The Housing Bubble

Clearly it’s going to lead to the biggest fire-sale of our lives. Plan accordingly. You’ll run out of money/gold before you run out of opportunities. Patience, grasshopper. Patience.

A lesson in hubris and a blast from the past courtesy of the SDCIA board and our long-lost poster child, Jeff:

Jeff
Senior Member
Registered: 03/14/05
Posts: 1,464
07/29/06 at 03:24 PM #147

——————————————————————————–

Quote:
Originally Posted by jj
“One question, yes or no, do you have a plan in place if you are wrong about about investing in the first year of an “up-leg” in your markets and you see declines in all 5 of your markets?”

Once again…I am certain that I don’t understand your question…or that you are again repeating the same question/statement–”You could lose money so don’t do what you are doing…”

At the risk of repeating myself, I do have a “plan.” I plan on keeping these homes for >5 to 30 years, and paying for any shortfalls with my “cash reserves” (and any sales I make from my “dogs” or “half-dogs). Of course, my “cash reserves” are really just borrowed money (of two kinds). My “primary” cash reserves (initially 200k, all borrowed) are down to around 35k now due to some recent vacancies and other expenses, my “secondary” cash reserves (a HELOC) I hope to not touch for several years if ever…but at 200k should be more than enough to cover any conceivable shortfall.

This is all covered in that URL I posted earlier…

P.S. Because of our talk (and others) I took the time to calculate my LTV on 10 of my houses last night. Even though these were 0% or 5% down purchases, because of appreciation I now have a house at 68% LTV, one at 71% LTV, and two houses at 74% LTV. My average LTV for all of my houses is 81% (pretty good as I have owned some of these houses for only a few months…). As I have stated above, it seems as if the worst risk is over–at 80% loan to value, my “exit plan” can be just sell and break even (can I do that?). Until now, I haven’t taken (wasted?) the time to make this “exit plan,” as it didn’t seem necessary. Does this “exit plan” qualify as good business planning (albeit done after-the-fact) to you?

If not, all’s I can say is that “you can’t get blood out of a turnip.” If each and every house I bought last year is a “turnip,” and remains a turnip for 5 years without any exceptions–then I am screwed. However, I estimate the chances of that as less than the chance of getting struck by lightning.

I don’t carry “getting struck by lightning” insurance either…

__________________
The first million is the hardest…

Even the settlement seems to be quicky and mainly designed to “keep people in their homes”. Admittedly, this is presumably the “deceptive mortgage practices” end of the spectrum, but sounds like BoA may have gotten out quick and relatively clean.

Or perhaps the plaintiffs gave up as more and more subjects may have turned out to be greedy people sold what they asked for.

How deceptive is it if you don’t call it a “suicide loan”

yes, Euroland is in severe trouble. A wave of nationalisations and other drastic measures to protect the banking system is killing the euro currency (just what the kleptocrats wanted, although not in this way I guess …). And this is probably just the start of things to come. Note that on the EU mainland the housing bubble still hasn’t burst! And the EU bubble might be prolonged again because of calls for lower rates etc. from all directions

That’s good news for a lot of FBs out there. We’re making progress. Let’s hope Paulson uses the TARP to encourage more workouts.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3141428/Germany-takes-hot-seat-as-Europe-falls-into-the-abyss.html

interesting….

Remember - the Euro didn’t shoot up the way it did because Europe was that much stronger than the US. I’m no FXpert but a more even exchange rate across the Atlantic seems like a return to normality or a more evenly balanced scale.

Today’s rate is still high and the EUR at 1.6something USD was just plain ridiculous. But it was fun while it lasted

That was a great piece. Link below in case anyone is interested.

http://www.cbsnews.com/video/watch/?id=4502673n

Alad,

I didn’t catch the name of that snake, but I did find the organization he chairs - ISDA.

Good folks, click the membership tab (first upper left) and see if your institution is infested!

http://www.isda.org/

Best,
Leigh

It’s going to be bad, real bad as all these CDS’s unwind. Let me start with that:

However,

1. The positions went both ways, so the NET positions is going to be less than $60T. Already, to my understanding, these positions are unwinding–we’re already down significantly from the peak outstanding CDS.

2. As counterparties begin to default, etc., risk premiums will rise (since CDS won’t give the same comfort anymore)–underwriting will tighten, and it will cost far more to borrow money–as it should.

3. Those with wealth (whether it be gold, cash, whatever), will be rewarded, as the premiums paid for investment and/or loan dollars will be much higher.

All that said, it’s going to be ugly, real ugly.

Anecdote: I ran into a state senator yesterday (of a small state). I asked what he thinks of the bailout. He said that it was needed because without, all ATM machines as well as *all* credit would have shut off.

Is this what these people were told, and believed, not having an opinion of their own?

Kashkari …..Another Goldman’s ex- employee from the Banking
division . Does anyone get the feeling that the shadow banking world is going to be helped .

The dude is only 35 years old. It’s great when the future of our financial system is in the hands of babies.

Mr. Kashkari will be heading the “Office of Financial Stability”. Oh, Mr. Orwell, you couldn’t have done better.

Holy cripes - that is too funny. You know, sometimes your name really should preclude you from entering a particular field.

Feeling better about gold all the time.

(BTW - up $35 today - maybe on this guy’s name alone? )

Kashkari = Cash & Carry

the same is going on all over Europe now (Ireland, Benelux, France - to name a few). The European Commision might object because of ‘unfair business practices’ though. I guess within a week or so either all savings accounts in Europe will have 100% protection (that might sink the euro below 1.0 to the dollar?) or they will force all governments to limit the deposit insurance to the same amount everywhere, but probably higher than the 20K euro of just two weeks ago.

Of course it doesn’t matter is the insurance covers 20K or 1M euro, there isn’t any money in case of a massive bank run. It has all been spent by banksters and homeowners.

Yes, I saw that, also. It was no surprise to me. Gee, 60 Trillion Dollars. The whole world economy is $55 Trillion or so. I think there are no more output scenarios to speculate on. It looks like it is gonna get as bad as it can get with or without a Gov’t Bailout. I’m really sad about this because even though I did nothing wrong and I watched my debt and my financials properly, I’m going to get hit and badly, too.

I knew there was going to be collateral damage, it looks like there is way more than even I anticipated.

A whole lot of people who had nothing to do with this are going down.

Roidy

P.S. It’s just too big, and it’s gonna hurt.

This is great, we have multiple petri dishes running different experiments at the same time. We’ll see which one cures the disease (or slows its spread), and do the same thing everywhere…

“Word of the day; deleverage.”

Phrase of the day; cash is king.

I guess I’ll be breaking links off my scrap gold bracelets to buy stuff soon, LOL! As Ben said, all fiat currencies come to an end soon.

Race to the bottom of fiat currency hell is on

definitely, euro gold is acting very nervous lately and close (again) to a breakout above the all time high. Went up more than 5% just this morning…

Why isn’t he calling bottom again?

Why are they allowing Crammer to rant on TV . Crammer has done more harm with his rants than any other talking head on TV . If Crammer was any kind of friend to the people he would of told his following he was a bubble picker host 3 years ago .

Cramer has an article in New York Magazine where he says he wouldn’t be surprised to see the Dow at 8500. It is basically an article promoting Obama and the Bailout, but when an uber-bull like Cramer can even mention something like Dow 8500 you know the sentiment has turned.

Cramass:

“Buy! Buy! Buy!

Sell! Sell! Sell!”

Cramer on the Today show says ’sell it all’. He was a raving bear and probably scared J6P so badly he singed himself with the morning coffee. Mentioned Dow 5000. Heh.

Ya know… given his track record of late, the guy has become something of a contrary indicator.

But I am not selling my SKF yet.

To clarify - he said if you will need it in the next 5 years to sell. He did look pretty scared, though.

More money is destined to dispappear as this recession thingy gets into full gear.

Look for mutual funds to dump their holdings as frightened lemmings demand their money. The mutuals will have to raise cash to meet this demand and thus will throw out onto the market excellent stocks at fire-sale prices. Those armed with lots of cash and solid information will end up rich.

Where would the money come from? What about economic stimulus cheques, $6,000 for everyone, every month. That should get the economy back on its feet.

In a deflationary environment how would the Government even pay the interest on $11trillion, let alone the principal?

The value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago, data compiled by Bloomberg show.

And the investment banks are gone, leaving us with the “regular” banks. Is it true that the bailout bill allows banks to hold a 0% reserve ratio? If so, they can let their borrowers be infinite in number, theoretically, as long as what they loan comes back in as a deposit by the seller of a good or service borrowed against. Sheesh!

I knew it ,Paulson was part of the problem .King Paulson should of been disqualified as the head of this Bail Out long time ago for extreme conflict of interest . In the final analysis Paulson was part of the problem . Out with Paulson before he does more damage .

Here is another Reagan person’s take on this maelstrom

http://rutledgecapital.com/rutledgeblog/

Did you not make moneys on the scam? Aren’t you planning to make more moneys on the scam? If you understand the system, work the system. The sheeple never listen anyways.

Jas, whats your new target price on oil?

Small retail purchases are now impossible but some dealers have started selling kilo gold bars at about $20 per oz over spot and 1000 coxex silver bars at .49 over spot. It got me thinking:

Someone is doing arbitrage between the physical market and the Comex.

Someone is taking delivery.

If dealers are successful in these sales and If this happens in large enough quantity it will put an end to the manipulation of the gold and silver prices… because taking delivery will reduce Comex inventory and in the event of lack of physical in Comex delivery will either eliminate or greatly reduce the effect of the futures manipulated price on POG or show the Comex price to be a sham — unbacked by physical.

just heard there are protesters in the audience. Lol!!!!

I saw a little bit, he started off by blaming short sellers for Lehman’s demise.

Patience… This winter will shake a lot of rotten apples to the core, and you will start seeing some good ones next year, but if you are patient enough, 2010 seems to be much better around MA. Right now you are seeing the last of the subprimers, and the first of the Alt-a’s and primes. You do not want to buy a 3 floor apartment in Dorchester or Roxbury do you? What about just waiting 2 years and getting something in a much better neighborhood.

“You better act fast. I just put in an offer of $375K for the place.”

That’s freakin hilarious. You would have to be a complete idiot to fall for that, considering that no real buyer would be encouraging you to come in over his bid. Instead, he would be pointing out the problems with the house, to make sure you come in under his bid.

Them thinking that someone would fall for such a scheme suggests to me that _they’re_ complete idiots.

i dont remember if the links to the votes on the bail-out bill were posted last friday (FYI, i have a horrible memory) so sorry if its a double post.

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=110&session=2&vote=00213

http://clerk.house.gov/evs/2008/roll681.xml

Brazil halted again, down 15%. Russian down 20%. BRICs are falling.

First time under 10k in 4 years.

Someone remind me about the soundness of DCA again.

PPT bloodletting…

8k…. ready on the trigger.

Where ever the bottom is - it ain’t gonna be all nice and neat. It’s gonna be drawn out and sloppy - just to wring out every bit of juicy goodness left in old joe’s wallet.

Looking at the DJIA numbers is useless, ridiculous and something only a true amateur and non-economist would do. The same is true with the price of anything considered an investment.

It is not how much something grows or how far something falls, but what it compares to in terms of purchase power.

Saying gold goes to $2000 is nice and makes some of us gold bugs say “yay!” (not me), but if gas is $6 per gallon, the value is on par with when gold was $350 and gas was $1 per gallon.

So the DJIA going up or down means nothing — absolutely zilch. Stop being an amateur, and instead look at what the value of those assets are: when you bought them and now. If selling them means you can buy MORE than you could with the initial investment (even if it was higher than your sell price), then you profited.

I am debuting a website, soon (meant to do it last year) that will let people track prices of things important to them. Basically a social network focused solely on sharing prices of common items, and letting people track things over time. I think the DJIA to the cost of eggs ratio is more important than the DJIA to dollar ratio.

wow - I was waiting for it to fall below 10k but didn’t expect it to keep falling like that right away.

Remember that the market hits its low well before the economy does.

My trigger finger is getting itchy.

Fleck is right. All this funny money will lead to massive inflation and higher interest rates. Basically it is a war between the asset owning class and the non-asset owning class. The asset owners will do anything to prop up prices, and hammer anyone without them via inflation.

Anything to protect their asses…er…assets.

My plan is to buy gold and silver with the assumption that prices are going to eventually go ballistic. They may actually go down near-term (who knows what this crazy market will do tomorrow) so I have developed a PM strategy. Here is goes…

I bought Gold, Silver and Palladium today. The quantities don’t matter, but it comes out to be about 5% of my eventual position.

I will not add to my positions unless each price goes up 5%.

Every time I make a purchase, I set the next purchase price target at the last purchase price, plus 5%.

I use the end of day price as the final price, ignoring intraday moves. This eliminates the noise.

I hold my gold and silver offshore.

This strategy has several advantages IMO.

1. Unemotional strategy

The price action determines my entry points, and I use a specified time of day to make that determination.

2. Don’t average down

I don’t believe in averaging down. All that does is add to a losing position, and add more to my losses. I reward winners, not losers. I don’t add to my position until my previous positions have rewarded me with profits.

3. Ease into position

Building a big position can be a big mistake. It is far better to ease in, even though my strategy guarantees that I only buy at higher prices from my original purchase. This sounds counter-intuitive, but we all have to balance risk vs. reward.

4. Diversify holdings

Gold looks like the best performer so far, but that could mean that Palladium will be the best bet going forward. Or maybe silver will race up. Hard to say and I do not claim to know the answer. I have exposure to all 3.

My % is 70% gold, 15% silver and 15% palladium.

5. Independent holding strategy

I don’t buy anything unless it exceeds my previous purchase by 5%. This means I may be adding more to my gold holdings, for instance, while avoiding silver and palladium purchases. This helps me be in the right metals and ignore the losers. Palladium could be a real turkey due to auto exposure.

6. Hold metals offshore

I believe that there is a good chance our government will outlaw/confiscate PMs before this is over. It is not guaranteed, but it is a real risk. Therefore I hold my gold and silver offshore, in a Swiss vault. The Swiss would be the last place to sell me out, because that is their thing.

7. Balance risks and rewards

I didn’t come up with this strategy overnight. It is a clear compromise between risk and reward. I know my profits will be less if the PMs take off. But I also minimize my losses if I am wrong. And one thing I have learned over the years is it isn’t what you don’t know that hurts you. It is what you are absolutely certain of, but are wrong. Never marry a position!

The next thing I am working on is the exit strategy. Like any good investment strategy, you have to know how to lock in profits and cut losses early.

Losses:

With my strategy, I have a low risk/loss tolerance with new purchases. So my last position cannot exceed 10% loss or I sell it. In this way I avoid the potential that I will get fully invested, only to give it all back in one massive sell-off.

Taking profits:

This is harder, and I have not worked this out yet. I know one thing. When the top is near it will be very hard to get out. So there needs to be some emphasis on locking in profits along the way. I have some time before finalizing this one, but any ideas would be welcomed.

You will refer to yourself as a “voter” missy - at least until midnight November 4th. Then you may resume referring to yourself and others as “consumers”.

I don’t think the repeal of Glass-Steagall has had anything to do with the current collapse. I am not aware of any bank or S&L that has gone under due to anything other than making bad loans.

Ditto.

As Dolly Parton said in Steel Magnoloias,

“Laughter through tears is my favourite emotion.”

IMHO .Lenders aren’t interested in extending credit like they did before
so they are not renewing the same amounts of short term type credit .
In my opinion this is actually the prudent thing to do . I don’t know how the powers are going to force lenders to extend risky credit when we are going into a recession . To suggest that the Bail Out would open up the credit markets that were contracting is suggesting the lenders
would be willing to extend credit to people already over-extended . That would be like giving a sub-prime borrower another loan based on faulty up-side -down -equity that is still falling . What a joke
If anything the answer lie in the people having more buying power by income ,not more easy money they can’t pay back .

Institutional investors (pension funds) are fleeing money markets. Money markets are taking the money from maturing commercial paper and using it for redemptions — no one is buying new commercial paper. And banks can’t lend.

What I don’t understand is why rates don’t rise to attract savings to money markets?

I get the feeling that retail investors are in this ghetto, where rates are low, and they don’t want to pay higher rates to them — even as they are paying sky-high rates to others.

It’s like the early phases of housing deflation — the “sellers” hold out of high prices (low rates) despite a buyer’s strike.

Interesting - I didn’t know that was part of the bill. I worked for a relatively fast-growing telecom and I had a couple of co-workers who were burned by that pretty badly actually. I managed to avoid it. It taught me a valuable lesson that has since saved me tons of $$$ - never ever let tax incentives drive your investments - especially if it comes to adding significant risks. Specifically for stock options - I’ve always done same-day-sale. I’d much rather take the extra short-term gains tax hit than add the tremendous amount of risk that comes with trying to hold the shares for a year before selling.

I think I have an Audi fetish.

Methinks that someone might soon be trading trading their Audi for 1999 Chevy Cavalier.

Well, at least it wasn’t a Subaru. I’ve decided I have a fear of Subaru drivers, which must be why I’m a bit prejudiced against them - the yuppie Birkenstockers with NIMBYism who never never let their dogs be dogs and pee on lamposts.

Disclaimer: my dad drove a Subaru. My bro and I sold it as fast as possible after he passed on to the Beyond, where I’m convinced he’s now driving what his heart really desired all along, a 1944 10-20 John Deere Tractor.

(No offense meant to anyone here who drives a Subaru, it’s just a stupid stereotype I’ve developed.)

Treasuries are quality? LOL, they are the last great bubble.

I’d much rather see a taxpayer advocate run this thing. One who called the bubble, has no vested interests in any of the beneficiaries of this largesse, and who “We the People” can trust.

There were plenty of economists who were sounding the alarm years ago. Why can’t one of them be in charge of the new program? Additionally, why can’t one of them be on the oversight committee?

To what data are you referring? To my reading, Uncle Buck is strongly rallying against the European currencies…

In my googling, I read that the IRS could come after him for the difference between what he owes the bank and the amount of the short sale. For example, if he owes the bank $170,000, but sells short at $150,000, the $20,000 excused debt may be considered ordinary income. Is this true?
—
The law was changed (in 2007?), perhaps temporarily (for several years, so far?) such that this income is no longer taxed.

Dude, its the internet you’re already anonymous. You dont have to use the whole “i have a friend routine”.

You know Nixon’s father bought a home from a Sears catalog, had it delivered by a train and then put it together in Yorba Linda CA. I guess old “Tricky Dick” could have answered how many houses he lived in.

They can build dam’s that hold back millions of gallons…but not houses for millions of families. I guess a FEMA trailer might pass as a house in some parts of America, then again… we are a Nation on the move.

Here’s an oldie, but goodie got from a Used House Sales Person three years ago.

——-

YOU MUST READ THIS TO UNDERSTAND WHERE WE TRULY ARE AT IN THIS ORANGE COUNTY MARKET

Orange County Real Estate 2006 Economic Report…

Why the Housing Bubble is Bogus!….

Updated on October 31st - 2005…

The following is the outline Gary Watts is using in his current talk on the housing market. It shows why demand for housing continues to remain strong while supply is shrinking. It explains why the forecasting of housing declines by the pundits are wrong, once again, and why real estate values throughout most of California should continue to grow at a 15% appreciation rate. If your wondering how often Gary has been right, here is his record for the 21st Century.

Year ….Pundits …Gary …..Actual

2000 ….8.0% ……12.5% …13.0%

2001 ….7.7% ……12.0% …10.1%

2002 ….2.8% ……10.0% …16.8%

2003 ….2.0% ……15.0% …19.1%

2004 …-2.7% ……25.0% …24.8%

2005 …-7.4% ……15.0% …16.1% as of August 2005

His record has been very good and it goes back to 1989 when he told the real estate industry that their Party was Over and real estate would turn downward for at least 5 years losing close to 30% in value! He became known as Dr. Doom & Gloom and Scary Gary - until his 1996 forecast. It was then that he said the downturn was over and we would be in for another great run-up in real estate values that may last 10 years or longer!

And now, his current talk to the real estate industry . . . “Why the Housing Bubble is Bogus!”

I. Historical View of Bubbles

A. The last nationwide bust of home prices occurred in the late 1930s!

1. In the past 30 years, the Federal Deposit Insurance Corporation counted 63 home-price run-ups in various cities but only 9 of these ended in a bust - all being regional! 86% of the time, the run-ups in city home prices did not end in a bust

2. In the past 25 years, the FDIC says there were 54 instances of regional housing booms (Defined as 30% or more in appreciation - happening in 3 or fewer years)

3. During the same 25 years, the FDIC found that a “bust” occurred only 21 times (Defined as a 15% decline or more and happening over a 5 year period)
62% of the time, regional booms do not end in a regional bust!

4. A joint study by both Columbia University and the Wharton School of Business found that the bubble is a myth! The growth in housing prices of 46 single-family markets over 25 years is due to basic economic fundamentals, strong incomes and low interest rates!

5. In the past 30 years, there were only 9 years when home prices did not keep pace with inflation - those years were in the early 1980s and again in the early 1990s.

Since 1970, the median home price in the U.S. has never gone negative!

B. California Housing Bust of 1990 - 1996 was caused by a huge decline in aerospace and defense jobs.

1. In the mid 1980s, President Regan proposed a Star Wars defense project. California was receiving 1/3 of all defense contracts with 40% of that total going to northern California and almost 60% going to southern California!

a. The builders began large housing developments to meet the employment demands and built these tracts based upon the economy of construction

2. November 9, 1989 - the Berlin Wall came down, ending both the Communist regime in the Soviet Union and the Stars Wars program. The major defense contractors, followed by the smaller sub-contractors, began massive lay-offs.

Southern California lost 750,000 jobs in 3 years!

3. The builders’ supply of empty and unfinished housing rose significantly; developmental land sat vacant; foreclosures began. By the end of the decline, many properties lost 30% of their value!

II. The 21st Century . . . and “Bubble Talk”

A. In the latter part of 2001, the forecasts for 2002 began with predictions of a “burst in 2002″ and significant declines in housing prices.

1. The impacts of the dot com burst were still lingering then the terrorist attacks hit the U.S., leading to major disruptions in the economy and hurting employment. Additionally, we began fighting a war in Afghanistan!

2. When 2002 came to a close, real estate had gone up 7.8% in the U.S., while home prices rose 14.6% in California. Northern California home prices rose 15.6%; Central Valley prices were up 13%; southern California prices rose 19.3% and Orange County prices rose 16.8%.

B. The Housing Bubble talk became more heated in the forecasts for 2003, with the introduction of the idea that supposedly higher interest rates would cause our over-priced real estate to finally burst.

1. Since we were heading towards a war in Iraq, it was thought that the resulting bigger deficits would mean rapidly rising interest rates, which would hurt homeowners with adjustable rates.

2. As 2003 came to a close, rates declined and real estate prices continued to rise, with the U.S. going up 8.1% and California going up an amazing 19.4%. Northern California cooled by rising only 11.5% (dot com bust), while the Central Valley and southern California were up 20% and 21.9% respectively. Orange County went up 19.1%.

C. With 2004 just around the corner, other forecasters began jumping onto the bandwagon with negative forecasts for housing price declines of 2.7% to 10% per year for the next 2 years.

1. According to these forecasts, because we were in a war with Iraq, interest rates were definitely going to rise. One forecaster said “the California economy is rolling along on a false sense of wealth”. The affordability index was dropping, and the predictions were that buyers would have trouble qualifying for loans and the bubble would burst.

2. 2004 . . . interest rates did not rise: they actually fell. Real estate went up 10.4% in the U.S. and up 20.9% in California. Northern California prices rose 18 %; the Central Valley gained strength at 19.3% and southern California was up 22.5%. The big winner was Orange County, where real estate went up 24.8%!

D. At the end of 2004, the “experts” knew the real estate bubble “burst” was going to hit hard next year, with home prices dropping 8% to 15%. Why? Because interest rates would reach 8%.

1. With the affordability index reaching record lows and the price of oil doubling, they thought adjustable and interest-only loans would hurt buyers and create foreclosures.

2. Year to date for 2005, rates are lower than a year ago and U.S. housing is up 15.8%. These lower rates added 8.7% to a buyer’s purchasing power. California has gone up 18.1%. The big winner this year was the Central Valley, skyrocketing 29.6%. Northern California is up 16 %, while southern California has risen 17.0%. Here in Orange County, resale homes

and condos have gone up 16.0% and 20.1%, respectively.

III. Forecasts for 2006

A. The pundits are at it once again with their 2006 forecasts, which are not pretty! They are predicting

an increase in interest rates due to the volatility in oil prices, the protracted war in Iraq and the

costs of Hurricanes Katrina and Rita.

1. They now claim that housing prices should decline 7% to 10%. Some are reporting that

California real estate is over-valued by 40 to 45% and that a major recession will occur in 2007!

2. One local university wrote this past June (regarding their 2006 forecast for real estate):

“We understand why this forecast might be met with cat-calls. Our inability to

accurately forecast housing prices the past several years does not leave us with

In the real world of human knowledge, to be wrong by such a large percentage, for such a long

period of time is taken as an indication you don’t have a good grasp on what you are estimating!

(tweaking a quote from Michael Crichton’s fictional novel: State of Fear)

a whole lot of credibility”.

B. What the forecasters should NOT be looking at: 1st - Affordability Index

1. This index assumes a buyer has no equity down payment and is putting down 20% to buy.

In the U.S., you would need an income of $50,650 to afford the median priced home of $220,000, which would limit the ability to purchase a home to only 45.9% of the population.

2. In California, only 16% would be able to buy, provided they have an income of $125,670.

In southern California, family income falls short by $67,000 to buy a median priced home.

Only 11% can afford a home in OC with an income of $164,220. It gets worse in Sonoma,

Santa Barbara and Napa at 7%, and San Francisco at 4%. Only 1% can qualify in Santa Cruz. In the past 5 years, California residential equity has gone up by $1 Trillion! In that time, Orange County residential property prices have gone up 118%!

3. Today’s buyers have equity and, with lower interest rates, their mortgage costs are lower than they were in the early ’80s when they represented 30% of household income. Today, mortgage costs only average 17.5% of household income!

Sellers received a net of $220,240 from the sale of their home - an all time high! Repeat buyers’ down payments average $119,000, while 1st time buyers have average down payments of $47,000!

4. Last year in California, we sold 33,107 million dollar homes. This year, we will easily exceed 40,000! Here is a list of the top 10 median prices by zip code in California:

(1) Atherton ————— $2,496,533
(2) Santa Barbara ——- $2,176,251
(3) Rancho Santa Fe — $2,144,254
(4) Newport Beach —– $2,046,577
(5) Ross ——————- $1,910,263
(6) Santa Monica ——- $1,749,834
(7) Beverly Hills ——— $1,582,886
(8) Diablo —————— $1,452,500
(9) Belvedere Tiburon — $1,421,336
(10) Los Altos ———— $1,392,522

C. What the forecasters should NOT be looking at: 2nd - Rising Interest Rates

1. Huge employment gains are causing a gushing of money into the Treasury; funding requirements were reduced by $59 billion for the July/September time period.

2. There is a global savings glut that has translated into heavy competition to lock in long term yields. Foreigners purchased $71 billion of T-Bills in the last quarter. Pension funds, insurance companies and public/private corporations are all trying to off-set retirement obligations. We also have 78 million baby-boomers looking towards retirement and converting IRAs, 401Ks, Roth, Sep IRA and other retirement accounts into income funds..

3. Add to this a the fact that excess manpower and machinery are being reduced in most industries and you can begin to understand why the core index is 2.2% vs. 1.9% a year ago.

Even with all the oil price surges, the consumer price index is at 3.6% - well below the 4.2% historical average.

4. This helps explain why mortgage payments are now 8% less (in the U.S.) than they were in 1989, and .02% less (adjusted for inflation), than they were in California. Fixed rate loans are at 5.71% vs. 5.83% a year ago. Adjustable rate loans were 4.0% a year ago; today, They are only 4.45%.

5. Even if interest rates were to rise, it would not affect most homeowners. Here’s what the Mortgage Bankers Association tells us about home loans in America:

a. 35% own their home outright - so no interest rate problem there;

50% have fixed rate loans - many refinancing to lower rates with fewer years;

15% have adjustable rate/ interest - 8% of those being high wealth income earners.

Therefore: Only 7% of all mortgages are rate sensitive!

For housing prices to decline, a majority of households would need to have adjustable rate loans that were exceeding 8.5%!

b. Another way to look at this is to note that, out of $7.3 trillion in mortgages, only $83 billion are adjustable or interest-only loans!

c. Today, 1/8 of homeowners spend 50% of household income on housing, while 1/3 spend just 30%.

6. The media only talks about the explosion in housing debt. Homeowners’ equity growth in the 1st quarter of 2005 was up over $300 billion in the U.S. Today, we have $16.6 Trillion in household value vs. only $7.3 Trillion in mortgage debt.

This is a 57% equity position - a fairly large buffer against price declines!

7. This also explains why foreclosures are going through a 9-year decline and are at a record low. The U.S. foreclosure rate is 1.0% - the lowest in 25 years. “Expensive” California is at .17%- the lowest in the nation! Through August of 2005, 33,868 homes were sold in Orange County in 2005, and only 81 of those were foreclosure sales!

IV. Looking at Reality- Demand vs. Supply. You cannot have a housing bubble when demand exceeds supply!

A. Demand for Housing - Current housing boom has lasted 13 to 15 years!

1. In 1990, 2.9 million existing homes were sold in the U.S. Today, existing homes sales are on track to reach7.29 million. In California, repeat buyers make up 2/3 of the market.

Demand for existing homes has grown 114% - while supply has fallen 4%!

2. The new home market (inventory relative to pace of sales) is near its lowest level.

New home sales would have to drop by over 33% for over a year to reach equilibrium.

New home demand is up 143% - with only a 23% increase in supply!

3. Last year, California developers built 210,000 units (homes/condos/apartments). This was a near record, yet still fell 40,000 to 50,000 units short of the demand. Half of this shortfall occurs in southern California!

4. The State population growth rate is 1.6%, with 600,000 more people added last year. Over the past 3 years in southern California, the population has increased by 1.1 million!

5. Four of the 10 fastest growing areas in the U.S. are located in California. The #2 spot goes to the Riverside-San Bernardino-Ontario area - up 15.7%. Stockton is #4 at 14.4%, and the # 8 is the Sacramento-Roseville area up 11.5%. Bakersfield is #10 with a 10.7% growth rate.

6. In the next 10 to 15 years, 3.5 million more people will reside in southern California. That is the current population size of Orange County!

Orange County’s housing demand is 15,000 (+) units per year but, in the last 12 months, only 4,159 single family residences and 3,917 condos/apartments were built.

7. This demand is coming in waves, the 1st wave being the baby boomers who are now in their early 40’s and late 50’s. They found a way to mix leisure with work and are not ready to fully retire - they have money and income and are still investing in real estate.

a. As investors, they average 47 years of age, have an average yearly income of $85,000 and were responsible for 23% of all sales last year.

b. As 2nd homes purchasers, they are approximately 55 years of age, are making $71,000 yearly and were responsible for 13% of all sales in 2004!

8. The 2nd wave of home buyers are predicted to grow at a rate of 1.17 million per year for the next 10 years. They are 1st time home buyers (median age 36). Those purchasing upscale properties have a median age of 45.

9. The 3rd wave of home buyers is the largest group. They are presently 23 to 33 years of age and will total 1.2 million new households per year for the next decade!

It’s happening all over the world! Residential real estate is up $30 trillion in 5 years!

Appreciation Prices as of June 2005 for the past 12 months

Country Price Appreciation: 1997-2004 Numbers for ‘05

Ireland 174% 11.1%

Spain 121% 15.5%

Britain 116% 5.5% (Jan-May of ‘05)

Australia 113% 1.1% (may be too low)

Netherlands 75% 11.3%

Sweden 67% 15.7%

France 59% 15.0%

Belgium 54% 8.2%

Italy 54% 10.8%

United States 53% 15.1%

New Zealand 47% 14.3%

Denmark 41% 5.0%

Canada 30% 7.3%

Switzerland 11% 2.1%

Germany -3% n/a

Japan -22% n/a

A. Demand for Housing (continued) - here come the immigrants!

9. The immigration of new buyers is largely due to the U.S. policy on family reunification.

In the U.S., 2/3 of all immigrants go to just 6 states. California is the #1 destination, receiving 22.4% of all immigrants.

Latinos are the fastest growing segment of the housing market!

a. Since 2000, 1.1 million more foreign immigrants have moved to California - which, for the first time, is a larger number than the number of migrants from other states!

b. Four of the top 11 counties attracting immigrants in the U.S. are in California!

Los Angeles is #1 - receiving 400,000, followed by Santa Clara (#5) and Alameda (#9).

Orange County ranks # 11, with 82,794 foreign immigrants arriving since 2000!

c. From 1980 to 2000, over 6.2 million minority households joined the ranks of middle-income earners and are purchasing housing. Those who arrived in the ’80s and ’90s with children now have children who are looking for a home!

d. These 2nd generation Americans now account for 15% of the population between 11 to 20 years of age. If history repeats itself, they will out-earn their parents and be an even greater source of housing demand.

And how about your multi-million dollar salary, Mr Mudd.
Is that not fair also?

Mudd. Ugh.

Mistakes Were Made needs its own acronym: MWM.

This would really shorten the length of newspaper articles which site quotes from managing parties.

“Alan Greenspan adressing newly raised questions about his handling of the economy explained, ‘In laymen’s terms, MWM’.

Jeffrey Skilling, who we reached at Waseca Federal Penitentiary added an interesting note about the current crisis, ‘As I tried to explain at the time of my incarceration, MWM,’ he said.

The White House issued a report this morning. Press Secretary Dana Perino told gathered reporters that, quote, ‘MWM.’

By cutting in half the amount of newsprint required, I think this new acronym could save a lot of trees. It would also save wear an tear on my poor eye sockets. They are getting strained with all this rolling.

It’s not fair to blame us for not predicting the unthinkable. We blame your ilk for your unthinking behaviors.

“I too said what I absolutely believed to be true at the time — that the worst of the impact to the financial markets was behind us,” Fuld said. “With the benefit of hindsight, I can now say that I and many others were wrong.”

=

“MWM, “Fuld said. “MWM.”

see, it’s such a handy time-saving device

OMG, You got bitten by gold bugs!

kidding, kidding…I hope your head feels better very soon.

My absolute sympathies, Laddie. I hate those creatures with an irrational passion, and delight in smashing them into wet cat food with a fly swatter on late summer afternoons.
As for their voraciousness, I once watched them strip a rattlesnake to the bone in less than an hour. Molto Creepy.

I’ve actually considered trapping a few, painting them with radium paint, and tracking their nasty asses with a geiger counter. In fifteen years, I’ve been unable to find their nest, but I think that would work….

At least you now know where they are hanging out. Cloak yourself in mosquito netting about the face, don gloves and a lab coat, then go back to The Ancient in the late morning with a can of wasp spray and enjoy yourself. The stuff shoots 20 feet with ease. Effective on contact.

Revenge is soooo sweet! Nail a few for me?

You need a local volcano to quiet them down next year.

Buy the pantry.
Sell the phone book.
Hold the fetal position.

i just heard on CNBC that the market is trying to force the FED’s hand into cutting rates. what are the chances of this blowing-up in their face? will alot of people liquidate their stock holdings out of panic and defeat their efforts?

Panicking Pancakes.

lmao… beautiful. Let the four winds blow. I can hear the denying fools now….. “Nuttin’ here goin’ on ma!” in the aftermath of the CAT5 hurricane.

How do you think those Congress critters feel today? The markets have lost about 2+ TN since last Monday. It was supposed to save Mr. 6Pack’s retirement, stop the bloodletting. I’d like to see them explain the fallout. This thing will steamroll any and every thing in its path. It hath been foretold.

A shrink will make you feel even worse when you realize how much poorer you are after paying.

Shrink yourself - pretend you’re a single mom with 4 kids, poor health, no job, homeless, no car, and all your retirement’s in the stock market. Sit back, imagine that, feel how it feels, then open your eyes and look around you.

If the economy had a color coded threat level a la Department of Homeland Security, today’s color would be flashing neon RED, with a side of swirly bright orange, blaring siren horns sounds and captions underneath that state “Oh, my God! Game over man! Game over!

It is swinging +/-50 pts every second… amazing volatility!

Yeah, this is historic. I have been watching the markets most of the day, watching billions of dollars of wealth evaporate. Also watching the company I work for have it’s stock plummet to a multi-year low and wondering when the executives who run the place start putting together plans to lay people off wholesale. It’s like a car accident, you want to look away but you just can’t.

>The world-wide economy is like a haemophiliac bleeding from 1,000 cuts, all at once, all of the sudden.

So does your prediction about USD falling 2/3 against world currency still stand or not?

Well, Winnipeg has a lot of land, being smack dab in the middle of the Canadian Prairies, but Winnipeg has its own style of cream cheese and sky and air and nice people (I hear)…can you put a value on that? 10% is probably quite justified.

In Vancouver we’re down almost 6% from May, but I’m sure it’s just temporary. Yes, everything is peachy Western Canada

Of course, the price will eventually come down, but all the ugly building they slapped up, which block ocean and mountain views will be for longer.

My bad…

He’s in the PPT 109, and the part where the Asian Destroyer bears down on it is forthcoming.

Only to get his horn stung by reality. Sorry

And it looks like he’s pulling out all the stops to get everything propped up.

Amazing how the Dow can just rocket back up from the depths of despair in the final minutes.

How about they way they got the DOW back above 10K??

Now thay have to bail out everybody or there will be an age discrimination lawsuit.

No.

Like many a pundit you confuse intelligence with education.

30 years ago a Chicago undercover cop and I were talking about drug dealing in Chicago.

The cop said “”Hos (sp), you had a good education, these kids had them same opportunities they would be CEOs of GM. They are not stupid, just not the opportunities.”

He was and still is right. It is always a mistake to assume education replaces intelligence. There is no Joe6Pack. Another myth perpetrated by the foul media.

Cap’n, i’ve got a wee bit of de-riskium crystals left, but the shields cannna last long.

October 6, 2008 4:53 P.M.ET
BULLETIN
Stocks back off ledge
Dow at one point sees biggest intraday drop on record of 806 points
Wall Street sells hard along with the rest of the world and then stages some kind of recovery.
——————————————————————————
Fed, Treasury move again to help financial markets
Paulson taps point man to oversee high-stakes mortgage rescue effort
By Greg Robb, MarketWatch
Last update: 2:04 p.m. EDT Oct. 6, 2008

WASHINGTON (MarketWatch) — The Bush Administration and the Federal Reserve said Monday they are moving “with substantial force on a number of fronts” to shore up confidence in, and protect, the financial system.

Earth to Citi: “drop dead”.

Probably the only reason that Wells made the bid for Wachovia is to hope and pray Wells, after the takeover, became to large to fail.

Wells is not stupid.

Drawing the Maginot line.

“Private Aladin Sane, guard the Eastern Front,” he said sunnily.

Where is Hoz?

I do not know if I was the one that wrote that tidbit.

However if I did, I wish I were wrong. Sad for a generation, a market with negative returns.

I do not trade the DJIA. I trade all and any stock. My baseline is the S&P500, I will cover my shorts at 690. (Or if I am wrong when I am stopped out. There are some stocks-about 11 as of today- that I would buy if the market turns around.)

This is the top of the Fourth. The Third inning ended with a triple play Bernanke to Paulson to Bush.

“taken by the Federal Reverse”

is this their new title?

I called the office of the doctor who did my Lasik surgery to schedule another one in the hopes my vision will end up good enough to pass a driving test. I was hoping someone out there in Dallas would be holding back on discretionary purchases. No such luck. Dr. Assemblyline is booked until early to mid December.

FPSS is in San Francisco on vacation (?).

Capitalism at its finest…

very concerned here hozzy.

LIBOR may be no bid in the overnight.
Treasury and FED are going to step in.
Asain open is bloody.
MId week banking closures and Nationalizations are pinging the f-ck out of the tinfoil.
Im long Yen, and the Japanese are helpless.
Capital Controls are on deck.
This feels sytemic.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSiAeDH_QZtk&refer=home

thats how ya cut rates while you crash the commodity market.

these guys are sharp.

why long the currency and short the bonds?

this was the emphasis of my attitude of you funding sources..
——————–
Japan’s 10-Year Government Bonds Fall as Stocks Pare Declines
Oct. 7 (Bloomberg) — Japanese government bonds fell as the Nikkei 225 Stock Average pared losses after declining below 10,000 for the first time in almost five-years.

The yield on the 1.5 percent bond due September 2018 rose 3.5 basis points to 1.41 percent as of 9:54 a.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.309 yen to 100.784 yen. A basis point is 0.01 percentage point.

Ten-year bond futures for December dropped 0.71 to 137.84 at the Tokyo Stock Exchange and the Nikkei 225 pared declines of as much as 5.3 percent and currently trades at 10,108.39.

Hoz — If the 10yr and 5yr sell off, do you expect the 99 pct or so correlation between 30-yr fixed mortgage rates and l-t T-bond yields to break down? (The alternative is skyrocketing mortgage rates, and plummeting home prices…not to suggest they are not already plummeting, or anything…)

For the love of sweet candied yams!

really?

I fully expect gold sales to become illegal again, just like in the 1930s. For now, the Fedury is keeping its powder dry…

Does it seem like the world is suffering from a sudden shortage of market bulls? Have they all been gelded or something?

EMERGING MARKETS REPORT
Emerging markets plunge, confidence breaks down
Russian stocks lead the global sell-off; currencies and debt also hard hit
By Polya Lesova, MarketWatch
Last update: 4:53 p.m. EDT Oct. 6, 2008

NEW YORK (MarketWatch) — Russian stocks led emerging markets into one of their worst daily losses ever on Monday, as concerns over the global financial crisis and slowing economic growth erupted into a perfect storm, triggering a breakdown of investor confidence.