Oversized Dreams Swallowed Up Common Sense
It’s Friday desk clearing time for this blogger. “Hundreds of miles inland from the booming real estate markets of Beijing and Shanghai, an unlikely property fever is gripping this middling industrial outpost. Taxi drivers boast of owning multiple flats for investment. Billboards hawk developments with names such as Villa Glorious and Rich Country. Frenzied crowds pack sales events with bags of cash, buying units that exist only on blueprints. Average home values in Hefei soared 50 percent last year. Xi Zhou, a cameraman for a local news channel, paid $50,000 for his 900-square-foot unit in December. He figures it’s now worth $80,000. He’s so anxious to take possession that he visited Binhu’s sales office on a recent weekday to gaze at his property in a plastic diorama of the complex. ‘For people of my generation, property is all we talk about,’ said Xi, 27, who will share the new home with his wife and parents. ‘I felt a lot of pressure to buy because the longer I didn’t, the more likely I wouldn’t be able to afford anything.’”
“As the real-estate market in Canada continues its record-setting recovery, the market for high-end homes is surging. The country’s richest residents – as well as millionaires from countries such as China and the United Kingdom – are turning to property to provide a safe haven for their money. ‘There is no doubt a great deal of the demand is coming from mainland China,’ said Ross McCredie, president of Sotheby’s International Realty Canada. ‘The Chinese are the people shopping at above $5-million.’”
“Phil Soper, CEO of Brookfield Real Estate Services, said there’s also no rush to buy because the homes are no longer looked at for their investment value. ‘Those buying these homes are typically financially sophisticated and there aren’t too many who will believe we’re in for several years of highly appreciating values,’ he said. ‘They see today’s prices as reasonable, and don’t really think prices will fall very much.’”
“The Canadian Real Estate Association lists Victoria house prices as the second most expensive in the country. Taking in a tenant is the only way for many young homebuyers to keep their heads above water. ‘If you don’t mind the loss of privacy, renting a downstairs suite is the easiest way to augment your income,’ says Ted Jones, an accredited mortgage professional. ‘It enables you to buy up — to afford more of a mortgage than one just based on personal income.’”
“In Vancouver, based on RBC’s data, nearly 80 per cent of all median pre-tax household income was needed just to pay the cost of a typical mortgage on a standard two-storey home. That figure almost certainly increased again in the first quarter of 2010, as house prices continued to skyrocket. If that’s not a bubble, I don’t know what is. In fact, it makes one wonder how homeowners have enough money left to buy food and keep the lights on.”
“When U.S. house prices got to their most extreme levels during the U.S. housing bubble, the ratio of average household income levels to average local house prices got to 10 times or more in overheated markets like Los Angeles and Phoenix. In Vancouver, the average detached bungalow now costs roughly 11 times the typical average local household income level, based on the data above. So just who can afford to buy these homes?”
“Everybody lists location among their top priorities when shopping for a home. But Hilary and Gareth Baxendale had a different item on their wish list: FHA approval. ‘We were thinking we were only going to get something where we had to put 10 percent down,’ says Hilary, who works as a nanny. This would have meant a small apartment in the $300,000 range. ‘But [FHA status] made a whole new set of apartments available for us,’ she says.”
“‘Most people haven’t been saving for 10 years,’ says David Burks, who just bought a one-bedroom at the Residences at Dixon Mills in Jersey City, which got FHA approval last month. ‘But they could easily make that monthly [mortgage] payment.’”
“An $8,000 federal homebuyer tax credit ends Friday, after months of helping fuel sales among first-time customers. But despite concerns that the buyer frenzy will diminish as the credit goes away, Realtors and observers say the market will continue strengthening and prices will rise. ‘We didn’t see (prices) getting any lower,’ said Rudy Quinonez, who with his wife recently bought a condo in Claremont. ‘From what I read, the market kind of bottomed out. So, it was kind of the right time. Looking around, the prices were lower than we’d expected. But it kind of bottomed out. So we said, `Do we wait?’ We didn’t think they would lower any more, if any.’”
“Still, even the California Association of Realtor’s own president said last month in a press release that while the loss of the federal credits would remove some urgency from the market, it’s ‘not likely to derail current market trends.’ ‘Maybe it’s wishful thinking,’ Mueller said. ‘But I don’t think demand will stop.’”
“Industry lobbyists have pushed leaders on Capitol Hill to extend the credit once again…but lawmakers instead seemed to be emphasizing ways to create jobs as a way to drive the home market. ‘A significant component of the housing market crisis is a jobs crisis, and that must be the top priority moving forward,’ said Rep. David Dreier, R-San Dimas. ‘I believe our focus must be on creating jobs in order to help get the economy back on track.’”
“After nearly 30 years of business in this city, Chino Hills Ford closed Wednesday. Business had declined precipitously in recent years due to the sluggish housing market, popularity of imports, decrease in discretionary spending and higher fuel costs, said Lenny Woods, manager and owner of the dealership. ‘We flourished until the recession,’ Woods said. ‘We peaked in 2003. Since then, it’s been downhill.’”
“‘I’ve never seen anything hit this hard in all my life,’ said body shop manager Michael Aiken. ‘I’ve been through gas shortages, but nothing like this. People with money are scared to spend it, which I don’t blame them.’”
“Woods said he put much of his money into keeping the family business alive. His family is now in danger of losing their homes, he said. ‘Everything I own is invested in this business, sadly, and I made a commitment to this,’ he said. ‘It’s like a runaway train. I put more and more into it to try and save it, and I don’t know what I’m going to do.’”
“The word on the street is that this is the strangest market most agents have ever worked. Even agents who have been through two or three of these cycles know this one’s a little different. Why? Probably the biggest reason is that the federal government has never been as involved in the market as they are right now. On the financial side, they are regulating banks, they are a direct lender (Fannie, Freddie, FHA), they are imposing moratoriums and delivering incentives and stimuli. You name it – they’re there along with their unintended consequences.”
“In some respects it has served to stabilize the market, but in a broader sense it has prevented the market from achieving its own balance, finding a real bottom and starting a real recovery. The market is being artificially manipulated right now and we just don’t know what’s next.”
“The state Senate is gearing up to debate a bill to protect renters and homeowners amid the rising number of foreclosures statewide. Many housing experts agreed that the Berkshires has been spared some of the worst of the foreclosure crisis that has surfaced in many parts of the state, but there is still concern locally. ‘[The national foreclosure rate] has to impact values and it has to impact everybody — there’s no getting away from it,’ said Jay Anderson, president of the Pittsfield Cooperative Bank. ‘We’re not immune.’”
“Saying that some properties would default on their mortgages no matter how they were restructured, Anderson said, ‘If they want to start changing that process … I’m not sure if it’s a wise thing to do, because it stalls what will eventually happen anyway.’”
“The U.S. housing market won’t recover for three to five years as mounting foreclosures hold down prices, according to mortgage-bond pioneer Lewis Ranieri. At least 3 million new properties will join 5 million already in a ‘cloud’ of distress in the next 18 months, Ranieri said.”
“‘There’s another big leg down and the question is how long does it stay,’ Ranieri said. ‘You can’t have much of a rally when you’ve got this big overhang.’”
“Salt Lake City had the largest percentage increase in foreclosure filings the past year among more than 50 communities hardest hit by the nation’s foreclosure crisis, a new report shows. RealtyTrac said Salt Lake’s growing foreclosure-filings rate demonstrates how the problem has spread in a big way from cities in California, Arizona and Nevada into other once-booming areas. As home sales and prices have fallen over the past two years, more and more homeowners are ‘underwater.’ Many of those in this situation are unable to sell their homes for enough money to cover their mortgages after they encounter financial trouble and can’t keep up with their payments.”
“That’s why Mark Knold, chief economist for the Utah Department of Workforce Services, isn’t surprised that Utah’s foreclosure rate is significantly higher than the national average. ‘We were late in to the housing bubble, we’ll be the last to get out,’ he said.”
“Kristen and Chuck Dvorscak of Midland Park, N.J., need to sell their 1929 three-bedroom Colonial now. The couple just had a second child, so the Dvorscaks, 33, want to upgrade to a bigger home nearby. Trouble is, their house’s value has plummeted about 7 percent from the $535,000 they paid four years ago. They’re resigned to taking a loss, but hope to save the traditional 6 percent real estate broker’s commission by having Kristen market the house herself. (Asking price: $499,900.)”
“‘Frankly, I don’t think a Realtor does much that I can’t do myself,’ she says.”
“Housing markets everywhere are fraught with market failures and there is no housing market in the world devoid of government intervention. I am stating the obvious, of course, but it bears repetition, especially in the light of the growing frenzy in the residential property market in Singapore. There are two schools of thought, diametrically opposed, on what should be done.”
“Would-be home buyers, especially first-timers, want the Government to ‘Do Something Drastic’ to control runaway prices. The other camp wants the Government to ‘Do Nothing’ about rising property prices. But if you take a long view, a lot is going right in housing, thanks to the Government’s refusal to treat housing as a free market.”
“Instead of pretending that the housing market is like any other market, the Government has explicitly turned housing into an object of social policy, making home ownership a national objective and tailoring policies accordingly. Market forces are allowed some free play to allow home-owners to realise the value of their assets - but with the Government retaining a watchful eye in case of wide swings.”
“Instead of ‘Doing Nothing’ or ‘Doing Something Drastic’, the best policy in an overheating market is precisely what the Government is doing now: Stay cool, watch the market and be prepared to ‘Do Something Judiciously.’”
“A few common human characteristics were shared by the Wall Street masters of the universe who packaged exotic financial instruments and the Main Street homeowners who purchased more house than they could afford: the insatiable lust for more, the need to impress, the desire for newer, shinier, bigger and ostensibly better. The consequences of allowing those common traits to metastasize across the economic landscape are in evidence in the current economy, edging back from the brink of collapse but still enfeebled by the housing bubble.”
“The homeowners who allowed their oversized dreams to swallow up their common sense are already paying for their mistakes with sullied credit and/or massive debt. From California and Florida, from three-bedroom bungalows to six-bedroom mini-mansions, houses are in foreclosure and neighborhoods are gloomy with abandonment.”
“As President Barack Obama said recently, Wall Street reform would prevent ‘a situation where people are allowed to take wild risks and all the downsides are socialized even as the profits are privatized.’ Just as there will always be homebuyers tempted by the vacation place they can’t really afford, there will always be bankers tempted to earn a sweet million on an obscure deal with an immediate payout. In other words, human frailty will always be a part of the human condition. Government regulations curb the excesses.”
“Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general.”
“It’s easy to see why this happened. People who make it into the establishment work and play well with others. They are part of the same overlapping social networks, and inevitably begin to perceive the world in similar, conventional ways. They thrive in institutions where people are not rewarded for being cantankerous intellectual bomb-throwers.”
“As is traditional in our culture, the elected leaders of the clueless establishment have summoned the leaders of Goldman Sachs to a hearing so they can have a post-hoc televised conniption fit on the amorality of Wall Street. The second big event in Washington this week is the jostling over a financial reform bill. The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.”
“If this were a Hollywood movie, the prescient outsiders would be good-looking, just and true, and we could all root for them as they outfoxed the smug establishment. But this is real life, so things are more complicated.”
“If this were a movie, everybody would learn the obvious lessons. The folks in the big investment banks would learn that it’s valuable to have an ethical culture, in which traders’ behavior is restricted by something other than the desire to find the next sucker. The folks in Washington would learn that centralized decision-making is often unimaginative decision-making, and that decentralized markets are often better at anticipating the future. But, again, this is not a Hollywood movie. Those lessons are not being learned.”
“Just as there will always be homebuyers tempted by the vacation place they can’t really afford, there will always be bankers tempted to earn a sweet million on an obscure deal with an immediate payout. In other words, human frailty will always be a part of the human condition. ”
+1
That kinda stands out, aye?
“there will always be bankers tempted to earn a sweet million on an obscure deal with an immediate payout.”
The temptation of the “single transaction”…and I’m not talking beenie babies baby…
Thus fraud is attracted to the largest target, with the largest number of participants…like a super magnet…but no worries mate, because “Bidness” has an “ethical” element that needs no Gov’t over-sight…it kicks in “automatically”… why? Because they are all: “Professionals” with a fiduciary “Duty” and if this “ethical” duty is breached.. the “punishment” would be “unbearable” pain for the rest of their lives.
Actually, if they were just allowed to go bankrupt and have all their assets seized when they “Failed”, which they have, then the market could work correctly, assets could be repriced and life would get back to doing real work and creating products and desired services.
Unfortunately, our “government” has seen fit to “Bail out” the privileged few and not let them LOOSE.
Failure is a good form of regulation. The Administration and their minions at FED and Treasury (crooks) have saved their buddies the punishment of financial collapse for making HUGE leveraged bets that went bad, and for committing massive fraud in the process.
Break up Goldman, Citi, JPM, Bof A, and FIRE and JAIL Geithner, Bernanke, Lewis, Blankfein, and a slew of other participants and the market will work just fine without another 2000 page “regulatory reform” package.
Does anyone know whether Turbo Tax Timmy has sold his house yet? Did Obama or Soros buy it from him? HBBrs want to know.
Really.
“In Vancouver, based on RBC’s data, nearly 80 per cent of all median pre-tax household income was needed just to pay the cost of a typical mortgage on a standard two-storey home. That figure almost certainly increased again in the first quarter of 2010, as house prices continued to skyrocket. If that’s not a bubble, I don’t know what is. In fact, it makes one wonder how homeowners have enough money left to buy food and keep the lights on.”
And to think, after the 1980s housing price bubble in the Northeast and California collapsed with terrible consequences for those areas, I figured people had learned their lessons and this would never happen again.
People are not afraid to buy now because it is already certain the Chinese investors are coming in hordes to wipe the arses of the flopped California flippers, early knife catchers and discouraged sellers of 2010 turned circumstantial landlords … Take it easy Chinese are coming. Dude, this show is great. I will keep watching it from the sides. It is better than 3 stooges…
“In Vancouver, based on RBC’s data, nearly 80 per cent of all median pre-tax household income was needed just to pay the cost of a typical mortgage on a standard two-storey home. That figure almost certainly increased again in the first quarter of 2010, as house prices continued to skyrocket.”
Yikes…your wife could get angry, stop at a 7 Eleven, buy a Hostess Twinkie and you’d loose the freakin’ house !!
Blame it on the twinkies.
Worked for Dan White.
Uh, no it didn’t. He was convicted.
“….there will always be bankers tempted to earn a sweet million on an obscure deal with an immediate payout.”
Sure, but if there are real consequences if they are wrong (ie., no bail outs, ie., free market) they would be a lot more cautious about it.
BINGO! You nailed it.
Corollary: Any economy which uses bailouts to insulate bankers from the consequences of their own stupidity is FRACKIN’ DOOMED!
You still get to keep your bonuses etc when the corporation you work for goes broke, no? So how does allowing corps to fail dissuade people from scamming the system? I suspect many people raking in millions during the bubble secretly thought their firm might one day go broke. Why should they care as long as they had already got theirs?
I agree, failed firms should be allowed to fail, but that alone won’t make the system less corrupt. There were regular failures in the chronic boom/bust economy of 19th century America. It didn’t stop the booming and the busting, or the fraud.
“We didn’t see (prices) getting any lower, said Rudy Quinonez, who with his wife recently bought a condo in Claremont. From what I read, the market kind of bottomed out. So, it was kind of the right time.” I’m sure the sales office was more than happy than supply a few reading materials. How freaking hard is it to google “housing bubble.”
The bubble for low end has burst.
In my view, what we are dealing with now is not a bubble, but the aftermath of the bubble popping.
What is the source of the next leg down in CA when demand is sucking up all the foreclosures quite quickly (there is less than a 4 month supply in pretty much every locale in CA) at prices that people can actually afford (all time affordability levels still in CA)?
I’m serious, what is the source of the next leg down? Low end housing has fallen 50-60% in many of these markets (the high end of what people were predicting on this board during the bubble). The correction has happened.
‘the high end of what people were predicting on this board during the bubble’
You didn’t ask me.
‘there is less than a 4 month supply in pretty much every locale in CA …all time affordability levels…The correction has happened’
Ah, dude, thanks for the Friday morning humor!
Let’s make sure our definitions are correct.
If you look at all foreclosures that are happening and will happen in CA, it will take 20 months PLUS to burn through them. I’m sure this is what you are seeing too.
However, the demand for those foreclosures is such that at any given time, the current month’s sales pace divided by current listings is 4 months or less in pretty much the entire state of CA. In other words, demand is more than sufficient to absorb the supply of foreclosures as they make their way to the market.
If you do the same math in Florida, you have 20+ months of foreclosure mess to work through AND the current listings swamp current demand (12+ months of supply). It is a bit harder to say the same thing in Florida.
It is not expected that the foreclosure mess in CA will have further impact on prices–especially at the low end. It is harder to say the same thing at the higher, non-conforming end of the market.
And the affordability numbers are true, especially in hardest hit markets in CA, where it is cheaper to buy than to rent AND homes are selling for below replacement cost. This is just as unsustainable as strawberry pickers buying $700,000 homes. There are very real population and cost pressures that will drive low-end home prices up, especially as the pace of foreclosures begins to slow.
What is the source of the next leg down in the low end?
Supply? No, the worst of the foreclosures have happened, and demand is more than keeping up in CA. New home starts are at a 50 year low. If they double in CA in 2010, it will be the SECOND lowest number on record.
Job losses? No, the worst of the job losses are behind us.
Spike in interest rates? Not yet, the Fed seems to be wanting to keep money free for a while. The Fed stopping their mortgage purchase program was a big yawn–despite all sorts of people saying rates were going to spike causing the next leg down.
A leg down in psychology? Nope, things have been pretty bleak, and Buffett is now saying that across his subsidiaries he saw a big upswing starting in March.
I simply don’t see the reason why there would be another leg down in the low end based on what I’m seeing. I’m still not convinced at the high end.
I haven’t been convinced otherwise. The bubble had all sorts of signs pointing to disaster. Plenty of reason and evidence to hang your hat on then.
If a person without any knowledge of the past few years landed on earth and you needed to convince them that home prices were going to fall from where they are today, what evidence would you produce?
‘it is cheaper to buy than to rent’
Not here in N AZ and I’ll let folks in CA chime in here.
‘homes are selling for below replacement cost’
IMO, this is irrelevant.
‘the worst of the foreclosures have happened’
I’ll just let this one hang out there.
‘homes are selling for below replacement cost’
IMO, this is irrelevant.
–this is not irrelevant in a backdrop with significant population growth. Eventually homes need to be built to house people, and they will not be built if they sell for less than the cost to construct. Prices will need to rise. This effect will cause housing prices to snap back first in markets with the least supply. CA is one of those markets. I don’t expect a spike in prices for at least 12-18 months, but I understand from some people in the industry that homebuilders are already modestly increasing prices in subdivisions in CA a few percent, 3-5%.
In 2009 in CA, population grew by 393,000 people (LA Times today). According to them, 62,000 houses were added. In most markets in CA it does not make economic sense to build new finished lots. Supply is dwindling.
In CA, foreclosure notices were down something like 30% year on year in the first quarter.
Ben,
I met a gentleman who is buying houses for ~$85k apiece (shortsales at about 50% of replacement cost) in SW Phoenix, and renting them out for $1k per month. According to him, with HOA, etc., there are about $500 per month in expenses on the landlord side, which doesn’t seem unreasonable. He’s buying them therefore for about a 7% cap.
If a renter owned the house, and paid 6%, his monthly mortgage with $5k down would be about $400 per month. Add in the expenses of $500 per month…you get to $900. The reason they are not buying is 1) bruised credit scores, 2) no $5k, and 3) severely damaged psychology.
In the worst hit parts of regions, it is cheaper to own than to rent (Central Valley, CA, SW Phoenix, etc.). These parts have bottomed. Higher end locales have not yet, especially those that would require non-conforming loans to purchase.
Unless your $500 monthly costs includes something for maintenance and vacancy rates, your cap rate is overstated. If we use 1% of replacement cost for maintenance, that’s another $1700 / yr, and if the place is empty one month a year (probably conservative - tenant turnover, non-payment, etc.) then yearly gross income is $1k * 11 = $11k, and gross expenses are your cash costs of $500*12 plus $1700 has costs of $7700. NOI of $3300 on a cash investment of $85k is 3.9% cap rate.
Even if the $500 includes assumed maintenance costs, but no vacancy, it’s a 5.9% cap rate. If I had to sell the property in a “normal” environment, I suspect I’d need to offer a buyer something better than 7%. For comparison, Tokyo residential is ~6% cap rate, and clearly has a more diverse economy than PHX, with lower mortgage rates. Berlin is over 9% cap rate, and has been for many years.
I’ve seen 8-9% cap rates in the Seattle suburbs using the methodology above. Those are starting to be interesting, mainly because it’s a diverse economy with lots of built-in stabilizers.
Personally, if this is a intended to be a long-term investment (10+ years) I’d rather own a diversified portfolio of dividend-paying stocks. Less risk, less effort on my part. Doesn’t mean I don’t think they might be too expensive now, but if you’re making me choose between them, I’ll pick the liquid asset that doesn’t depreciate.
OK, here we go:
’selling for below replacement cost’…is not irrelevant’
’shortsales at about 50% of replacement cost’
So,….replacement cost IS irrelevant.
‘the Seattle suburbs using the methodology above…are starting to be interesting’
Darn, why are you giving away these nuggets on the housing bubble blog? You should be holding seminars and charging big bucks. Assuming, of course, that you are right.
‘it is cheaper to buy than to rent’
Current rent on an 1835 sq ft 4/3 = $2300/mo.
PV of $2300/mo over 30 years at 4.875% (assuming 1 pt origination fee) would fund a loan in the amount
pv(-2300,.04875/12,360) = $434,612. Since the buyer needs to also pay the point, we need to reflect that in the calculation; subtracting one point off the amount loaned (to pay for this up-front interest charge) leaves 0.99*$434,612 = $430,265 for the purchase. But then one needs to further subtract off taxes, insurance and maintenance, not to mention the UHS’s 6 percent, off the purchase price; say this sums to 10 percent of the original purchase price:
0.10*$434,612/0.99 = $43,900, and
$430,265 - $43,900 = $386,365.
PPSF of an 1835 sq ft home at $386,365 =
$386,365/1835 = $210 / sq ft
– supposedly what a SD home now sells for, but there are none in this price range in our ‘hood yet. When decent SFRs start selling below $390,000, I might consider looking around.
$500*12=$6,000. $6,000/$85,000=7%. The investor has no vacancy in his fairly substantial portfolio, except for recent acquisitions (I think he said he’s bought about 100 so far).
Distress is what matters today in terms of what you need to pay. Replacement cost doesn’t factor in. True statement.
However, it is not irrelevant with respect to where prices are going, which is what matters if you are looking to invest.
If prices were trading at replacement cost today, there wouldn’t be much of an opportunity to buy today.
I think as a long term investor 10+ years, I would tend to agree. Having liquidity matters. However, as a medium-term investment, buying a <10-year old house in a new neighborhood at 50% of replacement cost, implies that you should roughly double your money (including cash flow) whenever development recommences (you can still sell at a 20% discount to new homes at that point).
The rate of return depends entirely on when you expect development to return. In some places, it will be 12-18 months. In others it will be 3-5 years. Either way, you are looking at 15%+ investment returns.
Can’t argue with the complexities in being a landlord, etc.
PB,
I would agree that San Diego doesn’t qualify in the cheaper to own than rent.
You need to be farther inland for that math to work.
Rental Watch,
I didn’t catch if the $6k costs per year included any type of accrual for larger capital items - roof, appliances, etc. It seemed to me like you were saying it was purely a monthly cash cost number, which is why I penalized the return. I am interested to know if there is anything included so I have a better sense of the state of the AZ market.
My comment about Seattle / Berlin / Tokyo wasn’t to suggest that these were great investments, just that all of them provide better returns on a cash flow basis under the same methodology, and to me, have more attractive qualities from a stability perspective than AZ. Yet certainly the Seattle one in particular would be a big PITA to administer - I suspect delinquencies would be higher than expected. As are many rental properties where the tenants are only one or two paychecks away from disaster. Put it this way, if I thought they were attractive investments, I’d have bought them instead of using them as comparative datapoints.
Vacancy is a big one that can significantly swing cap rates depending on the assumptions used, and I would say that if Rental Watch’s friend can maintain a zero vacancy rate with zero turnover costs over an entire cycle in a cyclical market, he/she is in the top 0.1% of property managers in history. Or charging significantly below market.
Replacement cost is only relevant when the market is going to grow and more construction is needed. If the local population grows _and_ can afford to occupy space as new jobs are created, they will. But if the only jobs that are created are low-wage ones, the only residences that appreciate will be the affordable ones - the high-end ones for the employers, and the low-end ones for the employees — but only to the extent that one $15/hr job or two $10/hr jobs can carry the mortgage. If the largest portion of high-paying jobs in the area were construction-related, you’ll need an extremely lax credit environment to get that going again. But within five years, that’s probably a reasonable timeframe for some form of recovery, although construction workers may never see their peak paychecks again in their lifetime, which puts further pressure on replacement cost.
“SW Phoenix, and renting them out for $1k per month.”
I rent a house for $750/month in metro Phoenix. I wonder why they pay $1,000/month to rent in an area with a high violent crime rate.
“What is the source of the next leg down in CA when demand is sucking up all the foreclosures quite quickly (there is less than a 4 month supply in pretty much every locale in CA) at prices that people can actually afford (all time affordability levels still in CA)?”
Sales have been goosed through a variety of stimulus measures and demand is artificially constrained through large numbers of foreclosures being held off the market, hence the months of supply numbers are obviously not representative once the artificial constraints are removed.
Prices are still elevated well above late 90’s levels and wages are nearly stagnant. One’s got to be pretty lose with the affordability criteria to get all time affordability such as using one standard then and using a looser standard now.
Sales have been brought forward, yes. I don’t think this is a major impact, just on the margin. Take a look at the cash-for-clunkers example. It brought sales forward, there was a brief dip after the program ended, and now car sellers are doing even better than when the program was in place.
Prices in the SF Bay Area, low end, are at about a 3-3.5% growth rate from the prior housing bottom in the mid-90’s.
Are you saying that wages have not grown 3-3.5% on average over the past 15 years nominally in the SF Bay Area? People are earning nominally the same as they were 15 years ago? I simply don’t buy that.
I know I’m now bringing my CA example to one market, but I think the same numbers would ring true elsewhere in CA.
“Take a look at the cash-for-clunkers example. It brought sales forward, there was a brief dip after the program ended, and now car sellers are doing even better than when the program was in place.”
Bad analogy; cars are a lot cheaper and less subject to falling knife asset price risk than are houses.
They are giving 0% down on cars, too. I hope we never see that on houses again! People can easily buy cars if they are given money to “buy” them.
We paid a 100% downpayment on our last automobile purchase. Consequently, we are giving the bank 0% in interest payments.
The next leg down is rising interest rates.
Rising interest rates would kill the economy, so they are held low.
Exposing the shadow inventory of commercial and residential property defaults will likely be the next shoe to drop, IMHO. Many retirement lifestyles will be shattered.
Hasn’t the Fed committed to keeping rates low pretty much forever?
Wait until the hyperinflation starts…
When the bond vigilantes go after a government’s currency,
treasury bonds, and default protection (see Greece for a recent example — or look up Korea, Asian Crisis, Brazil late 90s’, Russia, Soros and UK in the 70s, or disorderly current account adjustment; also, sovereign debt crisis) the government in question loses control of their interest rates. Anyone who thinks that is not a highly probable event in the U.S. has not seen our balance of payments statistics and the accumulation of large imbalances with foreign countries; nor has seen the projected fiscal deficits for the near, medium, and long term horizon. When the markets start to bet that the U.S. will have to raise rates to defend the dollar and to rollover its treasury debt, it becomes a self fulfilling momentum building event that the Fed will have zero ability to reverse. Rates will go up because of the markets, not because the government’s wishes.
There are three sources of the next leg down.
1. The second hump of the Credit Suisse graph, when a truckload of Option ARMs are due to recast. Not quite as much as subprime, but enough to precipitate another drop. And I don’t see anybody can refinance out of an Option ARM. Refinance into what?
2. The shadow inventory which banks can’t hold forever. they know that at some point, the houses themselves are going to fall apart.
3. The government money is going to dry up. You can all make fun of Barack Obama, but the fact is, the Admin has not been handing as much money we all think. It’s been all high-visibility programs, with few found to be actually deserving. Plus I think they realize that the deficit will overcome any extend and pretend.
1. This will impact the high end principally–the average option ARM is several hundred thousand (I think I saw half a million).
2. More evidence is coming forward that the banks aren’t holding the inventory, but the process of seeing if there is a way to restructure takes time. There will not be a flood from banks.
3. Are you talking about the tax credit, or something else?
Ok, good sir - what, pray tell it, is your source of the next leg UP?
4. unemployment; at least, employment at reduced income for many e.g. two-income household becoming one-income
Spent an hour with the VP of our best bank who
just got back from a seminar in Denver. He stated that it was general knowledge with other
bankers nation wide that there is 5.4 - 6 million
houses in the shadow inventory and that it will
take anywhere from 5 to 10 years to work them
into the market. From the horses mouth!
I love that info Rancher, just wish I knew the distribution.
Of course we know the states that will go down in flames. Places that have 20% -50% empty homes in some neighborhood streets. (Sorry guys) What I want to know is how bad will it be in the areas that didn’t go way over the top.
To date our foreclosure rate has been .04%, pretty close to the bottom in the entire country. Utica, NY a relatively low income town is #1 for least foreclosures in the country.
http://www.syracuse.com/news/index.ssf/2010/04/syracuse_area_has_one_of_natio.html
I’m not doubting we’ve got shadow inventory. I’ve heard the whispers among the bankruptcy attorneys. It’s just that I’m not sure the impact here will be what it is elsewhere. I’ll feel so much better able to make a decision when the banks actually start dumping the inventory.
The correction has barely started!!
One reason for the bubble was a large percentage of people buying homes that they never intended to occupy.
This is still happening!!
There were more houses built than required by current population demand.
Not in CA.
4 million people were added to CA in the 90’s with 1 million housing units built.
In the 00’s, we didn’t keep up with population growth either–we were barely doing so in 05/06. It is simply too difficult to get land approved for building here.
We are still working off prior decades lack of supply here in CA. The big problem was prices in CA, not supply.
CA has one of the lowest vacancy rates for SFH and apartments in the US, and one of the highest household sizes. This is counter to the “empty housing units as far as the eye can see” argument. We have more people crammed into fewer houses than most states.
I live and work in CA, in the construction field.
Population growth in the Bay Area has been basically nil since the year 2000.
http://articles.sfgate.com/2009-03-19/news/17215290_1_housing-market-bay-area-housing-prices
At the same time, you have to realize that estimates of population are also derived from # of homes built…
“We have more people crammed into fewer houses than most states.” According to the US census bureau California’s population in 2009 was just under 37 million. Housing units in 2008 were just over 13 million - that’s 2.5 persons per housing unit. Just curious were your numbers re: low vacancy rates/high household sizes are from.
IMO, in ‘urban’ centers such as the bay area demand outpaced supply driving people further and further away and into the central valley farm areas were corrupt/short sighted politicians were only too eager to sell out to ‘developers’ resulting in what I call fungal houses - because like mushrooms they sprang up overnight on land that was once growing food. The crazy thing is those living in fungal houses have to drive through miles of hilly/non farm land to get to their bay area jobs - why they didn’t build on that land and save the farms & shorten commutes is beyond me.
“At the same time, you have to realize that estimates of population are also derived from # of homes built…”
Kind of a crazy idea, given (1) historically large number of vacant homes; (2) large number of households combining under one roof.
US Census is the source.
As of July 2008, CA was at 36.6MM people in 13.4MM houses, or 2.73 people per housing unit. This was the second highest in the country. Florida was 2.08 people (46th), Arizona was 2.39 (13th), #1 was Utah at 2.89.
For Rental Vacancies, CA is at 8.2%, 17th in the country. Arizona is at 17%, 49th. Florida is 17.9%, 50th in the country. The best is MA at 4.8%. The top 10 are all at about 7% and below. The median is about 10%.
For Homeowner Vacancy Rates, CA is now at 2.4%, which is middle of the pack at 28th in the country (the number was at 13th in the country last I checked). FL is the worst at 4.7%, AZ is 48th at 4.0%.
So, we have among the highest household sizes, and above average occupancy rates (more people in fewer housing units).
And to answer the question on why don’t they build more houses closer? NIMBYISM. A group I know once wanted to build an apartment project right next to a train station on the mid-Peninsula, thinking “this is a great spot for a hundred rentals, people can use the train to get to SF and SJ, but walk to a nice downtown”. The City squashed it, and so a very expensive condo project was built, only about 25-30 units, if I recall correctly.
Also, it is nearly impossible to build on the land that isn’t adjacent to an existing City. The infrastructure costs would be prohibitively expensive (water, sewer, etc.). You couldn’t practically build homes on the way to the Central Valley towns, you have to get to the towns first.
P.S.
The US average population per housing unit is 2.36. For CA to get there, they would need to build 2.1MM more houses.
Utah would need to build 185k units…but I’m guessing that in the land of heathens, CA generally has smaller families generally than Utah.
Texas is #3, at 2.53 people per housing unit. Despite having 24MM people, they only need to build 509k housing units to get to the average.
Florida needs to destroy 1MM houses to get to average (but one would argue that their household size is smaller given retirees, etc., so I’ll give them some leeway, except that they have such high vacancy rates, which flies in the face of the retiree argument.
Arizona is right about average.
Forbes magazine recently said that Milwaukee was the worst city to try to sell a house in the US and that was some big time heavy duty bad press. People were mad, indignant and stunned that Forbes could knife them in the back and expose their housing laundry to the whole world. The crickets were deafening.
Finally, a profound reply came from a government official spokes person.
“Honestly, I’m shocked; I’m really shocked about that,” said Shar Borg of Shorewest Realtors when told about the article.”
Now RE, jobs, banks, school districts, the city of Milwaukee, Milwaukee County and damned near the entire State of Wisconsin is circling in the toilet bowl and the best our local media and gov’t can come up with is some idiot canned quote from an idiot Real Estate agent !?!
Sheesh…Tase me again bro’…I really need to be shocked !!
Reporting from the Center of the Known Universe, mikey on “Shock n’ Ow”.
The reason for the bubble was free credit allowing people to buy houses far more expensive than they could afford. Speculators coming into the fray trying to profit from rising prices was a side effect, not the root cause.
Investment and second homes made up about 30% of sales during the height. In many condos, speculators made up to 70% of those who purchased.
That rate is still elevated.
Au contraer, the demand will be increasing as the illegas flee the enforcement of our laws and protection of our border by the smart law abiding people in AZ. Take a leap, MALDEF and LaRaza.Go to san Francisco or L.A.
The latest Tucson Weekly has an interesting article about the lack of safety in the borderlands of southern Arizona. Prepared to be angered at how our government has failed to protect its citizens.
For more on the negative impacts of uncontrolled illegal immigration on our borderlands, read Leo Banks’ Tucson Weekly article, “Trashing Arizona.” Speaking as a lifelong environmentalist, I find this aspect of the illegal immigration issue most upsetting.
I just heard on the radio that an Az Deputy was shot in the abdomen with an AK-47 in the desert by illegal thugs today. I hope they can find him before it’s too late. He called for help.
Arizona Slim .I’m glad I read the article your posted about the trash that just gets dumped by the illegal immigrants because I find it upsetting also . The shooting of police is increasing on the border and that part is alarming .
“If this were a Hollywood movie, the prescient outsiders would be good-looking, just and true, and we could all root for them as they outfoxed the smug establishment. But this is real life, so things are more complicated.” Did he just call us a bunch of ugly assholes?
He did, along with Shiller, Roubini, Robert Talbott, Brooksley Born, and maybe Paul Krugman.
I wonder what it means to outfox the smug establishment. We avoided the direct fire of the smug establishment, but we’re still being hit with the collateral damage from the War on Savers.
We were called worse during the bubble.
“Hundreds of miles inland from the booming real estate markets of Beijing and Shanghai, an unlikely property fever is gripping this middling industrial outpost. Taxi drivers boast of owning multiple flats for investment.”
How do you say deja vu in Chinese????
How do you say “home equity locust plague” in Chinese?
Do any of you know how to short the chines housing markets through credit default swaps or anything of the sorts.I found FXP but not as connected to housing bubble over there.The greed will switch to fear soon.
Reading these bits on China is swinging me decisively over to Chanos’ point of view on that country. I know the dynamics are different in a command economy — banks are ordered to lend, and builders are ordered to build — but a bubble is a bubble. This is not going to last forever or even a few more years. And command economy or not, there are going to be political consequences.
This is what I’ve noticed. Even the media here in the US is watching these events with the same kind of gee-whiz attitude. Back in 2005, we were told that one of the reasons our houses were worth so much was because the chinese loved our debt. Can’t the PTB see that a collapse of the asian bubble will send out financial shockwaves all over the world? Throw in Australia and Canada, and this financial ‘crisis’ is just getting started, IMO.
‘This is not going to last forever or even a few more years’
I like to recall statements we found here over and over; ‘it was going gangbusters, then it just stopped’… ‘it was like someone flipped a switch.’ I guess it’s the nature of manias that they turn on a dime and drop like a rock, when they do finally end.
“Can’t the PTB see that a collapse of the asian bubble will send out financial shockwaves all over the world?”
Isn’t it odd how no MSM commentators have picked up on this seemingly-obvious eventuality? You would think the humiliation of having completely missed the U.S. housing bubble would be a motivating factor to get out ahead of the Chinese bubble story, but apparently that is not the case.
‘picked up on this seemingly-obvious eventuality’
Well, the china story above is an LA Times piece. Back in the summer of 2005, when they profiled this blog, one of the things they asked was, ‘how will this play out?’ I told them I could imagine over 100 scenarios, but it would end about the same.
So here’s just one possibility regarding the current bubbles; the US was the ‘worlds economic engine’ based on debt, with big bucks going overseas,and recycled into that debt. Now we see the US consumer hurting, just about every state and municipal govt in the red, and the federal govt borrowing insane amounts of cash, just to keep the lights on. Is it so hard to imagine this ‘economic engine’ grinding to a halt? And what if there are no more bags of foreign cash to keep interest rates low? What would that do to US housing prices?
I don’t remember any switch-flipping. I remember an agonizingly slow 18 months of non-activity starting in Early 2006. We were all here, watching selling activity slowly ground to a halt as the country slowly run out of buyers while sellers still had enough ARM grace period time to not give it away. Banks were still doing okay because nothing had recast yet. Things didn’t heat up until Aug 2007 when subprime and Alt-a caused the first little banking bust and Bernanke had to open the discount window to “contain” subprime.
btw, I’m looking at the two-hump recast graph (agorafinancial has it), and who bought all the subprime loans in order to “contain” it? Did banks write them down, or does F&F have them, or are they three-year old shadow inventory?
I’ve repo’ed houses that were abandoned for three years. And these were big lenders too.
‘I remember an agonizingly slow 18 months of non-activity starting in Early 2006…Things didn’t heat up until Aug 2007′
It’s a individual reality situation. I was talking with a spec builder this week. He would go down to Phoenix and borrow money from people and return 25% to them. Every time he went back, they said ’sign me up.’ Then he went to them once and their checkbooks were closed. He said, ‘it just stopped.’ I also spoke with a person this week who is underwater on 5 rent houses in the PHX area, to the tune of 3-5k a month. I didn’t say anything, but IMO it’s just a matter of time before this person sees good money going after bad. THAT’s shadow inventory too.
I remember reading somewhere that something like 30%+ of the second hump has already defaulted, and a fair bit of that second hump is in higher priced homes.
The most volume of housing was hit with the first hump. The second hump is the reason why the high end has farther to fall…
Which will, in turn, crush the lower end even more.
This isn’t over yet!
Rental I agree there is a demand in CA, but at same time during 2000-2006 there were more than 300 000 new homes build, which can acomodate (x2.5 people/home ) around 5 million people. There were homes build for 5 million in CA and population incresed less… Part of the problem with this homes were they are not in the right place…
I agree that low end market is coected, specialy in NV and AZ, but there is still huge bubble in the mid and high end which is coming to a slow motion end in the next 2-3 years , becouse in the long run fundamentals always win, on short term you may get distortions of interset rate , state subsidies, psihology ( mania) , but on long run all that matter is income to prices and in west side LA , South bay, Orange county, SF is bubly as hell… actualy prices have gone up 5-10% last 6 months and median income/price is still 7,8 and even 9… When mid high end is corected low end will get one more hit. But what is hapening now is low end is draging the mid end (mid is draging high end) becouse there is eating of demnd up in the RE food chain. People which hesitate where to buy , buy in lower end of ther range becouse it has corected more , besides been cheeper in the begining, discrepancy is growing and this proliferate upwords .. bottomline mid/high end markets needs the support of the low end , which does not exist now, quite on oposite, demand is sucked to low side. It will all go down one more time, much worse for high end ( which is not corected even a bit) and less for low end …
The media is too busy cheerleading the phony US recovery.
And the ruling elites are unlikely to make a serious attmept to coopt the resulting tea-party style populism that results. So we can expect another drunken swerve towards repression on the part of the chicom governement IMHO. And like Argentina in the 80s an attempt to distract with saber rattleing about territorial claims about a certain off-shore island. This is a significant fear of mine.
It seriously took me a minute to realize you were talking about China. LOL?
“I know the dynamics are different in a command economy — banks are ordered to lend, and builders are ordered to build — but a bubble is a bubble.”
Reading that taxi drivers are buying multiple properties for investment purposes is an obvious sign of a bubble. And bubbles always burst. But are there previous examples of a bubble in a command economy and do they play out differently in a command economy than elsewhere once they burst?
“Still, even the California Association of Realtor’s own president said last month in a press release that while the loss of the federal credits would remove some urgency from the market, it’s ‘not likely to derail current market trends.’ ‘Maybe it’s wishful thinking,’ Mueller said. ‘But I don’t think demand will stop.’”
I hadn’t realized until now that LAY belonged to a cargo cult.
“Still, even the California Association of Realtor’s own president said last month in a press release that while the loss of the federal credits would remove some urgency from the market, it’s ‘not likely to derail current market trends.’
Not me, I forsee an urgent need for popcorn, fence posts and lawnchairs as well as a long term market demand for large cardbord boxes.
“In some respects it has served to stabilize the market, but in a broader sense it has prevented the market from achieving its own balance, finding a real bottom and starting a real recovery. The market is being artificially manipulated right now and we just don’t know what’s next.”
My hunch about what’s next: Formation of government-sponsored real estate cargo cults, and a federal government deity who is reluctant to disappoint the faithful adherents.
Bend over and meet your new landlord, uncle sam?
BOHICA?
“If this were a movie, everybody would learn the obvious lessons. The folks in the big investment banks would learn that it’s valuable to have an ethical culture, in which traders’ behavior is restricted by something other than the desire to find the next sucker. The folks in Washington would learn that centralized decision-making is often unimaginative decision-making, and that decentralized markets are often better at anticipating the future. But, again, this is not a Hollywood movie. Those lessons are not being learned.”
I beg to differ:
Experience keeps a dear school, but fools will learn in no other.
– Benjamin Franklin –
The folks in the big investment banks would learn that it’s valuable to have an ethical culture
This is the key phrase, and unfortunately it’s not true, not for bnaks or any other corporation. It’s true only if all the employees are interested in the company staying in business for 50 years or so. However, the employeed are only interested in the company staying in business long enough to feather their own nests. For average Joe it would be 10-15 years, long enough to put down a decent 401K, build a marketable resume and raise a couple kids in the same house. For high level management and for the Senators they buy, it’s 15-20 months or until their multimillion bonus/lobbying gig arrives, whichever comes first.
“They thrive in institutions where people are not rewarded for being cantankerous intellectual bomb-throwers.”
I had a bit of experience with that during the tech boom. Had a new sales manager who came from a Fortune 500 company (he kept telling us) who used terms like “new paradigm” and judged skeptics as “not team players” or “not a people-person” etc. He held a retreat 200 miles away at his ski lodge and expected all Sales to show up. I passed. Within year he left to start a B-to-B dot com, in the year 1999.
LOL.
“Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general.”
>>>>>>>>>>>>>
Perhaps if some of those guys watching porn at the SEC had decided to play ‘Undercover Boss’ and had visited their local Countrywide office and applied for a loan then this bubble would not have even had a chance to happen.
BTW, we got an interesting first reply from the OCC regarding shadow inventory, and they said they will have something more in-depth as well. More to come on that here, and we’re waiting on a response from the Fed and OTS.
“Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general.”
Nobody “missed it”…they all tried to cash in on it, even the ones who should have known better.
Interesting that Lew Ranieri was quoted on this. Michael Lewis’ book Liar’s Poker, which discusses Ranieri’s career at Salomon Brothers as a backdrop for the author’s own experiences at the firm, was the first financial book I read, and it is still the best.
Lewis once said that he was surprised at the reaction to the book. He expected the culture he described, which was greedy, macho, juvenile, and ruthless (sometimes all at the same time), to be looked upon with disapproval. But he would speak at schools like Ohio State, and the students’ first question was to ask how they could work for a place like Salomon and trade bonds and be the prototypical big swinging d__k.
Little boys often aspire to be pirates, too.
schools like Ohio State
That explains a lot.
And that’s why this mess will not end until the citizens stop trying to be like the Big Crooks and instead demand justice vs. a chance to play the game of fraud themselves.
Much like the movie Wall St. wasn’t intended to be an inspirational story.
Wall Street was totally inspiring. At the end of the movie, Charlie Sheen was going to jail and knew that his father was the best man he had ever known. I saw it with a group, but I was the only one who thought it had a happy ending.
9 years of inventory and over 7 million people going to foreclosure or 30 days behind on mortage payments.
Very nice housing recovery? Reminds me of the player hitting 200 but his agent says he shows up everyday so give him a new contract for millions.
“Very nice housing recovery? Reminds me of the player hitting 200 but his agent says he shows up everyday so give him a new contract for millions.”
The one with the 300 average and 30 home runs when juiced, but without juice is barely a 200 singles hitter that can’t run? Any new contract, if there is one, is going to be a lot smaller than the old bloated contract. The housing market has as much chance of returning to bubble levels of performance as players do of returning to steroids level of performance.
“Kristen and Chuck Dvorscak of Midland Park, N.J., need to sell their 1929 three-bedroom Colonial now. The couple just had a second child, so the Dvorscaks, 33, want to upgrade to a bigger home nearby. Trouble is, their house’s value has plummeted about 7 percent from the $535,000 they paid four years ago. They’re resigned to taking a loss, but hope to save the traditional 6 percent real estate broker’s commission by having Kristen market the house herself. (Asking price: $499,900.)”
————————————————————————————
Ya know….. these clowns must have their head planted squarely up their ass. I can’t imagine being on the hook for a half-million-dollars on a 75 year old house right now. Their detachment from reality is stunning. I’d being $hittin’ basketballs if I were them.
I’m still trying to figure out how having a second child causes you to outgrow your 3 bedroom. Doesn’t everyone still get their own bedroom?
Well you got the families where each parent needs their own room to keep from killing each other, and everybody wants an extra bedroom for an office, studio, whatever…
These don’t sound like necessities to me.
Me thinks their house has declined by more than 7% since 2006.
“Xi Zhou, a cameraman for a local news channel, paid $50,000 for his 900-square-foot unit in December. He figures it’s now worth $80,000. … ‘For people of my generation, property is all we talk about,’ said Xi, 27, who will share the new home with his wife and parents.”
“Marital relations” must be awkward when four people share 900 sf. Just sayin’.
In Latin America it is not uncommon for everyone to clear out for an afternoon so that a young married couple can have some time alone.
Probably helps with the one child policy, tho’.
“As President Barack Obama said recently, Wall Street reform would prevent ‘a situation where people are allowed to take wild risks and all the downsides are socialized even as the profits are privatized.’ Just as there will always be homebuyers tempted by the vacation place they can’t really afford, there will always be bankers tempted to earn a sweet million on an obscure deal with an immediate payout. In other words, human frailty will always be a part of the human condition. Government regulations curb the excesses.”
This is all very nice for him to say, but why he doesn’t give Joe Specuvestor some of the burden of cleaning this up, too? Why, for example, does every homedebtor get a tax holiday on income on forgiven debt?
Does anyone know about flipping?
I have an opportunity to purchase for CASH a home listed on the MLS for 210,000 for 200,000.
I have been made aware that this is a flip.
The seller is going to use my money to purchase the home for his price ( I have no idea what that price is) and then sell it to me for 200K.
Is this illegal?
“The seller is going to use my money…” No, the seller is likely to STEAL your money.
I’m not sure what you’re saying. If it’s on the MLS and you want to purchase it for $200k, why not just make an offer? Where does the flip come in?
The RE situation where the Chinese are buying all the RE in Canada and other parts of the world is playing out exactly like the Japanese buying all the US properties (especially West Coast and Hawaii) back in the 80’s.
You know what? a few years later, they all sold at losses and heading back to Japan with their tail between the legs.
Just sit patiently and watch the RE collapse in China first, and you will see a lot of Chinese selling their US properties.
“Just sit patiently and watch the RE collapse in China first, and you will see a lot of Chinese selling their US properties.”
This should be great fun to watch, especially since ‘no one could have seen it coming.’ Got popcorn?
Great opportunities are available for smarty-pants short sellers!
==========================================================
StreetTalk With Bob Lenzner
Smart Money Is Short Debt Of Greece, Spain, Portugal And Japan
Robert Lenzner, 04.30.10, 05:00 PM EDT
But the sovereign debt crisis won’t be another subprime meltdown.
Robert Lenzner
Smart money went short the bonds of Greece, Portugal, Spain and Ireland when the price of buying protection against default was cheap, some weeks ago. The price of buying insurance against default has spiked now that the crisis is full blown and a $100 billion bailout of Greece is not a done deal.
The Smart Money, mostly hedge funds thinking ahead, were betting on the historic findings that over 800 years severe recessions are always followed by sovereign defaults. Smart Money had studied This Time is Different, a history of financial crises by Harvard professor Kenneth Rogoff and his co-author, Carmen Reinhart.
You want perspective on more than 2008-09, you have to read this book. One clear finding of Reinhart/ Rogoff is that sovereign debt default is in “a cyclical trough” based on a chart published by Hedgeye Risk Management this week. The percent of countries in default or restructuring is about the same as in 1930 as the depression took full force.
Smart Money is worried. It has seen the need for bailouts segue from a few billion dollars for a single hedge fund, LongTerm Capital in 1998, to trillions on behalf of banks, insurance companies and quasi-public institutions like Fannie Mae ( FNM - news - people ) to prevent an economic meltdown equal or worse than the 1930s. European Central Banks needed 27.5% of total European GDP to staunch the wounds, according to Jean-Claude Trichet, ECB chairman, at the Council on Foreign Relations this week. “The transmission of shocks were moving rapidly every half-day. There was no textbook to tell us what to do,” he said.
Nor was he forthcoming about the odds of a deal for Greece. At stake in the first instance are European bank loans to Greece ($190 billion), Portugal ($240 billion) and Spain ($840 billion). That’s a nifty $1.2 trillion exposure to the economically vulnerable European nations. Faced by French banks like Societe Generale, German banks and British banks as well. A big problem, but not of the proportion of the subprime crisis, which morphed into prime mortgages, LBO loans, credit card and automobile debt–making Citigroup , Bank of America , Fannie Mae, Freddie Max, WAMU and others in effect insolvent. Still, a challenge to European bank balance sheets and further deterioration in European stock markets could be destabilizing.
LaRouche on Eurozone Meltdown: Get the Passengers Off the Boat; You Cannot Bail This Thing Out
April 28, 2010 (EIRNS)—This release was issued today by the Lyndon LaRouche Political Action Committee
Panic spread across international financial markets as the Eurozone debt crisis escalated yesterday and today, with Spain joining Greece and Portugal on the list of countries whose sovereign debt has been downgraded by Standard & Poors, and some analysts asking the question, is Italy next?
When you add up the demanded bailouts of the bank creditors of these countries, Lyndon LaRouche commented today, you are talking about something in the range of $1 trillion dollars. If you consider the insane derivatives built on top of this quicksand—in typical Goldman Sachs style—you are in the range of a quarter quadrillion dollars, or higher. “You cannot bail this thing out,” LaRouche asserted. You have to get the passengers off the boat, not try to bail out the Titanic—and hopefully there will be enough boats to do that.
The British Empire’s media outlets and experts, looking at this situation, are urging an exactly contrary policy to LaRouche’s: a second TARP-style mega-bailout. Barclays Capital economist Piero Ghezzi is cited in today’s New York Times saying that, in order to satisfy “the markets”—i.e., the predator financial institutions that created the problem in the first place—”the number would be huge. Ninety billion euros for Greece, 40 billion for Portugal and 350 billion for Spain—now we are talking real money.” The Times article then calls for a TARP-style bailout of Europe to be launched:
What a growing number of investors suggest is really needed is a ’shock and awe’ figure… something similar to the Bush administration’s decision to provide $700 billion to shore up America’s financial institutions in the peak of the 2008 crisis.
Bloomberg.com concurred:
Europe may need to come up with a plan equivalent to the $700 billion Troubled Asset Relief Program deployed by the U.S. after the collapse of Lehman Brothers Holdings Inc.
The head of the notoriously anti-science Organization for Economic Co-operation and Development (OECD), Angel Gurria—in Berlin to survey the damage along with the top dogs of the International Monetary System, the World Bank, the European Central Bank, and the International Labor Organization—was openly hysterical:
It’s not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it, you have to cut your leg off in order to survive.
Prescribing self-dismemberment to a nation is coherent with the OECD’s anti-nation state goals. The OECD is an international organisation which advises governments on how to tackle the economic, social and governance challenges of a globalized economy, in a way that won’t challenge the British monetary system.
“(Our) Treasury has now redeemed $596 billion in Bills in Aprils: an all time world record, even when accounting for the Fed’s steroid abuse period of SFP 1 (we are currently in the second iteration). Add $47 billion in Notes and there are almost $650 billion in redemptions. This number is simply ridiculous. Forget the interest expense: this ever increasing roll is the number one danger to the US and world economy. Should the Treasury be unable to keep issuing shorter and shorter dated debt (and it already is skirting away from even the belly of the curve), it is for all intents and purposes game over.”
zerohedgedotcom
This is going to be an Advil night, I can tell.
Friday April 30, 2010
Bloomberg
Dollar, Euro, Pound Are All ‘Ugly Sisters,’ HSBC’s King Says
April 26, 2010, 10:46 AM EDT
By Jennifer Ryan
April 26 (Bloomberg) — The dollar, euro and pound are all unappealing investments, either because of policies of “benign neglect” or concerns on the euro region’s stability, said Stephen King, chief economist at HSBC Holdings Plc.
“It is a competition between ugly sisters, they are none of them particularly attractive” he said in an interview today in London. In the U.S. and U.K., “there will be a policy of a desire not so much to drive the currency low, but a policy of benign neglect. If the dollar weakens and sterling weakens, the authorities in those countries will be more than happy.”
The European Central Bank won’t want to see a weaker euro because that would imply a loss of investor confidence in the single currency, King said. The euro has dropped against the dollar and sterling on concern that Greece won’t get a rescue package to help it meet its debt payments.
“If the euro weakens, it’s more a worry about the stability of the euro zone and that’s more of a concern to the ECB,” he said. “You’ve got on the one hand the benign neglect approach from the States and the U.K., on the other you have the worries about the structural integrity of the euro, which is obviously weakening the euro.”
King’s book, “Losing Control: The Emerging Threats to Western Prosperity,” will be published next month.
The euro is down about 1.5 percent against the dollar this month and traded at $1.3331 as of 2:39 p.m. in London. The currency has dropped 3.3 percent against the pound in the same period to 86.13 pence.
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Bloomberg
Euro Falls for Fifth Month as Greece’s Budget Crisis Spreads
Friday, April 30, 2010
May 1 (Bloomberg) — The euro dropped for a fifth month versus the dollar in the longest stretch of losses since November 2008 as Europe’s deficit crisis spread and officials negotiated a potential $159 billion rescue for Greece.
The dollar rose yesterday to a three-week high versus the yen after the Federal Reserve said the labor market is “beginning to improve” before next week’s payrolls report. The franc was the only currency to drop in April versus the euro among its most-traded counterparts as the Swiss National Bank cited measures to limit appreciation.
“We’re underweight the euro,” said Jonathan Lewis, founding principal of New York-based Samson Capital Advisors LLC, which manages more than $4 billion. “If past is prologue, markets won’t be satisfied with the aid package. Even if it looks impressive, the market will focus on the next country that might need aid.”
The euro fell 1.6 percent to $1.3294 yesterday, from $1.3510 on March 31. The euro dropped 1.2 percent to 124.78 yen, from 126.27. The dollar rose 0.4 percent to 93.85 yen, from 93.47, after reaching 94.58 yesterday, the highest level since April 5.
The 16-nation euro touched $1.3115 on April 28, the lowest level since April 2009, when Spain’s credit rating was reduced to AA from AA+ with a negative outlook by Standard & Poor’s, a sign the debt crisis is spreading. It fell below $1.32 the previous day for the first time in a year after S&P cut Greece’s credit rating to junk and lowered Portugal’s to the third-lowest investment grade.
Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2010/04/30/bloomberg1376-L1PPWB1A74E9-3.DTL#ixzz0meaSV9ec
Sadly, Mr. Timothy Woods (Lenny), owner of Chino Hills Ford that was quoted in this article, was found dead in September of 2010 of a self inflicted gunshot to the head. He was a great caring man who is deeply missed by many. RIP Mr. Woods…