May 3, 2015

They’re Spending A Ton, And Why Not?

A weekend topic around some comments in the desk clearing post. One reader said, “In the 1970s I remember having a long discussion with my uncle about all the doomsayers. Going off the gold standard, nuclear war, economy tanking, the end of the world…..all that stuff. His advice: proceed with life, because you can’t live in a box of fear. That is the best advice I ever received.”

I replied, “We’ve had at least two major manias in 15 years. My position is that we are in the midst of a global real estate bubble, and probably stock, bond, milk, art, antique car and rosewood furniture bubbles too.”

One replied, “With the exception of real estate, who does it hurt? If some successful 70 year old dude with a hot blonde 40 year old wife wants to pay a million dollars for a stupid 1970 Barracuda at Barrett-Jackson, then be my guest. That purchase probably caused the employment of ten marginally adequate body shop men in Texas.”

The Lodi News Sentinel. “Home prices are rising, and homeownership is falling. How can that be? If prices are rising, it must be because there is increasing demand for homes, but if there is increasing demand, then why are there fewer homeowners? In the nation’s 20 largest markets, home prices were 5 percent higher in February versus the same month one year ago, according to the S&P/Case-Shiller home price index.”

“‘Home prices continue to rise and outpace both inflation and wage gains,’ said David Blitzer, of S&P Dow Jones Indices. ‘If a complete recovery means new highs all around, we’re not there yet.’”

The Santa Cruz Sentinel. “After months of lagging, the high end of the housing market has taken off in Santa Cruz County, with one in five homes in March sold for more than $1 million. The median price — the midpoint of what sold — reached $749,000, the highest since August 2007, according to Gary Gangnes of Real Options Realty, who tracks the market. Prices are just about where they were before the housing bubble burst. ‘My God, right now, the shortage of listings, things get bid up and up and up,’ said veteran Santa Cruz appraiser Glenn Fuller. ‘On the Westside, everything as selling $20,000 over what it was listed.’”

“Low interest rates push prices up. When the cost to borrow is less, people are willing to pay more. Experts have been predicting a rise in interest rates but it has yet to materialize. ‘Who want to pull the punch bowl, so to speak?’ asked Fuller.”

The Star Exponent. “Culpeper has seen a steady increase the past few years in residential home permits with 230 issued last year, compared to a low of 49 in 2009 and the peak of 611 in 2006. In the first three months of this year, typically the slowest, the building department issued 40 permits, according to interim Culpeper County Administrator John Egertson. ‘I think we will surpass last year’s mark by the end of this year,’ he said. ‘The larger homebuilders are telling us that they will be very active with new home starts in the coming months.’”

“Ryan Homes is advertising various models, from the low $220Ks to the high $250Ks, where homes in the neighborhood, overlooking the mountains, once sold for $400K at the building peak. In Culpeper County, the median sold price for single family homes was $249,900 in the first three months of 2015, a 1 percent year-over-year increase, according to a new first quarter report from the Greater Piedmont Association of Realtors. While the slight increase is good news, it’s indicative that the market is still fragile, said Ellen Butters, principal broker at EXIT Cornerstone Realty in Culpeper.”

“‘Healthy numbers would be a bit higher, historically at 3 to 5 percent,’ she said. ‘If you look back at the boom in 2003-2006, we were experiencing double digit year-over-year increases, which was unhealthy in that it could not be sustained and a burst was inevitable.’”

“Of the five counties, Rappahannock showed the highest year-over-year increase in the median sales price for the first quarter, increasing nearly 38 percent to $344,150, compared to $250,000 in 2014. In Madison County, the median sales price fell 8 percent to $161,000 in the first quarter, according to the association report.”

The Real Deal. “Barbara Corcoran says that New York City might be in a new bubble, but she doesn’t seem too concerned. ‘Let people buy these apartments, they’re spending a ton,’ the Corcoran Group founder told Bloomberg News in an interview. ‘They’re parking their money here. It’s fueled by foreigners more than anyone else. And why not?’”

From Barron’s. “What’s your mutual fund worth? It seems such a simple question. But for investors in GL Beyond Income it’s currently impossible to answer. The mutual fund’s board froze its assets in December, pending the results of investigations by the Securities and Exchange Commission, and the Federal Bureau of Investigation into an alleged fraud by its manager, Dan Thibeault. ‘The trustees have determined that the valuation of the fund’s assets may not be reliable,’ the board wrote in a letter to shareholders after Thibeault’s arrest that month.”

“GL invested in obscure, difficult-to-value loans to medical students—a category ripe for scandal, according to some experts. Thibeault allegedly created fictitious loans. But the case has implications that go beyond a narrow subset of unusual funds. The fact is, almost every bond fund and some stock funds have assets that are difficult to value. Market volatility, negligence, or outright fraud can render the share prices of such funds inaccurate.”

“Managers can be tempted to maintain incorrectly elevated prices to prevent a stampede by redeeming shareholders. Such mispricing occurred, the SEC found, in its enforcement actions against now-defunct funds run by Regions Morgan Keegan after the 2008 crash. Worse, level 2 bonds can suddenly become level 3 during a crisis. The mortgage-backed bonds that Regions Morgan Keegan owned were fairly liquid prior to the crash.”

“‘Because of the housing bubble people thought these bonds were homogenous,’ says Stephen Keen, a securities lawyer. Then defaults spiked and it suddenly mattered which mortgage pools you owned. ‘Once it became apparent investors didn’t know what they had, there was no liquidity and the valuations collapsed,’ Keen said.”

The Charlotte Observer. “A Charlotte-area whistleblower suing Wells Fargo in federal court is now facing foreclosure from the same bank. Robert Kraus lost his job in 2006 after he says he raised red flags about questionable activities in the corporate and investment bank at Wachovia, now part of Wells Fargo. Since then, he says he has fallen behind on his mortgage because he hasn’t been able to find work in financial services. Wells Fargo started foreclosure proceedings against Kraus and his wife, Julianne, in December, according to court documents. The Krauses are behind on payments on the $515,000 mortgage for their Waxhaw home. A hearing before the Union County Clerk of Superior Court is scheduled for June 9.”

“Soon after being recruited to Charlotte-based Wachovia in 2005, Kraus alleges he found ‘problematic practices’ related to the booking of trades, the reporting of losses and other activities inside the investment bank, according to a lawsuit he later filed in state court. Kraus, who was a controller in the unit, brought his concerns all the way to the then-head of the investment bank, Steve Cummings, according to the suit. But months later, in July 2006, a lawyer for the bank told Kraus that an internal investigation had uncovered no wrongdoing, and he was offered a severance package on a ‘take it or leave it basis,’ according to the complaint. With a pregnant wife and a new home under construction, Kraus accepted.”

“Two years later, Wachovia was in serious trouble, hobbled by losses in its mortgage portfolio and in the corporate and investment bank. San Francisco-based Wells Fargo swooped in to buy the faltering bank in fall 2008 at the peak of the financial crisis. In 2011, he and another whistleblower, Paul Bishop, filed a suit in federal court in New York alleging Wachovia’s investment bank violated accounting rules and skirted internal controls to pursue short-term profits, benefiting senior management at the expense of the company’s financial health. The case was unsealed in October 2014.”

“The complaint includes allegations that Wachovia, in violation of federal law and proper accounting practices, routinely placed loans in an off-the-balance-sheet entity called the College Street Funding Master Trust, known internally as the ‘Black Box.’ Wachovia’s former headquarters was on College Street in Charlotte. The goal was to skirt regulatory constraints on the amount of loans the bank could keep on its balance sheet, according to the suit. In a 2005 email, a Wachovia executive, according to the suit, wrote that the accounting process was ‘held together with band-aids, spit and gum.’”

“Kraus doesn’t think it’s a coincidence that he faces foreclosure as his whistleblower lawsuit is pending. According to his 2010 lawsuit, Kraus received a loan modification from the bank after he sent a hardship letter explaining his dismissal from Wachovia. According to the suit, Wells Fargo pushed back payment on $395,000 of the balance until the end of the loan term and charged 2 percent interest on the remaining amount.”

“According to one of Kraus’ mortgage statements, his monthly payment is $1,192 for interest, principal and escrow. Kraus says his wife works, but it’s not enough to keep up with the family’s bills. They have two children. ‘The reason I can’t pay my mortgage is because I did my job at the bank,’ he says. ‘I’m losing my house to the same bank.’”

Bits Bucket for May 3, 2015

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