By someone else
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follow someone else 2005 May 22, 1:51am
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Take a look at Fannie Mae's weird balance sheet at http://finance.yahoo.com/q/bs?s=FNM&annual
Is this a good stock to buy puts on or maybe even to sell short? On the one hand, they apparently have $22 billion in net tangible assets, but on the other hand, that is merely the 2% difference between their truly massive $1 trillion debts and assets. Those massive assets are backed by on inflated house values, so they may fall a lot.
They seem to have a price / earnings ratio of 7, which is really cheap, but then again, not if they start losing money on a big scale. Will they?
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Re: lack of data available for Vegas...I like looking at lasvegashomes.com in their reduced and new listings sections to get an idea what is going on. Right now it shows over 1,100 home prices reduced in the last 7 days!
Netrugu, great quote! I love it.
I remember when the mother of a friend of my daughter, who is a raging socialist, said, "I'm very liberal. I'm so liberal, I'm a libertarian." I literally begain to choke.
The way I look at libertarianism, which I think is textbook, is you are socially liberal and economically conservative. That's pretty much me. I don't care what you do, but when you screw up, don't come knocking on my door for more tax money to bail you out.
Those numbers reflect contracts made two months ago. I think the market, here, peaked Februray/March, so I expect those numbers - it's a lagging indicator. A better number will be new home sales going under contract for April, which I believe is due out tomorrow.
WARNING! Did anyone see the Fed notes today?
The Fed noted an "upcreep" in inflation. What a bunch of lying sacks of potatoes.
I predict a steeper rate of increase in interest rates before the end of summer.
I don't know. I've had no luck with investing, and I have no skill, certainly.
I'm still interested.
It makes me ill to think that some idiot taking investment advice off of an Internet Blog could even get into court to sue for lost monies.
As I pointed out in a previous thread, SF is (obviously) losing children, and the people in charge are finally taking notice:
Sadly, there is nothing that can be done. The fundamental problem is cultural. Merely wishing that more children were around will not change the fact that both parents must work (usually overtime) to afford a home now, that schools are neglected while other social services which compound social pathologies hemmorage money, and that the "if it feels good do it" culture of SF is inimical to child raising, which is the very definition of deferred (or even sacraficed) gratification.
What is particularly amusing to me is the constant claim that SF is a great cultural center. Aside from the opera, SF is a second-tier city at best. The orchestra is mediocre. The museums are awful. MOMA? Please. The theater? It is an insult to gay men everywhere that such a city could be so average. San Francisco is an empty husk, with a beautiful exterior bequeathed to it by nature and the architects of the late 19th century.
I yield the soapbox.
"I take back the nice things I said about in the other thread"
Perhaps a bit overheated. Do not get me wrong: I was born in SF and lived there for many happy years only a few years ago. In fact, my wife dragged me kicking and screaming down here to Palo Alto. It is because I love San Francisco so much that I am so harsh on it. There is so much potential there as the only even moderately european-style city in California. But raising a family there? Would that we could. Would that we could.
Hey Libertarians, in short, I disagree. Libertarians, to me, tend to be the folks who just want to be left alone. They don't want to tell others what to do, and they don't want others telling them what to do. Like anything else, I'm sure there are extremes.
" Can anyone please post some positive news about the economy or housing market?"
-If you bought your house more than two years ago (at which time, I must humbly note, I was beginning to call it a bubble, so take what I say with a grain of salt), and don't leverage yourself out in the current credit blowup, and you love your house and plan to stay there for a while, things will be fine. You can't lose money on something you don't sell.
-The economy is much more flexible than it was 70 years ago, and should be able to adjust more quickly to a major recession.
-Technological advances will continue to improve our quality of life.
-Regardless of what ever else happens, we have our families. All of the rest of it is really inconsequential in the long run.
One thing to think about -- if you take a contrarian view, the more people think it's a bubble, the more that it isn't.
How's that for irony.
BTW -- the economy is actually doing pretty well in general. It's actually had a remarkable recovery since 9/11. We in the Bay Area, as much as we like to think that we're the center of the world, do not define the whole economic picture for the US.
Really -- would anyone here consider 3.5% annualized GDP growth a depression?
Good question. Most data out there starts with 1930. There are various approaches to extrapolating data to before then, but nothing on a quarter-by-quarter basis.
I'm not sure how accurate this website is, but it "appears" legit (and if it's on the internet, it must be TRUE!! :-))
It does appear that growth between 1928 and 1929 though is around a very large 6.8% (if my 10 thumbs are correct).
"One thing to think about â€” if you take a contrarian view, the more people think itâ€™s a bubble, the more that it isnâ€™t."
That is contrarianism for contrarianisms sake, which is not prudent. Prudence notes that Real Estate has never beat inflation by more than a few percent over history. Therefore it is most likely that either inflation is rampant or a housing correction is due. Being reasoned and correct, not contrarian, should be our goal.
Prudence is in the eye of the beholder.
Don't get me wrong, I think real estate prices are inflated as well, but it is also critical to note that it is never 100% certain that anything happens. And that in financial markets, what is sometimes considered common knowledge, isn't always true.
My sense is that if there is something bad that will happen, it will happen 2 or 3 years from now when all those interest-only loans begin to ask for principal. Of course, this presumes that mortgage rates grow as well. Who knows what mortgage interest rates will be in a couple of years? No one is able to predict what they'll be next week.
Of course. But we must also remember that losses, like gains, are on paper until a transaction is made. If you're planning on living in a place for a long time, any short- to medium-term turmoil is theoretical.
That's why I think that those interest-only loans (or 1/1 or 3/1 ARMs) on less than 20% down may be the key to when this thing will finally slow down -- it's when people are forced to sell because they can't afford the monthly mortgage payments.
But then again, if mortgage rates are stable, who says someone can't just refi and start the clock again? But then if prices drop, they might fall below the magical 20% and might have to pay PMI, which might make the payments unaffordable!
That's what makes this market so interesting compared to, say, stocks and bonds. The market is not quite so liquid with many interlocking factors.
While I may be assuming people are more rational than you give them credit for, you are assuming that everyone acts like an investor, which is not always the case. The truth is likely somewhere in-between.
Maybe I parked the pumpkin truck too close to the door, but riddle me this -
Isn't GDP gross domestic product, which comprises mostly consumer spending?
If so, won't any fall in consumer spending cause a reduction in GDP?
Finally, and most importantly, hasn't the GDP been artificially propped up over the last 2-3 years by millions of people taking home equity loans, refis, and otherwise using their houses as credit card ATMs?
Doesn't it stand to reason, then, that as soon as the housing ATM closes down, for whatever reason, then we will watch as GDP shrinks?
And aren't recessions and depressions measured as trends in GDP.
"I've got a bad feeling about this"
(Prudence is in the eye of the beholder.)
Not really. Beauty may be, although I would disagree on that as well. But prudence is obvious and self evident: it is caution in the face of change, preparing for possible bad times, and using reason and history in predicting the future.
(Donâ€™t get me wrong, I think real estate prices are inflated as well, but it is also critical to note that it is never 100% certain that anything happens. And that in financial markets, what is sometimes considered common knowledge, isnâ€™t always true.)
I'm struggling to find something to disagree with in that paragraph. Nope. Can't do it.
(My sense is that if there is something bad that will happen, it will happen 2 or 3 years from now when all those interest-only loans begin to ask for principal. Of course, this presumes that mortgage rates grow as well. Who knows what mortgage interest rates will be in a couple of years? No one is able to predict what theyâ€™ll be next week. )
You are predicting rates will go down? The fed rate is currently negative in real terms. It would be a trick. _shrug_ But, sure, who can say for sure.
I forget. What are we arguing over? If the point here is that humans, all humans, including us, are fallible, I say sing it sister.
(You are predicting rates will go down? The fed rate is currently negative in real terms. It would be a trick. _shrug_ But, sure, who can say for sure.)
Yeah, that's the question. If there is a bust, and the economy sinks, I would imagine that rates would go down. But don't forget there is a loose connection between what the fed does and mortgage rates -- mortgage rates are tied to long-term bonds (currently 10-year, but if they bring back the 30, it will be tied to that again), which are set based on expectation of future growth and inflation, not on (relatively) short-term actions, which is what the fed does.
If the economy sinks and if people do what they always do, which is draw a straight line based on the immediate past, bond prices generally (but not always, of course) will go up, reducing rates, and taking mortgage rates down with it.
That's why this is an interesting market. Lots of little things that don't quite make things crystal clear.
GDP isn't all consumer. It's (thanks to Wikipedia)
GDP = private consumption + government + investment + net exports
Consumer spending is about 2/3 of gross DP. I will never understand how buying crap is considered "product." Look I bought a $100 tv. GDP just went up 100$
Who produced what? The Koreans made the TV, Circuit City sold it for a 20% mark up, and I bought it. We didn't produce anything.
In any event, when an economy is based 2/3rds on consumer spending, then you don't need to be a prophet to predict that a 20% reduction in consumer spending will reduce GDP by about 17%. How long till we stop spending?
I don't know, but I know this. . .
When someone says "spending money like a drunken sailor," nobody considers the "GDP" that has been inflated by the sailor to be a sustainable figure. That is, inherent in the metaphor is the conclusion that the sailor is spending like a rich man, but he is not rich and will soon run out of money. What happens when he does? Everybody goes home, turn out the lights in the bar and the cathouse, and he returns to the ship to resume swabbing.
Am I going nuts here, or doesn't it seem obvious that nothing good can result when you are a nation of spendthrifts? That, barring a major cultural change, the only result can be calamity?
Our country will be the same
I don't know about cali, but most folks out here are buying with 0-10% down. The trend here is to use a primary/secondary 80/20 or 80/10/10 or something like that instead of PMI. I liked it when I did it in 2000, although I felt a bit nutty putting down "only" 10%. The good thing was, when I paid off the 2nd mortgage, I didn't need to beat down the mortgage company to shed the PMI.
PMI is just as exposed as everyone else, I'd guess. There's some number of defaults well below 100% of existing PMI policies that would cause the PMI companies to belly up.
No no -- Netrugu, you're taking the word "contrarian" too literally. What I was meaning with contrarian is that if there are enough people are thinking that this is a bubble (whether or not it is a bubble is a different question), that means there are people on the sidelines waiting with money to jump into the market.
It's like all those people waiting for the Big One to hit the Bay Area -- everyone assumes that prices will go down if it hits. Therefore people are waiting for the event to happen before they pile into the market. Therefore, prices really won't go down that much in the event of an earthquake, interestingly enough, because there will be a big rush to buy property afterwards.
On the other hand, if everyone thinks this isn't a bubble, then everyone is already in the market with no other "fools" to jump in to prop it up when someone wants to sell, then it probably is a bubble.
That's what I meant by contrarian.
Believe me, after March 2000, I much prefer steady growth than what we're seeing right now in real estate. I'm planning on staying in my place for a while (yes I own) so I'm just here for the show, so to speak.
The people to whom you refer are, IMO, folks who my sister describes as "big hat no cattle."
All the income in the world won't help you if you have little savings and you are fired. How has the Bay Area done since the dot com bust? Not so great, eh? Imagine another round of "downsizing."
Please note, I think you're right when you imply that those who are overexposed are a small percentage of the population. That small percentage, however, and IMHO, will be enzymatically catalytic.
When the guy who lives down the street loses his job and goes belly up . . .
Well, there ain't too many goldfish out there who will buy a bigger bowl and a better filter when Seymour has just assumed the unnatural upside down position.
In other words, I think the whole thing is incredibly fragile, and I think it won't take much to trigger a massive recoil.
My 2 cents.
"The job market in the area has actually improved over the last year (at least in tech). Most of the folks I know are doing fine. Many of the claims in this blog just arenâ€™t reflected in reality. It may be the reality of certain people who arenâ€™t making it here, but thereâ€™s a much bigger picture."
Well, here's a data point: masters students coming out of the CS program at stanford. Average salary is around 85K. Some higher, some lower. Many people are going to google where salaries aren't spectacular but the equity bet is big. Most people are finding jobs. Most people who worked during the boom are seeing slight salary decreases, or staying level.
Is that enough to support the price increases we've been seeing? Probably not. It seems obvious to me that nothing fundamental changed in 2002 other than interest rates, and, now, the flight to more and more heavily leveraged mortgages. It seems statistically likely that interest rates will not be negative in real terms forever. Whether or not the current trend towards disadvantageous loan terms will hold I am less sure of, but I tend to think it won't.
The end of the world rhetoric may be a bit over the top at times, but I think a severe correction is more likely than a plateau, moderately more likely than a modest correction, and much more likely than a continuation of the current market.
Measured enough for ya?
That's the part I don't get. Why do you guys think there will be a crash and not a plateau? I really haven't seen a convincing reason for this.
$85K+equity straight out of school isn't bad. Many people here are more experienced, and they make a lot more in salary and bonuses. Add to that the large number of two-income households, and you begin to understand the housing market. By the way, there have been a few (not many) IPOs since 2002, quite a lot of acquisitions, and stock appreciation at large companies (such as what used to be Veritas), so people are still making money on stock.
Yes, we're well below bubble-time job levels, but so what? That period was insane. Traffic is still quite bad during rush hour.
"The only wealth being made is through real estate. The entire economy is a house of cards."
What are you basing this on? Are you telling me that all the hardware/software/services/biotech companies in this area have generated no wealth for people? What are you talking about?
This would be news to people at eBay, Google, Symantec, and a whole bunch of other companies where many people made money on stock in the last few years (after the bubble).
I agree that real estate has to slow down. I just don't agree with the Bay Area crash theory.
"Thatâ€™s the part I donâ€™t get. Why do you guys think there will be a crash and not a plateau? I really havenâ€™t seen a convincing reason for this."
Well, if you think there will be a regression to the mean, then you can have:
-a flat market for 20 or so years
-a slow deflation over 10 or so years
-a major correction, with a return to normal appreciation
With over 1/3 of all housing being purchased for investmen purposes, and given historical references, which strikes you as more likely? I am willing to grant you that I (and we) may be wrong. Who can predict the future without error? But I'm not willing to grant that our position is unreasoned, or unlikely to bear out.
"$85K+equity straight out of school isnâ€™t bad. Many people here are more experienced, and they make a lot more in salary and bonuses. Add to that the large number of two-income households, and you begin to understand the housing market. By the way, there have been a few (not many) IPOs since 2002, quite a lot of acquisitions, and stock appreciation at large companies (such as what used to be Veritas), so people are still making money on stock. "
85K isn't bad. In fact, its an outstanding salary, as one might expect from a good program like Stanford. And if you double it up (leaving aside the social costs of children growing up without parents), you can buy a really crappy house in a bad school district safely, or a moderately upgraded ranch home from the 50's in a decent school district if you go I/O.
Programmer salaries start high but top out quickly at around 120/150K. Pressure from india will make sure that doesn't change. (And I say that as a programmer.) Most people in the valley with options are either underwater, or making just enough off them to buy a car. Google is the exception, and there are only so many googlers.
But we are talking about the top of the top here. These are the people with the some of the highest earning potentials around. What about the other 98% of the bay area?
But sure. We are the one's not facing reality.
It will be the same effect as when a lot of hi-tech workers of useless
dot coms went out of work.
When this excess employment in housing construction , real estate
brokering, loan processors etc dies out, it might well be much worse
than the hi-tech downturn.
Lesser jobs , lesser spending. Your house is no longer an ATM you
can just withdraw from. Lesser consumer spending in turn supports
even lesser employment. And the cycle begins to unwind.
The only thing that could mitigate this effect is the Yuan revaluation.
Which will make imports from China more expensive and help jobs
remain in th US.
A reduction in Chinese exports, could crash Chinese economy.
China's consumption of oil reduces, sends down oil prices
and helps US consumers.
The sad part is that those clueless people refuse to project into the future. To them, the boom will continue indefinitely. They keep looking for excuses why historically abnormal appreciation can continue. But reality always asserts itself over wishful thinking.
A good school system is good mostly because of parents. Administrators, teachers, and other assorted idiots like to believe that they have a huge impact on schools, but they don't. Schools are good IN SPITE of the administrators, not BECAUSE of them.
Netrugu. Do you have any children?
At what indicators are you looking for in the housing market that will prompt you to believe that housing is at â€œthe right priceâ€?
A good price will be 95-96 pricing levels adjusted
Plus a bit of what you think is an acceptable
"desirability" premium for the Bay Area.
95-96 is a good baseline, as it was just about the
beginning of the tech inflated housing boom/bubble.
Then the speculator/investor/low interest rates
driven forces turned this bubble into a mega bubble
A Mega bubble will end in a Mega Bust.
It is not improbable that prices may fall below the 95 adjusted levels.
As we have seen in the case of Nasdaq.
The momentum of the market forces ( read panic selling ) in the
downward direction can bring prices lower than their fair market
value. It went down to 1200 before stabilising at around 2000.
But when a 95 level is reached, you buy, and it goes further down.
It will rather bounce back in a few years, and your loss may not
really count. Further the amount of rent you might otherwise pay
by not owning, will help bridge the gap.
Waiting out for the bottom may not be the rightest idea.
One might pay a bit extra, for the benefits and feeling
of home ownership.
Painful recovery : The Bay Area's crash was more than a setback
Look at this article that appeared today in SF Chronicle.
This is an article on how real (or unreal ) an economic recovery for Bay Area is.
Add the fallout from the Housing Crash, on this already
frail recovery, starting later this year. Which will be prolly
just as bad or worse than the tech bust.
I am frightened for this world.I do not think that what will happen will be properly described as a "correction," unless one can say that Marie Antoinette's fate was a "correction."I think things have been building up for some time. We are fragile. Beyond the fragility of the economy there lies the greater frailty - the lack of savings. We cannot withstand a sudden downturn for any length of time. It would keep me up at night, I'm sure, if I had the statistic on the % of American households that would be unable to pay bills as they came due within 2 months of losing a job. Not to sound childish, but it's all very frightening, and there is no bright spot.Our manufacturing base is mostly eroded, so we can't make stuff to get out of this.Our debt burden is so large so as to ensure we will be indentured even if we could work our way out of it.Natural resources, and particularly oil, are becoming more costly as the rest of the world catches ...
I am frightened for this world.
I do not think that what will happen will be properly described as a "correction," unless one can say that Marie Antoinette's fate was a "correction."
I think things have been building up for some time. We are fragile. Beyond the fragility of the economy there lies the greater frailty - the lack of savings. We cannot withstand a sudden downturn for any length of time. It would keep me up at night, I'm sure, if I had the statistic on the % of American households that would be unable to pay bills as they came due within 2 months of losing a job.
Not to sound childish, but it's all very frightening, and there is no bright spot.
Our manufacturing base is mostly eroded, so we can't make stuff to get out of this.Our debt burden is so large so as to ensure we will be indentured even if we could work our way out of it.Natural resources, and particularly oil, are becoming more costly as the rest of the world catches ...