost of living standards that we now argue about on countless blogs just like this one become the new standard, then you can bet your boots that the smart people will be on their way out, leaving an older, richer, and otherwise less useful population behind. That's my 2 cents. Not to add fuel to the fire or anything. Again- just throwing my opinion into the hat.

183   DinOR   2006 Jun 6, 2:08am  

Randy H,

Right. I know a number of the guys on State Street in Boston (CFA's and CFP's) and they were using IO's and buying high yield funds with the difference. Even if they wind up flat or neg. equity in their home they've had 5 or 7 years of dollar cost averaging and an 8%+ yield working in their favor. At that point they'll determine if they want to bring that liquidity to the closing or just hang yet another for sale sign.

The software programs out there are just incredible! They can tell you the exact day the consumer will be out of debt. The other side of the "hypo" is that with this new found disposable income folks can really "max out" all of their retirement and college funding options. I wish they had this stuff around when I was younger. But the important part is that it works almost as well for people that are even in their 50's. For folks in their 60's it means that there will be more equity in the financial legacy you leave behind.

184   saurin13   2006 Jun 6, 2:18am  

WW2,

Good points. I should clarify by saying that CA has a built-up center of intelleectual minds and infrastructure that give it certain advantages. By no means does mean no where else does this exist. But increasingly areas of specialization are emerging. Example: Italy for design and food; TX for telecom and logistics; CA for high tech and biotech; and so on...

185   saurin13   2006 Jun 6, 2:23am  

DiNOR,

That makes sense. The real risk of IO, is using the amount that would be toward principle as either non-discretionary expense or flat out spending it - not keeping to for buying equity at a later point

186   DinOR   2006 Jun 6, 2:59am  

newbietobayarea,

Please remember, a lot of these guys/gals are MBA's that carry several higher designations as well on top of making 300/400K per year. Then again they are in Boston and I couldn't park my car for what I rent here in Oregon! These folks get all kinds of bonuses etc. but if you'll recall MA was one of the very first markets to show "cracks in the foundation".

I really hate to admit this (because I've been on the other side of the equation) but even if they are upside down at the time their rate lock expires it can still be a good move. The lender has taken all of the risk, you've carved out an 8% return and HAVE liquidity! Had you been paying on an amoritizing loan very little if any of the pricipal would have been paid down (if at all) and you wouldn't have ANY liquidity! What happens next? Well I'll leave that up to you.

187   Peter P   2006 Jun 6, 3:07am  

My conclusion?Keep your old car until it’s totally trashed, which these days is around 20 years.If you do get something, Buy something used and off the radar of the car-chic.

Buying used is good... but I still want the latest safety features like pre-collision and blindspot radar.

188   Peter P   2006 Jun 6, 3:14am  

Is PeterP still shorting TOL?
The buillder stocks are taking a hit.
tinyurl.com/qyjlr

No. Too bad.

189   DinOR   2006 Jun 6, 3:25am  

SQT,

The bomb! I couldn't believe it. We're #7 folks so we try harder! While it will undoubtedly make a hysterical thread I'm gonna go one better. Have you noticed how quickly Hollywood turns real life events into a movie of the week? We can beat them to the punch. A complete "made for TV" script on standby and at the ready to deliver to material starved studio head honchos before the actual events have taken place! I mean seriously, what can Lereah or anyone do at this point to put the steering wheel back on the column. Libel? Truthfully, is anyone THAT worried? I think I have a "working title".

HOW ONE MAN BUILT THE PROMISE OF EARLY RETIREMENT AND EASY MONEY:

(And bankrupted a nation)

The David Lereah Story:

Oh sure we'll do all the obligatory "early years" stuff where young David learns his first scam by offering to cut lawns for blind widows by just running the lawn mower at full throttle (with the parking brake set) while raiding the neighbors freezer for popsicles. We'll have enough "filler" material to keep us in production shooting until the actual crash event takes place and by that time the script will be fairly polished. I've heard you can "hawk" your script on the entertainment message boards while in pre-production so what are we waiting for!

190   Peter P   2006 Jun 6, 3:34am  

It’s tough for me to stomach that an “economy” car costs 20k. Yikes.

Get a late 90's Lexus LS400.

191   Peter P   2006 Jun 6, 3:35am  

This is why I’m hoping the economy implodes. At least my car won’t look out of place anymore.

I do want to be driving the worst car in a neighborhood. This is actually a semi-requirement when we finally buy.

192   DinOR   2006 Jun 6, 3:44am  

SQT,

He is the man of the hour!

But that's the weird thing about RE. There really isn't anything resembling accountablility. He'll probably get fired but given the way that Realtors TM operate under what statute would he be prosecuted? David told a nation to go out and buy all the house your lenders will let you! But he didn't tell any one individual specifically. I don't even know how much success any of us would have with a local realtor that cooked the appraisal, got a kick back from the mortgage broker and slept in the same bed with the seller?

193   DinOR   2006 Jun 6, 4:07am  

SQT,

Yeah, there have been some storm clouds gathering on that front and my guess is that much of the blame (rightly or wrongly) will be shifted to the mortgage brokers. The realtor handled the transaction BUT the broker handled the money end. Is it fair, is it right? I don't know. There is so much blame to go around there's enough for everybody! I have no idea what kind of an advance DL got for his books. What would rub me the wrong way is that I was wrong. So wrong. I hate being wrong more than being broke! DL probably isn't "wired" that way though.

194   Randy H   2006 Jun 6, 4:12am  

Just make sure you take advantage of the great outdoors and take a walk down Market and Castro just to broaden your experience. If you’re really headed out of here, you might as well leave with some interesting stories.

Methinks FRIFY and I share an existentialist streak.

195   Randy H   2006 Jun 6, 4:45am  

Ray W,

Good read. The only important disagreement I can find is the statement

"The day will come when it costs less to buy than it does to rent."

That is bad advice, and those who follow its implications strictly will never buy even when they probably should consider doing so.

Rents seldom exceed ownership holding costs, and really haven't since WWII except for in very specific areas affected by secular localized deflation (like the Rust-Belt or depopulating farmlands).

I don't think the BA will go the way of Detroit, but for this argument it doesn't matter if I am right or wrong about that. If the BA doesn't go the way of Detroit, then rent will not be lower than holding costs; if it does then you almost certainly won't want to own a home here anyway.

196   Randy H   2006 Jun 6, 4:46am  

*rent will not be HIGHER than holding costs

198   DinOR   2006 Jun 6, 5:07am  

All of a sudden I'm not having much difficulty visualizing buyers asking their realtors "Don't show me ANYTHING that was purchased in 2005".

Don't show me anything purchased in 2004.

Don't show me anything purchased after 2000!

After the few buyers that ARE out there actively seeking a home have kicked through one over priced sh!tbox after another they are going to have to draw the line! I mean from a pure practicality standpoint. My husband doesn't get home from work until 6:00pm and we only have an hour before kids/dinner/homework etc. Please stop showing us these places where the seller is upside down and can't afford to come down on price, unless! They are willing to negotiate a short sale. If not, please don't waste our time and start showing us "pre-2002" purchases or we'll find someone that will.

199   StuckInBA   2006 Jun 6, 5:09am  

I think, DL is trying to do the smart thing for himself and NAR. They need to find some reason rather than admitting the speculative excesses they were cheerleading.

See it is the Fed that spoiling the party !

This can boomrang. What if BB gets cold feet and NOT increase the rate and the bubble still explodes ?

200   FRIFY   2006 Jun 6, 5:13am  

Methinks FRIFY and I share an existentialist streak.

...as I do with my 3 year old daughter who has taken an inexplicable interest in an old Camus paperback ("The Possessed"). I'm afraid I do her a disservice by answering her philosophical "why"s with literal materialistic responses.

I never took any philosophy courses in college, but The Teaching Company's lecture series are great. I re-recommend them for any commute longer than 20 minutes. Robinson's overview is fantastic, but the specialized "No excuses - Existentialism" is pretty good as well.

201   DinOR   2006 Jun 6, 5:14am  

Now I'm fully prepared to deal with all the grief so bring it on.

Well what if a couple paid CASH in 2005 and just wants out? They're entertaining all offers!

O.K, I'm willing to allow that.

Well what if some couple bought in 1985 but have House ATM'd it to death? Couldn't they owe more than the place is worth? Don't know, don't care. Since Surfer X has already well established that this person basically "re-purchased" their home, it would not qualify. Please don't show it to me.

I realize that there is really no buyers "union" but can you see how this can very easily become the standard practice?

202   FRIFY   2006 Jun 6, 5:17am  

BTW Randy, are you feeling a little better about your cash position these days? ;-)

203   DinOR   2006 Jun 6, 5:19am  

To BA or not,

Yeah, that boomerang effect came up on Ben's and someone astutely pointed out that DL had absolutely no issue with the FED taking rates to 1%! Down in the traders pit at the "Merc" that question was put to one of the traders and they guy basically said that the distance between 1% and 5% was a given. Now the real debate on the cost of money begins.

204   Peter P   2006 Jun 6, 5:23am  

Ignore this date, because when Christianity took over the Roman calendar, in the 4th Century, the monk who compiled the dates got it wrong.

But the Mayan calendar ends on December 21, 2012. If we get a 7/1 ARM now, it may not reset until the end of the world. :-P

205   DinOR   2006 Jun 6, 5:27am  

Peter P,

That's what we like about you! Always thinking. You know though there is a semblance of truth there. So many of these folks that took out "suicide loans" seem to share your appreciation for Mayan history.

207   Peter P   2006 Jun 6, 5:33am  

So many of these folks that took out “suicide loans” seem to share your appreciation for Mayan history.

I wonder if "suicide loans" have anything to do with human sacrifice. You know, a house is not worth getting your heart ripped out. :-P

208   Randy H   2006 Jun 6, 5:33am  

FRIFY,

I'll feel even better in the coming days I think. I feel yet even better that I rebalanced my risky portfolio thereby selling off the over-weighting that had emerged from my tiny position in gold, copper etc. about 3 weeks ago, though.

Diversification is sometimes almost magical.

209   Red Whine   2006 Jun 6, 5:35am  

"The bay area is, in my opinion, the most racially and politically progressive area in the country."

HAHAHAHAHAHAHA. Right, no one in Palo Alto, Los Altos, Menlo Park, Atherton, etc. etc. has even SEEN a black person except on the WB. They love to brag about how racially progressive they are, but then scurry behind their gate and start fretting when one actually walks by. They love diversity -- just not in THEIR neighborhood.

And they love Latinos too -- I mean, who else is going to clear their dishes when they're done scarfing porcini raviolis while chatting on their cell phone about how racially progressive they are as compared to people in Toledo?

You're hilarious. Keep on deluding yourself -- it makes great entertainment for the rest of us.

210   DinOR   2006 Jun 6, 5:35am  

Robert Cote'

So true. What few buyers are out there will learn this quickly. Looking back they will say.

Yeah, back in 06 we bought a real nice older place from a nice older couple, nothing special. Sure, we looked at a few of those McMansions but just when we were ready to sign the paperwork the whole deal would fall apart. We were never sure, I don't know foreclosed, filed bankruptcy or some damn thing. We're real happy now though. They'd been here a long time and made a lot of improvements. Real nice folks.

211   Peter P   2006 Jun 6, 5:37am  

I mean, who else is going to clear their dishes when they’re done scarfing porcini raviolis while chatting on their cell phone about how racially progressive they are as compared to people in Toledo?

I will only eat open-face raviolis.

212   DinOR   2006 Jun 6, 5:38am  

Peter P,

I can't say for sure. Never really had one. But if I was going to go neg. am. this would be the time. Unless there is some sort of acceleration clause?

213   Peter P   2006 Jun 6, 5:46am  

Right, no one in Palo Alto, Los Altos, Menlo Park, Atherton, etc. etc. has even SEEN a black person except on the WB.

Have you been to the part of Menlo Park that still has SFHs for under 750K?

214   Peter P   2006 Jun 6, 5:47am  

We need a world in which people of all races work together. However, forced diversity will not work. We must get to the root of the problem in order to fix it.

215   Randy H   2006 Jun 6, 5:52am  

about how racially progressive they are as compared to people in Toledo?

The BA area is far more progressive on every dimension than Toledo. Trust me. If not, I can arrange for a personal reality tour for you. Bad example.

216   DinOR   2006 Jun 6, 5:57am  

I was unaware that there was any significance to 6/6/06. It's strange b/c I consider myself something of a an expert in theology. Well, I've seen all of the "Exorcist" movies and a great many of the "Omen" franchise as well.

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