~Welcome to the Econo-Almanac~

I started this website in mid-2004 to chronicle San Diego’s spectacular housing bubble.  The purpose of the site remains, as ever, to provide objective and evidence-based analysis of the San Diego housing market. A quick guide to the site follows:

  • New visitors are advised to begin with the Bubble Primer or (if wondering about the site name) the FAQ list.
  • Housing articles I’ve written are found in the main section below.
  • Discussion topics posted by site users are found in the “Active Forum Topics” box to the lower right.
  • This website is an avocation; by day I help people with their investments as a financial advisor*.  Market commentary, an overview of our investment approach, and more can be found on my firm's website.

Thanks for stopping by…

Stated Income Loans—Now There's a Great Idea

Submitted by Rich Toscano on January 7, 2006 - 9:13pm

The folks at the Voice of San Diego are on a rampage with their continuing series on articles on housing-related chicanery. Their most recent piece focuses on mortgage fraud—specifically, the ever-popular stated income mortgage, otherwise known as a "liar's loan." While it's impossible to know how many people are overstating their incomes, the article quotes one mortgage professional as estimating (conservatively) that 25% of stated-income mortgages are fraudulent. Another mortgage executive acknowledged the "let it go" culture within the industry, supporting my frequent assertion that people tend to turn a blind eye to fraud as long as everyone is making money. This is an important topic, and we have by no means heard the last about it.

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Housing Slowdown Starting to Cause Real Pain

Submitted by Rich Toscano on January 7, 2006 - 12:45pm

A good friend of mine named Ramsey enjoyed a multi-decade career in the San Diego real estate industry before more recently becoming a full-time stock trader. Between his knowledge of the local housing scene and of economics and financial markets he is able to routinely come up with some very interesting analysis. He usually shares his insights with me over beef tendons, pig ears, jellyfish, and other frightening "delicacies" during our weekly meetings at local Chinese restaurants with questionable ratings from the Department of Health.

Today, however, he spared me the entrail-eating experience and sent me an interesting email in which he posits that the local real estate industry is already experiencing "layoffs" of a sort due to the housing slowdown. Ramsey's email is reprinted below in its entirety:

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Are Interest Rates About to Drop?

Submitted by Rich Toscano on January 6, 2006 - 8:03pm

PIMCO's Bill Gross has written an interesting, if somewhat dense, piece in which he opines that both short- and long-term bond yields are close to topping out. In (very) brief, his thinking is that the lagged effect of rate increases to date will soon start to cause the type of economic slowdown that has historically preceeded lower bond yields.

I find it troubling to question the wisdom of the world's biggest bond investor, and more troubling still to maintain that "this time is different." That said, it seems to me that Mr. Gross' analysis does not fully account for the fact that U.S. interest rates (at least on the long end) are largely controlled by foreign investors. This dynamic—or, at very least, the magnitude of its effect—truly is a new development. Foreign investors in U.S. debt, most especially central banks, have a different set of priorities than Treasury buyers of yore, and it's not clear to me that a U.S. economic slowdown will induce a decline in long rates this time around. Foreigners may find reason to sell U.S. bonds regardless of the state of our economy.

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Piggington Goes North

Submitted by Rich Toscano on January 3, 2006 - 8:43pm

Southern California is our beat here at the Econo-Almanac. But when an enterprising reader sent me a table full of data on the San Francisco Bay Area, I couldn't help but throw it into a graph. I figured that with the effects of the dot-com boom and subsequent bust, the Bay Area would be an altogether different animal than SoCal. But that wasn't really the case at all. While Bay Area home prices took off sooner and have proved a little more volatile, the end result is very similar: home sale prices rose much faster than rents.

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Appraisal Reform Efforts: Too Little, Too Late

Submitted by Rich Toscano on January 3, 2006 - 9:00am

The Voice of San Diego has run a followup story on appraisal fraud, this time discussing the middling reform efforts currently underway. As an example, the state senate is considering a bill "that would require any person who initiates a mortgage to have a certified broking license."

While it's encouraging that the appraisal fraud issue is being recognized, I don't think that a few grasping attempts at further oversight will solve this problem. It is the nature of end-stage speculative bubbles: there is too much to be gained by continuing fraudulent behavior, and too much to be lost be halting it. Once the bubble is deflating in earnest, the appraisal fraud problem will fix itself. By then, however, the damage will have been done. I can only hope that the powers that be use the opportunity to put in place a regulatory system that will prevent fraud from getting out of control during the next housing boom.

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The Dangers of Exotic Loans in San Diego

Submitted by Rich Toscano on January 1, 2006 - 9:56pm

The San Diego Union-Tribune has run a really good article on the risks of creative mortgages. As a matter of fact, my eyes nearly welled up with tears as they beheld the following paragraph (emphasis mine):

One product that concerns federal regulators is the pay-option ARM. It is "one of the most aggressive loan products out there to countermand the prices of homes," Smith [president of the local chapter of the California Mortgage Brokers Association] said. It gives borrowers the flexibility to choose how they make monthly payments. They can make a low payment that allows the principal to grow, increasing the amount owed. The theory behind that choice is that home appreciation will outpace rising debt. "That is a calculated gamble a lot of people have taken."

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Housing Market Report: December 2005

Submitted by Rich Toscano on December 31, 2005 - 6:10pm

The housing market gave us some mixed signals this month. Below I will attempt to interpret the various—and sometimes conflicting—messages provided by price levels, price breadth, sales volume, and inventories.

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Fraud and the Home Appraisal Business

Submitted by Rich Toscano on December 30, 2005 - 11:16am

The Voice of San Diego is at it again, this time with an article about appraisal fraud.

In the past, appraisers would estimate the fair market value of a house based on comparable sales, construction costs, and various other methods. If the appraised value came in too low, the mortgage would not be approved because the bank would want to ensure that the collateral on the loan (i.e. the house itself) was worth a certain amount in comparison to the loan amount.

Now, though, many appraisers claim that there is enormous pressure from some mortgage brokers to appraise homes based not on their actual value, but on the figure necessary to close the loan. The mortgage brokers, after all, are not the ones lending the money, so their main incentive is to close the deal. And since they are often the ones who hire the appraisers, it's possible to see how there would be a conflict of interest.

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The Real Estate Agent Bubble

Submitted by Rich Toscano on December 28, 2005 - 5:43pm

Much ink has lately been spilled on San Diego's burgeoning glut of housing inventory. Today, the Voice of San Diego spills some ink on our glut of real estate agents. We learn that the number of California real estate agents has grown by 55% since 1999. More frightening, 15% of Q2 2005 GDP growth nationwide was due to real estate commissions—and as usual, you can bet that the percentage is a lot higher in real-estate happy Southern CA.

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A Message from the Yield Curve

Submitted by Rich Toscano on December 27, 2005 - 8:22pm

The yield curve briefly inverted today: for a moment, the yield on longer-dated bonds was actually lower than the yield on shorter-dated bonds. To be specific, the yield on the 10-year Treasury briefly dropped below that of the 2-year Treasury, before rising up to close barely above the 2-year yield.

This brief foray into yield curve inversion is getting a lot of press, and for good reason. According to economist Paul Kasriel, a yield curve inversion between the 10-year and 3-month Treasuries has preceeded every recession over the past 45 years. Over this period, there were only two periods of yield inversion that did not precede a recession, versus six that did. That's a pretty decent economic indicator, though as Kasriel notes, it's a better predictor of economic activity in general than recessions in specific.

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The Ghost of Housing Bubbles Past

Submitted by Rich Toscano on December 26, 2005 - 6:13pm

Adherents of the ever-popular "They're Not Making Any More Land" school of real estate valuation would be well advised to read this New York Times piece on the Japanese housing bubble and its aftermath. Unless it becomes more cost-effective to build waterborne cities in the Sea of Japan than it is to build housing developments in Temecula, Japan will remain considerably more land-constrained than Southern California. Yet neither this limited land supply nor Japan's extremely high population density (one might say that "everyone wants to live in Japan") managed to deliver the nation from a massive, 15-year housing bust that has seen home price declines of up to 50%.

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Credit Market Report: December 2005

Submitted by Rich Toscano on December 24, 2005 - 8:15pm

The markets got all atwitter because the Fed dropped the word "accommodative" from its latest post-meeting statement. Does the change in wording imply that the rate hikes will soon be over? This question will be discussed below, along with some thoughts on fixed and adjustable mortgage rates, inflation indicators, the new federal lending guidelines, and how all of the above will affect the housing market.

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Is This the End of E-Z Credit?

Submitted by Rich Toscano on December 23, 2005 - 5:03pm

This past week, a group of federal agencies released a draft of their guidelines on non-traditional mortgage lending . Christmas came early for those of you who like to pore over 42-page regulatory manifestos; for the rest of you, highlights follow.

The issuing agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration) have done a good job of covering the notable areas of risk in non-traditional lending. They begin with loan underwriting standards, addressing the following topics:

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On Supply and Demand in San Diego

Submitted by Rich Toscano on December 22, 2005 - 5:58pm

Well now they've gone and done it. The Voice of San Diego has printed the words many thought would never be spoken in this town again:

Some sellers -- albeit a small minority -- have even begun to sustain losses on their property.

The article concerns San Diego's colliding trends of fewer home sales and greater home inventory. This is nothing new to readers of Premium Content, where I cover local housing stats in depth, but the long and short of it is that supply is increasing, demand is decreasing, and some folks are starting to do the math on what that means for prices.

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As Goes Housing, So Goes the Economy

Submitted by Rich Toscano on December 17, 2005 - 12:57pm
The UT publishes another article on the economy's unhealthy dependence on housing activity. If this topic gets enough press people may finally start to question the "diverse economy" meme (though I doubt it will be widely questioned until we start losing jobs).
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