patrick.net

Do you think the bank’s will keep overlooking bad credit?

When the stuff hits the fan, any imperfection in the credit history can be detrimental. People still think that the same credit standard will apply regardless. This is a dangerous assumption.

I think lending standard is already being tightened. This may be why there are more transaction fall-throughs recently. I am not sure about this though.

I have to call it the night. Getting late. "See" you all tomorrow.

Of course the banks and credit card companies encourage people to use their product! Why would anyone with an IQ of more than their age be surprised by this?

So many people borrow “too much” but who is to blame? Most people eat too much for their own good as well. Should we blame that on the supermarket for selling so much food? …for offering special deals and cheap calories?

Everyone must be responsible for their own actions. Many people are fools. Why look for some conspiracy when the answer is obvious. No matter what we do there will be fools who have no self control and will eat their way to obesity and borrow their way to financial weakness.

Food is cheap. Credit is cheap. Of course people over consume them. In a time of unprecedented prosperity it is very easy to do these things.

I don’t agree with bond bulls that deflation is coming. I was in deflation cample last year, but now don’t see any way for bond and housing bubbles to unwind without double digit inflation.

News, why is that?

I’ve been looking strongly into Forex. I think that might be a smart thing to learn a lot about. It might be a place to play with some small part of a portfolio in the near future.

TWIT, will you take the buy-and-hope approach or the trend-following way?

Individual bubbles do go bust. The FED could not do much to stop the tech bubble from bursting. The only question is whether they can prop up another bubble to “contain damage”.

I'm reading 'Devil in the Hindmost', a great read on the modern history of speculation. One theme that comes up over and over again is that the swan song of any doomed market is when investors shrug and think "this is too big to fail".

If you think about the high priced counties like San Mateo and Marin, they are the same “money volume” (volumeXprice) as last year that indicates the top.

Yes, this indicates that the money flow into real estate is not increasing. Also, there is divergence between price and volume, indicating a non-continuation of trend.

matt_walsh, that book is fund to read, no?

The "too big to fail" line of thinking is truly flawed because The Roman Empire failed even though it was too big. Moral decay did it on.

If anyone flies on SouthWest in the near future you must look at their in-flight magazine. It gives condolences to those not in the market, stories of people who bought in 1948 and now have $1,000,000 in equity, and talks about ways to get in the market. My favorite part was how lovingly they portray the condo conversion market.

It gives condolences to those not in the market, stories of people who bought in 1948 and now have $1,000,000 in equity, and talks about ways to get in the market.

Have you counted how many condo ads (Las Vegas, Miami) in the magazine?

BTW, if you had invested in 2000 shares of BRK.A in 1965 (cost = $30000 total) and not do a single thing, you will have more than 165,000,000 (yes, 9 digits) in equity. A house costs about 30K in 1965, right?

Gee, my grammer is bad today.

Harm is either very perceptive, or he’s peeking.

Thanks, TWIT. Not sure what this was for though --was it the "head-and shoulders" comment?

Harm, were you an english major?

*Gulp* Yes. I hope revealing this doesn't bring down the wrath of Escaped from DC! Even worse --I don't change my own oil!! (In my defense, I do know how, I just don't want to dispose of it, or worse -pollute.)

One theme that comes up over and over again is that the swan song of any doomed market is when investors shrug and think “this is too big to fail”.

Matt,

Have you seen our previous thread of the same name?

Fake P, at 10% a year ("historical" stock return) 30K in 1965 would have become 1.35M.

In 1969, DOW was about 174 (dividend-adjusted), it is now over 10000. 30K would have grown to 1.7M.

Anyway you look at it, even a diversified stock portfolio would have out-performed home investment by a large margin in less time.

However, you could try to name me a house that was bought in 1965 and sold in 2005 that didn’t make substantial amount of money.

Any house in the middle of the country that was destroyed by a natural disaster. Many of such houses were uninsured.

Excerpt from interview with Robert Schiller: tinyurl.com/69tqv

The notion that home prices always go up is very strong, and very wrong.

The appearance is that the investment in the house did extremely well. But the consumer price index rose eightfold between 1948 and 2004, so the real increase in value was only 48 percent, or less than 1 percent a year.

Highlights from Fed Charman Alan Greenspan's testimony to Congress this morning.

Sources: Ben Jones & Bloomberg
tinyurl.com/ccrpg
tinyurl.com/a7g7k

"History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and, at times, may lead to financial excess and economic stress."

Greenspeak translation: Bubbles burst

"Such perceptions, many observers believe, are contributing to the boom in home prices and creating some associated risks. And, certainly, the exceptionally low interest rates on ten-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding, home turnover, and particularly in the steep climb in home prices."

Greenspeak translation: Gentlemen, we have a Housing Bubble

"Whether home prices on average for the nation as a whole are overvalued relative to underlying determinants is difficult to ascertain. Among other indicators, the significant rise in purchases of homes for investment since 2001 seems to have charged some regional markets with speculative fervor."

Greenspeak translation: Get lubed up

"We certainly cannot rule out declines in home prices, especially in some local markets. If declines were to occur, they likely would be accompanied by some economic stress, though the macroeconomic implications need not be substantial."

Greenspeak translation: I recommend KY

"Nationwide banking and widespread securitization of mortgages make financial intermediation less likely to be impaired than it was in some previous episodes of regional house-price correction. Moreover, a decline in the national housing price level would need to be substantial to trigger a significant rise in foreclosures, because the vast majority of homeowners have built up substantial equity in their homes despite large mortgage- market-financed withdrawals of home equity in recent years."

Greenspeak translation: MBS-holders are screwed

Does anyone know of a "retail" way to profit from the widening spread of MBS and the treasury without having to short MBS directly?

Waiting in Vegas Says, the time to "LA LA LA LA LA with ears covered" has come for the housing bulls.

btw-does anyone think they will bring back the push for purchasing items Made in USA like they did last time?

Outside of flimsy, overpriced stucco shitboxes, I wasn't aware that we still made anything here.

HARM: You said "Outside of flimsy, overpriced stucco shitboxes, I wasn’t aware that we still made anything here."

You should gain a better familiarity with the U. S. economy before knocking it. Manufacturing production, while diminished in many sectors, is at an all time high. We no longer make as much of the labor intensive goods, but we still manufacture a massive quantity of goods. Unfortunately for our worker bees the domestic demand for low skilled manufacturing labor is greatly reduced as such production moves to other countries.

You should also learn something about the building industry if you want to provide competent comment. The homes being build today for the masses are of a quality level that surpasses what was generally built in prior decades.

Your satire on Greenspeak is humorous but takes huge license on accuracy.

Your post from Shiller points out a very real fact, that housing (on average) has only outpaced inflation by about 1% per year. Interestingly, when looked at as an investment, the total return (including net rent) on rental housing (with no debt leverage) has been about 1% below the total return of the stock market over the last 50 years. Of course, most real estate investors use debt, and with modest leverage the ROE for real estate blows the stock market away over the same 50 years. Of course, past results are no guarantee of future performance.

Of course, most real estate investors use debt, and with modest leverage the ROE for real estate blows the stock market away over the same 50 years. Of course, past results are no guarantee of future performance.

Leverage presence in the stock market too. With derivatives one can easily synthesize a leverage of 5X to 10X.

(Warning, leverage is a double-edged sword. But this is the same for all aset classes.)

To avoid margin calls, one can use options or option spreads to leverage without large losses.

(Not investment advice.)

PeterP:

Stocks are far more volatile than residential real estate. Much higher debt can be used used with RE while remaining at a lower risk level than stocks pose. The techniques you mention mitigate risk under most scenarios but can leverage you to the risk of ruin. They also cost money reducing your profit. I am not saying these techniques are inappropriate, only that they are less than perfect.

I have been investing in the stock market for almost 30 years and will likely continue to do so. I have done very well, and was fortunate enough to sell in 1998 before the first decline. I stayed out until March of 2003. I am still in.

Berkshire Hathaway has indeed been a great investment for such a long time. However, over the last 10 years the bloom has been off. It has been fine but nothing like the prior performance that is driving the numbers you cite. But it’s very difficult indeed to make great numbers when you are so big. I still own some BRK, but it has been among the lowest performers in my portfolio during the last 10 years. It is also the only stock that I held through the entire 10 years. Hope springs eternal...

Zephyr, I am just saying that leverage is also possible in the stock market. One can also get ruined in the real estate market if leverage is too high, occupancy is too low, and negative cashflow is sustained.

Also, when RE is great stocks are lousy, when stocks are great RE is lousy. They complement each other pretty well under most circumstances.

Much higher debt can be used used with RE while remaining at a lower risk level than stocks pose.

I agree, and it is easier to use leverage in RE because values are not marked to market. (i.e. no margin calls)

Also, don't get me wrong, RE investment is excellent when the P/E ratio (or cap rate) is reasonable. But if invest in RE, I will see it as a stream of future cashflow, nothing more.

HARM: You said “Outside of flimsy, overpriced stucco shitboxes, I wasn’t aware that we still made anything here.”

You should gain a better familiarity with the U. S. economy before knocking it.

Zephyr,

I was using sarcasm and exaggerating for the sake of emphasis, not trying to knock everything that's American made. Yes, we still make things of good quality (as Fake mentioned) and I'm glad to own some.

You should also learn something about the building industry if you want to provide competent comment. The homes being build today for the masses are of a quality level that surpasses what was generally built in prior decades.

As far as building quality goes, I'm no expert and my limited personal experience is mainly with CA housing. but if you mean homes today are generally of better quality than recent decades (1970s, 1980s), then I agree with you. However, compared to older Craftsmen (1900's - 1940's) there's no comparison. IMO they were better built back then.

PeterP: Margin calls are a huge risk because you can be forced to sell when it might be best to be buying. I never use direct margin. I do occasionally borrow against my real estate to buy stocks. No margin calls that way. I did this in 2003 when I jumped back in as big as I could.

I would like to see more and more "outsourcing" in the building industry. Pre-fab modules can be constructed in lower-cost states or even Mexico and then trucked to the home site 90% finished.

Margin calls are a huge risk because you can be forced to sell when it might be best to be buying.

Of course.

I only use margin for hedging occasionally. One good thing about stocks is that you can hold good stocks through a downturn, using the long equity to short cyclical stocks as a hedge. I have yet to do this in large scale though. Any comment?

I always image pre-fab homes being trucked from Mexico to the Sun Belt states. Can't we do this with NAFTA?

HARM: It is a difficult comparison to the Pre-war product. The materials were definitely more substantial then, but the defect rates were higher than today. Today’s materials use significant technological and engineering advancements to build a better product. The construction of the 1970s and 1980s was the low point in quality for both materials and craftsmanship. The 1960s were not so great either but mixed. Most homes today are built in a very controlled process that relies more on the process and engineering than the individual craftsmanship. The pre-war homes had the best craftsmanship -- when it was good. However, there is a survivor’s bias in the remaining homes from those pre-war decades.

PeterP: I prefer to sell and shift to bonds (or cash)when I expect a downturn. The Dow was around 9600 when I sold in 1998. I sat in cash from 1998 to 2000, and missed the big final up-tick, and the collapse. In early 2000 I put that money in bonds when the yield curve when flat. I stayed there until about Halloween of 2002.

I prefer to sell and shift to bonds (or cash)when I expect a downturn.

That works too. :)

Fake P, why am I evil? Are you suggesting that it is heartless to provide job opportunities to workers in Mexico (or China/India)?

Are we more entitled to opportunities simply because we have had them?

No, I do not want to see poor families get hurt. But in the tide of globalization, it is hard to avoid.

Peter P: You are so evil. What is going to happen to our construction workers when we outsource even the construction of our houses?

Fake P: I thought you were a champion of Free Enterprise, warts and all? ;-). Are you being ironic here?

Y'know, come to think of it most of the construction in Cali is done by illegal immigrants getting paid under the table. No doubt their families (here and back home) will be negatively impacted in the short run, but I imagine they'll just migrate to the next industry or location where low-skill labor is needed.

Fake P will use any opportunity to discredit me. :(