There’s No Debate That The Market Has Changed
The Orange County Register reports from California. “The Yorba Linda beauty had been on the market for more than a year. But despite the ‘$450k in upgrades,’ the ‘unbelievable view of Catalina’ and the ‘gorgeous pool/spa’ – not to mention a $150,000 price reduction – it drew only low-ball offers.”
“So Tom Pelton of Prudential California Realty decided to take drastic action, both to get the house sold and to teach other agents how to retool for the current sluggish housing market. He hired a professional photographer and brought in a ’stager’ and gave the home an ‘extreme listing makeover.’”
“‘We’re getting a lot more people through the door,’ said listing agent Kimberly Rehnquist.”
“Pelton is one of many real estate office managers prodding agents to adapt to the new realities of the housing market. ‘We’ve always had training. We just changed the training as the market changed,’ said broker Bill Plattos.”
“There’s no debate that the market has changed. DataQuick reported recently that Orange County sales last month hit the lowest level for a May in at least two decades, falling 37.5 percent below the month’s norm. As of mid-June, the number of homes for sale in Orange County had swollen to nearly 16,900, according to Steven Thomas.”
“The number of new escrows during the past 30 days, meanwhile, was below 2,000, or just over one sale for every 10 homes listed. Two years ago, three homes sold for every four listings.”
“Bob Schultz, a sales consultant, has been holding ‘Home Sales Boot Camps’ for agents. ‘Every builder and every real estate broker should be training their people how to deal with this kind of market,’ Schultz said. Agents who don’t adapt won’t be around much longer.”
“‘It’s Darwinian,’ he said. ‘It’s a thinning of the herd.’”
The North County Times. “Northeast Oceanside’s 92057 area near the back gate of Camp Pendleton is on the list of the 10 San Diego County ZIP codes with the highest number of homes in some stage of foreclosure, according to a new report.”
“In April, a total of 1,316 houses and condominiums were in some stage of foreclosure countywide, a sharp increase from the 324 reported for the same month in 2006, the report shows.”
“Dennis Smith, a Carlsbad real estate agent who sells homes in coastal North County, said the group’s high number for 92057 does not come as a surprise because sales prices are relatively low there. A large number of buyers in recent years opted for adjustable loans that are now becoming more expensive, he said.”
“At the same time, there are 554 houses and condominiums for sale in the 92057 ZIP code, Smith said. Given that 292 homes have sold there since Jan. 1, that means there is close to a year’s supply of housing.”
“‘That makes it real difficult to get top dollar on your property when you’ve got a lot of competition,’ Smith said. ‘There is always someone more motivated who is going to sell it for less.’”
“The price in the 92057 ZIP code declined 10 percent from May 2006. During the same period, the median condo price there declined 5 percent year over year to $273,500. With falling prices, people who are having trouble making house payments are less likely to be able to sell their homes and more likely to end up losing them, said broker Carlton Lund”
“‘When the market is not moving, there is a less of a tendency to hang on,’ Lund said. ‘If you’re stretching and you have a hiccup, you just have no staying power because there has been no price appreciation.’”
The Record Searchlight. “Pulte Homes’ massive restructuring has claimed the job of Sun City Tehama project manager Brendan Leonard. Leonard was among 45 people laid off from Pulte subsidiary Del Webb Corp.’s Sacramento and Reno division, said former company spokeswoman Judy Bennett, who was let go at the same time as Leonard.”
“Bennett said management told her that ‘it’s going to be a bare-bones operation, mission critical.’ Bennett spent 14 years with the company, working on Del Webb projects in Roseville, Lincoln and Cloverdale. ‘It was a wonderful run, but it’s definitely over,’ Bennett said.”
“Don McKim, a principal owner of Walnut Creek-based Nine Mile Ranch, which owns the property where Sun City Tehama would sit, said the project is not dead. Del Webb has an option to buy McKim’s land.”
“‘Everybody is waiting for the market to return,’ McKim said. McKim said Pulte’s restructuring makes sense. ‘Look at the home builders, they’re all running for cover. You can’t build and have homes just sit there.’”
From Kiplinger. “Mike Franey, a mortgage loan officer in Bakersfield, Cal., saw trouble coming. For years, swarms of investors descended on his hometown, buying and flipping some of the cheapest housing in the state, driving up the area’s median home price from $99,000 in 2001 to $280,000 in 2006.”
“Franey feared that when the investors left for greener pastures, prices would decline and he and his wife, might lose the equity in their home just as they approached retirement.”
“‘I said, ‘We need to sell right now and rent until we can buy again cheaply,’ says Mike.”
“The Franeys sold in May 2006, just as prices peaked, for $577,000, nearly twice what they had paid in 2002…and they moved into a much smaller rental home.”
“But for Mira, owning a home meant security. She hated renting and wanted to buy again. So the Franeys purchased a four-bedroom, two-bath house in a nice neighborhood for $420,000. They used an ‘alt doc’ loan, one that lets borrowers state their income without proving it.”
“For six months, Mike didn’t make a single loan, and his six-figure income dropped by half in 2006. Struggling to make their mortgage payments of $3,200 a month and running out of savings, the couple tried to sell the home last fall but had no takers.”
“Mike approached their lender, Countrywide Financial, and offered the deed in lieu of foreclosure. Countrywide refused to do anything until the Franeys were delinquent, a common practice among lenders for legal and tax reasons.”
“The Franeys missed their first mortgage payment in January, and in February they listed the home for sale at $368,500. Countrywide agreed to accept a ’short sale,’ meaning it would cancel the couple’s debt in exchange for the proceeds of the sale. In early May, the couple lost a buyer who had offered $350,000 but then found a better deal while everyone waited for Countrywide to approve the sale.”
“The house is back on the market and now stands vacant. The Franeys moved into a rental with an option to buy in three years. By then, Mike’s loan underwriter tells him, he’ll be able to get a mortgage again, as his credit score and his income improve.”
The Union Democrat. “The number of Calaveras and Tuolumne county residents in the process of losing their homes to foreclosure in the first half of this year has nearly tripled compared to last year. A slowing housing market, creeping interest rates and changing loan conditions for some borrowers are largely being blamed for the rapid ascent in foreclosure activity.”
“‘For a lot of people, their hope was to get into a home and then deal with the loan later,’ Robert Featherstone, who runs the loan division of Sonora-based Mother Lode Bank, explained a common scenario. ‘Now, they are paying the price.’”
“‘A large part is people were lured into interest rates and programs that weren’t beneficial to them,’ Featherstone said. ‘It’s not that people don’t want to make their payments, it’s that people financially can’t make their payments.’”
“In the first six months of this year, more than 220 default notices have been filed with the Calaveras County Recorder. Compare that with the same period last year; 69 between Jan. 1 and June 19; and 2005, when 65 were filed.”
“Tuolumne County has seen a similar spike:142 default notices recorded between Jan. 1 and this week, compared with 74 for the same period last year.”
“Other indicators of foreclosure trends, trustee’s sale notices, which follow default notices, and trustee deed filings, which occur when a defaulted property is foreclosed upon, are also up. Altogether, the number of filings this year is almost triple the number as this time last year.”
“Sonora attorney Timothy Trujillo, whose specialties include real estate law, says he’s seeing the rapid rise in local foreclosure activity through his practice. He’s seen four or five clients in the past six weeks in danger of losing their homes, he said.”
“With foreclosures on the rise and the real estate market softening, more and more lenders are being stuck with properties that can sit on their books for months before selling, and which may fetch less than the amount loaned on them. That makes lenders more willing to negotiate, either for a new loan or a lower payment, said Trujillo and Featherstone.”
“‘A lot of times, the lender just ends up selling them at a discount,’ Trujillo said.”
“Many borrowers now facing foreclosure bought more than they could comfortably afford during the recent real estate salad days, betting they could turn a profit and not considering home prices could stop rising or drop.”
“‘In many cases, people got loans from subprime lenders and their interest rate that was fixed has gone up. And now, all of a sudden, a payment that was $1,200 a month is now $1,800 a month,’ said Trujillo. ‘They were betting essentially on the market going up and now they are underwater on their loans.’”
Also from the Register:
‘Stanley C. Brooks, founder and CEO of failing Brookstreet Securities in Irvine, sent this email in response to questions from reporter John Gittelsohn. The message was sent at 2:38 am Friday.’
‘A group of brokers had client accounts invested in CMO bonds. Some were on margin. The declines in value forced many into negative equity. Those amounts are charged to the firm’s net capital. The accounts were liquidated by the clearing firm which further accelerated the net deficits….We have notified the NASD and SEC that we are out of capital and have been placed on sell only status for client accounts…This devastation took one week. I have been in the business 30 years, I have never seen anything like this.’
This debacle perhaps is what may well be going on behind the scenes with regards to some of the Hedge fund loans and financing arrangements to support their often 5 to 10 times or more leverage commonly used in their operations. I’ll bet that there is a lot of overtime this weekend at the lenders to these funds and as well the lenders to the big Buy Out firms that have been raiding and stripping many formerly great companies. There has been so much outright greed and speculative gambling on levered debt that a severe credit contraction has now probably started. The kind of illiquidity and malinvestment that is everywhere will lead to massive losses going forward and more likely than not the availability of literally any kind of mortgage will be much more severely restricted and thus the housing price collapse ought to accelerate from about here on in.
I give it till oct 2007. Holloween spook. It will be known as the great collapse of 2007.
I’m with you repo girl,
For some reason, intuition perhaps, October 31, 2007 seemsto me like the day the koolaid runs dry and the gloom begins…
I don’t know when or how fast this will happen, but eventually everything will have to be marked to market, margins called and the days of massively leveraged investing will be over.
When this happens, buying will be much cheaper than renting as no one will have the money to buy.
like from 1991 to 95 ?
people forget
That is why now is the time to be saving. If you wait and assume your current income will apply in say 3 years, who knows?
I agree that credit will contract. They will limit how much a person can borrow to what that person can actually repay. But once prices fall to that level, I would think the loans would start up again. Furthermore, the house prices will be back to historical norms so the lenders will have proper collateral.
Rates may increase and bigger down-payments may be required but when prices fall so does the risk for the lenders.
I agree that if this thing is not truly contained then it has to unravel further right away. It’s not inconceivable that this could be a seminal week - massive losses Monday and Tuesday in stocks and non-Treasury debt instruments, followed by the Fed either intervening or announcing they are ready to intervene when they meet Thursday, followed by a massive short-covering rally. In other words, if you’re going to be bear, might want to act quick.
Another good negative indicator for the early week:
http://www.marketwatch.com/?siteid=&avatar=seen&dist=ctmw
Read the first sentence. When marketwatch or thestreet.com tries to call the directioin of the market they are almost always wrong.
I really don’t know how or whether Fed Speak can or will prevent ANY one from acting in their own self interest to sell or liquidate things in the face of this kind of oncoming freight train. After all isn’t this very Fed greatly responsible for sponsoring and fostering all these unregulated massive speculative bubbles in the first place and thus why should any one believe anything they say or tout. The only real problem i will bet is that there is trillions of dollars already “lost” in these illiquid and malinvested markets and so far no one yet realizes this or acknowledges it. However with the windmills now starting to tilt, it ought not to be long for some kind of serious acknowledgments and actions by lenders and other stakeholders in this mania. It doesn’t take much of a stetch to envision black all over, especially with three or four hundred trillion dollars in derivatives floating out there in the twilight zone as icing on the turkey.
Three of four hundred trillion in derivatives? U.S. GDP is roughtly $10 trillion, total Treasury debt somewhat less than that.
Rough back-of-the-envelope type calculation tells me total value of residential housing is on the order of tens of trillions max, total mortgages somewhat less than this.
Think you might be getting billions and trillions mixed up.
Not so. This is the size of the derivative swamp out there and that is the kind of “energy” that has been generated to propel these global markets and “insure” all the players against losses in the mania. Only trouble is what will happen when things start getting marked to market or when derivative counterparties start getting called on their bets. An interesting read at http://www.321gold.com/editorials/tustain/tustain062307.html Just another persons look at this fiasco with some suggestions but i don’t necessarily buy in to the gold thing at this time although i do have some physical gold put away as rainy day money. However in the event of a liquidity driven crush i would tend to think most if not all things would be turned to ccash where possible and that might include gold for a time as well.
What’s more liquid, gold or US Federal Reserve notes? I’ve actually wondered about that lately, you know, aside from the buying milk with gold at the grocery store canard. If this thing morphs into a currency crisis, we might find out.
Paul in Jax, the last report I saw was that there are $370 trillion in derivatives floating out there. Yes, that is trillion. It is insurance level upon insurance level upon insurance level. That’s why all of these boys think they are so safe, and smart. They think they’re covered even though nobody really knows who is covering their back any more.
A few months ago residential real estate in the U.S. was valued at $22 trillion. I would guess that it is probably down to $21 trillion by now, or less. In 2002 it was worth $12 trillion and there were already well thought out articles about a bubble existing. Those trillions can cause a lot of damage.
Perhaps, but those derivatives include the underlying value of all options, futures, and options on futures of equities, debt instruments, commodities, and forex in the whole world. For example, I buy 100 July 200 call options on BSC for .05 ($50) and the underlying value is $20,000. Your hundreds of trillions is an impressive number, but it’s not meaningful in the argument about either the size of the CDO problem or the viability of investment banks. It’s a number meant to impress and scare that purposely lacks analysis of its meaning and actually weakens the bear argument.
Correction - 1 (100 shares) option at .05 costs only $5. 100 options would be $500 with an underlying “value” of $2,000,000.
I agree with you. But the $370 trillion which is all funny money nonsense is meant to shock and awe Johnny Lunch Pail and Vivian Volvo. That $370 trillion doesn’t exist anywhere except in the minds of Wall Street and the worldwide corporate kings. I think that number is thrown around to make FBs really feel like their house could be worth that fantasy number that they have attached to it in their own hearts. The reality is that it is a nonsense system that is backed merely by wishful thinking.
A couple of stories down:
“To Our Valued Brookstreet Members,
Disaster, the firm may be forced to close…
Today, the pricing system used by National Financial has reduced values in all Collateralized Mortgage Obligations. Many of those accounts were on margin and have suffered horrendous markdowns and unrealized as well as realized losses.
National Financial and the regulators expect Brookstreet to pay for realized liquidated losses and take a capital charge for unrealized mark to market losses.
This firm has done a valiant if not Herculean job of managing the liquidations and capital charges to the firm’s net worth and net capital. We had reduced the margin balance significantly; we had liquidated and reduced exposure by 80%.
That still left a $70,000,000 margin balance against around 85,000,000 of value. Unfortunately the pricing service used by NF revalued many CMO positions downward last night. We went from a positive net capital of 2.4 million, down from 11 million at the end of May, a negative net capital of 2.1 million. It would take a capital infusion of at least $5,000,000 to keep the company in compliance with no guarantee that additional markdowns will not be forth coming.
I cannot in good conscience request that anyone put money in the firm, I think $10,000,000 would be a minimum without consideration of the horrific customer complaints to follow.
I have told many of you that you are always in danger of not being paid on your last check when working for any broker dealer, which is why I have always paid twice per week and maintained huge net cash positions, generally in the realm of 15,000,000 on average. I will try to get enough money from our account at NFS to complete our upcoming payrolls.
“Unfortunately the pricing service used by NF revalued many CMO positions downward last night.”
Sounds like they didn’t get in with the right appraiser.
Ouch. The entire post…ouch.
“But for Mira, owning a home meant security. She hated renting and wanted to buy again. ”
Look at this guy who got screwed by his wife’s itch for a house. A warning to all wives; be careful of what you wish for.
Arruggghhh! it is painful to read this story….
yeah - he would have been ok if he didn’t cave to his stupid wife
Wait a second. Before even looking at that, I have a question. “Where the heck did the money go from the house that got sold for $577,000?” They should have had $300,000, at the very least, left over from that. I have no sympathy for these troglodytes.
lost $100k so far…
My thoughts exactly a r g. What a dork! He sold at the peak and then gave in to his wife because she couldn’t rent. But did they buy what they could afford? no they had to go Alt-doc for a 4 bedroom! sheesh. the more I read about these type of stories the less pity and patience I have with these GF’s
How did that security thing work out for you, Mira?
{rotfl} Lots of security having to sit in the penalty box for 3 years.
Ok… most foreclosures will occur in 2008 (by my best guess).
So it means that Neil should buy prior to 2011.
Ok.
That’s a ton of time. Heck, 18 months feels like a lot!
Its happening and fast. Not that we’ll be ready to buy even in a year… wait. Have patience.
Got popcorn?
Neil
By then, Mike’s loan underwriter tells him, he’ll be able to get a mortgage again, as his credit score and his income improve.”
Uh, no.
The friggin’ idiot underwriter is extending current credit standards into the future — and that just ain’t gonna happen.
Three years from now Mike & Mira will be lucky to finance anything not found in the local Rent-a-Center showroom.
that Mira dumbass is getting her azzkicking like she so deserves
This story is my story, up until the henpecked idiot let his wife talk him into buying.
I’ve told my wife I’ll divorce her rather than buy too soon. I have my families future to think about.
good for you!
A warning to all wives; be careful of what you wish for.
a warning to all husbands: Force your wives to read HBB and the great links and comments by all on the blog. Otherwise ignore your wives!
This is bollocks.
The husband did what the wife said…Hardly. I believe its more likely that greed got the better of both of them and they both willingly jumped back into the market. Wife needing “security” is an excuse. Doesn’t sound quiet so bad as “yeah, actually we’re greedy wankers”.
Bet you’re right. Depends who’s telling the story. The hubby blames his insecure wife…doesn’t want to admit he got greedy and jumped in over his head. Easier to blame her than admit he’s a fool…typical FB.
For what it’s worth, I meet more men who want to run with the big dogs than women, who seem to me to be much more cautious with their money.
Many wives already read here. And not because their husbands tell them to, but vice versa. I love this blog but hate the way all wives get sold out repeatedly as idiots.
Thank you for stating that fact! (from a wife who’s been doing battle with her husband for over three years, trying to keep him from forcing us into financial slavery).
Indeed. I’m a wife who reads HBB, married to a husband who doesn’t.
Fortunately, he respects my opinion enough to hold off buying until at least next summer, despite his wish to ‘nest’ and find a place he can indulge in his need to DIY.
Not all wives are gold-digging bimbos, and I mean no offense to the guys posting here, but it speaks volumes about your marital relationships that you keep on placing the blame for the current housing cluster$%^& on the wives.
So - ’nuff blaming the women - stupidity and greed occurs in all religions, colours, nationalities and genders.
Um….what happened to their $200,000+ in equity from selling the first house??? Why were they making payments of $3,200/month? There must be more to this story. Even if they invested that money for retirement, the earnings should have helped to supplement his loss in income. (They didn’t spend that money, did they?)
Good catch. There must be more to the story. If he had the equity from the previous sale then this should have been a low interest fixed loan with reasonable payments.
“They used some of the proceeds to pay off debts, and they moved into a much smaller rental home.”
Please define “some”. There should have been $300,000. I really hate these stories.
I’m in Silicon Valley for a few weeks. I’ve talked to a few colleagues/friends about real estate. They all say “it’s different here!”. Can this area really be insulated from the rest of the country and state? These people live in Palo Alto (where it is REALLY different), Cupertino, Saratoga, etc. I get push back when I say I think prices are going to fall, even here where everyone appears to be at least a multimillionaire. The response is: VC money flowing in at even higher rate than during the dot.com, rents are sky high, traffic is terrible everyone has a job, blah, blah, blah.
There is so much renovation and building going on it is breathtaking. In old Palo Alto the streets are almost paved with gold.
What is going to happen here? Is it really going to keep going up, up, up?
Thanks for your insights.
They have said the same thing about other tightly zoned places like Boulder, CO and Santa Barbara–both of which are seeing declining RE prices.
Yes, Shallow Alto is a desireable place to live (I lived there for a couple of years back in the 90’s). But there is always a trade off point in every market, and when the prices in other areas drop enough PA will follow suit. I would also suggest that right now everyone is awash in liquidity, but it won’t take much to start a cascade of margin calls that dry that up pretty quick.
a 10M house i know was up to 20M+ in ‘value’
things WILL fall, no doubt - possibly 40%
I live in the bay area and I’m renting. I’m making about mid$200 with no debt other than a small car payment. I could probably stomach a $800,000 house but it’s going to put a major crimp on spending. I am more inclined to buy a house within 2 - 3 times my income. But these 800K houses are pieces of crap. I see houses going for 1Mil on skeptcial neighborhoods and the houses are over 40 years old. You got to be kidding me. I just laugh at these people that say it won’t happen here. It’s going to take some time but it will happen. VC money my butt. VC money only goes to a very very very small percentage of people. Salaries have not gone up enough to sustain these type of mortgages. No way. Interest rates are also going up therefore our purchasing power decreases.
I’m just happy I wasn’t stupid enough to buy a home within the last few years. The amount I’m saving today could be a HUGE down payment for a house in the future. I’m not wasting it on interest and losing equity by the slow devaluing of home in the next 10 years.
If I made 250k/year (net), I’d be able to save roughly 220k a year towards the house. Down payment wouldn’t be necessary. Ain’t hard.
Not sure about that; with a $250k salary FP is in AMT territory. Yes FP can save but probably not $220k per year.
~Misstrial
I’m close to the mid $250s and have paid AMT, the last couple of years, but the feds decided I did not owe it each time and sent me back refunds! I have one car, a $966 per month apartment, and there is no way I could save $220k from $250k. I would say $130,000. Taxes are still quite high.
I have a wealthy close relative who makes similar to you, and he bought a SFH at the top (mid-summer 2005) in a high-priced near-in suburb of Boston for around a mil. He has lost $100K per year for each of the last two years in resale value and it’s quite possible this $100K/yr. loss could go on for two or three more years. Makes a $250K/yr. salary not go very far. . . so, even though I’m a low-income guy personally, it’s not hard to see how you can drain a big income in a hurry by buying at the wrong time.
Imagine if Alec Baldwin’s character in Glengarry Glen Ross had been politicallty corrected to death, and 15 years later, may I present the modern version of him, Tom Pelton…
All show, to make it go.
“So Tom Pelton of Prudential California Realty decided to take drastic action, both to get the house sold and to teach other agents how to retool for the current sluggish housing market. He hired a professional photographer and brought in a ’stager’ and gave the home an ‘extreme listing makeover.’”
Of course this article overlooks one VERY important fact. For all the extreme staging, this house still hasn’t sold!
“‘We’re getting a lot more people through the door,’ said listing agent Kimberly Rehnquist.”
But still not sold, seems like Pelton is a genious at putting his clients even further in the hole!
seems like tom is “working” for earning the 6%.
The guy forgot the deal clincher: cupcakes and the smell of hot apple cider cooking on the stove. It worked every time during the boom.
Reminds me of some places I looked at back in ‘05. One place had been staged and had classical music playing a little too loudly from a boombox. The realtor had tried to bake some pre-fab cookie dough. She was also burning several candles to try to hide the smoke smell from her attempt at scenting the house, but couldn’t open the windows because of the loud traffic on the street outside.
During the boom you could have had urine boiling on the stove and the morons would have still been buying, above asking price.
LOL!
“Put that hot apple cider the f*** down. The hot apple cider is for closers only.”
He needs to offer 200k illegal cash back at close and there will be a bidding war. CHA-CHING!!!!!
Actually he MIGHT be offering cash back.
Whever I see the wide price range (1.3 to 1.6 for this one) I think hmmmm… they would take 1.3 OR they would take 1.6 with huge cash back at close. They cant advertise that, so the price range is a wink-wink to other players(criminals).
OTOH it could be a way to get an out of touch seller to lower the price. We all know the low range is the real list price but its not as painful to the seller since its a ‘range’.
OT, enlightening article:
Bear Stearns Hedge Fund Fallout Continues
“So why am I taking the [Wall Street] Journal to task when it did a great job of getting the dirt? Read to the very end of the piece:
[Bear Stearns Co-President ] Mr. Spector worked the phones Thursday afternoon, reaching out to various CEOs and senior Wall Street executives, according to a person familiar with the matter. The upshot: save the less leveraged fund that had better-quality assets and let the other fund collapse.
“Huh? Let the other fund collapse? If this is where things stand, this is a vastly more important news item than anything preceding in the story. Stopping here is the sort of trick you see in serialized fiction, not serious journalism. The backstory and the prurient details of the wrangling, while impressive, are largely entertainment. The crucial bit, of most importance to readers, is what the prospect for these funds is and what the windup or failure of these funds might mean.
“Let’s assume the bombshell at the end of the article was true. Why would other heads of Wall Street firms advise Bear to save the fund with better collateral but less debt outstanding? Normally, one would think the bigger fund, which had much greater borrowings (roughly $6 billion) and junkier assets, would do more damage if it failed.
“Possible explanations…”
You have to read between the lines. The phone call to the other banks’ execs was to get the OKs from the other banks, who lent Bear Stearn the money, to limit their loss with the first fund and to let the second fund dies. (This is like the mafia boss calling around to get the OK before a hit job.) Obviously this is the only way out, because the second fund is already underground and there is no way to resuscitate it. Pumping more money into the second fund would be throwing good money after bad. But the thing is that the first fund will also fail despite the 3.2 billions, but at least the other banks will get part of their money back.
If I understood a previously posted article, this 3.2 billion is 30% of Bear Stern’s total market value. Can they really afford to loan this much to a fund that is going under? And to get right again, the fund will have to gamble big time. Is this any different from a gambling addict begging/stealing money from family/friends so he can go back to the tables and “win it all back”?
Someone with more inside knowledge: to what extent does the failure of these funds threaten BS as a whole?
By comparison: At inventory/net worth ratios of 3-to-1, which approximates the big homebuilders a year ago, a 10% cut in inventory valuations represents a 30% reduction in net worth.
Even if BS lost all their borrowed money, it would be no worse. They will likely be taken over by another IB or money-center bank after this thing shakes out, mainly to capitalize on their human capital.
I worked for a boutique trading firm on WS in the early 80s; total capital only about 100mm but of course we were leveraged to the hilt and we were a big player in a lot of markets. One over-aggressive group of 4 or 5 traders on one desk lost most of the firm’s capital in one bad year; a top IB took us over.
more precisely, “net worth” not “capital.” If I remember my financial accounting correctly any debt not due within a year is technically considered part of capital structure.
you overlooked the fact that these other houses will be in the same boat with all the crap loans/investments on their books…won’t happen
No, I didn’t overlook that. That’s specifically why I said after it shakes out. Will happen.
No, I didn’t overlook that. That’s specifically why I said after it shakes out. Will happen.
A second fund at B.S.!! Letting one fund fail fast and the other to slowly bleed out (the blood going back to some of the banks) from the 2-3 billion bucks BearStearns sez it is going to inject will not forstall the inevitable. All of B.S.’s capital and cash on hand just to save a small portion of its many funds it offers. When the word gets out about B.S., there will be calls on all B.S.’s funds to start selling by its customers. Multiply these shenanigans over the galaxy of financial houses and funds that have dabbled in CDO’s, derivatives and other fiction paper and ANYTHING can cause the house to come in. This little outfit in Orange County folding in a week (Brookstreet) could tell you the velocity and speed this whole thing could get rolling down the hill.
If we open Monday at 9:30 and if it goes straight down, particularly banks stocks, coupled with lousy new and older home sales reports, we could have a total market meltdown that The Fed could not even stop. May even see bank runs by end of the week.
I’ve been quietly cashing out for the last three weeks, paying off all my debts and staying in a positive cash environment…as least I will be able to buy gas and groceries.
Well, this doofus cashed out in end of Dec. No debt. Ton of old ibonds at 3% +CPI for what was going to be a downpayment.
Everything else at Vanguard, but the Admiralty stuff is 80%T-bills, the rest gov’t paper–anybody figured out something better? Like, no gov’t paper? It’s all old 401ks and IRAs rolled over.
crapburner - i do not think there will be a run on banks. at least not yet…
One more point: just checked BSC’s market cap vs. net worth. End ‘06 data: market cap $17b, net worth $12b. (It’s amazing how big investment banks have become.) So it’s hard to see this problem alone taking down Bear. But it’s definitely enough to send heads rolling up Wall and down Water.
“But it’s definitely enough to send heads rolling up Wall and down Water.”
That would be weird to see when I’m walking over to the South Street Seaport.
It’s 15% of market value, about 25% of their book value.
It’s a huge chunk…how can they do this? They’re not injecting their own capital…they just borrow the 3.2B and put their company on the hook for it. IF they lose the whole 3.2B, then they’re in big trouble though.
Great post, thanks. Still waiting for the Monday action on this.
Thanks for the Bakersfield story. What a dumb and selfish wife.
(Hopefully this posts, 1/2 of my posts dont show up)
test
“‘It’s Darwinian,’ he said. ‘It’s a thinning of the herd.’”
http://en.wikipedia.org/wiki/Coffee’s_for_closers
“Mike Franey, a mortgage loan officer in Bakersfield, Cal., saw trouble coming. For years, swarms of
investorsequity locusts descended on his hometown, buying and flipping some of the cheapest housing in the state, driving up the area’s median home price from $99,000 in 2001 to $280,000 in 2006.”“driving up the area’s median home price from $99,000 in 2001 to $280,000 in 2006.”
Yeah, I watched that sort of thing happen around here, a quiet, relatively neglected area of the Tampa Bay area. It was cheap, it was quiet and there was plenty of space and not much traffic. And that’s the way most of us liked it. And yet, not a bad drive to Tampa, or St. Pete.
And then the bubble, with all the development vultures and the pushn’shove attitudes.
Franey feared that when the investors left for greener pastures, prices would decline and he and his wife, might lose the equity in their home just as they approached retirement.”
“‘I said, ‘We need to sell right now and rent until we can buy again cheaply,’ says Mike.”
And then he buys again??????? WTF?
“Thanks a lot, Mira, you dumbass. Hope you’ve got a job lined up, since we won’t be retiring anytime soon thanks to your insistence on owning a house”.
This just in… an Amber alert has been issued for “Goldilocks”… if you see her please call Wall Street immediately….
I think she’s over at Larry Kudlow’s house drinking Kool-Aid
you’re all a bunch of inflationistas!
“Many borrowers now facing foreclosure bought more than they could comfortably afford during the recent real estate salad days, betting they could turn a profit and not considering home prices could stop rising or drop.”
In this market they should have bet against the house. (sorry could not resist)
I don’t know if I have mentioned this. but I am sooooo glad we did not buy in the last 4 years!
driving up the area’s median home price from $99,000 in 2001 to $280,000 in 2006.” - I think this statement sums up the bubble up, and what it is going to do going down. Bakerspit? I think the drop there is going to exceed more than 50%. The Mira wife deserves to lose her A$$ for being so stupid. The husband did the first part right. Lost on the second. Too bad.
I believe Goldilocks is stuck in Kudlows’ house getting unmentionable things done to her. Maybe Larry will get arrested?
I had heard that it was Goldilocks doing unmentionable things to Larry.
Is that how he stays so chipper ?
I’m in cash. Wish I could rely on doomsday scenerio. Sold my RE in 2000 thinking recession was hitting. Had 9% mtg int. Instead of recession, rates dropped. Really would like to buy a house in Boca area but stuff still way too much $. Unfortunately, gov’t listening to Bear Stearns story and will most likely bail them out overtly or covertly
If we open Monday at 9:30 and if it goes straight down, particularly banks stocks, coupled with lousy new and older home sales reports, we could have a total market meltdown that The Fed could not even stop. May even see bank runs by end of the week.
I agree but I do not think the Federal Reserve will do anything immediately until the panic abates. I totally got out of all stocks and mutual funds 3 weeks ago and put it into money market for temporary keeping. Several hundered thousand. I have a large amount from the sale of my home a year and 10 month ago in short term Tbills.
I am quite happy to share popcorn with Neil……
With all due respect, extreme reactions to predicted economic crises are a huge gamble. In 1979 when I was 20, things looked awful for the U.S. We were in the cold war, inflation was more than 13%, the bills for the unpopular war were rolling in, and there were people advising to buy nothing but gold and silver bullion, ammo, and flak jackets. Those who sold gold in 1979 or early 1980 were lucky. The luckiest were those who bought ten year CDs, ten year notes, and 30 year bonds. Luck was all that was needed. But then Howard Ruff, Douglas Casey, and others were pushing metals for the long haul.
I am starting to buy more stocks now. I see prices coming down in my portfolio (I’m 50% cash in my brokerages) and I’m finding a lot of great buying opportunities as yields are rising in utilities and other industries.
I think you know what you are doing and that it’s the only way. But I am very skeptical about extreme measures in personal finance. We are laughing at the fools who bet everything they have and put it in real estate and rental property. And here you have everything in money markets and T-bills.
All I’m saying is that you may want to check out gold bullion and stocks that are below their 52 week lows.
I’m eating popcorn right now.
Agreed. You have to be lucky to call both the direction and the timing of big moves. Either that or own a fully functioning time machine.
Having been a stock broker in the 80’s I do know what I am doing and many stocks are way over valued as is real estate.
Let’s see what time will tell us……
Muching on popcorn!
hmm.. gold… one sec.. lemme find my tinfoil hat. There is is.
I recall a story a few years ago about an asteroid.. Ahh.. Google to the rescue. Lots of hits.
http://valdostamuseum.com/hamsmith/Asteroids.html#eros
“If Eros is typical of stony meteorites, then it contains about 3% metal. With the known abundance’s of metals in meteorites, even a very cautious estimate suggests 20,000 million tonnes of aluminium along with similar amounts of gold, platinum and other rarer metals. In the 2,900 cubic kms of Eros, there is more aluminium, gold, silver, zinc and other base and precious metals than have ever been excavated in history or indeed, could ever be excavated from the upper layers of the Earth’s crust.”
Perhaps such a rock did hit Earth way back when.. and someday, someone is gonna trip over the carcass. Finding a cubic kilometer of solid gold might put a slight crimp the market.
out damned bold.
Cool story about Eros. Also I would never put more than ten percent of my net worth in precious metals. Let’s go mining! Ever read Heinlein’s “The Moon is a Harsh Mistress?” It’s one of my favorite libertarian sci fi’s.
Here are my personal predictions for how the housing bubble will unwind. There will be 10 million foreclosures in the next 8 years. Based on current rates, 1.4 million foreclosures are “in the bag” for 2007. Assuming about 100 million homes, that is 10% of all of them.
Prices wont hit bottom for 3 more years (2010). Although prices will fall about 60% in california bubble areas, this will be acomplished with 30% nominal discolure and 30% inflation between 2005 to 2010.
If you look at the price of homes in terms of Euros, Gold Ounces, Barrells of Oil, Gallons of Milk; house prices have allready dropped 20% to 40% since 2005.
Assuming we do get 10 million foreclosures, with an average loan balance of $250k; and a recovery loss rate of 30% (amount lost after bank sale of house); this will ultimately be $750 BILLION in losses for the banks, MBS holders, hedge funds, pension funds, wall street firms. The $30B in losses from Bear Sterns represents just the first 4% of the ulitmate losses to be suffered. In other words, we are in the 2nd out of the top half of the first inning.
Are you accounting for the leverage? With CDOs of CDOs that own CDOs, and the opportunity for leveraged bets at each level, the numbers could be quite frightening with the hedgies commonly running at 10:1 ratios. It’s possible that there could be 1000:1 or worse gearing on some of the toxic waste “loan products”.
Never run to see the dead cat bounce before you CHECK for other 18 wheelers
‘unbelievable view of Catalina’
From Yorba Linda ! I call bullshit on that line, maybe on TV.
Well it looks like the ref has thrown a flag on that one …. he’s walking out of the stadium and driving up the 55 to the 91 for the review …
“So Tom Pelton of Prudential California Realty decided to take drastic action, both to get the house sold and to teach other agents how to retool for the current sluggish housing market. He hired a professional photographer and brought in a ’stager’ and gave the home an ‘extreme listing makeover.’”
- I work with a builder in Manhattan Beach who had 4 spec homes priced 3 to 3.5 million. He hired a company to stage the houses and has sold 2. It definitely was worth the thousands of dollars in cost to move the product.
Manhattan Beach.
This made me laugh so hard I was crying:
http://www.craigslist.org/about/best/lax/184295834.html
OMG…I never knew Craig’sList had a “best of”…this one and others are too much. The “Vietnamese Waxer Lady” and the “Pringles” one are making me almost pass out…OWP
Funny and sad. The lesson a 40-something man learned from spoiling his kids - in Manhattan Beach. I love the area but laugh at the extreme pretense of the South Bay beach areas. MB is the epitome. You know the thing I really could not stand? Cars with the “MB”, “HB”, “RB” letters in a decal on their rear windows. It was like “I live here so I am great!” Right!!!!! Even if I move to HB or the 90277 zip, I will never put any bumper sticker or bragging decal on my car. I hope some burglar follows those cars (with the decals) home and robs them. Would serve them right. I will keep my little Toyota economy car.
txchick57
You can find them…cute
From the LA Times on Bear…
Bear Stearns, he noted, is tying up its own capital on a bet that it can hold onto the risky investments until the market for them improves. Merrill Lynch made the same bet by auctioning off only a fraction of the assets it seized from the Bear Stearns hedge fund, he said.
The problem, he said, is that sub-prime woes will grow as home prices fall in many areas and monthly payments jump over the next year on almost $1 trillion in adjustable-rate mortgages.
Bear Stearns is relying “on the implicit assumption that recovery is right around the corner, when in fact it looks like we’re in for a summer of increased defaults,” Mason said.
What’s worse, he said, is that the biggest investors in mortgage-backed debt are not hedge funds, whose investors are supposed to be wealthy enough to withstand losses. Instead, they are banks, asset managers, pension funds and insurance companies that serve mainstream Americans and have put their money at risk by buying exotic mortgage securities, he said.
http://www.latimes.com/business/la-fi-subprime23jun23,0,3011228.story?coll=la-home-business
my wife begged me to buy after i sold my home in the los angeles,she screamed and cried,and didnt cook dinner for me but i stayed firm,got fired from my job of 13 years,surfed for 6 months , i am a RENTER,and damn proud of it,it has given me the freedom to recreate myself,who needs or wants a mortgage in a falling market. if i listened to her and bought the 600k house she wanted i would have been wiped out,now that 600k house is 475k and she loves me again,and is willing to wait even longer for lower prices.
That is one of the things that surprises me about the reaction to the Bear Stearns news. It seems as if a lot of people are cheering it on saying things like it’s time that greedy bankers and hedge fund managers take a beating. But this isn’t the case. The managers of the small number of hedge funds that will be effected by this will still be making huge amounts of money, the bankers at Bear Stearns will still be making a huge amount of money, the wealthy investors that are invested in the funds are diversified enough not to be materially effected by this. The losers are going to end up being the average person whose pension is invested in these funds, or whose retirement plan administrator invested in a fund-of-funds that is invested in this fund.
Most pension funds are defined benefit, ie if they lose on this the losses are born by the pension payer (employer) not the employee. The employee is still due his pension. If the pension outperformed the market, would the employee get more? No.
It’s only in mutual funds with individual ownership that individuals would lose their money. Possibly insurance companies if the assets are backing separate account policies.
Hate to tell you this, but defined-benefit pension plans are a thing of the past. Something like 15% of the population still has them, and they are almost all government employees. They will be the last to go, but they are going to go away. Most businesses did away with defined-benefit plans years ago.
No- if the pension fund sustains significant losses, the company will declare bankruptcy- citing the need to dump pension obligations in order to remain competitive. See airlines, for recent examples. Excess profits will line the company (shareholder) pockets, losses will be borne by the employees via bankruptcy.
I suggest a quick scan of the assets of several of the large MM funds, maybe fidelity.com or vanguard.com. Both of these have assets approaching $100B.
Click on annual reports or shareholder reports, and look up the latest holdings of these funds. The holdings change very frequently, and most will be outdated, but I doubt the current holdings of these MM funds is really much different now, than when the reports were filed.
It is freaking scary. The amount of mortgage bonds these MM accounts hold is huge, usually through slice and dice cardboard companies you never heard of (and have virtually zero web presence), and through repurchase agreements that use MBS as collateral. The fidelity funds have a ton of direct investment in wonderful companies like Countrywide and Bear Stearns.
Ouch, break a buck? That would be really bad, but doesn’t look like it’s out of the question either.
I was surprised to see my money market account (IRA) invested in GNMA. I want to move to a US treasury fund but I have feeling that the rates would go higher than lower, so I sit on my cash.
Meanwhile I decided to put a small fraction of my cash to work by buying a few shares of SH (shorting S&P 500)….
why is it everybody on the internet is making $200K per year plus??
damn, i don’t know one human being in my universe that comes even close to that……even my customers that own business don’t pull down that kinda of coin…yet EVERYBODY on the internet does?
WTF?
I thought I was the only one making less than that. That must be true, or a tsunami of foreclosures are still heading down the pike.
Because there are a lot of engineers on the Internet, and there is a massive shortage of *talented* engineers. Try hiring one sometime. I have a junior guy two years out of university consulting for me at $120/hour. I’m paying another one with 10 years experience $140/hour. I just hired a network engineer at $110/hour. I recently interviewed a bunch of wankers for a systems administrator position, and they were all crap, but they were expecting $100K/year or better. Still looking to fill that position. This is in the LA, CA area. The few talented people that are willing to put up with living here are getting some serious bucks. Looks like there’s been some inflation, eh?
Adopt me!
I’m a softie and have been working lots of overtime the last four years in the southwest. A colleague of mine made $102 per hour while I was in the $80s at the same gig in LA. Now he’s earning slightly less than me at a different job but is getting lots of OT. I have 22 years of experience in embedded software and what sm_landlord is saying is true. Times are very good for us. My friend is too optimistic that these times will last and has 90% of his net worth in real estate. I am “slightly” more humble and think nothing good will last. I invest my tax deferred plans in aggressive stock mutual funds, also my IRA. I get “free” money with matching contributions and have done this for many many years. But outside that, I’m very conservative and invest as if I’m retiring in 5 years. It’s a very diversified portfolio. I can live several years on my conservative investments. I know of some people who had 5 months with no job in the bad times about 5 years ago. The more pay you get, the less stable your source of income is. I consider myself lucky, but I made my own luck by getting rid of all my anchors. I have very few material possessions and can move to the opposite coast comfortably within a week and start another consulting gig. My aim is financial independence. At least I want to be able to be independently middle class. That is, have a middle class lifestyle without a job. Google “Scott Burns independently middle class.” He’s a financial columnist in the Dallas morning news. He wrote a column on that several years ago.
one more thing, if i was making $200K PLUS per year there WOULD BE NO FUGGIN HOUSING BUBBLE.
Is it just me, or am I the only person to realize, that one foreclosure in California equals three foreclosures almost everywhere else in the country?
The factor may be greater than that, given non bubble areas will not see very high losses at foreclosure (10 - 20%). In CA where prices may fall by 50 - 60% when all is done and starting at $500K to begin with. The real news in CA will start when the ALT-A’s adjust upward. By the time this happens, prices will be substantially lower and many will be in deep trouble.
$200K and higher salaries have also become fairly common in the NYC area where I live because of Wall Street. In fact a $200K compensation is nothing on Wall Street, it’s what they pay junior bankers that are just 24 years old. Technology specialists make up a lot of the $100-$200k earners in major metro areas as well but remember a lot of these people work as consultants and don’t get benefits. Also the IT consultants who charge $120 per hour are not usually working full-time, at least not here in NYC. My brother was charging $100 per hour when he was working as a consultant but would sometimes spend several weeks without a job. There is also little job security which is why he’s changing fields, when the economy turns down technology spending is one of the first things that gets cut. There are also foreigners coming in every day entering this field. An IT generalist is one of the least secure fields, or the IT areas that require certifications. I know so many people from my high school who didn’t go to college and than went to get Microsoft certification or one of those things so they can work in IT. With such little barriers to entry the job isn’t too secure.
But of course the housing bubble wasn’t caused by people earning more since increases in house prices outpaced incomes by a wide margin, and if the overall economy slows the resulting slowdown in income growth, particularly crowded fields like IT will only exaccerbate the crash.
My wife and I took a drive through Merced, CA (ground zero) and I was amazed at the amount of ‘For Sale’ signs, especially FSBO. What is strange is that there were houses for sale at $299K that are identical to ones being listed at $200K (practically next door), still a lot of $349K cheap tract homes, these people are screwed.