Long Live The Bubble Man

Alan Greenspan, who’s busy promoting his latest book,The Age of Turbulence: Adventures in a New World .

He’s come under a lot of fire lately for re-writing history to clean his record. Richard Russell, veteran writer of the Dow Theory Letters, said:
“I finished the Greenspan book. I firmly believe that history will see this little egotistical pip-squeak as one of the premier disasters in US history. In my opinion, Greenspan is the ultimate ‘Mr. Inflation’. Greenspan almost single-handedly set the world on the high-liquidity, super-inflation path, all the while saying or thinking that the Fed was acting ‘as if’ the dollar was still backed by gold.

“What’s so disgusting is that Greenspan traded all his earlier ideals for power and ego. Greenspan never did anything that required real courage. Greenspan was the total political animal. His legacy will decline as the years go by.

“The saddest thing is that Greenspan leaves poor, humble, honest Fed Chief Bernanke in an untenable situation. In a US so dependent on high inflation and massive liquidity, Bernanke has no choice but to ‘inflate or die’. In a normal situation, the US could take a recession and take the correction. Not now – with the US depending so heavily on inflation and massive liquidity, any substantial contraction in the money supply would bring the US economy to its knees.”

Here’s a very nice video about Mr Bubble-man, Alan Greenspan, and his inflationary tactics.

I was planning on reading Greenspan’s book (eventually), but I guess Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars would make a better read.

Mortgage Lenders Squeeling Like Pigs: WAMU First To Cry Uncle

Despite Ben Bernanke’s optimism that the sub-prime issues wouldn’t spread to the rest the of the economy, not only is it spreading to the rest the of the economy, its become our favorite export to global economies too!

The resulting liquidity crunch has already begun. Many banks just announced that they’ll no longer accept loans through brokers. This is to reduce the additional cost of having a middle-man.

Washington Mutual also announced that its Jumbo loans would be priced at 8%. OUCH! Basically, WAMU is having a tough time reselling these loans on the secondary market (to unsuspecting pension and hedge funds) so they’ve jacked up the rates on these.

As of 2007, a jumbo loan (in most parts of the country) is a loan thats over $417,000 for a single-family residence.

Unfortunately, with the median home price in San Diego is over $500,000. (Not sure of the exact figures but its dropping from the peak). This means the average family has a jumbo loan on their median-priced home.

It was ok when rates where 4.5%, but now when rates are at 8%, the corresponding home payment will jump 43%!!!! I don’t know about you, but I’d be looking to move if my home payment rose 40%+.

I think as the rates rise and loans become more difficult to get, home prices will start falling faster than they have in the past 2 years. Many people are still in denial about dropping home prices in SoCal – but this looks like the beginning of the end. I wouldn’t be surprized if rates fall another 25% of where they are today.

Countrywide Down (Finally!)

Like I mentioned in March, CFC finally has began to crack. I tried unsuccessfully to short it a few times and then I missed the big decline!

Insiders have been dumping for quite a while now, so they pretty much now what was coming. Even if they claim that the housing slump was unexpected. Kind of strange considering that I’ve been expecting a housing decline for 2 years now, especially in Southern California.

The housing slump in SoCal is far from over. Prices have dropped 10-30% and I expect another 20-30% drop over the next few years. If we see a large contraction in liquidity, it might be more severe. There’s talk that the cheap money for the private-equity buyouts is drying up. Mortgages have become more difficult to get. The 100% financing for broke, jobless borrowers with lousy credit has completely disappeared. Countrywide stated that the delinquencies in Alt-A and Prime mortgages has been much higher than expected. Could the availability of these loans also dry up?

I sold naked calls on August iShares Dow Jones US Real Estate (IYR) on Monday. I would’ve made more money if I had bought puts instead, but I still did okay. The calls are almost worthless and I can buy them back to close out the position for 70% less than I paid. I’ll be keeping a close eye on CFC and other home-builder stocks to see if there are any other shorting opportunities in future.

Average Home Size Increasing

According to this article, McMansions gain popularity despite the housing slump, national new home sizes are averaging 2,400 sq ft!

Thats a huge increase from about 40 years ago. In the sixties, the average home was about 1100 sq ft with 3 bedrooms and 1 bath.

American homes, on average, are nearly twice as large as those in many European countries, including Britain, France and Germany. Only Luxembourg comes close among European nations, with average homes about three-quarters the size of those in the United States.

U.S. homes are also becoming more expensive. The median home value jumped more than 40 percent form 1990 to 2005, to about $167,500.

As the standard of living keeps growing I can understand the need for more living space, however after a point it becomes ridiculous. It seems difficult to understand that 20% of all new home construction be for “atleast 4 bedroom homes” when the average family size is 2.6. Somehow I can’t see that the economy has been growing all that much in the past several years where people can afford to upgrade to such large houses.

I can’t help but wonder how many buyers got an option-ARM loan or an interest-only adjustable mortgage and can’t really afford to buy it with a “traditional” 20% down 30 year amortized mortgage.

Also, as the cost of oil and gas increases, heating these homes will also become increasingly difficult.

I wouldn’t be surprised to see the number of foreclosures sky-rocket over the next few years. According to what I heard from a friend, foreclosures in California for the 1st quarter 2007 are at 86,000. This is opposed to 800 for the entire year in 2006. (I haven’t verified the numbers at all, but I believe the trend).

What Are NINJA Loans?

I was listening to the radio yesterday and I was listening to an investment show. The announcer was talking about mortgages and I heard him mention a NINJA loan.

It stands for “No Income No Job or Asset” verification! If that isn’t a liar loan I don’t know what is. You basically show up at the bank(or mortgage broker’s office) and say I have a job and assets to qualify for this loan to buy a house but I don’t want to show you anything. Just take my word for it!

Talk about easy money and excess liquidity! No wonder there has been such a boom in the real estate prices in some parts of the country. I wouldn’t be surprised if these loans end in tears for someone people.

Seems like there’s a lot of easy money chasing global investments. The Swiss and Japanese carry trades (where borrowers could borrow money under 2% in these currencies and invest them in something else, say a US T bill yielding 5%, and pocket the difference) has created a lot of excess liquidity that is chasing investments all over the place.

Some people think that asset prices have now become a function of liquidity and are no longer a fucntion of value.

I wouldn’t be surprized if the subprime meltdown caused coastal property prices to drop 40-50% from the peaks.

Friday Rant

I came across this article last night, 32 Reasons Why The Stock Market Will Jump This Year.

While its written as a serious prediction, I personally feel its more like a christmas wish list or a list of finalist answers at the Miss World Beauty Pagent!. Here are some of the gems

#1. Housing and Auto-manufacturing weakness will subside
Based on what? Major layoffs in both industries?

#5. Unemployment with stay at record lows.
Hmm…with the massive layoffs in Housing and Auto-manufacturing, you really think so?

#7. Inflation will continue to decelerate, with CPI averaging around 2.0%.
Hmm…ever since the minimum wage was jacked up, small business around where I live jacked up the price of everything along with it. That doesn’t sound like low inflation to me. Anyone who thinks that CPI is an accurate measure of inflation makes way too much money to begin with. Once you take out all the factors that cause inflation, of course you’ll be left with 2%. What a doofus.

#11. The US Dollar will firmer up and even maybe become stronger
With almost all the worlds major currencies strengthening against the USD how is this going to happen? Oh yeah, Bank of Japan is enforcing a weak Yen policy. And of course the USD will strengthen against the Iraqi Dinar! And with China owning a Trillion USD do you think a strong Dollar is actually in our interest????

#12. The U.S. budget deficit, which is currently 1.5% of GDP, well below the 40-year average of 2.3% of GDP, will continue to trend lower as healthy economic activity continues to boost tax receipts substantially more than estimates.
Uh…isn’t the US GDP is currently mainly comprised of government spending? Thats not really a show of healthy economic activity. Although it is true that the tax receipts are up more than estimated.

#15. The mania for commodities will completely end.
Yeah Right!!! All those millions of people in India and China who can now afford to buy a car and a decent place to live will choose to buy plastic go-karts and tents instead of regular cars and houses that use steel & copper. Is he completely blind to the global industrialization thats taking place? Every year China adds to its electricity generating capacity by the same amount as the entire UK. This electricity comes from coal and is used to make more cars and power more houses. The dude’s smoking crack now.

#16. Oil falls to $35 to $40 per barrel and eventually $20-$25.
#19. Gas prices will drop below $4/mcf.
#20. Gold will drop below $550 per ounce
This was written on the 1st of Feb 2007 when Oil was around $50/barrel. Its since gone up to nearly $60 and is probably on its way up. Corn has quadrupled to over $4/bushel making ethanol almost as expensive as gasoline now. Similarly Gold is also up to $665. I actually bought some GLD (the gold ETF) 2 days ago and I’m already up 7%. I predict its going to $800 in 2 years.

#17. Peace in the Middle East.

Some of the points are actually valid, but the ones I’ve mentioned are pretty stupid. Like I’ve said before, I’ve taken exactly opposite bets in my stock investing, so of course my views are out of line with the authors.

What do you think?

Investors Bail On Condo Market in Florida

Apparently some builders are so desperate, they’ve started suing buyers who are walking away from their deposits. Several of my friends have received letters stating that the builder will be suing them for damages and for fraud. Of course, the builders are just shaking the tree trying to see if anyone will buckle and send them some money. They must be really hurting!!!!

I’ve been bearish on WCI [which builds condos in southern California} for several weeks now and RealEstateJournal.com has an article on it.

Investors Struggle With Aftermath Of Condo-Investing Fever

By Amy Hoak
From MarketWatch

People camped out for the chance to buy a unit in Radius, a condominium development in Hollywood, Fla. The building’s 285 units sold out in just over 10 hours — half a year before construction was even set to start.

But that was in the summer of 2004, when the red-hot condo market was peaking and money could be made by investing in condos expected to quickly appreciate. Units were often on the market for resale as soon as they were completed. It’s a much riskier proposition to flip a condo in some of today’s cooling markets. “You see some of these communities that investors purchased…there are no lights on at night,” said Bill Donges, chief executive officer of Lane Company, developer of Radius, which is scheduled for completion in the spring.

The lack of post-dusk illumination in some South Florida condo communities is a sign that many buyers never planned to move into the units they bought, he said. Their plans now: sweat.

According to the National Association of Realtors, inventory of existing condos and co-op homes rose to about an 8.6-month supply in August. The national median sales price for the housing type settled at $223,200 in August, down 2.4% from $228,800 a year ago.

“The market is clearly oversupplied in many places,” said David Seiders, chief economist for the National Association of Home Builders. “The key symptom of that has been on the price front. Prices have taken a hit.”

Not wonderful news for those who have invested in condominium units with the intent to sell them quickly — and are still holding them. According to NAR data, 31% of investment purchases made between 2002 and 2005 were condos.

But it may not be time to jump off the condo’s balcony just yet. There still are investors entering some markets with the intent of purchasing one or more units and holding them for a few years. Some are encouraged by increased demand for rentals in certain areas and betting that long-term appreciation won’t skip a beat.

Seiders put it this way: “If you’re in it for the (short-term) price appreciation then you want to get out,” he said. “If you’re an investor wanting to rent them over time, you don’t necessarily want to get out of the investment.”

Get out while the getting is good

Patience is a virtue not all condo investors have in abundance. The National Association of Home Builders is noticing increased reports of sale cancellations, meaning buyers are backing out before closing, Seiders said. “In that case, all you’re losing is the deposit,” he said.

In South Florida, Mark Zilbert has another way to help condo speculators in their hour of distress. Zilbert owns a real estate brokerage and also helps link up condo buyers and sellers through the Web site CondoFlip.com.

A new feature on the site is a slate of panic buttons for investors worried that they won’t be able to unload their properties: One button for those who aim to sell their condos for a profit, another for those who are willing to break even and another for those who are willing to lose money in order to get out of the deal.

After sellers decide which camp they fit into, they can be connected with buyers interested in relieving them of their burdensome investment.

Of course, another highly publicized way of generating buyer interest without cutting the actual asking price is to offer incentives to sweeten the deal. Incentives can include in-unit amenities or the covering of closing costs.

Adjust your thinking — and your financing

Investors who can afford to wait out the storm, however, could benefit in the long run.

“There are a lot of unique proprieties that would be a shame to sell out,” Donges said. “In the long run, a lot of these properties are going to have value.”

It’s also important to note that conditions vary from market to market. For example, while the South Florida condo market may be iffy, conditions in some Texas markets are going strong, said Jim Fite, president of Century 21 Judge Fite Co., based in Dallas.

“We have a very robust environment for investors right now in all segments of the market,” he said. Investors have shifted focus from places such as Phoenix and Las Vegas to some parts of Texas, where rental values are more attractive, he said.

Chicago has a “normal to healthy” investor market, said Chris Kenny, chief financial officer for Palladian Development. “The difference in this market — it’s not a flipping market,” he said. Instead, investors will typically hold on to a property for about three years.

Those who do change their course to incorporate a hold strategy also might want to rethink their financing, said Lucy Duni, director of consumer education for TransUnion’s credit-information site, TrueCredit.com. In the recent past, condo investors often took out 1-, 3- or 5-year adjustable rate mortgages because the intent was to make a big profit in the short term.

If the adjustable loan is about to reset, investors might want to think about locking down a fixed rate. “If they’re in an ARM, it might be time to think about refinancing,” Duni said.

Becoming a landlord

Investors going into hold mode may decide to rent their units as a way to cover costs. In markets with low apartment vacancies and increasing rents, the move is an especially attractive way to bide time.

“Because of the fact that the market is softening, a lot more people are making decisions to rent because they don’t see themselves getting what they anticipated for the sale,” said Patrick Roberts, a real estate agent with 773 Realty Inc. in Chicago.

Even some builders are taking note of the current rental fundamentals; Donges said Lane Company’s focus is shifting back from condo building to apartment building.

But there’s some work involved in being a landlord. The first hurdle: setting the rent.

A fair amount of owners know how to set an acceptable price, Roberts said, but others ask for a couple hundred dollars more than comparable properties in the area. Incorrect pricing causes the rental to sit vacant for months, resulting in lost cash flow.

Condo owners have to accept that they won’t get all their mortgage payments, taxes and assessments covered in the rent, Roberts said.

There’s also some effort required to find the best tenants, he said. Credit checks on potential tenants are wise, he said, and sometimes condo associations will require criminal background checks as well. Some associations will also have restrictions on how many renters can occupy a building; owners should make sure they can rent the unit before proceeding.

Or, in some cases, it’s possible to hire a firm to do the landlord work.

In Chicago, a new business was created to manage condo owners’ property for them, performing such tasks as finding tenants and collecting rents.

The service, CRS, helps the owners of condos converted by American Invsco, said Michael Zink, one of CRS’ developers. Its success is prompting it to expand.

In some situations, condo owners who use CRS are guaranteed a rent check every month — even if the unit is unoccupied, he said. CRS’ cut is a 10% commission based on the lease value from the rental transaction. If the condo owner chooses its rental guarantee program, CRS is paid a fee instead, Zink said.

“At this point in the market, what we really are is more of a safety valve or a way for people to weather the current situation,” Zink said. “We can mitigate loss in this period of recovery.”

Mortgage Delinquencies

I got a Fedex today from my mortgage company. They sent me a letter stating that my mortgage was delinquent[no address, just an account number] and that they had tried calling me several times [yeah right!] and this was a final attempt to collect debt.

I called them up wondering which property this could possibly be on and after spending several minutes going through automated prompts I got a recorded message saying that my mortgage has been paid off in full.

Hmm…so yesterday I was delinquent when they overnighted it to me and today it was paid off in full? How moronic are these companies? With them selling a mortgage every 12 months its surprising they can even keep track of the payments!

Housing Update

Interesting update on some markets from the Real Estate Journal.

Utah homes worth their salt

Utah apparently has missed the news about the end of the housing boom, with median selling prices on the way up. For example, Utah County’s Alpine area saw median selling prices rise 57.2% to $529,000 between the first quarter of 2005 and the same period this year. In Hooper, located in Weber County, prices appreciated 40% in the first quarter to $230,000 from the previous year, the The Salt Lake Tribune says. “Most people in Utah should not pay much attention to all the talk of a housing bubble,” the paper quotes Richard DeKaser, chief economist for National City Corp., as saying. National City produces a quarterly “House Prices in America” report. There is little chance of housing prices declining in Utah, with the exception of the St. George area — which the report deems as “extremely overvalued,” the article says. Driving the rise in demand are an increase in jobs, higher wages and an influx of people from other states, The Salt Lake Tribune says.

Commuting costs brake California’s Central Valley sales

More far-flung than other Bay Area suburbs, California’s Central Valley is experiencing a housing market downturn more pronounced than in the Bay Area, the Mercury News says. During the residential real-estate boom, home buyers were buying properties farther from San Francisco in exchange for cheaper price tags, and Central Valley communities proliferated, the paper says. But now, with higher gasoline costs, rising mortgage rates and significantly appreciated real-estate prices, homes in the region are harder to sell and prices are falling. The article reports that in California’s San Joaquin, Stanislaus and Merced counties, sales of new and resale homes dropped 29% in the first five months of this year from the same period last year, according to DataQuick Information Services. At the end of May, almost 4,000 houses were up for sale in San Joaquin County, a year-over-year rise of almost 250%, the Mercury News says. To get an idea of the commute between these communities and San Francisco, a calculation on Indo.com shows that the driving distance between the San Joaquin town of Tracy and San Francisco is 62 miles.

North Carolina’s coastal market changes tide

Along North Carolina’s coast, home sales appear to have crested, making sellers wonder if the market is in a correction — or even worse — a collapse, says The News & Observer. In the Outer Banks, located at the northern end of the state, year-over-year sales of existing homes fell by more than 50% in April and May, the article says. In May, the average home price in the Outer Banks dropped about $100,000, or 16%, from the year before, the paper says. With a glut of oceanfront homes, buyers are asking for discounts of 10% to 15% from sellers’ asking prices, the paper says. (Though sellers are resisting price cuts, The News & Observer reports.) The not-so-sunny portrait is about the same throughout the coastal area, with sales of existing homes in Brunswick County (on the south of the coast) down by approximately 50%, and sales of existing homes in Carteret County showing a drop of 15% in May and a 34% dip in April.

Buyers scarce in Michigan

Michigan is experiencing one its slowest housing markets in history, says The Detroit News. To attract buyers, home builders and individual home sellers are offering incentives, the paper says. For instance, one Commerce Township homeowner is offering a two-year lease for a BMW X3 SUV for any real-estate agent who sells her $699,999 home. Some sellers are turning to Web sites that allow real-estate agents to bid for the chance to sell a homeowner’s property, the article says. Agents are offering lower real-estate commissions in exchange for sellers’ business, The Detroit News says. Responsible for the housing market slowdown are “the state’s sagging economy and low consumer confidence,” the paper quotes one local real-estate agent as saying. “People have kind of lost faith in the real estate market,” the article quotes another realtor as saying.

Foreclosure frenzy in South Florida

A slowing housing market and increasing interest and home-insurance rates have combined to create a swell in the number of home foreclosures in South Florida, says South Florida Sun-Sentinel. In the first quarter of this year, there were 3,000 additional foreclosures (a rise of 40%) than at the end of 2005, the paper says. Those most at risk for foreclosure are homeowners who stretched their real-estate dollars during the housing boom through creative financing, the article says. In the first quarter, foreclosures rose 69% in Palm Beach, Fla., from the end of the previous quarter, the paper says. “We’re seeing people who have overbought and their rates are going up now and they can’t afford their houses,” the president of Foreclosure.com says.