Sunday, August 27, 2006

What Where When?

Robert, what area do you think of when you think of investment property?

Investment property:
1. Unrecognized value.
2. -Potential- for appreciation.
3. Proximity for personal oversight.
4. Stable community.
5. SFR/Townhouse/4plex. A personal preference.
6. Pool of renters.
7. Rational land-use regulation. Some would call this a personal foible but I call it putting my money where my big mouth is and voting with my feet.
8. Nowhere near transit.
9. No HOA.
10. No Mello-Roos.
11. No pending plans for rezoning, a freeway, etc.
12. Defects are okay but no unkowns.
13. There’s about a hundred “second tier” factors as well.

So, with all that in mind an casting out from my location the conclusion is obvious. I cannot find a property in the US that I personally consider a worthy investment property at this time. Spring ‘08and I’ll bee looking at maybe San Luis Obispo, Santa Clarita, Simi Valley, North San Diego, Big Bear.

Places I don’t consider; core urban areas, large metro conurbations, high end (Santa Barbara, Orange County), bad weather communities (Bakersfield, Ontario).

Places I wish would open up; Coastal California, Cape Cod, low density Gulf Florida pennisula, the next Sedona.

Do I paint a picture?

Thursday, August 24, 2006

Bubble? No!

It isn't a Bubble, it is a pustule. Feel free to try for one upmanship.

Tuesday, August 15, 2006

"There is no way you can justify the math."

"Christopher Thornberg, who says the Southern California housing market is a bubble beginning to pop, has left UCLA Anderson Forecast to strike out on his own."

"Look at what your house was valued at three years ago and what it is now. Is it really worth 70% more? The answer is no," he said. "There is no way you can justify the math.",1,4462297.story?coll=la-mininav-business

Monday, August 14, 2006

Dumb Money

"Rhetorical question: Is private equity "dumb money"?"

Does Fortress taking Intrawest private for a 50% premium answer the question? All that debt won't go away but all the asset valuation backed by resort area land holdings will. This isn't a deal that has to happen unlike the Homebuilders who had their buyback programs to prop up the price while the insiders cashed out of Lyons who by going private can report awhole lot less. When Intrawest is carved up and sold off for debt repayment things will get interesting. There seems to be some weird bet that the Vancouver Olympics will enhance their BC holdings but I want the name of the bank that okayed this white elephant deal.

Wednesday, August 09, 2006


"How about a "hard-soft landing?""

- PIMCO's Paul McCulley

FBs Need to Grow Up

It would be immoral and a hindrance to their development as responsible citizens to intercede and shelter them from facing the full consequences of their actions.

The problem with compassion in this case is that it isn’t compassion. I have an infinite supply of compassion. Anyone with a modicum of humanity can manufacture more at any time. No, what people are trying to pass off as compassion is actually spreading pain to those of us who don’t deserve it. Money handed to stupid people or even people with money problems is no more compassionate than give heroin to addicts. Worse, all the offers of compassion to date have been in the form of people offering these FBs my money. It is my money and calling its forcible confiscation “compassion” doesn’t make it compassionate. Look into my children’s eyes. Tell them we cannot visit grandma this year. Tell them they cannot afford the “free” California College education they earned despite being accepted. There, tell them about compassion and needing that money to resuce somebody who paid 4 times as much for a house as they could afford thus pricing these children out of their childhood communities when they grow up.

Go ahead, be compassionate. Just don’t call anything less than the necessity that they face the consequences compassionate.

Sunday, August 06, 2006

Inflection Point

Nothing like disaster staring you personally in the face to sharpen the mind and narrow focus to the important facts. These things are “brainers.” The problem is so many people sleepwalking or in denial.

It is important to remember that housing is priced at the margins. That’s also why the bubble won’t be as injurious to the general economy as some here believe. Imagine getting a letter in the mail saying you won a million dollars. Next day you get another letter saying a mistake was made, you only won $400,000. Did you just lose $600,000? Only if you went out the night before spent it all (MEW). [Calculations below.]

I’m not too worried about the coming and needed recession even if it is late and thereby harder than necessary. The jobs that will be lost are largely parasitical and not ultimately productive nor are they the jobs we wish to have created in a modern economy. Obsolete jobs are best cleared out. A recession will ease our crushing immigration pressures here in California as well. Schools are already talking about closing buildinngs, saving billions. Lower taxes, less crowded schools; what’s not to like? Maybe the national psyche can find enough breathing space to heal as well.

How deep will be the declines? Anyone will be able to justify anything from 0% to 80% with careful work. Small Midwestern stable communities that missed the bubble will drop in real terms with inflation but prices will stay flat. Certain problem properties in wildly speculative areas, a mudslide in Califorina for instance will see 80% declines. A brutal winter or two in New England with home heating oil prices or a brutal summer or two in Phoenix with home cooling prices could literally leave empty unsaleable houses. That’s 100%+ declines where governments may be forced to pay for dispensation. But all these are extremes. I’m guessing 25% on the national median which is actually about 35% on any one house same sale and 40% in the bubble zones with some truly spectacular outliers. Why the small difference twixt BZ and normal America? The problem is/was a nationawide credit/lending issue not local real estate issues.

Just like any herd behavior at infection points and changes in direction individual chaos overwhelms underlying trends. There are still large numbers of sheeple in the Euphoria category. Witness the continuing negative savings rate and massive MEW amongst some while at the same time people like me have recently sold off every non personal piece of real estate.

At the top of a cyclical process this noise in wave terms is called froth. Hmmm, who in the highest levels of economics do we remember using that term? "Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels." - Alan Greenspan 06/08/05.

Likewise at the trough the disorderly behavior of individuals will in wave terms be likened to churn. This is indeed the point of maximum oportunity. Those of us with forward thinking perspectives will be able to take advantage of those still panicing.

I commented back in April on the closer resemblance to physical waves ratrher than mathematical waves:

By my estimate $2.5T in MEW is unsupported by reasonable asset valuation. In total somewhere between $7T and $9T in phantom equity is exposed in any retracement to the mean. An orderly retreat will allow inflation to eat away much of this. A decline in the dollar may result in a disproportionate amount of pain to be taken by foreign investors. No matter how the pain is spread, there will be consumer pain. Likewise because of govt spending policies that resemble the proverbial cricket in summer we can expect massive deficits and even larger tax inceases. I hope everyone likes their neighbors because nobody is moving for a very long time. The new immobility class has moved in to stay.

Friday, August 04, 2006

Let's Go EV

Or not...

Oh dear. Where to begin? Okay, first we are comparing brand new, cutting edge, designed for efficiency, small, niche vehicles to the 8.8 year old average US automobile (23mpg) in this efficiency comparison. Second, don't fall for the lie of omission in comparing electricity to chemical fuels. Only 31% of the energy used to make grid electricity actually gets to the customer. When that electricity is used to charge a battery this can be 60% but never less than 20% losses. So, getting useful work out of an EV is about 25% efficient. the claims of 0.3-0.5 kW-h/mile is 1000-1700 BTU/mile. For conventional vehilces 1.58 kW-h/mile is 5,400 BTU/mile or 23 mpg as calculated but the equivalency ignores passenger loads. While there is no definitive information it is highly likely that EV useage resembles the average occupancy of the commute segment of road users; 1.2 passengers while the US average is 1.57 passengers.

You see where I'm going with this, EVs are not anywhere near as efficient (yet) as their proponents claim. Within the next few years as solar comes down in price and/or increases in efficiency and as technology improves maybe but not yet. Oh, and it is important to note that a huge portion of the claimed transportation efficiency derived from EV designs can be applied to IC primary movers; low cD, narrow tires, limited capacity, range, advanced materials energy recovery, etc.

In short, every bit of advancement helps but there's no magic bullet here swithing to electricity from hydrocarbons.

Californians use 414.4 gallons of gas per capita per year (8th lowest in the US). 14.5 billion gallons. How much electricty is that? 530,982,417,478.593 kW-Hours. California can generate at present 46,000 Megawatts. We'd need and additional 61,000 Megawatts of energy to make it into the battery. Let's not mince words, we'd need 3 times as many power plants as we have now. Too hard to grasp? How about 28 new Diablo nuclear power plants (2x9.5 million mW-H reactors). Actually more like 40 Diabos. [insert lame ; "better the Diablo you know" joke here] And what would that cost? Nukes cost about $2000 per kilowatt to build. $122 Billion dollars. How much does that gas we Californians guzzle cost? $47 billion. Surprised? Gets better. Anyone here doubt that an order for 40 nukes could garner a volume discount? Yeah, like half price. A 50 cent per gallon surtax would pay the capital construction costs in 7 years. And what would the electricity cost? Remember we don't have any capital costs to amortize. 1.5-3 cents likely. We pay 14 cents now.

We could do it and it would make sense but we won't do it because of a combination of boiled frog syndrome and the cognitive dissonance of the eco-warriors.

Tuesday, August 01, 2006

How FB can you be?

A fellow real estate investor is in a bit of a pickle:
Select quotes:

"...took out an adjustable-rate mortgage (ARM) with an initial 10.3% interest rate that will increase after two years... believed would be just over 7% but was actually 10.3%."

"Home appreciation could save him eventually, he says, if potential development of a year-round resort at Malans Peak and a generally strong market continue to boost Ogden housing prices."

"[H]e is marketing the home as for sale by owner."

And my favorite:
"in Ogden [Utah], there is little room left to build new housing near the mountains, where the home is located."
Happy Trails Mr. Klein.