Post Weekend Topic Suggestions
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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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some insights from doug kass. good summary of the economy and housing
http://immobilienblasen.blogspot.com/2006/08/partymuffel-partypooper-doug-kass.html
In addition, there are no asset classes that are likely to produce a new wealth effect for consumers.
So, who predicted that housing would have created a “wealth effect” in the year 2001. Here is a more correct statement:
In addition, there are no asset classes that Doug Kass can think of are likely to produce a new wealth effect for consumers.
He seems to be confusing his ignorance of possibilities with nonexistance of possibilities.
i agree with doug kass on this topic. there is no asset class that can pumped up that creates enough wealth effect to save the average us consumer.
even if stocks would go higher (i doubt it) it translates not to the average person/family.
housing is done.
there is nothing big enough left.
http://www.immobilienblasen.blogspot.com/
I suspect the stock bubble will start blowing again, as money rushes out of real estate, gold, oil and the other commodities.
Cash is sort of a bubble right now and it can sort of be popped by inflation.
I do believe though that the comsumer is getting tired, but they do love using the plastic.
make that consumer.
“I suspect the stock bubble will start blowing again, as money rushes out of real estate, gold, oil and the other commodities.”
I think you should amend that to “selective” stock bubble. I doubt if consumer item stocks, leisure sector stocks, technology stocks, automobile stocks will do well. Companies in those sectors need consumers to spend. How often have people on these blogs been telling you that consumers are topped out? Did you see any news at all that said the savings rate was negative in 2005 - the first year since the Great Depression?
On the other hand, there is a DECREASING amount of oil in and on this earth - the combined amount that has been extracted and that is still in the ground. Basic economics means the cost of oil and related goods will continue to climb. Health care costs and college costs continue to climb. Stocks in oil drilling and the health care sector should do well. The only way gold will be driven down is if the 10 year note and 30 year bond can be driven up substantially higher and become at least 2% points higher than T-bills. As long as T-bills are paying better than 5 year notes and longer terms, gold and T-bills are the safest places to put your $.
I agree with some of your response. However, I believe most people “invest” on emotion, rather than analysis, which makes them chase returns. I think there are a limited number of asset classes that people are willing to pursue. So, I can envision people just rotating their money among them.
Possibly an international stock bubble.
Yeah, health stocks will do well in the upcoming recession. Hospitals and doctors offices will overflow when consumers maxed out from indebtness and declining home values go bonkers and end up in ER’s.
health stocks will do well in the upcoming recession
I can hear it now: There’s always sick people! The population is aging! They aren’t building any more hospitals!
Back to pen…earnings do count. Stock buyers have a short term memory, but still long enough to remember that they bought stocks in companies that had no earnings and they lost their shirts.
“earnings do count”..until next time when it is a different paradigm…:)
That was posted yesterday, in real time.
missed it.
8 hours time difference
another story
china raises rates to cool growth
http://www.immobilienblasen.blogspot.com/
Northwest Florida joins the July yoy decline club with median prices in Escambia county down 1.8% and average prices down 9%. Next door in Santa Rosa county median prices are down 5% and average prices are down 7%.
There’s a first time for everything. Can anyone say “National Decline in Prices”?
Article in the PensacolaNewsJournal effectionately known locally as the Peaanut Butter and Jelly:
http://www.pensacolanewsjournal.com/apps/pbcs.dll/article?AID=/20060818/BUSINESS/608180319/1003
For a weekend topic how about a compilation of all known yoy declines and estimates when NAR or other “authoritive voice” announces the first ever National Decline in housing prices? Name the date and the source correctly and you could win an overpriced cash munching alligator known as a beachfront Florida Condo!
I suggest a topic of “How long do you wait to buy/What do you do with your money while you wait?
We should discuss how to get “real” numbers on the state of RE. A year ago the sales price was the sales price. This year, the “sales price” includes $50k in free options, no HOA fees for 2 years and no closing costs. A $500k house really cost $460, so Y/Y declines are much greater than listed.
The question: how can we best quantify those numbers (if at all)?
Good topic . Also need a discussion on just how legal all these kick-backs are interms of truth in lending .Nobody thinks about the investors in loans ,but aren’t they entitled to full disclosure on loan packages ? Yesterday there was a thread on a builder giving away 120k in kickbacks . If the lender lends on the inflated price they are giving a loan that exceeds 100% of value . Lenders in the past would never allow that kind of incentive kickback without lowering the loan amount so how are the builders getting away with it now ? I’m getting sick and tired of this incentive crap ,lower the price . It’s not fair to raise the property taxes based on a inflated price with kickbacks . I contend that this will be and should be a issue .How are the builders getting away with this ?
I agree with you, Wizard. A great topic. To add to that (something that I have spoken about a few times), what, if anything, is going on with the speculative buying where no one is checking on the “owner occupied”, multi-house purchases? There is, or was, clearly a line as to the percentage of rentals to owner-occupied units in a developed community. Is that not the case now? Or, has there been a wink and a nod on these things? There wouldn’t be so many dark houses in communities (or dark towers for condo projects) if that wasn’t the case. Is what was done legal? And how can you stop it from happening in the future?
So many rules were broken, twisted or were otherwise ignored in this run-up, but this one made it extremely easy for neighborhoods and communities to look like ghost towns, all they needed was tumbleweed rolling passed.
BayQT~
Wiz, QT — great topic — I am particularly interested in QT’s “where no one is checking on the “owner occupied”, multi-house purchases?” There is a lot of fraud there and both lenders and property tax extractors should be paying attention, in the latter case where owner-occupied homes are not charged as much tax as non-owner-occupied.
Because its an unregulated industry (housing, R.E. loans and R.E. sales). The builder can record the transfer at full value and the person at the county recorder’s office doesn’t think twice. Why you ask, because the property taxes are based on that trnasfer amount, so if they actually took the correct (lower incentive-adjusted) value, then the county would collect less tax… The bank doesn’t care either - having been an appraiser many yeara go, I know this first hand. The loan officer gets a higher commission as does the V.P. for producing a higher loan production (I have been a loan officer and a production manager). Most investors know the paper (loans) is crap, but they are getting a pretty good return vs. other investments, so they dont care. Trust me, there will still be “easy financing” when the dust settles. If a pension fund, insurance co or foreign investor has a billion sitting around, it does them no good unless they loan it to someone…and since its not heir primary source of income (like OPEC), they dont care if they take some hits on the loan portfolio. OPEC families cant invest in their own countries or most of Africa due to threat of revolution. The U.S. is still the safest place to invest due to the military’s protection of the dollar. We have the dumbest consumers of any industrialized country - we buy stupid and useless crap everyday (SUV’s, flat screens, Ipod’s, etc.). None of it made here and all of it depreciable.
I had a friend who received a windfall of $400K. At the time I was wroking for the most succesfull apartment broker in SoCal. I tried to get my friend to buy a property we had for sale. With his money, he could had just swung the deal. Positive cash flow (just under $100K), medium age so little deferred maintenance. He thought I was trying to sell him cause I needed the commission. Instead he bought a new car, went to Vegas every weekend and within 6 months had lost most of the money. I tried to explain to him that the businessmen (mostly Asian) that he was gambling next to actually own businesses and even though they are losing money, their employees are making it for them while they are away on vacation. They were not gambling with their principal. Americans never learn, dont read and are generally clueless.
….Could not agree more. I once asked a German friend what she thought the biggest difference between a European education and an American one was. After a moment’s thought, she responded, “critical thinking.”….. Truer words.
Boeing planning closure of C-17 plant in Long Beach, CA, and laying off 6,500 high paid employees. Raytheon in S. Cal also laid off few hundred employees last month. Looks like the defense industry is going to exaggerate the downturn in S.Cal RE, just like it did in the 1990s.
How many of those Boeing employees [and subcontractor employees] invested in second or third home because they had a “steady” job?
How many flipped homes?
How many bought homes recently and was dependent on two incomes?
If its anything like where I work (also Aerospace engineering), it is an amazing number. I’ve posted before that I have one coworker with 5 “investment” properties. (He’ll do ok. He stopped buying in early 2004 and sold enough that he’s currently cash flow possitive on what he’s holding.) Another coworker with 4 investments (he’s toast). We then have a smattering of those who will be smacked down in various geographic “condo crazes.” (Mostly San Diego… why?!?)
But what is *really* going to smack down the Aerospace work force is the *huge* amount of unintentional speculation. Let me explain. The current aerospace workforce is pretty “bimodal” in age with an huge fraction of the work force approaching retirement. These soon to be retires bought their vacation dream home “before they were priced out” and have been struggling to carry two mortgages. Most expect to sell their California home at *huge* profit and thus have no trouble retiring.
So this creates a two way issue.
1) For California many of these retires will pull the rip cord and just start their retirement. Obviously, they’re not going to get what they expected for their house.
2) Those retirement homes are hungry “Alligators”. How many are going to find they must keep working (in Southern California) due to the sudden “haircut” their California home takes in value? Thus they’ll have to sell the retirement home at great loss or possibly even lose both homes.
3) There are even a few that if they cannot sell at *exceptional* profits will probably go BK.
But what’s scary is the shop floor… There are people who earn a fraction of what I do and “own” two or three homes where I dream of buying but feel I’m priced out (as I’ll only use a 30yr fixed rate, etc.). I’ve found out that almost all of them put
Neil: your comment got cut off: please continue!
I’m listening too. Continue when you can.
Thanks for noting the cutoff.
Ok, I was talking about the workers on the shop floor. As I noted, they “own” 2 or 3 homes where I dream of buying. But what do they own? With them typically putting 0% down, only their appreciation and so much of that has be HELOC’d to death.
1 in 4 of my coworkers is in speculative real estate! Whisky Tango Foxtrot?!? And yes, that’s the mix of speculative and “unintentional speculation.” How they got into the market doesn’t matter, only that they are in the market and most cannot really afford to “wait and hold out.” Some… can hold out and pull properties off the market. Most… must sell within 12 months of their last HELOC (if not sooner, the payments are killing them). The 401k’s have already been raped.
And then there is the regular HELOC’s. We have one technician who *needs* overtime and hardship pay to pay interest on his $650 mortgage. Oh, should I note he bought his California home for $150k. His home *was* the bottom of the last market! We have a pool going on when he losses his home. (I selected May 2007 only because Febuary and April were already taken).
Well… we’re cutting Overtime. We’re having to “release” people from projects with hardship pay.
I’ve noticed that the shop floor has stopped taunting me for not being a home buyer. Now… they want to get me interested as a buyer in their investment properties (I overheard at lunch how quite a few of them consider me to be typical of their “target market.”) I cannot help but notice that when they say “real estate only goes up” its now with quiet desperation instead of misplaced optimism.
I hope to buy soon. (Soon=2 years). But I’ll wait… I’ll keep track of the inventory/median salary/population trends, etc. I even plan to buy early. (For best selection.) But man… not at today’s prices. Not for the homes I could struggle into.
Neil
Thanks Neil: Just don’t buy em on the way down as I think the bottom will be lower than what most people will assume, just as people have been calling the tops of this bubble for few years already. Best “selection” may not be your best buy. And remember the opportunity cost of money tied up in real estate which could have been better used elsewhere….
I just hope it doesn’t get ugly for you at work.
Boeing’s Connexion business in Foothill Ranch is also being shuttered and people laid off.
The OC Register reported that in the last week or so.
I’m surprised about Raytheon myself in view of world events. I was under the impression they had a huge contract with Israel to fulfill (and expedite). I thought Boeing was doing well with lots of new orders too. Any insights as why the haircuts in supposedly good times?
I worked in the aerospace industry in most of the years from 1985 to 2003. All defense work. I’m still working defense but I moved out of aerospace and I’m into a more lucrative, more in-demand field of defense. For now the money is super. $224k in 2005 and I may earn $200k by the end of this year. All along, however, I have been telling myself that good times don’t last. Anyone who depends on his job for paying off his house should beware. Politics can change signficantly every presidential election year. I anticipate I will have to move to a lower salary, such as $70,000 in 2008 when Hillary gets elected President and Jesse Jackson is Vice President. That is what the American public seems to want, in addition to burying our heads in the sand and becoming sitting ducks when terrorists flood the USA shooting us all up.
That is what the American public seems to want
I think it is interesting to contemplate what “the public” wants, from a financial interest standpoint. I disagree that they “want” hillary or jesse or (insert right or left wing name here). I think what is present: major discontent with the current state of affairs. The last time approval ratings approached the current numbers were during Nixon.
So the point is: “the public” “wants” change. Whoever presents themselves as the “change” catalysts in 2006/8 will come out on top.
Now with my jaded eye, I’m trying to figure out what that means for asset classes.
“So the point is: “the public” “wants” change. Whoever presents themselves as the “change” catalysts in 2006/8 will come out on top.”
Hot damn — there’s my opening! Let’s elect a libertarian for once. Ron Paul for President!
“Let’s elect a libertarian for once.”
I have decided that it is a wast of time to vote for Republicans or Democrats, although in the past I have voted Republican. There really isn’t any difference anymore between the two and I don’t like either. I am planning to vote libertarian for the first time this year.
OK Bill;….It was a good post until the V.P. prediction…
The problem is that people keep looking for their leaders (mostly third generation bluebloods) to bail them out. What does someone who went to Hardvard/Yale and never had a real job (Bush 1, Hilary, Bush 2, Gore, Bernanke, Greenspan, etc.) know about getting up in teh morning and going to work. What do they know about having to choose between braces for your kid or reliable car. What do they know about budgeting. Chelsea Clinton got her first job at one of the East Coast consulting firms starting at at six digit salary. Now what the h*ll does a 22 year old know about business consulting, the economy or the geopolitical events that effect it. But she started out making more than most people will ever retire at, just because of who’s family she was in. So when people continue to elect these people to represent them, then they can rest assured that everything that takes place is going to go against the working class, as it always does. We see that bankers, politicians, homebuilders, Wall Street, bascillay everyone rich, knew that the housing market was crashing two years ago, but they kept the easy money flowing and encouraged “homeownership”. So now who got screwed and who made money…
Franklin Delano Roosevelt was from very old money, but his second term put fear and hate for him into his fellow rich guys.
“I anticipate I will have to move to a lower salary, such as $70,000 in 2008 when Hillary gets elected President and Jesse Jackson is Vice President. That is what the American public seems to want, in addition to burying our heads in the sand and becoming sitting ducks when terrorists flood the USA shooting us all up.”
I suspect your political interests have much more to do with “your” financial well-being than the interests and safety of our country and it’s people as you try to insinuate. I also imagine you have been dramatically overpaid through government contracts or “waste” as I see it. It is, indeed, wise of you to realize that these good times, which you like to flaunt so much, won’t last forever, and one day very soon, a more sensitive government will wrest control of this sinking ship of a country and put money back into the pockets of the middle and lower classes which keep it afloat.
“Politics can change signficantly every presidential election year. I anticipate I will have to move to a lower salary, such as $70,000 in 2008 when Hillary gets elected President and Jesse Jackson is Vice President. That is what the American public seems to want, in addition to burying our heads in the sand and becoming sitting ducks when terrorists flood the USA shooting us all up. ”
The American people do not like long, drawn out indecisive conflicts. This was demonstrated in Korean war and Vietnam. They want certain decisive victorys with a definite limited duration, and after that all Troops return home. That was the Mistake they made after WWII: they disbanded too quickly and allowed the Russians to swallow half of Europe.
Western DEmocracies cannot engage in long-drawn out conflicts on battlesfields without internal dissension sundering the country. And futhurmore, a ruthless enemy such as Militant Islamic Fundamentalist Jihadists cannot be faught in the traditional Narrow confines of a traditional western type set military battles. No, this enemy will be faught right here at home thru such devices as the Patriot act, and constant easedropping of domestic communications, ect. The enemy will not stop, ever, attempting to blow up US planes, buildings, trains,ect. Either the American people come to accept this or a 10-meg nuke going off in a major US city will force them to accept this.
No, i am not being hyper nor am i afraid at all. Have worked in some of the meanest areas of LA and have narrowly escaped from being shot at or seriously mained many times. I know the reality of just being alive and what it takes to survive. I think that most of the average working class citizens have more common down to earth sense than the Bushes, Hillary, Al Gores,and all the other spoon-fed milk-toast politicians
The major difference between WWII and the conflicts in Afganistan and Iraq is that in WWII it was “total war” without regard to the consequences to the populations we were waring upon. I’m sure there were Japanese and German citizens who did not subscribe to the path their governments chose to take, and yet they suffered the consequences of the conflict.
The problem with “modern warfare” is that we have become hyper-sensitive to the loss of life for people not directly engaged in the support or execution of the confict with our soldiers. Never mind the fact that Iraqi and Afgahni citizens alike know when, where, and by whom the IEDs are placed. They just choose not to share this information (not without good reason).
I am not saying that we should prosecute all wars with the same intensity we used in WWII, but that we cannot come out the obvious victors in a war that is fought with such restraint as our military is fighting the current conflict.
I am not advocating the instigation of “total war” against Iraq and Afganistan, but I had my reservations about these conflicts before we became engaged in them. Our government has no business getting directy involved (ie. with ground troops and offesive) with any conflict in this modern day unless they have the will power and moral high ground which justifies this level of engagement.
Afganistan passed this test, as the people in Afganistan were part and parcel to the terrorist which trained to destroy the World Trade Center. If the peoples liberated in Afganistan do not appreciate their liberation from the Taliban, then they are complicit in the intent of the Taliban’s operations.
By the same respect, we had no comparable moral reason to engage in a war with Iraq. The reasons given were feeble and relied on the American populace to take the word of the Government that there were good reasons to go to war. In retrospect, threre was not good reason to risk life and treasure in Iraq.
The next time our leaders decide to take us to war, it should be because we have been attacked directly and must respond in kind. Half-assed wars like were are fighting now only prolongs the pain and hardships in the civilian population
War is not pretty, nor safe, nor without its injustices. To try to delude the public that war can be fought surgecally and without the loss of innocent life is a big lie and has done great harm the world’s view of America.
War should be fought only as a last resort, but when it is used, the gloves should come off.
Once a state decides to commit to war as the final resolusion to resolve a political conflict then it should go all out. That did not happen during the Korean war nor vietnam war: we did war for limited objectives, otherwise we would have given Gen Douglas MacArthur the green light to nuke China.
I do not not think that the American people can be persuaded to accept and go to all-out war. It would require that we turn to a wartime socialism economy and become a garrison state, which we did during WWII. Right after 911 there was a brief flareup of war-mongering among the gen public which gave us the impetus to go to war in the niddle east, but that has since waned. The American people want quick certain decisive results, not long indesisive drawn-out conlicts. They have no stomach for the long-haul.
No, war is not pretty, nor is it without civilian casualties if applied in the Clausewitzian Concept of Total War. Certainly the Allies powers in WWII when dropping bombs on German cities could not do precision surgical stikes, and did indeed cause massive firestorms in major german cities resulting in unnumbered deathes among civilians.
You made 200K+ a year in defense.
I wonder why you support the Republicans?
Here’s a Market Watch link about Boeing shutting down the C-17 plant in 2008 if anyone is interested.
http://tinyurl.com/gpphx
C-17—–Texas takes a small hit, too.
“In Texas, Vought Aircraft is the largest subcontractor for the C-17. Texas has more than 5,600 workers whose jobs are directly tied to the C-17.”
http://www.presstelegram.com/news/ci_4199820
This is the big problem with aerospace and defense work (and I work for a defense contractor). Even if a company is doing seemingly well, one contract gets shut down and a bunch of people are out the door. Or a new president comes into office and slashes defense spending and half the industry is out the door for a few years. And then we hear from on high that America needs more engineers and scientists. Do we have work for them? Do bright people really enjoy dealing with a boom/bust cycle when they could just go to dental school or something else that provides well-paying, steady work? Maybe we need more of our top 1% minds going into research, but needing sheer numbers? I don’t see it. Half of the engineers in my group haven’t designed or analyzed anything in months, too much paperwork and make-work to grind through.
We need more engineers and engineers need more respect. But there are a ton of areas other than defense to use our skills like alternative energy so eliminate dependence on foreign oil, telecommunications so we can work from home, research in deseases to improve health.
Ford plans to cut 10-30% of its staff and will have major, though temporary, plant shutdowns this Fall. Is GM far behind? And this is BEFORE the recession gets underway. More and more buyers out of the pool and more and more FBs closer to losing their properties.
Ways that we, Ben’s bloggerati, can gather data from around the country (and world) to “prove or not” a factoid about the housing bubble. E.g. each of us asks 3 realtors in our immediate area a particular question TBD, and then we post all of the results here.
Blogeratti # 684 here waiting for assignment.
Ooooooh, I’m diggin’ that one!!! I’ll ask a realtor somethin’ on long island. there is nothing more fun than playing the role of an obnoxious, no it all lawng i-landaaa. (i say this with love it my heart =)
Northwest Airlines passes out tips for living on a tighter budget including dumpster diving and never shopping while hungry.
http://tinyurl.com/rhjos
A sign of things to come? Although I’m a big proponent of making hard choices if you’re serious about your goals, I’m thinking even with home price reductions the availability index is still going to be heading south for quite a while.
I was wondering if we might do a thread on signs of the downshifting economy.
I second this topic.
Yesterday shopping both Costco and Trader Joe’s were easy to get through.
Looks like some of the former Costco/TJ’s shoppers have moved downmarket to Sam’s Club and Food 4 Less.
A lot of stories about TJ and Costco being relatively empty lately (I’ve noticed my shopping cart doesn’t bump as many people in both lately, too!). Can someone find data on sales/profits for these companies?
I 3rd;….Not having any problem getting any work done….Just signed a contract to re-roof 10 houses yesterday…They are starting on Tuesday….Try that a year ago….
Hey, are you in property management?
I manage my own…But I take on projects here & there hence the re-roof on 10 houses….
Next stop for the fb is the food pantry.
This sounds like something Marie Antoinette would have put out if she were living in the 21st century.
WTF?
“Sorry, we can’t give you a raise. Sorry, we need to eliminate your medical insurance. Sorry, we need to eliminate your retirement benefits. But hey don’t fret. We hired this million dollar consulting company that has short listed the best dumpsters within your zip for fine pickings.”
A major US company takes a page out of Dragworm 101 as advice to its employees? Corporate America has finally taken off the mask.
Wow ~ totally insensitive of NWA to send that to employees. (However, I am a big fan of living frugally and “dumpster diving”. I just don’t agree with my employer giving me tips on it prior to cutting my salary or job.)
In my ‘hood, you would have to compete with the indigent nutcases over the best dumpsters. They already have their territories reserved.
The local businesses have been forced to padlock their dumpsters in order to keep the bums from spreading the contents all over the place. Unfortunately, the city-mandated (plastic) residential dumpsters cannot be locked
So we frequently have garbage strewn in the allys. Really adds to the ambience. Not.
My dumpster diving isn’t really diving - it’s picking up furniture placed out by dumpsters (or on the curb for trash pickup) and then refinishing. I don’t dive for food or anything - and I don’t think that’s what NWA was inferring.
And stuff left over from do-it-yourself public storage places. Got a lot of good used furniture items from those places.
I wonder if they are considering outsourcing their upper management as well, seeing what a great job they have been doing running the company, I can not see how laying off low skilled workers is going to save this albatross. They should start by taking out management in the back room, and having a firing squad ready.
In europe (hope that NHZ gives me some more info about this) the CEO and upper management are the first to go when the company is in trouble. It is harder to lose your job, but it is also harder to land one.
I cannot f-ing believe that. Tidbits like these reveal the true insanity of corporate america. You realize that this drivel had to go through dozens of hands probably before being distributed. None of those drones recognized this as crass and heartless?
“We’ll make good pets.”
More Helpful Financial Tips From The Airline Who Cares:
* Take donations on a busy street corner (a cleverly worded sign is always a plus). Be sure not to dress too well, heavy clothes and a knit cap in the middle of summer are sure to boost the sympathy dollars.
* Try downsizing into a cute cardboard bungalow. You can always personalize and accessorize with the latest treasures you’ve rescued from the refuse bin.
* Keep a dog for a low cost security system, helpful to catch a couple hours of solid shuteye without worrying about being attacked by your fellow open road adventurers.
* The library is a nice place to keep cool in the summer and warm in the winter. Plus they have all those books with lovely pictures you can look at.
* Summertime is blackberry time! These plump, sweet berries are full of antioxidants and fiber, a real health booster. Best of all they’re free to pick on the side of the road (watch out for the thorns!).
Levity aside, I wonder if this is part of Northwest’s PR strategy relative to a pending (as in two weeks, if I recall correctly) strike by their flight attendants.
from the consumer sentiment report
AUG. UMICH 12-MONTH INFLATION EXPECTATIONS 4.2% VS. 3.2%
seems that they live in a real and not the “core” world
http://immobilienblasen.blogspot.com/
There have been more than a few threads addressing investment strategy over the coming years after the RE meltdown and a number of bloggers are presently reaping the benefits of shorting RE related securities therefore I would like to get comments and links to research on the profitability of a bear market vs. profitability of a bull market for an individual investor.
The theory (not sure who to credit) is that just as there are more right handed people in the world than left handed people, there are more long investors than short investors in the financial markets. The majority of individuals invest either long (defensive stocks) or go to cash or near cash when markets turn bearish (long term bear market) which results in a significant smaller pool of investors (investors taking either short positions through borrowing stock or through puts) in a bear market. I believe this is also true in investment banks i.e. that the population of “long” brokers/traders and positions is significantly higher than the population of “short” brokers/traders and positions.
I am not referring to a contrarian investment strategy per se but the proper strategy to play in a developing or known bear market (shorting the bumps and putting in a bear market in this case) that due to fewer participants (majority of market investors scared and sitting on the sidelines or buying the dips) produces larger profits per participant executing the proper strategy.
Ex: If a bull market goes up by $100 and there are 50 people investing long then the profit per investor is $2 however if a bear market goes down $100 and there are only 5 people investing (short/puts) then the profit per investor is $20 (taking into account even weight of each investor)
Can bear markets produce higher profits per individual investor executing a proper bear market strategy (shorts and puts) vs. the proper strategy in a bull market (long and options)?
Apologies for being long winded. Hope to get some good comments from THBB brain trust!
I agree that the number of investors who invest on the short side is way lower than the long investors. This is especially true since most retirement investment plans don’t allow shorts and puts.
However, I am afraid that institutions and hedge funds make up the difference. For people worried about short squeezes and who have not studied options, try Rydex and Profund bear mutual funds. Rather than selling more stocks from a Roth account, I bought a bear fund. In terms of market exposure, a bear fund is just like selling a portion of an accounts stocks.
If you want to protect a taxable acount without buying options, and you don’t want to sell stocks for tax reasons, a bear fund is a good alternative. Just be carefull!
If you own a lot company stock that you don’t want to sell, consider buying collars. This means selling calls and buying puts for a net cost of about zero. This also means that you have capped both potential losses and potential gains.
Thanks for the comment Bill. I will take a look at those bear funds you mentioned.
Can the HOA of a condo building go bankrupt? Say only half a building’s units are ever sold and the developer has financial problems or most of a building’s units are sold to non-occupants who have financial problems. As a result, the amount of condo fees needed to maintain/insure the place aren’t collected. What happens?
Could this scenario play out in overdeveloped areas like Miami?
The associations that I have formed have specific recourse for non=payment of association dues including, sale of the unit…
What if there are many, many non-paying units and the sale of those units takes a long time? And do HOA liens take priority over the lender’s lien? What if there arent’ sufficient funds from the forced sale to pay the HOA lien? Is a bankruptcy-like scenario possible for the HOA? Where does the HOA get funding in the mean time? Does it let the building go uninsured and without basic services until money can be recouped from sales of units?
Like Donald Rumsfeld says, there are “unknown unknowns”. Me thinks we will be charting new territory for HOAs. It would be interesting to watch the stories unfold and see how the cookie crumbles.
Good question. I was on our board after the 1994 Northridge quake. We did have a few owners who stopped paying. As I recall, the board lien comes after the lenders liens so there may, in fact, be no money left to pay the association if the mortgage is underwater.
In Texas, HOA can and will force the sale of any non-paying units in order to recoup the monies owed.
Fontain;…What is this, Jepordy ??
I will attempt to answer some;
#1. If its a new development (at least in California) the developer is required to bond the association dues for 6 months, possibly more..
#2. Lenders lien would take priority (probably)…
#3. Insufficiant funds is hard to understand…If the lender took the property back in forclosure, the lender would be responsible for the dues in arrears…
#4. HOA have borrowing capasity from lenders…Its done all the time on large HOA’s…Typically its because of some major repairs that are required and the reserves are not sufficiant to cover the costs…HO’s sign off on a note for their portion of the loan…
Did I help ???
Chicago Comsumer Sentiment numbers didn’t improve at the last reading…ok, fine, then why does the consumer keep spending like drunken sailor?
I’m wondering how long we’ll continue to see what I call the “glass floor” of house prices. I swear everything around me has a minimum price of $200,000 (except for maybe a very few condos that are in the upper 100s). The market I can afford to shop in would be homes that sold between $80K - $125K in the last “rational market” (assuming that was 1997 like Shiller has said). All of these are at least $200,000 now.
Are others seeing a glass floor in their areas? Is it foolish to think these will be broken through? Or is this the price where homes will flatten out at for a long stretch (meaning the “hard landing” or crash will occur on the higher end prices, and a “soft landing” or flattening on the lower)?
Econ 101. Bubble ALWAYS crash harder and longer than people expect. This is the mother of all bubbles.
“This is the mother of all bubbles.”
Excellent! You win 1st prize for the best quote of the day.
This is the mother of all bubbles, but RE is not the only componant of this bubble. This bubble started about 1985, more or less, and the stock market has been and is an integral part of it and now finally at the last stage they are both going to go down together.
had dinner last night with a retiring dentist who is fairly astute about the market. owns a home in boulder (free and clear) and one in scottsdale. his current investment activities include fbr (friedman, billings and ramsey) homebuilders (they’re cheap you know) and joint ventures in high end real estate in boulder ($1000/sf). what was amazing was his total lack of grasp of what was playing out in the real estate market (it always eventually goes up, you know), even with the backdrop of the current colorado market (grim at best). i think a large majority of the general population are at a very early stage of the learning curve on this impending disaster. readers on this blog have been light years ahead in predicting this burst, but i’m sure we are a very small minority. imho.
From much of what I have read, dentists and doctors make some of the worst investment decisions, they also make terrible consumer purchases.
They are some of the highest earners, but tend to retire later than those that earn a whole lot less. They make six figures, but they spend six figures. They are very often self-employed or in partnerships. They focus on building their practices. They rarely have anyone address retirement planning with them, so later on in their careers, they end up making risky investments to get larger returns.
making risky investments to get larger returns.
Not just Doc’s, many, many boomers are doing this trying to catch up….
Same here. Some of the more financially astute people I know STILL have blinders on…I think it’s a reflection of their success never hitting a bump in the road…everything has been just dandy, thank you very much…and they DON’T want to hear anything to the contrary…it is very early in this financial…readjustment…and the pyschology of most is denial.
I would guess 1 out of 15 “smart” people (that I know) are getting ready.
Just today, my husband’s co-worker was making fun of us for not buying a house yet, claiming that we will never have the “guts” to buy a house (we sold to rent, so have already bought before). He also recently bought a house, though my husband tried to warn him.
This evening, had a computer repairman over, and the subject of housing came up (he said that the housing prices were due to the .com bubble). After I gave him all the regular info regarding a credit bubble and showed him the stock charts of HB after HB, he said that prices wouldn’t likely decline much. After all, so many of his friends have bought multiple houses and are making so much money on them. It’s such a good investment. Even after I told him that YOY prices have already gone negative in many leading bubble markets. (sigh)
IOW, no…psychology has not turned, yet. Lots of folks still think housing is a “can’t-lose” investment. This is going to take a while, IMHO.
The myth of “new buyers are always out there”.
it goes like this; people are always moving and getting new jobs so there are always new buyers. Also, the Baby Boomers want to move to the sunbelt so those states will always have buyers.
Well, people who move to a new job can rent. But people who leave a job MUST sell their home. And Boomers who want to move south MUST sell their home first. So rather than a ever present crop of buyers to keep the housing train going, there are more and more sellers lying in the tracks.
> people who leave a job MUST sell their home
Actually, that is not the whole truth. You could also rent out your old home, especially if you are not sure if the relocation plays out well. We did so, BUT, of course, didn’t buy a new home in the area we noved to.
Of course if rents are 1/3 of your mortgage payments due to ARMs and/or HELOCs, you can’t afford to rent out your old home.
I think my point though is there is more pressure on sellers than the mythical oversupply of buyers.
And not that many people have as much cash flow in retirement as they did when they were working. For me, I think it will be about 40%, maybe 45%. If I can’t pay cash for my next house, it ain’t happenin’.
I’d like to know if anyone else has noticed that the cost of things like insurance lately has no bearing on reality. Our health insurance has been rising %20 per year. Our home insurance suddenly doubled (and we don’t live in florida) We have had a lot of ‘mistakes’ on phone bills where we are signed up for programs that we never signed up for. Our electric bill has been raised twice and is about double what it was a year ago and due for yet another raise. It’s as though companies are aware that the consumer is so out of control that they are out to raise until something breaks and get all they can while they can. Is this inflation? I thought there had to be some underlying reasons for the cost of things going up. The reason we got for our electric bill going up is that they are building new infrastructure but, weren’t they doing that all along? Shouldn’t they have been? Haven’t all these companies been making record profits? I understand that companies raise rates but when it is a sizeable chunk you get the sense that they think the consumer is insulated from disaster by the use of credit.
But interestingly enough, inflation is not going up much at all.
Ooooh come on!
Bernanke said “inflation pressures remain well contained”.
So you must be imagining those price hikes.
“No inflation here folks, nothing to see, move it along.”
Topic?
Do people think that if the Fed were to lower rates again, would that help the housing market in any significant way.
I know I have my own opinion.
“Do people think that if the Fed were to lower rates again, would that help the housing market in any significant way.
I know I have my own opinion. ”
I don’t know if that would help real estate, and personally I don’t care. My approach is never take out a loan on more than 1/5 of my net worth. Right now I can buy a POS on 1/5, so I will continue to rent in a near new and well-maintained luxury apartment where I can practically snap my fingers and a broken appliance or other problem gets fixed.
Do people think that if the Fed were to lower rates again, would that help the housing market in any significant way.
———————-
Yes. I believe it can slow the downturn for a while. Many GFs are convinced that 5% off peak prices are a deal. If they do not see significant YOY price declines, they will buy.
If interest rates around the world are lowered again, it will force large investors and hedge funds to continue buying MBSs. IMO, it’s why we’re still seeing the crazy loans. The credit bubble has not yet popped. It’s showing signs of strain, but not broken yet. It can’t come soon enough…
Here’s one: How do those of us in non-disclosure states keep track of the slowdown and know when to buy eventually? It’s kind of tricky to do without knowing exactly what is selling and what it’s selling for. The county assessor’s web page will show the date of a sale (if it sold), but not price. I keep track of inventory and median asking price from Realtor.com. Even basic sales data are nearly impossible to find. There is one realtor web page that shows the YTD sales for the current month and compares it with a year ago (by writing this down every month, I can deduce actual sales for a month). No newspaper articles, ever. Zillow is pretty much useless here. No comps, of course. The only thing close is if you go to Realtor.com and put an address in where it says “What’s your home worth?” Then it shows a few nearby sales, but it’s far from complete and I’ve found suspect information there (houses once listed for $110,000 supposedly sold form $150,000).
We can get trickles of info here and there, and there’s always the trailing HPI, but I’m a data hound and need it all! You Cali folks have it so good. No, actually, with your prices I guess you don’t. Any tips? The state is Montana.
Interestingly, here’s a newspaper review of Zillow where he says it’s not perfect but he is also critical of the Realtors for guarding sales info:
A real estate broker sent me her newsletter the other day. She took a potshot at a Web site I have been visiting off and on for a few months, a Web site I find fascinating. She didn’t name the Web site, but my bet is that it is Zillow.com. It is a beta site that makes a mighty effort to estimate the value of homes across the country.
Valuing homes complex
Snakes On A Plane? No worse; Realtors On The Internet! Post egregious examples. Post admirable examples too but make sure you distinguish.
Here’s one from RE broker Karen Thompson in the Sarasota HeraldToday.com (earlier this week):
“With the short-term investors now out of the market, Thompson foresees a return to a more normal market and doesn’t think prospective home buyers should worry about losing money when purchasing a home.”
Sound financial advice don’t you think?
I posted this here a few weeks back, but this Realtor covering downtown Baltimore’s “hottest” markets has some scary and unfriendly words for all would-be sellers…”The trend seems to worsen every month. Maybe 20 years from now we’ll talk about the real estate boom of the early 2000’s, but will we talk more about the big bust?”
http://tinyurl.com/rt3zg
“…but make sure you distinguish.”
LOL.
I imagine that when construction is booming contractors buy new trucks. When it’s not:
New truck sales plunge here in July
The 1,033 new truck sales in July were 19.4 percent below the 1,283 a year earlier. In contrast, new car sales rose 4.5 percent to 1,028, leaving total new vehicle sales for July 8.7 percent below a year ago at 2,108.
Year-to-date through July, the 12,408 new vehicles sold here are 6.7 percent below a year ago, with new truck sales down 13.1 percent at 6,319 and new car sales up 1.0 percent to 6,089.
http://www.madison.com/tct/business/index.php?ntid=94872&ntpid=4
And consequently:
Ford slashes production
SAN FRANCISCO (MarketWatch) - Ford Motor Co., aiming to bring its production in line with waning demand, said Friday it will slash the number of vehicles it builds in North America by 21% in response to its flagging U.S. sales.
The Dearborn, Mich. automaker said it will cut fourth-quarter production by 168,000 units from year-earlier levels, reflecting the continued consumer shift away from trucks and sports utility vehicles amid lofty gasoline prices.
“We know this decision will have a dramatic impact on our employees, as well as our suppliers,” said CEO Bill Ford. “This is, however, the right call for our customers, our dealers and our long-term future.”
While Ford’s move is intended to better align supply and demand over the long haul, GimmeCredit analyst Craig Hutson said the short-term ramifications will be ugly.
http://www.marketwatch.com/news/story/Story.aspx?guid=%7BA43D82D6%2D841B%2D42F9%2D8600%2DAD0D730BC66A%7D&siteid=
Ford and GM need to try a restructuring where they replace their entire upper management and product engineering team with Japanese management.
Seems like Toyota, Nissan, and Honda have proved able to manufacture high quality cars in the US and make a profit utilizing the American factory worker so he/she can’t be the problem.
“Seems like Toyota, Nissan, and Honda have proved able to manufacture high quality cars in the US and make a profit utilizing the American factory worker so he/she can’t be the problem.”
I agree that the American worker is not the problem, but his or her union sure is. The Japanese companies didn’t spend a lot of money building factories in the rust belt. I think a lot of their good fortune is due to luck — by being able to locate outside of the traditional strong-union areas and by not having the crushing legacy costs of the Big 3, they are effectively racing on 13-pound bikes against guys who are stuck with 26-pounders. Whether or not the Big 3 should have allowed themselves to get into that predicament is not the fault of present management. I think if you put Japanese management in charge of Ford, GM or Chrysler tomorrow, you would not see a miraculous transformation.
The Japanese also have their own legacy. I always wonder why we need to “outsource” manufacturing, Tech support to 3rd world backwaters like China and India? Can we not get the same quality here at reasonable price? The answer is that we can, but large corporations do not like to admit it.
Honda, Toyota, Nissan all have plants here in the US producing good quality cars. BMW also has a plant here doing the same thing.
Since the ’70s we have steadily replaced the made in USA with quality mantra for Imported from China and India with cheapness….
May corporate america live in interesting times…
Seems like Toyota, Nissan, and Honda have proved able to manufacture high quality cars in the US and make a profit utilizing the American factory worker so he/she can’t be the problem.
———————–
Exactly!!!!! If the executives of the American companies were on top of R&D, I don’t think we’d be discussing “problems” with unions. IMO, the unions and their “legacies” are not the problem. Planned obsolescence and poor quality, as well as lack of ingenuity WRT fuel efficiency and safety are the main problems with the American companies, IMHO.
I would be interested in continuing a conversation I started on an earlier thread about how a bankrupt municipality might impact home owners. Does anyone have any examples of what happened in previous instances where cities went bankrupt?
It doesn’t seem like the fall-out was all that terrible in Orange County, in the ’90s, or New York City back in the ’70s. People saw services decline, but they didn’t see any shocking bills delivered to home-owners to cover the bankrupt city’s debts.
Just what will happen to home owners in bankrupt cities when the WHOLE nation is facing a deep recession?
Part of my interest in this question is a concern that home ownership (at ANY price) could be a severe liability if you happen to be living in a town that goes bust.
Any other thoughts?
A possible topic, or tied in with something related, like Pococurante’s above:
What will be the next-6-months result of the massive yoy drops in new building permits that we are now seeing? If, for example, new permits are half what they were last year, does that not mean that about half the skilled trades that were working on housing last year will be unemployed by early 2007?
Yup….Then the fall out….Civil disruptions, crime, etc….
I have a topic: How to get a Government Job. I currently have a Government Job and know how to get qualified people into the system. I think they are about to pay me 140k to work in Italy for “40 hours a week”.
This is my tactic to save money so that I can buy when I come back in 5-7 years.
“Ford Sets Steep Cuts to Vehicle Production ”
Is not it clear indication that recession is comming?
This article from tomorrow’s (Sat.) Washington Post is drivel. I think it is a cut and paste from a recent article I remember reading in another paper. A few choice excerpts:
Title: “In It for Long Haul? Might as Well Buy”
“Residential real estate has hit a speed bump.”
“Average home value appreciation nationwide should be around 7 percent for the year, and is predicted to slow even further to 6.2 percent in 2007, according to Freddie Mac. Local markets vary, however, and even as some markets are cooling, others are still on an upward climb.”
“Consider this piece of information from the National Association of Realtors: Since record-keeping began in 1968, the national median home price has risen every year. In a balanced market, home values typically rise at the general rate of inflation plus 1.5 percentage points. That’s to say nothing of the tax benefits that come with owning your own home.”
“The downside of real estate is better than the downside on just about anything else”
Desperate times call for desperate measures.
As the reality of the bubble popping seeps into the RE sector, desperation may result in some blatent illegalities. Gary Watts (SoCal RE eCONomist) openly called for collusion amongst agents last week in a feeble attempt to prop up prices in his Mid Year report.
What are the ways RE may be quickening their own demise. What are the most transparent acts of desperation you are seeing/hearing/reading from RE this week? Who in the regulatory sector should be watching more closely as things unfold. What measurements are the best and how could these be standardized?
At the end of the day IMHO RE needs to be regulated in the same manner as securities. The reporting and measurment of the transactions should be standardized and controlled from outside of the industry. Falsification, decepetion, misrepresentation and collusive tactices are fraud and should be punished with fines, jail time and restitution. Changing statistical measures on the fly in ways that prop up the sellers/RE side as we saw this week with the affordability index seems just plain crooked. How does a whole industry get away with this crap?
I am in no way suggesting that consumers are devoid of responsibility. Just looking for honesty, truth, and some semblance of ethical behavior in an industry that is showing itself to be blissfully free of all three. With usable and accurate measurments consumers will be better equipped to take on the largest debt of their life and if they choose, have a better grasp of the risk involved.
Or, maybe we just sit back and watch as the clowns in this three ring circus burn their own tents to the ground with their desperate measures …
oc-ed,
Agree that the REIC needs to be regulated just the same as those related to all other “investments”. RE actually affects many more people, and much more severely, as a majority of most people’s money is tied up in RE, not stocks.
After reading Gary Watts’ suggestions to the RE agents/brokers and with the new HAI publication, there is no doubt that these people need to be regulated if their statistics, predictions and recommendations are published in the MSM with the intent of influencing buyers’ and sellers’ decisions.
Good point CA renter. As a “data” source for MSM REIT has shown it’s colors and needs to be regulated or replaced. I wonder if there will be a time in the near future where sellers will opt to list as FSBO on craigs list or another medium to squeeze that last 6% out and to stay above water? As RE now moves to “educate” the sellers on “realistic” pricing I imagine that many sellers will take their business elsewhere hoping to get the max profit.
I also imagine that any attempts to introduce regulatory legistlation will be met with very stiff opposition from the RE lobby. But, as this gets increasingly uglier our esteemed representatives may start looking for scapegoats and if the choices are RE vs lenders I suspect RE will take the hit.
So, knowing that any dominant, but failing, paradigm can only be replaced by a new and better paradigm, what would a new set of measurments be? As the “loyal opposition” in this case, this is an opportunity to define a new set of measurements and statistics and a new set of “rules” and thus a new paradigm. Here is my list,
1. Affordability indices should be expanded to include all classes of lending instruments. Show all options and retain historical consistency.
2. Listing prices and sales/transfer dollar amounts should be public domain.
3. Once listed as for sale in a 12 month period, DOM cannot be zeroed out by relisting. DOM only resets with change of ownership or a 12 month off listing period.
4. Semantic accuracy for properties. A Condo is not a Townhouse is not a Single Family Residence. Listing and advertising information must be accurate in this regard.
5. Do away with pocket listings entirely. Make them illegal.
6. Use average sales price or mean with price bands or ranges YOY and MOM.
7. Mean and Average price stats must be fore the same type of property. (I know there are people here who have a much better grasp on this than I do so pipe in folks)
8. Full disclosure: All offers submitted must be disclosed to buyers making an offer and documented in the public domain to keep fraud in check during “bidding wars”.
9. All properties listed for sale in detail in the public domain.
10. Provision of a means for owners to list in the public domain without an agent or RE agency.
This is just my list. What say ye out there in bubble land?
“At the end of the day IMHO RE needs to be regulated in the same manner as securities.”
That’s an interesting idea. In the past, my house has always been my home, not an investment. In fact, I’d never have sold right now had I not been forced to move due to my husband’s layoff and subsequent re-hire on the other side of the country.
But it seems that in the time that I’ve owned, things have changed and real estate is now an investment. If that’s true, then yes, regulation is in order. And if that’s not true, and a house is really still just a home? Then let the prices reflect that reality. Either way, a change is overdue!
Peggy,
I agree with the distinction you are making. For the most part residential real estate purchases were not investments in the past. People bought houses to live in. There were always some purchases for rental and cosmetic fixup and turn over for profit. But these latter I feel were a small percentage historically.
Something did change in this cycle and I believe it has to do primarily with how captial gains taxes on property were changed to encourage activity in the sector. Here in OC the shift was noticable 5 years ago. Real estate became about profit rather than housing families in communities.
I also believe that the ways that real estate is measured have always needed to be changed irregardless of the agenda of the buyer. It has always been a cryptic maze of moving numbers that agents and brokers have manipulated/skewed/slanted to CONvince buyers and sellers that “It’s a buyer’s market!/It’s a seller’s market baby!”. IMHO more than anything it is those numbers and that reporting that needs standardization and regulation.
If we can accept that the proportion of invetsment activity in the sector has become the majority recently, then at the very least the statistical reporting and financial disclosure for activity in this market sector needs to be regulated.
“It has always been a cryptic maze of moving numbers that agents and brokers have manipulated/skewed/slanted…”
That’s a very interesting perspective and, frankly, one that I had not considered. “A cryptic maze.” How true! Especially for those such as myself who do not have any formal training in finance or law. I have to give the idea of regulation some more thought, but right at this moment I’m inclined to agree with you.