Finally, I agree with Jim Rogers on something:
We need the insanity to stop. Stop rewarding bad behavior, let the country be fixed.
On March 6, 2009, In Denial, By Chuck Ponzi
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.
Hint: It’s not from our own corrupt government; and I think the answer will surprise you:
Ladies and gentlemen,
Unfortunately, we have so far failed to comprehend the true scale of the ongoing crisis. But one thing is obvious: the extent of the recession and its scale will largely depend on specific high-precision measures, due to be charted by governments and business communities and on our coordinated and professional efforts. In our opinion, we must first atone for the past and open our cards, so to speak. This means we must assess the real situation and write off all hopeless debts and “bad” assets. True, this will be an extremely painful and unpleasant process. Far from everyone can accept such measures, fearing for their capitalisation, bonuses or reputation. However, we would “conserve” and prolong the crisis, unless we clean up our balance sheets. I believe financial authorities must work out the required mechanism for writing off debts that corresponds to today’s needs. Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings. We must not harbour any illusions while assessing the state of the global economy and the real corporate standing, even if such assessments are made by major auditors and analysts.
In effect, our proposal implies that the audit, accounting and ratings system reform must be based on a reversion to the fundamental asset value concept. In other words, assessments of each individual business must be based on its ability to generate added value, rather than on subjective concepts. In our opinion, the economy of the future must become an economy of real values. How to achieve this is not so clear-cut. Let us think about it together.
Third. Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.
Fourth. Most nations convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states. This highlights mutual interests and interdependence. Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognised rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive. At the same time, the global financial system is not the only element in need of reforms. We are facing a much broader range of problems. This means that a system based on cooperation between several major centres must replace the obsolete unipolar world concept. We must strengthen the system of global regulators based on international law and a system of multilateral agreements in order to prevent chaos and unpredictability in such a multipolar world. Consequently, it is very important that we reassess the role of leading international organisations and institutions.
If only we could have this kind of leadership in this country. I was convinced that Obama would not simply revert to politics as usual, and my hopes have been severly dashed. We are screwed up more than I thought. You cannot fix free markets with state intervention; our speaker will attest to that.
On January 13, 2009, In Bubble, Contrary Indicators, Denial, Investing, Lizard Brain, Mean Reversion, Psychology, By Chuck Ponzi
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:
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?
On December 16, 2008, In Bottom Callers, Contrary Indicators, Denial, Flipping, Lizard Brain, By Chuck Ponzi
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.
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?
If you haven’t read the big news lately, I suggest you take a trip on over to Jon Lansner’s blog and read about Gary Watts’ Mea Culpa. Except if you’re expecting him to admit fault and take the blame for blind boosterism, you’ll need to wait for a while.
What does he blame it on? Banks. Duh. Isn’t that what everyone else is blaming it on?
OK, even in a way, I blame the banks too, but that doesn’t excuse the absolute unbelievable disregard for history, facts, trends, or truth. However, I will extend an olive branch to Gary: on one condition. The condition is that I can get some of his speaking engagements (or at least as a ride along). I figure that if the real estate industry is so brain dead that it can not only believe his past published crap, but buy it hook line and sinker, I have nothing to lose, and a whole lot of speaking fees to gain.
Some choice quotes from Lansner’s bag:
“I apologize for not knowing what Wall Street did to our mortgages,” Watts told about 360 attendees during the associations annual membership meeting at the Irvine Marriott. “I had no idea how Wall Street restructured these loans.”
No accounting for affordability? No accounting for sales volume preceding price? No memory of the written lashings he received publicly on blogs? Does he have no memory of this?
Didn’t I write some verbal poundings here on this blog? If searching Gary Watts on Google, my articles and sites linking to my articles were consistently on page 1 in the searches. Did he really not know what was said about him?
What else?
Watts said today, however, that the tide of foreclosures likely will mean that the housing market will remain soft into 2009. He noted that short sales, or sales with asking prices below the owner’s mortgage balance, are taking at least six weeks to gain approval from lenders, forcing even more homeowners into foreclosure.
“It’s just inevitable that (foreclosures are) going to spill into the 2009 market,” he said. While a rebound still is possible this year, Watts said, he called the market too difficult to predict.
This is one thing that I am agreeing with him on. The market is in such a disarray that it’s nearly impossible to predict what will happen through 2009.
Despite what the bottom callers are now saying, they are forgetting the achilles heel of housing. It goes like this:
1. Banks cannot hold nonperforming assets on their balance sheet. Regulators will not allow it. Bond covenants of RMBSs will not allow it. Noone can hold onto REO property for very long. They will price it to move, and if it doesn’t move, they’ll cut until it does.
2. A recession is a terrible time to sell houses, especially in bulk, or if you have to as above. Buyers need to be assured they are getting a good deal before they are sure.
3. Increasing numbers of NODs and NOTs ensures a parabolic supply of future REOs coming on the market for at least another 10 months, possibly as much as 36 months for Orange County because of the impending neg-am crisis about to unfold in 2009 and 2010.
4. Whatever buyers there are today are still just setting bargaining points for future buyers. The demographics of the situation does not allow it to be the bottom at this point.
5. Voila! The longer to wait will ensure lower prices. This will likely be the case for the rest of the decade. We’ll refresh predictions in 6 months.
I’ll part with an analysis of Gary’s assessment:
He also believes that subprime lending gets a bum rap for causing the housing slump. Rising subprime delinquencies merely acted as a catalyst, tipping a range of bundled “structured investment vehicles” into increasing trouble that alarmed Wall Street investors.
“It was so complicated. It’s a nightmare. A real estate credit crunch usually lasts six months, and this one, we’re in it almost a year, and it’s still not straightened out,” Watts said.
Jeebus, this guy is just reams of material. It wasn’t, and isn’t just subprime. It’s everything and I’m pretty sure he’s referring to MBS, not SIVs. Credit crunches have been fairly uncommon, the last one of a similar magnitude in US history might have been the one directly preceding the 1930′s Great Depression. And, those kinds of credit crunches take years to recover from the immediate effects, but the long-term effects were felt for more than a generation. It’s likely that Gary Watts will be worm food before we see reckless abandon in lending like that again. (at least I hope for the sake of all fiat currencies everywhere).
Last year, my predictions for 2007 Southern California Housing turned out to be of all things, too optimistic. Let’s take a quick peak back at my predictions with respect to the most recent Dataquick information.
1. The bubble will or will not burst depending on your definition:
Predictions:
Sales Price: Down 5-7% correction
Sales Volume: Down 10 to 20%
Actuals:
Sales price: Down 13.3%
Sales Volume: Down 45.3%
Comments:
I whiffed this one. I believed strongly that we could encounter a credit event at some point in 2007, but as all events are, they are hard to anticipate exactly how swift they will start or end especially a year in advance. I was way too optimistic in 2007, though not nearly as optimistic as Gary Watts who predicted a 7% increase in prices.
I think that no matter whose definition you are using, the bubble burst in 2007. Only Gary Watts can’t see it, and he’s got to be the only person in the entire world who cannot see it.
2. The Subprime Mortgage market will shrink considerably.
Volume Prediction: Down 40%
Volume Actual: It has been difficult to find a reliable source that can be quoted, as even the MBIA doesn’t have a grasp on what happened in 2007 yet, it is safe to say that subprime was likely much more than 40% off from 2006. Many of the major subprime companies went Tango Uniform this year, while those that (somewhat) survived have been castrated (Countrywide total volume was halved, subprime near nonexistence)
Comments:
This again was unpredictable due to the sheer volume and speed of failures of subprime lenders. It is very likely that subprime will contract back to its 2001 or 2000 originations volume, which is about a 95% retracement. Reversion to the mean.
3. Gary Watts will not realize how bad he is at predicting things, and he will still make a lot of money this year.
Comments:
This is a no brainer. Gary Watts is quite possibly the worst predictor of housing in Southern California. Even the most hardened and staunch supporters were asking questions at the beginning of 2007. If you were completely surprised by last year, I suggest you stop covering your ears and eyes.
Still, I’d like an opportunity to offer as many workshops as he does. He knows no more about the local real estate economy than my 4 year old, and yet he’s highly paid for his “work”. So much for reporting integrity if he’s just doing it for the money. If he really believes it, I have to wonder how he’s able to dress himself in the morning. Normally that kind of mental retardation imposes some pretty stiff limitations on your ability to care for yourself.
4. We will have asset deflation with stable (high) CPI inflation.
Lead story on Yahoo finance today was titled: “Inflation Rate is Worst in 17 Years“. Housing prices are plummetting in almost every locale. Nuff said.
5. I will be spending more time on posts
I did… I really did. Sometimes it seems like I take long breaks between, but it’s because I hold down a regular job, run an internet business on the side, am involved in community and church affairs, and I have a wife and 2 young children.
I will be following up shortly with the belated 2008 predictions. Suffice to say, it’s not going to be positive. We won’t be seeing a bottom in 2008, much less a rebound.
On October 25, 2007, In Denial, Psychology, By Chuck Ponzi
This one has some great value to it.
This is perhaps a perfect example of courage in the face of adversity.
Others might call it delusional denial.
From the Marin Independent Journal (Marinite, you make us proud down here in Socal, never have I before seen this kind of lunacy. I think even Gary Watts would concede in the face of these facts)
Local homes sales dropped 77 percent last month, Thayer said. “The housing market has slowed down,” she said.
Gee… ya think?
Mostly, I wonder if the author had to stifle a chuckle while writing that.
If 77 percent of sales evaporated… I’d say it hit a brick wall and it’s brains are splattered on the pavement… we’ll all be lucky if we make it out alive.
People often ask me if I have one regret about blogging on the housing bubble. I do. It’s having missed the opportunity to document more of the amazingly delusional comments people have made over the past 3 years. I would have liked to refer back to them now that the koolaid is running out.
