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no_such_reality

Good Post!

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I hear you CONHCO. I would say right now the GOP will build a monument to John Kerry if he bails them out of this election. It’s too bad in my opinion. I have never seen the GOP in worse shape than it is right now. I’m a libertarian and this GOP basically has become the antithesis of everything I believe in. I looked at John Kerry’s speech on Youtube, he was clearly taking a jab at the Pres, not the troops. Even if you think he did take a shot at the troops, think this thing through. What politician in their right mind would take a pot shot at our Armed Forces during a time hostilities? The reason everyone is discussing this on basically every blog on the web is because we live in a “soundbite” political world. The Kerry gaff is the perfect soundbite to be taken out of context. It was concise and clear. When I first heard it I went WTF? Most people will not dig deeper to see what really happened. If you are a democrat well then Life ain’t fair. This whole thing makes my stomach feel a little queezy. We are facing some serious and I mean serious challenges in this country. To have a major political debate be reduced into a soundbite gaff taken out of context doesn’t speak well of our current state of mind as a country. IMHO

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Man, I’m glad David spoke up. I was getting a little worried there.

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I always welcome contrarians to these boards, it keeps everybody honest. I guess in response to your post “I’m holding my breath” You make a very good point that people won’t put their living situation on hold but in the case of Southern California there is no choice but to put that on hold or leave, which people are doing in droves. Simply put home prices are not supported by incomes virtually anywhere in the state of California.

Here is what is going to happen, these over priced homes are going to sit on the market as they are now and just sit. The people who have to sell will begin competing against each other in order to close the deal. And you will see and are already seeing the price per sq ft nose dive. Southern California is facing a huge storm of foreclosures because people took out exotic loans banking on continued appreciation of their homes. They gambled and they lost. They can’t make their payments and the potential buyers will not take out these loans when they see prices falling. How far this thing tanks, i really don’t know. Right now the disparity between what people pay in rent verses the financial cost of owning is too great in face of a falling market. I save over $1k per month renting verse owning (after tax break). Combine that with flat and falling prices, it literally makes no financial sense to own. We are in totally unchartered and untested waters here. I have no problem holding my breath when I’m saving more money.

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From the article;

Sharga said the recent increases reflect the “first wave” of defaults and foreclosures stemming from the rise in adjustable-rate mortgages whose interest rates are rising too fast for some borrowers to afford.

At the peak of the buying boom, he said, as many as 35 percent of borrowers nationally were signing up for ARMs. In San Diego the figure sometimes exceeded 70 percent, DataQuick has reported.

“California had a disproportionately high number of these mortgages,” he said. “What we don’t have a precedent for in the marketplace is that many of that type of mortgage, especially not all that adjust at the same time.”

This foreclosure story is really something to watch. It’s kind of like a category 3 hurricane sitting over very warm tropical waters gaining strength. We are just now getting the outer bands of the storm. By this time next year we will be bumping up against the eye wall. As pointed out in that last paragraph having this many exotic loans all resetting at the same time is totally unprecedented. I think I have noticed a higher number of people with fever blisters lately. Wonder why???

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Here come the foreclosures

“Thanks to a 19 percent increase in foreclosure activity, California leapfrogged past Texas and Florida to report the most new foreclosure filings of any state in September, it says. The state documented 14,806 properties entering some stage of foreclosure, nearly three times the number reported in September 2005 and a foreclosure rate of one new foreclosure filing for every 825 households — 1.3 times the national average. The state’s foreclosure activity has risen more than 40 percent over the last two months.”

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There are still alot of people that have it in their mind this is only a dip and the boom will resume. I was one of those people back in 2000 knowing my Ariba stock was going back up to 150 from 5. Right now any data point that is favorable to RE is being devoured. There has been a slight seasonal dip in inventory, on Wall Street you have Cramer with a blow horn screaming don’t listen to the HB CEO’s they are too doom and gloom, BUY BUY BUY. The money managers on Wall Street have a tendency to feast on novice shorts, they have made a nice meal of them lately. The soft landing argument is still fresh and alive even as these horrendous numbers show no sign of abating.

I saw where somebody posted the headlines on the last RE downturn from the LA Times, starting in 88 through about 96. You can see the reporting of many false starts during that downturn. I don’t anticipate this will be any different. Downturns are not totally linear, there will be months where sales will show a slight YOY increase then fizzle. Home prices in San Diego have dropped 9% since this time last year and they are currently dropping, thats about as much of a drop that you can get in an asset class like RE. And as everybody has pointed out we haven’t seen the full brunt of the ARM resets. This thing is far from over.

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Here is Bob Casagrand’s Sept report.

“–Sales for September were 2,150 homes sold; this is down 42% from last September’s 3,602.

–If we look at the sales over the last 4 quarters we see steady erosion in sales from quarter to quarter. Last quarter of 05 was down 10% from prior year, 1st quarter 06 was down 20% from prior year, 2nd quarter 06 was down 26% from prior year and the 3rd quarter this year is down 33% from prior year, with the last month of the quarter down 42%.

–While the absolute number in inventory has declined the important inventory supply has increased slightly to 314 days. This is due to sales declining faster than the decline in inventory.

–The typical detached home sold was 2,050 sq ft with an average selling price of $626,296, this is down about 9% versus last years average of $691,608 for the same home. We see the same trend with attached homes, with this year’s average of $395,936 down about 6.5% from last year.”

We are now over 10 months inventory and prices are falling. This looks like a dead cat, no bounce, just a dead cat.

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Isn’t this more of a CYA move by the Federal Reserve. They see the increase in foreclosures coming, and now they can say they have addressed the problem. It will take time to see if this does have teeth, I have a feeling this is pretty meaningless outside a symbolic gesture.

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I am so glad to see the LA Times run that story. I am speculating here but you are going to see this hit TV on a 20/20, 60 Minutes or something of the like. I know a Fox News reporter got attacked in California on an expose about mortgage fraud. A huge chunk if not all of this housing boom has been one big LIE. One thing has to happen to expose the extent of this and that is simply for home prices just to stop going up. And as we all know they are actually falling. There is alot of carnage out there.

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I agree with Nor_LA_Temec_SD_Guy. Even if there are buyers who buy this line they won’t show up in the numbers. Affordability is way too low. There are two key things I am watching moving forward 1) Exotic loan resets 2) true impact on economy.

Especially here in CA how many people are discovering they over extended themselves? Home price appreciation was a central tenet to making these exotic loans work. What is the fallout now that home prices are falling? How will that further impact inventories and prices?

There is a great contraction of RE and RE related jobs that is now occurring that has not really shown up in the data. The new mantra on Wall Street is that a bottom is in clear site. The assumption of this bottom is that the economy will remain robust during the housing downturn. (And we all live happily ever after)
Lets apply another assumption, we are heading into recession (have you seen the deepening inverted yield curve?) Recessions erode demand i.e. job loss, loss of income, fear of losing job. Exactly how much will a recession impact demand? I don’t think we will have true answers or gauges to these questions until 2008 at the earliest. IMO I think many experts are under estimating the impact of these exotic loans. Thats where we as a nation and especially CA are in totally uncharted, untested, and very dangerous waters.

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Actually I am not short right now. I like to look to Wall Street due to its ability to gauge future earnings. And then sometimes you get to see Money Managers trap retail shorts in a squeeze. I guess that’s what is going on here, you couldn’t get worse news about housing right now and its happening on a daily basis. Yet these stocks are behaving like we are entering a new boom. And we all know they ain’t happening. CNBC is drooling over falling interest rates and the worst is over which leads me to believe we are now entering the “its never been a better time to buy” phase we were all predicting. Get ready for an onslaught aggravating perma bulls.

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Love him or hate him, nobody said slick Willie isn’t entertaining. Fox News tried to sandbag him, that should be no surprise. Some of the points he made were true and some were questionable but what I enjoyed was the body language between the two. Mike Wallace looked like one of those little drop kick dogs that pissed off a pit bull. You could see his tail sticking in between his legs wishing he were somewhere else. If Fox was trying to score some conservative talking points, it backfired. This thing is all over the left blogosphere as a rallying cry. This is all good theater for the mid-term elections. I’m sure we will see some amazing sliders and curveballs from Karl Rove before this is over. It’s just the nature of the beast.

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I agree with PerryChase. It’s not your fault that you got caught up in a mania. I guess I’m on the opposite end of the spectrum, we have a condo on the beach with a spectacular view. My thinking is if you have to be on the sideline be in a place you want to live in. Trust me it makes it much more tolerable. I would like to admit that we were very fortunate to find the rental we did. The landlord bought this place over 20 years ago and owns outright along with four other properties in the area. Our rent for what we have is extremely low but it is all profit for him. We have had one small increase in three years, primarily because we treat the place like we own it pay rent like clock work and give him suggestions on upgrades. He’s almost afraid of losing us as tenants.

I know we all know this equation of renting verses owning and this is the barometer I use. We have an additional savings of approximately $12K a year by renting versus owning (factoring in tax breaks). We will probably buy when we can break even. Our quality of life is better renting. I like to compare ourselves to couples of equal circumstances and income (apples to apples) that decided to take out these insane mortgages to attain ownership (we’ve been in the market i.e could have bought since 2004). We just came back from a 2 week vacation in Europe, what did the couple that bought in the last couple of years do? If we were to own right now, that would be the extent of what we could do. I’d rather go to Europe.

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Josh

This is speculation here but think about this. Business Week had an excellent article on the Nightmare Mortgage. Probably one of the best articles to date concerning the topic of exotic loans. It had teeth. There is a reason they came out with that article along with all of these other articles concerning housing and that’s because the bulk of these exotic loans are beginning to reset now. From what I have read over 1 trillion dollars (I always think of Dr Evil with finger to mouth) will reset. Thats a big number impacting a large number of people. Now going back to the example of my aunt, her situation has sent shock waves throughout my family’s communication network. I see my family 2 to 3 times a year and the last couple of years they would just look at me cross eyed about my housing bubble views, Kind of like (has that boy gone crazy out there in California). My last visit in August all that changed among all the adults in my family, sisters, aunts, uncles, cousins. Now they are asking me questions about what I think will happen. They were in denial, then they saw what can happen with my aunt. They didn’t read that or see it on TV, it was somebody they know and care about. Now multiply that story by the number of people that will go into some form of default and foreclosure over the next 18 months. Also combine that with officially showing YOY price declines starting this Fall. Also combine that with the internet age of blogs. This thing is far beyond the FED easing a 1/4 point.

Regarding my aunt, yes she was counting on this investment as her retirement, she may be able to salvage one house with a little equity in it and she has two daughters that will look after her. She is still self employed with some income but this has been an extremely painful experience.

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