The Housing Bubble

“Real estate is the only way to get rich.”

For many people this has historically been true. I would certainly say for my folks this is true, as their properties increased in value over the years.

This may someday be true again, but today buying real estate will only make you poor and ruin your credit rating for a decade or more.

Also, even if prices did fall back to 2000 levels and again become affordable, I do not believe we will see prices rise much until wages and salaries rise, which barring protectionist policy will be a cold day in hell.

http://www.risknews.net/public/showPage.html?page=685494

When playwrights are weaving housing bubble themes into their plots, you are witnessing another version of the shoe shine boy legend from the Great Wall Street Crash of 1929.

We saw “Rock and Roll” a couple of weeks ago. Really enjoyed it. I thought Rufus Sewell was amazing.
As for plays about Real Estate. Nothing can beat Glengerry Glenross.

As the fine print always says:

“Past performance is no indication of future returns”

Ushers discussing real estate……..enough said.

Commercial real estate, properly acquired and managed, can make you very rich.

Done well, your cash on cash return can start at 8-10%, and will generally go up with rental increases over time. You can shelter a portion of your cash flow with depreciation deductions, and if you ever sell, you can trade into another property and defer paying taxes on any gains indefinitely.

If, after a while, your rents grow (as, they generally do over long periods of time), you refinance out your original equity investment, and put it into property #2, etc., etc., etc.

An 8-10% return with an inflation hedge is pretty damn good. Add in appreciation over long periods of time, and you’ll begin to understand why people make lots of money in real estate.

A home on the other hand, is something to live in.

“…To have a long-term bust you need to have more than one bad thing.”

Sir Greenspent + “Dickey Boy” Cheney = ?

Can’t claim the REO association, but I still think football’s LT is Lawrence Taylor.

Given Downey Saving’s exposure to bad loans, boxes of fabric softener will probably be worth more than their stock soon.

I’m predicting that Shrub’s presidency will be bookmarked by the loss of two twin towers: at the beginning by the loss of the WTC and by the conclusion by the loss of the SPX (long term double top).

Too Negative — Who, Me?
7:51:47 PM January 27th, 2008 Permalink | Comments (25)

Nothing surprises me anymore. So when I saw that my pal Paul Kedrosky was quoted in the New York Times over the weekend as saying certain bloggers are too negative, I had to laugh.

The bloggers in question were yours truly and Barry Ritholtz of thebigpicutre (SIC) blog, who paradoxically is a pal of Paul’s and mine.

Yep, we’re too negative, all right — too negative for not willing (SIC) to cheerlead people into the abyss.

http://blogs.marketwatch.com/greenberg/2008/01/too-negative-who-me/

billion v/s trillion.

He’s a fool. Extraordinary that you can get paid for that stuff.

It is amazing what has happened to Stein over the past 6-9 months. He has become completely unmoored from reality. I have heard him repeatedly say that “Sub-Prime” is only a small part of the total and that it should not be a problem. He mentions it again in this article:

“To my humble eyes, this is what we have seen recently on world markets. Note that the losses in United States markets alone are on the order of about $2.5 trillion in recent weeks. How can a loss of roughly $100 billion on subprime — with some recoveries sure to come as property is seized and sold — translate into a stock-market loss 25 times that size?”

When does he come to the realization that this problem is way bigger than sub-prime? How is it that someone who is paid to follow the financial markets can publish such drivel? One thing that the collapse of the housing market has done is expose is how little some of these “experts” actually know.

wow. I don’t understand. The his just keep on comin’,

No, the money’s still flowing shockingly enough.

If they had “fictitious equity” in the first, they use that as collateral, and dump the house. Nobody’s doing the due diligence (yet!)

CA has homesteading laws.

They are giving up the homestead for a better deal. Nice work if you can find it.

Prosecution? At this stage in the game? Fuggedaboutit.

Bankers aren’t too fussy about loans-to-facilitate the sale of REO; they’re happy to get any buyer who can make payments. Also, such loans are rarely securitized.

I have no idea, but I do continue to see and hear ads for 100% loans here. And I guess the banks and mortgage companies have not suffered enough pain yet. This is a good example of why the industry should NOT be bailed out.

Our system is based soley on the almighty credit(stupid) score which can be manipulated…have a 780 you can get what you want…I don’t blame those people to take advantage of the system especially if they see themselves in trouble in 6 months when they adjust on their ARM..

They are buying the house in Mom’s name, they are getting papers from family saying that the house #1 has a rental agreement….there are many ways to mess with the system when you are one of a ton of loans sitting at someone’s desk…and most mortgage brokers who work with a particular lender alot know what will and what will not get the loan passed in underwriting…

This is how it works. Bob paid $420,000 for his home. Then he notices the house across the street, with more upgrades, and is selling for $315,000.

Its going to be fun to see what Bob does when the $420K house sells for $215K and he’s stuck in the $315K house with lousy credit.

I lookey-looed yesterday and a desperate Realtor-FB told me “creative financing” was still available including 80/20, 90/10. “It just depends..” but I don’t know on what and I don’t want to fake my way through the paperwork to find out.

This credit crunch is a myth.

I know someone is trying to buy a bank foreclosure in the outskirts of Temecula CA. He is frustrated that getting a jumbo loan being soo difficult. Most want 5-10% down even though the appraisal came in at a 30% premium. He found 1 lender who would do 3% but they are a credit union that he belongs to. He is having his dad help him with the downpayment and then plans on REFIing since the loan to value is low enough to REFI in order to pay his dad off. They will not lend new but they could easily REFI for the amount they are purchasing for. CRAZY!!

Forget the moon, it seems to be headed toward a neighboring planet.

“Hey…….how’s this for a moon shot”

RE: Ca has 31, 676 foreclosures 4th qt 2007.
LA County recorded 4815 foreclosures, 24,323 NOD’s and 2725 homes ready for auction block as of JAN 28th 2008(Foreclosure.com).
Long beach has 1100 NOD’s, 240 foreclosures, 131 sheriffs sales as of JA 28th 2008. Total of 1471 LB households seriously delinquent or lost their homes, or roughly 2 % of total households.

There will be over 1000 auctions/sheriffs sales jan 28-31 for LA County REO’s. There will be some serious comp resettings come february as over 50 % of these homes are pure trashed out inner- city wasted crackshacks hardly worth 20-30% of their previous fraudulently overappraised prices of 2005-07.

You might say that Le Tan Orange is making Hay, while the sun shines.

So the price of not getting arrested is $37.5MM.

What are the tax implications of walking away?

I bet the problem is finding credit-worthy counter-parties.

It is my understanding that the British Govt essentially created a million phantom jobs to put it’s population to work. I believe it has worked very well. Much better than tax rebates. Also infrastructure is being maintained at a high level. When I was over there a crew was out replacing lamp posts and other crews were fixing roads. At the train station, each track had a small group of security people milling around.

I recon a big works type project is a must for America right now, and god only knows our infrastructure is in serious need.

For those who believe a more free market approach is best, try and imagine a world in which we have 30% default rates on credit card and other forms of debt, and in which there is no money to buy even the most basic essentials. Survivors of the depression remember this world, and short of real action and quickly, this will be our world before we know it.

Typical British tabloid stuff.

The dumbazzes need to learn to read the prospectus which determines the allowed components of any fund or investement vehicle. The name doesn’t mean squat.

just -0.3% again, but if you take inflation into account it already starts to look a bit worse

but how do they taste?

Despite govt protection, sea lions are on their way to being shot near the Bonneville Dam, on the Columbia River in Oregon/Washington. They apparently eat 10-15% of the salmon run, and attempts at scaring them off have failed. Last year, a frustrated fisherman shot a sea lion when it tried to eat the salmon he hooked and was reeling it in. Of course, how can sea lions resist it when the buffet streaming past gets funneled into narrow salmon ladders?

Lots of FB’s trying to work their way upstream. Chomp.

By the time the MSM gets a hold of an issue then its usually too late!!! Good luck!

See the Andy Rooney bit at the end? “Recession? what recession? I lived through the Depression! Souplines blah blah.” Then he admits his family was pretty well off back then anyway.

Just getting started, dipwad.

Not that interesting in retrospect; the trick was to recognize it ahead of time and make some coin off of it. Many here did.

This is a good place to lift a story. Why? Lots of first person accounts, and news articles from everywhere that from a local perspective look like a particular situation but added up sum to a global catastrophe.

Moreover, structural changes are hard to model, but they start somewhere and then spread. What is happening in some places now will happen in other places later.

Now we are hearing about banks selling at market, and people who can pay the mortgage on houses bought at the peak walking away just because that makes business sense. Soon to spread.

I called up my Octomom to make sure she watched it, and we discussed it afterwards…

I’ve been trying to get her to dump her stocks for about 6 months now, and she’s fought me tooth and nail, not knowing what has been really going on, despite me being quite persuasive and giving her reams of evidence to support my conclusions.

My mom is no dummy, but when we talked after the show, she said, “but the problems seem to be mostly in Stockton, and who would ever want to live there, anyway?”

They did mention other locales, but only in passing.

Only one word…greed!

That was a great story on 60 minutes. In fact, it was one of the best bubble pieces yet by the MSM. I loved the part where they interviewed the FBs who ran a daycare out of their home. Their mortgage payment jumped from 2,500 to 4,200 a month and they could no longer afford their home. The reporter starting asking the FB questions about his mortgage and the FB gave the same sob story. But the way the reporter told the story and asked the questions show that he was utterly amazed that anyone would give those morons a mortgage at all because it was obvious the could never repay the loan. Near the end of the story they had a guy who said that the FB made out like bandits too. They borrowed more than 100% at closing (they were paid to buy a house!) and then lived in a new house for a couple of years, stopped paying the mortgage then lived for free for months or years. The story said that there was a human impact to the subprime crisis but that there were no innocent parties. I commend 60 minutes for this story.

I was secretly hoping all those who thought I was paranoid years ago watched, gulped and said, “Daaaamn, she was spot on!”

I recently had a conversation with a friend who bought a house in 2005, about how we would see more and more people simply walking away from houses because of the fall in value. His response to me was something to the effect of, “I can’t believe people will just walk away, that won’t happen”. For those of us who follow this blog stories like the one on 60 Minutes are old news, for many people it is not. The more the MSM picks up stories like this the more the magnitude of this problem will sink in with the majority of the country.

Called it all subprime - never mentioned any prime ARMS, Alt As, or I/Os.

I loved the conclusion of the 60 Minutes piece last night:

Subprime is indeed contained……..to the Planet Earth!

Apparently it’s still a nice parachute, though.

weird. looks like just an anomaly in the CNN data. only down 1% or so according to other sites.

Lunar land sales are an outright fraud. No one owns the moon and there is no one to pay for such land until international treaty figures it all out. Not saying it won’t happen some day, but idiots buying fake deeds from outfits who have dubious claims are in for a big surprise.

and waterboarded.

I’ve sent 3 emails to CNBC telling them to can the jerk. I can’t imagine that anyone there likes working with him.

He comes on, I change the channel… He is a clueless dolt or an out right liar.

Perhaps obvious, but still worth mentioning, that he said this during the aftermath of a severe banking crisis.

I thought I just read in Forgotten Man that going off the gold standard when he did (temporarily) automatically hosed billions o dollars in current contracts.

Loan Reviewer Aiding Inquiry Into Big Banks
By JENNY ANDERSON and VIKAS BAJAJ
Published: January 27, 2008

http://www.nytimes.com/2008/01/27/business/27subprime.html?em&ex=1201582800&en=e9faa78f9430204c&ei=5087%0A

And then there is this issue for the FOMC to weigh into their decision:

The dismal dollar

Also, the Fed’s actions do not just have an effect on share markets. Alan Ruskin of the Royal Bank of Scotland says that rapid rate cuts mean the dollar risks becoming a funding currency for the “carry trade”, rather as the ill-starred Japanese yen has been. (The trade involves borrowing in a currency with low interest rates and investing the proceeds in a currency with higher rates.) Mr Ruskin says that the gap between 12-month dollar and Swiss-franc rates is already as low as it was in the last cycle, when the Fed cut rates to 1%. “By the end of this cycle, dollar short-term rates will be lower than all 40 liquid currencies except the Japanese yen and Hong Kong and Taiwanese dollars.”

If the dollar becomes part of the carry trade, it will tumble even further. And a falling currency makes it harder to persuade foreigners to finance America’s trade deficit. David Bowers of Absolute Strategy Research reckons the subprime crisis has “destabilised the symbiotic relationship between Asian and Middle Eastern savers and American consumers.”

Those foreign investors may also get spooked at the direction of Fed policy. They have seen the bank cut rates in response to last August’s credit turmoil and now a January stockmarket plunge. They may start to feel that the Fed has turned from a watchdog against inflation into a labrador puppy. Thanks to the global slowdown, there is no short-term inflationary threat. But the longer-term risks have probably gone up. And, as James Carville discovered in the 1990s, the bond-market vigilantes can be powerful enemies if they feel neglected.

http://www.economist.com/finance/displaystory.cfm?story_id=10567544

gonna reverse Friday and dump Feb puts at the open into this gap down; buy Feb. calls.

If the Fed holds or only cuts 25 BP, we’ll get the minus-1,000 day in the Dow that we dodged last week. If it cuts 50, I suspect not much of anything will happen, because it’s baked in.

Notice how the 75 BP cut didn’t do much for the market. Everyone’s getting too used to the cuts and they are losing their effectiveness.

– Judge Smales
“You’ll get nothing and like it”

What a crock.

Pending sales in December were down 41 percent year over year. And Inventory was up 60%.

Austin is about a year behind the rest of the country in home sales. Sales only peaked in the Summer of 2007 vs 2005/6 for other places.

10,000 homes for sale was around the peak of inventory during the “crash” after the dotcom bust. Now 10,000 during January, before most homes are put on the market is considered a little bit more inventory?

They didn’t mention one of the condo towers going up downtown that didn’t even sell 40%, and decided to convert to apartments either.

What a puff piece. No stats, data, and only comments from realtors trying to sell to make a living.

How many ground zeros are there? Here are a few that come to my mind:

San Diego
Los Angeles
San Francisco
Modesto
Merced
Bakersfield
Las Vegas
Phoenix
Detroit
Cleveland
Minneapolis
Tampa
Miami
New York City
(you get the idea)…

sorry for poor spelling

Yes, it was a decent piece. Steve Croft at least started to ask the right questions, especially of that one couple (”did you READ your loan documents, did you get a lawyer to look at them, did you understand them…?)

How exactly is letting the populace go deeper into debt (by letting Fannie and Freddie buy bigger loans) going to stimulate the economy?

It seems to me that raising conforming loan limits will only suppress spending as people are forced to service their ever-larger debt.

A lot of the FB’s seem to have an endless appetite for debt, but eventually, they will max out their ability to go deeper into debt, and will have to spend much of their cash servicing it.

I guess the US government has adhered to this kind of a model for years. But the government can print money, FB’s cannot.

The only way to encourage spending when the population has exhausted its ability to accumulate debt, is a period when some of that debt has to be paid down, and then later, the population will have some ability to spend again/go into debt again.

That might be the core of the new business cycle - spend/pay down, spend/pay down.

The executive and the house were mistaken to think of the senate as a rubber stamp. This is fun to watch because old joe has already spent his $600…and then some.

On a $650,000, 30-year fixed-rate mortgage, the eased loan limit could save homeowners $417 a month, according to her office.

If you can afford a $650k house, why the h*ll would you need a gov backed loan? I always thought these loans were originally started to help the poor and lower middle class. All this limit does is allow those that can already afford houses to take advantage once again. If you can’t afford a $650k house if the interest rate is 1% more, guess what, you buy a $600k house.

Everything looks eerily similar to 1972, just after trickus dickus took us off of the Gold Standard.

Gold went from $35 to $125 in a hurry.

As a ‘gold bug’ I prefer slow and steady to parabolic moon shots.

Here’s a good article by Fekete:
THE ANTI-GOLD GOSPEL ACCORDING TO ANATOLE KALETSKY
http://www.financialsense.com/editorials/fekete/2008/0126.html

“I strongly object to the idea that “gold is an investment”. Gold is better described as a non-investment, more precisely a place where you park your savings when you cannot find satisfactory investment outlets either because interest rates are too low, or because the risk of holding equities is too high, e.g., after a bull run of the stock market driven by printing-press money. Gold is not an investment any more than a fire-insurance policy is. Governments have a sacred duty to protect the value of funds of the weak, who cannot fend for themselves in the investment arena. Without protection their funds would melt away like butter left in the blazing sun. Governments have failed miserably in discharging this sacred duty. The Biblical curse is upon them for ‘tormenting widows and orphans’.”

In the 1960’s, an ounce of gold cost $25 and the typical (average) new car went for $2500. In other words, a car cost 100 ounces of gold.

Today, an ounce of gold costs about $1,000 and a car costs about $20,000. Gold is the the same today as it was in the 60’s. The 60’s car had a lot of chrome, a radio and maybe air conditioning. Today’s $20,000 car has an anti-theft system, power windows, power steering, anti-lock brakes, air bags, fuel-injected engines, CD changers, better fuel consumption, reliability, crashworthiness, etc.

But today’s car only costs 20 ounces of gold. I think there’s inflation in the air. But that inflation is in the price of gold.

state of the union address tonight = green stock market.

You can’t blame the hoi polloi…

They’ve been brainwashed by Wall Street to believe in the unbelievable, and it’s worked for an awful long time now.

And the average joe thinks Gold is akin to a shady black guy trying to sell them a “Gold Necklace” that weighs 1/2 a pound for $35, in the parking lot.

They simply have never had any exposure to the real deal.

Obviously I’ve known about the bubble through this blog for years, but this piece infuriates me. And the fact that bubble news is still being revealed to the general public through investigative reporting speaks volumes of the decline of our main stream media. It’s truly sickening.

Being Ben Bernanke (triple-bbb rated)

There are swiss franc etfs

google

I would look at the yen. It’s been heavily suppressed and looks like a coiled spring, IMO.

Kim

free sites:

http://www.bankrate.com/brm/safesound/ss_home.asp

http://www.bauerfinancial.com/btc_ratings.asp

paid sites:

http://www.weissratings.com/

I run banks through a series of screens. I insist
on a physical presence in my area so I can go
‘pound on the formica’ if I have to to fix a
problem. (it has happened a few times).

Yet homebuilders are rallying bigtime today. Go figure.

Did you see the frame grab I posted on Friday night from someone’s Bloomberg terminal showing the guy’s job open like 10 days before the loss was made public?

It’s all sleazy as hell.

“It is also the case that folk hero (Mr.) Warren Buffett has always liked insurance and also likes to be seen riding to the rescue, paving the way for more cheesy interviews with fawning females on CNBC.”

Chris Woods
Greed and Fear

Ah British word smiths , on why Mr. Buffett may buy MBIA.

John Mauldin has the best perspective and describes concisely what will occur the next few quarters and beyond:

$5 Billion a Quarter

Here is how I think the next few quarters are going to play out. Each new downgrade triggers more losses at financial institutions. You don’t write down a bond insured by MBIA as AAA until there is actually a write-down. And then you do, and announce it at the end of the quarter. Along with the rest of the losses caused by new downgrades. We are going to see massive write-offs every quarter by the same financial institutions that have already written off $100 billion. We are only in the beginning innings.

There are very serious suggestions that several extremely large banks (and not just in the U.S.), of the “too big to be allowed to fail” size, technically have negative equity. With each announcement of a new massive write-off, we will see yet another large capital investment announced as well.

And every time it happens, the market is going to be disappointed. And continuing disappointment is what keeps a bear market intact. Couple that with earnings disappointments from companies with exposure to consumer spending, and you have a recipe for a bear market that could linger for awhile.

I think there is very serious risk that taxpayer money is going to have to be spent on shoring up some of the financial players that are at risk. There will be much screaming and wailing and gnashing of teeth before that happens, but it is quite possible.

As I am closing this letter (as I have yet another meeting tonight), I take special note that Bank Credit Analyst has changed their forecast. They now are forecasting a recession, but they see one that is worse than I am predicting. They think the recession will last a year and that GDP will be around a -2% for that time period. I will call Martin Barnes when I am back in Texas next week and get an update for you. Martin is one of the best economic minds I know, and I value his opinion highly.

Next week I will review my thoughts from this whirlwind trip to Europe. Let me say that at least the people I met with were generally more bearish than I am. That is a little disconcerting. A few think I am quite the Pollyanna. And now that Martin is bearish, maybe I should enjoy being the “optimist” in the crowd.

Here is a fellow who did not do his homework. If he had, he would realize that housing busts typically have even more devastating long-term macroeconomic effects than stock market crashes. Quoting from the article linked above:

“Some analysts think that, whatever happens at first, stocks will be up within a year. Charles Reinhard, director of portfolio strategy at New York fund manager Neuberger Berman, studied the past 11 series of Fed rate cuts. He concluded that in all but the most recent one, 2001, stocks showed gains a year after the Fed started, with an average one-year increase of 16%. He considers 2001 an aberration because it followed a devastating stock bubble.“

Have you bought a house since 2005?

FB= focked buyer/borrower

I get them all the time, too. Make it stop, Citi.

This trend will continue as many on this blog predicted a couple of years ago.

My wife had a friend in high school ($$ private school) who drove an expensive BMW and always had the trendiest clothes. The girl’s mom was a housewife, but fortunately her dad was an electrician. Every two years or so, the house they were living in would mysteriously burn down due to “faulty wiring”. They would collect the insurance and move to another, more expensive/valuable ATM. How he never got caught is the real mystery. Friend in the Fire dept. or maybe they just kept hopping from on insurance co. to another. I don’t know.

Good one! LOL!

“It’s a 15 page speech with the first 7 pages dwelling on domestic issues and the rest on Iraq, Afghanistan, the ME peace process and foreign affairs in general.

Part of it will have to do with a bit of a retrospective concerning the surge, reminding us that a year ago we were talking about changing strategy. If you haven’t read the Fred Barnes piece in the Weekly Standard about that decision, you ought too. It is a fascinating read.

He’ll also briefly touch on the reconciliation process, both bottom-up and top-down and progress there (such as, for the first time executing a 48 billion dollar budget, de-bathification and the coming provincial powers law which will set up provincial elections).

As mentioned Dale will be live blogging it. Make sure to tune in.”

This is QandO.com - those of you not familiar: caution do not drink in front of your ‘puters keyboards.

“For those who can’t hold their liquor, a shot for every time he tells the truth might work. Personally, I’m thinking of having a shot every time he lies, so I’ll be hammered before the 5 minute mark.”

http://www.qando.net/

Here’s a link to the NPR story http://www.npr.org/templates/story/story.php?storyId=18489441

I’d get a lot more respect from the Democrats if I stopped working, paying my bills, and paying taxes! Then they’d hug me and shower me with everything I need.