Earthquake! 11:42 AM PDT
Chuck Ponzi July 29th, 2008
If you felt it, register it here on the USGS website.
Event number 14383980
Archive for July, 2008
Liquidity Trap!
Chuck Ponzi July 28th, 2008
For anyone interested in why interest rates on property are still going up, here’s a great chart courtesy of Paul Krugman’s Opinion column today:
I’m predicting whatever lift we saw this summer from decent rates (muting the crash underway), will disappear and the next leg down of prices will continue. This dead cat bounce is dead!
I will be officially revising my 2008 Socal Real Estate estimates based on recent action.
Got Foreclosures?
Chuck Ponzi July 22nd, 2008
It’s no secret that almost every real estate blogger is talking about the unbelievable level of foreclosures. The mainstream media has latched on as well:
Foreclosures across the state surged to a 20-year high during the last three months, as tens of thousands of additional Californians lost their homes and more than 100,000 neared the brink.
Notices of default, the first step in foreclosure proceedings, rose nearly 125 percent from a year ago during the second quarter and trustee deeds recorded, which reflect the actual homes taken back, soared more than 260 percent, according to research firm DataQuick Information Systems.
But, this doesn’t even come close to telling the full story. Fact is, it isn’t the highest foreclosures in the last 20 years, which would imply that it was higher 21 years ago. Not so. In fact, these are the highest foreclosure statistics EVER.
Noone demonstrates that better than BubbleTracking in the update to the LA Times graph of foreclosures. Thanks OCRenter!
What’s noteworthy is the backstory to the image. The original LA Times article was somehow attempting to soothe buyers that the real estate market was healthy, in part because foreclosures were at historic lows.
Even more onerous than the picture above is another factoid of the story.
The number of defaults and foreclosures were the highest in DataQuick’s statistics, which go back to 1992 and 1988, respectively. Among homeowners who fall into default, an estimated 22 percent now emerge from the foreclosure process by catching up on their payments, refinancing or selling. That’s down from 52 percent a year ago.
That’s an incredible fact. In other words, 78 Percent of those entering the foreclosure process end up going through foreclosure. Considering that there is a record number of notice of defaults, we are ensuring years worth of upcoming foreclosures to push down prices. Recent report have showed that banks are swamped simply with the volume current in process and unable to expand to the need. Early in the bubble blogging world, more than 90% of those who received a notice of default were able to cure their delinquency due to quckly rising prices. Now, with prices falling 30% or more per year, one misstep is a lucky break for a would-be homeowner to simply walk away.
Remember, it’s a wonderful life
Chuck Ponzi July 15th, 2008
Even with all of the headlines out there, and with pretty much everything looking as black as it has been for a long time… we saw this coming, and we can see what’s on the other side.
It’s always blackest before the light. I don’t know exactly when the panic will end, but it always does, just like the euphoric mania that preceded it.
Great Minds Think Alike
Chuck Ponzi July 10th, 2008
Almost as fast as I suggested 3 days ago that nationalization of Fannie and Freddie was likely, it seems that everyone has jumped on the bandwagon despite assurances.
Does it matter? Lending is changed forever.
Fannie and Freddie are going to have a threesome with Uncle Sam. Dirty, ugly, and seemingly unavoidable after 2005. It just had to happen, the whole world went mad with real estate. This place seems so F@$&#D up. I am now worried more about serious social unrest coming in parts of the US. I’m pretty ticked off and I’ve got a lot, think about those who have lost jobs and have lots of time on their hands. I’m just sayin’, I think lawmakers need to be careful when they start committing taxpayers’ money. It is ours, after all.
An Inexact And Unscientific Price Study
Brad_Davidson July 8th, 2008
June Sales and Future Median Prices
You’re going to hear it here first. Data Quick will be coming out with their sales figures for June in the next week but I’m going to try and beat them to the punch each month. I don’t know how my numbers are going to measure up in comparison with Data Quick’s far more detailed studies but I’m going to give it a shot. What I think will be very interesting is using pending sales to try and predict future median prices.
Here goes!! According to the totals on the MLS website, June home sales in Orange County totaled 2,176 residential properties. These are mainly resale homes as the majority of new homes are not listed in the MLS. The median sales price of these homes was approximately $475,000.
According to the MLS, May sales totaled 2,135 properties with a median price of $480,000. According to Data Quick and as published in the OC Register, there were 2,266 sales and the median price was $485,000. Given the disparity in the total sales numbers, I’m content with the $5,000 price difference and if the June number is within $5,000 of $475,000 it’s all good.
I’ve always thought that the data provided on homes sales was of marginal value. I’ve long realized that the sales figures as published by the media are a lagging indicator. The 2,176 sales in June are deals that were negotiated in April and May, some I’m sure in March. In essence the median sales figures are two months old.
As of July 7, 2008 residential listings, categorized as pending sales or in back up offers total 4,183 properties. I’ve been tracking this number for the past few months and find it interesting that there are typically twice as many pending sales and back up offers as there are closed sales for the prior month.
A far more interesting number I’ve been tracking is the median list price of the homes categorized as pending or in back up offers.
I wanted to come up with a median sales figure that would be more current and perhaps be a better market gauge than numbers that were essentially two months old. I first tracked the list price of homes in pending sales on April 31, 2008. This is the unscientific part because I’m tracking the price the properties are listed at, not the sales price. While unscientific, my first set of numbers hold up remarkably well. The median listed price of pending sales and back up offers was $475,000 as of April 30, 2008. The same price as I show for closed sales for the month of June 2008!
While I have read that the median sales price number has ticked up a bit, it’s not what I see in pending sales. For the 4,183 pending sales as of July 7, 2008, the median list price is $439,000. If that number were to hold up when the actual sales figures for August are released in September, it would be a continuing slaughter for the OC real estate market. I think the median number will be higher because there are a lot of short sales and REO’s in the pending sales that actually sell for over the list price.
Then again, when I first ran these numbers in April and came up with the $475,000 median, data Quick had just released the March numbers showing a median of $506,000. $475,000 seemed pretty low then too.
I hear Orange County is looking for a new real estate oracle now that Gary Watts has publicly apologized for being wrong. I’ll track these number every month and report here and see how I do.
Can You Say Systemic Risk?
Chuck Ponzi July 7th, 2008
Anyone who hasn’t seen the charts for Freddie Mac (FRE) should really take a look at them. This is definitely a crash in the making. As of this writing, FRE is down 22% today on news that FRE and FNM CDSs have widened 10BPS. That is quite an increase.
The funny thing is, I remember less than a year ago, discussions about how Freddie Mac and Fannie Mae were well capitalized, preeminently prepared for any disaster, and frankly, as unsinkable as the Titanic. Little good that has done. We may be witnessing a historic crash of epic proportions, greater by far than the crash we have seen to date. To put it in perspective, FRE and FNM have pretty much been the only thing that have kept the real estate market together in the US over the past year.
Consider for a moment this statement regarding the mortgage insurance statistics from the GSEs.
There are more hard numbers available to support MI’s recent surge. MICA, the trade association representing the private mortgage insurance industry, began reporting rising volume monthly after February 2007. For example, mortgage insurers wrote 190 percent more business this year, through April, than in the comparable period of 2006, when subprime/Alt-A were in their heyday.
To put that sort of gain into proper context, consider that even GSE production is only up 160 percent — and they are doing an estimated 80 percent of all new mortgage lending. By inference, MI providers have made huge gains in market share.
Let that sink in for a moment: GSEs are doing an estimated EIGHTY PERCENT of all mortgage lending, up 160 percent. IN AN ACTIVELY FALLING MARKET. Any implied “worst case scenario” imagined last year of the US government bailing out the grossly irresponsible GSE lending facilities is quickly not only becoming a reality, but would represent a necessity unless the entire lending business in the US becomes STATE OWNED.
State owned lending?
Is that such a bad idea? I mean, we pretty much have so many controls that we expend an enormous amount of government money in oversight, what’s so wrong with giving the federal government the right to nationalize the largest lenders as they fail?
I’ll write the next part only partially tongue in cheek.
Lending is perhaps one of the great debatable rights of Americans in the 21st century. We have become so conditioned by its availability to believe that it is owed to us. We need it, we want it, we should have it. If we want to create our own financial ruin, and by extension the country’s entire financial ruin, we should be able to do so. It is our right as Americans. By this rationale, we should allow all Americans the right to open access to low-cost lending much like clean air, clean water, food and drugs free of harmful contaminants, and an interstate transportation system.
For example, if free enterprise were required to finance our transportation systems, we would be required to pay for every trip we consume on local and long-distance roads. This is where economics has a hard time playing the role of moral coach, because, frankly, Economics is concerned with the free market and the most efficient method of delivering the utility people desire. Governments have typically only concerned themselves with PUBLIC NEEDS. Therefore, the big question is, is real estate lending a PUBLIC NEED?
I am certain that many could make the argument for and against, but perhaps the question needs to be viewed in a longer timeframe. Is lending STABILITY more important as an ongoing public need to ensure the ability to liquidate lending and homes in an orderly manner? What controls and insurances should the government provide? How should the government handle lending standards and manipulation? Could there be a cross-control against lying using collaboration with the IRS? What kinds of manipulations would this open up the home lending business to? Would the government “crowd out” any potential competitors and therefore stifle competition? Has the current role of home lending harmed the public more than it has helped?
In any case, the general public perception is that home lenders have harmed America, and therefore must be harshly dealt with. I don’t agree with that. I personally believe that the problems is on its way to being fixed by the free market, and frankly I’m not happy with the directors of the GSEs getting away with fat pensions, stock options, and the like while the public swallows the bad debt. On the other hand, it would end, once and for all, the deceptive practices and level the playing field by nationalizing lending. Frankly put, the government could recapitalize easier than a private entity or a stock-owned entity.
I have to say that I oscillate between incensed outrage and cold acceptance of the reality. There is no simple answer to that. Lending has changed forever (hopefully).
What to do, Part Two
Chuck Ponzi July 2nd, 2008
If you were reading the previous post, you know that I was helping out a reader with some advice about his home in Arizona and what to do. Tonight I’ll take on the opportunity of what to do with the funds he has available. My next article will tackle when to buy.
Keep in mind that this advice is free, and you get what you pay for. If I were in the same situation, my actions might be different from what I am currently doing simply because each person and situation (as well as timing) is different.
When we left our friend Boomer yesterday, I had advised him to sell his home in Arizona even though that wasn’t the question. There was no question that the house was overvalued based on normal valuation methods. In addition, rates have remained stubbornly high despite a strong easing campaign by the Federal Reserve Bank. To that point, just over 2 years ago, I wrote about interest rates and what that portended:
1. Why are rates going down over time?
2. Is there a savings glut?
3. Why are risk premiums (spread) so small?
4. Are we about the enter a recession like the other small spreads indicated?To the last point, if we enter a recession, is there any chance that housing can be saved through inflation? Does this mean 70’s style stagflation, or even worse, Japanese style deflation with ZIRP?
If anyone can provide a coherent way that housing can survive in the next 2 years, please tell us now!
At this point, I think we are out of options from a monetary perspective.
1. We already have inflation. Dropping rates will make it much, much worse.
2. Economic growth is slowing despite the mad dash of construction.
3. The credit market is precariously spread and rates could make a mad dash upward if international investors get spooked and run for the exits. The only way to keep the Dollar from meltdown at this point will be to raise rates even more.
4. Housing speculators will be crushed by negative amortization and high interest rates in this event(which arguably should have already happened by now).
5. The sitting inventory will cause personal financial distress and combined with the mad dash of rates could generate a general credit system event.Either way, we will be seeing a much more favorable buying environment for housing in 3 or more years due to the general stress and turning of investor sentiment.
The backdrop of investor sentiment is the worst that I can remember, insomuch that you have everyone talking about a financial armageddon:
and, don’t forget the fear du jour:
Oil climbs peak, economies plumb depressions and the future will not imitate the past
While I agree that the next 10 years will not look like the last, I do think that there are plenty of opportunities that can be entered into in the next 6 months.
First, I have a couple of predictions:
1. The DOW should hold somewhere between 10,000 and 10,500. If it breaks that support level, even I’ll admit I haven’t a clue where we’re headed there.
2. I do think we are headed for a U-shaped recession, but that we have entered that recession 6 months ago and that we should emerge sometime in the next 18 months.
3. Oil is a bubble, but like the housing bubble, it is unpredictable. But, whatever you do, do not listen to the experts. They are called the experts because it’s up. If it were down, they’d be called idiots like bubble bloggers were circa 2005.
So, what should Boomer do with his new tax-free windfall?
I am also not quite 50% cash now with some recent purchases, but I do have a major cash position. I won’t recommend specific stocks, but there are some areas that I will generally avoid:
1. Oil-centric energy stocks. This is really dangerous because we learned from previous energy shocks, the seeds of conservation are being planted now and will grow into the future. Oil could very easily crash.
2. Look for investments that provide a cheaper way of performing necessities, or some game-changing technology that reinvents its space in a necessity. (wouldn’t we all like to find them) while avoiding consumer-centric stocks (many of which have already been trounced)
3. Small caps that rely heavily on borrowing for operating expenses. Many of these are already having difficulty obtaining financing, or even maintaining revolving lines.
Personally, I have invested most heavily in individual biotechnology stocks that have previously crashed by have a strong pipeline. Pharmas and biotech are littered with the remains and half-eaten carcasses from failed drugs, but entering after a crash for a company with strong fundamentals can provide some cover for potential falls. Personally, I stay away from pharmas with “lifestyle” drugs such as ED treatments in favor of those with candidates for life extending treatments for cancer, heart disease, and alzheimer’s. With an aging boomer population, I believe that we can still see strong growth in these areas in an attempt to “fix” the medicare problem. The companies I look for are those that don’t just extend life, but prevent deterioration of mental and physical faculties as these will be.
Any way you look at it, even investing in CDs is going to provide a better return for the next 5 years than real estate.
Boomer, sell and find a good place to park that money. Find a few funds that you believe in, or do the research yourself. All of the easy money was made and now it’s down to the nitty gritty of investing… yield, growth, and preservation. Good luck
