“Bank of America CEO Ken Lewis told editors of the Wall Street Journal that he’s worried about borrowers with strong credit scores not making loan payments if the housing crisis worsens.
Such concerns by the head of California’s largest bank could trigger a tightening of credit availability beyond the subprime customer base.
“There’s been a change in social attitudes toward default,” Lewis told the Wall Street Journal. “We’re seeing people who are current on their credit cards but are defaulting on their mortgages. I’m astonished that people would walk away from their homes.”
Apparently even borrowers with strong credit scores are finding it easier to walk away from their mortgages, especially if they put little or no money down on houses and condos purchased for investment purposes.”
BofA CEO worries about creditworthy borrowers defaulting [Business Times]

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Comments from “Plugged-In” Readers

  1. Posted by Mole Man

    Is it really a change in attitudes, or did banks recruit a whole new class of potential defaulting customers when they gave out all that no skin in game low teaser rate loans based on obviously bogus appraisals? Loan “innovations” like that almost never pan out. The teaser rates on this latest batch of toxic loans smell a lot like the balloom payments that wiped out the Savings and Loans.

  2. Posted by Satchel

    “Is it really a change in attitudes, or did banks recruit a whole new class of potential defaulting customers when they gave out all that no skin in game low teaser rate loans based on obviously bogus appraisals?”
    Exactly. And those people who were bidding with “other people’s money” and who have no skin in the game set the marginal price of the comp that may have been used in YOUR appraisal. Fraud and a cavalier attitude towards what are (or should be) HUGE commitments for the average salary worker can have devastating effects when it unwinds. This kind of fraud happens in all bubbles. All. Read about the people who got caught up in Miami real estate in the 1920s. By the time the last of them was dead, pump it right up for the Miami Mambo today! Sf should be careful about the amountof new condo supply coming online over the next few years, IMO. I’ve said it a million times. There are a HUGE number of vacant houses around me for what should be a stable, family-friendly nice part of SF.

  3. Posted by badlydrawnbear

    “There are a HUGE number of vacant houses around me for what should be a stable, family-friendly nice part of SF.”
    wouldn’t you just rent these out? Everyone has been touting the +10% increases in rents in SF because of such strong demand. If the demand for rentals is so strong why are these places vacant?

  4. Posted by Trip

    “We’re seeing people who are current on their credit cards but are defaulting on their mortgages. I’m astonished that people would walk away from their homes.”
    People are much smarter than bankers think. Thanks to the new bankruptcy laws that the banks pushed through Congress, it is extremely difficult to walk away from credit card debt. But because most home loans (a big exception is refis) are secured only by the house, a homeowner can walk away from housing debt scot-free, without even having to file for bankruptcy. Whereas in the past it may have made sense to let everything else slide in order to keep housing payments current, now the incentives are just the opposite. The banks got their punitive changes in the bankruptcy law, and this was yet another factor in creating the horrendous mess in which they now find themselves.

  5. Posted by Trip

    bdb — I’ve always been stunned at the numbers of vacant or uninhabitable dwellings in SF. Hard to imagine why one would not rent it out or sell it. All I can figure is Prop 13 keeps the carrying costs so low that they just don’t bother.

  6. Posted by Satchel

    Trip & badlydrawnbear,
    You guys are exactly right! Prop. 13 lowers opportunity cost for holding properties vacant, in the minds of long-term owners. Of course, this is foolish. They do not understand the concept of opporunity cost. This is a great arbitrage opportunity for anyone who understands how markets actually work. Think, and I bet you can come up with some approaches….. I mean, the prop 13 tax records are public, so you know who’s paying what. And you can get the address of the homeowner from the bill. And you can see with your own eyes which are vacant….
    Anyone who looks at craiglist for prevailing rents and BELIEVES that those are prevailing would literally be chopped up and slaughtered on a Wall Street trading desk within 3 minutes.
    Hypothetically, and I’m not saying I would do this, but hypothetically one could put up a picture of one of the condo buildings in SOMA and, say, pretend to be the owner of a unit, and set a rent at, say, 50% of carrying costs. Then, hypothetically, you can sit back and be **overwhelmed** with demand for your unit as a rental. Not that anyone I know would do such a thing…. If you can find someone willing to pay just 50% of the cost, then you can be cofident that if you were to buy, you would only be consuming your housing needs at 200% of their instrinsic worth. Sort of like walking into a pizza place and seeing that a slice is $3, so you rush to the counter and overbid $6. Makes you think….
    Remember, guys, renters set the rental rates, not owners. Because no one is foolish enough to mortgage their future for rent money (and no one is silly enough to lend to you for rent, except at credit card rates), prevailing rental rates are the best gauge of true demand.
    Also, don’t forget the impact of Bubble psychology. Because of the false price signals, people who don’t understand anything about economics simply go with the flow. Understandable. they think their house will continue to appreciate into the stratosphere. You see, that house in St. Francis that costs $3MM today will be $10MM by 2015, for sure.
    I wonder how many people are aware that from about mid-2002, an investment in SF property (at least on an unlevered basis) has been just about the worst investment out there? (Other than, of course, property investments in most other US cities – they were definitely worse.)
    Just throw a dart at at your range of investments. Gold? US equities? International Equities? Even the long bond. How about simply holding interest-bearing Euros? I haven’t checked the numbers exactly, but I am about 99% sure that ANY of these would have returned better than even that house in Noe (on an unlevered basis). Not surprising. This is what happens in a HUGE credit bubble, the largest bubble ever blown in the history of central banking (incidentally, joe schmoe, which only started relatively recently in the history of money – read your history).

  7. Posted by FSBO

    Satchel – thanks for these informative and thought-provoking posts. Regarding your comment on craigslist and prevailing rents, are you saying that the asking rents on craigslist are higher than actual market rents? If so, how significant is the difference and would this be caused by just natural wishful thinking by landlords or by some kind of intentional manipulation?

  8. Posted by Bill

    Laws passed in San Francisco make it very difficult to get rid of bad renters, so several people I know prefer to leave units vacant rather than have to deal with renters in this city.

  9. Posted by Bill

    Bill, I can certainly understand that logic. but why not just sell the property?

  10. Posted by fluj

    Craigslist is the first place would be renters look nowadays, though. Believe it or not. It’s fact.

  11. Posted by Satchel

    FSBO,
    Great question! I grew up in NYC. We know all about phony housing shortages caused by stupid city policies. The scam in NYC was always to **induce** the rent controlled occupant (who could literally never be thrown out) to let you live there for some up front but under the table cash. The laws for all practical purposes would never allow the landlord to enter. NEVER. If he knocked on the door, call the police. It was a **very** renter friendly city. Just like SF.
    In the mid 90s, my new wife and I lived in a beautiful prewar 3/2 for $1500 on 36th & Madison. The people next door were paying $4000+. See, and here is the point of the story, the guys next door didn’t know about “key money” because they were from out of town. They thought that NYC was really expensive so they actually WANTED to pay alot to validate their assumptions. There are a lot of newcommers to SF is all I can tell. Wages here are actually very low (on average) compared to the NYC area. My brother is a cop in a NYC suburb. No college. He makes $150K. A garbage man makes $100K+. Receptionists at hedge funds can make $125K, and there are a lot of funds there. And even with all that. NYC prices in the nice near suburbs (not the nicest mind you, but good) are only 50-75% of comparable SF prices. Big difference is the Prop 13 limits here. Get the picture?
    (Now of course, much of these distortions have washed out of NYC and there is real demand there No question. I haven’t been there for a while, but my family is back there.)

  12. Posted by Satchel

    FSBO,
    I reread your question. Sorry about not being more succinct and getting off on a tangent. I think that it is a combination of wishful thinking and the fact that some are willing to pay the asking rent. When I said prevailing, I sort of meant what is actually being paid on average. I guess that new renters set the marginal rent, but my only caution for people is to get creative. That’s what people did in NYC. Look around in the western side for a deal. I guess my big thing is I have seen a number of acquaintances of my wife struggle so hard to buy a shoebox condo, thinking that it is going to be their ticket to wealth (first leg of the property ladder). At these prices, I think that will be a tragic mistake for many, because the sheer cost in excess of renting is going to mean that all their future wealth prospects are going to be tied up in a single, nondiversified four-wall asset, purchased at an insane multiple to what people ACTUALLY pay to rent, and even at a high multiple to what the marginal new renter pays. How much more wealthy is SF going to become? Keep in mind that NYC has been the center of wealth for so long that $150K has devolved onto municipal workers in the nice suburbs, and even given that their houses cost LESS than comparable SF properties.

  13. Posted by fluj

    So, NYC nice near suburbs are only 50 to 75 percent of SF City prices. What on earth does that show? SF suburb prices (Mill Valley, Burlingame) are more than SF city prices. This is a sillyfruit dance. Apple swings orange, round and round. Cops make good money around here too by the way.

  14. Posted by dub dub

    Satchel, please explain to us exactly how prop 13 works. You are a renter and presumably from out of state so I want to make sure.
    Like most renters, you seem to be blaming CA’s prop 13 for housing cost in the Bay area.
    thanks! love how you’ve taken over this whole blog! 🙂

  15. Posted by dub dub

    Oh, and the Prop13 wikipedia entry is horribly one-sided, so don’t use that (“citation needed”). Obviously written by a renter (that’s what you get when you work for free) 🙂

  16. Posted by burble

    “Key money”? Are you kidding? Has anyone else heard of such a thing in SF?
    I’m browsing rental listings on Craig’s List right now, so I’d love to know.
    I also grew up in NYC, and think that it is much more an “under the table” culture than SF, but maybe that is just newcomer naivete.

  17. Posted by fluj

    We don’t call it “key money” around here. But it happens. A friend of mine, who actually holds a real estate license, pockets $700 a month by subletting his rent controlled flat.
    Satchel flatly dismisses craigslist rental ads because the high prices shown on there don’t really fit in with his whole theory.

  18. Posted by jd94114

    Burble –
    I also grew up in NYC, and you are correct in that here in SF, “key money” is really not in effect.
    The rent control rules are different out here than in NYC.
    But be warned, just like in NYC those new to the city might look for apt. listings in the Village Voice or the NYTimes, those were always the worst and/or most over priced listings…same thing with craigslist here.
    In NYC you had to pay “key money” to get a deal, here, you need to walk the streets literally.
    Pick a neighborhood and walk the streets looking for individual For Rent signs in windows…this is how you find the more down to earth rental rates in SF.
    Literal leg work

  19. Posted by Trip

    I don’t think Craig’s list rents are completely unrelated to what people are paying on new rentals, but I agree that they give an inflated picture of what new renters are paying. We have a steady flow of new associates that start every fall. Most of them start out by renting something on Craig’s list. But within a year they have almost all either moved in with a roommate who has a house/flat at much lower, rent-controlled rents or they’ve just moved into somebody’s place and taken over the lower payments without even telling the landlord (I guess this is like the “key money” concept although I don’t think any of them actually pay the leaseholder anything).

  20. Posted by dub dub

    “… pockets $700 a month by subletting his rent controlled flat”

    @fluj: I personally knew two cases of that (several years ago). I also know of a person who lives “cash flow positive” by subletting to roommates. I’d like to think my casual acquaintances are not particularly sleazy, so based on this small sample size, I think “rental abuse” is rampant in SF 🙂

  21. Posted by anon

    I have to agree with Bill. I also know several people that have left their properties empty rather than dealing with renters. In most cases, they have decided not to sell, because they plan on leaving it to their children.

  22. Posted by Satchel

    dub dub,
    I really do have to stop taking over the blog, but it’s been fun talking to everybody.
    Wikipedia I guess gives the mechanics, so I won’t go into them here. Instead, I’ll give you the intuitions, just from a renter’s perspective.
    Here’s all you need to know.
    Liberals do not understand economics 🙂 So they do things, and stupid consequences follow. They have an idea, like “we have to protect people”, and what results of course is the precise opposite. Not sure if the powers that be are actually aware of the consequences (since they invariably enrich the establishment at the expense of future arrivals into the economic sphere), or if they’re as clueless as the average voter. I suspect the former.
    Now, the Satchel rules:
    1. Rent controls tend to help existing landlords, at least intially. They do NOT help tenants.
    2. Property 13 is a renter’s best friend. It HURTS new home owners.
    See? Easy.
    In the first case, rent controls typically arose during WWII and immediately following, as the waves of army guys came home and started families. This new demand caused equilibrium rent prices to rise. So, the authorities clamped on price controls. Great news for the landlord, and for the existing tenants! Not so good for the tenants who would come afterwards. BTW, there are still tenants in NYC apartment buildings living on Park Ave for $800/month – or at least they were 10 years ago – who had lived there since the 1950s. Guess what? You guessed it – they were empty! Why not have a pied-a-tierre. My mom to this days regrets giving up her apartment that cost about $500/month as recently as 1996…
    Why would the landlord like this? Well, in truth sometimes there are problems for him if costs get out of control relative to rents (and this was a problem in the 1970s). But in general he likes it because it eliminates competition over time. Not too many people willing to build apartment buildings over time, if he can’t adjust prices at will. I mean, would you open a sandwich shop if the government might come in and tell you that you can never raise your prices (in case they pass something stupid like,say, ethanol subsidies to please the green lobby, which causes your costs to skyrocket as grain prices feed through to increased sandwich meat prices?)?
    So, ordinarily new landlords would enter, buildings would be built, etc., and this would equilibrate demand and over time LOWER rent prices. Now, the landlord has no competition, and he is assured a steady stream of demand because rent controls are keeping the price lower than the level at which demand would clear. So, if he’s smart, he’ll just let the apartment go to pot. I mean who cares, no real reason to maintain it beautifully. With all this artificially induced demand (because of artificially low rent), if the tenant complains the landlord could justtell him to take a walk. I mean there’s always another renter waiting at the low (controlled) price. See? Tenants lose. Apartments suck, and they’re hard to find. (Liberal) mission accomplished.
    I’ll continue this after the market closes, for those who would like the intuitions on Prop 13.

  23. Posted by location

    Satchel,
    I agree with a lot of what your are saying, but I don’t think that you will find many people who are green to be in favor of the scam that is ethanol. Unrelated to Real Estate I know.

  24. Posted by Satchel

    Now. On to the greatest thing for a renter Prop 13. The basic thought here is that Prop 13 is (in effect) a subsidy to the existing homeowner. Because he now has certainty as to the path of future tax increases, the value of this subsidy is capitalized and his house price rises to reflect his increased certainty. The new buyer pays the price. Over long enough periods of time, equilibrium housing prices rise, and when you add a bubble to it, well, then you can get a moonshot. I think that if you look at some of the other comments, especially the idea that people are “warehousing” their properties for use by their kids – very common BTW and actually does make some sense economically under certain circumstances as long as you can “grandfather” the low tax base – you’ll really understand why there are a lot of vacant houses.
    This is GREAT news for solvent renters. Lots of vacant houses. Where I live alone, there are at 15 within a two block radius (maybe 10% – I haven’t counted but I might.) Find a nice one. Look up how much he pays in prop 13 tax (in my neighborhood, the best I saw was a $2MM property paying $900/yr tax). Then approach the owner, understand his concerns about renters. Offer to place one year’s rent in escrow with an escrow agent, plus $25,000 as security deposit. Negotiate the rent – I mean he’s not getting anything anyway. Offer $2K. Maybe $2.5K. Put all the cash in an escrow account (now that the bubble is bursting, I hear that they are looking for work) and I bet you’ll find a deal. Don’t worry about being forced to move. Tell him you’ll leave anytime he wants – just give you 3 months’ notice. If you get thrown out, don’t worry, there are plenty of others. Unless equilibrium housing prices in California fall about 30 or 40%, there’ll be a surplus for at least a decade. (Note, economics always wins. If prices stay this high, builders will keep building. That’s what they do. They build, and they’ll undercut existing owners. I mean, a builder has to eat, after all. The idea that rents will rise substantially given this surplus of housing is crazy.)
    If you have kids getting ready to go to school, do this in a good school district. Let the new buyers pay for your kids’ education while they pity you for not “owning”. Recognize where your true wealth lies.
    Now, if you don’t have at least $50K or $75K in cash laying around, well then with all respect IMO you have no business buying anything in SF. Nothing. Rent, save your money and build your wealth, or decamp for a city where you will have better prospects.
    One last intuition about Prop. 13 that Wiki doesn’t cover and is actually important. In my view, measures like this **infantilize** the public, turning them into children. In effect, once the homeowner is assured that his taxes can’t really go up, he really has no incentive to monitor how the funds are used. No reason to get involved with the school district, because the school district will be dealing with far away state bureaucrats, rather than the local owners whose money is being extracted. Same thing for local services. In effect, he is being removed from the polity.
    The Founders really worried about just this type of occurrence. For that reason, there was a lot of talk about whether the vote should be restricted only to property owners. Today, I guess that type of debate would go on regarding whether someone who does not pay income taxes should be allowed to vote (because back at the time of the founding, there were only excise and property taxes – no income tax of course). But of course, you will never hear anybody talk about restricting voting. Today, something like only 50% of the eligible voters pay any income tax at all and about 50% get some form of government check or welfare (which is of course what social security and medicare are, among other programs) (someone help me here if you have the exact percentages – I’m going by memory). So, I know we’ve gotten very far afield here, but let me leave you with what I think is a profound quote about our political system, generally attributed to an obscure historian, but the ideas and phrases will be familiar from numerous speeches. I think that if one really understands the ideas here (and economics, of course), one understands everything necessary to figure out what is going on:
    “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
    Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage.”

  25. Posted by Trip

    Always an interesting experience hearing from you, Satchel. His idea might work. Especially if you find a vacant house to rent — explain to the owner that SFRs are exempt from all local rent control laws to give the owner piece of mind that he’s not stuck with you forever.

  26. Posted by anonSF

    Wow Satchel, how many of these “get rich quick using prop 13 info” or “get rich quick taking advantage of the inefficient rental market and ignorant owners/renters” schemes have you actually ever put into practice?

  27. Posted by james

    i think satchel needs his own blog

  28. Posted by dub dub

    I’m going to go out on a limb (respectfully) and say Satchel isn’t exactly who he says he is. I may be wrong (add it to my pile of wrong) but I think we may have a fantasy personna on our hands!
    Maybe that njudahchronicles guy! Or, judging from all the “past is present” history lessons (signed by Thomas Jefferson), a Time Lord (unlike proposition 13, the wikipedia entry for Time Lords is fantastic) 🙂

    Not to say there’s no useful info (and plenty of opinions) in his posts, and I completely accept and respect that he does have to prove anything to me (or other socketsite folks). All in good fun!

  29. Posted by dub dub

    Ooops: I meant he does not need prove anything to me or others of course. Sorry 🙂

  30. Posted by Boris

    Just throw a dart at at your range of investments. Gold? US equities? International Equities? Even the long bond. How about simply holding interest-bearing Euros? I haven’t checked the numbers exactly, but I am about 99% sure that ANY of these would have returned better than even that house in Noe (on an unlevered basis).
    Well, sure. But the use of leverage is damn near universal in buying real estate, no?

  31. Posted by Dan

    “Not too many people willing to build apartment buildings over time, if he can’t adjust prices at will…”
    Newly contructed apartments are not covered by rent control. The reason new housing is built as condos rather than as rentals is that the sale of individual condos has been more profitable than selling an apartment building.

  32. Posted by Satchel

    Boris,
    Leverage works both ways…. Remember, people leverage their real estate assets because they think their home value is safe. It’s not, as literally millions of buyers are finding out right now. Very easy to lose 100% of your downpayment.
    If you could have found a house or apartment that satisfied your needs in SF and rented, and invested the difference between renting cost and owning cost, you are substantially wealthier today. Substantially, and that goes for just about any market investment that you would have made. Think about that.

  33. Posted by Satchel

    Boris,
    I’m sorry, that is “If you could have found a house or apartment that satisfied your needs in SF and rented [since about 2002 or so], and invested the difference between renting cost and owning cost, you are substantially wealthier today.”
    Just to clarify.

  34. Posted by james

    over what period of time satchel and in what investment? the s%&p 500 is behind inflation for the last 7 years.
    unless you were front loading your own mutual fund, or lucky as hell to not have sold goog or aapl in that period, you haven’t made dick in the stock market.
    of course, nobody ever tells the truth about these things so go ahead and tell us how rich you are.

  35. Posted by anonSF

    If you could have found a house or apartment that satisfied your needs in SF and rented, and invested the difference between renting cost and owning cost, you are substantially wealthier today. Substantially, and that goes for just about any market investment that you would have made. Think about that.
    I hear that comment all the time, but I really wonder if it’s not missing something:
    1) Most places someone would buy are nicer than the crap rentals available, so there’s an intangible price people are willing to pay to live in a nice place.
    2) The tax advantages of owning real estate.
    3) The fact that most people are lousy stock pickers. (As an average investor, my returns have been pretty lame. The NASDAQ is still below its 2000 peak).
    I think real estate is a good part of an overall investment strategy (it shouldn’t be 100% of course). Maybe it’s just me, but the doom and gloom of folks like Satchel (and Jim Kunstler (Clusterf**k Nation), etc, just don’t ring true to me. People will go broke, lose their homes, companies will fail. But I don’t see the world ending just yet.

  36. Posted by Boris

    Satchel,
    I’m well aware that leverage works both ways. As it works both ways in most of the other items you mentioned (unless you were speaking of actually stockpiling gold bullion)

  37. Posted by Satchel

    james,
    Sorry, I corrected my post immediately but perhaps you didn’t see it. From about 2002 I said. I only use that date, because that was the date i was deciding whether to rent or buy, and determined that I was much more likely to attain much higher returns in equities (and especially foreign equities) than SF real estate. I was of course right, but that is only apparent from about 2005 on….
    Incidentally, not that you would believe me, but i was telling my friends (screaming really) to get out of NASDAQ in fall of 1999, at index 3500 average exit. They laughed at me when the index went to 5000. I got back in around 2002-2003, average entry around 1500. they were busted by then, still hanging on waiting for 5000 again. I told them it would probably be around 15 years. Now I think it will be longer. The outlook for tech profitability is really not all that good, and its role as a percentage of GDP is likely to decrease from here, as utilities, infrastructure and basic materials (and agriculture plays) are likely to increase in importance. Finance sector is on a secular decline, and will negatively impact the finance centers of NYC and SF/SV IMO. I don’t do individual equities – I’m a macro trader.
    You guys can laugh at me and resist, that’s fine. I feel the need to warn, like Ezekiel’s watcher, if any of you know the reference.
    But you should evaluate the ideas, nonetheless. Expected returns on SF real estate from where I sit will be negative, and substantially negative for a good period of time. How long depends on the inevitable policy responses, all of which so far validate my thesis that the Fed knows a deflation is coming and is in fact engineering it.
    BTW, my opinion on GOOG here is that it is not a good bet at these prices. Ditto for AAPL. But overall equities are expensive, but not extraordinarily so. I am expecting a recession, and so there are probably better entry points, but some equity exposure is ok here. BTW I am 50% long equities (balanced US/developed international) but I also do some pretty sophisticated derivative spread trading to hedge downside risk that is probably beyond what you could understand even if I could explain it.
    If you can’t hedge downside exposure with derivatives, don’t go more than 30% equities. Just do indexes, S&P and EAFE will be fine. After it becomes obvious we are in recession, and it will, look for Chinese stocks to crash. I can’t predict when – that’s not the way it works, unfortunately – but when things look bad in Asia, go long Asian equities in a big way. A big adjustment is coming in the world.
    For now, 10-15% long treasuries. 15% laddered treasuries. And about a 5% net worth gold position. If gold falls in the coming recession, increase exposure to 10-15%. The rest in short term treasuries, and long-dated foreign currency bonds.
    0% US credit exposure – a credit crunch is here. No muni bonds. 0% They won’t default, but people will panic and you will get them cheaper when that happens. Again, I can’t predict when, but you’ll know it when you see it.
    At some point, depending on policy response, real estate will be a great investment. I’m actually putting some structures in place now for that eventuality. If the policy guys allow the collapse, it might be safe to buy as early as 2009. If they draw it out (which I fear they will), it could be much longer. It doesn’t matter to me – just another asset class. When it makes sense on a risk/reward basis, you can be sure that Satchel will be there.
    As I said, if you have any equity in your home, HELOC it out now. We might not get any real collapse of course, but in that case the money that you HELOCed out will do MUCH better in equities and foreign currency bonds and gold. If we get a collapse, well you just bought yorself a free option to walk away and throw the keys on the roof.
    Real estate is usually desirable as part of an overall strategy, largely because of the subsidy that tax policy provides – analytically, tax deductions make implied owner yield tax free. But at these prices (no tax deductions available for debt over $1MM) and these pitiful implied yields, you would literally be crazy to expect to grow your wealth by buying anything in SF right now.
    Investing is not about predicting what is going to happen. It is about estimating probabilities in an uncertain world. The odds are extremely against youi in real estate right now, and have been since 2002.
    Instead of just sniping at me james, perhaps you could share your investment strategy for growing your wealth with me?? I might learn something. Unlike perhaps how I appear in the blogworld, I do have an open mind, and am always looking to figure out where I am wrong. that’s what traders do. It’s a pretty tough business, BTW.

  38. Posted by PaulG

    I’ve used Craigslist recently as both a landlord and a tenant so I’ve experienced it from both sides. I don’t think there’s anything mysterious going on.
    Rental prices are a Dutch auction. You set the price initially to the highest you think anyone will pay. If somebody agrees to pay that, great. If not, you wait a while and lower the price until you get someone to pay.
    As an owner, you want to maximize your rent and people don’t get into bidding wars for rentals (maybe they did in 1999 but not now). As a renter, if you see a place you like, you have the choice of paying what the landlord is asking or waiting to see if the price is reduced and risk someone else coming in and taking it.
    This is just people behaving rationally in a free market.

  39. Posted by FSBO

    Satchel – good investment advice. Questions – what is your recommendation for the best way to go long in Asia equities (for the typical fund-oriented small investor). And, how much does a sophisticated downside hedge strategy cost to implement (as a %) and is there a simple effective hedge for the small investor or should one just let their equities ride?

  40. Posted by james

    so your a stock broker satchel. what firm are you at and how long have you been there?

  41. Posted by doodle

    Satchel:
    If you are not a certified financial planner, I hope you have a good umbrella liability policy. If you are a certified financial planner, you should disclose your ownership of the stocks you mention.
    I am a professional and would never give advice online like this.
    Watch out.

  42. Posted by joe shmoe

    The Fed has been around since the teens my friendly duffel. I have read much about it in the Monetary History of the United States and How The Federal Reserve Runs The Country.
    The Fed’s decisions in 1934 to cut liquidity produced the bank holiday.
    While pure fiat banking is rather new (yeah, I know about Bretton-Woods and all that jazz and I trade derivatives from time to time myself –uncovered puts as a liability limited short and covered calls to try to maximize returns. I do some other stuff with volatility and risk that you might not understand. This is not a recommendation of an investment strategy and should not be construed as advice. Always consult a certified financial planner and your broker’s options help desk before embarking on a derivative strategy. Listed options are a high risk security and are not suitable for most investors), the western banking system (unlike the Islamic banking system) has been defined by margin since the 17th century– it was really fiat with a little real specie and metal being moved around.
    Sure “money” is disappearing. But even if we are up to $350B in written down loans, that is only $1000 per person in the US, hardly a year’s income and hardly reason to panic and anyway much of the notional money that is vanishing was owned by foreigners and foreign banks. The homes and condos that were built are still here.

  43. Posted by Satchel

    doodle,
    Thank you very much for that. No. I am not a certified fianacial planner or stockbroker, and that is good advice you are giving me. I am only offering some market opinions, and I emphatically am not suggesting that anyone act on what I am saying without talking with his or her own investment adviser or broker. Really, I am just throwing out some ideas, and yes I do have positions in PLW, TLT, FXP, EWJ and BWX.
    Please, once again anyone reading this consult your own adviser before making any investment in securities, and my apologies for getting so off topic from this post.

  44. Posted by Satchel

    joe schmoe,
    All good points you make. I guess where I am coming from is that the market seems to be telling us that we’ve reached the point where the lenders (collectively, our “savers”, FCBs, institutions, etc.) recognize that the sheer size of the debt/GDP problem is implying an insolvency of the system, if that makes any sense, and so lending is seizing up.
    In other words, in recent years, we have had to add something like $7-10 of debt just to generate $1 of real GDP growth, and that this ratio has been steadily increasing since the 1950s, with a radical steepening of the trajectory since the 1990s, and with a moonshot following 2001. It seems the market is telling us ‘no mas’, IMHO, because it knows that this debt cannot be serviced without a radical increase in domestic savings.
    Sure, the money goes and has to deflate, but the economy still needs to import the foreign capital to the tune of something like $2-3 bn/day, and it doesn’t look like capital infusions in the financial sector would be able to plug that sort of gap.
    So, IMO, the fed is trying to engineer a slow deflation of the debt, balancing the need to protect the dollar against the necessity of likely diving the economy into mild recession in order to get a positive trend in the current account. My sense is that that is what the dollar is telling us with its recent bid, and the long bond as well.
    Definitely, it doesn’t have to be a credit collapse, but at 350%++ debt/GDP, who knows how much debt needs to be retired and/or defaulted in order for the credit markets to beging to believe that the remaining debt is serviceable? It could be large – historical debt to GDP ratios hovered around 150% (more or less on a slightly increasing trend) for most of the postwar period, before ramping in the mid-80s and then really taking off as I described above. My only point is, we could be talking a lot of money just to bring it down to 250% (that would be $14T) – obviously over time – which seems a tough order for the Fed to do if you buy this reasoning.

  45. Posted by anon

    Never thought I’d say this, but where’s Marina Prime/Boomtime when you need him? As an unflappable bull, he used to be the one to troll this blog. Now I would love to see him and Satchel get into a Real Estate Celebrity Deathmatch. Who’s with me?

  46. Posted by SocketSite

    Satchel’s comment on December 20, 2007 at 10:37PM was removed at the request of the author.
    And now (if possible) back to the original topic at hand…defaults and tightening of credit beyond subprime.

  47. Posted by Trip

    I see that the multi-bank effort to prop up all the SIVs is dead:
    http://online.wsj.com/article/SB119826733522845631.html
    Looks like the private financial sector can’t/won’t fix this debacle. And the government is impotent to do anything big in an election year, so this tire fire is just going to have to burn.

  48. Posted by Michael

    ^ Not exactly:
    “Lack of interest has led the banks to drop the plan — known as the Master-Enhanced Liquidity Conduit, or M-LEC. In many cases the banks, in particular Citigroup, that were supposed to sell assets to the fund have instead bitten the bullet and moved the assets onto their own balance sheets, alleviating a key rationale for the rescue fund.”
    HSBC and Rabobank have done the same with what were to be SIV assets.

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