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Unalloyed says:
Okay…off the thread, but I’ve been watching metals markets. Why is this sector rising so fast? And it’s not just gold and platinum. 20 articles give you 20 spins. I can’t believe that the middle class in India is suddenly spending more on jewelry, causing a worldwide surge. Are investors who see the RE decline turning to metals? Are the oil mullahs hedging against an Iran-Israeli armageddon? Anyone have a “spin-free” angle on this?

No idea. Came across this today, though:
http://pda.physorg.com/lofi-news-researchers-metals-copper_9971.html

HARM,

While it is true that many people do buy to flip, MOST people buy a home to live in it – even in Southern California. If most people flipped their homes the average time of ownership would be closer to one year. (more than half flipping in a matter of months and the remainder holding for multiple years). If most buyers were flippers the median holding period would be a matter of months. However, the average duration of ownership is about seven years. Obviously, with a seven year average, most people hold their home for many years before selling. And when they do sell almost all of them buy another home in a trade-up purchase – not the type of pattern that flippers follow.

Of course, the presence of flippers is very cyclical and during the last few years they have been out in force in the hot markets. Let these fools play their greater fool game. The last fools will get burned.

I have been actively studying the real estate markets (in a serious way) for more than 30 years, and I have been actively investing in rental properties for nearly as long (also stocks and bonds). Over those many years I have had countless conversations with perhaps a thousand homeowners and many property investors (from mom and pops to mega millionaires). It is nearly universally true that they expect their real estate to go up in value in the long run, and many think you can never lose with real estate. However, people who were buying property to flip have been the exception, not the rule in my experience.

When I encounter other investors or even flippers, I seek to understand the entirety of their strategies. I started doing this exploration when I was a mortgage loan officer in the mid 1970s in southern California. There are many ways to make money as an investor, and also as a flipper. However, I have never “flipped” a property – I follow a buy and hold strategy with a very heavy market timing bias in my buying activity. The only exception to this was in early 1989 when I sold much of my Los Angeles property because I thought the market was about to crash badly. It did. I then waited until 1998 to resume buying. I bought steadily until late 2003 when my analysis showed that the market had become fully valued (time for me to wait again).

I have made many millions of dollars in this game while never ever having invested more than $20,000 of my own money. Until 1989 I was leveraged to the eyeballs. After selling in 1989 I had only modest leverage. By 1997 I was debt free on my rentals from the positive cash flow of the rents. Even after much buying in and after 1998, today my average loan to value is under 25%.

In the summer of 2004 while many talked of collapse, I remained convinced that the market would do well until the summer of 2005. As it turned out those 12 months were probably the best 12 months of appreciation in US history. Since then I have believed that we were in the beginning stages of a cyclical decline in the hot markets. I expect this decline to last for several years. However, the bulk of the country will experience no significant decline, and much of the country will see low single digit price appreciation during the decline of the hot markets.

If the decline that I have forecast takes hold, I expect that 2009 will be a very good time to buy. Until then I am waiting, and (like always) I am watching...

Even a 25% price decline would leave the average homeowner with 40% equity (and 60% LTV). This is hardly a scenario for most people to have any financial troubles. It is not even a scenario that would prevent them from further borrowing on their HELOCs (foolish as that might be).

True. But many people get equity out just to pay for their mortgages. They tend to have very high LTV already.

Prices have been set by frantic buyers in the past 18 months. A moderate decline can cause trouble, turning them into frantic sellers, setting prices once again, towards the other direction.

I agree that much of the US will not see much decline though.

Yes. People on the edge will be at high risk from even a small decline. Only those who have an event requiring sale or refinancing will get into distress. This will be a very small percentage of homeowners. However, since only a small percentage of homes are sold each year, even a very small percentage of homeowners in distress can disrupt the market.

Remember several years ago when the power was out for about 6 hours on the west coast? I drove around town to see if any areas had power or any stores were open. What struck me most was how close the public was to civil meltdown. People were having shouting matches at intersections because nobody obeyed right of way in the absence of working traffic signals. I'm amazed there were no murders that night. People turn ugly at a moments notice. If we have a real depression I think it will look more like Mad Max than the Waltons.

Jeez guys getalife!

A San Jose resident (and homeowner), I started reading this website in the summer to gauge my suspicions that homes in my neighborhood were too expensive. (I am rooting for a crash, to make life more liveable around here for the few natives who remain.)

But jeez, the same posters add rant after rant, with no tangible information to enhance this site.

Get a life!

Japan made our rates rise.....

Jan. 26 (Bloomberg) -- The yen rose as a report today showed Japanese investors sold bonds abroad for the first week in seven.

The currency snapped a two-day drop that pushed it to the lowest in three weeks against the dollar after a finance ministry report showed Japanese money managers last week dumped the most overseas bonds and notes in four months. An auction of U.S. two- year Treasuries yesterday drew the weakest demand in nine months.

``Japanese institutional investors are returning money by selling dollar-denominated assets,'' Akihiro Tanaka, a currency dealer at Resona Bank Ltd., said in Tokyo. ``Repatriation will support the yen'' toward the end of the fiscal year on March 31.

sybrib Says:

"Get a life!"

Noooo. Get a house!

Ever notice how much better "I'm buying a house" sounds than "I'm signing up for a shit load of debt and have agree'd to pay the bank interest for 30 years".

I guess the former is applicable in the fantasy world where people by houses to live in, so 1950's. Remember if your house is paid off, you Sir are not in finance. I love the wholesale selling of "investments" to the greater unwashed. One can't help to think of the ex g/f in San Diegho, who works for Cal Trans, do I really need to state her income. Well that all doesn't matter because she's a real estate tycoon now, what with those 3 downtown condos. Upsidedown you say? Troll, RE only goes up, what she loses in monthly she'll more than make up for on y/y gains.

DinOR, you get my vote :) as a pathetic renter who is moving from Pismo to $anta Barbara I couldn't agree with you more.

"From what I understand (and please correct me if I am wrong), the Federal Reserve popped up somewhere in the 30s or 40s and took away the gold standard - meaning paper money meant nothing unless two parties agreed to the “money contract” of its value.
Right?" --Linda

No. The US did no go off the gold standard untill Nixon ended the Bretton Woods system in the '70's. Check it out, I Wiki'ed it up for you yo:

http://en.wikipedia.org/wiki/Bretton_Woods_system

"Now that I’ve read almost everything on this site, it seems to me that you all have a great distaste for anybody who owns a home and is trying to decide whether to get out now and take the money and run." --Linda

I don't. I was still in College 5 years ago and in no position to buy in to the RE market. I do not hold it against anyone that they made the right decision to buy in years ago and also had the financial ability to so.

I also do not think it is accurate to say that even most of us here have a great distaste for those who have made a fortune in this bull run. I think some are very jaded that they missed out and/or are now priced out, but that is their problem, not yours.

It's been over 2 months now since Lyon RE of Sacramento has updated its market statistics page:

http://www.golyon.com/pricingtrends_f.htm

HMMMM.......

by missing out on the 2003-2005 gold bull, you have missed a massive investment opportunity.

How can one take part in every single opportunity? It is neither possible nor necessary. It is much better and easier to be cautious and play only when risk and reward are favorable.

by missing out on the 2003-2005 gold bull, you have missed a massive investment opportunity.

Of course, timing is everything. :)

Most homeowners have lots of equity in their homes. The average homeowner has about 55% equity in their home. A short-term fluctuation in the value of their home is not likely to be important to them. Even a 25% price decline would leave the average homeowner with 40% equity (and 60% LTV).

Lies, Damn Lies, and Statistics, Part II

DinOR mostly beat me to the punch here (average in Midwesterners owning their homes outright with people who have little-to-ZERO equity, and viola!: 55% "national average" equity rate).

However, I can also add the following:

--This "55%" figure (demos-usa.org/page269.cfm) is an all-time low from 1973, when they first began collecting this data.

--This "55%" figure is based on current home valuations. If prices drop, then guess what? So does the assumed equity.

"by missing out on the 2003-2005 gold bull, you have missed a massive investment opportunity." --Fewlesh

Zephyr knows Real Estate, so that is what he invest in.
"Buy what you Know" --Peter Lynch

For some reason the last paragraph of my above post on flipping/speculation stats got chopped. Should have read:

Statistics on national averages tell me little about what recent homebuyers in my city have been doing. As DinOR pointed out, national averages combine people in the Midwest who have lived in the same house for 50 years with serial condo-Flippers from South Beach.

See “Lies, Damn Lies and Statistics”.

BTW, all of this is recycled, already-posted information, well known to any Patrick.net long-time poster.

I suspect Zephyr is just having a bit of fun with us ;-) .

PIMCO research indicated that 82% of the purchase loans in California in the last year were either I/O or negative-amortization That’s what we expect in the year ahead. Indeed, I would suggest that the downside for home price appreciation (note, being an optimist, I said downside for home price appreciation, not home prices themselves!) is particularly acute right here Paul McCulley of PIMCO announced that in California over 80% of new mortgages over the last year have been exotic creatures – interest only, pay option, and negative amortization concoctions.

Regarding equity of recent buyers, here's some info that caught my attention:

"Recently compiled statistics at Legacy Escrow Service, Inc. reported that 71% of closed purchase transactions by the firm in 2005 were 100% financed."

Legacy services the Puget Sound (West Wa) market (which isn't has hot as here), but what does that suggest for the SF Bay Area? It's pretty easy to imagine it's just as bad (or worse) here.

Zephyr:

Do you happen to have a connection to Zephyr Real Estate on Brannan Street here in San Francisco? Just curious, no need to respond if you don't want to.

@jeffolie,
Thanks for the stat. Here's the link:
blogs.ocregister.com/morningeye/archives/2005/12/the_future_and.html#more

DinOR,
Ah, yes, that's beauty of statistics. ;-)

usatoday.com/money/perfi/housing/2006-01-17-real-estate-usat_x.htm?csp=14

WASHINGTON — As housing prices soared last year, an eye-popping 43% of first-time home buyers purchased their homes with no-money-down loans, according to a study released Tuesday by the National Association of Realtors.

Who are entry-level buyers?
Survey of home buyers reveals:
Median age: 32
Median household income: $57,200
Median down payment: 2%*
Purchased with no money down: 43%
* — on home costing $150,000

Source: National Association of Realtors, 2005 Profile of Home Buyers and Sellers

New thread: Denial is not a river in Egypt

@Linda

OK. Now that I’ve read almost everything on this site, it seems to me that you all have a great distaste for anybody who owns a home and is trying to decide whether to get out now and take the money and run.

Not the case at all, there is this dude I work with that bought a house in $anta Barbara about 10 years ago, paid 2-300K, it's now worth south of 1.5mil. I told him to sell, sell now. His real estate mogul wife doesn't agree, she thinks it is going to go up more. They have a house in templeton also, for what they would gain (tax free I might add) they could pay the templeton house off and have cash in the bank. I do not grok these boomers. I guess when you have had your head in the trough all your life, you expect that the pigs will be slopped forever.

If you think that the market will tank, I do. Sell the house and move to a rental. I've never had a problem renting with my 2 cats (well now only 1 :( ) and my wife has a boston terrier, still no problem. I could see a problem is your dogs could double as draft animals. I would think about what to do with the cash if you sell. I personally have never had much grub to worry about. Education is expensive.

Linda

I understandard your difficult position. Consider what I believe the most likely outcome by the end of 2007. Even though you have plenty of contentment and equity most arround you in recent years have subprime mortgages.

When the subprime owner defaults the following happens:

The first to feel the declines in price are the new sellers. The second ripple is the MEW's (mortgage equity withdrawal, home equity loans, HELOC's, etc) which depresses renovations and major purchases. The foreclosures and REO's come third because the laws give months and months of grace period. Oh, did I mention the defaulting mortgage backed bonds, especially derivatives.

The fear is that the sheer pace of the growth in credit derivatives has outstripped both the scope of the existing regulation and the development of infrastructure to manage exposures in the sector. According to the International Swaps and Derivatives Association, the total notional volume of credit default swaps outstanding had reached $12,430bn by the end of June - a growth rate of 48 per cent in six months. The market had scarcely existed in 2000.

Collapsing mortgage backed bonds and derivatives, plus stock derivatives and a declining economy will overwhelm the Fed. The central bank of Japan in 1990 failed. This is my reason to conclude that all prices will fall in a severely.

Oh, did I mention that the hedge funds use derivatives. Hedge funds account for more than half of the daily volume in the US stock market. Hedge funds can buy or sell the risk of default by a single company or a portfolio of them. Derivatives have been used to create securities that track the credit of hundreds of companies at once, allowing hedge funds to bet either way on the corporate credit market.

the source for this is:

Financial markets: Spread of derivatives reshapes markets
By John Authers Tue Jan 24, 1:00 PM ET

According to the International Swaps and Derivatives Association, the total notional volume of credit default swaps outstanding had reached $12,430bn by the end of June - a growth rate of 48 per cent in six months. The market had scarcely existed in 2000.

That is 12.4 Trillion!

Remember Warren Buffet's warning on OTC derivatives?

@ Bob Cote,

Read closely, I said

They have a house in Templeton also, for what they would gain (tax free I might add) they could pay the templeton house off and have cash in the bank.

Tax free 500K, house in templeton has 250K note.

Priced rentals in Santa Barbara lately? Actually, yes, I just rented a 2/1 victorian flat here for $1950, which I consider a vigourous ass pounding

Yeah the PITI on their current home is low, but come on now these are mid 50's boomer who can take a ton of money off the table for doing squat, the boomer ideal. Dude also has the fat legacy pension from back in the day, you know, back when the boomer hogs were slopped thrice daily.

Surfer-X, based on what Linda wrote it appears she is in a significantly different situation than your friend, mainly:

1. She is living in the house they are considering selling (not a 2nd investment property).
2. No major outstanding debts to pay down (such as your friend's $250K Templeton mortgage).

Different situations, different needs.

So often people today speak of trillions as if they are chicken feed.

Yes, they are used to the Moore's Law for semiconductor. So no problem if the deficit doubles every 18 months.

With 12.4 trillion of trouble, won’t the Fed make a move to prevent such a large exposure?

Greenspan has a very clever plan in place: retirement.

Some derivatives are regulated by the Fed while others are not. In finance, a derivative security is a contract that specifies the rights and obligations between the issuer of the security and the holder to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event.

"As the delinquencies and losses on mortgages flow through to subordinated mortgage- and asset-backed securities, who will be affected? Who buys these securities? The interesting part about these private label subordinate pieces is that for the most part, they’ve ended up in CDOs [collateralized debt obligations] and have been sold outside the U.S. Subordinated pieces are trading at their most expensive levels ever primarily because of the demand from structured deals—CDOs are underwriting the risk in the mortgage market. The lender (buyer of the CDO) is the person in line to lose money. While CDOs often have higher yields for a given rating level, they also usually have higher risk for a given rating level. Because the investors are CDOs, the bonds are outside the banking system, and the regulatory agencies cannot police the market. That has been a frustration for the regulators—they can’t do as much about the situation as they had hoped."

Linda,

there is a simple rule to this. If you sell now, you pocket 300K windfall. Do you think you can save that amount of windfall before you retire with the economy going south? If not, sell now and pocket the money. If not, ride it through.

I am about in the same shoes but I am quite far away from retirement (30+years), and I believe I can save the windfall before I retire. Also, I locked in a tax base which will benefit me for a longer period of time going forward. As you get closer to retirement, pocket the cash whenever you get a chance, don't wait for tomorrow.

Whatever you do, don’t listen to gold bugs until you are financially sophiscated enough to know the difference amongst speculation, hedging and investment.

Honest, very few professionals practically distinguish the three. There are lots of grey areas.

When people tell you that gold is now over 500, ask them what it was in 1980.

I think gold was about $2000 (two thousand dollar!) inflation adjusted. Do your own research.

I won't recommend Linda to get into gold, although I am 40% in gold and silver. The reason is because she is close to retirement and perhaps not mentally prepared for huge swings in metals. I personally believe that gold will go beyond $2000 in a few years, but along the way, there will be huge swings (recently gold went from $540 to 485 within a week), and if you need money to spend, you are not mentally prepared, you should stay out of the game. When it pulls back, it shakes out a lot of weak souls, and you may start to question your own long-term judgement.

The prudent way for Linda to hedge is perhaps through diversification into foreign currencies, at least for part of her portfolio.

Peter P,

Historic Peak Price for Gold: $850 on Jan 21, 1980. In today’s dollars this would be over $2,000. So in real terms gold has lost about 70% of its value since then. Of course that $850 was a price spike and the prevailing price for the last three decades was much lower, but not enough lower to make gold a good place to have been all along. Gold is a speculator's asset, with good moments and bad moments and a lot of boring low return stretches.

Fewlesh,

You said I should look at the macro trends outside of real estate. Good advice. In fact, I spend over two hours each day studying the economic data and trends and have been doing this continuously for about 35 years.

I have been investing in the stock market for more than 30 years. I have put far more money into the stock market than into real estate. I have beat the market by a small margin for most of those 30 years, and by a nice margin in recent years. I have been continuously invested in the stock market for over 30 years with the exception of the period from 1998 through 2003 when I exited the market when the Dow was around 9500 and stayed out until March of 2003 when the Dow was about 7300. I was so convinced that the Dow at 7300 was a buying opportunity that I bought back in with everything I could reasonably muster. I even maxed out my HELOC to buy more stock in 2003. I have made double digit (and seven figure) gains in 2003, in 2004 and in 2005. I am up by about 3% so far this year. That would be about 40% if annualized, but I do not this pace to hold all year.

It is true that gold has performed well in recent years, but not as well as my investments have performed. I expected gold to do well, and it did better than I expected. But I expected stocks and real estate to be better for me. If I had bought gold instead I would have done well - but not as well.

In the long run gold is a piss poor investment. You are lucky if you break even in real terms. In fact gold is really not an investment, it earns nothing. Gold is a pure speculation play. It rises on fear and falls on calm. Over the last 25 years it has not even been a hedge against inflation. It is volatile, as its price is a barometer of fear. And you can make money betting on fear. You can also lose.

I focus my investing attention to real estate, stocks and bonds. They have earnings and capital gains potential. There is a time and place for each. There are definite cycles in each, and I have much experience in working those cycles. There are many other potential investment areas to consider if one desires. However, these three asset classes have been enough for me.

DinOR,

I am sure that most of the equity that people have in their homes is from appreciation, and not from paid in capital.

BTW, the equity percentage is higher in areas where the home prices are higher. Of course, this is logical when one considers that the equity is usually from appreciation in that location or from appreciation in a prior home being brought to the more expensive home. Also, in the luxury home category, about half of all buyers pay 100% cash – no financing. At the other end, first-time buyers generally have very little to put down, given that they had no prior appreciation to work with.

In the hot markets there is a lot of appreciation equity. Of course, much of it is temporary and will validate the old cliché “easy come, easy go” when the cycle heads for the bottom.

DinOR,

While refinancing has been used to extract record levels of cash, the largest single factor affecting the refinancing of mortgages is declining interest rates. People refinance to save money and many decide to take some cash out at the same time. Certainly some are mostly motivated by the cash out, while others merely seek the lower interest rate. Watch the markets for a decade or so and you will see that refinancing is hugely correlated with obtaining a lower interest rate.