The Housing Bubble

WCI is one of my biggest positions, with about 200 puts of the mostly Sept and Dec 22.5, 20 and 17.5 stike options. These were bought at the money. From yesterday morning through 10:00 am this morning those positions are up $30K.

The Sept HOV 30 puts that I bought on Fridays bounce, just by luck when the stock peaked are now up 170%.

I wish that my positions in Accedited (LEND) were bigger. The Sept 50 puts were up 60% and the Sept 45 put were up over 100% just today. Lend gapped down this morning on the opening. I have not read their earnings report yet.

I hope that txchick got out of her housing long positions.

Right now the implied volatility is almost 100% on WCI, almost unheard of for a builder. I will probably buy more Dec 17.5 and Mar 07 $15 WCI put positions when things settle down. WCI is over 70% Florida construction. With the increase in homeowners insurance in Florida in the last few weeks, the housing decline there may accellerate into the fall, even if they are not hit by hurricanes. Cramer again pronounced WCI a buy yesterday, because of the Fed pause. Anyone following his advice is getting killed.

Congratulations on the Newsweek Businees Interview Ben. We always knew you’d amount to something!

Does this make you a profit now?

I’ve also learned alot from this blog and have enjoyed it for almost two years now.

Keep up the good work.

correction
cashflow in 05 minus 178m$

Interesting . . .

“Toll said the company is holding the line on discounting homes and has instead chosen to allow its sales pace to slow.”

Where are you located, waaahoo?

Comments like yours are good, but they’re even better when they have a geographic bearing.

Katrina will be nationwide.

flat,

Got any new tunes??? You’ve played that one to death.

FYI, the guys at DailyReckoning have calculated that pretty much half (yes, 50%) of the U.S. gets their checks directly or indirectly from government. Military, civil/public service, contractors, granted researchers, pensioners, subsidized farmers, social security & welfare recipients, etc. Scary, eh?

Uh-oh…..car salesmen must have got their hands on the realtor handbook. I can’t wait to here a car described as a “creampuff”.

USATODAY - Mortgage applications rebound as rates lowest since March

http://tinyurl.com/z8h8a

My favorite quote “The worst of the housing market is behind us,” said Richard Yamarone, chief economist at Argus Research in New York, before the MBA data was published. “That’s simply because the two primary drivers of housing — interest rates and demographics — are improving.”

pray for them and skip the agent
5% is in the way of a deal……….

That’s really not a lowball offer eastcoaster at least not by my definition.
Lowball would be offering 103k or less. At 150k I’d still ask for closing costs. It’s a down market nationwide if you just have to buy now starting at 20-25% list might be a good place to start.

If your agent indicates that they don’t want to do what you want indicate that you will find someone who will. If your a first-time buyer no matter how confident you are unless you are a lawyer I would ignore the advice of flatffplan.

I would hate to be bringing up three children in a 2-bed apartment. And once the oldest starts school, it won’t be any fun being one of the kids either. (Trust me on this one; from 7th grade to 12th grade I had to share a room with a brother 3 grades below me. It’s incredibly irritating even if you get on OK, because you just aren’t interested in the same things. And as for having friends over; forget it.)

Looking at the listing, if your neighbours are unsophisticated financially I could see them thinking that this is their only chance to get a house where (after subdividing the upstairs bedroom) they can give their kids a room each. Literally a once in a lifetime shot.

Congrats Ben! I sure hope you summarize the insanity of the last couple of years in a book!
have to ask, are you blogging from a public restroom?

CONGRAT BEN !!!!!!!!!!!!!!!!!!!!!!!!! Nice job hanging in there…

Great article Ben. Very impressive!

Well done Ben!

Has anyone read the other article about homeowners being crushed by their arms? One couple took out a HELOC to pay off their cars, credit card debt and the 6% fixed rate mortgage on the house. The starting interest was 5.25 and is now at 8%. What were they thinking? Now these people have my vote to be the poster children for the financially clueless that are about to get reamed.

Can you say @sspounding? Gooood, I knew you could.

Congratulations!!! It takes a lot of balls to be the first one to get out there and say that the market is crazy.

The blog provides a global communication and media outlet that is cheap and easy to set up. It’s pretty facinating how this blog is having a significant affect on the marketplace and other blogs like dailykos are affecting the political scene.

Bought a home listed for $500,000 at auction for $300,000. Figures she should still make a profit. Probably will, “IF she can resell it.” Thats just plain stupid. I don’t care what she paid for it, there will be carrying costs, and if the market keeps dropping, and she can’t sell it, another dumb investor

Agoura Hills. Thousand Oaks. Westlake Village. Their names are a tribute to the rolling hills, trees and lakes that dot the landscape.

So proud were they of their surroundings, the three Conejo Valley cities lobbied for several years to have a 16-mile stretch of the Ventura Freeway designated a scenic highway.

The state turned down the request because there were too many billboards, industrial parks and gas station signs lining the road. That was more than a decade ago.

Although the corridor that connects Los Angeles and Ventura counties is still known for its dramatic topography, these days, corporate headquarters and luxury homes define the valley. Further enhancing its image, a Four Seasons resort and spa is set to open in November, adding Westlake Village to its list of locations that include London, Paris, Singapore and Bangkok, Thailand.

Wealth and fame are no strangers to this area, home to five Fortune 500 companies: Countrywide Financial Corp., Dole Food Co., the Ryland Group Inc., Guitar Center Inc. and Amgen Inc., the world’s largest biotechnology firm, which for more than two decades has helped fuel the business boom.

The high-tech and healthcare companies that followed Amgen’s path — including divisions of Baxter Healthcare Corp. and WellPoint Inc.— brought to the area thousands of well-paid, white-collar professionals who were also drawn by the good schools and the Conejo Valley’s reputation as a safe community. The estimated median household income along the corridor ranges from $87,895 in Thousand Oaks to $128,684 in neighboring Westlake Village.

“It wasn’t always like it is today. There was a day when we would celebrate when a barbershop would open,” said Charles Cohen, a Thousand Oaks land use attorney who served as mayor from 1967 to 1972.

Bill Fulton, an urban planning expert and Ventura city councilman, said the core of the Conejo Valley was destined for white-collar exclusivity.

“Westlake Village and Thousand Oaks were originally developed as executive suburbs,” he said. “From the late ’50s forward, they were designed as a self-contained enclave for executives and middle managers. And businesses like to locate where the bosses live. That area tends to attract high-end jobs.”

Development in Westlake Village is on a tear. At the intersection of the Ventura Freeway and Lindero Canyon Road, crews, cranes and heavy machinery are visible on three projects that are under construction, including the Four Seasons. The six-story, 270-room hotel, set to open on the Dole Food campus in November, will be part of a 750,000-square-foot health resort that is the brainchild of Dole Food Chairman David Murdock, who has played a key role in the area’s upscale climb over the last 20 years.

Starting in the 1980s, the billionaire developer began transforming the rustic community of Lake Sherwood, on Ventura County’s eastern edge, into a posh residential enclave where homes are priced up to $25 million. Actor Will Smith and hockey legend Wayne Gretzky are among the celebrities who have called this area home.

During a ceremony at the construction site last year, Murdock said that creating a luxury health resort next to his privately held company’s headquarters has been a longtime goal. He said the resort — Four Seasons Westlake Village, which will include the California Wellbeing Institute — will offer a spa, nutritionists and “life coaches” to help attract health-conscious guests. The facility also will have a television production studio where programming on health and nutrition will be created.

“We started from the very beginning to build a complete wellness center,” Murdock said. “Sixty percent of the people in America are overweight, and 40% are absolutely obese. People are killing themselves by improper eating.”

The California Health and Longevity Institute in Santa Monica will oversee an 11,400-square-foot on-site medical clinic and diagnostic facility featuring nutritional laboratories and teaching kitchens. It also will employ staff cardiologists, radiologists and internal medicine specialists.

Across Lindero Canyon from the Four Seasons, Texas-based Huntington Hotel Group is building a 160-room Marriott Residence Inn, which is set to open next spring. Farther east of the Marriott is the project most visible from the freeway: Westlake Landmark, a two-building complex that will add 180,000 square feet of office space to the city.

Who’s to say that one of the office park’s new tenants won’t one day become a star on the Fortune 500? Amgen, for example, had modest beginnings. From sharing leased space in an office park, the biotechnology firm expanded until it took over the building, then the whole park, before stretching out on both sides of Rancho Conejo Boulevard. The company now has 45 buildings spread over 184 acres, with nearly 8,000 full-time employees.

After Amgen received FDA approval in 1989 for its anti-anemia drug Epogen and two years later for its drug Neupogen, which stimulates white blood cell production to help chemotherapy patients fight infections, Amgen’s financial growth skyrocketed.

“I remember the real estate depression in the early ’90s, yet for those of us in the Conejo Valley, we never felt it,” said Wayne Pearl, vice president of Amgen’s Thousand Oaks operations. “That was also during the days when Amgen stock was doing remarkably well, so a lot of people were moving up.”

The region also suffered only modest effects of the dot-com collapse a few years back and has continued to experience business growth, said Mark Schniepp, director of the California Economic Forecast in Santa Barbara.

“It’s because the labor force in the Conejo Valley was always very rich,” Schniepp said. “Once the workforce reaches critical mass, then companies start to move there.”

But there are also drawbacks to all the business growth.

“This used to be a nice bedroom community, and then all these companies came in and changed that,” said Kathy Kelley, who moved to Thousand Oaks more than 40 years ago when the Ventura Freeway had only two lanes and sheep grazed on both sides of the roadway.

“When you build companies, people come in and things change — home prices, the traffic,” said Kelley, whose husband, Bill, is a direct descendant of one of the valley’s pioneer farming families. “They really cater to the rich in the Conejo Valley now, that’s what it’s turned into,”

“It’s beautiful, but it’s very expensive,” she added. “My children … will never be able to afford homes here. That’s an unfortunate fact.”

Traffic is another problem. California Department of Transportation data indicate that thousands more vehicles now travel the freeway.

For example, a daily average of 185,000 vehicles, traveling in both directions, crossed the Hampshire Road intersection in Thousand Oaks in 1994. By 2004, that number had climbed to 193,000. And the freeway traffic at Parkway Calabasas increased from 192,000 in 1994 to 201,000 in 2004.

But more cars also mean more potential customers for the hotels and additional revenue for the city. Ray Taylor, Westlake Village city manager, said that even by conservative estimates, the hotels will add more than $1 million in occupancy and sales taxes a year, boosting city revenue by 15%.

“The Conejo Valley is in an enviable position: It has good-paying jobs, nice neighborhoods, and while the price of homes is up, it’s not like in Santa Barbara-Montecito,” said Dan Hamilton, director of economics for the UC Santa Barbara Economic Forecast. “It’s not intensely urban like L.A. or the [San Fernando] Valley, and the prospects for growth are very good.”
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this would be 91360 and 91361, if these RE prices go down ( and they did in the 1990’s ) then we really do have a crash.

I’m from Portland originally, and my parents still live there. Downtown has indeed gone condo crazy, but the real fun is out in the burbs. The condo bust started way early out there, like several years ago, from what I recall. They built a light-rail system out to Beaverton and the western suburbs and did zoning stuff so that a whole bunch of condos got built around the light-rail stops. “Smart growth” and all that. Well guess what? No one wanted these crappy little suburban condos, and many of the projects languished, even as SFHs went crazy in the same suburbs. You are dead on about Portlanders not making all that much money, either. There are a lot of California equity refugees, and a few decent large employers there, but nothing that provides huge wealth. One of the saddest parts is that downtown Portland used to be kinda funky and cool–a bit weird and ‘off’ in an artsy way–and all of the overpriced condos and cookie-cutter yuppie businesses that followed made downtown really tacky, plastic, and just plain uninteresting.

“The Pacific NW is one of the most overbuilt (silently) areas of the country. Sorry guys.”

This isn’t news to us. We live here.

Thanks for the report Clouseau. Yes, Seattle’s a huge bubble. The 400K/2004 homes that miraculously became 1 million dollar and up 2005/06 homes tell the story.

The “cheaper” First Hill condos that you mentioned are already being price reduced: 425K last month, 360K this month.

The amount of denial here, coupled with a lack of healthy skepticism when it comes to local news, convinced a lot of people that we’re different.

And I have to say, the press had been all over this one since last Fall, rushing in to assure Seattleites every time bad National RE news arrived, that we were indeed “different”.

If there was even one bidding war in a neighborhood, that’s what got the spotlight. The price reduced properties in same neighbnorhood were completely ignored and denied (realtor speak: they were “overpriced to begin with” ! LOL!)

Thank God for Zip Realty and the county tax records, that was the ONLY place truth was to be found.

The good news is: Just this week, the local press started admitting we’ve got a problem on our hands. Bad credit, bad loans, price reductions, long DOM’s, slowing sales, rising inventory and now finally, stagnant median.

The median’s been stagnant for about 3 months and inventory’s been rising since early spring. This is the FIRST they’ve reported on it.

It wasn’t long ago they were encouraging young people to do whatever it takes to get into a home they can’t afford. Advice like: cut back on all other expenses, buy with friends, etc. Pity the poor people who took their advice.

Yes, I’m also following this issue after the Supreme Court ruling last winter on that Massachusetts or RI case (can’t remember the state). Very interesting ruling given the so-called “property rights” agenda of the current administration. It has caused at least some state legislatures to begin work on trying to close up the loopholes in their own areas.

The Supreme Court found their own decision distasteful. That is why their own decision had specific language about their need to enforce the law as it is written, not as they would like it, and including a detailed description of what states need to do to avoid this problem in the future. It is funny that the same folks who complain about the supremes making things up as they go along refuse to see the truth in this even though the decision included this extra language. It is rare for supreme court decisions to include a formula for a workaround.

Eminent domain abuse has been going on for decades. I recall one of the most notorious abusers was Atlantic City, NJ. The city ‘condemned’ lots of private property and then gave it to Donald Trump to develop a bunch of casinos. Interesting definition of “public use” there, I’d say. Back in the day, courts were understandably reluctant to second-guess condemnation decisions, simply because it is a necessary power for govt. to have. Even the founders of our country, who were extremely suspicious of any govt. infringement on property, conceded that. But all of those years of a hands-off approach by the courts gave license to corrupt politicians to misuse the eminent domain process for the benefit of their large developer cronies. Hopefully, all state govts. will act quickly to stop these abuses.

You can go to areas just west of downtown LA and watch all the razing down of the admittedly blighted neighborhoods just west of the 110 fwy, and the tremendous amount of new mid-high rise structures going up. There would’nt be much local neighborhood resistence in these areas as they are almost 100% immigrant occupied, and the eminent-domain process must be relatively smooth going here.
The SC eminent Domain Ruling was made-to-order for a big monster city Government such as LA, which is currently in process of doing a complete make-over of the old Bunker hill neighborhood(mentioned above). One of the newfangled bldgs just completed is the new hdqtrs of the LAUSD, right off the 110.

I have to wonder about people who have the free time to remove street spam, but I bet somebody here could answer the question.

http://www.causs.org/dc/dcboard.php?az=show_topics&forum=14

Bet those signs which offer to buy your house are some type of scam run by bunko boiler plate operations manned by marginal phone operators offering to buy from distressed homeowners. There are probably hundreds of these RE Scam ops taking place all over LA, probably run by Bunko RE Scam artists, who may or may not be Realtors/brokers, looking for easy prey(old retired folks, naive immigrants, ect) to sign over their homes/deeds for a little quick cash.
LA has always been the biggest region for all types of frauds and scams. There will be a lot of corrupt RE scam activity out there as more and more homeowners fall behind in their payments, or face foreclosure. As the Re bubble slowly or rapidly collapses, the RE vultures will swoop in and look for victims to shread.

In a word? Yes! If humans live there, psychology reigns.

The OC Register interviewed McCulley of Pimco on the pause.

Here is what he said about housing.

http://blogs.ocregister.com/lansner/

Q. How big a role did shaky housing market play in Fed’s decision?
A. Huge.
Q. What does this mean for mortgages?
A. Mortgage rates down a touch over last month, likely to hover ’round here, even as “affordable” product — pay options, neg am stuff — abates with tighter underwriting standards and fear.
Q. Should I keep my adjustable mortgage? Is the rising-payment pain over?
A. Yes.
Q. Which is worse for housing: higher rates previously feared or the economic weakness the Fed’s sniffing?
A. What’s bad for housing is that it has turned, as a result of hikes plus spent speculative forces. Housing is the most reflexive market in the world. Very momentum driven, hard to turn, but once it’s turned, it stays turned.
Q.”Soft landing” or disaster ahead for housing?
A. Somewhere in between. How about a hard-soft landing?

Here’s a link to the SF Chronicle article Lisa mentioned:

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/08/09/BUGTEKDFD51.DTL

Kathleen Pender, the article’s author, is actually a pretty level-headed finance columnist. Unfortunately, she doesn’t normally cover the real estate beat. (A beat which is of course covered by a writer entirely untrained in finance/economics, the very silly Carol Lloyd).

” incomes have made under 20% increases.””

Try 5%…

Nikki-

this is great news about Baltimore.

If I’m not mistaken, you are the poster who kept complaining about the local media pumping Baltimore unashamedly (in the face of all evidence to the contrary) for the past several months.

The same thing was happening in Seattle. This week, for the first time we had our taste of local media here saying RE was “cooling”. HUGE step!

Looks like the last of the denial towns are falling!

The homeowners in foreclosure that have no equity are moving into a rental house the weekend before the trustee auction, so there is no foreclosure on their credit report. So many homeowners have decent jobs, but the mortgage payments are just too much of a burden. They can rent a house for half of their
mortgage. They can hold off BK’s for a while

The problem is …a lot of the FBs ARE flippers!
Bwahahah!

I will be honest, I don’t think I know enough about things like the stock market to really play with shorting companies. My approach is if I don’t understand it, I don’t mess with it. Probably comes from being a software guy and watching too many chimps who think they can create systems create problems (that I can make $$ cleaning up).

Anyhow, at present I don’t know what to do about making money in the probable downturn in the future. I recognize that I think it is coming, so I am trying to bring as much revenue forward (into NOW) that I can before my customers decide to hold onto their money. That cash is going into CDs to help carry the company during what could be some lean times ahead. I just hope we can get enough in to bridge ourselves. Should be ok if the downturn is not too harsh, but I fear it might be.

That being said, there are lots of sharp money people here. Maybe some of them can give you strategy. BTW, good idea with the web site, but be careful as if there is any real market there, much bigger fish will come in too.

Hi JH:

Save your money with Emigrant Direct or some other high-yield online account and wait till the bottom to buy a house. RE will probably be undervalued in a couple of years.

You may also consider putting your money in a CD for safekeeping.

There are lots of other investment strategies out there (some of which I’m currenlty engaged in), but they all carry risk and may erode your future house money.

Can I ask where you live? I’m curious because my local recorder’s office in the Bay Area doesn’t offer such detailed info on the types/terms of mortgages people have taken out. (Though I’d love it if they did.) Maybe California doesn’t allow so much info to public? Or is it just my county?

That house sold for $55k in 1997, and $143k just last year in June.

She makes it sound like a hostage situation.

Wow. That is a new attempt to motivate someone to buy your house - belittle them for renting.

AT THE END OF THE YEAR I WILL STILL HAVE A NICE HOUSE, TAX WRITE OFF. What will you have, a bunch of rent receipts

I love the “playground” tone…

I e-mailed the buyer. Told them to keep the house. This is fun!

Hi Susan:

Your sister sounds like she’s loving this power trip. I have a strong feeling that she will purposely go against whatever you say, so try getting a real estate agent to contact her without divulging the fact that you sent him/her.

Perhaps the RE can talk sense into her.

I live 45 minutes from Portland, Me. I don’t know for sure but i believe the market is like everywhere else up here,….DEAD.

Good luck. I wouldn’t do anything BTW, let her call you and apologize.

Good catch, Salinasron. Agree very much with your theory.

ah, yes. the jointly inherited home. i advise EVERYONE who is in this situation to sell the property and it has nothing to do with a housing bubble. multiple people with multiple situations/needs/ preferences/money don’t do well owning property together. i’ve never seen it work.

TxChick –

That is a good indication of where I believe we are headed. Soon the most valuable assets will be inflation-insured savings and a good credit record. But it sounds like some investers are trying to find suckers willing to trade their valuable credit ratings for $$$…

It would be impossible to prop up prices without increasing the imbalances because wages would have to come in line with prices, and I can’t see that happening in these days of outsourcing a immigration. Maybe the question should be whether it is possible to prop up prices at all.

I always try to think of historical examples: Has any set of government/quasi-government agencies/financial systems anywhere been able to pull such a feat off? (The permanently high asset price plateau, even in the face of seriously worsening fundamentals, and where it all just turned out fine.) My guess is a big no, or we would have heard about such an example from the NAR/MBA ad nauseum by now. Or maybe someone knows of one?

I can think of a way in which it could be done, but the mechanism would almost certainly be politically impossible as it would imply a loss of state sovereignty.

Have the Federal Government impose severe restrictions on new subdivision.

We need a compilation of all the “Not here!” articles so I can send it to all my “Not here!” friends located in different cities.

> like all those prudent folks that bought homes in the 70’s & 80’s may not be able to afford to stay in their homes, either

The prudent folk should have burnt their mortgage by now, and any moving would only increase their costs. If their property taxes rise above a limit, they should be put as a tax lien on the property instead.

But can Congress cancel the (interest and principal) obligations to the SS Trust Fund without a general Treasury default? Alternatively, can they divert SS contributions while failing to pay pensions?

If neither, then surely some sort of SS benefit would continue indefinitely simply by using the Payroll contributions and Trust Fund interest.

Won’t matter. Democrats (and Independents, for that matter) won’t have a better answer, IMHO. To me, this (retirement and healthcare obligations) is the **REALLY BIG** issue we face in the future. It’s one of the reasons many of us “gloom and doom” bears see very hard times in the future. Buying a “dream house” might just be the least of our worries. What TJ didn’t mention in that post (but I know he’s aware of it) is declining “real” wages.

The only way I see out of this mess is hyperinflation. It’s why we have the whole deflation/hyperinflation debate. Both are likely to happen. The question is, which one happens first?