Looking Out From the Garage

Image via Wikipedia

Two years ago, we were in the midst of the financial system meltdown.  real estate was looking bleak... and so was everything else.  Unemployment hadn't really reared its ugly head.  It was swirling up, but still seemed manageable.

So, I thought that a blog about market psychology was in order...  And this isn't just real estate.  The same holds true for any kind of market.

Fear and Greed

Those are the emotions that drive ALL markets.  Stop into the old post and take a look at the background.

In a nutshell, when fear overruns greed, markets expand.  When greed overtakes fear, markets contract.  Many are still fearing.  The market hasn't recovered.  As the bubble was inflating, there was little fear... greed had full run of the emotional mind.

The markets will recover, barring some massive calamity like the currency market collapsing.  People just have to start being more greedy than fearful.

We need to keep a little of that fear in the back of our mind, too.  It will keep away the next bubble a little longer.

Related articles

• Friday Flashback: "Prices climb without a hiccup." (seattlebubble.com)
• Wayback Wednesday... Case-Shiller Index (lanebailey.com)
• Wayback Wednesday... Is NOW the Time to Buy? (lanebailey.com)

Fear and Greed on LaneBailey.com

It is coming FAST.  On Friday, October 1st, Atlanta will host its first ever real estate barcamp.  It has been a long time coming, too. 

The first rebarcamp was in San Francisco in July, 2008.  It was the day before Inman, and I think I got more information that I could use that day than the next two combined.  Since then I have been to a couple more rebc events, like Charlotte and Raleigh.  Each time, I have come away just amazed at the level of information that I took in.  The networking has also been extraordinary.  Great friendships have been forged... 

A few months ago, a small group started looking at putting on an event here...  And now it is time. 

rebarcampAtlanta website

There are still spots left...  and it's FREE...  and there is free LUNCH... and for the first 250 people, there will be a free T-SHIRT.  The latest in technology... Lunch, and Bling... FREE.  Having really cool sponsors ROCKS.

The event is being held at Spring4th Center at 728 Spring Street NW in Midtown Atlanta.  It is easily accessible from just about any place in the metro Atlanta area. 

Randy Barnes put together a super video showing you EXACTLY how to get there... even where to park.  So, go sign up now.  We'll see you on Friday.

I have been wondering about this for the last couple of weeks...  There are a few things about that give me pause.  We've seen the Dow climb a bit, but I don't think there haven't really been increased profits to explain it.  And where there have been increased profits has been largely from overseas operations. 

Sure, there are some companies that are bucking that trend... but I still wonder. 

A good bit of the increase in overseas profit comes down to exchange rates.  the US Dollar has been pounded in currency markets.  This means that companies with overseas profits will see an increase in the profit measured in Dollars, even if there hasn't been an increase in the local currency. 

And with the increased and continuing deficits, strengthening the Dollar isn't likely.  To start with, it isn't in the government's best interest to keep inflation in check too much... although they DO need to keep interest rates down.  As the currency suffers from inflation, the debt the government owes becomes less valuable (easier to pay off).  Of course, if interest rates rise, the service on the debt increases. 

Back to the markets... 

Normally, when the markets rise, it is because there is an expansion of business.  We are seeing contraction or stagnation in most sectors.  The market increases because there is an expectation of higher profits... we don't really see a lot of that, either. 

Instead, many analysts think the market is rising because it is the only place to put money where there is any sort of reasonable return.  Saving accounts are paying less that 1%.  CDs and other longer term investments are paying not much more.  Obviously, real estate isn't hopping in the short term, and many are still worried about the long term prospects.  So, some of the market rise can be explained by a flight from other investments... 

If we look back at the stock market bubble of 2000, we know that it started with people investing in the stock market based not on an a reasonable expectation of future corporate profits, but because the returns looked to be better than anywhere else.  People were chasing a "hot stock" or the "next big thing".  In many ways, this market has a lot of similarities with a momentum market like that. 

The bubble of 2000 led to a severe recession.  The bubble of 2008 led to a severe recession.  I'm just wondering if we still aren't through with the 2008 bubble...

It is a simple option... isn't onerous, and doesn't involve the government spending billions of our dollars...

Simply make banks responsible

As it stands, in many jurisdictions, banks aren't responsible for maintenance, taxes, HOA fees or any other impacts their foreclosed properties might have on the community.  So, if a block is foreclosed, the homes go to crap while the banks dither at dealing with the inventory.  The cities lose valuable tax revenue while they are already struggling because of diving property values.  HOAs lose chunks of their budgets trying to maintain properties in their neighborhoods... while not collecting fees from those same properties. 

Give banks the bill for THEIR inventory. 

This would accomplish several things... to start with, it would tilt the equation from the banks back toward the consumers.  As it stands, the banks have little risk in allowing properties to go into foreclosure.  Their carrying costs can be invisible. 

Short Sales would have a whole new complexion... and even loan modifications.  Right now, the banks have little to lose by NOT negotiating aggressively in a short sale or loan mod situation.  Currently, if they take back the property, they might not be hurt as much as if they agree to concessions.  As a business, they are DUTY BOUND to not try to lose more money.  This would increase their risk in holding the property by increasing their exposure to expenses. 

I know that it isn't as glitzy as a program costing tens of billions of dollars with a nifty name.  But it might be more effective at slowing foreclosures and moving properties through the system when they are foreclosed. 

What do you think?

Have you ever hung out around the County Courthouse on the first Tuesday of the month? 

The County Courts CAN make for some great people watching on any day of the month (ok, any weekday...), but the first Tuesday on the month here in Georgia is a little more special.  There are deals to be had...  property deals. 

OK, maybe there are deals to be had.  Honestly, there wasn't much action on the foreclosure auction front... but I'm getting ahead of myself. 

The the tax record on the County's website said that the sale would take place at 8:30am...

First up were the tax sales.  They started a moment after 10:00am.  There were six parcels to be auctioned off.  Five of them sold... and might have been good deals.  The final property was unable to attract a bid, and there were a few chuckles from the assembled thirty or so people.  None started above $1500 (except the last one) and the final bids ranged from just under $10,000 to just under $30,000...  I wasn't there for those properties and hadn't done any background, so I don't know if they were good deals or not...  

A few minutes later, some attorneys started showing up for the foreclosure auctions.  The banks involved had predetermined their minimum pricing. 

Each lawyer would stake out his spot and begin "the chant."  It consisted of the legalese that they were required to read before accepting bids.  They were quietly "speed-talking" the required verbiage in their own space... bidders wanding near to try to figure out which property they were representing.  They would each briefly mention the address of the property and the tax ID... before anyone knew what they were doing there. 

It was largely the same crew of bidders, even though there was no actual bidding... 

• Mr. Bored  This guy would mention his bid as if it was bothersome.  As he was outbid, he would slightly top the new bid... trying to sound like he would rather be anywhere but here...
• Miss Aggressive  She actually punched the air with several of her bids.  It was funny as she outbid Mr. Bored... the juxtaposition between her excitement and his "duty to respond"...
• Mr. Business  He effectively combined boredom and excitement...  It was obviously a duty for him to bid, he seemed to not care about the outcome.  At the same time, he was quick to react... 
  
• Mrs. Pre-occupied  Perhaps she couldn't be bothered to bid.  She would bid... but it just seemed that she was annoyed that the auctioneer expected her to stop her other conversations to pay attention...

In the end, I'm sure I missed some of the sales.  There were anywhere from 2-7 lawyers chanting at any given time.  But the one thing I did notice... nothing was sold.  One of the properties that I was familiar with was going for something between two and a half and three times what it would fetch on the open market... 

Deals DO come up at auction.  But, you have to know the properties and what you are willing to spend to get them... BEFORE you get there.  And you have to know the players... who will be auctioning off the property.

I wandered out to look at some investment properties this afternoon…  One of the properties was priced at $29,000… in a neighborhood of $100,000+ homes.  In fact, this very home had sold for over $110,000 in the last couple of years.

Could it be overpriced at $29,000?

Yep.

The funny thing is that the wholesaler says it needs like $12,000 in repairs…   Maybe if you pick up all of your materials from the curb after they are tossed out of nice homes…  I would put the budget at closer to $40,000.  and that is assuming that the mechanicals and structure are ok, and that isn’t a safe assumption.

Here is a list:

• Gutters
• Roof repairs
• Front door and casing
• Enough of the siding to make it worth replacing all of it
• Ditto for the windows
• All of the flooring.  That which is still there is nasty
• And every wall and ceiling needs paint
• Rebuild the rear deck
• About 20 sheets of drywall
• All of the appliances
• EVERYTHING in the kitchen… like the cabinets and counters
• Landscaping
• Un-convert the garage from its bonus room conversion

I would peg the property at a value more in line with $15,000.  An investor will need to realize a healthy profit AND have enough room for hidden defects.

• Mold abatement
• HVAC replacement
• Structural repairs
• Foundation repairs

I’m not saying that those are probabilities…  just that they are possible.

An end-use buyer would face similar issues,  AND they will need to be able to finance it without FHA support, since it probably wouldn’t qualify.  It also would have trouble with many renovation programs… so cash might be in order for renovations.

But for the right buyer it could be a great deal.

I did run across another property that looks like a much better deal…

from LaneBailey.com

Markets are not nearly as logical as one would expect them to be.  The stock market, the commodities market... even the real estate market.  Don't get me wrong, the DO move based on logic and reason, and they appear to be very logical... but there is a HUGE component that isn't logical...

There are two emotions at the base that move markets...

Greed

Fear

Those are the base emotions to which markets react.  Let me illustrate...

In a euphoric market, greed overcomes fear, and people buy.  This creates a bubble.  We saw it in tech stocks in the late 1990s and early 2000s.  Companies that didn't even have a plan for profitability were being run up because they were being run up.  We saw it in housing in the last couple of years.  "Houses ALWAYS rise in value", the NAR told us.  The most famous example is the Tulip Bubble in Holland in the 17th Century.  People were paying "20 times the annual pay of a skilled craftsman" for a tulip contract... not even a tulip.

in all bubbles, someone spoils the party and introduced logic and reason...

"Why should we pay $1000/share for a company that has never shown a plan to actually make money?"

"Why should I pay $600,000 for a tulip contract?"

"Why should you pay $400,000 for a fixer-upper in Braselton that only cost $127,000 to build and was purchased three years ago for $175,000?"

The obvious answer is that logic and reason left the building while people were seeing all of the money they could make.  Enter fear.

And again, we have seen this played out before.  The price is dropping, everyone is selling and nobody wants to buy.  The ball of string is unwinding.  We can see it in the tech bust.  Companies that WERE making money had their share price crumble because they were "tech-related."  the Dow, NASDAQ and S&P300 all saw major declines, much of that in companies that weren't even tech-related.

The "market" was afraid of the possible ramifications.  Even explanations with a giant stretch caused further price erosion.  It was a mirror image of the run up in prices.  Just as anything that could be stretched to seem like a good reason to buy, now anything that could be used to rationalize the fear was used to sell.

We saw it play out with oil in a short period this summer.  Back in June, before Goldman-Sachs predicted $250/bbl oil, I was saying it might be a bubble, and that the introduction of fear could cause it to burst.  In July, President Bush killed the Executive Order preventing oil drilling on the Outer Continental Shelf.  There was still a Congressional ban, but speculators started to fear... prices dropped.  We are currently looking at $25/bbl oil.  And now there are entities saying that it could go back to $10/bbl...  Logic has left the building, and the oil market is in fear mode.

Housing?

There is NO doubt that there was a GIANT bubble in housing.  especially out west and in a few areas in the east.  And those places also saw 30% and even 40% decreases in value.  in some cases, brand new homes were purchased out of the builders bankruptcy for less than it would have cost to build the house... if the land were free.  Obviously that isn't a rational price. In some cases, the properties wouldn't even sell at prices that couldn't be duplicated.  Fear had taken grip and the pendulum had swung too far in the other direction.

Here in Gwinnett County, near Atlanta, we didn't have the huge run-up in prices.  We had an accelerated appreciation, but not to the levels of some of the serious bubble areas.  And we have not had the severe decline in values, but there certainly has been a decline.  Oddly, the worst hit markets are starting ot move quite well. Phoenix, Southern California and even many places in Florida are posting nice sales increases and the values are coming back to realistic.

Here, and some other markets that didn't have the radical swings (the crash started in those markets) we are lagging behind.  We haven't started the positive move yet.

Here is the tip...

The first people to overcome their fear with rational logic are the ones that profit or get the good deals.  The ones that wait for the herd are the ones that run with the bulls.  And, in the case of a market top, the ones that use rational logic to sell or cut back are the ones that lock their profits.

Now is the time when rational logic is a profitable plan.  Not for every property, but for the good ones.  I know of a few in various parts of Lilburn and throughout Gwinnett County.  I have fellow agents that are tracking deals in other parts of the Atlanta Metro.  I have mortgage connections that are hooking people up with great financing.

If you wait for the herd, you get what is left after the first movers pick up the best deals.

Give me a call for a no obligation chat about some of the deals on the market right now.

from my blog at LilburnDwellings.com

Ok, you’ve seen the TV commercials and scoured the Thanksgiving paper.  You know that the best deals require that you get to the store by 5:00am… or even 4:00am, right?

Sleep in, call me, and let’s go get you a new house (ok, a new to you house…) and save $100,000.  That is even better than picking up a new flat screen for $300 off!

I have found a few deals.  They range in price from around $100k, to just over $300k.  The deals range from 5% off of what you would have expected to pay last year, to 25% off what someone DID pay last year.  I wrote a little bit about each of these properties last week. Here you go…

About $100k

About $170k

A little over $200k

A little over $300k

Instead of fighting a bunch of people to get the last Speed Racer Mach 6, get something that is going to make you happy for years…  And make you money!

Give me a call.

from LilburnDwellings.com

While cruising around today, I ran across a great post by Linsey Planeta.  You should go give it a read.  Primarily it is about real estate agents finding a little piece of positive info and blowing it out of proportion...  And to that extent, she has hit the nail on the head. 

But then in the comment stream I noticed something about how the increase in sales was largely due to getting the foreclosures moving through the system... and that they didn't count.  Nothing could be farther from the truth.  Prices are down because foreclosures are polluting the numbers... true.  Sales are up because the lower priced foreclosure are clearing... true. 

But that is part of the cycle... it HAS to happen.

Right now, foreclosures and distressed properties are the old and sick of the housing inventory herd.  In order to return to a healthy market, the old and sick inventory have to get eated by the predators.  They need to be culled.  In my area, inventory levels are still very high.  They aren't as high as they were a few months ago, but they are higher than they would be in a market that is even slightly out of whack. Absorption rates and sales statistics won't look healthy until the herd is healthy. 

We can try to be the guy in the video...  but we aren't always going to win.  We have to accept the circle of life...

Earlier today, I read a fine post by Larry McGee.  In his post (which I would suggest you read because it illustrates how a failed closing affects more than just a couple of people), Larry mentions that the correction to real estate prices can be very painful.  And, in the comments, one commentor mentions that the current financial crisis is an outgrowth of the housing bubble and crisis. 

I agree... and I don't. 

I think that the financial crisis IS based in the housing crisis and the "sub-prime mortgage meltdown".  I think that in many ways, the credit crunch was brought about by the SPMM... but there isn't a cause and effect relationship there... rather, they are both the product of an imperfect storm. 

• Lack of corporate ethics
• Lack of leadership in the private and public sector
• Lack of personal responsibility
• Failure of individuals and companies to save
• Desire for instant gratification

Each of these items is a flake on the snowball that our business and financial system is currently stuck under... 

The credit crisis isn't because there isn't money to lend... it is because nobody trusts the balance sheet of anyone else.  Companies are reluctant to loan to other companies because too many of the loans of the past were not as advertised.  One certainly can't blame them for failing to trust when trust has been dashed... 

The signs of the impending SPMM were getting clearer in the financial community... and in the halls of government.  Some members of the Congress were calling for new oversight to the GSEs (Fannie and Freddie), but others blocked attempts to slow their growth.  The President tried to bring up the issues... but wasn't able to make his voice heard.  Corporate executives and those that were in a position to alter corporate behavior knew that there was a problem, but failed to act.  In short, instead of leading, these people, from the President to Members of Congress and CEOs all just knuckled under because it was easier than fighting. 

Home buyers bought houses that they knew they couldn't afford.  Real estate agents sold people houses that they were pretty sure people couldn't afford.  Mortgage brokers and bankers gave people loans that they knew would go bad.  Right down the line, people passed the buck...  The real estate agents said "if they can get a loan..." and morgtgage brokers said "if they tell me that is what they make..." and the buyers said "if they are willing to let me have it...". 

But now we are starting to get to the root causes... 

We have become a society built on consumption.  We lack a balance.  We have a negative savings rate... there is no money in the bank, but instead we carry our lives as a loan balance.  That isn't sustainable.  And isn't like the government hasn't asked for it... and the companies that are getting slapped in the face in the current financial doom asked for it.  Credit has been easy, and savings has been punished.  Spending above and beyond our means has been promotoed, encouraged and rewarded.  From the tax code to college tuition plans, assetts are punished... savings is punished... investment is punished. 

And that brings us to instant gratification.  As a society, we have knuckled under to the pressure and we are running the rat race full speed.  Instead of seeing the car at the dealership that we would love to own, and saving and scrimping until we are at a point we can afford it, we took another line on the house or just leveraged a little more until we could justify it.  We cashed out on the house in order to add a flat screen and a butt-kickin' stereo.  We didn't save for the vacation... we charged it.  When we got a great piece of news, we hit the expensive sushi house for dinner.  When we got a bad piece of news, we hit the expensive steak place.  We rewarded ourselves before we earned the reward. 

Housing is at the center... but it isn't the root.

Housing is where the credit crisis surfaced.  But it could have been cars, it could have been college loans.  It could have been credit cards.  It could have been business loans...  It could have been anything.  But now, houses are where it surfaced...

The causes are WAY deeper than sub-prime mortgages.  They are way deeper than a housing "bubble."  The causes go to the root of the society that we have become.  In fact, one could make a case the trace it all of the way to individuals ceding responsibility to the government or to their employers for everything that is uncomfortable.  Health insurance, retirement, housing, food...  All of these are becoming something that society doesn't want to "deal with", but rather something that someone else should handle. 

Until that changes, we can count on financial strife.  We can count on instability.  We can count on the beast being ready to bite us in the utt as soon as we aren't paying attention.