[davelj]

I can’t vouch for sdhomepix.com, but it sounds like you’ve found the discrepancy, which suggests that ziprealty is the better source. The trend on both sites, however, is showing precisely the same thing… an ominous and rapid building of inventory.

[davelj]

Actually, the $60 million isn’t counted as “cash” on the balance sheet, it accumulates under the generic asset heading “gross loans,” because the amount of deferred interest is added back to the previous loan balance. However, it does increase the equity account on the other side of the balance sheet. It does not, however, improve operating cash flow. Also, the $60 million is not profit, but rather revenue – two very different things.

However, you’re right in that they are counting chickens before they hatch.

[davelj]

Perhaps, but I’m a big believer in caveat emptor… if someone is incapable of understanding a mortgage, perhaps they shouldn’t be buying a house.

[davelj]

everything appears to be back on track with my inventory source (21,000+ and growing):

There are currently 21215 listings in San Diego County

1. North County Coastal (3277)
2. North County Inland (6957)
3. Central San Diego Coastal (1434)
4. Central San Diego (4304)
5. South Bay (2325)
6. East County (2918)

[davelj]

I’m with these folks… keep renting. Given your rent and circumstances, what’s the hurry?

[davelj]

Actually, of all of the “innovative” loan products of the last few years this is one of the least objectionable. Recall that with a typical 30-year fixed rate loan, the borrower only pays down about 15% of the original principal balance in the first 10 years. Consequently, it’s only that 15% or so that gets amortized – in effect – into the total monthly payment over the last 20 years of the loan. So, while there is a little bit of payment shock in year 11, it’s not very dramatic, especially in comparison with most of the other crazy products out there. Furthermore, from the lender’s risk management perspective, that extra 50 basis points of yield acts as a quasi-principal payment during the first 10 years of the loan. My general belief is that “innovative loan products” are synonomous with “future charge-offs” where lending institutions are concerned. But, in this case, I don’t see a big problem if the underwriting is done carefully. And, as a consumer, I would consider taking on one of these loans under the right circumstances.

[davelj]

i think you have three separate questions here (correct me if i’m wrong):

1. what percentage of these thrifts’ of total interest income is represented by deferred interest income?

obviously it differs from institution to institution, but i’d say meaningful but not enormous (yet). to give it some perspective, golden west generated $2 billion of interest income in 1Q06. consequently, $60 million (or twice that number if you like) hurts, but is not a back breaker if it disappears. nevertheless, these option ARMs are a big concern. having said that…

the biggest problem with these articles is that they are written by non-bankers and they confuse the terminology. to use golden west as a specific example, the company has almost $121 billion in loans on its balance sheet. 90% of that $121 billion is NOT comprised of option ARMs, however perhaps 90% of their origination volume in any particular recent quarter is comprised of option ARMs and/or perhaps 90% of the company’s deferred interest income comes from option ARMs.

These option ARMs could cause huge problems for thrifts, but their composition of thrift balance sheets is not stated properly in the recent articles on the subject.

2. what happens to the deferred interest income if the homeowner prepays the loan (whether through refinancing or a sale of the house)?

assuming the homeowner receives enough to pay off the entire outstanding loan balance, the thrift gets paid off in full (including the deferred interest balance) and the loan disappears. no problem for the institution.

3. what happens to the deferred interest income if the home goes into foreclosure?

assuming the home gets sold for some number below its original mortgage balance, then both that portion of the original mortgage balance as well as the deferred interest balance gets charged off – a direct hit to the thrift’s equity.

this accounting, like the gain-on-sale securitization accounting that many lenders were using several years back, will get changed after these institutions run into serious problems, which they likely will. accrual accounting is wonderful in concept (and in practice most of the time), but sometimes it gets taken a bit too far.

[davelj]

looks like the site i use has fixed the problem. numbers are back up to “normal” now:

There are currently 20924 listings in San Diego County

1. North County Coastal (3218)
2. North County Inland (6872)
3. Central San Diego Coastal (1424)
4. Central San Diego (4247)
5. South Bay (2301)
6. East County (2862)

[davelj]

here’s the link to my inventory number: http://sdhomepix.com/

click on the “homes for sale” tab

now it’s up to 20,555… go figure.

it went up by 25-50 homes per day for about two months, then declined by 1,000 in two days, then climbs by 550+ in one day. needless to say, i think there’s something screwy going on with these figures over the last few days.

[davelj]

since paul volcker left the fed, generally, and over the last ten years, more specifically, the fed has responded to one thing and one thing only: wall street’s applause meter.

if the fed feels that raising rates will blow up the housing market (which will then blow up the economy), it will lower rates eventually, regardless of the inflation rate. if the fed were really concerned about inflation, rates never would have been reduced to 1% and they would have been at 6% a loooong time ago. the fed is comprised of spineless economic hacks who care more about politics and being liked than about limiting the debasement of the u.s. dollar. it’s all a bunch of smoke and mirrors.

and it will all end in tears…

[davelj]

i was talking about latin america as a whole in my previous post – i never mentioned mexico specifically. mexico is not the only country for which spanish is the primary language, and in case you aren’t aware we are in the process of ratifying free trade agreements with other latin american countries besides mexico (CAFTA, for example). while mexico and china are about equal trading partners with the u.s., latin america as a whole is a larger trading partner than china. also, u.s. direct investment in latin america dwarfs that of china. put simply, latin america will be equally if not more important than china to the u.s. economy for many decades.

since you brought it up, where mexico specifically is concerned, china is a greater economic power than mexico solely due to its larger population (1.2 billion in china versus 110 million in mexico). mexico’s per capita gdp is over 8x that of china ($10,000 vs. $1,200). outside its major cities, china is a poverty-stricken wasteland, while mexico is just merely poverty stricken (outside its major metropolitan areas, that is). china’s educational system is better than mexico’s, but mexico’s infrastructure, transportation and communication systems are all ahead of china’s when you look at both countries AS A WHOLE (as opposed to just comparing shanghai with guadalajara, for example). i’m curious… how much time have you spent in mexico and china?

again, i’m not knocking mandarin, but you have to keep the current “china hype” in perspective.

finally, if learning mandarin is what will make the incremental difference in your kids’ college applications then perhaps there are other issues that need to be addressed. anyhow, getting into the “right” college is dramatically over-rated in the whole scheme of one’s career and life. just a thought.

[davelj]

“america’s glory days are dwindling” because no one stays on top forever and success breeds lethargy. so, yes, china has certainly become an economic force to be reckoned with.

having said that, for our lifetimes and our children’s lifetimes the u.s. will continue to be THE dominant economic force on this planet. why? our risk-taking entrepreneurial culture is like nothing else on earth and is the real engine that drives the global economy. it’s no coincidence that silicon valley and wall street (and many others) dominate their respective global competitors in innovation and efficiency.

sure, china’s overall economy is growing very rapidly. but that’s what happens when you have a huge population (1.2 billion vs. 300 million here) and you’re starting from a very low base of per capita GDP. china’s grown at an annual rate of 9% (real) since 1978 but it’s per capita GDP is still only $1,200 (versus $38,000 here in the u.s.). also, as china’s economy gets larger it will run into the law of large numbers and a negative second derivative – that is, it will grow at a decreasing rate.

don’t get me wrong – china’s a powerhouse in the making and if you want to learn mandarin, it certainly can’t hurt. but english will continue to be the language of global commerce and not only that, it will become MORE so as each year passes – the momentum of using english around the globe is too strong at this point to reverse. mandarin will be the language for chinese businesses that don’t want to deal with “outsiders” – for better or worse.

frankly, if you’re going to have your kids learn a language, i’d have your kids learn spanish. there are 600 million people in latin america, we already have free trade agreements with many latin american countries, geographically latin america’s closer, and culturally they’re more similar to most americans than are the chinese (who have a fairly provincial culture when it comes to non-chinese). also, while latin america isn’t growing as fast as china, it’s growing much faster than the u.s. and has 3x china’s per capita GDP.

a general rule of thumb is that if wealthy new yorkers are doing it, it’s probably the result of some neurosis – these are the same people that spend a disproportionate part of their lives making sure that their (soon to be maladjusted neurotic) kids get into the right PRESCHOOL, for christ’s sake. i’ll take the other side of that trade. if they’re so inclined, my kids will learn spanish.

[davelj]

my guesstimate:

aggregate prices will fall 10% or so from their highs this year and another 5%-10% or so in 2007. then in 2008 and 2009 we’ll see two mid-single digit declines, such that prices will hit bottom around 2010 at about 30% below the peak. then we’ll have two years or so of stagnation – not much movement in either direction. we’ll see late-2005 prices again in ten years or thereabouts. the only reason that i don’t think prices will fall further is there’s a lot of money on the sidelines waiting for disaster, which may end up limiting the downside, which by all rights should be a 40%+ decline. also, the fed will pull out all the stops to prevent an outright disaster… as they always do. it isn’t just the american consumer that believes in “buy now, pay later.” our politicians and the fed (oh, that’s redundant) believe the same thing.

[davelj]

yeah, i think grantham’s THE best. his methodologies and conclusions are so sound and logical it’s scary. every serious student of finance and economics should read everything he writes… three times.

stephen roach at morgan stanley is also pretty good. one of the very few bulge bracket economists worth reading.

[davelj]

i’m actually semi-optimistic about inflation going forward. i think it’s understated now by a large margin, but i think the next recession will get us back toward something more normal. recall that owner equivalent rents comprise 24% of the CPI. while this has helped understate inflation for the last 10 years – because as we all know real housing prices have gone through the roof relative to rents – when housing prices start dropping, the reverse will be true: owner equivalent rents will overstate inflation. also, aggregate commodity prices will likely drop in the next recession. so, while real inflation does look bad right now, i’m actually mildly sanguine going forward. now, if we could just get the government to stop cooking the figures… that would be something.

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