You know you're in a bubble when....

[tryan]

Nords, good post.

Remember "Flip This House" with Richard Davis & Trademark Properties?

Was always tempted to follow-up (via on-line registry of deeds) to see if his finished work sold anywhere near the "projected sale price". Always noted: realtor fees, closing costs and taxes are mysteriously missing from the "math" used to show the "projected profit". At a minimum, short term capitol gains at the federal level are a killer ... then there's state taxes (which might also deter a short term sale).

 

[Nords]

Was always tempted to follow-up (via on-line registry of deeds) to see if his finished work sold anywhere near the "projected sale price". Always noted: realtor fees, closing costs and taxes are mysteriously missing from the "math" used to show the "projected profit". At a minimum, short term capitol gains at the federal level are a killer ... then there's state taxes (which might also deter a short term sale).

I think he'd actually come off pretty good from a "Whatever Happened..." episode. (Unlike the recent frantic manipulation of the "Biggest Loser" alumni or Dr. Phil's reviews.) For starters, Trademark is a corporation and not a self-employed business so he probably has a much more favorable tax structure. Next, he rolls all those costs into the flip total (which I agree is frustrating) and I'm sure those guys are bartering each other to death.

He bought one foreclosure where the former owner wouldn't move out. They bribed him into a hotel, hauled out dumpsters of trash, garbage, & pet waste, and rehabbed the home but he let himself be conned into keeping the former owner as a tenant. A year later, of course, the scamster had paid zero rent and Davis spent an entire episode kicking himself in the assets while they evicted the guy, rehabbed the home all over again, and sold it.

Davis has said many times that he flips as fast as he can and leaves money on the table. He's minimizing his carrying costs and he's giving the buyer a large equity incentive by selling at a below-market price. He's also counting on being an early investor-- if he flips the first house in a bad neighborhood then he'll make more money from additional flips during the subsequent gentrification. The show probably helps their profits too.

Don't get me wrong, he reminds me a lot of Ted Turner from his "Mouth of the South" days. He's also way too deceptive on how he handles permits & fees. But he works very hard at his image and at maintaining good community relations, something that "professional" flippers (are there any besides him?) would do well to emulate. (At least Trademark can deduct it from their marketing budget.) Note how "Flip This House" was busted on their deceptive documentary tactics during the very next season after Trademark left the show.

The only routinely successful flipper I've read about, aside from all the hype and testosterone, was a woman who bought houses and lived in them while she was rehabbing them days, nights, & weekends. (She also worked a succession of real-estate and admin temp jobs.) She was able to keep rolling over her cap gains in the 1970s-1990s, and since 1997 she's been exploiting the tax-free cap gains deduction by staying in the homes for two years before selling. She had an entire chapter in her book about how to pick up and move every 18-36 months, and her son must've attended a dozen schools before graduation. OTOH he probably learned more at Mom's Trade Apprentice Hall than he ever picked up at school...

 

[haha]

The only routinely successful flipper I've read about, aside from all the hype and testosterone, was a woman who bought houses and lived in them while she was rehabbing them days, nights, & weekends. (She also worked a succession of real-estate and admin temp jobs.) She was able to keep rolling over her cap gains in the 1970s-1990s, and since 1997 she's been exploiting the tax-free cap gains deduction by staying in the homes for two years before selling. She had an entire chapter in her book about how to pick up and move every 18-36 months, and her son must've attended a dozen schools before graduation. OTOH he probably learned more at Mom's Trade Apprentice Hall than he ever picked up at school...

Nords, could you give the name of the book? Or her name?

Thanks, ha

 

[Nords]

Nords, could you give the name of the book? Or her name?

I'm afraid that an hour later my best answer is "I wish I could". I read the book in the late '90s or early 2000s, before I started logging them, and I don't remember her as much as her method. Google & Amazon are absolutely no help for my current vague keywords.

Maybe a reader in the Bay Area can help out. IIRC she started in the late 1970s by moving into an unfinished home and finishing it in exchange for her rent or her down payment. She kept that up for the next 25 years by buying Bay Area homes in need of rehabbing and living in them while she did the work. She talked about figuring out how to set up a family space among all the renovations, sleeping on the diningroom table, how to get used to washing dishes in the bathtub while the kitchen was torn apart, and how to move every 18-36 months. I think she started doing this with her husband but later ended up divorced and raising her son in the various rehabbed homes they moved through.

What struck me about her method was:
- Very low carrying costs since the house was also her home.
- Able to get low down payments & very attractive rates since the mortgage was for a primary residence.
- Always onsite to keep an eye on the contractors and to work around the edges. She'd borrow their tools on Friday and have them ready for them on Monday.
- Never had to pay taxes because she always rolled profits up into a bigger home (especially Victorians).
- Fancied herself a designer who would create "stunning" rooms as part of the rehab. I remember we thought the rooms were indeed very striking but very hard to live in.
- Essentially moved every 18-36 months to various parts of the Bay Area.

The reason her book resonated so much with us was that we were also moving every 18-36 months for the Navy... her moving tips were every bit as good as her real-estate experience.

 

[eridanus]

Justin That data is for the SF metropolitan area that probably includes 9 counties in the Bay Area. Some of these sales would be more that 2 hours from SF. It would also include alot of new home sales. I'm on record that subsequent sales in new developments are often lower than the first sales. I reccomend not buying in new developments.

Someone may have already posted this, but the Shiller data does NOT include new home sales. It's only for re-sales of existing housing.

 

[eridanus]

I state facts and my opinion and am willing to provide support. You resort to attacks and name calling.

Not quite 10% yet...

San Diego peak in November 2005 is 250.34
June 2007 is 231.37

Shiller data lags by 2 months, so the August report is for June. It may well be within a hair of a 10% decline by now.


Of course, 21 years of outsized returns begs the question...shouldn't honobob be hobnobbing with Bill and Warren and not with us plebes?

 

[barbarus]

Here's a bear with a sense of humor.

“The R-word is usually avoided by Wall Street’s economists. It tends to be a conversation-stopper when investment bank clients are told to prepare for the worst.” “‘It is like looking a client in the eye and telling them that their child is ugly,

’ says David Rosenberg, chief economist at Merrill Lynch. ‘It is not what people want to hear.’”
“But the parameters of polite conversation have shifted following the shock decline in the employment market revealed last week. Recession is the word on everyone’s lips.”
“‘You are talking about a $23,000bn asset class – there is nothing on the planet as big as that,’ says Mr Rosenberg, who is predicting a fall in house prices nationally of up to 15 to 20 per cent.”

 

[clifp]

I was going to argue with Honobob but quick google showed this recent story

Oahu’s median home price jumps 2.4%


STORY SUMMARY »
Oahu's residential real estate market defied the mainland downturn again in August, posting increases in median prices for both single-family homes and condominiums over the same period last year.
The number of sales also increased for homes, but not for condos, according to data released yesterday by the Honolulu Board of Realtors. "Single-family home sales during August were not only the highest in 2007, but also the best since March 2006 when there were 392 sales," said Berton Hamamoto, president of the board

 

[haha]

Here's a bear with a sense of humor.

“The R-word is usually avoided by Wall Street’s economists. It tends to be a conversation-stopper when investment bank clients are told to prepare for the worst.” “‘It is like looking a client in the eye and telling them that their child is ugly,

’ says David Rosenberg, chief economist at Merrill Lynch. ‘It is not what people want to hear.’”
“But the parameters of polite conversation have shifted following the shock decline in the employment market revealed last week. Recession is the word on everyone’s lips.”
“‘You are talking about a $23,000bn asset class – there is nothing on the planet as big as that,’ says Mr Rosenberg, who is predicting a fall in house prices nationally of up to 15 to 20 per cent.”

Do you have a link to this story? Looks interesting.

BTW, I don't see why Hawaii could not have a housing market still rising while others are stable or falling. Houses in very different places aren't very good substitutes for one another. Can a house in Akron Ohio compete for sales with one in Honolulu?

Ha

 

[twaddle]

Oahu’s median home price jumps 2.4%

Phew. Looks like honobob's in the clear! As long as his [-]margin[/-] mortgage is costing him less than 2.4%/year, anyway.

Appreciation < CPI = real loss. FWIW, that's all I ever predicted. It could reasonably go sideways for years in nominal terms and still get back to the historical appreciation trend.

 

[barbarus]

Here you go Ha.

The R-word surfaces on Wall Street - Financial Times - MSNBC.com

 

[honobob]

Just the facts, mam

Kenneth Harney: Two indexes give different views of home pricesBy Kenneth Harney
San Jose Mercury NewsArticle Launched:09/06/2007 07:29:10 PM PDT
WASHINGTON - How worried should homeowners or sellers be at the moment? Looking at two nationally quoted measures of home values, you might be perplexed.
At the end of August, Standard & Poor's Case-Shiller national home price index reported that prices in the second quarter fell 3.2 percent compared with the second quarter of 2006. Declines in property values in some metropolitan areas were much more severe - down 11 percent in Detroit, 7.7 percent in Tampa, 7.3 percent in San Diego, 7 percent in Washington, D.C., 4 percent in San Francisco and 3.7 percent in Boston.
The sharp drop in the Case-Shiller index grabbed headlines, rattled Wall Street and fed fears that housing values might be unraveling in many of the biggest markets around the country.
Two days after the Case-Shiller announcement, however, the Office of Federal Housing Enterprise Oversight (OFHEO), the agency that conducts home pricing surveys in more than 300 metropolitan areas, came out with its own quarterly report and the numbers were startlingly different from S&P's. Rather than a 3.2 percent year-to-year decline, OFHEO's index found a 3.2 percent average gain in prices on a national basis. Though the agency reported price depreciation in 61 markets, prices were up in 226 others.
On a market-by-market comparison, OFHEO's numbers rarely agreed with the Case-Shiller findings: Prices in metropolitan Washington, D.C., were up 1.2 percent for the year, not down 7 percent. Chicago prices were up by an average 3.7 percent, not down 0.7 percent. Los Angeles home prices gained 2.1 percent, rather than dropping 4 percent. Miami homes didn't lose 4.8 percent, but gained an average 7.5 percent.
In some parts of the country, the government's index moved in the same direction as Case-Shiller's, though by different magnitudes. Rather than San Diego's 7.3 percent decline as reported by the Case-Shiller index, OFHEO found an average 3.3 percent drop. In San Francisco, rather than a 4 percent decline, OFHEO reported less than a 1 percent drop.
So which has it right? How could major statistical surveys, covering hundreds of thousands of home sale transactions, come to such utterly divergent conclusions?
Take a closer look: It's all about the underlying data and the purposes of the two indexes. The government's index taps into a vast housing database - the combined new loan and refinance transaction records of mortgage giants Fannie Mae and Freddie Mac - but omits home loan transactions on upper-bracket houses and jumbo loans above $417,000. It also omits government-insured loans (FHA and VA), has only limited coverage of houses bought by people with subprime credit, and home mortgages using various "exotic" terms that spurred sales in dozens of areas during the boom. OFHEO's data also includes refinancings, which often have more generous appraisals than do actual home sales, but exclude condominiums.
The Case-Shiller index includes no refinancings, and covers the full gamut of loan types, including the exotics, limited-documentation and subprime loans that Wall Street bought and packaged into securities. In that sense, the S&P database ranges more broadly across the home loan universe.
However, the Case-Shiller index has its own limitations. It contains no data from 13 states and has incomplete information from 29 states because of legal restrictions or lack of electronic records from local courthouses.
OFHEO chief economist Patrick Lawler considers that a critical difference. By his calculation, the 13 states missing from the Case-Shiller numbers "averaged 6.3 percent gains over the last four quarters - these are now some of the strongest housing markets," he said, but they are nowhere reflected in the 3.2 percent national depreciation rate reported by S&P. Terry Loebs, managing director of MacroMarkets, says the missing states do not greatly affect the Case-Shiller index. For example, Wyoming, which OFHEO ranks as the second-fastest appreciating state with an average annual price gain around 13 percent, represents "just one-half of 1 percent" of the national housing value pool, says Loebs. Not having data from Wyoming "is not a significant drawback." Loebs also said his company's index "represents over 70 percent of the value of houses" nationwide, far beyond OFHEO's scope. Bottom line: Don't overreact when you see big drops - or jumps - in these indexes. They are measuring different things, and there is no national index that gets down to the nitty-gritty: What's happening to property values in your ZIP code, micro-market or neighborhood.

 

[honobob]

More evidence of the bubble POP? 238-40 24th Avenue SF, CA 3504sq ft 1922 2 sty / 2 family wood frame on slab with tar and gravel roof purchased for $1,150,000 11/5/2003. Buyer remodeled kitchen and added full bath in existing space and converted to two condo's. Sold one unit recently, 5/16/2007 for $1,100,000!! So for $50K and the price of a Home Depot kitchen and bath they're living in a $1,000,000 plus condo with property taxes of $5,500 a year! Today is a good day to buy real estate.

 

[honobob]

Phew. Looks like honobob's in the clear! As long as his [-]margin[/-] mortgage is costing him less than 2.4%/year, anyway.

Appreciation < CPI = real loss. FWIW, that's all I ever predicted. It could reasonably go sideways for years in nominal terms and still get back to the historical appreciation trend.

Twaddle

Conservative $1.2M market value in Waikiki and Diamond Head. 2.4% appreciation is $28,800 for this POP year. 20% down as a good midwestern boy would equal $240,000. That gives me a 12% return. Of course if you've read my earlier posts you know I've only got $98,200 in the properties for a return of 29%. Also, I look at my average annual appreciation that had been 9% in Honolulu so I figure I've put $108,000 in the Bank of Equity this year. Actually I think the 2.4% reported is low due to the idiots in Miliani who report they are barely keeping up with inflation. Bunch of skewers!

Blah blah taxes ..blah maintenance..p&i Pretty much a wash. I am cash flow positive and have been for more years than I was negative.

Leveraged appreciation in historicaly high appreciation areas is WAY > CPI =
inflation beating gains in real dollars. Remember YMMV and there is more than one way to pluck a duck.

 

[CuppaJoe]

366 Lovell Ave (Mill Valley): closed on 8/09/07 for $4,500,000 (2.4% over asking)
∙ 220 Danvers: closed escrow on 8/08/07 for $2,050,000 (3.5% over asking)
∙ 7 Cameo Way: closed escrow on 8/22/07 for $1,550,000 (3.7% over asking)
∙ 801 Teresita Boulevard: closed escrow on 8/29/07 for $950,000 (6.1% over asking)
∙ 741 Noe: closed escrow on 8/20/07 for $1,057,000 (6.9% over asking)
∙ 610 Rhode Island: closed escrow on 8/30/07 for $2,551,000 (10.9% over asking)

SO grew up a few blocks from the Rhode Island address and refuses to set foot in the area again, not a risk taker! Does that place have an armed guard?

 

[twaddle]

I am cash flow positive and have been for more years than I was negative.

Leveraged appreciation in historicaly high appreciation areas is WAY > CPI =
inflation beating gains in real dollars. Remember YMMV and there is more than one way to pluck a duck.

I think you're in much better shape than many real estate speculators. And you're right, speculative returns always have a huge YMMV. Ask any hedgie: leverage works great ... until it doesn't.

Shiller doesn't like real estate as an investment. He views homes as "consumables" and thinks investing in real estate makes about as much sense as investing in tables and chairs.

Frankly, I think his position is almost as nutty as yours. Rental real estate can be a good investment. In the long run, returns are comparable to stocks with less volatility.

Leverage can help or hurt your returns, just as in stock investing. But if you can *start* with positive cash flow even after mortgage payments, that's about as safe as you can get. I'll probably buy once properties start flowing cash from day-1 again. Until then, I can get safer and higher returns elsewhere.

 

[honobob]

Shiller doesn't like real estate as an investment. Until then, I can get safer and higher returns elsewhere.

Teach me!

 

[twaddle]

Teach me!

Didn't you follow me when I announced I bought DRYS at $61 a couple weeks ago? 23% in 2 weeks. That's 598% annualized returns, and I didn't even have to buy a new kitchen at home depot before the flip.

Look ma, no leverage!

 

[honobob]

Didn't you follow me when I announced I bought DRYS at $61 a couple weeks ago? 23% in 2 weeks. That's 598% annualized returns, and I didn't even have to buy a new kitchen at home depot before the flip.

Look ma, no leverage!

Like now I'm supposed to be paying attention to every post! Sorry. So, what do I buy tomorrow to get 23% in two weeks? What's the tax situation on that also. No sense making a killing if Uncle Sam gets it all. It's low risk, right? Hell, if I can keep doing that I'll pay full price now for beach front property. Who needs 50% off with 598% returns. Dude, I'll take care of you. Me honocasa, you honocasa.

 

[twaddle]

Like now I'm supposed to be paying attention to every post! Sorry. So, what do I buy tomorrow to get 23% in two weeks? What's the tax situation on that also. No sense making a killing if Uncle Sam gets it all. It's low risk, right? Hell, if I can keep doing that I'll pay full price now for beach front property. Who needs 50% off with 598% returns. Dude, I'll take care of you. Me honocasa, you honocasa.

Well, you have taught us that past returns predict future returns, right? So, you should buy DRYS and hold on tight. YMMV, of course.

 

[honobob]

YMMV

waitaminnit! I was offering honobob backed investments! So is DRYS gonna give me 23% in two weeks or are you welching? DRYS, is that like Huggies or just full of the same?

 

[honobob]

More news of the SF real estate POP!! NOT!!

Newer 192 unit condo. Sales in 2004, right around this bubble prediction and resales in 2006 & 2007.

200 Brannan SF CA
Bought
8/30/04 $440,000 Sold 2/9/07 $640,000 +$200,000 in 30 months
9/10/04 $795,000 Sold 4/19/07 $1,150,000 +$335,000 in 33 months
9/22/04 $932,000 Sold 3/7/06 $1,265,000 +$333,000 in 18 months
10/22/04 $708,000 Sold 2/23/07 $890,000 +$182,000 in 29 months
11/9/04 $678,000 Sold 3/31/06 $820,000 +$142,000 in 17 months

Walking away with over $300K in tax free money would go a long way towards early retirement.

 

[twaddle]

hobonob, you're hung up on my 2004 prediction of being *near* the top.

If it makes you feel any better, I didn't actually claim the top was in until 2006:

http://www.early-retirement.org/forums/f28/sizing-housing-bubble-21688.html

 

[honobob]

hobonob, you're hung up on my 2004 prediction of being *near* the top.

If it makes you feel any better, I didn't actually claim the top was in until 2006:

http://www.early-retirement.org/forums/f28/sizing-housing-bubble-21688.html

Good try Twaddle. You posted repeatedly in 2004 claiming the sky was falling. AND I'm not hung up on 2004, I'm hung up on a TOP at all (in certain areas). See two posts above. Shiller doesn't like real estate as an investment, you don't like real estate as an investment. I do, the people above do, maybe there's one on two other people that do. Sorry my evidence contradicts your analysis of reversions to the mean, bubbles, HGTV shows etc. Just suggesting someone might be able further their step towards FI through real estate or NOT!

 

[honobob]

I was going to argue with Honobob but quick google showed this recent story

Clifp, Even better report, 7.7% increase in the number of sales and 3% increase in median price.
Oahu home prices continue upward march

Pacific Business News (Honolulu) - 10:27 AM HAST Thursday, September 13, 2007


Oahu home sales continued to decline as prices rose during the three-month period ending August 31, when compared to last year, according to a new report.
The median price of a single-family home on Oahu during the June-August period was $660,000, a 3 percent increase over the same period in 2006, and a 1.5 percent increase over March-May this year, when the median price was $650,000, according to the report from Prudential Locations.
"The steady rise of median prices for both single-family homes and condominiums reflects a consistent market trend for Hawaii in 2007," said Scott Higashi, executive vice president of sales. "This price trend is an indication of Hawaii's healthy real estate market, which continues to experience growth at a sustainable rate."
There were 365 single-family homes sold during August, a 7.7 increase compared to August 2006 and the highest number of homes sold in one month on Oahu so far this year.
However, there were 50 fewer single-family home sales on Oahu during the June-August period than there were during the same period last year, a decline of nearly 5 percent to 1,032 sales, down from 1,082 sales in 2006.
The trend is similar for condominium sales, which declined nearly 12 percent during the latest three month period, to 1,489 sales, down from 1,685 sales during the June-August period in 2006.
The median price of a condo, however, rose 6 percent during the three-month June-August period to $335,000, up from $315,000 during the same period last year, and up 3 percent from the March-May period this year.