[davelj]

sdrealtor, I agree completely with you. The perception of SD as a living/vacation destination has changed considerably over the last 15 years. SD is now considered one of the handful of U.S. “glamour cities,” for better or worse. That’s why I think prices may not go down here as much as some think (or would like), although I still think there’s a long way to the bottom from here, like another 20%-25% or so, depending of course on how you’re measuring where we are (which is a different topic entirely). But I don’t think we’ll see properties changing hands at 10x rental equivalents. The bar has been raised a bit over the last several years. I think we’ll see out-of-market buyers emerge once prices start to decline in earnest; wealthy buyers that either want to retire here or want a second home but are waiting for prices that aren’t completely insane. Having said all that, I still think the RE market is going to look and feel pretty ugly over the next few years.

[davelj]

So that’s a $250K-ish hit in 14 months (before transaction costs)? Egaad.

[davelj]

I’ve got a friend that makes over a half million and year and he’s been renting (with his wife and two kids) for three years now (paying over $3K/month). He was living in LA and is now in the DC area. He just can’t stomach paying $1 million for a house that’s worth $650K regardless of the convenience opportunity cost. But I suspect he’s an exception rather than the rule.

[davelj]

Here’s my question: Would it be so hard for the government (or someone else) to keep track of sales prices on a per square foot basis, calculating medians for sales in the following three categories: less than $500K; greater than $500K and less than $1MIL; and greater than $1MIL? And then to do the same thing for listings as well? This information along with days on market would give everyone a much better feel for what’s actually going on out there.

Granted, this too would not be perfect, but it would be a hell of a lot better than the data we get from these clowns. There’s gotta be some research outfit out there already doing this sort of statistical work on behalf of institutions (hedge funds, private equity, etc.) and I’m ashamed to admit that I don’t know who or where they are. But I’m going to look into it…

[davelj]

Buffett’s a great investor but he’s made PLENTY of mistakes (which he acknowledges). You can’t follow his decisions blindly and expect to do well… anymore. As an investor if you’re right 65% of the time you’re a genius. But even the geniuses are wrong a lot. Lowes? Don’t know it well but I wouldn’t touch it even if I did invest in the stock market.

[davelj]

My best guesstimate is that long rates aren’t going to move much from here (maybe decline a bit) but that short rates will decline next year and into 2008. The high inflation we’ve seen over the past 10 years is in the PAST (by definition) – it’s probably over for a while. So, while the government’s been reporting 3% inflation, the real rate has probably been more like 5% after adjusting for hedonics, substitution effects and the use of owner-equivalent rents (instead of housing prices). But now housing prices are already high (and moving lower), oil is already high (and probably won’t be increasing at the same rate it has over the last few years), commodities are already high (and not increasing at the same rate as the last few years)… you get the picture. So, the big inflation moves have probably already happened for this long cycle. My guess is that for the next 5-10 years the reported inflation figures will actually be roughly what the real inflation rate is, or 3%-ish. Housing prices will decline but it won’t show up in the CPI because use of owner-equivalent rents smoothes the series on both the upside and the downside. Commodities may increase but at a decreasing rate. We’ll probably get a bit of import inflation due to a declining dollar but I don’t think it will offset the other stuff. So, again, it’s just a guess but I think the “real” inflation rate is actually going to be reasonable over the next 5-10 years, which means short rates would decline 150-200 bps over time and long rates would stay about where they are, give or take 50 bps. The problem is for those people who have owned fixed income over the last decade, because interest rates were set by the market based on the government’s reported inflation figures, which were much lower than the real inflation rate. These people have been screwed and don’t fully know it (although they may sense it when they look at prices around them). But that’s the past; that doesn’t matter going forward.

[davelj]

Why do I bother? You have your opinion and it’s not going to change. No amount of rational analysis will change your view. Everyone here knows this about you. I’ve tried to get around this issue by saying, “Look, if you think you’re so smart then take the bet for god’s sake!” And you won’t bite. So just drop it… or continue to debate with yourself. Either one is o.k. with me. But without a wager of some sort this topic gets pretty old for me.

[davelj]

It wouldn’t surprise me if rents flatten out over the next few years, especially downtown. But rents rarely actually decline in a decent market (in nominal terms) and if they do it’s under extreme duress. For example, rents plummetted (like 30%+ in some cases) in Texas back in the mid-80s after the oil bust. But it’s hard to envision rents here going down more than a couple of percentage points unless something really dramatic occurs.

[davelj]

No, PS, I won’t. I actually agree with jg. But even if I didn’t, his assertion is not nearly as outlandish and uninformed as your assertion regarding ARM defaults. But find me something equally silly and I’ll be happy to take the other side of the bet. That’s what investing is all about after all: finding assymetric bets, where your downside is limited and your upside is several multiples of the downside, based on reasonable probabilities.

[davelj]

PS, the ability to refinance is a semi-important part of the whole issue. But, to be clear, I’m willing to bet anyone on this board $10,000 (or more) that less than 50% of almost any specific type of mortgage product from a particular vintage year will default. Yes, there are some bad products out there. But I’m willing to make a very large bet that there is NO product in which 50% of the origination volume from a particular year will default. But, again, I’m allowing for these folks to refinance out into a product that may one day in the future lead to their demise.

[davelj]

PS, you don’t gamble with strangers over the internet? No problem; if you’re in for more than $10,000 on this bet I’ll be happy to meet up with you. I’ll even pay for my attorney to draw up a simple agreement. Think of it as a personal credit default swap agreement where you’re taking the more bearish side of the swap. Unless of course you’re just full of hot air…

I went to talk to my employer about this banker issue you brought up and then I remembered, “Hey, wait a second… I’m my employer; I own the company!!” After that revelation, I thought I should get on this credit line issue you brought up and then I remembered, “Hey, wait a minute… my business generates more far more capital than it uses and my investment capital is captive… so I don’t need a credit line.”

Every time I think I’ve read the most ridiculous and uninformed post you’ve made, you take it up another notch. And for that, PS, I must salute you.

[davelj]

PS, you made a generic bet regarding home prices falling when you sold your house. I’m talking about a SPECIFIC bet regarding defaults on existing ARMs in 2007. Two different things entirely.

So, how about a specific wager? Your bet is that greater than 50% of all existing ARMs will ultimately default. My bet is that it will be less than 50%. Make it a dollar amount that’s worth my while, say anywhere north of $10K. How ’bout it? Are you willing to walk your talk? I am.

[davelj]

PS, let me get this straight… you’re saying that 75% of all mortgages that face a reset in 2007 are ultimately going to default? Figure out a way for me to take the other side of that bet and we can definitely do business – I’ll bet on under 50%. (I’ve asked you to do this before but you didn’t respond.) Weren’t you recently saying that the default rate was going to be 90%? Are you becoming less bearish?

On a separate note, the December SoCal medians are going to be interesting. I wonder if we’ll be down 10% YOY by the end of the year. I hope so.

[davelj]

The other issue is this: Which of these economists spotted the Nasdaq Bubble? Few to none. If you didn’t identify the Nasdaq Bubble then I don’t trust you to identify ANY bubble properly. The Nasdaq Bubble was even more obvious than this RE bubble. You either understand bubbles or you don’t. Most people – including economists – don’t.

[davelj]

Generally when this sort of thing happens the Directors are merely fulfilling a contractual obligation the details of which are largely unknown (unless you want to dig through the archives for the guy’s employment contract) to the public. Often, however, the Directors are in the CEO’s pocket and do whatever he suggests they do (or what one of the CEO’s lackeys suggests they do). Shareholders? Hahaha… that’s rich. Like they matter. One more reason not to even bother with publicly-traded stocks…

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