Amused by Rick

Maserati. There are two, one owned by the CEO and parked in the same spot every day. But then there’s a white two-door that is curiously parked in the non-reserved section of the garage.

GMC Acadia. I want one of these, there’s a brand new cream colored one on P3. I am trying to eyeball the owner to get a ride around the block.

Porsche Cayenne Turbo S. Owned by an executive. Black. Red brake calipers. Very nice.

Lexus SC. Ordinarily an ordinary car, about as exciting as burnt toast. But what makes this car interesting is that it’s owned by our favorite corporate mega-manager Barry Diller. What’s particularly interesting to me is that a mega-manager-billionaire would choose to drive such a bland car. This is not a complete reflection on him, please do not find this a reason to fire me, but man, he could use some of my advice buying his next set of wheels.

Frankenstein Mustang. Driven by another fellow OCDer, modded to unreal proportions.. I think at the last hallway conversation this car had north of 500 horsepower. It’s something of a sleeper too, you’d never know from the outside what’s under the hood.

Cadillac EXT. Cream, with 22s. Tinted windows. Fresh from the rap video shoot.

Land Rover LR2. Brand new. Silver. This is a chick-car, by all accounts, yet it is driven by a guy.

As for BMWs, there’s a flurry of late model 4-door 3-series sedans, a brand new 335i, a 2004 525i, a new Z3 and two M3s. But my heart skips a beat when I drive past the two e39 540s.

There are a few models missing that I would expect to see in our collection: an Audi S4, any AMG-ized Mercedes, a 911, any SRT-class Dodge, an SL in the executive lot, a Mitsu Evo, a late model Tahoe/Yukon, perhaps a Lexus IS and finally, a Civic Si.

Then, of course, there’s that little Nissan Sentra parked between the Range Rover, Saab 9-3, Porsche Cayenne and Maserati on P1….

A year ago I predicted we would be well into a real estate crash by the summer of 2007 — I was mostly right but things haven’t materialized quite as I thought they would. My theory was that the imbalance of ARM loans predicated on super-inflated principal at the top end of the price spectrum would all go back to the bank, but in reality it was the bottom of the market that fell through — Sub-prime mortgages with high LTV ratios, primarily making up the bottom spectrum of the overall price range for any given area, have started tanking the entire Sub-Prime-Mortgage business and the areas that relied on that type of financing to turn over real estate properties. Details are all over the news.

For California, Notices of Default — the very first step in the foreclosure process — have risen by 148% in the first quarter 2007 compared to the same quarter last year; trustee sales are up 802% (this number means that more foreclosures are going to the last step in the process); the ARM share of all mortgages in California over the last three years has been roughly 70% of all loans written, with negative amortization loans going from 7 to a whopping 26% of those — pair that with a dwindling percentage of “stated income” loans from 34% in 2004 to just 19% in 2006 — all signs of an incredibly brittle market. To the layman, this basically means that an economically significant percentage of real estate financed in the past 2 years has been (1) on ARM mortgages, (2) negatively amortized and (3) with loose requirements on documenting qualifying income.

Source: The Norris Group, California Economic Update. May 2007

There are two things that can keep the party going: low interest rates and rising equity (or rising values, however you want to put it). If you can refinance your risky mortgage you might having a fighting chance at staying in your house. If you can’t refi, chances are you can sell and break even. In the past 5 years, people have either refi’ed or sold at a profit big enough to cover the principal they’ve borrowed. Neither options appear sustainable — interest rates are rising worldwide and the real estate market is about to experience a glut of REO properties by the end of this summer. The worst that can happen is that interest rates will go up and prices will go down.

I have a personal suspicion that rates are being artificially held low for this precise reason, if the US is drop-kicked into a recession we are going to take world financial markets down with us — in particular, China, since they’ve bought so much of our debt and rely on our consumers to buy their products.

So let’s see what happens: sit back, relax and watch the show. By October we should have a pretty good idea how things are going to look for the next 18 months.

My team made a t-shirt for me ribbing on stuff I’ve said here and there.  It was hilarious.  It came with a Strawberry-Chocolate-Mousse cake and Peet’s Coffee.  They are a thoughtful bunch, I was sincerely touched by the attention and effort put into it.  Today was a good day.

I wrote this poem today for a friend:

I wanted to go to the Pyramids

So I rented a Cairo Camel Taxi

Except that my budget was short

And the driver hissed in retort

And got a Camel who only walked backwards

She was afraid of left turns and big rocks

(and very, very large Grandfather clocks)
(and smelly, holey, grassy socks)

But cautious and friendly she looked

One round trip of a lifetime almost booked

So with a wimper and a worry and a safe bet

I jumped right on her off into the sunset

(in big, round right circles)

Props to the first comment that can name the inspiring poet.

Kman asked me to read this article from wsj.com, Why Your Home Is Not the Investment You Think It Is, and render some kind of judgment for or against. Catchy title, too tempting to pass up. So I read it. There are some good points here and there but I found it to be mostly misleading and drowned in spite.

The one fundamental difference between your mortgaged home and your brokerage account is that you can live in your mortgage investment — this point is constantly undervalued in these types of comparisons. The perks you get with a mortgage on your primary home are irresistible: a domicile, tax deductions galore, equity, new avenues of capital, improved credit, more. If I can invest $50,000 in McDonalds stock and get occasional use of the company jet, then maybe the two are comparable. But they are not.

So in most cases, the examples and situations cited served the title and not the reader, imho. Examples:

• ..and for the ants, economic studies have demonstrated over and over that houses (1) cost more…: I can’t stand it when people throw around “economic studies” — citations!!!
• If you bought a house in Los Angeles in 1990, just as the real-estate market turned downward, you would have had to wait a decade for your home’s value to return to what you paid: Real estate prices have [more than] doubled from 1990 levels to 2007, and 17 years in a mortgage would have considerably paid the principal down on a 30yr mortgage . So if you bought for $300k, financed $250 in 1990 and 17 years later owe [roughly] $150 on a $600k house — you’re in good shape. These are real numbers, btw, they are based on the house my mom bought in Sierra Madre in 1990, except that the house is worth $850k in today’s market. The example in the article was wrapped squarely around an economic recession that hit real estate particularly hard due to the savings and loan scandal, so I found the example misleading and self-serving.
• ..the costs of owning a home — buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it — sap most of what most homeowners think they make in price appreciation..: fixed mortgages have fixed payments, so over the long term the already-subsidized total cost of the payments will typically be less than a rental rate that increases each year. Can’t argue with repairs, you are definitely on the hook for that, and if there is a major problem you will have to pay for it — but I would say they are rare, I have never paid for a major repair. Regarding renovations, you are not forced to renovate and if you do you benefit from them. I spent $30k renovating my bathrooms and have been enjoying every moment in them since.
• Boom market or bust, home buying has so many extra costs — from upfront “points” paid to a lender to title insurance and appraisal fees: You don’t have to pay points, I never do. Title was $1,200 on my last loan. Appraisal was $300. BFD.
• …Yes, the government picks up a portion of that with the tax deduction, but most of your monthly payment neither builds equity nor is deductible…: This one is particularly disappointing. The latter part is technically true, but it ignores the fact that you are also building equity slowly over time. Mortgage swings interest in the lender’s favor, yes, but you are at least paying back some of the money in every payment. When you rent, you have no equity and you are building no equity, period. The same statement for rent would read: ALL of your monthly payment neither builds equity nor is deductible, EVER. So this one was misleading. When I refinanced after 5 years in my last loan I was pleasantly surprised to hear that I had paid back about $16k of the principal.
• You can easily end up spending three times the purchase price of a house: I hear this all the time. Add up the mortgage payments and, whoah, it’s a massive number. Ok, yes, interest adds up over 30 years. So does rent.

Reading past all the angst there was definitely a good point in there though: with prices the way they are in top markets (like our beloved Los Angeles), you need to put down an amazing amount of money to get into a loan — typically on the order of 6 figures. I can see how you might second guess a $100,000+ down payment in a real estate market that feels like its at its peak; especially when the stock market is on a tear and you’re not sure how long you want to be in the property. Entering the r/e market in the middle class right now is a tough decision. The author could have just said that.

I also agree that your house should not be your primary investment vehicle. You should own your own house and invest in other sensible things, like a 401k.

I agree that the wrong house can sink you. Like if you built one next to a volcano, or in a flood zone, or on a Pacific atoll.

I started off with a $40k down payment on my first house in 1999, if I cashed out today we’d have somewhere just south of $500k in our bank account. And I made extremely conservative moves. So perhaps that’s the bottom line? If I live in my house for 25 more years, it will be completely paid off and any proceeds from retirement accounts or Social Security can go towards living expenses.