patrick.net

Option Dude,

I'm thinking of running another ZIRP thread this weekend.

"there is no way to get true BID prices"

Sir Randal H esq. here's a question for you cutting edge of technolgy types out there. Why not?

It's 2006. Why are we still handling RE offers like they were written with a quill? (As soon this wax melts I'll affix my seal?) WTF? I mean ultimately the offer is faxed to the buyer's agent right? Would it be possible to simply make your offer DIRECTLY over the internet and then keep records of those offers?

Oh wait, that would render RE agents totally worthless now wouldn't it?

Fetch me my cape and call for the coachman to bring the carriage 'round! I'm off to tender on a "manse"! Out of my way you peasants!

This just in, folks. A diplomatic warning to the Democrats to not press China too hard on trade-practices and currency-manipulation:

“China has a clear plan to diversify its $1 trillion foreign exchange reserves and is considering various options to do so, central bank governor Zhou Xiaochuan said on Thursday.” - Reuters

It will be interesting to see if the Democrats give in to the pressure, or if they decide to initiate a trade war with China. If they do go the trade war route, it should add fuel to the housing collapse fire. If China "diversifies," then the dollar would presumably collapse, causing long term interest rates to spike and forcing the Fed to raise short term rates, which would make houses even less affordable.

I think if Pelosi and Rangel have their way, they will lead the China-bashing charge and pass a bunch of lousy trade laws. Hopefully cooler heads will prevail, but I'm not too optimistic. Most Americans have forgotten what really high inflation feels like. Everyone takes cheap imports for granted. And China is a convenient scapegoat for US economic problems. Moreover, very few voters understand the connection between trade policy and inflation. So the Democrats will have a mandate to try to squeeze China. "Blowback" will be the inevitable result.

Bush has given in to protectionist pressures before and he is a hostage to Democratic plans, given his strong desire to maintain his Iraq policy. He is also clearly not a visionary, big-picture thinker. My fear is that we will see myopic populism trump pragmatism.

If this plays out, then inflation will really take hold. The bull market in commodities should continue. The Fed will need to get much aggressive in raising rates to keep dollars flowing to the US. The housing collapse will be longer and deeper than necessary, causing much anguish and gnashing of teeth. Maybe 2016 will be a good time to buy a house. I hope this blog is still around by then.

Not investment advice

-faxed to the buyer's agent
+faxed to the SELLER's agent!

Recorded as:

MLS # 539874 @ 1.25m
Orig. 1.15m 11/10/06 11:59am w/1 pt. SBD DC
CO. 1.15m 11/10/06 1:57pm w/o 1 pt. SBD
CCO. 1.15m 11/10/06 4:59pm w/ 1/2 pt. SBD AC

etc. etc.

Dinor,

Excellent idea re: a public market for real estate. You can already buy or sell real estate on Ebay. This practice should become more prevalent as sellers (especially institutional sellers) get more desperate to unload listings.

We have seen what Ebay did to the market for baseball cards. I suspect better access to market data could also contribute to a decline in housing prices.

Some entrepeneur really should create a site which is customized for real estate auctions (or Ebay should improve its RE section). You should be able write your offer using an electronic version of the standard purchase agreement for your state as a starting point, with the ability to add terms or strike out language as desired. Anyone looking at the site should be able to review all of the details of all offers submitted (financing, contingencies, inspection rights, allocation of costs, etc.). This would create a competitive bidding process. There should even be a privacy-protected way to review bidders' financials.

I predict that something like this will be available in the next five years or so from Ebay, Redfin or some new upstart company. The market opportunity is too great to ignore.

@Glen,

An unknown to me at this point is, how influential are Unions to the Dems these days? Their time seems to be waning (Uniondammerung?) and they were a key part of the Dems' protectionist views and dislike of open trade. However, Rangel especially is an "old time" Dem, and a stupid one at that. Plus, he dresses like he thinks he's a gangster-dandy from the 1930's hanging out with Al Capone.

DinOR

You have a way with words. There is no excuse in the current day and age for RE transactions to be handled as they are, other than maintaining status quo de facto monopoly power.

Fetch me my cape and call for the coachman to bring the carriage ’round! I’m off to tender on a “manse”! Out of my way you peasants!

@DinOR,

Hilarious! This makes me picture David Learah dressed in top hat, cape, and cheesy villain mustache:

http://content.answers.com/main/content/wp/en-commons/thumb/c/ca/180px-Villianc.svg.png

Glen,

I agree with every point except for the real-interest rates necessarily forcing up nominal-interest rates.

I rather think the US would, facing blowback from protectionism, become even more protectionist. In such an environ we'd be more likely to head down towards ZIRP than force a recession to defend the dollar.

When I look at the total global picture I see other countries & trading blocks much farther up the protectionism curve than the US. The EU has been turning extremely protectionist. They are practically begging for an all out trade-war with the US. They're trying to protect themselves from US software, US microchips, US aircraft & related, and US agriculture.

If we're indeed slipping away from globalization then there will be a dramatic rise in demand for USDs as an offset to rapidly slowing growth in Europe. In the worst case scenario, the US loses out on about 1/5 to 1/4 GDP potential with total protectionism. The EU probably loses the U part of the EU, as the western economies come crashing down under the weight of their social entitlements.

China will continue to demand USDs for at least another decade. If I were in charge I'd consider calling their bluff. If they want to threaten to not buy USDs then we should demand floating RMB, open capital market access, and elimination of all their punitive import tariffs. If they refuse I say let them eat their implied 40%-50% per year inflation, and good luck with that. (Of course meanwhile we'd do well to help Japan rearm and develop nukes).

Glen,

You address some very serious and sober issues in your previous post. Some I hadn't even really considered and I want you to save those for MONDAY when I'm in a crappy mode anyway OK! Oh I hear ya!

I'm not throwing down the gauntlet here w/Randy (un-wise any day of the week) but these market gyrations have gone on in RE for centuries. As far as I can tell they'll continue. Why not modernize them and bring it into the realm of the "information age"?

Back in the 1960's the NYSE had legions of clerks. They worked all night and barely had every trade manually entered from the prior trading session just in time to meet the next market open. It was a nightmare and some of my mentors over the years started out in this meat grinder.

Enter "DOT" and then "Super DOT", but..... we did it. RE transactions would be absolutely dwarfed by equity volume standards. When I bought my first house not every office had a fax machine so the realtor DROVE the offer to the sellers RE office! My how things have changed!

DinOR

The primary difference is the existence of the SEC as an empowered regulatory agency over capital markets, both public and private (many people don't realize the SEC has power over private companies & markets too, just they choose to not enforce public reporting or audits).

Add to that the SECs delegation of industry "self-regulation" vis-a-vis FASB, and the subsequent body of standards known as GAAP.

So in finance, recent dalliances excepted, everyone is keeping score the same way and playing by the same rules. When someone breaks those rules or ignores those standards they are investigated and punished, with credibility.

Real-estate would need a similar apparatus for any normalization and harmonization to occur.

That won't happen until something like the events that caused the creation of the SEC happen in RE.

Randy H,

Thanks and exactly. A big part of the "value" for these RE firms purportedly bring to the table is the "handling" of the offer. BFD.

Anyway, globalization and ZIRP aside for just a sec? A buddy of mine and I are trying to set up a "contact database" that we both can access, use and update. I normally just use outlook but are you (or anyone) aware of anything that we can use that's affordable yet reasonably secure?

just they choose to not require public reporting or audits [of private companies or private markets])

Outlook is what most people use. To share you'd need to subscribe to a hosted Exchange Server service or set up your own server. I used to use www.bizatlarge.net in Chicago.

You might be able to use LinkedIn also, depending upon what you want to do. www.linkedin.com

Randy H,

Agreed. I've even been told some of the local MLS don't even cooperate with one another let alone surrender autonomy to some regulatory body. Perhaps the only way for it to be implemented at this point would be to have a "test market" and show realtors they could double, no triple their revenue stream! (Then they'd be all over it).

Oh man, I just went to LinkedIn for the first time in apparently way too long. Way too many messages in my inbox.

Plus, he dresses like he thinks he’s a gangster-dandy from the 1930’s hanging out with Al Capone.

skibum,
Kudos on your critique of Rangel style. You nailed it. You should be on "What not to wear"!

You are right that union power is in decline. However, scapegoating never goes out of style. As the housing bubble continues to unwind, angry voters will be looking to vote for angry politicians. It is no longer safe for Democrats to attack "the rich" (since many Democrats are rich, or at least aspire to be). Latinos are now 15% of the population (and perhaps 20-25% of the Democratic party) and the number of foreign-born Americans continues to increase, so scapegoating immigrants is out. But China is still a convenient target for political posturing. Democrats will be looking for a way to tap into xenophobic sentiment without being too explicit about it. China will be a top target.

If I were in charge of China's policy toward the US, I would employ a two-pronged strategy:
1. Stick: See above comments on currency diversification; and
2. Carrot: initiate a "charm offensive" to familiarize Americans with Chinese people and culture and persuade Americans that China is not setting out to destroy or "take over" America or "steal American jobs." Convince Americans that China is committed to improved labor and environmental standards, etc...

Randy H,

So true. I've had clients that own "private non-voting" stock and treat the shares like baseball cards. Ahh, if they only knew!

Bap33,

Scuzzbutts, I like it.

The scenario you describe above simply has got to stop! I call it "sleeping in the same bed". Probably didn't invent it but it's accurate.

DinOR

I'm sure you know as well as I, having started various C-Corps, made S Elections, LLCs, the whole shebang. Every time you lawyer (should) have you file a little exemption form vis-a-vis your equity shares. That little form is an SEC registration, telling them that this company requests exemption from public reporting and disclosure requirements. I think CA has its own version of all that too.

I believe one of the legendary reasons Google went public was because of either revenue or employees? Either can trigger forced public reporting, even for private companies. At that point, might as well sell the shares on the markets and take the $. This is also why huge companies like Ford can't go private in a LBO unless they dissect the company into pieces.

Oh yea, and the SEC is getting way more active in Private Equity and Hedge Funds of late. I wouldn't be surprised to see a lot more registration, reporting, and disclosure rules forced on those "private" markets.

I'm so glad alot of sellers were stubborn with reducing their asking prices;thus heavily driving up inventories. Without all this, prices would stabilize much quicker. Instead, the inventory will sharply increase by the spring before the panic really begins. I'm looking forward to a very exciting spring :)

Randy H,

I have several clients that are looking to parcel off their considerable comm. RE holdings and have ME do the distribution to the street in the form of an LLC/LP. I asked since it's RE why not a REIT? Daggers! I'm looking at Daggers! Anything that might even show up on the registration radar (post sarbox) is...... how do you say? verbouten (sp)?

SO! They want ME to find whatever it is, no more than 25 sophisticated investors (that meet the qualifications) to parcel off an RE empire that took three generations to build without forming a REIT Oh, and keep it all within the state btw! Uh, uh sure...... no problem.

I am going to have to pull out ALL the stops and call in every marker to pull this off! Oh and they prefer to have "redemption windows" (meaning the shares won't be liquid). I swear if this cuts into my blogging time......

I agree with every point except for the real-interest rates necessarily forcing up nominal-interest rates.

I rather think the US would, facing blowback from protectionism, become even more protectionist. In such an environ we’d be more likely to head down towards ZIRP than force a recession to defend the dollar.

Randy,

Hard to predict. I guess it depends on whether the Fed would rather defend the dollar or prevent a recession. Initially, you could be right that the Fed might choose ZIRP over recession. But couldn't this lead to a "reverse conundrum"--that is, just as the Fed was unable to move long term rates by raising short term rates, wouldn't we find that lowering short term rates would not necessarily lead to lower long term rates (as foreign and domestic investors demand higher inflation premiums)?

In this scenario, mortgage rates would remain static (or even go up), providing no relief for the housing market or the FBs, while screwing retirees and savers.

Eventually, the political pressure to contain inflation would emerge and the Fed would have to start the painful process of raising rates.

Another variable, which could distinguish the US from Japan: inflation-indexed entitlement programs. I don't know how it works in Japan, but in the US, entitlement spending rises with inflation. ZIRP could positively crush the US economy. With inflation running at 8 or 10 percent, wouldn't the Fed be forced to raise rates to rein in entitlements?

I'm starting to see really big increases in the price of food, anyone else seeing this? Olive oil up 50% and that's on sale!

Allah,

Last night we got 4 small plastic bags (nothing special) $70! Thankfully beer prices seem to be holding the line though.

DinOR

Good luck with all that. Sheesh. At least they're not asking for you to do much work.

Maybe you can drum up some interest in OR "not a REIT" investment here on the blog.

"verboten" -- fair-boat-en.

So saw sale price of a house - now can't access it, but sold for about 1.4 listed for 1.7m - +/- 18% reduction - in Los Altos.

Out of my price range, but still that's a nice price reduction right there! Although it probably won't alter the YOY figures much for that area.

Another one sold for 3.8% reduction after 7 months on the market - only shows as 61 days, but I have been tracking it for longer. Not much of a reduction, but we are getting there!

Glen

In the short to medium term, ZIRP would dramatically _increase_ the value of domestic assets like RE, even if mortgage rates increased.

The main reason being the effective negative nominal interest rate that ZIRP would cause, thus meaning that nominal savings actually shrink even in nominal terms.

Meanwhile, if inflation were only 5% (I would guess closer to 10%), then RE will be guaranteed to increase by that rate regardless of other factors. So even if RE net decreased, say by 12%, then it would be beating savings returns by 5%, meaning that it _should_ have decreased by 17%.

The US entitlements gap would be more than plugged by the "freebie" we'd get repaying foreign obligations in weak dollars. It's kind of a loan-forgiveness-program we force on foreign central banks. The numbers are so huge that I highly doubt it would unravel here faster than anywhere else, therefore meaning by the time we Volcker-ized rates to stop inflation we'd be ahead in terms of global current accounts.

The negative is that at the end of all this there would be a very unstable, no-cooperative global economy and probably politic. It would lead to loss of global liquidity, halt in developing nation progress, and likely regional expansionism and wars. Think Russia re-acquiring lots of former republics (at an even faster pace).

Randy H,

Thanks. I view the blog as my "water cooler" where we exchange ideas etc. I wouldn't want people to avoid me b/c I'm forever peddling this or that. Besides when I say "markers" I'll have to go to some of the guys I've worked with over the years and really peddle the name. We've pretty much decided there won't be HUGE up front pay outs so I'll have to go to buddies and tap into their "A Book" of clients which just makes it all that much touchier. Wish me luck! (Actually it will be fun) and I'm looking forward to it. This is the price we pay if we want to grow.

"Pocket Listing" has been added to the Housing Bubble Glossary.

@dryfly,

Welcome to our blog! Please keep the data and comments coming --very good.

I have several clients that are looking to parcel off their considerable comm. RE holdings and have ME do the distribution to the street in the form of an LLC/LP.
Mosey on over to water cooler....
Dinor, I know next to nothing of which you speak, but what about parceling off the the holdings as TIC "shares" to eager Starker 1031 exchangers. My general impression is that this would be a bit of a wider audience than LLC/LP investor types (don't know ahbout the work on your end, though :-)

EBGuy,

My role truthfully? Yeah uh it's to SELL it! We've interviewed several firms to handle the underwriting aspects and to make sure everything is compliant. (Emphasis on "compliant").

The idea was to target investors that have really graduated from the "cheap seats" but aren't quite ready for direct investment nor want the headache. I'm told it will be like a 100K min. with annual redemption window. A lot of the appeal is that with publicly traded REIT's you never actually own the "bricks" just the shares.

Speaking of the cost of compliance it's driven a lot of mom and pop shops out of bus. and the big players aren't interested in doing a 1031 for some old dude w/ a 40 unit apt. bldg. and a mini mall!

Peter P very astutely brought to our attention though that 1031's can be used for assets other than RE! He provided a link that showed aircraft and even livestock can be 1031'd! (These guys that are CFA material always have to one better you!) Arghhh.

I would probably be more suspicious if he claimed to represent Harlem but wore Armani and Cartier.

Actually, he does claim to represent Harlem:

http://rangel.house.gov/bio.shtml

Congressman Rangel lives in Harlem with his wife Alma, who is a founding member of the Congressional Black Caucus Spouses and participates in many civic and community organizations. Congressman and Mrs. Rangel have two children.

And he does dress in Armani and Cartier equivalents (hanging w/ Al Sharpton):

http://www.gwu.edu/~action/2004/sharpton/sharpton091302.html

I modified a post in moderation (too many url's):

I would probably be more suspicious if he claimed to represent Harlem but wore Armani and Cartier.

@SP,

Actually, he does claim to represent Harlem:

Congressman Rangel lives in Harlem with his wife Alma, who is a founding member of the Congressional Black Caucus Spouses and participates in many civic and community organizations. Congressman and Mrs. Rangel have two children.

And he does dress in Armani and Cartier equivalents. Neither Glen nor I were implying he dresses shabbily. Rather, he's a bit of a fop (here he is hanging w/ Al Sharpton):

http://www.gwu.edu/~action/2004/sharpton/sharpton091302.html

could someone delete the original 2-link post that was put in moderation?

Randy,

I just wrote a four paragraph post in response to your comments on ZIRP. Then I re-read your post and thought it through again. Then I had to delete all my comments. Oh well.

On further reflection, I think there is a decent probability that the scenario you described will come to pass. But of course a 5% inflationary gain in your RE holdings is small consolation when faced with a 17% real decline.

OTOH, I can imagine other scenarios as well--like a newly hawkish Fed. I guess the bottom line is that you probably shouldn't try to use macro predictions to drive investments in residential real estate. Until I can buy a house for something reasonably close to the cost of renting, I will wait it out.

For one thing, a short, heavy man look even heavier in double breast and light color.

It's not just the suits and ties. The pomade and moustache add to the bootlegger-chic look. I was just commenting that skibum's "gangster-dandy" comment was particularly apt. I think it is kind of nice to a few "characters" in Congress.

I think Charlie Rangel is actually pretty entertaining to listen to. He's kind of a showman-politician. I disagree on skibum's assessment of his intellect--I think Rangel is a smart guy and a wily politician. But unfortunately, like most politicians, he is likely to sacrifice economic rationality to political expedience.

Realtor Spoof Ad makes it in to the SF Chronicle

http://www.sfgate.com/columnists/lloyd/

I think Charlie Rangel is actually pretty entertaining to listen to. He’s kind of a showman-politician. I disagree on skibum’s assessment of his intellect–I think Rangel is a smart guy and a wily politician. But unfortunately, like most politicians, he is likely to sacrifice economic rationality to political expedience.

Glen,

I'll concede on that - he probably is reasonably intellegent, but he's definitely entertaining. I found his pet issue of reinstituting the mandatory draft at the very least interesting.