patrick.net

FRIFY

Thanks for following the refs. There is no shortage of macroeconomic models predicting some fairly bleak things for the future of US-Style Housing. The irony is that my role here on Patrick.net has generally been one of skeptic's-skeptic. I don't share the worst of the doomsday predictions. I think that US-Style Housing will continue on for quite a few generations yet to come, only with ever narrowing constraints. I also think that cold, quantitative economic models tend to miss the primary "human" component of something often dismissed as irrationality.

In reality, when things start unwinding -- as I believe they are in the US now -- people react by changing the rules. This is actually when paradigms shift, fundamentals themselves change, and new winners & losers are generated. Who's to say that the economy just doesn't lurch through a reorganization over the next 50 years whereby the very concept of "Home Ownership" itself changes? There is precedent. A homeowner pre-depression is fundamentally different than a homeowner post-war. Debt, liquidity, even risk-free itself all had different meanings in pre-depression US.

Were I to guess, I'd say we're transitioning into a much more stratified society, with less social mobility. Isn't that true of every large modern society as it matures, and the haves get ever better at securing their position? But I also think we're stepping onto a very long tail, where being a have or have-not is not largely predicated by one's home-ownership status. More, it will be predicated on one's position relative to control of debt. Specifically, control over other peoples debts. I'll be that US home ownership rates dip only a little, then continue to climb. But meanwhile, the median wealth of the lower 3 quartile continues to shrink, even though they "own" their homes.

If I control capital, and you are indebted, then by extension I control you in a US-style market capitalist society. Democracy be damned. Vote "correctly" else I shift my capital and you lose very tangible standard of living -- like your house. And if you wish to go on consuming life's pleasures like taking Jr. to Orlando, then be compliant else I won't allow my capital to let you indebt yourself to me even further.

skibum,

See what I mean?

tos,

I perfectly agree with FormerAptBroker (who is one of the only one here that really knows what he is talking about) when he states that being a real estate investor NOW is crazy but does this apply to a personal residence!!

Why don't you ask him if he owns his own home? And if not, why not? Oh wait, maybe he can't know what he's talking about being he has an MBA too. Damn. You're just outta luck here, with all us morons fluttering about.

Randy H Says:

> Here’s just some samplers from references
> I’ve read over the past 2 years: There are
> more formulae, datasets, and statistics therein
> than you can shake a troll-paw at–

I have not read anything that discusses three of the big reasons that I believe we will see a huge near term correction in Bay Area real estate (as the number of retail jobs, main jobs and support jobs shrink).

1. Technology making it easier to shop on line outside the Bay Area (buying items for much less from retailers who don’t have to pay high Bay Area rents or salaries and avoiding the high California sales tax).

2. Technology making it easier for many people to work from anywhere (I have friends with kids who have moved to big suburban homes near their wives family in small towns and their clients and often even co-workers who worked a floor below them for years have any idea they are not in the Bay Area any more).

3. Technology making it easier to send lots of work out of state or out of the country (I send work out of the US every night and have it ready for me to review first thing in the morning, my CPA sends data entry work outside the US and even my dentist is e-mailing dental x-rays out of the country for an inexpensive second opinion).

Hmmm Randy H. could you learn me sumtin? If I put 10% down on a "home" and say it tanks by 10% over 5 years, my 10% is gone. If I instead put that same 10% in some sort of investment and it went up 10% over 5 years, wouldn't I be in fact 20% behind had I chose the "home" investment option over the other?

DinOR,

I'm alluding more to semi-fraud where the manager starts rewarding themselves before seeing any kind of performance gain. It's quite hard to detect in a REIT, and it's also hard to get your money out when they have cashflow problems, generally stemming from the bigger paychecks.

Style drift is another problem altogether. There, you'd run into managers with subpar performance ramping up on high-risk investments to catch up to their benchmarks. But when/if their bets don't pay off, you'll again have trouble getting your money back.

I think my house-ownership aversion comes from when my dad bought a fixer when I was in high school. I spent a TON of time landscaping. Much more than I did studying (and I went to a top college). It was a nightmare of a backyard. I loved being outside working with my hands, but doing it day-in day-out just wore me down. Even after we fixed it up, it was still a lot of work maintaining the thing. And it wasn't even that big a yard. Like 1/6 of an acre or something.

Guess nowadays you can hire someone, but it just doesn't feel right to have someone else doing the work that you can do yourself. And, I'm pretty frugal, so it doesn't make sense in the $$ department either.

Can you eat koi? I don't want to grow anything I can't eat.

Here's a more realistic counter-bet for TOS:

If CA median real prices* fall at least 20% by January 2009, you must show up at the next blog party wearing a "dunce" cap and pose for photos with us.

If median real prices fall 30%, you agree to the above AND must buy Peter P all the sushi he can eat at a restaurant of his choice (trust me, this will be more costly than it sounds).

If median real prices fall 40% or more, you agree to submit to whatever punishment Surfer-X selects for you.

If median real prices go up 20%, I wear the dunce cap and write a mea-culpa "TOS was right" thread.

If median real prices go up 30%, I wear the dunce cap AND buy TOS dinner at a restaurant of his choice.

If median real prices go up 40% or more, I quit my job and re-dedicate my life to serving my new lord and master, Casey Serin, King of Floppers.

*for lack of something better, we can use the CPI to inflation-adjust

I have come around and believe that most men are fools. Their women make better decisions.

Women have better intuition. Men are usually clouded by the wrong kind of emotion.

I think (mentally healthy) women are more self aware and better intuned with their needs.

I think mentally "unhealthy" women have even better intuition. Too bad no one will listen. :)

If median real prices fall 30%, you agree to the above AND must buy Peter P all the sushi he can eat at a restaurant of his choice (trust me, this will be more costly than it sounds).

My understanding is that Masa's at the Time Warner Center in Manhattan runs about $300 per person. And that's for a normal sushi eating person.

Pretty OT, but are the Public Storage(TM) locations around here reputable? A friend has some stuff that needs storing.

I doubt I can consume $300 worth of sushi alone in the Bay Area, since I do not drink alcohol.

It is easier to spend that much in a Chinese restaurant.

Grateful Cheeta, back from the dead.

Glad to hear about the the D&Nsing. Any other Upgrde$ or are you just going to Phi$h with non-sek quiters? Razzle-dazzle?

Peter P,

What if you order only the expensive stuff, like Kobe beef & fatty tuna. Can you hit $300 then?

What if you order only the expensive stuff, like Kobe beef & fatty tuna. Can you hit $300 then?

Not easy. I cannot handle more than 10oz of beef and/or 5 slices of fatty tuna. They are good but just too... er... fatty.

Anyway, $300 is a lot of money for food.

My weapons stock pick (FRPT), if you remember, is now at $17.50. I recommended it when it was $3-4.

I heard that the US may be replacing 9mm pistols with .45 ones. Who is likely to benefit?

Argh, another comment of mine is in moderation. When did 2 links become the trigger?

Bah, Peter P, why do you encourage it?

Randy,

I agree that the demographic wave combined with growing inequality could provoke either a counter-revolution in how we currently handle the three big liabilities retirement/housing/medical-care. Two out of three of these are clearly headed for crisis. It's almost as if the bubble is meant to address the other two by enslaving Gen-X and new buyers with debt overhang. Is this simply our capitalistic system seeking a new equilibrium?

The human factor doesn't pop up in the dry economic models, as you say, but the models can often point out where the human factor is out of control . Bubbles appear when the infinite wants of man pull most strongly on the finite resources of the universe.

.45s have a lot more stopping power. They are generally more accurate over longer range, too, if you have good aim.

For short-range stopping power nothing beats the old trusty 12 gauge, though. Aiming is optional. Just point and shoot. It's just a bit bulky. But I've heard of intruders taking flight at first glimmer of the end of the barrel, though. No respectable farmer adjacent to I-71 in rural Ohio answers an unexpected knock at the door without one in hand. Never know who's come a traipsing across your corn field at 2am.

Surfer-X

Sorry I missed you last month when you were in town. I had to travel back east on short notice for a funeral.

You are correct in your analysis. The key is the notion of having alternatives -- specifically reasonably quantifiable ones -- at the time of making the decision.

Part 1: you earn X + (X*10%) in future value dollars.

Part 2: you realize (by selling)
Selling Price - (Purchase Price - X) + amortized principal; or
Selling Price - Loan Balance in future value dollars.

--Now you consider your alternative use of funds, or in this case what you forgo by not taking Option 1, so you subtract that from option 2.

Your real value of Option 2 is:
Selling price - Loan balance - Alternative Savings Return.

So the home buyer has to clear a hurdle, or she's actually losing money even if the home sells for more than her loan balance.

This is her discount rate. And we keep talking about that being the risk-free rate, T-Bill, CD, etc. But for *most* people their discount rate is much higher. Remember the consumer debt figures and number of people who carry a credit card balance. For someone with a credit card balance, they're paying 18%+ nominal, much higher effective. So they get to earn a risk-free return of over 20% simply by paying off their credit card. For them, buying a home is purely financial stupidity. People who buy crap with HELOCs that revolve aren't much smarter; they just get to play more games and have better rate structures. Is revolving home equity credit interest still deductible? That I don't know.

I’m bored with this now. I’m going back to work.

pa renter,

Let me just apologize now for all the other posters here who labeled you a troll a while back. Clearly that's not the case. The "you'll be priced out forever" THREAT is one of the usual realtor (tm) "talking points."

gentle cheetah,

Haven't heard from you in a while! I miss the interesting tangents. Did you ever get your Arc'teryx jacket? Have you had a chance to use it yet? Can you pack your .45 in the pocket???

Record foreclosures

Check out how this asshat uses words:

"It is a problem, a big problem, but it is not the worst it has ever been," said Chris Holbert, president of the Colorado Mortgage Lenders Association.

"If everybody groans this is the worst it has ever been, it scares people out of the home-buying market," Holbert said.

So in other words, lets make pretend all is well! Not that the tightening of credit has anything to do with it or the fact that prices are too damn high!

He said people who bought during the previous foreclosure crisis in the late 1980s, after the decline in energy prices, are the ones who have made the most money on their homes.

Yes, the ones that bought AFTER the bottom of the market, not at the start of the fall! ....If you feel this way, you should buy!, buy!, buy! If you don't buy you should shut the f@ck up! They should really treat these people the way they treat stockbrokers!

"The truth is, it is a better time to buy now in Denver than it was four years ago" before the current crisis began, he said.

Yeah, yeah, yeah, it's always a good time to buy, but it will be a MUCH better time to buy next year!

He also noted that a large percentage of homes that enter foreclosure do not complete the process.

In some of those cases, lenders accept "short sales," or less than the mortgage amount for the home, instead of going through with the foreclosure.

So in other words, we should go for one of these short sales where the price is 20% below the 300% marked up price. What a good idea!! :lol: It's funny how desperate people become when their business is in trouble.

I expect to see "Colorado Mortgage Lenders Association" go under in the comming months ahead. :evil:

2- you salary is not going jump from 263k to 323k, so use a 3% increase (you seems too bitter to have smelled a wall-street-like end of year bonus, do we have another hungry consultant???)

assuming a 40% total return over 3 years and a 9.3% rise in income to $328,000…

theotherside,

Palo Alto's official household income is around $200K. Are you telling me that most of Palo Alto homeowners lie on their tax returns?

So why can't a $263K household afford a median home in Palo Alto?

palo alto renter,

Theotherside has now thoroughly bored each of us with her amazing powers of real-estate-agent-math.

She's full of shit. She said: If you rent for 3 years, your MORTGAGE TERM in 3 years should only be 27 years and not 30 years as you assume in scenario 2!! First, you didn't assume that, but let's see what those huge whopping 3 years of amortization bought you in value:

At 20% down on a $900K home ($774K financed, after closing costs) @6.5% fixed:

Year end 3 you've a loan balance of $745,332.

Assuming you pay down all $347K of reinvestment return, you're financing $607K after closing costs.

Year end 3 you've a loan balance of $584,517.

The differential in outcomes is even more pronounced when present value is applied to those future dollars.

--

By the way, t.o.s. is just FaceReality, MarinaPrime. He gave it away with the Wall-Street bonuses comment.

C'mon MP, you're really still not over not making the IB cut? With math like you've demonstrated here it's no wonder. You're bad even by IB standards. Oh well, back to the grindstone. Got your new headshot on your cards for the "Spring Bounce" yet!

L
M
A
O

theotherside:

Of course PA Renter can afford *a house* in Palo Alto. (is there such a thing as a bad school district there?) He just can't afford a real house that's not about to be torn down.

According to CNN Money, the median household income in PA in 2006 was $133k. Why is it that someone with 2 times the median income can't afford the median house?

CNN Linky

Here's how I did my math:

Buy:
- kill myself trying to make the payments on a crappy house that's gonna fall over when the next 4.0 hits
- eat only instant ramen 3 times a day for the next 10 years
- get foreclosed on when my NAAVLP resets in 12 months

Rent:
- eat regular food and even go out for sushi sometimes
- go on a real vacation once in a while
- save some money to boot

Decisions decisions.

Today is my last day off, so you will not ear nearly as often from me for a very long time (do I ear good riddance )!

theotherside,

So, tomorrow you're starting back at the realtor (tm) desk manning the phones for the onslaught of springtime buyers coming in?

theotherside :

You really don't understand options, do you ? Which serious investor will invest in such gambling scheme ? If it drops 19% there is nothing to gain. Such binary pay-off is hardly worth discussing.

If you are so sure, why don't you accept HARM's proposal ? Put your ego on line. Why bother with this fuzzy math stuff which is way out of your league ?

theotherside,

You are so full of shit that even shit is offended.

If you believe all that, go long in CME housing index options and/or futures. A real financial product exists for you to go lose your money, so quit badgering those of us who can do math.

You don't have $600,000 to throw into an illiquid, crappy return escrow anyway. You're not kidding anyone. People with $600,000 cash or more -- and there are more than a few who read and post to this board -- don't jack it off on a bunch of bloggers; they have it working hard for them earning return.

and the notorious complexity of accurately forecasting medium term inflation, I don’t have the tools.

I say inflation is going up and staying up for the medium term -- based on putting my finger into the wind... and fallout from high fuel prices and the economy struggling to recover from the housing boom triggering an inflationary cycle...

GC Says:
Actually, some mental/personality disorders predispose the patients to be extremely sensitive to other people’s emtions and thoughts and to the surrounding environment. I forgot which ones.

Avoidant PD is hyper-vigilant to others intent. Paranoid PD read sinister motives into innocent remarks and others intent. That's about it, and both are a bit off...

I would I love to make you guys a two-way market on the same type of derivatives using REAL PRICES, but with two underlying stochastic processes (nominal prices and inflation) and the notorious complexity of accurately forecasting medium term inflation, I don’t have the tools.

Yea, math is hard. Not to mention statistics.

I'm so dense I still fail to see why you can't just use the CME Housing Futures/Options market. Unless you're offer is baseless to begin with, that is.

Good luck back at work. I heard there's a shortage of those nice, wooden, "For Sale" yard signs due to all the exploding inventory. Enjoy your spring :)

Notice how theotherside has yet to deny being a realtor (TM).

Wow, bold move TOS! Let me get this straight:

Theotherside is accusing us "bubble theory experts" of failing to put our money where our mouth is unless we accept his bet --on his terms, of course. Merely renting, not buying and investing your money elsewhere is not sufficient PROOF to him we're all not pussies. Golly, I feel my manhood is being questioned.

So, to accept his wonderful offer I would need:

--$200K in free liquid cash, an amount greater than most people's net worth (don't have it), and/or be willing to cash in all my retirement funds & other investments (I'm not).
--settle for some unspecified escrow fund (indexed to LIBOR?) that probably pays a lot less than my current index funds, at TOS's brokerage of choice (earning him a commission too?).
--lose everything if nominal, non-inflation adjusted median prices (reported by the ever-honest CAR, btw) fail to hit the -20% mark by January, 2009. -19.999%? Sorry pal, not good enough.

Gee, I guess TOS has called our bluff cuz' I'm not biting.

HARM you pussy. Just buy a house with a 2yr IO Option ARM and do a cash-back closing for the $200K! Then you'd be hedged either way, lol.

Randy H,

That's brilliant!

Inflation and housing prices - are they tied together?

I'm increasingly of belief that we will see dramatic inflation in the near future. The perpetual fall of the dollar. The massive government debts. Continued upwards trend of the price of raw materials.

I'm too young to know - but what happens to housing prices if inflation say... hits something moderate like 5-6%?

Does it tend to match?

I've been futzing a lot with this calculator recently: http://www.dinkytown.com/java/MortgageRentvsBuy.html and I'm perpetually surprised at how close the break even point is... especially when I tweak the inflation knob.

Inflation and housing prices - are they tied together?

I have a feeling they are -- like a bizarre twist to the business cycle and capitalist waves -- in a way that share prices probably are not, due to elastic demand for shares, etc...

ahem, my theory, the theory that is mine, is that...

speculative inflation in housing prices which outstrip general inflation cause mayhem in the economy -- the petit bourgeoisie (shopholders, etc) can put up their asking prices to meet increased mortgage repayments, as can tradesmen, etc. This is the beginning of the inflationary cycle. However, these increases in turn spark increases in wage demands from wage workers, as well as increased asking prices for housing, and wage growth tries to catch up. Next thing you know, you have high inflation. It's currently tracking at about 4% p.a. here, and the Treasury is 'worried'. Increased oil prices and other 'external' price shocks also trigger inflation, of course -- it is hard to disentangle multiple inputs as we are experiencing them now.