patrick.net

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 !

First its nice to be back at Patrick.net after a year or so sabbatical.

Having left Miami and now living in Portland, OR it is fascinating albeit frightening to hear the same rhetoric about how "its different here." Fortunately the MSM is at least somewhat accurate in reporting the coming storm that we are now just seeing the first systemic signs.

To that end with banks acting like adults and paying more attention to their borrower's loan criteria we must conclude that the pool of buyers at the lower end of the price range (sub 250K) will all but evaporate and those stretching to be in the next bracket will have to come to the table with real money.

While most of us know that savings rate is in the negatives this means the number of potential buyers is also very low in this segment. So the obvious conclusion is severe price cutting.

But the situation for the rest of us is not without peril. Since housing has driven the economy and produced artificial wealth what of the collateral damage? An interconnected economy will suffer if there is no market driver to encourage consumer spending. And the government will be loathe to allow a Depression no matter who is in power.

So I propose the following will occur: Huge public works projects at home. A sure fire way to ensure low unemployment and stimulate an economy is tax and spend. If the economy stiffens up there will be a backlash against illegal immigration and its labor in favor of locals who will be tasked with repairing a country that will be largely out of work in the financial aftermath.

This is not a doom and gloom scenario but rather a time tested and sure fire way to drive resources towards needed repairs and provide for the public welfare. China has used this practice for centuries as did other less admired countries.

Since the workers will return to producing items domestically and relying less on exports (due to dollar devaluation) the impact on their realized earnings will be mitigated.

Randy, thanks. I'm not about to invest in gold or foreign currencies. But I guess the question for me is whether I take my current "buy the world" mix (domestic and int'l stocks and bonds, cash, REITs) and add TIPS or similar to the mix.

And, what is the tipoff that it is time to buy the TIPS? Do you have to buy *before* inflation picks up in order to maximize their value to your portfolio?

Zeke--those are crazy numbers. I've seen people say on this board that jumbo mortgages have jumped 100 basis points in the last couple weeks. I wonder if your experience is typical--if it is, and it persists, I have to think it will have a HUGE effect in expensive areas where jumbos are needed. My worry is fannie mae steps in and increases the limit on a jumbo to a much higher level in order to grease the lending wheels...

The west valley prime real estate will drop on two premises:
1) jobs
2) overseas, particularly Asian stock market performance

While 1) is obvious to everyone, 2) is not. But I have had first hand experience with quite a few people who made money in Asia and seek to deposit their hard-earned (or cheated) money here back in prime spots of BA to secure their future on this soil, just in case there is another revolution or whatever in China.

People in 1) are typically first gen immigrants, having survived 911 and subsequent rounds of layoffs. They use that as a benchmark. "Things cannot be worse than 911" is the comment I hear so often. These people actually do make decent salaries and have a big chunk of savings, be it from ESPP, IPO lotto tickets or compulsive aggressive frugality habits. The only thing that will get between them and their relentless pursuit of a permanent foothold in BA is a shitty job market.

People in 2) are not even living here, they typically send their kids here for school while their wives attend to the residency requirements of US immigration while they rake it in big time in Asia. Because there is a similar asset bubble in Asia's prime spots, BA is actually quite a steal even at the current price. The only thing that will get between them and their safe haven for family's financial future is a 97-style Asian financial crisis, which I believe is looming.

I do share some of the sentiments of the multi-millionaires, while I certainly think quite a few of them have an attitude problem.

Nowadays, if you own a home with a small mortgage in a nice neighborhood, and have some savings on the side, you are almost by default a millionaire, if not a multi-millionaire. However, most of your net worth is just tied up on this stupid shack called million-dollar or multi-million-dollar home which can lose most of its value overnight. There are so many "millionaires" whose marginal eligibility is dependent on zillow's daily fluctuations. EVen if your home retains the paper value, the tied-up equity in a home is still of no use unless you cash out and move to another state with cheaper housing cost.

Because of the asset bubble, millionaire really means little these days. Just about 10 years ago, I could still look at some barely million-dollar homes in Los Altos Hills and felt motivated. Now, a million-dollar home in BA inspires nothing other than disbelief and disgust.

Then, the liquid part of the million plus dollar net worth may be tied up in a vesting portfolio of options, which can be worth very little very soon. While I agree that having a million dollars, even on paper, is better than having none, I wouldn't say there is much material difference between the so-called millionaires and high-income households who haven't reached that mark yet, particularly for those house-rich millionaires.

OO Says:

> The west valley prime real estate will drop on two premises:
> 1) jobs
> 2) overseas, particularly Asian stock market performance

3) People can not Borrow enough money to buy at current prices.

The mainstream media has not even come close to describing how bad this past week has been for lenders. Many lenders that planned to sell a $100mm pool and loans and making about $1mm (1% profit) are looking at taking a loss of about $4mm (4%). It looks like homebuyers will have no chance of getting any kind of “creative” loan until at least the end of the year (probably longer)…

Renterforever,
We chatted about that NYT story at the tail of the Netherlands thread at length.

There is only an inflection point in spin and perception.

The fundamentals and personal values they're built on inflected a long time ago.

FAB: Can you comment on some of my observations above (2nd from the top)? I am puzzled at how landlords can be selling properties that are immediately cashflow positive. Can you outline some situations in which that happens for medium-sized and large complexes?

FAB

Diana Olick on CNBC started to talk about it last Friday when the first news of rate changes started coming across. I noticed she quite abruptly deemphasized it the next time she was on, and they went to great lengths to assure everyone that it wasn't really a rate hike, it was just a temporary "sitting out". I think they said something like BofA and WF "benched themselves".

I don't smell conspiracy. I think the media are just worried they'll be blamed (not in the least by their sponsors) for inciting a panic, so they want to let the news bring itself out.

Looks like one of the surefire signs that we are in a real estate slump has happened - one of Donald Trump's RE-related entities is tanking:

http://www.nypost.com/seven/08062007/business/trump_mortgage_flop_tied_to_credentials_flap_business_paul_tharp.htm

We'll know things have hit rock-bottom when (yet again) Trump files for bankruptcy, like he did in the '80's.

@veritas_faust,

There is FINALLY a Portland HB Blog! Since I no longer live or work in town it's great to get the real skinny from younger, more energetic guys that really follow local development, etc. What's even better is that Robert Cote' (rob dawg) stops by from time to time to expose the folly of our flexible and sometimes "Urban Growth Boundary".

I noticed though that you said "you are now living in Portland" as opposed to "I've made this my home and I'm never leaving"? Good for you. I've lived here continuously since 1988 and I'm STILL taking it a day at a time!

Even local weather guesser Jim Donovan smirked when he reported rain in this morning's forecast, noting that it is after all... "only August".

http://www.mercurynews.com/ci_6562038?nclick_check=1

Major bank stops approving home equity loans, credit lines

Here's the thing about inflation. Sure, the government will want housing/income inflation to bail everyone out. But how can/will they go about doing it? The same way they always try -- by lowering the Fed Funds rate and encouraging "free money" as others have said. However, will lowering the Fed Funds rate 100bps really make lenders eager to make subprime loans again? Will lowering rates 100bps lead to sharp income inflation? What if investors, instead of borrowing in the US to build businesses or invest in stocks, decide to put their money in commodities and foreign currencies as a hedge against a weaker dollar and a weak US economy?

The Fed can print/lend as much money as it wants. But it can't control where it goes. Watch this FNM/FRE situation that HARM pointed out carefully...it has Bernanke/the administration's fingerprints all over it.

Conor,

You're right, and it will. One thing is for sure (it won't go back into RE any time soon!)

Something I've noticed (in terms of inflexion) over the last few weeks is the astronomical rise in "Out at the Top/Bailed in '06" posters. Not nearly so much on bubble blogs but more so in MSM feedback. All of a sudden it's become rather popular to have bailed with each seller declaring the peak as the day they sold for their particular market!

Excuse me!

"We bought in _____ in December 2003 with 20% down (seems to be a favorite number) and sold in ____ of '07" and boy am I glad we did! My neighbor bought in _____ of '05 w/nothing down and...."

These guys remind of the film clips you see at "the running of the bulls". They wait for the last bull, tap their big toe once on the sidewalk and then bolt back into the doorway! Dude, you were -not- there.

If these guys were such visionaries what were they doing buying on the last day of '03? Can someone please coin a term for these "Nancy boys"?

Luminent slumps 85% after company warns on margin calls

Conor,

I was planning on doing that exactly. there are a lot of opportunities in emerging countries.

goober beat me to the headline, but here is the rest of the news... it seems to be all over the morning AM radio stations here in the Bay Area. I heard the story come up three times in my 20 minute commute. Cue up the music to Another One B.T.D. The best part is that UBS "downgraded Luminent to sell from neutral and cut its price target to zero".

Luminent Mortgage hit hard by margin calls
Shares slump 85%; secondary mortgage market has 'seized up'
SAN FRANCISCO (MarketWatch) -- Shares of Luminent Mortgage Capital Inc. plummeted 85% on Tuesday, plunging after the home-loan investment company warned that it's been hit by lots of margin calls as the secondary mortgage market "seized up."

Luminent (LUM 0.81, -3.57, -81.5% ) said its board of directors suspended payment of its second-quarter dividend. The board's also considering a "full range of strategic alternatives" to improve the company's liquidity and preserve shareholder value. Luminent shares fell $3.56 to stand at 66 cents during late morning trading on Tuesday. The stock was halted on Monday.
:
:
The company was set up in April 2003 and started by investing in so-called agency mortgages that conform to the standards of government-sponsored enterprises such as Fannie Mae and Freddie Mac. It also bought AAA-rated parts of mortgage-backed securities. However, in 2005, Luminent expanded its strategy and started investing in mortgage-backed securities with credit ratings below AAA. This year, the company also got into collateralized debt obligations, or CDOs.

Nice move, Sherlock.

SP

It has been a year since I posted my deflationary depression scenario. The biggest slug of foreclosures is due over the next 18 months. The foreclosures will destroy the CDOs and derivatives. Derivatives are about $500 TRILLION world wide now.

The inflection point is directly ahead. When housing prices start to decline dramatically then the attitudes will turn to FEAR. Declining housing sales has not yet moved the FEAR motivation into the main stream news. The average homeowner is not much affected by declining sales and a 3% (Schiller index) decline.

One major factor missing is a noticeable decline in employment. One factor in the missing decline in employment is that the illegal immigrants who are being laid off in residential construction are not accounted for in the unemployment numbers. Another factor is the stong commercial construction sector.

I have heard the argument for stagflation here many times. It is a good alternative. However, I do not see stagflation now in a meaningful way. With the huge inventory of vacant housing, I expect rents to begin declining which favors deflation as in a declining CPI.

An MSM article on the sudden hike in jumbo mortgage rates...

http://money.cnn.com/2007/08/07/real_estate/jumbo_jam/index.htm?cnn=yes

Isn't this huge? I mean, seriously, won't this rock the BA? I feel like I'm missing something...