Tuesday, September 25, 2007

What the Future Holds in Store

Check this out over at the Seeking Alpha site.

Earlier this week, the Chicago Mercantile Exchange (CME) extended the futures market on the S&P Case-Shiller Home Prices Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011.

For all of you who think a 15-25% pullback in the real estate market can't happen, I suggest you take a look at the CME pricing Web site.

The market is new and illiquid, so price discovery may be imperfect. But futures traders are putting real money on a major pullback in real estate prices. The table below shows the estimated percentage change in real estate prices in 10 cities based on the most recent futures sale on the CME. The data starts with the November 2007 contract and runs annually through November 2011.

Sunday, September 23, 2007

NAR Pushes for Increases in FRE and FNM Portfolio Caps

Update: And make sure you read this. If the financial raping and pillaging of the American people doesn't inspire you to revolution, nothing will.

* * *
First the National Association of Realtors (NAR) pushed for exotic loans to keep prices rising. Then they redefined the way affordability is calculated so that housing looks more affordable than it really is. Then they demanded that the Fed lower interest rates. Then they backed the asinine Bush housing bail-out proposal. And now they are pushing for raising Freddie Mac's and Fannie Mae's portfolio caps:
After working overtime to initiate Bush's preposterous mortgage bailout, the NAR (National Association of Realtors) asked themselves what else they could do to artificially prop up overblown home prices. And then it hit them: why not ask the OFHEO (Office of Federal Housing Enterprise Oversight) to increase portfolio caps for Freddie Mac and Fannie Mae.

Under current caps, Freddie and Fannie can only buy mortgages valued at less than $417,000. Proposals are floating around to increase the size of the mortgages the two companies are allowed to buy and sell. Freddie and Fannie each hold more than $700 billion worth of mortgages in their respective investment portfolios already. The new proposals would allow the companies to expand their portfolios to dangerous proportions.

...In our demoralized world, we allow real estate agents to push a personal profit agenda and influence the decisions of policymakers. The NAR is not a trusted authority on banking and risk, yet they are allowed to personally address and pressure Congress and the Director of the OFHEO.

Does anyone else see something wrong with this picture?!
Although not unexpected, it still sickens me nonetheless. When will We The People take back America from special interests?

Write to your representatives. Get out on the street and make some noise.

Some Charts

The Bureau of Economic Analysis updated some of their data (and revised some data points) so I decided to update one of my favorite charts in response.

Here is the average price of a Marin single family residence (SFR) divided by average per capita income for the years spanning 1969 to 2005. The data has been normalized to 1969.

Here is the same data as above except expressed as a percentage deviation from the base trend line (not shown).

Here is the average price of a Marin SFR in terms of the number of ounces of gold you could get in exchange for it for the years spanning 1969 to 2007 (the 2007 data point is based on today's spot price whereas all the others are the average for the year).

Truth or Dare?

I keep trying to understand how it can be that Bernanke's lowering of interest rates last week by 50 bps can be the cure when it was too low of interest rates for too long that caused the problem to begin with. How can a course of action be both the cause of a problem and its cure?

Or was it all about saving the banking system (by giving them more time to unload over-leveraged positions in toxic holdings) and ensuring Wall Street's Christmas bonuses this year? That should make some of the Marin elite happy. But the general public, savers, the middle-class be damned. The Bernanke Fed abandoned inflation and the dollar just for a short-term bailout. Shameful.

What I like about the following video is that it suggests that Americans just might be starting to wake up. The video ends with the following quote but it should really start with it:
"It is to be regretted that the rich and powerful too often bend the acts of government to their own selfish purposes." (Andrew Jackson)

If you want to see the full video clip of Rep. Sanders raking Greenspan over the coals, you can see it here.

Wednesday, September 19, 2007

San Rafael Advocates Moral Hazards

Apparently, the city of San Rafael wants a new fire chief and the income for such a position ($152,000) is too low for him to be able to afford a decent, middle-of-the-road house in Marin. So, the city of San Rafael has approved to offer him a special low-interest mortgage loan of $600,000 so that their new fire chief can purchase a $1.2 million house. They have also boosted his salary in a number of ways so that his total take-home pay is $179,200 per year. And the justification? According to the city, it is important for people to live in the community in which they work and to be close to family who are located in the area.
The San Rafael City Council has offered a $600,000 low-interest home loan to the city's new fire chief, Chris Gray. Gray, who started his $152,000-a-year job this week, is in escrow to buy a $1.2 million, four-bedroom home in East San Rafael's Villa Real neighborhood, just west of Loch Lomond Marina. Escrow is set to close in early October.

"We'd like the fire chief to live in San Rafael - homes are expensive in San Rafael," Mayor Al Boro said [in justification].

The council approved the home loan agreement at its meeting Monday.

The council also awarded Nordhoff a $350-per-month raise and an additional $2,000-per-year contribution to his deferred compensation account. Nordhoff's annual salary is now $179,200 per year, plus benefits.

Gray, 50, who was previously the fire chief in Glendale, said a big draw of the job was to be near family in the Bay Area. He said he says it's important to live in the community he serves.
This is wrong on so many levels. Look, one of the complaints people like me make about the affordability crisis that afflicts Marin, the Bay Area, and much of California is that public servants, like fire chiefs, teachers, etc., cannot afford to buy a decent house in the community they serve. But handing out special mortgages to a few people that we deem as special is not the answer.

I mean, what about the firemen and others who work for this fire chief? Should they all get special loans too? No? Why not? Why don't we insist that this guy make some hellish commute from Sonoma or the East Bay or the central valley like we do with so very many other people who work in Marin? What about you and me? I make about what this guy originally came in making, but I don't see any handouts coming my way? Why aren't we offering a $600,000 mortgage to this poor, blind, sick Marin resident facing foreclosure or to anyone else facing foreclosure for that matter? Oh, and 'it is important to be near family and to live in the community in which we work'? (Haven't I been saying the same thing?) Well then, what about all the people who grew up in Marin but who cannot afford to live here, be near their family and loved-ones? Why don't they get special handouts too? Why aren't we telling this new fire chief the same lame story realtors tell other folks -- go buy "the perfect starter home" which comes in at about 800 sq ft in a crappy part of town as that is about all your income can support?

The hypocrisy of this is almost too much to bear.

Look, despite the fact that we Marinites like to apologize for our ludicrous housing costs and hide behind the belief that we are so very special, the problem is that we are suffering from an affordability crisis -- a crisis no matter how much the real estate industry tries to redefine the calculation of affordability and the median sales price. House prices have become unhitched from certain, basic fundamentals such as income. The only healthy way out of this mess is for house prices to fall and fall a lot; not provide designer handouts. The sooner we as a community engage with this the better -- the less of a mess we have to clean up and the less likely someone will come in and force some unpalatable course of action upon us (like affordable housing which we, for some reason, are so vehemently against). What we should be doing is to do everything we can to make sure house prices are congruent with the income of the people who live here and that credit is given out based on proper assessments of risk (and not given out to "anyone with a pulse"). You Mr. Marin House Owner may not like the idea of your house value dropping, but that is exactly what must occur. And besides, if you bought your house to live in, you shouldn't even care.

The Fed, Congress, bailouts galore, and now Marin... moral hazards define our society it seems.

And why isn't the Marin IJ questioning this, even a little? There are issues here that even they should see.

Monday, September 17, 2007

Common Cents

Now, I thought this (in the IJ no less) just doesn't happen in Marin because we are all so financially savvy and wealthy:
Marc Savoy, a San Francisco mortgage consultant and real estate attorney who also is a former resident of Mill Valley, says for the past five years, the 5-year, interest-only loan was the most popular loan written. In other words, for the past five years, the most popular financing vehicle for property purchase in the North Bay was a loan that remained stable at a low interest rate for the first few years - typically three or five - and on which no principal was paid. At the end of the three or five years, however, the loan is "recast" to include payments that reflect (a) some of the as-yet-unpaid principal, and (b) today's higher interest rates.

When loans are recast, people find their monthly payments are suddenly much higher. These folks cannot refinance because the credit markets have tightened to a stranglehold, and they can't sell because there are few buyers who can obtain the nonconforming loan (or who have the whopping down payment) that's needed for most properties in Marin.
Cry me a friggin' river already. No one forced them to take out a suicide loan for their Marin POSs.

But no worries. If you can't sell your Marin POS now that your rates are resetting and you're still asking bubblicious pricing that, deep down inside, you just know is your God-given entitlement by virtue of being so damn special, then Christopher Thornberg has the answer for you:
Many home sellers, bogged down in a housing downturn, are now doing the only thing they can to sell, dropping prices. Only this time, the sagging market often means taking a loss if the home was bought in 2005 or 2006. Christopher Thornberg, the former UCLA Anderson Forecast economist who predicted the 'housing bubble' since 2002, said that sellers' only hope is to "price to sell."

"You want to get out of the market," he said. "There’s no point in holding out if you want to get out before the next three years."
'Lower the price'?! Now who would have ever thought of that? What a novel concept!

But I guess someone better explain said concept to this sorry Mill Valley seller as their POS still hasn't sold and has been on the market for nearly two years (despite what the misleading DOM says... 131 days). You have got to wonder how long the listing agent is willing to spend money on advertising this pig before they force the seller to admit that their flip flopped long ago and they ought to just face the fact and drop the price to where it needs to be to sell.

On second thought, I think the seller of the above mentioned POS serves as a valuable warning to our community -- "don't let this be you".

Sunday, September 16, 2007

The Latest Out of the Mouth of Greenspan

Alan Greenspan was reported as saying:
US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market... the decline in house prices “is going to be larger than most people expect”.
It's a good thing we are immune and special and not in a bubble, at least according to the experts. That way we get to continue living in a crushingly unaffordable market while the rest of the state becomes a comfortable place to live.


Econ 101 -- You're Late, Get In There, Sit Down and Shut Up

Real Estate Bubbles and California's Economic Growth:

Part 1 (9:38)
Part 2 (7:57)
Part 3 (7:29)

Saturday, September 15, 2007

Precipitous Drop in Marin Sales; Tightening Lending Standards Just Starting to Bite

Yawn. The IJ is reporting on old news, stuff we figured out long ago.
Marin's median home price hit the $1 million mark again last month [August, 2007], but sales of homes slid more than 32 percent compared with this time last year... homes priced under $1 million were off by 39.8 percent between 2006 and 2007... in Novato, single-family homes sales were half of what they were a year ago...a 23 percent drop-off in Mill Valley...In Tiburon and Belvedere, sales remained flat. Regionally, Bay Area homes sold at the slowest pace in 15 years last month.

The rise in the median... combined with the decline in volume signals a stable luxury market making up for the lagging low end that has been most affected by the mortgage meltdown...

"Until the first-time home buyer can get back in the market in a strong way I think we'll see these trends for a while," said Valerie Castellana, president of the Marin Association of Realtors.

Yet to fully play out is the impact tighter lending practices, including restrictions this summer on jumbo loans over $417,000, have had on markets such as Marin, DataQuick analyst Andrew LePage said. In Marin, 76.9 percent of borrowers took out jumbo loans in August.

Realtor Kira Swaim, co-owner of San Rafael-based Tam Realty, said continued real estate jitters make it a great time to buy.
In summary, reporting of the county median is a joke because of the luxury market which is still able to prop up the county stats; but the rest of the market, the one that the majority of people here care about, is tanking. Furthermore, as explained before, the bubble is collapsing inward, towards our regional employment center. So we currently see the most distress in north Marin and the least distress in south Marin. Lastly, realtors continue to claim that no matter what the market conditions, it's always a good time to buy and pay them a commission (does anyone even take their self-serving talk seriously anymore?). Nothing new to anyone here on this blog. Enjoy the show.

Monday, September 10, 2007

Shame on the IJ

Well, I was going to show some discretion and let this story in the IJ rest and not form the centerpiece of a blog post. But apparently, a passing comment in a different post was too terrible to bear and indicative of me not being sufficiently considerate and sympathetic to this Marinite's plight... Never mind the fact that for the last two+ years this blogger (and, of course, other bloggers) has feared and lamented this very outcome and duly condemned this housing bubble for this very predictable and unnecessary eventuality. But back then, everyone was so busy making money in RE and living it up with RE profits and fantasizing that 20%+ appreciation was "in the bag" for perpetuity that no one cared; we bubble bloggers were loons after all. Back then (even still) the Marin IJ was doing everything in its power to encourage the housing bubble and be the local real estate industry's propaganda whore. But how short is the typical Marinite's attention span...

So without further ado, I give you the Marin IJ's latest tear-jerker sorry sob story du jour.

Here is the summary of "the saga":
  1. An individual (whom the IJ is quick to point out on numerous occasions is poor, old, legally-blind, suffers from multiple sclerosis, and female) lives in a terribly small house in Fairfax with kitchen curtains that read "bless this house" (if there is any doubt of this woman's sweetness, the IJ quickly dispels it).
  2. The house needs a new roof and other repairs.
  3. She is approached by an evil Southern Californian broker (Southern Californians are the sworn enemy of any self-respecting Northern Californian) who offers to refinance her into a loan (presumably with some equity extraction so she can fix her house -- blessed be the housing bubble's guaranteed riches).
  4. We are told she refused mightily but in the end she yields to the seductive powers of her nemesis and she "reluctantly" signs the loan documents... officially taking her first step into victimhood.
  5. Her original lender calls her up and persuades her to refinance with them for a better deal.
  6. So she attempts to rescind the Southern Californian deal, believes it is kaput (and the reasons for why it is not are completely ignored and we are led to assume she is being victimized), and signs on the dotted line with her original lender.
  7. But as it turns out, our poor, blind, sick female now ends up refinancing into not one but two subprime loans!
  8. Not realizing this of course, she doesn't know that she needs to pay the Southern Californian loan. And so, after some time has passed, she receives a notice of default.
  9. Not knowing who to pay (the evil Southern Californian lender or the angelic Northern Californian lender), she apparently doesn't pay either of them.
  10. She will now likely lose her home of 30 years to foreclosure unless some heroic Marin attorney, her local knight in shining armor, can come to her rescue.
Never mind that bloggers were yelling and screaming (in a vacuum it seems) that sad stories such as these were all too likely. The real question is not so much why these bad-things-happening-to-good-people stories appear in papers but where in the hell was the IJ and other local news papers during the run-up in the housing bubble? They were out pimping for the local real estate industry of course; falling all over themselves cheering on this housing bubble (and all that it entailed) as high as it could possibly go when what they should have been doing was acting like independent journalists, examining where the housing madness would ultimately likely lead and prudently cautioning the poor, old, blind, men and women of the county. This piece by the IJ is nothing more than emotional button-pushing; the dark side of the "better buy now before you are priced out forever" fearmongering.

If accurate in its stated (and presumed) details, this is truly a sad tale... there can be no doubt of that; I hope it has a happy ending. If it's not true, then I am, unfortunately, certain that there are true stories around which rhyme with this one. But it was utterly predictable and a natural consequence of capitalistic greed run amok. Whether they suffered or not, everyone who participated in this mass greed is partly to blame. But instead of facing our shame, the IJ presents us with this red herring to distract our attention away from our own complicity. As the wave of foreclosures and forced sellings hits Marin and elsewhere, will the wail of shock and dismay yield to ready excuses or will we admit to our own place in this sad melodrama that didn't have to be and that should never be allowed to repeat?

Update 9-12-07: Thanks to a reader and frequent contributor for the graphic for this post. I'm not sure if I am supposed to be Dudley and the IJ Snidely or the Marin attorney is Dudley and the lenders are Snidely. No matter. It works both ways. But there can be no doubt who plays the part of Nell (although that's not Nell in the pic, oh well). And if I may quote the contributor:
I was entertained [by] the way you skewered the melodrama to the IJ story. All it needs is a "Snidely Whiplash" character, hence that cartoon. After hiding behind a façade of a friendly "community newspaper", while serving local realtors, the[y] deserve all the scorn we can muster. Their pitiful little story makes me nauseous.
I couldn't agree more.

Sunday, September 09, 2007

Foreign Regulation of American Markets?

Wow! Talk of foreigners actually regulating American markets because our massive indebtedness, silly house prices, bogus government statistics are so out of control? Descriptions of America as "the world’s largest debtor nation"? Questioning of America's status as the world's "financial safe haven"? Talk of foreigners greatly reducing their financing of our debt and the resultant massive increase in interest rates? America the has-been -- "Indebtedness is eroding more than America’s economic independence — it’s eroding its status as a superpower"? How could it be? What about all that "wealth-creation" technology? What about that financial "dark matter"? Were we all just sold a bill of goods? You mean we can't lie, cheat, and steal from other countries without consequences? But we're special! All you loser countries should be kissing our arses!

But it's all worth it, right? You got yours, right?
International bankers and investors from China to France and Germany have lost billions of dollars because U.S. investments, sold as safe, turned out to be far riskier and worth much less than what American investment-rating agencies and banks led them to believe. They don’t want to be deceived again.

The international worry is that American regulators are not properly monitoring the products or alerting investors to the risks.

Now international investors are asking not only why American banks were allowed to originate hundreds of thousands of mortgages to home buyers whom they knew would likely be unable to repay them, but also why these risky investments were pawned off with top ratings to unsuspecting investors.

If and how long Washington will be able to resist international pressure is unclear, but America will probably fight hard to limit foreign regulation, especially since financial products and services are one of America’s most dynamic and most important export industries.

However, while regulators in the U.S. have been unreceptive to international monitoring, Europe and Asia, unlike in years past, now have growing financial leverage up their sleeves. “America depends on the rest of the world to finance its debt,” reminded Bofinger. “If our institutions stopped buying their financial products, it would hurt.”

Foreign willingness to purchase U.S. debt has kept interest rates low in America—thereby creating millions of jobs in real estate, home construction, remodeling and other associated industries. If foreigners stop lending to America because of difficulty assessing borrower credit-worthiness, the cost of borrowing could go way up.

But a potentially bigger concern is the effect the subprime disaster could have on America’s reputation as a financial safe haven. As the world’s largest debtor nation, America borrows hundreds of billions of dollars per year from the rest of the world. America needs foreign money, and its ability to attract it depends on its perception as a stable and trustworthy borrower.

The exposed corruption associated with America’s housing bubble, which includes mortgage originators, banks and rating agencies, may be irrevocably damaging the nation’s economic reputation and its ability to finance its debt.

America’s economic recklessness seems to be coming home to roost. Politicians, regulators and financial specialists outside the United States are seeking a role in oversight of American financial institutions and rating agencies in the wake of recent mortgage and banking problems. Indebtedness is eroding more than America’s economic independence—it’s eroding its status as a superpower.

Bay Areans Invest in "Arm Pit" Locations

Many Bay Areans like to describe CA areas outside of the Bay Area as "arm pits" and so very beneath us that they serve as "obvious" justification for our lofty prices and ingrained snobbery. (That and other such derogatory terms can be found in the comment sections of earlier posts to this blog when the housing bubble was still hotly disputed by local housing bulls.)

It is rather odd, then, that so many Bay Area RE "geniuses" saw fit to buy investment properties in "arm pit central", aka Sacramento, and contrary to our claimed opposition to the loss of prime agricultural land to development:
Many real estate agents estimate that about 40 percent of the 10,000 single-family houses for sale in Sacramento County are empty...

"There are so many new homes here and so many investors from the Bay Area," McDonald says. "When we pull up the owner's names, nine times out of 10 they live in the Bay Area."
So these investments aren't selling. They sit vacant and their lawns are brown and choked with weeds, the pools clogged with algae and breeding pits for West Nile virus. Because no one lives there, when and if the investment sells, there is no move-up buyer, so that move-up chain breaks. If it doesn't sell but the Bay Area "genius" has to sell it, they walk away (since it was probably a no-money-down sort of thing anyway). Their credit is now crap and they might have to sell their primary residence as that investment loan might be a non-owner occupied recourse loan.

Speaking of which, remember this post and this article?
But in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment.

"They can literally go after everything you have," Hall says.

There are a few limited exceptions. Retirement accounts are excluded, and declaring bankruptcy could protect some homeowners.

In the past, lenders have been reluctant to go after borrowers personally because it takes time and can involve costly litigation, but Hall says things might be different this time, especially if a borrower has substantial assets.
Too bad it is so much harder now to get bankruptcy protection.

"We Had to Share Tennis Courts with Other Families"

I first saw this Onion News Network video on the Housing Doom blog. I think it is quite appropriate for a certain segment here in Marin. "We had to share tennis courts with other families"! Oh, the humanity! Enjoy.
Panelists discuss a new study showing the gap between the wealthy and the absurdly wealthy is widening, and how we can help the merely rich catch up.

Saturday, September 08, 2007

Yearly YOY for Marin, 2003-2006 Using DataQuick's "Revised" Data

I was thinking I should get back to data mining and so I was looking at DataQuick's data and could not help but notice that their "revised" data for Marin (and probably elsewhere too) is often very different from the monthly data they report. DataQuick seems to frequently err on the side of over-estimating appreciation rates in their monthly data and then revise them downward months later when they publish their revised data (to which they do not draw attention to the extent they do for their monthly data). I've known this for a while and it is one reason why I don't like to use their data so much anymore. Another reason why I don't use their data much, at least for this year, is the fact that DataQuick has changed the way they calculate the median sales price which has a significant effect for smaller counties like Marin; as a result year-over-year (YOY) comparisons using their data won't be valid until next year.

So I used the internet archive Wayback machine to go find all of DataQuick's revised yearly YOY data for Marin. Here is the result:

(Click on graph for larger view)

Unfortunately, it appears that DataQuick started doing the yearly YOY reports in 2003 so there is no prior data that I could find.

Friday, September 07, 2007

Greenspan: It's LTCM and the Bank Panic of 1907 All Over Again

According to this article, Greenspan likens the turmoil in today's markets to that of 1987 and 1998, when LTCM collapsed, and the bank panic of 1907. Yawn. Is it really a surprise to anyone that now that Greenspan is "retired" he has been coming clean on the housing bubble he helped to create?
Former Federal Reserve Chairman Alan Greenspan said the current market turmoil is in many ways "identical" to that which occurred in 1987 and 1998, when the giant hedge fund Long-Term Capital Management nearly collapsed.

"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907," Mr. Greenspan told a group of academic economists in Washington, D.C., last night at an event organized by the Brookings Papers on Economic Activity, an academic journal.
Thanks Alan, you're a real help.

Thursday, September 06, 2007

Subprime Time

I found this graphic here.

What is interesting about this graphic is that the states with the highest use of so-called "affordability products" also have the lowest home ownership rates. Furthermore, according to the article, home ownership rates are not significantly different from those of the mid-1960s (before the securitization of mortgages came into existence). So it would appear that the securitization of mortgages has little benefited the home owner but has benefited Wall Street (except for the fact that by being highly liquid securitized mortgages sow the seeds of their own panics and crashes).

Thanks to a reader for sending me the graphic.

Some choice quotes:
In the golden age of American home buying — the years after World War II — savings-and-loan institutions or government agencies supplied returning G.I.’s with fixed 30-year mortgages. Home prices appreciated, steadily but at modest rates, and lending fiascoes were rare.

The world began to change in the late 1970s, when Salomon Brothers, in the person of a banker named Lewis Ranieri, pioneered the mortgage security. This showed a flash of genius. Even though each unit of real estate continued to be a slow-moving, illiquid asset, Ranieri perceived that the underlying mortgages could be traded as rapidly as stocks and bonds.

Salomon and other institutions would take the mortgages sold by banks and stitch together bonds backed by the payments of many mortgagees, which they sold to investors. Voilà! Ranieri had knitted a group of inert mortgages into a tradable security. The mortgage market thus obtained liquidity, which, according to Wall Street, made mortgages cheaper and benefited us all.

The [resulting] distancing of the borrower from the lender has contributed to the development of lax underwriting standards... investors in the securities, being remote from the actual real estate, could hardly be expected to scrutinize the underlying mortgages loan by loan. Most delegated the task to ratings agencies, and in time the agencies, intoxicated by the booming market, also grew lax. Meanwhile, Wall Street, sensing the appetite of investors, devised exotic ways of repackaging mortgages.

What happened over the last generation is that housing was turned from a market that responded to consumers to one largely driven by investors. Liberal mortgage financing pushed home prices higher — and younger, first-time buyers were effectively priced out of the market. Rates of homeownership are scarcely any higher than in the mid-1960s.

It was John Maynard Keynes who observed the paradox of securities markets: their very liquidity, which investors perceive as a safeguard, creates the conditions for disaster. “Each individual investor flatters himself that his commitment is ‘liquid,’ ” Keynes wrote, and the belief that he can exit the market at will “calms his nerves and makes him much more willing to run a risk.” The catch is that investors, collectively, can never exit in unison. Whenever they try, panic and losses are the sure result. Once, you had to be a hedge-fund player to experience such a trauma. Now, thanks to the dubious wonders of financial engineering, home buyers are exposed to the very same risks.

Wednesday, September 05, 2007

2007 Economic Symposium Papers

You can find links to some of the papers delivered at the 2007 Economic Symposium in Jackson Hole here.

The paper by Shiller argues that the housing bubble was not caused by fundamentals but rather by speculative psychology run amok. Here is the first graph from that paper to whet your appetite:

Any questions?

Wall Street Hiring and Bonuses At Risk

I know it is "old" news now but thanks to the credit crisis the Wall Street hiring machine is sputtering; layoffs are mounting and the lavish bonuses are waning and it is likely to get worse before it gets better. Late last year some readers commented that a burst in bonuses granted to investment banker types would likely result in a bump in house buying activity here in Marin and we did see a rise in buying activity in the higher end around the December-January time frame. Will we soon be reading sob stories in the Marin IJ about the poor, innocent, deserving, victim investment bankers who didn't get their expected bonus and/or lost their job and so had to sell their Tiburon trophy house but couldn't find a greater fool, err, of course I mean a willing buyer thanks to the credit crunch that they helped to enable? And what about the trophy wife? Will she still want to continue to hang with a houseless has-been? Inquiring minds want to know.
Hiring has slowed or seized up at many firms including Lehman Brothers Holdings Inc. and Citigroup Inc., where 17,000 job cuts were announced in the spring. And more layoffs loom in many areas in the investment-banking industry in the wake of the August credit crunch, particularly in businesses such as credit trading and structured products, analysts and job recruiters predict. At the very least, bonus season looks a lot tougher this year on Wall Street and in The City in London.

"Substantial losses from this credit debacle are unquestionable," said Sean Springer, chief executive of Napier Scott Executive Search Ltd., a London-based firm that helps banks, hedge funds and law firms track down talent in debt, credit, currency and emerging markets. "If investment banks hire when their profits increase, it's fair to assume the reverse is true when they suffer unforeseen losses."

Areas that could be affected most include credit trading and collateralized debt obligations, recruitment executives said. But hiring freezes have also hit closely related industries such as hedge funds and private equity funds too.

Analysts say big firms will dip into the bonus pool to smooth earnings. Options Group estimates an average 5% decline in bonuses. Traders in the collateralized mortgage securities business may see a 40% drop, maybe more if the conditions worsen.

Desperate Six-percenters Applaud Bail-out

Is anyone really surprised that the organization that argued most vociferously against the idea that there was a housing bubble (wrong, there is), that now is always the best time to buy (wrong), that on a national basis housing has never declined and so won't now (wrong), who, along with their lackeys, changed the way affordability is calculated so that things look more affordable than they really are (just plain wrong), now do an about-face, implicitly acknowledge that a bail-out is needed, and are practically begging for it? Silly you.

Doesn't this make you mad? Are you ready to (peacefully) revolt yet or are you just revolted?

This didn't take long. The National Association of Realtors (NAR) -- you know, the trade group that spends millions lobbying our legislatures in order to ensure those fat, 6% cuts on residential housing sales -- is in favor of President Bush's proposed housing bailout, beginning with Federal Housing Administration changes and including the proposed tax break to be given to debtors whose banks hand them a pile of money in the form of debt forgiveness.

NAR President Pat Combs details the organization's alleged concern for homebuyers here. Of course, the NAR attempts to couch this support not for what it is (an appeal to the government to save its own skin by reinflating the housing bubble that put a Cadillac in every garage and a Rolex on every wrist), but as an appeal to humanity: "Many families who have been making their mortgage payments at the starter rate but were unable to keep them up after the loan reset have been unable to refinance through the FHA ..."

That's true, but it ignores the reasons we got to this tight spot. And foremost among them were years' worth of Realtor press releases touting rising home prices, but also "affordability." The latter was the appealing buzzword for exotic mortgages with teaser rates -- the only thing that made these bubbling assets affordable. The myth about housing always increasing in price is, of course, an old NAR favorite.

By bum-rushing buyers into bidding wars in hot markets (I saw one from the inside, once) and issuing positive spin to gullible mainstream media outlets, the Realtors could create a self-fulfilling prophecy, for a while. But now the roof is on fire, as all of those exotic mortgages threaten to toast the NAR's crop of gullible buyers. Unfortunately for them, an inevitable result of the NAR's getting people to bid up houses and buy with zilch down payments is that far fewer homes and buyers qualify for FHA assistance.

Although the NAR helped make this mess, now that its 6% is on the line, it wants the taxpayers to clean it up. The press release is worth reading if only to see the depths of the NAR's ignorance. It calls for the president and Congress to deliver a dose of medicine that would kill the patient entirely, including raising FHA loan limits and reducing or eliminating cash down payments altogether.

Do these yahoos still not realize why housing is tanking? It's precisely because the loans that many Realtors jawboned people into taking were too big and had too little equity. As a result, the derivatives backed by those loans are, in some cases, all but worthless. Bear Stearns (NYSE: BSC), Goldman Sachs (NYSE: GS), Countrywide Financial (NYSE: CFC), Impac Mortgage Holdings (NYSE: IMH), Accredited Home Lenders (Nasdaq: LEND), not to mention BNP Paribas and dozens of other banks all around the world, can tell you just what happens when no one believes in the quality of the real-estate-backed derivatives, and there's no equity to fall back on: The market for the derivatives disappears, and there's no more money forthcoming to make new loans.

If the NAR gets its way, the people of the U.S. who didn't go out and spend irresponsibly during this housing bubble will be tasked with stepping in to guarantee the bad loans of those who did, spurred by the 6-percenters at the NAR. That might not even be enough to reanimate the dead monster bubble, but it might buy those Realtors a few more months of commissions.

This kind of shameless, pecuniary self-interest should surprise no one. After all, it's tone-deaf real-estate agents who came up with the infamous "Suzanne" advertisement that now serves as the poster child for the triumph of greed, duplicity, and bullying over old-fashioned financial reason.

That the greedy and thoroughly discredited NAR supports these bailout measures ought to be the final proof that they are not in the public interest. For the rest of the no-bailout case, see my comments last Friday.

Remember this from around November, 2006?

Ah, the memories...

Update: The comments of the eFinanceDirectory blog resonated with me:
...the president of the National Association of Realtors applauded Bush's FHA mortgage bailout proposal, and admitted that the Association has been pushing for the bailout since early 2007. If the NAR continues to have their way, taxpayers will be forced to clean up the mess the realtors helped to create.

If you thought that there was nothing else that the NAR could do to discredit themselves further, you were wrong. In a recent press release, NAR president Pat Combs made it clear to everyone that the Association isn't looking out for public interests, but rather, their 6 percent commission check.

The NAR neglects to mention that the proposed changes will also bail out the lenders who thoughtlessly offered exploding ARM loans in the first place. Also not mentioned: when somebody refinances into an FHA guaranteed loan, the risk is transferred to taxpayers. If the newly refinanced borrowers default on their mortgage once again, it will be American taxpayers who eventually pay off the loan.

So, why is it that the NAR is so eager to keep this bubble artificially propped up at the expense of someone else? Why are they so eager to transfer the risk to taxpayers versus the banks who will no doubt keep the easy money train rolling if they can only get out of this mess?

Because, the NAR is the (self-dubbed) 'Voice for Real Estate', not the 'Voice of Reason'. They want to keep those 6 percent commission checks rolling in. The more people pay for a house, the more realtors make in commission. That's why they were so eager to encourage housing as an investment during the boom, and so eager to encourage the bailouts now.

Dear Future Generations

One of my favorite "blogs" is the Of Two Minds blog (ok, it's not a blog, it's a web site) operated by Charles Hugh Smith. This letter by Mr. Smith is too precious to miss and so well expresses how a lot of us undoubtedly feel that I decided to shamelessly copy-and-paste it here:
Dear Future Generations:

We come to you hat in hand to borrow trillions from you to pay off our insanely risky gambles in the housing bubble. Because you can't vote yet, and our spineless, morally corrupt and short-sighted politicians are so cravenly desperate to win the next election that they will gladly sell you down the river to pander to the Greediest Generation now, well, you don't really have a choice.

We've already burdened you with deficits adding up to $8 trillion--money we squandered today on ourselves, leaving you the bill, and the interest payments of trillions, for the rest of your lives. You don't yet know that the interest on the National Debt--money we wasted on our own entitlements-- costs taxpayers $243.7 billion (+13.4% year over year) this year.

That's more than Education and training $89.9 billion (+1.3%)
Transportation $76.9 billion (+8.1%)
and Veterans' benefits $72.6 billion (+5.8%) combined, and 62% of the enormous Medicare expenditures ($395 billion). (Source: U.S. Federal Budget 2007)

(Note: National Debt numbers sometimes include "debt we owe ourselves," i.e. Social Security Trust Funds and other sums; the interest of $243 billion is on external debt, i.e. owed to foreign banks and individuals foreign and U.S.. Sources: United States public debt and
Why the National Debt Matters (OMB Watch)

You know, kids, interest rates are set to rise due to our gluttonous, outrageous borrowing, so the interest payments will rise to $500 billion or more a year by the time you can vote. (See bond chart above for the trendlines.) By then, it will be hopeless; by the time you pay the interest on the debt we racked up so thoughtlessly, and our stupendous entitlements like Medicare, Medicaid and Social Security, there will be nothing left for you or your kids. Except, of course, higher taxes.

But you want the unvarnished truth? We don't care about you. We want our Big Daddy, the Federal government, to bail us out of our speculative housing losses. Sure, we know that ultimately Big Daddy is you, the future taxpayers, but that reality is too painful for the fragile, weak-willed, fools that we collectively are--so we hide it behind layers of obfuscation like Fannie Mae and other accounting legerdemaine to hide the fact that every bailout is all taxpayer money being used to bail out private companies and individuals.

Some people will try to say we didn't know better--but that's just a lie. We knew that buying houses with no money down and liar-loans was a gamble, a gamble that housing would rise forever and we could sell for outlandishly easy profits from the gamble we'd taken on huge leverage (no money down! Teaser rates! Stated-income loans!).

Those of us who worked for mortgage companies and money-center banks and brokerages also knew it was all a massive gamble, highly risky and fraught with dangers--but we said nothing because we profited immensely from the charade of "low risk lending." We all knew you don't get something for nothing, but we saw everyone else getting something for nothing and we all wanted to join the party.

We are the most gutless, greediest, most irresponsible generation of consumers, borrowers and lenders in the history of this nation. Not only are we spineless, whimpering, self-piteous worms, we are completely shameless. Rather than stand up and take our losses like adults, we go on TV and rant and rave that Big Daddy is obligated to save us, conveniently forgetting that the money used to bail us out comes from you, our children and grandchildren. We are truly pond scum, life of the lowest order, borrowing from our children so we can keep gambling and trying again for that big "something for nothing" profit.

If a riverboat or Vegas gambler had borrowed every cent possible against his assets and income, how much sympathy would he garner from those who scrimped and saved to have what they have? Zero, zip, nada. Now he demands to borrow money from his children and grandchildren to bail him out of his insane speculation. What should our answer be?

1. Throw him in jail for criminal stupidity and greed

2. Take him out and whip him for criminal stupidity and greed

3. Take away his children and place them in the care of someone responsible

4. All three (whipping first, then jailing, then protect the kids)

5. Cravenly cave into his whining demands and give him more money to continue his speculative frenzy, indenturing his children and their offspring for decades to come.

If we borrow $1 trillion or $2 trillion to bail out all the speculators who gambled and lost playing the Real Estate Roulette Wheel, we are in effect saddling you with trillions in interest payments. $250 billion a year times 20 years is $5 trillion. A trillion here, a trillion there, and pretty soon you're talking real money.

But you know what, kids? We don't care. We loved getting something for nothing, and huge profits without having to make any sacrifices or risk our own capital. Now that we've lost our unearned profits, now we want you to spend your lives paying interest on trillions in debt so we can go on spending frivolously and lending without regard for risk.

Yes, it's pathetic, but we're the Greediest Generation. Sorry about your bad luck to be born to such selfish, short-sighted, blinded-by-avarice people. Hopefully you won't wake up some day and cut off all our entitlements and refuse to pay the debt we saddled you with; that's what we so richly deserve.
The Of Two Minds "blog" is one of the best out there IMHO. Please visit it often and consider making a donation.

Tuesday, September 04, 2007


The Marin Market Heat Index has recorded its lowest reading ever. Check it out:

Here is the historical data clearly showing that this selling season was no better (and a little worse even) than last year:

Here is the key if you want to have some sense of what these Heat Index numbers mean; we are a very long ways into a so-called "buyer's market":

Some of the current lack of heat in Marin's housing market is due to the normal slowing down of the market this time of year. But much of its coolness cannot be so explained. The owner of the Marin Heat Index has always been pretty good at being forthright with his analyses so I will leave the discussion to him:
Late summer is always a time of slow, then slower still, activity in our Marin real estate market. Year after year in early to mid-September this heats up, relative to the late summer levels, and the market gets a bit of jump back through early November.

This year the slow summer market has followed this pattern, with an overlay of anxiety and mistrust deepening the slow-down as buyers, sellers, and realtors have watched, startled and stunned, as the mortgage-credit crisis unfolded.

What is happening, other than that the market is recording its coolest activity Index numbers ever? Here is our take:

Sellers with discretion to choose the time to sell (in Marin, a larger segment of sellers than in almost any other market area in the country) are increasingly choosing to wait.

Closed escrows (closes over the prior 30 day period) dropped sharply in recent days and weeks. This decline is, in our estimation, largely because buyers in contract have pulled the plug on their deals at a much higher than normal rate. Buyers often suffer from doubts while in their contingency removal period (with the famous medical condition- "Buyers' Remorse"). During recent weeks, this has been spurred on by the relentless bad news on the mortgage and credit markets-resulting in buyers canceling contracts at higher rates.

Pending sales are down sharply as well. About half of the decline is attributable to end-of- summer seasonal patterns. The rest of the decline is due to the ripples from the scary world of finance, in which high-risk lending started a wave of credit paranoia that has breached the dikes of many seemingly safe sectors of the economy. Buyers clearly are asking themselves, "Is this a time to make major financial/life decisions?" The answer for a significant number of them is quite obviously, "No--not now."

Here are some of the market activity facts from the Marin Market HEAT Index that we used to draw our conclusions:

Today Compared to 30 Days Ago:

Marin Market HEAT Index Down 27%
Closed Sales (prior 30 day period) Down 30%
Pending Sales (all "in contract") Down 24%
Active Listings (unsold homes) (Virtually unchanged)

Today Compared to 7 Days Ago:

Marin Market HEATIndex Down 7%
Closed Sales (prior 30 day period) Down 12%
Pending Sales (all "in contract") Down 9.5%
Active Listings (unsold homes) Down 7%
I honestly hope those "fearful" buyers have enough sense/savvy to wait long enough to break the sellers' wills. Then, find those sellers who really need to sell and who did not buy during the last few years and/or who did not HELOC out the majority of their "equity". Such sellers can make deals; the others cannot. After all, if you are the sort of house buyer who views their house as an investment and given that we are starting the slow and painful slide in prices which are not likely to recover for many, many years, the lower the purchase price, the less painful the wait will be.

Thanks go to reader "Lisa" and an anonymous emailer for kicking my lazy butt and alerting me to this record low.

Monday, September 03, 2007

Shiller of Yale Says U.S. Home Prices May Fall 'Substantially'

September 3 (Bloomberg) -- Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, talked with Bloomberg's Kathleen Hays on Sept. 1 about the outlook for the U.S. economy and housing prices.

  • RE Governor Rick Mishkin's paper - said the Fed should ignore the housing market, and speculative bubbles in general, when setting rates.
  • His sense of the audience is that they generally believe that central bankers of the world should have leaned against the housing bubble a few years ago by raising rates.
  • What the central bankers of the world will do next is unclear.
  • Shiller's criticism of this conference is that there was too much time spent on what the Feds of the world should have done vis the housing bubble and far too little on what the Feds should do next.
  • We have a crisis developing -- home prices have had "the biggest boom in world history" (not just in the US). In the US home prices have been falling and there is a very real chance that they will continue to "go down substantially" with all sorts of negative repercussions.
  • A few people in the conference pointed out this developing crisis but in Shiller's opinion the discussion on "what do we do next" was not sufficiently central to the conference.
  • If the recession we are likely entering now is like past recessions (and it seems to be), then a Fed cut in interest rates will "eventually" cure the recession.

Saturday, September 01, 2007

All Aboard the Gravy Train, Next Stop: Housing Nirvana

I'm sure glad it's different this time around and the markets have figured out how to perfectly assess, slice and dice, and otherwise manage risk. It's a good thing there is no need for yet more government intervention in the "free-market" known as housing. What a relief. Frankly, I don't know what to make of the Bush-Bernanke-Obama-Dodd-Clinton-Gross bail-outs-that-aren't-really-bail-outs since house prices totally make sense, are completely justifiable and based on sound fundamentals, and are all-in-all priced to perfection.

Have a great extended weekend. And watch that last step; it's a doozie.
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