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

Cash will be King

It's amazing how many real-estate related direct mail ads I get these days. I just got one for some real estate expo, imagine that, I couldn't stop laughing. I don't know how I got on their list, but they sure wasted their time sending it to me.

These ads are incredibly polar, either how to make your fortune in the real estate market, or how to profit when the real estate market crashes. I'm actually quite surprised about the latter, those guys really don't waste any time. Psychology really is changing much faster than I imagined.

I've been thinking about position lately, when the RE market crashes, how does the average person position themselves to best take advantage. The more I went through the scenarios, the more complicated that position became.

Here is the simplified scenario:
Market crashes, homes lose 40% of their value
Buyer sweeps in, picks up a bargain, lives happily ever after

Now, I really don't think this would happen. Why? What are the mortgage rates? Have lending standards changed? How much of a down payment do these new buyers have?

Gets more complicated for sure. Lending standards would definately be stepped up, as would interest rates, so the average 'buyer' would need to have their 20% down plus closing costs, as well as good credit. Taking all these factors into account, has 'affordability' changed at all? No. I don't think so, if you compare the PITI of two scenarios, a home at 6% and that same home reduced 15% with an 8% mortgage, the monthly payments are about the same. So, if prices fall about 15%, and mortgages jump to 8%, there really is no change to the average buyer. In fact, if lending standards are tightened significantly, I might argue that even though prices have fallen, homes are still no more affordable.

So gee, that scenario fizzled out. And, I think it's one of the main arguments against bargain hunters keeping the market elevated during a crash. If homes aren't necessarily more affordable, the price might changed, but the situation didn't. So if anyone is waiting around to pick up 20 condos using 0% down IOs after the crash, sorry, not going to happen. For the average joe that wants to buy a home, but doesn't have a down payment? Sorry, you won't be able to get a decent rate mortgage unless you've got your 20%.

So doing nothing but sitting around doesn't improve your position much. So how do you benefit given the a large decline in price? Cash. Accumulate as much as you can. You will make out like a bandit if you can put down very large down payments. The more the better, 30, 40, 50% down or even more. This shields you from the premium associated with a higher rate mortgage, as well as gives you a bit of a cushion to ride out any recession. If you don't want to put the money down, but hold it in other assets, fine, you can pay the mortgage premium for the luxury of holding cash, but you need to have it.

So this is what I'm doing to position myself to take advantage of a decline, accumulate cash, take advantage of rising interest rates, I've only got 20% of my money in the market, the rest is in laddered short-term CDs. Save every penny you can. Pay off any debt you might have and clean up your credit (although I'm sure most savvy readers here have no debt and substantial cash on hand). Unless you have cash on hand, homes are going to be just as unaffordable after a crash as they are now.

So pass on the conspicuous consumption, pass on the hummer, plasma tvs, expensive toys, etc.. Live humble. Break the habit of immediate gratification. Any pain you incur for the lifestyle change now will be rewarded in the future. The easy money will be long gone and cash will be king again.

Caveat Emptor,
-grim

NNJ Weekly Inventory Update

It's Wednesday again, so time for the weekly inventory update:

GSMLS

Bergen
9/28 815
10/5 833

Essex
9/28 1920
10/5 1918

Hudson
9/28 97
10/5 100

Morris
9/28 2526
10/5 2540

Passaic
9/28 1374
10/5 1408

Somerset
9/28 1641
10/5 1677

Sussex
9/28 1598
10/5 1560

Union
9/28 1760
10/5 1767

Warren
9/28 804
10/5 808

Total
9/28 12535
10/5 12611

All in all, slight increase in inventory in GSMLS, nothing really noteworthy as far as week to week increases go, I believe it was on the order of 0.6%. Notable is that the GSMLS changed their system/database on 10/3, I noticed a drop in active listings at that time.

NJMLS

I'm having issues with NJMLS this morning, all sorts of errors with the database, however I did pull data yesterday, so I'm going to post up a shorter timeframe anyway, but just the totals.

Total
9/28 5455
10/4 5542

These figures are more in line with expectations, an increase of about 1.6% for 6 days. If they resolve their issues later in the day, I may edit this post to include the new values.

One last tidbit I'll throw out, and it's completely anecdotal, so take it with a grain of salt, but it seems like the days of price increases are long gone. The hot sheet price changes are almost fun to read these days. However, there is still a fair share of overbidding in certain "hot" areas.

Caveat Emptor,
grim

Northern NJ Year Over Year Analysis

A few days ago I posted the September sales data and received some negative comments because that data is highly seasonal in nature. I agree with the criticism wholeheartedly, RE sales rates are indeed highly cyclical throughout the year, and it just so happens that some of the drop I reported is just simply due to the yearly cycle. However, I did have some other data that showed this September drop to be more drastic than drops in the last few years. I put out a call asking for more detailed sales data, and that call was answered by a local agent with access to that data. I was provided the raw sales numbers, by month, for 2003, 2004 and the first nine months of 2005. I received this data this morning and was assured that Septembers sales numbers were solid at this point (being that we were now 4 days into October). While there could be some change to the numbers past this point, it was not likely we'd see any kind of dramatic change. So, I plotted the data into a year over year graph for 2003-2005 to show that the September data did in fact represent a signifcant change.

This data is for sales for Bergen, Essex, Hudson, Morris, Passaic, Somerset, Sussex, Union and Warren. Middlesex is not included.

As you can see, the September decline is steeper than the prior two years. I think this fits well with the anecdotal stories I've been hearing about slowdowns lately. Also quite curious is the double hump this year. It makes me wonder if June was actually the top with September being more of a dead-cat-bounce. Anyhow, I'm still going to say this is going to play out on the scale of years, not months, so I'll continue to try to plot the data to try to accurately track the data. I'm never one to not throw out some opinion and guesses, so I'll leave you with just one. I predict that NNJ February sales this year will be the lowest we've seen in many years. This winter is going to bite into many new and in-debt homeowners sharply. Keep an eye on your utility bills as the weather starts to turn, we're likely to see something on the order of a 25% increase in utility bills. Combine that with the increase in credit card minimums (2%-4%), increased gas prices, continuing increases in interest rates, etc.

Caveat Emptor,
grim

Times Reports on Housing Slowdown

What a change from the last few years, those years where no one dared to say the B-word. Heady days.. You couldn't lose on real estate speculation. Seems that opinion is shifting rapidly, much more rapidly than even I could have imagined.

I'm not sure if anyone caught the NY Times article from yesterday:

Slowing Is Seen in Housing Prices in Hot Markets

"More sellers are putting their homes on the market, houses are selling less quickly and prices are no longer increasing as rapidly as they were in the spring, according to local data and interviews with brokers."

It's something the RE bears have been noticing for some time, the growth rates were entirely unsustainable, and it was only a matter of time before the house of cards tumbled back to the ground.

I'm happy to start seeing articles of this nature in print, in the past, you seldom saw anything but Real Estate cheerleading in the press. These articles will, no doubt, have a strong impact on buyer psychology..

grim