Saturday, September 11, 2010

At the intersection of Wisdom and Common Sense.............. finds the execupundit, Michael Wade.

Here, here, here, here, and here for starters.

Whither go housing prices...............?

Our friends at Keeping Current Matters believe that the time
to sell is now because that old supply/demand thing will be
increasingly putting downward pressure on prices. Full essay here.

If you have followed this blog, you might be inclined to think that
I concur.  You would be correct.  Housing prices have no where
to go but down.  The question far is down?

First, some historical data put together by the Case-Shiller folks
and charted by Bill McBride at Calculated Risk.

The bad news is that clicking on the image may not increase
it to readable scale.  The good new is that if you go here,
the image will be enlargeable.

I do not read these charts for a living, but it sure looks like
that by January of 2010 housing values had retreated from
early 2006 highs to approximately the level of housing
values in mid-2003.

If we met at a cocktail party and you insisted that I opine
on where housing values are going to bottom out, I would
tell you that I don't have a clue.  If you were persistent, got
me another drink, and really, really insisted, I would cluelessly
tell you that, in my unsupported and unscientific opinion,
housing values are headed back to January 2000 pricing levels. 
If you foolishly got me another drink, I might tell you that we will
not see housing values back at the January 2006 level in the next
twenty years.

There, I said it.  Sorry.

The circles are unbroken......................

Musically, and visually, fun link here.

I'd like to give credit for the introduction, but can't
remember who sent me there.  Sorry, but thanks.

Click away.  The more you click, the more music you make.

Insanity still reigns....................

There is probably an excellent chance that, even after thirty years
of doing this, I still don't understand investing in real estate.

Jonathan Hipp, who follows net leased real estate, just posted an
article titled "Lack of Inventory= Lower Cap Rates", here.

Here is an interesting excerpt:

     "High net-worth buyers with excess cash are not satisfied
      with  the 1% return they are receiving from banks, are leery
      of the turbulent stock market and worried about increased
      inflation. They desire to invest their cash into secure assets
      which produce high returns. In many ways, net lease
      investments are the perfect option. The problem is there are
      so few high quality net lease assets available.

     "Today we are seeing cap rates between 5.75-7.50% (they
      were at 6.75-8.5% six months ago). These are numbers not
      seen since the height of the market in 2006. This is not a
      long-term trend as much as the odd environment we are
      currently in. Lack of supply plus increases in demand has
      equaled lower cap rates."

      "Buyers want the best assets available; risky assets are no
       longer popular."

Like a lonely voice in the wilderness, I'm here to tell you that
investing in real estate, long-term net leased or not, at a 6% cap
rate is highly risky.  It is short term thinking with a long term
asset.  I hope they have a plan for getting the return of their
investment, while they are getting a return on their investment.

Over-paying for, and more importantly, over-lending on,
investment real estate is one of the causes of our current
economic situation.

I have a hard time believing that smart people have forgotten the
lesson so quickly.

Friday, September 10, 2010

Music from when I was 18..........

Everything you need to know about the problems with investment real estate............ one handy chart. 

Capitalization Rates are supposed to reflect the risk and reward
ratio of investment ownership. The higher the risk, the higher the
rate.  They have not been used that way lately.

A Capitalization Rate is calculated by dividing the investment's
net operating income by the cost of the acquisition.  If you were
thinking about buying an investment property that has an annual
net operating income  of $100,000, at a cap rate is 10%, you
would pay $1,000,000. If the cap rate was 6%, you would pay
$1,666,666 for the same income stream.  A bit of a difference.

As noted on the chart, cap rates were in the vicinity of 10% in
the year 2000.  By the year 2007, cap rates had fallen to the 6%

Sellers gained.  Buyers paid too much.  Banks lent too much.
Therein lies the problem.

This blog has covered this topic before.  Real estate is not the
same as a financial instrument, yet really smart people were
benchmarking cap rates to the rates of return available from
financial instruments.  Our current economy would suggest
that was a bad decision.

From a layman's point of view, if someone offers you a real
estate investment priced at a 6% cap rate, run, don't walk,
run away.

If E. is accepting nominations for........

E.'s Cool Hall of Fame, I want to nominate Arnold Palmer,
who was born this day in 1929.

Today, I pledge................... pay attention to the amazing.  Thanks for the
reminder Jessica.

Oh, the irony of it all.................

The Ohio Realtor newsletter arrived in the mail this week.  One of
the main articles is titled "Seven reasons banks are denying home
loans".  It is a sign of the times that this is news, but here are the
reasons banks are saying "no":

     1.  Poor credit 
     2.  Insufficient liquidity (as in no cash for a downpayment)
     3.  Lack of income 
     4.  Lying on the application
     5.  Debt (as in too much)
     6.  Unemployment
     7.  Self-employment

That applying these standards constitutes a problem tells
you how far off track our industry was in the mid-2000's.

The article then concludes:

     "Once the traditional lending route has been exhausted, both
Realtors and potential buyers are often times at a loss of what
to do as a back-up plan.  Private lending has been around for
many years, but most borrowers and brokers have no idea
that it's even an option.

     " 'With the strict underwriting guidelines banks are governed
by these days, private lending is the wave of the future for
getting real estate loans funded,' explains Eric Wohl, president
of Noteflo, an online private lending marketplace launching

     "NoteFlo's unique service allows borrowers to post loan
funding requests for free, which will be broadcast out to
thousands of private lenders that will bid for the opportunity
to fund their loan.

     " 'Our goal is to make sure borrowers know that they
have plenty of other options if their loan application is
denied by a traditional bank.' says Wohl.

     "For more information, visit"

All I can say is WOW.  I wonder if the editors of the Ohio Realtor
have visited the noteflo web site.

Maybe I'm reading it wrong, but their web site sure makes it look
like their featured loans include 60% loan to value ratios and
interest  rates higher than 11%.   I know some private lenders. 
They have always asked a premium of at least 6% over what
was available from a bank.  So the indicated rates on NoteFlo's
site are not a surprise. 

What is a surprise is that someone thinks this lending avenue
will be helping the person turned down by the bank.

Somehow I doubt that "private lenders" are much of a threat to
traditional banker or much of a help to the typical borrower.

I'm just curious what the editors of the Ohio Realtor were
thinking when they included this article in the September

Thursday, September 9, 2010

Music from when I was 17..........

1969. High school graduation. Freshman year at Denison. An
amazing year.

Talk about ridiculous assignments..............

........trying to find the "Best" of Nicholas Bate.  It is all  good.

He has been an absent blogger for almost two weeks now. 
Over the past six months I developed the morning ritual of
awaking, turning on the computer, reading his new posts-
which inevitably were a gentle prodding towards growth
and fullness of life, then starting my day.  Pretty healthy

Looking at his archives this morning, I stopped here:

7 Great Quotes to Live By

     1. Stay hungry. Stay foolish.
         -Steve Jobs

     2. And in the end, the love you take is equal to the love you make
         -Paul McCartney

     3. Dream as if you will live for ever. Live as if you will die today.
         -James Dean

     4. Seek first to understand, then to be understood.
         -Stephen Covey

      5. Be the Change you are Seeking

     6. There is no failure, only feed-back
         -Richard Bandler

      7. Whatever you do, do it with passion.
          -Carlos Castaneda.

and here:

I don't like being disagreeable, but..................

"If the crisis has a single lesson, it is that the too-big-to-fail
problem must be solved," Bernanke said.....

I have to disagree with this quote (clearly taken out of context
from this article at the HousingWire).

Surely this crisis has more than one lesson.  But............if
forced to name THE single lesson, I would suggest this:
        standards must be upheld.

It is a violation of standards to provide mortgages (and credit
cards) to people who have no apparent means of repaying the

It is a violation of standards to allow such a thing as a "no
document" loan.

It is a violation of standards to offer gimmick mortgages like those
featuring negative amortization and teaser interest rates.

It is a violation of standards to build buildings for which there
are no readily apparent users.

It is violation of standards for underwriting agencies to bless
investment vehicles that they themselves do not understand
as AAA investments.

It is a violation of standards to tie peoples' pay and bonuses
to how fast they can lend money, if there is no claw-back
of pay and bonuses if the lent money is so clearly not

It is a violation of standards for really smart Wall Street
types to package and sell mortgage backed securities when
they clearly knew that the underlying collateral was deficient and
not deserving of the AAA credit rating.

Ben Bernanke is way smarter than me, so I'm probably
wrong about this:  If proper standards are upheld, too-big-
to-fail is not an issue.

Of staples and luxuries....................

Our friend Richard Green indirectly points out the folly of looking
at residential real estate as a national market.  It just isn't.  It is a
compilation of a countless number of local markets, each one 
different from the next. 

Full essay here.

Otis Redding.........Gone but not forgotten

Otis Redding was born this day in 1941.........

Wednesday, September 8, 2010

Music from when I was 16..................

"I had never worked so hard in my life"..........

John Grisham is a fine writer.  A few years back I overdosed on
his books.  I think I read six (The Pelican Brief, The Street
Lawyer, Testament, Rainmaker, The Firm, The Partner) of
them in a month.   I loved them, but have not picked up one of
his books since.

Grisham recently wrote about becoming a writer in the
New York Times.  It is well worth reading-  here.

Time to head to the library again.

"Don't look Fiona"........................

Peter Sellers was born this day in 1925.

Re-visiting John Tuccillo...........probably not his finest hours....

In March of 2008, the former chief economist for the National
Association of Realtors was quoted as saying,

     "People think the market is down and the market will
      still go down. That's not the truth. The market is down,
      but it's not going down anymore." 

     "I think it's because consumers focus on national news
     and not enough on local news."

In April of 2009, Tuccillo said,

     "Yes, knowledge is power, but increasingly in a world
     where we are told far more than we need to know,
     knowledge is fear. Take the swine flu affair. A virulent
     disease which is ripping its way through Mexico is being
     played as if the Apocalypse is upon us. Yet, in the United
     States, a country where vaccines and drugs are readily
     available to blunt the symptoms of the disease, there
     have been only a handful of cases. On this basis, the
     price of airline stocks dip, oil prices go down and there
     is a widespread belief that our friend the pig will bring
     down the whole world economy.

     The handling of this story by the media is intended to make
     us very, very afraid. But so was the media handling of the
     real estate cycle, and so it still is. We are coming out of a
     severe downturn in the real estate market, a price we are
     paying for a ten year expansion. These things happen,
     sometimes gently, sometimes harshly. The reporting of this
     story has ignored how cycles operated, focused on prices
     rather than sales and made a hero out of Bob Shiller, an
     economist-entrepreneur who is attempting to profit from a
     futures market that has yet to get off the ground. And we
     are being taught to be very, very afraid.

Pretty sure I disagree with that "knowledge is fear" quote.  Pretty
sure I agree with the "price we are paying for a ten year
expansion" part.

This punditry stuff is a tough business.

More comedic genius.........................

Sid Caesar, born this day in 1922, and Nanette Fabray
have an argument while Beethoven fiddles......

Tuesday, September 7, 2010

Music from when I was 15...............................

"So it’s time for everyone to take a deep breath and try a bold new strategy:


So opines Mathew Ferrara, whose blog is really worth following if
real estate is important to you.

Some fun excerpts from one of his recent posts:

     "Forget about the contradictory charts, reports, media
     and analysts. If any other sector of the economy were
     reported on with such daily deviation, the public would
     conclude that someone was drunk."

      "Nothing is exactly what we need. More accurately,
     doing nothing else to distort or delay the market
     correction, no matter how painful or disruptive.
     Doing nothing has worked before: we’ve been through
     asset bubbles, dot-com manias, equity explosions, and
     credit-fueled consumption by irresponsible consumers
     before. Pardon the pun, but the house of cards has
     collapsed many times over the centuries. And it came
     back into shape without any help from then-nonexistent
     Federal reserves, mortgage tax deductions, housing
     subsidies or tax credits."

     "Doing nothing takes time, which is terminal for
     politicians and sometimes difficult for the real estate
     industry itself."

     "Until we admit that housing purchases are discretionary,
     we won’t understand that sometimes there’s nothing to
     actually “do” when the absorption rate falls some years.
     Remember, there’s no necessary requirement to purchase
     a home, compared to other products such as food or energy.
     And since there’s sufficient stock to accommodate the
     housing needs of nearly everyone, there could be a lull in
     housing volume for quite some time.

     "The only reason to “do something” is emotional. We’re
     a society that doesn’t like the fact that some times are tough
     and some people have to feel pain. Our laudable tendency for
     social compassion has become complete avoidance of any
     problems, along with political and financial absolution for
     any mistakes, even the ones we bring on ourselves.
     Unfortunately, social compassion isn’t an economic policy.
     Good emotions often lead to bad market interventions and
     unintended consequences that mostly make things even

No more Mr. Nice Guy. I think I'm going to post that last
paragraph again later this week.

On becoming human.......................still some work left to do

“A human being should be able to change a diaper, plan an
invasion, butcher a hog, conn a ship, design a building, write
a sonnet, balance accounts, build a wall, set a bone, comfort
the dying, take orders, give orders, cooperate, act alone, solve
equations, analyze a new problem, pitch manure, program a
computer, cook a tasty meal, fight efficiently, die gallantly.

Specialization is for insects."

-Robert Heinlein

John Tucillo as a "dutch uncle".................

Twenty some years ago, when I was a lot more active in my
local Board of Realtors, John Tuccillo was the chief
economist for the National Association of Realtors.  He knows
some stuff about real estate

Reading one of his recent blog posts tipped me off that maybe
he is no longer employed by the National Association.

Besides making an enormous amount of sense about
what happens when rebates and credits are offered,
he puts the real estate industry's favorite sacred cow in play.

Full essay here.

Fun excerpts here:

     "The market is now verging on being in the same position
       as retailers during the Christmas season. Consumers have
       been trained to wait as long as possible to buy ......... they
       hold out in expectation that the best deals are yet to come.
      This is what the home buyer tax credit is doing to the
      housing market. Buyers will wait, knowing that the industry
      will lobby for yet another tax credit and that will come on
      top of even lower prices....... Consumers are not dumb; they
      see what’s going on and they act accordingly."

     "Between the mortgage interest tax deduction and the
      recurring tax credits, the government is underwriting
      massive portions of the cost of becoming a homeowner.
      I’m amused when Realtors rail against creeping socialism
      when they are in a sector which is a the head of the chow


Self-esteem v The Dream Merchants.........or, a culture drives off the cliff.....

Thanks finerminds

Darwin revisted......................

Monday, September 6, 2010

Music from when I was 14.....................

A Poem for Labor Day.............


Hog Butcher for the World,
Tool Maker, Stacker of Wheat,
Player with Railroads and the Nation's Freight Handler;
Stormy, husky, brawling,
City of the Big Shoulders:

They tell me you are wicked and I believe them, for I have seen
   your painted women under the gas lamps luring the farm boys.
And they tell me you are crooked and I answer: Yes, it is true I
    have seen the gunman kill and go free to kill again.
And they tell me you are brutal and my reply is: On the faces
    of women and children I have seen the marks of wanton
And having answered so I turn once more to those who sneer at
    this my city, and I give them back the sneer and say to them:
Come and show me another city with lifted head singing so
    proud to be alive and coarse and strong and cunning.
Flinging magnetic curses amid the toil of piling job on job, here
    is a tall bold slugger set vivid against the little soft cities;
Fierce as a dog with tongue lapping for action, cunning as a
     savage pitted against the wilderness,
Building, breaking, rebuilding,
Under the smoke, dust all over his mouth, laughing with white
Under the terrible burden of destiny laughing as a young man
Laughing even as an ignorant fighter laughs who has never lost
     a battle,
Bragging and laughing that under his wrist is the pulse, and
    under his ribs the heart of the people,
Laughing the stormy, husky, brawling laughter of Youth, half-
     naked, sweating, proud to be Hog Butcher, Tool Maker,
     Stacker of Wheat, Player with Railroads and Freight
     Handler to the Nation.

-Carl Sandburg

Rube Goldberg redux.......................

Rube Goldberg got lots of play on this blog back on July 4th
(his birthday). 

Boingboing posts a video Goldbergian disciples hard at play-

Happy Labor Day..................

Happy Monday!

Thanks Hugh

The Law of Unintended Consequenses strikes yet again................

 September 1, 2010 story from - here

      "Prices of used cars jumped 10.3 percent overall in July
       from a year earlier, or by $1,800 on average, according

My favorite law in action- here

     "Why are used-car prices rocketing?"

     ".....part of the answer is that the supply of used cars is
     artificially low, because your Uncle Sam decided last year
     to destroy hundreds of thousands of perfectly good
     automobiles as part of its hare-brained Car Allowance
     Rebate System — or, as most of us called it, Cash for
     Clunkers. That was the program under which the
     government paid consumers up to $4,500 when they traded
     in an old car and bought a new one with better gas mileage.
     The traded-in cars — which had to be in drivable condition
     to qualify for the rebate — were then demolished...."

     "Congress and the Obama administration trumpeted Cash for
     Clunkers as a triumph — the president pronounced it
    “successful beyond anybody’s imagination.’’ Which it was, if
     you define success as getting people to take “free’’ money to
     make a purchase most of them are going to make anyway,
     while simultaneously wiping out productive assets that could
     provide value to many other consumers for years to come. By
     any rational standard, however, this program was sheer

     "No great insight was needed to realize that Cash for Clunkers
      would work a hardship on people unable to afford a new car.
      'All this program did for them,' I wrote last August, 'was
      guarantee that used cars will become more expensive. Poorer
      drivers will be penalized to subsidize new cars for wealthier
      drivers.'  Alec Gutierrez, a senior analyst for Kelley Blue Book,
      predicted that used-car prices would surge by up to 10
      percent. “It’s going to drive prices up on some of the most
     affordable vehicles we have on the road,’’ he told USA Today.
     In short, Washington spent nearly $3 billion to raise the price
     of mobility for drivers on a budget......."