patrick.net

...that is, unless my net worth is then $17mm.

I stand corrected. Apologies.

Yes, I was thinking only of the New Testament.

I fear that the REIC+FB community will be considered 'too big to let fail'.

allah Says:

"The only thing we have to fear is fear itself."
_____

Let's examine this axiomatic truth a little more closely. I believe there is something deeper contained within this old saying.

The only thing we have to fear is fear "itself?"

ITS ELF!

The Elf of fear.

So, now that we have mined the glittering gem of meaning from within the muddy soil of this bromide, we can restate it thusly: The only thing we have to fear is: fear, its Elf.

Fear its Elf? I don't fear its Elf. And neither should you!
Its Elf is a big wussie!

Now if we could somehow remove from the context of that saying, this little Elf of fear, this little imp, then perhaps fear would be drained of its noxious vitality. Perhaps if we could kill this damn little fear Elf, then fear would be enervated, if not outright conquered and evaporate into thin air like an imaginary specter whose time had come.

So what is the moral of this story, you ask?

Kill the Elf of fear and fear becomes less empowered, than, say, a few cookie crumbs on your kitchen table.

I want some of whatever Michael H is taking or smoking or freebasing...

I thought real estate couldn't fall more than 20%. Atleast that's what all the realtors on TV keep saying.

Has anyone EVER heard a realtor say that it wasn't a good time to buy?

Add to that, the owner of the building that the elevator is in can't pay his electric bill because he is in preforeclosure, so they shut the power off to the elevator in between floors.

Then after the auction the new owner opens the elevator doors, and the JBRs are still alive because they know how to subsist off you.

While stuck in the elevator you weren't able to respond to some frivolous lawsuits by the tenants of the building so your estate loses it, and still owes money on the judgments.

The good news is that your heirs file a wrongful death suit against the original owner of the building.

The bad news is that he has no assets to attach. But they feel better knowing that justice was served because they have a court judgment.

I fear being stuck on the same elevator as theotherside. Not because of her faux wit or JBNLIB (jealous bitter no longer investment banker) status; but because of those pink knee-high boots she's wearing.

While stuck in the elevator you weren’t able to respond to some frivolous lawsuits by the tenants of the building so your estate loses it, and still owes money on the judgments.

But how will you be served though? Will the process server just yell through the elevator doors?

As long as SurferX was present in the elevator, I expect I could stand to share space with TOS or even Confused Opinions. I assume order would prevail.

By the way - are there any photos around of past blog festivities? I have an image of SFWoman as a Kirstin Scott Thomas doppelganger. True?

As long as SurferX was present in the elevator, I expect I could stand to share space with TOS or even Confused Opinions. I assume order would prevail.

Surfer is at least 74% less offensive in person. And he makes good mac-n-cheese.

Stick with simple regression-based analyses (like the MIT paper) and understand that long term predictions are tricky because psychology plays such an important part…

Psychology does not play an important part. It is the whole damn thing.

Stick with your instinct.

'But how will you be served though? Will the process server just yell through the elevator doors?'

Notice served to his assistant at the rental office. Can do, if it is his place of business.

When in doubt, consider fear as the only driver of history. Learn to love fear.

"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."

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. I believe this to be partially true. As a current owner with no intention of selling (mainly because I bought really cheap and prop 13) I don't really care what happens around me. However someone who bought recently may indeed panic at the prospect of being 'trapped' in an upside down situation.

The other problem are the foreclosures which don't have a sticky owner. If a bank gets desperate enough it will have to liquidate the asset at whatever price the market will bear. Since we are now in a downward market, there is almost no premium being paid for the speculative short term gain. When you value the property at the fundamental value of it's income potential the value is currently 1/3 to 1/2 of what its specualative value was. Therefore the owners sticking to their guns become irrelevant since most of the transactions will be in the alternative form.

theOtherSide

Another look at why you should be careful when using models (like the HSBC or Randy H ones) to assess the value of a consumption asset…

Stick with simple regression-based analyses (like the MIT paper) and understand that long term predictions are tricky because psychology plays such an important part…

Silly me, and here I thought that "simple regression" was at the core of the HSBC model. In fact, now that I think of it, the HSBC model doesn't do _any extrapolating at all_. It's merely a model of historical aggregation methods, providing a number of views and perspectives.

The R^2 of most of those regressions is extremely high, well over .90.

Psychology always correlates with fundamental analysis over time. This is because something simply cannot be what it never could be. All the wishing and wanting in the world can never change that.

Anyway, there are plenty of other models, even from MIT, that utilize different forecast methods. I've referenced them many times before. Most I don't use because ... (wait for it) ... they are *too pessimistic*.

I also note that theOtherside has yet to submit a single error, correction or modification of my Bubblizer model, which she promised over 6 months ago.

You don't even need to don pink knee-high boots, just email or leave a comment on the blog. Let me know where the model is flawed in specific terms, please.

Peter P Says:

> OT: I broke my laptop and I need a new one.
> Any suggestion?

My last three laptops have been Dells. For years I bought the hottest laptop on the market and paid top dollar. I paid over $7K for a Thinkpad less than 10 years ago, but now I just get a new better than average Dell every couple years and pay about $2,500. When I get a new laptop I retire the old one to the trunk of the car and move that one to the back of the SUV (so I always have a laptop with me).

> I can only use a eraserhead-type pointing device.
> So any laptop with only a trackpad will not work
> for me.

I started using the eraserhead when I got my first Thinkpad and got rid of a Toshiba with the clip on trackball. I got used to the eraserhead and kept using it on my Dells, but when they recently got rid of the eraserhead I made the switch to a Bluetooth mouse and can’t believe I didn’t do this years ago (the eraserhead is not the most efficient pointing device so they are going away)…

P.S. If anyone doesn’t have an external backup hard drive you should click over to eBay and pick one up. The new backup drives are cheap (under $100 for 200GB) and easy to use.

Randy H Says:

> Yes, most libertarians who aren’t Libertarians are
> Objectivists, although they may not know it. Not
> coincidentally, you can find articles there that will
> tell you why big L Libertarianism is also bullshit.

Over the years I’ve found that Objectivists (who more often than not are not very religious) are the only group of people that are not primarily motivated by fear.

Libertarians fear that the DEA will show up at the next String Cheese Incident show.
Democrats fear that government may not take care of them.
Republicans fear that their children may be exposed to the “homosexual lifestyle”.
Atheists fear that they may look up and see a cross on a hill.

KGO AM 810 had a rabbi on this morning (who is planning to head a protest at Speaker Pelosi’s office in SF tomorrow if anyone wants to join him) who compared the Democrats to a bad parent that just “condemns” their kid who drives around all day throwing rocks at neighbors while making his car payment and giving him money to buy rocks (most of the Democrats in Washington will say that they don’t want GW playing war in Iraq but most won’t vote to cut off the funds)…

Somebody suggested here that the housing-bubble-equates-to-dot-com argument is wrong, because housing provides a place to live, but dot-com stocks didn't.

Well, it is true.

But I think they misunderstood my analogy. The analogy was on how the thing would unravel, not on how it got bubbled-up. The dot-com had an aburpt almost immediate correction in March 2000, followed by a gradual, but deeper decline after that.

Here in housing, something similar may unfold with the destruction of capital in those subprime and alt-A capitalized homes all going on to the market in a relatively short period of time, with a "steep" but not necessarily deep price decline. Then, in a feedback loop, a gradual, but over time, deep price decline. That's how dot-com collapsed. And real estate in bubbled up Asian cities.

We may be fooled by a constant nominal-price structure if our currency gets inflated. Better to figure a way to monitor these things in non-USD measures of capital.

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.

Does anyone know what percentage of dot com stock sellers “had” to sell (margin call)? I know a lot of people that invested on margin but only a few that actually had a margin call.

I was in Southern California when home prices dropped ~50% from 1990 – 1994 and since almost everyone made a down payment and had a fixed rate loan very few homeowners “had” to sell but prices still dropped.

In the parts of Southern California where apartment rents dropped and vacancy went up there were a lot of apartment owners who “had” to sell and in those areas values went down 60-75% (most couldn’t “sell” the banks took the buildings back and “had” to sell them since the FDIC only lets a bank own a small amount of REO property).

The NYT also mentions a counter clerk with 20 condos. This guy and all the other “Caseys” out there will have to sell as soon as their “cash back at close” runs out. In the last down cycle we didn’t have any flippers with no equity that got cash back at close…

theOtherSide,

Cross-validation? Next thing we're going to be running genetic algorithm generations to test for parameter fitness. And here I thought you weren't a quant. I'm starting to like you more everyday, lol.

As a good citizen, I am afraid that some islamofacist terrorist will illegally enter the country with a suitcase sized dirty bioterror weapon and detonate it right before the next election. We know how much they hate us for our freedom.

@Vita Says:

my ... energy choices

That's a laugh! You get to pick Exxon or Mobile!!

Peter P,

I bought my current Thinkpad T60 for less than $1,200 including shipping and taxes.

However, it is loaded with XP (which is what I wanted).

peter,
i have a think pad z61m.
it has in built wireless receiver but it is not good.

it does not receive well on the second floor. But sony vaio is probably has better reception.

tOs

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)

Really? What is the real option value of the opportunity offset by exercising that option? Be honest. You don't get to pull the rip cord for free, after all. There is a heavy price to pay over many years thereafter.

What is the real option value to the volatility for no-recourse statutes being modified and/or case law precedent being set whilst holding that "unexercised option"? After all, if you're more solid than most other people, because you're smarter, then by the time you get to where you'd need to exercise that option the herd will have already crossed the river.

There is a valuable embedded option in a mortgage. It is the PREPAYMENT option.

Evidently Key Magazine/NYT openly plagiarizes "How to Awaken the Financial Genius Inside You". Next you'll excerpt the chapter on the wonders of compond interest.

Boilerplate, I say.

OK. Make it compound interest.

Randy, you have to admit, most people don't understand the cost of leverage (I think tOs understands it fine). Just on Friday I had an MBA argue with me that the gain on a house was pretty much "free". I had to argue vehemently about the fact that you're paying interest every month to support the leverage, and the only way to determine true gain is to take Sell - (Buy + TotalInterest). That leverage isn't free. It might be cheap at 6%, but that's still a 60% value loss over 10 years. If housing tracks at inflation + 2-3%, then your house is still a huge net loss.

Then came the deductible interest battle, which I shot down with my favorite, "You give me $10,000, I'll give you $3000 back and you can tell everyone how bad you screwed me over."

In my particular case, I then fought down the age-old argument "You have to live somewhere." I can live in a $600/month 1 bed 1 bath apartment instead of paying $1500/month + a $50,000 downpayment on a 2500 sq. ft. house (including insurance and taxes).

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).

Americans are abysmal at math. Ugh.

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)...