Saturday, October 08, 2005

The Greater Fool

Popular media once again feeds the frenzy creating a crop of greater fools through unrealistic television reality shows.

If anyone is looking for a greater fool to pass the hot potato to, here they are:

It's hip to flip real estate

Take a peek, the picture they paint is absolutely unbelievable. It's no wonder we're in a market like this, the mass of sheeple have conspired in the greatest get rich quick scheme ever created.

Cutler agrees. You'll succeed as a flipper, he says, "if you do it wisely. Study, anticipate the unexpected, and use reliable contractors and subcontractors, or you might take a risk and fail."

So there it is everyone, we're all wrong, all you need to do is study, anticipate the unexpected, and you too can be a real estate tycoon! I wonder how many would-be tycoons were created based on these television shows, my guess, quite a few.

Have any of you ever watched these shows? I can sum it up, a bunch of hacks do a hack-job on a run down shack and almost always walk away rich. I guarantee if you watch a few hours of these shows, you too will run out the door, check book in hand, ready to find the fortune you deserve.

Boy-o-boy. There is a great anecdote about the stock market crash right before the great depression (it's been said it's a myth, but who cares, it's appropriate) Joe Kennedy stopped to get his shoes shined, and the shoe shine boy was giving him stock tips and telling him how to get rich in stocks. That day, he sold all the stock he owned, and the market crashed soon after. The moral of the story, when the shoeshine boys start talking about something, make sure you aren't in it.

These TV shows are made up of nothing but shoe shine boys. Go out on the street, ask anyone to give you a way to make alot of money quick, I bet you the majority will say real estate. Popular media, tv, newspapers, they all seem to push this nonsense with no regard for the real consequences. All shoe shine boys with their get rich quick schemes. There is only one way this mania will end, I'll give you a hint, it's not going to be with everyone a real estate millionaire.

I'll leave you with one last parting thought, an old poker quote..

If you can't find the sucker at the table, it's because the sucker is you.

Caveat Emptor,
Grim

33 Comments:

Blogger InvestorDavid said...

After the stock market crashed in March 2000, people moved the money from the stock market to the real estate.

As the real estate boom is about to end, where would people put their money into? Many people I know pulled their money out of real estate and holding it now.

I personally don't think that people will start buying stocks. Any ideas or predictions?

10/08/2005 10:41:00 AM  
Blogger InvestorDavid said...

I wonder how long it will take the real estate market to recover after the bubble pops. 2 years? 5 years? 10 years?

10/08/2005 10:47:00 AM  
Blogger grim said...

I don't really think it was the dot.bom/market crash alone that pushed people into RE, although that was definately one of the factors.

Coming off the dot.bom get-rich-quick scheme, everyone was in the money-mindset looking for the next free-ride.

WTC bombings happened, and shifted mindset again towards family and home. I feel that this was one of the major factors behind the remodel craze.

Greenspan & Co. dropped rates to unheard of levels and lenders lost touch with reality making it possible for just about anyone to buy.

I'm not sure which of these three I'd point to as the trigger here, although all three definately played some role.

Now, as to where people will put their money after this? Alot of folks have said commodities, but looking at oil and precious metals, they are near peak prices as well. I don't think the average joe will ever comprehend commodities or foreign currencies, and I think the market crash is still too fresh in the minds of many.

Believe me when I say I've been thinking and looking about the next big bubble, the folks that find it now will be very very rich.

Unfortunately, that requires that there is another bubble. If the housing crash puts us into a long painful recession (or even depression), the question won't be where people are putting their money, because there won't be any.

grim

10/08/2005 11:02:00 AM  
Anonymous Anonymous said...

Found this article about possible tax reform. And housing is a target.
http://www.latimes.com/business/la-fi-taxbreak8oct08,0,1112971.story?coll=la-home-headlinesh

10/08/2005 01:23:00 PM  
Blogger InvestorDavid said...

Grim,

Maybe the biggest factor would be dropping the rate to 1% by A.G. et al?

Since most of us believe that the bubble will burst, maybe we should spend some time discussing what will be the next big bubble?

Gold looks real good and I still remember Gold going over $800 in late 70's (someone said that it is equivalent to about $2500 in current dollar).

Maybe next big bubble will be gold? Gold always does well during a time of unstable economy, recession and especially during depression.

10/09/2005 06:06:00 AM  
Blogger InvestorDavid said...

I have been using the same realtor for over 10 years now. I made some money because of him and I don't think he is a bad person but still take caution when he gives me advices.

According to him, the sales of over $1M houses have been very slow but anything below $500K houses/condos are still active in Bergen County.

Also, he tells me that commercial properties are still undervalued, which I doubt highly.

What do you think of commercial market? At least in the commercial market, you can't buy them with 0%, 5%, 10% down. You have to put up at least 25% down. And I never heard of IO payment for commercial lending (unless someone tells me that it has been done lately).

Any prediction in commercial market?

10/09/2005 08:15:00 AM  
Blogger Richie said...

I'd like to know why real estate is never mentioned in articles about overall 'inflation'. Wouldn't steep rises in real estate trigger inflation worries?

Or is the government/RE industry trying to keep those topics out of discussion to prevent a major slowdown?

Mortgage companies and real estate companies are dealing with the highest volume of business they ever had in the past 15-20 years. I'm sure they want to deflect any attention elsewhere...

I find it incredibly hilarious how people complain about the $3+ gas situation, although their dumping $450k+ on a cape cod that's over 50 years old...

-X

10/09/2005 09:46:00 AM  
Blogger grim said...

Gold is great, if you bought it a while ago. While I think it's great for capital preservation, I really don't believe we'll see huge appreciation like in the past (only because we've already seen quite a bit of appreciation already). However, if the the fed can't keep tabs on inflation, you'll see that in the price of gold..

I've been looking to buy gold for a few weeks now, but the thing that stands out is the large difference in the bid/ask spot prices.. Seems the guys making the big bucks in physical gold are the ones buying and selling it.

The one precious metal that looks undervalued in comparison is palladium.. But I'm a complete neophyte, and I don't know why it's currently trading so low in comparison (or why there was a huge spike a few years back)..

As for why you never see housing as part of any inflation measures is because the government wants it that way. The CPI uses something called equivalent rent, and not housing prices in the index. Because rents are historically low, and home prices aren't part of the index, the government says there that it doesn't affect inflation because the rent on an equivalent home has not increased. The fact that rents have not risen but home prices have is *THE* biggest bubble indicator there is.

grim

10/09/2005 10:18:00 AM  
Blogger grim said...

It's another homebuilder bloodbath today.

Dominion Homes Inc (DHOM) down over 17% so far this afternoon. It seems the market was a bit spooked by profit warnings.

Other homebuilders on the slide as well, Toll Brothers (TOL) down almost 4%, Hovnanian (HOV) down over 4%, KB Homes (KBH) down some 3 and a quarter percent. Drops across the entire sector.

Seems the market has been reacting (overreacting or properly reacting?) quite dramatically over the past few weeks. The homebuilders look like they are on a neverending downward slide. While we don't have a real-time view into the U.S. housing market, we can certainly make some assumptions based on the movement of homebuilders. It looks like shareholders don't have any faith that past growth/profits will continue. This is most certainly a sentiment shared by home buyers. Either way, I believe these movements should be viewed as a harbinger of things to come in the real estate market.

The party is over and the hangover is going to be a nightmare.

grim

10/10/2005 11:08:00 AM  
Anonymous Anonymous said...

Commercial real estate has peaked.
5-6% cap rates suck.

Heard from a few sources going to open houses across the state. They said things were dead. Really dead. Spoke to some looking buyers. Most are aware that prices are to high and will only bid less alot less.
Surprising but true.

10/10/2005 11:52:00 AM  
Blogger InvestorDavid said...

I just talked to my agent and he told me that anything over $1M has been real quiet in Bergen county (both commercial and residential).

Someone I know bought the house "on the plan" around March for $1.7M (5 houses were being built). Only one has been sold to this person I know. Over this weekend, the builder lowered $100K on all 4 other houses.

10/10/2005 12:26:00 PM  
Blogger InvestorDavid said...

And there were several houses I have been tracking. One house has been on the market for over 6 months at $860K and were down for $827K for the past 3 months. Not sold and off the market.

Another house on the market for 3 months at $1.198K. Now, it was just listed at $1.098K. Down of about 9%.

It seems like over $1M houses are lowering its prices between 4%-10%.

But anything below $500K is still active and the price is NOT going down.

10/10/2005 12:33:00 PM  
Anonymous Anonymous said...

So you are saying soemone just bought a house for $1.7 mil now builder lowered $100,000?
lol. What happens when the builder lowers by $400,000? or $500,000?

10/10/2005 12:34:00 PM  
Blogger InvestorDavid said...

and the Gold keeps going up.

Grim,

As you predicted, Palladium is going up (gained close to 3%) today.

I think Palladium is used for some sort of catalyst but I don't know much about precious metals at all.

From what I read there was a spike in Palladium price since Russian supply was disrupted 4 years ago. The price topped at $1050 and now it is at $210.

10/10/2005 12:38:00 PM  
Blogger InvestorDavid said...

He bought the "house/plan" around March 2005 at $1.7M (he put down the 5% deposit and he was going to pay another 5% deposit when the house is done. He was going to use IO payment to close the house and was going to flip the house for $2.1M around this December when the house is done). Over this weekend, the builder reduced the price on the other 4 houses by $100K since the builder couldn't sell any of these 4 houses since Feb. 2005.

My feeling is that the builder will probably reduce the price by another $100K-$200K by this December as there will be no buyers.

I warned him about the risk of "flipping" this late in stage but he thought he was Invincible.

10/10/2005 12:43:00 PM  
Blogger Grim Ghost said...

In Somserset county (barely North NJ), there is definitely a real slowdown and even properties below 500 K (admittedly there aren't that many) have reduced prices.

I think the key issue here may simply be areas that have seen the most appreciation. Parts of Bergen County and Hudson County have seen the most appreciation in the last 2-3 years. People here still think they can price 20% over the last sale and get a turnover. In a community of 40 townhomes near me, 4 are on sale, most have reduced their prices by around 150 -100 K. One (the cheapest) either sold or was withdrawn, the others which are asking 400 K more, languish ..

10/10/2005 01:08:00 PM  
Anonymous Anonymous said...

Your fiend is going to wipeout all his bubble gains on this one. $85,000 deposit up in smoke. Hahahaha.
It's always fun on the way up but leverage does quite the destruction on the way down. Lots of fools going to be wiped out.
50% corrections in condos on the way at least.

10/10/2005 01:16:00 PM  
Blogger InvestorDavid said...

I am not sure we will see 50% corrections in condo/apartment price. I think it will be more like 20%-30% correction.

As for this person, he bought his first house around March 2002 at $550K and spent $120K for renovation (total: $670K). Then he rented out his house and bought a $1.2M house 1 1/2 years ago with 10% down and IO payment. He was waiting another 6 months to sell his house (thus only 15% Capital Gains tax). He truly belives that he could get 1.7M on this house. In the mean time, he sold his first house at $830K 2 months ago (so not much gain considering paying capital gains tax -- though he didn't use an agent to sell his house -- he sold it to someone he knows).

And this March 2005, he bought that $1.7M house with 5% down.

I have a feeling that he will not be a happy person as he is losing money on his half-built house. In addition, I don't think he could sell his $1.2M house at $1.7M next Feb. He will have a problem selling his $1.2M house next Feb. And if he can't sell it, another 3 years, his mortgage payment will go up when his IO payment period is over, though he might re-finance again.

10/10/2005 01:40:00 PM  
Anonymous Anonymous said...

In the early 1990's condos dropped by 50% in price. So why do you feel they will only drop 20-30%?
I know at the top it's very difficult to buck the trend, but believe me, anything with this kind of leverage will have a big drop.
Leverage works both ways..sharp moves in either direction. Now the unwinding of leverage will cause much distress and many stretched.
Those with sanity and discipline will be able to pick up a few pireces when the bust bottoms.

10/10/2005 01:54:00 PM  
Blogger InvestorDavid said...

I believe that northern NJ housing price dropped around 25% during 1989-1991.

If the condo drops 50%, I will be all over picking up properties. I will start picking up properties when it dips about 30% and buy even more if it dips 50% -- maybe even highly leverage myself at 50% of the current price.

And if the price dips 50% and the rental price remains the same, it should be about 7-8% return on my investment.

Currently, the rental price is about $1700/month for a $450K property. which is less than 4% return (due to property tax and maintenance fee).

10/10/2005 02:13:00 PM  
Anonymous Anonymous said...

It is easier said than done. I wouldn't rush in there to quickly. Many trigger happy buyers need to be a little more patient. When bankruptcies are front page and real estate is doom and gloom it is hard to step up to the plate buy and go into massive leverage. I did most of buying in 1993-1994. 2 years after bubble pooped. This time around though I believe it will go down much faster and harder due to massive leverage and greater transparency through internet and 24 hr news.

10/10/2005 02:55:00 PM  
Anonymous Anonymous said...

another thing as mentioned here before is that credit availability dries up. Only those with pristine balance sheets and cash can have free reign to buy. Others will find it difficult so liquidity is definately tight. As the bozo lenders when awal in recent years they will hunker down and tighten up lending standards so to turn off the money supply.

10/10/2005 02:58:00 PM  
Blogger InvestorDavid said...

"This time around though I believe it will go down much faster and harder due to massive leverage and greater transparency through internet and 24 hr news."

If it goes down faster and harder, would it go back up faster and harder? :)

Yes, I do agree that there has been massive leverage due to no downpayment, low downpayment combined with ARM/IO etc.

Maybe you are right. It might go down much faster than in the past and it might go down deeper.

The way I look at my real estate investment is, if I buy and have the place(s) rented and getting my 6%-8% return, I am a happy camper. I am not one of those flippers.

If the current real estate price dips 50% and the rental price remains (it might go up since rental price usually goes up when the interest rate goes up), it makes a sense to buy the property and rent it out and make 6-8% return on the investment.

10/10/2005 03:02:00 PM  
Blogger InvestorDavid said...

As the lenders will tighten the standards, it will be more difficult to buy the property.

So the rental price will go up.

In that scenario, it makes a perfect sense to buy the property (at 50% reduced price of the current value) and rent out at a higher rental rate.

10/10/2005 03:04:00 PM  
Blogger InvestorDavid said...

I have been getting rid of my real estate holdings and accumulating cash reserve. As I wrote in previous posts, I am just not too happy with 4% return on my CD.

I just hope that the real estate price goes down "fast and furious" and deeper as predicted by the "anonymous" poster so that I could wisely invest my money once again into real estate, rather than just collecting 4% (more like 2.3 or 2.4% after tax) return.

I have been seriously thinking about putting 10% of my cash reserve into Gold and/or Palladium in the mean time, so that I could get better than 2.4% return -- one thing about Gold is that your capital gain will not be reported if you buy and sell gold from "gold dealers" -- not all dealers, but many dealers.

10/10/2005 03:13:00 PM  
Anonymous Anonymous said...

6-7% isn't worth the headaches.
Believe me. As for escalating rents. I think rents are not going to soar either, so price is important.
in my opinion if it drops faster does not mean that it will bounce back quicker. Pessimism about real estate will grow.
People are getting laid off. Companies like AT&T LU Merck Schering Plough Pfizer dominated employment. Now they have been laying off in our areas. Salaries are not growing very much and are definately not keeping up with living expenses...house prices gas utilities insurances..

10/10/2005 03:14:00 PM  
Blogger InvestorDavid said...

Anonymous,

So what do you suggest to a person who has large cash reserve at this point? Just hold tight and keep it at CD for another 5 years?

10/10/2005 03:21:00 PM  
Anonymous Anonymous said...

What is the cash for?
cash may just be the best investment right now. Noone can predict the future with any certainty.
But I feel very certain that housing is insane and irrational activity has been widespread. This will change.

10/10/2005 05:17:00 PM  
Blogger InvestorDavid said...

Cash reserve was from the sales of my real estate holdings.

I am looking for next investment and I liquided most of my real estate holdings within past 6 months.

I have been following gold for a while. It has been holding at $465 and hovering over $475. Many experts say that it will consolidate before breaking through $500. I might just wait until the consolidation occurs and invest some of my money into Gold.

10/11/2005 07:22:00 AM  
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3/29/2006 10:42:00 PM  
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4/16/2006 05:14:00 PM  
Anonymous Wendi said...

When we are born our brains are like empty computers waiting to be fed information. As we grow our peers act as our programmers, they supply us with the knowledge which we channel through the conscious mind into the subconscious (our hard drive). The subconscious mind is the biggest hard drive ever developed - it stores everything we come in contact with and by no means is all of this information of a positive nature.
All that we have heard, touched, smelt, tasted and seen are stored in the recesses of our minds. The subconscious mind holds on to this information until we need to recall it. For example when you were young your curiosity lead you to investigate your surroundings. When you approached a substance that was dangerous, such as fire, your parents or guardians would most likely have rebuked or scolded you if you ventured too near the flame. Perhaps you may even recall an incident when you were physically burned. Your subconscious mind then began to relate scolding (or pain) with the intense heat of the fire and would therefore feed the feelings of the scolding incident back to you whenever you got too close to fire again, thus acting as an early warning system.
This is the mechanism used by our brains to learn. It is also the same method employed by the mind in every situation. The subconscious mind has a tendency to emulate what it sees - it tends to replicate its environment. This is why so many people find themselves in similar relationships and situations that they saw their parents in while they were growing up. Most people also hold very strongly or similar views of their parents.
Think of a time when you gave yourself praise. What words did you use? Do you use the same words that your parents or peers used when they were praising you? The same is applicable when you scold yourself.

Watch your internal dialogue. Look at it closely. It takes diligence to change the way you think. When you notice yourself thinking a negative chose to think the opposite. This way you neutralise the negative thought. Now the think the positive thought again! You have just reversed the negative thinking in that moment and remember you only have this moment. No other time exists!
Daydream about what might be. Imagine things they way you wish them to be. If you catch yourself thinking "this is just a daydream - a fantasy" then stop! Think the opposite. It is not a daydream it is your reality. Now think it again.

By doing this simple procedure you will begin to retrain your subconscious mind to think positively and you will ultimately begin to consciously create a life that dreams are made of! personal development

6/24/2006 03:51:00 AM  
Anonymous Wendi said...

Your subconscious mind is a powerful force. It can be an un-defeatable ally or a dangerous foe! It is a powerful force of nature that can be harnessed and made to work for us or it can be a wild beast that runs riot with our lives.
How powerful is 'powerful'?

Take the first Atomic Bomb - it could lay waste to an entire city in seconds. Or the gravitational pull of the Sun which stops our tiny planet from hurtling into space. Imagine the power of a black hole - that region of spacetime from which nothing can escape not even light travelling at 186 thousand miles a second. The Universe is full of powerful forces. Yet, all these wondrous things pale into insignificance when compared to the power of the subconscious mind.

The subconscious part of your mind is that part which regulates your heartbeat, lungs, digestive system and everything else in your body. It directs the inner workings of your body and such things as (what biologists call) 'machines' - tiny living cells that are composed of motors, drive-shafts and propellers - seriously!!! There is mounting evidence that the cells in our bodies have memory and that our very DNA is coded with memories of our ancestors. As well as having full control of all these functions and more your subconscious also retains all the thoughts, experiences and emotions you have ever felt. It regulates the most complicated mechanism in the unknown Universe - your body - and it can calculate the trajectory of multiple moving objects while supplying you with the words necessary to debate an issue while controlling a complex task of activities such as driving a car!
These tasks alone show how powerful the subconscious mind is. But it is much more powerful than that!

The truth is: No-one knows the limits of the subconscious mind's power!

Tell yourself that you will wake up at 6 a.m. and chances are you will awake. Go to a crowed party and through a mass of voices you will hear someone at the other side of the room mention your name! Set a problem aside and miraculously, out of nowhere, the answer comes while you are involved in another task. It recreates situations in your life that correspond to your beliefs. Time and time again you find yourself in the same situations, with similar partners, in almost identical jobs. Like a wheel your subconscious mind creates situations that bring your life back to the same spot.
Likewise it can totally transform your life - even overnight! It can bring you new situations, life experiences, luxuries and even people.

However, it is like a na�ve child or a better analogy is that of a computer. It believes everything that you tell it. Your conscious mind is the gatekeeper. Anything you think with complete faith is immediately past to the subconscious mind - which it then takes as literal fact. There will be no arguments because it has no discriminating capabilities.
Although your subconscious mind is more powerful than you can possibly imagine it is a mere servant. It is at your disposal. YOU are in charge. It acts just like a computer and like every computer it needs software to run. So if you do not program it then someone else will! You are constantly being bombarded with software programs for the mind every minute of everyday. Buy this product and you will look slim, drive this car and you will seem sexy, drink this potion and you will feel more vibrant about life. You are told what to buy and when to buy it, when you are too young to do a thing and when you are too old. You are told what is possible and what is not. Snap out of it!
Take back your control over mind and body. You were born with the most powerful computer system known to man - a bio-computer that regulates a sophisticated, highly flexible, changeable, self repairing vehicle. You are amazing, a true miracle. If you bought a new top of the range diesel Mercedes would you let Joe or Sue down the road fill it up with petrol?
Begin to think for yourself. Who told you that you could not achieve your dreams? Do you believe it? Who told you that you were too fat, too skinny, too stupid, too smart, too young or too old?

Does it matter?

No! Because you are and always have been in total control. Change your thinking and you will change your subconscious beliefs. Change your subconscious beliefs and you will change your life. personal development

7/01/2006 06:34:00 AM  

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