The Housing Bubble

Unfortunately, there was a real earthquake, 4.7. Realtors still hanging around:)

I woke up from a jolt, but was like “eh” (shrugged), and went back to sleep. Only watching news I realized there was a quake.

An earthquake just got posted in the financial markets.
…The US Treasury reported that net inflows into US assets of more than one-year duration totalled just $46.7bn in April, the lowest figure for a year. This was not only below March inflows of $70.4bn and consensus forecasts for a reading of $60bn plus, it was also insufficient to cover April’s trade deficit of $63.4bn….
http://tinyurl.com/hb6r4

I’m seeing the same thing here on our high priced stuff. Big adjustments down, no takers. I’m think people are finally stepping back and saying to themselves “600, 700, 800 thousand? Damn!…….that’s a lot of friggin’ money!” No one even questioned it when the mania was raging. Why? Because it was something they weren’t going to keep. It was all about turning it for a profit. Now they’re thinking “Jeez, I may have to pay this back.”

Instant Equity ! That’s right folks, step right up, we’re giving money away !

I call the over improvement of a property with granite and stainless steel in high gunfire zones “flipper’s contagion”.

“GREAT OPPORTUNITY TO ACQUIRE INSTANT EQUITY RIGHT AWAY”

Well, that’s certainly a plus… I HATE having to wait for my instant equity.

That “view” of the Washington Monument cracks me up.

This is a “transistional” neighborhood. Lots of public housing / projects within 2 block. “Interesting characters” e.g. homeless looking men hang around all day.

Or even 1/2 the cost in the high-bubble zones.

Actually, that disparity is not that drastic. I’m renting a house for $975 that would sell for 375K. That’s an over $1000. A friend of mine who a talked into “getting out” is renting a home for $1400 that would sell for 525K. Now we’re talking over $1500 difference. I recently found a rental home out at our local country club that rented for $1900. This home would have sold for about 900K at the top. You do the math. Any way you figure it, it’s ridiculous.

I rent a $1,000,000 for $2100/month - about 2 miles from the Pacific Ocean - 3000 sq.ft. - on a golf course - built in 2003.

“Why buy if you can rent for 3/4 cost?”

To capture the 20% YOY gains forever, silly! At least if you live in The OC…

In July Russian ruble becomes fully convertible and Russian oil & gas will be sold in rubles. The country is the #1 world’s exporter of oil & gas.

Important post. Everyone who is interested in the future of interest rates needs to understand this. The US needs to keep it’s debt attractive. And if foreign investors decide to dump all that debt, these so called lousy long term interest rates will be something to be longed for in the near future.

Kwurst;…Outstanding read particularly with the historical relationship to the 70’s….

“This created a nightmarish prospect of the United States losing control of its own currency, and in 1971 the Fed chairman, Arthur Burns, negotiated a deal with the European and Japanese central banks. The deal was that they would return to America the dollars they acquired in their own economies, and the Fed would invest the money on their behalf, in absolutely safe government securities, without charge and at the best rates.”

I wonder if the lense of history will view this move by Burns as the beginning-of-the-end for US dollar hegemony. One might argue the Volcker era was merely an interuption in a long-term trend initiated by the regime change to repatriate foreign $US holdings into our debt securities. This policy change took place before many folks were talking about the problems of “moral hazard” or “systemic risk”…

Do I understand that under the current regime we have added about $1 Trillion in international debt in the last 3 years? If we got it at 1 to 1 1/2%, we’re kickin’ ass!

With the kind of money Ben is making on clicks and advertising - who can sleep?!

Ben’s tireless work, to keep his blog troll-free and at the very pinnacle of the housing-bear sites, has amazed me ever since I started following it around March ‘05. I do not recall a single day without a thread, except perhaps when he had to change servers/services. That means ZERO vacation days for Ben Jones, or darn close to it, if my memory’s bad. You betcha contributions are in order. Cheapest education, relative to its top-notch quality, that I’ve ever received — and fun, to boot.

If you sent a friend to buy a car from a saleman you knew, you would be a bird dog and the salesman would give you $50 - $100 for the referral. I am not sure if the Craigslist Ad violates RESPA, since, my understanding,( -which is probably wrong )is that RESPA does not allow referral payments.

It means to pursue with undivided attention. That place looks Soooo McTownhouse. In Ashburn, to boot. Ick. Race you over there MeShell…..

Here’s another one in Loudoun.

http://tinyurl.com/qnjvu

They are looking to sell for $380k. Median price (Zip Realty guesstimate) in this area is around $430k. The high sold in November 2005 for $460k.

In comparison, the last time we saw prices of around $380k was in November 2004! Also, these places sold new for around $180k in 2000.

Looks like prices are dropping faster than I thought. I feel sorry for the people that bought after 2002 (the last time prices matched the long term trend: http://tinyurl.com/mld22)

An example would a real estate investor hiring his $20K-month assistant to hunt high-and-low for FBs willing to part with their underwater homes at a deep discount in exchange for hard cash.

It means the house is a ‘dog’ and you’d be a ‘bird’-brain to consider it.

Bird dogging is a hunting term. When you hunt with a dog the dog does the hard work. The dog finds the bird and stops and points to the target. Upon command the dog flushes the bird and the hunter shoots. Please keep in mind that in this case you are the bird.

I was under the impression they were already doing this. I sure hope it doesn’t make our current situation worse (longer, stronger credit bubble).

I still don’t understand why long-term USD rates are so low, especially in light of these developments.

It should be a “B.”

After a couple of centuries, they finally pulled the ruble out of the rubble.

“Is this a communistic attact on private property rights”

Yes, Especially after the fiasco the last couple of days with the farmland in Downtown Los Angeles.

Gooooo baby, go — CDs are next.

That was me. Thanks for the link.

Also, check out CORS, a bank that, by purpose and design, issues mortgages to high rise, high end condo builders in the bubbliest markets, SW Florida, Northern VA, etc. That’s what their online stuff says.

The builders pay off the mortgage as they sell units. Talk about hanging your butt out in the wind! What happens when the builders go bust, and stiff lenders like CORS? Ouch.

I looked around some more at boring quarterly and yearly reports, and I’d estimate the big banks have at least 50% of their assets in mortgage back securities, BofA, Citibank, Wells Fargo, etc. It’s one thing when realtors, builders, etc go out of business and scale back. But if the banks get in trouble with their MBS, the whole system might become totally unglued, which would be a disaster. Better hope that doesn’t happen.

Correct me if I am wrong, but I believe Citi’s CEO is part of the Working Group on Financial Assets (aka Plunge Protection Team), which would go very far to explain the occasional rallies of the HB sector on bad news releases (rocketing share price at the opening bell across the entire sector, followed by a flat line for the rest of the day).

Forgot to post link China daily
http://tinyurl.com/m2xmj

This tidbit from Stratfor http://www.stratfor.com/
———————————————————-
Geopolitical Diary: China’s Economy, Out of Control

China announced Wednesday that industrial production increased in May more rapidly than at any time in the past two years. Output rose 17.9 percent compared to May 2005. The numbers exceeded expectations. Exports in May rose by 25.1 percent while domestic retail sales grew by 14.2 percent. In other words, the Chinese government’s campaign to slow China’s overheating economy is not working. On the contrary, the economy is accelerating.

That is why the People’s Bank of China (PBC), China’s central bank, issued a statement Wednesday saying that banks should be concerned about the potential risks associated with the rapid increase in lending, following a meeting between PBC officials and representatives of China’s banks. China’s M2 — the broad measure of China’s money supply — grew at 19.1 percent year-on-year, outstripping government targets. More important is the fact that Chinese banks, which are provided annual targets for the amount they should make in loans, have already loaned over two-thirds of that amount — with more than half a year to go — and it appears that the rate of lending is accelerating.

Put very simply, the Chinese economy is out of control. One would think that the faster the growth, the better the economy; but at a certain point — and in this case — that is not so, which is why the PBC is trying to get control of the situation. The problem is the massive overhang of debt, and in particular, troubled loans. Looked at from the standpoint of Chinese corporations, servicing this debt is a tremendous burden. Looked at from the standpoint of Chinese banks, the loans threaten the banks’ viability if they become nonperforming.

The solution of Chinese companies is to sell more products to generate cash to pay off the loans. It is difficult to sell into the Chinese economy because of high savings rates, driven by government policies and economic insecurity. The Chinese government needs a high savings rate to help stabilize the banks; dramatically increasing domestic consumption would undermine the savings rate, threatening the banking system just as surely as defaulting loans would. The solution for these companies, therefore, is to increase exports. In a world already saturated with Chinese exports, the only way to increase cash flow is to cut already low prices. That increases cash flow but does nothing for profitability. In other words, companies already saddled by debt burdens cut into (or below) profit margins to service the debt.

(more on the Stratfor site)
——————————————————
Learned mentors, is this a sure sign of the credit bubble really starting to unwind from the supply side?

The Chinese and US residential property markets are doomed to drag each other to the bottom of the sea with the breakdown of the symbiosis which will accompany the death of the conundrum.

Details!!

Is that a building in Folsom???????? Folsom is outside of Sacramento. It is where the Intel campus is located.

Thanks….

IMO, yes. They **are** undervalued compared to recent history, but my guess would be that their earnings quickly deteriorate to pre-2002 levels by the end of the year. They truly have come down a lot already, so wondering how quickly/how much they will move down from here. Expect a rather dramatic fall in Oct, IMO.

That, combined with a short squeeze.

That letter’s author reads the tea leaves correctly. Being upside down is one thing, but being upside down in Montana is totally different. While their scenery is beautiful the economy is firmly bricks and mortar with a largely uneducated workforce, and the winters are long and cold. The wait to being right side up could be very long indeed.

GS,

They warned us that prices would be sticky on the way down, and they were right. Let’s face it. If you thought (counted on, actually) having $500,000 in your pocket, how quickly would you be willing to let it go to $300K? Yes, one would think, “easy come, easy go,” but these people are desperate. As you know, many have debt based on the highest former sales price in the ‘hood.

Until the crazy loans are gone, this will not end quickly, IMO…perhaps it will literally “plateau” for a long, long time. We need lots of foreclosures to put the fear of God into these final lenders (some risk premium, PLEASE!!!).

Remember, contrary to what many think about the internet driving prices lower more quickly. I think it makes prices even stickier. Sellers do much more research than buyers WRT pricing history, from what I’ve seen. They know what the top price was, and are hell-bent to get it. Used to be Realtors helped set the price according to what the market was doing. Now, the sellers “know better” and will cause the market to stall. That is why we are seeing record inventory so early in the game, IMO.

GS - I am of the opinion that pain will not hit until 2008, I am looking for a decline to last 10 -15 years. I wish the NAR was correct in that this will be a soft landing; because I believe the economic missteps since 1994 will result in a world wide recession that will make the great depression look like a cake walk. I wish there was a way to avoid the carnage that is going to occur. IMHO this is a Perfect Financial Storm. My family, friends and coworkers will not be immune- would that it was otherwise.

Like watching paint dry. I don’t know how long time blog participants have maintained their sanity.

I have not seen any significant price declines on the properties that I am interested. Although one good property that I thought was sold came back on the market today with the following comment by the re agent:

“ALERT!!!! SALE JUST FELL THROUGH BECAUSE MTG. BROKER WOULDN’T FINANCE DUE TO MISSING KITCHEN. (WATER PIPE BURST–SELLER WILL RESTORE KITCHEN, BUT A SMART BUYER COULD BUY QUICKLY AS IS–REDO THE KITCHEN HIMSELF DOR A PRICE REDUCTION)”

We are and will see price declines on marginal properties and the weakest of the weak are going into foreclosure but IMO a serious correction will only occur when a critical mass of ARMs reset. There are about 2 trillion in ARMs resetting in 2007 which will trigger the panic button. Until then we will be bitching and moaning with the occasional tactical or moral victory.

I do not believe that housing prices will do a 50% free fall in two-three days like the HB’s. The RE market is too illiquid and disfragmented with too many individual players. You got to get all the lemmings headed to the cliff at the same time to get a good crash.

Sounds like the lull before the storm. Measuring the general economic picture in Scal in early summer things look rather slow. The recently opened Home depot mega store in Long beach had very light traffic. I Do a lot of traveling around LA metro area and even road traffic seems lighter than usual(high gas prices?).

Go all around to different neighborhoods and all i see are for sale signs everywhere. In rich areas. poor areas.

For Sale House across from my home has languished several monthes without a looker.

There seems to be a standfoff in Scal with sellers unwilling to budge on prices, or playing a Waiting game.

Actually I am amazed at how quickly asking prices in DC are dropping. The run-up in prices was what 5 years? If Aug 2005 was the height just wait until August 2007. If the correction takes only 5 years (same as the run-up) I think that would be fast in historical terms.

I think the deer are still standing frozen in the middle of the highway. The car had time to stop before hitting the deer. They wait.

(flip, flip, flip to end of chapter — deer dies.)

Don’t the unions have anything better to do. If you don’t like his comp package sell the stock.

Homebuilders/Construction
The Real Story: Look Who’s Buying Homebuilders
By Marc Lichtenfeld
Senior Columnist

6/15/2006 10:30 AM EDT
URL: http://www.thestreet.com/p/stocks/homebuilders/10291769.html

It’s scary to step in front of the speeding train that is the housing market decline.

Investors in homebuilder stocks have had their heads handed to them as the Philadelphia housing sector index is off 20% this year. Bubble-bursting data such as inventory gluts, fewer mortgages and slower home sales make investing in the group a treacherous task.

Yet that’s exactly what several shrewd investors have been doing lately.

Take Emaar Properties, a real estate company based in Dubai. On June 1, Emaar said it would acquire privately held John Laing Homes for $1.05 billion in cash. John Laing has significant exposure to the California market — which is believed by many to be frothy. An Emaar spokesman said the company was interested in the deal for its long-term value and wasn’t worried too much about different cycles in the business.

John Laing recorded $1.6 billion in revenue in 2005, giving the deal a price-to-sales valuation of 0.65. Margaret Whelan of UBS estimates that the P/E on the deal was 6.4. As you can see from the table below, public homebuilders are trading at significant discounts to the Emaar transaction.

In particular, stocks such as Beazer Homes (BZH:NYSE) , Hovnanian Enterprises (HOV:NYSE) and KB Home (KBH:NYSE) , all of which have taken a tumble through the first half of the year, look inexpensive when compared with the Laing transaction.

There’s also the case of General William Lyon, the chairman and CEO of William Lyon Homes (WLS:NYSE) .

In March, Lyon made a tender offer for all the remaining shares (roughly 26%) that he or his trusts do not own. With the stock at $72 at the time, Lyon offered $93. He later raised the offer to $100 and finally to $109. Now the stock is north of $140, as its largest holder, Polygon Investment Partners, which has a 9.9% stake in the company, is clamoring that $109 isn’t enough. Investors (or speculators) appear to be banking on General Lyon upping the ante, despite stating that $109 is his best offer.

Value Plays?

Symbol Price/Earnings Price/Sales
BZH 4.4 0.3
CTX 4.8 0.4
DHI 4.7 0.5
HOV 4.1 0.2
KBH 4.2 0.4
LEN 5 0.4
MDC 4.5 0.5
MTH 4.4 0.5
PHM 4.6 0.5
SPF 3.8 0.4
TOA 3.4 0.3
TOL 5 0.6
WLS 6.5 0.7
Average 4.6 0.4
Emaar/Laing 6.4 * 0.6
Source: Thomson.
Valuations are based on trailing 12 months.
* The P/E ratio for Emaar/John Laing is an estimate based on 2005 results

The general, who is 82 years old, is already worth about $900 million based only on his Lyon Homes holdings. He obviously believes there is an opportunity to increase his wealth by paying a 51% premium to where the stock was when the first tender offer was announced.

But don’t dismiss Lyon’s offer as a speculative bid. Last September, he sold 117,000 shares in a forward contract. In essence, with the stock at its all-time high, General Lyon locked in his profit. After the shares had been cut in half, he attempted to buy the rest of the company. Think he knows value?

Other insiders, while not necessarily gaming the system like Lyon, are hanging on to their shares. For example, at D.R. Horton (DHI:NYSE) , only one insider has sold stock in the past six months — a sale of fewer than 16,000 shares by a director. At beleaguered Technical Olympic USA (TOA:NYSE) , no insiders have sold since the beginning of the year, and 33,000 shares have been bought. Other homebuilders have seen insiders holding steadfast with no massive dumping of shares.

But it’s not just insiders. Some money managers also are enamored of the current valuation of homebuilders. Tontine Management is one of them. The Greenwich, Conn.-based hedge fund company run by Jeffrey Gendell saw its Tontine Partners fund soar 197% in 2003 and 101% in 2004, according to Institutional Investor. Thomson reports that nearly 28% of its assets are invested in homebuilders.

The company’s top 10 holdings include Centex (CTX:NYSE) , KB Home, Pulte Homes (PHM:NYSE) , Ryland Group , Beazer Homes, Toll Brothers (TOL:NYSE) and Hovnanian Enterprises. Last month, Nicholas Yulico reported that Gendell is an activist investor who persuaded Beazer’s management to increase its share-repurchase program.

Homebuilders “have an amazing ability to make money in difficult periods,” says one anonymous hedge fund manager who runs about $60 million. “I’ve never seen a group of stocks do poorly when they’re trading at five or six times earnings while management is buying back stock,” he added. The manager owns and cites Standard Pacific (SPF:NYSE) , NVR (NVR:NYSE) and KB Home as his favorites.

Wellington Management, a Boston-based investment company that manages $322 billion in assets, owns more than 5.6 million shares, or 8.5%, of Standard Pacific; 21 million shares, or 7%, of D.R. Horton; and 2 million shares, or 2%, of Lennar (LEN:NYSE) . In the first quarter of the year, Wellington put more money into the sector, adding to its holdings in those stocks by 12%, 27% and 29%, respectively.

I don’t blame investors who don’t want any part of homebuilder stocks, especially with the avalanche of bad news in the housing market lately. However, it’s important to discern between bad news and bad stocks. At less than five times earnings and 0.4 times sales, I believe investors who can handle some volatility and risk will be rewarded greatly. But don’t just take my word for it — listen to the Gendells and Lyons of the world.

Hell no.

I don’t understand the condo tower. I lived in New York City, I loved it. But I was also allowed to put a BBQ on my patio and have a pet.

Why would anyone want to live (full time) in a hotel room?

Santa ana is the most densely populated city in OC. South of Segerstrom ave it is still a pretty solid middle class well kept suburb. North of segerstrom all way to the 5 frwy it is well on way to becoming a rundown deteriorating immigrant subburban slum. Here you can actually witness the deterioration of a once solid middle class clean OC suburb into a ragged immigrant-swamped latinoized barrio.

The location for those aforementioned condo towers is actually in the far southeast corner of Santa Ana close to Costa mesa and irvine. This area falls in the south-of -segerstrom area which is an area of apartments, condos, and office parks, not “tijuanized” as of yet but a stones throw from the Tijuana section of SA.

WHERE ??

Good comment CITOC, This is going faster than I thought and accelerating.

Agreed. I’m surprised at the speed. We are now where I thought we would be in December.

I still think this will take years to play out fully. We have 2, 3, 5, 7 and even 10 year I/O loans to come to fruition and I believe even the 10 I/O loans may find themselves underwater at the end of that period. Of course they’ll have paid taxes/maintenance during the time anyways, even if they show a 2% gain.

I think we have already had sharp drops. Then we’ll see the dead cat bounce. Then more drops. Then another bounce. Then another drop and then a long long long slow suffering silence.

These are everywhere down in the OC. It started a few months ago with a handwritten yellow sign by the Borders Best Buy in Mission Viejo. Now I’m seeing fancier versions all with the same empty promise.

My bet: a multi level marketing scheme

Stucco

I am trying to put together an exiting plan for my 401K and my financial advisor just looks at me and says I have 10 years before I need to access the money and I should just leave it in the stock market. Does anyone know when would be a good time to GET OUT? Where do you put the money while you wait for the market to bottom out?

Yea, he probably get his investment advice from a purple fella named Barney.

I saw that on the news last night LOL He says he’s going to Peru with he metal detector after he gets his hole filled.

If its Monclair digging a 60-ft deep unauthorized hole in ones yard no big deal. Monclair is one of the smelly armpit
communities in The tricounty region. Lots of Gangs, graffiti and assorted low life. As Monclair is close to the Inland empire, if not part of it, why is it a big deal about the 60 foot hole. The Entire IE is being dug up and bulldozed for housing and urban development. There are big, gaping fenced-off holes for foundations all over the IE.

LMAO a used car no longer in the blue book at that. Sign me up Boise here I come.

From the CL listing: “Owner will credit back to Tenants up to $500/month towards their utility payments, or $6,000/annum, at the end of each lease term date provided there has been no breach in the lease’s terms and the utility bills paid for the year either meet or exceed $6,000.”

OK, let me see if I have this straight. The owner will credit you the equivalent of $6,000 if and only if your cumulative yearly utility payments exceed $6,000?

So what are you supposed to do if you rent this house, and in month 11 you’ve only racked up $4,000 in utility bills?

“Turn on all the stove burners and open the windows, Honey! We’re gonna run the pool pump 24-7, set the thermostat at 20F, throw extension cords over the back fence for the neighbors to use! We gotta burn through $1,000 in 30 days!”

This guy must be on crack.

Could be. “For females only.” Looks like innovative trolling.