So much kool aid... So many properties... When will it all end? I have speculated it will end near rental parity. Based on the inputs for this property, rental parity is around $2,250 a month depending on financing and tax considerations. It is even lower for someone in the highest tax bracket, but the owner-occupant of this property probably would not be. Could this property rent for that? I think that is a bit high, but it might.
I last profiled a property in the Marquee at Park Place in May of this year. In it, I noted "As you can see, the HOA dues are a value killer. The breakeven value for an owner-occupant is only $321,893 which is nearly 70% off the asking price for this unit. The monthly cashflow drain the owners of these units are experiencing
is remarkable, particularly for the plethora of empty boxes." Is it possible for prices there to drop all the way to rental parity? Well, today's featured property is making significant progress...
All methods of predicting future price action rely on the same basic premise: prices are tethered to some fundamental value, and although prices may deviate from this value for extended periods of time, prices eventually return to fundamental valuations. This premise has been reinforced by market observation; in fact, many estimates of fundamental value are based on market action. Since many market participants believe in buying and selling based on fundamental values, there is also an element of self-fulfilling prophecy contained therein. The efficient markets theory is based on this idea, and although the behavioral finance theory is needed to explain the wide deviations from fundamentals real-world prices exhibit, both theories share the same notion of an underlying fundamental valuation on which prices are ultimately based. The challenge to market prognosticators is to select a fundamental valuation to which prices will return, and then extrapolate a period of time in which the return of prices to fundamental valuation will take place.
Did any of you see the KCET special on Foreclosure Alley? It was well done. It humanizes the whole foreclosure mess we are all in.
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Rise so high, yet so far to fall. A plan of dignity and balance for all. Political breakthrough, euphorias high. More borrowed money, more borrowed time. Backed in a corner, caught up in the race. Means to an end ended in disgrace. Perspective is lost in the spirit of the chase.
Foreclosure of a dream, Those visions never seen, Until all is lost, Personal holocaust. Foreclosure of a dream.
Barren land that once filled a need, Are worthless now, dead without a deed. Slipping away from an iron grip, Natures scales are forced to tip, The heartland cries, loss of all pride. To leave aint believing, so try and be tried. Insufficient funds, insanity and suicide.
Time is running out. Congress is working to pass a massive banking bailout before our economy completely implodes (which it might anyway). They have taken the steaming pile of manure they rejected earlier this week, candy coated it, and resold it to the American people. Of course, a major selloff on Wall Street probably helped sway public opinion as well. After they pass the bill, there will probably be a relief rally on Wall Street celebrating the massive government intervention, and this rally will be touted by all as confirmation that Congress did the right thing.
In the meantime, house price are still falling, and some of our speculators are trying to sell before they go underwater. Today's featured property found some motivation recently, and he lowered his asking price about 30% to try to move the property. Of course, the original asking price was totally WTF, so he isn't getting multiple bids over the ask.
Hank Paulson, who art in Washington, hallowed by thy name. Thy fiefdom come, thy will be done, transfering wealth from Main St. to Wall St. Give us this day all your bread. And forgive us our debts, as we foreclose on those indebted to us. And lead us not into solvency, but deliver us from bankruptcy. For thine is the fiefdom, the power and the glory. For ever and ever. Amen.
How many bankers are uttering those words right now? How many are soiling themselves praying for the government to pass this bailout?
Personally, I have my doubts that any government intervention will help the situation. It certainly won't make a difference for house prices. If it is passed, it may keep a number of insolvent banks on life support for a brief period of time, but their demise is inevitable. Perhaps this whole bailout is just a way for Bernanke and Paulson to control the implosion of the banking industry. I believe it would be far preferred to make the banks bring all these hidden assets back on to their balance sheets and value them at market. (Barry Ritholtz at the Big Picture wrote a very good post on Understanding the Significance of Mark-to-Market Accounting. I highly recommend it.) We would know immediately who is solvent and who is not. The insolvent banks will quickly go under, and the survivors will pick over the bones of the dead. That would be the natural recessionary purging that would occur absent a useless government intervention. Once this purging has taken place, then we can talk about infusing capital back into the banking system. It would be a far more efficient use of government money. What we are proposing to do now is very similar to what Japan did when their stock and real estate bubbles collapsed. The result of propping up all their banks was a decade of lost economic growth. This whole process is like removing a band aid. Remove it quickly and it is more painful, but then it is over. Take it off slowly, and it is arguably less painful, but the pain goes on for much longer. There is no way to avoid the pain.
Today's featured property is yet another example of why the securities the government wants to buy are worthless. Bad loans like this one were packed up into asset-backed securities and sold to collateralized debt obligation structures. There they are loaded with more debt and sold to banks and investors who thought that they would be getting their money back with interest. The money is not coming back, and the various tranches of CDO's have little or no value as a result.
"In the sweat of thy face shalt thou eat bread, till thou return unto
the ground; for out of it wast thou taken: for dust thou art, and unto
dust shalt thou return." Genesis 3:19
You can't take it with you. This is a rational argument justifying HELOC abuse. If you spend your whole life hoarding your money, you will die with a big pile of unspent money. Your heirs will undoubtedly be pleased, but if you didn't live a little while you had the chance, what was all the money for? How much HELOC abuse does this justify? All of it? If your house made you $800,000 over the course of 10 years, would it be OK to spend it all?
Today's featured property spent it all. This isn't the record for HELOC abuse, but it is pretty close.
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