Wednesday, April 30, 2008

For The Record: KLK vs Eleua III - IT'S ON!!!

Yesterday, there was a great exchange on the Seattle PI Real Estate Professional blog that was debating if 2008 was a good time to buy. It was your standard REIC tripe about how today represented a screaming buy which was countered by a handful of economic realists (Bubble Bloggers - BBs). Let it suffice to say that the BBs kicked the crap out of the REIC and the REIC scuttled the thread.

After all, mushrooms and buyers of real estate have two things in common: both are best if kept in the dark and fed a steady diet of Bravo-Sierra.

Kary L Krismer, a retired attorney and real estate agent has thrown down the gauntlet again. He is waving his red cape in front of the BBs and daring us to respond.

This time the comments will be saved on this forum to prevent the REIC from taking their ball and going home.

Pop some corn, crack a beer and enjoy the show. REIC comments are in italics and my responses are in normal font.


But bubble bloggers find their places to share ideas, and convince one another that their thoughts are mainstream, and even worse--correct.

Bubble Bloggers (BBs) don't need to convince themselves they are correct. Many forums have sprung up on the net that allow BBs to share ideas and refine their views. Widespread censorship of dissenting views is not practiced as BBs tend to enjoy a healthy exchange of ideas. BBs find it frustrating when myopic simps offer an open forum to debate the existence and aftermath of the RE bubble and then shut off debate as soon as they lose.

I'm not aware of one BB that believes his thesis is anything close to 'mainstream.' Every BB I know (including yours truly) believes his thesis is a decidedly minority opinion and uses his efforts to attempt to educate those in the mainstream.

As for being correct, the BBs have been the only ones correct in this debate. The biggest national news story over the past year has been the bursting of the REIC bubble. Only a true believer in the REIC cult would attribute that to a 'lucky guess' on the part of the BBs.

KLK said
As to being incorrect and fringe, if bubble bloggers beliefs were common, more than 10% of listings would be sold without a buyer's agent on the other side. That apparently isnt' the case based on the limited searches I've done (I can't track it directly, I can only determine where there is no co-broker). If bubble bloggers beliefs were common, more people would be using rebate brokers, but they aren't (one limited search I did put that number in King County under 2% of all transactions).

I will admit that I have no idea what this has to do with the presence of a huge credit bubble that was manifested in residential real estate. Would it matter if the Realtor wore boxers or briefs? BBs need that important information to determine if home prices have skyrocketed in the face of stagnating wages and incomes and a normal correction is in order.

Given my inability to connect the dots on this, I'll concede this point to KLK, but I want to go double-or-nothing on the boxers vs briefs issue.

KLK said:
If bubble bloggers were correct, we wouldn't be looking at the median SFR price in King County increasing $10,000 for the second month in a row, which would put it within $10,000-$15,000 of last April. True we might very well have less volume than March, but that was true last April too. And true we will definitely have less volume than last April, which is very troubling (as is the effect of the price of gas on the economy).


WOW! Two whole months in one county in the USA. Now, that's a stat I can hang my hat on.

If the lower end is sluggish, but the upper end keeps moving, the median will rise with a falling mean. This is typical bubble behavior as people that view homes as investments will react the same way stock holders do. They will sell the grade B stocks and pile into the Blue Chips. This sends the indicies higher but still represents a net outflow of money in the investment arena. Eventually, the Blue Chips collapse under their own weight and the entire complex suffers.

Either way, two months of a squiggle on a chart is hardly worth pronouncing a bottom when your own post shows that there was an entire year's worth of deterioriation.

Higher prices on lower volume, like in stocks, is a bearish indicator.

I still find it amazing that Seattle area RE agents can look over the national landscape, see the carnage, and think they are going to be just fine.

KLK said:
Oh, and most importantly, if bubble bloggers were correct, the economy and banking system would have collapsed by now, and house prices would be less than 70% of their peak.


I really don't know how to respond to this without being overtly rude and obnoxious. I'm wondering if you have picked up a newspaper anytime within the past 9 months, as this has been the #1 topic in the nation (after Brad and Joline's baby).

The banking system has imploded. The reason you can't see it stems from the FEDERAL RESERVE cannibalizing itself to the tune of almost $400B in order to keep this rancid system from having to take its marks and file for bankruptcy. The latest H.3 from the FED shows that the "non-borrowed reserves" (that's what the member banks have on hold at the FED) has deteriorated from $42.5B in 4/07 to a -$99B in 4/08. That's a swing of almost $144B in one year, or $12B/mo. Most of the damage has occurred in the past 4 months.

Why is this significant? Great question.

Banks are required to hold in reserve money to offset losses in their loan portfolios. For decades, the amount of required reserves and the amount of "non-borrowed" reserves has never dipped below the mid 90% range. In fact, before all this started happening, the accounting for this has been very mundane and stagnant over the decades. Starting in December 07, the amount of these reserves not only left their historic 95%+/- level, but descended well below the zero line, and now we are holding in excess of -200%.

Let me repeat myself. THIS HAS NEVER HAPPENED IN YOUR LIFETIME! The FED has burned through almost 75 years of reserves in less than 6 weeks, and burned through 3 times 75 years of reserves in 4 months.

Then, in mid-March, the FED, JPMorgan, and the US Treasury had to hatch an illegal, unauthorized bailout of Bear Stearns Corporation, which has the US taxpayer on the hook for $29B. Congress and the Federal Reserve Act contain no such provision for this action.

Why did they do it? Had BSC been allowed to liquidate their portfolio, your banking crash would have happened in the week leading up to Easter 2008.

Just about every bank is raising capital as fast as they can to cast into the gaping maw of the mortgage defaults that are hitting each and every one of them.

The FED now has to take the most rancid collateral to keep money in the banks, as private sources of funding for banks has dried to a trickle. The FED also has pumped the banking slosh to historic levels to keep overnight lending moving, and even with that, they still have to create a new "facility" every month to keep the slosh from freezing up.

The US Treasury is hatching some new scheme every month to keep home prices aloft and banks from being forced to take their marks. This doesn't happen in 'good times.' It happens in times like now and the 1930s. The government knows it's a bubble and they are spending all your money in a futile attempt to prevent it from destroying the economy.

Your banks have collapsed. You just don't know it yet. I certainly hope you don't have your money in the US banking system, or you will be living in a Pioneer Square flophouse before you know it.

BTW, I fully acknowledge that Seattle real estate has shown resistance to the price drops seen further down the coast. You say that 30% off the peak isn't bad, I'm wondering how that squares with what people in LA/SF/SD are thinking. That's almost 1/3 of the value that has disappeared within 18 months. If you buy that Seattle real estate is linked to X-Cals buying (and you would have to be a special kind of clueless not to), you can see that 1/3 off is just around the corner.

Don't worry. Higher end properties will eventually sell for 80% off the peak. It's coming.

KLK said:
Yes, I'm being very Seattle specific, as are bubble bloggers when they sarcastically say: "Seattle is special." Actually I tend to be neighborhood specific--not depending much on county-wide stats (there are no true Seattle stats), but for purposes of these discussions, county-wide stats are good enough.
You're right that the lower end cut hurt the upper end eventually. I've mentioned that myself several times. If people can't sell their old house, it's harder to move up to a new house.

Most BBs talk about how national trends will weigh on local markets. Local REIC members like to hide behind the idea that Seattle has some sort of immunity against these trends, and BBs like to point out the folly of that idea.
You can get as specific as you want. You can retreat to the Pacific NW, King County, Seattle, Queen Anne, 6th Ave. W, or the NW corner of Howe and 6th for all I care. At some point, the macro-economic trends will bring reality to whatever doorstep you wish to call your base. Look beyond your horizons to see what is coming. Good grief! People are paying you good money to give them relevant information, so how about looking up for a change to see what is coming your way?
Yes, if people can't sell their old house, they will not be able to move up.
So....what happens if Joe Hippen and Mary Trendy can't sell their Orange County tri-level because they are 30% underwater? How does that translate to sales in the PNW?
My RE friends that sell on Bainbridge say that the market for X-Cals died an abrupt death in October 07, and the remaining sales are locals moving around on the island or from Mercer/Bellevue.
That has killed the top half of the market. No more funny-money loans in California equates to no more funny-money equity transports from California.

9 comments:

Anonymous said...

Eleua,

Your revisionist thinking is amusing. In Jan 2006 you inaugurated coverage predicting that Bainbridge Island was over-inflated vs. mainland Seattle and other environs and would soon see 40%+ declines. Instead prices are 30%+ above Jan 2006. Your fave value town for value comparisons - Dallas TX was it? - has foreclosure rates FAR above Seattle which in turn is above Bainbridge Island. And w/out the appreciation.

Of course there is an overall real estate meltdown and of course Puget Sound is not immune to it, but your blog's raison d'etre was the vulnerability of BI. Instead we have been WAY less vulnerable to date. And our commute gets more attractive as gas gets more expensive - many of us are ferry walk-ons/bike-ons.

Basically you have been 100% wrong all the way, yet now you are trying to make it sound like you were a prophet or something.

Eleua said...

Yeah, you got me. House prices did go up, peak, and now are on their way down.

So, I didn't call the exact peak. That wasn't my point. My point was to educate people on how silly the prices are of Seattle-area real estate.

I heard all the way up that prices would never correct. Then I heard that prices would just level off...then drop only a few points...

Yes, my timeline didn't account for how irresponsible or delusional the people buying and financing real estate would become. The stupidity that I witness is truly breathtaking.

I routinely make a comparison to Highland Village, Texas where the incomes are 50% higher, and prices are 1/3 of what you find on Bainbridge Island. The point isn't that Bainbridge can get more delusional, but to show how incomes and home prices can be at historical ratios, even with more disposable income.

Why don't you go on the record? Don't reveal your real name, but choose something other than "anonymous" and tell me where the bottom will be.

I still stand by my "20 cents on the dollar" (for the most egregious Bainbridge properties) prediction. 2010 looks good to me, but calling the timing on these kinds of things is certainly frought with uncertainty.

If you are going to run that "Seattle is special" nonsense around here, you might want to back it up.

You may see it as "special." I see it as "stupid."

Eleua said...

As gas gets more expensive, commuting from Bainbridge to the urban core of Seattle makes sense. That will help offset the gas...right up until the WSDOT raises ferry fares to cover its fuel costs.

I've never said that living in the Winslow portion of Bainbridge (or along a bus route) and walking to the downtown part of Seattle is foolish or even oppressive. It's fantastic, provided you can live with ferry life. I go to Seattle all the time, and I've taken my car on two round trips in the past year. I like that aspect of the Bainbridge.

If you think I'm going to overpay $500K to have a commute like that, you are seriously mistaken.

If you have to drive on the Seattle end, then you are in serious trouble. If you are overpaying on the Bainbridge side, you will be in even greater trouble.

Your incomes are not keeping pace with inflation. At some point, something has to give.

Winslow Willie said...

This is not about calling the peak - your original point was that Seattle area was more exposed than most places, and Bainbridge even more exposed than the rest of Seattle, and you are so far wrong and wrong. And anyway prices never rise monotonically forever - if your only point was that eventually there would be a downturn - well, duh.

I will go on record & predict prices on Bainbridge will not fall on average below 80% of peak, and that this bottom will be reached by the end of this year. I agree a few of the more egregious mini-mansions in remoter corners of the isle may fall a bit harder, say 30% off peak.

In fact if you really think BI values are going to plummet, I will be glad to buy your BI home now for 30% of FMV appraisal, cash on the barrel head, no limit, regardless of location. If you're right and it's poised to drop to $.20 on the dollar, you'll make 50% more! Or, if you don't want to sell, I'll buy an option to purchase your property during June 2010 for that 30% price, for 1% cash paid now. Then if you're right and the price plummets, I won't exercise and you pocketed the 1% option premium.

Glad we agree on the appeal of no driving on the ferry, and downtown BI walkability!

I don't feel BI is "special" - just that RE markets are efficient enough that there's no such thing as "stupid", other than rampant speculation, which is *NOT* common on BI (a few Harbor Sq. would-be flippers aside).

Eleua said...

Winslow Willie,

Thanks for coming back here and I apologize for not responding sooner. CCB is something I need to update more often.

I appreciate your offer to buy my home at 30% of peak valuation. I also like your offer of an option.

As an active options trader, I think you need to visit reality. What you are asking is that I sell you a "call" option that is "in the money" by 55% for 1%.

Sorry, options that go for 1% are WELL OUT of the money, and since you are buying the right to "buy" a house, that's a call option. To do this correctly, you would have to buy a $3,000,000 strike call for the $8500 premium, which is something you won't go for.

You are asking to buy a deep in-the-money call, which would necessitate that you pay the intrinsic value (.7 x $840K) plus the extrinsic value, which at the turn commands the highest premium (say $170K). This adds up to $758K for the June 2010 expiration for the $250K strike.

I would also have to write that call in a "naked" fashion, as I don't currently own a BI house. My broker won't allow me to write a naked call on an illiquid asset.

I've put my money where my mouth is, as I have effectively "sold-short" BI real estate. If the prices keep going up, I will lose if I wish to buy into the market. Given that my wife wants to own in the future, I am in a position where I will be compelled to buy to close out my short.

So far, I am up 15% on my short in 8 months, and unlike selling stocks or options short, this kind of shorting is not taxable by Uncle Sugar.

We are down 15% in less than one year. This happend WITHOUT a systemic banking failure or major equity selling panic.

Wait until the banks are forced to take their marks on their REO, loans dry up, the dollar DE-flates, the banking system fails, and the stock market sells for sub-5000.

You are going to be wishing you could sell for 30c on the dollar.

Anonymous said...

"As to being incorrect and fringe, if bubble bloggers beliefs were common, more than 10% of listings would be sold without a buyer's agent on the other side. That apparently isnt' the case based on the limited searches I've done (I can't track it directly, I can only determine where there is no co-broker)."

Note that most times when a buyer is representing himself in a transction, the listing agent will appear "on both sides". It is essentially impossible to record the sale in the mls without putting an office and agent code # in the buyer agent side. So most will put the seller's agent as both sides.

I know that is how I do it when the buyer gets to keep the buyer agent fee by having no representation. So there is no way to search for buyer representing himeself, until the mls has a field for buyer representing himself so we can officially record a sale in that manner.

ARDELL

Anonymous said...

Pretty sad that Eleua doesn't feel like she can debate me directly, and posts off on some other place. I guess if you don't trust your own intellectual abilities, that's what you do.

Kary L. Krismer

Eleua said...

Anon 8:09,

I'm going to give KLK the benefit of the doubt and assume that you are just some troll, as I'm sure that KLK is too busy sorting multiple offers for his listings.

However, the reason this thread was established was to allow a record of what was said on the Seattle PI blog to remain, even when the RE agents decided they wanted to dump the board (like Leanne Finley did last night).

The market is down, and going lower. I stand by this and welcome any person that would like to discuss the subject matter.

Eleua - providing a "center" for RE professionals since 2006.

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Now that was an outstanding post.