patrick.net

Well currently I'm approximately 28% in real estate (my house, paid cash), 36% in S&P 500 index funds and ETFs, and 36% in cash (bank CDs and bank MMFs). So I don't feel too bad right now.

Before I unloaded my 1,040 square foot stucco box in SJ, I was about 70% in bubble real estate, 15% in stocks, and 15% in cash equivalents.

So maybe I should have unloaded about half of my S&P stuff a month ago, but I'm still in much better shape than I was two years ago.

Hey SQT, where were those McMansions by a golf course? You aren't talking about Rancho Solano by any chance are you? I have friends there who are thinking about selling......

A fearless prognostication. What do I have to lose....Surfer-X already has castigated my worthless boomer hide.

For FBs that need to move for job related reasons....there will arise a no-money housing swap market. Say X in city A needs to move to city B. A web broker will pair him up with Y in city B who needs to move to city A. The two close together and exchange deeds. Web broker gets some flat rate.

What's wrong with this business model?

Oh, and I have *not* sold any equities. My SEP and wife's 401k are long-term focused with regular balancing. My brokerage account is purposefully between 75% equities (sometimes including options) and 25% cash and 100% equities. I do this on purpose regardless of the market as a self-discipline rule, primarily because I tend to hold way too much in cash.

Right now my stocks are mostly monopoly/market-power techs, telecom and infrastructure with strong cash statements. I don't think traditional "defensive" stocks will work this time round because of the extent and direction of the consumer credit crunch. Wal-mart = bad. Working/middle classes spending a lot less, with even less to come. Upper/Rich classes spending a tad less, maybe spending more if inflation kicks in.

My wife just sent me this listing to look at, in prime Crappertino foothills (near Rancho). We got it from a realtor who knew we were looking over there a few months ago and doesn't know we have since stopped wasting our time.

Address: 10460 Serra St Cupertino CA 95014
4/4, 3800sf, Half acre lot, built in 2002

Sale History: 08/15/2002: $2,299,500
Currently on sale (no bidders) for: $1,795,000

Just for a laugh, I checked out Zillow. Those idiots think it is worth $2,617,761

I think the death of Jumbo's will be felt very keenly by sellers like these.
SP

My prediction? I think the Bay Area will actually crash. Maybe not catastrophically, but inflation plus a mild crash will definately take the luster off of housing. I also think we're going to see wage stagnation as consumer spending drops, corporate spending will drop, and tech profits will drop, leading to inflation based raises and not much more.

I think we'll be 3-5 years grinding through the mess, and by the end housing will be 3.5-5.0 x median income.

I also predict :

My first kid by 2009
My second kid (last) by 2012
A house purchase sometime between the two.

I HOPE :
This mess will let us get some REAL reform, like booting prop 13. But I won't hold my breath.
The Fed keeps walking a tightrope or even *gasp* raises rates to keep the dollar/inflation in at least slightly reasonable shape.

Hey SP, I'll put in a bid for 850k if you promise to put one in for 855! ;)

@SP

We should seriously consider inking a deal to do a phantom-framing strategy. I'll pretend I'm moving down there and bid from out of area, you up here. We'll lead each others' bids at 60% or more off asking.

I think prices in San Diego will drop another 25-40%. They've already dropped 20% from the peak.

I'm glad I sold out in summer 2005!!!

SFBB said:
I think we’ll be 3-5 years grinding through the mess, and by the end housing will be 3.5-5.0 x median income.
For all of California, maybe. If you are talking Bay Area, I would put that in the catastrophic category. The SF MSAD barely dipped below 6.0x during the last downturn and saw 5.0x in the mid-eighties (twenty year moving average is 7.2x). It was estimated to be 11.3x in Q3 of 2005 according to the HSBC study on Randy's site.

SP sfbb and Randy,
I'll join in on the bidding! If you guys start a "bidding war" anchored around 750K or so, I'll come in with a "rescue" bid at 800K!

@EBGuy,

I believe it was on CNBC this morning about a money market fund in Europe which halted redemptions. I may have been mistaken, it is very early for me when I arrive at work and watch this stuff!

@Paul

In Germany (maybe France too) a money fund halted redemptions. It was temporary and was the primary motivator for the ECB action. When some were calling the ECB and later Fed liquidity injections overreactions I think they were misreading how important it is to keep cash liquid. Basically, even if a money market fund strayed into some subprime -- even if by accident -- the central banks will do everything they have to do to prevent any failure of that fund. Otherwise psychology will turn to outright panic because people will perceive "their bank deposits" as "disappearing". Even if that's what happened, the central banks won't let it. They can't. Better we eat 20 years of inflation than eat government-dispensed bean soup we have to wait in line for on Tuesdays.

Randy,

Are Treasury Money Market funds safer than money market funds? The yield is a little bit lower, I think in a taxable account for a Californian it's a wash.

@sybrib

I'm not the expert on the performance trade off. DinOR's the guy to ask that, or one of our many resident experts. I think theoretically a Treasury of any type is safer. Really, a Treasury is as safe as you can get worldwide in terms of failure. But you pay for that in inflation, which HARM has detailed quite well.

My entire proposition is simply that "normal" money-market funds are practically as safe as Treasuries because the effect of allowing money-markets to fail is largely the same as defaulting on Treasuries.

Seriously, what else rational can you do if you believe the subprime taint infects everything down to money-funds and cash-equivalents? Request (often) hundreds of thousands in $100s and buy a big safe-deposit vault at your local bank? IMO, that's as useless as buying gold. Even if you have it, you can't use it if you're right and it all comes down.

Hey SQT, where were those McMansions by a golf course? You aren’t talking about Rancho Solano by any chance are you? I have friends there who are thinking about selling……

They are on a golf course but at Morgan Creek not Rancho Solano. The thing is there are at least 5 golf courses in Roseville (where I live) alone. There are a bunch in Rocklin and Lincoln as well. There really isn't any prestige to living on one when there are so many and Morgan Creek is suffering big. I saw an ad today on Craigslist that said they had dropped the asking price on one bank owned home by $150k. Ouch.

Randy,

Fidelity and VG have these "Treasury Money Market" that they categorize as a money market fund, not a bond fund. I used to know the difference, but it's been a long time since I thought about these things (it was during the time of Lincoln Savings and all that). I think the main difference was the duration of the holdings.

Anyway, if you think it is a good time to stampede out of the non-FDIC-insured money market funds, well in concept at least the Treasury Money Market might be a way to go. I'm gonna read up on it this weekend. Maybe Dinor will have some suggestion in the meanwhile.

What is TIC?

TIC = Tenancy In Common, or Tenants In Common.

Sort of a co-op arrangement. Wiki it.

SP

TIC = tenancy in common. My info comes from a good friend who is in a TIC.

Tenants-in-common have part ownership (a share) in a single building. These are generally buildings not zoned as condominiums, but they have physically separate units, each owned by one of the tenants-in-common. They all basically sign up and agree to the part-ownership structure. The upside is that these units are cheaper than condos. The downside is that the tenants basically all share the finances and hence mortgage for the entire building, so you need to have faith in your co-tenants. You can buy/sell your share separately, but it's more difficult than selling/buying a condo. Many try to buy into TIC's with the goal of converting the building into condos. This is pretty common in SF, and there are tried and true channels to doing this.

oops - SP already posted an answer. Much more terse!

Thanks for the answers above.

Oh sh*t, Yen just breached 117, yen carry trade unwinding plus subprime blowup, it is not going to be pretty tomorrow. When it rains, it pours.

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/08/15/MORTGAGE.TMP&tsp=1

the mortgage crunch bites even the rich.

http://tinyurl.com/yo9rvq

I was a little off-

Here's the money fund with problems.

sybrib,

Up until a few days ago, I (like most of us here) spent very little time worrying about the portfolio composition that makes up a mmkt. If your account is at a brokerage, they're actually insured through SIPC (Securities Investor Protection Corporation) not FDIC. All brokers pay into a SIPC assesment out of every paycheck. It's not much, so we don't mind. Can SIPC "cover" everyone in the event of a wide spread mmkt. default? I doubt that. Since the majority of holdings should be "repo's" (re-purchase agreements) short term commercial paper, LOC's (letters of credit) etc. they would likely only have to cover the MBS portion of the portfolio.

From a pure marketing perspective "some" firms have treated their mmkt as an advertising tool or "lost leader" so they can boast a higher yld. than their competitors. I'm not worried, we've always had the cr@ppiest yld. on the street! And all these years I thought the toughest part of managing a mmkt fund was making sure you locked the doors when you left at night?

Randy,

You wrote:
>And…all cash will be honored even if it’s more than the FDIC limit; even if they have to print it up for you; even if they have to prohibit the sale or ownership of gold. Banking failure in the modern economy is not a tolerable option. It would derail society.

But failures of single banks do happen occasionally and are tolerated to happen. And deposits over 100k can get lost, as recently found on Mish's blog, under
http://www.post-gazette.com/pg/07217/807090-28.stm?cmpid=HBEHTML
I agree with you in so far, however, that the Fed's primary job (even before inflation fighting) is keeping the banking SYSTEM alive.

But failures of single banks do happen occasionally and are tolerated to happen.

Just deposit in a bank that is "too big to LET fail." :)

Oh sh*t, Yen just breached 117, yen carry trade unwinding plus subprime blowup, it is not going to be pretty tomorrow. When it rains, it pours.

Reflexivity at work. Everything is feeding back into everything.

What is the best way to dump US Peso?

Peter T,

I can't believe that poor guy had over $500K in a SINGLE bank.

I have accounts at several banks, and don't keep much more than $100K in any one of them (e.g. $102K). Just enough with the MM accounts to get the highest interest paid, generally on amounts over $100K.

Money Market funds at risk by commercial paper downgrades

Subprime Problems Spread Into Commercial Loans

By GRETCHEN MORGENSON and JENNY ANDERSON
Published: August 15, 2007

Turmoil in the subprime mortgage market spread again yesterday — this time to a type of short-term security held by money market mutual funds. These funds have become the investment of choice for many people seeking a safe haven.

Standard & Poor’s, the ratings agency, warned yesterday that it might downgrade several issuers of commercial paper, a short-term I.O.U. by companies that promise to repay loans typically within a few weeks to a year.

In these cases, S.& P. said, the commercial paper was backed by residential mortgages.

The amount of commercial paper in the United States has grown to $2.2 trillion, according to Lehman Brothers, with about $1.2 trillion backed by residential mortgages, credit card receivables, car loans and other bonds. The major buyers include pension funds, insurance companies, hedge funds and short-term money market funds.

The S.& P. highlighted four issuers of commercial paper for possible downgrading. Broadhollow Funding, which was set up by American Home Mortgage Investment, a lender that filed for bankruptcy last week; KKR Atlantic Funding Trust and KKR Pacific Funding Trust, two affiliates of the buyout firm Kohlberg Kravis Roberts; and Ottimo Funding, an affiliate of Aladdin Capital Management, an investment manager in Stamford, Conn.

Among the money market funds that held commercial paper issued by the companies singled out for possible downgrading were two offered by Evergreen Investments. As of May, the $16.6 billion Evergreen Institutional Money Market Fund held $385 million in Broadhollow Funding and $72 million in Ottimo Funding. The $4.5 billion Evergreen Prime Cash Management Money Market Fund held $50 million in Ottimo Funding as well.

http://www.nytimes.com/2007/08/15/business/15fund.html?pagewanted=1&_r=3&adxnnl=0&ref=business&adxnnlx=1187197471-GOakR85KTQ9XPYUJzpBW/A

Am I missing something? If you put the funds (awaiting investment) in an SIPC brokerage account, aren't you insured up to $500K?

To me, bank accounts are just for paying bills.

The exposures of MM funds to the credit crunch has been predicted on this blog months ago.

I am looking forward to less-crowded restaurants. Hopefully, there will be enough people to keep the best restaurants in business and enough empty tables to accommodate me. :)

jeffollie,

It appears that is correct. Barry Rithotlz did a great piece on mmkt "Substitutes" (as he liked to call them). Where Sentinel was concerned, he felt that they are not a trad. mmkt. They make int. rate bets to deliver yld. and felt they should be described as an "ultra-short term bond fund". A very different thing.

It looks like the market has already priced in the down grade on the senior subordinated debt paper. So far.

Peter P,
But brokerage accounts only pay around 2% in comparison of the 5+% of banks/CUs. Any money not being invested in my brokerage account gets skimmed off pronto and goes into the CU.

For those who didn't follow OO's link, here's some good news for folks looking at higher end homes. Fear -- even scarier on the way down.

The buyers could have gotten a mortgage at a substantially higher rate - just under 8 percent - Hogan said, but "they crunched the numbers and said, 'Hell, no, maybe this is a sign for us to get out.' "

The buyers walked away from the deal, forfeiting their $73,000 deposit. The home is back on the market for $2.2 million, its original asking price.

http://www.dqnews.com/RRBay0807.shtm

Bay Area home prices steady, slow sales

> I can’t believe that poor guy had over $500K in a SINGLE bank.

Greed and Ignorance. He got higher interest at the now folded bank. And (he claims) he didn't know about the 100k limit.

Why are my posts from today missing?

Oops, wrong thread, sorry.

EBGuy,

So what exactly sent these high end buyers packing? To walk away from that kind of money takes real fear! Uh... was this the first they'd heard there "might" be a housing bubble? When their 10% down payment wasn't going to be enough? What do you MEAN our loan didn't go through!?