Housing & economy doing great…shut down this site!

[Allan from Fallbrook]

Scruffy, instead of continuing the argument using 1990s employment statistics and how the uber-rich are likely to be unaffected by the downturn, how about discussing this in terms of monetary policy and macroeconomic theory.

This run-up in prices has not been driven by any sense of fundamental underlying value. Hence, it is not sustainable. Rather, it has been driven by cheap, easy money, combined with virtually non-existent loan underwriting standards and kept aloft by real estate “professionals” who fervently believe that prices never go down.

You can look at any market in California right now and the metrics have completely reversed themselves. Sales are down (in some markets like Sacramento, Bakersfield and the San Fernando Valley they are plummeting), and NOD/NOT/foreclosure notifications are skyrocketing, in some cases 150% on a YoY basis (San Diego County is my example here).

How on earth can you believe, let alone push, the assertion that all is well and this is nothing more than a hiccup? I grant that Armageddon is strong word, but a 20% correction in most markets will be devastating, and that is certainly not outside the realm of possibility in that it is occurring right now. Looking at some of the neighborhoods in and around Sacramento right now (Rancho Cordova, Galt, Elk Grove) there are price corrections in excess of 30%. Factor in carrying costs, realtor fees, and closing, and you are talking about a major haircut, especially when you consider that the houses in question are already substantially overvalued to begin with.

You’re not actually David Lereah or Lawrence Yun, are you?

[Allan from Fallbrook]

Excerpt from Merrill Lynch newsletter:

The housing situation is going from bad to worse
Second, the housing situation is going from bad to worse and you can forget about a recovery until next year. The starkest piece of information last week was the news that the national unsold existing inventory of single-family homes and condos surged at an astounding 82% annual rate so far this year. We still can’t wrap that number around our head. The overhang is now up to an 8.9 months’ supply, which is the highest inventory-to-sales ratio in 15 years. By way of
comparison, the months’ supply of inventory was 6.4 a year ago and 4.3 two years ago. The massive excess supply we have on our hands today is simply going to reinforce the deflationary state in the housing market, at a time when home prices on average have already declined at an annual rate of 5% in the past six months, the biggest drop we’ve seen since the summer of 1991, and fully three quarters of the country is now deflating (outside of Manhattan, that is). Clearing out the excess inventory is going to mean at least another 10% downside in average home prices, in our view, which is just going to reinforce the weak performance we’re seeing in the homebuilders, financials and consumer discretionary space.

[Allan from Fallbrook]

Excerpt from Merrill Lynch newsletter:

The housing situation is going from bad to worse
Second, the housing situation is going from bad to worse and you can forget about a recovery until next year. The starkest piece of information last week was the news that the national unsold existing inventory of single-family homes and condos surged at an astounding 82% annual rate so far this year. We still can’t wrap that number around our head. The overhang is now up to an 8.9 months’ supply, which is the highest inventory-to-sales ratio in 15 years. By way of
comparison, the months’ supply of inventory was 6.4 a year ago and 4.3 two years ago. The massive excess supply we have on our hands today is simply going to reinforce the deflationary state in the housing market, at a time when home prices on average have already declined at an annual rate of 5% in the past six months, the biggest drop we’ve seen since the summer of 1991, and fully three quarters of the country is now deflating (outside of Manhattan, that is). Clearing out the excess inventory is going to mean at least another 10% downside in average home prices, in our view, which is just going to reinforce the weak performance we’re seeing in the homebuilders, financials and consumer discretionary space.

[JWM in SD]

Ah yes, Merril Lynch. The Grim Reaper of subprime chop shops in OC. Gee, is it any wonder they pulled the plug on New Century? Guess not given this statement from the newsletter.

[JWM in SD]

Ah yes, Merril Lynch. The Grim Reaper of subprime chop shops in OC. Gee, is it any wonder they pulled the plug on New Century? Guess not given this statement from the newsletter.

[Allan from Fallbrook]

JWM: Don’t forget they also dumped their position with Bear Stearns MBS sub-prime operation a few weeks back.

What is your take on Blackstone and KKR IPOs? My sense is that the smart money has already hit the doors and this is nothing other than a thinly veiled cash out. Just curious.

Also, there was a really good article in The Economist this week on private equity funds.

http://www.economist.com/opinion/displaystory.cfm?story_id=9441256

[Allan from Fallbrook]

JWM: Don’t forget they also dumped their position with Bear Stearns MBS sub-prime operation a few weeks back.

What is your take on Blackstone and KKR IPOs? My sense is that the smart money has already hit the doors and this is nothing other than a thinly veiled cash out. Just curious.

Also, there was a really good article in The Economist this week on private equity funds.

http://www.economist.com/opinion/displaystory.cfm?story_id=9441256

[JWM in SD]

“My sense is that the smart money has already hit the doors and this is nothing other than a thinly veiled cash out. Just curious.”

That is what I’ve read on other economic blogs as well and it seems to fit all things considered.

Regarding Private Equity, I work for a well known start up in San Diego and I’ve heard the CFO talk about private equity with some degree of disdain. Basically, what he said was that if you as a business owner / entrepreneur get involved with Private Equity guys, then don’t expect to make much money (ROI). In all liklihood, those leaches have financially engineered the deal such that they receive most of the benefits of sucess and little or no risk if failure ensues.

[JWM in SD]

“My sense is that the smart money has already hit the doors and this is nothing other than a thinly veiled cash out. Just curious.”

That is what I’ve read on other economic blogs as well and it seems to fit all things considered.

Regarding Private Equity, I work for a well known start up in San Diego and I’ve heard the CFO talk about private equity with some degree of disdain. Basically, what he said was that if you as a business owner / entrepreneur get involved with Private Equity guys, then don’t expect to make much money (ROI). In all liklihood, those leaches have financially engineered the deal such that they receive most of the benefits of sucess and little or no risk if failure ensues.

[Allan from Fallbrook]

You mentioned in a previous post about the excess liquidity in the marketplace.

Interestingly, the same pool of cheap funds driving private equity, hedge funds, etc is (was) driving the mortgage funds market.

However, Scruffy and his ilk don’t seem to see this and insist that the housing bubble is built on solid fundamentals (i.e. “they’re not making any more land!”) and is not being fueled by that easy jingle.

I have heard the same catcalls about private equity guys and venture capital (vulture capital) honchos in particular. I worked with a high tech venture out of LA that was seeking angel investment and dealt with quite a few VC people (mainly out of the SF Bay Area).

The ROI/ROE calcs they were demanding for funds invested, as well as the equity participation for same, were astounding. You basically were being asked to hand the keys over in exchange for funding.

I definitely get the feeling that the funds are starting to dry up, though. Whether this is a bellwether for a full-blown credit crunch is anyone’s guess, but the wind seems to be blowing in a different direction.

[Allan from Fallbrook]

You mentioned in a previous post about the excess liquidity in the marketplace.

Interestingly, the same pool of cheap funds driving private equity, hedge funds, etc is (was) driving the mortgage funds market.

However, Scruffy and his ilk don’t seem to see this and insist that the housing bubble is built on solid fundamentals (i.e. “they’re not making any more land!”) and is not being fueled by that easy jingle.

I have heard the same catcalls about private equity guys and venture capital (vulture capital) honchos in particular. I worked with a high tech venture out of LA that was seeking angel investment and dealt with quite a few VC people (mainly out of the SF Bay Area).

The ROI/ROE calcs they were demanding for funds invested, as well as the equity participation for same, were astounding. You basically were being asked to hand the keys over in exchange for funding.

I definitely get the feeling that the funds are starting to dry up, though. Whether this is a bellwether for a full-blown credit crunch is anyone’s guess, but the wind seems to be blowing in a different direction.

[stansd]

This is very different from what I’ve heard and read. From what I’ve read (economist and other sources), management in LBO’s is compensated quite handsomely. This is happening to the degree that some public companies with more shareholder scrutiny are having trouble retaining talent because they are having to compete with LBO shops that don’t have the same restrictions.

Also remember that LBO’s only make you rich if you can service the debt and have some left over. You want the incentives of the management team to be aligned with those of the investor. Equity stakes with attractive payoffs insure that.

I wonder if some of the angst you are hearing is from management teams of poorly performing LBO targets. It’s a bit like a lottery-payoff of average performance isn’t goign to knock your socks off, but the upside is tremendous.

Stan

[stansd]

This is very different from what I’ve heard and read. From what I’ve read (economist and other sources), management in LBO’s is compensated quite handsomely. This is happening to the degree that some public companies with more shareholder scrutiny are having trouble retaining talent because they are having to compete with LBO shops that don’t have the same restrictions.

Also remember that LBO’s only make you rich if you can service the debt and have some left over. You want the incentives of the management team to be aligned with those of the investor. Equity stakes with attractive payoffs insure that.

I wonder if some of the angst you are hearing is from management teams of poorly performing LBO targets. It’s a bit like a lottery-payoff of average performance isn’t goign to knock your socks off, but the upside is tremendous.

Stan

[Allan from Fallbrook]

Stan,

Speaking of The Economist: They are reporting in this week’s issue about private equity issues that are not going, such as US Foodservice’s cancellation of a bond flotation, and the unwillingness of certain banks to extend bridge financing due to worries about downside exposure.

The WSJ has been reporting as of late on the amount of debt service necessary to make some of these deals happen, and the parallels to the late ’80’s LBO frenzy and the amount of subordinated debt that generated.

JWM: There are reports that United Capital is having major problems with their sub-prime lending unit, and that Fannie Mae might ride to the rescue on that one. Speaking of Fannie Mae, there are rumblings about Fannie’s exposure to the sub-prime mess due to their holdings in sub-AAA rated paper. So, the mess continues to spread.

[Allan from Fallbrook]

Stan,

Speaking of The Economist: They are reporting in this week’s issue about private equity issues that are not going, such as US Foodservice’s cancellation of a bond flotation, and the unwillingness of certain banks to extend bridge financing due to worries about downside exposure.

The WSJ has been reporting as of late on the amount of debt service necessary to make some of these deals happen, and the parallels to the late ’80’s LBO frenzy and the amount of subordinated debt that generated.

JWM: There are reports that United Capital is having major problems with their sub-prime lending unit, and that Fannie Mae might ride to the rescue on that one. Speaking of Fannie Mae, there are rumblings about Fannie’s exposure to the sub-prime mess due to their holdings in sub-AAA rated paper. So, the mess continues to spread.

[Author]

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