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LuckyOne

Let's Not Underestimate .......

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In the summer of 2007 (between the failure of the Bear Stearns sponsored fund in February and the peak of the equity market in October), I sat in the sun talking with a person that I know from the West Coast of America.

At the time, he had a property "empire" of $85 million and associated debts of $55 million. His "net worth" of $30 million was generating income of $150k per month after tax and he was happy and spending most of it.

We explictly discussed his risk position and I suggested to him that he stop growing his "empire" and withdraw some equity and move it into less risky assets. He thought that I was insane and that he would become infintely rich.

I spoke with him to-day and the situation is completely different. He is now hanging on by his fingernails. He has had to sell his Maserati, Porsche, summer home, extra home, fire 50% of his managerial staff and his wife has left him.

He is on the verge of having to return all of his "empire" to the bank and to walk away from his debts. Like many landlords, he is suffering from falling rents and lower occupancy rates in his buildings and an inability to roll over his debts.

I have been naive in assuming that the obvious direction that the market will continue to take will result in a unidirectional and rapid adjustment in house prices to fair value based on income multiples and rental yields.

This assumption was incorrect.

There have been many people on this site who have correctly suggested patience and warned of countercyclical moves (a bear market rally, spring bounce, bull trap etc). While it is always dangerous to generalize based on a very small sample size in different markets, I am confident that my anecdotal evidence is actually representative and that we are soon going to face a wave of capitulation from property owners.

Lower prices here we come. The medicine of ultra low interest rates is not going to be enough to revive the patient.

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Where did the wife go?

To a guy who had his net worth roughly equal to his assets and is far more likely to remain rich over the medium and long term ........

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To a guy who had his net worth roughly equal to his assets and is far more likely to remain rich over the medium and long term ........

Not shallow then. Oh well.

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I have been naive in assuming that the obvious direction that the market will continue to take will result in a unidirectional and rapid adjustment in house prices to fair value based on income multiples and rental yields.

This assumption was incorrect.

Um, this was where exactly? I know US west coast covers a lot of ground, but it sure sounds like somewhere there has been a rapid and unidirectional correction.

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Not shallow then. Oh well.

This is a very tangential observation but I think that the "game" between the sexes is changing during this recession and possibly depression.

Women are probably smarter than men and are starting to look for mates who are going to be successful in the longer term rather than looking for shorter term "fun".

The mini driving guys with lots of gel in their hair and scuffed shoes who love to "party" are out. The men with more substance are in. The balance of power is finally shifting back to intelligent, numerate, literate men.

While the example that I gave might appear to be distasteful, it is consistent with my view that women are becoming more interested in men of substance. Without going into too much detail, this observation is more consistent than it might appear to be without describing the entire context.

In this case, she was richer than him even at his "peak net worth". She is now much, much richer than him.

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Women are probably smarter than men and are starting to look for mates who are going to be successful in the longer term rather than looking for shorter term "fun".

The mini driving guys with lots of gel in their hair and scuffed shoes who love to "party" are out. The men with more substance are in. The balance of power is finally shifting back to intelligent, numerate, literate men.

Bugger! Just my luck to be sidelined by the grey hairs and paunch when it should be my time!

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In the summer of 2007 (between the failure of the Bear Stearns sponsored fund in February and the peak of the equity market in October), I sat in the sun talking with a person that I know from the West Coast of America.

At the time, he had a property "empire" of $85 million and associated debts of $55 million. His "net worth" of $30 million was generating income of $150k per month after tax and he was happy and spending most of it.

We explictly discussed his risk position and I suggested to him that he stop growing his "empire" and withdraw some equity and move it into less risky assets. He thought that I was insane and that he would become infintely rich.

I spoke with him to-day and the situation is completely different. He is now hanging on by his fingernails. He has had to sell his Maserati, Porsche, summer home, extra home, fire 50% of his managerial staff and his wife has left him.

He is on the verge of having to return all of his "empire" to the bank and to walk away from his debts. Like many landlords, he is suffering from falling rents and lower occupancy rates in his buildings and an inability to roll over his debts.

I have been naive in assuming that the obvious direction that the market will continue to take will result in a unidirectional and rapid adjustment in house prices to fair value based on income multiples and rental yields.

This assumption was incorrect.

There have been many people on this site who have correctly suggested patience and warned of countercyclical moves (a bear market rally, spring bounce, bull trap etc). While it is always dangerous to generalize based on a very small sample size in different markets, I am confident that my anecdotal evidence is actually representative and that we are soon going to face a wave of capitulation from property owners.

Lower prices here we come. The medicine of ultra low interest rates is not going to be enough to revive the patient.

Yep. I'd say that's about right. Once the general public see the light, oh dear!

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Um, this was where exactly? I know US west coast covers a lot of ground, but it sure sounds like somewhere there has been a rapid and unidirectional correction.

Arizona, Southern California and Nevada have been rapid and unidirectional. Northern California, Washington and Oregon thought that they were going to be immune but have finally succumbed. This example is drawn from a market that thought that it was going to be "different and unique" to the rest of America .......

Some in the UK think that we are also going to be immune to the deleveraging process despite what is happening in Portugal, Ireland, Italy, Greece and Spain (the PIIGS).

History never repeats exactly but it often rhymes (I forget the attribution for the quote). I suspect that we are going to repeat the experience of the PIIGS.

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