Do policy makers at the Federal Reserve really believe their policies will work, or are they just doing whatever they can to save the banks at the expense of everyone else?
Irvine Home Address … 5242 ROYALE Ave Irvine, CA 92604
Resale Home Price …… $640,000
You take it on the run baby
If that's the way you want it baby
Then I don't want you around
I don't believe it
Not for a minute
You're under the gun so you take it on the run
You're thinking up your white lies
You're putting on your bedroom eyes
You say you're coming home but you won't say when
But I can feel it coming
If you leave tonight keep running
And you need never look back again
REO Speedwaagon — Take It On the Run
Most of the policy decisions coming out of the Federal Reserve appear as if they are making it up as they go. During 2008 and 2009, some of the emergency lending windows opened at the Fed likely saved the economy from total collapse; however, many of the policy decisions have not been as successful, and the attempt to re-inflate the housing bubble to save bank balance sheets is failing as house prices roll over despite historically low interest rates.
Are the Fed's Honchos Simpletons, Or Are They Just Taking Orders?
(November 1, 2010) — Charles Hugh Smith
Without exception the Fed's policies are pernicious failures; either they are exceptionally thickheaded, or they are just taking orders.
At the risk of boring you with material you already know well, let's quickly cover the Fed's policies and stated goals since the Global Financial Meltdown of late 2008.
The Fed's supposed goal is "get the economy on its feet again" by stabilizing employment and prices. At the risk of sounding naive, we can paraphrase all the Fed's statements thusly: "We're trying to help everyone in the U.S. by fighting this recession."
Sounds noble enough, so let's look at what the Fed has actually done in the real world.
1. The Fed has injected "liquidity" into the banking sector, enabling banks to borrow essentially unlimited sums at essentially zero interest–the infamous ZIRP (zero-interest rate policy).
2. The Fed has pushed down mortgage rates by buying over 10% of all outstanding mortgages in the U.S.–all the toxic garbage loans which the banks were desperate to get off their crippled balance sheets.
3. The Fed has pushed down yields on U.S. Treasury bonds ("monetizing" this newly issued debt) by buying hundreds of billions of dollars of bonds itself.
Much has been made of the latest round of quantitative easing (a fancy term for printing money). That particular policy has caused concerns that inflation is right around the corner. i do believe inflation is going to occur at some point, but not until the Federal Reserve has printed enough money to compensate for the debt destruction that is occurring in residential and commercial loans. The debt creation during the bubble was extremely inflationary as all this new debt inflated massive real estate bubbles in both sectors; however, since the official government compilation of inflation does not include those asset prices, it went unnoticed by the Federal Reserve.
Now that the residential and commercial real estate bubbles are deflating, debt destruction is causing widespread deflation far in excess of the official government measures. This deflation is what is ravaging our economy. Quantitative easing is one method of combating deflation. Basically, you print money to make up for that which was destroyed. To the degree the two cancel each other out, neither deflation or inflation results. Unfortunately, in the real world, the Federal Reserve generally errors to the side of printing which will cause significant inflation once the deflation ceases and the economy improves.
Here is what each program was intended to do:
1. ZIRP and unlimited liquidity was intended to enable the banks to "earn their way back to solvency" by giving them free money which they could then loan out at much higher rates. The difference between zero (their cost) and the interest rate they charged borrowers (such as those wonderful 19% credit cards) was pure profit, courtesy of the Federal Reserve.
This is also theft from savers. The free market would place a value on stored financial reserves, but the Federal Reserve usurps the free market and diverts the return on savings away from savers to the member banks. The inflation that comes at the end of the cycle is a second form of theft from savers we will see when interest rates go back up.
2. The purchase of $1.2 trillion in mortgage-backed securities was intended to stabilize housing and real estate prices at far above their "natural" level set by "organic" supply and demand; in essence, the goal was to stop market prices from "reverting to the mean," i.e. returning to historical trendlines which are roughly equivialent to pre-bubble valuations circa 1997-98.
This was intended to stop the implosion of banks' balance sheets as their assets–all those mortgage-backed securities and derivatives they own–kept falling in value.
It was also intended to stabilize real estate prices so banks could slowly sell off the millions of foreclosed (REO) and defaulted homes they hold in the "shadow inventory" at prices far above where organic supply and demand would let them settle.
We have certainly seen the result of this policy here in Irvine. Our real estate prices have remained elevated far above their natural market levels. Banks are still hoping to unload their shadow inventory when demand increases as the economy improves. I believe we will see the collapse of the real estate cartel and lower prices in Orange County over the next several years.
On the other hand, markets like Las Vegas have over-corrected. Prices there are back at mid 90s levels, and they are likely to stay there for the foreseeable future. The Federal Reserves policy goals have been a failure in Las Vegas.
In the bigger picture, Las Vegas is actually a success of the free market whereas Orange County is a failure. When prices bottom in Las Vegas, the entire housing stock will be affordable, and as normal appreciation resumes, people will again build equity while enjoying the economic stimulus of low housing costs. Contrast that to Orange County where we will likely see slowly grinding downward pricing, no equity, and a moribund economy because so much of the local incomes are going toward debt service. Which market is a success and which is a failure?
As a side benefit, keeping home prices inflated far above their real value would also allow the Fed to dump its own portfolio of $1.2 trillion mortgage-backed securities without suffering catastrophic losses.
Lastly, the goal was to lower the cost of mortgages to such ridiculously low levels that otherwise prudent citizens might be seduced into buying a house "because rates are so low." (Never mind what happens if the house falls another 40% in value over the next few years.)
I freely admit that the low interest rates are certainly enticing me to buy cashflow properties. Of course, I don't believe those properties will fall 40% more in value, and frankly, even if they did, I wouldn't care because i bought them for their current cashflow not their resale value.
The idea was to encourage rampant home buying (for speculation or long-term ownership, it didn't matter) to prop up the market with "demand," even if that "demand" was driven by the low cost of borrowing rather than organic demand based on the need for shelter. (Please recall that there are 19 million vacant dwellings in the U.S. now.)
3. The outright purchase of U.S. Treasury bonds was intended to drop the yield on newly issued bonds to keep the cost of borrowing trillions of dollars for "fiscal stimulus" down so the potential future cost of all the trillions of dollars in new Federal debt would be masked from a credulous citizenry who care more about their entitlements than what happens to their kids and grandkids.
The lack of consideration for future generations is one of the features of the housing bubble I find most distasteful. The generation of owners who still have artificial equity do so at the expense of the next generation who must grossly overpay for housing. It is a transfer of wealth from the young to the old that rivals social security.
4. All the policies led to super-low yields on low-risk investments so that "cash is trash;" that created a powerful incentive to put capital into risk assets such as stocks, commodities and real estate. By explicitly pushing free money and zero-interest rates, the Fed made it impossible to earn any yield on low-risk assets; thus they have been explicitly pushing capital and borrowed money into the "risk trade": emerging markets, commodities, and stocks.
The goal here is to create a new "wealth effect": if another bubble is inflated in stocks and commodities, then owners of capital will feel wealthier and as a result, they will start spending more.
Right now, nobody is penalized for tucking away cash in their mattress.
Are the Fed's honchos really such knuckleheads that they don't know most Americans have no financial assets to boost in a new bubble?
Source: Wealth, Income, and Power.
The top-earning 20 percent of Americans — those making more than $100,000 each year — received 49.4 percent of all income generated in the U.S., com
pared with the 3.4 percent earned by those below the poverty line.
U.S. median household income fell 3 percent in 2009 to $50,221, the second straight annual drop, the Census Bureau said.
One Year Later, No Sign of Improvement in America's Income Inequality Problem:
Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase.
The Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics.
The Fed's central idea was to create a "trickle down" of wealth as a new stock and commodity bubble increased the financial wealth of the top 10%. That idea has demonstrably failed; could the Fed's economic geniuses really be so stupid as to trust in the long-discredited "trickle down" theory that enriching the top tranch will actually benefit the bottom 90%?
What the author fails to recognize is that financial assets are not required to inflate a housing bubble. Copious amounts of debt are all that's required. The middle class proved they could inflate a massive housing bubble and consume any wealth it created by mortgage equity withdrawal.
5. All the policies were designed to flood the economy with new "free" money, thereby sparking inflation and a new round of consumption that would inject "growth" into the economy.
In other words, the "problem" is perceived as sagging asset prices (real estate and the worthless mortgages written on homes that have lost 50% of their value) which have impoverished homeowners and impaired banks' assets.
The Fed's "solution" is to reinflate the housing bubble (or stabilize its collapse) and push investors and speculators alike into risk assets, in the hopes that a new asset bubble somewhere will boost assets enough to create a "feel good" wealth effect which will trigger massive new consumer spending and repair banks' balance sheets with higher asset valuations.
The concept that asset prices are depressed is part of the problem with banks and the Federal Reserve. Most real estate markets — Las Vegas excluded — are not depressed and undervalued even with the dramatic price declines we have seen so far. Prices were previously elevated beyond their fundamental value, and the crash is a return to stable valuation metrics. This conceptual confusion is why the policies of the Federal Reserve have failed.
Put another way, here are the Fed's goals stripped of niceties:
1. Revoke the business cycle–no recessions allowed. In the normal business cycle of classical Capitalism (as opposed to the crony Capitalism we have today), then expansion of credit/debt and rising assets leads to mal-investment and rampant speculation: overbuilding, overcapacity, over-indebtedness and leveraged bets that misprice risk.
Which is precisely what occurred in the 1995-2000 stock market bubble and the 2002-2007 housing/real estate bubble: mal-investment, over-indebtedness, overbuilding and mispricing of risk on a grand, unprecedented scale.
In the normal scheme of things, all this bad debt would be written off and the assets would be sold/liquidated. Holders of those assets and the debt based on those assets would both suffer losses or even be wiped out. All the overbuilt properties and overcapacity would be sold for pennies on the dollar, and the liabilities (debt) wiped off the balance sheet along with all the inflated assets.
That is a great description of how free markets are supposed to work. Recessions are how free markets purge their excesses. Foolish business plans and excessively leveraged speculative bets are wiped out and capital is redistributed to where it can be used more efficiently. Keeping capital tied up in unproductive assets hinders economic growth and creates the malaise we experience today.
There is no other way to clear the market for future growth. Yet the Fed has pursued a "solution" that violates all the principles of Capitalism: to reinflate asset bubbles or keep them artificially high by injecting more credit/debt into the system.
In other words, if you can't service your current debt and you're insolvent because your assets have declined, then the Fed's "solution" is to give you free money to roll over into a bigger debt load and boost the risk-asset trade so the assets on your books will rise again, "solving" your insolvency.
Do you see the foolishness of this approach? You can't borrow your way out of debt.
Does anyone at the Fed really believe this will work , or are they just thick? Or even worse, are they just lackeys taking orders from Wall Street and the Financial Power Elites?
You cannot eliminate the consequences of speculative bad bets and over-indebtedness with more debt and more speculation, yet that is precisely the intent of all the Fed's policies.
The Fed's unprecedented purchase of mortgages and Treasury debt have indeed reinflated the stock and housing bubbles to a limited degree, but most of that free money has flowed into emerging markets and commodities, which are now in their own massive bubbles.
In yet another pernicious consequence, the Fed's bumbling attempts to create inflation in the U.S. have failed–the inflation is raging in China. And as inflation rages there, then the cost of Chinese goods in the U.S. will rise.
Is there any possible way to fail more spectacularly that the Fed? Instead of sparking "good inflation" in the U.S. which they presumed (thickheadedly) would boost wages along with prices, thus enabling debt-serfs to pay down their debts with "cheaper" money, they have sparked runaway asset bubbles in commodities and "bad" inflation in China, which means the cost of goods the debt-serfs need to survive is skyrocketing while their wages and income stagnate.
In other words, the policies of the Fed have completely backfired in terms of "helping" 90% of the citizenry. The "wealth effect" of rising stock prices failed to boost the spirits and balance sheets of the bottom 90% who have essentially no financial capital, average incomes have declined in the recession and yet prices for commodities are climbing.
The Fed's policies have created the worst-case scenario for the average American household: stagnant income and rising prices of essentials. The problem is demand is falling along with net incomes, not the supply of new debt. By raising the costs of commodities, the Fed is actually reducing the net disposable income of households: the reverse of the "wealth effect."
Rather than allow the economy to clear out bad debt and re-set asset prices that would enable organic growth, the Fed has tried to inflate new asset bubbles to save the Financial Power Elites from suffering the losses resulting from the last two bubbles popping.
I have stated on many occasions that I believe the end game is price inflation without wage inflation that will cause a decline in our standard of living. Everyone who is bullish on real estate believes inflation is coming and it will push real estate prices higher. The Federal Reserve's printing money will eventually ignite inflation. I agree with the bulls on that point; however, the inflation in prices will not be accompanied by inflation in wages, something required for house prices to go up. How does the Federal Reserve create wage inflation with chronic high unemployment? They can't. That is why house prices will not be going up any time soon.
It's as if the fever the patient needs to wipe out a deadly infection has been suppressed by the Fed, creating the illusion of "health" even as the infection destroys the patient from within.
2. "Save" Wall Street, the banks, the nation's Financial Power Elites and the nation's homeowners by blowing new asset bubbles with massive injections of free money and the bogus "demand" created by the Fed's own purchases. The dynamic has already been explained above: cover the losses of the last bubble imploding by blowing an even bigger bubble now that boosts the asset side of balance sheets.
Do the Fed's honchos really think there is another end-game here other than the collapse of their latest ZIRP-QE2-driven asset bubbles? Could they really be so blind, so stupid, so misinformed, so ignorant of reality and history, as to believe their policies will actually work?
Are they so detached from reality that they fail to see their policies are backfiring, further impoverishing most of the citizenry as they set up the inevitable collapse of the banks they have tried so hard to save?
Are they really simpletons, or are they just taking orders from the Financial Elites who have the most to lose when the whole sagging sandcastle finally collapses into the waves?
I think they really believe their policies will work. I also think they are mistaken.
Personally, I plan to load up on 4% debt to buy cashflow properties. If I am paying 4% in an inflationary environment where inflation exceeds 4%, I am paying back the debt with dollars declining in value at a rate higher than my interest rate. in other words, they will be paying me to keep the debt alive. This works great for cashflow properties, but not so well for speculative bets on price appreciation because higher inflation — absent wage inflation — and higher interest rates makes borrowing more expensive and reduces loan balances which hinders appreciation.
Cashflow will be the only way to make money in real estate for the next decade or more just like it was in the 90s.
Thinking up their white lies
I've often wondered what long term loan owners tell their families when they finally implode. How do people explain to their friends and relatives that they borrowed more than double what they paid for their house years ago, blew the money, and then lost their family home? It must be an interesting yarn.
- The owners of today's featured property paid $438,000 on 12/18/2000. They used a $365,000 first mortgage, a $36,500 second mortgage, and a $36,500 down payment.
- On 2/20/2003 they refinanced the first mortgage for $322,700. For the first two years, they were going the right direction, but then they tasted a bit of kool aid, and everything went poorly from this point forward.
- On 5/28/2003 they obtained a HELOC for $30,000.
- On 12/30/2003 they refinanced with a $359,400 first mortgage.
- On 3/17/2004 they got a HELOC for $115,000.
- On 7/28/2004 they refinanced with a $376,800 first mortgage and went Ponzi.
- On 1/25/2005 they refinanced the first mortgage for $524,000.
-
On 5/31/2006 they refinanced with a $640,000 Option ARM with a 1% teaser rate.
- On 6/11/2007 they refinanced with a $656,000 first mortgage and a $40,000 stand-alone second.
- Total property debt is $696,000.
- Total mortgage equity withdrawal is $294,500 including their down payment.
- Total squatting time is 18 months.
Foreclosure Record
Recording Date: 07/01/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 07/15/2009
Document Type: Notice of Default
Seriously, how do people explain this behavior? Is it possible to dodge the question at family gatherings?
Irvine Home Address … 5242 ROYALE Ave Irvine, CA 92604 
Resale Home Price … $640,000
Home Purchase Price … $438,000
Home Purchase Date …. 12/18/2000
Net Gain (Loss) ………. $163,600
Percent Change ………. 37.4%
Annual Appreciation … 3.8%
Cost of Ownership
————————————————-
$640,000 ………. Asking Price
$128,000 ………. 20% Down Conventional
4.29% …………… Mortgage Interest Rate
$512,000 ………. 30-Year Mortgage
$122,018 ………. Income Requirement
$2,531 ………. Monthly Mortgage Payment
$555 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$53 ………. Homeowners Insurance
$0 ………. Homeowners Association Fees
============================================.jpg)
$3,139 ………. Monthly Cash Outlays
-$417 ………. Tax Savings (% of Interest and Property Tax)
-$700 ………. Equity Hidden in Payment
$198 ………. Lost Income to Down Payment (net of taxes)
$80 ………. Maintenance and Replacement Reserves
============================================
$2,299 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,400 ………. Furnishing and Move In @1%
$6,400 ………. Closing Costs @1%
$5,120 ………… Interest Points @1% of Loan
$128,000 ………. Down Payment
============================================
$145,920 ………. Total Cash Costs
$35,200 ………… Emergency Cash Reserves
============================================
$181,120 ………. Total Savings Needed
Property Details for 5242 ROYALE Ave Irvine, CA 92604
——————————————————————————
Beds: : 4
Baths: : 3
Sq. Ft.: : 2011
$0,318
Lot Size: : 6,000 Sq. Ft.
Property Type:: Residential, Single Family
Style:: One Level, Ranch
View:: Faces Northeast
Year Built: : 1969
Community: : El Camino Real
MLS#: : P758091
Source: : CARETS
——————————————————————————
Charming 4 bedroom 3 bath home in the Ranch. Tastefully updated and well maintained. Granite counters in kitchen and bathrooms. Laminate flooring, crown molding, plantation shutters in kitchen, living room and family room. Dual pane windows. Mahogany front door. 2 car garage. Backyard has a pool, patio with awning, and gazebo. No HOA dues.
I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.
Have a great weekend,
Irvine Renter
If Las Vegas is a success of the free market when unemplyment is trending above 15% then the great depression was a monumental free market achievement.
Las Vegas is a train wreck because of market manipulation.
As interest rates continue decline as I have predicted with new quantitative easing the impact on both Irvine and Las Vegas will continue to be the same.
There already is inflation and wage inflation you need to look in the right places. If you are taking a bigger picture view you won’t see it.
Wage inflation isn’t happening for us “po’ folk”, it’s happening for the rich. The have’s and the have not’s are more clearly divided every single day.
If you happened to be born at the right time during America’s golden era after WWII (you know, when the wealthy were taxed 90%, our social structure was the envy of other nations…social security for our elderly, schools, roads, health care, all excellent, but hey, socialism sucks right?) If you were born at the right time, you could of invested in a turd and reaped interest and gained in wealth.
Anyone that bought property during these times was assured massive wealth, a place to draw upon for investments, college tuition for the family, or simply a place to live free and clear of debt (that’s the PLAN at least right?). It’s the reason you have so many pseudo-rich in places like Irvine and Newport Beach. Most of these people couldn’t afford to buy in the same neighborhood they now live due to the manipulation of our currency. If you want to find the truth “Follow the money”.
Watch Zeigeist – the movie, if you can dare question what you have believed to be the truth for so long. Beginning is horribly boring, but it gets very good…very, very good.
http://vimeo.com/13726978
This was my exact point but don’t segregate the rich, the well to do in the right areas are also seeing wage inflation. At the same time inflation is occurring in many life necessities even though the larger picture says disinflation. Obviously this is bad for the poor, lower middle class, and the old median.
Market manipulation has created relative stability in Irvine.
The same market manipulation has created a near depression like environment in Las Vegas.
To expect any different as interest rates trend lower would be foolish. Quantitative easing is exactly what caused the Las Vegas and Irvine environments.
Stock up on nonperishable food. Commodity futures up due to bad farming weather, it’s gonna get more expensive at the grocery store soon.
OMG THE SKY IS FALLING. You better take colloidal silver due to the upcoming shortage of antibiotics. Just ignore the fact that your skin will turn blue.
http://news.bbc.co.uk/2/hi/americas/2297471.stm
Higher commodity prices are already here. It’s just a matter of time before retainers and food manufacurers
pass them along to the consumer.
http://chicagobreakingbusiness.com/2010/10/mcdonalds-plans-to-raise-prices-in-2011.html
I don’t think you can have ‘market manipulation’ and ‘stability’ in the same sentence. That’s cognative dissonance.
Yes, QE2 will drive down interest rates but not far enough or fast enough to save those who are sitting on the IO-ARMs time bombs. Or even for who bought relatively recently using the affordability product of 3.5% down FHA loans since to able to refi you need to bring more money to the table due to the changes in the insurance effective at the beginning of October. We need to have competitive commericial mortgage products again and that won’t happen until the foreclosures are flushed from the market, unemployment falls and we have a new booming economy. The Fed droping rates isn’t a sign of an improving ecomony, its’ a sign of panic.
I bought in Austin, TX back in 1992 – good thing, I could not afford this same house today. And while it may have increased in
valueprice since then, the increase was nothing like what you folks in Irvine saw.The author is wrong when he writes “2. The Fed has pushed down mortgage rates by buying over 10% of all outstanding mortgages in the U.S.–all the toxic garbage loans which the banks were desperate to get off their crippled balance sheets.”
The fed’s purchases were of newly issued GSE securities which are of much higher quality than the toxic assets people think of. The toxic assets are tranches of MBS based on subprime/alt-a poor collateral, no underwriting mortgages. The MBS’s the fed bought were at a time when underwriting was much stronger and collateral was not nearly as inflated.
Irvine is different. The fed’s actions affect the nation as a whole, and that it might be distorting the Irvine market is not reason to let the rest of the country overcorrect. We looked at a new construction home around this time last year by a builder that built a nearly identical home in a nearly identical neighborhood in 2003. If you take 3%/yr inflation over that period, the sales prices of $485k in 2003 is almost identical to the $575k price in 2009. Another very similar new home sold recently for the same $/sqft. Prices in many areas have not seen the dramatic shifts that the bubble areas have seen.
The fed doesn’t care about ever selling their MBS’s. They can just hold them till people refi & the principal is returned
2003 2.1
2004 2.7
2005 4.1
2006 3.3
2007 2.3
2008 5.8
2009 0.0
2010 0.0
COLA charts from SS.
Even using that horrid example (there’s no way in CA out cost of living only averaged 2.5% per year, shit my government taxes, fees, medical costs (from 2007- 2010 my medical coverage costs went up 956%, how about yours?), went up a helluva lot more than that.
Winston, I like your posts, they get me to think and dig around a bit. It’s in the plutocracies best interest to keep housing prices high. You NEED a place to live, when prices are high, you pay more in interest, you pay more in taxes, and if you rent, you pay more simply due to the cost of housing in general. It’s a form of slavery, and one we have put on without a second thought….DEBT SLAVERY. It is designed this way.
Then you have the really intelligent calling for no forgiveness of debt of individuals, but totally support and allow the forgiveness of debt of corporations.
We as a nation as in for big troubles, thankfully or hopefully, I’ll be dead before the real shit hits the fan. Sorry kids, Daddy tried.
I disagree with the idea that prices are high everywhere. Relative to what? You had markets with obscenely high prices (CA/FL/NV/AZ), but for the most part (seems like Irvine excluded) they have come back to early 00’s or even earlier price levels.
I also disagree with the idea that prices move inversely with mortgage rates (hard to find historical data to back that up). When we were looking at homes in ’09 we had the option of 100% financing at 6.25%. We ended up under 5%, but that didn’t change the amount we would have paid for a given home. Where markets are most sensitive to small changes in mortgage rates is where people are devoting the largest percentage of their income to their home payment.
There is massive debt ‘forgiveness’ for individuals. If you go through a foreclosure, for the most part those debts are gone. Granted we haven’t put our biggest banks through anything close to foreclosure, but we aren’t holding people unconditionally to their debt.
“You had markets with obscenely high prices (CA/FL/NV/AZ), but for the most part (seems like Irvine excluded) they have come back to early 00’s or even earlier price levels.”
Why is that?
It’s a serious question. So many people in the comments bash Irvine yet no one has explained why many areas have retained their pricing levels even higher than the first 5 years of 2000.
And I still hear crickets when I ask about how did Woodbury sell 700+ homes in less than a year when many of the doubters here and elsewhere didn’t think they could sell half that in more than a year.
That’s an excellent point.
No one, other than TIC, seems to acknowledge the positive rising demand that Irvine is experiencing.
More housing product keeps coming to market, where else is in the country is that occurring?
The Woodbury sales are hard to understand. With all that development, why are the businesses in the Woodbury Center struggling ? Peppinos is gone. That Home Depot is always empty. The Ralphs is terrible. The fruit and perishables are always right on the edge. Other than The Counter and LA Fitness the place is not doing very well at all. Is it all Asians and Cash or what ? I see Laguna Crossing going in. Where are these high paying jobs coming from to pay for this expansion ?
It sure isnt from Quail Hill owners trading up.
They are all underwater ?
It’s more convenient to avoid reality, the reality that the boom and bust and subsequent rounds of quantitative easing has fueled the economic haves at the expense of the have nots. The flight from low quality assets to high quality assets is a transfer of money surgically designed.
It’s more convenient to look at overall unemployment, median income, and inflation and say that everyone is impacted equally. It’s difficult for some to accept this has never been the case.
In the mean time the median down payment on an Irvine home continues to be over 20%. Why doesn’t Las Vegas have the same?
How do you know what the Fed bought? Bernanke has refused to release that info.
It’s the debt impact on future generations that infuriates me. It’s a cash grab by Baby Boomers and loan owners – pure and simple. They’d rather see their children and grandchildren live in a cardboard box than consider losing any of their pulled forward “wealth.”
If the men and women of WW2 are the “greatest generation” then I would argue the Baby Boomers are the “most selfish generation,” leaving their children worse off than they are for the first time in the history of this country.
I thing every generation has borrowed and pushed the debt forward. The Ponzi scheme kept working because people
had a lot of kids and worker productivity kept going up a lot. But now with less people in the pipe after the baby boomers, and the rest of the world having the necessary infrastructure to compete with the US worker, the Ponzi scheme isn’t working so well.
Irvine Renter,
I have to question one statement from todays entry –
“of course, I don’t believe those properties will fall 40% more in value, and frankly, even if they did, I wouldn’t care because i bought them for their current cashflow not their resale value.”
I would think that a 20% drop, let alone a 40% hit would be devastating to your cash flow properties. Who, in their right minds would rent if the house next door could be bought for significantly less. Hell, in Vegas you would be able to by a house working at In-N-Out.
I believe IR has the potential to be successful in his endeavor.
However I agree with your sentiment. He makes it out to be far less risky than it is, not sure if this is his bias or a sales tactic. Most likely it’s a combination of both but mostly mental speculative bias on current cash flow.
Am I missing something?
The goal of IR’s fund to purchase at a discount and flip and not hold for cash flow.
Both of the LV properties profiled yesterday we’re purchased by IR’s fund to flip.
What does cash flow have to do with this?
I was going to ask the same thing. Are the 2 properties mentioned in LV exceptions to the plan because they presented quick and substantial profit, or is cashflow the just the backup position in case quick flips don’t materialize?
The fund only purchases to resell. I am personally planning on buying cashflow properties for my own account. I have been contacted by many others that want the same.
I think IR is exaggerating a little. As for Vegas, if prices fell another 40% their Case-Shiller index would be 60. In 1987, it was 67. I don’t think those numbers are inflation adjusted either.
Cashflow is the only real way to invest in real estate, otherwise you’re speculating. Providing liquidity from a foreclosure auction to a loan-financed buyer is a lower-risk, but it’s still more speculation than investment.
I’m not bullish on Vegas in general, but IR is doing his homework, which helps a lot.
A 40% decline in resale value does not impact a cashflow property at all. By definition, a cashflow property is one that you hold for its cashflow. Changes in resale value have no impact.
If rents were to decline, then the cashflow would decline and there would be real problems. Rents are not going to decline 40% unless Las Vegas becomes Detroit. Even then, I don’t see how rents can decline 40% because even people making minimum wage or on Section 8 assistance can pay more than that.
I think what you are not understanding is that total cash flow can easily become negative in the extreme scenario where values dropped 40% more.
In Beach Renters scenario, the In an Out Burge doesn’t even exist any more, Las Vegas unemployment has increased to 20% with under employment increasig to 30-40%.
Further more in this scenario population has decreased by 5-10%.
Your mistake is thinking total cash flow is relatively static as prices drop another 40%. What happens when 10-20% of your renters are not paying rent and rents have dropped. What happens when you are doing 20% more work and cash flow neutral? What happens when your investors get uncomfortable. They have put a lot of trust in you.
While you might not see rents decline 40%, if vacancies rise enough, then you might have a unit that is vacant or tenant-not-paying 40% of the time.
The biggest problem with Detroit is their vacant properties. If you’re more careful about the price you get into a property at, you’re less sensitive to resale price changes.
America’s emptiest city
Look, I don’t think that Las Vegas prices are headed 40% lower, 20%…maybe. That statement just seemed a little cavalier in what are almost always very well thought out and presented posts. If someone else had written that IR would certainly have examined closer. Planet has a good point – It is not a zero sum event, further price reductions ripple through all segments of the economy.
It is a somewhat of a stretch to compare LV with Detroit. LV has global tourism as an asset, Detroit has??????? Even if the auto companies come back, they are so outsourced it will have little effect on Michigan’s economy.
Making money by arbitraging the spread between buying at forclosure and selling at retail seems to be a pretty good way to put cash to work right now. Your other options currently are to run with the bond market (pretty played out) the stock market, or deal with the ridiculous t-bill rates. It is the long, or short, term landlording that make me a little hesitant.
Breaking news – Nov 05 2010, the Chosen One and Hellicopter at oval office:
The One: You promise me re-elected at 2012 when I re-nominated you, but ever since bailed out my ratings keep dropping.
Ben: I outlined a four year campaign plan two years ago, now just heating up.
The One: But economic goes nowhere since then.
Ben: In order aggregated monetary policy affect mutual signified efficaciously we need to bring down the economic deeper so we can have more stimulus
The One: But does it means more debt to next generation
Ben: People perceive revalue dollar will erase debt, and … remember 2012.
The One: But I just lost the midterm
Ben: Now you know where to point your finger
The One: But hurry, what if my rating lower than un-employment rate.
Ben: if QE2 is not enough, QE3 and QE4 … Fed is not part of federal government.
The One: I got it. I will re- nominated you another 4 years.
**************************************************
Ben: Hi Alan, this is for us, I cover your dumb A$$ for free, and I will get my 20 years too.
There is no risk in Real Estate !?!.
Especially if your looking for investors.
Why do you feel the need to come here, put words in my mouth, then cast aspersions on my motivations based on the false words you put in my mouth?
the state of the world, look at obama’s 2 billion dollar india trip :/
What 2 billion dollar Indian trip? That figure was obviously bullshit, even before the White House confirmed it was bullshit.
I agree with IR. none of us have a crystal ball. It’s all about your impression of the current market and statistics and your belief what will happen next – hopefully within the context of the macro and micro environments that we live, work and invest in.
It’s funny really, casinos make their living in statistics. That said, IR is far more likely to make a killing in LV as loose ANY amount of money. Do you all think that housing is going to the moon in Irvine but, will go to zero in LV in prices or rents?
This is foolish thinking if you ask me. The reality is that LV bottomed years earlier than OC and we will see better price appreciation in LV than we will see in OC any time soon – like a decade or more.
The idea that a person working at in and out burger can afford a house in LV is beautiful! Rising rents and rising home prices – IR = winner.
In OC we have the exact opposite. Properties that cost 5 times as much and people that make 2X what people in LV make.
We are in the next phase of “adjustments in price” and equilibration.
Do you realize you can live in LV and fly every day to the OC to work and STILL make money?
Fools, all of us that don’t realize what is going on…
Irvine is unique in the fact that we have the best schools and people are willing to pay huge premiums to be here for that purpose. But, Everything that Irvine may gain is a loss to other local communities.
OC and the most expensive ‘costal properties’ will loose the most going forward.
I’m guessing 20-50 percent.
Vote with your dollars! Buy now or be priced our forever! I would rather live in MV and spend 10K a year for a private school than pay an extra 300K to live in Irvine. Which is where i live now….
My .02
BD
“Especially if your looking for investors.”
At least learn you’re grammar before you start having at people on this board.
Thank you Grammer Police. You`re right.
Nobody is going after anybody. But a little Devils Advocate is healthy. I think IR was wrong to bring up his “deals” before they are closed. Just not kosher to count your winnings before the horse is across the finish line. Or in this case.
Escrow closed and cash flow in hand. Its gambling in in purest sense. Not Arbitrage. Arbitrage if done properly has zero risk. Once upon a time this board was to inform loacal people about the risks of real estate in Irvine. Now its a platform for speculative investment in the very same business that IR was so bearish about back in 2006 when I joined this board.
Now, your just making it to easy. Maybe you should get you’re own website.
Wow. And just btw Grammar-Policeman AbroadThankGod, that ought to be “Now, YOU’RE just making it TOO easy.” and “Maybe you should get YOUR own website.” lol
I think your missing the point in both of my comments above…
My worry with all of this ‘money printing’ and intervention that we get the exact opposite of what the Fed is trying to do… that is, we get huge commodity inflation – gas, food, energy and stagnant wages. This means more and more money being spent just to live and even harder to stretch for big housing debt payments.
I doubt these Fed actions do anything productive and are more likely to hurt people and housing.
My .02
BD
“The Fed is creating consumers, not producers” ~ Peter Schiff
I think it’s clear the Keynesians have it wrong! The only answer is to downsize the scope of the govt/FED, get them out of the equity markets, out of the real estate market, out of our pockets.
Take this morale hazard out of the markets!
IR wrote:
“This is also theft from savers. The free market would place a value on stored financial reserves, but the Federal Reserve usurps the free market and diverts the return on savings away from savers to the member banks. The inflation that comes at the end of the cycle is a second form of theft from savers we will see when interest rates go back up.”
—————————-
II completely identify with this being a saver who saved money for at least 20% down payment but did not buy due to job insecurity (only to be laid off as feared), and my full-fledged down payment is “earning” me about $20 per month. When inflation occurs, I will eat more shit.
Even Bill Gross the bond guru said printing money and Fed buying debt (thus creating artificial demand for bonds at ridiculously high prices (i.e. low interest rates) will kill the bond market because rates will have nowhere to go but up, and eventually driving bond prices down.
IR – Aren’t you glad there are so many experts here who can point out your mistakes?