Saturday, April 21, 2007

Cape Hatteras: Mc'Mansionville

I spent a few days on the outer banks of N.C. My impression was ‘Major Speculation’.

I was a windsurfer once in the 80s and 90s. (O.K. I’ve now dated myself.) I remember photos from ads in the windsurfing rags that showed some nice established homes for rent. Now it seems there are several thousand more houses! Maybe I exaggerate, but not by much.

Most of what I saw was new, probably built in the last six years and all of them Mc’Mansions. I did not check but most of them appeared empty. Most of them were also vacation rentals but half of those were for sale. That added up to a lot of properties for sale.

Now as you might surmise, I traveled to N.C. to look at property to scoop up when the market falls further, say three or more years out. I am now a little gun-shy of my first choice, Cape Hatteras. I’m not familiar with the outer banks but I think that the over capacity I see there is a very bad thing, enough to cause problems for their housing market for many year to come, but that is just my opinion.
Any comments are welcome.

Hard times in N.C. housing market

I arrived at Washington Dulles airport to see three building cranes rising in the distance within sight of the tarmac. A sure sign of continued building.

I connected from there to Raleigh and drove to Hampstead down highway 40. I saw lots of billboards advertising houses, condos and real estate agents. The rest of the billboards were mostly for cars which can be had right now for 50 to 70% off of the sticker price…Yah, that’s quite a price cut.

Driving around a small town called Surf City in the Wilmington area, I saw row after row of new beach homes with more for sale signs than you could read while driving. I opted to walk a bit, but then a R/E agent spotted me and saw I had a pulse, the chase was on! Me running for my life, him running for his dinner. I got away.

I managed to pick up a flier for one house listed for 1.4 million, price reduced to $999,000. A couple of streets on an owner had a custom made banner hanging across the house that read ‘Make me an offer’.
(Smells like desperation to me).

I have to say that so far I am surprised to find the number of projects under way here in the area and the shear number of for sale signs, far more than I had imagined. It leaves me wondering, what are they thinking?

Wednesday, April 18, 2007

I'm on the road again

I'll be traveling again, this time to North Carolina. I will be posting as often as I can.

I’ll be taking a look at the S.C. housing market close up.
S.C. is touted as having a strong jobs market but their R/E market looks to be tanking, two things that usually don’t go together.

I’ll be back with what I find.

High gas prices and big profits

It seems a little too convenient to me that oil refiners point to environmental laws as reasons they can’t increase capacity. This same lack of increased capacity is their reason behind rising pump prices.

While I don’t begrudge a business for making profits, I do take exception when their profits are breaking all historic records. Why on earth would they want to build more capacity, killing the golden goose and spending their windfall to do it?

Increases in gas prices won’t kill the economy but they will put a squeeze on Americans, further depressing any forward momentum this economy has left, if any.
Behind high gas prices: The refinery crunch
When gasoline prices surge, a lack of refining capacity is often blamed. What's being done, and is it enough?
"Everyone is quick to say "look at these refiners, they're driving up the price,'" said Phil Flynn Flynn, senior market analyst at Alaron Trading in Chicago. "But if I wanted to build a refinery tomorrow, I couldn't do it."
And then there's the public's newfound concern over global warming and its supposed commitment to do something about it. President Bush himself has called for a 20 percent reduction in gasoline use over the next 10 years.

Tuesday, April 17, 2007

The definitive housing bubble glossary

Housing Bubble Glossary
For a primer on acronyms and R/E jargon this is a must read.
You will be seeing many of these used as the R/E bubble unwinds and it will help to understand as well as entertain.

Monday, April 16, 2007

Subprime blame game

As I pointed out in an earlier post, The Blame Game , the finger pointing is about to begin.

The finger pointing has started early and promises to become even more entertaining.
The entertaining part is the fact that no one really wants to own up to their part in this mess. Like children we will point at the next guy and say he did it. On either side of the transaction however, each party has an obligation to be aware. Claiming to be coaxed down the road to ruin by someone else just won’t wash.

And to the government: A bailout of anyone in this chain reaction cluster f@ck is bad parenting. Let us learn from our mistakes. That goes for bankers too, of all the parties involved they should have known better.
That’s my rant, Vern

This from CNN Money Subprime Blame Game
Some 2.4 million homeowners are in danger of losing their homes, many because of bad subprime loans. Critics are pointing their fingers at who is responsible - here are the main targets.

Sunday, April 15, 2007

French housing bubble set to burst

French property construction plummeted 15.1pc in February and home prices have begun to slip in the first sign that America's housing woes are spreading to Europe.
French house prices have shot up by 210pc since 1995, compared with 190pc in the US, much to the delight of 180,000 Britons with second homes across La Manche. But after years of double-digit gains the pace slowed to 7.2pc last year and turned negative in January with a fall of 0.6pc.
"The market has turned in France, and this is the trailer for the movie we're are going to see across Europe this year," said Jean-Paul Six, chief Europe economist for Standard & Poor's.
"I think we will see falling house prices in France in coming months and that is going to cause headlines. It is the delayed effect of rising interests rates, which have already gone up seven times to 3.75pc, and are going up further.
Spain, Ireland, Scandinavia, Holland and Italy - as well as Britain - have all enjoyed housing booms, with much of Eastern Europe playing catch-up. The big exceptions have been Germany and Switzerland, where property has been flat for a decade.
I can tell you the effects are showing up here in Norway. Last year there were bidding wars for homes, this year the market has stalled with a lot of homes coming on the market and lackluster sales.

After a long visit to Spain last Spring I saw first hand the housing bubble there. I have to agree, it's probably the largest R/E bubble in the world. However news about the French housing market going negative is just starting to emerge and I will be watching it with interest.

Friday, April 13, 2007

Bailout and the law of unintended consequences

It seems no matter how I pencil out a possible bailout of the cascading mortgage defaults, it ads up to a reward to the banks and lenders. They perpetuated this mess, turning a blind eye while dubious mortgage brokers pushed predatory loan packages on anybody with a pulse.
You know who is going to pay the bill…you and I.

Here is yet another reason that government meddling is a bad idea. Better to let the market sort it out and the banks that stood by and let it happen can go hang.
"Still economists say bailout could have the effect of causing more defaults. "If the plan is to pay off loans when people quit, then I plan to quit paying my loan," says Michael Englund, chief economist at Action Economics.
What's more, some economists say a bailout could encourage more risky lending in the future. "A bailout would validate what some of these lenders and borrowers did, which we now understand was reckless," says Carl Tannenbaum, president of the National Association of for Business Economics.
"I don't think that's what we want to do."

Default Dilemma

Default Dilemma
The subprime market was developed for people who don’t pay their bills.’”
“‘Now they owe more than they have,’ Robinson said. ‘They’re unable to sell because they owe more than it’s worth. (Buyers) waited too long to sell. They panic and they do a short sale.’”
“In short sales, sometimes the lender has to ‘eat’ the loss and sometimes the borrower carries it as a debt, she said.”
This story comes from Oregon but it is playing out in many parts of the country right now.

A new dilemma is realized by many who took out second mortgages on their homes. Recent laws passed by congress make second mortgages actionable, meaning the home owner can not declare bankruptcy and walk away from the debt. The bank has the right to take action to collect what it is owed.

The short sale rout:
OK, you’re patting yourself on the back for successfully negotiating the short sale of your house with the lender. You have a buyer at a lower price than what is owed the bank and the bank agrees to take less to keep the house off its books.

You are now broke but debt free right? Wrong!
The IRS is one step ahead of you. Recent changes in tax rules now make the amount the bank took as a loss on the short sale a monetary ‘gift’ to you, the home owner/seller. You are now not only broke but you owe taxes on the amount ‘gifted’.
One thing to keep in mind if you are forced to short sell your house.

Thursday, April 12, 2007

Upside Down to Right Side Up

Eric Janszen --- A study of over extended Americans and how they got there by, James Scurlock.

James Scurlock's book and movie "Maxed Out" appears to be about over-indebted Americans. That is in fact what the Wharton Business School graduate set out to discover, he told us in an interview this week. What he found instead during six months traveling the nation was an out-of-control lending system, causing more than half of Americans to take on debts they cannot repay, leaving a wake of financial and personal destruction, driven by the rational actions of banks in desperate competition with each other for loans, running to its logical conclusion.

Right Side Up Signs
*Borrowers pursue lenders for loans
*Lenders prefer credit-worthy borrowers
*Borrowers who do not repay are "deadbeats"
*A mortgage is a debt
*A house is a place to live
*Revolving credit is used to finance major purchases, such as autos
*Banks don't need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"

Upside Down Signs
*Lenders pursue borrowers
*Lenders prefer borrowers with poor credit
*Borrowers who repay are "deadbeats"
*A mortgage is "wealth"
*A house is an "investment"
*Revolving credit is used to finance all purchases, such as food and clothing
*Banks need to be given specific guidance by the FDIC "To make reasonable efforts to determine a borrower's income"

If you start to see unemployment ticking up, the reversion back to Right Side Up has started. And I do mean "see," as in, with your own eyes. Don't pay much attention to the government numbers. As Paul Kasrial noted after the Bureau of Labored Statistics' employment numbers came out last week, the employment numbers are becoming increasingly self-contradictory and non-sensical.

James believes the transition back to Right Side Up will be rapid and catastrophic, taking only a couple of years. After studying this problem for over seven years, I stand by my prediction that the transition will be a slow and catastrophic process, taking a decade or more, much as the Japanese post-bubble period lasted, because the government will get involved to manage the transition. The difference is, whereas Japan's post-bubble period was deflationary, the US period will be inflationary.

Wednesday, April 11, 2007

Home prices to fall for first time in 2007

CNN Money "The National Association of Realtors said Wednesday it expects its measure of home prices to fall this year for the first time since the group began tracking sales nearly 40 years ago.

In its latest monthly forecast, the group said it expects a 0.7 percent decline in the median price of an existing home sold this year. A month ago it had been projecting a 1.2 percent increase. Median is the point at which half the homes sell for more and half sell for less.
The Realtors noted the problems in the subprime mortgage market had led it to cut its sales forecast. It said problems of some potential buyers getting financing has cut its expectation of existing home sales this year by 100,000 homes to 6.34 million."
That's a pretty serious restatement by David Lereah's cheerleading section.
In fact, in light of the probability that this is still spin, it is a little worrying. The reality is probably much worse.

Growth Prospects in U.S. Dim on Subprime Crisis

Bloomberg --- "Prospects for stronger U.S. growth in the second half of 2007 have dimmed as the housing recession deepens and businesses cut spending, according to economists surveyed this month by Bloomberg News."
"Subprime mortgage defaults and rising foreclosures raise the risk that the already wobbly housing market will contract even more. A decline in business investment and slower consumer spending will prompt the Federal Reserve to reduce interest rates sooner than previously anticipated, the survey showed."

"The subprime problem ``is a brand-new kind of shock,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``The data we've seen lately is consistent with an economy that's just not picking up.''

Tuesday, April 10, 2007

Hedge funds running out of places to profit

"People are actually selling stocks to raise capital to buy cheap real estate. The liquidity from the stock market is getting drained into the real estate market bottoms."
"The trend is actually much more significant than perceived because of the hedge funds. Hedge funds are actually moving out of the stock market to real estate. This can cause massive outflow of funds from stocks to real estate."
I made mention in an earlier post that I saw unexplained decreases in housing inventory in March in many markets around the U.S. I have some theories about the reasons for this but that’s all they are, theories.

I came upon this story today in .
It is clear to many stock market investors that even the raging emerging Asian markets have run out of room to grow as we’ve seen over the past three years. The U.S. markets are fundamentally out of whack and hedge fund managers are taking bigger risks trying to match profits of days gone by. I see this new trend of jumping into housing as very risky, and if it works it will only prolong an inevitable reckoning the housing market will have to face.

Monday, April 9, 2007

Housing markets slump and rents start rising rapidly

"Federal Reserve is very concerned about the inflation from rising rents. Before the recent real estate bubble collapse, people were buying homes and leaving the rental apartments. It made sense at that time to buy than to rent with real estate moving up close to seven to ten percent every year.
Now people are favoring rentals to buying residential real estate. Consequently, the rents are rising rapidly. According to some studies rents are rising at the rate 4-6% per year at this time. This adds to consumer price index and the Fed is really concerned about the same."

This makes sense if you consider that a lot of housing capacity has not yet hit the pipeline, adding to the number of units that just won’t sell. There is currently a lot of housing stock for sale, still more being built and some sidelined standing empty as flippers wait for the housing market to improve.

I expect that available rental units are not currently keeping pace with the numbers of people now looking to rent, - bubble sitters and those forced to sell or walk away from their dream palaces.

The houses that were previously owned however don’t just disappear. If they are not re-sold they will have to enter the rental pool at some point or sit empty. I don’t expect a sudden large increase in U.S. population so the net affect will have to be an eventual increase in available rental units and a resulting downward pressure on rents.

Sunday, April 8, 2007

The Economy, Through the Eyes of a CPA

It's always good to get reports from those on the front lines to see how they line up with official reports on the economy.

From: Fox News

"I am a CPA, CFP who specializes in individual income taxes for affluent Americans. I am shocked by the bad and deteriorating financial condition of many of my clients."

"The underlying cause that is apparent to me is years of unrestrained/uncontrolled spending beyond one's means. This is now catching up with many."

"Two of my clients had to sell their homes last spring to cover their 2005 liabilities; some BIG numbers. These clients had adjusted gross incomes in excess of $200,000. At least they were lucky because the housing market was firmer a year ago!"

"I am afraid that what I have been seeing is just the tip of the iceberg."

Lessons from another bubble

In the 1630's there was a great financial bubble in Holland involving tulips. It took six years to build to a peak and at one point one tulip bulb was worth the value of an entire ship, also it's crew's wages and upkeep for a year!
One Bulb!

At the time there was wild speculation in the tulip futures markets and people were mortgaging their homes to buy into tulip operations or start their own.

With the onset of irrational exuberance, lenders loosened credit standards and even men who could not read or write were granted loans on the strength of their ink scratch on a loan agreement. Essentially, at the time, if you had a pulse you could get a loan.

Toward the end, some noticed the fundamentals were out of whack. The cost to produce and the cost at the retail end did not justify the soaring stock prices. Still, the tulip bull-market fever raged on...

In 1637 the bubble popped. It took six years to expand and six days to deflate. An avalanche of lawsuits ensued. Many investors lost everything plus found themselves on the wrong side of crushing debts as a result of leveraging everything they had to get in on the party that was 'tulipmania'.

Does any of this sound familiar?

We saw something like it with the tech bubble in 2000, and still again with the current housing bubble.

Will we learn from the past? The Dutch didn’t. Less than a hundred years later they had a similar bubble, just with a different flower, the Hyacinth.

It doesn't look like we will prove any wiser.

Friday, April 6, 2007

More signs of deflation?

In Canada a Flood of used cars pours in from U.S.

"Mr. Pauls said he sold a handful of Pontiac Grand Am and Oldsmobile Alero cars before Christmas for between $12,900 and $14,100. That's half of their manufacturer's suggested retail price. All the cars were one year old."

"I'm still up to the rafters in inventory," he said yesterday. "I'm over-filled. Unless I've got a vehicle sold, I am still not buying anything."

"Used-vehicle prices are a key leading indicator of overall vehicle demand and also a good proxy for the health of the overall economy, according to Bank of Nova Scotia. And their accelerated drop in recent months signals potential pain ahead -- not only for the economy as consumers become more cautious, but also for the environmental initiatives being trumpeted by governments."

I've asked the question before, if US domestic spending slows, who will buy the products currently being produced at the still optimistically high levels?

With a temporary glut of goods on the market there will be at the least temporary deflationary pressure which could ad to other downward price pressures prolonging the ‘temporary’ deflation effect still further.

Ad in to this mix lower housing costs, along with dropping prices of electronics and other non-essential consumer items and you can expect that a deflationary event of unknown duration will set in if it hasn’t already arrived.

As more of us see prices of these goods drop, the psychology will shift to why buy now when I can get it cheaper tomorrow? Further exacerbating the downward cycle.

I for one am not buying anything at the moment. I suspect I’m not alone.

Monday, April 2, 2007

Mortgage Crisis Hits Million-Dollar Homes

Fox News Business
"That giant ATM you've been living in has just shut down," said David Wyss, chief economist at S&P in New York. "Consumers are in debt and we've been living beyond our means for some time."

"Because of the financing that was possible, so many people bought the bigger house, the million-dollar house with the bowling alley or the tennis court outside," says Guzek, who works for GreenPath Debt Solutions, a nonprofit service based in Farmington Hills, Michigan. "People across all income brackets are having financial hardship."

For those on the frontlines of the growing U.S. mortgage crisis, these are the early signs that the explosion of subprime loans made to mostly poorer borrowers is reaching higher ground. The damage is hitting homes financed through jumbo loans for more than $400,000 and so-called Alt-A loans that are a notch above subprime and a step below prime.

I think it’s safe to say that the scope of the problem has not yet been fully revealed. I think I can also say that many people will be surprised at the depth of the current mortgage cancer.

There were young professionals who saw an opportunity to move up from a half million dollar home to a one-plus million dollar home. They got caught at the top of the market with a depreciating asset and a teaser ARM that they were sure they could refi out of and into a low fixed rate loan later before the reset.
No Dice!

Still there were others who were playing the flipping game at the higher end of the price scale and got caught with a property or two too many when the trend turned negative.

Because no oversight entity keeps track of private home sales like the SEC tracks the stock market, no one can really say how bad the situation really is. My guess is there will be more auctions of multimillion dollar homes to come and a new class of people we will call 'The High Income Poor'.

Sunday, April 1, 2007

Spring may turn into season of reckoning for U.S. housing industry

You don’t need to be a physicist to work out the economic gravity of the current U.S. housing situation. It went up, and now it is coming down. April it seems is bringing some unpleasant surprises, reality being one of them.

No Spring Break “Springtime usually means good times in the U.S. housing industry, but this year it’s threatening to become a grim season of reckoning. ‘Things seem to be snowballing very quickly,’ said economist Steven Cochrane. ‘It’s going to be a weak spring.’”

"The sombre outlook marks a dramatic shift from the euphoria that prevailed in 2005. Years of steadily rising home prices had spawned a giddy, greed-driven atmosphere that seemed to make people forget about a basic law of economic gravity: what goes up eventually comes down.

As housing prices soared, lenders entrusted more money to borrowers who probably would have been turned away under more normal market conditions.

The risky behaviour propelled the rapid growth of subprime mortgages - home loans designed for borrowers with blemished credit histories. By some estimates, about $1.3 trillion has been lent to subprime borrowers across the country. That's nearly as large as California's economy."
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