patrick.net

DinOR, with stagflation in the bag, Free Market is going to teach us a lesson on wastage.

We just need to have better relationship with Nature. Building homes on sand dunes is just asking for it. :)

"When in history did you see a period free of crisis?"

dunno. This is the only period in history I have lived in.

Well it's all about "the view" now isn't it! That's what realtors need when they ask triple what a home w/out said "view" would sell for!

At the same time, I agree w/ Fuzzy. If reasonable alternatives are being dangled in your face like a lifeline, for goodness sake, grab it. I happen to think (and I know this won't be popular here) but the U.S in the near future will re-discover agriculture. As water becomes more scarce and food prices drive higher we may find that it becomes one of our most valuable exports.

Yes, the view.... I think realtors need to be informed that the view is actually sort of bad... Freddie Mac Chief Executive Officer Richard Syron had some rather astounding things to say in early March, including “HOME PRICE DROPS ARE ‘ONLY’ ONE THIRD DONE”, and the “US IS IN WORST HOUSING MARKET IN A CENTURY.” Perhaps the strength of the overall economy can help to alleviate the housing crunch… but the Fed’s Bernanke has made it clear that the economy is in perilous shape, plagued by a continuing plunge in the housing market, rising job losses, rising energy prices and a paralysis in credit markets as banks and financial institutions sell off even high-quality mortgage-related securities at fire-sale prices. For those who like comprehension, here is a ton of data to help verify these statements:

1) During the 2007 calendar year alone, house prices dropped 9% nationwide with Miami/Ft. Lauderdale decreasing the most at 18% (from Case Schiller data - the most reliable housing index). Home sales are down 65 per cent from their peak in 2005, and vacant year-round homes now number about 2.2 million; an increase of 800,000 since peak – at 2.8%, it is the highest ever on record. It is estimated that a slide of 25 percent in home prices would wipe out about $5 trillion in household wealth alone. It is hard to say how much capital will be lost at the bottom, but if $7 trillion was lost in the dot.com bust, most economists – including those at the Fed expect to see a figure more than that, and Goldman is predicting $1.3 trillion in financial sector losses alone.

2) Nationwide, Merrill is predicting another 30% housing price drop in addition to the 12+% that prices have already dropped from peak in mid-06 – and Moody’s just increased their estimate from 13% to 20% -- with their worst case estimate at the same 30% drop. Goldman is more optimistic -- predicting home prices will only drop by 15% from now. The housing price futures market, which is small, fluctuates between a 15% and 20% drop. 07 was a record price drop for a year and if predictions are accurate this will be 3x worse than the housing price drop of the early 90s – which maxed out at 13%. The anticipated decreases in Florida, Nevada and California should outpace the national average again in 08, and January 08’s price drop was the largest on record.

3) Foreclosures are at post WWII record numbers – particularly in California, Nevada and South Florida, which leads all other areas in the nation at the end of 07. Nationwide homes in foreclosure are at over 2% of all homes at year end – an increase of over 70% from the previous year. Despite Fed interventions, February 08 nationwide foreclosures increased 60% from year ago figures, again led by California (131% annual increase) – now “the walk-away state”, Florida (69%) and Nevada (68%). In Miami Dade County alone, 07 foreclosures averaged 2,200 a month, rising to 8,800 in the 4th quarter, and in January 08, Dade approached 3,500 foreclosures. In some courts in Dade, foreclosures proceedings are backed up 18 months. With-in the next 2 years, 1 in 4 homes in California will have ARM resets, and in South Florida, it is about 1 in 5, and foreclosures are anticipated to peak in the summer of 08.

Current foreclosure levels are nowhere near the nationwide 40% foreclosure rate during the depression, but with the nationwide housing debt being higher than equity for the first time since records were kept at the end of WWII, it could be a bit of a problem. BTW, the last time housing was this bad in South Florida was in the late 1920s, and it took more than 40 years for the prices to return to peak. That factored somewhat into the great depression, and the 40 year recovery soon met the first oil price shock, which helped to drop prices again.

4) The housing inventory is not a concern if you are looking to buy. The nationwide inventory of homes was at 4 months just 2 years ago and it just receded to 10 months. South Florida is at almost 40 months. Dade County had over 40,000 properties available for sale at the end of 07, with almost 2 in every 3 being a condo. This fact is also slowing condo sales due to concerns on who will pay the condo fee. Banks, FYI, are not bothering to pay condo fees after foreclosure, just ask management in Miami’s Carlisle’s condominium association, where 30 units are in foreclosure, and nearly 60 of the building’s 115 units aren’t paying maintenance fees. Nine of those fee-delinquent units are owned by major banks, all whom are breaking Florida state banking laws. Despite that, do not expect Bear Stearns or Citi -- with astoundingly weak debt to equity ratios, to pony-up their fees any time soon.

Part of the problem is that mortgage companies stopped using a 28% ceiling on house debt to gross income about 7 or 8 years ago. But according to the US Census Bureau, the median household income in 2006 was $48,200 or a monthly gross of $4,017, and the median sales price for existing homes as reported by the National Association of Realtors just last month was $201,100. Assuming no down payment, as was the case with approximately one-third of homebuyers a year ago, you’re looking at a monthly house payment of about $1,740 or 43% of monthly gross income. Please remember that this is real data for all the homes in the country, and a 28% ceiling on $4,017 gets you a home with a price tag of about $130,000, not $200,000. The take-away is to expect foreclosures and inventory to continue their climb as prices inch towards the basic fundamentals.

5) If you thought supply was a problem, consider how screwed the demand side is. Many people who never should have bought a home were able to do so with no-due diligence (liar) loans and “low doc” mortgages, where they lied about their incomes and picked up adjustable rate mortgages. They were called sub-prime for a reason. If you were going to sell in a year and a half and the house prices would sky-rocket in the new economy, then it is no problem. On the other hand if market prices dropped, then your ARM did you in… Plus you had other types of fraud with liar loans – it became easy to make up a person’s I’d, as no one was checking. This was apparently an epidemic in South Florida, California, and Vegas. So, if you found a house for sale at 100K, you’d pay-off an appraiser who says it is worth $300K. Pay the 100, pocket the 200 and never make a payment. When the bank comes after you, you don’t exist. (Exceptions are cases such as the nine year old girl in LA who did not realize she owned several homes.) If you are really, um, clever -- you will rent it out and make additional $ -- just be sure to use cash. This is not to mention the apparent thousands of cases where brokers allegedly misled buyers by not including taxes, etc. into the monthly payment figure.

The fraud started at the property level, but didn’t end until the accounting irregularities were recorded at firms such as New Century and allegedly helped to cover losses in 2005 and 2006 – and now New Century and their accountants at KPMG could be liable for millions. Florida edged Nevada for the distinction of the most fraudulent state with FBI statistics showing 46,700 sunshine state mortgage fraud reports in 2007, from 30% the year before and twice as many as in 2000. OK, so the FBI has nailed some of these jerks, but all this is to say that the banks have clamped down on providing loans, and have made it extremely difficult to get one in the foreseeable future.

Even a few Fed led infusions of say, $400bn into the multi-trillion mortgage market – of which 1/3 is supposedly, well, problematic, will probably not move banks to significant lending increases. Further, securities that are backed by Fannie and Freddie that were seen as safe, carry an implicit federal government guarantee, and now guarantee insurance up to 730K per home until 09, are becoming questionable, after a combined $6 billion loss of Freddie and Fannie in quarter 4 07. Many investors have stopped buying FNM and FRE securities – further reducing borrowers ability to get conventional loans. The result, according to Wholesale Access is that 30% to 40% of borrowers who could have qualified for a conventional mortgage a year ago can no longer do so – and those who can afford it, will pay more points, pay higher interest, and are required to put more money down. Those who were scavenger-buyers, looking to buy ARMs with less than 10% down… are shut-out.

6) Add the fact that several banks have blacklisted South Florida and parts of the West (Countrywide is still lending everywhere), and specific buildings with high vacancy rates (due to high maintenance fees), and it is even more difficult to find money to buy in distressed areas. On a related note, beginning in March 08, PMI Mortgage Insurance, the country's second-largest insurer, began requiring at least 10 percent down to insure loans for borrowers in distressed zip codes/buildings, even when lenders are willing to take smaller outlays per borrower.

7) Apparently, banks still make more money by a combination of allowing foreclosures, milking problem owners and by picking up the 20% PMI (general insurance), rather than working with a troubled borrower. Banks do offer short sales – where they work with owners to unload the home at a loss and the bank walks away with the loss differential. In doing so, they convince owners to continue payments (mostly interest), so owners can supposedly save their credit rating. Some owners will do stupid things like max out their credit card debt before caving in – at which point banks often put the house into foreclosure and in many cases sell the house rather quickly – sometimes at a higher price than what they had listed as the short sale. Many short sales fail, and there are accusations that the banks reject short sale offers so that they can collect more money from interest and make more from the sale. All that seems dubious, but it is possibly true in some cases, and the short answer is to not expect the banks to help reduce foreclosures anytime soon, or for govt. programs to have a major impact on upcoming foreclosures. The fact that approximately 1/3 of sub-prime borrowers in 2006 had a 2nd mortgage (for buying cars, televisions, medical services, etc.) is not helping, as two-tiered mortgages are extremely difficult to get a short sale, since the 2nd lender will often receive nothing and may veto the deal.

So as the Fed is trying to figure out how to avoid recession, the banks are not cooperating and are not refinancing at a lower principle, as requested by the Fed. In fact, banks have already begun to ask the govt. for bailouts. For instance, BoA’s confidential proposal to members of Congress in early March, asking that the government guarantees $739 billion moderate to high risk mortgages to save banks from potential losses… when more of their efforts should focus on refinancing foreclosures on the margin. The Fed is now responding with all sorts of interventions and perhaps these guarantees are next. This leads to the next point:

8) All this is why the Fed and DC have introduced programs to stimulate the economy. It will help – but will not be enough for many homeowners – and some people who can pay for homes and have realized that their home value has dropped to the point to where what is owed is more than the value of the home… are walking away. The number of these “upside down” homes where debt is higher than its value is at 9 million homes now and if the trend continues, as Paul Krugman predicts it will, it will reach 20 million by year end, although the walk-aways are a bigger issue in California, thanks to laxer laws. In addition, as the Fed drops interest rates, mortgage interest rates have risen, as bond investors, worried about inflation, have fueled a rush into Treasury bonds, and drove up long-term interest rates. Finally, Bloomberg recently reported that the value of triple A bonds has tanked to 60 cents to the dollar… and those are the portfolios with the highest values… Credit Suisse is predicting AAs will drop to 20 cents on the dollar! As some bank portfolios are performing below the average, it is no wonder banks are not paying off the association fees of foreclosed properties. As Bear Stearns languishes in part due to have almost $400 billion in debt with $12 billion in equity, it is mind-boggling to think that at Merrill Lynch, $1 trillion of debt is teetering on around $30 billion of equity.

9) OK, there are zip codes that have escaped the leveling… those with better schools and infrastructures, etc., hold up better than newer or speculative sprawl. While DC has dropped by 15.2% from its May 06 peak, some cities such as Salt Lake and Seattle are fairing better than others. Weston, just down the street from Ft. Lauderdale, has barely dropped at all, compared to the 20% price declines of its neighbor. So, in Newport, prices increased by 7% in 08, despite a 12% drop in Rhode Island, and Manhattan has not flinched – but NYC home prices have dropped 7% from peak in June 2006. Although the brunt of the 7% NYC drop is led by the outer boroughs, Manhattan has softened and is expected to turn down in 08 due to the fallout in the sub-prime and banking industries and of course the about to be Wall St. pummeling of bonuses and jobs (at the mostly lower title levels). Since August, the NYC financial industry has shed at least 20,000 finance jobs, and Bear Stearns is likely to lay-off at least ½ of its 14,000 staff, and Citigroup is in the process of cutting 10 percent of its I-bank force, or 6,000 people. Further, Lehman Brothers announced 1,400 layoffs in mid-March and The New York Post reported that Goldman cuts would rise to 20 percent, or 6,400 jobs.

This will have a ripple effect, as the finance industry was responsible for nearly a third of all wages earned in the city, and each Wall Street job supports three workers in other sectors. It is likely that this will be a bit worse than Manhattan’s 15% real estate drop through 1987-1993, when 100,000 financial sector jobs were lost over a six year period, as more than 25,000 NYC financial sector jobs are marked to be cut in the past half year and more are certainly to come. Add hedging from Euro/Asia investors – who believe the market will drop more, and who had purchased 20% of NYC property that was sold in 07, and the arrow will likely point down. This is despite the fact that the dollar may drop another 30% to 40% against most currencies in 08, even as consumer spending shrinks, thanks to the impending and current recession, Fed rates going down again to 1 or 2 point something or even a Japan-style ZIRP, zero-interest-rate policy (which failed to dent Japan’s 20 year housing decline and an associated 10 year recession), and the war(s) continuing. Anyway you cut it, expect things to be cheaper in a year in NYC real estate on all fronts and in the Northeast area… especially for foreigners.

10) Anything else? I need a 10th point… how about one last kick at Florida, where we have the half-backs – those who moved to FL from the north and due to astronomical hits in hurricane insurance and high rising taxes, left for the cheaper lands of places such as the Carolinas – which if in large numbers would further depress the FL market. I could not find hard data on this – only former Floridians who blogged, angrily, from their homes in Georgia, Greensborough, Costa Rica, etc. etc… and did I mention that places such as West Palm – with upcoming adjustments in ARMS at 24% of all mortgages, and Lauderdale -- at 22%, will continue to be hit with resets/increases?

All that said, and Richard may have a point. Although sales did increase in February from year ago data, it coincided with a continued and steep price drop. So, in order to learn how best to cope with all of this, it might be most useful to pour yourself a tall drink, and watch “It’s a Wonderful Life” at least a few times… and if you have any money left, maybe consider real estate in a couple of years…

but the U.S in the near future will re-discover agriculture

Yep, you can eat in Second Life but you will still be hungry. Facebook is completely inedible.

mike b,

Excellent post. You just KNEW the banks were going to play this way. Lip service and nothing more. Do I feel bad they got burned by a "9 year old"? Sure, but they should've checked. Thanks Mike!

It's really sad about agriculture in Santa Clara county. What was once the nation's premier orchard fruit producer has been paved over with tech shops that promise the moon and deliver wages that ensure sub-standard housing for professionals.

Almost no wine vineyards exist in SC co. anymore, yet even as recently as Nixon's trip to China he brought with him "home vineyards" cabs from Mirassou as a gift from the American people. These were out on Aborn Rd. which is now simply suburban sprawl. Even now Ridge Vineyards produces almost all of its wine from vineyards outside the county.

Right now major agribusiness can swing its clout and get subsidies, but looking forward the fiscal realities - along with international obligations - may put an end to this cozy deal. I wonder whether this change will cause a renaissance of the mid-size agribusiness companies (real family farms will never be more than a niche in the future).

We are already beginning the debate in my subdivisions HOA whether to amend the CC&Rs to permit raising chickens in our backyards. Will permission to raise a milk goat be far behind? ;)

Chicken co-op?

hey I have 2 comments stuck in mod. i used 2 separate comment entries with one link on each. Does that go to moderation? can anyone help...they are on topic and juicy.

Peter,

Here's some food porno for you....

www.snakeriverfarms.com/srf/default.asp

One of our bulls, Fukutsuru, is considered to be the top marbling bull in the United States. He is one of the anchors of our extreme quality oriented program and we treat him, and all his progeny with respect.

Ooh....

HK, I don't see any comment in moderation.

maybe i forgot to hit submit or sumthin..thanks for checking.

ok my friend sent me this example of 'broken market'.

This house in ventura county is listed for wishing price 1.8m

http://tinyurl.com/3bf9h8

And a similar home 2 doors down just sold as REO for 899k (in escrow)

http://tinyurl.com/335ohb

talk about a price differential - from recent comp to wish price is 50% down to 'fix the market'/actually sell a home.

thats about right for ALL OF CALIFORNIA. quite a gap between buyers and sellers but the REO's are stackin up faaast.

DennisN,

Ridge still produces its flagship wines from its Cupertino Hills property (which I cannot afford of course), however, most of the Ridge labels sold at Wholefoods are grown in Sonoma and bottled at Ridge.

A few years ago, I saw a Ridge bottle (forgot which kind of white wine) for $60 at a local shop. They suddenly jacked up the price to over $300. Had I know about it, I probably would have bought the $60 bottle just for "investment".

HK, you submitted those to the previous thread.

Had I know about it, I probably would have bought the $60 bottle just for “investment”.

BSC Puts would have been good investment too. :)

oh i see. thanks Peter.

OO,

You got it. Ridge "Montebello" cabs are wonderful but too pricey for mere mortals like me.

One of the guys I worked with at Lockheed played in a string quartet with Paul Draper so during the 1980's I got lots of Ridge Montebello cab at music parties I was invited to.

HK, isn't this the place where we forest fires every other year? I still remember driving around there in 03-04 with burning bushes on either side of the freeway.

It's odd and ironic that the Santa Clara county town of Cupertino was named by its Italian settlers after the Copertino wine area in Italy.

www.laterradipuglia.it/ing/wines/copertino.htm

yeah you could all of SoCal gets the brush fires.

remember the 4 seasons of CA: Fire,Mudslide,Earthquake, Riot.

Currently its earthquake season but fire is around the corner. Always something to look forward to!

Speaking of fires, in some places it is illegal to overinsure a house. I wonder if insurance companies anywhere are lowering the payout to match the declining value of the insured house. If so, I presume many houses have mortgage balances that exceed the insured amount.

Check out the latest H.4.1 release. BEN HOLDS THE LINE! Previous week saw an increase in credit of around $9 billion; well, this week credit contracted by $9 billion. Oh, and the "discount window to non-depositories" aka Primary dealer credit facility (first time since the Great Depression!) increased by almost $20 billion. How could Ben be trying to hold the line against inflation you ask? The Fed sold $47 billion worth of Treauries. Approximately $629 billion of ammo (excuse me, Treasuries) are now left. Did I miss anything? Oh, repos increase by $23 billion and JPM paid off their non-recourse line ($5.5 billion).

EBGuy Says:

> If I ever go to a BA blog party (anybody know of any high
> end foreclosures where we can have a “no host” party) ,

I wonder if this was a blog party?

“Bakersfield police broke up a party at another vacant home in south Bakersfield, and concerned neighbors hope it was the last… Officers took two untapped kegs of beer, DJ equipment, cups and a folding table”

http://www.kget.com/news/local/story.aspx?content_id=f3b1fd20-82d2-4b98-a25d-e089671464e5

I wonder if this was a blog party?

LOL!

HeadSet Says:

> I wonder if insurance companies anywhere are lowering the
> payout to match the declining value of the insured house.
> If so, I presume many houses have mortgage balances that
> exceed the insured amount.

Home “value” does not have much to do with insurance pay out.

If a $1 million 2,000 sf home burns to the ground in Burlingame the insurance will only pay a little bit more (due to higher contractor pay) to build a new one than the insurance company will pay if a $350K 2,000 sf home burns to the ground in Phoenix…

EBGuy,

check out the latest H3 report on non-borrowed reserve, OUCH, very very big OUCH
http://www.federalreserve.gov/releases/h3/Current/

-61B, exponential growth man.

Hold the line, what line? The Maginot Line?

FAB,

that's right, my current home insurance policy will only pay out something around $300Ks if the house is burnt to the ground, and I don't even have an earthquake insurance because it is really not worth it. When the last big one happened, many homeowners were left with little payout because insurance policies were not set up to handle such a catastrophic scenario. My neighbor only got her claim on the swimming pool repair and had to foot the bill for the home repair completely out of her pocket.

It really discourages me from wanting a big mansion because if there is a big one, or a fire breaks out, there is almost no chance in hell I can fully recoup my $250/sf building cost on a house that is larger than 1500 sf.

I think the best earthquake-proof house is a boat house. It is not tsunami-proof though.

FAB says:

If a $1 million 2,000 sf home burns to the ground in Burlingame the insurance will only pay a little bit more (due to higher contractor pay) to build a new one than the insurance company will pay if a $350K 2,000 sf home burns to the ground in Phoenix…

I see. Do all areas required a burned house to be rebuilt? The insured cannot just elect to take the money and leave at most, cleared lot?

I think the best earthquake-proof house is a boat house

Or a rental

HeadSet,

hold that thought. Arson has already been tried by many desperate Californian homeowners.

Hopefully arson investigators will follow the money and catch all of them.

The good will prevail.

I was thinking that the Insurance Industry would have taken some preventative measures, such as pushing legislation to allow Insurers to unilaterally lower coverage/premiums in areas where house prices have plunged. After all, if they can push mortgage companies to forgive principle.....

I wonder if this was a blog party?
Actually, that WAS my inspiration. The idea being, though, that if the police did get called they would be less likely to arrest a bunch of sedate thirty or forty somethings sipping wine and "evaluating" the property. I suppose it would also be helpful to have you around with your RE license.

@OO, TAF (increase of $20 billion, no surprise) plus primary dealer credit, that'll leave a mark. The fact that it all shows about in nonborrowed reserves in H3 is a bit disquieting; I've always had this theory that this is where deleveraging occurs. When the money evaporates (loan is written off), a small percentage of it essentially disappears from the reserves. Not totally straight forward, but my naive interpretation is that banks rely on principal and interest to keep up the reserves as part of ordinary operations. When enough loans go bad, the reserves need to be replenished. And of course interbank lending has gone to pot...
The Maginot Line? Oh, give him some credit. Let's see though, this year the Fed sold off $138 billion ($740 - $612) of Treasures. At that rate, we have a little more than a year before the Fed has to start selling off its gold (and still be "sterilizing" the credit supply).