Who’s the Fanatic Now?
Chuck Ponzi June 6th, 2007
A fanatic is one who can’t change his mind and won’t change the subject.
Winston Churchill
Let’s take a look back on some of our favorite local real estate guru’s predictions.
Gary Watts told us earlier this year that we’d have a “Little Bit of Heaven in ‘07“.
Maybe if he meant a market that is so slow it might be considered dead, he might have been right. But, I might have to take issue with his assertion that it was automatically going to Heaven. I think we might revisit some of the words of Kurt Cobain on the matter:
Where do bad folks go when they die
They don’t go to heaven where the angels fly
Go to a lake of fire and fry
see them again ’till the Fourth of July
His predictions were as follows:
1.     The economy will continue to show positive growth while the Fed continues to stay in the pause mode.
2.     The interest rates will continue to remain around 5.78% to 6.25%, with some downward pressure.
3.     Number of home sales may actually rise when compared to last year’s decline of 13.4%!
4.     The media will have to compare last year’s numbers to this year and things will begin to look good!
5.     However, resale appreciation may not rise when compared to the big increase in 2006’s 1st quarter!
First off, I have to commend him on his restraint on using !!!! Exclamation Points !!!!  Most agents have a problem with CAPS LOCK and !!!! Exclamation Points !!!! Kudos to him.
His first assertion that the economy will continue to show positive growth was pretty much a given. It doesn’t take much outside of a plot and graph of the last few quarters to see a trend. However, the .7 reading nominal was quite low (and negative in real terms). Not a great showing, but not too bad either.
Unfortunately, interest rates didn’t have a single showing for Jan, Feb, or March in his range. The actual numbers were 6.33%, 6.37%, and 6.27% (got close in March). This is typical of a strong economy. The stronger the economy, the less likely to have lower rates. We won’t likely see lower rates until the economy does worse, and even that’s a crapshoot with inflation at the high end of the FED’s comfort zone.
Home sales also repeated their smackdown. Southern California sales were down 24% in the first quarter according to Dataquick. The actual stats were:
January 2007:Â Down 17%
February 2007:Â Down 20%
March 2007:Â Down 32%
Anyone see a trend here? It’s getting worse, not better. Unfortunately, but Dataquick changed their methodology of counting sales, and has not revisited their publicly available data, so it’s impossible to see what the 2 year drop from the peak was, but it’s ugly no matter how you look at it.
The media has looked at the numbers (according to #4), and it’s not liking what it’s seeing. There is no way to spin this. We are firmly entrenched in the beginnings of a housing bust.
His last point that resale appreciation may not rise when compared to previous year was nevertheless correct. This is because affordability has nowhere to go but up. Our beloved Orange County shows a YOY price increase of .6%. (Hey, only 9 more years of this to recover your full-service realtors’ fees! Gotta look on the bright side, right?). However, the median belies what is really happening in most neighborhoods around SoCal. Most areas, prices have already dropped 10-15%, while better and/or larger housing stock selling than previously at similar price points). We have not yet felt the fallout of the Subprime meltdown. We can look forward to what that means.
In fact, recent news from Ben Bernanke tells us that the economy is more prone to overheating, and therefore, rate cuts are all but out of the question for the rest of this year.  This is more in line with my statement that the next move would likely be a move up, not down. In fact, these are now front and center on the markets’ mind.
The Fed chief hardly downplayed the severity of the housing recession. Indeed, he admitted that the slump is going to last longer than the Fed previously thought in a speech made via satellite to the International Monetary Conference. But Bernanke thinks weakness in the sector shouldn’t keep the rest of the economy down. The Fed chairman said the central bank remains focused on inflation, as “risks remain to the upside.” The remarks appeared to catch financial markets off guard, sparking an 81-point drop in the Dow Jones industrial average June 5.
Coming soon, as soon as Q2 data is available, we’ll review his predictions for Q2.
Here’s what he predicted:
1.     The Federal Reserve should begin reducing the Fed rate, and mortgage rates should decline further.
2.     Inventory should begin to rise, but at a moderate rate.
3.     The media will have to report dramatically increasing home sales when compared to last year.
4.     Home prices should continue to rise, and condo prices should begin to appreciate once again.
I still firmly believe that Gary will come over to the housing bubble camp sometime soon. While he completely lost his mind in 2005-2006, so did everyone else in his industry. But, unfortunately, by then, his believability will be gone.
So, he’s going to be 0 for 4 on Q2 predictions as well? Why does anyone listen to this guy anymore?
Also, “Lake of Fire” was written by the Meat Puppets. Nirvana covered it (actually, performed it with the Meat Puppets) in the now-famous MTV Unplugged version.
Dang,
That’s right. It WAS the Meat Puppets.
I totally blanked that since Kurt voice is the best known.
Chuck
Looks like Gary W. gas updated his forecast. No more “heaven”, the quote is now “still in neutral”. He’s sticking by his 7% though….
Damn.
He changed it the same day I post this to it.
Chuck
I bet he changed his original predictions. I’ll check it when I get a moment.
Do you have any comments on Fannie Mae. Seems like they are taking a big swallow of poison and purchasing bad boands/loans.
What is the public liability on this bizzare delaying action on the housing burst. Seems like another bailout effort.
I think Fannie is private but such a large interest that as they go under the gov will get dragged into the mess.
Congresional Democrats are apparently gushing over their “help”.
I feel my paycheck being sucked up as we speak.
Fannie and Freddie might be get off the hook - all the institutional investors who bought their securitized mortgages will be the bagholders who get burnt (pension fund managers, etc.)
They were promised high returns that were basically guaranteed during the boom years. Many people incorrectly assume that Fannie and Freddie’s products are government guaranteed. The reality is that they can lose value just like any other corporate bond.
Simi, you win the award for best user name of the day.
Chuck, what makes you think Gary has any credibility left to burn? To the extent the MSM continues to provide him a forum, it’s only because they either don’t check his accuracy at all, or actively don’t care because they’re acting as advocates for an outcome rather than disinterested reporters of fact. (There are a lot more advertising dollars to be had in a booming market than a tanking one, and they know where their bread is buttered…)
Let us face one fact, people that report stories, conduct researches, or offer their opinions on TV/Newspapers are home-owners. They do not see the personal benefit of a tanking market and therefore will manipulate the extend of the bubble…
I got stopped on my street while accompanying my daughter on a tricycle ride by a lady trying to give me her card since I said I was renting. I refused her card since I still am keeping my current agent. It was kind of funny…. she asked me why I’m not buying and I told her anyone who buys now is nuts. She told me that the market is going down, like it was big news.
She wished me well and drove off.
Did she really think I would actually do business with someone who interrupts my precious few minutes of daily family time?
These agents will do whaver it takes to make some money…. :o)
Well the stock market is momentarily unhinged. So perhaps we will see some shocks ripple into the financial sectors combined with interest rate increases.
That all might turn into shock in the real estate market.
I’d venture I’m reading way to much in this but seems like a pretty big sell off going on.
Big enough drops and losses will ripple into that NYC market and pound the east coast.
I’m kind of waiting/watching for the shock that puts the whole system into a tail spin. Not profiting on this just observing and trying to prepare.
The sell-off is the 10 Year yield soaring. Pretty rough shakeup in the bond market today.
We could yet see the “credit event” that I have been predicting could happen.
Think the house sales are slow then? It’ll be like a frieght train running into a mountainside.
Chuck Ponzi
It would be an interesting thing to see you, Tanta and CR figure out what percentage of the market is underwater.
Yeah, looks like this is going to be a doozy. The pension funds will be suing a lot of lenders in short order.
Its weird how all this was so preventable. I remember as Easy Al was slashing the rates had a discussion with a coworker. He was a very sucess investor and he remarked that “the rate changes didn’t seem to be having much of an effect.”
I remember cautioning that there was a big time delay before we felt the effect. When we realized it the momentum was going to be horrific.
I also had hopes that a substantial portion of the population would use that time to refinance into better loans and stabalize their cash flow situations.
Didn’t happen. The assets went through the roof and they all spent like crazy. Over time I have lost my sympathy for them.
Question by the simple minded…
Does the FED print money or is that the exclusive domain of the treasury?
I thought only the treasury can actually print money or issue federal government bonds?
Did I completely lose touch with the situation?
I realize the FED are like a big bank clearing house for loans. A banks bank. However, I do see the people saying the FED will print money stated a lot or lower rates. My thought was the treasury recently slowed the printing presses. How does that impact the FED and overall money supply?
I wonder what their reserves are like?
Well,
The US Mint actually prints money or coin.
But, physical money is just a small portion of money.
Most money is created by Federal Reserve member banks. The Federal Reserve is authorized by Congress to safeguard the currency… hence the periodic testimonies in front of Congress by Ben Bernanke.
Here’s a good description of the creation of money from debt:
http://www.notjustnotes.ws/howbanksrobyou.htm
Fair warning; the videos at the end have interesting suggestions that I don’t necessarily agree with.
Chuck Ponzi
Great now I am stuck with this knowledge. I already know too much.
There are some limits on the power of the banks and the FED.
1) Treasury can physically print money and side step that aspect of the system
2) Courts can decide how to enforce debt contracts
3) Government can revoke bank charters or disolve the Fed.
— dangerous moves
4) At certain points money has no meaning. If you are starving.. exc so physical wealth is more certain.
5) Treasury can change accounting standards and force Fed to restrict money supply
So, the government is working within the system to spur certain types of investment and wealth distribution. Not entirely a bad thing.
Can we find out who owns the FED?
Also funny to see how easily the government could pay off or cancel its debt system and move to a non-inflationary system very quickly. Huge impacts to that but still possible.
I’d also say I’m pretty happy with the system and the amount of investment it has created. Overall we try to stimulate commerce and activity so that things like cars/houses get built, doctors get trained, research gets done.
When they system gets really non-productive then you have some kind of reboot. AKA depression and reorganization.
We have built a historically high standard of life. Just hopefull we can sustain it and spread it to the rest of the planet.
LAEF2:
I totally agree with you. Instead of being able to take advantage of the low interest rates to secure better loans, people refinanced to pull out cash to spend on luxury stuff that I can’t afford. They admire themselves for being able to have soooo many nice things. I never have and never will feel sorry for these people when they can’t pay the new payments. They are still too stupid to realize that their houses will not increase in values forever. In the Riverside Press Business news today, an article states that people in the IE are still spending and the economy is still booming. They have not stop the spending spree. They WILL NOT stop until they loose the house. Well, the folks that sell BMWs and Lexus had a good ride… and still are making lots of sales… Let us see when this is all gonna stop.
A note about the “bubble”, the creation of money, and the quantity of it versus it’s value: Almost every single PHD in the world will tell ou that the quantity of money dictates it’s value (the smaller the money supply, the higher the value of the money). By “creating” more money, the member banks would therefore be increasing its supply and decreasing the value of money overall (called inflation).
THEY ARE WRONG!
The truth is that these member banks issue what is already there: the value of the home that the money represents. They are not creating money because money is only a representation of value. The value of the home will exist with or without the money.
The house could be traded for an equivalent value in tacos (another item of value, instead of a representation of value)if money did not exist.
Inflation happens when people default on paying thier loans, not when more money is “created”! The loss of the value in what the money represents causes the inflation.
That is a lot of tacos
You seem to have smoked a bit too much weed for your own good.
Your spurious argument completely misses the critical importance of financing and its ability to push off payment until tomorrow.
Your argument might hold water in a single-transaction system where everything is paid for out of cash, and you could instantly consume the total of purchases and reap the benefits of equal parts of utility for each and every unit without diminishing returns. And, likewise, could break down the sub-units of a house into fractional utility units (since one taco reflects one bijillionth of a house, I could get exactly one bijillionth of the utility of a house by buying one taco).
None of those conditions exist, so your academic argument doesn’t go far in the real world.
House prices are what can be financed out of regular income given the available financing. Nothing more. Trying to assign the value based on tacos (or anything else for that matter) to try to remove the inflationary bias of a fiat monetary system is a rat hole that noone cares to chase you down into.
We agree: more money is inflationary. Houses are expensive when priced in anything. It is because of irrational exuberance.
The only way that the irrational exuberance will die away is when it is killed off by fear.
I, for one, welcome that day.
Gary Watts is trying to sell some condo conversions he owns in West Costa Mesa with huge prices and he will not cooperate with real estate agents. Most of his biggest fans were realtors. What a guy!
[...] Where’s the Inversion? (October 2006) Watts, Old Scoundrel, At it Again (February 2007) Who’s The Fanatic Now? (June [...]