[davelj]

One thing that drives me a little bit nuts is when people like Patrick point out the 1.36% (or thereabouts) annual increase in real estate prices and come to the conclusion that, ergo, purchasing a house is a generally a bad investment (or, even worse, it’s corollary that it’s better to be in the stock market). This conclusion ignores two important facts: (1) You can borrow money to buy the house, therefore the return on real estate should reflect the ability to use leverage (that is, the return on your equity), and (2) if you get a fixed-rate loan, your “rent” will never increase and you hold an explicit option to put the mortgage back to the financial institution and re-finance at a lower rate if one should become available. Anyone who ignores these two issues simply cannot be taken seriously, in my opinion.

I would argue that at least 50% of the time (assuming normal swings in the real estate market) a person will be financially better off in the long term by purchasing as opposed to renting (assuming that they can comfortably afford the mortgage, of course). Although clearly we’re not in one of those 50% chunks of time right now in SD.

[davelj]

SD Realtor, sdrealtor, and other realtors…

I’ve got a question for you:

If every seller you had was willing to sell at a 5% discount to the cheapest subset of the most recent 2-months’ sales comps (legitimate, recent comps – not comps from a year ago), on average how long do you think it would take to sell these houses?

Maybe I’m nuts, but I bet that homes that are legitimately priced 5% below the “real” market will move within a few months despite this crappy market. My suspicion is that everyone crowds around the comps (many of which are old) – with little or no discount – and they just chase the market down instead of getting a little bit ahead of it and getting their property sold. Is this what you’re seeing or am I nuts?

(Sorry to hi-jack the thread.)

[davelj]

SD Realtor, sdrealtor, and other realtors…

I’ve got a question for you:

If every seller you had was willing to sell at a 5% discount to the cheapest subset of the most recent 2-months’ sales comps (legitimate, recent comps – not comps from a year ago), on average how long do you think it would take to sell these houses?

Maybe I’m nuts, but I bet that homes that are legitimately priced 5% below the “real” market will move within a few months despite this crappy market. My suspicion is that everyone crowds around the comps (many of which are old) – with little or no discount – and they just chase the market down instead of getting a little bit ahead of it and getting their property sold. Is this what you’re seeing or am I nuts?

(Sorry to hi-jack the thread.)

[davelj]

I’ve heard these ads on the radio. Basically they guarantee that they can sell your house or they’ll buy it from you, or something silly like that.

I suspect – “suspect” being the operative word – that they take your listing and give you the guarantee only if it applies to a price that they dictate, which will be below the market. I could be wrong, but that’s my guess. Nothing else really makes sense.

On that note, if you’ve got a 3,000 square foot house in La Jolla, I GUARANTEE that I can sell it for $300,000 or I’ll buy it from you. Any takers?

[davelj]

I’ve heard these ads on the radio. Basically they guarantee that they can sell your house or they’ll buy it from you, or something silly like that.

I suspect – “suspect” being the operative word – that they take your listing and give you the guarantee only if it applies to a price that they dictate, which will be below the market. I could be wrong, but that’s my guess. Nothing else really makes sense.

On that note, if you’ve got a 3,000 square foot house in La Jolla, I GUARANTEE that I can sell it for $300,000 or I’ll buy it from you. Any takers?

[davelj]

golfgal (and perhaps a few others), I think you misunderstand how some of these securities work. Yes, you’re correct, that most of them are not worthless because, yes, there is some collateral protection. (And, in fact, some of the securities in question may very well be worth more than the valuation the market is placing on them currently.) Having said that, THERE ARE ABSOLUTELY QUITE A FEW WORTHLESS MBS – “GOOSE EGGS,” IN TECHNICAL TERMS – OUT THERE.

Allow me to explain.

Let’s say I own two different portions of a single subprime mortgage securitization. One portion is rated AAA; the other is rated CCC. And let’s say that this securitization, as a whole, ends up with a 20% default rate and losses that total 10% of face value. Well, considering it’s going to take one of the initial loss positions for the whole securitization, guess how much that CCC piece is probably going to be worth? You got it: somewhere around zero.

Now, the AAA piece is rated AAA because it’s protected by all the pieces rated AA and below which are, in descending order, going to take on the securitization’s losses (to varying degrees). (These losses will be assigned by formulas outlined in the offering documents.) As the losses mount, they wipe out most, and in some cases all, of the value of the “Z tranches” and start moving up the ratings scale. So, let’s be clear here: There are some MBS that are, literally, worthless. There are others that are merely impaired. The question is what is the difference between the market value and the economic value of these various securities. Regardless of all of these shenanigans we’re going to find out the true answer over the next couple of years. I’m skeptical that the market has it completely wrong, although there’s likely some variance due to illiquidity and behavioral issues.

golfgal, you said, “The valuation question – its whatever people will pay.” We’re in complete agreement here. According to your statement, there’s no need for this “super fund” at all. These institutions should just sell this dreck into the market and find out what the market thinks its worth. Let’s just say that I’m not going to hold my breath on that one…

[davelj]

golfgal (and perhaps a few others), I think you misunderstand how some of these securities work. Yes, you’re correct, that most of them are not worthless because, yes, there is some collateral protection. (And, in fact, some of the securities in question may very well be worth more than the valuation the market is placing on them currently.) Having said that, THERE ARE ABSOLUTELY QUITE A FEW WORTHLESS MBS – “GOOSE EGGS,” IN TECHNICAL TERMS – OUT THERE.

Allow me to explain.

Let’s say I own two different portions of a single subprime mortgage securitization. One portion is rated AAA; the other is rated CCC. And let’s say that this securitization, as a whole, ends up with a 20% default rate and losses that total 10% of face value. Well, considering it’s going to take one of the initial loss positions for the whole securitization, guess how much that CCC piece is probably going to be worth? You got it: somewhere around zero.

Now, the AAA piece is rated AAA because it’s protected by all the pieces rated AA and below which are, in descending order, going to take on the securitization’s losses (to varying degrees). (These losses will be assigned by formulas outlined in the offering documents.) As the losses mount, they wipe out most, and in some cases all, of the value of the “Z tranches” and start moving up the ratings scale. So, let’s be clear here: There are some MBS that are, literally, worthless. There are others that are merely impaired. The question is what is the difference between the market value and the economic value of these various securities. Regardless of all of these shenanigans we’re going to find out the true answer over the next couple of years. I’m skeptical that the market has it completely wrong, although there’s likely some variance due to illiquidity and behavioral issues.

golfgal, you said, “The valuation question – its whatever people will pay.” We’re in complete agreement here. According to your statement, there’s no need for this “super fund” at all. These institutions should just sell this dreck into the market and find out what the market thinks its worth. Let’s just say that I’m not going to hold my breath on that one…

[davelj]

Feng Shui is very important to my evaluation of any dwelling. In addition, I look for easy access to the house for Santa Claus and the Tooth Fairy. Moreover, a back yard with lots of bushes is necessary for ease of hiding eggs and other magical treats brought by the Easter Bunny.

[davelj]

Feng Shui is very important to my evaluation of any dwelling. In addition, I look for easy access to the house for Santa Claus and the Tooth Fairy. Moreover, a back yard with lots of bushes is necessary for ease of hiding eggs and other magical treats brought by the Easter Bunny.

[davelj]

kev374, I’m not sure how to answer your question. All I really know is the people I know, and they may not be representative of the aggregates.

Nevertheless, I think what you’re getting at is that the median household income (I know you initially mentioned “individual” incomes, but I’m going to focus on household income here) should be able to afford the median price of a home in the area in question. I’m not sure if this applies well to coastal Southern Calfifornia because in most years (although not in every year) and over the long term, net in-migration has been substantial and demand for housing has historically exceeded supply. So there are a lot of people who bought in a ways back – let’s say pre-2000 – who are in at either bargain or, at worst, reasonable prices relative to their incomes. Although many of these people couldn’t re-purchase their homes today at current market values given their incomes.

Having said all that, I think there should be a RELATIVELY steady RELATIONSHIP between median household income and median home prices, although it wouldn’t surprise me if this ratio creeps up a bit over time in SoCal for reasons that I won’t go into here. Clearly we’re WAY off into uncharted territory where this relationship is concerned, although we’ve begun to creep back in the proper direction toward equilibrium. I’m sure that Rich has all of these stats somewhere.

I don’t think I answered your question but maybe I touched on the issue you were getting at.

[davelj]

kev374, I’m not sure how to answer your question. All I really know is the people I know, and they may not be representative of the aggregates.

Nevertheless, I think what you’re getting at is that the median household income (I know you initially mentioned “individual” incomes, but I’m going to focus on household income here) should be able to afford the median price of a home in the area in question. I’m not sure if this applies well to coastal Southern Calfifornia because in most years (although not in every year) and over the long term, net in-migration has been substantial and demand for housing has historically exceeded supply. So there are a lot of people who bought in a ways back – let’s say pre-2000 – who are in at either bargain or, at worst, reasonable prices relative to their incomes. Although many of these people couldn’t re-purchase their homes today at current market values given their incomes.

Having said all that, I think there should be a RELATIVELY steady RELATIONSHIP between median household income and median home prices, although it wouldn’t surprise me if this ratio creeps up a bit over time in SoCal for reasons that I won’t go into here. Clearly we’re WAY off into uncharted territory where this relationship is concerned, although we’ve begun to creep back in the proper direction toward equilibrium. I’m sure that Rich has all of these stats somewhere.

I don’t think I answered your question but maybe I touched on the issue you were getting at.

[davelj]

On this subject, a few quotes from friends of Bill Fleckenstein that were included in Bill’s market update today:

“How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how ‘fixed’ the markets’ problems are. The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora’s box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, investors realized they were getting paid no risk premium to buy the paper and fled. The answer? Do it again, in the same way, but call it something different.”

“Meanwhile, in the background, Moody’s is telling us in no uncertain terms that massive downgrades of subprime-laden CDOs are coming. To be sure, the ABX has been telling us for many months what the market thinks about the value of these things [and the top of the stack was pounded again today], but until the actual downgrade comes, an investor isn’t necessarily obliged to sell. The IRS is also investigating accounting for mortgage-backed securities. Thus, the situation has become quite dicey.”

I can’t improve much on this synopsis.

[davelj]

On this subject, a few quotes from friends of Bill Fleckenstein that were included in Bill’s market update today:

“How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how ‘fixed’ the markets’ problems are. The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora’s box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, investors realized they were getting paid no risk premium to buy the paper and fled. The answer? Do it again, in the same way, but call it something different.”

“Meanwhile, in the background, Moody’s is telling us in no uncertain terms that massive downgrades of subprime-laden CDOs are coming. To be sure, the ABX has been telling us for many months what the market thinks about the value of these things [and the top of the stack was pounded again today], but until the actual downgrade comes, an investor isn’t necessarily obliged to sell. The IRS is also investigating accounting for mortgage-backed securities. Thus, the situation has become quite dicey.”

I can’t improve much on this synopsis.

[davelj]

I think people in Southern California, in general, make more money than the tax and census rolls suggest but less money than their lifestyles would suggest, if that makes any sense.

For reasons that I won’t go into I see a fair number of individual financial statements of people here in Southern California. There’s a large subset of real estate entrepreneurs that have huge cash flow but little or no reported income due to allowable depreciation. An extreme example: I saw financial statements for a developer of apartments that showed a net worth of almost $300 million (on assets of about $660 million), cash flow of almost $12 million/year but the guy hadn’t paid taxes in over 20 years; in fact, he reported losses due to huge depreciation and the fact that he keeps developing new projects (all over the U.S. – not just here in SoCal) to keep the depreciation train running.

In addition there are a lot of non-real estate entrepreneurs that run a lot of “otherwise personal” expenses through their businesses, thus reporting lower income for tax purposes than is really the case.

So part of the disconnect between household income and housing prices is due to the much higher rate of entrepreneurial activity in SoCal versus the U.S. in general. But the other part of the disconnect is that Californians tend to spend above their means to a greater degree than the rest of the U.S.

[davelj]

I think people in Southern California, in general, make more money than the tax and census rolls suggest but less money than their lifestyles would suggest, if that makes any sense.

For reasons that I won’t go into I see a fair number of individual financial statements of people here in Southern California. There’s a large subset of real estate entrepreneurs that have huge cash flow but little or no reported income due to allowable depreciation. An extreme example: I saw financial statements for a developer of apartments that showed a net worth of almost $300 million (on assets of about $660 million), cash flow of almost $12 million/year but the guy hadn’t paid taxes in over 20 years; in fact, he reported losses due to huge depreciation and the fact that he keeps developing new projects (all over the U.S. – not just here in SoCal) to keep the depreciation train running.

In addition there are a lot of non-real estate entrepreneurs that run a lot of “otherwise personal” expenses through their businesses, thus reporting lower income for tax purposes than is really the case.

So part of the disconnect between household income and housing prices is due to the much higher rate of entrepreneurial activity in SoCal versus the U.S. in general. But the other part of the disconnect is that Californians tend to spend above their means to a greater degree than the rest of the U.S.

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