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Thursday, July 20, 2006

Real Estate Insight Hiding In Sports Talk

Don't miss Bill Virgin's latest column in the Seattle P-I today. The subject is the Sonics' sale, but check out the reference to Seattle real estate that he managed to slip in there:

Owning a sports franchise is like buying a Monet painting. The immediate payoff is psychological, not financial; in fact, ownership is likely to be a financial drain. A work of art doesn't pay interest; it does generate expenses for security, insurance and preservation. The financial payoff comes when it's sold — if a buyer can be found who is willing to pay more than the original purchase price and accumulated losses.

In other words, the Greater Fool Theory — which is what the Seattle real estate market is based on these days. People are paying outrageous prices for homes, even properties they know they'll have to pour money into for renovation or upkeep, with the expectation that when it's time to sell, they'll be able to recoup their purchase price and those remodeling and maintenance expenses by finding a Greater Fool who will pay enough.

As long as an owner has confidence the pool of Greater Fools has not been drained, the issue becomes whether there's enough psychological benefit from owning a team, a house, or a Monet to put up with the losses — and the wallet is thick enough to endure them. The former Sonics ownership group decided the trade-off wasn't worth it, especially when a live one showed up on the doorstep, checkbook in hand.
I think Bill may well be the first person in the "mainstream media" in Seattle to actually openly admit that. Kudos, Bill.

(Bill Virgin, Seattle P-I, 07.20.2006)
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christiangustafson said...

That's just great! Kudos to him for explaining the Greater Fool theory so well and in public.

It's been bizarre watching the RE mania seep through all corners of our culture. Both Backpacker and National Geographic Adventurer magazines include references to RE purchasing in their articles.

For example, in Adventurer, they can't just write about a wild place and the attractions there (e.g kayaking, mountaineering). Now there's always a little sidebar explaining the cost of RE there.

And of course, thanks to the market distortions of the bubble, a lot of these wild, lonely places will be overdeveloped. "Hey, let's build luxury condos in the Methow Valley ..."

Comrade Chairman Greenspan said...

I'm astounded they printed that. Should be interesting to read the screeches of complaint that are no doubt already pouring in.

Anonymous said...

Finally someone who's telling it like it is.

Every time I see a house sell off the MLS for the past couple months, I can't help but breathe the word "idiot".

I mean honestly, what are these people thinking? They've been warned time and time again now that the market will crash.

You'd think with such a major purchase they'd do a tiny bit of research beforehand.

Today Bernanke did his 2nd day of questions before Congress. Half of the silly congresspeople were whining about the housing market going backwards. Bunch of numbnuts.

Are we going to find out that even congressmen and women bought overpriced homes with ARM loans?

BTW, Seattle has been being promoted as the "next San Fransisco" by realtors since winter as a way to suck in the last few suckers.

Now SF is starting to go down. (See todays Housing Bubble BLOg).

So I guess we know for sure now what our future holds.

But hey, like Bill says, sellers NEED those greater fools. So do somebody a BIG favor and buy their house just before the mother of all housing crashes.

They'll be glad you did.