patrick.net

C@pitalistPig Says:

> BLAME THE INACCURATE DATA GENERATED
> BY MISLEADING REPORTERS WHO CONSIPIRE
> TO KEEP FOLKS STUPID.

The reporters are not “trying to keep people stupid” they are (like they always have) just trying to “keep their advertisers happy so they can keep their jobs”…

In the past I can recall a few times (just a few) where a newspaper or magazine said something to offend an advertiser, but with the print media dying I may never see it again…

Did someone change a BLOG settings?

Yesterday I quoted the Boston area Realtor and my comment was killed and today when I quoted CP (and spelled his name with an "a" rather than an "@") my post was killed...

I didn't change any blog settings. Sorry about comments that get killed. You can always mail them to me personally (p@patrick.net) and I'll figure out what the problem is.

Patrick

skibum,

No worries. What made for such interesting sport was it was almost as if CPig finally got some time off from his squirrel cage during the holidays and just now realized there are "a few" folks that *did not* drink the kool-aid! It was funny that with so many FB's already having made the transition from denial to "bargaining" there was ONE clueless wonder STILL in the "anger" phase?

Learning from a WSJ article (during the holidays of all times) that educated and informed people are LAUGHING at you HAS to be a rude awakening! He was sooooo angry he charged into the belly of the beast (Ben's & Patrick's) half cocked and totally unprepared for a sound and well deserved thrashing. It wasn't until much later we found he'd "invested" in "Bear-i-zona" (TM) where they aren't making any more land.

Refi fever is a coming....

Refinancings were up in mid-December by 60 percent over the same period last year, and they accounted for more than half of all new home mortgage applications -- the highest since the spring of 2004....

For example, Douglas Duncan, chief economist for the Mortgage Bankers Association of America, estimates that $1.1 trillion to $1.7 trillion of adjustable-rate mortgages are scheduled for payment resets in the coming 12 months, and that $600 billion to $700 billion is likely to be refinanced by homeowners eager to avoid higher monthly outlays.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/12/24/REG0MN41EL1.DTL

Douglas Duncan, chief economist for the Mortgage Bankers Association of America, estimates that $1.1 trillion to $1.7 trillion of adjustable-rate mortgages are scheduled for payment resets in the coming 12 months, and that $600 billion to $700 billion is likely to be refinanced by homeowners eager to avoid higher monthly outlays.

...Meanwhile, the remaining $500 billion to $1 trillion of resetting option-ARMs are people who have ZERO or NEGATIVE equity and therefore CANNOT refinance into a standard FRM. These are the people who will be setting the new (falling) comps, in the form of foreclosures and short sales. We should be very grateful for these GFs.

I'll add to what HARM says - not only are the FBs with zero or negative equity unable to refi, but the examples the author gives of those who "can" refi in the article are also somewhat unrealistic:

Your heads-up alternative: Refi into a new 30-year fixed-rate $197,000 mortgage at 6.1 percent. Sure, your payment will be $196 higher than your 4.375 percent rate, but not what you'd pay if you stuck with your loan's post-reset rate.

A whole lot of these folks can't get the "advertised" rate of 6.1% for a FRM precisely for the same reason they ended up with a NAALVP - bad credit ratings and shaky finances. Many of those who even have a chance of refi'ing into a FRM will be staring at higher mtg rates than 6.1%. Not to mention in CA and the East Coast, many of these are jumbo loans, which also increases available interest rates.

EBGuy,

Like most REIC cheerleaders they are so self serving I couldn't say for sure if Lending Cactus' (TM) Anthony Hsieh's "This boom has legs" comment meant "boom" for RE prices or "boom" as in yet ANOTHER round of re-fi's for MB's?

Anthony, most of the people who's loans you're foaming at the mouth to slap fees on JUST re-fi'd a few years ago! Do you guys run projections based on the avg. American "homeowner" re-fi'ing every what...... 18 months? Once they have all of us on the "Re-fi-go-round" the only thing they can do to show growth is to speed it up?

While we here have been focused on end of year issues, the holidays and our vision, goals and direction for 2007 these freakin' idiots have been running around town trying to get yet another fluffed up appraisal before Christmas? You're kidding right? What kind of a way is that to live?

Questions regarding the re-fi-go-round. Irrational, cheap money got us where we are today. Skibum has called the ARM reset the "X factor". I am wondering about the "Y factor" -- lenders and MBSs doing all they can to keep the market from falling off a cliff. Which does raise the question, does an MBS trustee even care? Or is the only option available market insurance for the toxic loans, pay the premium or lose your shirt. Five hundred billion+ dollars of resets could give us the 40% declines demanded by Shiller fairly rapidly (thanks to foreclosure sales), but it seems like there are a lot of interests that won't want to see that happen -- lenders and those holding the MBSs. I see two factors working in this area: refi the mortgagees out of non-recourse loans and put them into something they may stand a chance of hanging onto. It seems like everybody loses if the lenders repossess, but I suppose that may be the sacrifice the market demands.

"because mortgage money at 6% offers such exceptional problem-solving opportunities"

What problems! After a decade of ever increasing RE values and money cheaper than my father had access to in the 1950's how could there be ANY "problems" TO solve!?

What a cruel joke these mortgage jokers have been playing on FB's. Shame on you Anthony, find a "real job" and let these people heal up! If the avg. FB were to "swear off" re-fi's, weather the downturn by getting a 3rd job for the next 3-5 years to make some extra payments they 'might' have some actual equity in the next 5-7 years! As is, they're re-fi'ing these poor schmucks all the way up AND all the way down.

That's a first and THERE'S your "new paradigm".

EBGuy,

Good questions. Few clear answers. Loss mitigation (loan work-outs) will become the standard. Your fellow employees will be hanging out in the lunch room pretending they didn't have to go that route.

Some form of "loan modification" will be required in many, many cases. Delinquent payments/principal re-payments will be added to the "back end" of the loan or a little bit each month. In ways, Neg. Am. loans are "non-performing paper" to begin with. In the end though, these modifications will fail too as debtors finally take an interest in math and realize they're paying more and more on a home that's worth less and less. Lenders will have to figure out a distribution channel to get vacant properties rented. With an ever softer rental market that's going to be an uphill battle.

bubble-burst,

Don't take this the wrong way but that's more in alignment w/REIC tactics than ours. If I'm going to lowball somebody, I'll just go right ahead and do exactly that. I don't want to be part of some conspiracy to defraud someone (that's NAR's job).

EBGuy,

Even with the many parties interested in keeping the RE/lending party going, I don't foresee the possibility of any of these guys having enough sway to enable the bubble to continue. It's a simple matter of numbers. How many more GFs can be pulled out of the woodwork if in the "ideal" case mtg rates were able to be lowered back below the previous historical lows (that's already a ridiculous proposition if you think about it)? "Home ownership" rates are already at historical highs, the psychology has turned away from expectations of large "equity" gains from RE in the near future, affordability indices can't really go much lower. In other words, where are the additional buyers and mortgage "consumers" going to come from???? During the last 5 years, the REIC "shot its wad" and is going to be dry for several years as a result. I just don't see where they are going to find that magical wave of new buyers - they're not making any more buyers!

I don’t foresee the possibility of any of these guys having enough sway to enable the bubble to continue.
Just to be clear, I am talking about a prolonged sideways slide (with inflation taking its toll) versus someone yelling "Fire" and everbody heading for the exits. I am guessing there are a lot of interests that don't want see the "fire sale". Should I assume that there are a lot of big name players with their names attached as trustees for MBSs? Do they care if these things tank or will they want to see them shutdown in an "orderly manner"?

One more question. Is a foreclosure with a non-recourse loan any different than a regular foreclosure with debt forgiveness (and the taxman demanding his due)?

I am guessing there are a lot of interests that don’t want see the “fire sale”. Should I assume that there are a lot of big name players with their names attached as trustees for MBSs?

My understanding is that once you reach the end of the convoluted money trail from Joe-average FB, to mtg broker, to secondary mtg market, to MBSs, to institutional/hedge fund investors, to the money and credit available to these investors to play with, you eventually end up at the doorsteps of the central banks of countries like China. The masses of citizens in China and other Asian nations save like crazy, and this $$ is injected into the US in the form of treasury and other security purchases, which in turn provides the dough for all of this nonsense. So the interesting question is how these central banks will be able to stem the tide of foreclosures, and in fact, if they care.

Folks with a better understanding of economics (RandyH, DinOR, FRIFY, others) will have a better answer to your questions, I'm sure.

skibum,

No, uh.... actually that's about the size of it.

I've been a "party" to a number of underwritings over the years but I've never worked "in" underwriting so that's pretty much where my expertise ends.

I don't how much these CB's care but I know this, I DON'T! We've all done more than our share of being concerned about the fall out and my conviction for 2007 is to not give a rip. Let the chips (and the pain) fall where they may. That's the "fall out" side. I've chosen to concentrate my efforts on the "supply side" of the REIC (MLS monopoly, fluffed appraisals etc.) No one here is going to be able to influence the way CB's do business.

Am I missing something not mentioned in the article? Maybe your wife doesn’t work and you have lots of kids? (I’m not trying to be an *sshole, just trying to get perspective…) I tend to agree with most of the blogheads on these boards that it’s crazy to buy now but I would give away a kidney to go back to 1997 and buy into the market. It was hardly crazy then.

Well, if you're the proud owner of a time-traveling watch, there are far easier ways to earn a fortune in liquid wealth than in making a single long play in 1997 on an asset with a 6% exit load fee.

Historically, the 1987 stock market pop was followed by the 1989-1995 real estate crash. Patrick might have had a good personal reason from 1997-2001 not to buy (and if he was in the stock market, he was reaping amazing returns on his assets). After the stock market bust, most people expected a broad and deep recession (I know I did which is why I held on to cash). Instead we got a credit bubble and the rest is history.

FRIFY,

Excellent points. It seems like any time there's the slightest wane in posts on bearish blogs there's a troll (or troll-like) effort being made to hi-jack the blog. CPig must have figured by the time a lot of people returned after the holidays he'd have had us all "converted" by then?

I swear it even seems to happen on 3 day weekends.

Thanks to all you guys for the kind defense (and to CP for the entertainment). The WSJ did attribute quotes to my wife and I that were not exactly what we said, but reasonably close. I'm just happy it finally got to print. The interview went on for hours, so it's amazing that so little of it was in the actual article. That was about 7 weeks ago. I had pretty much given up on ever seeing it.

We've been in the house for more than 5 years now, and it's been very nice. My rent actually went down 3 years ago, and never went up.

It all comes down to this: I can rent the house I'm in for 2% of the purchase price per year. No bank will ever give me a deal like that. Even if I had the cash to buy it outright, I'd invest at 5% and still be a renter.

Patrick

PS It's a pretty nice Italian pine table.

asset with a 6% exit load fee
What? Pay no attention to the man behind the curtain.
Shouldn't this be a section on the "mortgage worksheet"? Okay, should I pay points to buydown the mortgage rate on my loan (how long do I plan on staying in the house)? Now add six points. Should I be getting this loan? Well, essentially this is the question that Randy's Bubblizer asks. I do hope the REIC gets hoisted by their own petard after selling RE as an investment vehicle during the bubble years.

Is a foreclosure with a non-recourse loan any different than a regular foreclosure with debt forgiveness (and the taxman demanding his due)?
To answer my own question, essentially lenders have NO leverage over the borrowers on non-recourse loans as there is no taxable debt forgiveness. Point being, someone is going to be anxious to get the borrower out of that non-recourse ARM.
http://www.wwlaw.com/forecl.htm

I’m just making the point that being a housing bear in 1997 could be interpreted as rather extreme risk aversion. Today it’s a different story that’s far more justified…

Ok, so this is a fair criticism. Most of the regulars here would happily buy today at 1997 prices, which basically marks the exact bottom of the last RE market cycle. If Patrick balked at prices way back then, then, yes, it looks like he missed a prime buying opportunity. C'est la vie, missed opportunity --perhaps he is a little older and wiser now. Maybe he had other large debts and could not make the mortgage payments. I don't know the exact details of his particular situation.

Personally, I was not in the market way back then, nor had I even heard of the concept of a "housing bubble". I wasn't introduced to the term until late 2003, when my wife and I first started looking to buy (SoCal) and were astonished at skyrocketing prices. It took me another full year of asking questions and doing online research until I finally concluded that the RE/easy-credit bubble really existed and that a correction was inevitable.

That WSJ slime job (among other things) basically insinuates that everyone who is reluctant to buy NOW was also reluctant way back THEN --an irrational perma-bear, which is complete horse$hit.

Interesting figures, SP.

Are they preliminary, based on sampling, subject to a corrected final version later? Please forgive my ignorance, I simply don't know.

That WSJ slime job (among other things) basically insinuates that everyone who is reluctant to buy NOW was also reluctant way back THEN –an irrational perma-bear, which is complete horse$hit.

Quite correct.

We bought our first CA BA home in 1996, just before the bottom of the market there. We didn't give much cause for concern given that the home, even though quite pricey by national standards at $365K, was well within our affordability as measured by historical standards. Our rate was 8.25% on a 30 year fixed, 20% down, which then was a Jumbo.

But after selling to move (not the same home) in 2005, we were looking at spending the better part of $2M in order to just buy a home comparable to the one were selling. Granted, there is a premium difference between Southern Marin and Belmont, but there is a fundamentally deeper problem:

People with quite high salaries cannot afford to buy reasonable homes. Although we could easily buy something, there is no reason to believe that we should expect to be forced to buy less home even though our salaries are increasing (many times faster than the median salary).

So folks like me and myriad others here vote with our rent checks. Like Patrick, I'll gladly keep banking my 50% greater total return on invested capital until these prices lose the 25% nominal value that isn't just likely, but necessary.

Or maybe Dow 36,000 is just around the corner.

(quantitative support for all this is provided on my blog, just click and download the Bubblizer).

You can accuse me of being a troll if I don’t blindly agree with everyone here. But don’t accuse me of saying that someone needs to have had a crystal ball or time traveling instruments to make decisions. I’m just making the point that being a housing bear in 1997 could be interpreted as rather extreme risk aversion.

In '97, he had just arrived in the area. I know I didn't want to buy when I first got here. You want to get the lay of the land and figure out the neighborhoods. In '99-'00, there was a housing crisis here in rentals (thank you market-distorting rent control - NOT) so presumably his rent situation was stable enough to not fret. Suddenly, in '00-'01, most tech workers are wondering if they'll have a job in 2 months. It seemed crazy to buy then too.

The fact that your salivating about buying in '97 shows the mania is still here. In a true free market, renting is supposed to be more expensive than buying because you preserve the option to move and because the owner of your property wants to see a reasonable ROI after PITI. If you were presented with a chance to buy in 2004, you would presumably jump at it because you see the 2005 prices are higher and you dream about those leveraged returns.

Until you truly comprehend the disconnect between $5000-$6000 PITI vs $2300 rental prices here in the Bay Area, you will remain vulnerable to catching the falling knife. Renters can flee if rents increase (I know it's an option I'm considering). Owners are under the knife.

I tend to agree with most of the blogheads on these boards that it’s crazy to buy now but I would give away a kidney to go back to 1997 and buy into the market. It was hardly crazy then.

It would be great to be an investor with 20/20 foresight. I predicted the stock market crash of '97 in '95 and that cash would pour into housing as an escape valve. I then predicted 9/11 and that Greenspan would keep interest rates low forever. With my inside connections at the banks, I knew they were going to start throwing money at anyone, just like in the '80s. For that reason, I bought in 1984, on entering high school...

I haven't read the WSJ article yet. I'm sure the pine table is very nice. Patrick assembles articles from all over, I've been lucky the local paper runs 'objective' stories on the situation at times for suitable posting to my blog, but is simultaneously beholden to RE advertising revenues. It often depends who the journo is and what group they are in at the paper as to the nature of an article -- the RE writer says it only goes up, the next boom is just around the corner, the economics people are more cautious. I'd hate to think who the RE writer drinks with, tho, come to think of it...

Interestingly, the rough equivalent of the WSJ here would be the AFR, Australian Financial Review, which is also a Fairfax paper, but it is a pretty balanced and objective paper, mainly because business types need to make informed decisions. It's a dry read, not much mainstream circulation. 'The Australian' is much more ra-ra and right wing, being a Murdoch paper, with much less substance behind its claims.

New Residential Sales continue to show steep declines as compared to a year ago. In colder climate areas, seasonally adjusted sales increased as compared to a month ago due to unusually warm weather.

Falling prices in the form of greater incentives have been the theme with most new home builders as they strive to offload sitting inventory.

Small or individual RE investors may not be as willing or able to lower prices and are likely to remain steadfast until the end.

PA Renter,

Here's an option to get 2002 prices on a California house:

http://www.nytimes.com/aponline/us/AP-Laci-Peterson.html?_r=1&oref=slogin

I now proclaim Gerry Roberts the King of the FBs

Randy,

I was just thinking about the book Dow 36,000. Maybe they were just a bit early in the books release! Germany in 1922, "...stock market at 743 in January and rose to 8981 in December."

http://www.nowandfutures.com/us_weimar.html

Patrick,

Congrats on the WSJ article! It's interesting that the web site hasn't really picked up much additional traffic. Anyway, thanks for time and money spent on the site!

Regards,

Paul

From Ha Ha's post about the article that says: "is the ‘mark of the beast’ in the Old Testament."

I hate to break it to the author but 666/mark of the beast is from Revelation.....the New Testament. For all you CA heathens.....it's the last book in the Bible. LOL

"the fact that you're salivating about buying in '97 shows the mania is still here"

Amen. What's more, it isn't like Patrick moved up from LA or Down from Seattle! Being a native mid-westerner myself I can honestly say my first impression of CA was that it really IS different out here!

Saying, "Yeah you could have bought stocks or bonds or whatever but DAMN look at all that housing appreciation!" tells me that "the girl" may have moved out (but that doesn't mean we don't miss her!)

Paul,

That's an interesting site, even if I disagree with the general analogy. 21st Century USA is not all that comparable Deutschland from nearly a century earlier. Quite a lot has changed, including a couple of fundamental paradigms. The intervening period holds the Great Depression, World War II, not to mention a couple of important revolutions in communication and war making technologies.

My contention is that what inevitably ends bouts of hyperinflation is a credible capability to make war. Germany's Inflationszeit ended promptly when they gained enough credible threat to halt foreign debt payments. Russia's short hyperinflation was no different over 50 years later. The US will not suffer hyperinflation of any form so long as we have big things that go boom. Ditto for Russia, France, UK, und so weiter.

It is false to say that in 1997 nobody thought that houses were good investments. Some of us thought it was the market bottom, and a time of bargains.

It is true that most people were not enthusiastic about real estate investment in 1997 - which is understandable because most people (about 99%) do not really understand economics or market cycles. Because of this the average person tends to be bullish at the top of the cycle and bearish at the bottom. They are the ones who sell when it is smart to be buying, and buy when it is smart to be selling. The stock market is the best example of this - but housing gets a strong dose of this effect as well. They make it easy for the other 1% to make a killing playing the cycles and markets.

Most people who try to time the market actually hurt themselves by their very bad timing decisions - such as thinking in 1997 that it was a bad time to buy. It was a great time to buy - and the fundamentals were screaming that at the time.

In 2003 and 2004 I expected prices in the hot markets to peak in 2005, and then decline at about 10% in real terms until about 2008 or 2009. I still hold this view.

Of course, the price declines will be very uneven depending on the area and type of housing. Condo prices will decline by more than house prices. Florida condos will have a bloodbath.

Housing prices are slow to recover at first, so the optimal time to buy will probably be 2010.

10% per year

After 2010 I expect that home prices will appreciate at a rate comparable to the available 30 year fixed mortgage rate.

Bap33, I think the bulk of buyers ultimately see the use value as being the very important. When you buy a house you are locking in the bulk of your housing costs for the life of the loan with a substantial reduction in cost after the loan balance is paid off. This long term cost protection is worth a premium, so owning should be more expensive at first - with the payoff coming in the later years (not counting appreciation).

Of course, it is not so good to lock in near the top of the market cycle. Even so, in the long run it has always been cheaper to own than to rent. However, in recent years the math suggests otherwise in most of the expensive markets. But it looked that way at the top of previous cycles as well.

Prices have a long, long, long way to fall before I even start to get interested in just looking to buy!

Zephyr,

I'll have to agree with your overall assessment. I worked at a small boutique house in Portland in the early/mid 90's and we cold called the BA and LA "relentlessly"! Any time the sore subject of RE came up prospects were really touchy about it. Like, do we really have to go there?

By '96/'97 there was 'cautious optimism' (at least amongst qualified investors) that the darkest days were behind them. All of this anecdotal of course. If Patrick was off base at all it's simply b/c mid westerners seldom consider their primary residence as part of their overall investment strategy, or at least certainly not in the mid 90's.

In fact if you were attempting to impress a client or prospect with how much your home has appreciated over the last year it would probably be the end of that relationship! They would firstly struggle with why any male would be so obsessed with a "woman's domain" and further wonder why you lacked the confidence in your self to such a degree that you were in some way reliant on appreciation of your home/homes as being such a large part of your net worth that you felt it merited discussion. Obviously things have changed but at the time the differences in culture really were that drastic.

Paise the Lord & pass the Kool-aid:
_____

US home resales increased 0.6 percent in November, industry data showed, suggesting the slumping property market is stabilizing.

The National Association of Realtors said existing-home sales amounted to a seasonally adjusted annual rate of 6.28 million units in November, well ahead of the 6.15 million figure expected on Wall Street. This followed a 0.5 percent increase in October.

The November sales level was 10.7 percent below the pace of a year ago, reflecting the tumble in the real estate market after years of spectacular growth.

David Lereah, NAR's chief economist, said the report suggests the worst may be over for the housing slump.

“As the housing market recovers from its correction, existing-home sales should be rising gradually during 2007 -- it looks like we may have reached the low point for the current cycle in September," he said.

"We've entered a more sustainable period of home sales now, and we expect greater support for prices over time as inventory levels are eventually drawn down."

The latest report showed housing inventory levels fell 1.0 percent at the end of November to 3.82 million existing homes available for sale, which represents a 7.3-month supply at the current sales pace.

The median existing-home price for all housing types was 218,000 dollars in November, which is 3.1 percent lower than November 2005 and slightly below the October median.

The report came a day after government data showed new US home sales rose 3.4 percent in November, also defying expectations for a further slide.
_____

Could this be the last hurrah?

Certainly hope so!

Ha Ha,

Liz Pulliam-Weston wrote a companion article based on Alicia's research and it's pretty chilling. They also did a piece on how 401k's are failing most Americans, equally disturbing.