Chuck Ponzi September 3rd, 2009

Not for long. At least we all have good crappy music to enjoy the crash by.

• Lizard Brain , Unintended Consequences
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Chuck Ponzi January 13th, 2009

Some of you who are long time readers of this blog and other bubble blogs remember the zeitgest of mid-2006.  There was a lot of angst in the air about what was happening with the residential housing market, and quite a few financial idiots posting on and on ad nauseum about how housing was a fantastic investment and how you should leverage yourself up to the hilt just to get in.  One of my favorite examples was Darren Mead of Victory Lending.  Yes, the homeless boy turned bodybuilder, turned finance expert.  Perhaps it would be best to turn to one of his gems of wisdom, quoted on Yahoo’s answer site in response to a user question posted in July 2006.  Yes, the height of the bubble:

Is now a good time to buy a new home? i would be a first time home buyer and i have heard the market is bad.?

Darren gave a long-winded answer:

Congratulations of thinking of buying a new home.

Is there a “bubble”? The simple answer is “no”. Even if interest rates move a bit higher, it won’t be enough to cause a nationwide slide in home prices. The key to a healthy housing market is the job market. If the payment on a new home might be slightly higher due to increased interest rates, it generally won’t stop someone from purchasing the home of their dreams…but if they feel their job is in jeopardy, it might be enough to stop them from making a move. So with the currently low levels of unemployment and the beefy gains in job creations, it looks like the housing market will remain vibrant. Although it will be difficult to sustain the double-digit gains that much of the country has seen, price declines are highly unlikely. Expect a more moderate rate of appreciation, perhaps closer to the historical 6-7% range, which is still very good.

The post goes on for nearly 2 more pages of bubblespeak.  It’s an interesting read on what was going on at the time.   The most choice example:

Don’t be victimized by the bubble hype. Buying a home is a big step, but it is almost always one in the right direction.

Darren was also quoted on housing doom and felt required to issue a long-winded discussion of the merits of buying a house, leveraging it to the hilt and other such nonsense.  I also at the time replied (when I was writing under the pseudonym John Doe) to his crazy thoughts:

I kinda wish we had a behind the music rendition of where is he now?

Anything worth saying to Darren after the bubble popped?

• Bubble , Contrary Indicators , Denial , Investing , Lizard Brain , Mean Reversion , Psychology
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Chuck Ponzi December 16th, 2008

BMIT put up an interesting post the other day that I think needs to be read and reconsidered.  Basically, there are still people flipping properties; it is unlikely that after the biggest bubble in the history of the world, that the crisis is over and properties can once again be resold for several hundred thousand dollars more by simply trimming some bushes, putting down sod and painting the picket fence.  There are still too many people chasing limited opportunities and therefore overpaying for something that makes little economic sense.  In a recession, economic sense should prevail.

Therefore, I ask the most difficult question regarding the property that OCR dragged up in San Diego:

San Diego Shack

In this corner, we have the lightweight contender.  Weighing in at just 570 square feet, and surrounded by squalor, you can bask in the beauty of your red front door that leaves nothing to the imagination and your K-mart clearance special patio set.  Luckily for you, you can now dry your clothes directly outside your front door with the convenient ledger board that is stapled to the outside of your quaint demi-cottage.  Only you and your neighbor will know when you pass gas in this  beautiful little near-beach house.  IT HAS PRACTIALLY EVERYTHING YOU NEED TO SURVIVE.

Similarly, I’ll compare it to this:

Laguna Niguel Shack

This quaint beach cottage has a measly 10,000 square feet, but who can be sure?  It features subterranean parking, wine cellars, an opulent entry, is centrally located in Laguna Niguel near Monarch Beach and boasts a true 180 degree view of the ocean.  Luckily, you won’t need to hang your clothes out to dry, you actually have a laundry room and servants quarters to ensure your underwear is neatly pressed day or night.

However, there’s something this house lacks that the San Diego house has.  It’s a critical component in today’s current economy.

No, it’s not irrational exuberance… but you’re getting close.

Figured it out yet?

OK

Here

it

is.

The shack in San Diego boasts a higher price tag per square foot, exceeding $1000/ square foot while the opulent mansion with views to the ends of the earth weighs in at a measly $975/ sqft.

Now that’s amore.

• Bottom Callers , Contrary Indicators , Denial , Flipping , Lizard Brain
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Chuck Ponzi April 1st, 2008

Hard to believe this crappy site has lasted a whole 3 years. I was one of the first, and thank god, finally, I was exonerated as a non-insane person.

Makes me so proud.

• Credit Bubble , Happy Birthday SoCal , Lizard Brain
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Chuck Ponzi March 4th, 2008

Rarely does the Chuck Ponzi Law of Unintended Consequences have such colorful supporters being quoted in Bloomberg.  Yesterday, Fed Chief Ben Bernanke suggested in a speech to bankers that the best option might be to reduce loan balances rather than pursuing legal foreclosures.

Remember, I stated:

The other is the physics of a forgiveness. Like Newton’s third law of physics, for every action there is an equal and opposite reaction. If Banks believe that they can lose up to 20 or 30% of the value of a home, they will begin to require borrowers to “self insure” by raising collateral requirements to mitigate their new risk. They will also likely offset the risk through higher risk spreads translating to substantially higher rates with stricter requirements for credit worthiness.

Bloomberg quoted the following:

We could not imagine that the policy response would be to pour napalm on the fire,” said Julian Mann, who helps manage $3.4 billion of bonds at First Pacific Advisors LLC. “I’m going to demand higher and higher rates” to buy mortgage debt if the collateral is altered, he said.

Go Julian.

BTW, banks will get their pound of flesh one way or the other.  The only thing left is for the government to start making housing payments for people.  I’d like a little of that action.  My rent is breaking me here in OC.  I’d also like to take a heloc out against my rental, go to Hawaii, buy a Hummer like my a-hole neighbor and have it paid off by the other taxpayers too.  Only, I realized that as a renter, I pay higher taxes anyway… D’Oh.

I guess the only logical conclusion left is to revert to anarchy if that happens.  I’ve been looking around for a good MAK90 like I used to have in college.  It’s hard to believe how much they’ve gone up in recent years.  Good ole Chinese manufacturing practices.

• Debt , Lending Standards , Lizard Brain , Unintended Consequences
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Chuck Ponzi January 8th, 2008

Just how smart is Chuck Ponzi?

I might rather ask, how lucky is Chuck Ponzi?  It doesn’t matter to me what you think is more important, luck or brains; either one can fail you at an in opportune time, and frankly, luck will almost always beat brains.

Late last month, a poster commented on my “Who is Chuck Ponzi?” post with the following:

Wow you must be a genius. That’s like saying – “I feel it coming, its going to rain!” Well, yes if you say it long enough you will eventually be right. In truth you thought home prices were overvalued late 2002 early 2003. In 2004 you say honey housing is overvalued lets sell (this sounds more like an investor). You sell it for twice as much as you paid for it a few years earlier. So lets say you sold it for 450,000 (meaning you paid 225,000). You move out and most likely had to pay rent right? $1000/mo – Approx. the same as what the mortgage on a $225,000 house was at that time. Hmmm….Seems to me that that house is now worth about $500,000 – down from the $600,000 at its peak but still that’s a lot of equity on your $225,000 house! Me thinks you made the wrong move. Granted, this story would be different if you thought it was over valued when it was at 575,000 and sold at that time. Then you’d be my hero – of course I would argue that maybe you just got lucky. – You are entertaining reading though

This dripping with sarcasm comment nevertheless displays just how ignorant of opportunity cost some are.  There are so many variables to determine whether it has been a better play to sell and rent or to buy since mid-2004, but I will outline a few here for you:

1.  I enjoyed a great low rate on my ARM financing of 5.5%.  Monthly payments after taxes were about $1600 with HOA and not including maintenance.  I generally spent another 300 per month on general maintenance that I would not spend on a rental.

2.  I enjoyed some tax benefit of my payments,  I could deduct about $14000 per year on payments, and my combined marginal rates were about 27%, for a tax benefit of about $3,500, although some of my standard deduction would have eaten it up some. (nevertheless, I used the most conservative approach when calculating opportunity cost)

3.  Total after-tax cost of owning was about $19,000 per year for our very small 3 bedroom detached condo (1380 ft2) in Santa Clarita.  Similar houses were renting for about $1900 per month for a total after-tax cost of about $23000 per year.  That additional 4K per year represented my lower-cost of owning.

4.  After selling our house and paying expenses and buying a new car (cash), we cleared less than the person above stated.  It was less than half since realtors fees, escrow fees, and a million other expenses pop up when you sell.  That was to be expected and was calculated as part of our opportunity cost.

5.  We have actually lived in larger places since we sold, renting for $1900 (Hollywood 1900 ft2), $1895 (San Diego 1450 ft2), and $2500 (OC 2000 ft2).  In the last one, we are renting for an after-tax cost of $30,000/yr.  This means we are paying an annual amount $11,000 greater than our original.

6.  My income has increased substantially since we sold (67%), and we needed to be mobile since I have had 2 new jobs in the last 3.25 years.  Renting was pretty much a given, and my increase in income could not have come without that mobility.  For us, it is clear that renting has payed off just because of that.  I suspect that my income otherwise would have increased about 15%.

7.  In addition to the increase in income, our investments have done quite well.  I’ll let our ‘07 returns speak for themselves:  the green line is ours, the blue line is the S&P500.  Each of the last 3 years has been about the same in terms of returns for our portfolio.

As you can see, we are doing just fine.  In fact, we have done so well, I am considering starting a vulture fund if I can find enough outside capital to do it with.

All told, selling (even early in ‘04) has been extremely lucrative for me and my family.  I stress this because we are going to see substantially lower prices in the future.  We’re just getting started in the residential housing sector of SoCal, and we’re already seeing prices equivalent to Mid-’04 (and lower in many places including the one where we sold).

8.  We have really enjoyed living closer to the ocean in San Diego and Orange County.  That it has been cheaper than living in the desert in addition to the great weather has been an added bonus.  Because we have not spent a dime of our housing windfall shows 2 things about me and my family:

a.  We are extremely prudent people.  Unlike those who immediately spent their housing windfall via equity extraction and will need to repay it in the future, we have only “borrowed” from ourselves to purchase large items with cash.  Even that has an opportunity cost through rate arbitrage, though I have been unwilling at this time to take.

b.  We have remained impervious to the temptings of wealth and consumption so prevalent in our society today.  Not that we won’t wisely spend our money in the future, but that now in our lives is a time to build, not to spend wealth.  Too many of our age cohorts have not followed that and appear to spend like they will will be dying tomorrow.  There is no substitute for savings.  It is laying up in storage that which you do not need today in preparation for the day that the need does arise.

The opportunity cost of keeping the home meant that job opportunities, and the investments could not have happened.  Indeed, we have lived a better lifestyle by renting than by owning, not to mention the long-term benefits provided by substantial returns on investments.

Someday, I hope to say that the housing bubble made us rich.  In the meantime, we’ll still be wisely investing our money.  For many who already say that the housing bubble made them rich, it won’t count until the money becomes liquid.

I still stand by my assertion that home prices were overvalued in 2002 and 2003.  The difference is that over time, increased income eats away at that imbalance so that home prices in some areas may not dip below 2002 prices, but many places in SoCal are already experiencing 2003 prices, and will erode further in 2008.

• Lizard Brain
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Chuck Ponzi October 15th, 2007

Expect a new “Gary Watts will Burn in Hell” series installment in a day or so.

In the meantime, I like to take a walk back down memory lane with what people were saying before we had our mortgage implosion kicked off by the past 3 years of excess.  Our entry today seems like it was the talking points of the Gary Watts 2007 “Little bit of Heaven” predictions.  It seems that Gary is not only a scammer, he has pretty much plagarized every idea in his book.  (BTW, he claims to have predicted the 1990’s crash, but we have yet to find any published credible evidence that he ever made that call; if you ever find some, please post it so we can independently verify it!)

This particular writer made a contribution to Realty Times, one of my favorite denial rags.  It’s not just the quantity of denial, after all, but the quality and precision of the denial.  The author was Blanche Evans titled “Housing Bubble T-shirts indicate Market Confusion“, published August 11th, 2005; virtually the exact month of the bubble top for all of Southern California.  This particular writer latches on to the theory of “bad news affecting the housing market” theory.  Here are some choice quotes.

If people can grab some real estate, make more money than they ever dreamed of in the stock market with less risk, is it any wonder housing has been on an 8-year streak? And why would consumers who are having homebuying made so easy for them assume that they are making a mistake?

Luckily for them, there are plenty of pundits out there who are trying to slow what Greenspan and company didn’t accomplish — a housing market that has absorbed one-third of the nation’s investment wealth.

The housing bubble is so pervasive that new products released by T-ShirtHumor.com make fun of the phrase. More ominous, T-ShirtHumor.com believes it is doing a public service with its “funny but serious warning to investors on the future of the real estate market.”

This, of course, is prescient considering the present state of much of California’s real estate bubble.  Had you bought in August 2005, you would likely be at least $100K in the hole, and have made single-handedly the worst investment of your life to date.  This was the same month that my now-facing-foreclosure mortgage banking friend purchased an expensive home that has already shed as much as 200-300K in value.

The problems with bubbles is that they produce malinvestment that can never support itself long-term.  Players concede time-tested investment strategies just to “get in” and in so doing, violate the fundamental values of investing in that asset class.  Keep in mind, real estate investment can be a very lucrative asset class; just not in today’s environment of super low returns.  There might well be returns to be had, just low and speculative.  You’re hoping for something that has never happened before; the repeal of basic economics laws; or at the very best, worse returns than what you can get in a risk-free environment for a period longer than many people will live.

Her argument stems from this then-popular (but baseless) argument:

Constant talk about a housing bubble could single-handedly cause housing prices to moderate or dip, as the financial press attempts to worry the nation into shifting its money from real estate back into stocks.

Consider this for a moment: the financial press was exactly the group that pushed real estate investment to the brink that it went to, although in most cases belatedly.  It reports facts, not conjecture or emotional pleadings (something that cannot be said about Realty Times, which is a real-estate-as-investment pimp) in the context of its importance.  The very fact that an investment that generally provides single-digit returns  and has done so consistently for the past 100+ years garners as much as 30% of the investment community should already explain how we stumbled upon a property bubble.

In the present, we haven’t moved much, even with all of the losses.  We are still just apes banging bones on each other… the laws of economics haven’t changed and a few bloggers notwithstanding, have not risen our collective intelligence to keep from hurting ourselves even when we’re told we will.  Therefore, I dedicate this special video clip to Blanche:

• Lizard Brain
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