Lost: Agents Find Their Way Home

I rarely watch television. But one show that I really enjoy and regularly watch is Lost. It is a show about a group of castaways, from all walks of life, redefining their lives and trying to find out who they are on an isolated island after a horrific plane crash. In the process, one’s past life does not matter as long as you can make and become who you say you are. An office man with a disability becomes an uber-hunter and leader. An ex-convict is given the opportunity to find his new morality. And most importantly, a shoe shine boy is able to make millions in real estate speculation?

Okay, maybe that last part was inserted by your author but you would think that by looking at the number of real estate agents, everyone decided to castaway their old jobs and ride the housing boom gravy train. Agents, brokers, lenders, construction, and home builders all benefited mightily by the housing boom. In addition, travel agencies and consumer outlets did well too with the newfound equity wealth of many. A virtual ATM had been slapped on to the side of your stucco two-bedroom condo, courtesy of the housing boom. The Los Angeles Times has a real estate section each Sunday, more like a housing propaganda section, but the last few weeks of articles are pointing toward a slowing housing market and are creeping their way into the paper like the tide at your locally polluted beach. This last Sunday they had an article titled “Not an agent’s market either” which talked about the apparent boom and now bust for new real estate agents. Currently there are 510,000+ agents in California. 50 percent of agents have joined the ranks in the last four years according to the article. This would mean that none of these agents have faced a real downturn. Let us read a section in the article describing a recently minted new agent LA Times Article:

“Nuechterlein found the business a tough slog from the get-go. He had a job selling computers for a major chain, earning up to $60,000 a year in commissions, but like so many others he thought he could make an easier buck in real estate.”

Okay, so first we have a case-study of someone earning a middle-income leaving their job to enter real estate. Little did he know that real estate ebbs and flows in cycles Real Estate Cycles from 1800 till Present. But now that the market is shifting he is beginning to rethink his new career choice. Let us look at another statement in the article:

"This is not a get-rich-quick industry," said Jodi Werner, vice president of the Orange-based Pacific West Assn. of Realtors, which predicts a 10% drop in its 14,380-person membership next year. "There is a lot of pressure."

This isn’t a get rich industry? Oh really? Then why are all the Tom Vu late night commercials touting get-rich-quick schemes in real estate? Heck, I even see Donald Trump doing a learning Annex here in Southern California in November. Come on, these talking heads are now doing a good cover your a** (CYA™) technique since they know the market is shifting dramatically. But in real estate, where we are constantly told how limited land and space is, will there be enough of the pie for everyone?

“The air coming out of Southern California's real estate balloon is sending more than a few agents packing. In a business where 15% of the agents make about 85% of the sales, according to industry experts, and the number of sales in California has plummeted 31.7% since September 2005, it's no wonder that rookies and veterans alike are opting out.”

Read that very carefully you aspiring Tom Vu, 15% of the agents make about 85% of the sales. The Pareto principle applies here as well. Italian Economist Vilfredo Pareto observed that 80 percent of tax revenues were received by 20 percent of the Italian population. He went on to conclude in many economical systems that an 80-20 rule would apply. Residential real estate in this country also applies. Again, the facts are pointing toward a declining market and many fail to realize what will happen to these agents when the market dries up completely. Is the well deep enough to maintain these new comers on life support? I doubt it. Then what will happen to the economy? This is the main question. I pointed out in one of my previous posts Realtor Mantra that 40 percent of new jobs are linked to the massive housing boom of the 21st Century.

It is hard to beat a dead horse, hearing the thud of your shoe against his stale skin, but the mainstream media is only starting to point out what many on the housing bear circuit have been purporting for the last year (some even longer). Do people think, like our above case study Nuechterlein that they will be able to waltz right in back to their old job positions? I doubt it especially when an economy is contracting – just look at the latest GDP numbers. Many folks will soon realize that they are lost and will quickly need to redefine themselves. How they will go about this is another topic in itself.

Filed in: Realtors real-estate housing-data mainstream-media

Realtor Mantra: Buy Today, buy Tomorrow, buy Yesterday!

Let us warm up our brains and do a visualization activity shall we? Imagine you are in a forest being chased by wild boars. You run through the green and brown shrubbery and hear the grunts of the boars as they follow your scent. Your breathing is intense and you run at full pace toward a light that you see creeping through the forest foliage. As you approach the light, you realize it is heading toward a steep and rocky cliff. The boars are gaining ground. What are you to do? You only have a few minutes and things are getting worse by the second. But then you realize you are a card holding Realtor! And you remember the speech given to you last month about real estate always appreciating and growing branches into the sky! Heck, the speech even went so far to discuss that everything in life given the right mentality goes up like a hydrogen powered German Hindenburg. As you remember this the boars surface, hungry for your flesh. You smile and hold your mantra to your heart and jump with pure glee.

So what is the point of this story? Besides the fact that the boars were only chasing you because you had unopened beef jerky in your left pant pocket the story serves as an example of faulty logic even in the face of imminent danger. Yahoo Finance had a top story today discussing the massive drop in new home prices. The headline reads “Home Prices Plunge by Most in 35 Years” and the article contains this as the opening paragraph:

“The median price of a new home plunged in September by the largest amount in more than 35 years, even as the pace of sales rebounded for a second month.

The Commerce Department reported that the median price for a new home sold in September was $217,100, a drop of 9.7 percent from September 2005. It was the lowest median price for a new home since September 2004 and the sharpest year-over-year decline since December 1970. The weakness in new home prices was even sharper than a 2.5 percent fall in the price of existing homes last month, which had been the biggest drop on record.”

Even in the face of this we get talking heads such as David Lereah, King of all things delusional discussing that the worst is already past for housing. Even Greenspan jumps in by saying real estate has seen the worst, but not yet. Huh? Are we taking notes out of the Karl Rove handbook or are we testing our ability to use Orwellian double-speak? So let us dissect the article. Last month we had a record drop of 2.5 percent reported by the Commerce Department for August housing data. This month, we get a drop of 9.7 percent for September which is four times the amount of the past month. These are year over year figures so this is a trend. By my account, when you break a record two months in a row you have not seen the worst. Anyone who has taken a basic economics class realizes that macro trends take time to filter through the economy. Reversion to the mean at times is slow but at other times can happen very quickly. But listening to these folks is like having a four year old translate a Chinese television program to you in Oxford English and expecting it to be 100 percent accurate.

You are starting to see a paradigm shift. Those associated with housing have had centralized meetings regarding their message.

“How should we address inventory rising?”
“What about year on year price drops?”
“What can we say when home builders are losing 50 percent of their market cap in one year?”

And these brilliant minds of America came up with a slogan that would even baffle Einstein for years. The bust and slow down is already over! Wow! Simple yet so profound. These real men and women of genius decided that their campaign message would be to preempt any bust or down turn talk by already saying that it occurred. Forget the fact that the last six years of real estate appreciation would look like a rocket ship flying off of your Excel spreadsheet. Forget the fact that we are in unprecedented territory and have never witnessed such massive credit expansiveness linked to one industry. Even Bloomberg magazine links 40 percent of recent jobs are somehow related to the current housing boom.

Bloomberg 40 Percent Linked to Housing

But again, why let facts get in the way! These are things of the brain and who wants to waste their time using a worthless organ when you can go with Jim and the Twins and speculate, flip, and use massive credit to become the next Donald Trump. You need to give it to the housing industry for this tactic. They are simply protecting their interest (and livelihood for that matter).

So why is the party only beginning? Let me list a few major reasons:

1. Sky rocketing inventories
2. Massive number of loan resets
3. Buyer and seller psychology

Regarding point one, sky rocketing inventories by simple microeconomic theory will force prices down. Homebuilders have created a massive glut of homes on the market that will continue to saturate 2007. For you mathematicians you can figure out inventories by this very complex Calculus equation:

Homes For Sale – Homes Sold = Remaining Inventory
More homes for sale plus less homes sold equals more inventory! Damn, my head hurts when I do math so let us move on to point two.

This year it was estimated that 500 million in loans reset. Next year it is estimated that 1 trillion (yes, that is a Mr. T) will reset as in 2008. So if so much has gone into reset this year why haven’t we felt the boars teeth in our leg? Because this year, many folks were still able to refinance and unload homes to greater fools. Yet 2007 will prove to be the year were the buck stops for housing. I discuss this in detail in another one of my post so I won’t go into that further. Point three regards market psychology.

Remember the current Yahoo headline? They use the word “plunge” as in “yo, he took a massive plunge on that motocross jump dude.” Or the word conjures up memories of you standing over the porcelain throne plunging away to fix the toilet. Either way, pain or crap, we are in for it and this is only the beginning. Yet listening to real estate agents you would think that today is the absolute greatest day to buy because as the fool you are, you missed out on the equity run. This Johnny come lately mentality worked when year on year gains were in the double-digits. But how do you sell a 9.7 percent drop? Easy! Just say this:

“Hey when I told you the 2.5 percent drop was the lowest ever and prices would go up I was off one month. This 9.7 percent drop IS the real lowest and now we are set to soar to the moon.”

You can modify this script to fit your needs and modify it to incoming figures but you get the point. Market psychology is shifting quick and the mainstream media is now using stronger words in headline stories. There was a story on ABC this week about a couple that didn’t realize there payment had adjusted from $1,700 to $3,800 a month. There explanation? They didn’t read the fine print. The lender didn’t mention a reset happening so soon. Oh, and the lender said boars don’t bite and you can fly as if you were tripping on LSD. Well, they didn’t say that last sentence but at least that would have more semblance of reality than the drivel that they are currently spewing.

Filed in: Realtors real-estate housing-data

Ponzi Financing – The House that Credit Built.

Do you know the story of Charles Ponzi? Ponzi was an Italian immigrant and figured out how to use an early form of arbitrage to create money. In a nutshell Ponzi made money by exchanging foreign postal stamps that were fixed and leveraged into favorable currencies. Since Europe was ravaged at the time, many currencies were devalued yet the rate of stamp was never changed. This was all legal. However, Ponzi decided that he would seek out investors and offered them a 50 percent return on their investment in 45 days. You could double your money in 90 days! What did this do? Well after a few successful investments he started to build momentum. Take a look below:

Feb 1920: $5,000
March 1920: $30,000
May 1920: $420,000
July 1920: $1,000,000+

This was the start of the Securities and Exchange Company (sound familiar?). The ironic thing was that Ponzi was losing money daily. The thing that kept him going? Debt. Basically he was paying out his investors with money that was coming in. In fact, so many people bought into the hype that widows were mortgaging their homes to get a piece of the action. When someone from Barron’s decide to examine Ponzi more closely, they realized that the company was completely unsustainable. They realized that 160 million postal coupons would need to be in circulation when only 27,000 were estimated to be in use. By August 13 Ponzi was under arrest. Even at this time, so many people had blind faith in Ponzi that they cried and held anger toward the officers who arrested him. They bought into the dream Ponzi was selling even though economically it had no basis in fundamentals.


“Hello, my name is Charles Ponzi and I approve of the Housing Bubble.”

Looking back nearly 100 years one can easily say “why in the world did people fall for the Ponzi scheme?!” Why look back that far when we can look at our modern day heroes, the flippers and speculators. Again how does this compare? For one thing, many flippers that purchased properties in the last few years did not care that the property would produce a negative cash-flow because they figured a greater fool would purchase the property. Heck, they were fixated on 50 percent gains! Think of it this way, buy a property with $10,000 down, spend $5,000 fixing it up and sell it for a profit of $15,000. So you get your $15,000 back plus $15,000, a net gain of 100 percent. In addition, many flippers held onto property for only a few months thus increasing their yearly gains. So this is all anecdotal right? If you want a real life case study I point you toward Casey, a 24 year old flipper with 2.2 million dollars in debt: www.iamfacingforeclosure.com

And again if you look at recent foreclosure data for the month of October, 50 percent of mortgages that are entering foreclosure originated in 2005 or after and have a median age of 14 months. This is not a homeowner that bought in 2000 and is worried; that is unless he used his home as an ATM machine and did cash-out refinancing. The well is quickly running dry. Washington Mutual reported that 30+ lates noticeably increased in the last few months and their mortgage portfolio has decreased. In addition, they are laying off 9,300 workers. Are these signs of a booming market? Or what about Kara Homes that is now in Chapter 11 bankruptcy? http://www.bloomberg.com/apps/news?pid=20601087&sid=ajY74Kg6RI7o&refer=home

These are only two examples of a financer (WM) and a seller (Kara Homes) that are two sides of the same coin. One cannot do exceptionally well without the other. Now that the Ponzi scheme is starting to unravel and lending is tightening, we will see more caution by buyers and more drastic measures by sellers. Now we will get those that say “are you kidding! I can still get a 125 percent interest only with no money down.” Is this really prudent? Look at the below data by the Mortgage Broker Association:

“As of September 2005, Adjustable rate Mortgages (ARMs) accounted for roughly 70% of the prime mortgage products originated and securitized and 80% of the subprime sector.*”

* 2006 Global Structured Finance Outlook: Economic and Sector-by-Sector Analysis, FITICH RATINGS CREDIT POLICY (New York, N.Y), Jan. 17, 2006 at 12.

Think this is isolated? Look at some data for the Bay Area:

“The following chart shows the percentage of Bay Area loans that were interest only or Option ARMs (know as negative amortization).”**
Year Interest Only Option Arm
2005 42.6% 29.1%
2004 43.7% 9.6%
2003 20.3% 0.8%
2002 12.0% 1.7%
2001 2.9% 1.6%

**Kathleen Pender, Mortgage options explode, SAN FRANCISCO CHRONICLE, April 13, 2006

Like a Ponzi scheme, it is good until it isn’t. Think of it as musical chairs. When chairs are plenty, everyone is having fun. Yet as the music winds down, we know that eventually only one person will be able to sit.

Filed in: mortgage-fraud housing-humor mainstream-media housing-data

Foreclosures? Housing Bubble? In Southern California? Impossible!

Last week DataQuick released quarterly foreclosure numbers for the state of California. If anything the numbers again are pointing to a bursting housing bubble. Take a look at the chart below:



First, DataQuick has an interesting quote in the article accompanying this data:

“The median age of the home loans that went into default last quarter was 14 months, and more than half were originated in 2005.”

More than half of the loans that are currently in the foreclosure stage were originated in 2005. In addition, the median age of loans in default is only 14 months. 14 months! Think home owners did a Gumby and overstretched themselves? Let us dive into three key points from the chart:

1. San Diego is getting hammered. Foreclosures are up 159.9% from the third quarter in 2005. Didn’t get that? San Diego is facing foreclosures up in the 160% range. In raw number terms we have 2,355 homes facing foreclosure where last year we only had 906. Let us run a hypothetical from the article. The average California home foreclosure was 5 months behind ($9,829) with a median mortgage of $306,000. Let us do the numbers above shall we?

2005 3rd Quarter = (906)x($306,000) = $277,236,000
2006 3rd Quarter = (2,355) x ($306,000) = $720,630,000

Even at a low number, many housing head pundits say that the difference between 906 and 2,355 is negligible. Do you think half a billion dollars only in the San Diego area now at risk is negligible?

2. Southern California is up 104.8% in foreclosures. So you are telling me that this isn’t isolated? Nope. This is statewide. Where last year the canary in the mine San Diego was facing pain, now all of Southern California is facing an increasing number of foreclosures. And we are talking a dramatic change.

3. Statewide California is seeing a jump of 111.8% in foreclosures. How this isn’t big news boggles the mind. We currently have 26,705 homes facing foreclosure. Of course there are many stages to foreclosure as listed below:



But the difference now in 2006 as opposed to 2005 is:

• We are in a falling market
• By looking at the data, half of these loans originated during or post 2005. So much for having years and years of equity like many claim.
• Less buyers are in the market
• Many adjustable mortgages are, well adjusting (big surprise)
• Market sentiment is drastically changing
• An X factor as well. Many folks took out HELOC and home loans that have much higher rates. Equity is at all time lows even though appreciation has ramped up to all time highs. An oxymoron yes but foreclosures are through the roof. Like I discussed in a previous post, equity isn’t yours until the certified check is in your hands after escrow is closed!

The market is changing day by day. Fall and winter are slow selling and buying seasons. I’m thinking the big show will be spring and summer of 2007 when many sellers think they will be able to unload their homes at peak prices. Unfortunately like the five year old learning there is no Santa Clause, they will find out the equity bunny is nowhere to be found.

Filed in: foreclosures housing-data Southern-California-Housing