"It's going to get worse before it gets worse."

[Tybee Island]

Re: "It's going to get worse before it gets worse."

Please define "Market Value."

In my opinion and it seems to mesh well with some of EJ's points in his recent posting re: The End of Delation." "Market Value" for housing is a fast and slippery slope downward.

In his words, "We aren't even close."

Case in point. I pleaded with my father-in-law in 2005 to sell several homes that he had amassed as rentals and buy physical gold with 50% of the net gain. These are located in a very nice suburb outside of New York City on the Hudson in a little town called Nyack.

"Are you kidding, me sell now, for what" he said in 2005.

"I think I'll refinance a few and take out a little of my "earned equity" he said in 2006.

Tangentially, "My broker has got me in a no lose deal for Citibank and GM preferred, what a yield I am getting, he said in 2007 and upon buying more again in early 2008. "No, No, No, don't buy any GM or Citi preferred, I screamed, are bankruptcy and insolvency the characteristics you look for in companies that you invest in?" I said in 2007

"I have an offer on one house for $550,000 but its too low, for god sakes its a brick house" he said in 2007.

"Gee, I can't seem to get the rents I was getting last year, why are so many of my units not leasing up quicker?" he asked in the Fall of 2008.

"I have two tenants I am evicting, never had to do this before, do you know what I am having to pay my attorney for this crap" he said in Dec. 2008.

"I have an offer for $310,000 for that brick house, should I take it?" he said in January 2009, "Yes, Yes Yes, I screamed and tell him you will give him a free Chrysler, a freezer full of tenderloins and some of that Citi Preferred stock you have if he closes in 30 days" I said.

"No way, it will come back, for god sakes I had an offer of $550,000 in 2007, how can I sell for $310,000 it a brick-house for god sakes. I will reluctantly counter-offer $450,000." he said in late January 2009

"Can you believe it, that SOB never responded to my counter-offer" he said in Feb. of 2009.

"Got a call from my Smith Barney broker who said I should dump my Citi preferred, there is no hope for them, its only a matter of time before they are nationalized, his broker remarked. What a shame, I bought at $23 and am selling for $8, he was apologetic and said he wouldn't charge me a commission on the sale" he said in Feb 2009.

"Can you believe that bastard had the nerve to charge me a commission" he said in early March 2009

"Finally, took your advice and bought some physical gold as you told me I should do in 2005" "But I think I am going to raise rents on my units and try and get a higher price for my homes" he said in April of 2009.

"I am glad you took my advice" I said in April of 2009.


Steve, I have "reasoned things through" $.05 on the dollar beats zero or worse, why don't you pay me to take it off your hands.


I firmly stand by my position.

I am indeed looking at "Market Value" today and five years into the future. in hind sight, "3% of Market Value" will look like a missed opportunity to these banks.

Thank you for your response.

[Starving Steve]

Re: "It's going to get worse before it gets worse."

The eco-frauds, because they have this elitist attitude of not wanting to build atomic power plants or to build hydro-electric dams, are doubling the electric bills here in British Columbia to about $200 per month for a large home. The water bills here in East Sooke, where water gushes out of everywhere, are being tripled to about $70 per month. The grocery store is jacking my grocery bills up on nearly every item, but with the odd item as a loss-leader to bring in the customers. One single bag of groceries can cost up to $55 now, just to buy a few basic items and not to splurg. And I even have to bring my own bag because the eco-frauds don't want people to have new bags.

My $25,000 double-car garage cost $49,000 because I had to pay an environmental expiditer to reason with the government that fish can't swim 700 feet up in altitude, one mile from the sea. Add the generator wiring in and the blasting to make the driveway, the lovely Rocky and Bull Winkle scalloped siding on the garage and a few other add-ins, the outrageous permit fee that the eco-frauds charged, and the garage cost $49,000.....I understand your father's logic about what real estate is worth; I don't understand yours.

If the money was made out of gold and one dollar was one silver dollar, I could understand your thinking. Cash would talk then, but not now.

We have Ben Bernanke at the Fed and Carney at the Bank of Canada. When I see cash, I run the other way.... I used to think exactly like you, but I have learned my leason. Cash is worse than trash--- because I can re-cycle trash, but cash is totally worthless..... Or if cash isn't worthless now, it soon will be.

Yes, one can sell a house and rent, but rents are not cheap, and rents tend to go up, fast. Landlords aren't stupid.

A few other things to round-out the picture: I burn wood in BC to keep warm. The eco-frauds won't allow natural gas. One dump-truck load of wood, split and dumped at your house was $375. But that is going up too. And the propane for the gas fireplace is now 80c or 90cents per litre plus delivery charge. Propane in the days of silver dollars used to cost one beaver nickel per litre, but those days are over.... We have only one refinery in BC because the eco-frauds think refineries are ugly and spoil the view, so we pay thru-the-nose for refined products like propane. Five cent propane is now 80 to 90c per litre, if you are lucky, and if you can get a delivery truck to come to you to deliver.

I hate the best part of the Republicans in America, but the eco-frauds here on the West Coast of America and Canada are one step even below the Republicans. This is a breed all to themselves.

Add the pro-inflation economists ( like Bernanke ) to government along with the eco-frauds, and life becomes impossible. No-one can possibly earn enough money or save enough money to make this cost of living and retire.

I would starve rather than take paper money anymore. I have learned my lesson well. Never, never, never, NEVER sell real assets and take any paper money from any country WHATSOEVER. Don't walk away from cash, RUN!

Whatever cash buys now, it will buy less and less and LESS AND LESS to-morrow. And this is the game of the economists; the universities have trained them well.

I will sit here in East Sooke, BC and starve, and I will have my gold and my log home and die on my own terms. I have been screwed enough in life by inflation and divorce lawyers, so I have learned.

Your daddy is right to keep his brick home in Niyack, NY. And you are 100% wrong. Listen to papa and learn. Que escuche al padre.

Yes, gold can drop. Yes, oil can drop, too. But the mega-trend is UP. Gold may go to $700 and oil to $30 per barrel for five minutes, but gold is really heading north and so is oil. The mega-trend is UP. I play the mega-trend, ALWAYS. My Russian friend in Winnipeg used to tell me, "Everything go up. Up, up, up!" You buy the dips in commodities and use the paper money to pay your bills, day-to-day to live. Let the governments have their paper money too, so be happy to pay your taxes. And one saves real assets, whatever those assets are worth, and one gives the questionable paper money back to government.... That is how you play their inflation game to win.

I have to laugh at these eco-frauds who are breathing down Detroit's neck about electric cars. Where is this electricity going to come from???????? They don't want power plants unless they are solar, so where is the electricity going to come from? The reasoning is incredible, just like Bernanke and Carney babbel about draining trillions in paper money from the economy to prevent inflation. And the economy in the U.S. which is supposed to be responding to $9 trillion in stimulus money is now functioning at 69% of capacity utilization--- a new record low so deep that the 1930s look prosperous by comparison.

And these stinkers tell me that Keynsian economics works!

[CanuckinTX]

Re: "It's going to get worse before it gets worse."

The quibble I have with your argument Steve is that I don't think the dad, and many other people, really understand why they need to hold those real assets like you insist. If they did they wouldn't have turned down offers of $550k back in '07.

If the real pain in real estate is still a few to many years away then you can be sure at some point people like the Dad are just going to get fed up and want to part with the asset at any price whether that's .25, .15 or .05 on the dollar (and who knows what value that is calculated from anyway - today's, last year's, at the peak??). They'll just be glad to get rid of it and never have to look at the property again.

If anything you're supporting Tybee's argument to scoop up large blocks of those assets at the firesale prices. All that is up for dispute is what the perceived discount is that he can get them for.

[Tybee Island]

Re: "It's going to get worse before it gets worse."

"So how is the Uni-Bomber, lately?"...............sounds like you and Joaquin have been sharing fashion tips and philosophies you old rascal you.

I got off at the exit back there that was focused on a discussion of the current and future real estate market in our post bubble and post FIRE economy.

Novel it is to think that this sort of discussion stirs you to think of "eco-frauds" (whatever those are) "propane," "divorce lawyers, and log cabins." Well hang on a minute, I can make the "log cabin" connection has having some relevance to a discussion on real estate.........good point there, Joaquin, good point, need to watch the market on log cabins more closely.

It does sound like we agree on gold, I have plenty of that, and it seems that if you believe your statement about "Whatever cash buys now, it will buy less and less and LESS AND LESS to-morrow." then my Father-in-law, who, you like to call my "daddy" and "papa" which is cute and I will share that with him, should sure as heck get out of the those deflating "real assets" like brick homes and transform them into something more than that cash, which you like to say is like "trash" another cute but terribly over used little goodie, and buy some "real assets" that in some terribly affected english spoken by Russians passing through Winnipeg say will go "UP, UP, UP."

So it doesn't sound like I am "100% wrong" and should " Listen to papa and learn. Que escuche al padre."

In fact, sounds like I am standing back at the exit with a very sound thesis which has been accurate since 2005 when I sold all of those nasty real estate assets and exchanged them for gold.

"I understand your father's logic about what real estate is worth; I don't understand yours" really, I think you could if you try harder, Joaquin..............enjoy that expensive double-car garage and perhaps test yourself once in awhile for altitude sickness.

Best regards,
Tybee Island

[Starving Steve]

Re: "It's going to get worse before it gets worse."

If anyone has a nice brick home in a lovely quiet neighbourhood, not far from New York City, it seems to me that that would be a better buy than a sell to-day at $350,000--- especially with a genius like Bernanke running the U.S. Federal Reserve Bank.

Again, I always say to slowly reason things through and to think simple thoughts and write a simple sentence: "This house is a BUY to-day."

Gavel down! Bring-in the next case.....

[Tybee Island]

Re: "It's going to get worse before it gets worse."

Respectfully, you have missed the entire point.

He refinanced and now has over $550,000 outstanding on the house.

He passed up an offer in 2007 that would have let him break even and just barely.

These are investment homes, not a primary residence.

The last offer for $310,000 came in January 2009 which would have meant an out of pocket loss of $240,000+.

If you would like to buy this house in a lovely neighborhood for $550,000 today, please contact me and you and your gavel can live happily together and champion the neighborhood (Galloping White charger comes at an extra cost).

There is no next case, only tears.

[Starving Steve]

Re: "It's going to get worse before it gets worse."

Respectfully, you have missed the entire point.

He refinanced and now has over $550,000 outstanding on the house.

He passed up an offer in 2007 that would have let him break even and just barely.

These are investment homes, not a primary residence.

The last offer for $310,000 came in January 2009 which would have meant an out of pocket loss of $240,000+.

If you would like to buy this house in a lovely neighborhood for $550,000 today, please contact me and you and your gavel can live happily together and champion the neighborhood (Galloping White charger comes at an extra cost).

There is no next case, only tears.

Now I understand your predicament. The market value dropt, but you have a loan on the brick home at the old market value. So naturally, you have to make up the decline in market value to the bank on the loan, if the house is sold. ( That would hurt. )

If this house is not far out of New York City, I think your dad will still come out just fine, especially if he can rent the house out now and get a cash-flow going on the house to cover the carrying-costs on the property.

Real estate around New York City is the top real estate in the world, just like real estate around London or Paris, Tokyo, San Francisco, etc. I think you are going to come-out just fine at $550,000, so be pacient (sp?). Just like oil has dips and gold has dips, real estate has dips in price too, periodically, but not for long.

The key point is that cash is NOT king and never will be king again. The U.S. dollar is no longer the world currency anchor. You can thank the central bankers for destroying money, worldwide. That is what they wanted to do; that is what they were taught how to do, and they have done a good job of it, everywhere. Confidence in paper money is gone.

[Glenn Black]

Re: "It's going to get worse before it gets worse."

Twenty years ago, Ginza Strip in Tokyo sold for many times what it sells for today. Commercial real estate in New York has been some of the most expensive real estate in the world. When that commercial real estates crashes, as it is now in the process of doing, it takes the homes all around New York with it, down the toilet.

The highs of last year will not be repeated within your lifetime, nor your grandchildrens.

As inflation of commodities takes off, as it will in the near future, real estate won't be one of those commodities.

Unlike land, houses have carrying costs, energy, maintenance, etc. to keep the asset from depreciating. Scrimp, and your asset drops value like a rock in the ocean. See study of housing prices in hottest region of Amsterdam over ~350 year period popularized by Shiller, net gain was ~0.3%/yr, but some years were + 300 % of that mean line (real estate bubble, war, plague, etc.).

Recent 100 year price trends of only up, up, up were short term anomolies, similar to rolling 7 three times in a row, it happens, but no one can roll thousands of sevens without stop on fair dice.

For the father, all of that is water under the bridge, never to return. Forget about it! It matters not today. You can't change the past.

You need to focus on today and what is to come in the near future. Those are events you can act upon, and decisions you can make. Focus there to the exclusion of all else.

[Tybee Island]

Re: "It's going to get worse before it gets worse."

I think we agree. The paradigm that seems to have been at the root of all of the speculation in Real Estate is that "It can never go down."

In fact, this was the critical flaw of all of the algorithms and models that the young MIT brainiacs hired by Wall Street excluded from their realm of possibilities. They literally never modeled that the asset class could go down in value.

I was making a presentation to investors last week to raise capital for my acquisition fund, and something amazing was occurring in the room during the presentation.

Here I was sitting with some very savvy guys all of whom had made fortunes in shipping or oil, and were for the most part from several generations of family wealth.

After giving them my overview for the future of real estate they seem to dismiss that their own personal homes could possibly be affected by the decline in real estate values. It was if they assumed that it was everyone else's homes that had lost value but not theirs.

Needles to say, I didn't press any harder to avoid bursting their bubble. "Yes of course," I said, "it has happened to everyone else but you."

[cjppjc]

Re: "It's going to get worse before it gets worse."

I think we agree. The paradigm that seems to have been at the root of all of the speculation in Real Estate is that "It can never go down."

In fact, this was the critical flaw of all of the algorithms and models that the young MIT brainiacs hired by Wall Street excluded from their realm of possibilities. They literally never modeled that the asset class could go down in value.

I was making a presentation to investors last week to raise capital for my acquisition fund, and something amazing was occurring in the room during the presentation.

Here I was sitting with some very savvy guys all of whom had made fortunes in shipping or oil, and were for the most part from several generations of family wealth.

After giving them my overview for the future of real estate they seem to dismiss that their own personal homes could possibly be affected by the decline in real estate values. It was if they assumed that it was everyone else's homes that had lost value but not theirs.

Needles to say, I didn't press any harder to avoid bursting their bubble. "Yes of course," I said, "it has happened to everyone else but you."

Yes, I also find this to be true. People always think that their residence has / will hold up better than others for a myriad of reasons. The property, the location, the uniqueness, you name it. Sometimes they will mention things that not only don't help value, but rather reduces value. like homes on corner lots.:eek:

[Thailandnotes]

Re: "It's going to get worse before it gets worse."

the root of all of the speculation in Real Estate is that "It can never go down."

Amsterdam. The records go back for centuries through wars and all kinds of other upheaval.
Prices are mainly flat.

[flintlock]

Re: "It's going to get worse before it gets worse."

Thought I'd throw in another anecdote about housing and how people can't get the past behind them.

My brother is a home builder. Was once president of a very large home building company. He lost his job as a result of the housing bust about 3 years ago after 22 years with the company.( His boss saw this coming unlike many builders). Literally the only job he'd ever had. So you can imagine how ingrained the FIRE economy/"housing as an investment" philosophy is in him.

After taking off a year to regroup and enjoy his large severance package, he decided to build a home to sell, right at the beginning of the RE collapse. He bought two one acre lots, at what I thought was a rather high price. "They aren't making any more land" he says. I rather meekly suggested he reconsider building a spec home in this market. After all, what do I know? I'm no expert. He assured me that THIS market was immune to the slow down affecting the rest of the country. People here have money!

So I was really surprised when I learned his first home out of the gate was going to be a $1.4 million spec house. A home half that cost would be considered a very fine home in the area. We are talking 6500 sq ft and done very nicely with all the bells and whistles. This is GA , not FL. One of the richest zip codes in Atlanta area and this would still be well above average home price.

So he built it. Then a year went buy and it was complete but no offers. So last year I suggested he slash the price and just get rid of it while he still could. Lesson learned, you know. No he said, just give it time. So the prime spring selling season came and went, no buyers. Not even an offer. Just a lucky guess on my part that it wouldn't sell I guess. :rolleyes:

That brings us up to today. Still no buyer, though he did slash the price a whopping 10%, lol. Gee, you think the jumbo rates and increased down payment requirements might be hurting sales in that price range? Why would anyone want to pay 2006 prices when they can just wait and pick it up from the bank at half that? When homes no longer appreciate then gone is the rationale for buying homes like that. Then people have to face the true cost of owning that price home, and the vast majority are not that stupid. Even those who could pay cash usually choose not to piss their money away like that. The number of people considering that price home has shrunk tremendously,thats just a fact.

So I heard this week he is going to put his personal home on the market, which I think is a good idea. After all, he has had no real income in three years, and lives in what once was close to a $1,000,000 home. Perhaps its time to "Get real" as Dr. Phil would say. Only now he says he's going to build a new home for himself on a 5 acre lot he owns and do it all over again! So if he can't sell either property he's looking at $2-3 million or so "invested" in homes, no income, and no real prospects of an income.

And he was by no means "rich" before all this started. But I can tell by taking to him that he thinks we are just around the corner from going right back to the good old days. That its bound to turn around soon. It has to right?

[Starving Steve]

Re: "It's going to get worse before it gets worse."

Twenty years ago, Ginza Strip in Tokyo sold for many times what it sells for today. Commercial real estate in New York has been some of the most expensive real estate in the world. When that commercial real estates crashes, as it is now in the process of doing, it takes the homes all around New York with it, down the toilet.

The highs of last year will not be repeated within your lifetime, nor your grandchildrens.

As inflation of commodities takes off, as it will in the near future, real estate won't be one of those commodities.

Unlike land, houses have carrying costs, energy, maintenance, etc. to keep the asset from depreciating. Scrimp, and your asset drops value like a rock in the ocean. See study of housing prices in hottest region of Amsterdam over ~350 year period popularized by Shiller, net gain was ~0.3%/yr, but some years were + 300 % of that mean line (real estate bubble, war, plague, etc.).

Recent 100 year price trends of only up, up, up were short term anomolies, similar to rolling 7 three times in a row, it happens, but no one can roll thousands of sevens without stop on fair dice.

For the father, all of that is water under the bridge, never to return. Forget about it! It matters not today. You can't change the past.

You need to focus on today and what is to come in the near future. Those are events you can act upon, and decisions you can make. Focus there to the exclusion of all else.

You posted, "The highs of last year will not be repeated in your lifetime or your grandchildren's lifetime."

May I remind you that Printing-Press Ben runs the Fed and his clone, Carney runs the Bank of Canada. Monetary policy is now in INFLATION-mode. If you sell your house, what are you going to do with the money? Save it at 0.25%?

Always think everything thru. Always think simple thoughts. You have no place at all to go with money except home. You invest money in your home (a new roof, a garage, whatever) or stash gold inside your home. And that is it.

As for this idea that real estate tends to be flat in price, yes, in the Netherlands or in Japan or in Deutcheland. In those countries, there was monetary discipline. But in America or Canada, monetary discipline???????????

I am wetting my pants laughing......

We had one short spell of monetary discipline in America when Paul Volcker ran the Fed. Real estate dropped slightly in price when Volcker pumped interest rates to 5% or 10% real return on money. But Paul Volcker is out, and the Putz from Princeton is in at the Fed. The banana trees are already growing around the Federal Reserve Bank Building in Washington.

Yes, Volcker could return to the Fed, but he is now 82 years old, so that possibility is getting rather remote.... [Sic,] "It's going to get worse before it gets worse."

[Tybee Island]

Re: "It's going to get worse before it gets worse."

Flintlock: I very much enjoyed your account of your Brother's travails. I like you am not hopeful for the final outcome.

It hit me that your brother is speculating in Atlanta, as my market area is the Southeast and formerly (until 1999) the West. I literally have been on the Georgia Superior Court's website most of the morning researching liens, security deeds, foreclosures, and assignments, preparing for meetings with bankers tomorrow.

Even after being in the business for a long time, and having seen what was coming long before 2005, I am staggered by how much money was still being loaned well into 2007 and mid-2008 for RE projects that never made sense from a pro forma standpoint, let alone any potential for being profitable in a declining market.

If there is any comfort in numbers, your Brother was not alone in his thinking. Unfortunately, he and many more will end up in a very, very bad way.

I have a view into what is really happening as I can get into review the actual loans that were made and where they are now. Any discussion of "green shoots" is only temporary cover for what is really a series of nuclear bomb explosions going off on bank balance sheets here and abroad.

I like the title of this post "It's going to get worse before it gets worse."

However I would modify it to read "It's going to get worse before it gets unbearably painful whereby anything spoken that remotely describes how Real Estate used to be may subject one to a lynching by the mob when they are reminded once again of their agony."

[metalman]

Re: "It's going to get worse before it gets worse."

I think we agree. The paradigm that seems to have been at the root of all of the speculation in Real Estate is that "It can never go down."

In fact, this was the critical flaw of all of the algorithms and models that the young MIT brainiacs hired by Wall Street excluded from their realm of possibilities. They literally never modeled that the asset class could go down in value.

I was making a presentation to investors last week to raise capital for my acquisition fund, and something amazing was occurring in the room during the presentation.

Here I was sitting with some very savvy guys all of whom had made fortunes in shipping or oil, and were for the most part from several generations of family wealth.

After giving them my overview for the future of real estate they seem to dismiss that their own personal homes could possibly be affected by the decline in real estate values. It was if they assumed that it was everyone else's homes that had lost value but not theirs.

Needles to say, I didn't press any harder to avoid bursting their bubble. "Yes of course," I said, "it has happened to everyone else but you."

your posts are really great. thanks for sharing these insights/experiences.

wanted to show you interviews ej did in early 2007 with jim finkel (sp?) who ran a firm that made cdos. but they're all gone! legal issues?

anyway, ej'd asked 'what do your models use as worst case housing declines' and he said '15% over 5 years' and ej asks 'i think 30% (or something). what happens if i'm right?' and jim says 'that will not happen. there is no model for that'.

the guy's sense of denial was amazing. wish i could find the interviews for you.