Bits Bucket And Craigslist Finds For July 8, 2007
Please post off-topic ideas, links and Craigslist finds here.
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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300 Trillion… Time bomb
http://www.portfolio.com/news-markets/national-news/portfolio/2007/03/29/The-300-Trillion-Time-Bomb
Yes, that was a nice article on derivatives, published in the premier issue of Portfolio magazine in April 2007.
Barron’s has a bearish article on housing this week, and in another article estimates the cost of the subprime loan backed CDO disaster at $100 billion. By comparison, it adds that the S&L crisis in the late 80s and early 90s cost the government $150 billion. This time, Barron’s says that the cost of the subprime loan fiasco will be born by investors.
And for non-subscribers, here is an excerpt from the housing article, “Why a Housing Recovery Is Far Off”
“The key problem now is not the level of nominal mortgage rates, which are not particularly high by the standards of the past decade. Instead, buyers are backing off because the real mortgage rate has rocketed and continues to rise. At the peak of the boom, people essentially were being paid to buy a home. The average 30-year fixed mortgage rate in 2005 was a tax-deductible 5.9% The Office of Federal Housing Enterprise Oversight says that home prices rose 10.7% that year.”
“As long as buyers expected prices to keep rising, the implied real mortgage rate–home price increase minus mortgage interest rate–was minus 4.8%. This was an enormous incentive to borrow heavily to buy real estate. Result: a bubble”
“But recently, the average 30-year mortgage rate was 6.5%, so with home prices up just 3%, real mortgage rates are now 3.5%. And with most potential buyers well aware of the huge excess supply of homes, there’s no reason to expect prices to rebound soon. A reasonable person might expect them to fall further, boosting the real mortgage rate further.”
Yeah, no sh*t.
During the bubble, you were being PAID to take a loan. The bigger the loan you took, the more that you got paid. And, this person is using very moderate home price increases, imagine in FL where some areas were seeing 25-35% YOY!
So for much of the bubble area, the implied real interest rate was about -20%. Oh, and a tax deductable -20% as well, let’s not forget that little piece of tax BS that the NAR managed to keep in there.
I agree with the article; however the point is self evident. If I can borrow money at 5%, and buy something with that money that is appreciating at 15%, I am making 10% a year by carrying the loan. However (I will leave the in depth discussions to those who understand economics better then myself) the kind of “spread” cannot continue. If it does, then everyone will start to “play the spread” and inflation (and therefore interest rates) will rise to the level where it is not longer lucritive to play the spread. In this case, IR would rise to 15%, and with the asset and the loan both at 15%, it becomes worthless (well, except for the interest deduction, which could still make this worthwhile).
Anyway, this guy is slowly starting to realize what many of us have said for a long time.
I had a conversation a while ago with someone at work (older than me with grown kids) who told me with all the “wisdom of his years” that the only way to make money for retirement was investing in the market and real estate. When I questioned the real estate part of his equation, and pointed out that real estate on average closely mirrors inflation, he said the leverage is what makes real estate work.
Now, forgive me if I am stupid, but the “advantage” of the leverage in real estate comes from the time when you haven’t paid off the loan. If you can get a loan with a minimal down payment (so there is limited opportunity cost) and the rent pays ALL of the related expenses, then you have a “free” inflation indexed investment. Not a bad deal. You are still dealing with market timing, but if the rent really covers everything, it might be worth the risk long term - after all if the rent covers everything, there is no pressure to sell in a down market. And, if you can get the rent to cover all the expenses and a fully amortising loan, then you are accumulating equity off the rent even if the market is flat. Is that what he means? This scenario sounds like it is mostly a bet on the idea that rents will never go down and good tennant will always be easy to find.
But how likely are you to get the rent to cover all expenses these days? He purchased a 1 bedrtoom in northern VA recently. The rent is $1400 per month. If I believe him (and have no reason to doubt), the apartment is very near the metro, very commuter and hip-young-thing friendly. Those are the bubble condos. One bedrooms are even less likely to hold value than larger spaces. I think he is an FB. I sure don’t believe he got the condo in the last 2 years for $140K, more like $300K, perhaps more. The only way this works is if he is dealing with a serious teaser rate mortgage and will be able to sell at a profit before a reset. In northern VA. Right.
Can anyone provide any other explanation for the idea that real estate is an essential part of a savings portfolio because of “the leverage”? I didn’t push the conversation. I consider him a friend. But the more I think about it, the more it sounds like a mantra rather than something with a logical argument behind it.
Your older friend has seen alot of inflation in his lifetime. Thats why he likes RE so much. That plus the demographics of the baby boom so older folks made out well in housing renting or selling to younger people. Now we are all getting old who will we rent/ sell to?
OK. That at least makes a little sense - sort of an emotional reaction to past economies. But there are so many variables that the numbers aren’t easy to run through in your head - especially at a time when $0 down mortgages were available. My head says that just waving the word “leverage” around isn’t enough in a market where prices can go up and down. Leverage is good on the upside but a train wreck on the downside. But if it is a reaction to a long term perception that there is always substantial inflation, it makes sense.
But there is some hope in Mudville. I was chatting with another collegue last week. She asked if I was going to buy soon. I took a deep breath and said credit bubble and that I would wait until I didn’t have to bid against people with bad credit and no savings. She totally agreed with me. I almost fell down with the shock.
Polly,
I think your older friend is partly correct, RE and the market are very good ways to make money, he just forgot the part about “buy low and sell high” which is where so many get it wrong.
I have no idea how they came up with only $150B for the resolution trust. The Resolution Trust sold over 400B in Assets for 140B to the same scum that put the S & Ls into the position. I believe that the cost to tax payers to date is close to 600B and costs 32B every yr.
The theft of the century (The looting of the S & L’s) has been surpassed.
The Resolution Trust is chump change compared to the mortgage market fiasco. If the FDIC estimates the subprime/Alt A market at 2T, why would Barron’s suggest only 5% are going to be in difficulty?
It won’t matter til it matters. I saw some BS yesterday about how this will all be good for the stock market, might drive the blue chips up to prices we can only imagine.
I’ve been inactive most of the summer so far and don’t see anything that’s going to change that.
Inactive! As you should be, The stock market has done nothing to get excited about. IMHO, the risk in the US market is great. When spin doctors try to make a theft appear good for the market, I believe ’tis time to go.
You folks want to see the FB in action? Watch the A&E show “Big Spender” comes on Saturdays 11:30 AM. Every time I have watched this is a Jaw Dropper! Wife says they should not be allowed to reproduce and I agree.
But they do reproduce and teach all their little spenders to be big spenders too. We lived next to such a family with 4 kids. As they grew up they too leased a new expensive vehicle every 2 years, wore the latest designer clothes, only lasted a semester or two at college and are in debt over their eyeballs.
Has anyone else noticed that some commentators are starting to use the word “nonprime”, rather than “subprime”, when referring to the housing loan troubles?
Sounds to me like they might be getting a tad nervous about Alt-A . . .
I haven’t heard that one, but you are right. It is a very interesting development. I wonder if that sort of thing is the result of a decision made by the commentator, or a change in the style manual at the place they work…
Is there a graph depicting banked owned properties over the last 24 months or so? I see a lot of stats regarding foreclosures, but few once they become REO or bank owned. I have been using RealtyTrac and if their figures are even close to correct I’m more concerned than ever. Many seem to have been on the books for quite some time.
Portland’s Pearl now has 139 listings, about the most ever. Prices in early 2006 were running about $500 sf. Asking prices now range from 400-450 sf. Prices look to be down 15% from the peak.
http://pearl-district-lofts.com/portland-oregon-pearl-district-homes.html?x=1&ob=b&startrow=101
To me, the Pearl District is one of most desirable places in the U.S. to buy something but 400/sq foot if it isn’t in Mahattan or San Francisco is just loony toons.
The hilarious thing is, they are charging $500/sq. ft. in L.A. right on skid row, literally, with people dealing drugs from your stoop…
Lexis on the Park
0 Beds, 1.0 Bath, 586 SF MLS #6103506
$231,400
City view studio in the Pearl! High vaulted cielings. On Trolly route, 2 blks from Starbucks, fine dining, banks, galleries, and shopping. Across from park. Rented for $825.00. Building includes gym, community room, storage unit, Key card security system, gated courtyard. Great upgrades.
Wonder how much the HOA is??
The Pearl District is a glorified mall. As such, it doesn’t surprise me that someone from Texas finds it so desireable.
Retail sales fall amid housing slump:
http://www.bloomberg.com/apps/news?pid=20601087&sid=am594JOXNGgE&refer=home
Don’t you think that article overplays the influence of gas prices? Gas prices seem like a red herring - an all too conveinent way to plaster over deep, deep fissures in this economy - since volatile gas prices are assumed by the masses to go down again and make everything just peachy. These guys need to bite the bullet and start acknowledging the real threat here.
Yes, I think that gas prices are pretty much insignificant when compared to the greater economic forces at work in our economy.
I actually posted some time ago a discussion of the impact that gas prices have on my life (and I drive A LOT!) and how insignificant it would be to my overall finances if gas prices were to rise significantly. Here is the cliff notes version:
I burn about 1000 gallons of gas a year (25K miles in a fuel effecient car).
That puts my current gas expense at ~3K a year. If gas were to go to 5 bucks a gallon, that’s only 2K a year in additional expenses. This would have no impact at all on my lifestyle (yes, I realize it would for some people, but I don’t think that most people burn 1000 gallons of a gas a year either).
Gas prices are a total red herring to get us to stop looking at the real issues. I would pay 10 bucks a gallon for gas to have reasonable home prices. Just the money I would save on taxes (forget the smaller morgage) would make up the difference for me in the first 1-2 years.
Average number of miles driven per year for US is 12,000 according to the “estimate your carbon footprint” calculator on the Live Earth website. (You had to input the make model and year plus your average monthly gas and electricity bill, number of people in your household, etc.)
So you are right, that is a lot of miles. However, with the proliferation of SUV’s vs. your fuel efficiant car your gas consumption per year may not be as far off average or meadian as you think.
A lot of J6P’s drive older pickup trucks that only get about 10-12 mpgs. If he drives 12K per year that 1000 gallons as well. An extra 2K per year is a big deal for many J6P’s.
I don’t know about that…an extra $167 a month in gas for youmay be no great shakes, but a lot of people (especially here in L.A) have to travel miles from the hinterlands to get to work and back.
They’re already struggling with mortgage resets, and trying to find another $2K a year just for gas will be the straw that broke the camel’s back.
And when that additional amount for gas hits the credit card statement, and the minimum payment rises, so does the ability to service the credit card bill for other purchases suffer.
Add to the immediate direct effect of higher fuel charges, those higher charges have an indirect effect on every material thing you buy at retail.
Because each of those items got to their point of sale by a truck. And the cost of transport, baked into the cost of that item, also rose.
If fuel prices rose 50% in the last year or two, that is more than sufficient to rise the tide for everything. So what the article should really be asking is, so what if retail sales rose .02% for a month… how much of that percentage went where… and most of all, how does that reflect profit to the retailer?
“And when that additional amount for gas hits the credit card statement, and the minimum payment rises, so does the ability to service the credit card bill for other purchases suffer.”
And yet people still buy gas guzzling cars. I dont just mean SUV’s. I mean those huge mercedes and bmws that have 1 person and maybe 1 kid in there. I really hope gas goes up a lot and not back down. It just encourages people to become wasteful.
Its kind of like how in Southern California there is a huge drought, where the cities are about to do mandatory water conservation. But how many people know this???? Scary to think what that could do to all the outlying areas who are last on the list to get water compared to those cities which helped build the way water travels to SoCal.
HELOC - Don’t call it a loan
FWIW, most people who buy big a$$ Beamers and MB’s actually have money. Sure, wannabes lease 3 series Beamers, but the the big 7 series beasts are out of their league (especially with easy Helocs being a thing of the past).
I also seem to recall reading that mongo SUV’s aren’t selling all that well these days.
Call me crazy but the best cure for high prices is?????? Higher prices. Fuel prices crashed in the 90’s after Japans RE/Nikkei runup, I suspect it will happen again in the next 10 years.
I’ve said this again and again. They want to credit housing with keeping the economy afloat 03-05, but they refuse to admit that it’s also going to sink it 07 and beyond.
“American chip maker Microchip Technology Inc is suing a leading Chinese semiconductor maker in Shanghai, accusing it of infringing the copyright of its database.
Microchip is suing Shanghai Haier Integrated Circuit Co, accusing it of copying the microcode and the data manual of the Microchip-patented Microcontroller Unit.
“Microchip has devoted huge resources to developing the data manual and the microcode, and we have solid evidence to prove Shanghai Haier has violated our copyrights,” said Yang Jinzhu, vice president of Microchip Asia Pacific.
Shanghai Haier said, “Microchip’s accusation is a distortion … which Haier cannot accept. Haier’s MCU is not completely compatible with Microchip’s. Our products have more functions and better resistance to interference.”
Haier has taken 3rd generation technology and created a 4th generation technology (possibly by stealing and infringing on Microchips patent - I’ll leave that for the international courts to decide). Haier may be the first Chinese company to fight back and claim original material.
My belief is that in 20 years we will be paying licensing rights to Chinese companies. Microchip and other companies probably would not be in this position if they had not outsourced their manufacturing. The US Department of Defense has to be having a fit - this is not leading edge design this surpasses leading edge design.
Good luck to microchip. From what I understand, China has not bought into the IPR laws.
My company has not sourced in China for this very reason. We’ll sell there but will not help them become our competitors.
“As senior lecturer in strategic studies at the Australian Defence Force Academy, Clinton Fernandes, pointed out in 2002 before the decision to invade was announced, the US didn’t need to go to war with Iraq to get access to Iraqi oil, it had to go to war if it wanted to retain control of Iraqi oil.”
For summer book reading I recommend
The Mess They Made: The Middle East After Iraq
by Gwynne Dyer
From McClellands book review
“As Iraq descends ever closer to civil war, no one doubts that George W. Bush’s Iraq strategy has been an abysmal failure — just as Gwynne Dyer argued it would be in both Ignorant Armies and Future: Tense. The question now is what will happen not just in Iraq but in the whole Middle East region once American troops are withdrawn. In The Mess They Made, Dyer predicts that the Middle East will go through the biggest shake up since the region was conquered and folded into the Ottoman Empire five centuries ago.”
Gwynne Dyers writing is clear, concise and verifiable.
http://tinyurl.com/36bylg
from one of his writings in June:
“… Now the window is closing. Before long, some of the Arab states
that Israel needs to make peace with are likely to fall to Islamist regimes
that have an ideological commitment to its destruction. (Hamas’s capture of the Gaza Strip is a foretaste of what is to come.)
Israelis trying to evade hard choices have long complained that they had “nobody to negotiate with.”
It is about to become true.
Israel faces another generation of confrontation and quite possibly
of war, and the Palestinians face another generation of military
occupation. Significant chunks of the Arab world face Islamist revolutions
that would bring more poverty and a new kind of oppression. It is a mess, and it’s too late to fix it.”
Not sure what this is got to do with RE.
Uhm, now is a good time to buy ? They are not making any more middle Easts.
I think the take away is be very careful before you plunk down $600k to buy that 3/2/2 in Baghdad.
After reading the book, it placed a lot of things in perspective. I had 2 sons that enlisted after 9/11- one got blown up and wounded in Iraq….I thought this was significant news upon which I will base future decisions. Significant because of Mr. Dyers past history of correctness in Journalistic reporting.
What I failed to emphasize was the importance that Mr. Dyers placed upon oil.
It is a mess, and it’s too late to fix it.”
Then checkout Ron Paul
And for the gold bugs in the audience:
“Dubai: Growing demand from Middle Eastern buyers and expatriates ahead of summer holidays boosted Dubai gold sales value by 34 per cent in June from the same month last year, a top industry executive said yesterday.
“We are seeing a very strong demand from the Middle East and many expatriates are buying large amounts of gold for friends and families back home,” said Tawhid Abdullah, managing director of the Dubai Gold and Jewellery Group.
“We have seen a 34 per cent jump in sales value in June and I expect to see a 40 per cent increase in sales value in July.”
Gulf News July 8
http://tinyurl.com/3c4hz4
WTF? selling dollars to buy gold - everyone knows the dollar will never go down.
“Demand from foreign workers and residents in Abu Dhabi buying gifts to take home during the holidays boosted volume in the past two months,” Patni said. “This will continue throughout the month of July and then we will have a quiet period of two months,” he added.
Hoz — this may not be much of a reflection on the dollar. The UAE and Saudi Arabia have a huge number of expatriate workers from Pakistan, India, Bangladesh, Sri Lanka, Nepal and other “developing” countries. Those worker bees head straight for the gold souks every payday, and it is particularly important that they take some with them when they visit their families once a year (if they’re lucky). I think much, if not most, of the YOY increase in demand in Dubai (neighboring emirate Sharjah is where most of the Dubai workers actually buy their gold) is due to the increase in building activity and therefore worker-bee employment in that area.
Chip, You are correct that the gold will be sent to Pakistan etc. The important point is these are the news items on which people will be making financial decisions tomorrow. Employment is up 10% from last June, but this does not account for a 34% increase in dollar value alone. I am not sure what this means, but after the news Friday I would not like to go into the gold market tomorrow short. (not necessarily long either - I am not much of a gold player).
URL: http://www.frontlinethoughts.com/printarticle.asp?id=mwo070607
Where is the Real Risk in the Subprime Debacle?
Warning - If you click on the above link, you can’t go back to HBB.
“The steady advance of the Korean currency against the U.S. dollar and Japanese yen has been a steady source of headaches for Korean exporters, while ever-rising oil prices pose a great challenge to local importers. But in a growing indication that the Korean economy may become increasingly immune to currency fluctuations, the nation’s exporters have grown at a rate unseen for years….According to the Bank of Korea, the won has advanced nearly 30 percent to the U.S. dollar since 2002, which usually results in declining exports as firms are forced to raise prices in overseas markets to earn the same profit. But this has not happened since 2002; exports have grown 12 to 30 percent each year since then.”
Joong Ang Daily
9 July 2007
http://tinyurl.com/ysfhq3
http://www.larouchepub.com/other/2007/3427pensions_hedges.html
New Pension Crisis Seen in Credit Crunch [Trade unions, recognizing the danger of hedge funds, are telling their members to pull their pension money out of them].
From my little seat in the peanut gallery, that looks important.
If the union guys have caught on, the hairdressers and strawberry-pickers can’t be far behind.
From the article:
“Some 40% of the new flow of assets into the hedge funds is currently coming from pensions. And in fact, the overall flow of capital into hedge funds has dropped dramatically at the same time—from $40 billion each quarter over January-September 2006, to just $12 billion in fourth quarter 2006, and $20.7 billion in first quarter 2007. In other words, pension fund money coming in, is allowing “smart” money to get out of the hedge funds. Numerous reports, including a new one from Chicago-based Hedge Fund Research, Inc., have shown “high net-worth individuals” reducing their net hedge fund investments by half, between 2006 and 2007—investing instead into real property and stocks. They now account for only about 20% of the assets of hedge funds, which were supposedly made for them.
Looked at from the other standpoint, the proportion of pension fund investments which are in hedge funds and “hedge funds of funds” has risen to about 3%, according to Greenwich Associates. But among public employees’ pension funds in the United States, the portion is higher, between 5% and 6%. The largest of all, the $245 billion California Public Employees Retirement System (CalPERS), which now has 2% invested in hedge funds, on June 19 raised its hedge-fund investments to 4% and its targetted range to 8%. That’s a lot of pension money to lose.
Yet, the Colorado Public Employees Retirement Association (PERA), which has a pension liabilities deficit to make up, has, since 2004, realized higher returns each year, investing exclusively in conservative public stocks, than has CalPERS with its hedge funds, or GM with its “Project Alpha.” And large losses have already begun. The San Diego County Employees Retirement Association invested and lost over $100 million, 2% of its assets, in the large Amaranth Advisors hedge fund, which crashed in October 2006. The San Diego fund was one of seven pension funds hit with Amaranth losses, including those of the state employees of Pennyslvania, New Jersey, and Maryland; city employees’ pension funds of Philadelphia and Chicago; and the 3M Corp.
But despite such losses, some of the same public pensions are making or planning bigger plunges into hedge funds. The San Diego County pension has 15% of its assets in hedge funds and “alternative investments.” The New Jersey State Employees’ plan, in a fit of desperation for “junk”-level returns to make up a large deficit, is investing $20 billion into hedge funds. Richmond, Virginia’s employee pension fund, already 5% invested in hedge funds, is “studying” raising that to 7%. The Pennsylvania state employees’ fund increased its hedge-fund level to 4%, after losing $33 million in the Amaranth collapse. The Boeing Corporation employees’ pension fund raised its investment in hedge funds and private-equity funds to 14% of its portfolio in 2006, according to a report by the Congressional Research Service (CRS). New York City’s pension plans, which have never invested in hedge funds, are making plans to do so.”
Public pension funds at all levels are grossly underfunded, and now they’re doubling down to try to make up the shortfall. I suspect they’ll have as much luck as the typical down-on-his-luck Vegas gambler.
http://archive.gulfnews.com/articles/07/07/08/10137658.html
Gold buying up sharply in the Gulf Arab states - 34% in June, an estimated 40% for this month. Looks like petrodollar holders are getting scared.
Fannie, Freddie exceed standards
By Damian Paletta
ASSOCIATED PRESS
July 8, 2007
WASHINGTON – Fannie Mae and Freddie Mac were adequately capitalized as of March 31, the Office of Federal Housing Enterprise Oversight said recently.
Both companies are still recovering from sizable accounting scandals.
Each housing finance government-sponsored enterprise is required by law to meet minimum and risk-based capital standards.
As of March 31, Fannie Mae’s risk-based capital requirement was $20.5 billion and the GSE’s total capital of $42.6 billion on that date exceeded the requirement by $22.1 billion, OFHEO said.
The OFHEO-directed capital requirement for Fannie Mae, which takes into account a higher requirement stemming from the company’s accounting problems, was $38.4 billion, and the company’s core capital of $42.3 billion exceeded the OFHEO requirement by $3.9 billion.
“Although progress is evident and OFHEO is classifying Fannie Mae as adequately capitalized for the first quarter of 2007, significant work remains before Fannie Mae becomes a timely financial filer and corrects its internal controls and operational weaknesses,” OFHEO said.
http://www.signonsandiego.com/uniontrib/20070708/news_1h08fannie.html
NATION’S HOUSING KENNETH HARNEY
Subprime loans target of new U.S. guidelines
July 8, 2007
WASHINGTON – It won’t mean the end to no-income verification or high-risk mortgages for subprime home buyers, but new guidance from federal financial regulators will almost certainly cut their availability sharply.
In a long-awaited policy statement on loans to borrowers with imperfect credit histories, federal financial regulators on June 29 urged banks, credit unions and their mortgage subsidiaries to verify income, assets and employment on all loans except in special cases where borrowers could demonstrate substantial financial reserves.
http://www.signonsandiego.com/uniontrib/20070708/news_lz1h08harney.html