Brad_Davidson February 19th, 2009

Every once in a while, I find a comment on a blog that captures an important thought. This one comes’ from Wally on The Big Picture

The systemic risk is that since credit = debt = money, we can pretend that there is more of it than is possible. That is because debt cannot exceed some fraction of the potential future amount of work. When it approaches that point, confidence collapses and the debt is destroyed. We have gone through this over and over and over in history. The hot fad now is to think government can alter this cycle by creating even more debt. The answer to that is : ha ha ha ha. Think it over: by preventing the destruction and extending the time frame of debt (by financing with future deficits) the government lengthens the process, as it did in the 1930s, rather than decreases it.
We are in for a loooonnnnnnnng one this time.

That is why we are just fiddling while Rome burns.  Twist from Housing Doom had it right: what we need right now to fix the housing market is MORE Foreclosures, not LESS.

• Contrary Indicators , Deflation , Denial
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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
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Chuck Ponzi December 16th, 2008

BMIT put up an interesting post the other day that I think needs to be read and reconsidered.  Basically, there are still people flipping properties; it is unlikely that after the biggest bubble in the history of the world, that the crisis is over and properties can once again be resold for several hundred thousand dollars more by simply trimming some bushes, putting down sod and painting the picket fence.  There are still too many people chasing limited opportunities and therefore overpaying for something that makes little economic sense.  In a recession, economic sense should prevail.

Therefore, I ask the most difficult question regarding the property that OCR dragged up in San Diego:

San Diego Shack

In this corner, we have the lightweight contender.  Weighing in at just 570 square feet, and surrounded by squalor, you can bask in the beauty of your red front door that leaves nothing to the imagination and your K-mart clearance special patio set.  Luckily for you, you can now dry your clothes directly outside your front door with the convenient ledger board that is stapled to the outside of your quaint demi-cottage.  Only you and your neighbor will know when you pass gas in this  beautiful little near-beach house.  IT HAS PRACTIALLY EVERYTHING YOU NEED TO SURVIVE.

Similarly, I’ll compare it to this:

Laguna Niguel Shack

This quaint beach cottage has a measly 10,000 square feet, but who can be sure?  It features subterranean parking, wine cellars, an opulent entry, is centrally located in Laguna Niguel near Monarch Beach and boasts a true 180 degree view of the ocean.  Luckily, you won’t need to hang your clothes out to dry, you actually have a laundry room and servants quarters to ensure your underwear is neatly pressed day or night.

However, there’s something this house lacks that the San Diego house has.  It’s a critical component in today’s current economy.

No, it’s not irrational exuberance… but you’re getting close.

Figured it out yet?

OK

Here

it

is.

The shack in San Diego boasts a higher price tag per square foot, exceeding $1000/ square foot while the opulent mansion with views to the ends of the earth weighs in at a measly $975/ sqft.

Now that’s amore.

• Bottom Callers , Contrary Indicators , Denial , Flipping , Lizard Brain
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Chuck Ponzi August 9th, 2007

This was the headline of some financial reasearch issued by Joseph Hargett of Schaeffer Research on March 27th, 2007.

I’ll let you decide how prudent that advice was by viewing the top homebuilders’ stocks from that date until today measured against the S&P 500.

I’m predicting that even with all of the price declines, I believe there’s still a lot more.

Here is what Joseph had to say:

It seems you can’t talk about the housing sector these days without mentioning the “S” word. Subprime, yes I said it, has even wormed its way into the vernacular of many Fed watchers and Fed members – not to mention the warning shots fired from the sidelines by former Federal Reserve chief Alan Greenspan every other week or so. This morning, the Fed sounded yet another gloom and doom note for the housing sector, as Sandra Braunstein, the director of the Fed’s division of consumer and community affairs, stated that borrowers could see “more difficulty” in the next one to two years. In particular, those borrowers with recently originated adjustable-rate mortgages are likely to experience more delinquencies and foreclosures, Braunstein said.

and

Admittedly, the situation is not very flattering for the U.S. housing market. However, I think that the hype over the popping of the so called “housing bubble” is being overplayed just a bit too much. Just take this quote from a March 18 New York Times article titled “On the Homefront”: “In many quarters, Greenspan was essentially accused of cheating the country out of the depression we deserved: instead of allowing the swooning Nasdaq to bring down the United States economy and punish us for our sins, he had rolled the tech bubble into a housing bubble and allowed the party to go on.”

Blaming Greenspan seems convenient at this point, especially with Bernanke’s Fed in a holding pattern. And comparing the “Dot-com” bust to the current situation in housing seems rather irresponsible. After all, betting on virtual real estate seems a far cry from betting on housing prices and “real” real estate. I mean, can you really compare the long defunct Pets.com and WebVan to Lennar ( LEN: sentiment, chart, options) and Hovnanian (HOV: sentiment, chart, options) ?

I have sat on this article for 5 months to see if my research was right on where they were headed… in an effort to dispel any myths. He was dead wrong, and worse than that, revealed poor research on the underlying fundamentals of the housing problem. It is and still is an affordability crisis. The decline in sales will not abate until that affordability standard is reachieved. At current course and speed, that won’t be for another 2 years at the minimum.

I believe that we will still see some of these builders declare bankruptcy (ch 11) before this bust is through.

• Bubble , Contrary Indicators , Housing Costs , Housing Crash , Inventory , Mean Reversion
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Chuck Ponzi February 26th, 2007

The slow news days the past few days in SoCal has given me an opportunity to take a trip around the area. This last weekend I failed to post because I was visiting locations in Orange County, Riverside, San Bernardino, and Victor Valley. Needless to say, for me it was busy.

For real estate in SoCal? Not so much, especially when sewage backups in Tijuana are basically front page news. Isn’t there constantly sewage coming across the border from TJ? Sorry, no references to immigrants please. The place is just dirty, and is constantly polluting San Diego beaches because the Mexican government fails to do just about anything about environmental protection besides limiting ownership of land by non citizens. Pretty much sums up the problem with the Mexican government (er, politics)anyway… does nothing.

Which, sometimes isn’t all that bad.

For example the former Fed chairman Alan Greenspan (a politician, but alas not currently with the US government) declared today that we might slip into a recession later this year. This was as much of a contrary indicator that fellow blogger Barry Ritholtz of the Big Picture could take. It might make him change his economic forecast since Al has been wrong on so many occasions. Of course, the change in opinion was made in jest (I think), so there’s little chance of a major rally (or is there?).

Continue Reading »

• Bubble , Contrary Indicators , Mean Reversion , SoCal
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Chuck Ponzi February 9th, 2007

For many perusing the site, you’ll appreciate what a strong contrarian indicator mainstream media can be. For the rest of us, the mainstream media often acts as a blubbering beaurocratic beheamoth. No offense intended, just stating the obvious.

It is for this reason that by the time ideas come to print, they are often outdated and decidedly deceptive. Just such a cover comes our way. (Hat tip and thanks to JMF of immobilienblasen, or “real-estate bubble” for non-German speakers, for bringing this to my attention)

The article “It’s A Low, Low, Low, Low-Rate World: Money is cheap. And some experts say it could stay that way for years. That’s creating opportunity—and brand new risks” is here.

This is the cover of the current issue of Business Week:
How accurate you might ask, has the mainstream media been in predicting so far in the housing bubble? Consider, for example, the cheerleading piece Time magazine published in June 2005, at the near exact top of the housing bubble:
Not surprisingly, when you go to BusinessWeeks homepage, you’ll see this little one (the arrows are mine)
If you don’t see the irony in how the 2 issues impact each other, here it is:
1. Rates are low and credit available because there is low percieved risk. Risk is perceived as low because housing prices were rising.
2. Housing prices are supported by low rates and available credit. If rates go up, housing prices will go down. They are “priced to perfection”

Reminds me of something Alan Greenspan said:

Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.

• Contrary Indicators , Debt , SubPrime
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