Thursday, June 28, 2007

Spanish economic woes

By Nico Isaac

On June 13, one of Spain’s most prestigious honors -- the Prince of Asturias Art Award -- was presented to legendary singer/songwriter Bob Dylan.

If the Spanish boot of Spanish leather fits.

And boy does it ever. From the realm of folk music to that of
finance, The Times They Are A Changin’ for the main engine of Spain’s economic growth: Real Estate. Just in case you’ve had no direction home for the last year, this brief recap should put the moss back on your stone: In the 12 months ending March 2007, home prices rose by a national average of 7.2%. “House
affordability is at its lowest level ever” (AP ), with household debt running at 133% disposable income and a whopping 96% of all outstanding mortgages comprised of “adjustable” or “floating” rates. (This is against the background of eight
interest rate increases by the European Central Bank in the last 19 months)

On April 24 (informally known as “Black Tuesday”), Madrid’s main stock index, the IBEX 35, plunged 3% following a string of incidents indicating that the “Spanish housing market had had it.”

The first knot: Scandal at one of the country’s largest real estate developers -- Astroc -- lowers the company’s share price by two-thirds. Stock at Spain’s biggest real estate company, Metrovacesa SA is down by one-third in 2007.

The second knot: Construction starts in 2006 ran at 800,000 new homes, more than the total number of homes constructed in Italy, France, and Germany combined, FOUR times the UK number, and nearly one-half of U.S. starts, an economy that is seven times bigger than Spain. (Gulf News )

The third knot: This April, Spain’s best-performing fund manager Francisco Parames received a hand-written note from the third richest man in the world himself, Warren Buffet, seeking advice on how to safely invest in the region’s economic boom.

Parames' reply: You Can’t.

“The Spanish economy,” wrote Parames, “is going to go through some very rough times as the real estate crash [spreads] and credit bubble bursts.”Around the same time, the Bank of Spain issued a public warning pronouncing “unsustainable growth in real estate prices AND a housing market that is 30% overvalued.”

Despite the barrage of bad news, however, the mainstream majority is still tangled up in BULL-ue regarding the long-term prospects of Spain’s housing sector and overall economy.

“The country’s economy is still going strong and talks of a sudden downward correction are overstated,” begins a recent Forbes. Case in point: “Black Tuesday” included, Madrid’s IBEX 35 has soared 35% in the last 12 months to an all-time record high, a performance that has outstripped almost all other major European bourses.

If something were intrinsically wrong, explains one expertician,
“the trouble would show up in the stock market to reveal increasing pessimism about the Spanish housing market.”

Unless of course, one sector tarried behind the other…

Bottom line is: there is an integral stage of every mania in which warnings from the professionals go unheeded by the public. That time may be at hand in Spain.

For that very reason, Elliott Wave International’s European Short term Update has expanded its coverage of the major bourses to include Madrid’s IBEX 35, presenting labeled price charts of the index along with unique insight into the near-term trend changes in store for prices.

Spain is out on a limb. If they can pull it out of the fire, perhaps the U.S. economy and housing markets can as well. I won’t hold my breath however. Spain is in trouble, that’s a fact. With the selling off of their reserves and the dumping of their gold they seem to openly admit they’re in deep doo-doo.

Their housing market is certainly in worse shape than the U.S. market, why they haven’t melted down before now is a mystery. It will be interesting to watch Spain’s progress toward the abyss as they are probably cutting a trail that a number of other countries are about to tread down, with unfortunately, the U.S. included among that number I’m sure.

Wednesday, June 27, 2007

CDOs making waves in financial markets

Rising defaults on U.S. subprime mortgages have pushed at least 60 mortgage companies to close or sell their operations and forced Bear Stearns Cos. to offer as much as $3.2 billion to bail out a money-losing hedge fund. New foreclosures jumped to a record in the first quarter, led by subprime borrowers, according to the U.S. Mortgage Bankers Association.

The housing market may deteriorate if there's an ``overreaction'' from regulators, said Bitsberger, a former U.S. Treasury official.

The fallout will also increase if investors and hedge funds rush to unwind their positions at the same time, he said. The market's ``financial infrastructure'' is ``untested'' because of the pace of growth in bonds backed by mortgages and other debt, known as collateralized debt obligations, he said. CDOs package bonds, loans or credit-default swaps and use their income to pay investors.

Young Market

The market for asset-backed debt is ``still relatively young and relatively new and we've still yet to see a shakeout,'' he said. ``The jury's still out as to how this will play out. I don't want to say that we're in untested waters but it does scare a lot, it does become a bigger issue among many more hedge funds.''

Home prices fall at fastest rate in 16 years

S&P/Case-Shiller index shows prices down annualized 2.7%

WASHINGTON (Market Watch) -- Home prices in 10 major U.S. cities dropped at the fastest pace in 16 years during the 12 months ending in April, according to Standard & Poor's Case-Shiller home price index released Tuesday.

Home prices in the 10 cities fell 2.7% on a year-over-year basis, the largest decline since September 1991. Meanwhile, prices in 20 cities dropped a record 2.1% year over year.

Fourteen of the 20 cities showed falling prices in the past year, led by Detroit (down 9.3%), San Diego (down 6.7%) and Washington (down 5.7%).

"No region is immune to weakening price returns," said Robert Shiller, chief economist for MacroMarkets LLC and the co-creator of the index. Even in regions such as the Pacific Northwest or the Southeast, where prices are still rising, the gains have been slowing.

As a result of falling prices, foreclosures are rising nationally, especially in regions with a weak economy, such as the Midwest, and in Sun Belt areas deemed bubble regions, such as Southern California, Florida, Nevada and Arizona.

Tuesday, June 26, 2007

tick..... tick... BOOM!

Market Ticker
Initial household formation is down 70% from last year! This was a big surprise - and not of the good kind. You generally don't see that in a "strong economy." So is the economy really strong or is this an anomaly? Hmmmm.... and by the way, household formation collapsing makes getting rid of the inventory overhang much harder! Why do I think the truth is that the economics aren't as strong as we've been led to believe, and the Household Formation number is the more accurate indication? Oh, by the way, that's a leading indicator, unlike so many of the lagging ones that Bulls like to cite.

So what does the negative "household formation" number mean? Simple - this is 20-somethings and 30-somethings moving back in with Mom and Dad and/or taking roommates. Why? Do you really need someone to explain this one to you?
Its called hitting the economic wall - that is, going broke.

In even more ominous news, a Businessweek article suggested that people are now preferring to pay credit cards over mortgages. This is something that the Realty industry has said would "never happen" - in other words, that people would "guard their house" no matter what. Uh, no. See, people are a bit smarter - and more rational - than Realtors!

"The significance? One explanation could be that many recent
subprime homebuyers simply aren't that worried about losing their homes because they don't have much to lose. Most put down small or zero down payments. If prices have fallen since they bought, they may actually owe more than the house is worth, making it an easy choice to walk away.

At the same time, keeping access to their credit cards has become more important than ever, says Stan Oliai, vice-president of decision sciences for Experian Decision Analytics. "People are using credit cards for everyday items like gasoline and groceries, and to tide themselves over from paycheck to
paycheck," says Oliai."

A 70% decrease in initial household formation is an interesting stat.
Things like this that get little attention sometimes can yield a wealth of information. The article goes on to lay out what this number represents. Taken together with the recent Bear Stearns news and housing market figures, the whole picture begins suddenly to look more ominous.

I recommend reading the complete article. There-in is speculation that some major events will play out within the next two weeks concerning equity markets. It will be interesting to see if he is right. If I were a betting man, I wouldn’t bet against it.

Monday, June 25, 2007

More owners are trying to rent out houses

Number of properties listed for rent twice that of a year ago.

Real estate agents said the rise in home rentals is occurring
throughout the state, and with no end in sight for the sluggish economy, it's likely to get worse before it gets better. Cathy Petchell, a property manager with Reinhart, expects the number of homes being offered for rent to spike this fall, when people who listed their home for sale over the summer with no results decide to try leasing.

Well, there it is. The rental pool is beginning to swell as a result of owners unable to sell.
Look for this to become more of an issue as we reach the end of Summer.

Friday, June 22, 2007

Bear Stearns and the housing market

Banks fear rout on risky US bonds

Mr McAdie said there was risk of a chain reaction through the
market for collateralised loan obligations (CLO), a risky debt security now being issued on a massive scale.

Fitch ratings estimates that $477bn of high-yield debt securities have been issued over the past three years, mostly B-grade junk bonds.

The two Bear Stearns funds, specialising in structured credit,
borrowed roughly $20bn to bet on risky bonds, though this has been cut by more than half. They targeted the lowest tranche of sub-prime mortgage debt, which can yield as much as 20pc but is highly vulnerable to rising default rates.

The property slump is likely to worsen as mortgage lenders tighten up dramatically, triggering a credit crunch at the lower end of the market. A sharp rise in 10-year yields over the past two months has compounded the crisis, raising the base cost of mortgage borrowing by roughly half a point.

Deadly ripples threaten subprime funds

Troubles at two Bear Stearns funds could trigger a selloff that deepens losses, hurts credit markets.

LONDON ( -- The fallout from problems at two Bear Stearns hedge funds that may be on the verge of collapse could roil the bond market and lead to a tightening of credit, analysts said Thursday.

The problems at the two funds, which bet heavily on securities
backed by subprime mortgages, are also affecting
stocks, which took a beating Wednesday as jitters about the possible effect on credit markets coursed through Wall Street. The Dow industrials, S&P 500 and Nasdaq all sank at least 1 percent Wednesday and opened lower Thursday, though stocks later recovered and ended with modest gains.

The declines at the two Bear Stearns Cos. funds - its
High-Grade Structured Credit Strategies Enhanced Leverage Fund and High Grade Structured Credit Strategies Fund - have revived fears about the subprime mortgage sector and triggered worries that worse is yet to come.

Given the timing of this news I would say we are still on track for bad news in July.
The problem with the Bear Stearns funds is they are heavily invested in CDOs (Collateralized Debt Obligations). That means in part, home Mortgages. The subprime market is where they placed those bets. That market pays higher interest on their loans, so it generates a nice return, until it doesn’t.

As we get closer to the middle of the Summer house selling season with little improvement to show for it, a lot of the mortgagees will find acceptance and I expect walk away or deliver their keys to the banks. It’s one way to stop the bleeding.
This will absolutely have an effect on CDOs, rippling through private equity funds and the Derivatives market. Last time I checked those players were leveraging $370 trillion or almost 3 times global GDP. That’s a lot of clams.

The key word however is leveraged. Any failing link in this chain of heavily leveraged debt could cause the whole house of cards to collapse, and I believe we might be witnessing the beginnings of that unwinding with the failure of these two funds. The next few weeks will tell if this thing is going to spread.

Wednesday, June 20, 2007

I'm Back

I was out of the country this last week. I hopped down to Rome to have a look around. A great city if you like history. That wasn’t my motivation for going however.
I noticed that I have seen no information indicating a housing bubble in Italy. I traveled mostly in Rome but kept my eyes peeled for the signs of over exuberance that mark so many other bubble cities. Things like building cranes standing above rooftops like runaway weeds. No such story.

There are signs of building but not to the level of say, Oslo, where building cranes now dominate the skyline. It could be that Italy was passed by, by the great speculation boom in property of the last five or more years.

There were a lot of restoration projects underway in the city of Rome, but that’s a horse of a different color. Being a tourist destination I would consider that a good investment in their future, bound to keep tourists coming back and leaving dollars well into the future.

I will keep an eye on it though, just for curiosity’s sake.

Tuesday, June 12, 2007

ABN fears world housing crash

Soaring borrowing costs could spark a housing slump on a 'global scale', investment bank ABN Amro has warned.

'The decline in global interest rates has now been largely reversed,' White said. 'Rising real interest rates could result in greater economic volatility. I believe this leaves housing markets vulnerable to a correction on a global scale.'

Central banks have raised interest rates to the highest level since 2001 across the 30 members of the Organisation for Economic Cooperation and Development.

Meanwhile yields on government bonds - a key measure for the cost of borrowing - have increased in recent days, sending shockwaves through financial markets.

Although fears for the health of the US housing market have
captured headlines, the degree of over-valuation is more 'severe' in Britain, Australia, Spain and Ireland, ABN Amro calculates.

A note by the bank in April found that UK residential property is 50% overvalued, whereas US houses are 25% too expensive.

Increasingly I am becoming a less lonely voice in my conviction that the impending housing downturn will be global. More reports are surfacing from E.U. countries as well as others indicating that the party is over. Housing is teetering on the brink with no place to go but down.

Spanish housing, a precursor to the U.S. market?

Will the 'ghost town' development strategy push Spain into a house price crash? Madrid - Javier Usua and Ruth Graneda never got out of the car when they visited Sanchinarro and Las Tablas, two of Madrid's biggest new suburban developments. The concrete-block buildings and empty streets were all they needed to see...
"We came to look at apartments but found ghost towns," said
Usua, a taxi driver. "You'd need to drive miles for a loaf of bread or cigarettes and my girlfriend found it creepy and unsafe, so we turned around and left."

The abandoned developments are evidence of a housing glut that will lead to Spain's first decline in home prices since at least 1992, when the housing ministry started keeping records.

Spanish home prices have more than doubled since 1998, exceeding growth rates in the UK and Ireland, Europe's fastest-growing markets.

The increase has been driven by a drop in interest rates from about 15 percent to less than 3 percent as Spain adopted the euro, household incomes swelled as women joined the workforce, and northern Europeans, mainly Germans and Britons, caused a surge in vacation home purchases.

As prices start to decline, homeowners may face the same challenges as buyers in the US, which is in the second year of a housing slump. Falling prices may spur higher delinquencies as buyers face difficulty refinancing.

I read before that up to 3 million homes stood empty in Spain, held by speculators in one of the largest property bubbles by scale in the world. Now the chickens are coming home to roost as Spain’s economy is drifting into trouble at the same time as their housing market is skidding to a halt.

Could this happen in the U.S.? Yes. In fact a flavor of this ‘Ghost Town’ effect has already been seen in California with new subdivisions nearly empty except for the occasional abandon car, broken house windows and graffiti. I’m sure that Spain’s housing market will fall faster than that of the U.S. so it bears watching to get of taste of what is in store.

Friday, June 8, 2007

Florida, the future of the broader housing market


You're not going to believe what some brand new townhomes went for on the auction block Thursday night in Fort Myers, considering where prices have been. A three bedroom townhome previously priced at $310,000 sold for about $180,000! First time home buyer Brandon Quarterman, a student at Florida Gulf Coast University, was the lucky bidder. He said, 'I'm feeling great. more money in my pocket!"

Greg Toher was outraged when he heard the prices some of the homes were going for. Walking out of the auction room, he told us, "$145,000! Unbelievable! We paid $300,000! They just got rid of at least four for $145,000!" He says he closed on his three bedroom San Simeon townhome in December, "You've got to be kidding me, that's not fair."

New buyers may be getting a steal, but current San Simeon homeowners, like Greg, tell WINK News they feel like they've been ripped off. Tara Gionpalo said, "I feel really mad, really sad, hurt." Victoria Toher said the developer went back on their word, "They promised us they were not going to go below market value." A Levitt and Sons representative told WINK News on Thursday night that the homes did go for fair market determined by the hundreds of bidders at the auction. He went on to say they feel terrible for the homeowners, but the prices were reflective of a challenging real estate market and they're confident it will once again shift in the homeowner's favor.

That's a pretty steep discount!
Florida is surely leading the country’s housing market decline. Ten months ago experts there were saying that there was only a mild market decline state wide. Of course we all know how that turned out.

Other areas of the country are currently lagging behind in this market downturn, but predictably are following a similar course of rhetoric about conditions in their neighborhoods, (sugar coating it).
It must be remembered though, Florida was claiming the same things about it's markets last year, trying to convince us all that things were about to get better any minute.

With that in mind I think it’s easy to speculate a short distance into the future and imagine things only getting worse nation wide. No matter how much denial one employs wishing won’t change it or make it go away.

Bond yield up, stocks drop, housing worsens

An old expression reappeared during the 1990s stock market bubble to explain how Internet and telecommunications companies with no apparent prospects, and run by children, were able to go public and then see their stock prices shoot
up: "If the wind blows hard enough, even turkeys fly."

A gale force wind of money has circulated the planet for the past few years, putting everything from large public companies to large empty office buildings to flight. As inflation increases globally, the Wall Street backed American Association for the Prevention of Cruelty to Flying Turkeys has been lobbying the Fed for if not a rate cut at least forbearance on hikes. But recently the bond market started telling the Fed that time is running out, and stock market investors are taking notice.

Read the full article from itulip.

If you are a stock market investor you have no doubt been following the economic news and the bond market’s change of heart the last few days. Many are waiting for the other shoe to drop. Is this the beginning of the ‘Great Unwinding’?
Probably not.

Sure, a reckoning is due, but greed will win out over the short term and investors will storm back into the markets as they always do, pushing them still higher over the summer months.

Or this could be the straw that broke the camel’s back, setting into motion the cascade effect many of us have been dreading.

Thursday, June 7, 2007

Stocks Vs. Housing


Historically, stocks have always been superior investments to housing, according to a comprehensive study by Ken Winans, president of investment research firm Winans International. From 1920 to December 2006, the average new home appreciated from $4,030 to $276,400, a 6,759% gain, he says.

But in that same 86-year period, the Dow Jones industrial average returned 17,210%, not even including dividends. Stocks still beat real estate over the past 20 years. New home prices gained 268% from 1986 to 2006, a fraction of the Dow's 1,193% gain, Winans says.

But as anyone who bought stocks back in 2000 knows, neither real estate nor stocks are safe investments.

For instance, Winans says that during the Great Depression, real estate lost 73% of its value and the stock market declined more than 90%. Realtors don't forecast real estate prices to fall that much this time, but the estimates continue to worsen.

The cycles of investing return to stocks

The migration from real estate to stocks is part of the
natural swings investors go from loving an investment class to hating it, says Robert Shiller, a Yale professor who studies market movements. Just as investors saw housing as a haven from the bear market for stocks in 2002, they see stocks as their best bet now as some housing markets go from bad to ugly,
he says.

Housing saw a 73% decline during the Great Depression? It lends some credence to projected 50% declines now being broached by some economists. The worrying figure is however the 90% decline of the stock market during that tumultuous time. Who didn’t get that they both happened in concert? My worry is that we may be facing a similar situation now, different mechanics but same outcome.

Stock markets around the world have been acting irrationally seemingly with a mind all their own, with no clue by this investor as to what in hell is going on. The activities of private equity groups leveraging billions of dollars to fund mergers and acquisitions should have us as investors shaking in our boots. Derivatives funds leveraging huge debt in a market that most of us don’t understand nor would we be given an inside look into, should be cause for concern as well. I’m quite sure that some of the debt leveraged by these private clubs is mortgage debt, very risky!

In the mean time stocks look great. Many of those who are able are now following them from housing as the Dow and S&P hit new records, but for how long? I fear that when the music stops there will be far more butts than chairs.

Tuesday, June 5, 2007

How Bad Could Bad Get?

Irvine Housing Blog -- Home ownership rates will decline as homeowners lose their homes in foreclosure. With foreclosure comes bad credit; those with bad credit just got eliminated from the buyer pool. Therefore, people who lose their house to
foreclosure will move into a
rental, and the previously owner-occupied home will likely enter the rental pool. (A popular misconception is that rents will go up. The number of rentals will increase along with the number of renters.)

There will be some new buyers (like many on this board) who have cash and good credit; however, this group is small in number, far smaller than the number of foreclosures about to hit the market (if you don’t believe me, ask yourself how many potential buyers you know with cash and good credit.) This means a significant number, perhaps a majority, of the houses due to hit the market due to foreclosure will be purchased as

If the bulk of the houses going through foreclosure are going to be purchased as rentals, prices will have to decline to the point where a rental generates a positive cashflow. Prices are double that today! Home prices will have to decline at least 50% for properties to make financial sense as rentals, so if this is the fate of the bulk of the upcoming foreclosure inventory, prices
will decline at least 50% before buyers will enter the market and adsorb this inventory.

This was an excerpt from an article by IrvineRenter. Thanks I.V., this pencils out nicely.

As a former owner of income properties myself, I would have to agree with these numbers. A key factor is the bottom end of the buyer pyramid is now gone, sub-prime bowers have been iced out and builders have been busy putting up way too much capacity. That capacity won’t go away, but the buyers will. What’s left for those properties? A painful decent into rentalhood.


Monday, June 4, 2007

N.C. housing slide continues

NorthCarolina saw 45,512 foreclosures in 2006, attributed to sudden unemployment, emergency medical bills and divorce, yes, but also to bad loans unscrupulously issued and, often, fraudulently maintained.

In Greensboro, housing has taken over as a driving force in the economy after the decline of the textiles and furniture industries, creating jobs in architecture, contracting and construction, sales, appraisal, finance and loans, brokering, home improvement, landscaping, interior design and specialties like roofing, window hanging and cabinetry, all working in consort to build, beautify and sell a product that we now have in abundance. Supply side is so strong it's outpacing household population growth, which according to the US Census Bureau went down by more than 4,000 people between 2000 and 2005.

Take a look around your neighborhood or out your car windows on your way to work or school. Chances are you'll see quite a few homes with "for sale" signs spiked in the front lawn, some of which have been there for a year. The market is seemingly glutted while new construction continues and many homeowners are unable to maintain their current mortgage payments.

In the last nine days, 28 new Greensboro foreclosures have cropped up on, and an additional 29 residences in the city have been listed as lost due to bankruptcy. That's almost 60 families who have lost their homes and must make other living arrangements; almost 60 homes that will sit vacant in neighborhoods, lowering property values and encouraging crime uti they're sold in this saturated market. And that's just today - by the time this editorial sees the printed page there could be 25 more.

In a recent post I talked about my impressions and what I saw on a recent trip to North Carolina. Not much news about housing has come out of N.C. this past year but the downturn is picking up speed there and reports are now echoing what I have already seen, a lot of stock sitting for sale and more being built.

N.C. is not considered to be a bubble area but the effects of a broader downturn will affect jobs and their economy and in turn housing.

Saturday, June 2, 2007

Economy and Housing Right Now

When real estate market crashes what is going to be next?

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Friday, June 1, 2007

Why you still can't find a builder

Home building is in free fall but construction employment is steady, a sign housing won't tank the job market.

NEW YORK ( -- There's no doubt the bottom has fallen out of the home-building market in the last year. But if you're trying to find an out-of-work carpenter or skilled
craftsman today, you'd think the nation was still in the middle of a building boom.

Employment in home building has fallen 4 percent from a year ago, according to government figures, but construction employment overall has slipped just 0.2 percent over that period. The difference? A 2.7 percent jump in the number of workers on construction sites for hospitals, roads and other projects aside from homes and residences. And the shift may be even more dramatic than those numbers suggest.

Some of it is due to the shift of workers to non-residential
construction jobs, some of it is due to employers not wanting to let go of skilled craftsmen in case the homebuilding market picks up.

And part of it may be due to the large use of immigrant labor in the construction industry. If contractors and subcontractors were not reporting off-the-book employees to the government during the housing boom, their absence now won't be missed in the figures.

The government figures on construction spending show the same thing. Thursday the Census Bureau reported that while residential construction tumbled 14 percent in April from a year earlier, non-residential construction jumped nearly 13 percent.

"A concrete block doesn't know if it's a wall of a house, or the wall of a shopping center," he said. "The same people are going to lay the block."

It’s no great secret; commercial construction lags residential construction.
As residential projects develop, retail chains and infrastructure follow.
Many have already factored in this lag effect to forecast construction based job markets into next year. There should be no appreciable effect yet as workers move to the commercial projects now under way.

The problem will come sometime in late 2007 to 2008 when these commercial building projects reach completion. A number of residential developments these commercial projects are being built around will be non-starters. When those jobs are done construction workers will suddenly find less to do and construction employment numbers are bound to drop.

The mention of migrant workers filling construction jobs is also to be considered. I know from personal experience that this has been the case. In 2005 workers were in short supply. If you could hold a hammer, you were suddenly a carpenter. What was not mentioned were the number of skilled workers who were drawing pay under the table as well for what ever reason. My point being that the current numbers are bound to show only documented workers while off the books workers may have made up a considerable portion of construction labor force leaving no honest way of tracking the figures.
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