Bits Bucket And Craigslist Finds For December 25, 2006
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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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People buying up NYC properties to flip to bonus recipients? That’s how I read this. It’s sickening.
http://www.nytimes.com/2006/12/25/business/25bonus.html?ei=5090&en=5ced3ca840169e2d&ex=1324702800&partner=rssuserland&emc=rss&pagewanted=print
“In the last three weeks, the Corcoran Sunshine Marketing group sold the last four apartments in the Richard Meier apartments at 165 Charles Street in Greenwich Village. The last one to go: a two-bedroom, two-bathroom apartment with 2,350 square feet that sold for just under $7 million.”
We lived down the block from the 3 Richard Meiers monstrosities (on Charles Street) that now punctuate the West Side Highway. Those gaudy pieces of crap deserve to be lived in by hedge fund scumbags. Soulless buildings deserve to have soulless tenants. The sterility of the new architecture is appalling.
But if you read that full article you know that these guys know that 2006 was a watershed year for the financial markets. It will be much different in 2007.
You know, so few of these people recognize the role of luck in their windfall. They think they’ll go back out and do it again next year. I understand the comment about the money not seeming real to them. In the spring and fall of 1999, I was making 15-20K per day without even trying. All you had to do was buy 1000 shares of RNWK or YHOO or NSOL at the beginning of the day and sell it a few hours later. That money didn’t seem real either.
I do see that there was a bone thrown to the “managing director” who remembers the bear market and banked his.
If I were the dude with the $6M apartment looking to upgrade to $20M, I think I’d just pay off the $6M place, set up my own little trading operation in the house, and live like a king in Manhattan without a job. But of course, none of these people will do that. Those apartments will come rolling back out in a few years.
The problem with windfalls is that almost nobody that receives a windfall recognizes it as such. I would say less than 10% of all people recognize such a thing.
And these Wall Street guys are the worst with windfalls. They all think they are geniuses. They will pi$$ it away like they did so many times before. The only prerequisite for poverty is to live beyond one’s means. It doesn’t matter if you make $30,000 per year or $30,000,000 per year.
Txchick, in your opinion, what percentage of those late 1990s day-traders recognized that they were being given a gift from heaven? How many went bust?
Most went bust.
My brother is a case in point. An electrical engineer who made a bunch of money in the 90’s and started investing in the stock market. All his buddies were getting rich.
He began trading. Many of his fellows quit their jobs to begin “trading” full time. When he lost his job, he followed their lead. Things went very well until 2000. He thought he was another investment genius.
When Nasdaq declined to about 4000 he sold many positions to take advantage of the trough. He bought back at NAS 2500 because it was “half price”. How could he loose? It continued to decline another 50% and has never recovered. Naturally, he rode the market down and has spent additional time and resources trying to “recover” his investment money. It’s been 6 years of losses.
Gambling is a difficult addition to beat. Winning is a big high. The belief that you are brilliant is a big ego boost.
Rational behavior comes too late, when the money is gone.
I had a friend who lost 850K of a $1M account in one day (April 14, 2000 - check the market that day)
Yow! I hope those people did not point to capitailism as the villain. The disclaimers and warnings on any type of investing is well known in the personal finance text books 101.
Yes, I knew a young computer scientist back in 1991 who quit work to go full time into day trading. He probably did very well, given the pop did not happen until 9 years later. But if he was as greedy as those people mentioned above, he probably got in a bad situation. 9 years off the job means 9 fewer years of experience, compared to others his age in his career. Another fellow I know was smart enough to keep his job, but never gave any extra effort. When the clock struck 4PM, he was out of the office. He preferred to get home so that he could get on his road bike. He told me (this was 1999 or early 2000) that he made more money in the stock market than he was getting paid as an engineer. Sigh! I missed out on participating in those “strike it rich” stories. In 2001 I put a chunk of money into Series I Savings bonds with a fixed rate of 3%. Now that is one of my proudest investing accomplishments. From then to this day, I biased my investing outside my tax deferrals to government securities, money market funds, short term CDs and precious metals. In fact, if it weren’t for the real estate bubble to put off the inevitable, I think I would not have had the time nor opportunity to build up a good conservative base for my asset allocation. There are some top money investment gurus who think cash (money markets, T-bills, short term CDs) will be king again in 2007. VMMXX yields 5.11%, 3-month T-bills are about 4.85%, short term CDs are 6% or higher in some places. The investment advisor says short term high yielding cash investing is good for the inflation hedge while you should use selective stock picking for building wealth.
diogenes - the fallacy of recoverable sunk costs….burns a lot of us in many different ways
txchick - talk about a bad day; that kind of loss to me is unfathomable, I don’t think I could look at myself in the mirror
Bill,
You hit on the rest of the story that makes the tale even more distressing. My brother, also, lost about 3 years of “engineering experience” while trying to get rich the easy way. He could not get another engineering job after that, and has not tried. He is working a labor job, making about 26k a year. His condo is paid-off and his expenses are low, so he is not in any financial trouble.
However, he has lost his drive and is just getting by. The psycological impacts of financial destruction are hard to quantify, but I have seen my brother’s loss first hand.
Diogenes — “However, he has lost his drive and is just getting by. The psychological impacts of financial destruction are hard to quantify, but I have seen my brother’s loss first hand.”
Excellent, if unhappy, observation.
That’s pretty much what I’m doing with this gold market boom except that I am continuing to rent.
I never care to own a property. I like renting, always have.
Your friend who lost 850k of 1m was heavily margined.
“At cocktail parties, comparisons to 1999 abound. That year marked the height of the technology boom and the eve of a painful crash. “It feels a little bit like the top,” said another banker”.
I think we’ll see many of these bonus babies being a lot more cautious than usual. Even someone with a windfall doesn’t want to buy if prices are expected to keep coming down. I know a lot of real estate agents want to believe that the bonus baby calvary is coming to their rescue. But I think they’re in for a surprise this year. Professional dealmakers have a nose for bad deals. And RE will be a bad deal for the next few years.
I agree with you to a point.
On one hand, you’d think that those savvy trader types would shy away from buying RE, an ILLIQUID asset at what many think is a top.
But as several poster said, a lot of the Wall Streeters will think that they’ll make the same money next year, too.
It’ll be interesting to see how this plays out.
it all depends on that gut feeling. if you get that pile of money and have a sick feeling when you dream of spending it, you don’t.
We are back from Northern New Jersey. It was a telling visit. In my first 5 years going to New Jersey I can’t remember seeing a “for sale” sign. They were out everywhere on this visit. If this is the pre-Christmas inventory then I can’t imagine what the spring will be like. I would love to be the guy selling signs to Weichert Realtors and Remax.
The attitudes of our friends and their families were telling. I almost got into a fistfight when one know-it-all (not a friend of ours) gave me the “if you’re renting you’re throwing your money away” line. I said, “a lot of people in this area are going to learn that real estate doesn’t always go up.” I was amazed that every homeowner in the room then admitted that real estate was very slow and that prices were coming down.
But don’t fear for Jersey. This spring everything should return to normal. 1) “They aren’t making any more land”. I must have heard that 10 times. 2) With all of the inventory 2007 is a great time to buy a house. Yes, that is exactly what I heard. 3) The government won’t allow there to be a rash of foreclosures. Where are these governments going to get this bailout money? The budgets of Florida, California, New York and New Jersey are going to be in a shambles. They will all have major deficits. Yet, the middle-class peasantry is awaiting the great bailout that will run in the billions. There is always a lot of hand-wringing for the middle-class on this blog (and I sympathize) but the middle-class could help itself out a lot by having some clue of how things work.
There were several smug comments about real estate over the weekend. “My house is worth so much more than I paid for it.” But you should have heard the complaints about property taxes. These people are getting soaked. Do they have the money to bailout all of the gamblers in the market? I think not.
The Jersey-ites were so close to getting it. They knew the question is, “how much is 2 + 2″ and then they come up with an answer of “6,391″.
“There were several smug comments about real estate over the weekend. “My house is worth so much more than I paid for it.”’
The house is only worth as much as what a buyer is willing to pay for it. It’s not worth what Zillow puts up, necessarily. Selling is at a standstill and it will remain that way far into 2007 before the big price drops occur. Someone is going to blink.
When they say:
“they aren’t building any more land”
I like to respond with this:
“but the builders are still building new houses and condos”
The government is going to bail them out?
Hello?
What?
The socialist mentality of those capitalists — is well, amusing.
What government agency is going to bail them out?
FEMA?
Actually, they are building land.
They filled in the San Francisco Bay.
It has shrunk to 1/3 of it’s 1900’s size.
There’s quite a few large cities where 30 years ago it was water.
I would have to disagree with the Wall St. guys “pissing away” the money. A ton of these guys are stingy M.A’s from MIT and Harvard. This isn’t the 1980’s guys or 1990’s stock analyst or junk bond liars. A bunch of these guys are making money in commodities and shorting USD and American stocks.
So, this time it’s different? I won’t buy that until I see it. I don’t understand your reasoning that just because some guy is playing commodities that he will be financially conservative.
Shorting U.S. stocks? How’s that doing for them?
20m condo and ferraries lined up is pissing it away.
Housing pain comes wrapped in many different colored packages. At a Christmas party last night I talked to three relatives/friends with housing woes. My parents have a house in St. George, UT they want to sell. Bought it in 02, and they believe it’s worth 2x what they paid. They want out because the traffic, heat and taxes are getting too high. Only one “realistic” offer after seven months, and that offer was contingent on the other party selling their house in CA. Offer expires 1/2/2006. They plan to wait it out, because they believe homes will start selling again in the spring. They’re in their seventies and I’m encouraging them to choose quality of life over holding out for top dollar on a home they may never get. Relative number two has an age restricted condo in Henderson, NV. After fourteen months on the market she locked the door and moved. She told me she waited to get her full tax write off and ended up waiting six months too long. The market had already peaked. Another bad money over quality of life move. Finally, a family friend with a home in Sparks, NV. Moved to this area seven months ago and is living in a rented mobile home because he can’t sell the Sparks house. Rather than lowering the price he’s choosing to accept the burn rate of $2600 mo. PITI, because he’s sure things will pick up soon. I’m guessing it might be a while based on the fact that there are over 300 homes in the same price range as his right now.
Dude! $2600 monthly burn rate in Sparks???? I can’t believe he bought a property for that kind of money there. This guy is in serious, serious trouble! Who is going to buy his pain from him, in Sparks no less? St. George is in a huge bubble, influenced by the Vegas bubble. Of the three properties, the one in Henderson should be easiest to move. If they can’t sell it in 14 months, better cut the price!
Median household income in Sparkes is $45k, per Wiki. Wow.
crash ….Your examples of sellers that believe the NAR/REIC spin
about the 2007 spring-back in prices is pathetic. In those situations those people will lose additional money in carrying cost ,they won’t get more than they would of got in 2006 ,and they will lose more because of the NAR spin .
People believe the NAR/Realtors because they think they know the market and they wouldn’t tell such a big lie like this . It is amazing how this trade group thinks they can control the market by their 40 mil advertising campaign .
It’s amazing how many people I talk to throw back the 2007 RE going back up theory ,we have hit bottom in the slump in 2006.
How is the NAR/REIC going to explain to people in 2007 why they can’t get their price ,and how are they going to explain to the people they told it was a” good time to buy ‘, that they already have lost money ?
I just think it’s evil for the NAR to mess with people like this ,especially when you could wipe a family out because of it .
Just give the market data NAR ,and stop trying to keep the party going by this awful bogus spin on the state of the market .
“The bigger the lie, the more people will believe it.”
- Adolph Hitler
That’s an adaptation of Lenin’s “Big Lie” philosophy.
GREED
They’re going to sell the ghetto to someone else for 2x the price they paid for it last year?
“They want out because of taxes, traffic and heat.”
They didn’t know about these things before they moved in?
What, it was pin the tail on the donkey blindfolded, they threw darts at a map and bought blindfolded?
If they’re in their 70’s and making greed choices instead of quality of life choices, I say spend your time on some youth who seem promising, not old greedy geezers, parents or not.
As we near the end of 2006, it seems a fitting time to pay tribute to John Kenneth Galbraith, who passed away this year. Thank you for telling it like you saw it, instead of like someone paid you to lie about it.
I urge anyone who has not read Galbraith’s A Short History of Financial Euphoria to check out or buy a copy as soon as possible in 2007 and read it. You will be amazed at how accurately his blueprint for a bubble describes the situation at hand. I leave you with a quote which Galbraith used at the beginning of Ch. 3:
Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.
– John Maynard Keynes,
The General Theory of Emplooyment, Interest and Money
Merry X-Mas!
GS
He was an excellent economist because he was a historian.
Keynes and Galbraith have done more harm and impoverished more people than anyone other than Karl Marx. Soft socialism is still socialism.
Did you read anything Galbraith ever wrote, or are you just ranting on the basis of hearsay?
But it’s different this time isn’t it???
Yikes! A Keynes quote? Keynesian economics is the bain of our world today.
Did you bother to even read the quote, or did your brain instantly jump into diatribe mode when you saw the name “Keynes?” Whether you like the fact that “we are all Keynesians now,” including the last three Republican presidents — especially Reagan, who seemed to have no clue he was the slave of this defunct economist — some things Keynes said have timeless validity. I include the above quote, which pretty much sums up what is wrong with using an endless series of bubbles as the foundation of a country’s monetary policy. Not that it could ever happen here…
Another great Galbraith book is “The Great Crash,” whose thesis is that the ‘29 stock crash CAUSED the Depression, as opposed to forecasting it in some magical way. An upcoming RE crash may cause a 2nd GD.
Sorry Folks, but if you want a dead economist to explain things to you, go with Ludwig Von Mises. There ain’t a gov’t that’s out run him yet.
Paul
Not different this time, you usually get about a 75% survival rate of these guys. Sandy Weill and Lloyd Blankfein didn’t exactly fall in the past. Shorting US stocks has been fine if you are long internationals and FX
I know. I want to be short too come the new year.
PSQ might be a winner. I don’t think NASDAQ will stay up.
OT, but I have noticed something strange lately, and wonder if I’m just reading into it too much. _Every_ time I got money from any ATM over the past month, the $20s were brand spanking new. They must be running the presses 24/7. I wonder if they are taking out from the money supply as fast as they are putting in…
Merry Christmas everyone!
Near the back of every Barrons issue “Market Week” section you should keep an eye on the Federal Reserve Data Bank section under “Economic Indicators.” One entry is “Currency in Circulation. Keep checking that entry over a period of time. It compares this week with the week a year ago. Is there always a “++ in front of the number? That means yes, more currency in circulation now than a year ago. Just something to watch out for. Also on that same page is the price of bullion coins. There is a strong connection when money is being printed in excess. Inflation follows. Notice on the same page, M3 is missing. They no longer publish M3, which is the real indicator of how the Fed is inflating the currency. M1 and M2 are not as important as M3 was.
There are lots of the older style counterfeit twenties in circulation that are being phased out. The newer stuff can be easily scanned and its movement can be tracked and patterned — technology. The inflation you’re looking for will happen electronically in M3.
Sorry to shoot this down but I’ve actually noticed lately, here in New York, that the $20 bills I’m getting out of the ATM look like $hit. I even said something to my wife just last week. We were putting twenties in Christmas cards for some kids we know and I had a hard time finding 3 out of 15 that looked nice.
Amazing sight in North NJ today.
Heading back to Philly from my cousin’s home in Demarest, NJ, this morning, I took a wrong turn and somehow wound up on Route 505, which hugs the NJ shoreline of the Hudson River.
Through just about my entire drive along Route 505 (10 miles or so), I saw about 15 massive developments. Some were completed, but most were still under construction. At least one developemnt hadn’t even laid a brick yet — but it had a massive area of land fenced off. Some developments were townhomes, with at least 100 units each. Some were high-rise condos, with what could have been closer about 1000 units each.
OK, the view of Manhattan from this location is very sweet. But the vastness of these developments is simply amazing. If anyone is familiar with the area, perhaps they can provide some links to these humongous develpments.
Who on earth is going to buy all of these condos/townhomes? Remember, there are tons of condos being built/converted in Brooklyn and Queen (and in Manhattan, of course).
Don’t respond to my past above. It’s been reposted in the “Local Observations” section.
Busy day with family, but wanted to wish a Merry Christmas to Ben and to all those on the board who celebrate the holiday. Happy Chanukah or Happy Kwanzaa to those for whom it’s relevant and for the rest, hope you’re having decent weather!
I would be surprised to find a single person on this blog who is interested in Kwanzaa. The only difference between Kwanzaa and ‘Festivus’ is that Kwanzaa has a stamp.
Festivus was started as a joke.
Kwanzaa was started by a joke (a Black Panther racist).
This year I have seen first-hand the revenge of the Chinese labor force. Lots of toys my kids received as X-Mas gifts (which I am sure all cost $20+) either initially did not work or fell apart already on their first use.
Those toys make me mad. We don’t get them for Xmas, because Santa-Mom does all the shopping. But a couple of days after every b-day party we have 3 or 4 of the gifts that end up in the trash. By biggest peeve: those “imitation” Legos that don’t click together.