patrick.net

Ok, I just got an email from Casey as well re: "shutting it all down for good" on August 3rd. Can't tell if this is *yet another* one of his dishonest going-out-of-business publicity stunts, but odds are, it is.

Anyone have any knowledge about the 2nd peak of resets that will occur in 3 to 4 years. How likely are they (the Alt-a/Option/prime ARMs) to default as compared to the sub prime ARMs? More or less likely? Will they reset sooner due to evolving credit issues?

I got a last call email too.

Oh well, that's what blogging email accounts are for.

I suspect its a too little too late attempt to pacify his wife.

@astrid,

Probably so, but I'd take anything that comes out of that socipathic, publicity-addicted fliptard's mouth with a grain of salt. I'll know it's *really* Game Over when I turn on the evening news and see him in handcuffs doing the FBI 'perp walk.

OT, but followed the link for little gem and wanted to share it. Apparently, our suspicions were correct:

http://blogs.wsj.com/economics/2007/07/10/report-illegal-hispanics-bear-housing-slump-brunt/

Report: Illegal Hispanics Bear Housing Slump Brunt

Why has the housing slump taken so light a toll on employment? In a new report, economists at Deutsche Bank estimate construction employment should have fallen about 900,000 since early 2006 when in fact it’s only down 150,000. They conclude 500,000 of the unexplained gap is attributable to layoffs of illegal Hispanic workers. They say this means, first, that there is not a surge of job losses waiting to show up in the data. But it also means the job market is not as tight as the low unemployment rate suggests. They say the unemployment rate would be closer to 5% than its current 4.5% if these layoffs were properly accounted for.

Probably so, but I’d take anything that comes out of that socipathic, publicity-addicted fliptard’s mouth with a grain of salt.
It will be interesting to see how Casey is viewed by the public in the next year or so. Will he go from hapless perpetrator of a victimless crime to the guy who brought down Bear Stearns ( destroyed your pension, raised your insurance rates, and ruined your neighborhood)? If that becomes the case, he may have to go into hiding as the Haterz may become a bit more... shall we say, vitriolic.

Do Rich Fund Managers Pay Enough Tax?

honest hard working, disciplined savers like us are doomed. i read the other day warren buffet was talking about how the system is broken. he earned close to 50M for 2006 and paid

got cut off.

honest hard working, disciplined savers like us are doomed. i read the other day warren buffet was talking about how the system is broken. he earned close to 50M for 2006 and paid

Long time observer (much of the last 2 years), first time commenter. I am optimistic by nature, but am stunned by the leverage that people take on to live a life they cannot afford, and pessimistic because it seems inevitable that the house of cards will collapse. I am one of the hard-working, saving types and own a home in the northeast that was purchased in early 2002, probably have about 50% equity in it. I have been contemplating upgrading to a nicer community and nicer home since 2005, but the education from this site and others has convinced me that such a move would be terribly timed. It is bizarre to see the stock market have the best day in 4 years when it seems obvious that the economy is at the precipice. How long can this go on? My wife will kill me if I keep us in our current home & town for years, awaiting the crash that never comes. ;)

PessimisticOptimist.

I also recommend:

http://badmacro.blogspot.com/

My wife will kill me if I keep us in our current home & town for years, awaiting the crash that never comes.

PO,

There's plenty of evidence that prices (lagging indicator) are modestly falling nearly everywhere, with sales way down and inventory way up (leading indicators). Take a look at some of the charts posted above if you need some reassurance.

If you are looking for a dramatic, rapid NASDAQ-style meltdown, then your "crash" will never come. Real estate market busts are excruciatingly slow, grinding, watching-paint-dry affairs. Even the early 1990s bust (which was mostly confined to the west coast, vs. the current national/multi-national one) took a full 7 years to play out, which is lightening fast by RE standards.

Consider it took a full 16 years for Japan's bubble to deflate (and prices may *still* be falling in some major cities, Tokyo, etc.). This was largely because the central BOJ adopted a ZIRP policy and kept it there for many years. This, plus China's Yuan-dollar peg are also the cause of the carry-trade and much of the MBS-CDO mess that led to our RE bubble. Their overnight rate is still only 0.5%, as I recall, vs. the Fed's current 5.25%.

Again: patience, people. This super-tanker does NOT turn on a dime.

Many of you may have already seen this, but I wanted to share it just in case:

http://tinyurl.com/38nj6v

If you look at the Shiller graph, it looks like prices shot up in the '50s, then sort of hit a plateau for about 50 years. Maybe this will happen again--ie prices could level off for a few decades in inflation adjusted terms. Anybody else concerned about this possibility?

If that happens, Glen, it the later you buy, the better off you are in theory as you'll have more salary to support you. In theory. Buying at the beginning of a plateau kills you with opportunity costs. Especially with a long plateau. In that situation, buying when you're sure you're not going to have to move again is the only reason to buy as moving during a plateau costs you money.

HARM Says:

If you are looking for a dramatic, rapid NASDAQ-style meltdown, then your “crash” will never come. Real estate market busts are excruciatingly slow, grinding, watching-paint-dry affairs. Even the early 1990s bust (which was mostly confined to the west coast, vs. the current national/multi-national one) took a full 7 years to play out, which is lightening fast by RE standards.

True, if it's a florida/las vegas style bubble you would have already seen 20-40% drop in prices. not sure about NE, if the economy/job market is good then it might be a little slow to deflate. all these years with appreciating market, it had become glamorous to own a house with shiny/glittery stuff. equivalent of stock portfolio in dot com times. it takes a while to get it out of people's mind. one thing i fear is the # of immigrants coming in, it might change dynamics of market. look at population growth and consider that as part of your decision making too.

If you look at the Shiller graph, it looks like prices shot up in the ’50s, then sort of hit a plateau for about 50 years. Maybe this will happen again–i.e. prices could level off for a few decades in inflation adjusted terms. Anybody else concerned about this possibility?

Please keep in mind that the Shiller chart doesn't depict NOMINAL prices, but represents an INFLATION-ADJUSTED index of same-house values tracked over a 115 year period. Now, I don't recall exactly how Shiller adjust for "inflation" (the official CPI, PPP, GDP deflator), but assuming he's using a somewhat accurate "inflation" measure, what he's really representing here is the RELATIVE PRICE of the houses being tracked vs. other goods and services.

This is really at the crux of why we *know* we're in a massive bubble fueled by easy credit, and the huge price- run-ups are *not* some sort of sustainable boom, reflecting real growth in demand for shelter. The cost of purchasing real estate is up --way up-- over the relative cost of other things --especially equivalent rents (an economic substitute) and supporting incomes.

IF someone could demonstrate to me that equivalent rents and household wages also shot up 250-300% over the past 6 years as house prices have, then I would be forced to concede that there is no bubble.

IF someone could demonstrate to me that there is a *real* housing shortage out there and that inventory levels were actually falling (not rising sharply as they are now) and that prices reflect a real demand-for-shelter (not speculative excess & easy credit), then I would be forced to concede that there is no bubble.

IF someone could convince me that we are somehow entering a permanent New Era of hyper-expensive housing, where people will forever be required to devote upwards of 90% of their gross incomes on PITI, while eating out of dumpsters and shivering in dark, empty rooms, and equivalent rents and incomes will somehow never catch up, then I would be forced to concede that there is no bubble.

HINT: I am not holding my breath.

Oh, and to address that "trough" period on the Shiller chart, keep in mind that inflation-adjusted prices were relatively stable from the beginning (1890) to about mid-WWI, then fell roughly ~30% though the roaring 20s stock market boom, Great depression and WWII.

One could argue (and I believe Shiller does) that this period represented somewhat of a historical aberation. Investment money mostly flowed out of RE (into buying stocks on margin) throughout the 1920s, and then the entire economy (and housing demand with it) tanked through the 1930s, never fully recovering until post-WWII and the G.I. Bill.

@sa,

Yes, illegal immigration is a bit of a wildcard --especially in regions absorbing high concentrations of illegals, like CA, TX, AZ & FL. However, as high as the inflow is, it is *still* not enough to explain the astonishing 5-year run-up from a purely demand-for-shelter perspective.

The extra demand is probably contributing to the slow speed of the contraction here in CA vs. other regions, but that's about it. Also keep in mind that the illegal influx (and associated strain on our infrastructure, taxes, overcrowding, crime, lower quality of life) is a big factor in driving many native Californians to leave. Indeed, without illegal immigration, we would now have a net population *loss* statewide.

http://www.mercurynews.com/ci_6355707?source=rss&nclick_check=1

Google's moving in again - this time to one of Silicon Valley's premier and historic addresses, the site of Hewlett-Packard's first company-owned building.

In a real-estate spree that shows no sign of stopping, upstart Google has leased 395 Page Mill Road in Palo Alto.

The office building, which served as Agilent Technologies' headquarters for six years, was the site of HP's original 10,000-square-foot campus, built two years after founders Bill Hewlett and Dave Packard left the famous garage.

"Bill and Dave designed it as an open system - without interior walls - so the space could be flexible," according to Agilent's Web site. Built in 1942, the campus was later torn down to make way for headquarters for HP spinoff
Agilent.

Now the giant search engine company will plant its flag on the historic 11-acre site.

The 225,000-square-foot office building can accommodate up to 850 workers, according to Phil Mahoney, a broker with Cornish & Carey Commercial, who represented the owner, Jay Paul Co. of San Francisco, in the deal that was "recently signed."

Those Google workers will have more sq footage per employee than some SFHs (EXTRA PARKING) in the BA have for their occupants.

RE: the Bay Area foreclosure story in the Chronicle, here's an interesting side note. Check out the "Comments" section for the story - people posting in response. There's a tool named "Creamy" who starts off with the usual Bay Area is special, RE only goes up, tax advantage, blah blah blah. He/she gets promptly pummeled by the rest of the posters. It's a mildly entertaining read:

http://sfgate.com/cgi-bin/article/comments/view?f=/c/a/2007/07/12/BUGP3QUSH41.DTL&o=1

sfbubblebuyer Says:
Those Google workers will have more sq footage per employee

Not really. Most closed offices have 4 occupants - 1 to a corner in a 12x10 cube. Smaller offices (8x8) have 2 people. Open cubicles have 4 to 6 in a bullpen.

SP

"Creamy"

LOL.

News out of San Jose:

http://www.mercurynews.com/breakingnews/ci_6360248

"Cambrian Park residents warned of West Nile virus"

I'm glad they reported this, I was so close to buying a house in prime Cambrian.

I used to live in Cambrian Park. It's probably the drought year working on Ross Creek. I'm sure there are stagnant ponds there this year.

HARM

I wasn't saying that rents are anywhere near parity minus historical premium yet. Just that rents are *not* going down, and might be going up at a healthy clip here in the Bay Area.

About a year ago I was having daily smack-downs on here with a crowd who quite smugly assured me that:

a) Real estate was not sticky, and the crash would happen _fast_

b) Foreclosures would happen _fast_. What did one of the "experts" tell me, something like 45 days from seizure to market? When I pointed out that even a small increase in the volume of foreclosures would overwhelm the bureaucracy, I was informed of my naivety.

c) Rents would go *down*. Yes *down*, in nominal terms. We were educated about the "laws of supply and demand", if I recall.

I'm just sayin...

But no worries. We've resolved to keep on renting for at least 6 more months, probably more like another 18 months or longer. I certainly won't buy until my rent is at minimum less than half of PITI, which right now is 3.5X my rent.

DinOr, I see I sailed right past your point wrt HI. It seems to me, even out here in the hinterland, we haven't escaped without at least some of what you describe.

But do you think we are interested in permanence? Will all that stucco and tile be here for several lifetimes? Not a prospect I care to think about.

Randy, I still wonder how the BA can absorb that much REO without affecting the rental inventory. I certainly don't believe you're naive, and I can see several factors more or less specific to SFO militating against lowered rents. Annual rentals here rose for more than a year following the local RE collapse, but bloated inventory is having an effect, though only noticeable within the past month or so. I credit the REIC/prop mgt cos with keeping rents high during the interim, but property owners evidently can't bear the vacancies eternally.

Randy,

RE: a) When I first joined the blog (2+ years ago), I could probably have been included in the "it'll crash fast" crowd --a feeling which quickly faded the more I learned about past housing market corrections. By early '06, despite my own personal desire that it be so (so that I and every other shut-out responsible renter would be able to buy soon), I was *firmly* in your camp on this, and was predicting a 5+ year correction as very likely. Heck re-read my intro to FuckedCounty.com “dead pool” revisited (August, 2006).

RE: b) Ditto on the foreclosure process. Once I had done a little online research on the foreclosure process and heard from experienced industry people (like FAB, OO, etc.), I wholeheartedly agreed with you that this would be a "sticky" factor slowing down the inevitable market correction.

RE: c) About the only thing I *wasn't* 100% sure about was where rents would go, and I said so. I strongly doubted overall rents would shoot up above overall inflation, and speculated they might even drop some in areas with lots of specuvestor-owned inventory due to the "accidental landlord" factor (which is now being born out in severely overbuilt areas like Riverside, San Bernardino, Sacramento, etc.). However, I didn't pretend to know for sure what would happen everywhere.

Regardless, if rents are really shooting up faster than inflation all over NCAL, while wages are NOT, then that's very bad news, I agree. That's just not the case where I am, though (Pasadena area), and I live in one of the most supposedly "desirable" and densely populated parts of SCAL.

Let me repeat: GET OUT OF MARIN. It is obviously overrun by extreme NIMBY privileged Boomers and greedbag Trustafarian a$$holes who want *nothing* to do with the likes of people like you and me, and are demonstrating this to you every single day. Why trap yourself and your family among such horrible people? Is pretty scenery really worth all the expense and needless aggravation? There are better places for you out there, I'm sure.

HARM Says:

Yes, illegal immigration is a bit of a wildcard –especially in regions absorbing high concentrations of illegals, like CA, TX, AZ & FL. However, as high as the inflow is, it is *still* not enough to explain the astonishing 5-year run-up from a purely demand-for-shelter perspective.

i wasn't talking about illegal immigration alone, population growth in general. if the local economy is strong with growth in population, it may be good reason for the market to pick up based on fundamentals. it's more of prep work for future buying not for the current run up.

most booms start with basic supply and demand, with easy credit the housing boom took off. It morphs into self fulfilling boom (profits from real estate plowed back for a bigger boom) until people realize it’s out of whack.

HARM

If only...

We're here for quality of life reasons, believe it or not. Above all else, our family is sacrosanct. As my wife is an executive and works in Marin, we'll stay here to minimize her commute as long as necessary, even if it means renting. Luckily, my wife is actively working to move her department out of Marin back into the City, which will open up a lot of options.

Marin is heavily NIMBY ridden, but I wouldn't say any moreso than much of the Mid Peninsula. When I lived in Belmont that was even more NIMBY. What Marin does have is proximity to the City. And it was just ranked #1 best schools in the entire country. Every time something like that is published, the people here are even more certain that "it never goes down" here.

It's not all terrible here, by the way. I just like to bitch.

"most booms start with basic supply and demand"

Just as most "bull markets" start off with legitimate fundamentals! Then something... strange happens?

And it was just ranked #1 best schools in the entire country. Every time something like that is published, the people here are even more certain that “it never goes down” here.

Again, education is over-rated. Being able to get into an absolute top university will not guarantee success. Being able to get in even with horrible grades will!

People are still confusing cause with effect.

NIMBYism is the perversion of democracy. Given a choice, it is much better for a society to lean towards market-driven policies.

>> Again, education is over-rated. Being able to get into an absolute top university will not guarantee success. Being able to get in even with horrible grades will!

I highly recommend this book:

The Price of Admission
How America's Ruling Class Buys Its Way Into Elite Colleges -- and Who Gets Left Outside the Gates
By DANIEL GOLDEN
September 14, 2006

Every year thousands of middle- and low-income high school seniors learn they've been rejected by America's top universities. What they may never learn is that candidates like themselves have been passed over for wealthy students with lesser credentials -- children of alumni, big donors or celebrities.

"The Price of Admission" by Daniel Golden is an explosive book that exposes how America's richest families receive access to elite higher education -- regardless of ability.

It lays bare the inner workings of a system that favors the children of the rich and powerful, perpetuating privilege across generations and undermining the American dream of upward mobility.

Resulting from six years of investigative reporting by the Pulitzer Prize-winning journalist, "The Price of Admission" names names, schools, grades and test scores. Among Mr. Golden's findings:

• At least half of the children of 425 big Harvard donors who applied to the school were accepted, based on Mr. Golden's study of these donors. By contrast, Harvard only admits 10% of applicants overall. Separately, Harvard provides a special entrée known as the "Z-list" for well-connected but under-qualified students; they are quietly admitted on the condition that they wait a year to enroll.

• Princeton admitted Senate Majority Leader Bill Frist's son even though it gave him the lowest ranking on its academic scale. Sen. Frist is an alumnus, an ex-trustee and prominent politician -- and his family has donated $25 million to the school.

• Brown University sought to expand its Hollywood connections by admitting the son of powerbroker Michael Ovitz. Chris Ovitz was a mediocre student who'd been suspended in middle school for swinging a baseball bat at a female classmate. Even though he dropped out in less than a year, Brown still reaped the benefits: it snagged Ovitz pals and A-list celebrities Martin Scorsese and Dustin Hoffman at university events.

• At most colleges, the president and fundraisers funnel a "development list" of applicants from rich families to the admissions office for priority treatment. In addition, college presidents often have a powerbroker, a right-hand man to the president, whose responsibility is to usher children of the rich and famous through the admissions process.

• Children of key alumni and donors enjoy advantages every step of the way, such as extended application deadlines, personal interviews with admissions deans, "special student" status and deferred admissions.

"The Price of Admission" is not only a must-read for parents and students with a personal stake in the college admissions process, but also for those disturbed by the growing divide between ordinary and privileged Americans.

About the Author

DANIEL GOLDEN is Deputy Bureau Chief at the Boston bureau of The Wall Street Journal, where he has covered education since 1999. Previously, he was a reporter at The Boston Globe. The recipient of numerous journalistic honors and awards, including the Pulitzer Prize and the George Polk Award, he holds a B.A. from Harvard College. He lives with his wife and son in Belmont, Mass.

Also, it is notable that the richest people in the world tend to have honorary degrees or no degrees at all.

Given a choice, I much rather have a honorary degree than a real one.

Peter, I think the guys you are talking about get rich first and then get an honorary degree. I suspect that they basically purchase them, although my father received an honorary degree and never really amounted to much.

Peter, I think the guys you are talking about get rich first and then get an honorary degree.

That is what I meant. I want to get an honorary degree "the old fashion way." :)

Oh, I got a new one to share with you guys. I might have mentioned earlier on this thread, or the one previous, that my husband has a friend who is a mortgage broker who has a really ugly neg-am loan on his house.

Well it gets better. The guy is the branch manager of some local brokerage firm--he's been there 5-6 weeks. He gets a call today from his boss telling him that they're shutting the doors and everyone that works there is out of a job. Just like that. So he has to round up the 20-something people who work there, tell them to pack up their desks and that they don't work there anymore.

Yikes! I admit to a certain amount of schadenfreude, but I'm not even so cold that I'd be happy to see all these people suddenly jobless. I don't know how most of us would cope if our job just went *poof* in one day.

This mortgage guy isn't too bright though. He made a ton of money while the market was going good. He paid over $100k in cash on cars and bought a huge house with a stupid loan and now he has very little saved. They've already got the house up for sale, but it's doubtful they'll do any better than a short sale on it. I wonder how this is going to turn out.

Anecdotally, there are now 3 accidental landlords in my relatively small social circle in Alameda, CA, and all 3 decided to rent out there old places for the first time within the last 6 months.

Two of them bought >4 years ago, so it is likely that prevailing rents will support their mortgages. However, I get the impression that the rents they plan to ask are carefully calculated to just cover their mortgages--the landlord who has owned longest was asking about $1700, while the landlord who bought more recently is asking $2500 for a similar place.

One accidental landlord bought more recently and probably would be kicking in a bit extra each month and praying for rents to rise. The asking rent is pretty high for the area--no surprise there.

This kind of thinking seems to be leading to piecemeal rent inflation on Alameda. I am seeing some list rents up >50% on smallish single family homes in the 4 years I have been paying attention, and that sounds like a lot to me. But from there, asking rents go all the way down to our rental price of 4 years ago.

It will be interesting to see how this turns out. In my little corner of the world, rents have been held down by elderly landlords who moved to the island after WWII, and a lot of those folks are dying and leaving the property to younger family members. On the other hand, there is a lot of rental property coming on the market as owners decide that selling their house at these prices would amount to giving it away, and that rental property will keep them fed when they are old--but they want much higher rents than their predecessors. It's a question of whether these accidental landlords can convince the renting population that rents should increase, even as the number of available rental units increases. People are funny--they don't always do what makes sense.

The figures I’ve seen are closer to 80% “average” equity ownership. The problem with these computations is that homes with no debt are not accurately included in the statistics at market value, whereas homes that are financed are expressed closer to market value.

In other words, the little old lady who owns the 1962 ranch outright is included at her purchase price of $28,000, not at the current market value of $650,000 of equity value.

Actually, the way the Fed calculates the equity ownership is as follows.
1) Get the estimated market value of all residential real-estate in the US from some other Federal agency.
2) Get total amount of mortgage debt outstanding from the banks and other institutions, which must report this data to the Fed.

To get total % debt, you just divide (2) by (1), and then you subtract this % from 100% to get % equity.

In other words, the Fed figures DO take into account current market values. Indeed, it would be quite difficult to get the distorted number Randy H is referring to, because there is no record of this info. If someone purchased a house in 1962 at $28,000, there is no easy way to know this, other than by looking at local real-estate records. Federal statistics are all for current market value. Zillow apparently has done the hard work of looking into the local records, but this is a private database. You might argue that the federal values for current market value might be flawed, given how market value can fluctuate wildly in places like San Francisco. However, when you are aggregating over the entire United States, most of which does NOT have a house price bubble, I doubt this numbers are that far out of whack, and I also doubt they are much further out of whack today than 10 or 20 years ago. If there is an error, it is probably a consistent error. Meanwhile, the % equity has been declining steadily, accordign to the Fed calculations. I think the picture of what is happening is pretty clear.