Chuck Ponzi February 8th, 2010

Those of you who know Ladera Ranch, know that at the peak of the housing market, it was a cesspool of speculating flippers gone wild.  Some of the most egregious lending happened here with Negative Amortizing loans that are quickly imploding faster than any subprime loan could.  And the size of these loans is even bigger than subprime by multiples.

Ladera was carved out of some leftover parts of Mission Viejo abutted to San Juan Capistrano, and for the most part is searing hot in the summer with no views to speak of, has insane choked off traffic to get to the 5, or you endure ever-increasing tolls from “The Toll Road Company” whose stated objective is to siphon off as much of the local wealth as possible while crying foul and getting “Community Reinvestment” money from the Federal Government.  Good to see that even if the rich won’t support the toll roads, everyone else gets to with their taxes (without the benefit of actually using the roads.

Our subject today is 40 Lewiston Court, Ladera Ranch, now for sale for $1.1M.  At the peak it sold for 2.2M, and is having a hard time finding a bottom.

Here’s the beauty.  And, by the way, this is what 3% of 1.1M will get you in OC today:

I guess Realtors here haven’t yet gotten the memo: the internet sells properties.

But, between you and me, the most interesting part is not the cesspool that your neighborhood is, but rather the cesspool that is in the back yard, lovely.  Mosquito abatement anyone?

Please, for the love of god, will some knifecatcher step up to the plate?

Edit: South OC tracker already featured this one.  She gets around.

• Bubble , Ladera Ranch
• Comments(13)

Chuck Ponzi October 22nd, 2009

“We didn’t truly know the dangers of the market, because it was a dark market,” says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission [CFTC] — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. “They were totally opposed to it,” Born says. “That puzzled me. What was it that was in this market that had to be hidden?”

• Bubble , Debt , Deflation , Delusion , Speculation , Unintended Consequences
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Chuck Ponzi March 25th, 2009

CNN Money provides an insight into just how much our tax dollars are doing to help people avoid foreclosure

If HOPE for Homeowners, the foreclosure-prevention plan passed last summer, was a soft drink, it would be New Coke. If it was an automobile, it would be an Edsel. A movie? Howard the Duck.

In the five months since it has been in effect, HOPE has helped exactly one homeowner to avoid foreclosure. This despite Congress having made $300 billion available to back these loans and estimating that the program would benefit as many as 400,000 families.

This is no surprise to me or most readers.  We cannot fix the fundamental problem of too much household debt when the reason for foreclosure is simply an upside-down house.

I predict that even if we took the ludicrous action of simply depositing money into the bank accounts of those in foreclosure, they would rather spend that money on consumer products or pay off non-house debt because the asset the loan is secured against is worth less to than what they owe on it for the forseeable future; in SoCal possibly decades absent significant price, income, and asset inflation; something that seems unlikely for a while in the midst of a generational deleveraging and rising taxes at the present time.

• Bubble , Foreclosures
• Comments(6)

Chuck Ponzi January 26th, 2009

Long-time readers will know that I made my deflation argument as a distinct possibility some time ago, and that the crashing housing market was both a symptom and cause of deflation.  Within the last year, I have become a true believer of short-term deflation.  Follow me if you will and I’ll lay out my theory simply about current deflationary movements.

I’ll start at the beginning. Adam Smith wrote a book called “Wealth of Nations”. At the heart of this book was the concept that individuals attempt to maximize their own personal profit. A lengthy discussion of capital, labor, and revenue conceded that individuals seek to minimize the cost of production and maximize their own personal intakes. This is the reason that we stand today at the brink of quick and painful deflation. (Unless our leaders force us to long, deep, and painful deflation.) However, it is important to remember that Smith was not concerned with money or the use of money. His analysis was only ex post facto considered the defining text for a field of study, economics. Up until that point, trade was only infrequently international and the costs of trade were quite excessive and time-consuming. Modern economists have become so entrenched in the day-to-day predictions of economic output that they often forget to look at the big picture of economics and what it means. Even the most popular “economist” bloggers of today largely ignore basic economic theory and tend to focus more on policy and politics (Paul Krugman comes to mind as a perfect example of this dichotomy as an “economist” but opining almost singularly on political rants and ignoring the motivations of individuals and how the present environment changes them). The only blogger or writer I have found that engages in a realistic discussion of economics is Mish (Mike Shedlock) of Global Economic Analysis. His insights have largely influenced my ideas of the last few years and its application in investing. I applaud his most recent discussion of how Peter Schiff got his hyperinflation call all wrong.

Adam Smith wrote:

What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.

This predisposition leads us down the road of what competitive advantage each country has at its disposal.  In the natural progression of industries, whatever component of production is in greatest shortage will grow in cost.  This is considered a shortage.  Everything has a point at which it becomes the bottleneck of production and therefore to employ more of it in production, the price of it will rise to bring additional resources that were engaged in lower-value activities.  In the most recent past, labor within established economies was the choking point and wages increased strongly for many years.  It seemed that these gains were not only here to stay, but would increase in infinity.  Under normal circumstances, these pressures are offset by automation.  By investing capital into additional production machinery, the cost of production can held in check.  In Adam Smith’s world, the “invisible hand” of profit maximization motivation means that this transition is seamless.  In periods of major labor dislocations, investment is “lumpy” meaning that spurts and stops of investment cause labor to be temporarily in shortage or in tight supply.

For the decade of the 90’s, despite a recession, labor demand grew quite steadily.  At the same time, an entirely new labor force for America was being trained on the other side of the world.  Several types of labor were created in India and China; production and information workers.  With India’s long history of British influence and control, they were largely positioned as an alternative to information workers in the United States.  Until the infrastructure was created in the 1990’s to provide real-time support and analysis, the use of place-shifted information workers was largely unheard of.  After the late 90’s, it was a matter of general business in the US.  While the Tech bubble drove up IT costs to insane levels, most companies were planning to offshore as much of the information workers world as they could.  India had done an incredible job of attacking this part of Corporate America, both here (through H1B lobbying) and abroad(through direct outsourcing).  Meanwhile, China was feeding off of the wealth of the West by siphoning off manufacturing jobs.  First, it was manual menial labor, and later, skilled labor of all kinds from jewelry manufacturing to circuit boards.  American’s often now lament that nearly nothing is produced in America.  We, it seems, have priced ourselves out of the labor market.

Which leads us to the outcome.   America has lost the orignal source of its wealth: innovation and manufacturing.  Luckily for us, we own some quite valuable assets; Intellectual Property and real estate. (okay, we’ve got more, but that’s not really what this is about)

While the cost of labor was rapidly declining, and in an environment of tight labor supply (much of the 90’s and this decade), most Americans found high paying jobs such as consulting, sales, and management.  While these are often high paying jobs, they can be quite transitory. Meanwhile, the cost of everything was getting relatively cheaper compared to incomes; food, housing, computers, cars, etc.  Indeed, the loose monetary policies were in a sense combatting this dramatically increased productivity and lower cost labor.  We were digesting it quite well; however right around the corner was indigestion.  This indigestion was where monetary policy was letting us go.  We overheated and the engine of growth stalled.  There was nothing more to milk out when our housing bubble hit.  When  prices of the #1 asset owned by most Americans began to defy logic, reason, and prudence, most took it in stride.  To make up for diminishing household income in real terms, most just extracted the equity of their homes.  Because lending on real assets had proven so effective in the past, investors, cheered on by a FED determined to keep money flowing freely accepted lower and lower restriction on limit, chasing yield.  This chase of yield ended in multiples of leverage beyond human comprehension.  Meanwhile, average Americans could get a piece of their own leverage with low-down or even zero down (and frighteningly negative down 120% loans in some cases).  When prices were normal, this worked as there was little stress on incomes and savings could account for some losses.  Once prices began rising, consumers found little need for savings when their homes were provding them for us.

Which is what led us to the housing bubble popping when noone could afford their own home and noone could continue to pay their mortgage (more or less nearly everyone who “owned a home fit into one of these, if not both in Southern California in 2006-2007).

While we are deleveraging, deflation is setting in.  There is no way to combat this without creating massive amounts of money.  Where that money ends up is no matter when you’re in the storm of deflation.  Right now, 0 interest rates are all that are keeping us from a deflationary depression.  We’ll see what wins out.  Adam Smith’s invisible hand dragged jobs out of America.  Perhaps one of our own “economists” can provide us a way to bring them back.

Which brings me back to a statement I made back in November of 2006:

Historically, strongly inverted yield curves have historically preceded economic depressions… and normal inversions have preceded recessions.

I also agree that we have a “normal inversion” signalling a potential economic recession.

One of the questions that is somewhat debateable is still what makes this time different:
1. There is a lot of liquidity still in the system. China, for instance, has waaaaay too much currency reserves, and heavily weighted towards USD… depressing our rates in treasuries, likely setting off our really low mortgage rates as well. Mortgage rates could snap back due to a variety of situations, not the least of which would be higher defaults. Of course, the cows have already left the barn, the question only remains how fast will lenders close the gates?
2. Lending standards in the mortgage area are likely the lowest they have been in history. Lenders are offering neg-am option-arm, no-doc, teaser rate loans to people one day out of bankruptcy. Best Funding here in L.A. even advertises to this kind of people. I don’t know how you can get any lower than that.
3. Bank reserves are frighteningly low. Why the FED has not yet stepped in to raise reserve rq’s is beyond me. It’s like a drunk asleep at the wheel. I just don’t know when it crashes, but it’s going to. I wonder how much the FDIC designation is going to mean then… I wouldn’t recommend to anyone to exceed those amounts… open more accounts at more banks if you have to, but you dont’ want to take a haircut on cash.
4. The stock market is surprisingly bullish (might be a sucker rally, but I can’t say for sure). Either way, I can sense the tenseness on Wall Street. I am tempted to liquidate everything and hold cash for a while, just because spooked investors can pack the exits at any time.

Some time ago, someone was mentioning stagflation… something which is absolutely garbage. There is no comparison of now to the late 70’s. Still, i might be led to see the uncanny similarities to the ‘72-’73 market.

By your statement, you and I are both asset deflationists, however, the FED can (under pressure) jam the ZIRP pedal and go to infinity with debt monetization to stimulate the economy. It would tank the dollar, but we might actually start producing stuff again. If that doesn’t save us from price deflation, then there is no hope for Keynsian monetary policy in the future.

We’ll see if Keynsian Monetary policy can rescue us here.

• Bubble , Deflation , Housing Crash , Panic , Unintended Consequences
• Comments(4)

Chuck Ponzi January 13th, 2009

Some of you who are long time readers of this blog and other bubble blogs remember the zeitgest of mid-2006.  There was a lot of angst in the air about what was happening with the residential housing market, and quite a few financial idiots posting on and on ad nauseum about how housing was a fantastic investment and how you should leverage yourself up to the hilt just to get in.  One of my favorite examples was Darren Mead of Victory Lending.  Yes, the homeless boy turned bodybuilder, turned finance expert.  Perhaps it would be best to turn to one of his gems of wisdom, quoted on Yahoo’s answer site in response to a user question posted in July 2006.  Yes, the height of the bubble:

Is now a good time to buy a new home? i would be a first time home buyer and i have heard the market is bad.?

Darren gave a long-winded answer:

Congratulations of thinking of buying a new home.

Is there a “bubble”? The simple answer is “no”. Even if interest rates move a bit higher, it won’t be enough to cause a nationwide slide in home prices. The key to a healthy housing market is the job market. If the payment on a new home might be slightly higher due to increased interest rates, it generally won’t stop someone from purchasing the home of their dreams…but if they feel their job is in jeopardy, it might be enough to stop them from making a move. So with the currently low levels of unemployment and the beefy gains in job creations, it looks like the housing market will remain vibrant. Although it will be difficult to sustain the double-digit gains that much of the country has seen, price declines are highly unlikely. Expect a more moderate rate of appreciation, perhaps closer to the historical 6-7% range, which is still very good.

The post goes on for nearly 2 more pages of bubblespeak.  It’s an interesting read on what was going on at the time.   The most choice example:

Don’t be victimized by the bubble hype. Buying a home is a big step, but it is almost always one in the right direction.

Darren was also quoted on housing doom and felt required to issue a long-winded discussion of the merits of buying a house, leveraging it to the hilt and other such nonsense.  I also at the time replied (when I was writing under the pseudonym John Doe) to his crazy thoughts:

I kinda wish we had a behind the music rendition of where is he now?

Anything worth saying to Darren after the bubble popped?

• Bubble , Contrary Indicators , Denial , Investing , Lizard Brain , Mean Reversion , Psychology
• Comments(2)

Chuck Ponzi December 22nd, 2008

Over 3 1/2 years ago, I posted my first “Jobs, Jobs, Jobs, Recovery to Crash” post and followed up when layoffs began in 2006 to corresponding residential lending.

My basic premise was that housing created a lot of imbalances, most notably in job creation.  This included both traditional construction jobs as well as well paid professional jobs in lending and real estate sales.  At the time, the ranks of California realtors had swelled to nearly one in every 50 adults in California, and loan brokers were probably not far behind.  This not only supported high prices, but also ensured that even a slight downturn in one would result in a crash for the other.  Indeed, when sales volumes hit their lows last year, it was hard for many real estate agents, or even loan brokers to continue to exist which is evidenced by the Lender Implode-o-Meter.

Today’s news comes from the Inland Empire (and Coachella Valley), which is now sporting some impressive (if downright incredible statistics):

This corner of Southern California had the highest unemployment rate of any area with 1million or more people in the United States — including metropolitan Detroit.

“We are the epicenter of the economic crisis in this country,” said John Husing of Economics and Politics Inc., a leading regional economist.

Federal labor statistics showed the two-county Riverside-San Bernardino area that includes the Coachella Valley with 9.5 percent unemployment in October, compared to 8.8 percent in metropolitan Detroit.

What’s interesting is how much previous forecasts from so many economic think tanks based in SoCal were based on strong employment numbers.  While this has steadily worsened, it has not been completely unseeable; I saw it developing more than 3 years ago when I first began the blog as an outsider to the housing market.  Shouldn’t more have seen it coming?  I would argue no, due primarily to groupthink, and that we are generally programmed in larger groups to not question authority unless that kind of activity is rewarded; something that cannot be said about the last 30 years.  Most Americans have been told to shut up, sit down, and take what we give to you.  However, this blog is not about social commentary; greed is more of an objective observation to me since it motivates people.  Understanding others’ motivations will ensure you can achieve what you want.

Which after all, leads us to the basic questions posed by Southern Californicators:

1.  If we came to SoCal for the jobs, and they’re no longer here, why are we still here?

2.  If there are no jobs (or the ones available are transitory) why does it cost so much more to live here than anywhere else?

3.  Can weather pay the bills; house payment, electric, water, gas, and taxes?

4.  If weather can pay the bills, what about places with crappy weather like the IE?

5.  Also, if weather can pay the bills, what about cheap places with good weather like Florida?

6.  Oh, yeah, can’t forget the once-in-a-lifetime opportunity to have your life destroyed by a massive earthquake.

All of these questions have in the past kept SoCal home prices pretty well tethered to similary type-housing prices in other states.  And why did they go so out of whack this time?

Was it Subprime?  No, that wasn’t widespread enough, since only a small percentage of the people were getting subprime loans.

Was it Option ARM?  Maybe, but that’s a Ponzi scheme that requires a lot of confidence that others have more than you.

Was it Loosening Standards?  Maybe, but then you gotta be able to pay off that note.

I believe, in the end, the only conclusion that one can come to after so many other possibilities is that people were irrationally optimistic about housing.  Just like internet stocks in 1999.  Just like Tulips in the 1600’s.  We really have learned nothing, and many will lose their entire lives’ savings from it.  Hopefully, most of the innocent can keep their jobs, but I’m not optimistic.  I believe unemployment will get worse before it gets better.

• Bubble , Lending Standards , Speculation
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Chuck Ponzi October 29th, 2008

Today for lunch, I met up with Irvine Renter of the Irvine Housing Blog fame to talk about his book over lunch.  Was very enlightening and IR has a wealth of information about the workings of real estate in Southern California and the mania behind the housing bubble.  I’ll be posting a review of it as soon as I finish reading it (200+ pages), but in the meantime, if you’d like to get your hands on a copy of the book, pick it up at Amazon here.

• Bubble
• Comments(1)

Chuck Ponzi June 30th, 2008

I recently had a reader pose a question to me via email and I’d like to take some time from our normal programming to see what is on his mind

Our friend, let’s call him Boomer for short, had this to ask of me:

Moved my family to La Costa area (renting) and own a house in AZ which I owe $159k at 6.5% (it adjusted and will again in 8 months) The home was at peak worth $750k now $550k I had it rented last yr for $2200 and just signed a 3 yr lease w/ new tennant for $2,400 . I have $600k in cash..Should I pay this house off?? or should I just refi it and hold on to my cash to buy here in S cal in a yr or two?

First off, I have a couple of thoughts:

1. Whoever Boomer is, he’s in a pretty good position, relatively speaking

2. Without knowing his age, I’d say Boomer is likely Early Xer or Late Boomer.

3. The most important point of all (where he wants or needs to live) is missing from the question. Don’t feel bad, many people forget this little factoid. We’ll assume that he wants to stay in SoCal.

I’ll deal with some important points:

1. What is that house in Arizona really worth long-term?

2. What should Boomer do with the cash?

3. What kind of financing makes the most sense?

What is that house in AZ really worth?

This is the question that wasn’t really asked, but needs to be answered, what is the house in Arizona worth, so we can understand what to do with the money.

Well, Arizona is a big place. It has a varied geography with beautiful vistas, scorching deserts, and some bone chilling mountains. You may not like what I have to say, but I’ll say it anyway. Your perception of the world and finances is the boiled frog syndrome. Not that I blame you. You’ve been raised in a world of ever decreasing interest rates and increasing asset values. The world has been kind to you.

You see, the success of many of the past 30 years (primarily the boomer cohort) is a demographic abnormality. Asset values have increased simply because of the organic demand of the Baby Boomer generation and ever increasing ability to finance that demand. In addition to this, an extremely relaxed monetary policy has increased the value of assets consistently since inflation was trounced back in the late 70s.

Unfortunately for many, that time is over.

In the short run, houses are worth what someone else is willing to pay for it, but in the long run, they are subject to the value of the next best alternative, or substitute pricing. The best substitute for owning a house is renting one. In some cases (such as short-term living), renting is almost always the clear alternative.

There are many formulas for determining the value, but one of the simplest mechanisms is the GRM (Gross Rental Multiplier). Basically, this number is used to multiply the monthly rent to arrive at a fair estimate of rental value. However, this is only a rule of thumb and is not to be taken as gospel; lower interest rates (like I expect we will see for the forseeable future) will increase the GRM, while substitutes (buildable land, locus to employment centers) will decrease it. In certain premium places like Orange County, the upper stretch might be 220 or so, while in places like Las Vegas or Arizona, a more reasonable 120 to 160 is more in line with reality. If we err on the side of optimism (150 GRM), this places the current value based on long-term fundamentals at about $360,000, leaving Boomer with a $190,000 premium over its fair value. If I were evaluating a stock, I’d say SELL! SELL! SELL! Doubly more so if Boomer had lived in the house for more than 2 of the last 5 years since he can walk away with pretty much all of the money tax free. It doesn’t matter what the market is selling at, if there is really that much of a disparity, sell that house and get your money! (of course, it doesn’t help that it was just rented, but there are always ways to let a renter go, if the price is right). At a 229 GRM, his house is badly overpriced. When it was $750K, I haven’t a clue how someone could justify that, since it would have been a GRM of 340. Holy smokes!

The future good in some ways, but bleak in other. The Southwest is largely overbuilt in nearly every city with a real dearth of extensive employment opportunities (unless WalMart is your target), and if energy prices remain elevated (not a given in my mind), the ability to pay will deteriorate along with the economy. Boomer may end up with late (or no) payments from his rental. Rentals are generally difficult to manage from a long distance and I would only advise it if you were planning on returning back to the home at some date. However, that would be hard after living in LaCosta for a few years.

In addition, a house can be valued at the cost of money to purchase it. This is a bit more detailed, but an easy rule of thumb is to take the rental equivalent, figure in future increases in rent, and discount the cash flows based on current borrowing rates. It accomplishes about the same thing as GRM, but removes the variability of borrowing rates (especially if it is held as a long-term investment). Using the inverse calculation, you could figure what the “money rent” on the current place would be given a few variables such as the “current value” and current interest rates. Given a current value of $550,000, the money rent valuation using 7% says that Boomer should be collecting about $3,700 in rent on that money. This leaves out taxes, repairs, rental expenses, vacancy, and many other options, so it is by far the most optimistic. By this reckoning, the house would have an imputed value of $357K, pretty darn close to our above $360K value. Sounds like time to sell this puppy no matter how you look at it.

As another way of thinking of it, as interest rates go down, this increases the ability to pay, but that can only increase so much since the risk of buying on low interest rates and being unable to sell into a similar situation will weigh heavily on others’ minds and prices will need to adjust to handle this uncertainty. Since demand for housing is waning as the boomer generation ages in place or downsizes (or simply dies), it is unlikely that houses will be able to continue their rich valuation long into the future without a substantial demographic to replace them with the ability to purchase.

Any way you look at it, the house is currently valued at more than it is “worth”. I can show houses in Orange County that currently have better GRMs than what this house is showing, and Orange County is one of the most overpriced locales in the US.

Tomorrow, I’ll deal with the question of what Boomer should do with his cash. Any thoughts before then?

• Boomers , Bubble , Deflation , Denial , Investing
• Comments(3)

Chuck Ponzi June 19th, 2008

I always said we didn’t have a bubble until we had some perp walks.  These are from today thanks to Bloomberg:

Ralph Cioffi

Matthew Tannin:

The NYT has a great piece on the indictments of former Bear Stearns Fund managers.

In an April 22 e-mail from Mr. Tannin — which the indictment said was sent not from Mr. Tannin’s account at Bear Stearns, but from his personal account to the personal e-mail account of Mr. Cioffi’s wife — Mr. Tannin wrote:

the subprime market looks pretty damn ugly… If we believe the [CDOs report is] ANYWHERE CLOSE to accurate I think we should close the funds now. The reason for this is that if [the CDO report] is correct then the entire supbrime market is toast… If AAA bonds are systematically downgraded then there is simply now way for us to make money — ever.

Three days later, Mr. Cioffi and Mr. Tannin hosted a conference call for investors in the funds. This time, his tone was very different.

Lying openly like that to garner more money needs to be treated pretty harshly.  Maybe some in the securitization business can get some religion.  If not, they can always find Jesus in the clink.

• Bubble , Speculation , SubPrime
• Comments(3)

Chuck Ponzi May 13th, 2008

This is a travesty.

No mortgage bailout! None at all! Not to striving homeowners, not to the insanely-paid CEOs. Risk has penalties too.

Here’s our typical homeowners:

Here’s the problem with CEOs:

• Bubble , Housing Crash , Psychology , Speculation
• Comments(2)