Chuck Ponzi April 28th, 2006

Hello all,

After my posting about Deceit Subterfuge, Treachery, I recieved a few emails from the agent who sent out the mailer… I will post it in its entirety here because I believe it merits a good read.

Sent from : [Name Removed]

Well - I was just told about this site and my being featured.

I do apologize if anything I mailed was construed as intentionally dishonest. I actually entered into this field full time due to dealing with unscrupulous realtors and would never doing anything to mislead anyone. I send information on all sales within a community from all listing and selling brokers. When I pull information for the market updates from the MLS I enter a Close of Escrow date for the particular month. The MLS information on the closed transaction shows Time on Market as 14 days. In this case, I had no part of this transaction and had no reason to doubt the MLS information I pulled. I actually thought I was doing the home owners a service instead of sending recipes, or give-aways. I spend time pulling the original list price versus the current list price that the offer was made at to better inform owners what prices are bringing buyers. Again, thought I was providing a service.

I have no incentive to be dishonest - Actually, in respect to time on market, it would behoove me to show other realtors taking longer to sell, but I show what the MLS shows regardless. Additionally, I live in the other side of this community so I have a personal interest in maintaining my reputation.

The So Cal MLS board (Orange County) has actually worked to prevent realtors from manipulating data. The listings now show time on market and cumulative time on market - It was explained that this would avoid manipulating the time on market by canceling or expiring a listing then re-activating it. Well, I guess I found the glitch. After I was told about this blog I went back an checked the expireds and it seems that if the property is re-listed with a new broker, there is no running cumulative time on market, but instead starts fresh.

I do not believe I represent the type of industry or agent you are speaking of in your blog. They do exist, and I can see how you can point to the mailer I sent as an example. I have sent these out for approx. 9 months to 3 other communities and about 4 months to our community. I challenge you to find one other example of the incorrect time on market - and if I was skewing one in the tract, why would I stop at the one property?

I will be reviewing the error I found in the SO CAL MLS system with the manager in the office I work in and ask that he take it to the appropriate boards.

I will be holding an open house around the corner this weekend so please feel free to stop by and I will be happy to show you how this happened or answer any questions you may have.

Respectfully,

[Name Removed]
[Agency Removed]

I think we all appreciate Mr. M’s honesty with respect to the listings. I don’t believe that I as an author or many of my readers ever felt that He was being intentionally dishonest with the group. My original post included:

Still, it’s not Mr. M’s fault his organizations are corrupt and filled with deceitful people. Relisting a property should require an initial date of listing, listing history, and the Realtor’s association needs to have periodic peer reviews to ensure the integrity of their information and profession. This should not, and cannot continue to work for them!

This is the problem. At present, there is nothing that compels these groups to honesty. Unlike the SEC that requires NASD registered stock brokers to conform to rules if they step outside the bounds of proper investment advice, the NAR and CAR has repeatedly avoided imposing guidelines on “investment advice” offered by agents. Organizations like the NASD and the NAR and CAR are to the best of my knowledge, SRO’s (Self Regulating Organizations) that test their own members to ensure competency and ethics. Any ethics breach in the NASD is treated with temporary or permanent expulsion from the profession. Period.

Mr. M… there was nothing in my post that was intended to be a personal attack, but rather as an expresion of a symptomatic problem that exists within your profession. Please accpet my apology if you felt in any way it was personally levelled.

However, the recent moves by the NAR and CAR to prevent non-realtor view-only access to the same information as realtors in the MLS, present a publich breach in trust. If you can’t trust your realtor or his/her information when buying or selling a home, who can you trust? Noone else outside these organizations has access or oversight to the information being provided to customers. I believe that places an important fiduciary duty on Realtors. If only a realtor can provide you information that you need to make an informed decision, for Sellers and Buyers.

If inventory is not moving at certain price points, or is moving very quickly, this information is vitally important to buyers AND sellers who are making perhaps the most important financial decision of their lives.

As far as good realtors; yes there are some out there. In fact, I sold my home with one of the greatest Realtors I have ever met, Dan Hernandez (Name not removed) of ReMax Realty in Santa Clarita Valley. However, I believe that this price bubble has invited the worst kind of realtor into the mix. However, without external oversight and open information, this kind of trickery will continue to rule the day in this profession. Good realtors should be praying for a house price crash so these other idiots will get out and stop ruining their business for them.

Unlike other activists who feel that the commission is disproportionately weighted to the amount of work, I feel that the market will properly dictate what an appropriate commission for the work being down. In the case of a well-informed and prepared realtor, the commissions are well worth the expense. However, just as high profile cases of anti-trust actions like Microsoft, if witheld information prevents normal competition and consumers having access to the best information with which to make such an important decision, the CAR and NAR will find themselves in a spotlight they will not like to be in.

As a final note to Mr. M., this is perhaps a call to take up the cause for better access to information. If, when viewing a property, you were able to immediately see all of the history of that property at a glance, you might have been able to avoid sending out misleading information. This misleading information (even if not your fault) makes you and your profession look bad. We all appreciate correct information much more than recipes, chotchkies, or other give-aways when making perhaps the most expensive purchase of our lives.

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Chuck Ponzi April 26th, 2006

I have removed the addresses and neighborhood information so that I retain some anonymity. However, the house that sat, and sat, and sat, and sat and finally sold is listed as having sold in February (the only one in our neighborhood while at least 5 sit for sale (out of 50, that seems like a lot for me).

WE ALL IN THE NEIGHBORHOOD KNOW DAMN WELL THAT THE HOUSE DID NOT SELL IN 14 DAYS AS THE FLYER SAYS, IT WAS OVER 180 DAYS!

How should we know that any of the information that the MLS gives out when they can change the days on market at the drop of a hat?

THE FACT IS WE CAN’T. THE LOCAL REALTOR’S ASSOCIATION AS WELL AS THE CAR AND NAR ARE THE WORST KIND OF MONOPOLY; DECEPTIVE TO THE CORE.

Then, a friend of mine who was over at my house saw it sitting on my table picked it up, reads it and remarks, “Wow, houses really are flying off the shelves still! My neighborhood has really slowed down, but it looks like yours is still crazy.” This is how most people will read this mailer.

Still, it’s not Mr. M’s [Name Removed] fault his organizations are corrupt and filled with deceitful people. Relisting a property should require an initial date of listing, listing history, and the Realtor’s association needs to have periodic peer reviews to ensure the integrity of their information and profession. This should not, and cannot continue to work for them!

What leaves me the most surprised was that he sent it to exactly the people who know that the house was for sale for 6 months and would know that it was a lie.

Will Carless recently reported that San Diego Real Estate reached it’s historic inventory figure and is in newly uncharted territory. This is the story of the Circus.

Peter Chinloy, the new chairman of San Diego State University’s real estate program, said there are plenty of people in the same boat as Fulhorst. He said the reason the high inventory levels haven’t translated into substantial price decreases is that sellers are not yet willing to let go of the equity they have built up in their property.
“What you have is a large number of people who are sort of sticking it out there and hoping that some accident will happen — that someone will offer them a high price for it, but they’re not sufficiently distressed that they’ll take the low offers that come along,” Chinloy said

Yet is the operative word. Wait until ARMs start resetting near the end of this year…

Of course, all we need to do is turn over the MLS every 30 days and we’ll for sure have Days On Market figures under 30, then huh?

If there has every been any question in your mind about the DOM figure being truthful, please kill that feeling now.

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Chuck Ponzi April 25th, 2006

With the rising cost of gasoline, you may be mad at me for even suggesting that some kind of costs rise. However, historically, you will find that Mortgage rates are much lower than they typically are considering the cost of money.

If we take the mortgage rates over the past 15+ years and map them agains the Fed Funds Rates, you will see that there is a loose correlation.

While the 30 year mortgage rates are represented by the red line and the Fed Funds Rate is represented by the blue line, I took the liberty of adding some trendlines to show the general movement of the 2 rates.

Based on this simple analysis, there are a few things we can see from the information being represented graphically.

1. The rates have tended to move in similar directions for most of the period, albeit in smaller swings for the mortgage rates.
2. In general, the path of rates has been down. Although multiple inflection points are observed, the general trend is down.
3. The periods of smallest disparity happend twice (1991 and 2001) at the outset of recessions (this is also related to an inverted yield curve)
4. After these periods of stress, rates were quickly dropped.

Based on the historical average, the spread between the 2 rates have averaged 3.33% over time. Given the current FFR of 4.75, we should be seeing mortgage rates about 8%, but we are hovering just above 6%. This is the “conundrum” that Greenspan was worried about and the same one that Bernanke dismisses with his “global savings glut” theory.

Perhaps I can provoke a couple of thoughts from my readers.

1. Why are rates going down over time?
2. Is there a savings glut?
3. Why are risk premiums (spread) so small?
4. Are we about the enter a recession like the other small spreads indicated?

To the last point, if we enter a recession, is there any chance that housing can be saved through inflation? Does this mean 70’s style stagflation, or even worse, Japanese style deflation with ZIRP?

If anyone can provide a coherent way that housing can survive in the next 2 years, please tell us now!

At this point, I think we are out of options from a monetary perspective.

1. We already have inflation. Dropping rates will make it much, much worse.
2. Economic growth is slowing despite the mad dash of construction.
3. The credit market is precariously spread and rates could make a mad dash upward if international investors get spooked and run for the exits. The only way to keep the Dollar from meltdown at this point will be to raise rates even more.
4. Housing speculators will be crushed by negative amortization and high interest rates in this event(which arguably should have already happened by now).
5. The sitting inventory will cause personal financial distress and combined with the mad dash of rates could generate a general credit system event.

Either way, we will be seeing a much more favorable buying environment for housing in 3 or more years due to the general stress and turning of investor sentiment. 

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Chuck Ponzi April 21st, 2006

Back in October of last year, I did a piece titled Gary Watts will Burn in Hell. It is still the most visited and commented on post I have made to date. I still stand by my prediction that he is going to burn in a fiery pit.

I base my belief on the following: Mr. Watts is a pumper for SoCal real estate; convincing some, and teaching others to convince people to buy SoCal real estate they cannot afford with promises of riches to come in the future.

They are ruining their own financial future and families as well. Besides, he’s a shameless trickster who has no right calling himself an economist.

I can call myself a brain surgeon but it doesn’t make it so.

He was even recently quoted from Fortune Magazine:

Will the good times last another year? Gary doesn’t hesitate. “Fifteen percent is pretty much in the bag for Orange County in 2006,” he says. “It’s impossible for prices to go down this year.” … But Watts’s favorite indicator is housing inventory. Orange County has only about a two-month supply (compared with the national average of five months).

Fact: Orange county has recently had over 10 Months’ supply reported by Jonathan Lansner at the OC register. That number has exploded in the last year and a half. Inventory, it seems, has a mind of its own. You can track it at Bubble Tracker.

Some of the commenters to my original post: (notice how recent the comments are; shows that realtors are still bumping on to my site. in MSN, Google, and Yahoo if you search Gary Watts, my post is in the top 5 consistently, and for MSN, always #1)

At Friday, April 14, 2006 12:22:12 PM, Anonymous said…

Gary — while smugly confident — has not only been “accurate” the last 14 years in a row, he has been DEAD ON within one half of one percent in his estimations. I don’t like his smugness, but I’ve made a mint following his advice.

Agreed. Unfortunately, driving a car by looking out the back window is an accident waiting to happen. The past is a terrible predictor of the future; the future is an excellent predictor of the future. If you can see the future you can do better with your career and money than real estate. Current trends and analyzing outside forces are the best way to predict the future of real-estate.

I recently reported that 17% of the job-base in OC is directly real-estate related. From my own blog:

This represents the highest number, and the highest share of total jobs occupied by real estate on record. We have often heard that the 1990’s bust of housing (was) caused by job-losses in the manufacturing sector; we are more diversified out of manufacturing since then and it doesn’t represent the same risk. Pish-posh. We are out of manufacturing and much heavier in real estate.

We are on a real-estate crack binge with only one way to go now that G-span and Bernanke are taking away the pipe.

Besides, it’s his smugness that we hate about him. All he needs now is a Prius and he’ll start polluting our city with smug.

Another Realtor writes:

At Monday, April 17, 2006 12:38:37 PM, Anonymous said…

I am an Orange County Realtor and at any given time my Buyer:Seller prospect ratio is 8-9:1.

Watts may carry on like a little twerp, but he’s right - there is no bubble in Orange County, at least anytime soon.

Wish I could go into more details, but I need to make some phone calls to my Buyer prospects!

Handy dandy for you. Good luck with that! I have had calls from no less than 5 realtors in the past month alone pestering me and my wife, wondering when we’ll buy a house. “Keep me in mind, they keep saying”. That’s not even counting the countless leaflets, full-color inserts, and flyers we get at our home. I am sure that if you have the buyers outnumbering the sellers so much you should have no problem clearing that 13K inventory we have all by yourself. You should have to rake the money in with a backhoe.

That’s not the news the rest of the world is telling us;

The Wealthy Escape the Housing Market (San Diego)
Seven in Ten Consumers Expect a Housing Bubble to Burst in the U.S. Over the Next 12 Months (Gallup Poll)
Real estate insiders go bearish in blogs (CNN Money)
Los Angeles Foreclosures Increase Dramatically

These are just a handful of scores of stories within the last 3 days. You can check any major bubble blog and see that the torrent of bad news about real estate is reaching a level never seen before. And you clowns still have too many customers? If it’s true, all I can ask you to do is to post your marketing strategy here so that other realtors can see how you are being so successful; I am sure that you have no problem sharing your successes with all of us to replicate as well.

As for the rest of would-be buyers; don’t be fooled. There were stock analysts pumping dead-end .com stocks the day before the companies folded. That is their job; leave the real work of prediction to the real economists. At least some of them went to jail for misleading investors; Gary will have to wait until the afterlife.

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Chuck Ponzi April 18th, 2006

No reasonable person can say that they didn’t see this one coming. Although it has been reported on several other sites and blogs, I wanted to pay my respects to our nearly departed friend, Condoflip.com.

Condoflip was a great idea for specuvestors (pump & dump) to trade (boiler-room style?) condos through a slick front-end over the internet without so much as having to do your homework, run various investment scenarios, or even visit the condo.

This was real-estate’s moment to try to shoot themselves in the foot.

You see, the value of adding this “alternate market” is that the existing one is terribly inefficient and filled with graft, subterfuge, and unnecessary intercessions. Condoflip was to end all that (and provide a nice chunk of funneled business to the founder, Zilbert Realty). It was going to be the NASDAQ of condo buying.

I am certain that they have since realized that disintermediation of their own business would mean that they would no longer be getting fat commission checks on fewer transactions, but thinner commission checks on far more transactions. Doesn’t work if there aren’t any transactions coming through.

What’s going on.

The web page sports a brand new anti-bubble saying:

Bubbles Are For Bathtubs

Uh, does that strike anyone as something like a playground taunt? Do any astute property investors really believe that? It reminds me of a Romanian Proverb:

• Prostul nu e prost destul dacă nu e şi fudul!
  • Translation: “A fool must be conceited to be foolish enough!”

Volume is way down from last year. Prices have stabilized and are going to be falling due to out-of-control inventory, and on top of that, transactions are stagnating and failing. In short, the traditional market is collapsing as we speak. Condoflip’s website says:

We’ve decided to postpone the introduction of our new search engine until June 1, 2006. We’re doing this for a few reasons:

1. The Miami real estate market is currently sitting in an unusual “holding pattern”,and we found that while there are a growing number of units for sale, the buyers seem to be waiting to see what will happen

2. As things are with technology, it’s never a good idea to launch a high-transaction tool unless it is absolutely perfect. And, we’re fussy about quality. So, we’ve introduced some new features to our developers, and they need the extra time to make things just right

3. We’re in no rush to get the flipping of units going. We have predicted all along that 2007 will be the year of the Condo Flip, so we’re going to use this first half
   of 2006 to get our rhythm going

Any thoughts?

1. What’s so unusual about the holding pattern? It hasn’t happened since the last housing bust.

2. Developers? Who are they kidding? This type of tool is a few weeks’ worth of work for any single web developer that is worth his salt. They are either blowing smoke, or complete fools with their resources. (you decide which one)

3. You’re in no rush to get to flipping because noone else is. You need buyers to flip, not just sellers.

I rarely try to predict, but I would venture a guess that 1 year from now, condoflip.com will officially be out of business.

Zilbert Realty will be having bigger problems to deal with than how many condos they can help flip; and more likely they will be funneling business to their core brokerage rather than off chasing some internet scheme; volume will kill the deal.

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Chuck Ponzi April 12th, 2006

Readers: go visit www.itulip.com when you get a chance, it’s a good read, and have regularly updated articles and some great economic-based anecdotal articles available.

These are the same guys that predicted the .COM crash right before it happened and came out smelling like… well… roses (no pun intended). While their smarts and fame precede them, that doesn’t mean they’re perfect, just right a lot of the time; even if they are a little full of themselves. I guess you can be a bit hoity-toity when you’re dead-on right about one of the biggest economic manias in our lifetimes. But, sometimes they often create more questions than they answer.

One such came up recently about the Peso Problem. The problem is/was hyperinflation. Believe it or not, at one time, the Mexican Peso was a fairly strong and stable currency (although those days seem long gone). The guys over at iTulip are great about detailing the numerous failings of the government and peso devaluations the government underwent to try to rectify the situation. They also set up a few scenarios where the US government could find itself the tail that wags the dog with a fake write up of the future:

This renewed growth rested on shaky foundations. The United States’ external indebtedness mounted, and the dollar became increasingly overvalued, hurting exports in the late 2000s and forcing a second dollar devaluation in 2010. The action ended the U.S. dollar’s status as a reserve currency. The portion of import categories subject to controls rose from 10 percent of the total in 2008 to 24 percent in 2010. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of U.S. industry. As unemployment rose to more than 20%, government policies to limit immigration fueled further increases in wage rates and inflation.

I expected at any moment for Jacob Marley to appear with the ghost of christmas future and sing a can-can song with Kermit the frog. (I have truly watched too many Muppet movies and it has seriously warped my sense of what is funny, please help by sending donations)

Unfortunately, I disagree with some of the assessments made that fiscal mismanagement causes the monetary crises. While I agree that it is impossible to foot a currency on long-term deficits, Econ 101 will teach you that shorter-term fiscal debts are probably the best way out of a recession because it kick-starts spending (New Deal, anyone?). What didn’t help the US was a simultaneous attack from the monetary crowd. That’s what pushed us over the ledge, one or the other alone would have slowed the recession and monetary policy would have been better about stimulating corporate investments. The tax cuts or additional programs alone would have spurred spending, but paired with loose lending, formed a housing bubble. We should have incentivized invstment in education, not machines like AG would have liked to see; perhaps as a early leading indicator we should follow post-graduate enrollments more than hard-goods investments. (unfortunately, increases in post-graduate enrollments usually are counter-cyclical and increase in recessions)

Really, this doomsday scenario is only one of many possible options we could endure. Honsetly, none of them is appealing, but this one least of all. Inflation would cause a flight from our currency, and when you are suffering through fiscal shortfalls the last thing your central bank needs to do is prompt that kind of action through low rates. No, the FED needs to carefully raise rates while absorbing some of the debt through monetization. This will create a “soft(er) landing” that many economists are hoping (read praying) for since the alternative is almost so alarming and dangerous that it’s beyond comprehension.

They big question now is; how big are Bernanke’s cajones? Does he have the willpower to do what his conscience, education, and instinct tell him are right, or will he fold under the political pressure and pull an “Easy Al”? Ben, I hope you are reading this, but if nothing else, you will prove to the US and the rest of the world that their desire to hold US dollars was not unfounded (even if we think it was). We all know the alternative is straight-out thievery from the American people.

On the downside, keeping the dollar strong is only beneficial to those who hold them; unfortunately that isn’t many Americans. Economists know that inflation (devaluation) is a much easier way out of the mess we have gotten ourselves into.

The folks over at iTulip seem to think that the rest of the world will be very forgiving:

A nation can go through a severe inflation and come out ahead. Inflations are bad, yes. End of the world, no. A major inflation is a severe economic error but by no means a fatal error. Under severe circumstances, inflation can even be an optimal policy choice. The benefit: foreign and internal debts are erased; the nation starts again with a clean slate. The tarnished image does not last long. Markets tend toward nearly pathological forgiveness because market participants focus not on the money that was lost in the past — that’s gone — but on the money to be made in the
future.

I think they are wrong about this, but unfortunately the only way to test they theory is to try it out. While I don’t believe that inflation will permanently impair the dollar, it will most certainly be painful in my lifetime; I would rather endure a recession where my dollars at least held some value than to lose 10-15% per year to an unseen foe.

The question now is Ben, do you feel lucky? Well, do ya?

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Chuck Ponzi April 11th, 2006

There’s 2 things this country has no shortage of: US Dollars and knuckleheads.

There’s another thing that knuckleheads have no shortage of: optimism. The San Diego Union Tribune is reporting that Investors are just now eyeing San Diego for the crash. In fact, a recent “real estate investor” that made it big in Las Vegas, Gene Burns, is preparing for the SD crash next year, ready to buy just about anything.

“I’m planning on buying San Diego property when the market goes through the correction that will start in the summer of 2006,” he said. “I think it will crash in 2007.”

The reason for his predictions?

“A lot of 32-year-olds bought a house for $800,000 and they just can’t afford it,” he said. “In 2007, their adjustable rate mortgages will start to adjust upward and they won’t be able to find that extra $500, $800, $1,000 a month to make the mortgage.” Most borrowers aren’t planning ahead and they will be stunned when their mortgage payment rises, Burns said.

Too bad for him he doesn’t know much about investing psychology because that’s about the time the bursting bubble will just be getting started. He will be part of a sucker rally that will make some think that real estate is just starting back up before it collapses again. We see this in many investing models and is referred to as “head and shoulders”, “sucker rally”, “dead cat bounce”, “catching the falling knife”, and many other lovable phrases. The surprise here is how fast you can see it develop; we are just now getting over the phase where we say there is a”permanently high plateau“. Mike Shedlock recently informed us that we have crested the next location on the psychology of the bubble that Japan went through almost 15 years ago.

Mike tells us that the next phase after our current one is the “Never been a better time to buy” (NBABTTB) crowd. Usually there’s at least a slower blip that makes people think that the worst is over and it’s safe to go back in. This is the Nasdaq 3000 mark several years ago. Some even think the current stock market boom of the last 2 years is a sucker rally (their words, not mine). Unfortunately, the NBABTTB period lasts for so long that those who began saying it in the beginning start to wonder if it’s really true and later get so discouraged that their pessimism spills over into the final phase of terror, “Sell before it’s too late” and “It’s Better to Rent”. Of course, on an individual basis, we go through these phases at different times, and can even go through them several times, but the investor conciousness as a whole takes a long time to change philosophies. This is just the madness of crowds.

For the record, economists and others who watch the local real estate market are making a different forecast, predicting a slowdown in appreciation and a leveling of prices, but no bursting bubble or other calamitous market downturn ahead for San Diego. Burns has already targeted areas where he wants to buy. He’s put up maps of the coast from Del Mar to San Clemente on the walls of his Las Vegas house, and he’s watching the market carefully. “I like that town by Encinitas, below Oceanside, with all the new construction,” he said. “Carlsbad – there will be lots of people who are upside down in their mortgages there.

I think we all like Carlsbad (I took a drive down there this weekend with my family) and it is growing as long as the real estate economy is doing well. He’s a boiled frog who isn’t aware that real estate investing runs in cycles; it’s all up from one down year, right?

It’s too bad they didn’t ask an economist outside of the real estate cheerleading section, someone like Rich Toscano who arguably is the most knowledgeable unbiased real estate economist covering San Diego out there. It doesn’t help that he writes for a competing local internet paper, though.

We will likely be seeing him in bankruptcy court a few short months after the sorry homeowners he came in to replace. Never catch a falling knife.

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Chuck Ponzi April 6th, 2006

Hello to all people visiting from la.curbed.com. I had a nice little shout-out from these guys the other day after the blog turned one year old.

So the bubble debate continues. Sunday was the one year anniversary of the Southern California Real Estate Bubble Crash blog. One of our favorite blogs, the SCREBC blog has chronicled the anticipated downward spiral of the housing market, watching report after report signal the doom and gloom sure to come. We’re still waiting for that official announcement of the “pop”. Maybe in the second year.

While I agree that they are probably one of the hippest non-bubble LA real estate sites out there, I have to admit this is SOOOO LA. Nothing like a little nudge to know you’re loved.

These people come from a land where an $800K price tag on a 1 Bdrm in Santa Monica doesn’t even raise eyebrows; but they would never be caught dead on the west side even if they bought it. No offence intended, but the wackos over here at SCREBC blog are busy storing up our automatic rifles, ammunition, and army-surplus grenades waiting for a financial armageddon, so we don’t get out that much. We’ll definitely let you guys know when the pop happens when we roll into town in our modified dune buggies ala Mad Max.

Just kidding, but I’m not really sure that we fit the typical mold of “doom and gloom” like some of the better known bubble sites (I won’t mention them because you know who they are). But, we are pessimistic about housing prices in the LA area, if nothing else.

BTW, there was another write-up titled Rumblings & Bumblings: Mark Taper Memorial Questions that highlighted a place I used to live.

3) North Hollywood: A reader asks about homes being demolished in NoHo. We seem to remember something about this. Maybe we posted on it earlier… “does anyone know what is happening on La Maida st. between Elmer and Lankershim in North Hollywood? We live just south of Camarillo a few blocks away and noticed that literally blocks of houses are being demolished to make room for? more apartment buildings? How did developers get their hands on SO MANY beautiful houses? We are talking at least 10 to 15 properties, all at least 70000 to 9000 sq. ft., with homes from the 20’s on them, many still in great condition.”

Ok, I have the scoop on the place, since I used to live at 11150 La Maida Street and know pretty much everyone who moved on a first-name basis. First off, it’s on La Maida between Bellflower and Lankershim (Elmer is off of Camarillo on the south, not the north), and the guy who owned the first sell-out is a good friend of mine and he bought the place as an investment property in 2003 for 700K. It had a 1920’s home (across the street from where Carol Burnett used to live (I used to live in LA, so I had to name drop, but it’s also a bit of history that LA will soon lose), and a newer courtyard home in the back (where I lived). He was offered 1.1 for the place and he took it. I don’t blame him, I would have done the same. There were 4 other single-family homes right next to it, all with just about 7-9K sq ft lots on either side of him. Basically, the developer went to the neighbors and told them that he was building condos. They could either sell to him for market price (without an agent) or they could endure the construction and loss of privacy when the condo dwellers could look down directly into their back-yard. We all know which decision they made.
I haven’t been back there in a few months, so I don’t know how many homes they got, but I am pretty confident it was only 5 of them (there were some older apartment/condos, and they might have gotten those properties as well since they were only 2-stories and fairly dumpy) There are also some on the corner of Camarillo and Bellflower that were 1-story and very dumpy looking that really need to be razed, if you ask me. Actually, the only thing worth saving on that block is the Protestant Church where I voted in the last election.
No, it makes perfect sense. It will cost them about 300K each unit to buy the land and build the properties. When they sell them, there is a pretty strong market in the area that they will go for about 500-650K, regardless of the bubble. For goodness sakes, it’s a brisk walk to NBC Universal from there, and it’s actually fairly quiet since it’s away from Lankershim.

However, the building I was hoping they would demolish is the horrible eyesore that is the porn shop in the corner that is emblazoned with the “Paris Hilton” name on the side. in fact, I believe there are at least 2 porn shops within a 5 minute walk from these places. Not exactly family-friendly, but definitely LA.

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Chuck Ponzi April 5th, 2006

USA Today released an unknown fact in a great story that will surprise most related to the housing bubble; Second Homes occupied 40% of all sales of existing homes last year. 28% were for investment purposes and 12% for vacation homes.

I know, we have all heard tales of entire condominium towers being bought by eager Kiyosaki wannabees and clueless 20-something with dollar signs in their eyes. This fact proves that the truth is at least as bad as we imagined; perhaps much worse. And, it’s not clear how the polled statistics adjust for the disincentive to mis-apply “investment homes” under “vacation homes”. You see, borrowers often pay higher interest rates if the home is an investment compared to a primary or secondary residence; making it an incentive for people to classify it as a “vacation home”.

While we believe that perhaps 5% might go to vacation homes, and perhaps another 10% or so might go to investment homes in a typical year, one might see a developing problem here in the frenzy of the past few years. Unfortunately, I have not been able to lay my hands on a consensus of where second-home sales have historically been, so it’s hard to benchmark. However, it’s safe to say that if 2004’s 30% was outrageous, 2005’s 40% is absolutely ludicrous.

I always love the pseudo investment advice that is given out by real-estate salespeople and respun in articles like these.

“Real estate, over the past five years, has outperformed virtually every other investment vehicle,” said Ron Peltier, president and chief executive of HomeServices of America, the country’s second-largest residential brokerage firm. “A lot of people have just speculated in real estate.”

Oh, ok, so are you saying that this is growth that is supported by fundamentals, or just speculation? Or, is it safe to say that real estate will always outperform stocks in stock market crashes? Oh, and what other investment vehicles would you be referring to?

I don’t believe that Mr. Peltier is qualified to offer investment advice; I know if my stock broker offered that kind of advice, he probably would have gotten a nice little call from the NASD. Too bad the NAR isn’t into policing it’s people or it’s “investment asset class”.

Still, he’s factually correct; I won’t knock him on that. However, assets in aggregate are rarely a good investment; and if they are, you are most likely in a bubble. For example, you could say that stocks are a bad investment, but not if you were talking about Google or Apple. (yes, I know at least one of those that is in a speculative bubble, but who’s counting?)

Will housing continue to generate 20% returns per year. That’s what David Lereah would like you to think.

“That’s what spurred all this on in the beginning,” says David Lereah, the NAR’s chief economist. “It’s like all the stars are aligned. The tax situations helped, but at the same time, baby boomers were entering their peak earning years. That’s why we just boomed in second homes.”

So, it should continue to get even better as more boomers retire, right? You should doubt that. See, there is a demographic disconnect here that needs to be resolved. If during that time, we vastly increased the number of investment homes and second-homes and at the same time homeownership rates soared to nearly 70%, what’s wrong with this picture?

Ok, if you buy a lot of houses to rent them out, the homeownership ratio doesn’t change because there are no new owners. If at the same time, more people than on average are buying homes, you can get a lift in the homeownership rates. When both are happening at the same time, available housing stock (both for owning and for renting) is increasing faster than your increase in population. While the vast majority of increase in population over the past years has been illegal migrant workers due to a housing boom, these jobs and people are likely to go away.

Therefore, they only way to “use up” the surplus homes is to have more people buy them. With interest rates on the rise, the only way to accomplish this is to drop prices faster than the relative interest-rate increases. For example, if interest rates increase 15% (about .75% this year), prices will need to decrease by that amount in that year to preserve our already low affordability. If interest rates increase by 25%, prices will need to drop by that much just to preserve our affordability as it now stands.

Add into that another problem that is causing the bubble to leak air. Public stock homebuilders need to provide shareholders with increasing returns. If they were able to make a profit of 200K on each home with a cost basis of 100K (300K sales price) when they were selling 100 per year, how will they maintain a profit margin of 20M per year when prices drop 15%? The answer is based on simple algebra, 130 homes, for an increase in volume of 30% over previous year’s. This is where the massive overbuilding will trigger a financial debacle. See, there is no disincentive for builders to overbuild as long as people will still buy. And, the fewer that buy, the more incentive there is to bring the prices down until the prices barely reflect over the cost to produce.

Unless someone repeals the laws of supply and demand, the only floor to housing prices is the cost of production when supply equals demand. When supply is greater than demand, we can even overshoot that. Does our supply exceed our demand? Well, if you take normal second-purchase out, yes, by about 25% of all home sales last year.

At this point in the speculative mania, the psychology is all that is holding prices up, and we’re starting to see some cracks.

USA today ends with an optimistic investor:

Joe Klein and his wife bought their first vacation home last year on Lake Wabedo in Minnesota, three hours from their primary residence. He says he might like to retire there but might have to persuade his wife. “It’s something that we could hand down to the kids,” says Klein, 42, a program manager for a medical company. “But secondly, I see it as an investment. If we had to, we could sell it to help pay for their college.”

I suppose if someone is willing to pay more for his vacation home than the mortgage against it, Joe just might be right. But, we are likely heading into at least a mild recession triggered by housing, how many people are interested in a vacation home when they can’t make payments on their principal one? Is a vacation home that you use several weeks per year worth the 30K per year you spend if it isn’t appreciating?(or worse, depreciating) I guess Joe is just speculating, not a “vacation home buyer”. I know that you can stay at the 4-seasons Majesty Suite for about $950/night. Still cheaper to spend a month there each year, and he might come to the conclusion that this is better spent vacation money.

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Chuck Ponzi April 1st, 2006

Today represents a milestone for this blog; we reached 1 year old today.

While the last year has been a time of change for me and the blog, it has generally been positive.

When I began the blog, it was a way for me to vent some frustrations related to the Southern California housing market. It also gave me a place to gather my thoughts and present some contrary viewpoints. This is been therapeutic for me and I hope educational for my readers. While you may agree with my views, or just come to troll and see what someone is saying about housing prices, you can be sure that I am listening to what you have to say. Even if you think I am wrong.

When I began, I was influenced most by Rich Toscano over at www.piggington.com and by Patrick Killelea at www.patrick.net. Nearly since the inception, I have been a visitor at Ben Jones’ site, www.thehousingbubbleblog.com and his earlier sites as well. I am a regular visitor at a number of different sites; each of the regional blogs listed are important for me to visit at least on a daily basis. Marinite at www.marinrealestatebubble.blogspot.com, Cole Kenny at www.bighousingbubble.blogspot.com, and Mike Shedlock at www.globaleconomicanalysis.blogspot.com and calculated risk at www.calculatedrisk.blogspot.com are just a handful of others who have entertained, informed, and excited me and you alike.

Since that time, I have tried to chart my own financial course, relating macroeconomic trends to Southern California’s housing bubble and it’s culture. The blog began with nary a believer in sight, but with bubble support coming from many sides in closing its first year.

The therapy has allowed me to rethink financial decisions and even consider my motivations on a personal level; I appreciate the opportunity to make some rethink their own motivations. Whether you believe there is a bubble is not mandatory; I try to only present the thoughts of a contrary viewpoint to you.

At the same time, a lot has happened in my personal life in the past year; I have changed careers, finished my MBA, and my wife and I are currently awaiting our second baby. My daughter has turned 2 recently, and my personal demands have prevented me from posting every day like I would have liked to. We have also moved twice and changed jobs twice in that time.

When I sold my home in July 2004, it was an emotional decision; deciding to not purchase another home has been a difficult financial and emotional decision. Long-term options have changed for my family because of that decision and while I believe it is for the better; only the long-term will prove whether I was right or wrong. I hope that I might inspire even one other person to reconsider their view of material posessions; I am certainly happier not worrying about mine as much. I am lucky that I have a wife and family that supports my beliefs even if they do not fully understand the reasoning and I hope that everyone can be as blessed as I am in life.

The coming year will be at least as transitional as this year has been. I hope that it is for the better for all you, my readers. Please help me feel emotionally rewarded by posting your thoughts; even if you disagree. I always try to be respectful of your ideas when you present solid reasoning and I don’t mind if you correct my thinking.

For my faithful readers, I ask you to voice your support so that I know you are there; I see you on my hits list, but you don’t take time to post; take a second to thank me or tell me I’m full of it.

Thanks, and may the next year be as good as this one!

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