Deep REAL ESTATE Thoughts...OMFG!

When we downsized in 2005, it was not because we were timing the market. I know little about real estate and yet we has built tremendous equity over the years moving up in home size. We were in multimillion dollar home in Paradise Valley (5,000 plus stupid feet and 1.5 acres on a mountain). Our home equity was my main asset. I am rarely invested more than 50 percent of our net worth in stock but am always leveraged to illiquid investments. I am always fully invested somehow, but in 2005 we were severely levered to our home. I hated that.

We really never loved the big home, mountain living and when the home sold the second day…that is when I KNEW!

I was ecstatic. It was like I could see the future and it was NOT in real estate. How could you sell an illiquid multi-million dollar home in a day? (as an aside, the lovely couple who bought our home put even more work into it and luckily got out in 2006 at even a slightly higher price when he lost his senior executive job at Petsmart).

My main source of income in 2005 was from real estate lending with a serious veteran in lending who I often talk about on these pages – Blair. Blair was insanely bearish as he was competing in the mezzanine lending business with ‘newbies’ and small banks that were driving down rates and Blair out of the market. Blair would lecture me everyday how smart I was for selling and worrying about what was to come. I knew from Blair’s stress levels that I would need another source of income and soon. He was early, but even Blair is astonished by the catastrophe. I am bugging him to write ‘THE’ post on the subject as he has done an astonishing job managing a large loan portfolio in the southwest through the crash. He is fighting the nasty battle and doing the dance with borrowers, and banks to keep things above water on problem loans.

The true reason we decided to sell our home was to invest in a local internet business called GolfNow.com which at the time was Golf602.com. The first $500,000 in profits we had built up in home equity was tax free and ours to keep courtesy of senor Bush. God bless him. I had caught a lucky break with Rent.com exiting to Ebay and was passionate about inventory management an the web. When I met Brett and saw the company and model, I knew and wrote a check immediately. I pestered many friends and $4 million more was raised. That was the true beginning of my internet career.

Today in Phoenix, it was 85 degrees and perfect. The kind of weather that pre-2007 made you believe that Phoenix housing could never drop. People would move here forever.

Well, they are and that has not stopped a crash in housing and a crash in commercial real estate that will make housing look small. The lending industry both public and private is just closed.

Homes that I randomly drop in to see are 30-40 percent above where I would be interested and that’s after being ‘reduced’ by 30-40 percent. The word reduced is the dumbest word in real estate because an asset is worth what the BUYER is willing to pay. I can guarantee that BUYERS are happy to rent and will be for a very long time in Phoenix if prices do not drop by another 30-40 percent.

My buddy Brad who has been a landlord for 30 years in the Valley called me this morning to say that tenants were sending in checks that were far below their monthly rent amounts. In 2006, even 2007, those tenants would be gone. Today, they hold all the cards.

That is not a bottom.