Property Grunt

Thursday, December 31, 2009

All Over The World

I know I should be do some type of retrospective of the past year's events, but I don't really feel like it. I would like to instead talk about 2010.

Gawker had an interesting piece on how housing arrangements are changing in this economy.

One particular article that got my interest was a report of what was going on in Tokoy.

Sayonara to the Rabbit Hutch: Living With Roommates in Japan

Kumi Tahara, 27, and Kana Arai, 32, stepped into the void, founding a real-estate agency named "Tokyo Girls' Real Estate." They persuaded some landlords to let them slice up four-bedroom apartments into as many as 10 smaller rooms, which they then started renting out to young Japanese women. "After the Lehman shock, a lot of gaijin [foreigners] left, and there are some places that have been vacant for more than half a year," says Ms. Arai, who wears a pink sequined bow on her head and favors miniskirts and knee-high boots. "The landlords pay the redesign fees and we're able to increase the rent."

Last weekend, I met a person who was visiting from London, he informed me that because of financial meltdown, foreigner workers from Australia, New Zealand and other countries were laid off and had to leave which left a ton of vacancies in the residential rental market. And of course this person took advantage of the situation.

It is not just Tokyo or London but also Manhattan, Las Vegas and other areas that experienced insane amounts of growth and were hiring like mad. It was this surplus of people that was one of the reasons why the rental markets of these cities were on fire.

Recently I had the opportunity to invest in a rental property that honestly was a steal. It was in a great location and teh seller was very motivated because there were several deals on the property that had fallen apart. However, I decided to abstain from the purchase. And it ended up getting snatched up by another buyer. I am not kicking myself over not buying because from my own personal research and from the stories I just presented, I am unsure of the health of the rental market. There is no ROI if it can't be rented. Market conditions indicate there will be more opportunities, so I will wait.

Economy Stems the Flow of Tourists to New York

But the recession has interrupted the mayor’s vision, as businesses large and small have felt the effects of the tourism decline this year.

At Souvenirs on 5th, a gift shop on West 34th Street, Carlos Flores had time to rearrange merchandise just 12 hours before the crystal ball was to begin its descent toward the throng in Times Square. The store was fully stocked with all manner of T-shirts, key chains and other keepsakes expressing a global fondness for the city and, especially, its police force and firefighters. But few were selling — for the posted $15 or even at a haggler’s discount.

“My boss is really suffering,” lamented Mr. Flores, who said he lived in Astoria, Queens, and had been selling souvenirs in the city for 10 years. “We used to work here, like, 10 guys, now it’s just 3 people. This time of year, we used to work 24/7. Now there’s no people. They’re not spending money.”

Mr. Flores said a rise in the number of American customers had offset some of the decline in European shoppers, but not nearly enough.

I think a lot of people are going to be investing in staycations in the coming year.

And if you are not concerned about next year. Well these two articles might give you a moment to pause.

Is It All Just A Ponzi Scheme?

Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else

Happy New Year!

Tuesday, December 29, 2009

Surf's up

I am taking a break. Even in this s**tstorm, I am taking a breather from blogging. I might pop in once before next year.

Wednesday, December 23, 2009

And sometimes they come back.

Instead of the powerful landlord evicting the immigrants, the immigrants evicted the powerful landlord

This was a quote from an article regarding the sale of a very large portfolio of buildings back in 2007. The sellers had a reputation of following the substandard low income housing model much to the chagrin of their tenants. The sellers deny this of course and place the blame on their tenants.

When I read that quote, I shook my head because it was just another example of the differences between the thinking of the rich and poor.

Real estate is an illiquid asset, which is why real estate investors, particularly landlords always leave their options open whether it is to sell or to file bankruptcy. As long as that option leads to maximum profitability.

When that landlord sold his portfolio, it wasn't because his tenants ran him out of town it was because of the market. He realized this was the best time to cash out because everything was overpriced and there was very little inventory to go around. Which is why he sold.

And whatever victory these tenants proclaimed was Pyrrhic at best because they realized the new owners were worse.

"It is hard to believe, but the new owners are worse," said Juan Haro, leader of the Movement for Justice in El Barrio, a community organization that for over two years has battled abusive landlords in East Harlem.

Now here's where it gets interesting.

Tenants Struggle as a British Landlord Goes Bust

December 22, 2009
Tenants Struggle as a British Landlord Goes Bust

Foreign investors were a major force in New York’s real estate boom of the last decade, with families and companies from Dubai to Australia swallowing weekend apartments and Midtown office towers. In 2007, the roster of international investors came to include a British firm, Dawnay Day, whose executives had a splashy reputation for spending millions on fine art and yachts.

It was then, after a meeting with a New York landlord at an art show in Miami, that the British firm plunked down $225 million for 47 rental buildings, most of them in East Harlem.

The plan, in a gentrifying neighborhood, was to repeat the success its executives once found in the transformation of the south London neighborhood of Brixton. Dawnay Day would ease out its mainly lower-income residents, rehabilitate the apartments and charge a new generation of younger, more affluent tenants substantially steeper rents.

The efforts, though, didn’t get far before the recession spread across the globe and Dawnay Day went bust. Now, as part of one of the United Kingdom’s largest real estate insolvencies of the recession, the firm’s yachts are up for auction, and their expensive art has been stripped from the walls of its former London headquarters.

And in the 47 buildings, anger, uncertainty and a degree of misery have set in. At tenant meetings, renters complain of gaping holes in their ceilings and walls that allow rats to freely roam. The properties face foreclosure, and it is very possible that the buildings may fall back into the hands of the landlord some tenants say neglected them long before they attracted a foreign buyer.

“They were a multinational corporation guided by greed,” Juan Haro, director of the housing rights group Movement for Justice in El Barrio, who has worked with tenants in the buildings, said of Dawnay Day. “They failed miserably. They crumbled financially and they were a victim of their own devices.”

Saying the federal government has not adequately responded to the broader real estate crisis, a group of tenants are planning a demonstration for Tuesday at the Bank of New York Mellon, which holds the mortgage on the Dawnay Day properties.

Big surprise.

Now I am focusing on this situation from a real estate perspective not a moral one so please excuse me if I my tone sounds callous even admirable but I truly feel that there are many key points one can learn from this situation.'

The deal, which had been discussed for weeks, was completed during Art Basel, an annual art collectors’ gathering where Dawnay executives agreed to meet Mr. Kessner. Mr. Kessner recalls chatting with the company’s two head executives, Peter Klimt and Guy Naggar, about the final price and letting his son Michael stay and manage the buildings.

I don't hear any mention of any brokers representing involvement. Why? Because these guys already met and agreed on a price. The last thing they needed was an additional cost. I am sure Robert Knakal would have been smacking his lips over a deal of this size but it was not to be.

Besides the cost, it was the seller's advantage for the buyer to not be represented by a commercial because the broker would have been able to hammer out a better deal for the buyer.

Back in Harlem, where Dawnay Day had hired Michael Kessner to manage the buildings for them, there was general confusion. Mr. Kessner said he stopped receiving guidance from Dawnay Day after the company folded and had little direction to go by.

“Their office basically just shut down,” he said.

Now this was a critical error on part of the buyers and shows their ignorance of how New York Real Estate works. In certain situations you want to keep certain people around and there are situations where you want to dump them. What Dawnay Day should have done was scoured the entire building staff of any influence of the previous owners and recruited an outside property management company to take over.

However each situation is different and I am sure that loyal inside man made every effort to preserve the profitably for the new owners and did not contribute in anyway to the current state of foreclosure. And I am sure the inside man was not feeding information real time information to the former owner of the deteriorating conditions of the building and plotting a strategy to retake their portfolio at rock bottom prices.

Which brings me to this quote.

Mr. Kessner said he would bid on the foreclosed properties “at the right price.”

The right price will definitely be at the fraction of the original selling price. Banks are not in the business of managing real estate only loaning money for real estate. And with the commercial market on the verge of imploding, they will be more than happy to dump this onto someone else's lap.

It is so brilliant in its simplicity because technically the original owners never even left. They were just sitting on the sidelines waiting for the next opportunity. These original owners weren't even on the hunt for new properties since they probably knew that the buyers were way over their head and it was only a matter of time that they would be in the driver's seat. And now the cycle begins anew.

As I said before, in real estate investing, you always keep your options open and exercise the one that leads to the most profitability. Whether it means stepping forward, backward, around or just waiting it all comes down to what will bring you the most money.

Why? Because at the end of the day real estate is a business and the objective of a business to make a profit.

Monday, December 21, 2009

Jesus F**king Christ!

Those were the first words I uttered after getting this press release from Kelly Kreth.



New York, December 21, 2009 –, the first and only online real estate trading platform for Manhattan residential and commercial real estate properties, announces today that they will be holding a first-time $1 auction event on February 1, 2010, live in their Fifth Avenue showroom and online simultaneously at

Bidding for each of 13+ luxury Manhattan properties will begin at a minimum bid of just $1. The bidding event will run from 12pm-4pm at 15 minute increments.

Properties up for sale range in size from studios to five bedrooms, and range in price from $225k to $5m. All properties are located in top-notch buildings and are not distressed properties.

Potential bidders can view a complete list of properties up for $1 starting bid on Open houses for these properties will be taking place in December and January. For dates and times of Open Houses, interested parties can also find that information at the above link. Properties from the following neighborhoods will be up for bid: Upper East Side, East & West Harlem, Chelsea and Midtown West.

“We are excited about the opportunities in real estate in 2010 and want to provide both buyers and sellers with a fast, efficient and transparent way to get the prices on luxury Manhattan properties,” explains Vlad Sapozhnikov, co-founder and managing partner, Bid on the City.”

By no means am I taking any shots at BOTC. I saw this business model coming 6 years ago and they are just an indication of what is to come. They will play a significant role in the future of real estate. However, the fact their minimum bid is a buck just goes to show how much as changed since the market crashed. One could argue that this is all a publicity stunt but I disagree. Instead of whipping up numbers on their own, BOTC wants the market to decide what a property is worth. Is this foolproof? No. But it will be useful to learn from.

Friday, December 18, 2009

This is bad or good. Depending on who you are.

Snafu may overfill city shelters, rendering 3,000 subsidized housing vouchers worthless

NYCHA Chairman John Rhea Thursday blamed the move - which could push thousands into the city's already crowded shelters - on Congress, a lower-than-usual attrition rate in the program and unprecedented demand.

"NYCHA has had to make the tough decision," Rhea said.

The decision will not affect families who already receive subsidies, but the agency will "not be issuing any new vouchers, period," he said.

More than half the vouchers - 1,833 - had been given to families and individuals who were once homeless.

This is going to have some really nasty consequences. Expect a lot more homelessness and if they aren't stretched to their limits, shelters and other forms of aid are going to be overwhelmed.

If there is a bright side to this situation it shines on landlords who won section 8 housing. Although they are considered to be a difficult to manage, section 8 housing has the advantage of having an uninterrupted source of cash flow courtesy of Uncle Sugar. We are talking milk money straight from the teet.

A landlord with section 8 housing will probably have an easier and more profitable time cashing out.

Thursday, December 17, 2009

What time is it?

Looks like the Fed is sticking with the same game plan.

Text of Fed statement on interest rates and economy

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales.

Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.

The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

So what does this all mean?

This is obviously a good time to buy real estate since the market is now in recovery mode. And if you have good credit, cobbled together a decent down payment and are not an all around credit risk you could probably lock in mortgage at a really sick rate. But don't bother looking for a refi until the market kicks back up.

Interest Rates Are Low, but Banks Balk at Refinancing

This says it all.

Andrew Knapp, a sales executive in Bartlett, Ill., has tried twice to refinance, which would save his family several hundred sorely needed dollars every month. Lenders said the house had lost value and the Knapps had too much debt. “There was no urgency for them to do anything,” Mr. Knapp said.

The most recent Federal Reserve survey of lenders found that they were continuing to tighten terms for business and household loans. Banks say they are under pressure from regulators to raise their cash reserves, which means fewer loans. They also argue that a troubled economy breeds extreme caution.

“More than ever before, lenders are very conscious of making good quality loans,” said Michael Fratantoni, the vice president for research at the Mortgage Bankers Association. “They are looking at the value of the collateral and the credit quality of the borrower.”

There is no incentives for lenders to enter the refi game because that bats**t insane no holds barred market does not exist, so whatever value these properties once had is now gone. So any plans to refi some cash out of your property to buy another is probably not going to happen.

So what is a buyer to do?

Well I hear house flipping is back in vogue.

Or you can play the buy and hold which only works to your advantage is if you get absolutely amazing price on your property which isn't too hard these days and as I stated before, depending on your financial status and how much of a down payment you can acquire. However whether it is cash flow from an investment property or your own household income, you better have the money to make your payments. But it will all be worth it once the market recovers and the appreciation kicks in. But you have to be able to wait.

Tuesday, December 15, 2009

Stating the obvious

This was on Curbed.

One York Sales Team Chases Foreign Buyers All The Way Home

A tipster forwarded a recent article from the South China Morning Post with the news that One York's brokers have traveled to Shanghai and Beijing to chat up potential buyers. They even -- here's the biggie -- have hopes of one taking that $34 million penthouse.

This is an instance where I will say "I told you so." since I wrote about this back in 2007.

A Better Tomorrow

The question is are these brokers a day late and a dollar short? There is still much debate whether the Manhattan real estate market has even begun to recover and there is debate whether the other shoe has already dropped for the commercial market.

The Chinese are flush with cash right now so they need to park it somewhere. But they are not stupid. If they see a blizzard of falling knives, there is no way in hell they are going to drop some coin on a rapidly depreciating asset. They are going to wait till the smoke clears.

Apparently some passive aggressive behavior was exhibited when Obama had a sit down with the banks.

Putting Obama on Hold, in a Hint of Who’s Boss

President Obama didn’t exactly look thrilled as he stared at the Polycom speakerphone in front of him. “Well, I appreciate you guys calling in,” he began the meeting at the White House with Wall Street’s top brass on Monday.

He was, of course, referring to the three conspicuously absent attendees who were being piped in by telephone: Lloyd C. Blankfein, the chief executive of Goldman Sachs; John J. Mack, chairman of Morgan Stanley; and Richard D. Parsons, chairman of Citigroup.

Their excuse? “Inclement weather,” according to the White House. More precisely, fog delayed flights into Reagan National Airport. (In the “no good deed goes unpunished” category, the absent bankers were at least self-aware enough to try to fly commercial.)

That awkward moment on speakerphone in the White House, for better or worse, spoke volumes about how the balance of power between Wall Street and Washington has shifted again, back in Wall Street’s favor.

Now that Citigroup has given back its bailout money — and Wells Fargo announced late on Monday that it would, too — whatever leverage Washington had over the financial services industry seems to be quickly eroding.

Executive compensation, leverage limits and lending standards were all issues that Washington said it planned to change — and when the taxpayers were the shareholders of these firms, it probably could have done so. But now the White House has been left in the position of extending invitations, rather than exercising its clout. And in the figurative and literal sense, it is getting stood up.

Those who attended the meeting — Jamie Dimon of JPMorgan flew down on a private jet and didn’t take any heat for it — seemed to talk a good game, but even President Obama acknowledged they might have been just toying with him.

“The problem is there’s a big gap between what I’m hearing here in the White House and the activities of lobbyists on behalf of these institutions or associations of which they’re a member up on Capitol Hill,” he said after the discussion.

I would like to present the following message to Wall Street.

Even though your paying back the TARP people are still pissed at all of you for hellstorm that came down on the economy.

Whether you like it or not, Wall Street is considered to be the primary cause of everyone's troubles and whether you have the leverage or not, this is not the time to bite the hand that feeds you.

I don't care how much you make, I don't care that your watch is worth 3 villages in Turkey. Whatever swagger you have is a joke or worse a slap in the face to the people who really got f**ked over because of the economy. Show some humility.

You are not Gangsta Rappers. So please do not act that way.

Monday, December 14, 2009

After these message we'll be right back.

I have to address some personal issues. Hopefully I will be back on line later this week.

Thursday, December 10, 2009

Not too bright.

Not Exactly a Résumé Highlight: Madoff Work

Out of work since federal agents arrested their father, Andrew and Mark Madoff have been wrestling with what to do next, according to people who have spoken with them or other Madoff family members.

Mark Madoff, who worked at Bernard L. Madoff Investment Securities LLC for more than 20 years, climbing up the ladder to director of proprietary trading, recently met with at least two Wall Street contacts to get their opinions on whether he could find another job in finance, people familiar with the discussions say. He talked about working on a trading desk or in trading technology, asking one person to keep him in mind if he hears of any openings.

"He's untouchable in any firm that deals with the public," says someone who talked to Mr. Madoff. He was near tears while describing his feelings about his father, the person added, asking why anyone would bring his son to work at a crooked investment firm. Another person approached by the 45-year-old Mr. Madoff was told by his lawyer not to respond.

Honestly, these guys have more balls than sense. They are branded for life for what their Dad is "solely" responsible for. They should take a page from the book of their former employees.

"I'll never get a job in finance, and I'm one of the lucky ones," says Eleanor Squillari, Bernard Madoff's assistant for many years. She went to beauty school this summer and plans to look for work at a hair salon while selling her handmade jewelry.

Ms. Squillari, 59, lives in a two-bedroom apartment in the New York City borough of Staten Island, near the house she had to sell earlier this year. It makes her angry that former co-workers linked to the fraud still have their big houses and expensive cars. (Ms. Squillari co-wrote an account of her time at the Madoff firm for Vanity Fair magazine, for which she was paid about $50,000.)

Sometimes you have no choice but to walk away and start elsewhere.

Tuesday, December 08, 2009


To the douchebag or douchebags who are constantly spamming my comments.

Please cut that s**t out. All comments need to be approved by me personally before being available to the general public. Therefore if your comments do not pass my requirements, they are deleted. All you are doing is wasting my time and bandwidth with your idiocy.

These nutnigs are not even making an effort to be relevant where they comment. I am seeing comment spam on posts that are at least 5 years old.

Just f**king stop it already. It's not my fault that you f**ked up your lives so badly that you are reduced to troll for blogs comment spam.

This is actually pretty cool.

Picking (Up) Winners Without Placing a Bet.

For the past 10 years, Jesus Leonardo has been cleaning up at an OTB parlor in Midtown Manhattan, cashing in, by his own count, nearly half a million dollars’ worth of winning tickets from wagers on thoroughbred races across the country.

During his glorious run, Mr. Leonardo, 57, has not placed a single bet.

“It is literally found money,” he said on a recent night from his private winner’s circle. He spends more than 10 hours a day there, feeding thousands of discarded betting slips through a ticket scanner in a never-ending search for someone else’s lost treasure.

“This has become my job, my life,” he said. “This is how I feed my family.”

Leonardo, who favors track suits and wears his graying hair and bushy beard in long ponytails, is what’s known in horse racing parlance as a stooper — a person who hangs around racetracks and betting parlors picking up tickets thrown away by others. Most tickets are losers, but enough are winners to make it worth his while.

When I hear these types of quirky stories about people making ends meet in New York City, it brings a smile to my face because it displays the ingenuity and drive of someone who figures out a loophole in a system and uses it to their advantage. However, they are proceeding in a honest fashion and are willing to put the hard work into achieving their goals.

Uncashed winnings at all off-track betting operations and all racetracks in New York totaled more than $8.5 million over the past two years, according to the New York State Racing and Wagering Board.

That is why Mr. Leonardo said he would not stop stooping anytime soon, not by a long shot.

“Look here,” he said to Mr. Peguero after pulling a credit voucher from the machine for $6. “Another winner.”

He is definitely not stopping anytime soon. And he shouldn't. He put a lot of effort in what he has created and he should enjoy the fruits of his labor.

Sunday, December 06, 2009

What is the Matrix?

We aspire to be like this.

But the truth is through those aspirations this is what we are achieving.

Below is an interview with Thomas J. Stanley who is the author of the "Millionaire Next Door" which I highly recommend and he just published his latest tome "Stop Acting Rich...and Start Living like a Real Millionaire,". I higly recommend

To Act Like the Rich, Be Frugal

Q: You describe different levels of wealth in the book. There are the glittering rich, the income (statement) affluent and the balance sheet affluent.

A: The glittering rich make up a small fraction of 1 percent of the household population. They have a minimum annual household income of seven figures and a net worth of eight figures and more. They are extremely wealthy people, and they spend accordingly.

But, as I said in "Stop Acting Rich," no matter what they spend their money on, it is just a fraction of their overall net worth. In other words, even the glittering rich spend below their means. There are no more than 80,000 glittering rich households in a nation of more than 115,000,000 households.

3 years ago I did an entry on 740 Park Ave and on the type of people that reside in this building. They should also be considered the glittering rich.

If you watch old episodes of the Apprentice, there are some scenes where the cast meet at Donald Trump's enormous Manhattan apartment and go "Ooh! Ahh! Poppin fresh dough!" over the Fort Knox level of gold displayed in the interior decoration. In his line of work and as memeber of the glittering rich, he needs to be as flashy as possible, he has to show the world that he is a baller. Even though he has declared bankruptcy a number of times. His cost of living is high however, he probably watches his expenses very closely in order to maintain his wealth.

Unless you have their income or financial portfolio, don't even try to be like this group of people. It will only end in disaster.

Professor Stanley also touches upon why people who make a lot of money are not really rich.

The income statement affluent are those with high incomes and relatively low levels of net worth. They are not very productive in transforming their incomes into wealth. Many of the people in this category are highly compensated physicians, attorneys and executives. Many are driven to hyper-consume by their need to display high social status.

Farmers are found in high concentrations among the segment I refer to as balance sheet affluent. The balance sheet affluent are highly productive at transforming their income into wealth

Basically these numbnuts are focused on the perception of being rich rather than putting in the effort in becoming rich, like preparing a strong investment portfolio. Why? I think it is a lot easier to create the impression of being rich rather than doing the work in becoming wealthy. If you are a doctor making 6 figures a year, you buy yourself an expensive car because it is the quickest and easiest way to tell the world that you have money. That status symbol answers the question about your place in society. You can't do that with investing. First of all it is a lot of hard work. It also means exercising a strong sense of frugality which is not as fun as blowing enormous wads of cash on Armani suits. Afterall no one runs around with their financial statement indicating their net worth taped to their chest.

Professor Stanley lays out what the numbers really mean in terms of who is buying into the luxury market.

Q: Who is buying most of the top-shelf brand vodkas, extravagant cars and homes and why?

A: The question of "who" really has two answers.

Status products and homes are more likely purchased by people who have higher incomes. Look at three socioeconomic measures: net worth or wealth, household income and the market value of a home. Which of these variables is best at predicting consumption of the items mentioned? The value of a home ranks first, income ranks second and wealth ranks third.

Again, while it is true that the people at the upper level of these measures have a higher propensity to consume prestige products, it is not necessarily the most significant market.

For example, most prestige makes of cars -- 86 percent -- are driven by nonmillionaires. Yes, people with very high incomes, high levels of wealth are more likely to drive status automobiles. But in sheer numbers, the largest consumer segment for pricey cars, vodkas and homes is not the millionaire population, it is the aspirationals. These are people who think they are acting rich via their adoption of prestige brands, but in most cases they are only acting like each other.

Why do these people act this way? In large part, they are trying to imitate economically successful people. They take their cues from Hollywood and the advertising industry. The problem is that most aspirationals know few, if any, really wealthy to emulate.

It is not what you make but what you keep and you can't keep a lot of if your engaging in a lifestyle perceived as a "luxurious". What I find interesting about the three indicators of predicting consumption is the role real estate plays. It is obvious that this last real estate bubble we experienced was also a consumption bubble. Afterall, once you buy a new house, you need to buy new furniture, you also ned to get a new car and a new wardrobe to match your new lifestyle.

Q: How do you recommend that people become prosperous if they would prefer to get off the consumer treadmill?

A: The simplest way is to live below one's means.

The typical household should be able to put away 5 percent of their annual income while they are in their 30s, 10 percent when they are in their 40s, and 20 percent when they are in their 50s.

This is also related to satisfaction with life overall. There is a highly significant correlation between satisfaction in life and living in a home and neighborhood which are easily affordable.

What is a good rule if you are determined to become wealthy?

The market value of the home you purchase should be less than three times your household's total annual realized income. Also, if you are not yet wealthy, but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's annual realized income.

Frugality is difficult but not impossible to achieve. It is a matter of budgeting and deciding on the value of goods and services and determine their added value. In the end the rewards are enormous. Not just monetarily but it also provides the skill sets that enables me to survive.

Q: Do you have a sense that American consumer values are shifting from aspirational luxury purchases that seemed to be heavily marketed in the early 2000's asset bubble days to more frugal ones?

A: No, I don't think that the values are shifting.

The only reason that people aren't spending as much as they did prior to the current economic meltdown is that they don't have as much money to spend right now. We are a nation of hyper-consumers. We encourage our children to major in consumption and minor in frugality!

The smartest people in the world are in the marketing and advertising industries in this country. How else can you explain that 300 different brands of vodka coexist in our domestic market? In 2009, about 2.3 million American seniors will pass away. What did they do with the more than $2 trillion in income that they earned in their lifetimes?

I estimate that only 2.3 percent will leave behind a gross estate (all assets included) of $1 million or more. What did the other 97.7 percent of the decedents do with all of their income? If they did not save their income, invest it or allocate it to things that appreciate, where did the money go?

Beyond the basic necessities, an awful lot of it was spent on things, many things that now reside in landfills and thrift shops. We are and will continue to be a culture of hyper-consumption.

Speaking of Vodka, I was once informed by a liquor store owner that despite the many brands of Vodka, they are all pretty much the same. The reason why some brands are more popular than others is due to marketing. Which is why liquor stores always have a rotating inventory of Vodkas because they know that sooner or later a popular brand will fall out of favor.

Yet, here we are. We still shell out money for what is perceived as top shelf vodka despite the fact that there is no such thing. Consumption plays a critical role in our society. It makes things move. But when the money runs out and all the credit is tapped out, it all comes to a standstill.

Once this depression ends, the machine will begin to roll, as the advertising and marketing factions of this country implement a new of strategies to emotionally hijack the masses into buying products of aspiration.

The more I learn about economics, I realize how critical consumption is to our economy, yet I am disgusted by it the rising levels of hyper consumption that society indulges in order present the facade that are one of and the same with the glittering rich. Mind you, I am not a communist. I believe in the idea of social status because has human beings we all have the desire to be better than what we truly are. However, this mentality that you can better yourself simply by buying a product or service is twisted. It is akin to people who join McDojos and buy a black belt and are convinced that they can actually hold their own if they are attacked.

Our economy is a Matrix, but my argument is simply that one does not need to be controlled by it but instead be in control of it.

Thursday, December 03, 2009


From 6:43.

Same-Sex Marriage Bill REJECTED in New York State Senate

I don't know why this is such a shock for everyone. As I stated before in a previous entry, regardingthe rejection og gay marriage in California is about money and power. The same rules apply to New York State.

And with the economic landscape barely holding together, there is no way in hell that NYS is going to give up that access to all that gay disposable income. For all we know, that money is what supporting the state.

The Democrats and Republicans are shredding each other apart, the last thing they want is to embolden LGBT community and have them jump into the fray.

This isn't the end.