Comment to SDR on the short sale monitor

[Chris Scoreboard Johnston]

Chris Johnston

I for one am not scared, and I am paying very close attention to the RE market. Why would that scare anyone? We have a down cycle at hand, prices are going down, which should provide opportunity. Decisions made out of fear are typically the ones people live to regret.

Any bailout will just be in the form of friendly monetary policy, which we are seeing right now. Remove emotion from investment decisions, and if you consider a home an investment ( I do not ) then remove it from that decision as well.

One of the main adages I go by is that the market is always right, and it is my job to be in sync with it or I am the one that is wrong. Just because I think a certain outcome will take place, does not mean it will. If I am wrong, then I need to adjust my thinking to what is at hand. I think too many people in here are too rigid in their thinking about this armageddon that is in front of us. It may happen, but what is your plan if it does not? The times in my career when my thinking has been the most rigid, have always been the times my investing results have been the worst.

I am sure I will be killed for these comments, so go ahead, start shooting.

[PerryChase]

Chris, I think that you’re quite right. Life is like a river and your need to go with the flow. A good river-rafter learns to nagivate the obstacles to arrive at destination first.

As far are RE goes, friendly monetary policy is one thing. But we could also see an S&L type bailout. Personally, I think that FDIC and other types of government insurance should be limited to $100k total. More liquidity will just cause us to take on more risk knowing that we’ll be made whole.

The flow in RE is now downward. Going with the flow means waiting it out.

The problem with housing is that, lately, buyers have been looking at their houses as investments. However, they are unable to remove the emotions from it.

Personally, I think that psychology is the main driver of life. Rationale is only a small part.

[PerryChase]

That is true, but when you landlord sells the home on you, and you have to relocate, your children will have to make new friends and go to a new school. They will never feel at home.

School friends are way overrated.  Children are resilient and adapt better than you think.  As a child I moved frequently as my dad worked in different countries.  I learned so much thanks to that and I wouldn't trade that experience for anything.  I became stronger and more capable.  

Children are growing beings and they need support and stimulation to satisfy their curiosity.   That's, IMO, much more important than familiar friends. 

 

[PerryChase]

According to the LA Times, some lenders actually relaxed standards in 2006. Could it be that lending is still loose with many 2nd and 3rd tier lenders who need origination volume to stay in business? Just throwing some possibilities out there for consideration.

The shakeout in the sub-prime industry began last year as housing prices leveled off and interest rates rose, curbing demand for loans. At first, some companies loosened lending standards to keep loan volume high, a tactic that has produced a wave of early loan defaults. More recently, companies such as New Century have tightened their loan policies to reduce their exposure to mortgages that could go sour.

 

http://www.latimes.com/business/la-fi-subprime9feb09,0,2419088.story?coll=la-home-headlines

[DaCounselor]

“Why are you expecting any type of bail-out? Talk about magical thinking: Its okay to take risks, because the gvt will bail us out. Good luck on that.”
____________________________

“Luck” and “magic” have nothing to do with it.

It’s probably not even going to get to the point of a govt bailout. Again, the threshold question is why in the world would the purchasers and servicers of a loan want to own a property that is upside down? It’s a loser for them. They lose at least 6 months of revenue stream, attorney fees, transaction costs and who knows what other hidden costs. It is a bad deal for them.

I suspect we will see quite of bit of modification to existing loans once ARMS reset and borrowers cannot afford the higher payments and cannot refi because they are upside down. The “bailout” will come from within the lending industry itself.

[blahblahblah]

Again, the threshold question is why in the world would the purchasers and servicers of a loan want to own a property that is upside down?

They don’t want to of course, but remember that the majority of these loans have been securitized and aren’t owned by regular banks, which never would have loaned this money in the first place. No, once the defaults start showing up in greater numbers, those MBSes will be revealed as the toxic waste that they are and investors will rush for the exits. Prices of MBS shares will drop, yields will shoot sky-high, and the end result will be that the days of junk home loans are getting ready to come to an end. Without the securitized garbage loans that have allowed Joe McAverage to buy his $500K home in Temecula on a $60K takehome salary, the supply of potential homebuyers (which is already almost exhausted) is going to take a big hit. Also look out for pension fund crises as their MBS investments evaporate into thin air. This is going to cause tremendous heartache.

Real prices down 30% within 5 years, that’s my call.

[unbiasedobserver]

Okay, I have to jump in here. The horrible nightmare of being stuck with a house in a slow market and having to move due to a job loss is the most horrific situation you can ever be in, as I’ve just experienced 9 months of it, laying awake at night wondering how many more months of double payments you can make before going belly-up. I think this has probably made a lifetime renter out of me, and my kids will be just fine. Oh I finally sold the house and I’m closing today.

[PerryChase]

Let’s consider liquidity and there’s still plenty of it around. When the system is awash in cash, the financiers have to find a somewhere , anywhere to place it.

The big news this week is Blackstone buying Office Equity.
http://money.cnn.com/2007/02/07/news/companies/equity_office/index.htm

Now where do the private equity firms (LBOs) get all the money to play with?

Easy money from the Fed, and foreigners, made it easy for the LBOs to generate spectacular returns in the last few years.

Now pensions funds that are mostly underfunded are chasing returns and pumping the LBOs full of cash. In order to justify their existence the private equity firms have no choice to but take on more risk to produce the desired returns.

Problem is spectacular returns are becoming harder and harder to come by. My guess is that some LBOs will begin to fail. That combined with the losses in the MBS, as households walk away from their houses, will drag down the pension funds and companies will start dumping their pension obligations onto the government.

How will the bailouts occurs?
1. Even more liquidity.
2. Shifting of pension obligations to the government
3. Shifting of health care obligations to the government. Businesses are now beginning to embrace universal health care because they realize it will save them millions.
4. Outright takeover and receivership for some financial institutions.
5. The War and the national debt will prevent the Federal government from providing too much fiscal stimulus.

This will happen over time, under the radar of the public who will be too busy blaming the immigrants for crime and job losses. Maybe we’ll have 2-strikes and you’re out. Politicians will blame economic hardship on the mismanagement of the war. Life will go on and 15 years from now, we’ll be entering another business cycle.

Like Chris Johnson said, there’s nothing to be scared of if you take the emotion out of it. Watch the market like an ongoing soap. Life is fascinating… you just have to examine it.

[Chris Scoreboard Johnston]

Chris Johnston

Perry I have to tell you that I have other business interests aside from my trading that are somewhat indirectly related to commercial real estate. That equity deal and deals like it are baffling to me. The cap rates that buyers are getting in commercial RE are so low, that I cannot for the life of me figure out why people are paying up like this.

There are assumptions that raising rents over time can move the cap rates up to 7% or so, but today at 5.5% why not have your money in risk free cd’s? Some of my friends who are commercial RE brokers tell me that it is a dreaded “new paradigm.” Whenever I hear that I start thinking the opposite.

My conversations with my mortgage broker about the property I am buying right now have been very enlightening. I only had to show one account balance from one of my trading accounts to borrow up to 1.5M! Even though the balances are substantial, alot more should be required than this. In the old days 7 or 8 years ago, a foot high stack of things were required. I was also of course scolded for having too much cash and no debt, what a terrible position to be in. I told her I could run out and get a quick Walmart credit card if I needed some revolving accounts!

She has been in the business for close to 30 years and she said she is commonly seeing people fudge people’s incomes by 5 or 6k per month to get approvals. Fortunately, she is wealthy, and cherry picks her loans because risking the type of crack back that could occur if you are caught is not worth another 10-15k more of income. She did make one comment which I think is telling of all of this, she commented on the dramatic change on behalf of the lenders that she has seen evolve over the years. It is not a new paradigm, it is almost now a different asset class than it was (housing). This is also the conclusion that I have come to, which is why I am of the mindset that there is going to be a floor under this ponzi scheme at a higher level than I had thought 6 months ago.

I do think that floor is at a lower level than where we are now without question. My property will lose value in the next few years, but I will just live in it, what a novel concept!

[sdrealtor]

Chris,
Congratulations it sounds like you were able to find what you were looking for in SD at a price you can live with. I hope you enjoy living here. That is what it is all about after all.

SDR

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