Chuck Ponzi October 27th, 2006

News hit the fan yesterday that new home sales prices in the US had the largest downward movement in 35 years.

Without question, this is one of the most significant events in housing prices in a long time. Probably longer than many reading this have been alive. Therefore, the thing to remember is that this housing downturn is unlike any you have seen before. This is not your average run-of-the-mill 1990’s defense spending cuts downturn. This is the real deal.

In fact, Mark Zandi, Chief Economist at Moody’s.com is quoted in the article:

“It is going to be painful because there are a lot of price declines to come.”

Zandi said he is forecasting that prices of existing homes will drop by 3.7 percent in 2007, which would be the first decline for a full year since the Great Depression of the 1930s.

For those that don’t have an appreciation of history, the Great Depression is a period of strong price deflation.

For some time, we here at SCREBCB have been predicting that we will have a monetary deflation, and until recently were not convinced of a general price deflation, however, when well-known economists start throwing around comparisons to the Great Depression, we should probably at least listen.

OK, yes, there will always be kooky economists who constantly think the sky is falling. Many of them have something to sell you… a stock report, a speaking series, a book, or something else. It appears that Moodys has little to sell by reporting the potential problems we face.

But don’t worry, we have plenty of apologists to assure us that nothing is wrong, and that after a little downturn, we will be back on the top of the block.

According to Alan Greenspan:

But former Federal Reserve Chairman Alan Greenspan told a Washington audience Thursday that the economy will rebound after going through a “very weak patch.”

“Most of the negatives in housing are probably behind, us but we still have a way to go” before hitting bottom, Greenspan said. “We have too much inventory still.”

At the same time, many realtors are assuring us that there is nothing to be concerned about. –Buy, buy buy, by heavens, buy… I need to make my house payment!

As reported in the Washington Post:

Realtors’ association officials blame the continuing slump on what Lawrence Yun, the group’s senior economist, called “confidence issues.” Yun said buyers are waiting until they think the market has hit bottom, particularly because high prices have made houses less affordable.”Psychological factors have people on the sidelines,” Yun said. “They are waiting to time the market.”Yun saw reason for optimism, and thinks an upturn is at hand. He said the September figures represent a “trough in the market,” because for the past two months, the inventory of unsold homes has fallen slightly.

Pay attention to Yun’s message: Don’t worry about affordability… Housing prices will continue to go up, up, and away into the stratosphere. We don’t need no stinkin’ fundamentals!

Remember the last time we heard this? I distinctly remember talking heads on TV in early 2000 gushing about certain tech companies that “no longer play(ed) by the old rules, fundamentals don’t matter.”

We shall see if fundamentals don’t matter.

At least for the Washington Post’s sake, they included an economist whose group has nothing to sell you:

Charles W. McMillion, an economist and president of District-based MBG Information Services, said he saw little sign that the decline was ending. “I don’t see stability when sales continue to decline sharply and price continued to decline sharply,” McMillion said. “It’s pretty hard to argue we’ve reached a sustainable level.”

and an academic economist:

Peter Morici, an economist at the University of Maryland, said reduced inventory of unsold houses may mean “frustrated buyers are removing their homes from the market.” Morici said that major price adjustments will be needed to bring the market back into balance.
“The speculative frenzy of recent years is causing a major adjustment, and the happy talk of Realtors is prolonging the process,” Morici said. “The absence of realistic analysis about the extent of overvaluation is characteristic in an industry that sees nothing but an upward progression for values, but houses like any other asset can be overpriced. . . . Things are likely to get worse before they get better.”

You decide who you should believe… somebody who is the mouthpiece of an organization that is trying sell you something and whose success depends on “happy talk”, or economists who have nothing to benefit from lower prices, and nothing to sell you.

We here at SCREBC have always chosen to try to focus on experts who have no reason to spin the information to readers, rather showing how each spin doctor quoted has a specific reason to believe what they say.
Next up? Anger and lashback from industry “economists”. I think “Guido the Killer Pimp” from the movie Risky Business said it best:

In a sluggish economy, never ever f@(% [edited] with another man’s livelihood. Now, if you’re smart, and I hope you are, you’re not gonna make me come back here.

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Chuck Ponzi October 26th, 2006

In July of this year, Gary Watts, discredited Orange County real estate agent who sells his prognostications to local agents and runs a series of talking events masquerading as a “real estate economist”, told us that we would definitely for sure, without question, unequivocally, have a roaring second half of the year. Or, as he referred to it; an “Inverted Year“.

This was after the widely anticipated “Superbowl Bounce” which never materialized.

This was also after the widely anticipated “Spring Bounce” which never materialized.

This was also after the widely anticipated “June Bounce” which never materialized.

and… you knew this was coming…

This was also after the widely anticipated “Summer Bounce” which never materialized.

Which begs the question? Where’s the bounce?

Let’s look at the Stats:

Let’s look at Gary’s Prediction that he issued after 6 months of the year of abysmal performance:

The buyers normally begin entering the market in February and stay strong through June. However, this year is . . . INVERTED! The latter half will be more active.

And, we can’t forget his prices prognostication:

It’s been an absolute miserable six months in terms of real estate…I think we probably are not going to see 15 (percent), but I think 11 or 12 (percent) is still realistic.

The California Association of Realtors tells us what’s happening in sales in September:

Southern California Sales Change:
Los Angeles: DOWN 31.2%
Ventura: DOWN 38.8%
Orange County: DOWN 32.2%
San Diego: DOWN 31.7%

That’s all fine and dandy, but prices are still going up, right?

Southern California Median Price YOY change:
Los Angeles: UP 4.4%
Ventura: UP .6%
Orange County DOWN .3%
San Diego: DOWN 3.0%

Not quite holding up to the 10-12% up, huh Gary? I guess there’s still 2 more months before the year ends that we can make fun of your silly predictions. I’d suggest basing your predictions on more than hopin’ and wishin’. Maybe some affordability stats will help?

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Chuck Ponzi October 25th, 2006

Some of the best lessons can be learned from History:

The worst is behind us as far as a market correction _ this is likely the trough for sales… When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market.
-David Lereah, October 2006

Some eerily similar prognostications:

“The Wall Street crash doesn’t mean that there will be any general or serious business depression… For six years American business has been diverting a substantial part of its attention, its energies and its resources on the speculative game… Now that irrelevant, alien and hazardous adventure is over. Business has come home again, back to its job, providentially unscathed, sound in wind and limb, financially stronger than ever before.”
- Business Week, November 2, 1929

and…

“… a serious depression seems improbable; [we expect] recovery of business next spring, with further improvement in the fall.”
- HES, November 10, 1929

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Chuck Ponzi October 24th, 2006

Every once in a while, we come across something that is just too funny to pass up. This one is a great little Craigslist find.

$372000 O.C. -quality Decorator Home near Philadelphia P.A.
Reply to: hous-225303873@craigslist.org
Date: 2006-10-24, 9:11PM PDT

Buy my home for $24,000 under market. My agent isn’t doing the best job and we have already relocated to OC. This house is 3,721 square feet with EVERY amenity imaginable( Exotic hardwood, tile, granite, SS appliances, walkin closet built in, baseboards, maple cabinets throughout,french doors,$3,000 in hardware and faucets, cased windows throughout+ wood blinds, neutral paint/carpet, floor to ceiling stone fireplace, too much to mention.) This is a very open floor plan and feels “loft-like”. The master is on its own floor and off to the side. Even the basement has a sliding door, upgraded tile, lighting and maple cabinetry. 4bdr/2.5 ba, very private 25,000+ sq ft, fenced, lot with a view to kill. This is the best lot in the neighborhood ( fully landscaped front and back) and one of the top 5 homes. Taxes paid through 8/07. In a highly desireable upscale neighborhood about 45 miles from interior Philadelphia. The home is less than 2 years old. Call me if you are interested. 949-XXX-XXXX Trade considered for OC SFR.

OK, the house is better than decent… nearly 4K sq ft of high quality stuff… the pictures are quite nice, and I am sure the place is really amazing. Much more than you would ever find anywhere but at the highest-end communities that would run you more like 3.7M than 370K.

The funny? Reread the last line…

Trade considered for OC SFR

I’m tempted to email and let them know that I’m sure they can find a pretty decent 60’s era mobile home with fair lot rental to trade them, but I’m debating as to whether this was actually a joke. If it’s not, it’s quite sad to see people so out of touch with the local economics of home buying.

In times like this, I’m reminded of the profound words of the poet Axl Rose:

Welcome to the jungle
It gets worse here everyday
Ya learn ta live like an animal
In the jungle where we play
If you got a hunger for what you see
You’ll take it eventually
You can have anything you want
But you better not take it from me

They don’t call it a bubble for nothing.

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Chuck Ponzi October 24th, 2006

Try to guess what relevance these have to the Housing Bubble:

[Caption Reads] “On the one hand, eliminating the middleman would result in lower costs, increased sales, and greater consumer satisfaction; on the other hand, we’re the middleman”

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Chuck Ponzi October 24th, 2006

It appears that the world has lost it.

Yes, I know, it sounds melodramatic, but there is now so much information in the mainstream media about the Housing Bubble, one wonders if something so well reported can actually happen? In fact, many have now begun to believe that the Housing Bubble is already over. This is both tragic and laughable.

Let’s think about this for a moment… One of the problems with the term “Housing Bubble” is that it conveys different meanings to different people. Some believe that 10% change in prices is a bursting bubble. Others define nothing less than a 50% haircut. Thereby, each writer determines that there is or isn’t a bubble based on their specific definition.

Consulting the Oracles

Maybe it is better if we just define what a bubble is.

Wikipedia states:

An economic bubble (sometimes referred to as a “market bubble”, a “financial bubble”, or a “speculative mania”) refers to a market condition in which the prices of commodities or asset classes increase to absurd or unsustainable levels (that no longer reflect utility of usage and purchasing power)

Let’s use some of those definitions… Since you cannot use a word to describe itself, the concept of a “market bubble” or “financial bubble” are just plain out. Maybe “speculative mania” is more fitting. Let’s see if this imposes any specific numeric requirements…

speculative
Of or relating to an asset or a group of assets with uncertain returns. The greater the degree of uncertainty the more speculative the asset.
www.dictionary.com - Wallstreet Words Database

ma·ni·a
n. An excessively intense enthusiasm, interest, or desire; a craze
www.dictionary.com - American Heritage Dictionary

So, an economic bubble is an excessive intense enthusiasm, interest, or desire for purchasing assets with uncertain returns.

Well, you say, real estate always goes up, so it does not have uncertain returns. This is a falsehood, and can only be viewed in the light of the mania without sounding completely ludicrous. Housing does not always go up. Yes, they are making more of it, and Yes, it doesn’t matter if you’re running out of land. We have seen Japan’s speculative housing bubble unwind for 15 years in slow motion. They aren’t making any more, and they have a lot more people per mile than we do, hands down. Even rents are not certain returns, as there is some margin for error, and possibly declining rents. You would need to fully dicount cash flows for potential rents, which all economists are confident won’t come close to selling prices for real estate in Southern California.

Speculative Manias

How often do they really occur?

The truth is, humans are no strangers to financial manias and rampant speculation. Much can be said about the Wild West’s preoccupation with saloons and gambling, but the fact remains that the Dutch, English, Germans, French, Thai, Japanese have all had their own manias. And, it appears this most recent of real estate manias has gripped much of the developed world, and even parts of the undeveloped.

Many cases are well documented in several books I highly recommend:

Manias, Panics, and Crashes: A History of Financial Crises
Devil Take the Hindmost: A History in Financial Speculation

Just to name a few among many, many others. For a current version, see Robert Schiller’s famous “Irrational Exuberance”.

Near to the time when I began my blog, I wrote an article titled “Strong Hands, Weak Hands” that I think bears repeating in the context of what is currently happening.

1. Prior to 1930, “business cycles” were quite common
2. Expansion would lead to speculation, speculation leads to overcapacity, overcapacity leads to bankruptcies
3. Assets would pass from weak hands to strong ones, and the process would begin again
4. Typically, these cycles lasted about 5 years.
5. We have convinced ourselves that public policy could do away with these “cycles”
6. Bankruptcy is an efficient way for assets to pass from weak hands to strong hands.

In Wall Street jargon, a strong hand/weak hand relationship is derived primarily from the holding times of assets. Strong hands hold assets a relatively longer time than weak hands.
I continue on the discussion.

One of the most important observations that he makes is that at the bottom of the cycle, assets pass from weak hands to strong hands. To state it another way, through the ensuing upswing, either the entities that hold the assets become weak (not intending to hold the asset), or weak hands acquire the asset (pure speculation). For a definition of weak and strong hands, look here. Therefore, one signal of an asset bubble is that assets could be passing from strong hands to weak hands.

It is most definitely a time of weak hands. Flipping is all the rage.

Despite much of the media fervor over a financial mania, or Housing Bubble, there is no end to the number of tv shows describing flipping, people interested in flipping, and general commitment to house flipping.

We even have some here in Aliso Viejo flipping million dollar homes (Bought Aug 2006 for 1M, selling now for 1.1M). Competing with virtually identical homes selling for nearly a quarter of a million dollars less…in the same neighborhood. Can you tell which is which?

That is the reason that you can’t tell… they are virtually identical homes, with virtually identical views, both with custom granite counters, stainless steel applicance, and built at approximately the same time, both on single-loaded cul-de-sacs.

This is irrational exuberance

There is a saying that I believe is attributed to Warren Buffet: The market can remain irrational longer than you can remain solvent.

In light of this, I highly recommend staying out of the current real estate market if you doubt in any way your ability to pay off a beheamoth mortgage.

The problem with this approach is that no matter what smart quips are given by the most accomplished investors that most perfectly underscores the current mania, once someone has drunk the kool-aid du jour, there is no convincing them.

On a recent conversation with a former real estate agent (couldn’t sell a dang thing for over 6 months at the height of the bublbe so he quit), he mentioned that he just has to find a house, and that he has spent every weekend poring over foreclosure lists, attending auctions, and that it has disrupted his family life in his search to find a house. When I mentioned that housing prices (asking, and for sure equivalent selling prices) are off by nearly 10% since last year, he launched into a tirade that it was “just a blip down” and that he has to buy as fast as he can in the current environment or be priced out forever. His wife is also riding on him constantly since they have 2 small children. I pity the fool. Even if there weren’t a bubble, that is no way to live, constantly tortured about the price of a home and unable to buy one.

Which brings me to the other fools, the ones waiting for greater fools. One might have wondered why I haven’t mentioned Casey Serin of www.iamfacingforeclosure.com. It’s for good reason. He is a despicable human being who should be afforded no leeway, and dealt with according to the full extent of the law. Although, judging by his entries, he feels no remorse. Funny enough…he has recently posted a picture of a plaque in a bankruptcy attorney’s office that he recently visited. I’ll post the quote here because I know it well, and the speaker of the quote, J Reuben Clark.

Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours. It never has short crops or droughts; it never pays taxes, it buys no food, it wears no clothes and owns no home; it has no expense of living; it has no love nor sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.

This quote dates from April 1938. Here is a present-day discourse the Mormons give. To put it in context, J Reuben Clark admonished mormons to “avoid debt as we would the plague”.

Unfortunately, the world would have you believe otherwise. Debt in their minds is a path to riches… leverage to move worlds. This is not a sermon, but all should be clear that debt is not your friend, and anyone wanting to loan you money is only doing it to make money for themselves, it is not immoral, just amoral.

Which leads me to the final question:

Who is still buying homes?

OK, that’s not a real question. We all know that only greater fools are still buying. But, at least I can leave you with a funny comment today, right? If you think your day is bad, think about this guy’s.

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Chuck Ponzi October 9th, 2006

Timber Troubles

Recently, prices of lumber have dropped dramatically in the US. This is something that surprises many who have built the foundation of their belief about the housing prices of late to be based on a long-standing increase on input prices. Lumber prices have been going down substantially in the past few months, and rather dramatically at that. Anecdotally, I bought some 2X4s at Lowe’s a few weeks ago, and was pleasantly surprised that they were half the price they were nearly 2 years ago.

OK, so let’s review what the value of a home is based on:

1. Land value
2. Replacement cost of structures

I’ll start with replacement cost of structures… This one is the easiest because you can actually determine the value with hard facts from the local economy. The cost of labor plus the cost of materials equals the replacement cost of a structure. There are times in history where the cost of labor has dipped dramatically, and/or the cost of materials has dipped dramatically, and the replacement cost of the home has fallen correspondingly. Generally speaking, this is not too far from the increases in inflation. There is no formula that the replacement cost of the structures should be a percentage of the overall valuation. Anyone who says that is limited by time and changes in the mix of land/production costs.

The land value portion is the difficult part to measure, and the reason why Zillow.com is such a ground breaking collection of data. Using nearby data points, and the concept outlined above, they can come “close” to the value of the land the structure sits on. Since this is the most variable portion of the equation, it has been the most difficult to estimate when it changes. Land Value is based on the economics principle of centrality and transport, or basically, as the old adage goes, Location, Location, Location.

I’ll give you an example of Land value from my own experience that I am familiar with. A house was purchased in 1999 for 195K, and the appraisal showed a 165K replacement cost for the house, and a land value of 30K. That same home was sold in 2004 for $397K and the appraisal showed a replacement cost of 205K, and land value of 192K. While the structure’s replacement cost had increased 24%, the land value had increased 540%. Overall the total house cost increased just over 100%, but the land value had substantially outpaced the increased cost of construction (and the cost of construction in 2004 was heavily influenced by the cost of lumber).

Needless to say, it is fairly cheaper (in real terms) to build houses today than 20 years ago, primarily due to increased efficiency in everything from material production, use-specific tools, site preparation and economy of scale.

It appears that it is getting cheaper to build houses… so what should happen to prices?

Well, land prices are the real wild card… and they are the most volatile. Many builders are already talking about land writedowns. And, for a quick lesson in simplified GAAP Accounting, assets are held on books at the lesser of purchase/production value, or market value. Land writedowns mean only one thing… falling land prices.

Bad News Gets Worse

Inflation risks are still lingering despite slow job growth, due to the still low unemployment numbers. However, it is more likely that these official numbers won’t move in lockstep (job creation and unemployment) due to discretionary workers who have flocked to real estate opportunities where many are currently “employed”, yet earning little to nothing. Many more in the lending business are still earning reasonable incomes, but nothing like the past 3 years.

It makes sense that it is not necessarily fundamentals at play, but also inflation expectations that create inflation. Our recent Nobel Prize in Economics was awarded to Edmund Phelps, famous for his elaborations on the Phillips curve that describes the relationship between employment, wages, and inflation. This general rule means that even though slow job growth is around, it would appear that increased wages are creating short-term inflation. Whether this capitulates into full-blown deflation later on is an ongoing discussion. With a serious lag effect, it is likely that the FED will keep the rates it controls steady for the rest of the year.

How do we compare to the rest of the world?

A study recently released showed something we all already knew: Europe even has better job growth than the US. (although this is a bit slanted since it nearly covers 2 of the biggest bubbles in history). This is more likely due to an unusually strong US dollar considering our debts and trade deficits, and manifests itself as global wage arbitrage. (it’s cheaper to shift jobs overseas due to the policy of a strong dollar.

In sharp contrast to Alan Greenspan’s comments last week, we recieve some more verification that the slump is not yet over (at least in the Western US) from the Federal Reserve.

Some housing-industry contacts in the Fed’s 12th District, which covers the western United States, are “willing to bet that things will get worse before they get better,” Yellen said.

It apppears that Mr. Greenspan is a little removed from the data, so to say, or we have just lived through the world’s shortest downturn in history. More likely, he is nearly a perfect contrary indicator, with examples of his irrational exuberance and then flip-flop to productivity miracle speeches, “regional froth” speech, and “worst behind us” speeches. It just goes to show that you can lead a horse to water, but you can’t make him drink, especially if he’s already full of Koolaid and punch.

Trees Growing to the Sky?

So… Let’s see how we measure up!
1. Household formation a farce (established last year)
2. Input costs going lower (and probably even lower in the future)
3. Jobs are not measuring up

Ok, if demand isn’t driving it, and inputs aren’t driving it anymore, what will fuel higher housing prices, or for that matter, keep prices where they are now that nearly 40% of the market has exited due to speculation evaporation?

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Chuck Ponzi October 5th, 2006

Ben Bernanke Then

(Price Increases) largely reflect strong economic fundamentals … A moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.
- Ben Bernanke Federal Reserve Chairman (Oct 2005)

Ben Bernanke Now

There is currently a substantial correction going on in the housing market… How far will this correction go? It is very difficult to tell, is the honest answer.
- Ben Bernanke Federal Reserve Chairman (Oct 2006)

Most telling statement? Then

The Fed’s job is to protect the economy, not to protect individual asset prices.
- William Dudley Federal Reserve (Oct 2005)

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Chuck Ponzi October 5th, 2006

A Look back at 2 of our favorite Cheerleaders:

1. Gary Watts:
Then:

Fifteen percent is pretty much in the bag for Orange County in 2006, It’s impossible for prices to go down this year.
- Gary Watts Self Proclaimed Real Estate Economist (Feb 2006)

Interim:

It’s been an absolute miserable six months in terms of real estate…I think we probably are not going to see 15 (percent), but I think 11 or 12 (percent) is still realistic.
- Gary Watts Self Proclaimed Real Estate Economist (Jul 2006)

Now:

We will end the year with positive appreciation in homes while condo prices produce a very small gain.
- Gary Watts Self Proclaimed Real Estate Economist (Sep 2006)

Current:
OC At 2.6% (August 2006) - Dataquick

2. David Lereah
Then:

Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them
- book by David Lereah, Chief Economist for the National Association of Realtors (Feb 2005)

Then:

If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years, … It’s as if you had 500,000 dollar bills stuffed in your mattress.”
- David Lereah Chief Economist for the National Association of Realtors (Jul 2005)

Now:

We need to have a correction. Prices need to come down … Prices are finally coming down and that’s good news.
- David Lereah Chief Economist for the National Association of Realtors (Oct 2006)

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Chuck Ponzi October 2nd, 2006

Recently, I have happened upon the Gary Watts Real Estate Outlook for 2006/2007 as of October 2006. As the party presenting me with this information desires to remain anonymous, and I cannot source this from the internet, I will not be able to link to it externally. Maybe if I can clean portions of it up, and post it on a share, I will do so if people would like.

For some of the new readers, you might not be aware of my track record of posting responses to some of Gary’s predictions over the past year. You can visit some of my old postings sprinkled throughout my blog:

Gary Watts will Burn in Hell October 30th 2005
Gary Watts will Still Burn in Hell April 21st 2006
Gary Watts Pulls His Head Out Long Enough to Stick it Back In July 21st 2006 (A parody)
and, the ever popular
Gary Watts and the Incredible Logic Shrinking Machine August 14th 2006

Fact is, it has yet to be 1 year since he made his idiotic comment that OC would see increases between 15% and 18% in 2006, and that it was “In the Bag”. What’s suprising is still how many realtors believe that his predictions will still come true, even though we are seeing an increase of only 2.6% in Orange County, and that all of Southern California is at 2.7% YOY as reported by Dataquick Info Systems.

What’s even crazier, is that Watts “quotes” dataquick as having 7.7% increase (a full 185% higher than what Dataquick is actually publishing on their website) Makes you wonder if any of the agents paying for Mr. Watts advice are really getting their money’s worth, if they can just surf to the Dataquick site and see it’s very different than his “reporting”.

This absolutely goes beyond spin into the realm of falsification, fictionalization of numbers that don’t exist. Perhaps those at Dataquick would like to know that he is “selling” their numbers that are fictional.

Because it would take far too much time to write a blog on the entire document, I will attempt to piece apart the most important points he makes and see if they pass a smell test… The most difficult thing about evaluating a paper like his (besides the horrible, horrible formatting, seriously, doesn’t someone in his office know how to use Microsoft Word?, Please, turn this rubbish into something that is readable, and for god’s sake, use spellchecker! You’re selling this after all!) is that the datapoints are nowhere to be found. You must simply trust his information on the basis that he is Gary Watts…

Last Year’s Forecast

What Went Right!
1. Interest rate increases will be no more than ¼ to ½ percent on the upside, with it all being given back in the fall.
2. The Federal Reserve will stop raising interest rates by summer and may even begin to reduce the Fed rate by fall.
3. U.S. Economy will continue to grow and budget deficits will decline.
4. Employment will continue to increase as business activity remains strong.
5. Home price appreciation will continue upward with no “Bubble” in site.

Ok, #1, he is both factually right and correct. However, I am confident that he has no idea that this signals deflation, not price increases… And he dares call himself an “economist” he is no more an economist than I am a brain surgeon. I can call myself one all I want, but it doesn’t make it so.

#2 is questionable. First off, he did not make this prediction… this is a “backward-looking pat on the back” Will the Fed continue to hold, or even hold overnight lending rates this low? More importantly is, is this even relevant? I say no… credit spreads are too compressed to stay this way for long. There are only 2 ways out… lower Fed rates, or higher borrowing rates. Even then, this means nothing in a land where nearly 80% of of the buyers do not use a 30 yr. loan. ARM rates are the real trigger here, which have skitted substantially higher in the past 2 years, and with a large surge in resets coming in the next 18 months, the likelihood that all of these can pull off the higher payments is questionable at the most optimistic.

#3 is once again off-target. Is the economy growing? yes. Is it greater than inflation? Not likely. The inflation adjusted economy is shrinking. And, with all of the cash generated from the 6-year long housing bubble, the economy has been goosed long enough that it’s too bruised to even sit. We may have to fall on our backs to land. On an aside… am I worried about budget deficits… No. I’ll have to dedicate a much longer post to explain why budget deficits can be a good thing, (not always, but can be).

#4 is only important locally. Detriot is most certainly in a multi-year slump. With OC the center of the Sub-prime universe, we are likely to have a big hit now that origination volume has cratered. It’s just a delayed effect.

#5 is laughable. Delusion is a sad thing, Gary. Please, go get professional help. We’re all hoping you’ll get well soon.

The next section of the paper

What Went Wrong . . . (besides all the world problems)!
1. Inventory of both homes and condos exploded upward when seasonally, they should have begun to decline.
2. By April, resale condo prices began to decline (from previous month) but corrected by August and are still positive year to date.
3. By June, resale home prices began to decline (from previous month) but still positive year to date.

#1. — Yes, most definitely. If you cannot see what this means, noone can help you, as you are in the industry.

#2 — Correction. Price declines began late last year. We will likely see YOY declines by the end of the year. If not this year, early next.

#3 — Again, correction. Price declines began late last year according to Dataquick, who is your “source” for this information. Perhaps you need to hire a fact checker?

Here are his predictions for the remainder of the year:

How Will This Year End?
1. As mortgage rates continue to decline, buyers will get off the fence and purchase homes as soon as they believe housing prices have stabilize.
2. Sales of homes should start to rise by the fall, while inventory goes into its seasonal decline.
3. Appreciation should continue to rise in the fall, compared to last year when prices actually dropped.
4. With luck, we may end the year with double digit appreciation in homes with small gains in condos.

This is easy…No, Yes, No, No. Besides “with luck” from an “economist”. Good heavens! I’m glad junior college is doing you so well.

The worst kind of denial is present in his “data” table which shows the following numbers

Homes Condos
December 2005 $660,000 $459,000
January 2006 668,250 455,000
February 690,000 462,000
March 695,000 469,000
April 705,000 460,000
May 705,000 460,000
June 700,000 456,000
July 699,000 450,000
August 685,000 460,000

First off, these are a different set of numbers than what is published on the Dataquick site, so we must assume that the numbers are just different subsets of data. Worst of all… he states that this is a “YTD Appreciate Rate” for houses of 9.2% and 8.4% for condos…

So, if we break out our handy-dandy calculators and use our high-school algebra… okay, y equals x times constant divided by e=mc squared, carry the 2, and we get….

2.5% for houses “YTD” and 1.1% for condos. Something smells awful fishy. I think besides a spellcheckerand a fact checker, Watts needs to have someone check his math as well.

The last part I will cover is what I refer to as the “tinfoil hat” section of the paper. Remember, Stop Abductions!

The Media: Factual vs. Accurate

Their Problem

Newspapers are losing subscribers and television is losing viewers. Consultants have advised them that if they want to hold their viewers’ or readers’ attention, they have no alternative but to portray fearful impending events and instill anxiety in their audiences!

This raw emotion will help to keep people tuning in, thus possibly preserving precious advertising dollars. The media’s portrayal of a few past events will help make this point clear:

♦ What did they put us through with Y2K?
♦ How about the Killer Bees of South America, the West Nile Virus and Mad Cow disease?
♦ What happened with last year’s “serious” lack of vaccines for one of the “worst” anticipated flu seasons?
♦ Where did Scars and the Bird Flu . . . fly to?

Where do you start with this one? To be fair, I will not tear this apart, as I think his paranoia speaks for itself. I will only take some time to correct some of his references.
First, Y2K is yes, laughable in hindsight. The housing bubble will be anything but. Financial manias are rarely funny.

Killer Bees, West Nile, and Mad Cow have either killed people, or endangered lives. I find nothing funny about that.

And, as for the worst possible flu seasons, we might have been lucky this time. We could have another flu epidemic like 1918, “the worst epidemic the United States has ever known“. Vigilance is the key to survival, and mockers like Mr. Watts are beneficiaries of diligent workers who sacrifice to provide them with public health, and are repaid only with unkindness that they are “chicken littles” or boys who cried wolf! (I think we all know how that ended)

Lastly… and first off, it is “SARS”as in “Severe Acute Repiratory Syndrome”… these are once again real threats that only through people’s diligence, were we as a group of humanity able to *so far* (with fingers crossed) keep from spreading.

If you think that Mr. Watts sounds a bit paranoid and detatched from reality, you’re not the only one. I, for one, say he should really reevaluate his state of denial.

As for being an Ignorant Optimist, or a Deluded Sociopath… you decide.

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