patrick.net

In the spirit of the thread: I fear that Americans will never return to viewing a house as a place to live and raise a family, instead of as an investment vehicle where they reap huge gains with "other people's money".

I also fear that most people are too bad at math to understand that banks don't grant unfavorable terms for their own interests.

I suspect that tOs understands leverage better than 98% of Americans, even including MBAs (there is a very wide variance in b-school quality, after all). She's gone off on MBAs herself a couple of times, in fact.

That's makes her invoking FAB as if he supports her that much more irony. I'd love to see her directly ask him the questions I posed months ago:

1) Ask him if he went to B-School
2) Ask him if he rents, and if so why

In fairness Brand, the tax deductibility has a fairly high present value, and takes up more sensitivity in the value calculation the *shorter* the term of your ownership. But the largest sensitivity is the *cost basis* which is purchase price. No amount of realistic leverage, tax deductibility or alternative rent can offset an astronomical purchase price.

And for the record, here the ownership cost -to- rent is easily over 3X. In our case, maybe even higher in a months or so, as I'll comment on next.

Bruce,- I fear I do not look like Kirsten Scott Thomas, oh well.

Lost Cause- you don't need anything nearly as large as a suitcase for a bioweapon. Suitcase bombs are small nukes or simply constructed dirty bombs. You've got to fear the correct weapon!

My feelings on fear? There are two types of fear. The perfectly rational fear, where you are confronted with immediate danger, your adrenaline surges, and you react, hopefully well. You run away from the man in the alley, you swerve to avoid the guy who pulled into your lane, you grab a child and pull them from in front of a speeding car.

Then there is the other type of fear, the type that is so well used to manipulate people with. That insidious fear that can be planted in your head, that will make you feel helpless unless you do as you are told. "Housing can never come down, if you don't buy now you'll be priced out forever." "If you don't vote for our party the swarthy people will come and get you." "If you don't buy that $70,000 car you know you'll look like a loser. Everyone will think you're a failure if you don't drive a nice expensive car." "You aren't going to waste your life living in a rental, are you? What will people think?" "You won't be safe without us. Look, you need us, Fear is at Level Orange." "If you don't agree with me you are unpatriotic. You wouldn't want people to think you were like that, would you?"

Planting that fear in people is pretty easy, look at the ticker going across the bottom of Fox News sometime. Fear, fear, fear.

This is something I found really funny. Look at the crimes that our friend Khalid Sheik Mohammed has confessed to:
http://www.foxnews.com/story/0,2933,258818,00.html
Notice: He planned to attack Plaza Bank in Washington State in or before 2003 when he was captured.

http://www.plazabankwa.com/about.asp

Plaza Bank was founded in 2006. He was so wily that he knew to plan this attack three years BEFORE the bank existed!

I am thinking primarily in terms of my own generation (late X, early Y), which has been brainwashed to think that a house is a some kind of get rich quick scheme. Even at an own-to-rent ratio of 1.2, I still think that renting is the right answer for young single people.

I will continue looking at houses, but I think I will end up renting small apartments until I get married and start a family. I don't like where the housing market is headed, I value my mobility and I'd rather invest my money elsewhere. The $700/month difference can go into equities, commodities and bonds.

btw, a friend of mine decided to become a landlord in Phoenix circa 2002 or 2003. He is now a realtor as well. Didn't answer many questions about the housing market at Christmas. :) But just yesterday my realtor told me that he is now looking in Scottsdale, because prices have crashed so much that things are finally becoming a good buy.

We're in the midst of determining 3 options:

a) buy a house [don't worry, unless one of the lowball offers from last December calls back in the next 2 weeks begging for mercy, this isn't happening -- incidentally, neither has sold despite price cuts]
b) exercise option to continue to rent this McMansion
c) abandon the cost of option b and rent a different place (not necessarily a McMansion, but big enough for people and furniture).

Here's the kicker. As I started searching I was floored to find a huge bifurcation in rent levels for big South Marin SFHs. I commented on this before, that there seemed to be FB homes, priced right around PITI for people who would have bought in the last 1-2 years. And then there were a few homes about $500-$1,000 less per month.

But now I see a *huge* difference in rents for often equivalent SFH rentals. More like $2500 - $3100/mo versus well over $5000/mo. The extreme is a 100% difference. Often the only difference is the updating of bathroom and kitchen. But, it's not even that the high-rent places have all stainless Gaggenau & Miele appliances or anything, just more Pergo and some marble here and there. But sometimes the cheaper houses actually have nicer flat yards, more parking or more usable living space.

Is it these lower rent houses represent "perma-rent" stock that are simply now starting to turn over tenants amidst an ever growing pool of FB McMansion "please cover my mortgage" homes? And the owners of the other homes just have lower cost basis, don't pay that much attention to the micro-market, or would gladly forfeit some short-term bubble-rents in order to secure a tenant fast, and for a *fair* rent that easily earns them a comfortable positive cash flow?

Well, for us, if we can rent at *below the real cost we paid for renting a much smaller house in the mid 90s when we first moved to CA* (before buying in), then hell. Renting is a no-brainer even given all the pain and suffering. We'd be approaching 1/4 the cost of owning. Even tOs tortured logic, using her own equations, shows it would take over 50 years for owning, assuming her growth rates, to outweigh the benefit of renting.

SFW

WTF!? Please tell me there was another Plaza Bank he was talking about.

I fear that I find out the people who are supposed to be gathering intelligence lack that attribute themselves, rendering their work useless.

Randy H,

The entire yellowcake story could have been discredited by googling the politicians working in Niger at the time the report was written. The yelllowcake report author had apparently used an almanac from the 1970s or so, and had put the names of the politicians from that era in the 'intelligence'.

Dissecting the assorted media reports on the terrorists out there can be an interesting hobby. Ask a chemist friend how to make TATP and then dissect last summer's airline scare. Think about that as they are taking away your 2 ounce tube of toothpaste.

Did you see the NYT real estate special magazine today (I'm just getting to it now, we don't get the Times up in Sonoma). In Santa Barbara you can qualify for subsidized housing on $177,660/yr.

theotherside Says:

> Bottom line: For real estate, leverage helps you on
> the way up but does not penalize you that much on
> the way down (“non-recourse loans” as FAB put it
> or “million dollar call with no premium” as I put it)

I guess it depends how define “not penalize you that much”…

Last time real estate went down in value I lost over a half million dollars. That is a lot of money today, but in 1994 it was almost my entire life savings…

There are a couple homes near my apartment for sale ($5.3mm in Presidio Terrace and $5.8mm on Washington St.) that I could buy today making a $1mm + down payment. They are nice places and are located mid way between Burke and Town that would be a bonus if I ever get married and have kids.

Let’s not worry about the $4mm mortgage payment that will be about $20K a month more than I am paying in rent or the $5K a month in property taxes (or the $1K a month HOA in Presidio Terrace) and just focus on leverage.

If I meet a nice girl that wants to get married and have kids, but she wants to live (out of the fog) on the Peninsula I would have to sell the home (since $30K PITI every month is a lot of money and is 4-5 times more than I could get in rent).

If the home drops (less than 20%) to just over $4mm (what it was worth at the end of 2004 and double what it was worth in 2000) I’ll get another reminder of how leverage works when I lose my entire $1mm+ down payment (due to the cost of sale)...

About b-school.

But President Bush is the only U.S. President with an MBA, from a top-tier school no less.

justme,

I don't think that there's a crime since OJ's wife was killed that this guy didn't confess to.

Nice to know these things are all wrapped up now.

Anyone see this? How much did the NAR pay Ben Stein to do this "commercial"? I liked it better when he was doing the "clear eyes" commercials.

Randy H writes:
Here’s the kicker. As I started searching I was floored to find a huge bifurcation in rent levels for big South Marin SFHs. I commented on this before, that there seemed to be FB homes, priced right around PITI for people who would have bought in the last 1-2 years. And then there were a few homes about $500-$1,000 less per month.

I'm observing the same for 4-5 BR houses in the South Bay.

Is it these lower rent houses represent “perma-rent” stock that are simply now starting to turn over tenants amidst an ever growing pool of FB McMansion “please cover my mortgage” homes? And the owners of the other homes just have lower cost basis, don’t pay that much attention to the micro-market, or would gladly forfeit some short-term bubble-rents in order to secure a tenant fast, and for a *fair* rent that easily earns them a comfortable positive cash flow?

Makes sense. My current landlord operates that way. He bought the house in 1994 at a quarter of its "value" today, and could probably still make money if he rented it out for half of what he's charging me - which, even after the recent increase, is still about 20% below market.

Anyway, houses with realistic asking rents are usually gone fast, whereas the others linger for weeks.

The danger is though that landlords who look into Craigslist as an indicator of "market rents" get the wrong picture and ratchet up their own expectations, which may ultimately make rents go up.
Could it really work that way?

Some observations that I found noteworthy:
Some time in February, a brand new 3000SF+ 5BR house in Campbell went up on Craigslist for $3200. It lasted surprisingly long (maybe 3-4 weeks).
I'm currently watching an older house in Saratoga. It's pretty funny: Every week, they cut the asking rent by $100 - right now, they're at $3850, down from $4150. My guess is that it'll rent at about $3k.

It certainly seems that the air becomes pretty thin at $3k.

Ben Stein appears regularly on Neil Cavuto's Cavuto on Business Show on Saturday mornings. He continues to advocate buying real estate and buying emerging markets (which are dropping recently in a major way.)

He explains that he is not a market timer and in the long term, these investments will do well. I think it is a disservice to get people into these these investments just before they start dropping.

These gurus make lots of mistakes in their investment advice. They must make most of their money on books or whatever, but would probably go broke following their own investment advice.

Ben Stein is a paid shill! Probably on the NAR's payroll. This guys advice is going against all logic. Some people value money more than their own reputation!

The only thing we have to drink is beer itself.

Bap33,

"is it not odd that the mass media has successfully drafted and controlled the entire thought process for the entire self-proclaimed smartest bunch on the planet?? - aka Libs ??"

Interestingly the most recent examples of media groupthink that I can come up with aren't exactly those perpetrated by the 'Libs', but rather by the 'Cons', and cons they were. The entire debacle about the existence of WMDs in Iraq, with such liberal media outlets as CNN, MSNBC, NBC, ABC, CBS and Fox news all attacking Scott Ritter and Hans Blix about their views that Iraq hasn't had WMDs since 1992. I remember one particular interview in which Paula Zahn insinuated that Scott Ritter was unpatriotic and on Saddam Hussein's payroll because he didn't believe that WMDs were in Iraq.

Or how about Judith Miller, at that famously liberal paper, the NYT, dutifully reporting the Doug Feith spin on yellowcake and Niger? She never investigated at all, she simply reported what was given to her by people working with the vice-president.

Or how about right now? The mass media is failing to look into the funneling of money through Fouad Siniora to Sunni jihadi groups that is being run by a combination of people close to Cheney and the Saudis. It's interesting because some of the people involve include Eliot Abrams and Negroponte, who reportedly left his position as Director of National Intelligence to avoid another Iran-Contra scandal. How much mainstream media have you seen about that?

If the media is controlled by liberals they seem to prefer stories that present the neocon point of view.

LILL, I think I've found my next realtor. I hope he/she is in California. You just shook my belief system.

FormerAptBroker Says:
Malcolm Quotes the NYT article that Says:

> “This is the problem I have with the real-estate-equals-
> dot-com argument. Most homeowners buy to have a
> place to live. If prices fall, they react precisely unlike
> stock traders; rather than bail out, they stay put longer.”

Then Says:

> This is a true statement. The problem is that you can’t
> just wish prices to stay where they are. The prediction
> is that panic sets in as prices fall and sellers pile on as
> they fear losing more and more equity.

You have selected only an excerpt for you purposes. If you actually read the whole thing you may be surprised.
To add to that, a lot of owners won't have a choice to hold out. Things like divorce, or new job offers can force someone to sell so not everyone can hold out indefinitely.

And I wasn't quoting the article, I was rebutting the otherside using that article to support her point.

To add to that, a lot of owners won’t have a choice to hold out. Things like divorce, or new job offers can force someone to sell so not everyone can hold out indefinitely.

.........or am ARM reset.

Yup

All I said was that her point was partially true, there are many well rooted owners who are in it for the long term, but they become irrelevant.

SFWoman Says:

> Interestingly the most recent examples of media
> groupthink that I can come up with aren’t exactly
> those perpetrated by the ‘Libs’, but rather by the
> ‘Cons’, and cons they were. If the media is controlled
> by liberals they seem to prefer stories that present
> the neocon point of view.

Rich liberals are mostly neocons (e.g. Diane, Nancy & Hillary and a lot of guys that support Israel). If the US pulls out of the middle east Israel (and many big Dem. contributors who have names ending in stein and berg) will not be happy.

The overall spin of the mainstream media is Liberal (with a Conservative spin from most AM talk radio and Fox News).

I don’t think a day goes by in the Bay Area when I don’t hear about “the increase in Greenhouse Gasses that cause Global Warming”.

When I drive down to the Santa Clara Valley I see a lot less crap in the air (and way less crap in the air when I down in the San Gabriel Valley).

When my Great Uncle moved to Marin after the bridge opened he said that the road at the bottom of Tennessee Valley would flood when it was raining at a real high tide, now 70 years later the road still only floods when it is raining at real high tide…

P.S. I liked the conservative spin on the Gore wins an Oscar story that said “Former Vice President Al Gore was spotted in Hollywood fondling a short naked man”…

danville woman, you said

"Ben Stein appears regularly on Neil Cavuto’s Cavuto on Business Show on Saturday mornings. He continues to advocate buying real estate"

He also writes on Yahoo Finance...he spoke about how prices do decline and decline painfully.

What to Do When a Boom Goes Bust

http://finance.yahoo.com/expert/article/yourlife/10255

The real estate crash to end all real estate crashes began the next month. Within three years, I couldn't have given that house away. If I'd been able to sell it, I might have gotten $350,000 for it.

The price languished in the same miserable range for a few years, then revived, and then took off for the moon. By early 2005, I might have been able to sell it for $1.8 million -- a tidy profit. Plus, I had very much enjoyed living there. (Although I do recommend that you never buy a home with a septic tank.)

Then, in the early months of 2006, the real estate boom collapsed. I could put the house up for sale, but there are few buyers out there. I certainly couldn't get anywhere near what I could have gotten for it in early 2005.

Brand said..

I’m pretty sure that the only reason homeowners think housing is a great investment is because most of them lived through hyperinflation in the 70’s and 80’s, when they were paying a joke mortgage payment compared to the sale price of the house. And younger people point to that as a great example of real estate being a great investment (as it has been recently).

Good points... many forget we had wage inflation. Therefore landlords would increase rents and creating higher bottom line profits. Then the producer prices inflation kicked in and the inflation cycle would repeat. All this ended when Volker notched up rates double digit. Since then we had very very low inflation. Technology since the 80s has been deflationary. Products are better but also cheaper... Moore's law.

'If prices fall, they react precisely unlike stock traders; rather than bail out, they stay put longer.”

Yes....For primary residence.. but also we had many homeowners buying 2-3 homes for flipping or and vacation. That excess purchase may flip back to inventory when the net returns turn under say 5-7%. S&P index may return more in the future. And yes rental prices also may decline in the future making the investment not so desirable.

that the road at the bottom of Tennessee Valley would flood when it was raining at a real high tide, now 70 years later the road still only floods when it is raining at real high tide…

And barely at that. It really only floods at the 101/hwy 1 park-n-ride and Caltrans yard. They have to block the exit ramp for a couple hours, but that's the worst of it. The worse problems are downtown mudslides from overbuilding.

Has anyone heard of Bill Wattenberg's ideas on terrorism lately? He scared me out of my mind. He states that Iran is about a year from developing nukes and there is a possibility nukes can easily get through our ports. He is usually so grounded and calming, that I was shocked at his concern about this possibility.

I don't think a nuke will be set off.
More probably, they will wait till they have many nukes in many cities, then set them all off at once.

SFWoman,

You need to realise that many people think that all of the organisations you mentioned (except Fox) ARE liberal propaganda outlets. They consider Fox to be 'balanced'.

MD Renter: I could easily afford a median-priced house in my area. The price would be 3x my income, and I already have a 20% downpayment. But I am not comfortable buying a house right now. I fear a drop in house prices (I have already seen 5-10% here in the last year). I fear a market change in tech that causes my spinoff to cut back employees. I fear the loss of the flexibility that comes from renting, and I dislike the idea of trading nice vacations and good wine for a house payment.

I agree with your Aristotle reference that most virtues in moderation are good things. Fear is a natural reaction to the unknown or to a known menace. It should not be ignored lightly.

It continues to amaze me that people make the biggest financial decision of their lives without really understanding the finance or market forces involved. If you held out for better understanding, that was a good decision, even if you theoretically missed some appreciation along the way.

CB its amazing that prices have gone from 200K to 1.5M in 10 years.
Lots of fundemental reasons behind all these prices... Oh yea...Must be Google employees buying... Again... LOL!

Fear: what are you afraid of?

(1) Buyers 'buying into' the SF Bay Area RE myth... actually believing houses should be selling for $1-1.5M ... never mind they are buying 2000 sq ft SFR that had Granite Counter Type and Hot Tob etc and was on the market in 1997 for $200-300K.

(2) Buyers actually believing there are multipe bidders without confirmation...
Yes I trust you mr realtor, that someone else has bid over asking..."and I can go higher by 10% if I really want to buy this home. You deserve a bigger commission'...

I guess they would also believe Enron was a real company who did not rip-off California consumers to the tune $9B because they (enron did not) cause the shortages which spiked the prices.

FAB, astrid, hessesfan, and Randy, thanks for your laptop advice.

I am still typing away on my 4 year old IBM T40 but the lid is now semi-detached. :)

I am too cheap to pay $1200 for a laptop. Probably I will just get a late model reconditioned IBM/Dell/HP with Core Duo for $700. It is better to have someone pay for the initial depreciation. ;)

global warming is a clear and present phenomenon. there are some pacific islands increasingly underwater already, the sea rises further every year, and they can no longer grow traditional crops on their lands... plus polar bears drowning, ice caps melting, glaciers retreating, etc... oh well, a change is as good as a holiday...

For those who wondered how real estate agents and landlords can 'conspire' to raise the rent, here's a chilling story. The REI circulates a fax or letter to all RE agents in their member network encouraging to push up rents 10% annually, etc.

Media Watch: Front Page - Who's Raising The Rent? (26/02/2007)

I remember one particular interview in which Paula Zahn insinuated that Scott Ritter was unpatriotic and on Saddam Hussein’s payroll because he didn’t believe that WMDs were in Iraq.

Or how about Judith Miller, at that famously liberal paper, the NYT, dutifully reporting the Doug Feith spin on yellowcake and Niger?

that degree of bias is almost unheard in the West outside of the US -- for a large country, there seems to be a certain insularity, parochialism and groupthink (apart from downright collusion) that you just don't find elsewhere.

however, REI antics are the same everywhere....

saw a story on southern afghanistan, opium crops and the taliban on telly tonite... the taliban are taking large opium sale profits, opium crops are up 65% from last year, and there is virtually no control over opium growers by the govt, altho the crops pay the taliban handsomely. there is, of course, a huge international heroin market to service. however, 'coalition' troops are bravely fighting the taliban directly, never you mind about that.

further, there is major unrest in pakistan, and strong dislike of Musharraf, the military dictator so favoured by george bush, with the arrest of top judicial figures for being outspoken against the regime. it will be increasingly hard to get a pipeline from the caspian sea thru afghanistan AND pakistan at this rate, they just won't fall into line and set up puppet govts with repressive dictators the way we want, curse those whirling dervishes and howling cannibals...