Category — Investments

DOCTOR HOUSING BUBBLE looks at Client No. 10 and the Crash of 2008 compared to the Crash of 1929. Read this great post by Doctor Housing Bubble. The Spitzer Splatter, Client No. 9, was much more fun for anyone following the news. I agree with the Doctor’s conclusion, but not his analysis. There is a big bad bear recession headed our way.

OMB testified before the Senate Budget Committee broadcast on C-SPAN last week that 50% of the national debt is owed to foreigners; 20% of mortgage backed securities were owned by foreign entities, and over 20% of the state and municipal bond market has been owned by foreigners. As US interest rates are lower, and the dollar declines foreign individuals and entities are fleeing the dollar in favor of gold, commodities, oil futures, the Euro, and local currencies around the word.

For the first time in US history the economic destiny of the US is in the hands of foreign entities and individual making independent economic decisions. If the dollar melts down dramatically inflation will increase because our dollars buy fewer consumer goods made overseas while at the same time the economy is in recession. Asset bubbles will occur as foreigners flee the dollar. The Federal Reserve may have a difficult time keeping enough money in circulation to run the economy, and at the same time keep interest rates down. The recession is likely to be a big bad bear market for real estate and employment. This will add to the real estate wows we have already.

Being a Mountain Man from the Rockys, I’ve seen market Grizz bars a’fore, an’ I kin’ skin Grizz. But I can tell ya it can get ‘citin’ and it ain’t no fun ‘tall.

Follow McMurdie’s Real Estate Rule No. 31: in a recession/depression sell everything you don’t intend to keep; work hard an’ don’t mind a little grit in your teeth; save your cash; don’t borrow money; be charitable to those people who are wiped out, unemployed, have no home, or no money, and when the bottom hits buy all the real estate you can lay your hands on!

I ‘ll let you know when it is time to buy.

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A 270 VIEW OF SF BAY is something most people would like to have.  Curbed has the details on this 3bd, 3.5 bath condo’s open house this weekend!  Nice.  I’d like one… as soon as I get a salary raise.

WHAT IS THE NUMBER ONE mistake a seller can make?  It is overpricing the house.

The Silicon Valley Real Estate Blog itemizes some of consequences of overpricing.  There is actually an old real estate phrase for the rather common phenomena of owners overpricing homes in a declining price market.  The phrase is “chasing the market down.”

Owners who chase the market down go through this sequence:

First, owners know their home is the best in the neighborhood, they bought it, so naturally it is the best value.  When picking a listing price in a declining market, they insist on a price 5% or more above comparable recent sales.  Most of the other sellers in the area do the same.  In the current declining market there is about one buyer for every 6 homes on the market.  Five homes will NOT sell,  and only one will will sell.

Second, after 60 days on the market, some bright seller and agent, realizes their home is not going to sell unless the price is reduced.  The price is reduced 10% to 5% below market.  The house sells in a few days.  This is the one home being sold in six.

Third, a few sales occur over four months, and prices are now 5% below what they were when our homeowner put his home on the market 5% over fair market.  Our homeowner now reduces the list price 5%, for example from $720,000 to $684,000.  This is a $36,000 price reduction, and the owner hates it.  But our seller is still 5% over fair market value, as are all the owners just listing their homes, and only one home in every six will sell.

Forth, after six months the owner is absolutely convinced the agents incompetence is the reason the house has not sold.  The owner fires the agent, and lists the house with a different agent who agrees the house is worth $684,000, but to be “safe” the house is listed at $670,000 with the new agent.  In the intervening two months the house has declined in fair value another $16,000, or about 2%, consequently the home is still overpriced and will not sell.  And so the sequence goes, and a year later the fair market value may have declined 20%,  $144,000 in our example, and the same house still has not sold and is now listed at $580,000.  The are over 400 homes in Alum Rock actively listed today that have “chased the market down.”  Really.

McMurdie’s Real Estate Rule No. 324:  in a market declining .5% a month or more, sell only if the property must be sold, and then price the real estate 5% or more under the fair market value to avoid chasing the market price down along with saving interest and other carrying costs.  Get ahead of a declining market if you must sell.

In our example, the owner and agent should have first listed the home instead of at $720,000, at $648,000, or 5% below it $684,000 competitive market value.  The house would have sold within a few days.  The sale would have been one home that sold, and not one of the five homes that didn’t sell.

Today there is 12 months of unsold listings active on the market.  Any inventory over 90 days is a declining market.  Twelve months of inventory is a steeply declining market.  Homes listed today at competitive market will probably decline another 10% in value by the end of 2008.

Normally owners “chase the market down”.  Instead of “losing” 5%, or $36,000 in our example, they’ll loose $144,000, or 20%, and all the carrying costs.  It is a little bit like watching Buffalo stampede over the cliff.  Only a small percentage of Buffalo are smart enough to take the easy way down.

Silicon Valley Real Estate Blog has my full sympathy.

DESPITE THE DECLINE  in home values, investing in real estate still beats the stock market.  I agree.  Over a ten year period, irrespective of the specific time period, real estate has outperformed the stock market.

JEFF BROWN as a guest of 3 Oceans recommends selling real estate equity in California, or refinancing, and buying in other areas. Jeff Brown will be holding three real estate investment seminars.

I don’t agree with Jeff. More accurately, I don’t think moving equity out of the Bay Area is right for everyone.

As most real estate investors know, the quality and cost of management in some other region of the US, like Georgia or Montana, for instance, is a critical factor.

First, for investors with 5 million+- to exchange or invest in office, industrial, or apartments, a long term move out of the Bay Area might be a wise move. Remembering to include all costs of moving equity in projecting cap rates. One of the reasons for such a move is not only the low cap returns in the Bay Area for some types of uses, but the future.

California has not invested in infrastructure in 40 years; California schools are a disaster; California has one of the worst business environments of all the states, and it appears that Silicon Valley may soon loose its high tech advantage. Lastly, but by no means least, California is acknowledge to be the second worst governed state in the US. California state bonds have a junk rating. They’re rated as junk for a reason.

But this is not the entire story. Investors with $5 million plus or minus can invest in real estate in another region that can afford quality on-site management, or afford to pay for quality professional management. Investors need to do their own due diligence investigation of potential investment outside the Bay Area, and not rely on an agent in some other state.

Investors who are less sophisticated should follow 3 Oceans mantra, “All real estate is local”. Further, there are many real estate uses that will produce spectacular cap returns. I don’t think Jeff is going to recommend investors sell their California farms, gas stations, or mill-working shops. Investors with less than $5 million should stay local.

Another factor headed California’s way is something new. The dollar is melting down. California agriculture will boom as food exports boom. And the Inland Empire, now stretching into all the mountain states, will export through California. Don’t necessarily sell your truck stop, freight forwarding building, or food processing industrial facility.

Is moving real estate equities out of the Bay Area wise? It depends. Smaller investors should stay local, or move to the region they invest. Deeper pockets can go where they want.