patrick.net

True enough, lol. But, unless your system produces “you’re right” more than “you’re wrong”, then you’ll be at best out $0 minus the premiums, which is a net loss.

Also, "how right" and "how wrong" are important. :)

At least some of them are now indicted criminals due to the LTCM fiasco.

I thought there was no crime committed in the LTCM fiasco and most outside investors did not end up losing money.

On the theme of this thread, I have a reprint of the WSJ article, New Tools to Hedge Your Home if there’s somewhere here I can send it, in case anyone’s interested in how you’d set up a hedge using either derivatives or leverage (or both).

Was it about MACRO securities? Or was it about HedgeStreet?

Thanks.

Mainly HedgeStreet and their hedgelets. But also some interesting stuff about how you can create a sometimes safer synthetic hedge using short-term, variable financing and buying other things like TIPS and STRIPS.

Basically, if you are pretty sophisticated, and know what you're doing, and are comitted to making rebalancing moves when you see the signals you set (all big assumptions for most folk), you can hedge your RE cheaper with adjustable mortgages and treasuries than using a derivative. In fact, if you have enough wealth, because the expected future RE volatility is extremely high right now in bubble-markets, you can do quite well buying now if you know how to hedge AND you get a little bit of luck in the timing.

My guess is that almost 0 people will be able to really do this, unless they're already super-sophisticated RE investors (not flippers). The timing is the killer. The cost of hedging, even with financing, will only mount as you wait for the market to turn. And the window will close very fast on all this once sentiment does turn.

My husband just returned from the Bay Area yesterday. He was glad to be home. He got a ride to SJC airport from Campbell and it took him over an hour in bumper to bumper traffic @ 10:00am. He used to commute 1.5 hours each way to work when we lived there - 16 years - it reminded him of how much he hated traffic. Of course, he heard all of the stories about how all of our friend's homes have gone up so high (we sold two years ago because of a job transfer and are now in the Midwest).... anyway, I thought it was funny how everyone was so proud of themselves for 'making so much money' and they can't fathom that prices will ever go down - they all insist that prices will never drop. I thought it was interesting the same people just got new next door neighbors in Morgan Hill - Four sisters and their husbands and kids from Mexico - 4 families moved in together after purchasing the house for nearly one million dollars - house is 2800 sq ft. I thought it was sad that these people are having to live in such circumstances and probably took on a horrible loan as well.

Yes, I'm bothered that we sold at the 'wrong' time even though we did make a nice profit on the house at the time but I don't miss the traffic and congestion and horrible schools. The weather was nice in CA but what's interesting about other parts of the country is that everything is climate controlled - people in Vegas turn on the air, people in the midwest turn on the heat - it's comfortable - you learn to cope. I thought it was interesting that people would pay more than a million dollars for a shack because of the weather. You wouldn't believe the types of homes and lifestyles you can get elsewhere. It's not for everyone but there are other places. I'm glad I'm raising my kids here. The schools are wonderful, the parents are so involved. We can't find parking at any of the school functions because the parents are extremely interested in their children's education - the parent teacher conferences are 98% attended. When I was in CA, we had about 10 parents who showed up. I'm not trying to knock CA because I was born and raised there but I want those who feel hopeless about ever owning a home to know that you do have choices - sometimes those choices can give you a better life than you ever dreamed possible. Figure out what is important in your lives. I wanted to raise my children in a small town with family values and parks and trees and room to roam. Sure, I miss the possible equity loss because homes don't go up as much in the heartland -but I do think at the end of the day, our lives will be happier because of our choices.

Re: housing declines in "unbustable" BA markets.
Just for a bit of historical perspective, here's something from OFHEO.gov on house prices in SF:

1990 4 -2.56
1991 1 -4.79
1991 2 -4.95
1991 3 -4.72
1991 4 -1.67
1992 1 -0.96
1992 2 -1.05
1992 3 -0.85
1992 4 -2.27
1993 1 -2.63
1993 2 -2.34
1993 3 -2.74
1993 4 -2.11
1994 1 -1.33
1994 2 -1.71
1994 3 -2
1994 4 -2.97
1995 1 -1.55
1995 2 -0.19
1995 3 1.12

So, a hypothetical home "worth" $1M @ 1990 (4), may drop to roughly $675K by the end (-32.5%). Should we suppose this can't happen again?

“Assumption #2: Pro-RE Congress soon to pass mortgage income tax CREDIT (covering 100% of mortgage interest & prop tax)”

Has this credit ever been suggested in Congress?
This would make me sick

Not that I know of, but I wouldn't put it past them ;-)

Mainly HedgeStreet and their hedgelets. But also some interesting stuff about how you can create a sometimes safer synthetic hedge using short-term, variable financing and buying other things like TIPS and STRIPS.

HedgeStreet? OMG. It choked after I placed a $500 order. I think the "ask" side was exhausted after absorbing $200.

Basically, if you are pretty sophisticated, and know what you’re doing, and are comitted to making rebalancing moves when you see the signals you set (all big assumptions for most folk), you can hedge your RE cheaper with adjustable mortgages and treasuries than using a derivative.

I am probably too unsophisticated to handle the tracking risks. Using 5+ contracts of TY/US to "hedge" a mortgage can incur 5-digit losses in hours. These losses are marked-to-market and one needs a large capital base to meet margin requirements.

How would you hedge real estates? If you can convince me, I will call my agent this week.

I completely give up on the idea of hedging the RE market about 12 months ago. It appeared to me that the hedge is more dangerous than the thing being hedged.

Randy, can you post the reprint (or a summary) anyway?

You are an important source of economic theory and information. Without you the blog will be at the mercy of my half-truths. ;)

Always a little bit too late Says, I think quality homes that are reasonably priced and still selling. Fewer people are willing to pay unrealistic amounts now.

What type of property is that? Where is it located?

I think those numbers are year over year not quarter to quarter so the decline is actually a lot less.

Really? While dqnews compares prices from Y-to-Y, I haven't read anything that states quarterly numbers from ofheo.gov are doing that calculation. If anyone can source that directly, please post it. Of course, I may have missed something, even if those stats appear plausible. That said, I think the stakes are higher this time.

Always a little . . .

Tell us, I think we're all curious . . .

You own two properties, right?

How much did you purchase each for?
How big is each mortgage?

What do you think each is worth right now?

To the rest of the board . . . When frightened Sellers are postin on this board, that's a sign. . .

Yeah, LA was a mess and If I’m not mistaken so was San Diego. I just wonder if it’s dejavu all over again with the southland taking the brunt of the declines and the bay area getting hit mildly by comparison?

It may be a role reversal this time as there is growth in LA but no growth in BA.

OK--thanks: guess wasn't apparent to me. Since I've seen prices raise so high around here, I projected the now into the past.

Hmmmmmmmmmmmm I wonder what Martha Stewart thinks about stock options??

K

Thanks for sharing your story, I think it resonates with a lot of us here. The one thing that keeps me in Ca is family if that changed, there wouldn't be any reason to stay-- at least as things are right now. But, the times they are a changin'...

I seriously doubt “role reversal” this time for LA/San Deigo vs SF Bay Area in spite of no growth in SF Bay Area. Too many people buying here just because they can.

Hmm, to many people SoCal is a lot more desirable than NorCal though. We will see.

And dont forget the rat infestation that is sweeeping the central coast.

I thought rats are now in Marin county. Remember the newspaper? ;)

---It may be a role reversal this time as there is growth in LA but no growth in BA.

I'm not convinced the problem in the BA is as much lack of growth as it is increasingly fragmented growth. I also believe this is largely the cause of the increasing commuter-time-averages, whereas in the late 90s it was overall growth driving congestion. There are segments of the BA (that aren't RE related) that are growing quite healthily. The problem is that this growth is in financial services, M&A/consolidation, banking, legal, etc., so it's just concentrating wealth further at the top. SoCal is growing more smoothly, supporting RE better. This is why so many of these discussions devolve into the "RE in Marin" arguments. It's possible that certain RE pockets will hold onto much of their gains whereas others will bottom out, IMO.

I looked at a SJ downtown condo over the weekend. They wanted 850K for a 2/2! The agent said it is because of the extraordinary rennovations in it, such as a sub-zero fridge. (However, I told her that it is entirely unacceptable that full marble baths are missing in a supposedly "luxurious" condo.)

Similar (but slightly smaller) units in the same complex are asking low 600's.

The problem is that this growth is in financial services, M&A/consolidation, banking, legal, etc., so it’s just concentrating wealth further at the top.

So the market for $hitboxes will crash. MarinaPrime will be safe.

were those numbers for the whole nine county bay area, weak and strong markets included?

That data was forwarded to me, labeled "SF", so I assumed it was just that city.
Of course, that's what I get for not getting the data myself: confusion. ;)

Rats! Marin could be the future "Rats on the Bay". Think of the intangibles, the notoriety and possible capitalization: a Marin "Rat Festival"! Unemployeed realtors could populate a Rat Festival float during the Larkspur Rat Parade...
Sure sounds like Fairfax takes the news in stride. A sense of humor: I knew I liked that place. Here and there, I've seen a rodent actually swimming the water outside. I can only hope he'll meet the aquatic snake I've also seen. Then again, the river otter will take care of both: he camps out in our boats overnight.

I can't really post the WSJ article here without risking a copyright violation for this blog. I don't want to do anything that could jeapordize this awesome resource. Here's problaby the most useful statement for folks here from the entire article...

--
Another tactic: If you live in a frothy housing market and expect to move within a year or so, it may be worthwhile to consider selling now and renting for a few months. Last year Dean Baker, a Washington economist who is bearish on U.S. real-estate prices, decided to take profits on the
two-bedroom condominium he and his wife owned in Washington's Adams Morgan neighborhood. Having bought the condo for about $160,000 in 1997, Mr. Baker says, they sold it for nearly $450,000 in May 2004. The couple now live in an apartment nearby, costing $2,250 a month in rent.
Since they sold, Mr. Baker concedes, the market value of his old condo probably has gone up even further. But he says he is happy with his decision. "Realistically," he says, "you're not going to be able to pick the exact top" of the market.

--source:
September 17, 2005
HOME ECONOMICS
New Tools to Hedge Your Home
Exotic Investment Products Target Anxious Owners Eager to Lock In Their Gains
By JAMES R. HAGERTY
Staff Reporter of THE WALL STREET JOURNAL
September 17, 2005; Page B1

KurtS’s numbers are not cumulative to a 32+% decline but hey, if it makes you happy, go with it!

I agree that the number did not show 32+% decline. What do you mean by "if it makes you happy, go with it"?

Mr. and Mrs. Baker, barring any other unstated need for selling, made a serious financial mistake as they are now paying substantially more to rent than they did to own, and the cost to buy back into that market at comparable prices will require a crash ala 1929.

Well, unless they moved into a much better 225apartment... 450K versus 2250 rent does not indicate a bubble to me.

...and the cost to buy back into that market at comparable prices will require a crash ala 1929...

So it takes a 1929 crash to return prices to May 2004 level?

KurtS’s numbers are not cumulative to a 32+% decline but hey, if it makes you happy, go with it

My calculation was correct, but not my assumption that those decreases were from quarter-to-quarter, vs. Y-to-Y. I already noted that, strike it from the record.

Marin Co rats! Finally the So Cal desert and Marin Co have something in common. Can we count this as an intangible? We had a major rat population explosion here in the wasteland too after the big winter rains. I was forced to become a reluctant expert in rat hunting and disinfecting. (Um, disinfecting the screened patio, not the rats.) Aside from the ick factor, it was actually kind of funny to listen to prissy middle class women whining about their rat infestations.

Marin Co rats!

My cats would love Marin county.

If it makes one happy to believe that the BA market has recently and is soon facing a decline of 32+%, go with it.

If it makes you happy to believe that we would delude ourselves with false interpretations, go with it. ;)

It is interesting that many people are not aware of the micro-weather in the BA. I have settled in South Bay ever since I moved to BA and simply assumed that everywhere else was just the same.

However, whenever we visit our friends in the city, we just notice this big gush of fog cluttering over the mountains whenever we get to Daly City on 280. Throughout my hundreds of drives up north, I have never seen once Daly City with sunshine. Another persistently foggy place is Half Moon Bay, we used to go there quite often, again, never saw it bathed in sun. SF is nice in the morning, but the rain and cloud start to settle in at around 2pm in the afternoon.

Even up on the peninsula, areas around Belmont, San Mateo seem to quite cold compared to down here. It is pretty amazing that there is such a drastic weather difference just 20 miles apart. We fancy some mountain living, but haven't looked into what the weather is like up there. Perhaps when the downturn comes, we may go pick up a cabin in the Santa Cruz Mtns.

Usually a bubble burst starts in the marginal areas. I think Santa Cruz Mtns may qualify for this, because buying a primary residence up there for almost a $million is quite a stretch for many families, most people don't want to deal with septic tanks, propane gas, blocked roads in the winter season, etc.. Lately we've been driving around there for scoping out our ideal cabin for post-bubble consideration, the number of listings went up drastically in the last couple of months. We are talking about marginal communities with several hundred houses up there, but you can easily see 30% of the houses on a street up for sale. I presume quite a % of owners have a primary residence elsewhere, that is a sign of the market topping off.

I have also been tracking a few homes up there, lately, half of them were relisted for around $100,000 reduction (on a price tag of 700K-1M), and most of them have been sitting for longer than 5 months now.

A 2 topping large pizza and 3 pitchers of beer at Lanesplitters in Berkeley will set you back 90 bones including tip.

That's just criminal. I'd move too.
I told my cat about the Marin rats, he wants to move to Marin. (Marin rats....... sounds like the name of a band)

A 2 topping large pizza and 3 pitchers of beer at Lanesplitters in Berkeley will set you back 90 bones including tip.

What 2 toppings? Beluga 000 and lobster? That is crazy!

I would not read too much into this line by Mr. Right. This is just Mr. Right’s somewhat quirky/obtuse/laid back sense of humor in action. Uh….I think.

I know... I like Mr.Right. :)

Nope, standard pepperoni and sausage.

Must be unicorn sausage then...

Well, in Las Vegas, we were ordering some tea... the waiter was nice enough to tell us the price - $25 a pot!

Wow, lots of playmates for my cats in Marin, now the intangibles start to make sense to me!

FYI, you can buy housing in real nice parts of decatur for $60-$70/sq.

In Kah-lee-fornia construction alone will cost $150+/sf.

The nominal value of realty in BA won't go down 32% cumulative. If that happens, our country's financial system will be in big trouble. Hence comes in the government and money printing. Therefore, the nominal value of homes will probably drop around 15-25% to the most, while USD takes a big hit. But that is the only way to inflate our banks out of bankruptcy.

That said, it is plausible that some quite undesirable neighborhoods that have been lifted up by the overall RE bubble may go down 50%, in nominal value. But I wonder if you dare to pick up some properties there after the bubble bursts.

All it is is a socialist transfer of wealth from shareholders to employees who are getting a lucky deal and earning much more than they would command in a sane market. A market is never sane when its participants think the money is growing on trees.

Storry Stanman, everything you dislike is not "socialist." it is a transfer of wealth from VCs to founders and well understood by everyone involved. Big Bad Ole' Gubmint ain't got nothing to do with it.

I joined my current company pre-IPO and got a fair chunk of stock. Not enough to retire on, but enough that I have a downpayment for a bigger house, if I wanted. I would have not taken this job without the stock options, since I could have gotten a bigger salary elsewhere.

And I have to admit, doing this at a different company during the dot com boom got me my downpayment on my first house. I know I have been the preacher of "save 10% of your income for five years" but the truth is, I had very little saved before I sold my set of options in 1999. My fiancee, on the other hand, saved up her half of the downpayment on a waitresses salary, while going to graduate school. So at least someone I know has done it.

And now that I live with her, I save like mad. Funny how that works. :-D

Oh, by the way, my TOL and MTH puts are up 25% and 50% today. I guess the housing market did not like Greenspan's comments about interest rates.

If these puts work out the way I am expecting them to (at least 100% up) I will take any of you who wish to show up out for sushi, that's a promise. I would never have actually gotten off my tushie and applied for a level 2 trading agreement with E*Trade if it hadn't been for the steady barrage of housing bubble related information you all provided me with.

"500k blow my mind and I think what the hell are people thinking???"

More like what are they smoking. But seriously, 500K doesn't even do it in anyplace I'd want to live in the Bay Area. Prices keep edging closer to a million for a halfway decent single family house. And if you're talking a fixer with character, well, that's still in the same price range.

It's hard to fathom the mentality of spending that much until you're in the midst of a bunch of people who actually are. I have to give props to those of you who do live in desirable areas and have managed to resist the herd mentality of buy-buy-buy-real-estate-never-goes-down-you're-going-to-be-priced-out-forever. Because when we visit our family and friends who all think we should buy, I find myself starting to think crazy thoughts like, "Well, I guess if we can swing the 4000K per month payments, we might be able to own a house here..." And then we have to get the hell out of there.

I was talking to one of the parents at my daughter's school and told him I was renting and he totally agreed that it made sense in this market. He told me that he and his wife tried to find a house with some property because they have 4 kids and would like to have a place for them to play. He said they couldn't find anything they could afford within a 50 mi radius, and I believe him. They are going to Oregon this week to look at homes.

What bugs me about family/friends who do the buy buy buy mantra is that they really don't understand what it's like right now. All my family bought years ago and have no idea what homes cost these days. And when you tell them they say "well, why don't you just get an interest only loan.... blah blah blah." It's so hard to gat across to them that I don't want to buy some teeny tiny shack and then be house poor because I had to pay a fortune for it. I can literally get twice the house if I rent.

Did you guys read this article from Reuters about how borrowing and adding to the U.S. debt for Katrina reconstruction is likely to make interest rates go up?
http://tinyurl.com/76wqf

Very interesting.