What is amazing to me is that the condescending attitude seems to come mainly from those that bought YEARS ago. These people are sitting on houses that there is absolutely NO WAY they could afford to buy, even on their current salaries. Their uppence will come, though, as this paper equity will be reduced when they need to sell to cash in for their retirement, as the house is all a lot of them have.

When I call for a repair, I have to pull teeth to get them to pony up the money. Little birdie says the owners are experiencing cash flow difficulties (ya think!).

That’s the problem with getting high on your own supply. If you are a RE agent, and your investments are nothing but RE and RE has behaved in a very one-sided fashion for your entire career, you are blind to how your “investment” can go bad on you. There is no feedback that tells you to look for danger, because you don’t know what danger looks like.

The sweep account for my brokerage is FDIC insured and makes 2X what my house caps-out for. We are talking a brainless, riskless sweep account outperforming real estate by 225bp. I don’t have vacancies, maintenance, cap-depreciation (aside from US Peso devaluation), bad renters, advertising, management fees, tax hikes, insurance, etc… If I need to redeem, I get free checking and can have all my cash within the business day, whereas my house has a 7% redemption fee (assuming I get full price) and it will likely take 90-270 days to get the cash.

I don’t get it. Californians have had real estate appreciation as a fundamental tenant of their religion for my entire lifetime. As they moved to other states, they took that paradigm with them, and it doesn’t necessarily play as well in other areas.

I’d have an ounce of compassion if they weren’t so condescending to a lowly renter. You should hear how they talk to me. It’s pleasant, but littered with condecending comments along the line of “one day you may hit the lottery and you can own your own house.” I just act the part and play dumb. Pride is an ugly thing, so I try not to personalize it, but it is very difficult.

What little I know about them tells me they are juggling debt to carry on an appearance of wealth. Why go “all in” when you hit your retirement years? You should be preserving capital and living off interest and dividends.

You only go “all in” if you have to,or you are stupid.

Are we speaking hypothetically here?

There is a lot of ill will out there for some of the major lending players. And, within the industry (loan officers and others) a lot of people are vocal about their displeasure of these players.

I know some local old timers are frustrated with WAMU too. ‘Not what they used to be’ is common theme.

That’s a whole lot of “if’s. You really got a dumb Californian with 8 properties, or is an illustrative example? After all, you know the real specifics, and that could be the case. On the other hand, good develpment property will easily sustain much bigger negative cash flows for a long period, and two acres of waterfront ain’t a crackerbox in Ballard. Or maybe the Indians on Manhattan made a good deal suckering the Dutch out of some fine beads and trade goods?

btw, I’m no real estate agent. I don’t think it’s a particularly good time to buy. I’m just put off by braying.

The reason they create these vehicles is to hide from the shareholders much of their insolvent paper. You can hold it until you are forced to repatriate it to the BS. That happens when it goes to 0.

This isn’t over – not even close.

I personally don’t see too much downside left in Citigroup. C shares have lost 40% of their value in the last month because they wrote down a massive paper-loss. The cash flows on these assets are still intact however. They have a monster dividend, that even if it gets cut in half, is still impressive. They are currently trading at ~8 times cash flow for the trailing twelve months, (the industry average is about 13 times cash flow).

WaMu is trading around 6.5 times cash flow, and is trading under book value. The stock tanked in a large part because of fear of the NY state lawsuit.

In my opinion, the market has over-reacted on both of these stocks.

Eleua said Their accounting is like ENRON’s

Not quite like Enron’s. Enron’s accounting fabricated cash flow by selling assets with the agreement to rebuy them a short time later. They also used their stock as collateral for cash loans to fund operations. When they could no longer do accounting tricks to generate cash for operations, they were done.

On the contrary, these banks have real cash flows based on real business. And the cash flows aren’t going anywhere. Sure, they’re in for a rough year or two, and sure, mortgages will be a small portion of what they were during the housing boom, but 5 years from now, 10 years from, these banks will still be around. And they’ll likely have found new financial products to sell.

Buying these companies right now is crazy. The bleeding is just starting.

So true. There is NO WAY this ends with all our banks intact. Many of the big NY money centers are going to teeter on the brink of insolvency, and more banks are going to be taken over by the FED than most can comprehend.

Their accounting is like ENRON’s, and their fate will be the same.

Buying banks at this juncture may be good for a bounce, but you are juggling a worthless asset. The last one holding the bag eats a big fat ZERO.

Good luck.

Eleua is helping somebody to offset part of their land play, 2nd home, future residence or whatever. I’ll bet they are as happy with this deal as he is.

Not for long. If I am taking a (-$36K) annual cash flow on my investment, but it is appreciating $100K per year, then it works. If I am flat on appreciation, I need to hold long enough for appreciation to come back and liquefy my investment. If I take a $100K hit on appreciation and couple that with a (-$36K) cashflow, I’m really sucking wind.

If I hold 8 properties that all have similar financials (because I’m a dumb Californian that bought at the top of the market), it won’t be long before I’m insolvent.

If the house EBITs for 2.2%+/-, with a (-$36K) annual cashflow, that’s a crappy investment. It might make sense to speculate, but once the fever breaks, it’s a crappy investment no matter how you slice it.

To get EBIT at US debt + 4%, and cashflow positive, that home is going to have to come down in price a substantial amount. Having your “investment” at a 200bp discount to Treasurys and bleeding cash is just plain stupid – even for a real estate agent.

You are assuming that Citi, WAMU, and others have already marked down every liability on their books. This is far from the case. The situation is going to get much worse before it gets better.

The housing situation in America is far from reaching the bottom. Are you arguing that Citi is a buy right now? Even if they had marked all their subprime crap to market, why would you argue it’s a buy at 31? A huge chunk of their revenue streams are gone and never coming back.

The reality is that most financial companies have grown fat the last few years by engaging in VERY risky business. They have been highly leveraged, and marked to model not to market. This financial behavior is never coming back, and they revenue streams that they have been feeding off of are essentially cut off.

Buying these companies right now is crazy. The bleeding is just starting.

The guy is paying $1700/month for two acres of waterfront. It might be a nice place in a remote area, away from jobs-for-renters, It might be a teardown. (Maybe it’s his mom’s house.) But it is also 2 acres of waterfront. This might be the right rent, (so no subsidy), but there is easily more to the property value than the rent for today’s improvements – (which is what you clearly imply.)

Eleua is helping somebody to offset part of their land play, 2nd home, future residence or whatever. I’ll bet they are as happy with this deal as he is.

Exactly! I rent to take advantage of the difference between renting directly and renting indirectly through the bank and the REIC. Right now, that is somewhere between $30-$40K per year, and all that is tax free (IRS doesn’t tax savings – yet). My LL is a vehicle for me to extract that form of income.

Why do they do it? Why rent out a house for less than it costs to carry? Simple – APPRECIATION!

The way the game was played back in the middle portion of the decade was to buy a home, rent it out for a loss, and when the bank account ran dry, you refinanced or sold and took a huge cap-gain that (in theory) made up for the negative cash flow.

This worked when homes would go up 20% per year. Now, that they are flatlining or declining, we will see the fallout in this business model.

Obviously, raw speculators will be the first hit, and then those who bought in recent years. Once the banks break wide open, and the FED hikes rates to save the US Peso, the foreclosures will really come fast and furious.

Right now, the housing ATM is out of cash. Mr. and Mrs. Debt-bomb are running up the plastic to keep things going. They are also not paying their mortgage. Look at the amount of vacant homes that have not yet hit the market. Banks are going to run up against their REO limits in a few months, and then be forced to sell.

I appreciate the notation that I called the banking crisis over a year ago. Honestly, it wasn’t that tough of a call. You can’t base an economy on speculation, consmption, debt, and leverage. At some point, someone has to produce something.

The fact the banks oriented their entire business model to servicing the “can’t lose” real estate bubble made the current situation inevitable. Back in the Great Depression, we installed a law that prevented banks from putting too much of their assets into equities. This was to keep the banks from losing everything in the event they got caught offsides on an equity bubble. That’s why we didn’t lose the banks in ‘01-02.

Instead, the banks went “all-in” on real estate speculation.

My guess is when Great Depression 2.0 gets underway, we will have a new law limiting bank exposure to real estate.

This means fewer loans at higher loan standards in the future. This means more savings will be required (less consumption) and fewer people will be able to buy homes (lower prices).

While the recent market turmoil has been pretty dramatic, I certainly wouldn’t say that WaMu is collapsing.

These banks have been hit by mark-to-market accounting of assets for which there isn’t any current market, and they don’t quite know how to value them. The assets (some of which are highly-rated bonds) are still generating cash-flows.

This is analgous to owning a house that generates cash-flows in a down housing market; you still own the house, and you still get the cash flow, but the “market” says the house isn’t worth as much today as it was six months ago. Since these are public companies, they have to account for this “paper loss”, even though the cash flows haven’t materially changed. (okay, the RE fallout is going to affect these bonds somewhat, but the degree to which they are affected remains to be seen, particulary for the senior tranches that Citigroup had to write down).

WaMu’s stock is tanking because of the NY AG’s lawsuit, and the fear that WaMu will be cut off from reselling mortgages to fannie & freddie. There is also fear around profits on neg-am loans that are booked but not received. And that future income from mortgage related activities is going to fall. But “collapsing”? I would be very surprised if WaMu collapsed.

If you’ve got some cojones, some extra dollars, can stand the short-term volatility, and have a long-term horizon, these banks aren’t bad bets right now. OK, I wouldn’t touch CFC, but WaMu, Citigroup & others that have diversified incomes, positive cash flows and access to capitol will be around for years to come.

My $.02,

IgorOfTheFabLane

You are right. There are a few decent RE pros out there like S-Crow and Jillayne. They are few and far between, however.

Our country recently entered negative savings territory FOR THE FIRST TIME IN HISTORY. Everyone is in debt, and we’re having to borrow money from all over world to keep our economy afloat. This weakens us and benefits a lot of regimes we despise.

Prudence and saving is patriotic, as it will replenish the country’s capital base the right way and reduce our dependence on not-so-friendly neighbors.

Eleua predicted a banking crisis with alarming accuracy MORE THAN 1 YEAR AGO! Now look at what is happening to our financial industry.

Wachovia = huge mark downs
WAMU = collapsing
Countryslide = collapsed
Bear Sterns = in a world of hurt
Citi = world’s largest bank just fired CEO Chucky Prince amidst major mark downs

etc etc etc

This subprime filth has been spread throughout the world’s financial system. Our whole system is going to have to be MARKED TO MARKET, not MARKED TO MODEL. Writedowns have just begun people, this is going to get much worse.

Has anyone seen how well tech has been doing the last week? The NASDAQ has been getting slaughtered. Do you realize how tech laden the Seattle area is? Do you remember 2001???

And yet the entire RE world is promoting this time as a “GREAT TIME TO BUY”.

Yeah its a great time to buy if you like buying things at 50-75 percent over appreciated prices right before a major market correction. Myself, I prefer to buy low sell high.

This game has just gotten started. WAMU’s major problem is not going to the subprime issues currently facing the market, it’s going to be the MASSIVE option ARM resets in 2008.

Buy hey, buy now!

Actually you’re not. You’re paying the market price, i.e. exactly what the place is worth. There is no subsidy.

It’s the previous owner who was subsidized by your landlady when she bought the place, because she paid way more than was justified by the rental income she is now receiving.

So his landlady subsidized the previous owner, or in other words, paid too much. Then I guess you’d have to agree it’s Eleua’s landlord that is getting screwed, not him? That was pretty much his point – that this statement was wrong
If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords.

Actually you’re not. You’re paying the market price, i.e. exactly what the place is worth. There is no subsidy.

It’s the previous owner who was subsidized by your landlady when she bought the place, because she paid way more than was justified by the rental income she is now receiving.

I think condos owners/investors are pretty "golly" screwed.

I’d give 2:1 odds that this is the reason.

I have some friends who took the negative-am route when they bought an apartment building about two years ago. When I learned that’s how they’d financed it, I worried that they’d lose their shirts. Now that the market is stalling out, we’ll see how events unfold. They’re good folks and I hope they don’t get burned, but hey, they’re grown-ups and they chose to take those risks.

Our rental pays for itself (including the 15 year note) and then some. Making the leap to landlordhood was weird enough already when the numbers all penciled out. I can’t imagine doing it with some freaky fragile financing, too. Too risky for the likes of me.

One final question. If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords. Also known as, yes, property owners. People who bought instead of renting, then bought again.

Only this one’s on you.

Yeah, I’m really getting taken too. My landlord bought my place in Nov ‘05 for $587k. 30yr jumbos were going for about 6.44% then, so if they put down 20% their carrying cost is $2950 + taxes of $400/month. They pay $3350, less a ~$950 tax shield. – so say $2400/month.

I rent for $2000. And in the year I’ve been there – they’ve replaced the washer, the dryer, and had a leak that caused about $10k worth of damage.

Wishes for making up the difference in equity are tempered by the neighbor next door’s inability to sell an identical unit for $650k – on the market for 3+ months a very good capitol hill location. After transaction costs, I bet they’d be lucky to break even right now – but are waiting to sell until next July to get capital gains treatment. Not sure what gains they’ll be shielding by then.

I feel so used.

One of the reasons my landlard is always is in such a bad mood is that she purchased the place in 2004. My rent covers about 1/2 of her expenses.

I feel a little guilty, especially when I call her to repair things. Oh yeah, she’s a Realtor too. That also might have something to do with her current salty disposition.

http://seattlepi.nwsource.com/local/338963_needle09.html

Pithy quote:

[i]Or as Keister put it: “Ballard was old Scandinavians. Fremont was hippies. Capitol Hill was gay. Kent was where whites of modest means moved to escape Seattle school busing. Bellevue was the same for the rich.

“Today, you can make a joke about Ballard but it’s a bunch of wealthy people who work in the information industry. You make a joke about Wallingford and it’s a bunch of wealthy people who work in the information industry. Fremont? That would be a bunch of wealthy people who work in the information industry.

“And Belltown is a bunch of wealthy people who live in luxury condos … who work in the information industry.”[/i]

One final question. If you’re advising everyone to rent (which I know you’re doing because you believe in the truth of what you’re saying, so more power to you), who’s benefiting? Landlords. Also known as, yes, property owners. People who bought instead of renting, then bought again.

Only this one’s on you.

Really?

My LL pays out $4500+ every month for my place. She gets $1700 (less 10% management fee) from me. She also pays all maintenance costs and tax hikes. This year, maintenance will probably consume 25% of her gross revenues on this place.

From my perspective, it looks like I’m being subsidized somewhere in the $3500/mo range to live on 2 acres of waterfront. Also, as property values go down, she eats all the depreciation. I don’t have my balance sheet imparied one bit.

One check a month and someone else takes all the headaches, cost overruns, risk, and speculative carrying costs.

Yep. This one is “on me.”

Too bad the housing bubble has to end.

You know, I think we could help put the housing market back in balance *and* capitalize on the trend for locally-grown food…Soylent Green turkey for Thanksgiving, anyone???

Dave, you’re absolutely right—it’s not only about numbers. Control and stability, stake in a community, lots of other things go along with buying a house.

The stats on the number ARM’s, Alt-A’s, and ATM refi’s that frittered away the equity that is itself being eroded is the big picture that those who think are unaffected miss. One may be OK on the mortgage payments, but taxes are still high are they not? The tax valuations will not adjust signifcantly for awhile, and that is not a guarantee that your property taxes will be reduced on a one to one basis.

This represents the fallacy that since you are unaffected in one or more areas, that the reality for many others is not in fact, real. It ignores how those who are NOT responsible, even if they are a minority, can bring down everyone.

Having rented for the past 15 years before buying the house the fact that nobody can tell me I have to move, and that I can do what I want to the property, has value to me. Also providing the stability to my family that owning vs. renting is a great benefit to my psyche.

I guess what i am saying is that i am with you on the bubble – I very well may be underwater on the house. I think that will correct itself eventually – and no I do not have an ARM. 30 year fixed and we can handle the payments. What I am saying is that there are benefits to owning a home that go way beyond the financial. Trying to break it down to being just about the numbers kind of misses the point in a lot of ways, doesn’t it?

Dave

I gotta watch idiocracy again.

Unfortunately, these “someones” are usually the ones who shouldn’t.

Hey you! Out of the gene pool!

Kids are what make housing prices go up.

Think how many houses would be available, and how cheap they’d be if there were no people!

Traffic might improve a bit too.

Someone’s got to perpetuate the species.

When you buy your own home, it will be your yard that has no plantings and your walls that have bathtub rings around them at toddler reach height.

Unintended and unforseen consequences of actions taken.

Go ahead and spend your hard earned on some overpriced POS. With all those mouths to feed, you won’t have much left for things like plumbing repairs, paint, roof maintenance, landscape materials, etc.

It won’t matter will it.
The thing will be yours.
I understand and sympathise.

You’re right, very few rentals come with a free child and two large dogs. However if you really want a child, I can let you in a little secret on how to make one yourself. As for 2 large dogs, you could can get those for free at the humane society. Also, I’ve never heard of home seller’s throwing in a kid and 2 dogs as an incentive, so why would buying be better than renting in this case?

OK, that one really cracked me up. Thanks for brightening my morning.

Finally, the garden of rently delights is a little bit of a myth as I see it. First, try to find a rental with a toddler and two large dogs.

You’re right, very few rentals come with a free child and two large dogs. However if you really want a child, I can let you in a little secret on how to make one yourself. As for 2 large dogs, you could can get those for free at the humane society. Also, I’ve never heard of home seller’s throwing in a kid and 2 dogs as an incentive, so why would buying be better than renting in this case?

Eleua – I think your digital microvalumeter needs to be recalibrated. I measure 60.5% to 81.9% off peak. :)

I run into people in all areas of life who are insecure about their own personal decisions, and express it by attacking other people who make different decisions. It’s much easier to do that than to admit to one’s self that one isn’t sure about the decisions they made.

I think green energy will be the next bubble. History is littered with the carcasses of green energy hucksters, and I can smell the greed in the air right now.

Secondly, if you are just now becoming a gold-bug, I think you are a bit late to the party. Yes, it has performed well compared to the dollar recently, but I would be a bit cautious now….in “Manias, Panics and Crashes” Kindleberger does a pretty good job of showing what happens to commodities in a severe recession. It should be a part of a portfolio, but a balanced part.

The real numbers may well be 350 now and 280 in 5 years, when you do all the math it works as a home (not as an investment) if it’s worth it to you to pay more to own.

Websites like this are great to teach people that there are alternative ways to learn from and find the true facts without listening to mass media news and sound bytes that usually spin the statistics.

The real estate bottom will be here when you find out many real estate agents are finding new careers because they finally throw in the towel and give up on making a quick buck.