A place for residents of Marin County, CA and others to express their views regarding the real estate bubble and in particular the Marin real estate market
Sunday, January 20, 2008
Riddle Me This
Why is the real estate industry compensated for the value of the properties it sells and not the value of the service its agents provide?
1. Because they can and it lends itself to the image that they somehow hold the magic key to the rocket science world of real estate transactions... 2. Because 6% sounds better than 5% in terms of adding to the aura noted in my post #1 and the fact that they know they couldn't get away with 10% 3. The average Joe Six Pack is a knucklehead
Global banks and bond insurers are taking a beating today around the globe with Dow futures down about 500 points !!! … Tues is looking like another blood-bath… I expect the Fed will announce an emergency rate cut on Wed… Just unbelievable (but predictable)…
Yes, this same fate will play out here in Marin on home prices… gotta mark those assets down to get all the BS and hype out of the market to return things to normal..
One way of looking at this is that every home buyer in bubble markets from 2002/03 (maybe earlier?) on was like a mini-bank… They lent the promise to pay an exorbitant amount of their future wages/income to another bank or entity and secured it with their over-inflated home… Of course, all of this was done with excessive amounts of margin (zero / little down), just like Wall Street today…
Well, what’s the problem then ? Well, as in all banks, they only can stay solvent so long as they have cash in the coffers to maintain their balance sheet and cash flow… Until late 2005 or early 2006 (depending on local) that cash was in the form of a another mini-bank (future home buyer/FB) coming in and bailing them out of their balance sheet debacle when they sold… So, the freezing out of these future home buyers by an ever tightening credit / mortgage markets is analogous to having a run on the mini-bank’s future customers…. There will be no more knight in shining armor coming in at the last minute to hand them a wad of cash to fix their lopsided balance sheets…
So, like all the big banks on Wall Street and around the world, all these mini-banks (FB’s), will too write down the value of their assets (houses) or sell them in order to square away their balance sheets and cash flow statements..
I recall reading an excellent article a number of months ago by a financial analyst who forecast all of this (sorry, can’t find the article).. He said, when leverage gets so far out of hand, as it has today in the credit and housing markets, the risk increased to the point that any stall or minor change in the market’s direction would result in a complete unwinding of the market, because there would be little room for error and no place to hide once any sort of downward trend developed… Boy, did he call that right..
There is an article in recent Atlantic magazine titled: "The $1.4Trillion Question" by James Fallows. The author points out a potentially destructive tension in U.S.-China relations. The tension comes from the fact that "the Chinese government has parked their trade surplus - $1.4 trillion and counting, going up by about $1 billion per day- in the US treasury." This translates to "every person in the United States has over the past 10 years or so borrowed about $4,000 from someone in the People's Republic of China."
The author uses an example of Stephen Schwarzman, CEO of the Blackstone Group, who spent $3 million for his 60th birthday last spring. He points out that "in America, Schwarzman's perceived offense is greed - a sin we readily forgive and forget. In China, the suspicion is that he has somehow hoodwinked ordinary Chinese people out of their hard-earned cash." China has put $3 billion of China's national savings into Blackstone's IPO and half year later, China's holdings has lost about $1 billion on paper. The author is questioning weather this is a scheme a way to take money from the Chinese people and give it to the president's crony?
I like the following observation made by the author:
"Like so many imbalances in economics, this one can't go on indefinitely, and therefore won't. But the way it ends - suddenly versus gradually, for predictable reasons versus during a panic - will make an enormous difference to the U.S. and Chinese economics over the next few years, to say nothing of bystanders in Europe and elsewhere.
I read that same article and I remember the quotes you share. And your summary is quite correct.
What I also remember about the article is the author points out that the Chinese government has designed the system over there such that the Chinese people live way below the level they could be living due to the fact that the Chinese government redirects the vast majority of the country's earnies/profits into US treasuries and not back into the Chinese infrastructure and other public services. (Too complex to discuss here so I recommend everyone read the article.) As such, one of the biggest concerns of the Chinese government is to maintain stability (i.e., avoid social dissent)... what happens when the point is reached when the Chinese people realize that they could be living a substantially higher standard of living than what they currently "enjoy" in combination with actual/perceived poor investments of "their" earnings in US treasuries?
The Chinese/ American relationship is like a snake eating its own tail. The Chinese government can't invest the money it has parked in US Treasury funds in China or give the funds it has in Treasuries to its people because the source of those funds is the American consumer. If it did so there would be a shock to the US economy raising interest rates and thus slowing consumption of their products. If the American consumer reduces consumption of their products the Chinese economy tanks (see the market today on the threat of this) and the, Commies in name only, government would then have to deal with a billion+ people that will no longer believe in the growing prosperity they have experienced and come to expect. Thus potentially unleashing unrest and possibly requiring a forceful governmental response. It is much easier to keep them pacified with their own version of consumerism and relatively speaking they are doing pretty well in this dance. In reality the Chinese economy, by being based on the American consumer’s insatiable demand for crap and an artificially devalued Yuan that facilitates this consumption, is a house of cards. Much like I might add was (is) the housing market in this country. It may all be falling down.
As other countries and emerging markets continue their growth and march towards middle class, the American consumer will become more marginalized in the bigger picture. We're not their yet by any means, but the global middle class is growing, and that's not due to prosperity in the US.
This next century will won by the next big energy thing and managing your natural resources. Russia has the huge natural resource advantage at the moment. US needs to win the next big energy thingy.
On the subject of realtors, their services are largely superfluous. Nobody's inane sales chatter will change a house's marketability one iota. I can look myself, thank you--and gladly pay somebody to draw up the paperwork in the event the house sells itself.
The Fed's actions today have me unnerved. Just what we need...more liquidity. wtf? It reminds me of that famous quote "If the only tool you have is a hammer, you tend to see every problem as a nail".
OT, but the SF Chronicle ran a front page article today on CA foreclosures.
For Q4 2007, Marin had 40 foreclosures, up from 14 same period last year. But also for Q4, there were 224 Notices of Default sent out, up from 101 a year ago.
My understanding is that the majority of NOD's end up in foreclosure, so the numbers for Marin are definitely escalating.
People can't sell. People can't refinance under tighter lending standards, and heaven help you if you did 95%+ financing and have no equity.
9 comments:
Three reasons:
1. Because they can and it lends itself to the image that they somehow hold the magic key to the rocket science world of real estate transactions...
2. Because 6% sounds better than 5% in terms of adding to the aura noted in my post #1 and the fact that they know they couldn't get away with 10%
3. The average Joe Six Pack is a knucklehead
Global banks and bond insurers are taking a beating today around the globe with Dow futures down about 500 points !!! … Tues is looking like another blood-bath… I expect the Fed will announce an emergency rate cut on Wed… Just unbelievable (but predictable)…
Yes, this same fate will play out here in Marin on home prices… gotta mark those assets down to get all the BS and hype out of the market to return things to normal..
One way of looking at this is that every home buyer in bubble markets from 2002/03 (maybe earlier?) on was like a mini-bank… They lent the promise to pay an exorbitant amount of their future wages/income to another bank or entity and secured it with their over-inflated home… Of course, all of this was done with excessive amounts of margin (zero / little down), just like Wall Street today…
Well, what’s the problem then ? Well, as in all banks, they only can stay solvent so long as they have cash in the coffers to maintain their balance sheet and cash flow… Until late 2005 or early 2006 (depending on local) that cash was in the form of a another mini-bank (future home buyer/FB) coming in and bailing them out of their balance sheet debacle when they sold… So, the freezing out of these future home buyers by an ever tightening credit / mortgage markets is analogous to having a run on the mini-bank’s future customers…. There will be no more knight in shining armor coming in at the last minute to hand them a wad of cash to fix their lopsided balance sheets…
So, like all the big banks on Wall Street and around the world, all these mini-banks (FB’s), will too write down the value of their assets (houses) or sell them in order to square away their balance sheets and cash flow statements..
I recall reading an excellent article a number of months ago by a financial analyst who forecast all of this (sorry, can’t find the article).. He said, when leverage gets so far out of hand, as it has today in the credit and housing markets, the risk increased to the point that any stall or minor change in the market’s direction would result in a complete unwinding of the market, because there would be little room for error and no place to hide once any sort of downward trend developed… Boy, did he call that right..
There is an article in recent Atlantic magazine titled: "The $1.4Trillion Question" by James Fallows. The author points out a potentially destructive tension in U.S.-China relations. The tension comes from the fact that "the Chinese government has parked their trade surplus - $1.4 trillion and counting, going up by about $1 billion per day- in the US treasury." This translates to "every person in the United States has over the past 10 years or so borrowed about $4,000 from someone in the People's Republic of China."
The author uses an example of Stephen Schwarzman, CEO of the Blackstone Group, who spent $3 million for his 60th birthday last spring. He points out that "in America, Schwarzman's perceived offense is greed - a sin we readily forgive and forget. In China, the suspicion is that he has somehow hoodwinked ordinary Chinese people out of their hard-earned cash." China has put $3 billion of China's national savings into Blackstone's IPO and half year later, China's holdings has lost about $1 billion on paper. The author is questioning weather this is a scheme a way to take money from the Chinese people and give it to the president's crony?
I like the following observation made by the author:
"Like so many imbalances in economics, this one can't go on indefinitely, and therefore won't. But the way it ends - suddenly versus gradually, for predictable reasons versus during a panic - will make an enormous difference to the U.S. and Chinese economics over the next few years, to say nothing of bystanders in Europe and elsewhere.
holland,
I read that same article and I remember the quotes you share. And your summary is quite correct.
What I also remember about the article is the author points out that the Chinese government has designed the system over there such that the Chinese people live way below the level they could be living due to the fact that the Chinese government redirects the vast majority of the country's earnies/profits into US treasuries and not back into the Chinese infrastructure and other public services. (Too complex to discuss here so I recommend everyone read the article.) As such, one of the biggest concerns of the Chinese government is to maintain stability (i.e., avoid social dissent)... what happens when the point is reached when the Chinese people realize that they could be living a substantially higher standard of living than what they currently "enjoy" in combination with actual/perceived poor investments of "their" earnings in US treasuries?
The Chinese/ American relationship is like a snake eating its own tail. The Chinese government can't invest the money it has parked in US Treasury funds in China or give the funds it has in Treasuries to its people because the source of those funds is the American consumer. If it did so there would be a shock to the US economy raising interest rates and thus slowing consumption of their products. If the American consumer reduces consumption of their products the Chinese economy tanks (see the market today on the threat of this) and the, Commies in name only, government would then have to deal with a billion+ people that will no longer believe in the growing prosperity they have experienced and come to expect. Thus potentially unleashing unrest and possibly requiring a forceful governmental response. It is much easier to keep them pacified with their own version of consumerism and relatively speaking they are doing pretty well in this dance. In reality the Chinese economy, by being based on the American consumer’s insatiable demand for crap and an artificially devalued Yuan that facilitates this consumption, is a house of cards. Much like I might add was (is) the housing market in this country. It may all be falling down.
As other countries and emerging markets continue their growth and march towards middle class, the American consumer will become more marginalized in the bigger picture. We're not their yet by any means, but the global middle class is growing, and that's not due to prosperity in the US.
This next century will won by the next big energy thing and managing your natural resources. Russia has the huge natural resource advantage at the moment. US needs to win the next big energy thingy.
On the subject of realtors, their services are largely superfluous. Nobody's inane sales chatter will change a house's marketability one iota. I can look myself, thank you--and gladly pay somebody to draw up the paperwork in the event the house sells itself.
The Fed's actions today have me unnerved. Just what we need...more liquidity. wtf? It reminds me of that famous quote "If the only tool you have is a hammer, you tend to see every problem as a nail".
Good night--and good luck
I wouldn't mind paying for some of *her* services ..
OT, but the SF Chronicle ran a front page article today on CA foreclosures.
For Q4 2007, Marin had 40 foreclosures, up from 14 same period last year. But also for Q4, there were 224 Notices of Default sent out, up from 101 a year ago.
My understanding is that the majority of NOD's end up in foreclosure, so the numbers for Marin are definitely escalating.
People can't sell. People can't refinance under tighter lending standards, and heaven help you if you did 95%+ financing and have no equity.
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