Grave Dancing, Cheering, Puke, Our Market, and the Bandwagon

This article from Delaware Online is a perfect example of how some people can see the other side and capitalize on it. We’re not denying the market has changed, but we’re certainly not going to change our tune that real estate is a bad investment, and at the very least a great place to call home. Also, by putting these types of things out there, we’re not “cheering” (if we hear that word one more time, we’re going to puke), more like showing there are always two sides to every story, and that you can build a fortune in real estate, even in a down market.

Without further adieu…some quotes:

Sam Zell, the master real estate investor, has built a fortune on the cycles that shape his industry. These days, he believes the current turmoil in financial markets is more an emotional reaction to yet another period of excess rather than a true credit collapse.

In a wide-ranging lecture at Wharton moderated by real estate professor Peter Linneman, the Chicago-based investor said markets currently are spooked by problems with U.S. subprime lending. However, they still have capital to deploy, unlike during other real estate busts when financing could not be arranged at any price.

Zell said the slump should come as no surprise: “Over the last three years people were flippant. They bought anything they wanted and were proud that they didn’t do due diligence. I think they have all been chagrined and are scared out of their minds.”

Zell sold his flagship business, Equity Office Products (EOP), and its portfolio of 540 prime office buildings to the Blackstone Group for $39 billion. At the time, it was the largest private equity deal ever completed.

After a market crash in 1973, Zell spent the next three years acquiring $3 billion in real estate assets, much of it for $1 down. He built the portfolio by going to lenders and offering to take future operating losses off their hands in return for equity. Zell was able to carry the properties long enough for them to return to, and exceed, prior valuations. “As it turns out, we made a fortune,” he said. In the 1980s, the real estate industry was again marked by aggressive lending that sparked a development boom. “The idea was build it and somebody will buy it, and that somebody was the Japanese,” Zell recalled.

Zell acknowledged he does not always get it right. He told the story of how he acquired the Carter Hawley Hale stores in California in 1992. His firm did an analysis and determined that the 79-store chain would be worth at least 80 percent of the purchase price if it had to be sold in a fire sale. Soon after, Zell was faced with a sharp recession and a major earthquake in Southern California. In 1995, he decided to bail out and sell the chain to its competitor, Federated Department Stores. The price? Even though he lost money on the deal, Zell finds comfort that his firm calculated the downside correctly. Federated paid 80 percent of what Zell did. “The investment was a failure, but the process was a success.”

Zell is known by the nickname “the grave dancer.” According to Zell, the term grew out of the headline of an article he wrote describing his strategy of profiting off distressed real estate following the inevitable bubbles of investment enthusiasm. Zell said the article shows how “I was dancing on the skeletons of other people’s mistakes.”

Zell, however, also pointed out that the last sentence of the article reads: “He who dances closest to the graves, always has to be careful he doesn’t fall in.”

[begin rant] Come to think of it, this “credit crunch” is good. It’s going to weed out all the rookies and bandwagoners who are all saying the sky is falling. You go ahead and ride that bandwagon to the store that sells remedies for pit bull attacks, West Nile Virus, and Bird Flu masks. You might as well pick up a few flotation devices too, because you know, San Francisco is susceptible to tsunamis. While you’re doing that, the true real estate investors, and most likely a few of our readers, are going to scour this country for all the poor sods that weren’t smart enough to do their own homework when signing their loan documents and now blame the government for their own ignorance, buy a few of their homes for dirt cheap, rent them back to them, and wait this downturn out. Then, when the market turns, and your media mob tells you real estate is again a good investment, they’ll be happy to sell your home back to you for quadruple what they paid…that is, if you can find them on their yachts they purchased to ride out the inevitable tsunami that is headed their way. [/end rant]

‘What credit crunch?’ says noted contrarian [Delaware Online]

28 thoughts on “Grave Dancing, Cheering, Puke, Our Market, and the Bandwagon

  1. you have to admire folks that are not only contrarian but are willing to put huge bets on the line to take advantage of their theory that everyone else is wrong. that makes this guy my hero.

  2. I must say that your commentary is amusing at best. You are the equivalent of a high school cheerleader applauding a losing team. The market is going the other way now and you comments are sometimes absurd and disconnected from the fundamentals.

    I know you probably won’t post this.

    [Editor’s note: Direct from the post, “We’re not denying the market has changed”. Why would we not post your comment?]

  3. If you’re gonna call somebody a cheerleader, do us a favor. Show how the market is going the other way in San Francisco.

    Does you mean it’s down from spring of ’06 highs? It has reverted to ’05 levels. I think most would agree upon that. Where do you see evidence? Volume? Median? Or newspaper articles and bearish blogs?

    (was that mean?)

  4. It wasn’t mean.

    The median means nothing in this city as you have many high valued and low valued properties which necessarily skew the results of the calculation. The volume is roughly the same as last year. It is the macro-economic fundamentals that are askew. Salaries have not kept pace with real estate appreciation and there is necessary link between the two. Yes, there are a bunch of google godzillionaires running around the city but they are a finite bunch. At the end of the day, who can afford these over-priced properties?

    My comments were based more in terms of the “unbridled optimism” that I read on this blog which I find nothing more than amusing if not absolutely incorrect. It is kind of like someone cheering at an aircraft spiraling towards the ground with smoke pouring from the fuselage with hope that the pilot will regain control. Such an outcome is probably unlikely but I would hope for it just the same.

    The highs of 2005 and 2006 are irrelevant as they were based upon market hysteria created by the cheap money in the credit markets. Such liquidity has dried up and will become increasingly evident as time goes on.

    At the end of the day the value of housing is necessarily connected to the rent vs. buy relationship. Renting during the last three years has proven to have been a much better investment than buying (assuming you invested your savings and downpayment).

    Remember that the value of an asset is determined by how much people actually pay for it when you want to sell it. When the credit markets become increasingly illiquid and there are fewer buyers able to support a overpriced property……the prices will necessarily decline in order to sell the property.

    Just wait and see.

  5. To that I would say, first of all, renting in and of itself is not an investment. It is a utility. I would also point out that rent has really run up in the last 18 months, and it continues to climb. Right now owning a moderately priced home in some more southern areas such as Glen Park costs about the same as renting a flat on the north side of town. That is actually a calculation that young families who want to stay in the city are making. I’d also say that the Google millionaire factor is probably pretty ineffectual. What there is in the marketplace, you’re right, is liquidity. When and if that is going to dissapate, none of us can say. I’m sorry. None of us can say that. Because I think it has a whole lot more to do with the Bank of Mom and Dad a k a Baby Boomer Federal than anything else. And there are about 100 million chairmen on its board of directors. Last, I am seeing a lot of foreign buyers at open houses. They are probably more of a factor than the much spoken of Google dudes.

  6. I ask MD to consider this:

    Is there a chance that the need to ridicule the perceived “cheering” stems from your own inability to remain open-minded with the possibilities the market presents? Have you been so gluttonous with your intake of the reported “gloom and doom” and now so over served you can’t see past your belly?

  7. It takes some balls to post something like this Alex, but kudos to you for doing so. I’d just like to point out that all the discussion always somehow turns to rent or own. What a lot of people fail to remember is that its okay and common to actually purchase a home and rent it out to someone else. that is called an investment, and that is where you need to focus on the numbers.

    When you’re buying your own home, you need to decide how long you’ll live there, and if you love the place.

    When buying an investment, just focus on the bottom line. I am one of those “other readers” that has my eye on at least 20 properties in the Sacramento area, and about 30 in Bakersfield. Those are areas you should be looking to if you want to buy dirt cheap.

    I’ll invite you to my yacht sailing party Alex and other readers of this site. Cheers for putting such a ballsy post up.

    And for those that are ready to pounce on me for not knowing what I’m talking about. I’m not a realtor, i’m not cheering, and I currently own over 100 single family homes throughout the country, 95% of which break even or cash flow. Real estate is a fabulous investment. At least in my world.

  8. Studies have shown that long term s&p 500 has trumped real estate in performance. No doubt. If that’s how people look at it, then they should never own real estate, period. Then there is no point in hanging out on real estate sites — they should go write blog comments on Mad Money with Jim Cramer or something :)

    But don’t forget diversification. If you bought into the stock market in 2000, you are barely breaking even today, 7 years later. If you bought real estate at the same time, your real asset is be doing great today. It’s all a matter of timing.

    So putting some eggs in a piece of land, some in gold bullions, and some in the stock market, is a good thing. Recognize what real estate is in the pie chart of your portfolio – a slice that tempers the risks in the long run and smooths out the curve.

    People get too emotional when all their investments are in one basket — the stocks or real estate. Diversification is great for anxiety.

  9. great post anon. here’s a story that highlights the reality of the lousy performance of the s&p. you had to be a lucky stock picker to beat inflation in the market:

    99% of the public are horrible stock pickers and i bet 100% of the losers on socketsite are. everyone buys at the top and sells at the bottom. every day. that’s the true definition of contrarian on wall street. the banks taking your money on your lousy trading ideas.


  10. Did someone say renting has been a better “investment” than owning? Renting’s return is -100%, every month in after tax dollars forever.

    I would have to say bubble blogs, written by 30’s and 40+ year old renters outnumber bullish blogs 100:1. I feel sorry for renters who want to own in SF, and keep hearing American is falling, yet continue to get outbid in SF. But, given less than 20% of San Franciscan’s can afford to own, the frutration and anger to those who do own, and who continue to build wealth is understandable.

    Speaking of Google, I just remembered that 2171 Sacramento St. #3 just sold fo $645,000 with a free 45 day rent back to the owner. There were 6 offers. Price/sqft = $1,057. Last sale in that building was at $586/sqft. Talk about wealth affect to the other owners.

    Tahoe is Snowing!

    [Editor’s note: We’re still working on putting that property on the front page for you, but are a bit busy at the moment.]

  11. “…the poor sods that weren’t smart enough to do their own homework when signing their loan documents…”

    “…they’ll be happy to sell your home back to you for quadruple what they paid…”

    How ironic. Realtor’s stock and trade for years has been to emphasize that asset appreciation when selling those “poor sods” their property financed with 2/28 ARM’s while explaining that they could always refinance based on that “quadrupling” value. I’m sure those poor sods would all like to shake your hand.

    Zell’s right, btw. There is no credit crunch. Rather, it’s a return to normalcy after years of exceedingly lax credit which harms all of us.

    [Editor’s note: For the record, I, Alex, am one of those poor sods that didn’t do my homework on one particular investment in AZ. It was an impulsive 1031 exchange purchase. It’s crushing me, but I’m not pointing the finger. It’s 100% my fault, and I’m figuring out how to fix it, and I will. And I certainly don’t blame my Realtor down there.]

  12. Did someone say renting has been a better “investment” than owning? Renting’s return is -100%, every month in after tax dollars forever.

    YES. again, generalizations dont work well. So pick any $20M+ house, and you might think again.

    take property on Vallejo. 25M. property taxes are 25K a month. Brit is renting her house 35K (about that sema size). how much would that house rent for? about 25K? more? less?

    Read The MaMa blog … and the picture is not always that clear. people overpaying their house. people putting the property on the market at the same price they payd. or just plainly, people wasting money in remodeling/interior design.

    Assuming from day 1 that buying a 1M property in SF will make you rich is WRONG. To do that, you need a careful plan. You need a financial plan. You need a prenup with your spouse. You need a good CPA. You need to write down investment, remodeling, etc.

    Yes at the end MOST people will be richer by owning. And some will get poorer (cf Micheal Jackson foreclosure on Neverland for the funny example).

    Renting HAS upsides – including that you can bail out pretty easily if your lifestyle is unstable (or your job or whatever). A miss I know had to sell after 18months. The final math is that she spent 12K a month living in a place that would have rented 4K.

  13. Thank you MD for helping bring some reason and sanity to this site. So many people here are so emotionally/professionally attached to real estate that they can’t see the forest through the trees. 2 years ago they ranted that SF would NEVER fall. Today they opine that we’re only back to 2006/2005 conditions, and wil stay flat. In 2009 they’ll profess that the Marina has lost less value than the Richmond, or SF only fell 15% while Contra Costa fell 25%, so they were right all along. It’s funny to watch the psychology on this site change and the cognitive dissonance taking place real-time. I can’t wait to see what the 2009 rants/postings look like….

  14. Most people I know spend money when they have it on superfulous things. Harder than many think to “save and invest” the difference. But that’s just me.

  15. true dat tahoe. for sales guys it’s even worse. they typically spend 10% more than they make every year, no matter how much or little they make.

    i’m so glad i’ve had my money tied up in real estate the last 7 years. i’m a horrible stock picker and would have easily squandered away my 700k in equity in bad trades.

  16. Funny stuff. I pulled most of my money out of the market when the Dow hit 14K. It’s now in CDs, some of which are tied to foreign currencies and doing quite well. People forget that real estate and stocks are not the only two investments out there. Not that anyone cares, but I have the financial ability to buy today if I want. But who wants to catch a falling knife? However, I know that many of you are so insecure about your equity that you need to assume that anyone who hasn’t bought yet is a “bitter renter priced out forever.” So be it.

    I rent a very nice place at about one-third of what the mortgage probably is. Speaking of which…maybe you savvy real estate moguls could run a thread on what bitter renters can do when their wannabe millionaire investor landlord goes bankrupt? At the rate some “investors” are bleeding cash on their places, this may become an important issue in San Francisco very soon. Just a thought.

  17. I’ve actually never met a millionaire renter. Is this odd? But, I’ve actually met hundreds of millionaire owners.

    Believe it or not, many homeowners also invest in the stock market, private equity, etc as well.

  18. i dont think too many of the bayview or sunnyside short sales are rental properties there balanced. are you renting one of those?

  19. Ha ha. Wow you guys lay it on thick. But to humor you, here’s one millionaire renter:

    I believe Milton Friedman, noted economist, was another.

    To be serious, though, even Kiyosaki himself has said countless times that real estate is a bad investment unless it’s 1) cash flow positive and 2) levered. “buyer” above reinforces the same point, and makes an excellent point about where good real estate investments can be found.

    Forget about the fact that you bought 10 years ago and are sitting on $X of equity because you were in the right place at the right time. Look at SF real estate from a pure investment perspective TODAY. The rent/price imbalance is so high that it makes no financial sense to buy. Cap rates suck, and the only way you go CF positive is to put down like 40% on most places. And even then, you’re banking on appreciation to make a return on your exit, and will need at least 7-10% annually to make it worthwhile. And that’s not happening anymore because, as kenny said, prices have returned to 2005 levels.

    Run the numbers yourselves if you don’t believe me. Regarding a primary residence, the buy vs. rent analysis yields pretty much the same results (bad idea to buy unless you’re rolling tons of equity). My point is that the local market is way out of whack TODAY. I think the phrase “an aircraft spiraling towards the ground” is a little extreme. But further adjustment is necessary to restore balance.

    If I told most of you in early 2006 that 2007 prices would be back to 2005 levels, you would’ve labeled me as nuts. So what’s so extreme about saying today that 2008 prices may be like 2004 prices?

  20. Umm, but prices in 2007 are HIGHER than they were in 2006, and 2006 was higher in 2005, and 2005 was up 15-20%.

  21. What’s higher, asking (wishing) prices? Maybe kenny is wrong, then.

    Could you please show us a few examples of unimproved properties that sold for more in 2007 than in 2006? Because I’ve seen, both in person and on other websites, properties that are flat to down over last year. Where are the comps to the contrary?

  22. I’ve actually never met a millionaire renter. Is this odd?

    do you mean in San Francisco? or in general?

    it all comes down to tax laws. in other countries, you’ll find the exact opposite. Like millionaires who wouldnt dare owning (immobilisation of capital AND additional wealth taxes while renting is writen off as an expense).

    (not even mentioning cities where there is NO realestate for sale at all – think Zurich, owned by banks and inhabited by rich, very rich renters)

    as for millionaires renters in the States. please go back to the MaMa blog. there are a few. (considering that a million is a million so most likely anybody in the spotlight is a millionaire)

    I’m guessing you are refering to mr anybody whose only income is a regular paycheck and who, by smart investing, can earn his first million? For that guy, owning is not only about owning VS renting. It’s about not putting all the eggs in the same basket – and one’s house is another basket which conveniently puts a roof above one’s head.

    HOWEVER – there are also people in SF who cant/wont buy their living quarters and will rent here and invest in realestate in another city. I even know a lady who plays the rent controle: she rents a unit at a ridiculous low price while she owns and rents out the unit above at the market price – and lives out of the difference between rent in -rent out… from a financial point of view, they are renters. But they still have made a smart choice at the end.

  23. Balanced, very few people sell after only one year of ownership, and if they do, they are likely flat to down.

    Instead, you have to compare what someone bought last year, vs. a similar property sold this year. You should know that.

  24. I agree, the cherry picking of a property not selling for much more 1 year later is bogus. I live in Presidio Heights, and prices are up closer to 10% this year. Higher end is doing awesome.

    Bubble blogs can cherry pick TICs, bad locale properties, and 1 bedrooms examples all they want, but we all know better.

  25. balanced,

    that’s a great post and website. i liked reading it. the irony of course is that she never would have been a millionaire if she didn’t get rich OWNING and selling a HOUSE! where’s yours? nobody ever got rich renting, guaranteed!

    i like the simplicity message. i did this myself, selling my last house years ago after it doubled in value in 3 years and moved into a condo. i’ve owned 3 houses total and i’ll never own one again. i love condo living. i don’t have to spend any of my personal time taking care of the pool, the spa, the gym, the garden, the roof, you name it. i just live in it and enjoy it year round.

  26. James, that’ why i bought a vacation condo in a premier resort in Lake Tahoe intead of buying a house. All about no maintenance!

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