patrick.net

UPINARMS says:

Gary Watts said that 15% “was in the bag”, now he thinks otherwise

According to the article:

Real estate economist Gary Watts has revised his optimistic forecast for the Orange County housing market, telling an industry gathering this morning that he expects prices to go up 11 or 12 percent in 2006, and saying the gain could even be smaller.

Yeah, smaller like -11%. I don’t see how a county can appreciate double digits and have massive foreclosures at the same time!

NOTE: You can take my other post out of moderation pergatory

When we debate soft landing or not, it is meaningless without defining what is soft v/s what is hard.

I have asked this before, without many replies. What is your definition of soft/hard landing ?

To me hard landing is 25% nominal decline from these values before or by end of 2008. I think it is a real possibility. I will use price per sqft. Currently DQ shows it to be $500 for resale homes in Santa Clara county. I expect it to be back to 400.

Anyone else willing to go out on a limb and put a number on their definition ?

The low PE trick doesn't work so well for Buy&hold long strategy unless on has a multidecadal time frame. Otherwise you have to do a long-short strategy to get anything out of it.

Regarding low PEs, I believe it's very much a per-stock and per-sector thing. For example, in a hot market for commodities, a low PE for a leading mining company may indicate a slowdown may come this way. But if the sector has been neglected for the past few years or decades, the low-PE stocks may have potentials.

http://biz.yahoo.com/special/luxury072006_article4.html

Efficient markets are old skool. Behavioral Finance has trod roughly over it.

I would support making the efficient market theory a mandatory course in all engineering, physics, math, and business schools.

Intelligent graduates should not have to "waste time" trying to beat the market. :)

I was discussing the entire stock market. The lowest 10% of all stocks by PE creams the highest 10%. Ignoring sectors.
What's the trading (sorry, harvest) time frame for this approach?

Could somebody tell us the gist of the theory?

I’d agree. Fischer Black’s essays on equilibrium are sublime.

I hope you know what I meant. ;)

MA,

I see. I was about to ask an academic question: Why hasn't the market caught up with this observation and eliminated or reduced the opportunity? The harvest timeframe is too long. I think that's the answer. Trading firms won't shuffle money quickly enough using this approach. Correct or wrong?

What about negative PEs? I love those -PE (gold) mining stocks.

That's right. For the same reason I wish there are more gay men.

Yes, baby!

Speaking of gay men, I find them quite reasonable. I saw pictures of the SF gay pride parade. It was eye opening to me. How come those gay men look more macho and better built than regular males?

I think I do. You want everyone to go on believing that you can’t beat the market, and so creating little niches for you to harvest, right? IT’S ALL ABOUT YOU!

Just want to see how the widely-held belief of efficiency can lead to inefficiency. It is kind of paradoxical. :)

Well, it is a zero sum game.

MA,

I think we're in agreement. I sorta make my living in this area as well, although from a different direction. I actively trade my own hedge strategy, probably about once per 4-6 weeks with not all turning over as well. I'm quite familiar with Fischer Black et al. I was referring to FFM as it applies to efficient market theory in contrast to old-school value-investing. I am value biased, having been schooled at the birthplace of such. I actually favor the Black-Litterman approach to portfolio optimization, which allows for quantification of behavioral factors and sentiment.

I have asked this before, without many replies. What is your definition of soft/hard landing ?

I have a more lax definition of soft vs. hard landing:

soft: flat prices with only real inflation adjusted declines
hard: decline in prices without taking inflation into account

I think this is reasonable especially given the expectation that prices never go down. In other words, a "hard" landing is already a done deal in many places (SD, Boston come to mind right now).

Ray W,
Yeah, that's a more blunt and colorful way of putting it!

MA, Randy and Peter P,

The discussion about EMH is quite interesting (and a bit confusing to me). Still I have a question from my viewpoint as average Joe. I do not understand all this, I do not have time to master it and in general "active" portfolio management is quite impractical.

In such a scenario, I have not found anything as peaceful as investing in market index funds on auto-pilot - every month a fix amount in say SP500. I have no ambition to "beat the market", whatever definition of that is. I just want to beat inflation. So I try to stick to my asset allocation, periodically making sure it is on/near target.

Is there anything for lesser mortals like us to learn/apply from the debates about EMH ?

New term to describe the housing bubble future?

How about, "I wonder if my Starbuck barista job is available"?

regarding the "Google factor" there is no google factor. Google employs how many people, how many are in the BA, ~4-5K, of these I bet that ~500 or so are making bank. Besides, what's the population of the BA 3-4 Million?

Oh wait, applying HaHaian logic it all becomes clear. Certainly 500 people making really good money justifies high home prices in Crapatino.

Sorry for wasting your time.

Call it a, "Precipitous Downturn".

It's a bubble surrounded by a balloon inside a Zeppelin filled with hydrogen gas.

Oh, the humanity!

Here's my term: "Lubricant-free ass-pounding"

Ok, so when exactly did Randy H transmogrify into Face Reality? :-)

Randy, Randy, Randy... Have you completely lost your faith in reality-based economics? Has the incredible breadth and tenacity of the bubble destroyed your capacity to even IMAGINE the incredible sea-change in market psychology that's taking place before your very eyes? C'mon, dude, if LAY can publicly acknowledge the inevitable, why can't you of all people?

Biggest asset bubble in human history? No, of course not. Biggest in our lifetimes? Could be. Something like $3 Trillion was destroyed by the Dot.com crash, and housing has accumulated approx. $5 Trillion in new "value" since then (and $4 Trillion in new mortgage debt). And --as others have already pointed out-- housing is much more broadly owned & traded as a percentage by the general public than tech stocks, so the effects are more broadly felt. Even if it only gives up about half of those gains (conservative correction), Dot.condo should at least equal the Dot.com bust in terms of wealth destruction and macro-economic impact.

End of the world? Hardly. End of greed & fantasy-based pricing and ultra-loose lending? Let's hope so. I can see no realistic correction scenario that does not involve housing in bubble markets giving up a significant chunk of value in nominal terms --unless there is rapid, sustained wage inflation (to support non-RE price & rent inflation). Outside of the top 5-10% of earners, there's little evidence to support this scenario so far. Of course, if it happens, I can't say I'll be that upset. Who wouldn't mind housing becoming affordable again by staying relatively flat, while your salary goes up 200%?

Oh, and btw I thought LTCM, Dot.com & the current mess had finally put the EMH (Efficient Market Hypothesis) to rest for good. If anyone can figure out a way to accurately predict and "price in" greed, fear, euphoria, herd behavior & collective madness, I'll bet there's a Nobel Prize for Economic waiting for you.

This is SO weird. And this is probably how RE market works.

At the begining of this year, I started visiting open houses and picking up flyers. So I decided to check on two listings that were near each other in the highly sought after Kennedy - Monta Vista school district of Cupertino.

21765 Hyannisport Dr, 95014. Sales history from Zillow
3/31/94 529K
3/28/06 1.275M

The asking price was 1.5M. So good 200K+ shaved off the asking price.

21796 Hyannisport Dr, 95014. Zillow says,
6/31/99 735K
6/21/01 855K
3/9/06 1.3M

Sold around the same time. Asking price was 1.2M. So buyer paid 100K OVER asking.

So one listing goes 200K under, other goes 100K over. Now here is the amazing thing. The one that got sold for less has at least 200sqft more area, and whole 3500sqft more plot !! Both were built in 1968.

So what gives ? In Cupertino around March/April bubble was still alive and bursting at the same time. I guess it depends on who has what information. Also, the one that sold for less, has HUGE gains even after selling for 200K less. Remember DinOR's theory ? Bargain with a guy with biggest gains, not with an FB.

hmmm, very interesting, SP.

although there is a big Lebanese community in Australia, including quite a few politicians and other dignitaries, I suspect the Oz govt will quietly go along with the US-Israeli agenda while making reasonable efforts to get Lebanese-Australian nationals out as required. expect more rhetoric about 'terrorists' etc.

I just picked up a flyer about East Timor at random in the uni library, and it points out that othe Oz govt criticised the then-current govt in East Timor recently mainly because it is in Oz's power interests to do so. In particular, they have been after a rich vein of oil and gas in a trench in the East Timor Sea, which, under international border law, belongs to the East Timorese, but under an agreement with the invading Indonesians some time ago, went to Australia. In other words, Australia permitted Indonesia to invade in the first place in the understanding that they would get the resources cheaply for not objecting. The latest agreement is for Australia to retain rights for 2 generations, by which time the resources will be played out, an agreement the govt in Dili wasn't too happy about. The Oz govt didn't want to see a leftist Timorese-Chinese nexus opening up and a sea change occurring, so chose to support the 'rebel soldiers' as having legitimate grievances, rather than choosing to brand them as 'terrorists acting against a legitimate govt in a fledgling independent nation' etc. Choose the rhetoric to suit the situation...

It's a dictum of foreign policy that there are no permanent allies or alliances, only permanent interests...

http://www.wsws.org

HARM,

With all due respect, comparing me to infamous Trolls doesn't do much to advance debate; it only lessens my desire to share my perspective on the debate.

Your comparisons to equity market bubbles is flawed. Equity markets are incomparably more liquid than real estate markets. I've never once denied that a correction is eminent. I'm only suggesting that it will happen a lot slower than many here are cheering for, and that it won't turn the US and global economies into some 1930s dustbowl.

If we're "staring anything in the face" it is price stickiness. The correction started in mid 2005. If we wait until 2008 or 2009 until we see cumulative 25% comparative real price drops will you still be sitting there claiming that the hard landing is just over the horizon?

EMH is very far from being "debunked". Its usefulness in predictivity has been challenged depending upon what time horizon you are attempting to predict. There is a great deal of academic work which counters the pure behavioral theorists as well. In fact, it may be that EMH holds in aggregate over longer time frames but market psychology factors control the shorter term.

I'm in the camp that believes the market behaves as an emergent system (ES) or a system of ES's, where short term behavioral factors, microeconomics and reactive quantitative arbitrage are the inputs into discovery of longer term efficiency in a continuous dynamic process. But it will never be truly efficient because it is always changing, thus always trending towards efficiency (or specialization if you will) only to be perturbed (extinction if you will) back into generalization. Nothing in this model requires abandonment of EMH, only proper parametrization and factor constraint of it. Remember that the "E" in EMH relies upon the rational maximization function, which need not be a simple mathematical max fn, but can itself include many fuzzy factors (like utility).

Hell, maybe I should send a resume to D.E. Shaw.

Shit_hits_the_fan Says:
If I may make a rather blatant statement, I find it ironic that so many people in SF desperately want SF to be like a “mini-europe”, with the only difference being the inconvenience of being attached the the “other” chunk of the country.
Well.. at least economically, SF has suceeded in that respects, making sure that their economic situation has much disparity as you’d find in any number of those old word economies. Bravo! Bravo!

[splutter] i must protest! i don't think you'll find any european country which has wage multiples anything like the US! those 'old world economies' have a flatter wage structure. england is probably the most uneven, but american is a quantum leap ahead again. nobody has been gouged by the ultra-rich as in america since the days of the sun king prior to the french revolution...

World Map Gini coefficient with legend

what about IHM economic theory? invisible hand of the market.... :P

DinOR Says:

Leslie Appleton-Young is the Chief Economist...for the Califarnia Realtors Association. (S)he’s no longer calling CA RE a “soft landing” and frankly doesn’t know quite what to call it.
_____

Well, I'm sure Surfer-X could come up with a more than a few interesting
descriptive terms for the housing crash.

The word "rape" comes to mind.

Randy,

I was of course being tongue-in-cheek. You are certainly no troll, bullish or otherwise (thought the :-) was a hint). Even so, I do find your somewhat pessimistic turn a time when the tide is clearly turning in our favor somewhat mystifying.

Your comparisons to equity market bubbles is flawed. Equity markets are incomparably more liquid than real estate markets. I’ve never once denied that a correction is imminent. I’m only suggesting that it will happen a lot slower than many here are cheering for, and that it won’t turn the US and global economies into some 1930s dustbowl.

This I agree with 100% and if you go well back into the archives --even mid-2005 when I was most bearish-- you'll see that I did not expect the crash would happen short term, or would equal the Great Depression in economic impact. I was predicting a slow 'n sticky correction lasting ~5 years then, and I still am.

If we’re “staring anything in the face” it is price stickiness. The correction started in mid 2005. If we wait until 2008 or 2009 until we see cumulative 25% comparative real price drops will you still be sitting there claiming that the hard landing is just over the horizon?

No, I would not categorize a 25% realprice drop by 2009 as a "hard landing", as this would not constitute a true mean-reversion in terms of rents and incomes. However, a 25% nominal drop (plus another 15-25% or so of inflation erosion) would fit the bill nicely. This is very close to what happened in SoCal in the early 90s, and what I expect to happen more broadly in all the big bubble metro areas this time around.

Conor,

I contend that the rational maximization function still holds. Behavioral economics simply challenges what the definition of "rational" is. The function need not be linear either. In fact, I believe the rationalization function to be a cognitive "fuzzy" function. Nonetheless, it is a maximization function. Given a set of inputs, and a bunch of fuzzy reasoning, the actors are endeavoring to maximize whatever it is they most value. Actually, more to the point, actors are seeking to minimize that which they most fear or suffer pain from; so it is a sort of inverse maximization function.

But none of this is inconsistent with EMH. It's all about getting the E right.

“owner’s equivalent rent” as the housing component, not home prices.

Doing it the other way, as in the UK, then overstates savings rates. There is no free lunch.

Rational Actor: "I bought a hybrid even knowing that the premium I paid is greater than the fuel savings I'll ever realize. I did this because I feel good about the purchase for [insert qualitative thinking] reasons".

Irrational Actor: "I like to steal hybrids and drive them off of Devil's Slide for kicks. I gave all my money away to the [insert fringe cause] anyway".

Muggy Says:

What’s that called?

I'd call this, as well as the housing bubble, a cluster f*&k.

Bap33 Says:

SPLAT

Specuvestor
Profits
Losing
Altitude
Totally
_____

Nice, Bap33. Let's see if we can Haiku-out those prophetic words of wisdom, old school, PatNet-style.

SPLAT:

Specuvestor pro-
fits, losing altitude to-
tally...Bap...3...3...

Hey, I sense a mood change.

Randy, are you all right?

How do you get so much inflation in 3 years? 2006 to 2009?

Cactus, if we simply follow the inflation trendline of the past few years, then 15-25% is *no problem*. As Conor pointed out, the current politically manipulated CPI has been grossly UNDERstating inflation since the mid-90s, for a varieyt of reasons. If we use the pre-Clinton era CPI formula, you get 6.5-7% right now:

http://www.shadowstats.com/cgi-bin/sgs/

Aside from allowing politicians to look "tough" on inflation (while really doing the exact opposite), most of the gargantuan federal entitelment programs (SS, Medicare, etc.) are indexed to the CPI. The governement, in short, has $Trillions of reasons to continue understating inflation.

The first two Founders’ Awards consisted of restricted stock that was worth $12 million when it was awarded in November to two teams of a dozen or so employees each.

Ahh the power of myth, ok, how about the Ca lottery?

tinyurl.com/pdxdh

The lottery has paid out over 600 million in the BA since '88. I'll do the math for you, that's on average 38 million a year into the Bay Area. Certainly this eclipses the "google effect"

Sorry burbed time for you to cuddle with HaHa. There is no google effect, stories regarding google millionares are no better than lotto millionares.