Chuck Ponzi March 31st, 2006

In recent days and weeks since the FED’s announcement of 4.75% interest rates (which are historically still low) we have begun to hear a lot more chatter that the FED is trying to pop the housing asset bubble. Another theory that is floating its way around the internet and media outlets is that once asset price increases are “cooled down” to about 5% increases per year, they can again lower rates to accommodate everyone’s spending.

You can seal this from your mind; it is wishful thinking.

Jas Jain at FSU calls it a Ridiculous and Dangerous Idea About the Future Course of the Housing Bubble.

The Housing Bubble began as psychology, and it will end as psychology. Nothing but a mania or wild speculation can drive asset prices 3 standard deviations from the mean from historical valuations.

Jas says

People, especially, financial market “experts,” have very wrong ideas about the “panicky” rate cuts by the Fed and their impact on the financial assets, e.g., Scam Market, currency markets, bond markets, etc., and on the Housing Market. In that respect the former asset classes are indeed different from the last. What percent of people will buy a Single Family home within one month of “panicky” rate cut? 0.5%, give or take a little. A 2% instantaneous rate cut could make a dent, but that would be catastrophic for the global financial system wired with FWMDs in the forms of derivatives. Bernanke has so little wiggle room that it is not worth quantifying.

Bernanke doesn’t, and rightly shouldn’t, care about your stupid condo in Newport Beach. He also doesn’t care about what you think it’s worth. He only cares about inflation and production output. He might even care some about the value of the dollar. (Although I wonder sometimes if that is the case). Even stupid ‘ol Al knew that risk premiums were to low for the current environment.

The truth is, the FED is still accomodative. The bond market is, well, I’m not sure if you would call it optimistic, pessimistic, or just plain not taking risk into account. The world is awash is easy money and the only way to mop it up is through credit tightening.

The financial system has relied on the FED to bail them out whenever rough times hit. The advantage they had was coming off of a high-rate environment for the past 20 years. It always seems like interest rates have been going down for so long. The fact that mortgage rates are still near Historical Lows, should not surprise anything. However, that this historic lows is accompanied by Historic unaffordability means the printing presses cannot keep up with demand for dollars. The fed only has 2 options.
1. Print more dollars (inflation)
2. Reduce demand (chop off the hands of consumers with high interest rates)

While I have heard from some pseudo-economists that #1 is their preferred choice, this could trigger a downward slide that would effectively cripple the American dollar and make it about as worthless as toilet paper. My grandma had been given Confederate notes which she kept in a locked truck for years that were more costly to transport that they were worth; eventually she just sold them to a collector for basically nothing. We all remember pictures of Pre-WW2 Germany where people carted their paper money around in wheelbarrows. While it’s unlikely that it would come to that, you might be paying $6K for a plasma screen that used to cost $3K.

No, number 2 is much more likely. Consumers are what has been driving this frankenstein economy, and they need to be reigned in and made to start saving instead of buying. There’s no incentive to save when rates are below 2%. Ben Bernanke is trying to save the US from bleeding from every pore; rates will need to go a lot higher from where they are now to stop that. I can still recall aghast looks of the talking heads on CNNfn several months ago when it was suggested that we would barely touch 5%, nothing above that. I would say that is a certainty; and more likely we will continue on to 5.5% without a breather.

But, the bigger mystery is still the mortgage rates; historical lows without cheap money from the FED. We will need to see when this takes off. It may be that the spring lull in sales is keeping demand for mortgage money low; once the summer uptick happens, we could see more upward pressure, but they are still way too low for a normal financial cycle. The FED might need to pull out more pressure on financial institutions that own these MBS’s to increase reserves for losses.

Either way, the FED won’t be accomodating your condo’s value by lowering rates. This is dangerous thinking and most certainly not going to happen.

• Uncategorized
• Comments(6)

Chuck Ponzi March 28th, 2006

The LA Times has finally allowed a removed-gloves look at the bubble. I think as I read this article that the world had suddenly groaned, and a giant crack appeared.

Maybe that was just the bang on my head from hitting my desk as I fainted.

Either way, the article is a well written piece about the psychology mania of real estate in Merced. It’s typical of ground-zero for the housing bubble (although I am sure many cities will be able to claim that dubious honor a few years from now). From the talk of the article, appropriately named “Land of the Open House”, one would think that the world truly HAS gone mad.

The good times have already ended here, in the same way slamming into a wall reduces your speed.

The apt description of a mania that has stopped. After a buying binge like we have seen, much like the stages of coping (grief), many of those interviewed were in the initial of five: Denial, Anger, Bargaining, Depression, or Acceptance.

The mania started like this:

“It’s difficult to know what was driving these high rates of appreciation,” Leventis said. To people in Merced, however, there’s little mystery. This was a classic bubble, where people paid increasingly higher prices because they were sure that someone would come along and pay even more. Economists call this the “greater fool” Theory. In 2003 and 2004, carloads of investors would come down from the Bay Area and up from Los Angeles. They would see a $200,000 house and say, “Wow, if this were on the Westside or in Berkeley, it would be worth $750,000, easy. Let’s offer $225,000 to make sure we get it.”Then the seller across the street would say, “If that place was worth $225,000, I’m going to ask $250,000.”

Where is that mania now? The number of agents has swelled from 200 to 1200, mortgage brokers, title companies and other processing firms moved into town.

One new complex, the Plaza at El Portal, accommodates Chicago Title, Wells Fargo Mortgage, New Freedom Mortgage, First American Title, Building Showcase Interiors, Moonlight Development and Sunlight Development. There’s almost nothing that isn’t connected to housing.

This is our Southern California. The same could be said of Orange County, Los Angeles, or San Diego economies; just on a larger scale.

The Times wouldn’t be doing their journalistic duty if they didn’t bring the picture into focus. General stories of hardship mean nothing without the human component.

Rodriguez, 49, takes care of her disabled daughter. Her husband, Richard, is a maintenance worker. They finally were able to buy a place in November through a county program for low-income families. The house has its problems, but she’s glad to leave renting behind.”A house is something you invest in, it belongs to you,” she said. “You hand it down to your family. Renting is just throwing your money away.”Merced is going to grow, Rodriguez said, which means house prices will keep going up. And if they don’t? “Then I’m screwed.” emphasis added

The most gutwrenching part of her story is the feeling of powerlessness; she has made her bed and she must sleep in it; it’s like a train-wreck happening in slow motion. She was sorely mislead by the “renting is throwing your money away”. She’s probably in an interest-only or neg-am product and doesn’t realize that she hasn’t stopped throwing money away; she’s just doing it faster now. It gets even worse:

This presents an opportunity for mortgage broker David Alan Love. He bought a list of 2,000 people who are late on their mortgage payments by at least 30 days, and he is sending them all a letter. “Home values are coming down,” it says. “Call me NOW!!”And they do. A widow whose house is worth $225,000 called. She owes $98,000 on it, is two months behind and has no income other than Social Security. That makes a standard refinance impossible.Love’s advice was to sell the house, but she didn’t want to do that. He got her a cash loan of $25,000, a direct investment from a private lender. For a while, she has money to pay the mortgage, but of course she’s more in debt than ever.”You’re putting a Band-Aid on a bullet wound,” Love said he told her.

Just as sad, hope springs eternal in the defiantly denial-ridden investor.

If the overextended are vulnerable, the investors are at least disappointed. Liubo Hong, a Silicon Valley engineer, bought a four-bedroom on University Drive in February 2005 for $312,000. He’s been trying to sell it since October for $389,500. In the late ’90s, Hong said, “I got caught up in the stock market. I got in near the peak. I wish I had gotten in earlier.” He’s trying to rectify that mistake with real estate. “The market may get better in the spring,” the engineer said with hope in his voice. “Or next year. Or in three to five years.”

Or maybe not in 3 to 5 years. Maybe it will be like last time where it took 10 years, or even worse. This investor is like a perfect contrarian indicator. Maybe he should examine his ability to invest… and hire someone else to do it for him? Either way, these are the kinds of investors that everyone is fearful of. Amatuers heavy on cash and light on mental capacity or memory. Those who do not remember history are doomed to repeat it.

The shine is off in the labor sector as well. All those who jumped on the bandwagon for a good sales job are now reconsidering their notions.

The only thing worse than the real estate market here is the market for real estate agents. They’ve been coming down to the Auto Toyz and Auto Store used-car lots looking for work.”Everyone who applied recently, about eight people, they all were Realtors,” said Nico Pineda, who until recently was hiring manager for both lots. “But things were slow for us, so we had to turn them down.”

Noone needs someone to explain how this will not end badly. With chances high that interest rates will continue to erode what little (3%) affordability the area has, the endgame is far from over.

For the wise investor, consider my final quote:

The leaflet for Hong’s home calls it “ideal for investors.” But he’s receiving only $925 a month in rent, less than his mortgage, and Merced is running low on fools.

Welcome to the New California.

• Uncategorized
• Comments(2)

Chuck Ponzi March 24th, 2006

After giving the OC register a pretty hard ribbing in my post “The OC Register - The Nerd at the Housing Bubble Party”, I can say that Mr. Jonathan Lansner has nearly redeemed his paper singlehandedly. I suppose that guilty by association should work the other way too, right?

His recent article Home Prices ‘Soft Landing’ Can Hurt really took the gloves off to look at the data and do some actual analysis prior to taking doctored tidbits and statistics (see lies, damn lies, and statistics) from the NAR or CAR before passing them on in the paper.

Unfortunately, I would probably agree that this type of analysis is better read by educated folk, rather than the average OC-educated citizen. There were several pieces of information gleaned from his article that should be ingrained in anyone wondering if housing prices will go down (they will)

1. 2005 Home equity loans extracted $6.1 Billion (yes, that’s with a B), down from $7.2 in 2004.

While both numbers are ludicrously high and this represents figures larger than the entire GDP of several small nations, the real cause for concern is the necessity to repay those debts. They are not like selling a cash position of stock and spending them, all of that money plus interest must be paid. The future is when they will repay them.

Remember, HELOCs are generally adjusting (rarely do they adjust less frequently than every year). What does that do for our homeowner who needs to pay this off in the future, but doesn’t have the income to support it? Well, I suppose that if the worst case scenario happens, you can just sell your house, right? or Refinance? I wouldn’t bet on it. Lansner also reported that OC inventory stands at 10.4 Months!

Please don’t write me an angry email; I did not misplace the decimal place on that statistic; check out the link of you’re wondering if that is true.

2. 17% of Orange county’s employment base is Real-estate related.

This represents the highest number, and the highest share of total jobs occupied by real estate on record. We have often heard that the 1990’s bust of housing caused by job-losses in the manufacturing sector; we are more diversified out of manufacturing since then and it doesn’t represent the same risk. Pish-posh. We are out of manufacturing and much heavier in real estate.

Today, Orange County real estate businesses employ practically twice the work force of bosses running factories that make everything from plane parts to computer chips to industrial measuring tools.

And, the income base is much more tied to service production of real-estate jobs that are highly commission weighted as opposed to stable factory work. When the rout happens, the fall will be long and painful.

There is an intersection of several freeways in OC that remains seemingly perpetually clogged with people escaping from some section of the area that is affectionately referred to as The Orange Crush. (Although this has been relieved somewhat in recent years with construction)

This is our Orange Crush.

One aquaintance once commented that OC’s sole industry is constructing, financing, refinancing, cleaning, landscaping, and selling homes to its residents. Now we have proof that this perceptions is closer to reality than one might assume.

Flippers have not lost their hope… yet

On an unrelated note, the house next door to me finally sold after more than 7 months on the market. My wife and daughter and I anxiuosly awaited meeting our neighbors and hoping they might be a similarly situated family with young children.

Alas, but no. Suspiciously, the house (occupied by a very vocal and perhaps divorcing couple desperate to sell) had been reduced more than $60K since we came and the couple moved out without so much as an “in escrow” tag on their for sale sign. In fact, up until the day they moved out, there were still full-color leaflets advertising the home in the hand-out tray. Exactly 24 hours after they moved out, trucks began appearing at the entrance to the home carrying all kinds of tradesman, and a few peeks over the fence has yielded a surprising conclusion; no one lives there and the entire house has been gutted (of the normal cosmetic things, of course). Tile has been replaced with granite, carpets with wood, and white appliances with stainless, no less.

We’re now confident this is a flip. Perhaps the price was just too good for a flipper to turn down and they fully expect the spring to bounce right back. Either way, it’s a risky move to be making this late in the game. I sincerely hope he/she does not have to learn the meaning of the word BagHolder.

So, anyone thinking that real estate speculation is dead needs to visit my neighborhood. Hope springs eternal the hearts of those in Aliso Viejo. The nearly identical house across the street went up for sale during that same time for $80K more than their last asking price. Will this be a 10-month sale for them as well? If so, it could at least delay plans, if not bleed them dry. 2 months of attendanceless open houses have not yet persuaded them to lower their asking. Maybe someone will realize that $749K is really too much to pay for a 1500 square foot house on 2500 square feet of land backing to a major road. Until then, we will see full-color adverts of homes that no one will even visit.

• Uncategorized
• Comments(8)

Chuck Ponzi March 17th, 2006

Yahoo finance came out with a story about how great of a real estate investment downtrodden neighborhoods can be. Some examples include Watt’s price increase of 91.9%. The story’s HTML page’s name give away it’s real meaning; “hood_1.html”.

I suppose if you don’t mind the winos, the frequent shoot-outs, the hookers, the helicopters with searchlights, and the drug wars, this would be just a fine place to life. If you could only get rid of all of thos poor people…

No, in all seriousness, the piece reports that prices have risen dramatically in some areas like Miami’s Little Havana, Northern Liberties in Philadelphia, the Lower East Side of Manhattan among others. Is this any surprise?

The credit bubble has primarily affected first-time buyers, low-income workers, undocumented aliens, and those with poor credit which tend to be highly concentrated in lower-cost locales of major cities. The secondary effects were felt as those people moved “out of the hood” into more upscale areas, which prompted moves out of those areas into more upscale areas. This is typically referred to as “white flight”, although race does not play any part other than that unfortunately there tends to be higher ethnic concentrates in lower-cost locales.

Anyone remember the SF Valley in the 80’s? Remember such movies as “Bill & Ted’s Excellent Adventure”, “Encino Man”, “Valley Girl”? That was the Valley in the 80’s; and the valley of today bears little resemblance to that time. This is because the late 80’s loose credit that caused the last housing bubble in Southern California allowed the kind of move-up and move-out migration that this one is causing. This is also the reason that these areas fall the hardest and sink lower in the following credit-tightening period. Anyone been to Pacoima, Panorama City, or older Van Nuys? These were all nice areas in the valley at one time; working class neighborhoods.

You would expect an economist to be able to understand these types of trend in their own industry. Not so for our mentally-challenged friend Mr. David Lereah,

“In the past, you would expect that neighborhoods with higher median incomes would have stronger demand for homes,” says David Lereah, senior vice president and chief economist for the NAR. “Lower-income neighborhoods will have more renters. Higher-income areas will have more demand from people wanting to climb the ladder. It means that some things have changed.”

I suppose if you were only looking back 3 or 4 years, it would seem so, but having a longer time-horizon allows you to see larger trends at play. The only thing that changed recently was credit standards.

See, it’s not about income, it’s about the loosened credit demand relative to available stock that caused the price of housing to rise, and the prices rose most in areas where it made the biggest difference had the largest changes.

• Uncategorized
• Comments(19)

Chuck Ponzi March 16th, 2006

Marketwatch offers a glimpse into the FED’s thinking about the Housing Price Bubble today.

Fed Governor Donald Kohn reiterated the stance that the FED cares little about asset prices, and is only there to control inflation and promote growth. He states:

In his remarks, Kohn attacked the popular ‘Greenspan put’ theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise. “This argument strikes me as a misreading of history,” Kohn said. Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk,” he said.

I agree, many have misinterpreted the easing of monetary policy over the past 20 years as being accomodative to investing purposefully. However, the benefit to investors has been largely unintentional; albeit suspiciously so.

Understanding the FED’s mission, however is quite important; maintaining growth and full employment while containing inflation. This mission becomes compromised when asset prices fall substantially enough to disrupt financial markets and corporate climate enough to prevent full employment, or when inflation begins to appear. Because the last 10 years of technological advancement and efficiency have displayed deflationary pressures, monetary policy was eased to maintain proper inflationary levels (in their eyes). However, beauty is in the eye of the beholder (or blind eye).

See, the FED must pick and choose its prices carefully to determine when inflation begins again. Not all prices are important (for example, if prices of bottled water suddenly spike without a corresponding spike in regular water), the FED does not want to use the sledgehammer of interest rates to control inflation that is more hedonic in nature. This is often why necessities of life are concentrated in the CPI.

The biggest compaint of anyone in economics is the basket of goods in the CPI. Especially the cost of housing. Now that homeownership is nearing 70%, one could assume that the cost of homes would have some bearing on this indicator of inflation; not so. There is the elusive “Rent equivalent”, but that does little to reflect the rising prices of homes to buy vs. rent (we are mostly a nation of home buyers, not renters.

However, at the important peak of the housing bubble, the last thing anyone should want to do some owner-housing component to the CPI. This is because prices will be going down, and the deflation of asset prices would be masking the increase in consumer prices. No, the last thing we should do now is the change the calculation; it worked on the way up, it should work on the way down. In other words, don’t change the rules of the game at the end of the third quarter; we still have another quarter to go.

Kohn says it best

“The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode. Homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,”

The best part of the article?

But Kohn said he doubted that central banks should “lean against the wind” of an incipient stock market bubble by adopting a somewhat tighter policy stance than otherwise would be the case. He said there were three tough conditions that would have to be met before the costs of the extra tightening would be worthwhile. First, the central bank would have to be able to identify the bubble in a timely faction. Secondly, there would have to be a fairly high chance that the tighter policy would check the speculative activity and finally, the expected improvement in the economy would have to be sizable. “For my part, I am dubious that any central banker knows enough about the economy to overcome these hurdles,” Kohn said.

He knows there is a housing bubble, and just doesn’t want to say it; it’s the “don’t ask, don’t tell” philosophy that allows them to play dumb when the bubble comes home to roost.

• Uncategorized
• Comments(2)

Chuck Ponzi March 14th, 2006

Ok, I feel like I have harped on this enough; but it never gets old for the media. The media are finally saying what intelligent bloggers have been following for months, if not years.

CNN Money says that 15 of 20 of the most overvalued real estate is in California.

Recently, rates have gone up to erode affordability. There is now no out for this bubble; no way to save itself. If a single 1/2 point change in rates changes the picture so much, what will the next 2.0% be like? A disaster for homeowners who financed with adjustable rates resetting.

If the sensitivity to interest rates is so high, you can only imagine how much more pain there will be. Foreclosures will tighten the money supply because the allowances for bad debts at lenders will need to compensate. An illiquid market only exacerbates the credit crunch.

Rising rates had already begun to take their toll in the fourth quarter of 2005, when the 30-year mortgage averaged 6.22 percent, according to a report released Monday from Global Insight, a financial information provider, and National City. The report figures 71 of the 299 largest U.S. housing markets were “extremely overvalued” at year’s end, up from 62 markets a quarter earlier

I recommend readers take some time to look at their city to find it on the list and see how much their house is overvalued. The article states that Los Angeles is overvalued by 61.2% (although they must be including OC in that number, because it is not on the list and is much more overvalued)

On a similar note, I have noticed that Salt Lake City (where some in-laws live), has had rapid price increases - enough to scare most people there where housing prices jumped 50% or more over the last year. The list now ranks them 6% overvalued; and I distinctly remember several quarters ago that it was 20% or more UNDERVALUED. The California liquidity bubble is chasing returns farther than Las Vegas. Where this ends is anybody’s guess at this point.

• Uncategorized
• Comments(2)

Chuck Ponzi March 14th, 2006

I came across a great article by Robert McHugh about the interworkings of the Fed to reign in lending practices; something most don’t know about. The bubble bursting will be precipitated by commercial lending tightening. He even ties it in with the M3 disappearing.

Here’s just a sample, but I recommend you read the entire article:

It is official. A recession is coming. How do I know? Because this week new Fed Chairman Ben Bernanke gave an official warning to bankers about commercial real estate loans. That is always the kickoff to a recession. It is the starter’s gun, the national anthem before a ballgame, the opening hymn at a church service. Here is how it works. The Fed has three official tools to control the money supply: Setting reserve requirements (telling banks how much of their deposits they cannot lend. The higher the reserve requirements, the less loans, the less money creation by the economy). The second tool is open market operations. Here they set the amount of money in the system by buying or selling securities. Third is setting the discount rate, the rate of interest banks must pay to borrow money at the Fed. Theoretically, the higher the rate, the less money banks will borrow, the less they have to lend, and the less money that is created by the banking system.

It gives a very potent description of how lending triggers local recessions and is exactly one of the pins that will prick the SoCal Housing Bubble.

• Uncategorized
• Comments(5)

Chuck Ponzi March 10th, 2006

If you know what language the title is, you are probably already aware of the shift in underlying monetary policy and how that will impact the Socal housing bubble.

Thirty-year mortgages have risen to their highest level in 3 years (and that was the lowest they have been in more than 40 years). We are likely heading higher; if there is pain already in some of the bubble areas such as Southern California, think about the kind of pain we are heading into. It will only get worse from here.

Many economists are now believing that the FED will raise interest rates at least 3 times this year.

Vice Chairman of the FED Timothy Geithner has stated that US monetary policy may still need to be tightened more to offset the downward tug of capital inflows.

Asian central banks have been huge buyers of U.S. government debt in recent years, which analysts say helps explain why long-term bond yields have largely failed to react to a long series of short-term interest rate hikes by the Fed. Geithner said the downward pressure on bond yields has made financial conditions easier than they would be without the foreign buying.”Policy would have to act to offset these effects in order to achieve the same impact on the future path of demand and inflation,” said Geithner. “To do otherwise would run the risk that monetary policy would be too accommodative.”

The fed is finally coming out of the closet on the issue that many others have been fretting about for months and or years. Asian central banks are depressing interest rates; the FED can only put on the brakes by increasing their own interest rates.

Lest you think this is just another opinion giver, remember that as Vice Chairman he ALWAYS votes on interest rates.

His concern?

Geithner said the move toward increased flexibility in the foreign-exchange policies of countries with more rigid currency regimes may not be smooth and gradual but is welcome nonetheless. “It won’t necessarily be smooth and gradual but it’s probably healthy for the financial system as a whole,” Geithner said in a question and answer session. Geithner also reiterated his concern about the gaping U.S. external deficit. He said if the current account gap remained close to 7 percent of gross domestic product, the net U.S. international investment position would “deteriorate sharply.”

Do we all know who he is talking about? (If you’re thinking China, you may be right)

Geithner appeared skeptical of conventional explanations for persistent deficits, saying that low U.S. savings and increased productivity only went so far. “The present magnitude of the U.S. external imbalances seems difficult to reconcile with plausible estimates of future productivity and potential output growth,” he said.

Right, it’s a combination of all of them (even the bubble which we won’t mention just yet). But, the average consumer goes along blissfully unaware that the HELOC they have is about to become a financial HEADLOCK.

Yes, I heard a story recently from my brother who bought a house 80/10/10 down. His 10% was an interest only adjustable rate loan and he got it several years ago. He has excellent credit and perfect payment history, good job, the whole nine. He informed me recently that he refinanced his home and rolled it all into a single loan because the adjustable had risen to 9.5%. Yes, that’s right 9.5% And this is just the beginning of higher interest rates. If the central bank has any say in it, we will be fighting inflation for some time.

Wait a minute… Inflation?

You heard me right. Inflation, CPI inflation, the kind the FED cares about. The BOJ and ECB have already made their moves felt and known throughout the world. Maybe that’ s why the yield curve has twisted back to a more normal position.Many housing bulls have always maintained that even if the housing bubble starts leaking air that the FED will prop it up with lower interest rates.

I say don’t believe it. The FED didn’t care about asset prices on the way up, and it shouldn’t care about them on the way down, no matter how far they go down. In fact, a bursting bubble will actually help them control inflation. We will have asset deflation with CPI inflation. The FED will only care about the CPI. Damn the Torpedoes, full speed ahead!

Inflation AND Deflation?

In a word, yes. Remember, asset deflation and CPI inflation are possible simultaneously. Downward prices on homes coupled with slightly higher unemployment will take the pressure off of buying higher-priced Asian goods when the Yuan is revalued and everything is suddenly pricier. The lower pressure on consumer goods will require manufacturers and retailers to moderate prices to attract purchases. And, they hope to stop bleeding to the East (or at least slow it).

What will this do to companies in America? many will likely seek for the lower cost of doing business. With Asian currencies on the rise, and slightly higher unemployment, US companies may just do what the FED is hoping they will… keep the jobs in the country. Besides, if it’s cheaper to do something in Texas than it is in China, why would you want to deal with all of the headache of producing it half-way around the world?

Global Wage Arbitrage

Will this stop the flow of jobs overseas? Not likely either. It may just serve to keep low-paying jobs in the US while high-paying jobs bleed to India. But, it may also spark a migration of high-paying jobs out of Southern California if housing prices don’t moderate; or that migration will spark the moderation of prices.

The fact is, as long as something can be done cheaper somewhere else, the free market will allow that product to be produced there.

Now, if we could only get monetary policy to fix our bloated, infected, unionized education system, we could compete on a worldwide basis on an intellectual level.

• Uncategorized
• Comments(4)

Chuck Ponzi March 9th, 2006

The North County Times has reported that the San Diego MLS has reached nearly 16,000 unsold homes already.

If that’s not an eye-popper, remember that there was just 2,300 homes for sale 2 years ago!

The NC Times has taken a surprising left onto housing bubble territory with even reporting this number. Anyone who has anythign to do with housing in the area knows that 16K is almost an all-time record for the SandiCor MLS. ALL TIME RECORD!

In addition, sales were anemic for January (less than 2K for the first time in more than 3 years)

Of course, the NCT couldn’t resist at least “balancing” the outlook of the bloodbath:

“We are just experiencing a soft correction,” said Nicole McAllister, executive director of development for the University of Southern California’s Lusk Center for Real Estate, noting she does not consider the buildup to be alarming.”I don’t think (the market) is headed for any catastrophic burst,” McAllister said. “We’re going to gradually see sellers adjust and soften their prices a bit. I don’t think it’s going to turn around and tomorrow everybody is going to get all these great deals.”

I suppose it depends on what you consider “great deals”, right? If you don’t consider a 15% reduction from last year a “great deal”, then yes, you are right.

However, I have to say that I agree that all housing won’t fall immediately; and Chris Thornberg (of UCLA Anderson Forecast fame) hits the nail on the head…

“This is still just the beginning of a cooling trend in real estate,” Thornberg said. On the other hand, he said, it remains to be seen if prices will fall at some point or flatten out for several years. Thornberg is one who subscribes to the theory that Southern California is in a “housing bubble,” a term used to describe a market where home prices inflate beyond what incomes can sustain.Given today’s low interest rates, Thornberg suggests a healthy ratio of housing prices to income levels is 8- or 9-to-1. “Right now we are at 12-to-1 —- and counting,” he said.Thornberg suggests homes are overvalued by 25 percent to 30 percent.”There are two sets of people out there,” he said. “One set is saying, ‘The sky is falling! The sky is falling!’ That’s not true. The second set is saying, ‘We now know the soft landing is here.’ They’re wrong, too. We don’t know yet.”

Either way, if housing prices fall 25% overnight or if it takes 3 or 4 years to do so, the market is clearly tanking for selling homes.

Do we not know yet? We may not know exactly when it will fall, but we can all see that it will. Those who ignore history are doomed to repeat it.

Is it ripe yet to buy?

Not a chance. Don’t even think about it. We are coming off of a NASDAQ 5000, you’ll want to wait until noone even talks about housing anymore. It’s going to take a while to tarnish the minds of all of the Carlton Sheet’s wannabees. And, the recession hasn’t even begun yet. Wait until all of those real-estate dependent jobs disappear, homes go into foreclosure, and then buy. Better get out your camping gear, because this won’t be like waiting for KISS reunion tour tickets, this is going to be a sit-on-a-stump wait-for-the-corn-to-grow kinda waiting game. Sure, it will be filled with all kinds of drama and pain, but that will get boring after a while.

Wait for the pop… here it comes.

• Uncategorized
• Comments(7)

Chuck Ponzi March 6th, 2006

China has been stockpiling US denominated government bonds at an alarming rate, reports Yahoo News (see my yahoo effect posting).

No Duh!

What this means is that Treasury Yields have been depressed by the Chinese, attempting to keep their Dollar peg artificially low. Is it a good time to invest in Yuan? Maybe for a short term, but longer term, a weaker dollar means weaker imports from our main source of feel-good-juice that the US economy has been running on. Interest rates might finally pop our housing bubble, along with every other housing bubble in the world.

Shanghai’s has already popped.

Just how big is too big of their reserves?

“China’s foreign exchange reserve hit 818.9 billion dollars at the end of last year but what China really needs should be no more than 250 billion dollars,” economist Xiao Zhuoji told the Shanghai Securities Times.”The current (holdings are) way above actual needs,” he said. Chinese reserves should be cut by more than two-thirds from current levels, said Xiao, who is also a member of the Chinese People’s Political consultative Conference (CPPCC), an advisory body to the government.

Just slowing the train would pop our bubble, not to mention offloading nearly 600 Billion US dollar treasuries.

Soon after, we will see a healthy return to normal financing costs (and more likely, the pedulum swinging the other way as the lending insdustry braces for losses due to bad real estate loans.)

What the MBS’s do is anyone’s guess, but I would be willing to bet generational lows are going to quickly disappear. If you think 8Trillion is a lot of debt, try doing that without Chinese help.

• Uncategorized
• Comments(9)