Mr Mortgage: The Real Estate ‘Quickening’ is Upon Us
Posted on August 16th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research
Duck and cover.
They have been told to ‘de-lever and raise capital’ but it fell on deaf ears for over a year. Now, here come the ‘asset’ sales all at once. First, the FDIC said it will be liquidating IndyMac, then Merrill with $30 billion two weeks ago, this week Fannie says 54k homes may be bulked and now Lehman will likely sell $40 billion. To raise capital the banks burned through sovereign funds late last year, preferred buyers this year and now are selling common stock and/or ‘assets’. It’s all they have left.
In my opinion, banks stumbling all over themselves to get ahead of each other in the bulk real estate ‘asset’ unwind comimg right at the end of the Spring/Summer selling season is the wildcard that will deliver a cripling blow to the housing market for a long time to come. The last thing this market needs is more inventory.
“Lehman Brothers is in talks for potential sale of its $40 billion portfolio of commercial real estate and securities The portfolio includes mortgages and mortgage-backed securities that were valued at $29.4 billion as of May 31, the article said. It also contains real estate assets worth $10.4 billion at the end of May, according to the report.” Source: Reuters
“To speed up the disposition of the 54,000 foreclosed properties it owns, Fannie Mae is opening offices in California and Florida and is considering selling those properties in bulk to investors. “I do not think this is a time to be holding onto (foreclosed properties) hoping for a better day,” CEO Daniel Mudd said last week.”
“On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008″
Note: Barry Ritholtz is under the impression Merrill actually sold at 5.47 cents on the dollar when you factor in the details of the transaction.
Foreclosures keep increasing each month. Defaults are at a temporarily plateau at all-time highs, 800% greater than 2 years ago. We are entering a phase in which the defaults are moving from Subprime to Alt-A and Prime led by the Pay Option ARM, which is a subset of Alt-A. The problem is the Alt-A and Prime universes dwarf the subprime universe individually. Together they are monstrous. Pay Option’s hard recast either at 5-years or when they hit their maximum allowable negative amortization (110% to 125%), which in most cases comes sooner. This is the primary reason for default and the recasts do not peak until Dec 2009.
Below is the CA foreclosure market. The ‘Foreclosure Sales’ line shows that $12.5 Billion in loans or nearly 29k homes were sold at auction, a record high. However, 97% of these went back to the bank in July due to the lack of 3rd party buyers, which is typical. As you can see NOD’s have declined slightly but Notice of Trustee Sales and actual Foreclosures are surging…I cover the reasons why NOD’s may be declining slighly in my July CA monthly Foreclosure Report. I maintain it is not a leading indicator.
While sales have ticked up slightly over the past few months, they should have. Never discount seasonality. However, foreclosure-related sales keep ticking up as well are now a third of all sales nationally and 42% in the state of CA last month. The leaves ‘organic’ (you and I) sales at multi-decade lows. In addition, prices keep falling month after month due to the massive percentage of foreclosure-related sales into the market. Total sales increasing with home prices falling and foreclosures increasing at a faster pace than total sales is not a positive and does not clear inventory.
The banks ‘shadow’ inventory represents an overhang very few consider, as the majority is not MLS listed. This represents the real threat to housing across the nation. The foreclosure market is the real estate market and the banks are the market makers. Never before in history has one seller (banks) controlled so much of the available inventory or has been able to price to sell now. Across the nation, neighborhoods are being marked-to-market literally overnight, leaving many in the immediate area living in a ‘negative-equity’ nightmare. One from which they can’t escape other than with an aggressive loan modification or short sale.
- Mr Mortgage: Mortgage Modifications Part 2 – Being Forward Thinking
- Mr Mortgage on Mortgage Modifications: You May Qualify
The average home seller is getting squeezed out because they can’t compete with the banks. Most either owe too much to discount the homes to the bank’s level or hold onto hope that their home is ‘better’ and refuse to accept reality. Short sales, while becoming much easier to do, can take months to get approved. Many who want, need or should be selling are sitting on the sidelines because they do not think they have options. Many don’t.
The end of the Spring/Summer selling ends this month and if last year was any gauge, prices will take a hit. As early as late July/early August, many with equity who had to move and who were able to accept any offer they wished, accepted the best offer on the table knowing when seasonality ended so did their chances of selling. The banks that have virtually no price floor did the same. These homes will be the lowest priced of the season and go on record in September. Last September home prices fell 7.6% in a single month in the state of CA. I expect something similar or worse this year. Since Sept 2007, price fell a subsequent 24% through June 2008.
Where do new buyers come from? With so many in homes unsalable because the owners owe more than the property is worth or simply stuck because they can’t buy the same quality/size of home due to the highly leveraged and affordable loan programs being gone, where do the new buyers come from?
Remember, the majority buy homes when they relocate or move-up. Most can’t afford to re-buy in their own city again let alone move up. People are stuck and just waiting to default. If they are in exotic loan type or highly leveraged with a second mortgage in addition to an exotic first, when either one of those loans blows up, so will the borrower.
The move-up buyer was responsible for much of the housing boom we experienced in the last decade. There are very few move-up buyers left because neither median or per capita incomes can afford the median home prices in most cities in the nation using new vintage, 10-20% down, fully documented loan types. In the past an $85k per year income could buy a $800k home with little or no money down on a stated income Pay Option ARM. Now, the same borrower can afford a $300k mortgage. Affordability through financing has been removed from the market overnight.
Below is a chart I put together a few months back when everyone thought we had bottomed. While prices have fallen since to $328k on the median from the $354k shown, it shows that housing prices primarily rose over the past many years due to even more exotic programs coming out designed to lower monthly payments. Now, all of those are gone and we are back to 1990′s and before lending standards overnight. For payments have to become affordable again prices have a long way down to go.
BULK ASSET SALES – THE ‘QUICKENING’
This leads me full circle to the beginning of this story. With IndyMac, Merrill, Fannie and now Lehman all in bulk ‘asset’ dump mode, other entities with less will want to get out ahead of them. Especially those banks holding vacant REO (real estate foreclosures) wanting to get ahead Fannie Mae’s 54k units. There is so much ‘shadow’ inventory on bank’s shelves, an asset dump across banks holding large amounts of property such as WaMu, Countrywide, GMAC, Chase and IndyMac could seriously depress prices for a long time. This is a variable nobody is considering.
Bulk ‘assets’ go for pennies on the dollar as you saw with Merrill’s CDO dump. Therefore, the vacant REO and non-performing notes in these bulk asset sales will be sold so cheaply that vulture funds can swoop this up and get this product back into the market fast at deeply discounted prices. This brings values down immediately. The result is an immediate and swift mark-to-market in that neighborhood…as one family gets a ‘great deal’ 100 have more equity stripped away, 50 are thrown into an incurable negative-equity situation and 25 default as a result. This leads to even more inventory. It is a vicious cycle; a feedback loop from which there is no escape
I will post a follow-up to this story in October. -Best Mr Mortgage
OTHER MR MORTGAGE STORIES
- Mr Mortgage: Breaking July CA Foreclosure Report – Foreclosures Unexpectedly Surge
- Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche
- S&P Does Hatchet Job on Thousands of Prime, Alt-A and Subprime RMBS
- Pay Option ARMs – Up to 48% Default Rate! First Federal Featured
- Fitch: Massive House-Price Losses in Non-Conforming Areas to Come
- Mr Mortgage: June Home Sales Report & Preview for This Week’s ‘Official’ Reports
- ‘The IndyMac / Pay Option ARM Effect’ in Full Force
- Mr Mortgage: Engineering the Housing Bubble Through Monthly Payments
August 16th, 2008 12:08 pm
John Authors has a good backpage item in this morning’s Financial Times (August 16) about the “Slow Train Wreck.”. . .basically he says that bankers and homeowners don’t really know what hit them until the “final impact” which is taking place now, but still in slow motion. This will be a long cold winter for all. I still run into people who feel that “things will turn around” in a year or so, and want to “invest” in real estate. I try to tell them that buying today, they may not see any inflation adjusted appreciation for 10 years, but they don’t want to hear it. . .putting money out at even 3.75% in a CD would be a better choice right now. If you need a house to LIVE in, AND you can afford 20% down, AND you want to stay there 10 years, then now might be an ok time to buy.
August 16th, 2008 12:56 pm
Can I just say it is about time that this happened. I have been sitting on the sidelines for almost 1 year waiting for capitulation. It does make me upset though the the banks make great Q2 earnings announcements in July and now in August they are restating and writing down all over the place. I am sure that they will have *great* Q3 earnings announcements in October and then write down a bunch of crap in November.
August 16th, 2008 3:16 pm
Mr. M, you should be the professor in Havard Business School.
August 16th, 2008 4:32 pm
…now might be an ok time to buy.
Tough call – wait for the first round of bloodletting to begin or risk having interest rates rise once the election is over.
August 16th, 2008 4:43 pm
“The quickening” is right.
Right now, anyone attempting to purchase a bank-owned property knows that it is painfully slow process, with 3-4 months of back and forth, waiting to see if the offer has been accepted or not. For an emotionally attached prospective retail home buyer this is not practical or pleasurable.
Once the banks sell these properties to the liquidators, and the liquidators take over, the transaction process will be many times quicker than it is right now.
August 16th, 2008 5:25 pm
Much like shadow inventory the banks have shadow earnings. Earnings that are marked to model and not marked to market as they should be. The L3 and off book assets will come down as a result of these types of sales, but they are exposing their weaknesses as a result of these sales and acknowledging they have assets not worth what they are claiming them to be in their quarterly reporting. Taking profits they will never see will have to come back off of the books when these sales you speak of are made. I see this next wave of sales hurting more than helping these lenders in the end. Off course they have no choice but to sell them because of their dire need for capital. Like homeowners sitting and waiting to default and selling anything they own that is not nailed down, and stupidly borrowing from their 401K’s only to ultimately end up in default anyway, many of these banks will ultimately go under anyway as well.
I agree that this is definitely a cyclical crash phase we are entering where more defaults happen as more REO sales take place. The areas with heavy foreclosures to date have been somewhat isolated to 4 states (AZ, CA, FL & NV) but that is now quickly changing. The Alt-A and Prime loans were more of the non conforming loans you see in major cities like Chicago, Boston, S.F., N.Y., VA and the likes. These areas will quickly start piling up the numbers of foreclosures as we enter into this next phase.
Condos in locations such as these and elsewhere are about to get crushed from all of this. They are historically the last to fall and fall the hardest when this part of the cycle is entered into from my experience. They are more speculative in nature as an investment and only one or two foreclosures sales in an entire building of like properties can literally wipe out all of the owners equity instantly. That is what is happening in the major bubble states now and will continue into all major cities in the country as we move forward. Their is no area that is safe or that will remain unaffected by this housing bust. As job losses mount throughout the country more and more homeowners will simply default. Look at the revenue the city of N.Y. received from wall street this last quarter compared to last year… it is astonishing to say the least.
Taxes will also rise after the election as both candidates have all but said so already. The “Bail Out” of Fannie and Freddie alone will force tax hikes onto the American tax payer almost immediately following the election. Over rides are being voted down left and right all around the country and that was the only hope from a federal level of not having to raise taxes to help assist states to be able to offer the most simple and basic of services. Not to mention the layoffs coming from cities and towns due to budget shortfalls. The Government has been the largest jobs creator up until now, but that is all about to change and rather quickly.
All of these things and more will be the ultimate driver of a cyclical crash that is now upon us…
Thanks Mr. M. for your continued insight and diligent service to all of us by reporting and exposing the inner details the MSM fail to report or even recognize. You are a blessing for those that want to read the truth and understand what is happening as the MSM continues vehemently to try and hide and / or fabricate the truth to America!!!
P.S. I would love to see a condo specific report on the national level. It is getting pretty ugly out there right about now…
August 16th, 2008 7:22 pm
Does anyone know if the “quickening” will eventually affect rents? It seems to me that if housing prices are going to take another steep dive, investors will be able to buy houses cheaply and undercut local rents to fill their properties and still make a profit.
August 16th, 2008 7:36 pm
Mark,
Do you think this “quickening” could apply to other asset classes that banks might hold ?
August 16th, 2008 8:29 pm
C & C, I tried posting some links to charts that show rents are stagnant, but couldn’t? Prices have a long way to go in order to reach historical standards of Rent vs. Own models just the same however…
The double bounce (which will be triple etc…) fooled many and the next bounce will fool many more, but the SMART money is on the WAITING GAME!!!
August 16th, 2008 9:55 pm
whoa – whatcha got?
August 16th, 2008 11:33 pm
Curioser – Yes, it is already happening. Rents are dropping. This will also be a load on house prices. Investors look at cap rates.
Feng – Harvard students wouldn’t listen
Susan – absolutely but it wont be as damaging to Main St America
August 16th, 2008 11:52 pm
I believe that rent’s will drop, as well as household income. My reasoning is that most of the homes being purchased right now are investers looking to rent out the homes they purchased. These investors will compete against each other and therefore rents will drop. Some of these investors may have underestimated the situation and find themselves under pressure as well. Furthermore, as unemployment rises the average income per household will likely drop. Higher interest rates and lower income will definitely play into Home pricing.
Please let me know your feelings on this subject. I’m curious. I’ve been on the sidelines for sometime and my patients will definitely be put to the test on this downturn.
August 17th, 2008 12:28 am
as one family gets a ‘great deal’ 100 have more equity stripped away, 50 are thrown into an incurable negative-equity situation and 25 default as a result.
holy cow! Americans are going to wake up and find that they are not in the same country. What does your average suburb look like/feel like with 25 households out of 100 in default, 25 more highly stressed financially?
God bless America!
August 17th, 2008 1:18 am
Thanks Stu and Mr. M!
Any pointers on finding that info on-line?
August 17th, 2008 1:18 am
Thank you, Mr. Mortgage. I check for new stuff by you every day, and send copies of many of your articles to friends and relatives (and this one, for sure!!). I’ve watched house prices rise for years, and vaguely wondered just how much other people *could* be earning to afford such bizarre prices. Ha. Only last year, when we thought we might need to sell/move/buy, did I start to really try to figure out what was actually up. Your site has been the biggest help. Boy am I glad that my instinct has always been that it’s just *wrong* to spend more than 3X one’s income on a house. Please keep up the good work; it’s appreciated.
August 17th, 2008 10:25 am
retired FDIC employees being called back, so far this crisis has been far tamer than the S&L crisis according to them. But with fire sales of assets, more deleveraging and the continued housing bust, who knows?
http://www.nytimes.com/2008/08/16/business/16fdic.html?_r=3&adxnnl=1&oref=slogin&ref=business&pagewanted=1&adxnnlx=1218982718-T18i5MZsNkFi8yvyXqQZkA
August 17th, 2008 10:50 am
Excellent work from Mister M.
Southern Californian’s pay way too much of their income for housing. That’s gonna change.
The next real staple to nose dive in the cushy parts of SoCal … “RENTS”!
August 17th, 2008 11:02 am
Thanks for the excellent overview!
We are indeed falling off a cliff in slow motion.
Not that it rebuts the veracity of your central thesis, but I understood that Lehman’s offload of 40 billion was COMMERCIAL real estate, not residential.
Your thoughts?
Tony
August 17th, 2008 11:16 am
Tony, I was under the impression that they were selling their entire portfolio of RE both commercial and residential which is currently valued by Lehman at $40 Billion. They are currently in talks with private equity group Blackstone and fund manager Blackrock as possible bidders for the entire portfolio of RE. They are not opposed to breaking it up if needed to sell it all off either. That is what the Timesonline reported yesterday anyway…
August 17th, 2008 12:16 pm
Stu, my clear impression from the FT is that it is exclusively their commercial real estate holdings at play here.
This of course doesn’t distract from Mr. Mortgage’s central thesis here that these huge wholesale offerings cannot be construed as bullish in any way.
I’m just a stickler for accuracy and the FT has the best fact checkers I know.
Tony
August 17th, 2008 12:20 pm
Yep, just checked the front page of yesterday’s Financial Times and they repeatedly mention only commercial real estate and derivatives written thereon.
Tony
August 17th, 2008 2:11 pm
Tony, you may very well be correct. I did not realize that Lehman held $40 Billion in Commercial RE Assets, but apparently they do, according to FT anyway…
What will be interesting is what they get for offers on this crap. Say .20 on the dollar perhaps? That would mean further write downs on holdings and possible capital give backs on profits taken that will not be realized now. I know the value on this $40 Billion bundle was as of May 2008, so it has fallen substantially since then and Lehman themselves are projecting big write downs from this sale, but have no choice as they need capital really bad right now.
Their is also that little issue of a mammoth law suit by the Aussies heading their way… now that will be interesting!
August 17th, 2008 5:45 pm
There is a HUGE amount of commercial real estate out there and that is likely to be the next wave, likely cresting in 2010 and beyond.
It looks likely that Lehman will get more than 20 cents on the dollar, remember this is NOT residential. It looks far more likely they will get at least double that, with of course all the usual caveats that parts of this transaction will not be arms-length, it will be financed in substantial part by Lehman and Lehman is currently offering to reimburse the counterparties’ first 5 billion in losses.
As previously stated, everyone is positioning themselves for the annual AUDITED results in January, where a good chunk of the false quarterly accounting games have to stop.
In terms of the lawsuit by the Aussies, there is no way that will even come CLOSE to adjudication until 2011 at the earliest. Just for starters, and there is so much more, are you going to hear that case in Australian or US courts? That issue won’t even be decided, after multiple appeals, until another 18 months at the earliest.
Remember, we are STILL adjudicating the Exxon Valdez spill from 1989…..and the legal issues here are FAR more complex than whether the pilot of the tanker was drunk.
Tony
Lehman is also
August 17th, 2008 8:16 pm
Tony, my .20 is based on Lehman financing the deal which in all likelyhood will have to happen for the sale to take place (the new way to do business… CYA!). The write downs will be huge none the less…
The January date will be pushed back by the new administration. We as a country cannot handle the execution of that new rule. Sounded good in theory at the time, but not happening now.
Law suits are flying through the court system now in an attempt to gain credibility and recoup monies owed. This may go down much quicker than normal as a result, but we shall see…
Regardless it appears that Lehman is not a company one would be investing in for long term profits as they may not be around to realize them… Just saying…
August 17th, 2008 11:23 pm
Mr. Mortgage, Chinese stock market broke through 2400 long term support, declined from 6400 top in last fall, despite Chinese won bunch of gold medals in the Olympics.
Jim Rogers, the great investor who advocates China, was almost killed in China because he was saying that China is a Bull market, but the local investors blamed him as a misleading liar.
In June 2008, China purchased 3B less US bonds, while Japan and UK increased purchase @5.1B and 7.9B respectly, the world as a whole purchased 30B less.
August 18th, 2008 2:47 am
Mr. Mortgage,
My experience in buying a foreclosure in the mid-1980s can explain why there is so much hidden inventory.
I was shown a foreclosed condo on the other side of the street from Santa Monica. There were 5 foreclosures in the building and the S&L was close to settling with their mortgage insurer, so they listed the one that they thought was easiest to sell.
After accepting my offer for $155,000.00 for this unit that the L.A. County assessor had at $383,000.00, they listed the remaning 4 units all at $155,000.00 and they all sold at $155,000.00 within a month.
Many lenders are servicing multiple foreclosures in a tract development. It is better for them to cherry pick which of these to list and after entering escrow, add others to the MLS.
Listing all on the MLS will not help them in getting the best price.
For buyers, determine all nearby foreclosures before making your offer, as many will hit the MLS after you open escrow.
August 18th, 2008 10:39 am
Stu, there are a MYRIAD of accounting tricks that cannot be used in the audited annual reports.
Check back with me in February on this as to whether this is key.
Tony
August 18th, 2008 1:32 pm
The cynic in me says that the huge dumping of real estate asset by FNM, FRE, and/or LEH will be spun by bubblevision and the “buy, buy, buy” crowd as a huge spike in home sales. It will be spun, as Cramer spun the Toll Brothers latest conference call, as signalling the bottom in housing. Or to use his phrase from the column he wrote, Toll shows that we are leaving the housing bottom not entering it. Unless there is a way to keep the bulk selling of repossed houses from the sales statistics.
August 18th, 2008 2:01 pm
When did you ever think your friends would be jealous of you for being a renter. They are living in the same type house as me but I am paying 1/2 of what they shell out each month in mortgage.
Mr. Mortgage’s chart above says it all. Selling prices are headed towards 2001 prices (possibly lower because of dramatic oversupply). Wages haven’t hardly budged over the last 8 years. If you are smart you will rent. Sure there are downsides to renting but the $2000/month I save make those seem trivial.
Of course there is the constant fear that my landlord will foreclose……
August 18th, 2008 6:51 pm
“If you are smart you will rent.”
Unless your mortgage is less then what rent would go for your place.
The days of thinking it’s wiser to have a mortgage to write off, and banking on equity is over. Time to pay off our debts people.
Real estate is only an asset when it makes you money. Pay it off.
August 18th, 2008 6:53 pm
Well said od!!!
August 18th, 2008 8:14 pm
This is just too funny (and sad) not to share…
A quote in Bloomberg today:
“It is very, very likely to happen before the end of the third quarter,” Ajay Rajadhyaksha, the head of fixed income strategy for Barclays Capital Inc., said in an interview. “Without government help, we think there is very little chance of Freddie completing a significant capital raising.”
They are speaking of the demise of Fannie and Freddie off course… Now the sad part is the Treasury dept spokesperson stating:
“We aren’t going to comment on speculation,” said a Treasury spokeswoman, Jennifer Zuccarelli. “As the Secretary has said, we have no plans to use these authorities.”
Really???
So let’s see what we have here… Two companies insolvent by general accounting standards. They are trying to raise more capital than each one is worth if they sold each and every share in the company at face value… Hmmm…
Mr. Paulson said the American Tax Payer er… I mean the treasury won’t help. Isn’t this the same guy that bullied the president into agreeing to a blank check just a short time ago? Isn’t he the same fellow that said there is only a 50% (I said 100% from the start) chance that we will use it? That this was just a confidence boost to investors that things would turn around?
Yeah and pigs will fly tomorrow too… Dope!!!
Fannie and Freddie are now toast. Investors are pulling thier money out in what would resemble a bank run if they were a bank. The party is over and the American Tax Payer now gets to foot the bill and a whopper of a bill it will be. My guess is $250 + billion by years end and more to follow after that. Based on many things, but mostly the sad sack of crap paper they are holding in the trillions. If and only if they (the fed) can sell a lot of that off for pennies on the dollar before it is entirely worthless or the number goes much higher… say $500 Billion???
Sad and funny that the investors in this garbage kept pouring money into it chasing ever higher profits only to lose everything… Dopes!!!
P.S. The American Tax Payers are ONLY Dopes if they vote these same politicians back into office next election. Otherwise we are all victms of past voting mistakes and circumstances as a result.
VOTE ALL INCUMBANTS OUT OF OFFICE IN 2008!!!
August 18th, 2008 8:37 pm
Freddie and Fannie crash before Wachovia? Wow.
Will the rest of the banks follow now? I don’t understand how smaller banks can survive now. Are the two not related?
August 18th, 2008 8:48 pm
Can someone translate the relationship between what the big banks get for their retail housing CDO’s in terms of pennies on the dollar to the underlying asset/loan discount? In other words, if a bank sells a CDO for $.10 on the dollar that doesn’t mean they are valuing a $300K loan at $30K. I believe the CDO was originally “pumped up” to reflect high interest payments over the life of the loan (ex. $300k fixed 30 year mortgage at 6.25% = $665K paid…CDO value based off $665K?). Option ARM and other exotic loans assume higher interest down the line which makes their value higher.
So in the end, if a CDO is sold for $.10 on the dollar what does that mean for the underlying mortgage. I’m trying to get my arms around the bulk buyer’s “cost”?
August 18th, 2008 11:07 pm
So much of the value proposition of home ownership has been the expectation of steady appreciation every year.
What happens to potential buyers’ evaluation of a home purchase when the appreciation component is slashed?
There’s an interesting analysis of single family rental homes as the next real estate asset class to take a hit. The reason is the appreciation component is reduced, which pushes down prices. There is an excellent article on this at http://www.UsHousingMeltdown.org
Go to commentary and analysis and the article titled, “What to Sell Now”.
August 19th, 2008 1:44 am
One thing that the early buyers fail to realize is that real estate although appearing cheap now or in the near future does not represent a value investment. The most appealing thing with real property investment is appreciation, this will not be seen for many years to come. I dont care what a GOOD buy it seems to be it will be at the same price level for many years to come. When it comes to debt service its best done in a appreciating market.
August 19th, 2008 10:36 am
There is plenty of blame to go around. But it is not just the taxpayers who will take a sledgehammer to the skull.
There are very few shareholders who bought Bear Stearns at 190 sixteen months ago, forced to liquidate at 10 dollars a share (over a 90% loss), who would describe what happened as a BAILOUT.
Similarly, the median price for Fannie Mae in the second half of last year was around 60 dollars a share. That stock is now 6 dollars a share, a 90% hit for the shareholders.
When Paulson intervenes, it is highly likely that almost ALL shareholders in FNM will be largely wiped out even more.
When FNM shareholders lose 95% of their money in less than 8 months, how many of them will describe it as a “Bailout”?
It’s high fashion to play the blame game. And Bubblevision and ragetalk radio encourage such wastes of time.
What I find a more appropriate use of my personal time is preparing my family for the extraordinary catastrophe that will likely befall us all by 2010.
Just because this is all happening in slow motion doesn’t mean that the planet will not be completely changed and that the world as we know it, everything about it, will be transformed.
Tony
August 19th, 2008 10:43 am
That’s a pretty vague statement Tony. BFD, if people stop driving SUV’s, housing prices cash, people stop spending more than they can afford, and start becoming more self-sufficient.
Those are “world” transformations I welcome.
Maybe you could be more specific?
August 19th, 2008 11:12 am
od-
The “D” word, on a global basis, is highly likely by the middle of 2010.
Shanghai has crashed over 60% in 7 months and Mumbai has also crashed. Bourses are leading economic indicators.
Tens of thousands of excess deaths, minimum, in the USA over the next 10 years, for a variety of epidemiological reasons, including massive cutbacks in public health care and medical services generally attributable to the absolute liquideation of the world’s financial system.
Millions of premature deaths worldwide over the next 10 years attributable to the collapse.
Tony
August 19th, 2008 11:58 am
Ok. I thought your were going to go off on some sort for the “end of the world” scenario.
The big “D” is probably inevitable. It is also long over due IMOP. All I can say is , you either look at the big “D” as an opportunity, or hunker down and wait it out.
I plan on being more optimistic about it. Our great grandparents survived the last one. I don’t think we will have as much trouble this time. Unless of course you have been dependent on other your whole life.
Survival of the fittest. Even economics are a part of nature.
August 19th, 2008 12:46 pm
To Patrick the Patient posted 8/16 and Tony Buz. Here’s is something to consider:
from a recent analysis we’ve done.
When evaluating residential real estate as an investment, an analysis we did showed that in recent times, investors assigned a been a healthy percentage for the appreciation component when evaluting investment return. A generous number for the appreciation component, caused many investors to accept break-even or negative cash flow deals. Now with the appreciation component reduced or at zero, more emphasis will be on cash flow component. So going forward, as investors begin to demand higher numbers on the cash flow, asset prices will be pushed down.
August 19th, 2008 1:14 pm
….it’s a time when wealth is re-distributed once again.
August 19th, 2008 2:17 pm
Tony, I totally agree with your painted scenario. Heck in just deaths due to starvation we will be in the millions…
The Tax Payer “Bail Out” is on the Bonds for Fannie and Freddie which we must pick up as a result of the silly stupid and reckless work done by our Government. When they heavily suggested and then voted to come in on a white horse to rescue the GSEs it was a guarantee that our Government would do so. We have no choice now…
I could give a care about the stupid investors that continued to pour money into their stock. They should be wiped out. I am talking about the American Tax Payer ONLY that is going to foot the bill here. WE had NO CHOICE in the matter as our so called Government for the people decided to do this without asking the people they are supposed to represent if we wanted to or not. This is a reckless spending of Tax Payer money on private companies. That my friend is NOT Government acting in the “BEST” interest of its people.
That is a powerful egotistical band of brotherhood playing games and manipulating markets at the Tax Payers expense (YOU AND I)!!!
August 19th, 2008 4:26 pm
Couple of points
The Bear Stearns deal was a bailout. Not of BSE share holders, but of the assets of other companies that didn’t have to get written down. The Fed just took them off everybody’s hands. If the recent Merrill write down is any indication, the FED will only net .05 on the their newly printed dollar.
Also the tax payer won’t be paying these bills. The massive dollar printing that is going on will dilute the dollar, but also all other currencies. As foreign interests see their dollar denominated holdings shrink, their own net worth will shrink too. As the reserve currency the dollar has the ability to “share” inflation around the world.
So Americans won’t pay more taxes, but suffer inflation, perhaps even hyper-inflation. Paulson and Bernanke have already decided that any amount of inflation is preferable to a financial system collapse.
They always needed time to sort out the tangled web of interdependencies. The BSE bailout bought them some valuable time. The housing bill bought them time to figure out what nationalizing Fannie & Freddie actually entails.
I’m not saying they are going to be successful, but this is what I think they are doing.
DDT
August 19th, 2008 5:03 pm
stu, you are 100% right….hey, after starvation, let’s add, freezing to death in colder climates, as a choice between heat, meds, and food is a lost daily battle. My head spins when my husband’s six figure salary is not enough, even though we always thought we were pretty conservative with our $$$….anyone here looking to hire a part time admin. assistant?
We have no vote anymore, our last pathetic attempt left is to vote the incumbants out!..I am with you…I think we need to start a movement!
August 19th, 2008 5:12 pm
2010 might be the low point (assuming recasting and defaulting have peaked), but recovery will not be quick. I think prices will remain flat between 2010 and 2011 in the best scenario (lenders will be very cautious, still plenty of inventory). So no one should feel rushed into any decisions in 2010.
August 19th, 2008 5:13 pm
Voting everyone out, and holding a lynching won’t do anything.
It goes beyond individual incumbents. It is an ideology and a system bigger than any one rep. It’s actually what happens when capitalism gets too big, (or any ideology for that matter).
We just need balance again.
August 19th, 2008 5:20 pm
IMOP the Federal gov’t has gotten too big (and useless).
They are great at starting wars, taking our money and our rights, …but that is about it.
Tell me one federal program that is working?
Actually, I’m surprised New Orleans hasn’t done this already.
August 19th, 2008 5:29 pm
The only argument I ever hear in favor for our Fed gov’t is the “military protects us and our “freedoms” from all the evil countries that want to invade us”
I don’t trust ANY statements based upon FEAR.
August 19th, 2008 5:29 pm
LOL.. I knew EO would chime in!
August 19th, 2008 5:52 pm
I heard a great quote today from Liz Anne Sonders:
Her take on the lifespan of a bear market: “They’re born on euphoria, grow on denial, mature on panic and die on despair.”
I think we are still in the denial phase.
August 19th, 2008 5:57 pm
Liz Anne addresses the shadow banking system! Pretty good analysis.
Watch her comments here: You need flash btw.
http://event.on24.com/event/11/61/53/rt/1/documents/player_docanchr_1/lobby.html?eventid=116153&sessionid=1&key=EF4011FBA5E335590AF0B8309863AF49&eventuserid=18801440
August 19th, 2008 6:59 pm
I just chose July 2010 because I am convinced by that time if you do not openly use the “D” word to describe the economic situation, you will be snickered at.
Right now we are outliers in this opinion.
The Federal Government DOES have a key role to play in public health. We don’t really need an uncoordinated 50-state response to a bird flu pandemic. That’s a federal issue.
Additionally, I would NOT abolish the FDA. I’m convinced that if every state, facing huge cutbacks, had its own little food safety programs we would have a lot more food poisonings….
So although most Americans are CONVINCED that the Federal Government is all BAD, thanks to relentless advertising from the transnationals who are plundering the planet, it does have a proper role in food safety, airline safety and public health.
Or do we want to put the AIRLINES in charge of airline safety?
Just my opinion. Nothing more nothing less.
Tony
August 19th, 2008 7:22 pm
Any government is only as good as the people running it.
August 19th, 2008 7:43 pm
Food safety? Give me a break. Have you noticed how FAT Americans are these days?? And how many new drugs are advertised to us every week?? The FDA is completely useless!
The FDa doesn’t regulate anything. As long as it sells, they don’t care.
I’m not even going to bother responding about the TSA.
August 19th, 2008 7:50 pm
No EO, the whole point behind our country was to keep the gov’t in check. Right now it’s out of control.
August 19th, 2008 8:19 pm
I guess I’m the only one who doesn’t support IMMEDIATE abolition of the Federal Aviation Administration? Let the “free market” be in charge of air traffic safety, starting at NOON tomorrow. WITHOUT DELAY!
I remember conversing with Murray Rothbard, one of the GODFATHERS of the Libertarian Party, ADORED and REVERED by Ron Paul. Rothbard was on a book tour for his bestselling “Libertarian Manifesto”, back before being a libertarian was politically correct.
Rothbard told me on the air that ALL streetlights should be abolished immediately, in all neighborhoods, as an unnecessary usurpation of the power of the people….
Eliminate ALL traffic lights and signs immediately?
That was HIS view….
It’s on tape somewhere….
Just my opinion. Nothing more, nothing less…..
Tony
August 19th, 2008 9:41 pm
Tony, c’mon off course some things require regulation, but NOT “Bailing Out” PRIVATE ENTERPRISES with PUBLIC MONIES!!!! Give me a break… please.
Rumor has it that Lehman will report write downs of $4 + Billion (double what was expected) but hey what do I know… and by the way that is not even 10% of their marked to mythical models of $60 + Billion. What a charade! I would expect a more realistic $10 + Billion write down which is still WAY TO SMALLL for what needs to go, but it would be an honest start. This amount is just saying FU to the public and the share holders that we know YOU KNOW we are broke and near bankrupt, but WE WILL FOOL YOU ALL into investing in us further so YOU WILL ALL LOSE MORE MONEY and we will lesson our losses… Oooopss… did I say that???
August 19th, 2008 9:43 pm
Please stop the “free market” nonsense. It never has nor ever will exist.
Elites control Wall St. & D.C. so they get what they want when they want it.
“Free Markets” are for the Chumps that can pay to get it rigged.
August 19th, 2008 10:28 pm
I agree.
The GAINS are ALWAYS privatized and the LOSSES are ALWAYS socialized….
Tony
August 20th, 2008 4:46 am
Is deflation the winner?
“US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months”
“On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/19/cnusecon119.xml
August 20th, 2008 8:16 am
Viv, in my opinion we are on a crash course with severe deflation. By definition we are in a daflation tailspin right now with credit tightening and home prices entering into the free fall phase. Inflation is occuring as well with the printing of money by the Fed and in commodities, but the deflation effects are so much higher and widespread that they override any inflation worries. This is why I think the Fed has held steady on interest rates. They have very little fear of inflation hampering things. They are extremely worried about deflation however and its impact on the overall economy and its ability to pull out of the downturn we are in. Again in my opinion…
August 20th, 2008 11:02 am
stu, mr M and all, so do you reckon interest rates will head lower? what’s that going to do to the dollar and the price of oil and gold/silver. This crisis seems to get fuzzier by the day.
The disconnect between physical demand for silver and gold and the market price is unbelievable, check this article http://seekingalpha.com/article/91357-the-disconnect-between-supply-and-demand-in-gold-silver-markets
“investors are simply not able to get any, without waiting for months. Investor oriented shops are bare, and the U.S. Mint has suspended coin production. All available supply seems to be reserved for industrial users.”
August 20th, 2008 11:08 am
In terms of deflation, the recent Fed survey of senior bank lenders shows a VERY strong trend in two respects, each of them accelerating:
1. Banks are tightening standards, lending less in nominal terms AND
2. They are increasing their markups dramatically over their costs of funds, i.e. interest rates are RISING.
This is but one part of the bigger picture in which we are seeing a collapse in worldwide consumer demand.
What is the best hedge against DEFLATION? It surely isn’t gold! Gold CANNOT be simultaneously a perfect hedge against BOTH inflation and deflation.
Instead, the BEST hedge against DEFLATION is the VERY highest quality bonds you can find.
This according to Henry Kaufman, former head of Salomon Brothers.
And of course the massive rally in Treasuries continues. The next move by the FED will be to LOOSEN, but BONDS will STILL strengthen.
It’s a flight to quality thing.
Just my opinion. Nothing more, nothing less.
Tony
August 20th, 2008 11:18 am
LOL! Where do you find quality bonds these days?
August 20th, 2008 11:33 am
Viv, in my opinion interest rates will not head lower for us moving forward. They only have one way to go and that is up. They may head lower for the Aussies and Brits for example, but we are negative vs. inflation already and cannot go lower for many reasons and eroding the dollar further is one of the big ones. We will sit tight and start raising rates towards the end of the year as other currencies begin to drop their rates and as a result strengthen the dollar further. The current movement towards strengthening we do not want to jeopardize…
As far as gold goes it is a commodity after all and not tied to the dollar like it used to be. In my opinion it will be volatile and there appears to be some manipulation by the Fed and other central bankers in collusion with the big financials to decrease their overall losses. There is a lot of money out there still that needs to get parked some place and gold was one of those places during the recent run up in inflation and people being overall just nervous about things. It didn’t work out so well and now has to be unwound in an orderly fashion…
Tony, I totally agree with you and credit will get squeezed more and more until we are eventually back to the 80’s & 90’s lending standards which will cripple housing even further. Deflation is mostly a contraction of credit and we are about to see that take place like never before in our lifetimes in my opinion.
Long term rates will rise due to the risk involved in lending and the increased need for revenue to show profits by the financials. They are simply getting clobbered in terms of profits and have given back so much over the last year in regards to profits made over the past 5 years. Also the increased cost of borrowing has to be paid for by the consumers who want these lenders to loan them money. It will be cost prohibitive to do so without raising long term rates. Lenders are getting to a point where as they charge higher rates to lend or simply don’t lend. Seeing as how that is what lenders do and how they make money I see rates rising and quickly over the coming months. I would not at all be surprised to see 8%-9% on jumbo loans & 7%-8% on confirming loans as a norm very shortly…
August 20th, 2008 12:09 pm
With the price of oil this high (relative to last year), there is the beginning of the localization trend. With jobs moving back to america and less trade generally across the world as shipping goods from taiwan to china to japan and than to america becomes more and more expensive. There was a good article on this in the NY times recently and even Jim Paplava at financialsense.com reckons jobs are moving back to the rust belt. We’re certainly living in interesting times, there’s more going on in the financial markets and the geo-politics of oil than i can handle.
On a lighter note, anyone else saw the superb world record run by usain bolt in the 200m? the events have really been magnificent and the brits are beating the ausis in the gold medal count for the first time in years.
August 20th, 2008 1:22 pm
I’m a potential home buyer, but at this point, I’m in no hurry.
A few times a week I’ll look through the multiple listings, but, for the most part, all I see is delusional pricing. Fine. My money stays in the bank and the deluded sellers can keep their overpriced properties. As for working with the banks? The seem to be disposing of their properties through heavily advertised “auctions,” but some of the auction companies have less than stellar reputations. And so once again, I’ll wait rather than deal with crooks.
When will I buy? When I start to see properties advertised for sale at sensible prices. Until then, my rented condo in Scottsdale is just fine.
August 20th, 2008 2:01 pm
Re: the original posting, it was a vicious cycle on the way up but nobody was complaining then. All pyramid schemes eventually crash. Suck it up. Looking forward to sanity resuming, foreclosures can’t happen fast enough. You’ll know we’ve hit bottom when HGTV is doing reality shows on how you can redecorate to fit 4 adults in a 1-bedroom apartment.
August 20th, 2008 3:11 pm
OD, either you believe in the markets or you do not.
You can’t have it both ways.
The markets are saying US Treasuries are the ONLY place to be.
That’s just what the markets are saying.
The GREATER the risk of a DEFLATIONARY BURST, the safer your bonds need to be.
Hence the FLOOD of money into Treasuries, as the historic bull market in them continues apace.
Just my opinion. Nothing more nothing less.
Tony.
August 20th, 2008 4:30 pm
So T-bonds are the way to go? I don’t exactly understand how fixed bonds can ever keep up with the devaluing of the dollar?
I don’t understand why you would “loan” money to a gov’t that will NEVER pay it’s debts?
This is confusing.
August 20th, 2008 7:59 pm
od-
The markets don’t lie. There is no market more free, more transparent and with tighter bid/ask spreads than the Treasury market.
We are talking 500 BILLION a DAY trading in Treasuries.
In terms of this government “NEVER” paying its debts, that’s just not a serious comment.
The US Government has issued TRILLIONS of dollars worth of 90-day T-Bills and one year Treasury notes in the last 50 years.
You are somehow claiming that NONE of that was repaid.
Get real.
Either you believe in the markets or you don’t.
They are saying right now (as they have said since July of 1982) that Treasuries are the best game going.
Just my opinion. If you want to sink your money into gold or real estate, that’s up to you.
But it puzzles me how people can claim that gold is a PERFECT HEDGE against BOTH inflation AND Deflation.
That’s just not logical.
Tony
August 20th, 2008 11:16 pm
“Under the current monetary system gold is not the official form of money and therefore does not represent liquidity. In particular, taxes cannot be paid with gold, debts cannot be repaid with gold unless a special agreement to do so is made between the borrower and the lender, and more than 99% of purchases cannot be made with gold. Therefore, in a situation where dollar-denominated obligations were huge and the supply of dollars was contracting many private investors would probably be forced to sell their gold in order to obtain the dollars needed to meet their financial obligations. Also, under such circumstances those who were sitting on a large amount of cash and were therefore under no pressure to sell anything would be far more likely to invest their cash in US Treasury bonds than invest it in gold. This is because T-Bonds would be one of the few places where a guaranteed income stream could be obtained. In fact, if we thought a deflationary outcome was likely over the coming few years we’d now be advocating the buying of T-Bonds during every significant dip in their price because the scene would be set for bonds to provide substantial real returns.”
from http://www.safehaven.com/article-2925.htm An old article but agrees with what Tony says.
August 20th, 2008 11:44 pm
Sure. In a HYPERDEFLATIONARY environment, the trick is finding ANY income stream that will hold up and not go bankrupt.
This is the scenario for how to survive a complete and total liquidation of the entire financial system of the world.
Because everyone is bankrupt in such a scenario, no one has any MONEY to buy gold. That’s why the price plummets and why it is crashing now, along with real estate, stocks, commodities and everything else except extremely high quality bonds.
To value such a bond, remember, you are not just valuing the income stream, although that is PRECIOUS in a hyperdeflationary context.
Remember, people are actually bidding up the value of the ACTUAL SECURITY. This is the same mechanism by which bonds “rise” and “fall” lowering and raising their yields, respectively.
When you buy such bonds on margin, the CAPITAL GAINS are enormous. Plus you get the guaranteed income stream.
This is how the Fed makes its money.
The Fed is the best market maker in Treasuries. They have inside info in the form of advance economic data, before market release.
And they won’t do anything to let that bull market in Treasuries die.
Because it’s their 980 billion dollar portfolio (the size of their trading account at the Open Market desk in NYC) at stake.
Just my opinion.
Tony
August 21st, 2008 2:05 am
Fortune have an excellent article on how “Our easy access to plastic is about to dry up – and with it our ability to fake living the good life.”
http://money.cnn.com/2008/08/18/news/economy/Colvin_next_credit_crunch.fortune/index.htm
This quote was quite compelling, “So now what? It’s hard to see where consumers can turn next. Home prices seem highly unlikely to start rising again soon. Stocks? You never know, but the Great Bull Market looks like a once-in-a-lifetime event. Homes and stocks are households’ biggest asset classes by far. There isn’t much else to borrow against.”
August 21st, 2008 4:55 am
Deflation in the short run but Inflation in the long run.
All this talk about Debt misses the most important point:
Debt is how Money is Created in this Fed / Bank System.
No New Debt = No New Money.
Deflation is happening now because Debt Money is being retired by folks walking away from their Mortgage Debt.
Eventually, folks with a cleaner balance sheet will be loaned fresh new debt money.
This is what the Fed wants. This is being engineered.
August 21st, 2008 7:15 am
“After I began researching HUD fraud in the late 1990s, I would be contacted by people with experience with HUD fraud. They insisted that the same home was being used to create ten or more mortgages that were placed into different pools. They alleged that Chase as the lead HUD servicer and the other big banks were implementing such systems. This was why we would see the same house default two, three, or four times in a year, they claimed. FHA mortgages had to be churned through multiple defaults to generate the cash to keep all these fraudulent pools afloat. This, they insisted, was all going to finance various secret government operations and private agendas. ”
This is one of a series of articles that were written by Catherine Austin Fitts who served as Assistant Secretary of Housing and Federal Housing Commissioner in the first Bush Administration. Her company Hamilton Securities Group served as lead financial advisor to the Federal Housing Administration during the Clinton Administration.
This is startling, the same home being put in many different asset securitization pools!!! what a scam, the full article/s can be found at http://www.solari.com/archive/housing_bill/#PartV
August 21st, 2008 9:51 am
Viv-
Catherine was managing partner at Dillon Read, one of the world’s most prestigious firms that gave birth to all sorts of Washington and global insiders for decades. They were the chief investment banker for RJR Reynolds Tobacco, and made extraordinary sums investing all that tobacco money.
As one of the chiefs at HUD in the 1980s, she was well positioned to grasp and predict the catastrophe to come.
She was later offered a job as a Governor of the Fed, which she declined and shortly thereafter became very public in her speaking out against corruption at the highest levels of the GSEs and elsewhere.
Her journey makes compelling reading. Her extensive story is at:
http://www.dunwalke.com/contents.htm
Tony
August 22nd, 2008 12:01 am
Dear large banks-
Your effort to hold large invetories of reo’s was mobile. But now with fannies announcement you have no choice but to let them go. Yes this cause property values to decline across America, thus causing an even more extreme negative equity effect, this causing more of your loans to default, this causing more of you to go under like indymac, cw, etc.
What have we learned?
If you give candy to a baby they will eat it.
If you buy a bushel of hay on credit for 1000 bucks, and tomorrow it’s worth only 600 bucks, you might just let the seller take it back.
Everyone might have a value decline threshold but at some point you would expect most to throw in the towel based on circumstances.
Diffusion of knowledge and information will hurt this situation.
Banks have been greedy and must repair the mistakes they have made. Banks, don’t wait for govt to step in, like in new York, pushing back foreclosure timelines. Be realistic, if someone owes you twice what something is worth, they won’t pay. Modify the mortgage to account for the decline in property value in that area. Give people time to recover from distressed situations. Forget about foreclosure timelines. These ate human beings and you got thin into this mess. You fed too much candy to the baby and now it is sick. Nurture it!!
August 27th, 2008 1:31 pm
Why is Southern Maine Property still so expensive. I mean, Maine is a poor State and buying Housing in the soughern part of the state is like buying in Boston. When will home prices come down to a reasonable level in Southern Maine?
August 29th, 2008 2:06 am
Mike the Moose:
Maine property will probably fall to reasonable levels the same time that we’ll see drops in Seattle, Portland, New York, Boston and other such “strong” markets. Their strength won’t save them, just belay the inevitable. When you see prices begin to drop, they’ll practically free fall.
Or at least thus I hope. Lord knows I’m still waiting for the prices here in Seattle to drop. Granted $400K is better than $575-$600K on a year or two ago, but there is a LONG way to fall still…
September 6th, 2008 3:53 pm
This is a good thing. I’m sure the banks originally thought they could slowly leak the inventory out and get the best prices, but now their hands are forced. I don’t care if people’s equity disappears. It’s all phony to begin with as the values were pushed up by untenable circumstances. I’m sure it sucks to have bought back in 06 and see your property worth less than half that, but a lot of people said this was going to happen, and willful ignorance out of greed is always returned at some point. I’m one of those that will get a “deal” when they unload, and even then I’ll be a bit nervous about the future of housing.
September 15th, 2008 5:36 pm
[...] version below. What she says fits in perfectly with a report I wrote mid last month called ‘The Real Estate Quickening is Upon Us’. If you have not read please do. -Best Mr [...]
September 22nd, 2008 9:45 pm
[...] I call it the ‘quickening’. I talked about it a month ago in my post and video called ‘The Real Estate Quickening is Upon Us’. This is a bi-product of the failing and/or deleveraging of all financial institutions. Some of [...]