Bits Bucket And Craigslist Finds For October 1, 2006
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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Cheaper land in the way?
From Barrons:
”
IF HOME BUILDERS WALK AWAY FROM LAND OPTIONS, the impact is likely to be widespread. The land owner presumably would shop the property anew, and at a reduced price, particularly if it has associated debt.
Jeff Barcy, CEO of Hearthstone, a San Francisco-based land banker with access to $4 billion of equity capital, cites a deal in which a publicly traded home builder recently walked away from an option to buy land in Florida for $60 million. The parcel recently was resold for $32 million. (For more on Florida’s real-estate woes, ”
http://online.barrons.com/public/article/SB115957704636378814-tRvZLZKQYW2yRLsDWJTxJQi_vjQ_20061030.html?mod=mktw
“Joint ventures, too, have allowed home builders to buy land, and even other builders, while keeping both the land and leverage off their balance sheets.
For example, a developer seeking to purchase a $100 million piece of land with 40% equity might put up $19.6 million, or 49% of that equity stake, with a partner contributing $20.4 million, or 51%. The JV would fund the remaining $60 million with debt, which, because the builder’s equity stake is less than 50%, would not appear on the company’s books. Private-equity funds have been active participants in such deals.
Some home builders guarantee the debt of their joint ventures, which could come back to bite them if market conditions worsen. Lennar, for example, guarantees $1.2 billion of debt for its JVs and enters into option contracts to buy land from them. When the builder is also the guarantor, industry insiders say, a joint venture tends to get more favorable terms from lenders. But if things unravel, the company could wind up with a lot more debt than it discloses on its balance sheet.
In a worst case, or one close to it, the home builder might opt to prop up a joint venture with additional equity financing. If its interest exceeds 50%, under accounting rules it would have to consolidate the JV, with all its liabilities, into its own operations.
Every real-estate cycle is different, and it’s too soon to tell whether this one will end with a whimper or a bang — one that rivals, and maybe exceeds, the Nasdaq’s collapse in 2000. Land options and off-balance-sheet joint ventures are designed to mitigate corporate risk in the event of calamity. If market conditions worsen, however, they might provoke it.”
All these cracks in the GAAP along with deferred interest on payment ARMs by the banks will get exposed big time when the sh*t hits the fan. As the Barron article comments, this might be worse than the Nasdaq fall of 2000. As I cooment, this might be worse than anything previously witnessed.
Is this scheme to hide risky bets on land prices off the balance sheet part of the new-improved homebuilder business model? Will the consequences of these bets stay off the balance sheets if land prices tank, as they naturally tend to do when nationwide housing appreciation turns negative? (It seems like Enron used some grand scheme of hiding bad news off their balance sheet up until the time of their collapse…)
Looks like Barons is recommending a “strong buy” on homebuilders stocks. Since, Monday is a very light trading day because of a religious holiday, I just can’t wait to see how high the builder’s stocks rise because of this positive article.
CNBC with Kudlow and Kramer (who both should NOT be working on Monday) will certainly spread the good news about homebuilders as good investments. Wall Street is a crap table in Las Vegas without the free drinks!
does anybody remebre the barrons cover story from the end of august 2006 just a few weeks ago.
the have praised the homebuilderstocks as a value play with valuaitions close to book, low pe etc.
flip flopping at its best.
at leat their timing on the stocks was good. the arguments for the bullish call are now the arguments for the bearish call.
http://immobilienblasen.blogspot.com/2006/08/barrons-bullish-on-homebuilder-mal.html
summary of both barrons storys here
http://immobilienblasen.blogspot.com/2006/10/housings-hidden-headache-barrons-mal.html
I have said a number of times and will say again that these land options are a riskier play than owning the land outright, because they are call options. An out-of-the-money call option expires worthless — a 100% loss on the investment — whereas owned land can only decline fractionally in value. So much for the new business model, where options were supposedly used to somehow protect homebuilders from the risk from owning land outright.
“Jeff Barcy, CEO of Hearthstone, a San Francisco-based land banker with access to $4 billion of equity capital, cites a deal in which a publicly traded home builder recently walked away from an option to buy land in Florida for $60 million. The parcel recently was resold for $32 million.”
There is a case in point for you. The builder’s (call) option to buy the land for $60 million was a form of inflation insurance — if the value of the land had risen above $60 million, the builder would have pocketed the difference between $60 million and the higher price as a huge, leveraged investment gain on the small premium paid to purchase the option. Multiply this strategy across hundreds of replicates, and you get a huge, highly-leveraged bet, for which the entire stake (sum of all option premiums) could be forfeited if the nationwide land market tanked. Where would the homebuilders’ vaunted low price-book value ratio go in that case?
If I understand you correctly if in prior history an HB had $500 million of land bought and paid on the books that was at risk in a market decline this time around the HB has bought $500 million of options that will expire worthless. Its not (necessarily) the case that the HB purchased $100 million of options to $500 million of land. The HB’s just leveraged up further and bought $500 million of options.
P’cola –
Maybe none of this matters, since it sounds like these deals were structured to keep them off the balance sheet. Out of sight, out of mind
From the article:
“The pain could be twofold: If orders dry up and home builders are forced to write off their option deposits or joint-venture investments, which are considered assets, some could face substantial hits to book value. Alternately, builders’ earnings could be nicked if joint-venture gains turn to losses.”
My understanding is that “option deposit” is industry jargon for what Wall Street calls an “option premium” — a type of investment whose value drops to $0 if the option expires out-or-the-money. The above passage suggests the options are lurking somewhere on the balance sheet. TxChick — any insights on this?
Understand that I am not a FASB guy, but it appears that according to FASB Interpretation 46R, if the developer is on the hook for the debt (as stated int he above example from RERIP2007), then the JV would have to show up on the BS somewhere, regardless of the 50% and other accounting attribution issues being met. Further, if the JV were setup specifically for the benefit, or would inure to the benefit, of the developer, then again the JV would have to be on the BS.
But I think most of us on this blog realize from experience that very few “investors” actually read financial statements, and even those that do probably dont read the disclosures. And obviously the phone “analysts” on FOX, CCN and other MSM dont either or they would be giving us the info and their “analyst adjusted” takes for these HB’s.
sorry, meant phoney, not phone
“Jeff Barcy, CEO of Hearthstone, a San Francisco-based land banker with access to $4 billion of equity capital, cites a deal in which a publicly traded home builder recently walked away from an option to buy land in Florida for $60 million. The parcel recently was resold for $32 million.”
50% collapse in price of land doesn’t look like fractional drop to me. The builders are losing their shirt in either case.
They don’t want to lower prices of their housing inventory because this would destroy their book value. But market will do it for them.
that doesn’t make sense. if you lose 100%, but you don’t lose 20% of 60 million, that’s probably a good trade, no?
Contract options and study periods for builders are used all the time. They are not usually significant percentages of the overall price of the land. The ones I have seen are 5% or less, depending on the length of the study period and whether it is an exclusive option or something different. In this instance, if the builder put up 5% of $60 million, or $3m, and the values tanked, decreasing from $60m to $32m, then forfeiting the deposit or option fee is the only rational thing to do - better to lose $3m than $28m!
Whether this will hurt the builders significantly remains to be seen. I suspect like with many things, the prudent builders who have been using options and other rational strategies will suffer only minimal hurt, while the careless will take a savage beating.
“They are not usually significant percentages of the overall price of the land. The ones I have seen are 5% or less, depending on the length of the study period and whether it is an exclusive option or something different.”
That’s what I had thought — that the net loss potential for expiration of the options is relatively low compared to what is now the loss potential for a sale of owned land.
Here is the deal as per Barron’s:
“When land is owned by the farmer, industry experts say, the option might cost 5% of its full, agreed-upon value,
When an investor group, known in the industry as a land bank, owns the property, terms typically have been much steeper, with deposits ranging from 10% to 20% . In addition, a builder subsequently might make monthly payments of 15% to 20% of the value of the land, minus the deposit-well above the 6.5% to 9% it would cost borrow funds in the capital markets”.
We are not talking small potatoes.
I haven’t seen anybody mention the Mike Morgan column in the Barron’s print edition. It’s pretty outrageous. Morgan is Mish’s extremely bearish realtor buddy from Florida. I guess it must not be in the online edition and I’m the only one still reading the print edition.
What does it say?
“Florida’s Housing Hurricane” by Mike Morgan
Picture of big wave with condo building rolling over instead of Marky Mark’s boat.
excerpts:
“With prices on spec homes purchased a year ago going down as much as 40%, speculators’ losses will far exceed their 3% to 20% deposits. Not only are prices going down, but closing costs may have added another 5% to the cost of the purchase. Add the investors’ commissions and carrying costs to the ledger of sunk costs. Even if they can sell, speculators will incur another 10% in selling expenses.”
* * *
“With prices crashing, speculators who can do it are walking away from substantial deposits. The recent round of cancellation reports from builders will continue to grow, and some builders will soon report negative sales, as they experience more cancellations than sales. So the perfect storm ramps up, as builder inventory grows and the main force of buying in recent years, the investor, has dried up. What’s the role of the traditional sellers? Their ship is the one that capsizes, with all hands lost.”
land has 3 to or better leverage- lots going for 25% of 05 prices already
WEEEEEEEEEEEEEEEE……………
Another edition of Lowball! has been posted for Northern New Jersey:
NJ Real Estate Report - Lowball!
Some great successful lowball sales over the past week, a handful of 30% off sales, at least 15 were over 20%. More than 140 sales were greater than 10% off OLP.
Caveat Emptor!
jb (aka grim)
jb
The lowball site is great - I would love to see something for So. Cal, and San Diego in particular..
What Type of Landing?
http://bubblemeter.blogspot.com/2006/09/what-type-of-landing.html
David
Bubble Meter Blog
David , I agree with your hard landing #2 idea .Seems like that’s the only way it could go .
Hard landing? Soft landing? These terms are becoming tiresome. This is going to be a gear-up landing on a ten thousand foot runway without foam. Lots of screeching, lots of smoke, lots of people walking around in a daze who will never be the same again.
I second the vote for #2. Fundamentals dictate it should be worse, but various policy measures will be enacted to soften the landing (e.g., the Home Mortgage Payment Assistance Act of 2008).
Third vote for #2, we’ll have a national hard landing.
But in Florida, Southern California, and certain other markets that are so disconnected from wages that this momentum is going to break the markets…
We’ll see #3 (the crash. More than 40% price drop.)
Neil
Crash landing. Housing will go down hand-in-hand with the broader economy. There are more forces at work here beyond the housing market. Analysis of the housing market cannot be viewed in a vacuum. It must necessarily include other global systemic imbalances which are due to correct.
I believe the second half of this month will prove pivotal…
what is special about the second half of Oct.?
3rd qtr ‘06 reports start coming out, is that it? Will be able to directly compare figures to 3rd qtr ‘05? It’ll be more impossible to hide the truth.
Most of the big stock market crashes have started and or happened in October. This time will be no different.
I agree. The broader economic picture includes the retirement of the (80-million+) baby boomer generation, which will mean a smaller economic pie as those in retirement will spend less, and our economy that is 2/3 consumerism will shrink. I see a “soft landing” for the non-bubble areas, a “hard landing” for the bubble areas late to inflate, and a “crash landing” for the areas that haven’t had any fundamentals since tech’s stock option craze.
Variable. In most bubble areas #2, a hard landing. In the worst of the bubble areas and with condos, a crash.
Count me in the “crash” category. Nationally, perhaps we might just see a hard landing (I believe very few places will see a “soft” landing or better). On the coasts, we need a crash (40%+) to get back to business. If we go back to traditional lending standards, we ought to see a crash, but even that doesn’t include the effects of Boomers selling their coastal homes to pad their retirement (non) savings.
What traditional lending standards do not take into account is the “20% DP, 28-33% DTI ratios (on verified income) and 3-6 months cash reserves” standards were created when people had more secure (union) jobs, employer-paid healthcare (often 100%), defined-benefit pensions, etc. These days, people must be more flexible (able to move) and must have more direct savings for their own futures. This would be deflationary for housing expenses.
David
I recently proposed a different scale, borrowing the category concept from hurricane analysis, but we’re obviously in the same ballpark.
Soft Landing = Real median decline,
Hard landing = Nominal median decline,
Category 1 Crash = 10% Nominal Median decline,
Category 2 Crash = 20% Nominal Median decline,
Category 3 Crash = 30% Nominal Median decline etc.
On that measure the US as a whole has just moved from a Soft Landing to a Hard Landing, assuming (which I don’t) no further declines, and some parts have reached Crash territory.
I hope this is okay. I got this gem from Seattle bubble site ( http://seattlebubble.blogspot.com/ ). The talk is on IRS forcing adjustments to house purchasing…
On Monday the IRS will be initiating an electronic mechanism to speed up audits on Form
4506 -T, which every borrower signs just prior to closing (and of which I am very familiar with in assisting clients with signing closing and lending paperwork).
The form authorizes the lender or the investor providing the money for the mortgage to obtain transcripts from the IRS summarizing the borrowers income and tax data for four years. The form must be signed by the borrower and can be used only during the 60-day period following the date of signing.
By electronically (via secure internet I presume) allowing lenders to obtain IRS tax data on the borrower in only a business day or two will dramatically speed up audits and could potentially stop refinance and purchase closings dead in their tracks BEFORE the transaction closes—if data from the IRS is “curiously” different from what the borrower claims as income. This is huge. And, it is huge in that it will reduce F-R-A-U-D…
———————————————-
Looks like lending standards will get tougher, finally. The biggest crooks are the banks, since they can sell these mortgages as a package MBS to pension, foreign and hedge funds. Honestly, if you look deep, the biggest hit will be taken by Uncle Sam since they quarantee these MBSs made by the banks/lenders. The only ones that they dont insure are the MBSs that are giving as much as 15% on return rate. Uncle Sam needs to clamp down on this matter so that the banks/other lenders dont stick it to Uncle Sam (taxpayers) to clean up this mess. What a disaster this will be for Uncle Sam and us the taxpayers.
Here is another interesting article:
Title: “Market Bulls Ride In as Housing Sector Cools”
Sunday, October 1, 2006; Page F02
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/30/AR2006093000134.html
“It has been one of those unflashy, two-steps-forward, one-step-backward rallies that sneak up on investors while they are hardly noticing.”
“All week, the closely watched Dow Jones industrial average flirted with its all time high — at a couple of points surging past it, only to fall back before too many people had noticed. But even after a modestly down market on Friday, the Dow was able to post a solid third-quarter increase of nearly 5 percent. For the broader Standard & Poor’s 500-stock index, it was about the same.”
“This rally in stocks comes as the bond market has also put in its best quarter in years, which has the effect of forcing down long-term interest rates. By week’s end the yield on the 10-year Treasury bond settled at 4.63 percent, more than half a percentage point below the rate set by the Federal Reserve for overnight lending.”
“What energizes the stock and bond market bulls is the belief that the economy has settled into a period where the economy will grow at the just the right pace — not so fast that inflation will take off, but fast enough to keep profit growing, consumers spending and unemployment at less than 5 percent. Through much of the summer, jittery investors had worried that inflation, stoked by rising energy and commodity prices, may have been allowed to get out of hand or that the bursting of the housing bubble would soon drag the economy close to recession.”
“But more recent data have eased those fears and encouraged optimists who now believe that the Federal Reserve, in gradually raising short-term interest rates over the past two years and then stopping in August, has got it just right. Wall Street bulls are now expecting that the Fed’s next move will be to lower interest rates, not raise them, probably sometime early next year.”
“The case for this “soft landing” scenario is in the recent pullback in energy and commodity prices, which takes the pressure off inflation and profit while restoring confidence of consumers. Even as the economy has slowed, household spending, business investment and job growth have held up remarkably well. And while inflation is still running at the annual rate of 2.5 to 3 percent, the most recent reports have indicated that price pressures are easing.”
“What the bulls may be ignoring, however, is the lagged impact of the bursting of the housing bubble, which shows few signs of having played itself out. It is only now that projects are just beginning to be canceled, average home prices are just beginning to decline after years of double-digit increases and regulators are beginning to crack down on the loosey-goosey mortgage practices that kept the boom going for as long as it did. Given that, its unclear why anyone could conclude that the bottom of the housing cycle has been reached, or even that it is in view.”
Soft landing scenario = latter-day version of “It appears the stock market has reached a permanently high plateau.” Ignore that collapsing housing bubble behind the curtain, and the mountain of historical evidence across countries suggesting that a housing bust normally drags down the rest of the economy, and the evidence that this has been the most globally correlated housing boom in the history of the planet.
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf
great link.
That is just an interpretation. An alternative is that the soft landing actually happens in the form of a big squeeze. Instead of a swift correction various forms of government market tampering cause a long and protracted period of stagflation. Decades go by without a recovery. Not to paint a rosy picture, but there is a big difference between seriously looking at a soft landing and proposing no correction at all. A soft landing is still a landing, it just takes longer. In the long run that actually makes it more devastating.
In Denver, Real Estate of the Rockies is marketing 33 storage condos 2 miles north of Colorado 52 in Frederick. The condos are big enough to hold RV’s boats, classic cars or business storage. They sell for $70-75 a square foot, with a monthly association fee of $40. So far one has sold and two are under contract.
Who thinks this could ever be a good decision? Hmmm… if you paid say, $75.00/mo. for a basic 10′ x 20′ rental unit (going rate in my area) that would be $900.00/yr. It would cost you over $150/mo. to own it, or $1800/yr. Is this an appreciating asset, or am I missing something? Maybe you could buy one and convert it to affordable housing.
You could probably do well by purchasing long-term (LEAP) put options on companies in the off-site storage biz, unless these have already been dragged down with the builder stock prices.
On the other hand, some folks who have to move because of lost homes. They won’t be able to bear losing thier homes AND all the crap. Instead, they will store the crap at $100/mo.
There are probably better plays than shorting storage companies.
I was basing my conjecture on the strong correlation between the runup in stock prices for offsite storage companies and the general bubble euphoria. But maybe the offsite storage company sub-sector will stay on a permanently high plateau while the rest of the housing-related industries go up in flames?
Again ,not a good decision when one could rent for alot less . Some people like the idea of owning something and paying alot more ,rather than renting and paying alot less ,kinda like the state of the whole residential housing sector .
“Babylonian confusion of tongues in Europe”
http://www.ft.com/cms/s/28b597fe-4fe6-11db-9d85-0000779e2340.html
funny; missed the Dutch translation (the wording seems to match the speculative fever in the respective housing markets …).
I think one can always count on the ECB being severely behind the curve. Money supply has been ballooning ever since the ECB started, they will keep inflating until forever just like the FED (only the changes are coming MUCH slower over here). And if they ever try to seriously pull the brakes, they will be quickly shut down by the dumb politicians in the EU parlement who know that responsible monetary policy is dangerous to their political survival.
Anedoctal story of the market’s demise.
I am watching the market in Florida and the Southeast deteriorate in real time. I work for a manufacturing company that directly supplies home builders. During the past 4 years (excluding the latter half of this one), sales volume had been continuously increasing.
Things started changing around Feb/Mar of this year. Till that time, there had been a year-end frenzy for builders to complete projects and get them on the market. Our management had interpreted this to mean that business was increasing. So, they did what they thought was best. They increased the production work hours and added additional warehousing. We produced six months of additional inventory to beat the coming deluge of new business.
Around Feb-Mar, things began to slow just a little, volume still close to the prior year, but by April-May, the sales began to slide. From that time till about August, sales were running about 80% headed down to 70% of the prior year’s volume. Under normal production levels, the warehouses are FULL, and we are having excess production capacity.
The last 2 months, orders have fallen off a cliff. We are now shipping 30-40% of prior volumes. And remember our warehouses are Full. Orders are slow enough that with 2 work shifts, only one shift’s worth of volume is getting done. The rest is busy work.
Senior Management was living the dream. They didn’t see this coming, although I had tried to give some cautionary messages along the way, the Sales/Marketing types just view this as misguided “negativity”, so I have held my peace for the most part.
I have been working at my current position for 5 years now. For the first time, senior management required a BUDGET for the remainder this year and all of NEXT YEAR. I had 2 days to complete this and submit to my superiors. In all the time I have been here, costs were never an issue. If I needed to have something done, I just sent in a requisition. They were routinely approved. Now, we are looking at cost containment, warehouse/storage reduction, and no-one has said it yet, but I am sure the layoffs and cut-backs will be starting very soon. We basically just stopped hiring lost employees.
Already, one of our buyers on the East Coast has laid off 300 people.
Some of our customers have RETURNED inventory, anticipating slower sales. This seldom happened in the past, unless the customer was changing suppliers, i.e. went with the competition and wanted a credit back for unsold supplies.
Consequently, I expect I may have more time for blogging than I already do. The market here is falling fast, and no one in our company (me excluded) anticipated any of it. This is just ONE company. I wonder how many others are seeing the same thing??
What will your company do with more returning inventory when the warehouses are full? Adding warehousing?
“For the first time, senior management required a BUDGET for the remainder this year and all of NEXT YEAR.”
diogenes, this is the most insightful anecdote I have read anywhere regarding the housing bust. Thanks.
Have you started looking for new employment?
Not bad advice.
The great depression got so bad as manufacturers, anticipating a return to boom times, kept up production during the start of the slowdown. Why? They had just completed five years of being unable to meet customer demand. Then when the slowdown was recognized… they laid off. The largest private employer in the world at that time, United States Steel, did a simple layoff: everyone. 100% of staff were laid off until new orders came in (which was basically the empire state building).
You can expect one shift to go out the door pronto.
Have of the remaining crew (yes, a 75% layoff) within 12 months.
The best time to do home improvement projects will probably be next spring as inventory is sold off at fire sale prices and labor is willing to work at a discount.
Neil
Flash forward to 2006:
“The housing market implosion got so bad as home builders, anticipating a return to boom times, kept up production during the start of the slowdown.”
This is very interesting. My husband has gone along with me and we sold our house and are renting, but he sometimes wonders if I will turn out to be wrong for the very reason that the supply houses (he is in construction) are planning new branches to supply the boom that is going on here. (Seattle area) He says that these are smart people and they have been in business for many years and if they think the boom is going to continue they must have a good reason for it, etc. I reply that their plans for expansion are just what should be expected right at the end of a boom. Prices in this area did not actually go down during the early 90’s bust, so no one around here is old enough to have experienced a real RE bust no matter how long they have been in the business.
There were lots of smart people trying to figure out why they lost so much money in the tech bust of 2000, the market crash fo 1987, the real estate bust of the early 90s, et al….
Smart at what? The very things that make one successful in ‘business’ can be one’s downfall in investing.
As an individual investor, you are not in control of the markets. You can’t rely on personal persuasiveness, control, or perseverance. You cannot persuade the markets (unless you have a lot of money). The markets love someone who believes that if they hold on a little longer, the market will turn in their favor: the money tastes so good.
Those people who lost money probably did not make reasonable risk/reward calculations. The same is true in this bubble market. If the broad masses of the people did even rudimentary risk/reward calculations, Ben would be getting 1,000,000 hits a day! (or, more likely there would be no need for this blog)
Building will continue until the management of the builders have all cashed out their options. At that point, they will suddenly acknowledge the downturn and cut their production, which will cause the stock to plunge. They will NOT cut production before that time. Check the company’s SEC filings for insider transactions.
BTW, I’m not in a position to take advantage of this right now, but there has been enormous insider activity at the subprime lenders between May and August of this year. If you’re interested, check CFC, WFC, WM, TMA, NEW, AHM, NFI, NCC, MTG, NDE.
If I didn’t know any better, I’d say that their managements all knew either the regulators were going to publish new regs at the end of September or that the crash was imminent. Whatever the case, they’ve been cashing in and fleeing like rats from a sinking ship.
KIA,
I think that big builders were making such obscene profits from their developments, that they can easily afford to chase the market down 30% and still make money. They will be the pied pipers of this market, leading the market (and economy) down, first with incentives, then stalled projects, then lay offs, then lower prices, then cancelled projects, etc.
“If I didn’t know any better, I’d say that their managements all knew either the regulators were going to publish new regs at the end of September or that the crash was imminent.”
When I read the proposed regs, I had to go and put on my tin foil hat. When you backfit that events, it could look like a very scary assualt on the middle class:
- Fed cuts interest rates
- Regulations for loans are loosened
- Big lenders take advantage of easy money to make loans
- Sheeple take the hook and buy more than they can afford, increasing prices.
- Prices increase unabated because cheap money is available.
- Loans are sold to MBS buyers (including FCB’s and funds, and pensions)
* BUBBLE IS NOW INFLATED*
When there is no more easy money to be made:
- Easy credit is withdrawn
- Lending regulations are tightened
- Sheeple are locked in their McPrisons
- The ’smart money’ cashes out.
* BUBBLE NOW DEFLATES *
- The sheeple have been fleeced, and now are locked in more than ever to ‘The System.’ Their money is gone.
- At the bottom, small players who have some money are prevented from participating in good investments because of the new regs (40% investment down payments).
- Big players have the money and the leverage to purchase multiple properties on the cheap with the money they got from the shepple during the bubble.
This could be seen as a gigantic pump and dump, wiht government complicity and plausible deniability. The end result? A massive transfer of wealth to those at the top of the food chain.
Then off comes the tin foil hat and everything looks rosy, with the Dow high and gas prices low. Does it get any better than this?
This fits in nicely with my hypothesis of how sheep are fleeced in the conundrum era. The bubble was a form of induced volatility in a particular asset class whose purpose was to lure buy-and-hold sheep to go long. On the way down, the big boyz will sit back and watch, as the credit contraction plays out, including new lending guidance which takes away the ability of all but the wealthiest to buy, which will result in a price collapse. When the dust has settled, the homebuilders and others with deep pockets will pick up the bargains and get ready for the next boom.
How does it feel to know you are much smarter than the folks controlling and spending billions in the RE industry?
I often wondered how these guys could not see this coming, I still don’t have an answer.
I do. It is known as “group think.” Caution: Housing bubble bloggers are not immune.
http://en.wikipedia.org/wiki/Groupthink
Kim,
Been dealing with the exact same thing with my husband. Fortunately, by printing out articles and research papers over the past couple of years, I’ve been able to show him how very wrong the “experts” can be (we also had this discussion during the tech boom when I refused to put money into tech stocks and he argued that the experts knew more than I did).
Of course, we could be wrong, but i doubt it!
Thanks for the inside view from a supplier to the home builders, and good luck with your personal employment situation during the slowdown. I think this post provides a great illustration of the disconnect between ground-level economic reality and the rose-colored soft-landing fantasies served up by the media these days. The inventory correction underway is likely not just limited to a record number of new homes for sale, but extends to the inventories of everything normally purchased by new-home buyers.
Building new houses will come to almost a complete stop within 6-12 months with a few areas lagging (Austin, Raleigh, Atlanta, places where people are still moving to). These areas will stop building within 18 months or so as people moving to them won’t be able to buy due to foreclosures or unwillingness. By this time, YE 2007 -2008, there will be RTC-like ads in many Sunday newspapers with a page of foreclosures in tiny print. Selected building will resume in 2008-09 depending on how the defaults are handled and willingness of sideliners to jump in.
Scan the old 1920s-30s neighborhoods. I challenge you to find any houses built in 1931-33.
“Scan the old 1920s-30s neighborhoods. I challenge you to find any houses built in 1931-33.”
Now there’s another interesting observation.
Isn’t it just.
I would presume excess inventory from 1928-1930 plus foreclosure stock was sitting there waiting for anyone in a position to buy, and would undercut even the cost of materials for a new home.
Thanks for the un-edited observation from the front lines; precisely what blogging is all about!
Good luck to your and your family. The impending implosion in housing is why I left the R.E. field 5 years ago. Many people thought I was an idiot, but I would rather have a safe job with less money than be in mortgage or commercial R.E. (where I was last). My advice would to be look for work in the staples (food, utilities, etc.). I wasn’t sure if you were in production mgt or finance.
Just a side note. One of our support staff (secretary) has a shack-up who works in same industry as you (supply for HB’s) here in Phoenix. So i asked her one day if they were worried about the slowdown in housing, and she replied “why”, her boyfriend told her that they had tons of orders. Later when his company didn’t replace his supervisor (who obviously saw the writing on the wall and got out before everyone else would be looking for work), again I asked her, are you concerned. She gave me this glazed over look and said “are you going to try to tell me about the whole housing slowdown thing again???”… Of course they just remodeled their POS condo in the ghetto part of Scottsdale.
Diogenes — great on-the-ground reporting. Thanks.
diogenes,
Thank you for that very insightful post. Hope you’re one of the few remaining employees; perhaps, you can even get a promotion out of it (not kidding)!
Good luck, and please keep us posted on your job situation.
thanks for the insight
Gordon Gekko’s house just sold. The conversation value alone is probably worth a mil.
http://www.hcandg.com/sep06/deeds.html
“You’re walking around blind without a cane, pal. A fool and his money are lucky to get together in the first place”. - Gordon Gecko
This is from yesterdays Bit Bucket.
“if the stock market goes down, the banks will follow; so if you see the circuit breakers pop on Wall St go to your bank and pull out your money. If you can’t get all your money get as much as you can and a transfer the rest to a safe bank,”
You should have your money in a safe bank already. If you don’t- do it now. Weiss ratings has a free list of the A+ banks in the USA, most people probably have at least one available.
http://www.weissratings.com/HL_Bank.asp
We keep the bulk of our money in one (with most of it flowing in and out of short term Tbills) and we also keep a convenience account with enough for every day cash flow at WA MU, which is a rotten bank, but we can find a branch on every corner here, and our main bank is farther away.
I don’t know if this is acceptable in the US but when the banks collapsed in Russia even though you could not withdraw cash from a bank the banks did accept payment orders. Under Russian law a payment order accepted by a bank evidenced by the banks “stamp” is a legal discharge of liability for the individual or entity transfering the funds. Many people paid their taxes using the frozen money in the banking system. A whole trade in frozen bank accounts popped up for a few months with people buying frozen money at a discount and using it to discharge their tax debt.
A popular hedge was to make sure that you had a liability to the bank where your cash was sitting so that if the bank collapsed you could just offset your frozen money with the liability.
I think I heard about people buying frozen bank accounts in Argentina, too.
I was taking a walk through the newly paved streets of a development in So. O.C. yesterday. A big Infiniti SUV pulled up and the driver asked my opinion about the model homes that are now going up. I told him I thought they had a great view (ocean & Dana Point Harbor), but a lot of freeway noise, and they’d probably be finished just in time for the housing market to slump. Wow, did that hit a nerve! His response: “You’re wrong!!” He proceeded to quiz me about my reasons for looking at the homes, where I now live, etc. All of my answers were greeted with incredulity.
Turns out this guy is a real estate agent (“I’m in the business”) and knows everything about everything, especially the housing market, remodeling, psychology, and personal finance. And he was very eager to share his expertise. Lucky me!
This is what I found out:
There won’t be a housing slump in this coastal area because they’re not making any more ocean view land, and view alone is worth $500K to $1M.
No one ever really looks at homes just out of curiosity. Some part of me must want to buy a new home. I couldn’t really be satisfied with my current place.
Rather than pay our house off in the next few years (my husband is retiring) and using cash to pay for our planned remodel (after the market has slowed sufficiently), we should take out a big home equity loan, tear the place down (except one wall) and start again – “Don’t you need a tax write off in retirement?” he says.
We won’t be able to remodel within our budget, so don’t even try. He and his wife bought their place for $850K then slapped a second story on it. They couldn’t stay within budget, so we won’t be able to either.
Stupid me! And I thought my husband and I could retire debt free! Apparently, an outdated notion.
You and your husband are obvious lame-brains! Now go drink your Kool-Aid.
“No one ever really looks at homes just out of curiosity.”
True — it seems as though an increasing number of posters here are thinking of open houses as a reliable source of free food.
Yes, and in time of need those available bathrooms can come in handy as well.
“No one ever really looks at homes just out of curiosity.”
HMMM… I compare this to the comment heard at an open house I visited last weekend. Even though the traffic was moderate, the realty agent remarked: “Mostly just neighbors who are just curious.”
I like to go for decorating & landscaping ideas.
I’m sure that’s the case with many open houses. I know lots of people who like to get remodeling and landscaping ideas by seeing what their neighbors have done.
This particular guy was a numbskull. He kept asking me questions then talking right over me when I tried to answer. If that’s his selling style, I can’t imagine he’s very successful. But then, it hasn’t taken much skill to be a successful real estate agent the past few years.
Well, ocean view land will never be as cheap as a desert plot in Palmcaster. So the place where you were looking might be interesting after the price falls a lot.
As someone who has done a number of remodels, I can say that you never know what you have gotten yourself into until you start. It is really easy to go over budget because you found something seriously wrong when you opened up the walls. Or because you get on the wrong side of the building inspector, or a contractor goes belly-up on you, or you decide to do “one more little thing” while you have the place ripped apart, or whatever. Budget accordingly.
On the “leave one wall” approach, that’s known as a “Santa Monica Teardown”. For some reason, rebuilders are no longer doing this in Santa Monica, so the rules may have changed.
Best wishes, and may you retire debt free!
Thanks for the advice. I’ve only done one remodel prior to this, and it did go over budget, but not by much. Judging by what we’ve seen so far in this place (a toilet vent right where we want to put a door, etc.), we fully expect to see a number of ugly surprises. We’re planning to pad our budget by an extra 20% and hope it will be enough. If not, we still have other funds we can use if we need to. We’ve been here for 12 years already, so we’re not in a big hurry and we’re willing to live in a place that’s less than perfect until we can get the job completed. We don’t need any extra space, we just want to get some more light in here and pretty the place up. We’re also pretty handy, so we’re planning to do some of the interior finish work ourselves.
Our mortgage is our only debt, so barring some unforseen disaster, we should be able to retire debt free.
If you really want to laugh, read the OC Register today.
http://www.ocregister.com/ocregister/money/abox/article_1292348.php
Cypress, they are really stretching now. Probably trying to get some FB’s Black or Hispanics from LA now (I’m not racist, I am mostly Black myself). But Cypress, come one. In recent weeks the Register has tryed to sell us on Villa Park, Brea, etc. but Cypress. I haven’t been there lately, but if Fullerton is any example, you couldn’t pay me to live in Cypress. Let’s see close to LA and to far from OC employment centers. And probably demographics changing to illegals and gang members in all of the SFH rentals.
The article shows that the homeowners purchased in 1998 for $25K, which menas they probably overpaid then. But now they are asking $600,000. Okay some basic math here (fundamentals). Per the city’s website, median income $50K, so that yields about $175,000 at 3.5X times gross income. So the median home in Cypress should be $175,000. Even if we assume that the city wensite is using $50K for indiviaul and not confusing with household income, then lets add another $40,000 for the other household income ($50,000 main breadwinner and $40,000 for spouse). Tha still only gives $315,000 (3.5 times $90,000). So where do they get $600K?
But wait, they’re not making any more Orange County.
Cypress has not yet deteriorated to the run-down dumpy, illegal alien-overrun slumburg stage yet, as has parts of Anaheim, Santa Ana, Westminister,Garden grove, La palma,or Buena Park. It is a quite ordinary, bland, uninteresting suburb with a still influential(though probably declining) Protestant church presence. About the only excitement in this bland burg is the nearby Los Alamitos racetrack. Do not see any signs of significant inroads by masses of poor hispanics nor the buildup of extensive lower-income apts teeming with immigrants(yet). Cypress may actually be a step above Orange, which i am afraid is going the route of Santa Ana. Fullerton, though on the whole a decent burb, does have problem areas along it’s fringes. Brea is actually a pretty weel=kept burg overall, tucked out on the far northwest corner of the OC.
Not saying that Cypress is a picture-perfect garden suburb such as the South OC communities, and it is pretty boring and bland. Still, it fares better than Much of LA county, which IMHO is turning into Tijuana norte.
http://www.youtube.com/watch?v=Ubsd-tWYmZw
The classic Century 21 “Suzanne Researched This” commercial that was unceremoniously yanked after a storm of derision from the likes of Ben’s Army. For the benefit of the newbies, you gotta watch this to understand the frequent references in here to the infamous Suzanne and her ill-fated FB clients.
That one is a bubble classic, right up there with the footage of a San Diego newscaster getting pummeled by a real estate criminal.
The Washington Post had a special edition of their real estate section on SUNDAY. Their lead article on the inside pages was “Is Now the Time to Buy?” One economist thought that next spring prices will go up again, but another cautioned renters that there could be as much as a 20% drop in some markets and told them to rent another year and then reconsider whether or not to buy.
The Washington Post had a real estate section on Sunday. One of the lead inside articles had two economists’ views about housing. One thought prices would go back up next spring, but the other thought prices could fall by 20% and advised renters to keep renting and reconsider next year.
You guys know any good blogs that cater to housing bulls? Would love to get some insight into how the kool-aid drinkers think
http://www.flippinghomes.com (Although I see some funny posts sometimes, about deals gone bad)
http://www.agentsonline.net - RE Agents
http://www.brokeruniverse.com - Mortgage Brokers
The flipper sight is funny. Anytime some retard wants to give you advice by selling you “ADVICE”. Buyer beware– ha ha ha, I can’t wait untill I can start buying properties from the poor fools who bought these CD and DVD on how to flip a home. I hope they get most if not all of the work done for me so I don’t have to mess with it. Thanks alot (flippinghomes.com).
There is a post on the agentsonline.net that is talking about the fact that she cant get anything to sell and all the other shrills are giving her advice on how to change her attitude. Ha Ha Ha, LMAO- wonder when they are going to start begging for soul to walk through the door and offer more than the asking price.
I flew to Burbank, CA and I remember one of the stuartdesses was reading a book on how to become a realator. The only people who make money on the “get rich quick” schemes are the people selling the cr@p. I think I should sell information for money to the less expecting, however I have a level of moral integrity.
‘Anytime some retard wants to give you advice by selling you “ADVICE”. ‘
The worst vice is advice.
“I flew to Burbank, CA and I remember one of the stuartdesses was reading a book on how to become a realator. The only people who make money on the “get rich quick” schemes are the people selling the cr@p. I think I should sell information for money to the less expecting, however I have a level of moral integrity.”
That book must have been the “Rich Dad, Poor Dad” one where Kiyosaki pumped up RE and made more money by writing than by doing RE. He encouraged a lot of people to get into the real estate business (renting out and building cash flow) and AT ALL COSTS. Now many of these are FBs with multiple houses and they lied about their income. Kiyosaki is now into commodities. Maybe he will write another book to pump commodities so that people will start buying when gold is $2000 an ounce. That way when it becomes best seller, Kiyosaki will dump all his gold and oil stocks and stick the proceeds in T-bills while his ignorant readers snap up all the gold they can find, then suddenly gold will fall back down to $600 per ounce! LOL
Apologies if This may have already been posted: a vital bit of info for the RE Experts on this blog.
http://www.latimes.com/business/la-re-harney1oct01,1,1755656.story?coll=la-headlines-business
“NATION’S HOUSING
Honesty is best policy for loan
New IRS tool will make it easier and faster for lenders to verify income information on applications.
By Kenneth R. Harney, Washington Post Writers Group
October 1, 2006 :
“WASHINGTON — Starting Monday, it’s going to get much riskier to fib about your income when you apply for a home mortgage. That’s because the Internal Revenue Service is overhauling a key income verification tool used by lenders and is making it faster and easier to pull up electronically the confidential income tax information of borrowers…..
Until now, the process of faxing in 4506-T requests to the IRS and obtaining transcripts has been paper-driven and nonelectronic — making income verifications slow and difficult to fit into lenders’ highly automated loan underwriting systems. Most lenders have used 4506-T forms as a way to perform quality-control checks on pools of closed mortgages…….
But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing — even on loans to applicants who are not self-employed or using stated-income programs.
Just some exerpts out of the LAtimes BUsiness section online edition. Maybe a little bit too late!
But lenders are not *required* to verify income with the IRS. “Stated Income” lending won’t go away.
But it will be funny for those cases where the lenders do check. People lying on their loan app, probably lied to the IRS too… only in reverse. The disconnect will be glaring.
in most of Europe the disconnect is already there, and has been for years. Most lenders simply don’t want to know your income; even if it is obvious that you are overstating your income several times they are happy to provide the mortgage (and quickly resell it, I guess). A documentary from the BBC last year showed that in the UK some lenders are even willing to provide false ID documents and work history if necessary to get a loan … nobody cares.
I think no one knows how widespread this kind of fraud it, but judging from the disconnect between wages and home prices (about a factor ten) I’m sure it is more rule than exception lately.
that is maybe why we in germany have no bubble.
our lending standarts are very tight compared to the rest of the world it seems
“The only downside from a lending industry perspective: Rather than providing transcripts at no cost as in the past, the IRS now plans to charge a flat $4.50 for each tax year covered in a 4506-T request. Typically lenders want to see two years of returns, so the IRS’ policy change means costs will jump about $9 per loan application. Though lenders will be able to deal with the IRS directly online, most are expected to continue working through third-party vendors such as Veritax, that can handle large volumes of requests per month, but at a higher cost.”
Is $9 an application really a huge burden to a lender contemplating whether a prospective buyer qualifies for a loan in the $100Ks, especially given the magnitude of thievery involved with the rest of the holdup costs charged at closing time?
Ok another bad idea!
This website is supporting Prop 1c another bad idea to come out of CA.
http://www.housingca.org/2006/05/11/everything-you-wanted-to-know-about-the-bond/
While I have no problems trying to help lower income people get housing, this is ridiculous. I claim that instead of helping, it will ultimately hurt housing affordability.
The problem with this bond is it transfer money from me to landlords. It does nothing to solve affordability. In fact it has the perverse effect of pushing up real-estate prices by pumping yet more money into the market.
What would help affordability is rezoning to allow more building. Get people to build up not out, and the reduction in planning, approval, and various other reports and NIMBYs required to build in CA.
This kind of fuzzy thinking is symptomatic of the problems we seem to suffer from. I encourage people to vote against this uniformally bad idea.
Oliver
Yes, it’s a pretty slippery slope when the state starts to bribe landlords to do something that makes no economic sense, or worse yet, for the state to get into the development and landlord business itself.
This bill is a real grab-bag of questionable to bad ideas, all funded by general obligation bonds that mature over 30 years, thus assuring that the public pays as much or more in interest on the bonds than the amount of money made available to fund the programs.
The programs seem to be about buying down the cost of infill development, transit-oriented development (Hey R.C.!), and putting indigent people into loans that they cannot afford.
It’s essentially a $2,850,000,000 subsidy to the construction industry with a heavy dose of social engineering and urban planning attached.
It will hurt housing affordibility by perpetuating the high prices of construction and housing, while encouraging bad planning and inappropriate development. I notice it’s supported by BofA, Fells Bargo, and Citibank, probably because it will mean profits for them.
Things like this make me wonder if we’ll ever get around to addressing the real problems, rather than attempting to bury them under truckloads of public money.
As if people haven’t learned their lesson from this housing/credit bubble. Pushing more money into the system definitely makes the products/services more expensive for consumers.
I get particularly upset when I see money set aside for “poor people” to use as down payments on housing purchases.
I know I’ll get flamed for saying this, but what would the effect on housing be if the govt used all that money to enforce immigration laws, instead? They could even use the savings from public education, law enforcement, prison costs, free breakfast/lunch programs, subsidized housing, WIC/welfare and “free” healthcare that is not spent on illegal immigrants. (put that in bold, so people understand I’m not talking about race, but immigration status)
CA Renter,
I really don’t think Illegal imigration is a spectacular drain on the system. I can’t find any numbers to support this argument, usually just anecdotal evidence which quickly colapses under closer scrutiny. In fact if you know of illegals you are more than welcome to report them in this day and age. I think life here is pretty hard on them. The fact that they don’t consume much in the way of public resources makes sense, because illegals usually want to avoid detection at all costs. Detection almost always leads to deportation.
In fact I theorize a surprising number of illegal aliens in CA don’t look like what people expect. Many are probably coming from England, Ireland and other countries where it is easy to blend and make lots of money in the Construction / RE industry. Once again I don’t have data to back this up, it just seems that all of a sudden there are a lot of builders with English accents around. Don’t remember them before the boom.
No that sucking sound you hear my friend is the sound of your fellow citizens draining the life blood from the tax payers of this country. Lots of waist in schools, prisons and other government programs. I have argued before that government can do great good, but in this era it seems the public will tolerate astonishingly bad governance and do nothing about it.
I do think there are programs that can be cut that would actually help the poor. One would be section 8. What is the point. It is just another way to pass money from tax payers to land lords. A much better plan would be to expand the number of housing units in CA. Instead of zoning for a maximum number of houses per acre, allow denser pack housing, and remove restrictions on things like setbacks and other bizarre and arbitary rules. Let the builders go forth and build what they think will sell.
For folks who want to live in a certain type of community, there can still be HOAs and other private constructs to ensure no one hangs their underwear out to dry in the 20 foot set back in front of the house.
Oliver
Oliver,
I beg to differ. Re… “The fact that they don’t consume much in the way of public resources makes sense, because illegals usually want to avoid detection at all costs. Detection almost always leads to deportation”…I live in NYC and I can assure you illegals here are not at all frightened of being deported. Bloomberg the mayor has announced they are “essential” to the city, and the whole benefit system here is available to them. The ERs are their health insurance, the schools offer free education–and the classes are wildly overcrowded–they are eligible for housing subsidies, free legal help, employment training, etc. But yes, they are not just Mexicans or Brazilians, though they are everywhere, but East Europeans and Russians and Chinese by the boatload. The city pop. is around 8 million–about 1 million are illegal, and city rules make it difficult even to ask if you are a citizen.
Olivers First Sentence:
“I really don’t think Illegal imigration is a spectacular drain on the system. I can’t find any numbers to support this argument”
Because you haven’t looked or your head is stuck where the sun don’t shine. The rest of your post makes this obvious.
Middle of Post:
More nonsense in its entirety
Last Sentence:
“For folks who want to live in a certain type of community, there can still be HOAs and other private constructs”
Yes, fence yourself in and stick your fat head back in your arse.
This post is about as lame as I’ve seen on the subject and is not worth refuting line by line.
“I live in NYC and I can assure you illegals here are not at all frightened of being deported. Bloomberg the mayor has announced they are “essential” to the city, and the whole benefit system here is available to them. The ERs are their health insurance, the schools offer free education–and the classes are wildly overcrowded–they are eligible for housing subsidies, free legal help, employment training, etc. But yes, they are not just Mexicans or Brazilians, though they are everywhere, but East Europeans and Russians and Chinese by the boatload. The city pop. is around 8 million–about 1 million are illegal, and city rules make it difficult even to ask if you are a citizen.”
Responding to Spike66 and Fred hooper:
This is exactly the situation here in Los Angeles, where our mayor Villarigosa is an out-and-out pro-illegal immigrant advocate, as well as the city council. Except that over here in LA it is vitually 100% hispanic immigrants(green card and illegals).
Not only LA but the state of California is a Socialist Nanny State for all immigrants, and the LAPD is prevented from asking arrested persons their immigration status. 30% of all illegals/green card immigrants are on Medical(Cal taxpayer-subsidized free healthcare for illegals). They drain the california taxpayers(and insurance companies) out of billions each year and give virtually nothing back to the state. They may pay social security but they get back all their Fed deductions plus IRS EIC transfer pmts. Most of them who reside here in Scal do not give back anything to the community, as any excess income they make gets remitted back to their home countries, in many cases to build second homes.
Note: to Oliverks: please do not discuss the situation as regards illegals here in Scal without knowing what is going on out here. 99.9 % of the illegal alien construction crews in SCal are Hispanics.
“I really don’t think Illegal imigration is a spectacular drain on the system.”
———————
Oliver,
Years ago, I taught for LAUSD in an almost exclusively immigrant community (over 90% Latino and 5% Armenian plus a smattering of Asians & South Pacific Islanders). While many were here legally, I would say at least half were not (anecdotal evidence, as I personally knew and befriended many of the families). Our school had 100% participation in the free breakfast/lunch programs. Additionally, our school received a substantial amount of money from grants and special programs because our students were English Language Learners and poor. We had a full-time nurse, psychologist and a number of administrators whose job it was to ensure we were following special guidelines because of our student makeup. We also had to purchase more educational materials in different languages, had more remediation (largely due to SES of students/families), etc. If you think illegal immigrants are not a drain on our economy, you haven’t been out much.
Have you talked to hospital employees? Prisons employees? School employees? Law enforcement?
I do agree that illegal immigrants come from many different countries, but the majority come from Latin America. Additionally, I’ve never heard of hospital, school, etc. workers complaining about the illegal immigrants from England or Sweden.
BTW, I’m not against LEGAL immigration (my mother is an immigrant), but our immigration policies need to be managed, and we need to ensure that we don’t allow unchecked immigration to destroy our country (we might already be too late for that).
-
Anybody else torturing themselves with the “Million Dollar Listing” Marathon on Bravo TV today?
What in the world happened to the “Kiss your family good-bye, we’re all gonna’ die” hurricane season we were supposed to have? I can understand forecasts being off, say 25% or so, but the size of this apparent error leaves me with no confidence at all in the gee-whiz forecasting models our tax dollars pay for.
The forecasters are lucky to get the next 48hrs correct. A whole season prediction is just a wild guess.
Forecasters are balming it on a La Niña formation.
I think it’s good old Ma Nature playing with us. We’re gonna forget all about Katrina, and she’ll send another big one our way.
Someone posted about “copper in contango” yesterday as a significant development in the global commodities market. Mish’s blog has a good discussion on this (Go to http://globaleconomicanalysis.blogspot.com/ then scroll down to “The Doctor is Calling” September 25, 2006). Contango means the spot price is lower than the future price
( http://www.investorwords.com/1067/contango.html ). Mish’s theory, which sounds quite plausible, is that since copper is a key input to new home construction, and since the construction industry is in a recession, the copper market is suddenly experiencing a glut which is driving down the spot price. I would guess that a careful look at other inputs to the new home building and sales industry would reveal similar inventory crashes underway, as nobody in the biz seems to have foreseen the carnage.
Gekko said:”Anybody else torturing themselves with the “Million Dollar Listing” Marathon on Bravo TV today”?
It’s great. Those realtors wring their hands thinking of their hefty commissions. Would’nt it be fun if the show was revised to instead show the seller and realtor carnage when the market turns? I would think it would be alot more interesting to watch…
Here is a fascinating look inside of the murky world of “hard money loans”:
————————————————————————————————
HOUSING SCENE LEW SICHELMAN
Hard money is easy to find
October 1, 2006
WASHINGTON – A whole other world lurks just below the surface of mainstream real-estate finance, a world that most people don’t know about. Called “hard money” lending, the field is no longer dominated by the loan sharks who used to feed in these waters. Nevertheless, it remains a largely unregulated segment of the market, so would-be borrowers should swim with extreme caution.
http://www.signonsandiego.com/uniontrib/20061001/news_1h01sichel1.html
Actually, hard money is pretty well known in the industry. The hard money lenders will probably survive the coming crash just fine. They’ve been making 20% for the past ten years, and only take well-secured loans, so any losses they might suffer now will be a pittance.
Agreed. It seems like they do a pretty good job of making sure the risks lie primarily with the borrower (e.g., 65% limit on loan share of collateral).
Would any of you nice AARP members care for some Kool-Aid to drink?
————————————————————————————————
Latest disaster for hedge funds another reason to stay far away
UNION-TRIBUNE
October 1, 2006
How would you react if some guys with impressive credentials approached you with this financial pitch:
We can make you unfathomable riches, but we can’t divulge how we’ll do it. We’re pretty much unregulated because wealthy investors, pension funds, endowments and other institutional investors should be smart enough to choose their tango partners. If you sign our dance card, we’ll charge you exorbitantly high fees. Also prepare yourself to write fat checks to the IRS because our traders are whirling dervishes, who don’t give a hoot about your taxes.
Sound appealing? Most people hearing this would probably be screeching out of the parking lot before the financial wonks finished their presentation. But this imminently sensible reaction is rarely witnessed in a world where the allure of exclusivity and easy money turns the brains of so-called sophisticated investors into oatmeal.
What these investors can’t resist, of course, are hedge funds. The powerful mystique surrounding hedge funds has turned their managers into the alchemists of the 21st century. And the wealthy acolytes have followed. In 1990, there were 530 hedge funds with $50 billion in assets; 15 years later, investors have sunk roughly $1 trillion into more than 8,000 hedge funds. The hedge fund kings of Greenwich, Conn., and other tony ZIP codes, however, are no more likely to turn a lead pipe into a gold bar than they were when Thomas Aquinas was preoccupied with his theological writings.
Yet this black-box investing approach has generated so many positive press clippings that it catches victims unaware when the trap door opens. That certainly seems to be what happened to the officials overseeing San Diego County’s retirement plan, who apparently invested $175 million last year with Amaranth Advisors’ hedge fund. In just a couple of weeks, the hot hedge fund turned ice cold as it managed to lose billions of dollars. The steep loss isn’t a surprise. Wall Street is littered with the ashes thousands of hedge funds. Just last year, 850 hedge fund called it quits. What’s scarier, according to media accounts, is that the county’s retirement system had 20 percent of its money sitting in hedge funds.
Whether you’re a member of a pension board or a wealthy investor, who loves the idea of investing in something that the average Joe can’t, you need to know why hedge funds can be poison Kool-Aid. Here are just a few of the reasons to stay far, far away:
Returns are underwhelming. Academic studies have repeatedly shown that hedge funds underperform the stock market. One study, which examined a period between 1995 and 2004, for instance, found that the average hedge fund generated a 9.1 percent annual return, which lagged the Standard & Poor’s 500 Index by three percentage points a year. Significantly, the survey period included the nasty bear market of 2000 to 2002, which is when hedge funds are supposed to perform best. It’s ridiculously easy to find years when the hedge funds played laggards. In 2003, for instance, the HFRX Global Hedge Fund Index, an industry benchmark, returned 13.4 percent, which certainly sounds respectable until you look at how the competition did. The Standard & Poor’s 500 Index was up 28.7 percent, international stocks soared 39.2 percent, emerging markets turned heads with 56.3 percent and the REIT benchmark surpassed 36 percent. The next year, the hedge fund benchmark dipped into negative territory (minus 2.7 percent) and got its fanny smacked by the major asset classes again.
http://www.signonsandiego.com/news/business/shaughnessy/20061001-9999-1b1lynn.html
This is incredibly similar to the investment companies being created just before the 1929 crash. They didn’t say what they were investing in, they didn’t publish their results. They made promises, went public, raised a fortune from the sale of their stock to other companies, and the managers then started another company and repeated the process. It was a geometric progression, and it unwound in the space of a few months, crippling millions and unleashing a ten year depression. Very, very bad level of similarity.
KIA –
I couldn’t agree with you more. I just got off the phone with my retired parents, who have plenty of savings plus defined benefit pension wealth to last them if they live to age 120. But all these would-be investment-advisors keep hounding them to get into equity indexed annuities and REITs. I told them that this is a historically bad time for retirees with adequate savings to gamble with increasing equity and real estate market exposure, particularly given the Sword of Damacles hanging over the asset markets in the form of a dying conundrum coupled with a bloated hedge fund sector which is poised for a shakeout. I hope they follow my advice.
If they don’t follow your advice then do not lose any sleep over it, you did the best you could. (I have stopped giving anybody any advice, nobody follows it.)