patrick.net

Things are finally starting to unravel. If you compare the selling prices at the peak in 2005 to the asking prices now, prices have already decreased 15% to 20% in the Northeast. It’s more difficult to gauge the selling price, since homes are sitting on the market longer.

There are various factors at play that will influence where we go from here and how far prices will drop. I think there will be a rise in upside-down homeowners trying to short sell in the next 6 months. If they are successful, prices will drop accordingly. This is quite the microeconomic view, and really can only be applied on a neighborhood by neighborhood basis. The collective effect on a countywide, statewide, or nationwide scale will be slow to be seen. Less desirable areas will drop the furthest the quickest.

This is counter balanced by the fact that many have their notes held by investors and not the originally banks. Therefore short sales might be harder to negotiate as investors will want their money. I think the rise in foreclosures is evidence of this.

With houses not selling, and foreclosures rising, something has got to give.

Therefore expect the federal government to step in the following manner

1) Offer some form of a monetary bail out.
2) Increase regulation of the associated industries

And, since any money on a bail out increases deficit spending
3) Inflate their way out of the mess

With ’08 being an election year, and the media finally having picked up on the enormity of the problem, I’d be surprised not to see a bail out, since the problem can no longer be swept under the rug or put in the corner and ignored. Not that I’m for a bailout, I’d just be surprise not to see one.

In my estimation inflation is the only way out, as inflation will help keep prices from dropping too far down.

The value of a hold can be split into to parts – the value of the structure and the value of the land. The land cost is highly subjective, and is only worth what someone is willing to pay. The cost of the house itself is less subjective. If the cost of raw material goes up. (Copper, Wood, Nails, etc.) . Then the cost to build a new house (or repair an old one) goes up. Thus, as inflation takes hold, prices can only drop so far.

Just my two cents.

NOBODY BREATH! This house of cards is starting to shake. My borther is trying to unload a home he bought in Dec of 2006! He has only had the home 7 months and is trying to get out and just take the hit. Do you remember the guy in Oklahoma that got his arm caught between a boulder and a rock face? That cut off his own arm to get free and save his life. This is the picture I get when seeing my brother's situation and what he is trying to do.

I agree that the US is set to inflate its way out of this mess. In many ways it is the most responsible course they can hope to take. Call it a way to do a "soft default" on US debt.

Assuming overall rising inflation coupled with a flat-to-falling housing price market, winners and losers will depend upon your financial structure and position:

* Home owners who bought prior to 2002 -- the earlier the better -- who have fixed rate, standard amortizing loans with reasonable payments (no more than 28% of their gross salary, considering taxes and insurance) will do well. Their loan acts as a shield against inflation losses and helps to offset the decreases in their home price induced by inflation.

* Renters with well diversified and inflation-minded investment/savings will also do well. Renters who *could* have bought pre 2002 and didn't won't do as well as if they'd bought. Renters who waited after house prices skyrocketed will do better than if they had bought. Remember that you can use tax-exempt vehicles for saving as a way to offset a good portion of inflation, especially if you think that rates will fall and savings returns will be low. Use taxes as your return.

* Don't worry about the dollar unless you're in the 1% of folks who have some direct income or expense tie to foreign business operations. Lots of folks will moan and groan about the dollar, especially here on Patrick.net, but it really doesn't matter all that much to most Americans. Indeed, the irony is the weak dollar will continue to help strengthen US manufacturing employment, which many of the fleeting "middle class" will see as a positive.

Folks good news, American Home Mortgage(AHM) filed bankruptcy.

I am waiting for CountryWide Financial(CFC) to follow suit.

Folks,

I have a question.

Many people state that ENRON debacle would not have happened if they paid regular dividends.....

American Home Mortgage paid dividends and still imploded faster than ENRON.

Can anybody please explain what is the difference between ENRON scam and AHM scam?

Randy,

I clearly have an incomplete understanding of the ways an economy can be inflated. Doesn't it require both a willingness to borrow and the ability to qualify?

If people are in debt and have little in the way of savings or investments, and if credit is more restrictive - harder to qualify for and at a higher interest figure - then how is such an economy inflated.

I realize there are a number of parallels between conditions today and the those in the 1970s, and certainly there was inflation then. But how was it done. Or is it significantly 'different this time'?

- the those
+ those

Randy H Says:
[Prime Marin and Prime San Francisco... $2mm+ market], have seen a big reduction in inventory.

if the market stays flat or declines even a tiny bit between now and next spring there will be a huge influx of sellers aggressively and competitively pricing to sell.

Here in the south bay, the $2mm+ market (still some pretty crappy property) has been very slow for a long time. Many properties have been sitting on the market for weeks, until massive price reduction(s) finally generate a buyer. Even so, they are so overpriced that I haven't felt very tempted to make a bid. Properties in this price range were always tough to sell - it was only the dot-com bubble that pushed a lot of working stiffs up.

As for the bomb-sitters (tm) who pull the listing in the hope of getting a better price in a few months - I think they are in for a scare. Jumbo loans are going up to 8% (eg. wells fargo) and downpayment requirements are going to 90% LTV (eg. indymac), and sheeple are scared of a recession. Who is going to finance these 2M purchases?

SP

perma-renter,

Near as I can figure, these mortgage shops have zero assets. Their sole purpose for even existing is to pump loan volume. Enron on the other hand "had" considerable assets.

SP,

I agree with your observations. The underlying question in my mind is how much of the buying power of Fortress Home Shoppers (TM) is dependent on stocks, mortgage rates, and the loss of buyers in the lower price ranges who keep the real estate "ladder" moving.

Brand, or whoever it was, sorry the conversation is back to the Fortress...however, I'm always interested in discussing European women!

:)

Enron was a fraud because it lied about its assets, revenue, expenses and operations.

The failing mortgage shops do not appear to be frauds. They relied -- openly and obviously -- upon continuing liquidity in the MBS market. Everyone knew that declining liquidity would cause losses and severe loss of liquidity would cause failure. While they could have reduced their exposure, their investors didn't want that -- they wanted them to run highly leveraged / highly dependent upon MBS liquidity, but because high leverage = high returns as long as market conditions are favorable.

Brand,

If it makes you feel any better, I'll try to take some pictures of attractive Icelandic women, whenever I get there.

Bruce,

The assumption in monetary inflation is that nominal rates are set low by the central banker. Even if real rates are much higher -- for example mortgage rates -- the fact that the Federal Reserve is effectively giving away risk-free money for little to no charge will tend to keep rates lower than the market would have them in a large, open economy like the US. During much of the 70s it wasn't so much consumer debt that inflated as it was corporate debt. I would guess that the real risk of another Fed induced round of inflation would be to promote the "boom" in private equity leverage buyouts (and the associated billions in corporate debt) to a full fledged megabubble. A warning sign of this would be something like one of the DOW going private, for example.

I don't think dividends would have done anything to prevent the fraud at Enron. I'm not sure what the theory is behind that except to say they'd have to pay out more in hard cash on a quarterly basis.

Dividends have 2 big problems.

1. (and the biggest), dividends are double taxed. I personally think no dividends should ever be paid until the double taxation is removed. It is unconscionable.

2. Dividends are just distribution of earnings to shareholders. For a growth phase company (as Enron was supposed to be) I don't want earnings paid back. I want them reinvested for growth as a shareholder. My goal owning a growth stock is growth, not income.

"Lots of folks will moan and groan about the dollar, especially here on Patrick.net"

Moooooaaaaannnnnn...............grrrroooooooooaaaannnnnnnn...........

I bought a memory chip for my digital camera yesterday, the prices have really dropped!! Woot!! Woot!! Last time I purchased one was earlier this year. THEN we went by the food store, the price of milk is going through the roof (it's almost as much per gallon as gasoline!). But we buy memory chips once a year and milk once a week.

Moooooaaaaannnnnn...............grrrroooooooooaaaannnnnnnn...........

Randy,
propertyshark.com does have records for the BA now.

DennisN,

Thanks. I'd rather not pay the price for RealtyTrac given it doesn't even have title data.

goober,

Try lightly grilled memory chip, it tastes exactly like chicken.

goober

How does the exchange rate of euros to dollar affect how much you pay for milk? Maybe lay off the fancy imported frothy and try some of our home-grown dairy extrordinaire.

Seriously, the price of [real] Gouda and fine Brie will probably keep going up. That will hurt many o consumer right in the pocketbook.

And memory chips would be more expensive but for the fact the producing nation pegs their currency to ours by buying all our dead presidents as fast as we can print them.

mjdundon,

Probably true. Hence the name of Mr. Devaney's fabulous (and now up for sale) yacht "Positive Carry"? There was a time (as incredible as it may now seem) when Enron was a legitimate company.

Where I'm willing to consider the mortgage shops frauds is in the underwriting, approval and appraisal process.

Randy H,

I believe there are a few firms offering QDI ( qualified dividend income) which are taxed at a much lower rate or not at all after.... (and I don't want to get into trouble here... 2003 EGTRA?)

They are shown on your 1099 under block 10 (b)?

DinOR

You may be correct. I haven't claimed any dividends that weren't automatically reinvested since '03. In that case, then I would modify my statement to say #2 is my concern.

What constitutes the Q in QDI? I'd be curious to find out.

(I hate tax code and tax related minutia, so I try my hardest to ignore such things when possible.)

The ethanol in our gas tanks has much to do with the higher food prices. Stupid congress critters!

Randy H,

My limited understanding is that the "Q" resides primarily in the 'holding period' on common (and some pfd's). By holding for at least 60 days including through the "ex-date" the legislation reduced the tax bill from 39.6% to 15% for upper brackets and to 5% for the 10-15% brackets.

If I understand correctly this should move to 0% in 2008 for the 10-15% brackets (mom and pop). REIT's don't qualify for the exemption. After 2010 the coach turns back into a pumpkin.

RE: reaching an inflexion (or is it inflection?) point, I gather from the original post that you mean there has been a relatively marked and distinct change in housing market sentiment. I would expand that somewhat - there are clearly multiple constituencies that are at different points along the whole process.

Of course housing bears recognized the housing bubble long ago, and many of them have truly been overzealous in their doom-and-gloom predictions. Many of them have clearly been wrong about the velocity of this turnaround, and it's not clear to me if the magnitude fail to live up to vs. live up to vs. exceed their expectations at this point. I still predict this will be very sticky on the way down.

Then there is the investor class - fund managers, those working in Wall Street and the like. They seem to have been genuinely surprised (god knows why!) by the swift turnaround in overall sentiment re: the secondary mortgage market, credit availability, etc. That's where I think the true inflexion point has just occurred. Clearly, there has been a sea change in sentiment on wall street just in the past month or so. There, I think things are only going to get worse, as more funds revalue or are forced to revalue their MBS-related holdings and find out that they've lost lots of money. This was suggested in a recent WSJ (aka "The Murdoch Times") article, but it's been noted that these funds are in between a rock and a hard place right now. Revalue now, and they risk not only having losses reveal themselves early on, but they may risk a perception that the information they tell their investors is not to be trusted, as they would've been misleading them up to now if it turns out all of a sudden these illiquid securities are devalued (as I think is becoming the consensus re: Cioffi and his 2 Bear Stearns funds that implode). On the other hand, they risk holding onto these securities and riding them all the way down. Add on top of that the "stampede for the exits" phenomenon, and as everyone panics and cashes out, these securities will continue to lose value as everyone sells at the same time - a classic market panic. Of course, another wild card here will be what the Fed eventually decides about rates.

Then there are the average homedebtors. They have been very slow on the uptake. I think a few more savvy sellers (and buyers) have recognized the situation, but I still think a majority across all market segments are still overall clueless. To end on some personal anecdotes, I have at least 3 coworkers who just purchased within the last 3-4 months, as recently as this month for one of them, who are still talking about how prices continue to go up, the market is strong in the Bay Area, etc etc. Granted, that may be true in pockets, but I would have thought even the typical clueless Bay Area buyer would by now be able to smell that something stinky has been brewing.

damnit!!

I've wasted so much time worrying about inflation.......for no good reason..

I hate when that happens!!

skibum,

I think one of the things I was the most wrong about was that there was virtually NO price correction in most markets until credit availability had become an issue. Or as others have said "hit the wall doing 100 m.p.h".

I guess it was just wishful thinking on my part to believe that any meaningful correction would take place FIRST (as sales volumes tapered off) and leveraging yourself no longer made sense, no matter HOW MUCH credit was still available! In that regard, I suppose... I was delusional.

skibum Says:
The underlying question in my mind is how much of the buying power of Fortress Home Shoppers (TM) is dependent on stocks, mortgage rates, and the loss of buyers in the lower price ranges who keep the real estate “ladder” moving.

That's an interesting line of thought. It would be useful to 'deconstruct' the bubble in various regions (SillyValley, Fortress, Bend, Florida, IE, SAC, PHX, Vegas, FortCollins, etc.) because different factors contributed to it in varying degrees.

For the Fortress (deal with it, Brand :-) ) specifically, tech stocks play a disproportionately large role in the 1M to 1.5M range. Even without huge lottery wins, even plodders who were just putting a decent chunk of money into ESPP for the past five years at a large employer like CSCO or NVDA or NTAP would have a respectable amount of appreciation - to say nothing of high-fliers like AAPL or The G. This is why I think a stock market downturn and/or layoff news will be a body blow to this area.

Mortgage rates (and more importantly the lack of risk premium on Jumbo loans) were a factor in the Fortress, but not to the same extent as in someplace like South San Jose where the rates and easy-credit were the most important thing.

As with any Ponzi scheme, the entry-level suckers are absolutely indispensable, but in many cases, the 900K crowd was the entry-level since many of them were first-time buyers liquidating their combined 250K ESPP hoard and pouring it all into a stucco sh*tbox.

Anyway, just IMO.
SP

My limited understanding is that “Q” resides primarily in

DinOR that would be either London or The Continuum

tinyurl.com/duby7

tinyurl.com/2n64nc

Randy,

Thanks, yes I see. And what a prospect. I suppose we'll see, one way or another.

So if inflation is a likely prospect in the future, how will we see it coming? Can we just read the government numbers and react to them, or will it be too late at that point? Or can we just follow interest rates, or are they an unreliable indicator of inflation?

Secondly, I don't see how investing in inflation-indexed securities could ever be as effective as having bought (leveraged) fixed-rate debt. Given that the debt option is too late for those of us who are still renters, I don't see how renter/savers can avoid being screwed.

Randy, a tutorial?

The rate I've been quoted for a 30 year fixed loan (taking out 500K assuming 20% down on a house) has gone from under 6 (with 2 points) to 7.6 with 2 points in just 1.5 weeks.

It will be interesting to see what sort of pressure this puts on prices even in sticky areas.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajvhxLnFvk50&refer=home

Aug. 6 (Bloomberg) -- U.S. stocks rallied the most in four years, led by financial companies, on speculation the government will take steps to limit losses in mortgage lending.

Fannie Mae had its biggest gain in 20 years and Freddie Mac advanced the most since 2000 on expectations regulators will loosen restrictions on how much they can spend on home loans.

Never underestimate the government's ability to the wrong thing at the exact wrong moment.

Brand,

Longmont is getting hammered pretty good. Almost nothing is moving. I've seen the same signs up for 18 months. Realty Trac is showing about 800 REO/Auction properties.

My take on the Longmont/North Metro area job situation is that, while better, it still sucks big time. The last job engineering job I applied for had over 125 applicants in the 2 weeks it was listed. This was for a experienced to mid level career position requiring 10+ years experience. The salary is only a few grand higher than what they were paying 3 years ago.

This place is going to get ugly unless the job situation perks up.

Got any engineering contacts? How does one contact other users on this board?

Lee

HARM,

It's part of the discovery of the latest element Governmentium (Gv) composed of one neutron, 25 assistant neutrons, 88 deputy neutrons and 198 assistant deputy neutrons, giving it an atomic mass of 312 held together by morons! Sheesh, is a short term rally worth it?

I’ve wasted so much time worrying about inflation…….for no good reason..

Who said anything about *not* worrying about inflation? Reread what I wrote.

Boston Transplant

You are probably right that a cash rich renter cannot do exactly as well as an home owner with a low, manageable amount of fixed rate debt. This is the same type of problem like I chastised TOS in on the last thread: one is ex post and the other is ex ante. The home owner bought, we'll say in 1995, not knowing what future inflation would do. Certainly not knowing what it would do in 2007, twelve years in the future. Assuming they paid a fair price for their house, and they can pay their debt, they are enjoying the benefit of "guessing lucky" when inflation gets very high. Actually, most everyone has always known that a traditional mortgage on a reasonably priced house is about the best inflation protection available to the average person.

If that home owner bought in 2005, though, the amount by which they overpaid (the bubble premium) is much much higher than the benefit of the inflation shelter they receive. So this home owner isn't benefiting much even if she has a fixed rate loan *and* can afford to pay the debt easily.

For the saver about all you can do at an equivalent risk level is put your money into inflation-matching or inflation-protected vehicles. People will tell you to do things like invest in gold, invest in Euros or Euro-denominated equities, invest in developing countries, etc. But all those things carry risk many multiples higher than simply investing in tax free munis and money markets, or government TIPS. After all, if it were so easy as to simply bet the Euro will always get stronger and the dollar always weaker, then everyone would do it. In reality the EUR could reverse quite unsuspectingly for any of thousands of reasons, and then you're home-equivalent savings are gone. Here's one example. Do you know French politics and follow Sarko closely enough to know when he might say something that spooks EUR investors? Do you know when Putin will put another titanium flag down claiming some more Russian territory, like maybe in Warsaw or Budapest? I don't. I do know that a Federal tax free money market will automatically shelter my marginal rate.

That's the bad news. The house+mortgage beats the smartly-diversified defensive savings. The good news is that houses are *not* going up in value anytime soon. So the homeowner might be getting an inflation break on his interest repayment, but he's not growing his asset any faster than you are as a saver. And, he's probably losing value on his asset -- though if he bought in 1995 like in our example, he's very unlikely to realize a loss on what he paid. He's just seeing less potential gain. You with cash, on the other hand, are guaranteed not to lose any nominal value.

This link has been makin the rounds, but I didn't see this posted. Makes for pretty hilarious reading. "Silicon Valley - Home of the Miserable Multi-Millionaires" (HMMM).

http://www.nytimes.com/2007/08/05/technology/05rich.html?em&ex=1186545600&en=b0da90172897e340&ei=5087%0A

Enjoy !