Monday, March 26, 2007

Glad I sold my last house in a couple of years ago

Wish I could claim to be a genius - but it all had to do with having orders. Mrs. Salamander and I joked that "We sold at the top...." little did we know we did.

Hey, the house we have right now we have owned for over a decade and won't be selling it anytime soon. Glad. This bit from Financial Sense tells the story real well.

I am going to get right to the point. Housing, especially in California, is dead money for many years to come. Game over. It’s that simple.

In March 2005, I stated that anyone buying a house in Orange County should have a 10-year horizon and be comfortable with having lost paper wealth during that period of time. Virtually every investment boom/bubble has the same characteristics: The perception that easy money can be made with little risk is reinforced by the media and “cocktail chatter” which serves to suck in the public (the “dumb money”). Those that believe they are very smart want to display their intelligence by sharing with others how well their investments are doing. Those not in the game feel like they are stupid and not keeping up with their neighbors who are on the path to the American Dream. Other characteristics of an investment mania are a lot of borrowing, fraud at the tail end of the boom, questionable quality supply of whatever is in high demand, and then a crash.

Prior to the housing boom, the most recent financial bubble was the dot com/telecom craze of 1995-2000. Let’s compare the two:


  • Public Participation: Enormous numbers of day traders.

  • Borrowing: Huge margin debt and massive corporate spending on technology.

  • Fraud: Illegal IPO allocation, fraudulent accounting, and now back dating of stock options. Just think of Enron and Worldcom.

  • Questionable Supply: Junk companies going public in which most of them failed.

  • Crash: NASDAQ dropped 80%


  • Public Participation: Large numbers of condo flippers and investor/speculators.

  • Borrowing: Extraordinary amount of mortgage lending much of which is highly risky given the repayment terms and interest rate risk.

  • Fraud: Widespread appraisal fraud and false information provided on loan applications encouraged by shady mortgage brokers. Massive accounting irregularities by Fannie Mae and Freddie Mac.

  • Questionable Supply: Massive numbers of condo conversions of basic apartments and a large amount of new condo construction.

  • Crash: Housing prices are falling rapidly in areas that have experienced great appreciation, inventory is exploding, and new home sales have dropped 25% from its peak.

Supply and demand are out of balance. Second home buyers and speculators are no longer buying. In many cases they are selling. Inventory of new and existing homes for sale is at a record level and it is taking longer and longer to sell homes.

There are people out there that still want '04/'05 prices for their house and wonder why it has been on the market for so long. Rent it, or give it a '02 price. Otherwise, that nut will keep hitting you day after day.


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