August 21, 2007

Triangulating Real Estate. 3 New Market Behaviors: Rewriting History, Falling Sales Receipts, and a Sort of Diverse Workforce.

As I was cruising on the 405 this weekend fighting off the 93 degree humid weather, something was stickier than the air and that was the new message being spouted off over the airwaves pertaining to the housing market. Like listening to a compulsive liar, at this point I am amused at what is being presented as investment advice. The stock market seems pacified with the Fed’s actions even though foreclosures are going up by the hundreds each week and folks are scaling back their spending. With this as our context, I was listening to so called “real estate experts” saying that now is the perfect time to buy. Why? Because the market is going down! Yes folks, you heard right. Since the market is tanking you should jump in. Consider it like getting a 25 percent discount on your Titanic ticket after the ship hit the iceberg. The logic (or lack thereof) goes as follows. Since the market is going down, buyers now have the leverage in negotiations. TRUE. Since there is more inventory, you have more choice. TRUE. Therefore, you should buy a house. Sounds good doesn’t it. But what happens after you sign the papers and close escrow? Does the market suddenly stop going down because you bought a home? Are inventories projected to start declining anytime soon? Do we really need to point out how intellectually sophisticated you need to be to buy a Real Home of Genius at this point?

So today we will examine what occurs at the pinnacle of a panic. Amazing behavior occurs in times of distress. Like the powerful letter from the Depression, things can radically change when one lives in a helium-filled bubble. The three new items we will examine are the rewriting of history by housing pundits, falling sales receipts, and a diverse workforce.

Rewriting the Past for a Better Tomorrow

We all remember the massive 416 point drop of the DOW back in late February. Remember what caused it? Well at this point, the subprime implosion was in its infancy at least in the eyes of the mainstream media. The pundits jawboned and talked about the “silo effect” and how housing was much more diverse then a small insignificant subprime market. Oh really? Well the market bought this line of hog wash and went on back to its merry way of being in denial. While subprime outfits were struggling to stay afloat, we have this following astonishing vote of confidence from Countrywide on May 14:

“Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and 50-year-subprime loans, and also said Countrywide plans to add 2,000 sales jobs this year.”

So while the market was hitting a wall Countrywide decided to ramp up subprime loans. Not only were these subprime, but 50 year mortgages! Almost as an affront to the market, the implication seemed to be that the housing game will go on forever (at least for 50 years). It was as if Countrywide was going against the grain and staking their claim on the subprime market. Yet the problem with the current system is we’ve been living in a Ponzi Scheme. I talked about the Ponzi nature of the current housing market in October of 2006 even before any major subprime implosions hit the mainstream media. Now we are seeing the bold move by Countrywide come to roost:

LONDON ( -- Troubled mortgage lender Countrywide Financial Corp. has started laying off employees in an effort to cut costs as it faces a credit crunch, according to a report published Monday.

The Wall Street Journal, citing an internal e-mail sent Friday to employees of Countrywide's Full Spectrum Lending unit, said the company has laid off workers in that division, which handles home loans rated between prime and subprime. The e-mail didn't detail the number of employees laid off, the report said.”

Countrywide employs about 6,800 in this specific part of their business. The question must be asked, why were they pushing 50 year mortgages and hiring more staff as recently as May of this year in their subprime outfit? It definitely sounds like some folks are pining for the days of zero-down-no-interest-reverse-mortgage exotic loans.

Falling Sales Receipts

Americans love to spend. Personal consumption makes up about two-thirds of our gross domestic product. And with our negative savings rate, you can thank your Visa and Mastercard for your nice windfall. Or like many others, you can thank the shiny ATM on the side of your house otherwise known as mortgage equity withdrawals. Not much data has been shed on this pressing issue. However, the State Controller Office of California released figures that should indicate the future of the state. The release shows that total tax receipts are down $787 million below revised figures issued in May. I’m not sure why May was such a Pollyanna month? We have Countrywide hiring 2,000 people and ridiculous sales receipt projections by the state. Could it be that the industry was betting on the summer housing Easter bunny? It is absurd to think this game could go on forever. Leased $50,000 cars rolling off the lot. $5,000 plasma TVs sold on 0 percent interest for 12 months. Granite countertops. Even a boob job is available in 24 monthly payments. At a certain point the psychology of the market tips and people realize debt is not wealth. Even if they don’t realize this, unfortunately a foreclosure or an auto repossession will make this more realistic.

Keep in mind that the state receives tremendous amounts of money via sales receipts and property tax payments. Sales receipts you would think are easier to project. Property taxes however follow a different calendar and we are going to be in for a rude awakening in 2008. For one, folks are going to try to reassess their properties on a lower basis to lower their tax bill. Many will not because they still want to believe the housing market will once again bounce to the sky. Falling sales numbers will also hurt state projections. California is just one example but many other states including Florida, Arizona, and Nevada will have issues next year regarding dropping property tax receipts.

A Diverse Real Estate Workforce

If you haven’t noticed in the last two weeks, we are tremendously dependent on the housing complex. It is estimated that as of the start of the millennium, nearly 30 percent of all added employment is related to the housing industry. With the current housing market, how is this impacting the California workforce?

“The largest year-over job losses were in construction (12,000) and financial activities (7,000)--the sectors most directly influenced by conditions in the housing market. Construction's year-over loss was its largest since August 2002. In June 2007, year-over job losses in California's construction industry exceeded those of the entire U.S. construction sector, which showed a year-over loss of 10,000 jobs. The California financial activities sector's 7,000-job year-over loss was its largest since December 1995. In sharp contrast, the U.S. financial activities sector showed a year-over gain of 117,000 jobs (1.4 percent) in June 2007. Manufacturing (5,900), and natural resources and mining (100) were the other California industry sectors that lost jobs over the last year.”

*Source: California Employment Highlights for June 2007

When we have such a dependency on housing for work and wealth, problems will occur when housing trends downward. The last housing recession as most housing recessions, was inspired by drops in employment. Oddly we are facing a housing led recession here; that is housing going down will force people out of housing related jobs which are normally high paying and this will lead to even lower housing prices and a vicious feedback loop is activated. Will people cutback on their spending when times become tough? Don’t bet on it if the Duesenberry Effect has anything to say about this. Welcome to the new world order of housing. The rules will be updated as we go along and history will surely remember this epic bubble.

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Oso said...

Very interesting article, Dr HB. Thank you. Regarding another side of the bubble, Dean Baker has a very interesting article dealing with foreclosures and individual homeowners. He proposes upon foreclosure, the homeowner be given the opportunity to remain in the home and rent at fair market value. He lists numerous caveats to the idea to discourage greed. Definitely interesting, I'd rather see a homeowner (not talking about 130K families or 14K farmworkers) get bailed out than the hedge funds.

brianbarou said...

Amongst other differences between this housing sector decline and others is that your local bank does not hold the mortgage even if they originated the loan in all likliehood.
The owner -say a state owned German bank with a conduit subsidiary in Ireland- paid for the "stream of 15% income" they were going to receive for the next 28 years after the reset point when the bought the structured finance.
This is who one would have to negotiate with to stay in his foreclosed home!

thamnosma said...

Doctor HB quoted:

"Reuters, reporting from a Wall Street conference, says Countrywide CEO Angelo Mozilo unveiled plans for new reverse mortgage products and 50-year-subprime loans, and also said Countrywide plans to add 2,000 sales jobs this year"

Doc, do you really think Tony was just living with his innocent head in the sand when making that statement? I imagine he, more than most, knew exactly what was about to transpire.

Just as likely a scenario is that Mozilo (from now on to be known as master fraudster) cynically made that announcement to maintain market confidence in his stock.

All one need do is refer to Liberal's posting on your previous column listing all of Mozilo's cash outs since, say, last March or April. A steady stream of selling his holdings to this day, tens of millions of dollars.

Really think he didn't have a plan?

Dr Housing Bubble said...


All leaders in the housing industry are looking out for the little man on the street. This is fact. Mozilo selling his stock was simply a way to demonstrate his love for the public.

When Countrywide announced the 50 year mortgage while simultaneously dumping stock, it was a masterful ballet of saying one thing and doing another. NO one saw this subprime debacle coming. I mean who would ever think that giving a minimum wage worker a $500,000 loan could go bad? Not me. I believe everything the MSM tells me even if facts are contrary to what they are saying.

Dr Housing Bubble said...

Buying time has gotten more expensive:

Shares of Thornburg Mortgage Inc. continued falling at the opening bell Tuesday a day after the struggling mortgage lender disclosed the value of its assets had fallen sharply in a matter of weeks.

The Santa Fe, N.M.-based lender on Monday said it sold $20.5 billion of its safest bonds at 95 cents on the dollar to raise cash to stave off its creditors. The company lost $930 million because it sold the bonds at a discount.

While the deal shores up the company's balance sheet and buys it some time, Thornburg said the value of its assets has dropped to $1.4 billion from $2.2 billion at the end of June. The company's assets lost almost $230 million in value in just four days."

Dr Housing Bubble said...


What do you make of Buffet taking a look at Countrywide?

Countrywide buoyed on Buffet speculation


Steve said...

dr housing bubble wrote:

Property taxes however follow a different calendar and we are going to be in for a rude awakening in 2008. For one, folks are going to try to reassess their properties on a lower basis to lower their tax bill.

Doesn't California have a cap on the amount that property assessments (and therefore taxes) can increase per year due to increased valuation? Oregon has a 3% annual cap on the amount the assessed value can go up, and I thought the voter initiative that brought this into effect was modeled after a similar California initiative.

Unless you purchased a house built within the last 7-8 years in Oregon, even a drop of 50% or more in house values would still leave many above their assessed value.

thamnosma said...

Dr. HB:

Countrywide has assets and for a behemoth firm like Buffets, they can sit on stuff for really long time...way past one you and I hope to have something remaining in a 401k. Maybe it's just part of his newly-discovered conscience (and desire to raise our taxes) know, a private bail-out because he cares.

I am amazed how so many predictions you've made many months ago are coming true daily. How about this one:

I'm really concerned now that a deep recession is heading our way sooner rather than later. It is hard to imagine not starting to see a spike in general unemployement along with what promises to be a very dismal retail Christmas season.

Unless the power brokers can magically pull another bubble out of their hats, we are just beginning a painful slide down the economic slope.

Americans really haven't had to worry about mass layoffs in a long time. Maybe we still won't, but certain sectors are gonna be demolished here.

thamnosma said...

Here's one more very pertinent news story. It's Bernanke's deputy basically saying the worst is yet to come.

And only a month or so ago the subprime problem was "contained" and "at bottom". Remember all that? Anybody saying it now?

I guess we'd have to pull a Nixon on this and say any comments claiming the subprime problem is contained are now inoperative.,25197,22286304-5013404,00.html

Dr Housing Bubble said...


Yes. Prop 13. However, each time a property is sold it is reassessed at the current sales price. Some people looking for relief will try to restructure there tax burden.


When they say contained they are using it like, "these chains will contain Houdini."

We are no where close to the bottom. Need we remind people that we still have $1 trillion in Alt-A and subprime mortgages ready for resets? Each month $30+ Billion in loans will reset until September 2008.

Dr Housing Bubble said...

To be fair and balanced, here is a lender that is handling the storm so far:

The anti-Countrywide

"We call our product 'dull and boring,'" Hudson City CEO Ron Hermance told "Our main concern is credit quality. We lend money to people who almost don't need it."

Accordingly, Hudson doesn't - and has never - issued subprime or low down-payment mortgages. And unlike many other lenders, they hold onto all mortgages they originate rather than selling them on the secondary market.

Now tell me how many lenders avoided subprime mortgages, asked for down payments, and actually held onto the actual mortgage?

Steve said...

Interesting that the US Dollar has lost roughly 30% of value n the last 5 years.

More interesting that Chinese goods have kept getting cheaper for the last 5 years.

Sure seems like CHina is giving us a 30+% subsidy on all imported Chinese goods.

chilling said...

well, that is what greed leads you to.i laugh when at open house i am told we reduced it by 10,000,i say yaaa,but house price is only 200,000 and you asking me to pay600,000.
I see housing prices in OC still at their historic level above the last one, everybody is in denial.I know house which last sold for 600,000 and now on market for 700,000.joke lol.this is correcting market real price has to be 250,000.
we the buyers can wait, we will. why be fool and buy now?
let the investor deal with his investment plan and make exit and we the people who buy house to live can buy our homes.
I am sure with people on side line.housing will come to real time prices,I mean real time,how is what I think like this.
market went up for nothing, no new jobs,factories, gold rush,nothing noting, it will fall too hard as hard it will.
Investors lose , people who bought thier homes in real time, will keep selling and let investors lose.
One must not try to live in fanatsy world,will continue

Steve said...

We need another bubble!! How about used cars? Anyone feel like paying me $35,000 for an 8 year old Honda?

Maybe old computer gear? How about $10,000 for an old Dell PC?

Uncle Ben better call uncle Alan and find out what the next bubble is supposed to be.

How about DVDs? Maybe $90 for a slightly used copy of Battlefield Earth, case chewed a bit by the dog. Hurry NOW! It'll cost $120 next week!!

covered said...

LOL! Good one!

Dr HB:
RE: Buffet & Countrywide

Countrywide came out last week with a 4 1/4, 12/29/07 bond paying 30% at maturity!

Knowing Buffet's style, he'd scoop those up betting CFC stays above water 'till new years. That way, he'd have a prominent place in the creditor line in bankruptcy court if they go bust. On the other hand, and of course we're just guessing here, if they do go under, I think he'd try to buy them in bankruptcy rather than buy the stock now and lose it all at the courthouse. This assumes he has any interest in the company at all.

graphrix said...

This post has inspired me to get off my duff and do a post on foreclosures in OC with an adjustment to the housing stock.

I will also do an adjustment for the amount of people who live in the IE and who are commuting to OC for work. The census bureau did a study in 2000 about this. I can show the amount of job creation has been in line with the amount of housing produced in OC.

I also think it is possible that OC will have more NODs than sales for August.

TechGromit said...

I read a lot of who is to blame for our current mortgage / Market crisis, but no one blaming one of the worse ones. Sure the shady loan guy sold a adjustable, sub-prime mortgage to a deadbeat who blindly signed on the dotted line at the encouragement of his real estate agent. The mortgage was then sold to investors on wall street who used it as collateral to leverage even bigger loans. But why did wall street buy these mortgages in the first place? Because rating agencies like Moody's, Standard & Poor's and Fitch rating this crap at AAA ratings. If it's risk was properly accessed in the first place, and giving a proper rating, then no one on wall street would have brought this crap, thereby the original lenders would be stuck with it. They would be unable to make any more bad loans cause they wouldn't be able to sell what the lent so far, this crisis could been stopped in it tracks long before it became such a problem. With no more crazy loans being approved, the bubble would have stopped growing in 2003 with prices topped out by what people could afford.

There should be some kind of repercussions against these guys. They are the ones we were paying to keep this kind of thing from happening the in the first place. Now of course the market doesn't know what is a good deal and what is crap. Any security rated with AAA is eyed with suspicion, cause there no way to tell what it a good investment and what is crap without carefully studying what is made up of, taking days or weeks to do so, but isn't that what we were paying these rating clowns for?

There creditability is now shot to say the least.

Son of Brock Landers said...


To answer your question on Buffet and Countrywide, I don't think he'll scoop in and buy a stake in CFC. I think he might be looking at those subprime piece of sh*t CDOs and asset backed securities that are out of favor. He might be considering a purchase for pennies on the dollar, and if I recall correctly, bears sterns got 5% of total value when they tried to sell one hedge funds CDO bits. Yes, the CDOs are/were bad investments at the previous value, but a millions of loans on sale for thousands of dollars might sound like a good investment to buffet. He'll analyze a situation and invest when he feels it is right. I don't think Countrywide is right for him now, especially after the 10% pop to the stock price when the WSJ floated out that unsubstantiated rumor of Buffet intervention.

Keep rocking Dr HB. I do not know if you have seen the new Bravo "reality" series "Flipping Out", but it might be the best satire of Southern California culture-luxury lifestyles since "Sherman Oaks". I keep trying to figure out if it is completely faked or not.

Steve said...

Here is an interesting bit from an article back in June.

Citibank Credit Card Issuance Trust's (CCCIT) $350 million 6.15% class 2007-A3 notes are rated 'AAA' by Fitch Ratings. This rating addresses the transaction's ability to make timely payment of interest and ultimate payment of principal by the legal maturity date.

I love tidbit regarding "ability to make timely payment of interest and ultimate payment of principal"

Should be very interesting when all of the credit card debt ratings are updated once people can't suck cash out of their homes to pay them off.