4174 26th Street
The sale of 4174 26th Street closed escrow on 5/12/09 with a reported contract price of $785,000 (1.8% under asking). Purchased for $995,000 in 2006 with 5% down (and before that in 2004 for $829,000 with 25% down). No word on that number in 2009.
As we wrote in March:

…in October of 2006 [4174 26th Street] was refinanced with two loans totaling $1,029,750. It appears that the property was taken back by the bank two months ago, and three weeks ago it was sold to a couple of agents. It’s now on the market and asking $799,000.

There’s no doubt this property has its challenges (including a lack of parking). And perhaps this is the only house in Noe Valley that was purchased with 5% or less down (but we wouldn’t bet on it). Regardless, it was a legitimate comp for other sales in 2004 and 2006, all of which went on to become comps of their own. And so on. And so forth.

So what happens now if the imperfect comp upon which the values of other more perfect homes were based now sells for 20% less?

Make that twenty-one point one percent to be exact.
Apples To Apples (But Likely No Longer 5% Down): 4174 26th Street [SocketSite]

77 thoughts on “An Imperfect Comp (But Perfectly Good Apple) Closes Escrow In Noe”
  1. What’s the big stigma with 5% down? I purchased my home with 5% down. Some of us work for a living.

  2. What’s the big stigma with 5% down?
    No stigma at all – I think it’s a smart strategy.
    Even smarter is to put $0 down.
    The next best thing is to do what the previous owner of 4176 26th did: cash out refi the entire downpayment (including fees it looks like): “in October of 2006 [4174 26th Street] was refinanced with two loans totaling $1,029,750.”
    Smart move, especially if he lived for free while the default/foreclosure process inched along. Now someone else eats the loss, which in this case looks to be have been more than $300K (it looks to have been bought back at the trustee sale for $685K and then transferred to some real estate pros who flipped it to an average buyer).
    Original buyer did fine, the salesmen who originated the loans (the original purchase an then the refi – twice in the same year!) did fine, and so did the flippers who bought this out of foreclosure for probably somewhere south of $685K. Everyone wins when sensible financial strategies are employed! 🙂

  3. In response to LMiRM
    Everyone wins when sensible financial strategies are employed! 🙂
    yeah, everyone but the tax payer. Until the majority of people start to look at real estate as a home first and an investment second, this decline in housing has a ways to go. Investors will never have qualms with walking when the investment goes against them, and the foreclosure becomes the new comp. And so on, and so on. How can you be pleased about a nationwide housing crisis that is being carried on the backs of the tax payer? Oh, but kudos for the guy who refinances before going into foreclosure so he can walk with 100k while the rest of us foot the bill.

  4. yeah, everyone is a winner. Except everyone else that bought based on this comp when it was refinanced and APPRAISED at over 1 million. Everyone else that wants to preserve their credit is screwed.

  5. Sarah, let it go. LMRiM has already made it clear where he stands as a “trader”. He is by far more knowledgeable/smart/savvy than most SS readers, with the authority that comes from being able to turn one’s smarts into creation of wealth. I admire him for his professional accomplishment and his intellect. I pity him for the message he’s passing on to his kids.
    Amen-

  6. noe valley isn’t SF.
    SF is Pac Heights.
    heh.
    No. It’s just that the real Noe Valley starts at Clipper. That’s why the 25th st. $2.9M apple two blocks away got two offers and is supposedly going to sell for over asking.
    Just kidding. Noe is pretty entertaining these r.e. theater days.

  7. Right, Tweety, like LMRiM explained, there’s no stigma. It’s turning acually turned out to be a smart financial strategy.
    Also, depending on when you bought and how much prices in your area have dropped, you are in a stronger position to renegotiate your loan balance, interest rate, monthly payment etc. if you put down 5% or less. You put down 20%, the bank has you by the balls. (Sorry, there’s no other way to say this.)
    🙂

  8. Regarding LMRiM’s strategy of cashing out any downpayment then walking away after living for a year or more rent free… friend of mine cashed out his equity in 2007, then defaulted early this year as a ploy to get his bank to work with him on a short sale (he had been making payments up until the end of 2008, but the property was underwater by 20-30%). As soon as he started missing payments the holders of the first trust deed were eager to work with him on the short sale, and the holder of the 2nd eventually came around. What was NOT disclosed to him until they reached the closing table was that the banks had agreed to release the property to a new buyer, but would not release his loan from him (he’d refi’d out of his nonrecourse purchase loan). Seems there are firms out there that are buying the rights to pursue people through debt collection agencies on defaulted notes after the property has been disposed of. One of them is called Pennymac – started by former employees of Countrywide. I’m guessing they buy these things for pennies on the dollar (get it – Pennymac!), and then set up unsuspecting folks with payment plans. Kind of blows a hole in the “walk away” strategy if someone was no longer on their purchase loan – which many people refi’d out of in the boom years.

  9. I think it should be noted that it WAS a smart strategy. The required down payments going forward are now 20% or 30% for condos, so I guess everyone is now going to be held by the balls. Those days are over but yet the prices are still pretty high.

  10. Thanks, rabbits, for introducing a dose of reality into this fanciful discussion. If you’ve got money left over in your pocket, the debt collectors’ lawyers will be coming after you. Who could believe otherwise? And don’t plan to buy another home to live in for years to come.

  11. Sorry to hear about your friend, rabbits. He obviously didn’t get good advice on this – he should have forced the foreclosure and made the recourse lender elect whether to pursue the trustee sale or recourse under a judicial foreclosure. Short sales are sold to suckers as not dinging credit as badly, but they are fraught with peril for people who do not know the laws or are not getting good advice from someone who does.
    If I ever go back to work (now that the kids are getting into school age it’s getting boring just watching/trading markets and posting on SS) I might dust off my law degree and finance knowledge and get involved in helping people protect assets in what I really think is going to turn into a free for all over the next decades. But I’ll have to do that in a more tax-friendly state than CA – I’d hate to be a regular income earner/taxpayer here! Man, are the forces aligned against people here….

  12. What was NOT disclosed to him until they reached the closing table was that the banks had agreed to release the property to a new buyer, but would not release his loan from him (he’d refi’d out of his nonrecourse purchase loan).
    Well, the banks played that well (to a point)… Hope your buddy then tore up the paperwork and said “I don’t need no stinkin’ credit score”.
    Kind of blows a hole in the “walk away” strategy if someone was no longer on their purchase loan – which many people refi’d out of in the boom years.
    Again, can someone site a case where the bank actually went the judicial foreclosure route. FAB says he’s never seen it in all his years in the business (including the last downturn) and I’m inclined to believe him. I suppose that could change now that $1 million homes are being foreclosed (with the assumption that there some deep pockets involved).

  13. So my friend found a real estate attorney to review the closing documents for him, and he seems convinced that there is no way the loan can come back on him – but to your point, LMRiM, loans can be so complicated these days and the rules are changing so fast, who can be sure they got away free?

  14. I suspect FAB is right that going after deficiencies post-foreclosure, or post-short sale, has been exceedingly rare. Not worth it in the past. However, this area does seem ripe for someone like this pennymac outfit to buy up those rights in bulk for cents on the dollar and line up a small army of lawyers (on contingency fees, of course) to go after former homeowners. I hadn’t heard about things like that, but I’m going to keep my eye out for developments. That is really interesting.

  15. loans can be so complicated these days and the rules are changing so fast, who can be sure they got away free?
    That’s why I’m starting to get the entrepreneurial bug. There looks like there is going to be a real need and business oportunity here (it’s not just housing – college savings, IRAs, nonrecourse trusts – everything is going to be on the table for an insatiable government that is going to spiral out of control).
    About your friend, obviously the real estate attorney is closer to this and knows all the facts, and so is in a better position to offer advice. I would be worried about the theoretical possibility that the recourse lender could sue him personally on the theory the lender only released the property from the lien, not the borrower from the obligation. But I do think this is likely a remote possibility.
    In general, so long as there is a property to foreclose, as a practical mater the lender is going to elect to go after the property, which will have the effect of cutting off personal liability and that really ends the process. Even if in theory some possibility of recovery exists personally on the amount by which the refi amount exceeded the amount used for the original purchase, banks are not going to devote the expense to pursuing it. It’s a very low percentage bet b/c most borrowers are deadbeats – debt zombies who were zombified by the banksters and governmental “incentives” to go into debt.
    In this case, though, the bank will be closer to your friend’s finances, having just gone through the short sale process and (perhaps) recent financial info in connection with the short sale approval? To forestall this, I would have insisted on a full release from the 2nd at the closing, or just nixed the sale as EBGuy suggested. Your leverage is with the first lien holder. I bet that rather than risk the foreclosure process and continued implosion of prices, he’d sit on the 2nd and pay a few $$ to the 2nd to avoid the foreclosure – at least more than the Penny Mac fraudsters are paying for the paper – but maybe not? With all these 2nds bouncing around, it is certainly going to be a fertile field for the lawyers 😉
    Keep us posted on what happens, that is, if anything does happen which I am guesing is going to be just a few threatening letters.

  16. Don’t forget a ding on the credit report.
    Hopefully they violate the fair debt collection practices act in some way and you can sue in small claims to get that credit ding removed.
    Interesting question as to what happens to all those 2nd/3rd/nth mortgages and whether they will come back to haunt defaulted borrowers years from now.
    Perhaps there’s a giant computer system just waiting and watching, lurking until the defaulted people get back on their feet.
    Then the phone calls start …

  17. He expects a credit “ding” but is prepared to deal with that. Word is that after a couple of years it’s not that hard to qualify for a mortgage if you’ve been perfect since foreclosure, and you can bet there will be all sorts of loans out there for people caught in the Great Foreclosure Crisis of 2007-201?. But what I do think will happen is that some enterprising company will do exactly what Trip has laid out above – and that seems to be Pennymac’s business model. In order to qualify for the short sale my friend had to prove “insolvency” by showing income/assets. I believe he was able to hide his assets (don’t ask), but income is trickier, esp. for a W2 employee. For lots of folks, my friend included, there was no job loss or tragedy involved – just being way upside down and not wanting that payment anymore. So there really is no “getting back on their feet” for these people – they’re already on their feet and able to purchase again at newly reduced prices. It almost seems like an undiscovered gold mine for some debt collection-type outfit. Esp. in the high-earning demographic that used the option-arm, HELOC products with abandon.

  18. I suspect that lenders entering into the type of bulk deal with someone like Pennymac will be careful not to give a broad release to the defaulting homeowner. Most homeowners in this situation will not be like rabbits’ friend and seek legal assistance — they’ll just sign to get this monkey (um, I mean American Dream) off their back.
    But it really would not matter if the lender did things right. The Pennymac lawyers would just send letters demanding payment for the shortfall anyway and offering to enter into a stipulated judgment for some discount. These will get ignored for the most part. Then they will file a complaint in court. These will also get ignored as lawyers are expensive, resulting in a default judgment. Then the Pennymac lawyers can levy on that judgment — garnishing wages, etc. That would be extremely hard to fight as once a default is entered the homeowner has basically conceded everything, even if there were defenses to the underlying lawsuit. I can see it happening.
    Then the class action lawyers will get involved and the stakes will get big, then, hopefully, Pennymac will retain me 😉

  19. Wow. Another turd in Noe dug up by the crack research “team” at SS… I find it deliciously ironic that all the anti-establishment real estate sites have now started to the mimic the exact same behavior of the main stream realtors who drove the bubble all the way up. (Analysis? Who needs analysis when you can have apples? Anecdotes are far more interesting anyway and deliver more eyeballs, too!)
    And what’s the obsession around here with Noe? Every single house that sells in SF is a freaking “apple” unless it’s new construction. But somehow the “staff” at SS can only seem to turn up one apple every two days and, for some reason, every other one seems to be in Noe. What’s the agenda? Just curious…

  20. Noe foreclosure count (NOD, NOTS, bankowned) stands at 22. The most interesting action is in the ~$1 million range where we picked up two more NODs compared to last week.

  21. Anti-establishment real estate sites, LOL!
    Is there any evidence that any taxpayer dollars were burned at this particular stake? It looks like lenders absorbed the damage. Poor regulation of credit markets might have prevented this scenario from playing out, but because of this mindset of government being the enemy we now have a meltdown and bailouts.

  22. LOL! I wonder where “Dave” bought in 2007…
    “Dave” sold in 2006, sat out two years and bought a foreclosure at a 30% haircut, so don’t worry too much about “Dave”…
    I actually enjoy much of the content generated around here but most of the intelligent discussion happens in the comments, not in the posts. From what I can tell, the ed. of SS (who likes to refer to himself as “we”) has some kind of bone to pick with Noe but can’t seem to back it up with anything other than speculation.
    I can find 2 dozen similar turds to the one in this post in other neighborhoods that also had nice big haircuts, so what do we learn from this particular turd other than it aligns with the SS ed. bias? Read the SF magazine piece where SS ed. states something like, “Look out below in Noe!” Based on what, exactly? This apple?

  23. funny, but i emailed adam (the SS editor) about another noe apple, 1169 noe st. a 2/1 condo w/prkg. sold 4/11/06 for $775k. sold again 12/17/08 for…$775k. you’re looking at a 6% drop max,if you incl. 5% RE comm & 1% for transfer tax/closing.
    another one in the mish: 1117A alabama st sold for $665k 10/05, and sold 3/31/09 for $649k. again a very small drop.*
    bottom line: many here are focused solely on the > $1 mil properties, and yes, some of those are down 20%. but i see little discussion on condos and tic’s in the $400-700k range. and i don’t mean SOMA (lots of discussion on developer induced price drops.) but if you look at good tic’s and condos in prime SF (meaning all of SF except: D10, eastern parts of D3,and SOMA/FiDi highrises.) you will see that numerous condo/tic’s in the $400-700k range have lost 5-10%. i own several units in that range and track the prices closely in the mish, bernal and noe. it would be nice if this market segment got more attention on this site. but, the bearish forces here aren’t too interested in looking at less glamerous price drops. anecdotal information (such as apple/apple comparisons) can easily be misleading, and the lack of a true will to report on all major market segments, just feeds the comfort of selective bias (would you like mac & cheese with that?)
    * there is something screwy going on at propertyshark, as they list 1117 alabama st unit B as sold for $665k, but i know something is wrong. i live near this bldg and both times it was the upper unit that sold. matter of fact i saw this one, and 1169 noe st.too, and there have not been any significant changes to either units, so they are true apple/apple comparisons.

  24. All that means, 45YOH hipster, is that the buyers in the $400-700K market in the mish today are fools. They don’t yet understand the repricing that is occurring in the Bay Area, and are encouraged that there is still some competition in the segment thinking that they are “bulletproof”. This competition is also being supported by the government welfare loan programs.
    If you want my advice, sell that unit that you sometimes mention as wanting to sell out of your portfolio. When the dust settles, people buying mish TICs/condoze in that range today are going to look as silly as the people who bought these Noe “turds” a few years ago. This sort of market differentiation/segmentation often happens in the early stages of decline phases. Recently, for instance, you might recall how everyone thought tech stocks were “bulletproof” in Summer and Fall 07, while smart traders immediately recognized that the increasingly narrow distribution process that was happening (in which the smart money was unloading onto the dumb money) signalled a much larger across the board correction that ultimately overwhelmed the entire pricing structure (even I was a little surprised at just how violent the stock collapse of 08/early 09 was)!
    The dynamics of the SF real estate market decline are really not very surprising at all (that’s not to say, of course, that every twist and turn is forecastable, but the overall pattern and destination are assured imo).

  25. How many “fools” “catching knives” does it take to make a market? (Rhetorical question, as I don’t expect that to be answered by individuals who gauge within the context of a income/ownership multiplier which has never existed in San Francisco.) Speaking of the Mission, Mosaica has been neatly ignored by this website and it seems to be doing pretty well.

  26. “How many “fools” “catching knives” does it take to make a market?”
    One for every home that sells from here to the bottom.

  27. Lmrim- I actually am selling one of my condos, but not for the reason you subscribe. I maxed it’s value added (recently turned condo from tic) and also leveraged it (92% LTV) 2 years ago for another property/project. I don’t want to carry the neg cash flow, as I don’t expect appreciation for a few years as compensating offset. Plus the market for sub $700k is pretty good right now, so my tic to condo conversion upside pretty much offsets the 10% price drop since 9/08. (I already made, and pulled, my profit on it 2 years ago).
    What I do want to keep (almong others) are a few lower priced tic’s in the mish, with about 150x monthly rent/value. These cashflow pretty well for SF. I’m pulling my (bull:) horns in a bit. Like you, I live off my asset base, and I want to strengthen the cashflow/lower the debt load for the next few years. With limited refi options, it’s harder to tap into my equity, so I want to play it safe. I have no problem waiting until the market turns around and lending normalizes. Since I do development deals anyways, I think they work better in a neutral to uptrending market- I can always find interesting development projects in SF even with increased competition. Matter of fact, I am surprised by the dearth of great development deals, given the market crunch. So it’s better to wait for a lot hospitable lending environment, in my case.
    As for future values, sometimes I think we’re looking at the same coin from opposite sides. I don’t think the $400-700k buyers are suckers. Matter of fact, they show the resiliance of the SF market, as alot of buyers in that range are stepping up to the plate. You’d think with all the recent problems, buyers would still be shying away. But more than just a handful think differently, and one can’t just dismiss them as fools, even if it goes against your market prognosis. Even in your playing field (stock market) we’ve seen a 30% recovery from recent lows. I’m sure some early march bulls made alot of money recently just buying the index. Haven’t you been mostly short this year? RU considering taking more long positions now? (yet wouldn’t that be the classic sucker move, given that we already had a ‘feel good’ market bounce, and what’s the chance of being up another 10% even in the next 2-3 months?)

  28. What I do want to keep (almong others) are a few lower priced tic’s in the mish, with about 150x monthly rent/value. These cashflow pretty well for SF. I’m pulling my (bull:) horns in a bit.
    That’s a smart strategy to reduce risk here. I’m sure you’ll be fine – there will always be development deals and opportunities to extract value from any market (even a declining one) for professionals who are smart about it and are not so overleveraged that they become paralyzed.
    I’m sure some early march bulls made alot of money recently just buying the index. Haven’t you been mostly short this year? RU considering taking more long positions now?
    LOL, it’s ironic but you asked me the exact same thing almost exactly 1 month ago. (I know it because it was the day before April options expiration, and today is May options expiration!)
    https://socketsite.com/archives/2009/04/below_2004_or_2001_pricing_why_choose_when_you_can_have.html (see Posted at April 16, 2009 7:07 PM)
    I was very lucky to get long in early March (big call position initiated in the first week of March). I just about made enough money from that one trade to buy one of those crappy TICs in the mish for cash (well, at least pretax) so I’m in a good mood these days 😉 Options expiry is going fine this month as well, but nothing like last (I’m short the 880 put/900 call S&P strangle).

  29. I just about made enough money from that one trade to buy one of those crappy TICs in the mish for cash (well, at least pretax) so I’m in a good mood these days 😉
    Guy shares his outlook/portfolio information with you, and then asks you a question about your positions. You answer with a boast that you could buy one of his asset base holdings, calling it “crappy,” instead of “lower priced.”
    (Shakes head.)

  30. Yeah, that did come off a little more arrogant than usual. Sorry about that, 45YOH! It’s just that I answered the exact same question a month ago, sans any “boasting” ;
    About outlook, I’m pretty flattish in securities markets, and trying to position to make money in a declining market (without losing much in an up market), which is what I expect now that the bear rally seems to have run most of its course. No “green shoots” for the economy yet – the policies being pursued are disastrous.

  31. I thought you were mostly short in march, with the exception of one hedge position (which apparently did well for you). So didn’t you loose substantially on the shorts last month?
    Also, what percent of your net worth are you trading with? Aren’t you ‘parking’ substantial sums in safer/hope to keep up with inflation? If you’re living off your asset base I’m assuming you have strategies in place to protect a base sum, while leaving a portion to ‘play’ with. I’m curious what your strategy is. (As for me with RE, when I was able to leverage an existing asset and buy another it was like having my cake and eating it too. Carrying a reasonable negative for a future development upside was certainly manageable. Now it’s all about keeping the best assets with lowest debt possible. RE has a powerful boom/bust factor due to leverage. But I’m positioning myself for the right time/future event, and I’ll certainly be able to pull substancial money to buy in again. I don’t have to. I can well live off what I have now for decades, but I like the RE game too much to call it quits now. Hell I’m way too young to really ‘retire’ – plus I think it ages you when you mentally stop builfing and creating.

  32. Thanks anonn, but I took no offense. Matter of fact they’re pretty nice tic’s and with the high income tax rate lmrim will pay the Feds for that trade (to undoubtly help fund the bailout he’s so fond of 🙂 he’s maybe looking at 1/2 a tic.
    In my case all my profits from RE are in my holdings, and any trades have been offset by massive write offs. Being catagorized by the IRS as a professional RE investor allows me to accrue unlimited ‘losses’- essentially my development investment costs, which I eventually profit from anyways. It’s amazing but I have been paying zero fed taxes the last five years, so personally I’m cool with the bailout. All I know is that the tax codes suck for stock traders but can literally give a savvy RE investor free rides for a long, long time.

  33. LOL, 45YOH, don’t I know it about taxes! It’s amazing the amount of time I have to spend on tax strategy. In some environments – such as 2002 through 2006 – I was like you, paying almost no tax (even on a very large increase in net worth in 2003), but in environments like 2007-2009 (so far), the need to realize gains or at least engage in short term hedging, generates reportable income that can be a real drag. It’s one of the reasons that I am going to have to get out of California residency before the Bush tax cuts expire (recognition of a long held carried interest in a hedge fund will lose lt capital gains preference and would also get hit by the Clownifornia “milionaire” tax – no thanks), and I’m sure glad I don’t own any property here that would create a presumption of residency!
    About markets, I’ve been biased slightly long most of 2009. (I could dig up some posts I guess, but I think you’ll trust me.) I overlay options strategies onto underlying long positions generally to express bias, and as many on here will recall I’ve been steadily building positions in junk debt and Asian equities since late 2008. I have been short commercial REITs continuously for a long time, and that position has hurt a bit since early March, but was helped enormously by the total wipeout of GGP.
    About trading versus net worth and overall strategy, I always think in terms of overall net worth when trying to generate returns, and I strive to achieve 6-8% average annual returns net of tax effects on overall net worth. I haven’t had a down year since getting out of the business in 1999, other than 2002 (which was just -1% or so), while 2003 was an outlier (+15% or so).
    About your question on how much one should “trade” I manage size of trading positions to achieve those sorts of prospective overall returns, depending on market conditions. So, it will vary, but I’d say I actively trade approximately 30-40% of net worth on average. I do have a few largish assets that are not tradable, but much of the rest is in an “insurance mix” of cash, foreign currencies, gold and US I-bonds that date from the early 2000s.
    About larger philosophical “macro” strategy, now that the kids are getting into school age, I am looking for an opportunity to get back into the “real” world in the next few years. It’s not going to be in California – economic prospects are poor here imo.

  34. hey, thanks for sharing. personally i’m getting 3-6% after tax cash on cash return with my rentals. that does not incl. the tax/depreciation benefits. and if i normalize the appreciation rate, including a ~ 10% decline this year, and project flat apprecitaion for the next 2 years, modest appreciaiton afterwards, i’m well north of 15% normaized ROI.
    but what i like about RE investing is that it’s slower moving, and quite stable in the long run. (i guess i’m not built to trade 30-40% of my asset base on any given day!) this lends itself to really helping with the tax situation, and also justifies investing (in the right) SF properties, as they have been more stable than most markets. i’m down ~ 10% in value, and i do think we’re circling bottom on the lower end price spectrum, unless macroeconomics change drastically (i.e. double dip recession, rapid rise in inflation, would be the main culpits IMO.)
    personally i am still surprised by the strong market rebound since march. i agree no ‘green shoots’ for the economy in the short term, but i wonder if the market will just as easily drop 20% again, once the obama-in-february valium wears off. at this point i think that SF RE values are going to follow macroeconomic trends in a pretty straightforward fashion. our good case scenario is that the market muddles along +/- 10% this year, and starts some sustained recovery in 2010, along with some green shoots that year. which means lower priced SF RE will muddle along at current price range this year and next, with some modest appreciation late in 2010/early 2011. and that will work out just dandy for me.
    p.s. i also went off the ‘w-2 grid’ in 1999 (guess i left the insane high tech world at juuuusstt the right time.) i then went on to pursue a nichy international art business i had a fascination with, which did not result in significant profit, but travel like the devil i did with nice bouts collecting contemporary art in latin america, SE asia and east africa. in 2003 i decided to leverage my real estate and acquire more, and have not looked back since. (so here’s to 10 years of independence *clink, clink* of the glasses) ok, time for my sushi lunch and nice neighborhood walk in the sun. adios.

  35. I’ve always wondered about Inclne Village NV — all the benefits of Tahoe and none of the CA taxes. Anyone ever live up there?
    People are always going on about getting cabin fever in the winter but for an avid skiier it would be awesome.

  36. GWTF,
    Mostly due to family reasons, we are almost certainly going to wind up in FL, at least initially, so we really don’t have a top 5 list. We’re actually starting to look for some property there and are likely to buy a SFR in South FL for use by family later this year. Not exactly sure of the timing of our exit from CA, but we will certainly not qualify as residents for tax purposes (see FTB Pub 1031) past 2009 tax year. It’s been a wonderful place to live for the last 7 years (full time – we’ve been here intermittently before), but it’s time to go now that the adjustment in the US economy is getting under way. When we get out on the other side of this adjustment, you want to be in a place that is going to benefit disproportionately, and imho that’s not CA.
    In the absence of family considerations – strictly from a macro point of view – I like the southeast and Texas, and perhaps even some of the western states that can benefit from a CA exodus (notwithstanding the water issues), although of course much depends on what your field is.

  37. 6 hours later and no poo pooing of 45yo’s market prediction?
    as to the home… hollywood called and wants their Dodge City facade back

  38. “6 hours later and no poo pooing of 45yo’s market prediction?”
    I enjoy reading 45yo’s posts and always look forward to them. No poo pooing but I will point out his assumptions that I disagree with.
    Ok, 45yo, you write, “if i normalize the appreciation rate, including a ~ 10% decline this year, and project flat apprecitaion for the next 2 years”
    IMO that’s about the most optimistic scenario anyone can propose without being laughed out of the room. The odds of that scenario coming to pass are slim. I will say a realistic scenario is for prices to roll back to 2003 or earlier over the next couple of years followed by several years of flat appreciation.
    “in 2003 i decided to leverage my real estate and acquire more, and have not looked back since.”
    I hope not too leveraged… and that you have some fairly liquid capital cushion. Depending on your leverage and your assets outside of re, you might be playing with much more than 30-40% net worth that LMRiM is playing with and that you appear to deem too risky.
    I wonder what type of contingencies you have planned for. A return of prices to 2003? Rents turning back to 2003? A spell of vacancies? Interest rates going up? Having to refinance? More rent/eviction control laws?
    If I were in your position, I would be following Fronzi’s recipe and trying to go to cash. There would be time to get back in.

  39. I LOL at how 45yo hipster keeps trying to impress LMRiM with his real estate investing “brilliance”. Always a tone of “Hey, look at me. I’m just like you LMRiM but I do it by investing in SF real estate.”
    If your investments are sound and your tax situation and cash flow good, then well done and enjoy your just rewards. But it is pretty weak to so openly crave and seek the approval of an anonymous poster on a blog for your investing “brilliance”.

  40. I don’t really take 45YOH’s posts that way. I like learning about the motivations of investors in all markets.
    For the record, I have no problem with the idea of real estate investing, and I always am on here saying that if you are a professional and are disciplined about it, real estate investing can be a great way to make a living. I’m interested in it myself for the next phase of my “career”.
    I do get a bit of a laugh, though, from many posters (not necessarily 45YOH) when they try to “explain” to me how the tax benefits work or how I am “forgetting about inflation” or “appreciation”, etc. Believe me, I’ve managed money at a pretty high level professionally, and I do see the risk/reward calculus from a number of different perspectives that many posters clearly haven’t considered.
    What’s cool about investing (or trading), and what’s apparent from many postings from successful investors on here, is that there are many paths to achieving some modicum of success. After spending a number of years on trading desks with some of the smartest and most ruthless people you’d ever want to meet, what has always struck me is that investing is probably more about understanding yourself than understanding fundamental or technical factors relating to the asset classes/markets you’re trading. Even the smartest often fall down over the visceral reaction to success/failure and the gauging of personal reaction to it. What’s fascinating about real estate markets to me, is that many ordinary people have gotten caught up in what has been turned into a trading casino, and facing these sorts of risks is not what they signed up for or expected.
    I do think that SF and surrounding real estate markets are much more similar to the financial markets than many seem to accept, and it is unravelling in a textbook fashion (which would be recognizable to anyone who has spent time trading leveraged markets). I do think that people here are going to discover the same thing that beginning traders do with respect to financial markets: “If you don’t know yourself, this is an expensive place to find out” (The Money Game, by “Adam Smith”).

  41. I LOL at how 45yo hipster keeps trying to impress LMRiM with his real estate investing “brilliance”. Always a tone of “Hey, look at me. I’m just like you LMRiM but I do it by investing in SF real estate.”
    If your investments are sound and your tax situation and cash flow good, then well done and enjoy your just rewards. But it is pretty weak to so openly crave and seek the approval of an anonymous poster on a blog for your investing “brilliance”.

    What is it that you do within this forum, “nonna” ?
    Why don’t you tell us about yourself? You know, the knowledge that has sheped you … the wisdom that has enabled you to sit in judgment of others — who might have different perspectives than yourself — but who share real life r.e. experiences?
    Tell us.
    In the meantime, I’m ROTLMAO@U

  42. I do think that SF and surrounding real estate markets are much more similar to the financial markets than many seem to accept, and it is unravelling in a textbook fashion
    You mean like the last two major real estate downturns in 80-83 and 89-91? You keep telling us that it is different this time, which markets do you think are good historical analogies to the current one?

  43. The Great Depression. The Japanese housing bubble. Tulipmania.
    The last two housing downturns in California were caused by job losses, not a general overexpansion and then contraction of credit.

  44. “You forgot beanie babies.”
    No I didn’t. There’s a storage locker full of them and when they come back I’ll be rich, rich, rich.
    😉

  45. Chuckie- nice to hear you like my musings, and feel free to challenge/respond. But the short of it is, that unlike you/diemos/(and sometimes)Lmrim, I don’t think this ‘recession’ will reinvent or realign much of anything ‘fundamentally’. There is too much inertia in the new liberal democracy inspired form of capitalism that has taken root globally, and too many people are lined up (ie. BRIC- Brazil, Russia, India, china) to push this model forward (in the hopes) of obtaining it’s benefits.
    I’ve been hearing ‘this time it’s different’ for years now, and it’s always the same. The distortions Lmrim talks about, culminating in CA’s demise as a tech powerhouse/leading state of the union are distortions that will not work themselves out of ‘the system’. The distortions are part of the system! And real estate has a legacy of these, from the tax structure, to leverage, to prop 13. One could even say that SF RE is ‘super distorted’ given the limited land mass, crazy local politics/inability to build, rent control, and the bigger than life reputation this place carries in peoples psyche. And that’s exactly how I make my money- these distortions are often counter intuitive. I meet so many out of town investors who would never buy here. And they shouldn’t, unless they are going to committ to a deep level of understanding.
    Perhaps the smartest thing Lmrim has said in a while,WRT investing, is that you need to know yourself. Being successful in the long run takes more than jumping into a flashy market. There was so much bullsh!t with the investment bank apparatus, especially since the early 80’s. You get a visionary like Milken, and then a whole bunch of me too’s, until the whole thing collapses from it’s own distortions. Same thing happened with the SE Asian currency crisis in ’97, the wonder of arbitrage, the ever expanding in definition ‘hedge’ fund, CDO’s, quants. Someone comes out with a novel idea and it quickly gets copied and pretty soon Mba’s with the proper pedigree get the chance to jump in while the getting’s good! Most who made money under these circumstances were lucky- and at the right time at the right place. That’s good timing and good luck, not investing for the long term.
    I’ve been in SF RE for 15 years. I do it because I enjoy it, I’m pretty good at it, and most importantly, it allows for a lifestyle that I like. For me it’s all inclusive, and it also becomes a part of your self identity. That does not mean I won’t change strategy or tactics very quickly if I need to. I will. But brute stubborness and a strong belief in self are also critical. (You live by the sword, you die by the sword.) But often it’s the balance in between these extremes that makes this challenging and engaging.
    Man this heat must be getting to me, cause that’s some of the best investmemt-is-life-philosophy bullsh*t I’ve written in some time!

  46. Good stuff. Nice illustration of why 45YOH (and NoeValleyJim) are my favorite bulls on this site.
    My 2 cents (all it’s worth) is that real estate, including SF real estate, is right up there with the early ’90s junk bond collapse and the late ’90s currency crisis. Indeed, much worse. The last 15 years of SF real estate have been marked by two big bubbles, so your timing was excellent! But 30%-plus declines from here (50% from peak) are very possible (likely in my book, but, again, just worth that 2 cents). I hope you have the downside risk managed.
    Now, we’re off to Nonstop Banghra. Gotta get there in time for lessons!

  47. “I’ve been in SF RE for 15 years.”
    Then you got into the game just as the biggest housing bubble in history was starting to inflate. Instead of deducing from that that you are a seasoned and experienced real estate investor, perhaps that tells us that your instincts were honed in a unusual period and may not serve you well once that period ends.

  48. Apropos of diemos’ last comment, I was a huge bull on equity markets generally from 93 to 99 in the US, and I was often called a “bull market baby” by some of the older and wiser traders around me (fortunately, I was able to flip bearish in Fall 1999, but by then I was only trading for myself). Imagine that – I was a bull!
    Another trading aphorism that’s probably repeated on trading desks somewhere a 1000 times a day, every day: “There are old traders, and there are bold traders; but there are no old, bold traders”.
    Do be careful, 45YOH, this cycle is not going to be like anything most people have experienced. It already isn’t – 50%+ nominal declines in many segments in the Bay Area (not The Real SF of couurse, yet), has that happened in living memory on this scale before?

  49. I don’t really consider myself a bull. As I have stated before, I expect a normal cyclical peak to bottom correction of 25% in real estate, with SF not immune, though probably escaping the worst of it.
    And we are clearly past the peak. I have to admit to being surprised at the sudden and sharp nature of the downturn in some of the outer suburbs. I have never followed a downturn in Real Estate this closely before (I was pretty young during the last one) so perhaps this is normal, but I kind of doubt it.

  50. First, this whole bulls and bears dicotomy is a misnomer, and a disservice to to a more nuanced discourse, which presumably we are attempting to have. (think liberal vs. Conservative political labels; most people are more complex in their political persuasions).
    Second, I never said, or implied, that I expect appreciation like the last 15 years. Over the next 10-15 years I think we’ll have normalized appreciation in SF of 2-4% (which includes a moderate rate of inflation.) Some years it will be less, or negative like now, but I bet you that the in the next economic run we’ll be north of 6% in SF. If we have a bout of high inflation, eventually that will be reflected in RE values too (note I said eventually).
    Lmrim- regarding the -50% drops. Sure we have seen that in numerous boom/bust towns. Houston in the early 80’s was much worse. Denver, Arizona and other western states also took big hits in the past. That is why I don’t invest in boom/bust places. My mind is not calibrated to optimize that situation!
    And no, I don’t think there is a massive bubble to unwind in SF. We may be circling bottom on SF’s lower end, and if not it’ll drop another 5-8%, BFD.
    I don’t think that’s being bullish. If I subscribed to you guys and your prognosis, I’d want to sell everything, including my residence and rent! I think my perspective is a moderate one for the future.
    I have certainly recalibrated my outlook and debt load since the lehman bust and I’m comfortable with my new target debt level, going down from high 60’s to high 50’s. So when the market comes back and the lending environment normalized, I’ll be in a good position to re-leverage and expand again.
    NVJ- are you invested in SF RE beyond a primary residence? Just curious 🙂

  51. The problem with calibrating your intuition on the period from 1982 to 2000, is that was a in which interest rates were in a secular decline, the values of financial assets — both debt and equitywere in secular bull markets.
    This resulted in outsized gains for the top incomes — as these incomes are much more dependent on asset prices than on things like national productivity.
    If your sense of history includes periods other than the great inflation of 1982-2000, then you’ll see that when interest rates are climbing, as happened from 1960-1980, then financial assets don’t do so well, so that the top income’s share of wealth declines, and consequently real estate prices dependent on a steady stream of increasingly wealthy buyers take a hit.
    It doesn’t take belief in anything other than business as usual, except you have to expand your sense of “usual” to include the 4/5 of the twentieth century that most people don’t think about.

  52. That’s a very elegant post from Robert, and needless to say I agree with the analytical framework sketched out 100%.
    Regardless of whether you see the US tracing a future medium-term trajectory somewhat similar to Japan’s following the bursting of its twin credit bubbles (the view I incline towards), or a trajectory characterized by significant price inflation pressures, the outlook for prices of leveraged financial assets like real estate is not great.
    The Japan-style muddle through of price disinflation/mild deflation and credit deflation has been murderous to its stock and real estate market valuations over an almost 20 year period now.
    If you incline towards a view that the US is going to experience significant price inflation pressures, then I would pay close attention to the data that Robert highlighted regarding US equity returns from the mid-1960s through 1982 (August 1982 is when Volcker started the credit inflation, largely in response to the Latin American banking crisis). Nominally, markets went nowhere for about 18 years, while in real terms they of course declined fairly dramatically. Real estate did a bit better than that (nominally) in those years (no chart), but consider that pricing of real estate assets in those years was coming off a much lower base.
    This second scenario of price inflation would likewise not be good for leveraged assets like real estate (equilibrium interest rates would rise or credit would be rationed – to believe otherwise is to believe in the tooth fairy).
    I can’t foresee a scenario unfolding analogous to the 1982-2005/6/7 period in which on a trend basis price inflation falls (but remains above 0%) continuously, interest rates fall continuously, and availability of credit grows continuously. Interest rates can only fall from 20%+ (fed funds in 1982) to 0% once a cycle, and what a cycle this has been (see Robert’s link of total US debt/GDP)!

  53. Robert- thanks for putting the charts together in one place (I have seen most of them seperately). Regarding interest rates, they don’t have to me rock bottom/trending downwards all the time for RE to be a good asset. The volker years where we got into double digits were bad for leveraged assets, but that only lasted a few years.
    As for tight credit markets, the RE market adjusts accordingly. These last 18 months have been really bad for RE investors (different case for SFH buyers with the new gov pgrms, btw.). But investors that are in a large cash position are finding distressed deals and possibly making good acquisitions right now (ultimately time will tell). Additionally we are already seeing seller based financing, even if SF. If credit remains tight for investors in 2010, I expect to be buying with seller assistance (all those prop 13/old timers who own unimproved structures in the city will be my primary target :). It’s a perfect match. I need am old, POS bldg, and many long term owners will have exactly that. They’ll want the east cashflow from taking a first position (secured by the bldg they already know) and I will want the property which I can take to a highest and best use.
    Lmrim- I’d like you to explain something to me about the equities market. Both Robert and you agree that the forseeable future will be bad for stocks too. Indeed, seeing the adjusted for inflation stocks returns since about mid 2000’s, it’s been bad. So, how can you continuously profit from it? Just trend shorting positions, trying to adjust for the occasional run up (like we had in march?).
    All I know is that most traders and money managers cannot beat the index in the long run. Remember when the WSJ had those funny competitions? Pros vs. Darts? Where pros make picks and then (I think) a bunch of monkeys throw darts at the chart in random for comparison! Let’s just say the results were often humorous.
    Another ‘problem’ I see in being an individual trader is that you are adveraly effected by what institutional investors do. I don’t get the sense that there is a level playing field at all. At least to this casual observer based on what I have read and have heard from professionals in the field. So feel free to weigh in on this too.
    Bottom line, in response to the above two posts, I (and apparently you guys too) are not too rosy on stock trading also. Given that a few of you were professional traders, perhaps you feel comfortable navigating the next few years. But we also know that many professionals also lost a ton of money since last September. I’ll conclude with a rather pointed question to Lmrim (pardon the bluntness, but be honest!)- has your net worth taken a hit (over 10%) since sept 2009. Because so far I have only ‘read’ about the rare investor who was lucky enough to have shorted so strongly to have not lost substancial sums. About the only class of investors who did not take a hit were retirees who were mostly in cash/bonds/t-bills.

  54. NVJ- are you invested in SF RE beyond a primary residence?
    I own a two unit building and live in the top and rent out the bottom. So you tell me 🙂
    When I was shopping (around 2000) you could buy a 2-unit building for what was about 1/2 the price per square foot of a SFH, so it just didn’t make any sense to go any other way.

  55. LMRiM,
    Thanks — sorry for the mangled first sentence. Should not post while drinking. For the record, I think my inflation predictions are the same as yours — I see brownian motion around zero for a period of time, and don’t see inflation taking off for some time. “Some time” may be 10, 20 years or more. We’ll have to see.
    45YOH,
    Which asset you class you invest in depends on many factors, including comfort with leverage, tax implications, time horizon, etc. I’m not giving investment advice, but discussing valuations.
    The point I was making was that, as it now stands, SF real estate is wedded to the fate of the top 1% (nationally, which is more like the top 2% here). This top bracket has been receiving an abnormally high proportion of national incomes due to very special circumstances which cannot continue.
    As our economy delevers and adjusts to a more sustainable economic model, San Francisco will be hit particularly hard. I have no doubt it will come through in the end, but not without pain in the form of high vacancies, some job and population loss, and real estate pains. At least, that’s the historical precedent.
    Another point was not to throw away most of the twentieth century, and assume that the period of 1980-2000 was somehow typical. For you or NVJ, or any of the others inclined on this board, please do look at SF valuations in a broader historical context.
    For example, median SF prices (owner occupied), increased from $6,783 to $28,100 in the 40 year period from 1930-1970 — a growth rate of 3.6% nominally, and about 1.5% in real terms. Median contract rents increased from $40 to $128/month in that period.
    Of course, property tax rates at that time were north of 2% per annum, and you would need to throw in at least 1% for maintenance. In other words — once you include carrying costs — you would have experience flat nominal appreciation, and a 50% loss in real terms.
    This assumes an all cash purchase, so that no interest payments were needed.
    However, as a rental investment, that house would have yielded at least $40/month in cash flow — most likely more, since equivalent rents for owner occupied properties would be higher. So, after 40 years, you would get back 70 cents on the dollar for selling the house, but would have pocketed almost 190% of the final sales value from rental payments, assuming a forward rate of inflation, and of course more if you re-invested in similar properties.
    So, I am not against r.e. investing for the cash flows, particularly if yields return to historical norms.
    One more thing: San Francisco is definitely not stable. It rivals Florida! You have the Gold Rush mania, railroad bubble, barbary coast rise and fall, Great Earthquake, roaring 20s, Great Depression, major naval center rise and fall, 60s counterculture/white flight, gay liberation/more white flight, tech boom and bust, and finally real estate boom and bust.
    All of these significantly impacted things like population, real estate values, and incomes.
    California in general is a boom/bust state, but San Francisco more so, particularly because it is a resource constrained area with a lot of renters (they come and go quickly in good/bad times). Even in 1930, the city had 635K people and a 2:1 renter ratio.
    If you want to invest in somewhere stable, and at the same time expect appreciation, then good luck — money is made from volatility, and that cuts both ways.

  56. Oops, I’m a bit off in my depreciation calculation for the example. Property Taxes vary over that period, so it may be safer to assume a rate of 1.3%, for example. Anyways, the interested reader can estimate the carrying cost/effective rent of our example home.
    Also, I assumed constant growth rates, when in reality, they are volatile, which will affect returns. For example, the median SF home price fell from $6783 in 1930 to $4967 in 1940, and rents dropped by a similar proportion.

  57. So if you just look at home price appreciation in California post-WWII, you see that it is closer to 6% per annum, or about 3% real.
    In fact, $4967 in 1940 to $28,100 in 1970 is a 5.95% growth rate. Fancy that.
    Is the future going forward going to look more like the post-War period or like the period from 1930-1940? I think you would have to be nuts to think the latter.

  58. “I think you would have to be nuts to think the latter.”
    What I think is that home prices in the SF MSA will return to their historical trend of 4 times income because that is what people can afford to pay with normal financing. At the peak they were flirting with 11.

  59. Median household income, median family income or median individual income? Or average income?
    And do you mean all sales, or just SFH? And in SF only, or the SF MSA (okay you answered that one).
    Because it all makes a huge difference on what is “historical” and even where we are now.

  60. Well, NVJ, there was no housing bubble in 1929 — that was a more classical model of a business debt deflation.
    Most forms of consumer debt were just a glimmer in the eyes of the American middle class then. Actually our economy had many similarities with China’s current economy, and the debt bubble that exploded was one of over-capacity and over-investment within the world’s biggest export power.
    In SF, houses were reasonably valued in 1930, as I pointed out. Nationally, real house prices were trending down from 1895 to just before 1945, and fell about 50% in that 50 year period — again in real terms. So, by 1930, they were already pretty far along. I don’t have SF specific data before 1930, though.
    In any case, price to income, defined as the price of an owner-occupied house by that owner’s household income, was pretty close to 2.5. GRM, defined as the median house price to median contract rent paid, was 14 in both 1930 and 1940. The fall in value from 1930 to 1940 was because of the denominator — wages fell, and the multiple stayed the same. As I said, at those multiples, it made sense to buy, based on cash flows.
    Even in 1970, GRM was 18 — so you are talking about a 40 year period in which the multiple did very little. Houses in S.F. moved more or less in unison with the median HHI — of renters!
    All of this should tell you that 1) there is no reason to believe that multiple expansion is the “normal” course of events, and 2) there is no reason to believe that real house prices cannot go a few decades or so without increasing.
    Next, I said that current house prices are dependent on outsized income growth of the top 1% of U.S. earners. This wasn’t the case in 1929. It is this group of top earners who, satisfied to live in basically working class neighborhoods, allowed huge gains for enough of the 1/3 of owners here, that others joined in and began to “stretch” to buy a house. A little while later, the top 1% were disproportionately wealthier because of the general asset inflation, and so they dived back in and drove prices even higher, causing even more people to “stretch”. At the end of the day, fully 1/2 of those with mortgages found themselves stretching.
    The next point, was that the future will not be a time of falling rates — they are already at zero! — and consequently the share of income earned by the top 1% will fall, because the top earners are dependent on asset appreciation, which needs falling rates. Therefore this dynamic of stretching will come to end, not because SF stops being “special”, but because the top incomes will no longer be able to move enough inventory to bail out the much larger group of stretchers.
    This sensitivity of the top 1% to interest rate movements was a case I made by historical reference. I could just have easily pointed out that an asset is discounted at the rate of interest, but I wanted to point out the historical patterns in the 20th century. I’m sorry if this lead you to believe that everything happening now will be an exact repetition of what happened in 1930.
    Of course, that would be impossible, since S.F. house prices have a GRM of more than 50 now, not 14, and the debt deflation we are currently experiencing is primarily one of housing debt, not business debt.
    Btw, this distinction makes me a little wary of Keen’s model, and one result is that corporate bonds may be under-priced. Another is that it will be much harder to cause price inflation in consumption goods.
    As to your question to Diemos, it is price to HHI that matters in terms of affordability, since the household is the unit that can pay for the house (either by rent or purchase). Family income excludes single people or widows, or gay couples for that matter, and skews the statistics, because household composition in SF has been changing over time.

  61. That is probably SFH to Median Family Income for the SF MSA. Four is not the historical trend for that graph, it is the cyclical low during a couple of downturns. The average looks more like five to me, discounting the current boom. Usually housing cycles deflate slowly, mostly via inflation and it takes five to seven years.
    But if we overshoot in the way down, like we have in the past, they might get down to four.

  62. @45yo hipster
    ya know, I often see you posting about ‘problems’ with stock trading.
    And I also observe that you frequently close your posts with comments like “time to skip off through the sunshine to a sushi lunch”.
    But I also note posts where you talk of 100K “equity payment” (HELOC) to help sustain your “lifestyle”. And I note other posts where you talk of selling a TIC because your $1000k in the neg with it every month.
    Am I the only one putting this picture together??
    No healthy real estate investor puts property on the market now…. .especially a TIC in the mission!
    It’s easier for you to sell a TIC in the Mission in this market than ride out a $1000 a month shortfall for a couple years??
    Dude, on your next mid day blissful sun drenched walk to your favorite sushi restaurant, i suggest you ponder dusting off that resume.

  63. Lmrim- I’d like you to explain something to me about the equities market. Both Robert and you agree that the forseeable future will be bad for stocks too. Indeed, seeing the adjusted for inflation stocks returns since about mid 2000’s, it’s been bad. So, how can you continuously profit from it?
    First, no one continuously profits from a market, except the market maker who sees all the order flow (even then, it’s not really true). There are a few ways to achieve reasonably consistent profits, but for the independent (non-sellside) trader, they all involve getting directionality roughly right. By that, I don’t mean that you have to top tick your sells, or catch the bottom on the buys, but as far as stock markets go, you do have to recognize big inflection points. In most environments, I’m really more akin to an “asset allocator” that what people commonly think of as “traders” (there are many many different ways to “trade”). Also, in all stock environments, options (espcially shorting options for premium value) provide opportunities to increase returns (or decrease risks), again though recognizing that you need to get some measure of directionality right. BTW, stock allocating/trading/investing is only a moderate part of what I do.
    All I know is that most traders and money managers cannot beat the index in the long run.
    Absolutely right. If you think about it, any market can be theoretically decomposed into submarkets – the first of which is a group who tries to actively manage to “beat” the index and the second simply investing passively to “match” the index. Let’s ignore some of the frictional/transactional cost issues, and just concentrate on a basic truism: since the average return of the index will incorporate the returns of both groups, and the return of the second group by definition is equal to the index return (it’s passive), then the first group must be equal to the average too! (I’m ignoring leverage, though, which in effect distributes out excess gains or losses to creitors over time.)
    The key to getting past the conundrum of “active” versus “passive” is to adopt an absolute return hurdle that will be specific for each trader/investor’s preferences, and seek to outperform that. In fact, that is exactly the way prop desks and hedge funds are set up (for the most part). For me, I seek 6-8% annual net change in net worth, after tax effects, not to beat any particular index.
    Another ‘problem’ I see in being an individual trader is that you are adveraly effected by what institutional investors do. I don’t get the sense that there is a level playing field at all.
    The field is not perfectly level, but for directional trading, the smart small scale investor is not at a significant disadvantage in most markets. Sure, you don’t get the “inside deal” that Pimpco or Government Sachs do, but as far as directional trading, the slight frictional cost advantages that are enjoyed by the institutions are no big deal imo. The big caveat is sell side shops that basically make their money by knowing what their clients (mutual funds, hedge funds, pension managers) are doing. The so-called “flow” business. They make their money from inside information and arbitraging known order flow, as well as creating fancy products to sucker in the foolish (this rarely works on hedge funds, but pension funds and mutual funds are filled with fools). Prop desks of sell side shops benefit from this knowledge too, and hedge funds (as favored clients) sometimes get some nbenefit as well (in exchange for large fees to the ibank/dealers). I miss that.
    I’ll conclude with a rather pointed question to Lmrim (pardon the bluntness, but be honest!)- has your net worth taken a hit (over 10%) since sept 2009.
    I’m guessing you mean Sep 08, and the answer is no, I’m up a few percent since 9/08. I did give back a fair amount (maybe 5% net worth) in Sep/Oct 08, but I had a terrific first half of 2008, and so still finished out positive for the year. Tax issues were a huge deal last year, and after all was said and done probably knocked me a tiny bit below my “hurdle” range. End 2009 was ok, making up some of the drawdown from Sep/Oct, January and Feb 2009 were flattish to slightly down, while the last three months (especially March) have been great, so I’m now back above Sep 08, and already past my hurdle for 2009. After giving back a good chunk in the second half of last year, I am considering scaling it all back now and going on “sun drenched” walks like you! So, if I’m not posting (which means I’m not stuck at a screen looking at options hedges), look for me in the sushi place in Tiburon, or biking in the Marin headlands on a new pricey cross bike I recently picked up. (BTW, this is a great environment to pick up custom bikes, and musical instruments. Lots of distress out there, and you can find some good deals!)

  64. I LOL at how LMRiM keeps trying to impress 45yo hipster with his investing “brilliance”. Always a tone of “Hey, look at me. I’m just like you 45yo hipster but I do it by investing in the stock market.”
    If your investments are sound and your tax situation and cash flow good, then well done and enjoy your just rewards. But it is pretty weak to so openly crave and seek the approval of an anonymous poster on a blog for your investing “brilliance”.
    😉
    PS. I’d say that LMRiM is about 50 x (I’m sure an “über-trada” like LMRiM could give more accurate odds) more likely than 45yo hipster to still be taking those sun drenched walks (put on the sunscreen for that Florida sun!!) in several years time.
    One will, unfortunately, have to trade sushi for fake Florida grouper, and, fortunately, get to trade latte for cafe cubano.
    Good luck, though, finding interesting bike trails for one’s custom bikes in such a flat cycling environment! Maybe switching to a beach cruiser to ogle the sights on South Beach would be a “trade, well done”. 😉

  65. NVJ- good move on buying a 2 unit bldg. And if you have aspirations to continue investing in SF, that property will give you a flexible jumping off point. But at least for now I hope you’re in the city’s lottery for condo conversion (you qualify since you owner occupy).
    Robert- what can I say. I think you’re a great historian and you put forth an interesting historical perspective. But it’s relevance to today is very limited IMO. The broad timeframe you depict is also one where we moved from an industrial to a post industrial society. The debt levels, amount of wealth, efficiencies in the market, technological/communications advances, globalized trade make today a totally different world. I think it’s anachronistic to rely on past averages to the degree you imply, and can hamstring ones outlook to the future (which is what really counts). Similarily I don’t subscribe to the model that the amercian economy will follow Japans circa 1980’s +. Our countries, cultures, business practices, currency status, etc., etc are totally different.
    Lmrim- thanks for the details.
    Just for the record, this blog has turned (for me at least) to be a pleasant surprise. I never would have thought that a group of highly intelligent folks could come together over their (mostly) collective criticism of SF real estate. I really do appreciate peoples time and efforts here to present varied perspectives, data and POV’s. We have expert statisticians, analysts, traders, etc who are quite charged up about SF RE. Everyone posts here for their own pfychological reasons/rewards. But for me, who has serious skin in the game, I feel as if the information and challenges presented has direct relevance. Hence I’m respectful of those I may disagree with, for their unique motivations to post here end up as healthy perspectives for me to ponder.
    …the extended morning latte is winding down. BTW, for home based espresso afficionados, Ritual Roasters has consistently been my favorite. Both their espresso blends and their single origins (the Brazilian highland farms tend to have the best body for single origin espresso.). Invest in a good Italian machine (I like Ranchillio) and the best burr grinder you can afford, and it’s espresso sipping heaven 🙂

  66. Hipster,
    Have you ever done (or considered) moving from unit to unit while selling off individual apts as TICs (and then converting to condos once minimum owner occupied thresholds are met)? That was always my small time RE mogul fantasy scenario as you can receive up $250k tax free on the appreciation. Or should I say could have, as it looks like recent “reforms” have closed down that avenue to some extent.

  67. ^ actually i did, on a 6 unit property a few years back. not to move in/sell off, but to sell off 3 units to owner occupants, and keep the other 3 as rentals. and when the thing eventually gets condo converted, you get a nice upside as well.

  68. That is probably SFH to Median Family Income for the SF MSA.
    For those interested in things such as price to income ratios, I’ve been mining the census microdata at
    http://usa.ipums.org/usa/
    You can get actual median price to income ratios, instead of ratios of the median price to the median income. You can also get owner cost burdens from 1980 and gross rental burdens back from 1960, and house/rent ratios from 1930.
    There is a ton of fascinating data there, including all the ACS microdata. You can even create your own variables and data mining algorithms. The city code for san francisco is 6290 — enjoy!

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