Connecting The Dots With The Housing Bubble
Some housing bubble reports from Wall Street and Washington. Paul Muolo, “According to a new report by the Mortgage Asset Research Institute, ’stated-income loans’ deserve their nickname of the ‘liar’s loan.’ MARI says that almost 60% of the stated-income amounts are exaggerated by more than 50%.”
From Bloomberg. “Bonds of U.S. home builders, profitable through April, have turned into the biggest losers this year in the market for debt with ratings below-investment grade. Debt sold by D.R. Horton, KB Home and other construction companies have fallen an average 3 percent since May 1, according to Merrill Lynch. That is the worst performance of 37 industries tracked by the investment bank.”
“‘You have to ask yourself if the worst is over or yet to come,’ said Timothy Compan, head of corporate bond strategy at Allegiant Asset Management.”
“D.R. Horton said last week that it would sell 50,000 houses in the year that ends Sept. 30, below the 58,000 estimate it gave on April 18. ‘Every downturn is longer and deeper than people expect,’ Horton’s CEO, Donald Tomnitz, said Thursday after the company reported the first quarterly loss in its 28-year history. ‘We are assuming the worst.’”
From Danielle DiMartino at the Dallas News. “The first stage of grief is denial. That’s the state the few remaining housing bulls seem to be in. In Nevada, foreclosures rose 13 percent over May, nearly double the national rate. In California, foreclosures were up 15 percent, boosting the Golden State to No. 2 in the nation, ahead of Florida.”
“Even the usually gregarious NAHB chief economist, David Seiders, could not muster the levity to mention a ’soft landing’ in Tuesday’s press release. Instead, he spoke of ‘growing builder uncertainty on the heels of reduced sales and increased cancellations’ and builders’ concerns of ‘more monetary tightening by the Federal Reserve.’”
The New York Times. “According to Freddie Mac, homeowners are on pace this year to take $170 billion in cash out of their home equity as they refinance their mortgages. That figure is down from last year’s record, $244 billion, but it is still far higher than in other recent years; in fact, about 10 times higher than it was in 1996.”
“Homeowners have not only completed more of these transactions in recent years than ever, but they have also grown more aggressive in how much cash they are taking out. More than 20 percent of each refinanced loan will be taken as cash this year, virtually the same as last year. That is more than double the average of the previous five years.”
“Instead of saving or investing, some of these borrowers will spend $6 of every $10 they take out in home equity, said Raphael Bostic, a professor of economics at the University of Southern California.”
“He cited cars, which typically carry five-year loans. ‘If you pay for that car through a house refinance,’ he said, ‘you’re paying for that car for 30 years; long after you’ve stopped getting value from it. Talk to financial folks, and they’ll say you shouldn’t buy short-term pleasures with long-term money.’”
And from Bill Fleckenstein. “I continue to believe that worrying about the Fed being tough is exactly the wrong thing to worry about. This, after all, is the Fed that precipitated a stock bubble, and then a housing bubble to address what ensued. The Fed only knows how to do one thing, which is to print money and bail out whatever problem it previously created. If one wants to worry, one should worry about the consequences of Fed recklessness.”
“Some folks are beginning to rethink the notion of loans against homes as impregnable assets. In my opinion, any company that has profited by aiding and abetting the housing ATM is in trouble, if it has a leveraged balance sheet with its assets being loans to houses.”
“I make those comments based on what I can see has gone on, and I’m sure that lots of unusual business practices have gone on that we have no knowledge of. Just as we didn’t find out about Enron, WorldCom, options-backdating, etc. until the tide went out, we have yet to discover what borderline, if not outright criminal, behavior occurred in the housing mania. When the stock market begins to connect the dots, all hell is going to break loose.”
Here is an interview with Gary Shilling:
‘SHILLING: During the past 17 quarters of expansion, spending growth has exceeded income growth by 2.5 percentage points on average, on an annualized basis. And housing is what has been supporting that, with people pulling money out of housing by home equity loans or refinancing. Homeowners have been reasoning that their house is a continually refilling piggy bank, so they can borrow more on their credit cards or save less because their nest egg–all their saving requirements–is taken care of by that house.’
The House ATM aspect of the housing bubble has amazed and confounded me. The exploding cigar is getting down to the nub.
BTC is all over this for episode #8.
Does anyone know how far the median home price has dropped in Sierra Vista, AZ? There is an aticle about it on http://www.realestatedecline.com but it doesn’t say how far the prices have crashed…
The guy looks like a genius now after making that call to short homebuilder stocks a while back.
Except for this:
Third, and most important, American business has done a super job in holding down labor costs.
You can’t complain about people living on credit on the one hand, and celebrate the fact that workers have not had a raise in five years on the other. At this point, the American worker is underpaid enough to crater the world economy as soon as the house ATM shuts down.
http://www.latimes.com/business/la-na-wages24jul24,0,2662782.story?coll=la-home-headlines
That Raise Might Take 4 Years to Earn as Well
Those with bachelor’s degrees are finding their incomes stagnate despite a growing economy.
WASHINGTON — The economy has been steadily growing, with unemployment low and corporate profits at historic highs.
So why can’t David Lewis get a decent raise?
Yes, it’s the fault of business that people have been buying Plasma TVs and SUVs and the evil corporations haven’t been giving them the wages to pay for it.
The US consumer wanted to keep up with the Joneses… in fact they wanted to BE the Joneses… they’ve done this to themselves.
Perhaps the problem isn’t with “evil banks” for lending or even “evil consumers” for borrowing. Perhaps it’s with the new American political culture of “consequence-free” debt-based fake prosperity. Over the past 20 years, the Fed, Congress and successive Administrations have done everything in their power to ensure a never-ending supply of cheap money. And consumers have (surprise, surprise) done everything in their power to spend it as fast as it’s created.
Whenever the perpetually open credit spigot creates problems (S&L failures/RTC, LTCM, NASDAQ bubble, RE bubble, etc.) the taxpayer just “rides to the rescue” and bails out Mr. banker (and to a lesser extent, Mr. FB).
Privatize profits, Socialize risk.
Without any downside risk to the banks for making bad loans, and without much downside risk to the borrower, why should we expect them to behave otherwise? Why should we expect people or institutions who receive little-to-no pain (but plenty of rewards) for reckless borrowing and spending to ever stop repeating this behavior?
Risks and rewards are colossally misaligned under today’s system.
Nice, but depressing, observations. Depressing because you are definitely on target, and since the average American has zero comprehension of your point, there will never be a political will to fix the problem, or even the vaguest perception of what needs fixing.
Thanks, GS. I’m afraid I agree with your observations as well
.
Here’s another genius:
http://online.wsj.com/public/article/SB115204791463597636-_dwtqavFBN5w_kTARC8T9SKB_Fs_20060711.html?mod=mktw
This was linked in a previous thread a week or two ago, I can’t remember. But this guy Heebner bailed his mega mutual fund out of the homebuilders in 1Q and 2Q 2005. Then, in the one full year now since 7/20/05 the homebuilders have bombed a full 50% from their peak at 1115 (DJUSHB). That’s a pretty good crystal ball.
BTW, he’s calling for a 50% correction in RE prices “from their peaks”.
Bill asked “Just as we didn’t find out about Enron, WorldCom, options-backdating, etc. until the tide went out, we have yet to discover what borderline, if not outright criminal, behavior occurred in the housing mania. When the stock market begins to connect the dots, all hell is going to break loose.”
Lets start with fake multiple bids. You can hardly beleive any owner telling you that unless you actually meet these people. Which no one does. Therefore you cannot confirm this at all.
Fake apprasials anyone. After the fake bids, you get a fake apprasials to back up the price. http://appraiserspetition.com/
The concern of this petition has to do with our “independent judgment” in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.
This pressure comes in many forms and includes the following:
the withholding of business if we refuse to inflate values,
the withholding of business if we refuse to guarantee a predetermined value,
the withholding of business if we refuse to ignore deficiencies in the property,
refusing to pay for an appraisal that does not give them what they want,
black listing honest appraisers in order to use “rubber stamp” appraisers, etc.
IMO that will be the biggest of the HB scandals. Thing is, many played along. As one writer said last year, ‘everyone winked at each others scam.’
I cant even begin to compare this to Enron or WorldCom nonsense. Much bigger and deeper if anything reminds me of the same situation with Japan Banks and real estate of late 80’s.
And for over 15 years RE declined year over year.
That is what emboldened every Tom Dick and Harry to defraud each other and wink it away.
They are generally too small to attract much prosectorial attention.
Do you think that Joe Flipper with his 6 flips and fraud for a couple of mil is going to get US Attorney’s attention like an Ebbers or Lay?
Every area of the country is represented on that petition. This kind of thing must be terribly pervasive. IMO, nobody knows what is going on with “the big picture”. Flippers don’t look at the houses they buy, the lenders buy loans they know nothing about. When the final accounting comes in we may find out that everyone, everywhere, has lost money on this bubble whether they bought RE or not.
Everyone lost money….except for those that sold at the top and rented for a few years.
Yeah, congrats! California, on the leading edge of every scam. They must be very proud.
Oh, you’ll be shocked at how much of it has gone on in Texas, too - an allegedly “non bubbly” area.
Thomas- thankyou for posting the link to the petition.
here’s hoping that everyone who reads this blog will take the 10 seconds that’s required to sign it.
If they can’t get support from bubble believers, where are they gonna go?!
I could give a rat’s hind end about their petitian, they don’t work for homeowners, the work for lenders (who are all big boys and knew what they were dealing with when they picked this up). This is all political ass covering and anyone who signs their plea is just a tool of them.
Lenders will crack down on apprasers (who exist wholly at their benefit) when credit losses begin.
For the Times, see also http://www.nytimes.com/2006/07/23/business/23mortgage.html?adxnnl=1&adxnnlx=1153771348-oQB4P34TGcMsOIhW+XAvJg
What is really amazing is the graphic, charting the spread of negative amortization loans across the country. Only 5% of all loans in just a few places in 2002, they were everywhere in 2006, accounting for a large share of loans in certain bubble markets.
Here is a link to that article using the NYT link generator for blogs.
That link is broken
link no worky for me…:(
OK, try it now. You’ll have to ’skip the ad.’
works fine for me.
Wow, Salt Lake City takes the lead in neg-am mortgages. No wonder the market has shot up in the first half of this year. I’d like to know how much the California speculators have contributed to that.
I guess that year’s supply of food will come in handy.
“According to a new report by the Mortgage Asset Research Institute, ’stated-income loans’ deserve their nickname of the ‘liar’s loan.’ MARI says that almost 60% of the stated-income amounts are exaggerated by more than 50%.””
D*mn! That is scandalous.
David
http://bubblemeter.blogspot.com
60%, wow! That’s like almost half.
And about the size of the correction in real dollars we are eventually going to see.
Question. How are they defining the 50%? Do they mean that they exaggerated their actual income by 50% or that the amount they stated is 50% higher? It makes a difference, as in the first case (e.g., make $100k, say they make $150k) that is what I would consider a 50% exaggeration, while in the second case (e.g., say they make $200k, but only make $100k) I would actually call that 100% exaggeration, but depending on how you calculate it both could be deemed 50% exaggerations.
Either way, it a huge amount of people who are lying by a lot.
I liked this quote from Fleckenstein:
“Thus, if one wants to worry, one should worry about the consequences of Fed recklessness: The fact that our economy is entering a post-housing-bubble recession, given (a) how levered up the consumer is, and (b) the fact that our financial system is held together with baling wire, in the form of derivatives, credit-default swaps and other sorts of financial “dark matter.” It is this beneath-the-surface reality that comprises the real threat.”
Also, this is the first time I can remember seeing the word “criminal” used in an MSM discussion of the housing bubble.
It was used when discussing Fannie Mae in the fall of 2004. There was a formal, criminal investigation of the execs at the Justice Dept. I wonder how that worked out?
Former CEO of Fannie Mae Frank Raines still walks. FM had nearly $30B in accounting freud. This was much bigger then WorldCom and Enron conbined. He did testify that the books were clean infront of Congress. He was a member of Clintons cabinet and has politcal connections. Guess he wont be doing any jail time.
Greed exists in both political parties. It jsut seems to live longer and uglier in the Republican party.
Democrats are greedy in a sneaky, underhanded way (remember Hillary’s incredible luck in her first try at the options market) while Republicans are openly greedy and proud of it, because they earned it…
If you call writing tax laws that redirect $$$ into your pocket and allowing companies to eliminating benefits of retired employees after the employees held up their part of the bargain earning it…..
Signed a Registered Republican
It’s ongoing, the wheels of justice turn very slowly especialy with white collar crimes which are complex, and need to be made simple for generally not financially savvy juries. Most of fraud deals with intent which is hard to prove. Enron blew up in 2001 and 5 years later the trials occured (after several levels of deal making). Start asking about how things work out around 2010 or so.
Bluto:
Thanks for saving me from having to post that response.
I agree.
Someday perhaps people will understand that popular opinion does not mean rule of law, until then “CEO’s are obviously escaping jail due to their connections.”
Although not stated, I’m speculating “dark matter” = “brown matter.”
Fleckenstein is hardly MSM…
“‘You have to ask yourself if the worst is over or yet to come,’ said Timothy Compan, head of corporate bond strategy at Allegiant Asset Management.”
Yeah, the worst is over Tim. u r smart.
Mass Sales and Foreclosure #s out for May:
Condo and Single Families sold: 6,309
Foreclosures started: 1,613
Ratio of Foreclosures to Sales in May: 1 to 4
This is scary stuff, folks. Take a hard look. There is stuff on the verge of going down that I don’t even like thinking about. I know a lot here are waiting around for cheap housing to return. But when all the crap starts hitting the fan from the abuses of the last 30 some years, buying a home might be the last thing on your mind. Systemic risk at every turn…..I’m trying to figure out how a meltdown, not just of the housing market, but our whole economic system can be avoided at this point. It’s like this giant tsunami is rearing up and no one even knows it’s coming.
That’s why it’s fun to laugh at the doom and gloomers who are so excited about buying a house (with their savings accounts and treasury investments). If this comes anywhere close to some of the predictions to the downside spoken of here, the only investments that matter will be lead and brass.
Old plumbing fixtures?
Not true, “doom and gloomers” who have financially prepared themselves for said doom and gloom scenario, will actually live alot better then those that are currenly living high off of refinances. Not only does housing get cheaper, but so does labor. Also high end products will become more affordable, since demand will slip. Not to mention cheaper vacations, cheaper/bigger selection of female escorts, lol. You need to remember that its in a recession that the fools are weeded and the planner is rewarded. Many examples of this from the great depression.
Those that have been living below their means are well practiced in doing so, and have learned how to enjoy life “on the cheap”. The lifestyle adjustment that will be required of those living high on the “lipsticked pig” will be wrenching.
If houses correct by 50% in enough of this fine nation, you’ll be able to tell stories of “living on the cheap” to your grandkids who will be amazed at your spendthrift ways. There isn’t going to be a US economy if that happens, guns bullets and perhaps defensible farmland will be the only investments that will look good if we have another great depression style panic (back then we had savings to live off of, now we have debt, debt, and more debt).
Back then we had food — lots more folks out in the rural countryside who farmed for a living. Now that we have all become citymice, the chance in a pinch to live off your own production looks rather slim for most of us. The Mormons are better prepared, if they followed their prophet’s advice to grow a garden and to store one-year’s supply of food and drink. But guns might also be needed to make this work…
The other thing is that in the great depression only a small portion of the country owned stocks (I’ve seen estimates that range from (2-14% of people) and were directly exposed to the initial decline in asset value. In this case almost 70% of the country owns a home.
>>cheaper/bigger selection of female escorts
–cheaper/bigger selection of female escorts–
Damn!! I hadn’t even thought of this added benefit. Ok, I’m lying, I really did.
If you dont fix this now, then it will spread and makes things even worse.
You are right. I see most of my family taking hard hits on this one just because of occupations. No, no realitards or brokers, just worker bees who have jobs that depend on consumer spending. No. Va. could get semi-ugly just by itself.
Talk about about cheap houses but how many kids are going to get hurt too. Divorce, college, etc…
I went out with a friend last night. After a merger last year, her husband’s company is planning on laying off 50k! He is re-interviewing for his VP job for the 3rd time after already being told once after the 2nd interview that he didn’t have to worry. Everyone would be assimilated.
He went on vacation (gift from retired stock broker in-laws) and came back to find some of his co-workers gone. So much for the “don’t worry” spiel.
I can’t say which company it is, but it is in the financial sector servicing our government.
I’ve worked for companies where we couldn’t pay our suppliers and others where we brought our own toilet paper in. But those slowdowns (early 80s, early 90s) were mild compared to the shake-out I believe we’ll be seeing.
A meltdown can’t be avoided. Which is why those who are watching real estate waiting for the point to ‘jump in’ are the real fools. Buying a house will be the last thing on their minds because they and their families will be unemployed and starving, or on the receiving end of the scapegoat event those in charge will deploy as a cover for the economic implosion.
‘Everything was fine with the economy until that nuke went off’
Real estate is the last thing holding this mess up. When it implodes, so does your lifestyle. The only thing supporting you is newly created debt - whether you sign the loan docs/swipe the credit card or the stupid sap next door does it. Debt must be created (home loans, credit card swipes) to service previously created debt. When that doesn’t happen, the house of cards/ponzi scheme implodes.
“Well then how does this work in it’s simplist form…
The top lets say a home builder goes to a commercial bank and requests $100,000 to of course construct a house…At a short term wholsale debt manufacturing cost of 6% for a year to build the house and mark it up to $250,000
The line signer or Home buyer then goes to a commercial bank and requests $250,000 to of course to buy the house…At a long term retail debt manufacturing cost of 5.6% for 30 years…
The whole operation can take place within a month…
The end result…
The home builder gets $250,000 - the $100,000 - the 8000 or so interest…
profit to blow like a drunken sailor = $142,000
The banking system recieves $8,000 plus a $250,000 mortage which is a monetizable asset…
New money that did not exist a month earilier flooding out into the domestic economy? $250,000
The Home buyer spends the next 30 years or less of course servicing the top…since the monthy yield the bank recieves from the $250,000 mortage is $1166 per month profit while the principal is $268 or a total payment of $1425 a month with of course the interest portion shrinking while the principal portion is increasing during the 30 year period… At month 360 or 30 years later the principal being paid is $1426 while the Interest is just under $7 since the final payment is adjusted to account for rounding to the nearest cent…
Ok what is going on? what’s the problem? Once a unit of human capital has basicly consumed the maximum potential debt the pool of potential debt requestors will shrink if the supply of debt requestors is not inflating fast enough…
So then what is the maximum potential of a fractionally reserved debt backed by debt compounding interest commercial banking system under the current rules? Maximum potential is reached when the volume of debt requestors required to request the required amount of new debt to service the old debt becomes impossible to obtain…So far during the past 23 years of engineering rates lower and socially engineering the pool of potential debt requestors along with some other accounting tricks the required volume was obtained…While mantaining low wage inflation along with low consumer price inflation…
The following 3 stages of a debt backed by debt compounding interest commercial banking system take place…
Stage 1 is the inflation of debt and the destruction of savings…
The total circulating debt supply in 1981 was $5 Trillion and the savings rate was 11%…Now [2005] the total circulating debt supply is 38 Trillion and the savings rate is 0 or negative…
Stage 2 is the deflation of debt and the destruction of equity…
Ok here’s where it gets tricky…A recession this stage 2 begins to take place…Debt inflation slows and debt inflated assets like real estate or equity begins to be destroyed but fortunatly rates can be engineered lower and the volume increased to escape…no problem as long as the debt to income ratio is not too high and you have enough basis points to play with…
The maximum potential of the top to obtain a yield from the bottom will have been reached…then there is no escape from stage 2 of the debt backed by debt compounding interest commercial banking system…
Which then leads to stage 3…
Bankruptcy of the banks collapse of the economy/division of labor and the consolidation of power…
Here’s where it gets tricky again…
The crown system already went bankrupt…In the 1930’s… the period from 1933 to 1945 was the bankruptcy reorganization of the then 236 year old “Global” Crown or City of London system…
The system emerged from 1933 to 1945 reorganized but still bankrupt…It is still bankrupt currently…
Prior to 1929 the three stages of the compounding interest commercial banking system took place within a space of 60 years or so…25 to inflate and 25 to deflate and 10 for the base…The last bottom inside of the USA was in the late 1890’s and the top was in 1929…and the normal natural cleansing process began to take place…
One slight problem…Modern technological civilization is incompatable with the natural cleansing process…The actual deflation that occured in 1929 was only 4 years long…Not 25 like all the previous ones…
If the natural cleansing process were to have been allowed to run it’s course Modern technological civilization would have completely collapsed into rubble…Ok the top stopped it…But all they did do was prolong the inevitable reaching of maximum potential…
so from 1933 to 2005 or 72 years means that stage 1 of the compounding interest commercial banking system has been extended almost 3 times it’s normal length…Which means when the inevitable reaching of maximum potential occurs the magnitude of the implosion will make all previous implosions look like walks in the park…” Hyptertiger
This is a very interesting post. Can’t say I’ve ever heard anyone argue that the Great Depression was too mild…
So, if I understand your post correctly, not only will we get a depression out of all this, but, in essence, it will be permanent?
It will only be permanent for those who don’t survive. It’s not just debt that inflates, but the population; it is not only debt which must be liquidated, but the debtors.
It will last as long as it takes to liquidate both the bad debt and the debt saps who are no longer able to fund the cost of their existence through the creation of newly created debt.
I watch US real estate because I know when that goes, so does the world economy and life as we know it. It will come back, most of us won’t be here when it does.
We only ‘recovered’ from the Great Depression after WWII wiped out millions and bombed the rest of the world into the stone age. Multiply that by the debt accumulated in this go round.
9/11 sure was conveniently timed. What’s going on in the middle east right now?
Hey goldie, ever hear of the barter system, or see it in action? If not, come on down to New Mexico and witness the 1/3 or so of the real economy in that state that runs without money, and below the radar of the feds and “financial’ community.
You’ve made some very interesting points, but degraded with the “9/11 sure was conveniently timed” comment. Are you implying a conspiracy outside al-Qaeda? Convenient to whom?
The economy was imploding prior to 9/11. 9/11 was the excuse used for rates to plummet to 1%, allowing the real estate market to inflate and buy us more time.
Another bonus - the implementation of a police state. Sure is handy to have in place when the debt saps face reality and realize they’ve been had. And the debt saps include all of us. Your lifestyle, your pension, your job, your house, your dreams for your future and that of your children. They’re gone - it’s over. I doubt people are going to take it quietly - thankfully we have Homeland Security in place to take care of any restless…losers. And that’s how they will be portrayed in the media - at least at first.
I have no idea if 9/11 was a conspiracy or not. I just think it odd that whenever an event is needed, one occurs. The Venice system implodes - along comes the Black Plague, the Great Depression - WWII which wipes wipes out tens of millions, etc.
Ahhhh, NM, “Stepping Stone to the Third World.”
I found your comments interesting because I’ve spent considerable time over the last 25 years contemplating the macro-economic issues of compound interest. At some point, the growth of the money supply must accomodate a parabolic return on ever increasing gross investment (benefitting creditors), at the expense of borrowers or wage earners. Asset bubbles and their consequent busts are a result of fractional reserve banking and excessive credit supply, as well as the inability or unwillingness of buyers or borrowers to service higher levels of debt. I discount the implications of grand conspiracies, but have always viewed the world as a big ball of string, and at certain points, those in power can tug at a string and affect many strings in turn. The IMF, CFR, WB, Trilateral stuff is best ignored here since most are concerned about simply buying an affordable house. BTW, I am debt and real estate free, and have substantial savings in the form of physical PM’s.
Honestly, at this point I’d much prefer farmland to PM’s (even if those too are purchased at bubble levels) gold, silver, and platinum make lovely baubles, pictures, and catalytic converters, but you can’t eat any of those. If the crap hits the rotaries a fairly minor investment in 10 acres and $1000 in weaponry will ensure that you and your family are eating.
Just heard a renowned economist discuss the Great Depression today (his dad was one of the unemployed). Mild was not the term he used to describe it…
Is this THE hypertiger? If so, folks, listen up. This is some serious stuff to contemplate.
Some amazing stuff. Thanks for posting.
The hypertiger?
were am I?
Call me a fool, but I think some the tone here in the last few weeks is starting to border on tin foil hat area on some posters. Everyone is entitled to an opinion, especially if it is well informed.
I would never think that our government would light a nuke to cover up anything. For one you discount the mettle of those that guard and control such weapons.
There are very few ways anyone could be very accurate about the finer grain details of the next 5 years, broad trends can be spotted by the well informed and careful studies (this blog is proof of that).
But things like rolling back the constitution, giant government roll up between USA Canada and Mexico? I just don’t see it. There will be plenty of time for a bunker mentality when and if the time comes. For now the sun still shines (a bit too hotly in San Diego) and this is still the land of the free.
Cheer up folks, no matter how bad you think it might get, some of it may never happen.
“Call me a fool, but I think some the tone here in the last few weeks is starting to border on tin foil hat area on some posters.”
All right, I call you a fool! What do you mean, “starting to?”
Sounds like it might be time to investigate aluminum futures…:-)
Ban me if you want. Human’s are pack animals (at best) who respond to a strong leader in times of massive crisis (stretching back to the dictators of Rome and earlier). If housing does what some folks here are hoping for (and I hope doesn’t happen the US and Western Europe’s economies are toast. Too much borrowing has occured and too many unexpectedly levered systems are tied to real estate to bail them out. By unexpectedly levered I mean things like obviously state and local government revenues but a whole host of other industries will also decline as for example SUN microsystems did following the telecom bubble bursting (everyone knew about the dotcoms buying SUNs but how many people knew that most big telecom equipment had a SUN system running the show?). Look at what happened in Argentina 20 years ago for an example, at this point the best we can hope for is to follow the Japanese example of the last 20 years (the slow drip of economic declines) but I’m not sure our national psyche can accept our fate. Our imbalances are both worse and more levered than theirs, and they will retract to normalicy, eventually.
http://www.financialsense.com/stormwatch/geo/pastanalysis/2005/0916.html
Read it, think about it. I’m not saying it’s going to happen, but it’s scary to think it could.
The sky is falling!
The sky is falling!
I was under the impression that Lenders made you put more down payment on a stated income loan . It should be 25% to 30% down if you can’t prove your income . Don’t tell me they were giving low down loans on stated income borrowers . Please don’t tell me that .
Dont kill the messenger, but it is true.
Ha! True? You have no idea. I can do No-Doc loans through Fannies Alt-A products all the way to 95% LTV (5% down). No-Doc blows Stated Income out of the water because Stated still will verify employment and usually assets. No Doc is verify NOTHING! No income, no employment, no assets, no housing history,…..nothing, I repeat nothing is verified except for credit score. Now, if you want to step on over into the world of sub-prime we can really start getting crazy. 100% Stated all over the map, with some No-Doc thrown in the mix.
Oh, I could go on and on, but you would probably think I was exaggerating. I wish!
Can you get a seller contribution of 6% with the 95% purchase?
GreenPoint just sent me an e-mail today that they will do 9% seller contribution on 75/25 combo. In other words, 9% on 100% financing.
Ummm, I hope your not asking because your thinking of buying……don’t do it!
Hey NNV Mtg broker:
Can you get stated income or no-doc loans that are exotic (neg-am and interest only)?
How do stated income and exotic (toxic) mortgages mix?
World Savings does most of its Option ARM’s as Stated deals, and there are others that do it as well. I’m trying to understand your question on how they mix, because they’re two different things. Your describing loan type and underwriting criteria. Any loan program can mix with any underwriting criteria as long as the lender is willing to take on the risk of matching up a given underwriting criteria with a higher risk loan program, like the Option Arm. And, as we know, institutional lenders have been willing to take on unimaginable risk for some time now.
Your answer clarified it.
Depending on the lender there are programs that combine underwriting criteria (like NINA) with neg-arm or interest only loans.
How many lenders are you aware of that mix those two?
I know First Fed has plenty of both NINA and optionARM loans.
If you have a friend who’s in lending/underwriting, Bingo!!!
Consider buying gold and silver stocks or bullion.
Fear comes next. When fear strikes that’s where the money ends up. All this cheap money will be soaked up by higher gold and silver prices. Just like the 70’s.
Lender’s didn’t care about underwriting standards when you could forclose on the house and walk away with a profit (or the borrower could sell at a profit and repay you in full). The risk they were charging a premium for hasn’t been there for about 5 years.
Ok I wont… but when you really think about it, there are so many people at fault here. The buyers didn’t have to buy these places they really couldn’t afford. The buyers didn’t have to refi every few months to buy new cars, outlandish vacation, etc. Yes, the govt should have had better control but come on…
Melody - I agree with you on everything except “govt should have had better control”. The government voluntarily gave up all fiscal control to deliberately create a bubble economy. The government had no control. That is the true crime and the advocators of the inept policies are the true criminals.
20%
You can get a 95% NINA deal
NINA stands for No Income No Assets. That means that no questions are asked at all…they don’t even ask you if you have a job to pay for the loan.
All they get is a two year residence history and credit report
Scary Huh?
I’m going to have nightmares tonight . It’s worst than I thought .
The problem I have with “doomers” is that there is an implied personal helplessness with the impending implosion. Yes, it probably will be bad. But there is a lot, more than most people think, that one can do about it. However, I only have my personal experiences to draw on. Whenever I felt victimized, or helpless, my life would get worse. But when I felt responsible (response-able), and did something about the situation, even something somewhat maladaptive, my life would get better.
The problem I have with “doomers” is that there is an implied personal helplessness with the impending implosion.
Then you’re reading us wrong. Most of us in the “depression camp” simply want everyone to prepare for the worst in order to rise above it. If you don’t take it seriously, then you won’t be ready, because it will be bad.
Yes, I think we have to keep things in perspective. People have been predicting the imminent collapse of the world forever. Just because someone seems authoritative doesn’t mean they’re correct.
There ARE plenty of things to be concerned about these days, and plenty of basic conclusions to be drawn, i.e. many assets are overpriced, leverage is a b!tch on the downside, variable-rate long-term debt is risky, etc.
Despite this, I tend to listen most to those economic thinkers that simply state their observations and are wary of prognostication. Warren Buffet comes to mind, as does Robert Shiller.
Beware of anyone who is a little too confident in their crystal ball .
All this and they keep on building homes in Bakersfield. Number of permits pulled in June 2006 was the fourth largest amount EVER. We now have 4,569 re-sale homes for sale (not counting the FLOOD of new homes on the market) and we sell about 400 homes per month. Lennar homes is the big winner by a long shot!
Let see. Homes sales are down 35% YOY, Inventory is up 350% and we have almost a year’s worth of inventory AND WE PULL A MASSIVE number of permits. Tell me this ends good??
Same game in Merced. The subdivision’s are bought and paid for; the sewer, curbs and gutters, and phone’s in - what can they do but finish the last part and build the damn house. In our next o’ da woods, locals can’t afford anything by a traditional loan. Affordibility at something like 3%. Which is why 50%+ of re-fis are neg-am.
Reminds me of an engineer I knew who put the operating end on one of those under-sea fibre-optic cables that nobody needs for Tyco. I asked, ‘why spend $20 million on a project that won’t be used?’ He said, ‘it’s there, might as well finish it.’
Tyco started off by buying AT&T Submarine Systems in 1997. Now VSNL (India) owns Tyco’s fiber–they bought it in 2004 for $0.05 on the dollar. Reliance Infocom (also of India) bought Flag Telecom’s fiber for $0.06 on the dollar.
It’s the third owner that makes the money on telecom assets…
“When the stock market begins to connect the dots, all hell is going to break loose.”
I seem to recall saying something like this about six months ago.
Oh wait.
Here’s what I actually said…
“All Hell Breaks Loose in September.”
T-minus 45 days, and counting.
This statement is the thesis on which I am planning to load a lot of my net worth in various bearish positions. Timing is the only variable. Bear market could last until 2011.
I have shifted everything to this mode as well starting 3rd week in june. I am sure my pile of investment is much smaller than TxChick’s but I could not come to grips with what was happening in the market or why, so i decided it was time to take a break until I knew how or why the market moved. If I am wrong I am out a few months of stock gains, if I am right I protected (to some extent) the core value of that money pile.
Aha! YOU were the one that said it, and I read it back in February. I’ve got the popcorn and sodas in the cooler, and I’ll be ready for the fireworks show in September.
AHHHHHHH Flectenstein, and how long has he been saying this? at Least 4 years. And hows PAAS the silver minner doing?
At least he’s going to get the housing bubble right.
Auction
I was wondering if you have any insight as to why the stock market is not scared now.
Here is a good reason why California is in such a ridiculous housing bubble. Complete lack of oversight.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/07/24/BAG6GK49J61.DTL
state employees earn modest salaries of less than $50,000 a year, plus a decent pension and other benefits. But a growing number are earning more than $200,000 a year.
For example:
– Jose Chacon, a lieutenant in the state prison system, earned $228,971 in 2005, more than half of that in overtime.
– Dr. Tam Bui, who works at San Quentin, earned $299,040 in 2005, including $162,468 in overtime. Bui earned more in overtime than any other state employee in both 2004 and 2005.
– Mark Anson, former chief investment officer for the California Public Employees’ Retirement System, earned $678,665, including $269,483 in performance bonuses.
Overall, 77 state employees earned at least $200,000 — including overtime and other payments — a 60 percent jump from 2004, according to payroll records obtained from the state controller (excluding employees in the state university systems and the Legislature).
“That’s more than the governor makes,” said Ron Roach, a spokesman for the California Taxpayers’ Association, noting that the governor’s annual salary is $175,000, though Gov. Arnold Schwarzenegger waives the payment. “I think the taxpayers should be concerned that there are people who are earning such incredible amounts of money.”
The governor’s office declined comment.
The figures raise questions about the state’s ability to rein in overtime costs. Many of the state employees who made the list of high earners did so only because they earned tens of thousands of dollars working extra shifts.
Overtime is controversial because it can cost the state more than hiring additional employees.
Workers typically make time and half when they work extra hours. And a 1999 state audit noted, “Overtime can also lead to increased use of employee sick time, greater employee turnover, more workplace injuries, added disability claims and loss of productivity.”
Doctors make up the biggest share of workers earning more than $200,000.
For instance, 29 psychiatrists and other doctors at state mental hospitals earned at least $200,000 in 2005, twice as many in 2004.
A spokeswoman for the California Department of Mental Health pointed out that the department opened a new hospital in Coalinga in September, which required the department to add more employees. And existing staffers are picking up extra shifts to handle the load.
“We’re ramping up staffing,” said Kirsten Macintyre, the spokeswoman. “In the meantime, the staff who have been hired are doing a lot of overtime.”
There are also more doctors in the state prison system who earned more than $200,000 — thanks to overtime — as the system struggles to hire enough doctors to cover all its shifts.
In addition, two prison officers (a sergeant and a lieutenant) earned over $200,000 last year, versus zero the year before. More than 3,600 prison guards earned more than $100,000 last year, including overtime and other payments. The median pay for a prison guard is around $67,000.
“There is a lot of overtime, because there are a lot of vacancies,” said department spokeswoman Terry Thornton. “The inmate population is growing, and it’s hard to keep up.”
More money managers also made the list of top paid employees thanks to increased salaries and bonuses. In fact, the state’s nine highest-paid employees work for the state two main pension funds, CalPERS and the California State Teachers’ Retirement System.
CalPERS spokesman Pat Macht said the agency boosted the pay for many of its employees after conducting a survey that found they were paid less than their peers in the banking and insurance industries. The teachers retirement system also boosted pay to recruit and retain top employees.
But many say the managers’ pay is justified because they handle billions of dollars in investments.
“They’re worth every penny,” Macht said. “Every dollar they earn is another dollar less that the taxpayers have to bear.”
Zach Hall, head of the California Institute for Regenerative Medicine, earned $284,386 last year. (His annual salary is actually $389,004, but he received less than that last year because he started in March 2005.)
The state payroll data also show that many workers increased their salaries with other types of pay.
For instance, Wes Franklin, the former executive director of the California Public Utilities Commission, received $105,000 when he retired last year because he had accrued more than 37 weeks of overtime.
Nhuhy Hathuc, a prison psychiatrist, retired with a lump sum payment of $145,396. And Charles Snyder, a manager at the Department of Motor Vehicles, retired with $118,284 in paid leave.
Technically, state agencies are supposed is to limit the number of vacation hours employees accrue to 640 hours — or nearly four months. But not every department has enforced the limit, according to Lynelle Jolley, a spokeswoman for the Department of Personnel Administration.
Overall, records show that 21 state workers received, when they quit, at least $100,000 in lump-sum payments to compensate them for unused leave they accumulated over the years.
But at least one agency wouldn’t explain what some employees were paid for. The California Department of Forestry and Fire Protection would only say that “other pay” includes a variety of items, including car allowances, overtime and workers’ compensation. But for privacy reasons, spokesman Michael Jarvis said, he couldn’t break down the pay any more specifically for individual employees because one of the possible components is workers’ comp, which the department considers confidential.
For instance, payroll records show Battalion Chief Peter Yaninek received $82,482 in other pay. But Jarvis said he wasn’t allowed to explain what the money was for.
——————————————————————————–
——————————————————————————–
The 200K club The number of state workers earning at least $200,000 has soared over the past year. Much of the pay is for overtime, bonuses, vacation payouts and other cash compensation on top of regular salaries. Here are the highest-paid employees at various state departments. CalPERS Mark Anson* Chief investment officer 2005 pay: $678,665 Regular: $409,182 Other pay: $269,483 California Institute for Regenerative Medicine (stem cell institute) Zach Hall President $284,386 (pay for partial year) State Teachers’ Retirement System Christopher Ailman Chief investment officer 2005 pay: $368,936 Regular pay: $98,936 Other pay: $270,000 State Compensation Insurance Fund Dianne Oki* President 2005 pay: $273,621 Regular pay: $23,371 Other pay: $250,250 Department of Corrections Tam Bui Physician 2005 pay: $299,040 Regular pay: $136,572 Other pay: $162,468 Department of Developmental Services Ba Tran Physician 2005 pay: $221,164 Regular pay: $134,172 Other pay: $86,992 Department of Mental Health Tim Adler Staff psychiatrist 2005 pay: $275,897 Regular pay: $159,372 Other pay: $116,525 * Have since left the position Source: State Controller’s Office; The Chronicle
This is in our contract.. I’m not sure how they got away with more hours than permitted.
Vacation credits are cumulative to a maximum of two hundred and seventy-two (272) working hours for ten (10) or less years of qualifying service or three hundred and eighty-four (384) working hours for more than ten (10) years of such service. Accumulation in excess of this amount as of January 1 of each year shall be forfeited by the employee. An employee shall be permitted to carryover more than allowable credits when the employee was prevented from taking enough vacation to reduce the credits because the employee (1) was required to work as a result of fire, flood, or other extreme emergency; (2) was assigned work of priority or critical nature over an extended period of time; (3) was absent on full salary for compensable injury; or (4) was prevented from using vacation previously scheduled to be taken in December because of being on paid sick leave.
This is in the new contract.. so it’s stated correctly.
If an employee in Unit 1, 14 or 20 does not use all of the vacation that the employee
has accrued in a calendar year, the employee may carry over his/her accrued
vacation credits to the following calendar year to a maximum of six hundred forty
(640) hours. A department head or designee may permit an employee to carry over
more than six hundred forty (640) hours of accrued vacation hours if an employee
was unable to reduce his/her accrued hours because the employee: (1) was required
to work as a result of fire, flood, or other extensive emergency; (2) was assigned
work of a priority or critical nature over an extended period of time; (3) was absent on
full salary for compensable injury; (4) was prevented by department regulations from
taking vacation until December 31 because of sick leave; or (5) was on jury duty.
At the root of this lunacy is the fantastic notion that the job “Governor of California” is only worth $175,000/year. Everything else falls out from there.
If you pay peanuts, you get monkeys. No one might believe that the California government could be worse than it is, but just try staffing a mental hospital with competent psychiatrists for less than $200K each and see what you get. Or hiring an exec to run CALPERS (one of the largest pension funds in the world) for less then a typical CPA makes.
The fact that most middle-class folks don’t make that much is not relevant. The fact that the Governator’s nominal salary is lower than almost every CEO in California is ludicrious.
And this has nothing to do with the housing bubble, because only a tiny number of state employees make these sort of numbers.
The Presidential salary is only $400,000, so a gubernatorial salary under $200K is in line. The idea behind low compensation for public office is that if you make the job monetarily attractive, you’ll attract some types who are really nasty. Since we’re not protected from the types who seek publicity or who crave control, we’ve got to at least be protected from those who care more about the money than the job.
Seems to me that if you don’t pay a decent salary (and I do not consider $175,000 for that amount of stress decent) than you either need independently wealthy individuals (like what we have now) or those who will use the position to make money in other (meaning corrupt) ways.
Pay a decent salary and mayeb you’ll get some decent people.
“The idea behind low compensation for public office is that if you make the job monetarily attractive, you’ll attract some types who are really nasty.”
As opposed to what you get by offering political power, which we all know only attracts saints, statesmen, and do-gooders.
what? were are the >200K firemen? Always CA will remind me of Firemen in there 30’s driving H2 hummers and living in big new Homes. Or when is a .5 cent temporary earthquake tax not temporay? In CA when the voters get scared .
200K salary! Wow! Local firemen here are volunteer. Can you imagine going into a burning building without even getting paid? Especially when many of the owners of the homes you are protecting look down on you and your “blue collar” ways. My former pastor who was a chaplain for a local firefighting force shared how they asked to go into the high school to campaign for membership and were told most students there were above that type of work. Nice!
Just recently the locals in this town called for allowing a tax break on town taxes for all fire volunteers. We estimated at the most that was worth $3-$5k. Excusez-moi mon francais mais BFD! (Did I mangle that?) Needless to say I have incredible respect for these volunteers who truly care about their town.
The State must compete with private industry in order to attract competent employees, which is why it is never wise to increase the size and scope of it.
how do you get out equity when your home is going down since jan06
=whackey
I assumed the refinancing had to do with the looming ARM resets? I’ve heard some lenders will refinance up to 130%!
Fraud in the mortage industry isn’t relegated to just appraisal fraud folks. Let’s see…how about:
1. The borrower indicating on the loan application that the home he was buying was his primary residence (when in reality it was a non-owner occ — yes, this happened a lot in order to get better pricing).
2. Lenders requiring that buyers “stating” their income due to self-employment provide a letter from a CPA evidencing this fact. Then, you have Joe Loan Officer getting his not so honest CPA buddy to provide a letter on his company letterhead stating his borrower had been self-employed for two-plus years (for $100 of course). Yes, this happens.
Oh, you bet they allowed “stated income” borrowers to buy with no money down. If they could prove employement (either with a signed verification of employment from their employer or some proof of having their own business (see CPA letter) they were in the home for zero cash.
Stated income deals? How did they work? Well, the account reps from the lending institutions would tell loan officers to take the borrowers job description, go to the site http://www.salary.com, type in the description, view the annual income range for that job, and select an income within that range that permits the debt/income ratios to “work.” Tell the borrower that’s what we’ll state their income to be, they are paying a higher interest rate for the ability to do that, and rack up another loan!
Forget about stated income deals. How about the “bank statement” programs? Those that allow borrowers to state their annual income from their self-employed business was the average of their previous six months deposits into their bank account (business or personal), proven by providing page one of each of their previous six months bank statements to the lending institution which allowed 100% of the deposits to be used as income.
These deposits could have been anything. Christmas gifts, deposits from another bank account (simply transferring money from one account to another), etc. Didn’t have to be real income…all you have to show them is the first page with the total deposit amount — not the detail within the statement.
“Just show us the first page and we’ll average out all six, then you buy your home for no cash!”
That’s just some of the stuff out there folks. Little stuff like that spells fraud when you cut through the garbage.
Newsflash from Berlin: I am stuck in a hotel and watching Sky News (UK). As they often do on UK news channels late at night, they were just showing the covers of the morning London papers. Apparently, the Guardians’ lead story is that UK property prices are to rise for the next 10 years - producing huge windfalls for all involved. Amazing. This bubble can sustain another 10 years? I wonder if the Guardians’ editor will sustain employment for the next 2.
Can’t wait to read that fluff. If you think the US is bad, the UK is ludicrous!
Housing helps raise wealth of nation above £6 trillion”, by Angela Balakrishnan, Tuesday July 25, 2006, The Guardian.“The rise in residential property worth shows that people’s holdings of tangible assets have been rising as well as household debt levels,” said Howard Archer, an economist at Global Insight. “This should help to offset the risk to the economy from rising debt levels, assuming that property prices do not crash any time soon.”
In your dreams, Angie baby.
“When the stock market begins to connect the dots, all hell is going to break loose”
Sorry but the evidence has been a large as life for over a year now and getting worse. Wall Street looking the other way hoping the party never ends while getting congressmen to beat up Ben B. and start talking about lowering rates. No one wants to yell STOP BORROWING !
Borrowing is like most vices; once you start, it’s hard to stop.
N2LC: 200K jobs
Things are worse under the surface. Most of the jobs you list are safety retirement and the Ventura Co. court decision said that all pay counts towards retirement. Therefore, if they retire from a $60k job at age 55 with 90% bene’s but were earning another $140K in overtime, plus uniform allowance, they will retire with 90% of $200K and not 90% of $60K that was intended before the Ventura decision.Welcome to the ‘Break the Retirement Bank’ show…….
You got that right. I say more bonds!! Ventura county has some of the safest cities in the USA, thats gonna cost you……..
Well at least some people will be able to afford to retire in Ventura County.
This same thing has been going on in NYC and its evirons for many years.
It’s like once you join the club, the perks just don’t quit.
Centex reports:
‘Operating earnings were $281 million for the quarter, 17% lower than the same quarter a year ago. The 17% decrease in operating earnings reflected a 360 basis point decline in total home building operating margin in this year’s first quarter..The total home building operating margin, including land sales, was 10.6% mainly due to a 260 basis point decline in housing operating margin, primarily related to increased sales incentives. Also affecting the home building operating margin was a $23 million loss from land related operations, including the write off of $36 million of option deposits and pre-acquisition costs’
Lots of goodies in that Centex report in addition to the land write-downs:
- 3.5M shares bought at an average price of $53.40, that’s a loss of more than $6 a share based on today’s closing price. They’ve already ‘fessed up to another 1M at $50 so far in July, and there’s another 5.5M to buy back after that.
- After only this quarter of earnings, they’ve already lowered their guidance for the entire FY 2007 to $7 from $8.50-10. Yahoo says that the analysts were already ignoring that official figure and had a consensus of $7.30 for the year. (Note that the P/E as of yesterday was 4.85; let’s call it 5 to get a target price of 5 * $7=$35. Whoops!) I wonder if the analysts will apply the same 30% discount to that new, official $7 as they did to the old official $8.50-10 to get something like $5 in earnings for FY 2007.
- With Q1 earnings of $1.39 in the bag and their (also lowered) estimate for Q2 of $1.40 on the table, Q3+Q4 needs to be $4.21 or so. That’s exactly 50% above Q1+Q2. Conclusion: more downward guidance to come for Centex!
Kind of OT…
For some reason, I sense these two videos parallel the real estate market of today..
Crocadile Free fall
Bait and Switch
Comments???
Some crazy stuff… those poor guys were disappointed. Those fat guys were gross beyond belief. The free fall… damn!!! Are people getting that bored? That is so sick.
This is from a newsletter called Strategic Investment that I subscribe to.
The Effect of Global Liquidity on Housing,
and a New Way to Hedge
Against Its Continued Contraction
by Dan Amoss, CFA
Preoccupation with the housing market has become more than a national pastime in the United States. It is now vital to the continued growth of consumer spending, and by extension, growth of the economy. According to the U.S. Census Bureau’s 2004 American Community Survey, there are approximately 74 million owner-occupied housing units in the U.S. Combining this fact with the number of existing and new home sales over the past few years, this tells us that about 9–10% of the housing market turns over every year.
Compare this low turnover with volume in the stock market. The typical S&P 500 stock has about 150% turnover per year, so you can be reasonably sure that the stock sitting in your portfolio is worth within a fraction of a percent of the last tick. The low housing transaction volume makes aggregate national housing value statistics misleading. The near-term value of your house is completely dependent on what current shoppers are willing and able to pay for your house. The “willing” part is psychological, and psychology has morphed from “my house will appreciate 15–20% per year” to “my house will appreciate 8% per year.” The “able” part is dependent on global liquidity and mortgage financing aggressiveness, which will be addressed later in this issue.
Houses Overvalued Compared With Rental Yield
While the near-term value of your house is completely dependent on what current shoppers are willing and able to pay, calculating the yield you would receive from renting out your house is a good way to estimate its theoretical long-term value. To compensate yourself for the risk of mortgage leverage, potential delinquency of tenants, and variability of future fluctuation in rents, you should require a return (excluding the tax an depreciation effects) of at least 2–3 percentage points above default-free Treasury securities, or 7–8%.
In the May issue of The Gloom, Boom, & Doom Report, Dr. Marc Faber contrasts the carrying cost of holding gold bullion in the current environment with holding a house for rent:
While gold may be a negative cash flow asset, many homes at present are far more of a cash flow negative asset, since the negative cash flow from holding gold in a safe deposit box is a maximum of $200 per annum. I am indebted to Steve Leuthold for having recently provided in his monthly bulletin a precise calculation of how negative a real estate speculator’s cash flow might be. Steve starts out by showing how rental yields in the U.S. have collapsed (see figure below, which shows the average annual net rent — after expenses — as a percentage of average home prices).
Steve then assumes that an investor decides to buy a $300,000 home and that, in order to capitalize fully on the soaring home values, he borrows the 10% downpayment of $30,000 at a rate of 1% over prime rate (about 8% at present). He then takes out a conventional 30-year mortgage for the remaining $270,000 (interest rate at the end of 2005, when Steve published his housing cash flow mathematics: 6.35%). Steve then takes the national median for gross rent in 2004 of $11,700 and the median value of existing homes in 2004 of $234,400 to calculate a gross yield of about 5%. Based on this median gross rent of about 5%, the investor/speculator decides to charge a rent of $15,000 per annum.
Therefore, the home buyer/speculator has a negative cash flow of more than 5%, whereas, based on my own experience, an annual maintenance cost of just 1% for a house is in reality more like 2–3%. So while both the home and gold speculator bet on a price appreciation and incur the same opportunity cost, the negative cash flow from holding gold is negligible since it is just the cost of the safe deposit box (less than 0.1% per annum), whereas the carrying cost of holding the house is more than 5% per annum. (The cost of buying and selling a house is also far more than the cost of buying and selling gold, which is negligible.) So if gold is risky because of its negative cash flow and because of the inverted yield curve, maybe a noncommonsensical economist should come forward and explain to us what kind of risk the housing speculator is taking!
A Bubble Exacerbated by Government Involvement
When studying the housing bubble’s formation, it’s crucial to take a good look at the federal government’s historical promotion of homeownership. The first influence that comes to mind is the obvious effect that GSEs Fannie Mae and Freddie Mac have had on mortgage banking; they constantly replenish the firepower of mortgage originators, allowing originators to rake in fees for each approval. Due diligence on risk now rarely goes beyond checking off credit score and income range boxes, often over the phone or online.
As part of the New Deal, the Federal Housing Administration (FHA) was created to stoke the housing market. It accomplished this by providing default insurance for lenders leery of homebuyers without the ability to afford the high down payments required for mortgages. As with all government programs, politicians never respect the costs or consequences beyond the next election cycle. In hindsight, the consequences are clear: The artificial influence of government-subsidized housing is resulting, and ultimately will result, in a gross misallocation of resources, and usually asset bubbles.
There is an interesting parallel between the Federal Reserve and the FHA. They both interfere in the free market, and the consequences of this interference have been super-charging the business (and now housing) cycle. Just as the Fed thinks it knows better than the market what the optimal short-term interest rate should be, the FHA has developed into yet another conduit through which the federal government subsidizes the entire housing market, granting first-time buyers an artificial boost in home purchasing power.
Decades of housing market inflation attracted several private companies to enter the mortgage insurance business. They viewed it as a no-brainer investment to take on the risk of default in return for modest monthly premiums. I’ll have more to say about the current state of the private mortgage insurance business after some relevant macro analysis. For now, it’s important to respect the government’s aggressive response to the private sector’s market share gains. It is one of the many threats to the company I am recommending as a short opportunity. This excerpt from President Bush’s FY 2007 federal budget proposal includes initiatives to respond to increased competition from both “piggyback” financing and private mortgage insurance (emphases mine):
The Federal Housing Administration (FHA) is currently undergoing a rapid transformation to enable it to expand homeownership opportunities for low- and moderate-income families.
Traditionally, FHA has assisted homebuyers underserved by the conventional mortgage market to obtain mortgage credit at a reasonable cost. Since the 1930s, FHA has been a primary mortgage source for first-time and minority buyers. However, in the last three years, FHA loan volume has fallen precipitously. This is good news, in part. Lower interest rates have made unassisted mortgages affordable for more families, and the private sector has increased its use of automated underwriting, allowing it to offer loans on favorable terms to more homebuyers. This is a positive development, when the private sector is offering favorable terms to borrowers who previously would have turned to FHA. However, a small portion of borrowers may still be ill served by incurring higher costs or unfair terms as compared to a comparable FHA loan product.
Premiums for FHA mortgage insurance currently do not vary according to a borrower’s credit risk or the expected cost from defaults, causing better borrowers to subsidize weaker borrowers. This has driven safer borrowers to seek alternatives offered in the conventional market and pay higher prices than they would have if offered FHA risk-based pricing. The budget proposes tiered risk-based pricing to address this issue, which will decrease homebuyers’ costs, and thereby increase access to homeownership. This type of pricing will enable borrowers to know why they are paying certain costs and how to lower them…
To remove two large barriers to homeownership — lack of savings for a down payment and impaired credit — the administration proposes two new FHA mortgage products. The Zero Down Payment mortgage will allow first-time buyers with a strong credit record to finance 100% of the home purchase price and closing costs. For borrowers with limited or weak credit histories, a second program, Payment Incentives, will initially charge a higher insurance premium and reduce premiums after a period of on-time payments. In conjunction with risk-based pricing, these products will expand homeownership opportunity on an actuarially sound basis.
Formation of the Private Mortgage Insurance Industry
The private mortgage insurance industry was invented in 1957 by Max Karl, the founder of Mortgage Guaranty Insurance Corp., after he observed a disconnect between those who could not afford a 20% down payment on a house and lenders who, for good reason, avoided extending mortgages with greater than 80% loan-to-value ratios. The word “private” describes this industry because up until Mr. Karl’s entrepreneurial venture, the FHA had a monopoly in the mortgage insurance business.
Memories of the Great Depression were still fresh in the minds of bankers in those days. They respected the importance of avoiding overexposure to mortgage debt in a long economic downturn where job losses were involved. But Mr. Karl clearly saw an opportunity to bridge the gap between mortgage buyers and mortgage sellers by assuming a portion of default risk in return for premium payments.
This was yet another step in the evolution of the insurance industry. Now instead of assuming the risk of property destruction or auto accidents like traditional insurers, mortgage insurers would shoulder the risk of default on the part of homeowners with less than 20% equity in their homes. This has undoubtedly contributed to the nonstop buying pressure on housing over the past 50 years.
This sounds like a cash machine-type of business, provided that premiums are priced at a highly profitable level (“piggyback” loans and the FHA are a threat to this), housing prices do not decouple from income growth (they have), and the willingness of lenders to extend mortgages does not fall short of required demand (this looks like a distinct near-term possibility). Two widely respected economists assert that in order for the U.S. housing market to sustain current price levels, either household debt must continue growing exponentially or real wage growth must revive from its current doldrums.
A couple of quibbles. The spread in trading physical gold, while not as bad as housing, is not negligable. Bank safe deposit boxes are a bad place to keep gold, because even Roosevelt was smart enough to deny access to bank SDBs without a government agent present, back when he confiscated private gold holdings.
But I do agree in general with this position paper. BTW, who is editing Strategic Investment now? I’m pretty sure that Doug Casey is long gone.
I’d bet the spread on physical gold from even the smallest town dealer is less than the round trip realtor comisssion.
“Even the usually gregarious NAHB chief economist, David Seiders, could not muster the levity to mention a ’soft landing’ in Tuesday’s press release. Instead, he spoke of ‘growing builder uncertainty on the heels of reduced sales and increased cancellations’ and builders’ concerns of ‘more monetary tightening by the Federal Reserve.’”
David Seiders and Leslie Appleton-Young suddenly seem extremely reluctant to repeat the soft landing moniker. Does anyone want to take bets on how long Ben Bernanke, David Lereah, and Gary Watts will last before they, too, expunge the term from their spoken lexicons?
i thought bernanke already moved on to the comment that “the slowdown in housing seems to be proceeding in an ‘orderly’ fashion”. I didn’t catch the rest of the remarks, but I thought that had the air of a firefighter or a police officer during an evacuation or a schoolteacher during a firedrill asking everyone to line up for the exits in an ‘orderly fashion’…i.e., DON’T PANIC kinda vibe.
“Due diligence on risk now rarely goes beyond checking off credit score and income range boxes, often over the phone or online.”
A good credit score indicates a committment to pay one’s debts, no matter the hardship, which is an excellent risk.
If financial institutions wish to lend large sums of money to those with questionable FICO scores, then the problem is with the lenders.
We all know deadbeats. They like to brag about how they beat “the system”. They also have terrible credit ratings.
wow…that was a very informative series of article blurbs!
I found the info about the continued ridiculous levels of house-as-ATM use incredibly disquieting, even to someone who suspected such activity was running amok. I suppose I should have realized that the current use of cash-out refis was waaay lower as recently 5 to 10 years ago, but the idea of people being so irresponsible and dependent on home values to finance so much of their spending is amazing, in a scary way…
cheers all!