April 30, 2007

Mission Accomplished: 3 Housing Issues: Multiple Bottoms, Declining Dollar, and More Sub-prime and Alt-A Defaults.

It is said that the definition of insanity is doing the same thing over and over and expecting a different result. If we adhere to this definition, housing pundits must be clinically insane because since the middle of 2006 we’ve been hearing rhetoric of “yes, today we’ve reached bottom.” Amazing how these folks live on one way streets. During the past seven years, each new record high was welcomed and when asked if this was a peak most would respond that the sky was the limit. No end in their immediate future. If up to them, housing would appreciate 20% each year until the end of time. Yet now that we’ve experienced only two moderately challenging quarters the housing complex is ready to throw in the towel and issue a Siren call that this is the absolute bottom, mission accomplished. They would like us to believe their rhetoric as gospel and ignore every fundamental economic indicator pointing to the contrary.

Multiple Bottoms

Let us take a look at a few bottom calls from David Lereah, the chief economist for the National Association of Realtors:

May 25, 06: "This may be the bottom. It appears May is a little better." (Real Estate Journal)

September 25, 06: "We've been anticipating a price correction and now it's here. The price drop has stopped the bleeding for housing sales. We think the housing market has now hit bottom." (Bloomberg)

Dec 29, 06: "It appears we've hit bottom, the price drops are necessary to stir sales. It is working." (Globe and Mail )

Mr. Lereah also issued a bottom call in March but at this point why keep track? We also have Leslie Appleton-Young from the California Association of Realtors saying "Our economy is growing. We're running about on par with what we see nationally.” Apparently she didn’t take a look at the massive hit in GDP during the first quarter that came out last week. And of course we have the talking heads over at the Fed saying that we’ve reached bottom in the housing market. Sometimes I feel like I’m taking crazy pills listening to these folks. How can we be at bottom if for the next two years we will be facing resets of approximately $100 billion per month according to the MBA. Take a look at this chart:

Those in the housing syndicate would like you to believe that we lived through this in 2006 and housing was still resilient. Well for one thing housing was still trading in Pollyanna and easy money was flowing on Main Street USA. That came to a screeching halt in late February and March of 2007 with the sub-prime spigot being turned off. In addition, many folks that found themselves in trouble in 2006 were able unload to a greater fool since appreciation was still present. Now that appreciation is MIA and the sub-prime market is gone we are seeing incredible drops such as the 800% increase in NODs in California.

Declining Dollar

As Wall Street is dancing with the stars on the boulevard with 13,000, the dollar is heading in the opposite direction. Last week the dollar reached a new low and the DOW hit a new high. What the public doesn’t seem to understand or even care about is that massive orgy credit hurts an economy's currency. Even though a gallon of milk will cost you $5.00, twice the price from only a few short years ago, they are happy they have a 10% increase in pay over five years. Inflation is a stupid tax and apparently this is fleecing many in the public. Instead of decrying the government step in and protect the currency folks are happy that their 401k is up 4% for the year. In addition, this is another reason that housing prices are in the stratosphere. A declining dollar crushes purchasing power. So even though you are making more nominally overall you aren’t keeping up with the true inflation in assets. The CPI is a joke and I’ve discussed this many times, I doubt anyone believes inflation is 3% a year. Is healthcare 3% higher? Is housing 3% higher? The bulk of where Americans spend their incomes is massively up. Not sure if many care or even understand the implications of a declining currency. Maybe American Idol should have a PSA with Seacrest saying, “today please call your local congressman and tell them that you will not stand for your dollar being fleeced; and now, here’s American Idol.”

Sub-prime and Alt-A Resets and Defaults

We’ve all heard about the debacle in sub-prime loans. The absolute debauchery going on in companies such as New Century Financial have made many people recoil. Or cases where a 102 year old man was able to obtain a 25 year mortgage loan, apparently with new modified underwriting standards. Or the immigrant worker with a $15,000 salary purchasing a $700,000 home. These stories are tips of the iceberg of what we will be expecting in the next few years. But again, the pundits in the real estate industry maintained that Alt-A loans, those given to prime borrowers but with lax underwriting standards, are now taking a hit. Apparently good credit can turn bad instantly if put in a precarious situation. We are starting to see cracks in this system as well. Maybe this could be part of the fact that 30% of all jobs contributed in the past 7 years have direct ties to real estate. So if real estate goes down, these folks lose their jobs, and no credit can stay good with unemployment.

But don’t listen to the facts. This mission is accomplished. Housing has hit bottom. Go out and buy a home, it is your patriotic duty.

April 29, 2007

Real Homes of Genius: Today We Salute you Inglewood. For $329,000 you get 550 square feet and Garbage on the Lawn.

Today we Salute Inglewood with the 20th edition of Real Homes of Genius Award. Now 550 square feet is a lot of room so you may be thinking to yourself $329,000 is an unbelievable price in such a prime Los Angeles County city. We do have the sunshine tax after all. Thankfully, the agent tells us this place is a fixer upper as you can see from the garbage or toxic sewage piled up in the front lawn. But what’s a little fixing up when you get 1 bedroom and 1 bathroom?! I mean we are talking 5 star luxury here. Not only is this place a deal like no other, you also get garbage containers to place all your extraneous fixing up materials:

Now the seller will not kick you down with any money and is selling this place as is. You take it or leave it. I like their style of business negotiating! Not once did I learn that in my business education regarding negotiating and tact. I was told that in a declining market, you were to undercut competitors quickly and be flexible if prices in the future were projected to fall – it was called the cut your losses principle. Maybe I skipped the chapter titled, Put up so much smoke that you’ll think Snoop Dogg was your next door neighbor. Now for those of you outside of Southern California, we do not have much rainy weather so these sellers did you the favor of removing the roof:

What in the world?! Either this is a joke or an absolute case study on “how not to market a property in a declining housing environment.” Doesn’t the roof remind you of someone making pancakes and the excess batter is running over the sides? I’m sure that I do not need to convince you anymore that this home is worth every penny of the $329,000. In fact, let us take a look at what Zillow values this property at:

Value range of $394,414 to $503,974. So you’re telling me that we can have this mini paradise for $174,974 off retail price? Only in LA can we find fantastic deals like this and the tenacity of folks to panhandle their homes to the public.

We Salute you Inglewood with the Real Homes of Genius Award.

April 27, 2007

From Administrative Assistant to Loan Officer: GDP Down Markets Up! Welcome to Crazy World USA.

You need to check out this post over at CNN Money:

"(Fortune) -- Dear Annie: Please settle an argument. My daughter is bright, articulate, and ambitious. She is 26 and has worked her way up from an administrative-assistant job to loan officer at a large bank in Miami, and I really believe (okay, maybe I'm biased) that her talents and excellent people skills could take her all the way to the top. Just one problem: She dresses like a streetwalker. I have told her that wearing spike heels, ultra-short skirts, and low-cut blouses to the office will hurt her chances for advancement, but she says this is her style and she is sticking with it. Do you agree that she's making a mistake? If so, will you say so in your column? Maybe she'll listen to you. -Dade County Dad

Dear D.C.D.: A strong sense of individual style is a wonderful thing, but I have to agree that your daughter may be taking "business casual" a bit too far. The trouble with dressing provocatively at work is that it could distract people from her other assets...You can read the rest here. "

The problem with a market frenzy as we just had, many people will mistake sales ability with financial acumen and business skills. As you can see from the above, this dad is concerned about his daughter dressing as a "streewalker" to advance in the loan industry. Now, I have nothing against streetwalkers (funny title since all of us walk the street but anyways), but I do have something against these people suddenly labeling themselves financial professionals. Never would I go to midnight Sally for financial advice, it isn't her skill set. Ever hear about the administrative assistant who became a dentist the next day? Or what about Mike the Starbucks employee who became a defense attorney overnight. I'm sure you know many people who up and left their manufacturing jobs to become surgeons the next day. These so called professionals are nothing but glorified sales people. Looking at BLS stats most real estate agents, brokers, or lenders have little to no college education. I have my real estate license and was once part of the industry and can attest to this from first hand experience. And many mortgage operations run on the premise of a frat or sorority house. There are professionals in the field but very few, I would argue that 20 percent of the entire market truly have any financial sense. You can read up on the Vilfredo principle to understand why my reasoning for this exists. The rest are peddling agents of the Wall Street banks and little do they know that they are the first to get the axe.

Again the market will be purged and is being purged. My phone has been ringing off the hook with mortgage brokers calling me regarding my investment properties. Funny how last year I had a hard time reaching them trying to refinance my out of state property; I guess they figured my modest investments that were cash flowing wouldn't give them as much as the subprime no-loan doc they can push to some wanker with no down payment. Apparently now they have some interest in doing business and made time for me on their busy schedule. Suddenly those subprime loans don't exist and solid credit worthy customers are far and few in between because there is no way in hell we would invest with them; how do you think we've become financially successful? It wasn't by getting the most skewed loans and spending frivolously; the irony is those that are financially successful don't front like those that aren't. Isn't that sweet?

Low barriers to entry plus high wages equals a big draw. I argued in a previous post that we have become largely codependent on real estate as a nation. Nearly 30 percent of all job contributions for the last seven years has been real estate related. This is incredibly large because for the other decades we have averaged 10% growth in this field. Again the market is largely distorted but the world is taking heed and that is why the dollar hit another low in relation to the Euro. Yet folks here are somehow using Voodoo economics because GDP got slammed in the first quarter and stocks acutally went up! My graduate professors must be scratching their heads because what they taught us about business models doesn't apply to the credit extravaganza model of investing we are living through. GDP took it in the shorts today thus letting the markets know that yes, housing is having a large impact on society.

We have a lot at stake with this bubble bursting but so does China. I mean take a look at all the crap laying around your house. I can assure you that 70 percent of everything you own is out of the People's Republic. So if we stop spending and it looks that way, China is going to get a double kick in the groin. The Wall Street Journal showed the first decline in years in Mortgage Equity Withdrawls. Now you can connect the dots; massive hit in housing, less equity to spend, thus leading to less consumer spending.

My bias is that being a professional connotes a certain expertise in an area. Finance and economics are very complex fields; heck even after graduate school I continually have to refine my knowledge. And I can tell you in many of these operations looks do matter especially in the lending and agent side of things. Why do you think we have restrictions in the first place? So things wouldn't run a muck. The hard thing will occur when the economy will need to absorb these people back into the work force. They are going to get a major pay cut because nowhere else are they going to earn six figures without some sort of professional training. Time to go back to school and thus reducing productivity in the workforce. See, at least with the tech bust many people had B.S. degrees in engineering or computer science. They had transferable skills to positions that paid middle class incomes. What about these people?

Am I off with my reasoning??

April 26, 2007

Real Homes of Genius: Today we Salute you Compton. $294,900 for Your Very own Prison.

Just to show you how insane and ridiculous housing prices are in California today we present another Real Homes of Genius. Today’s wonderful specimen is a 588 square foot home located in prime country USA, Compton California. Now as you can see from the picture this home is the epitome of security; no one can get in and no one can get out. Whoops, I think that’s the definition for prison but anyways, you are getting a fantastic deal for less than $300,000! Let us take a look at some previous sales data on this place:

Sale History

08/04/2003: $106,000

12/20/2002: $121,097

08/02/2001: $115,000

Hmmm. Okay, so we have stagnant prices for two years and now this home has tripled in value since 2003? Now let me guess, it must be the white security bars on the windows that caused this price jump. Aside from this “affordable” price on this wonderful investment property, what does Zillow say it is worth?

Value Range: $329,981 - $421,642. Bwahaha! Okay, so we have a home for sale at $294,900 that sold three years ago for $106,000 and has a current Zestimate range up to $421,642! What does this tell you? No one has a damn clue of the true value of housing in Southern California. You might as well ask for $1 zillion because nothing is rooted in economics anymore. This place would rent for $900 a month. The $100,000 to $120,000 range seems more realistic because at least you can make a case as an investment property rather than the $294,900 to $421,642 range which makes no sense at all. These numbers shouldn’t even be associated with this place. To ask for these numbers is like financing a Geo Metro with a $30,000 note. The range is like your child’s teacher telling you “Johnny got either an F or a B+ on his project.”

Today we salute you Compton with our Real Homes of Genius Award.

April 24, 2007

America’s Codependence on Housing: 30% of Job Growth Contributed by Real Estate. 5 Point Plan on how the Bubble Will Burst.

has gone housing crazy. In the last six years, housing has contributed to 29% of total employee additions. How does this equate to past decades? Let us take a look:

1971-1979: 10%

1980-1989: 12%

1990-1999: 10%

2000-2006: 29%

Keep in mind that this is factoring the previous real estate run-up of the late 80s and early 90s. What we are witnessing is an unbelievable credit extravaganza anchored to one asset class, that of housing. As we all know diversification is the key to a healthy economy and each day that passes we are realizing how influenced we are by real estate. When any economy is rooted in one industry and that industry goes sour, what do you think happens? You can look at Texas and the oil bust and you’ll get a microcosm of what we will be facing on a global scale. We are already beginning to see the strain that a housing contraction will have on the economy. Consumer confidence will take a hit and GM has recently announced that car sales took a hit because of housing prices. Keep in mind that we are entering the first stage of this bubble unfolding. If you have any doubt how dependent we are on this industry let us take a look at California Real Estate licenses:

February 2007: 526,308

February 2006: 486,395

February 2005: 427,389

February 2004: 374,546

February 2003: 340,548

February 2002: 316,898

February 2001: 310,109

February 2000: 304,477*

*California Department of Real Estate Statistics

As you can see from the growth numbers above, real estate attracted thousands of new recruits into an industry that is extremely cyclical. At this point, the Vilfredo 80/20 rule comes to mind. In many industries including real estate the market is dominated by 20 percent of the employees while the other 80 percent scrimp to get by. If you look at the national median salary of real estate agents you will see that it is not a lucrative career option. But like the California Gold Rush, money is made selling the sizzle not the steak.

1 - The Dwindling Down Payment

The down payment used to be a barometer of a buyer's credit worthiness. It demonstrated your ability to baton down the hatches and save for a few years. Since American’s have a negative savings rate there had to be an alternative to this. As those in the mortgage industry sat up at night eating Ben and Jerry’s ice cream pondering their future, they witnessed a sign. Carleton Sheets with his no money down solution and Hawaiian Technicolor dream shirt gave the mortgage industry the solution to their stagnation, the no money down mainstream mortgage. No money down, once a thing left to experienced real estate investors became a standard practice throughout the industry. Now having a down payment is so passé.

2 - No Savings

As previously mentioned American’s are horrible savers. As witnessed by the above the beast needed to be fed and what better way than to collateralize your home as a massive stucco American Express card. Instead of signing on the dotted black line for a new line of credit, why not withdraw money from your most revered asset, your home. It became almost too easy and played into the cultural pathology of consumption perfectly. Spend today what you'll earn tomorrow. If your car shows your place in the pecking order at work, your home will show to the world your place on the economic ladder of prosperity. No country can spend into perpetuity without earning. As a nation, we spend 10% on servicing our debt. That means out of every dollar ten cents does nothing but keeps our heads above water for another day.

4 – Risky Loan Business

While someone has opened up a can on the subprime industry we are still assessing the impacts this will have on the overall economy. 20% of all mortgage loan originations in the past three years have fallen in the subprime category. Resets of $1 trillion dollars are scheduled for 2007 and 2008 each consecutive year. As these loans default via the domino effect, slowly we are realizing the ramifications this debt service is having on the overall economy. As the housing syndicate tries to call the bottom, we realize that the game has just begun. Each month seems to usher a record breaking performance on the downside and demonstrates how wrong the housing syndicate is. Record 18 year drop in sales. Foreclosures up 800% in California. Yes, these are all signs that we are at the bottom.

5 – Stagnant Wages

Now that housing is trending down what impact will this have on the overall economy? We’ve heard countless times from housing pundits that a diverse economy like ours can withstand a real estate down turn. I point to the first graph above showing 29% of added jobs directly related to real estate. So let us do some math:

Housing down = loss of jobs in real estate (big portion of current economy) = BIG impact on economy

And besides this, 70% of Americans own their home. The wealth effect will be multiplied because losing a large portion of your equity does not bode well for spending. This may have gone on longer but the credit spigot is being turned off and we are witnessing early withdrawal symptoms in the public.

6 - Housing Led Recession

In the past job losses have led to recessions in real estate. This made sense because if you lost your job you weren’t mister sunshine ready to commit to a 30 year mortgage. However this time we are swimming in a different sewer system because jobs connected to real estate dominate a large portion of society; these jobs depended highly on real estate continuing to go up into perpetuity. As witnessed by the major decline in remittances to Mexico from construction workers, we are seeing that those in the trenches are feeling the pain quickly of a depreciating market. Just ask New Century Financial about the pain of a declining market. This is the first stage of the market tanking and although many housing pundits are holding their breath that spring and summer will usher in a comeback, they are horribly mistaken because they are part of that 29 percent.

Home Sales: Worst Drop in 18 Years. Enjoy your Day!

As the ministry of truth, otherwise known as the NAR, spins faster than the Harlem Globe Trotters we have the worst drop in sales in 18 years. So what does the head chief of spin say the cause was? The weather. Yes folks, we are officially in LaLa land and smoking housing credit peyote...

"NEW YORK (CNNMoney.com) -- Home sales posted their sharpest drop in 18 years in March, a real estate group said Tuesday, as problems in the subprime mortgage sector pushed sales well below what economists had forecast.

Sales of existing homes fell 8.4 percent to an annual rate of 6.12 million in March from February's 6.68 million rate, the National Association of Realtors said. It was the biggest one-month drop since January 1989. Economists surveyed by Briefing.com had forecast sales would fall to an annual rate of 6.45 million in March.

David Lereah, the Realtors' chief economist, said that bad weather earlier in the year may have cut down on sales that closed in March. But he acknowledged a hit from tighter lending standards in the subprime mortgage sector, which most likely made it more difficult for buyers without topflight credit to get financing to buy a home."

Well he did acknowledge that tighter credit may make it more difficult for buyers to get a home. Bwahahahahahhaha!!! I'm not sure how much more of this crap I can take...

April 22, 2007

Real Homes of Genius: Today we Salute Inglewood. Bought in 1970 for $20,000 now selling for $397,400.

What is $400,000 worth to you? A Ferrari? Maybe. Or probably a nice cabin up in the Sierras? Well what if I was to tell you that it would buy you a 779 square foot jewel in Inglewood? Now before you speed dial your agent, today we are saluting Inglewood with our Real Homes of Genius award. I find it hard to believe that after all the drama occurring in the housing market sellers still feel they can ask for inflated bubbleland prices of yesteryear. This home has been on the market for 50 days and was originally listed at $439,000. So this seller has already given you the prospective buyer a $41,600 discount. Isn’t that fantastic? Why not wait another 50 days and maybe you’ll get a $50,000 discount.

I’m not sure what is going on with Southern California real estate. We know we are in a bubble, there is no question about this. Now that subprime lending is out, who and why are people buying these places? Let us run a check list that most buyers should have before buying a place:

1. When was the home built? This home was built in 1941 and cost the original owner $20,000.

2. What is the median rent in the area? $1,100

3. Is the area safe? Only true Los Angeles natives can tell you about that one.

4. How are the schools? Well if you are looking for the lowest ranked schools in the nation this is the place for you!

5. What is the median family income in the area? $53,000/year

So 0 for 5. Can anyone make an argument as to why this home is valued at $400,000? I find that the only argument any housing pundits are making is that “it’s in Los Angeles” or “that is what the market will pay for it.” Well if those are the only arguments you can make about purchasing a home in these areas you will be hard pressed to defend your outrageous purchase once this bubble pops. Most out of state people don’t have any idea of inner city Southern California and the dynamics of mortgage fraud, scrupulous lending, and the extent to which this bubble has become. Many that live in the area and have some basic idea of finance, look at these places and can only shake their heads in dismay. This turquoise gem is one of many.

Today we salute you Inglewood with our Real Homes of Genius Award.

April 19, 2007

Two Faces of Housing Panic: Schadenfreude and the Lender of Last Resort.

“The notion that a panic should be allowed to pursue its course is perhaps of two strains. One strain takes a certain amount of pleasure, or Schadenfreude, in the trouble visited upon the market, as retribution for excess of the past; this somewhat puritanical or fundamentalist standpoint rather welcomes hellfire as the just deserts of others. The other sees panic as a thunderstorm “in a mephitic and unhealthy tropical atmosphere,” cleaning the air. It purified the commercial and financial elements, and tended to restore vitality and health, alike conducive to regular trade, sound progress and permanent prosperity.” -Charles Kindleberger

It has been said that divided responsibility is no responsibility. We witness this in the moral hazards that permeate our society. For example say an accident will cost you $1,000 and your insurance is $900. Then there is really little incentive to avoid the accident since the difference is marginal. Subsidizing anything makes it more popular, it is a law of economics. In another example unemployment benefits can be seen as a moral hazard as well; in general people are less inclined to find a job if they are paid for not getting one. These are just minor examples of the moral hazard problem. But currently the housing bubble is in one of the largest moral hazard problems. There is this unstated assumption that housing will never go down because of Government Sponsored Entities picking up the flack if a major bust would occur. Sort of like the FDIC insurance you have at your local bank. By instilling this confidence people loaded up their money back into banks because if the bank were to go down, the government would be there with a check to bail them out. This hazard works in some cases but is never black or white. For example, do agents lose any skin if your house tanks 20% right after they get their commission check? Does the broker really worry about foreclosure since the lender now holds the note? Or does the lender really fret about losing declining values on homes if they feel that the government will be there to bail them out on bad loans should foreclosures surge? We are at this stage in the game because a moral hazard, if taken to the extreme will cause a major crisis.

Before, banks actually held in their portfolio large numbers of mortgage notes. So they had a lot of skin in the game and they policed carefully who they loaned money to. If the buyer was unable to make the payment, the immediate lender would be out and would need to foreclose on the home. In addition the bank was local to the area and had a better feel of the job market and other details that someone overseas cannot possibly understand. In the last decade, so many hands are involved in the credit infusion, be it the Fed, brokers, or lenders and the blue ocean of distance is growing from home owner and note holder. No longer is anyone worried about defaults or a crashing market because the omnipresent “government” will bail out the frivolous and imprudent lending that we have witnessed. We have now all heard about the 102 year old man who was able to get a 30 year mortgage and the immigrant farm worker who bought a $700,000 home on a $15,000 a year income. In addition, the data is now out that Q1 foreclosures jumped 800%+ in California from last year. And now that housing is going down and foreclosures are jumping we are doing our normal two-step of the blame game. Fingers being pointed, blame being assigned, and history repeating itself once again.


From reading hundreds of financial and housing blogs, it is the case that some people want to see people fail. The rhetoric is such that I believe many folks are putting out a red carpet for the housing Armageddon to enter this country. Not only do they want to see people fail they feel vindicated that it is a sort of past retribution for sins committed. A housing scarlet letter. Well looking at the massive rise in foreclosures and the collapsing of the mortgage market we are only in our initial stages of the housing crisis. This market psychology is rather interesting because the instant bail out talk came from Senator Dodd most housing bears raised the roof with a collective “hell no we’re not going to bail them out!”

I believe housing will come down and come down hard. No soft landing. This isn’t some wishful thinking but simply the strain on our credit system is hanging on a thin string. The fact that $1 trillion in risky loans are resetting this year. No longer is this supportable and the system needs to flush out excess. In any bubble resources are diverted from prudent enterprises to system wide gambling. The worth assigned to the housing industry in the last few years has depleted resources from more prudent areas of economic growth and created a real estate obsessed society. Want to know how much your home is worth today? Log onto Zillow and find out to the exact penny. Want to know how much your neighbor’s home sold for? Log onto your local county assessor office and get the scoop. We’ll be living in housing purgatory for a few years and the credit orgy we’ve gone through will linger for many years.

Lender of Last Resort

Again the faux pas in believing you will always have a bail out will create risky behavior. Each time Fannie and Freddie accept larger loans it is a de facto statement of insurance protection. Whether this is explicit or not all systems are telling us that credit is available to everyone and if all goes boom we’ll be there to pick up the mess. That at least is the assumption. And for seven years we never had to worry about the intricacies of this because of the booming market. Even if you over leveraged yourself in a home you could always sell the home to break even or make a nice profit. Even banks were losing very little on REOs they were getting back. Remember the moral hazard. So what happens when loans get kicked back and the market is dry? Just look at New Century Financial and you’ll get an interesting synopsis.

Ultimately and sadly, we the American tax payers are the lender of last resort on this mess. We’ll be paying either through inflation and a declining dollar thus hampering our quality of life. Whether you are an owner or renter we will all feel the implications of a massive global credit craze. There will be many lessons to learn from this. History repeats itself. Greed will always be part of society. And suckers are born every minute. Whenever you hear pundits talk about how its different this time and how we’ve learned form our past mistakes just look at the tech bust or world conflicts. Have we really learned from the past? Or do we suffer from historical amnesia now?

April 16, 2007

Real Homes of Genius: Today We Salute El Monte. 624 Square Feet for $440,000.

In Spanish El Monte means the Mount, or the mount of debt you’ll get yourself into should you purchase this Real Home of Genius. As you can see from this glorious structure modeled after the Pantheon in Rome, you will immerse yourself in all 2 bedrooms and 1 bath in this 624 square foot palace. Why build Taj Mahal when you can have this for nearly half a million dollars? Everything is updated on this place including the palm tree miraculously growing out of your concrete porch. This place also has a new toilet so after receiving your new mortgage payment from Wells Fargo, you’ll have a nice place to pay homage to the porcelain goddess.

But surely the sellers paid large cash for this place and that is why they are asking for this price:

Sale History

01/09/2002: $170,000

I guess that theory is out the window. So what are these sellers expecting to pocket with this sale? Let us run the numbers:

Assuming 6% sales cost: $440,000 - 6% - $170,000 = $247,360

This of course relying on the fact they still have a balance of $170,000 but we’re sure that is a lot less (unless they tapped equity out like the Lord of the Dance folks). So they are looking to score $49,400 per year in growth in a neighborhood where the median income is $48,000. Again we find another place where why would you work when simply living in your home makes more money than a job. Once a thing of infomercial lore, now you really can live in your palace and not work since equity will grow faster than your 9 to 5. We can understand why the lying scoundrels of housing have been pumping up the housing machine for seven years.

Today we Salute you El Monte with our Real Homes of Genius Award.

April 13, 2007

Real County of Genius: Los Angeles County Reaches Another Record: $540,000 Median Price. 3 Reasons why this Number is a Fabrication.

Instead of having just one home today, I would like to salute the entire county of Los Angeles with the Real County of Genius Award. While 3,200 workers pack up their boxes with pink slip in hand and leave New Century Financial in Irvine, the hard hit sub-prime lender, Los Angeles County has reached another record peak price. As shocking as this may be in the face of every negative piece of data coming out from multiple sources, this data is absolutely misleading and I’ll outline 3 reasons below. The massive bubble inflation that is going on will only drag out this needed crash for that much longer; I use the word crash because “correction” is so over used and underscores the mania we are in. We are going to face massive in your face foreclosures and perp walks from numerous lending firm executives in the near future. These will be the coming future attractions of stagflation and post-bubble recovery. This is the only remedy to the free flowing frat party credit floating throughout the world; we must tighten our belts and hunker down.

As you can see from the upper-left hand corner chart, Los Angeles county is up 6.3% year-over-year. However, the devil is in the details that sales are down 22.7%. Actually sales are down a whopping 32.4% across all Southern California Counties. Hardest hit are San Bernadino and Riverside both posting 45%+ sales drops. Now you may be asking yourself how can sales be dropping on a bungee cord while prices hold or even move up? In any classic real estate bubble, this is an indicator of future price drops. First sales drop and then prices follow. Since sales are dropping, thus leading to more inventory, the buyer starts gaining some traction. In addition, in the land of Wonderland with exotic financing and dangerous mortgages we are now facing an industry with less funding. These things coupled with resetting rates and stagnate wages produce a perfect stew of apocalyptic housing explosion just in time for the 4th of July.

Lagging Indicators

When you buy a house the information isn’t reflected instantly. Unlike a stock, with a liquid market, once a stock is bought or sold the price is adjusted accordingly. What can I get for Microsoft stock today? Just log into your brokerage account and you will find out. However with housing this is not the case. The asking price may be $500,000 but the current bid may only be $400,000. If no one purchases and the seller stalls, then nothing really happens and the market continues down its path. When you sign a contract, the process is only beginning since you will need to acquire funding, produce title paperwork, and get all papers sorted out before escrow can close. This can be anywhere from 30 to 60 days. Once this process is concluded, then the data is reflected in current median prices.

This time is different since only in early March did we face the sub-prime meltdown and Wall Street shutting the doors on risky mortgages. The appetite is no longer there and the excess hasn’t filtered down to the data. In addition we have a new legion of highly paid unemployed industry workers looking for new employment. Take a look at this recent LA Times article about those laid off from New Century Financial. I’ll give you 2 nice little quotes:

“Brad Cottrell was a paramedic when a friend introduced him to the high-rolling world of sub-prime mortgage lending.

Within three years of landing a job with Ownit Mortgage Solutions Inc. in Agoura Hills, his salary had tripled. His wife quit working and they bought a 3,000-square-foot house in Camarillo.”

And another:

“Erica Olsen knows it. She was an underwriting manager at New Century, and Monday marked the third time she had been laid off by a sub-prime lender. "It was just devastating," she said.

She didn't give up on the industry, though. The La Palma resident teamed up with a friend and colleague, Cece Sarno of Garden Grove, to start their own loan-processing outfit, CE Processing Group. Their goal is to grow so they can hire other workers who got pink slips from sub-prime lenders. They processed their first loan Tuesday.”

Let us examine these two cases. First, we have people making inflated bubble wages. We have someone making six-figures only by pushing an inflated asset. Now that the industry is well done like a steak, where else is he/she going to find a similar income? Somehow I doubt many of these folks have bachelors or masters degrees in some high paying profession. Then we have two women who still believe they are going to make it in the mortgage industry! Likely, their frame of reference has always been a positive [manic] real estate market and they have no idea what they just lived through is a once in a lifetime mania. They will no longer make what they once made, at least in housing, and this will be a hard fact of reality. What else can they do except open up another mortgage shop (yes, we need another one). Did I mention that delusions in Southern California run beyond Hollywood?

Sales Massively Down

If that 30%+ sales drop doesn’t shock you it should. Sales are drying up like Death Valley. It is only a matter of months before all of Southern California is negative year-over-year in median prices. In addition, many projects and sellers will be placing their inventory online during this spring and summer expecting the housing tooth fairy to save them. Once this grim reality passes they will realize that having a big mortgage and a sinking asset is the definition of financial distress. Even the mainstream media has gone neg-head on housing. The only people with pink pompoms out is the real estate syndicate. If the sales drop is any indication like previous real estate booms and bust, we are in for a major hurting in Southern California.

Only Higher Priced Homes Moving and Fraud

In addition only better priced homes are moving and square footage price is dropping. So the homes that do sell keep the median price floating high while the delusional sellers build up inventory with homes no one wants or could afford. In addition we know of many sub-prime $30,000aires buying over inflated homes assisted by desperate brokers and lenders. Mortgage fraud is peaking at a crescendo and stories are now hitting the mainstream media about folks getting over leveraged into homes they had no chance of paying. Even if the housing pundits want to run with this new peak price, let them. They are delusional and their rhetoric is like a pit-bull being cornered; but we housing bears are just as ferocious and like making money too. We smell their fear and realize that their time is up. They had plenty of warnings and signs were everywhere. But greed is strong and looking at the data we realize that they kept feeding the beast. Now the beast has a clogged coronary and no doctor is within site. Time for the battle of the housing bears and the housing bulls.

April 12, 2007

Lying Dirty Scoundrels of Housing: 3 Additional Factors to the Housing Explosion: Money Supply, Consumer Inflation, and Celebrities?

Many modern day monetarists would argue that the money supply should be fixed at a stable growth rate. This rate may range from 3 to 5 percent and assumes there is a concrete definition of what constitutes money. For all intents and purpose the provided chart shows the growth in 4 critical areas of the money supply, M0, M1, M2, and M3. Here is a brief description of each:

  • M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
  • M1: M0 + the amount in demand accounts ("checking" or "current" accounts).
  • M2: M1 + most savings accounts, money market accounts, and certificate of deposit accounts (CDs) of under $100,000.
  • M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

Money Supply and Inflation

As of March 23 2006 stats on M3 are no longer published by the Federal Reserve. Legislation is currently being presented by Ron Paul trying to reverse this. However this is critical since M3 is an important indicator of money growth and also includes foreign investment that has fueled a large part of this credit bubble. Monetarist would argue and have you believe that a controlled money supply is central to having a sustainable economy. They believe that a healthy economy is predicated on a key interest rate equaling the prevailing funds in society; essentially equilibrium between stable money growth and a prospering economy. Yet when these statistics are fudged or for all intents in purposes not even reported, this theory becomes much harder to stand by.

The fact that inflation is so understated by the Consumer Price Index (CPI) is laughable. For February of 2007 the current inflation rate is 2.42% annually. Oh really? Need we take a look at current house prices? Or maybe we should take a look at healthcare costs. And if you happen to drive you may have noticed that gas prices are not going up 2.42% a year. This again demonstrates the unbelievable measures that the Federal Reserve relies upon to calculate interest rates which directly impact the money supply. Lower interest rates create a higher money supply, the relationship is inverse. This is how the monetary exchange equation explains this:

Velocity x Money Supply = real GDP x GDP Deflator

Basically if the money supply grows at a faster pace than real GDP we would experience inflation. But this is another fabricated lie because we are no longer keeping track of M3 and the CPI is as reliable as Howard K. Stern. Any equation with corrupt variables renders the answer as negligible. From 2000 to 2007 during the Fed pants dropping of interest rates we’ve nearly doubled the money supply; now how is that for moderate inflation and free flowing credit? This actually explains why you may be making a bit more but don't feel richer. The Fed actually is ingenious in pulling the wool over the publics eyes. How can you increase consumer spending, postpone a recession, and keep inflation moderate? Easy. First you need to distort inflation statistics. Next, you need to keep the public bamboozled by thinking cheap money equals wealth. Yes rates are at 1% but that $10,000 car now will cost you $25,000 and you’re income has only increased at the “real rate of inflation.” Next, you increase foreign investment via CDOs and remove M3 stats. See! Shouldn’t we all be working at the Federal Reserve, otherwise known as the Wizard of Oz.

Now that sub-prime is heading toward the light, the focus shifts to the ominous Alt-A loans. You know, the grey matter between prime and sub-prime. Take a look at this chart:

As you can see defaults are rising sharply partly because rates are resetting and housing prices have become stagnate. Countrywide and WaMu are some heavy hitters in this group but all eyes will be on IndyMac to see whether they follow the path of big brother sub-prime. This free flowing money again is because of lose monetary policy that encouraged credit creation and the populations incessant fascination with all things real estate. Just look at the sharp rise of 30 day lates; this will parabolically explode because we are resetting at approximately $100 billion per month and housing is going the opposite way. Otherwise we are in a perfect time bomb with no remedy.


Then we face the celebrity status of housing. Unless you’ve been living under a rock, housing is the talk de jour in becoming an instant millionaire. TV commercials proclaim the benefits of no money down, flipper shows, and even radio ads talking about diversifying your portfolio with foreign real estate. In their view, a diversified portfolio would include houses in New York, California, Florida, and China. Not only that, there is a certain someone that is now infamous for going in debt to the tune of 2.2 million dollars. This 24 year old would be real estate mogul has been foreclosed on many of his properties and is now facing bankruptcy face on. Somehow he still believes, like many that the housing market will turn around and real estate will be that golden chalice that saves him. Not only that, he has become a social epidemic meme celebrity online inspiring hate and fans. Yesterday he decided that he will be coming out with a book. This reality based society we live in where it is better to be infamous than common is appalling. This swindler committed mortgage fraud, is publicly announcing it, and owned more homes than many frugal and prudent folks. The underlying message is this: don’t save, go in debt, and being common is pathetic. Let us not forget that ethics and financial expertise get an F for this person but somehow he has someone backing a book deal for him. Absolutely unbelievable. Nothing new I suppose, just look at what occurred when OJ tried to release his book about the murder of his wife.

Damn Lying Housing Pundits

And then we have the Real Estate syndicate machine trying to convince the public that housing is not on its last leg. They point to worthless inflation numbers fudged by the government and they focus on easy credit as your vehicle for wealth. Let me highlight an example regarding the Apprentice. Currently four people remain. What are their occupations?

James: Technology Company Owner

Stef: Defense Attorney

Nicole: Real Estate Broker

Frank: Real Estate Developer

Last week their task was promoting the new 2nd tower of Trump Condos; otherwise known as the oasis of delusional funny money. Anyways, phase one is sold out and they were pumping and hyping this place up. When Nicole and Frank hit the sites, they really had no idea about the nuts and bolts of real estate! The supposed experts got smoked by a Tech Company Owner and a DA. Again, my point being is that these labeled gurus rode the wave to the top but when all is revealed, they really have little business knowledge aside from pushing manic housing to the manic public. Do some research for yourself and you’ll find out this housing debacle is only beginning. Anyone buying a home in a high priced metro area at current prices is smoking some of Snoop Dogg’s pot and deserves a place on Real Homes of Genius.

April 10, 2007

Seeing is Believing: Los Angeles is in Another Housing Dimension. Let us Look at the Numbers.

I’ve put together this chart showing the magnificent run-up in housing prices from January 2001 to present in Los Angeles County, otherwise known as the era of manic housing. It is no wonder that people are so preoccupied by housing on a global scale. By looking at the above numbers we go from a starting reference point of $200,000 to the current median price of $528,000, an increase of 164% in six years. The fabled 20% double-digit increases now seem like a thing of the past; bidding wars and multiple offers seem like legend in today’s market place. As our trajectory is quickly turning downward most wonder what the impact of this housing debacle will be. Already we have our first major victim in the sub-prime industry and we’ve barely entered Q2. As the chatter shifts and all the housing head pundits begin to talk about the spring bounce and summer coming of housing, we must understand that this train has left the station long ago. If the yapping sounds like a Chihuahua it is only because they are fighting to hold onto an era that most likely, none of us will never see in our lifetime again.

Historically real estate prices had treaded at a slightly higher rate than inflation. Again I refer you to the above graph. One is the actual price and the other is linked to 5% appreciation compounded on a monthly basis. Although looking at the adjusted price range you may think to yourself that those prices will never come you must also look at the current price range. The truth is somewhere in the middle. But the stubbornness of many sellers and banks is unbelievable. While insiders in the housing industry leave through the red fire exits, late players are still coming into the game. They think that pie in the sky prices will be back again as soon as they place their 800 square foot home on the market with a new Maytag dishwasher. Many forget that there was a secondary mortgage market implosion in 1981 in California with price declines of 40%. But again we hear the typical peak chatter that somehow we are different this time and economic fundamentals no longer hold true in 2007. Oh yeah, and Southern California is the only place that gets sunshine in the entire northern hemisphere.

Let us assume that you are in the market to purchase a home in a middle-class neighborhood with good schools and a low crime environment. We will also assume that you have 20% down and the place you are looking at is $500,000. I want to walk through three various scenarios you would expect should you follow this route. I will not factor in tax benefits since this monthly nut has to come out of incoming cash flow. No abracadabra exotic financing nonsense:

Scenario 1: Fixed-30 year Traditional Mortgage

$100,000 Down-payment

$400,000 Mortgage at 6.75%

Principle and Interest Payment:


Taxes (1%):


Insurance (.75%):


Total Monthly Payment:


Scenario 2: ARM Interest Only

$100,000 Down Payment

$400,000 Mortgage at 5%

Interest Payment:


Taxes (1%):


Insurance (.75%):


Total Monthly Payment:


Scenario 3: Option ARM

$100,000 Down Payment

$400,000 Mortgage initially at 1.25% Teaser*

Option Payment:


Taxes (1%):


Insurance (.75%):


Total Monthly Payment:


*note this teaser rate has been common in the sub-prime market

So going over the three monthly payment nuts, we have $3,322, $2,395, and $2,157. From lowest option to highest, we have a difference of $1,165. This is enormous considering we have a difference of about 35% from the traditional loan to this more exotic form of financing. Interest only loans are dangerous because they are resetting and as the equity in the home is currently evaporating, there is very little room to navigate considering minuscule down payments. In addition, no principle is being paid since this is interest only. These loans, as many renegade brokers have advised, will free up additional cash-flow for other investing. Or as we know from the epic rise in foreclosures, squeezing in minimum wage crusaders into McMansions. The worst culprit of these has to be the Option ARMs; these loans give you the worst of every world. For one, you’re not even covering the interest payment if you don’t want to. As you may guess, the majority of folks opt for the lowest option; this is taken out of page 3922 in the credit card companies play book. If you give people a minimum payment they will opt for this. This is the psychology of the American consumer. Why else would we have a negative savings rate?

After looking at these scenarios is it any wonder we are in this mess? $2,157 sounds appealing especially if you can jump into a $500,000 home. However this number is vastly deceiving and many homeowners are quickly realizing this as rates reset and the pied piper is coming for his payment. The yellow brick road is paved with good intentions and many homeowners jump into the largest purchase of their lives without reading the contract. After witnessing this orgy of finance and most of us standing in the afterglow, we are starting to see the intricacies of this mess. It has been that people want to be deceived so let them be deceived. I’m not sure I agree with this. Basic finance isn’t taught in college or even in high school. Most folks assume that basic commonsense reigns in the world of finance but this rarely is the case. Given that only 25% of the population has a bachelor’s degree, and not everyone that goes to college studies finance or accounting, it shouldn’t be expected that people would understand complicated no-doc-negative-amortization loans that are concocted by MBS institutions. Brokers simply push the product, lenders simply underwrite the product, and Wall Street eats this crap up. Now that Wall Street has a full stomach, the option in terms of what you can use to purchase a home will tighten. Lenders are forced to use stricter underwriting criteria therefore forcing brokers to push more conservative lending options. Essentially the pool of buyers will shrink drastically at the worst possible time. Foreclosures are up, rates are resetting, and appreciation will soon go negative.

Looking at your three options if institutions become more stringent even enforcing only a 10% down payment the market will tank quickly. Maybe the above chart isn’t so unrealistic after all.

April 09, 2007

Real Homes of Genius: Today we Salute you Van Nuys. $535,000 for 814 Square Feet.

From county to county the party is heating up. Spring is in the air and overpriced homes are coming online like AOL. Each day, the MLS is flooded with delusional sellers thinking we are in 2005 and the market somehow will reflect yesteryear prices. In our 16 installment of Real Homes of Genius we will cover Van Nuys. We’ve covered such glorious places like Compton, Bell, Santa Ana, and Stanton. The jewels of Southern California and all showing sub-1,000 square feet homes for $400,000 to $500,000. Today we show that pie in the sky radius is rather large in Southern California. Today’s specimen is a 814 square foot 2 bedroom 1 bath mansion in East Van Nuys. This home is an excellent starter home with all the amenities you would ever want in a nest; a white picket fence, garage, and tree in the front yard. Okay the fence is actually security steel and the tree is bald but you get my point.

Average household income for this area is $44,712 and median net worth is $29,675. So yes, $535,000 is affordable for anyone looking to purchase here. If you are from out of state you are probably scratching your head and wondering “what is wrong with Denmark?” but you must understand that California has the sun and you don’t. I think the California Association of Realtors is trying to patent the sun for our soul usage. Hence you have homes for $200,000 and we have them for $500,000+. Makes sense? Good. It is always enlightening to see what this home sold for in the past:

Sale History
12/29/2004: $380,000
12/30/1991: $155,000

So these folks initially had the place listed at $574,000+ but realized they might be a bit too greedy trying to sell for over $194,000 in two years. Now they have dropped the price by $39,000 thinking they’ll lure someone into this magnificent place. I’m sure someone will do a case study on how folks can ask for ridiculous prices but have a hard time lowering their price. They call this the "sticky" nature of housing but I like to call it the delusional Napoleonic vision of grandeur you have on your home; why mince words when we can say sticky right? I discussed this in my previous post regarding the Duesenberry effect and how people rarely adjust their standard of living on the way down. Either way, these folks no longer have the lambs that were being suckered in by no-doc loans and claiming they make $95,000 working graveyard at Wal-Mart. Little by little underwriting is getting more stringent as the credit sewer system in Wall Street is getting clogged up and we need a little reality Drano to get this thing moving again.

Today we Salute you Van Nuys with our Real Homes of Genius Award.