patrick.net

rent a similar home a block away for less than the CD interest they are getting on their gain (the first $500K was tax free).

We've been earning just under 3X our rent in monthly returns the last 1.5 years since we sold out, also largely tax free (the rest carefully tax managed). This is also about 2X the average reported returns on housing prices during that period. I figure that at worst, we're even, and that assumes inflation is understated by about half.

I did engineer a portfolio out of Vanguard funds a bit more risky than a CD/MMkt: about .3 of market with a small portion in non USD returns.

We had about 60% equity in our place when we rang the register. My dream is that amount covers 100% in our next place and leaves some extra to reallocate to conservative future income-producing investments. In a perfect world, there's enough left over for a nice new computer too. This POS is starting to piss me off.

OT: Fear is a basic human instinct. I'm sure it was essential to the survival of our species at some point in our evolution. I imagine that many of those not scared of the dark got eaten by cats with big sharp teeth. We're stuck with it, and it is so primal that it can be manipulated and get out of control, becoming quite destructive. But even now, fear still has it's purpose.

Let me propose a different spin on fear. Perhaps all the FBs didn't have enough fear. The feared being "priced out", sure. But they weren't fearful enough as the storm gathered. Perhaps many of us are now out (or didn't get in) because we were healthily fearful of what was coming. Maybe we heard the thunder and scurried for cover while the rest of the herd just stood there, believing that someone would protect them from the lightning bolts.

Of course my biggest fear is that I'm wrong about all that.

JBR east bay Says:

> Say, does anyone remember this article from last year
> about these numnut flippers:

http://money.cnn.com/magazines/fortune/fortune_archive/2005/05/30/8261260/index.htm

> It would be interesting to try to do a case study and track
> some of them down and see what their current status is

It looks like Zareh Tahmassebian the 22 (now probably 23) year old son of Armenian immigrants is upside down on at least one home. He only owns just a single home in his name in Maricopa County, but he owes more than he paid at the top of the bubble:

Owner(s): TAHMASSEBIAN ZAREH
4162 E PALM BEACH DR CHANDLER, AZ 85249-7397
Recording Date: 09/30/2005
Sale Price: $464,117.00
Loan Amt 1 St: $348,000.00
Loan Amt Other: $116,000.00

Wow, a job that pays a 22 year old high school graduate with no training $250K a year. Where was this job all my life?

Paul Krugman was one of the very few MSM columnists to call the Bubble several months ago, and I'll bet he took plenty of flak for it at the time. He deserves our respect and gratitude.

SF Woman posted about 2266 Vallejo Street, SF 94123 that was on the markert for $12.9mm

It looks like the owners has a little more equity than the flipper in AZ:
Owner(s): DAVENPORT WILLIAM L
Recording Date: 06/14/2000
Sale Price: $3,950,000.00
Loan Amt 1 St: N/A

Even if he lowers the price by almost three million he will still walk away with about a million a year in appreciation. I can't tell you how many otherwise intelligent people have just ignored me over the past few years when I tell that "one million per year in appreciation is not sustainable". It is going to get ugly in 94123, 94115 and 94118 when people get scared and all try and run for the doors at the same time...

astrid Says:

> Wow, a job that pays a 22 year old high school graduate
> with no training $250K a year. Where was this job all my life?

Any sales job will pay $250K if you sell enough. All you need to know to do well in sales is how to "overcome objections and close for the sale".

Some young naive people make the best sales people since they really do think that it is a good idea to buy "another three homes to flip and pay two points for each firs loan and three points each for the three seconds"...

"since they really do think that it is a good idea to buy “another three homes to flip and pay two points for each firs loan and three points each for the three seconds”…"

Well, damn me for knowing better... I'm still quite impressed. $250K is quite a lot of commission for a 22 yr old broker (presumably one who does not have an assistant and must pay a large portion of his commission to his office).

spike66 said :
I’d suggest besides greed, that wanting to feel sophisticated and financially savvy made her easy prey for a “creative mortgage” especially if it came with a complicated spiel that emphasized shrewdness in choosing this option.

Quite true. Great observation. This cannot be the sole reason, but people do things because they do not want to look dumb. They want to be as smart as the guy next cubicle.

I have been a silent listener to so many discussions on which ARM is the best. "I took a 3/1", "No, I just went for a 5/1" and which mortgage broker gives back part of his commission to the FB and so on. Then how the refinanced cash-out is to be used for which remodelling, and how it increases the value of the home at the same time giving a better standard of living. The ones who did it gave authoritative advice to others, and those wanting to do it had this awe and respect in their eyes for the "elders".

It was exactly a replica of the dot-com stock market discussions. Day traders used to boast, and wannabes looked up to them in awe. Houses are not stocks, but this mania is no different.

From RealtyTimes for Cupertino : (emphasis mine)

For sellers, it is getting dicey out there. Comparative sales don't mean much in this market. What's important, if you really want to sell your home, is your competition. What are they priced at? If you want to sell, you need to price your home below theirs, otherwise all you'll be doing is selling their house for them.

Amazing. Amazing.

Is FaceReality around ?

A lady I work with has a brother who's a mortgage broker. She phoned him to ask for financial help with their mother, who just went into assisted living. He literally yelled at her that he did not have a cent to give her. He is really shaken up by the RE downturn.

I may try to talk to my family, but I never give financial advice to friends.

Spike,

I learned my lesson the hard way on this. In '04 a friend of mine asked me to review papers for a condo he wanted to buy for $400K. I told him that aside from the actual contents of the deal, $400K seemed like an awful lot to pay for a condo in my opinion and that I was very wary about the market. I told him that of course it was his decision, but if it were me, I wouldn't do it. I suggested he may want to wait a couple of years. He waited. A year later, with a baby in tow, his wife finally convinced him that they really couldn't wait any longer to buy. They bought a condo for $570K in summer '05.

On the plus side, I guess, is that I convinced my brother in law he should sell in '04. Although prices continued to go up in '05, it now seems likely that he will be able to re-enter at his exit price.

Yeah…I think most of us thought this bubble would pop sooner than it did. I thought the whole market would turn around in 04. Amazing that it lasted this long.

It has been an amazing ride. My sister in law lives in a tiny fixer in LA that probably would have gone for $500K last year. But her neighbor bought a very similar house in '01 for about $140K (granted, he got a great deal). My wife and I were astounded when prices hit $200k.....then $300K......then $400K.... then $500K. Unreal. But I just figure that circumstances haven't changed that much since '01 and wages aren't up that much. That house will probably drop back down to $250K before it's all over--if not lower.

My sister in law has a very low Prop 13 basis and no HELOC, so she won't sell even if hell freezes over. But if I were her, I probably would have takent the easy money back in '03.

Bottom line is that even though my wife and I are both professionals with decent incomes, we are not comfortable with debt. When we met in '99 we had combined debt of almost $200K (mostly student loans) and assets of $0. I have already lived with the stress of dealing with massive debt, so I refused to jump in as prices were rising. Now we have a decent nest egg to put down if prices ever return to something approaching normal... Otherwise, I guess life as a renter is not so bad.

Is this the one?

http://flippersintrouble.blogspot.com/

"I don't like renting...but I don't want to *own* without the liklihood of owning outright eventually"

LILLL, you don't have to be in your 40's for that to make absolute sense! That's solid advice for folks at any age. Nose bleed pricing does not bode well regardless of your resources. We may not be able to have a precise intersection where our last mortgage payment and golden watch ceremony occur on the same day but let's be reasonable here. How can we truly consider ourselves "retired" when an even greater percentage of our DTI is consumed by our mortgage payment/s?

Since when did "retirement" involve a "manse" to boot? My grandparents lived in a single wide in Sarasota FL! They had a comfortable lifestyle (railroad retiree) + social AND considerable savings!

Now that we've invited venture capital standards into our home I guess it's perfectly acceptable to be retired, and leveraged? Go figure.

Fear:

Fear will start to hit many sellers in nice neighborhoods with good schools. Those whose homes have been sitting on the market for a while. Those who've been stubbornly waiting it out; or at least for the flight to quality to save them at their anticipated price.

It'll happen where those homes -- mainly built in the 70s & early 80s -- are near new construction developments. For a long time these older homes have been selling for a moderate discount to new construction. The home we sold in 4/05 was such an older home, 1981, and we basically got people who couldn't afford (meaning couldn't win bidding wars) on McMansions just down the street. We got about 87% of what comparable brand new McMansions were getting.

Fear will come when the Home Builders switch, in earnest, from generous incentives to aggressive, outright price slashing. Home Builders are (usually) sophisticated operations, with long term financial planning, marketing machines, and financial accounting requirements. They have very large margins, and a lot of room to pull back prices and still make a profit. Witness all the land-option abandonment going on right now.

When the McMansion down the street, which cost 2.8M in March, 2.69M in July with a free Plasma HDTV, 2.65M in August with TV and Vacation and Pergo or Granite drops to 1.99M -- the for sale sign on that 1977 vintage inverted floor plan home won't look so great with a 2.4M price tag.

I look for lots of home sellers to start loudly complaining about builders/developers/mcmansions. They'll blame them for crashing prices.

Randy H,

So it's perfectly "o.k" for private individuals to do "off the books" transactions (and/or give cash back at closing/timeshare for life/plasma TV) but if a builder does it he's a comp crashing scumbag?

Randy H,

Btw that's been a quandry for me. Help me out if you can.

I sell you a house but I'm desperate. I get you off to the side in a discrete manner where no one would notice (like say Craigslist) and offer you 50K cash back at closing. Because cash doesn't have anyone's name on it you will accept mine. I got out from under an oppresive burden and you got a discounted price AND 50K. CASH! So everybody's happy, right?

I'm by no means an expert in RESPA or OCC/Federal/State banking regs. but haven't we just defrauded the lender and possibly the government?

If you go to sell (at a profit) 2,3 or 10 years from now what do you report as your cost basis? The 400K (what you actually paid) or the 450K considering this is a higher number and would shelter more profit from taxation you'd go with this one right?

How do you declare the 50K you got back in cash from me? Will you be claiming that as ordinary income or as a short term cap. gain? Or will you claim it all?

What about the lender? He loaned out 100% of 450K. But there's only 400K in collateral there right? What if you default? Where's his cushion? Where's his "equity"?

Is throwing around the approximate equivelant of the avg. American's annual family income (off the books) a serious issue or is it just a bit of harmless fun?

newsfreak,
Is that really Mr. newsfreak posting? Cool. Looks like he makes up for your terse writing ; )

StuckInBA - Thanks for that interesting post about the Cupertino market.

I have a friend in Cupertino who is getting ready to put her home on the market. She is literally freaking out about the market. You would think the market was going to collapse 30% in the next few months. She's in a good financial position, it's not like taking a bit off the price will hurt her. Last year all she talked about was RE never going down in the Bay Area. She's still going to make a nice profit, the panic from her is odd (this on topic, her fear is obvious). She also decided to rent for a while instead of buying right away.

What a difference a year makes.

astrid Says:
Wow, a job that pays a 22 year old high school graduate with no training $250K a year. Where was this job all my life?

mortgage broking. how many times have i said this before? my broker mate in DC pays herself $250K out of the business, works from home, employs loan officers and takes 40% of their commissions as well.

she didn't bother completing her arts degree in college...

brokers in Oz only make 0.7% on a transaction, whereas in US it's flexible, but around 5% (!). That's about 7x the pay for doing the same work, i.e. filling out a few forms.

doc1,

Well then you really must read FAB's article linked above from May 30th 2005 about all of the "wheeler dealers" that didn't even KNOW how many homes the "owned" in Las Vegas or was it Phoenix?

One gal, a former teacher said "well at least it's not like a stock, where it can go to zero".* Rally my dear? If you put 5% down (which would be major out of pocket to most flippers) and the home goes down by as little as 10% not only is your deposit wiped out but you now have a margin call to boot! If you can't come up with it at closing it's called a "short sale". A term which perhaps she should become aquainted.

*Sounds like it came from tape #36 from Carlton Sheets for crissakes!

DS,

I don't know why anyone would "chip their teeth" over this kids alleged compensation. Maybe he had ONE year where he made that (peak of the re-fi craze) but I doubt seriously this was sustainable by any measure!

I'll bet half of his gross commissions were done between his family (also flippers, a tight knit community of Armenian immigrants and of course himself) so I don't even know how great a "salesman" this guy was either.

In my business we call it; "Thank you for the business....... mom.

carlton sheets? carlton sheets? what the hell kind of a name is carlton sheets?

it's carlton sheets' name, sir...

dan Says:

I’m highly interested in all this “fear” people talk about. At my work I see people being very(VERY) happy that they can buy a house right now.

Well, SOMEBODY has to be the one to catch the falling knife, might as well be them.

do the math -- 5% of $300K is $15K. do 16 of those in a year -- that's writing only one mortgage every three weeks... and houses, condos and apartments are being bought and sold on quite a regular basis, or so reliable sources tell me... forget about working for a living... my broker mate shows me cheques for $10K, $15K all the time...

SFWoman,

I didn't want to be the one to have to say it. You're right. Many of these "newbie" MB's may have never actually seen one. Again this speaks volumes about the lending industry getting the general home buying public comfortable with the idea that;

a. Homes only appreciate

b. They're never really paid off so why worry about it.

c. You'll be trading up in a few years anyway so why not let some other schmuck pay off your credit cards and kids education!

d. Only losers and financial illiterates stay in a home for the life of the loan (assuring them plenty of repeat business).

DS,

Sure, during the re-fi mania it was easy money. Now? A lot of my clients home answering machines say "If you're a mortgage broker we JUST re-fi'd so PLEASE don't leave a message and take us off your list". Seriously.

Many of my buddies tell me that people are backing out at the last minute or finding all kinds of reasons NOT to go through with a deal. A lot are simply washing out of the business.

Davis_Renter,

Yes, I read that article. Totally MSM source. Almost sounds like the author just regurgitated what's been bandied about on this board, Ben's blog, and others for the last year or two.

Frify:

Thanks for the Krugman article (subscription required). In the article, Krugman references Nouriel Roubini, an economist who has predicted a nasty recession in 2007.

Is anyone else thinking this may be a good time to sell other investments (besides houses)? Speaking of fear, I am getting nervous about my 401K and IRAs which are mostly in stocks (US and international) with a little cash and commodities exposure thrown in.

What would be the best way to invest conservatively for a recession + dollar crash environment? The new swiss krona ETF? My guess is that a recession would be bad for stocks and commodities, but I am also nervous about holding cash if we have a real dollar crash. Then again, the old saying goes that the stock market climbs a "wall of worry," so I don't want to overreact.

Any ideas on what might make sense if Roubini is right? I will of course not hold anyone to their predictions... Anyone have ideas/theories/plans for this? Randy? Conor? Dinor?

SFWoman,

Now, I believe that young couples in Des Moines, IA are putting 20% down on a 30 yr. FRM!

It's all about setting a new standard. Question is, once it becomes glaringly apparent that outrageous appreciation is no longer the norm will the folly of these new "financial products" be exposed for what they are? Or will they prove to be the bubbles salvation? My guess is that it's already too late.

Anyone here able to verify the 5% mortgage broker fees quoted by DS? That sounds incredibly high. I thought $1000-5000 was the norm, and the mortgage broker's take is more like 1-2% of the total.

DS, also note that your friend is an experienced mortgage broker with her own office, so she would be expected to make more money. That's quite different from a 22 year old high school graduate, who probably works by himself and must share his fees with his head broker.

On a side note, monopolies are still alive and well in Amerika: wsj article.
WASHINGTON -- Federal regulators have prepared formal inquiries asking Verizon Communications Inc. and BellSouth Corp., for more information about their decision to keep money high-speed Internet customers would have otherwise gotten back following a government decision that broadband subscribers no longer have to pay into a federal subsidy program.

The letters, which sources said could be sent as early as today, are the first step toward a formal Federal Communications Commission investigation. The inquiry is particularly unwelcome for BellSouth, whose $67 billion acquisition by AT&T Inc. is still pending before the agency. It's somewhat unlikely the issue would have any significant impact on the merger, which is still being reviewed by staff. But FCC Chairman Kevin Martin was "very upset" by Verizon and BellSouth's decision to keep the money, an FCC official said.

"The commission takes its obligation to protect consumers very seriously," said FCC spokesman David Fiske. "Consumers must be provided with clear and non-misleading information so they make accurately access the services for which they are being charged and the costs associated with those services."

Last year, the FCC decided that digital subscriber line, or DSL, subscribers no longer have to pay into the federal Universal Service Fund, which subsidizes phone service in rural areas and for low-income residents. Theoretically, that meant that DSL subscribers would have seen their monthly Internet bills drop a dollar or two in September.

Last weekend, Verizon began emailing its roughly six million high-speed Internet subscribers, informing them that they would no longer be charged a USF fee -- which was $1.25 or $2.83 a month, depending on speed of service. However, their bills would not drop more than a few pennies because the company said a new "supplier surcharge" of $1.20 or $2.70 a month would be tacked onto bills beginning Aug. 26.

When contacted by a reporter, BellSouth said it would continue to charge all of its 3.2 million Internet subscribers the same $2.97 "regulatory cost recovery fee," even though it no longer has to use some of that money to pay into the federal USF fund.

Verizon strongly disputed the idea that it had not been upfront with consumers about the new charge and said its timing was designed to minimize the impact on consumers, who won't see their bills change significantly. "We increased prices but the impact was less because the government was removing this [charge]," said Eric Rabe, a Verizon spokesman. "We're not keeping that money. We're charging more for things we need to cover."

Representatives for AT&T and Qwest Communications International Inc. said the companies had discontinued USF charges earlier in the month and had no plans to impose new surcharges. Another Qwest spokesman said Wednesday, however, that the company had not yet decided what to do.

Earlier this week, a Verizon spokeswoman said the company decided to impose the new fee on all Internet subscribers because of increased costs of providing service to customers who only buy high-speed Internet, instead of a bundled package of phone services. A BellSouth spokesman said the company wanted to recover more regulatory costs than it had previously been able to do. Neither company said they had received anything yet, according to spokesmen for both companies, and neither had any immediate comment.

According to people who have been briefed on the matter, the "letter of inquiry" being prepared ask for documentation about how the surcharges are consistent with federal Truth-in-Billing laws as well as how the underlying costs of providing high-speed Internet services are supported by the surcharges. Additionally, the FCC wants information on why the companies are imposing the surcharges on all Internet customers, both those who buy bundled packages and those who subscribe only to high-speed Internet.

SFWoman, I looked at the MLS for the Vallejo 12M house. It did not mention central A/C. Is it just something to obvious to mention or it it something uncommon in San Francisco. I can imagine there are at least a few warm (80+ degrees) days in SF.

Glen,

Don't take this as investment advice, but forex and commodities (esp gold and agriculture plays) are periodically talked about on this board. Depending on inflation/interest rates, it might be advisable to hold a large cash reserve and watch for opportunities in bonds.

Different Sean Says:

> My broker mate in DC pays herself $250K out of the business,
> works from home, employs loan officers and takes 40%
> of their commissions as well.
> brokers in Oz only make 0.7% on a transaction, whereas in
> US it’s flexible, but around 5% (!). That’s about 7x the pay
> for doing the same work, i.e. filling out a few forms.

The only brokers that make 5% (five points) are the hard money guys who get money for people with bad credit.

Most people pay one point 1% for a personal home loan in the US. Flippers pay more since it is harder to get a little or no money down loan on an investment property.

People pay more for 2nd TDs since they are harder to find, but since they are usually small brokers don't make a lot of money on them.

Peter P Says:

> I looked at the MLS for the Vallejo 12M house.
> It did not mention central A/C. Is it just something
> to obvious to mention or it it something uncommon
> in San Francisco. I can imagine there are at least a
> few warm (80+ degrees) days in SF.

Very few homes in SF have (or need A/C).

I lived in a newer apartment in the Marina that has central A/C for a couple years and never got warm enough to turn it on (I really never needed it and was not just trying to save money)...

Astrid,

Thanks... don't worry, I won't take anything as investment advice...just brainstorming.

I have been thinking the same thing about commodities for a few years now since reading Jim Rogers' "Adventure Capitalist" and then, later "Hot Commodities."

I bought a little bit of the GLD ETF when it first came out in 2004 and also have had a position in QRAAX, which is a commodity mutual fund (mostly energy), but I have not found an easy way to invest in agricultural commodities, even though I think the investment case for them is pretty compelling. At this point, though, I have to wonder if the easy money has been made on commodities. In a recession, my guess is that commodity prices could easily go down. Then again, if Rogers is right, we could have another 5-10 year bull market in commodities. Wish I understood this stuff better.

I am mulling over the idea of taking a big chunk of cash and sticking it in the Lehman 1-3 year bond ETF (SHY). If BB needs to start lowering rates next year, the 1-3s should do ok, I think. Other than that, I'm fresh out of ideas.

Glen,

One of the best "all weather" managers in the business is Steve Lehman. He works for Federated Investors in Pittsburgh, PA. I don't believe he's EVER had a negative quarter. His mix includes every thing from New Zealand gov. paper to oil futures. Right now he's over 35% in cash. If you go to their web-site it will break it down for you in more detail.

This should give you an idea as to what to brace for. Steve's just a bearish guy and he definitely sees the upside since Oct. 2002 as a bear market rally (not to be confused with a bull market). He's pretty clear on that and has been one of AG most vocal critics. If your 401K doesn't offer anything remotely like this you can own it outside and emulate it inside. Not to plug for this guy but my more bearish clients love his take on reality.

*Not a plug for Federated.

DinOR,

Thanks, I will check it out. My 401k is pretty lame (selection of about 12 Oppenheimer funds, which is how I ended up with QRAAX). But the bulk of money is in IRAs, so I can move that money around more easily.