Fattrad: R/E question

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caughtinside

Social climber
Davis, CA
Topic Author's Original Post - Apr 26, 2006 - 07:56pm PT
I saw in another post you think a 15-20% correction. Are you thinking bubble-popping timeframe, or a slow decline?

I saw a talk today by a guy from some institute at UCLA, and he seemed to think that because unemployment isn't going up, that the market will slowly decline over about 5-7 years.

After looking at another $400k 900 sq/ft cottage, I've just about had enough of this.
Karl Baba

Trad climber
Yosemite, Ca
Apr 27, 2006 - 03:00am PT
Seems very reasonable and I wouldn't be surprised to see things shake out like that.

There is a "House of Cards" that could come crumbling down due to a cascade of forced sales by folks caught by higher interest rates on already barely afffordable ARM and Zero rate loans. A perfect storm could be gathering.

A weaker dollar might spare both the big government debt and folks housing debts from their former weight.

But somehow, doom and gloom never quite materialize as we fear.

Although the comparison with the dot.com crash is appropriate, a lot of folks losing their homes would seem to cut deeper

Peace

Karl
dirtbag

climber
Apr 27, 2006 - 06:56am PT
I'm waiting too. It's hard to be patient sometimes, but throwing money away on over priced housing is absurd.
Zetedog

Trad climber
PGH, PA
Apr 27, 2006 - 10:11am PT
Some of what Radical and Fattrad is saying is true, but there are a number of other things you guys are missing.

First, there is still Home Price Appreciation (HPA). Unless you live in the rust belt states of MI and OH, house prices are still appreciating. The press, unfortunately, hast been stating that the housing market is weakening, similarly that they have been stating that the economy is weakening. The reality is that both are still growing, just not at record paces. There is a big difference between a decline and slower growth. There are, or course, many examples that one could quote about the house down the street, but the report I just got this week, for data as of 3/31/06, shows that all except for 6 zip codes in CA (supposed to be the hottest housng market) still showed significant HPA month over month. Two fr the six had no sales (standard for those zips), the other four were slight increases. No Flat or negatives.

This becomes very important in regard to the 500BLN in ARM resets coming due in the 3rd quarter. When this happens, Owners are faced with three options
1) Pay what the new rate is.
2) Refinance into a new ARM. Teaser rates are still pretty low. This is the expectation that most of us that purchase mortgage loans have built into our prepay models. The hinderance to this is if there were prepayment penalties in the loans, which isn't very common in this set of resets.
3) Sell their house. Again, HPA is still in effect, NOT DECLINE. Meaning they will not take a loss on this. Still left with finding a new house. Even though you hear a lot of ads for it, pulling equity out of you house such that the cummulative loans to value is greater than 100% is damn near impossible, and really only given to those with superior credit rantings, very low DTI, and stable income history.

Fattrad has a good correlation between job growth and housing purchases, except that you need to lag house purchases to be dependent on job growth, and even then, you need to specify type of job growth. The unemployment rate for College (or better) graduates is around 2% (very tight), while high-school or less is on the plus side of 7% (slightly weak). Correlation to all forms of economic growth since the 50's is much stronger to college+ levels. If you beleive that labor supply is the driver of our economy and is tight, and even the HS or less has been cranking in since 2003.

Fattrad's example of the Mortgage office is contradictory to all the other reports that I have seen, and is only representative of one sample. Mortgage servicers (those pesky folks that call you when your late on a payment) have nearly doubled their labor for in anticipation of the ARM resets in Q3, which is in expectation that many of these folks will be hit by suprise (most servicers have been proactive, and calling them, trying to make sure they can afford the new rate). Additionally, orginators out of the left coast, primarially Long Beach, New Century and CWL, have also being hiring moderate amounts as they expect several of these ARM loans turned into new mortgage production.

Why were they let go? tough to say. Loan production did decline from December to now, which has pushed the spreads on the bonds that I buy to ridiculous levels. However, turnover in both the mortgage origination and servicing business is pretty high to begin with, averaging around a year or less. I get reports from all of these guys quarterly. It's been pretty stable.

What is the real worry in the housing market? First are the non-owner occupied houses, which tend to be people that have levered themselves to speculate on properties. This is not a significant portion of the market. There just aren't enough people that can even qualify for multiple sub-prime loans to where they'd have to worry. While underwriting standards have been pretty lax, unless borrowors meet minimum Debt To Income, guys like me won't purchase the loans. Countrywide is the only non-GSE that is in the business to carry loans on their balance sheets, and these are the type of loans they want.

The other real worry are MTA based arms or option ARMS, where the borrower selects MTA (Monthly Treasury Average). The structure of these allow for Negative amortization (think paying the minimum amount on your credit card). If the negative amort out paces HPA, then the borrows will be underwater on their loan.

As to the 500K loan at 8%, conventional (30YR) Mortgages were n the plus side of 7% in 2001. Currently 30YR rates are only around 6%, Affordibility (ARMs etc) products are still considerably lower.

Bernake's speaking right now. Will see what he has t say.

ToddE.
Karl Baba

Trad climber
Yosemite, Ca
Apr 27, 2006 - 02:02pm PT
"What is the real worry in the housing market? First are the non-owner occupied houses, which tend to be people that have levered themselves to speculate on properties. This is not a significant portion of the market."

I've heard around here (California) spec homes have been 25 percent of home sales in recent years.

Even one of my dirtbag buddies built one and I have several clients who buy em and sell em on the side.

Now if these homes get dumped on the market in distress, what's that do to eveyone else's prices who have to sell?

And for folks who'se home has appreciated greated to sell and buy a remotely similar property will (in California) subject them to greatly increased property taxes.

The market all throughout California is loaded with $500,000+ houses. Who can pay the property tax on that, much less the payments? How much can interest rates go up before the teachers, firefighters, Nurses, and other non-ceos get killed?

Sure things aren't bad now. Things are just slowing down, but if interest rates go up or the economy starts to choke, things could change rapidly. I think it would be madness to buy a house until some deals are visible.

Unless you have money to burn, in which case you should come visit me in Yosemite!

Peace

Karl
Bruce Morris

Social climber
Belmont, California
Apr 27, 2006 - 02:17pm PT
Glad I own a Prop. 13 house right next to Hillsborough. Everybody's over 60 in my neighborhood - none of those ugly young rats with kids and mortages to pay off.
Landgolier

climber
the flatness
Apr 27, 2006 - 02:32pm PT
I'm from one of the super-boom areas in Florida, and I can tell you that the real estate slowdown is going to be messy. We have experienced phenomenal growth in our are over the last 20 years, but the problem has been that 50% of the homes (in $, not units) are sold to rich, retired part-time residents, and the other half are starter homes and multifamily for the legions of contractors that build all of the above. We're growing, but our major industry is growth. Now the area is starting to get too big, people's commutes are getting to an hour and a half, and all of a sudden location is becoming a factor again rather than everybody just buying at the perimeter. Prices are up everywhere but the farthest out areas. We need 800 new teachers in our schools next year, but they had better be married to doctors and lawyers to afford housing anywhere near their workplace.

I don't know what the solution is. Our market is so nonlocal - the money all comes from people cashing out equity elsewhere. I guess when there is less of that it will slow down, but it seems like as soon as there is any downward price pressure the floodgates open again. These people are buying this crap out of a catalog, they don't care if it's there or 150 miles up the coast if they can save $15k.
DavisGunkie

Trad climber
Davis, CA
Apr 27, 2006 - 02:52pm PT
Hey Dave

Steph and I were thinking of trying to purchase a house this year, it didn't work out but there is this community of new homes in Woodland (just south of gibson on 102) that apparently had a bunch of stuff that they were tryin to sell with lots of incentives putting them in the 300s. never got the actually number but the realtor who told us thought we would qualify for 350..
Gene

climber
Apr 27, 2006 - 02:59pm PT
RE is relatively illiquid. Sales that close this month reflect deals made two months ago, or, in the case of new construction, the contracts may be much older. RE statistics are almost all retrospective. Although many indicators still are going up or are holding their own, like avg/median price, I pay more attention to the volume of sales, days on market and number of listings. In Stanislaus and San Joaquin Counties (Central California), the number of closed single family sales in Jan & Feb 2006 was 20% fewer than in the same two months in 2005. Price follows volume. Listings have more than doubled in the same time frame. More supply than demand. In a few more months, the imbalance will be more pronounced as non-owner occupant investors/speculators try to bail. Even the perception that the market has stabilized will cause many to try to sell. That's when the real fun will start.

Also remember that RE deals go to the greatest optimist, ie. the highest bidder.

A 20% decline in single family values in some areas is possible if not probable. Look back to the Cali RE market in 1990 through 1992.
Zetedog

Trad climber
PGH, PA
Apr 27, 2006 - 04:44pm PT
Gene:

While price discovery is somewhat problematic, Residential RE is a very liquid sector. Take out Detroit, And there are few areas in the contry where you can't sell a house, given a low enough price. I logic that price stability causes selling assumes that everyone is a speculator. Historically, people just stay in their house if they are still going to stay in the same area.

On the investor side: Since 2000, less that 6% of all mortgage originations in CA have been non-owner occupied (Investment). Number ticked up to 7.1% for 2005. This psuedo-low number, as multifamily homes (duplexes) are a seperate categorization, but if the borrower does not live on the property, it is categorized a commercial MBS, as has significantly worse tax implications for both the borrower and the note holder. Multifamily implies that the borrower intended to rent out to cover P&I payments. There are probably some that bought prior to 2000, but the odds that they get killed due to a price correction is pretty low. 20% is not a number that I have ever heard.

Karl argued that things could change rapidly if economy starts to choke, and interest rates rise. Karl's a smart guy, no doubt, but for those conditions to happen we would be in hyper-inflation (Argentina, any number of African countries), which has only happened when a Government has low lending rate and is printing too much money. The fed raises rates to cool borrowing when inflation is too hot. Inflation, being a function of the economy (among others). Prior to 98, when ARMs first started making a precense in the retail market, the 10YR note was the greatest influence on mortgage rates. It could be argued that 1 onth rates (Libor to the 2Yr) have a greater influence, given these newer products. Fact is the owner now has another free option. In the past, owners had a free option that if rates fell below their current mortgage rate, they could prepay, and refinance lower. In addition to that, they now a duration option, depending on the 2s-10s spread. The curve was flat to inverted for most of the year (10Yr yields under 2 YR, aka Greenspan's conudrum). This meant the market assumed that short-term rates were going to go down in the near future.

This would also mean that, if things were equal, that recent borrows should want to convert to a standard 30Yr fixed, over an ARM. Only, originators earn more fees on ARMS, and therefore push people into them. this can only be accomplished by have substantially lower teaser rates, which have persisted, often lower than the loan providers borrowing costs.

RE stats are some of the fastest economic stats to come out. New Housing apps is only a 2 week lag, compared to say GDP, which is only published quarterly, and on a 1 month lag (Q1 numbers announced on Friday). BLS inflation numbers, which we can argue about accuracy anyway, 1 month lag. The only two economic indicators that are quicker that I can think about are the Fed interest rate changes (2:30 day of meeting), and change in payroll (first friday of new month for prior month numbers). there are some others that are more frequent, but get revised continually, or are only sample data.

Personally, I get a report every week on mortgage initiations (original applications) from the week prior straight from originators (as do the hundreds of other peers in my position). Since most people apply for a motgage within 3 days of a contract, this data is, on average, up to 10 days old, still pretty good.

Landgolier: Yeah, for the most part, FL is screwed. However, it is still very desirable locatin for people to live, which s forcing a housing shortage (same still in most of CA). Prices will only go down when there is a surplus, which can only be caused by overbuilding, or populatin shift. Same can be argued for Vegas, and a few other areas in the SW.

Full disclosure for me: I work for a Fixed income shop, and I am responsible for buying and credit work on HEL (non-conforming or GSE loans), both in ABS and CMO markets. My portfolios are 1.2bln (90% ARM type loans), with responsibilities credit survelience on 26bln of residential MBS. We buy pretty far down in the capital structure of how these packaged and sold off in my market.

Motrgage loans are "pooled", then some financial engineering, occurs, and then nerds like me buy them. The data I get on the pools is down to the loan, which means I get address, credit score, income, employeers, all other debt, and occasionally social security numbers (by accident). I have even found a couple of my co-workers loans in deals we own.

While I am worried about "pockets", the overall market for this stuff is pretty good. Including CA. Vegas, parts of FL, not so much so.

ToddE
Karl Baba

Trad climber
Yosemite, Ca
Apr 27, 2006 - 06:28pm PT
I would argue that lending rates are low, that the government is printing money like mad (and their deficits are just like another form of printing money in some ways) and that high oil prices can be very inflationary.

When the government runs deeper and deeper into deficit, and the dollar enters a weakening trend, the government will have to pay higher rates to get folks to finance our economy.

They stopped disclosing the M3 money supply recently. Wassup with that?

Don't look at the man behind the curtain, obey the great and powerful OZ

Peace

Karl

Edit: On the other hand, if real estate bursts rapidly, it's going to be so very ugly for the whole economy that the powers that be will do anything to make a soft landing even if there is a price to pay for that
Zetedog

Trad climber
PGH, PA
Apr 27, 2006 - 11:07pm PT
Karl-

On M3: there is a lot of speculation to the kill switch, with the best conspiracy theory linking it to the Iranian Oil Exchange switching to the EUR as the base currency over USD. Although there was never a press release on it, the Phily Fed governor had started talking back in 2002 that M3 was getting to be a wild guess versus a calculation, and that the fed would stop publishing soon. One of the mid-west fed guys stated about this time last year they would do away with the publishing by the end of the year. Part of the problem lies with forward settle trades in markets like mine: I buy mortgages today that don't settle for 30 days. I then take that money and invest it in some other 30 day instrument (CP, REPO, etc). Pimco calls this Trade financing, reality is its leverage. M3, under the Fed method, counts both of these, but both sets of investments cannot be pulled into cash simultaneously, even though the are considered "near cash".

If the Fed and the treasury were the same entity, as it is in several countries, then you claim would be valid that it is the same, and again, was the cause of hyper-inflation in many countries. More importantly, if the decifit would be financed internally (by US residents), then your claim is also true, but the trade deficit is offset by a positive Net Foreign investment, mostly from Japan. So there's very little that is inflationary about that. As it stands, a Devaluation of the Dollar is much more pain full to several other countries.

(Ignore Europe, mostly because I sit through a strategy meeting every morning at 7am where this is argued to no conclusion). As we buy goods from Japan and China, devaluation raises the price of their goods, implying that we will buy less from them, which is really bad for them, most know that, reducing our . But the bigger impact is that most of the japanese savings, both individually and for the govt, is in USD, so they get smack around 2 times. US on the other hand, will be much more likely to buy our own goods (good for GDP).

So we're left with the amount of the debt, and how we will finance it further/refinance it. As long as GDP growth out paces our debt growth, we're self-sufficient, as we are earning more than our debt is growing. But even if that doesn't happen, US Gov't raises taxes. I hate to say it so soon after 4/15, but we have one of the lowest individual taxation rates of developed contries (taking into account all forms of taxes, and social taxes including semi-individual funded pensions). Our average individual pays about 42%, while most Europe pays around 50%, and Asia Pacific pays 47%. roughly.

Lynch pin to all of this is the growth of US debt. Stupid congress passed the balance budged requirement, but left a stupid loophole leaving out emergency spending, which stupid Clinton started spending out of for things that were pretty regular, which set the precedent for stupid W.Bush to classify most things as "emergency" spend even more out of. Jerks, all of them. Not a partisan issue, both sides of the aisle have been forcing things through the loophole.

There are many things that could happen catastrophically the the government can't do anything about. Sept. 11 comes to mind, as well as the tech bubble burst, and several others. Markets tend to show much more elasticity than we give credit for them to absorb with merely a "bumb" in the road. Not to say it can't crack, but that you'd have to go back to the Great depression or underdeveloped economies to find examples where stuff like this isn't "absorbed" in a relatively short time.

Todd E.
Karl Baba

Trad climber
Yosemite, Ca
Apr 27, 2006 - 11:52pm PT
I agree that markets are more elastic that they seem at first glance.

The other side of that is that if that elastic is stretched in a certain direction too far it could snap back pretty hard.

"More importantly, if the decifit would be financed internally (by US residents), then your claim is also true, but the trade deficit is offset by a positive Net Foreign investment, mostly from Japan. So there's very little that is inflationary about that. As it stands, a Devaluation of the Dollar is much more pain full to several other countries."

So what I'd like to know is how long Japan and China will continue to finance the US debt when the dollar is falling and the interest rates we offer on that debt is so low that treasuries are a losing proposition? How long does the charity last?

Fatty keeps saying the deficits are a low percentage of GDP but year after year they add up. How much total debt a threat? Is there something about economics I'm missing where you can keep going into debt with no possible end in sight and just print more debt and money to stay afloat? Wouldn't devaluing the currency be one sneaky way out? Didn't we do that before sometime?

I mean, show me a scenario where the US balances the budget. Are we going to invent some new technology that the rest of the world must have and can't do itself? When does the party end?

If it's in 100 years, I got mine.

Peace

Karl

Edit: and thanks for all the good and fact filled posts above.
Karl Baba

Trad climber
Yosemite, Ca
Apr 28, 2006 - 01:27am PT
Given that war is the other risk. What about an analysis of the best/worst case scenarios of any attack on Iran by US or Israel? Probably you should post it on your other thread.

Remember that Bin Laden claims that the terrorist strategy isn't military victory over the West but causing economic pain.

Peace

Karl
Zetedog

Trad climber
PGH, PA
Apr 28, 2006 - 01:49am PT
Karl:

Foreign Entities will keep investing in US when Yields are higher here than there and/or, we still have a lower expected default. There is some wierdness there, though. China just raised 1 year rates to 5.38%, but our 2 year is around a 4.90%. However, China's govt fixes a forward market on their currency, which forces Covered Interest Rate Parity out of wack, still giving people incentive to invest in USD. CIP mean the foward exchange rate equals the rate at which you can borrow in that currency, convert at spot, and invest for the same term in another. Every hedge fund is short the dollar vs the Yuan. Same bet Soros put on the pound vs marks 20+ years ago.


To your second part, yes we are growing. But if you think the US is one household, currently, Income (GDP) is growing faster than debt. Debt to Income (DTI) is probably the most looked factor in any type of borrowing. As long as GPD growth = debt growth, there is no fear. US will never eliminate debt. There is too much stability to the currency, rates and inflation becuase of it. The EUR stablized once there was some debt printed against it. Doubtful it will ever be reduced significantly.

Fattrad: I used to be a derivatives analyst before becoming a portfolio manager. My former boss heads the utility CDS desk at JPM. His book is flat. There is enough two way business that he can rely on flow for revenue, has no need to take positions. Two interesting things about CDS:
1) the bigger risk is all the contracts written from 2000-2004, few of which had a cash delivery option. The creates a scenario where the protection buyer would have to go out into the market and buy the defaulted security, which should be worth pennies on the dollar. (contract works that protection seller recieves a premium, delivers the notional less an assumed recovery rate, which is standard 30 to 40 cents on the dollar. Protection buyers have to deliver a defaulted security availble in a basket range determined in the contract) Since the contracts are written on so many multiples of outstanding debt, the price of these securities would actually rise, as people would need to buy a limited supply of bonds to deliver.
2) There is a cross capital hedge that can be done on the equity (using options) to cover debt losses and hedge CDS. Since protection sellers are equivalent to debt buyers (receive a coupon in premium), but they don't have to pay the principal upfront, there is a free financing option (which every hedge fund is using). This is forcing the returns between debt and equity to converge significantly.

There will be a lot of people burned when these go down.

As for Tranching, We buy any where from shorter cash flow Super Senior down to mid BBB mezzanine. No B piece (equity piece) nor last cash flow Senior, not value to us. Takes me about 2 hours to analyze a security before I can approve/deny for purchase. We don't buy synthetics (Asset Backed Default Swaps, which are written on individual traches of deals) Gross does.

Brings up one final point. "News" Agencies have been talking about a slow down in the economy and the housing bubble bursting for over 18 months. No real data has supported either as a significant possiblity until very recently (2-3 weeks). In february Gross took his portfolios to neutral duration (betting no change in interest rates) from short (betting interest rates rising, which the fed had been doing). He's been taking it in the shorts since. Several others followed suit. Talked to a colleage there, and basically, they started to believe the repitative press, over their set of highly intelligent analysts that were telling them don't go. Bernanke said today that they are seriously considering a pause. Bit early on that call, Bill.

Similar to the idea that if you heard the sky is green every day, day after day, then one day you believe it. Gotta look beyond what people are saying to what is actually there.

ToddE.
Karl Baba

Trad climber
Yosemite, Ca
Apr 28, 2006 - 03:03am PT
Thanks Todd

"China just raised 1 year rates to 5.38%, but our 2 year is around a 4.90%"

Since everyone expects the Yuan to appreciate relative to the dollar, isn't this another reason that China seems to want to buy real assets like energy these days instead of US Debt?

What accounts for US GDP growth as we lose manufacturing, ag, and even some tech jobs overseas. Real Estate and Housing related stuff maybe?

What role does petrodollar recycling play in supporting the dollar? Does selling oil for Euros really threaten us or not?

Peace

karl
Zetedog

Trad climber
PGH, PA
Apr 28, 2006 - 09:10am PT
Radical: I am wrong several times a day. The best I can hope for is be right more often than wrong.

After talking through all of this, I am reminded some psychological theorem called "Conformity Bias". This is the habit that most of us have to try to find as much evidence as we can to support whatever idea, theory, belief that we have. There really is no amount of evidence that you can gather that can "prove" your theory, yet one solid contradiction is all you need to disprove it. It would be much more efficient for us to spend our time, then, looking for the contradiction. Few do.

Again, I don't look at one-off things, like the guy that bought his house in Vegas or Pheonix within the last year, and then gets transferred to Florida, Boston or DC area in September, he's screwed. We all know a guy like that. The "reason" for this is that there is near excess supply in Vegas and Phoenix, shortage in the other three. That's whats holding prices up. There's only so much land in Malibu for movie stars to build on. And everybody wants to live in CA, or so it would seem.

Strangely, this leads to your next question. People want a yard and a garage in the US, not an apartment, not paying rent. Only so much people want to commute, only so much land close to their Destination. Renting, however, is not as riduculous. Of the many, many things wrong with how the BLS calcs inflation, this one has some rational. If costs were too high to buy relative to the cost of renting (which it has been in many areas), people should substititue renting. Only, it's really difficult for the dual income no kid couple that has had the 4 bedroom, 0.5 acre subdivision house in the outskirts of suburban sprawl to rent a two bedroom place for a 1/4 the cost if they have to move. BLS looks at the cost of "housing", not buying. Factor in the fact that everyone wants to live in CA and own a home there, it gets worse.

About being smarter than in the past, sure we are. But part of what we now know is how much more there is to learn, and therefore, how little we actually know. Economic theory is based on a lot of "shoulds". Couple those shoulds, with shoulds like a market correction, shoulds like whatever the press is spouting off about, somebody is bound to be at least a little right, I guess.

Karl: Oil in EUR doesn't hurt the US financially, but it hurt a lot of egos, so I am sure there's a financial impact in there somewhere. How badly is the US hurt if Iran kills oil production? Not actually as bad as they are if we kill trade with them (Iran has a trade deficit with the US). Its really a game of chicken.

GDP growth, who knows, but that argument has been around for 18 to 24 months. Q1 GDP was just realease 20 minutes ago, Quarter to Quarter was the 4th highest number we've had since 91. Way higher than anything during the tech boom. US is supposed to be a service economy now, I hear. I've been a working professional for ten years, can't say I have "produced" one thing in that time. Earlier in the thread someone pointed out transferability of labor. Most tech jobs are this. I have heard some people say that we never really moved so far away that if import prices increase a little, we'd un-mothball several factories, start production again. After ten years of pain, there are a number of people in MI willing to work pretty cheaply. Don't know if I believe that, one.


Excuse me while I dig through this stack of paper looking for more evidence of what I believe. . .


ToddE.
caughtinside

Social climber
Davis, CA
Topic Author's Reply - Apr 28, 2006 - 12:17pm PT
Thanks for all the info. Fattrad, good article. Chris Thornberg was the guy I saw speak on Wednesday.
Karl Baba

Trad climber
Yosemite, Ca
Apr 28, 2006 - 12:25pm PT
Impressive GDP numbers were just released.

http://news.yahoo.com/s/ap/20060428/ap_on_bi_go_ec_fi/economy

The article concluded with this:

"Risks to the mostly positive outlook, he said, could come from any prolonged runup in energy prices and sharp drop in housing activity. For now, neither scenario is envisioned."

Somehow, particularly if Fatty is right about Iran being attacked, one or two of those scenarios might be envisioned

"Conformity Bias"...Yup, we're all swimming in a thick stinky soup of that

Peace

Karl
dirtbag

climber
May 12, 2006 - 04:48pm PT
bump.

Todd, what 6 California markets are not looking so hot?
Gene

climber
May 12, 2006 - 06:20pm PT
Update

http://www.modbee.com/business/story/12173065p-12917978c.html

http://www.modbee.com/business/story/12173070p-12917985c.html
dirtbag

climber
May 12, 2006 - 06:30pm PT
Thanks guys.
caughtinside

Social climber
Davis, CA
Topic Author's Reply - May 12, 2006 - 06:39pm PT
Some good info. Hey dirtbag, where are you?
Gene

climber
May 12, 2006 - 07:08pm PT
Fattrad states “I know one individual that owns six homes and all are owner occupied, how does that work in the statistics you get?”

So true.


I don’t understand some of the statistics that Todd and Fattrad toss around. But I have my own favorite RE measures.

The ADNSDT. This is the After Dark New Subdivision Drive Through. While the developer claims X number of sales, I find that driving through the tract after dark and looking for lights on and/or cars in driveways is a more valid indicator of new home sales activity. Almost always, people living in the new homes < X.

The DDR. This has never failed me. It takes a bit of local knowledge but it’s foolproof. DDR stands for the Developer Divorce Rate. In the early stages of a bull market, the Developer tends to dump the Old Lady of 20 year tenure in favor of the Trophy Babe. When the Developer sees purchase contracts lagging and inventory rising, he telepathically or otherwise transmits this to the TB. The TB is the most sensitive analyst of D’s business, cuz that’s how she got her 'position.' She always bails at or near the top of the market to maximize her return. When the DDR goes up, you know the market is heading down.
Gene

climber
May 12, 2006 - 07:15pm PT
Down. Down. Down.

Central Valley.

Modesto.

I watch RE from Fresno County through San Joaquin County. Some foothill work occasionally.

Forgot to mention that the validity of DDR is enhanced if TB was D's former employee.
Gene

climber
May 23, 2006 - 07:01pm PT
Latest statistics posted by the Central California Association of Realtors shows a 34% decline in the number of closed sales Jan - April 2006 versus same time period in 2005.

Repent. The end is near.
rockermike

Mountain climber
Berkeley
May 23, 2006 - 07:39pm PT
Gene,
I love your analysis. But it seems there is a glitch in the system. Divorce up (old broad dumped) when market is good. Divorce up (old man dumped) when business is bad. It seems you need to factor in age dispersion of the couple. Old divorces old = good market; young divorces old= bad market.
JuanDeFuca

Big Wall climber
Stoney Point
May 23, 2006 - 07:41pm PT
Are you guys figuring in the massive Death Toll from the Bird Flu and the coming Nuclear War in the Middle East.

SUV sales are down this year by like 500,000.


MikeL

climber
May 23, 2006 - 08:59pm PT
Interesting conversations.

You do know, don't you, that the securities markets worldwide have some of the smartest people working in them who have access to far more data than you do. And there are at least 100,000+ of them (not to mention really big, fast computers).

I used to work for a primary government securities dealer in the 80s as an institutional broker. Discount Corporation of New York (created by JP Morgan in 1911 to make markets in banker acceptances) is a highly specialized broker-dealer at the short end of the yield curve.

So much in the market is social construction from what I could see. The job of our president (Buddy Hanlon) was talking to 100 cronies on direct lines to his little desk in the trading room. He'd call up and say, "so whadaythink?", and they'd say "I like them" or "I don't like them." Then we'd buy $5-10 billion worth of t-bills and long bonds and try to get rid of them (or vice versa).

All I'm trying to say (and maybe not very well) is that all the facny arguments with the fundamentals are simply hypotheses that a broker / dealer uses to generate a consensus with other players. For example, the data that Karl continues to argue about the deficit: it's just numbers, like M1 or M2 or M3. Those don't force or control the market. They do only if enough people believe in them.

The financial markets, especially the securities market, was the biggest con game I was ever a part of (and I've been a part of some others). You convince other people that things are going in one way or another, and then you get in front of it, when you can.

Wharton has had this 300+ variable model of the economy running now for years, patiently and gently tendered by leading financial academics from all over the world. The damned thing never works.

For what it's worth . . .

-MikeL
MikeL

climber
May 24, 2006 - 01:39am PT
One, those things happen regularly. It's called the business cycle. Two, business cycles are notoriously difficult to call, and no one does so consistently. Did you grok what I said about the Wharton model? It ain't day-trading, dude. Three, other than a broad market upswing or downswing, betting in the markets is a zero sum game, especially in commodities. That means R/E. Four, you must be rich, Fattrad. You're supremely confident. It's my professional experience both from working on the sell side of the markets and as an academic, that when you're in doubt, you're usually very close to the truth. It's when people are sure of themselves that I am most afraid.

Go get 'em tiger.

MikeL
Gene

climber
May 24, 2006 - 03:38pm PT
Rockermike,

You are absolutely correct. The DDR has to be viewed in light of the stage of the RE cycle. Young dumps Old indicates downturn. Old dumps Old is a sign of rising market.
Gene

climber
Nov 13, 2006 - 10:55pm PT
On Sept. 21, KB Home reported that its net home orders tanked by more than 40% during its fiscal third quarter.
WoodySt

Trad climber
Riverside
Nov 14, 2006 - 12:57am PT
My equation to financial security: [12g + 3(BofA)+MiniS]C= fortune
You guys make life too complicated and booorrrrring!
Karl Baba

Trad climber
Yosemite, Ca
Nov 14, 2006 - 02:05am PT
Todd wrote
"But if you think the US is one household, currently, Income (GDP) is growing faster than debt."

I've heard this argument from Fatty, but I don't think I buy it because the quality of our income is shaky. It's a lot of moving money around and Real Estate based money and seems pretty vulnerable to me. What does the US actually produce anymore?

If US debt is only marginally better than Chinese debt, aren't we looking at pressure for higher rates? Couldn't higher rates push the Zero interest and ARM spec crowd and highly leveraged buyers into forced sales? Seems like an avalanche waiting to happen.

The idea that Real Estate is finally falling in price because of excessive press is laughable to me. I had a friend who built a spec house a number of years back. We fantasized that, since it was a really awesome custom house, that somebody might fall in love with it and maybe offer the outrageous sum of $400,000 for it. Since then the market went so sky high that he put it for sale for $600,000 and turned down a $570,000 offer on it. Same house! Unfortunately, since the market has turned downwards, he's stuck with it for sale reduced to $500,000 and it ain't selling.

During this same time period when the house went from being worth from $300,000 to $600,000 and back down to below $500,000, the salary for a school teacher/fireman/police officer probably changed around 10%. Unsustainable and unaffordable prices were created by unsustainable financing equals bubble. Real people paying with conservative financing schemes can't afford this game and it's going to pop for that reason when the banks stop handing out free play money.

Just my opinion. I'm sure I'll be a bit to a lot wrong.

but I'd still bet that folks making 30 times more money will be more wrong than me.

peace

Karl
Gene

climber
Oct 24, 2007 - 07:29pm PT
Bump

What up Zetedog?
Gene

climber
Oct 24, 2007 - 08:03pm PT
Probably? I'm looking for another 20% locally.

GM
Gene

climber
Sep 17, 2008 - 04:58pm PT
Bump for historic view of the future we call now.

The Dow closed at 11,283.25 the date of the OP. Today's close was 10,609.66.

GM
klk

Trad climber
cali
Sep 17, 2008 - 05:10pm PT
west--

you can live in your car, but you can't drive your house.
dirtineye

Trad climber
the south
Sep 17, 2008 - 05:11pm PT
karl, if you mean by 500k+ 1 mil, then OK. The little cracker box in Alamo (ouside SF) that my cali cousins grew up in is valued at a little over 1 mil, like all the other houses in that area.

Woodside, (another outlying suburb of SF) is probably a lot higher.

Cali housing has been out of sight since the mid 90s, when one of my unix programmer pals moved there from PA and was SHOCKED at the prices.


We need a bunch of cali liberals to sell and move to alabamy, where even after taking a loss in cali, they can still buy a lot of property and a nice house and have money left over, and we can get rid of the repugncants in power here.

Please.
Mtnmun

Trad climber
Top of the Mountain Mun
Sep 17, 2008 - 05:30pm PT
Fannie Mae and Freddie Mac donated 111,000 to Obama. (Before the takeover) They know the dems butter the real estate bread.

It is unbelieveable what has transpired in the Real Estate market since this thread began.
Gene

climber
Sep 19, 2008 - 02:10pm PT
Latest and greatest from Central California:

From today's Modesto Bee:

Stanislaus County median sales prices fell to $185,000 in August. That's a one-year drop of 41.3 percent. Even more depressing, it's 53.3 percent below what homes were selling for at the building boom's December 2005 peak.
Stanislaus prices haven't been this low since the spring of 2002. Six years of appreciation have been wiped out.
Merced County homes sold for a median $150,000 in August. That's down 47 percent in one year and 60.8 percent from the December 2005 peak. Merced prices haven't been this low in seven years. Last month, 549 Merced homes were foreclosed on, costing lenders $176.6 million.
San Joaquin homes sold for a median $207,000 in August. That's down 44.1 percent in one year and 54.8 percent from the November 2005 peak. San Joaquin prices also are back to summer of 2001 levels. Last month, 1,245 San Joaquin homes were lost to foreclosure, costing lenders $467.7 million.
California as a whole isn't suffering quite as much.
The state's median home price dropped to $301,000 in August, down 35.3 percent in one year.
Bay Area home prices sold for a median $447,000, down 31.8 percent in one year.

http://www.modbee.com/local/story/435146.html
Nefarius

Big Wall climber
Sep 19, 2008 - 02:40pm PT
I don't see how that's depressing, Gene. It's reality. It's a reality I've been saying everyone, especially the Central Valley, would have to face, for years now. It was inevitable and just plain common sense and basic logic.

The housing boom was manufactured and total bullshit to make a few people tons of cash. I never could understand how everyone kept thinking it would keep going and things would be fine. F*#kin' ignorant. Fresno, for example has a median family income of the low $40K's. The median cost of a house hit $315K at one point. On what planet, I ask, do those numbers add up? It was the same everywhere. Throw in Merced's and Visalia's unemployment rate, which ranks in the highest in the nation, and on and on and on...

I remember telling the CEO of my bank, three years ago that he was smoking crack, when he said he thought it would keep going or stabilize where it was. Guess what? It's not finished. Housing prices will get very close to where they were before all of this bullshit started. Why? Because that's all the economy can support. Now we're in such a mess that they may even go below the pre-boom prices. Of course, rent will skyrocket, as everyone losing their homes is flooding the rental market, not to mention good folks with good credit are now being turned away for home loans, due to everyone else's f*#k-ups, etc... Basically, lots of empty homes and a ton of demand for rentals.

Everyone who went out and got a second mortgage, or overspent on their mortgage, got what they deserved. You got an interest only loan? You should probably be shot. It just seems that for whatever reason, everyone threw common sense out the door and leveraged themselves beyond belief, with no real thought as to how they were going to pay all of that debt off. So now, every other house in my neighborhood, which is completely a middle class hood, has a Beemer or Mercedes parked in front of it, a $50k SUV next to it, a woman wearing $240 jeans with fake tits, some dumbass dude with a few ATV'ss in the garage and a for sale sign in the front yard, cause they can't make ends meet. F*#king get what they deserve.
bluering

Trad climber
Santa Clara, Ca.
Sep 19, 2008 - 02:45pm PT
I don't mean to be an a-hole, but I'm kinda stoked. The wife and I were looking at homes last year or two and said, Nah, we won't be able to afford it. Especially with the boy on the way.

And then, BAM!!!

We just may be able to afford a house now. I hope interest rates don't skyrocket.
Nefarius

Big Wall climber
somewhere without avatars.........
Sep 19, 2008 - 03:07pm PT
I've also never understood the infatuation with interest rates... First of all, when people started going nuts when interest rates hit 6% and they started running around trying to say that interest rates were lower than they'd ever been... Well, for one, it was a flat out lie. If you look at interest rates over the 20th century, 6% was about the average. The only reason it appeared to be otherwise was because they were so high in the 80's.

But stop and think for a minute... Would you rather buy a $100K house at 10% or a $300K house at 5%? The whole interest rates "thing" was just part of the "make us some $$$, rip off the consumer" BS.
Gene

climber
Sep 19, 2008 - 03:08pm PT
Bluering,

You have every right to be stoked. It's called opportunity.

Randy,

I agree with almost all you say. I differ on apartments. One would expect this to increase apartment demand. But just like when the single family market tanked in 1990, vacancy rates are increasing and effective rents are decreasing in multi-family units. Counterintuitive, I know. If Fresno is anything like the three counties I work (Merced, Stanislaus and San Joaquin), you can’t pass an apartment complex without getting blinded by the “move-in special” banners. “Get 1 month free with a six month lease” or “$299 moves you in” - that kinda stuff.

Where are people going? Those who can move in with family or double up. Some rent from the investors/speculators buying “$300K” homes that just sold for $140K.

The income property market (apartments, commercial, industrial, etc.) is posed for a BIG time fall, especially retail. Locally, retail rents went from $1.25/SF to over $2.00 in the last 4 years. At the high rent level, folks could make it when the world was full of funny money. No one is buying those $200 jeans anymore. For the retailers that survive – and I’m mostly talking about small, local businesses - at lease renewal time they will negotiate downward or book. When the seven year call on the landlord’s loan comes up, he’ll be unable to refi. Owner loses property to bank. Bank sells cheap. Sound familiar? I’ve seen deals where tenants have been able to renegotiate $2.25/SF rent to $1.30 “temporarily.” Right!

The folks who bought those Starbucks/Quizno retail coupon clippers in the last couple of years at a 5.0% cap rate are absolutely screwed.

Should be interesting to watch.

GM
Nefarius

Big Wall climber
somewhere without avatars.........
Sep 19, 2008 - 03:24pm PT
Interesting, Gene. Fresno hasn't had that effect (apt. rentals). You can't get into a one bedroom in Fresno, in a decent part of town, for less than $1K per mo now. Of course, you'll have to pay first, last and a deposit (it doesn't seem to matter that this is an illegal practice around here)too. This is compared to those same places being $600 per mo. in `03/04. And it's climbing steadily. Not too sure about commercial properties...

Fresno is just weird tho. Cow town, turned wannabe L.A.. Maybe more wannabe O.C.. Everyone wants to pretend they're rich (still buying those jeans and boobs here) and are becoming as over-fashioned, over-fake, clueless/stupid and arrogant/as#@&%e as the typical L.A. crowd. If we were going to try to emulate a big city, I'd have much preferred it to have been the Bay Area. I prefer educated people who actually know a few things about wine, food and art, culture, history and science, etc. and actually care about things like public transport, all things green, humanity, etc... You get the picture - most californians understand the distinct difference between the two regions.

Definitely agree that it will all be interesting to watch. What say we grab some beers and sit on the sidelines and hoot an holler?
Gene

climber
Sep 19, 2008 - 03:31pm PT
What say we grab some beers and sit on the sidelines and hoot an holler?

That perfectly describes my recent climbing experiences, either at the Bridge or in El Cap Meadow.

There. It's a climbing topic.

GM
overit

Trad climber
Boulder
Sep 19, 2008 - 04:28pm PT
"Everyone who went out and got a second mortgage, or overspent on their mortgage, got what they deserved. You got an interest only loan? You should probably be shot. It just seems that for whatever reason, everyone threw common sense out the door and leveraged themselves beyond belief, with no real thought as to how they were going to pay all of that debt off. So now, every other house in my neighborhood, which is completely a middle class hood, has a Beemer or Mercedes parked in front of it, a $50k SUV next to it, a woman wearing $240 jeans with fake tits, some dumbass dude with a few ATV'ss in the garage and a for sale sign in the front yard, cause they can't make ends meet. F*#king get what they deserve."

EXACTLY!!!!!!

AND add to that, I can't afford health insurance so the government should pay for it!
Nefarius

Big Wall climber
somewhere without avatars.........
Sep 19, 2008 - 05:13pm PT
Ooooooooaaah!
graniteclimber

Trad climber
Nowhere
Sep 19, 2008 - 05:25pm PT
""Everyone who went out and got a second mortgage, or overspent on their mortgage, got what they deserved. You got an interest only loan? You should probably be shot. It just seems that for whatever reason, everyone threw common sense out the door and leveraged themselves beyond belief, with no real thought as to how they were going to pay all of that debt off. So now, every other house in my neighborhood, which is completely a middle class hood, has a Beemer or Mercedes parked in front of it, a $50k SUV next to it, a woman wearing $240 jeans with fake tits, some dumbass dude with a few ATV'ss in the garage and a for sale sign in the front yard, cause they can't make ends meet. F*#king get what they deserve."

They may have gotten what they "deserve" but that's even more true of the banks and other financial institutions. So now who are the Feds bailing out?

Also, I have a bunch of garbage I bought in a garage sale. I KNEW it was garbage when I bought it but I thought I'd make money selling it to suckers on Ebay. Now no one wants to buy it! It's worthless and I'm losing money on it. Who do I call at the Federal Reserve so they can come and buy this garbage from me at taxpayer expense?
Gene

climber
Sep 19, 2008 - 05:29pm PT
Call the Fake Tits Insurance Corporation.
bluering

Trad climber
Santa Clara, Ca.
Sep 19, 2008 - 05:31pm PT
Granite, I hear ya, not only should some of these a-holes not get bailed out, but the exec's and board members should be investigated and possibly jailed and fined.

Damnit!!
Nefarius

Big Wall climber
somewhere without avatars.........
Sep 19, 2008 - 06:03pm PT
I agree that the banks got what they deserved, as well. I also believe, however, that there is something called personal accountability. Kinda like the stupid "SuperSize Me" movie. What a biased load of sh#t that was! Just because McDonald's offers food, it doesn't mean you have to buy/eat it. And if you do, it doesn't mean you have to eat it often or over-do it when you do eat it. McDonald's had *nothing* to do with making the twins (that got the ball rolling), nor the "star" of the film, or anyone else overweight. If you're overweight, it's because you have an issue with self control when it comes to food, or (in rare cases) some sort of medical condition.

Same with banks. The banks put loans out that only an ignoramus would sign to and, well, there were just a lot more ignoramuses than they expected. Should the banks be offering those loans? Hell no. Is it the bank's fault anyone signed them? F*#k no! Learn to read a contract. Learn to think for yourself instead of expecting someone to come bail you out of everything, or thinking you can sue someone for some stupid sh#t. This is a message America needs to learn. Personal accountability.

How many people signed interest only loans? Seriously... WTF were they thinking? They weren't. When they're sitting on a curb with nothing, instead of having waited to buy the house when the time was right, or under a deal you could actually afford, they get what they deserve. When the bank approves these jokers, over and over and over, when they should have known better and they go bankrupt, they get what the deserve too. Unfortunately, that's not going to happen, because there are so many f*#ktards in this country that if we let them pay for their own mistakes, they'll take the whole ship down with them - us included.
Patrick Sawyer

climber
Originally California now Ireland
Sep 19, 2008 - 06:39pm PT
While house prices in Ireland are falling (and set to do so for a while according to the pundits) they are still a lot higher than elsewhere.

We are looking at the south of France (where we have both lived and worked before), or New Zealand.

We are headed out to Croatia and Slovenia next week, so perhaps something there will catch our eye. I hope to get some bouldering in and perhaps some easy free soloing but I am taking my harness in case I can meet and tie in with some people.


Jen loves San Francisco and I miss my home state, but jaysus, the property prices. Perhaps Oregon or Washington (my dad’s home state) but I do have 1-1/4 acres in West Virginia from my mom’s estate (which I will probably sell to my cousin who bought the family farm from my mom some years ago).



There is always the possibility of a nice sailing boat, travelling and writing - and climbing.
overit

Trad climber
Boulder
Sep 19, 2008 - 06:58pm PT
bluering, let me fix that for you:

"Granite, I hear ya, not only should "MOST" of these a-holes not get bailed out, but the exec's and board members should be investigated and "DEFINITELY" jailed and fined."

Damnit!!
Fraud + stupid spenders = money out of my paycheck!
Double Damitt!!!!
Karl Baba

Trad climber
Yosemite, Ca
Sep 19, 2008 - 08:26pm PT
"How many people signed interest only loans? Seriously... WTF were they thinking? They weren't."

It's strange how greed or wishful thinking makes us believe what we want to believe. I had a couple friends I sat down and said "Beware, this is a bubble, the crap will hit the fan..." and they always said the same thing: "My Real Estate Agent is a professional and convinced me that Real Estate never goes down, it just levels off for a time and then continues it's upward march."

Lots of people are going to go down in flames soon and many will be bailed out or even get golden parachutes in millions of dollars.

Justice? Maybe in time with karma but don't look for it soon

Peace

Karl
Nefarius

Big Wall climber
somewhere without avatars.........
Sep 19, 2008 - 08:27pm PT
Yeah, I hear ya Karl... I've heard that same line too. Sad, really. Now all of us get to pay... Even if we weren't involved in teh mistakes.
Patrick Sawyer

climber
Originally California now Ireland
Sep 20, 2008 - 07:54am PT
Thanks to the politicians, the American Dream has become the American Wet Dream.
Gene

climber
Feb 19, 2009 - 05:12pm PT
The worm has turned...

Stanislaus County homes are the most affordable in California, followed by Merced and San Joaquin counties, a study released this morning showed.

The new calculations show that Stanislaus's median-income families now can afford to buy 71.1 percent of homes on the market. Three years ago, just before the housing bubble burst, only 3 percent of Stanislaus homes were affordable to median-income families.

In Merced, the percentage hit 70.9 percent and in San Joaquin it is 66.4 percent.


http://www.modbee.com/local/story/605077.html

Of course, the median home price has dropped > 60%.

gm
tooth

Mountain climber
Guam
Feb 19, 2009 - 08:51pm PT
If only the stupid Olympics weren't pushing prices up around Squamish... anyone have some land there for sale, cheap? My engineering/contractor buddies in BC are still really busy building.. doesn't look like the California trend has hit BC yet.
apogee

climber
Feb 19, 2009 - 08:57pm PT
OK, fattrad, that's the second 'See, I told you so' thread you have posted in as many days.

Feeling a little smug?





Or inadequate?
TGT

Social climber
So Cal
Feb 19, 2009 - 09:05pm PT
I'd wait and see what happens to the commercial RE market in the second quarter.

The pain isn't over yet.

A, Gene bumped it.

Fatrad just threw in the expected Nener, nener comment.
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