patrick.net

Bottom line: A very simple yet effective time tested strategy is….

-Take a huge chunk of your wealth to put as a down-payment of a house when you start a family as a young couple (late 20s early 30s) = > painful but necessary step to stabilize your housing costs early on

- Over the following 20-30 years, build your retirement portfolio (lots of stock indexes, no churning, dollar averaging, little bonds funds, at least 10% of pre-tax income invested in bonds, no consumer debts, pay-down mortgage)

- As an empty nester, downsize and put all the free cash into fixed income securities.

== > Golden retirement, i.e. Trust funds for grand kids, salsa classes for early retirees, 21 days cruises, round the world trips, personal chefs, anything fancy ...

The other alternative will probably lead you to bitterness and lots of 'ex ante' 'ex post' arguments.... :-)

oops...

not
"little bonds funds, at least 10% of pre-tax income invested in bonds"

but
"a small % invested in bonds funds, at least 10% of pre-tax income invested in the retirement portfolio"

Zephyr,

Thanks for a cool headed explanation during some pretty frantic times! A lot of that stuff is covered in the Series 7 Exam (it's just been a while?) as in, I never thought it would actually come in handy?

OMG,

I can't believe this! I really can't. The Global Financial System is on the verge of collapse and we're "getting advice" from POS.

YO! @ssmunch. It's @ssclowns like you that created this fricken problem! Now you want to come here and dole out sagely advice? You're kidding right? Now that every available borrowed dollar (and then some) is adjudicated to residential real estate you come around here wanting to preach about diversification? That is truly comical.

Here's the local Silly Valley spin on rising jumbo mortgage rates:

http://www.mercurynews.com/breakingnews/ci_6594654?nclick_check=1

TOS: What a huge load of crap. I don't seem to remember you posting your net worth, income and portfolio. Go ahead, hang it out there---most of us have. Are you worried that it doesn't stack up to the "lowly" renters?

To all: Really, honestly. Houses are not an "investment". Of course you should be wary of price depreciation and illiquidity, that's just common sense. Buy a house if you genuinely want to own a house---because you value the stability, you want to make physical changes to the house, or even just because it makes your wife happy. I thought the Bubblizer was cool because it forces you to put a monetary value on the intangibles. If you're not going to live somewhere for 5+ years, or if you value flexibility and mobility over perceived stability, then don't buy a house.

Randy,

On straddling the line between renting and owning: A lifelong resident of Santa Clara County, I know many people who've sorta done this for a long time, by taking in borders.

I was a border myself for several years, and I expect that I'll be taking in borders one of these days.

It may sound like a horrible situation, but once you accept it, it's just another situation, another tradeoff. I think over the arc of human history taking in a border has not been such an unusual situation and probably goes on a lot outside of the elite circle of people who read this blog.

Talbott in his book about the "Coming Crash in Real Estate" suggested that the time will come when underwater homeowners will be compelled to take in borders to service their mortgage.

astrid Says:
August 10th, 2007 at 8:48 pm
What’s with housing bulls and “loose”?
Trust me, you don't want to know. ;-)

DinOr and Brand,

Way to go in calling BS on the POS.

It can be somewhat baffling when the people (TOS) who are the root cause of the financial turmoil of today suddenly change their tune and start double-talking about how "the moment of truth is fast approaching",
as if they had nothing to do with it in the first place, all the while trying to sneak their old "buy now" mantra in the back door.

The most dangerous forms of financial "advice" comes from the class of turncoats and chameleons that always try to sail with the prevailing winds as long as possible before abandoning their course.

[Whew, how was that for a pile of loose analogies]

justme,

It's better than the pile of loose anal logs the NAR is using. :D

justme: My simple strategy on determining credibility goes like this:

1. Know who has the money.
2. Understand how they got the money.
3. Decide if that way of getting money is available to you.
4. Monitor market conditions for ones similar to how they got the money.
5. Act.

Plenty of people are rich, but many got that way by sheer luck or indirect means---born into money, married into money, bought a house right before the RE boom, purchased Microsoft shares in the 1980s, etc.

Other rich people got that way by means which are not available to me. For example, Randy appears to have major tech finance skills that led to big salaries and successful IPO companies. One of my close friends is a highly respected heart surgeon. Two more are lawyers. Those methods of wealth are not necessarily available to me because they depend on skills which I lack.

For how much everybody hates them, I think Jim Cramer and Robert Kiyosaki make some intelligent points. I don't believe that they were purely lucky (although their TV shows and books are of gratingly poor quality). Both have acumen in investing and real estate, respectively. I could potentially start my own company or massively upgrade my education in the stock market. One of my good friends started a small company and is making nice money with control of his free time.

It sounds like TOS married into money, but currently isn't producing much on her own. That's a discredited position. If TOS gave specific examples of properties she bought and sold at huge profits, then maybe she would have the right to advise people on money and real estate. Alternately, maybe her husband could give us some pointers, if he's bringing in the dough.

Yeah, I wouldn't want any of those snuck in the back door.

On a completely different topic, have you guys noticed how some mildly well known SF realtors and internet personae have been on looooong vacations recently?

theotherside

...and what about your long promised criticisms and corrections to The Bubblizer model? We factored in all that bullshit you always fall back on, and you're still dead wrong.

Could that be the reason you continue to knock over poorly constructed straw men? Or have you built me that time machine so I can go forward or back in time that I might reconcile the fact you so carelessly mix ex ante and post ante premises?

Or in more simplified words: put up or shut up. You are no longer entertaining. Your not so coyly disguised "buy now" ads are outright disgusting. While I don't believe in karma, in your case I truly hope that I am wrong.

Does anybody really think this injection of liquidity will make people buy the now worthless finacial products formerly so popular? Hahahahaha...

This is starting to get interesting. I live in Ohio and have been watching the last 3 years in disbelief. I have had a mortgage pre-approval from Wellsfargo for about 18 months. I have been renewing it every 6 months with the credit check etc. I have not been able to find a home for the price I thought was reasonable and just sat on the sidelines building a down payment.

Two weeks ago I received an email and frantic call from the loan officer saying that the product I had been approved for was no longer available. I was told that I would have to resubmit an application for a loan product that was available. The 80/20 program is now gone! My plan was to get that loan and pay the 20 off at closing. This would have saved me on the fees. I now can't find a bank in town that will give me a mortgage approval.

I wonder now if the credit has completely dried up for people like myself! National City Bank in Cleveland is no longer making mortgage loans period! I am 27 years old and rent a shack for $350 a month. I have only been able to save $12,000 for a down payment. I could get more if I used my 401k money ( Hell will freeze over before I do this.) The jobs here in Ohio just don’t pay a whole lot. The average yearly income for a family is $33k. My land lord is probably praying every night I don't move. She works 3 part time jobs.

Can anyone please share their thoughts/opinions/ life experience regarding these questions below.

What the hell is going on and how long before this mess clears up and allows me to obtain credit?

Not that is matters too much to me, my last credit check gave me a 770 Fico score. Will banks now get the fico score as well as require a 20% down payment?

The homes in my area are already overpriced in my mind. The whole "vacation" land atmosphere skews the prices up more than 100% compared to the same home just 50 miles south in the middle of a farming community. If the 20% down payment requirement returns, how long must I wait to see the home prices fall to meet the new market equilibrium?

Not that is matters too much to me, my last credit check gave me a 770 Fico score. Will banks now get the fico score as well as require a 20% down payment?

It's today's Mercury News saying that you need to have 10% down, FICO of at least 680 and the ability to document income to able to get a loan. Compare to years past, these are still pretty loose criteria.

1- Ha ha ha … I am generatig so many abusive posts, I feel like I am being gang-r@ped by a bunch of Patrick.net old-timers….

2- I went back to my last three postings trying to understand why I was getting so much love from the usual suspects…

3- I did not find any abusing language, not even my usual jokes about JBRs…I found enough spelling mistakes to make "W." look like a poet, but no abuses

4- So It must be the hard truths in the posts that are getting on the JBRs nerves…In that case, I must tell you that I truly enjoy the love that I am getting …

Bottom line:
5- I am proud to receive your love and I am also sending mine (but not in writing :-) , so as not to offend anyone) to DinOR, Brand, Randy, Astrid, PermaRenter, SFBB, SP and skibum…

6- I suspect that your bitterness and frustration have nothing to do with me but the situation summarized in the following article:

-------------------------------------------------------------------------------

NY Times

In a Spiraling Credit Crisis, Large Mortgages Grow Costly

By FLOYD NORRIS and ERIC DASH
Published: August 12, 2007

When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.

“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.

So the FED "loaned" 36 billion, that's with a B, to the fuckwads, fuckwads "secured" the loan with Alt-A paper, what happens if fuckwads default? Doesn't this effectively mean the FED has bailed out the fuckwads?

@ Randy H:

1- I keep telling you that even though your Bubblelizer is a lot more complex than the dozen or so buy-versus-rent calculators available from the internet, it does not help the user make a better decision…

2- The real difficulty is in coming up with realistic sets of input variables for a useful sensitivity analysis…

3- To use an analogy, for the equity part of my portfolio, I only invest in low-cost index tracking funds with a dollar averaging strategy (most robust investment strategy out there). It is well known 95% of all the fancy investment strategies, expensive money mangers and financial pundits will not do better than my simple strategy over the long-term (2-3 decades). Your bubblelizer is very similar to the fancy investment strategies, expensive money mangers and financial pundits and is not that useful…

4- It is really simple…When you start a family you buy a house, that you can truly afford, with a 30year fixed mortgage and a 20% down payment, pay down the mortgage, don’t touch your equity until you downsize and only move up if you can truly afford it. If you have not yet bought, you should wait until 2009/2010 towards the end of the 2nd wave of foreclosures…

5- As long as you don’t have a truly exceptional insight into where mortgage rates, inflation, rents and housing prices will be in the next decade, your tool will surely not produce better outcome that the simple time tested common sense strategy…That’s what I mean when I talked about decision making with incomplete information and under uncertainty…

6- You want a simple strategy that produce good results under various future outcomes because that what’s matters…That’s how you can avoid making decisions and then having to invoke ‘ex ante’ and ‘ex post’ type arguments because your decisions-making process did not account for the “known unknowns”….

You want a simple strategy that produce good results under various future outcomes because that what’s matters…

Like a nice pair of fake tits and a snapping pussy?

Surfer,

>Doesn’t this effectively mean the FED has bailed out the fuckwads?

I'd like to know, too. But I have a feeling that the so-called "fed primary dealers" can ill afford to lose their particular privilege, so they had better pay the money back one way or the other. Anyone care to elaborate?

[If they don't pay, they will call Greenspan back from retirement and send him in as the leader of a black helicopter command unit. NOT!]

theotherside

Then why did you say that, by renting, you are either (a) in eminent danger of being thrown out when your FB landlord goes foreclosure; or (b) you are paying the mortgage of a smartly leveraged owner.

Does your "simply strategy" always assume that all decisions are binary, and irrespective of when & how? Or did you just accidentally try to tap into fear and jealousy?

You're too smart for your brand of bullshit. Seriously, cut the shit. You know damned well that the price paid is paramount in any financial decision, regardless of how simple or complex.

Answer me this, honestly, and I won't start cutting you out of my threads: I could buy back the Peninsula home I sold in 2005 for at least $150K *less* than I sold it for. Meanwhile, my banked equity has chugged right along returning equal or greater inflation, about 90% tax exempt. And also I've managed to increase that pot by over 15% by contributing the money I've saved by renting instead of buying an overprice piece of shit in prime-Marin (instead renting for less than 1/3 the cost of PITI).

Now, tell me how I've done my family wrong. Explain to me how securing my son's future college tuition, augmenting our retirement, and having the financial security to pursue lucrative but risky entrepreneurial ventures was a mistake? Even if I wake up tomorrow and decide I was wrong, and rush out and buy a house at today's prices, how am I behind, exactly?

Maybe we get annoyed at you calling us JBRs. It's offensive, and at this point it's unnecessarily gratuitous. Is it so hard for you to admit that maybe many of us made reasonable decisions, and perhaps now we're happy that the risky part about maybe having been wrong is past? Maybe we just don't find your shit entertaining anymore.

It was funny when it was funny, now it's just pathetic.

>> I am proud to receive your love and I am also sending mine (but not in writing , so as not to offend anyone) to DinOR, Brand, Randy, Astrid, PermaRenter, SFBB, SP and skibum…

Everybody repeat after me:

TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...
TOS is POS ...

The nice thing about blogs like this is we can just ignore the posts that we want to ignore.

That way, we can save our anger for other more important things.

TOS: Your redundancy smacks of cheap perfume and troll. Piss off already. You never meet people's arguments head-on. It's a bunch of vague fear-mongering rife with selective backwards-looking statements. Do I wish I'd bought a house in the Bay Area in 2003? No. I wish I'd leveraged $1M into Apple or Google. Just because Apple and Google were obviously a good buy in hindsight, doesn't make them a good buy right now. The same is true of real estate. Even someone as myopic as you can understand that.

RANDY H says

Answer me this, honestly, and I won’t start cutting you out of my threads:

I could buy back the Peninsula home I sold in 2005 for at least $150K *less* than I sold it for. Meanwhile, my banked equity has chugged right along returning equal or greater inflation, about 90% tax exempt. And also I’ve managed to increase that pot by over 15% by contributing the money I’ve saved by renting instead of buying an overprice piece of shit in prime-Marin (instead renting for less than 1/3 the cost of PITI).

Now, tell me how I’ve done my family wrong

You know damned well that the price paid is paramount in any financial decision, regardless of how simple or complex.

-----------------------------------------------------

1- Randy, you see, you banked your rental savings and the return on the equity you have freed by selling. You also banked the price differential (150K).

On the other hand, you paid the transaction costs on the sale and you will the pay the fees (tax, title…) when you buy for a total of 5%-8%. Moreover, your new mortgage rate will be much higher (the investment banker in the NYT article was quoted 13%, but let even assume that you end up getting a jumbo at 8%-9%). Finally, your rental saving is partially offset by the fact that now your new mortgage term is 2 years shorter (to compare apple to apple). On top of that, you new tax basis is much higher (assuming you initially bought the house long time ago)

We both saw from the simple numerical example I posted a few month ago that NOMINAL houses prices will have to drop by about 15% for you to break even (cost of churning especially given high mortgage rate for jumbo loan if you find one)…And the higher the mortgage rate the higher the bigger the drop needed

2- You are doing your family wrong by refusing to compromise on the location where you want to live and by mistakenly thinking that you are now millionaire and acting as one by not being fully employed (as long as you don’t relocate to a cheaper state, your situation has not changed, the equity is just transferred)

3- Again, it not true that the price paid is paramount in any financial decision, if as sated in my strategy, you have a long horizon…

Here is a plot of the S&P-500… try to pinpoint the 87 crash :- (hint you can barely notice it)

http://finance.yahoo.com/q/bc?s=%5EGSPC&t=my

In real estate, a big drop like the crash of 87 or the nasdaq crash of 2001 is even less likely (sticky downward NOMINAL prices)

To illustrate the point with a simple numerical example:

Assume that we both had the same house. Assume also that housing price grow at the rate of inflation (3%). You sold in 2005 and I did not.
4- Let say that you are right and NOMINAL prices drop 20% reducing your basis cost by 10% (after transaction costs, higher mortgage rate, shorter repayment schedule, rental saving and higher return on banked equity).

== > Your new cost basis is 0.9 while mine is 1.

Your return after 20 years: (1.03^20 - 0.9) / 0.9 = 100%
My return after 20 years: (1.03^20 – 1) / 1 = 81%
Your return after 5 years: (1.03^7 - 0.9) / 0.9 = 29%
My return after 5 years: (1.03^7 – 1) / 1 = 16%
This is close to your most probable best case scenario.

4- Now let say that you are wrong and NOMINAL prices drop only 10% increasing your basis cost by 5% (after transaction costs, higher mortgage rate, shorter repayment schedule, rental saving and higher return on banked equity).

== > Your new cost basis is 1.05 while mine is 1.

Your return after 20 years: (1.03^20 – 1.05) / 1.05 = 72%
My return after 20 years: (1.03^20 – 1) / 1 = 81%
Your return after 5 years: (1.03^5 - 1.05) / 1.05 = 10%
My return after 5 years: (1.03^5 – 1) / 1 = 16%
This is close to your worst case scenario.

Bottom Line:

6- You do better under one scenario, worst under the other…More risk more reward…But you know what, for returns like these, I keep my simple strategy of staying put and don’t need your bubblelizer…

7- Now you can also dream that NOMINAL price will drop 30%-50% while mortgage rates don’t shot up to the 12%-14% (giving you in a much better best case scenario) if it makes you happy and let you sleep better at night….As far as I concern, I trust the demagogues in congress/white house, the 08 politicians, and the helicopter Ben to effectively intervene way before we see that kind of bleeding (like during the SL crisis)…

8- I see a lot of over-reaction to my posts, this must be FEAR.....

Hey Mr. theotherside, How about those who never bought a house and keep saving a lot of money?I rent a 3 BR, 2 BA average home in San Jose which priced at about $700K, for $1800 a month. Am I not better off than you?

theotherside

You presume quite a bit about me.

You are doing your family wrong by refusing to compromise on the location where you want to live and by mistakenly thinking that you are now millionaire and acting as one by not being fully employed (as long as you don’t relocate to a cheaper state, your situation has not changed, the equity is just transferred)

You don't read here often, apparently. I'm fully employed. I have been for a while now. I certainly don't act like a millionaire. I act like all people who grew up without money do -- I'm cheap. I'm not sure why you think I won't compromise on where I want to live. I'd love to hear where you get that impression. We live in Marin because of my wife's career. We moved here for that reason and that reason alone. By the way, her income alone qualifies us to buy twice the home we want, so we're back to that "acting like millionaires" thing. Luckily for me she shares my values and not your [lack of] values.

I happen to think prime Marin is full of assholes, much like the part of the city you continually push. Wasn't it you who was telling me that it's all about location and it's not worth it to buy anywhere but the most prime of the prime? If you want I'll dig up those comments and link them here.

On top of that, you new tax basis is much higher (assuming you initially bought the house long time ago)

Ex ante, post ante dear. Try real hard to accept that neither you nor I have a time machine. Life isn't a bad English movie about a woman on a subway taking different courses in life. Anyway, assuming that we had to move when we did, how exactly is my tax basis higher on a *lower* purchase price? Show me the equation where .012 * X is _less_ than .012 * (X-Y). Oh wait! That only works if Y is negative, meaning prices _rise_, not _fall_. But then that's the core of all your arguments at the end of the day, isn't it?

For how much everybody hates them, I think Jim Cramer and Robert Kiyosaki make some intelligent points. I don’t believe that they were purely lucky (although their TV shows and books are of gratingly poor quality). Both have acumen in investing and real estate, respectively. I could potentially start my own company or massively upgrade my education in the stock market. One of my good friends started a small company and is making nice money with control of his free time.

Unfortunately, it seems likely that Kiyosaki is only worth a few million at best, and the bulk of that is from the sale of his gratingly poor books, seminars and appearances...

Kiyosaki's only intelligent points seem to be made (and only made recently) by reading a few articles by actual economists and commentators, and then regurgitating them, some weeks and months later after he's finally absorbed what they were saying. Even I do that, but I don't write books and articles about it... presumably he was tired of being lambasted for being superficial and lightweight for years...

He's made virtually no money in real estate except by buying his own place in Phoenix and riding the boom like everyone else.

see www.johntreed.com/Kiyosaki.htm (again, sigh -- I see John has finally sexed up his website after much badgering...)

www.johntreed.com/Kiyosaki.html even

UNIONS RULE, and their activities are arguably orthogonal to concerns around 'market efficiencies' ref Keynes. i.e. paid workers are the consuming market... and what are 'market efficiencies' and who do they really benefit on analysis anyhow?

I note that when the overseas blow-in Sol Trujillo recently escalated his pay while his telcom is going nowhere caused a huge slump in its share price, $2 bn in fact, more than offsetting his paltry multimillion payrise...

Telstra boss sets sights on $50m | Herald Sun

"turncoats and chameleons"

Can someone PLEASE... make POS go away!

At this late stage of the game to show up and declare that the reason we're bitter is b/c the funny money dried up is simply ridiculous. When I first came on board here the entire debate centered on "when is the Fed FINALLY going to raise rates!? Anything, just shut this thing down!

Bitter? You've got to be kidding.

@theotherside

You will no longer be welcome on my threads (I cannot speak for other authors though I encourage them to consider my position). This will remain true until such time as you do any one of the following:

* Follow through on past commitments. For example, if you say a model is flawed, and you'll prove it then prove it. Simply crying the model is too complex for you is not sufficient (or sufficiently entertaining).

* Apologize for having purposefully trolled. We don't need to pull up all those "looky here! sold with 6 offers for $280K over asking!!!" postings, do we?

* Apologize for continually insulting people here and admit that you were wrong about much of what you kept insisting for so long. Really, it won't hurt that much. Everyone else here has admitted to being wrong about stuff, myself included. It's liberating, really.

* Tell us who you are so we can verify the (sometimes outrageous) claims you've made. You have zero credibility right now because we can't trust anything you say. Although we could have gone a long way towards finding out who you really were any time, we respect your privacy so long as you respect this forum. At this point you're just abusing our "we don't censor trolls anymore" policy. I'm willing to make an exception in your case if you don't try to cooperate.

new thread

TOS, while I am 180 degrees in opposition to your points of view, I feel that you are treated quite harshly here. I happen to respect people that stick to their beliefs in the face of adversity.

I happen to think in a normal, traditionally valued market your points on the long term benefits of owning a home are correct, but have always disagreed with you on the current timing. In many markets the last year has proved that holding off when the fundamentals don't justify the purchase decision is far more beneficial in the long term. Someone who would have listened you you just 6 months ago would be facing a financial disaster now. Even if someone purchased now the benefit of waiting that 6 months would be significant, and the trend is clearly going to continue for a couple of more years even by the most optimistic predictions.

Lost Cause Says:
August 11th, 2007 at 3:55 pm
"Does anybody really think this injection of liquidity will make people buy the now worthless finacial products formerly so popular? Hahahahaha…"

Actually my take on it is now the government has done just that. Basically they have pumped money into banks to keep cash reserves up because the banks' lending ability is locked into paper which is becoming worthless. This is a patch, but I think I will add to my prediction that we will see the fed forgive these additional lines which will be converted from fed loans to basically grants.

Randy, maybe a thread discussing whether this liquidity infusion is actually a masked bailout might be fun. There are all kinds of tangents that could lead off to.

@Malcolm

theotherside has been very disingenuous. If you search back through the threads you'll find that she incited every fight with insults and other trolldom.

She also pissed off a bunch of people and drove away a few regulars when she began abusing our no-filtering of trolls policy by spamming us with the same listing for month after month.

She definitely backed herself into a corner with her 'houses are an absolutely good investment, and are always a safe bet point of view' but never struck me as particularly nasty or malicious. I think she is just really misguided, and I do agree with you that there is a hidden motive of either self preservation, or industry cheerleading at work there.

My experience is that when people act like that it is from a bruised ego, and I tend to try to guide them to my side rather than rub it in especially when you have the upper hand of clearly being superior to her in your sound points of view.