Category: Real Estate

Economics Update

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The Fed Bank of Philidelphia president is making noise about how inflation is poised fore a comeback, which bummed out stock traders.

It looks like the current economic situation is leading bankers to screw their small customers. Of course, were the economic situation reversed, it would be used by bankers to screw their small customers.

At least, there is symmetry.

Foreclosures: Las Vegas is the foreclosure capital of the US. This appears not to be from the economic downturn, it’s a prosperous area, but rather from exotic mortgages.

In a blaze of recognizing the bloody obvious, the NAR is now saying that they expect home prices to decline in 2008.

If you look at regional downturns, we are looking at 5-10 years before a rebound.

The director of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie Mae and Freddie Mac, is warning that the GSEs are taking on too much risky debt. He is saying that, “reducing risks in the market, but concentrating mortgage risks on themselves.”

I think that he is suggesting that without tighter regulation, the suggestion of allowing Fannie and Freddie to take on larger mortgages is a very bad idea.

Overseas, the Bank of England cut its benchmark 25 basis points to 5.25%, while the European Central Bank holds kept its rate steady at 4%. The UK appears to be in a real-estate driven downturn, while most of Europe (Spain excepted) did not experience the same sort of speculative real estate bubble.

On Jobs, new applicants for unemployment fell by 22K last week, but the total number of people collecting unemployment continues to rise. (the former is a far noisier number).

In retail, January sales posted their worst performance since records were kept, with same store sales rising only 0.5%, which is a significant drop when inflation is factored in.

And finally, a cartoon for your amusement:

Sonny Perdu is an Idiot, and He Will Kill Atlanta Through Thirst

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Most of you not from the far SE US are probably unaware of the fact that Georgia, Alabama, and Florida are fighting over water rights.

Well, alabama and Florida have just won a major case, over the allocation of water from the federal Lake Lanier reservoir.

The judge ruled that, “agreement between Georgia and the Army Corps of Engineers that would have given Georgia rights to use nearly a quarter of the water …. was void because the two parties had not first obtained Congressional approval.”

As is the case with most such cases, this has been bubbling along* for the past 20 or so years, and has been compounded by the drought, and by Georgia’s unwillingness to take steps to ensure adequate water to feed its growth.

In related news, the very next day,Sonny “He’s Not a Schmuck Because a Schmuck Has a Head†” Purdue has announced will be allowing folks to fill their swimming pools and water their lawns.

This is a metaphor for what will be the next resource fight, potable water.

If conflict over the past 35 years has been largely defined by fights over oil, fights over the next few decades will be over water.

It will be far more brutal, because people don’t die without oil.

*Pun intended.
†True…Learn your Yiddish.

Housing Secretary Alphonso Jackson Accused of Coercion for Business Buddy

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This joker was accused of telling people that he would not grant contracts to people who supported Democrats, and then claimed it was a joke, and now it’s claimed that he, “demanded that the Philadelphia Housing Authority transfer a $2 million public property to a developer at a substantial discount, then retaliated against the housing authority when it refused to do so, a recent court filing alleges.”

This is business as usual for Bush and His Evil Minions&trade.

Economics Update

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New home sales plummet. New home sales were down 26% from 2006, the biggest drop ever, surpassing the 23% decline posted of 1980.

Regulators opposes oppose increasing the GSE’s lending limit, with the director of OFHEO, James Lockhart saying, “We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform.”

I agree, the solution to too many people hanging themselves is not more rope.

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CBS News reporter Steve Croft has an interesting report on the mess on 60 minutes (click to view, but there is a 30 second ad at the beginning). Too narrow in scope, the big sh$%pile is about more than subprime.

European hedge funds are suspending redemptions.

Economics Update

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It appears that the the markets are expecting another 75 basis point rate cut by the Fed at their regular meeting next week. The futures market on the Fed rate cut puts the chance at 81%.

I have no clue what sh$# they are smoking, but I wants some. It’s gotta be some seriously good stuff.

Could someone please explain to me how this is not making book over the telephone and internet, and hence illegal?

Then we have George Soros warning that he is seeing a possibility of “systemic failure” in the markets. He expects that at the end of the US Dollar as the sole world reserve currency, which has been obvious for years, and that the era of “superleverage” is over, and that, “”I question how far the Fed can go, given the reluctance of people to hold dollars”, and, “We need a new sheriff, not Washington consensus.”

Basically, he’s saying that we are in 1930, and we need the restoration of FDR market regulations. I agree, but, of course, I didn’t break the Bank of England because I understood world currency markets better than the English Ministry of the Exchequer, and he has, so his opinion carries more weight.

In real estate, we have Credit Suisse predicting losses of $16 billion for Fannie Mae and Freddie Mac, and we have a year over year price drop of 6% in the US, and that median sale prices in 2007 was 1.3% lower than 2006, the first yearly drop ever.

And in employment and automotive, Ford is reported to be offering buyouts to all of its 54,000 hourly employees.

Every salesman, every buyer, every secretary, every engineer, etc.

Economics Update: OMFG Edition

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First, of course, the Fed cut it’s Federal Funds Rate by 75 basis points, the biggest cut since 1984, and it did so a week before its regular meeting, which it hasn’t done since 911.

The US markets recovered after the rate cut, but still they were down by over 1% for the day.

I think that Paul Krugman’s analysis of this is accurate, Bernanke used to be the head of his department at Princeton, so I would assume that he knows him pretty well.

Basically, Bernanke is concerned about the Japanese slow down of the 1990s, when monetary tools simply stopped working:

What was so disturbing about Japan was the way monetary policy became ineffective; by the later 1990s the short-term interest rate was up against the ZLB — the “zero lower bound.” This is alternatively known as the “liquidity trap.” And once you’re there, conventional monetary policy can do no more, because interest rates can’t go below zero.

There was a lot of discussion of various unconventional monetary things you could do. But the best answer was not to get there in the first place. A 2004 paper co-authored by Bernanke argued that the ZLB could and should be avoided by “maintaining a sufficient inflation buffer and easing preemptively as necessary”.

In terms of corporate profits, Bank of America took a major hit, with profits dropping 95% as a result of $5 billion dollar writedown, and its, “tier 1 capital ratio – a key measure of its ability to absorb losses – stood at 6.87 percent at the end of the year, down from 8.22 percent in the previous quarter, due to its purchase of LaSalle Bank and lower net income during the second half of last year.”

Wachovia took an 89% hit on profits, “due to a $1.7 billion reduction in the value of certain portfolios and $1.5 billion set aside to cover bad loans”.

More real estate and derivatives.

And while we are on the topic of real estate and derivatives, bond insurer Ambac is looking for a buyer. If they take monopoly money, I’m game, but only if it’s less than one whole game.

Otherwise, the deal just does not make financial sense.

Of course, the one thing that we can be sure of is that if George W. Bush speaks, the market will tank, so, of course, they are talking again, and saying that they are looking at increasing the stimulus package beyond the $150 billion originally proposed.

My guess is that there is a “Bush Ranger” out there who wants a special tax break just for him.

Of course, we are already beginning to see the allocation of blame, aka “blamestorming”, with EU Economic and Monetary Affairs Commissioner Joaquin Almunia saying that this problem is a result of excessive US trade deficit…..Ummmm…Well Duh!!!!…Though that whole deregulation of markets thing isn’t working either.

And on the housing front, California loan defaults reach have reached a 15-year high in Q4 2007, up 114% from the same time in 2006. Foreclosures are up 421.2% from 2006.

Economics Update

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We’ve just had £2 billion ($4 b) fund in the UK suspend trading because of a panic, but “Aegon UK added that it believes the “underlying fundamentals of the asset class remain healthy”.

Nope, there is an increasing understanding that the last one leaving the room won’t only be without clothes, but that the price of exit will involve selling an organ.

Standard and Poors is now assessing the risk of bond insurer giants MBIA and Ambac in excess of 70% over the next 5 years. If they unwind, a lot more unwinds too.

Sprint is laying off 4000, and closing 125 stores.

Bond insurer ACA is asking for more time to unwind its contracts, basically because it’s out of case. If they go under, “Banks and brokers could suffer billions of dollars of losses from credit protection they bought from ACA.”

Economics Update

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Philadelphia-area manufacturing activity lowest just after 911.

Lehman Brothers is downsizing its mortgage arm. I believe that there is an expression, involving the words, “barn”, “door”, and “cow” that would be appropriate here.

It looks like the real estate crash is finally starting to effect rents, with rents increacing by only ½% in 2007 in a sampling of 10 metro areas. (In previous years, it was in the 3% range)

Housing starts and permits plunge to multi-decade lows. Housing starts are the lowest in 27 years, permits the lowest in 33 years. The market is still on the way down.

This analysis predicts 5 years to recover. It’s probably wrong.

Local housing crashes have all taken at around 5 years to recover, and the markets were far less inflated. Additionally, the underlying economic situation is very grim, and the home buyers were less leveraged, meaning that foreclosures will be higher this time.

The Dollar has recovered somewhat against the Euro in response to an inflation hawk on the ECB saying that right now recession is the problem, not inflation

The Effect of Proposition 13 On the California Real Estate Market

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A friend of mine pulled a graph from an old story in the Orange County register where they predicted that home prices were expected to fall in 2007. (Well I did say it was an old story, dated 19 October 2006.

What I found interesting was the graphic, what we can learn from it with a bit more data:

Ignoring the obvious, that they underestimated the drop like every other real estate ad supported media entity, we can learn something about the effect of Proposition 13 on the California real estate market.

Proposition 13, passed in 1987, says that a house can only be taxed at 1% of property evaluation, and that absent a sale, that the evaluation can not increase by more than 2% per year.

So that $62,290.00 house in 1977 would now be assessed, absent any intervening sale, at $112,830.00 in 2007, while the true market value would $550,000.00 in 2007.

Truth be told, it would probably be less, if just because houses are getting bigger (McMansions), so let’s call it $508,000.00.

So if you stay in the house, and improve it, and don’t down size it, and leave it to your kids, right now you will be paying 22% the taxes you would if it has been assessed at fair market value.

Under those circumstances, it makes no sense to move to a bigger house when your family gets bigger, you just add on to the existing one, and if you sell to move to a smaller house when the children move out, your profit are wiped out by the tax hike.

There are a whole bunch of people sitting on houses that they would otherwise sell, because of the tax consequences.

So less housing reaches the market, you see less of the empty nesters moving into townhouses, etc., more sprawl, and through supply and demand, prices rise.

You also have the side effect that commerical property is corporate owned, and the corporation is sold, rather than the property, which raises the burden on new home purchasers.

It’s one of the reasons that California is so screwed up.

Economic Update, Housing Crash, Exotic Financial Instruments

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In real estate, we have new home sales at a 12 year low, and we have the phenomenon returning of people just walking out on their homes. The pertinent quote is, “Lewis’ comments came as a new expression – “jingle mail” – referring to the growing trend where Americans mail the keys to their homes to the lenders before vacating, entered the US lexicon.”

With all the news, the financial press is finally noticing that maybe, just maybe, those predictions of a quick rebound are a bunch of bullsh@$.

All in all, this is not surprising. News gathering is paid for by ad revenue, sales and subscriptions really only pay for ink and paper, not the words and pictures made with the ink and paper. Given the huge role that real estate pays in ad revenues, it’s unavoidable that the news media, notwithstanding the “Chinese Walls” will be the biggest boosters of real estate this side of Remax.

And in the department of the blindingly obvious, the Journal has an article saying that thecomplex financial instruments have magnified the credit crunch.

Well, duh. As much as people want to talk about innovation and the free market, much of that innovation has a seamy side.

The first man to rob a train was an innovator, and in financial markets we have a long (over 200 years just in the US) tradition of both fraud, and complex activities to benefit one entities, and transfer the downside of these activities to another.

At some point, society has to say that certain activities, like dope dealing and unsafe financial practices, are simply too damaging to society and they must be regulated.

Fed Shrugged as Subprime Crisis Spread

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The hed above is straight from The New York Times article about how the Federal Reserve under Alan “Bubbles” Greenspan ignored the warning signs of the real estate bubble.

It’s a clever turn of phrase. Greenspan was an acolyte of Rand’s and what was likely his first publication in the Times was his defense of Atlas Shrugged against a brutal review of the work. He argued that it was actually a “celebration of life and happiness”.

While the authors of the article rarely write the headline, it is clearly an attempt to cast the failures of the Fed to deal with the problems in the credit markets generally, and the housing market specifically as a result of Greenspan’s Randroid ideas.

It clearly shows that Greenspan was never the genius that he was viewed as in, say, 2000.

To my mind, the high opinion that many people had of him was an artifact of low oil prices and the cooking of the books with regard to inflation figures.

Read the article. It’s a hoot.

Your Update on the Economy

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Let’s see, the Fed cut rates by 25 basis points, but the market wanted 50, so the Dow dropped 294.26 points.

The WSJ is saying that the U.S. mortgage crisis rivals the S&L meltdown.

While it’s nice that they take it seriously, the US Credit/Insolvency crisis is already worse than the S&L meltdown. Still, it’s a good read.


Own to rent cost ratio, the real estate equivalent of P/E:


The discount for the mortgage packages:

And while we are at it, how about MBIA, the world’s largest bond insurer, getting $1B infusion from private equity firm?

This is not about someone finding a deal. It’s about a private equity firm keeping MBIA alive while they offload their piece of the big sh&%pile on some other idiot.

Also, Washington Mutual is closing offices and laying off more than 3000 employees, including a friend of mine, because of mortgage and credit problems.

Also, Freddie Mac is looking at $5.5-$12 billion in additional losses. That’s in addition to the $4.5 billion that it’s already lost this year.

At the rate this is going, it will be raining Katz and Hutton on Wall Street.

Watch out for jumping finance professionals.

Construction Loans Heading the Way of Subprime Loans

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This is not good:

Like Subprime Mortgages, Some Construction Loans Are Delinquent

Like Subprime Mortgages, Some Construction Loans Are Delinquent
By FLOYD NORRIS

BANKS across the United States, particularly the smaller ones, have become dependent on construction lending just as that area of the economy is weakening and the number of bad loans is growing.

Figures compiled by the Federal Deposit Insurance Corporation and released last week show that both midsize and small banks had construction loans outstanding that were greater than their total capital. A decade ago, such loans were equal to only a third of capital for those banks.

For most of this decade, that was a good strategy. Construction loans proved to be very profitable, particularly for smaller banks as competition from larger banks and securities markets eroded their position in areas like mortgage lending and credit card issuance.

Now, however, more than 3 percent of all construction loans are classified as being nonperforming, or have borrowers that are behind on their payments. That is the highest proportion in a decade.

…

The smaller banks have eschewed many of the riskier practices of the larger national operations, but it looks like they are going to get bitten by the turndown too.

Real Estate Update

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existing household real estate assets declined $67 Billion in the 3rd quarter. That’s about $200 for every man, woman, and child in the US.

You can see this in declining home equity percentages over time (there are more graphs at the link):

While we’re at it, Morgan Stanley analysts are saying that home prices could be falling for at least the next three years.

.…
The property derivatives market seems to be suggesting that we are in a very different environment, on the heels of market events that could force a housing recession like none ever imagined or experienced,” Morgan Stanley analysts said.

“The fundamental argument for going long housing is that history has never seen such extended periods of house price declines,” Morgan Stanley said. “We think that such arguments have limited credibility because of limited periods of data and over-reliance on analysis using national level data.”

While home price declines for three years or longer have not occurred in recent years on a national level, regional data demonstrates that unusual price increases often lead to sustained corrections, the report said.

….

And then we have Standard and Poors sayint that the mortgage relief program might cause downgrades on some of the related bonds.

Honestly though, I don’t see how the action will make things much worse:

.…

The share of all home loans with payments more than 30 days late, including prime and fixed-rate loans, rose to a seasonally adjusted 5.59 percent, the highest since 1986, according to a report today from the Washington-based bankers trade group. New foreclosures hit an all-time high for the second consecutive quarter in a survey that goes back to 1972.

….