Housing Conversation

   I reconnected with an old college buddy yesterday who sent me an email asking what I was up to. I called him and we talked for about 30 minutes. I consider "Brad" one of the most down-home good 'ol boys I've ever had the privilege of knowing. He's honest, upright, and I guess you could call him a square. Brad's a family man with a 9-to-5 and he tends to believe what he sees and hears in the news. In other words, he hasn't been bitten by the cynicism bug yet.

   He supported President Bush, is wary of Obama, and has no opinion on Sarah Palin... yet. Our conversation turned to housing and he told me that he's been unable to sell his house due to the market. My ears perked up. "Why do you want to sell your house," I queried. "My wife says we need more space but we can't get a house until we sell the current one we got," he replied. I wanted to go into a rant about consumerism and why the real estate market wouldn't bottom for at least another decade but I spared him my diatribe. I don't think he'd appreciate what I had to say and his wife definitely didn't need to hear about my prognostication if her heart was set on another house. So, I encouraged Brad to continue trying to sell the house and suggested hiring a staging company to spiffy up the house and show it every other weekend to drum up traffic. If Brad sells the house, I'll post up an update but I think it's going to be a long time coming.

Is the Government About to Make Mortgage Market Even Worse?

   Ever read a really dumb headline and think to yourself, "Man, that is real dumb?" That's what I thought when I read CNBC's "Is the Government About to Make Mortgage Market Even Worse?" this morning. From the article:

   "Yes, refinancings-which have been running at around 80 percent of all mortgage applications-fell despite a new record low average rate on the 30-year fixed of 4.38 percent.

Not so good.

   But on the other hand, purchase applications rose 2.4 percent, largely driven by a 4.5 percent increase in government purchase applications (FHA).

Great, except for that last part.

    In other words, the government has been propping up a dead real estate market for a year and because they're going to stop propping up a corpse, they're to be blamed for making it "Even Worse?" I guess Uncle Sam's supposed to keep supporting real estate for the next decade until investors wade into the market again. I've stated before that real estate prices have to continue to drop to bring buyers back - prices have to drop to a level where the risk vs reward proposition makes sense. Propping up prices only delays the inevitable and prolongs the pain. 

   Government purchase applications have been driving the market for the past year, accounting for, at times, nearly half of all new loans. That may be about to change. New premium authority (translation: higher prices) goes into effect next week, on Oct. 4. New seller concessions policies are about to go into effect as well.

"These two policy changes will increase the opportunity for private capital to return to the market while improving the safety and soundness of FHA," FHA Commissioner David Stevens tells me. "

Home prices to take hit next year in many markets

   A new AP article today starts off with, "Don't take the latest snapshot of U.S. home prices too seriously." and goes on to reveal:

"The Standard & Poor's/Case-Shiller 20-city index released Tuesday ticked up in July from June. But the gain is merely temporary, analysts say. They see home values taking a dive in many major markets well into next year."

Where are the housing bulls? Nowhere. They're NOWHERE for the next few years as I've prognosticated in previous entries on my little blog. I'm a contrarian's contrarian in that I always bet against the crowd during extremes. When shoeshine boys, Barbara Streisand, and UPS drivers were trading internet stocks in 1999, I knew the jig would be up soon. When it looked like the end of the world on September 11, 2001, I felt just as scared as everyone else and admittedly, I didn't buy anything when the market opened up again. I did start buying too early in 2002 and racked up losses before the market took hold and started to climb again. So what's the J-Sonoma meter telling me now?

   An extreme melting point in the real estate market hasn't been reached yet. Prices have pretty much stabilized and although buyers are scarce, deals are still being done. I think there's still steady price erosion ahead that'll probably ratchet prices back to the levels that were being bid in 1999-2000. If that happens, I think buyers will become courageous and start bidding again.

Thoughts from J-Sonoma

   Market was down today. Housing's still dead and crude's holding steady. In other news, the company I work for took over another social network today. I had my doubts about the purchase when internal memos starting popping up in the office but now that I've seen the active userbase for myself, I gotta say that I'm impressed.

   Other than the occasional idiot who uploads a photo of his penis for public viewing, the community that we've acquired is respectful to each other and I'm excited to be a part of a network that we'll try to build in the next few months.

Pace of new home sales second slowest on record

   The AP article which is tied to the headline listed above begins with:

"New homes sold at the second-slowest pace on record in August, signaling that the housing market will remain a drag on the economy."

   I guess printing news stories that state the obvious are good because they remind everyone that the real estate market continues to be in a funk and that no one should get their speculative juices boiling yet. The return of manic real estate speculation isn't coming back for at least another decade. During the course of the next decade when price appreciation in real estate is kept in check, credit-worthy young families looking to buy their first home should be able to afford said home without breaking the bank. That's how it should be and perhaps the death of the real estate market is a good thing in that it allows people who want to buy a home and live in it (instead of flipping it), are able to raise their families in a house of their own.

Housing Still in "Bottoming Process" But Worst Is Over, Zillow's Humphries Says

   Who knew a real estate website like Zillow needed a "Chief Economist" on the payroll? What does a Chief Economist on a website do? I guess he appears on Yahoo's Tech Ticker to talk about the state of the housing market. According to Stan Humphries:

"Homeowners remain torn about the prospects of the market. "Homeowners are in flux right now in terms of what their expectations are," Humphries says, referring to Zillow's homeowner sentiment survey. "A lot of them believe we're in a bottoming process, but a fair number do believe the bottom still lays ahead." 

   I've never believed in the intelligence of crowds. I've always bet against the crowd but when it comes to the housing market here and now, I have to side with the bearish masses. It's only common sense in light of the conspiracy of factors that have smacked housing down for the count. Humphries says that a lot of homeowners believe the bottoming process is ongoing so I'd say YEA to that. Also from the Humphries interview:

   "While Zillow foresees the housing market finally bottoming toward the end of 2010, it isn't projecting large gains. Factors such as the large foreclosure pipeline, high levels of negative equity, and the sideline sellers "will constrain the amount of appreciation we'll see over the next few years."

   This is on target and fits with my views. The only thing I'd amend would be the last line to "will constrain the amount of appreciation we'll see over the next decade." Don't want to get anyone's hopes up.

More than half exit foreclosure-relief program

   ^^^ That's an AP headline from earlier today. It's not a surprising headline to read given the trying times that we're in but if you were moved enough to read further, you'd find this obvious bit of information below:

http://finance.yahoo.com/news/More-than-half-exit-apf-1270328495.html?x=0&sec=topStories&pos=6&asset=&ccode=
"WASHINGTON (AP) -- The Obama administration's flagship mortgage-relief effort is failing to ease the foreclosure crisis as more than half of those who have enrolled have fallen out of the program. As of August, approximately 680,000 homeowners who applied to get their mortgage payments lowered, or about 51 percent, have been disqualified, the Treasury Department said Wednesday. That's up from about 48 percent in July."

   Is anyone surprised by this news? I'm not. If a homeowner is so strapped for cash that he's applying for a lower mortgage payment, it can be inferred that he's falling behind on his mortgage and/or has recently entered the ranks of the unemployed. If this is the case, why would he be credit-worthy enough to qualify for a lower mortgage payment. It's a dumb conundrum. There'll be a lot more dumb conundrums in the next few years as homeowners continue soldiering through the economic malaise. 

Home construction jumps 10.5 pct in August

   The road to recovery in the real estate market will be slow and will take longer than most people expect but it's coming. According to a new AP article released today:

http://finance.yahoo.com/news/Home-construction-jumps-105-apf-4101143282.html?x=0&sec=topStories&pos=1&asset=&ccode=
"Home construction increased last month and applications for building permits also grew. The gains were driven mainly by apartment and condominium construction, not the much larger single-family homes sector.
   Construction of new homes and apartments rose 10.5 percent in August from a month earlier to a seasonally adjusted annual rate of 598,000, the Commerce Department said Tuesday. That's the highest level since April.
   Pulling the figures up was a 32 percent monthly increase in the condominium and apartment market, a small portion of the market. Single-family homes, which represented about 73 percent of the market in August, grew more than 4 percent."

   The news is encouraging but it also shows that there's more demand for apartments and multi-unit dwellings than homes which is indicative of the slow pace of sales for single-family houses. Do I still believe it will take about 20 years from boom to bust for the real estate market to regain its health? Yeah, pretty much. I'm a business cycle guy and there's always going to be booms and busts. Booms inevitably follow busts and so on and so forth.

   I liken the business cycle to the rhythm of nature - during the spring, there's new life exploding everywhere as seeds sprout and insects hatch. The summer is buzzing with activity as the insects pollinate the plants and new seeds are created by the plants. As the fall rolls around, the plants start dying and the insects lay their eggs for the next generation. That's the boom and bust of nature in three seasons or roughly nine months. The business cycle obviously runs its course a lot longer but the concept is the same.

The Recession Ended in June 2009

   According to the National Bureau of Economic Research (NBER), the recession that began in December 2007 came to a conclusion in June 2009. The recession lasted 18 months which made it the lengthiest economic pullback in the United States since World War II. Although the recession's over, its effects and influences are still hanging over the economy as evidenced by the high unemployment rate, lackluster real estate market, and the rising stock market.

   "What? What did you say about the stock market," cried someone from the crowd. Well, it's true. The market's been on a tear since the summer of 2009 and it's going to go higher. It's like the market knew exactly when the recession had ended and started to kick itself into first gear, second gear, and soon third gear.

   It's too bad then that the average citizen is too scared of the market to put big money into mutual funds or ETFs. The beneficiaries of the coming stock market boom will be the rich, the rich, and the rich. Joe Sixpack is too busy trying to mine 1% interest from a money market fund or a bond fund to step into the market anytime soon. In my opinion, by the time Joe Sixpack steps back into the market, he'll be paying top notch prices and the newspapers will be crowing about how to get rich in the market. Maybe there'll be another book about DOW 30,000 and how it's different this time. That's when I get bearish and bet accordingly. Until then however, the market is swinging higher... without Joe Sixpack on board.

10 Reasons To Buy a Home - WSJ

   Man, this one's a doozy from Brett Arends for the Wall Street Journal. And I quote:

"Brett Arends explains why owning a home is a good thing.
Enough with the doom and gloom about homeownership.
Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers that declare "Owning a home may no longer make economic sense," it's time to say: Enough is enough. This is what "capitulation" looks like. Everyone has given up."
Link: http://finance.yahoo.com/real-estate/article/110685/10-reasons-to-buy-a-home?mod=realestate-buy

  Brett, you done got facked up again. Anyone who's seen True Romance knows that line. Yeah Brett, you're grasping at straws when you try to make a convincing argument that it's alright to buy a home right now. Pointing to a magazine cover as a contrary indicator stopped working during the crash of 2008-2009. Magazine cover after magazine cover decried the health of the market before the first crash in late 2008. You know what those contrarian magazine covers did? Nothing. The market continued crashing and crashed again in March of 2009.

   I'm going to go through Brett's ten reasons why it's good to buy a home now and smash them to pieces:

1. You can get a good deal
   Hey, I can get a good deal on a house. Let me take out a $380,000 mortgage from banks that won't approve my application because I don't have a job. Good one, Brett.

2. Mortgages are cheap
   Shut up. Get out of here!? Morgages are cheap? Holy shit, now I can run out and get myself a house.

3. You'll save on taxes
   This one is so stupid that I'm not going to bother humiliating him.

4. It'll be yours
   Will it still "be yours" after it's foreclosed on?

5. You'll get a better home
   This guy is a genius. By genius, I mean idiot.

6. It offers some inflation protection
   People aren't worried about inflation when they're on unemployment.

7. It's risk capital
   WTF is he smoking? No, I don't want any of it.

8. It's forced savings
   Um, what savings? "Hey Marge, let's put some money from the unemployment check into our savings instead of buying food for the kids."

9. There is a lot to choose from
   This guy has a knack for stating the obvious. I hope he's not getting paid for that article because he has to be writing for free. You know the phrase, "Beating a dead horse" right? I don't want to beat Brett anymore.

10. Sooner or later, the market will clear
   Thanks Brett. You're like Nostradamus with your pronouncement that the market will clear. Will it clear in time for people who just bought homes and lost their jobs to pay the mortgage?

   I will now read all of Brett's future articles in the WSJ with a jaundiced eye and a suspicion that he's got a screw or two loose. Those screws lost their threads and are spinning.

Poverty Rate Jumps to 14.3%, Highest Since 1994, According to Census Report

   Don't these headlines make you feel good to be an American? According to the Census Bureau, data from 2009 shows that more Americans joined the "Poor" class and the poverty rate leapt to 14.3% from 13.2%. That means about 45 million Americans were living at the poverty level while Uncle Sam bailed out the big banks and AIG made sure that their top executives got bonuses.

   Poverty is a growth industry and trends like this don't stop and reverse quickly. I'd expect the poverty rate to decelerate and reach a peak sometime in 2012 and then gradually decrease as the economy begins growing aggressively again. We've lived through one of the worst recessions in the past couple of years so it's little surprise that the poverty rate has grown. During times like this, it's sometimes tough to see a bright future for America but blue skies are straight ahead. Bluer than the bluest eyes. It's just going to take a little time.

Soros warns on gold rally, says nothing safe

   The man who broke the Bank of England in 1992 is telling everyone that gold's in bubble mode. And I quote:

"I called gold the ultimate bubble, which means it may go higher. But it's certainly not safe and it's not going to last forever," he said.

   George is right because gold is a farce. It is an illusion of value. You know why? Because it's value is tied to the value of fiat money. If you sell gold, you're paid in fiat money. Hey gold bugs, how crazy is that? If you walk into Walmart tomorrow and try to pay for $1,266.70 worth of diapers, Cheetos, Vlasic pickles, and Chef Boyardee with an ounce of gold, you'll probably get escorted out by a burly security guard. Without the Cheetos.

   I can hear the gold bugs screaming that I'm wrong and I just don't understand GOLD. Shaddap. I know gold and gold is nothing more than a commodity and a trading vehicle. Sure, you can make some nice jewelry with it but it is just a metal. It's value has been assigned by greedy people. I learned a few years ago that value isn't linear. Value doesn't move in a straight trajectory. Value is assigned. Who decides what an ingot of silver is worth? Who decides what a ton of pork bellies is worth? Answer: The MARKET sure, but the market is rigged. If the shenanigans of the days when crude rocketed to $150 per barrel didn't convince you of rigged markets, then nothing will. That's what's happening with gold now. It's rigged to rise. When the gold rug is pulled from right under the gold bugs, daily drops of $50 to $100 are not out of the question as everyone and I mean everyone leaps off the sinking ship.

   What does this have to do with real estate? Nothing. This is my blog and I'll slag gold if I want to. Love ya too.

Bank Repossession of Homes Sets New Record in August

   The foreclosures keep coming and Americans continue to get their homes repossessed by banks. According to the AP article, a record ~100,000 homes were repo'ed in August. A salient paragraph from the article is pasted below:

"Notices of Default, which are the first step in the foreclosure process, are up slightly but mostly thanks to a jump in California, where the numbers had been artificially low of late, as banks tried to modify borrowers.
"With respect to the NOD increase, I think it is the modification redefault wave beginning to build and new modifications slowing to a trickle, indicating banks have lost their primary borrower re-leveraging tool," says mortgage industry consultant Mark Hanson."

   JP Morgan is pushing back the housing recovery to 2014 but I think that's still way too optimistic. The foreclosure contagion isn't something that'll reverse itself within the space of a few years. It's going to be a long grind of at least two decades before the real estate market regains its footing. I've always looked at any market as a function of fear and greed which impel buyers and sellers. Right now, there's a lot of fear and a lot of sellers but not much in the way of greedy buyers. The recovery is coming but believe you me, it ain't going to be as soon as 2014. Try 2024 before speculative greed is rewarded once again by the real estate market.

   The original article is linked here: http://finance.yahoo.com/news/Bank-Repossession-of-Homes-cnbc-1047161091.html?x=0&sec=topStories&pos=main&asset=&ccode=

Couple buys home with 67 cents in collateral

   Where can I sign up? Well, if you live in Idaho, Massachusetts, Minnesota, or Wisconsin, you too can take advantage of Fannie Mae's Affordable Advantage Program which is putting first time home buyers into houses. From CNBC:

"The Fannie Mae program requires a minimum credit score of 680 (720 in Massachusetts) and the buyer must live in the home. All loans are 30-year fixed. The arguments for the program are persuasive: It wasn't the no-money-down loans themselves that fueled the housing crash, it was the poor underwriting. These loans are very strictly underwritten. Adjustable rate loans were the primary drivers of default, while these loans are fixed."

   So, Fannie Mae and by extension, the American people, are still footing the bill for the Uncle Sam's master plan to get people into homes. Guess the housing crash, the recession, 10% unemployment, and the emergence of Sarah Palin as a Teaparty mover and shaker weren't enough to make Uncle Sam cry "uncle."

Casey Serin Camp Idiot Watch

   The post count for the "casey serin: back in the game" thread on Camp Idiots has reached 26,568 posts and 525,092 views. On September 2, the stats were 26,074 responses and 512,578 views.

   The latest news on Casey appears to be a foreclosure auction for his parents' home which is scheduled for September 13 on the steps of the County Courthouse at 720 9th Street in Sacramento, CA. I'm not going to repeat the drama here but the dirt may be viewed on the CI message board.

   This may be one sign that the real estate recovery is really at hand. I'm not being flippant about it but all major moves in all markets start with small steps and gradually build momentum.

Speculative Activities

   Before the Great Depression whacked America, there was a big boom in all speculative activities. People were betting on stocks, commodities, horses, and more. Read Reminiscences of a Stock Operator by Edwin Lefebvre for a taste of what was going on back in the Roaring 20s and 30s before it all ended in tears.

   More recently, there was a lot of speculation in real estate before the big crash in housing. You know what I'm seeing a lot of speculation in nowadays?

   Websites.

   With sites like Flippa, DigitalPoint, and Sitepoint providing marketplaces for domain names, web services, and entire websites, anyone can get into the game of flipping websites and speculating in them. While the activity isn't at an alarming level yet, I do foresee it ramping higher in the coming years as speculators try their hand at buying a site for $100 and then flipping it for $1000 after doing some cosmetic surgery and updates.

   The company I work for has been acquiring various websites over the past year and we've been forced to pay higher prices because of amateur bidders coming in with competing offers. How do we know they're amateurs? Because they ask basic questions like "Can I become like Ebay with this penny auction site?" and "What does PHP and MYSQL stand for?" The sellers love it because they're able to lead amateurs with grandiose visions of how much money they'll earn with Adsense when anyone who's been in the game knows it's not easy because there's a lot of competition out there. We're going to watch how prices go as the economy recovers but we think prices can only go up for well-designed sites with potential as amateurs and speculators start spending. There'll be a crest and then the inevitable crash. Watch for it.

Average mortgage rate up to 4.35%

   Rates are creeping up from their lows but they don't mean anything in the real estate environment that we're in. One reader sent me an email where she described how her family has refinanced their mortage three times this year already as the rates have continued dropping this year. I asked her if the banks threw in any closing costs to make their money on the refinancing but she hasn't responded yet.  

Mortgage lending down 1.5 pct as rates inch up

"Mortgage lending down 1.5 pct as rates inch up"

   That's an AP headline from today but the gist is disingenuous. Mortgage lending isn't down because rates are creeping higher, mortgage lending is down because a lot of people don't qualify for loans. Why are headlines from papers and news services so out of whack with reality? Is there some pitcher of Kool-Aid that I have to drink before I can read these headlines and accompanying stories and believe that the writers are being truthful? People are trying to refinance their mortgage loans to pay for everyday essentials like food, energy, and sundries. Refinancing a loan to free up some money every month is a godsend in these trying times when a lot of people are just trying to keep up with their bills. Once they fall behind, it's not easy to catch up.

Chinese try to tame real estate boom

From the Los Angeles Times:
http://articles.latimes.com/2010/sep/06/business/la-fi-0907-china-hangzhou-20100907
Home prices soared in recent years in the picturesque city of Hangzhou, but government fears of a U.S.-style meltdown have led to new restrictions on sales and a severe slowdown in the market.

September 06, 2010

By David Pierson, Los Angeles Times
Reporting from Hangzhou, China — For generations, Chinese have flocked to this historic city to enjoy its centuries-old pagodas, Buddhist temples and scenic lakes surrounded by drooping willow trees.

In recent times, Hangzhou has attracted scores of visitors for a different reason: real estate.

Read the rest of the article by clicking the link above.

Casey Serin: "Back in the game"

   The tweet that blasted out on March 12, 2010 at 7:55 PM from would-be real estate mogul Casey Serin was obscure. It read:

... after a little hiatus, back in the game.
http://twitter.com/CaseySerin/statuses/10396464460

   That one tweet ignited a message board thread on CampIdiot that has reached 26,074 responses as of today. The view count so far? 512,578 views. Casey once called people who derided his real estate predicament and subsequent business ventures "Haterz."

   Casey gained notoriety for buying houses with liar loans and then subsequently lost them all when the real estate bubble popped. USA Today named him the "poster child for everything that went wrong in the real estate boom."

   Why am I mentioning Casey Serin? He's a contrary indicator. As long as he's still riling up haterz, the housing market cannot recover.

House Prices Are Still 10% Too High, Says Barry Ritholtz

   Barry, be honest and tell everyone that house prices are 20% too high. Maybe even 30% too high. Who's to say what's too high anyway? In the middle of a market crash, what's a stock like Pfizer (PFE) worth? Some sellers are willing to get out at any cost so figure $8 on the low end. Sure, it makes no sense but when prices are crashing through the floor, some people would prefer $8 than the possibility of $4. Others won't sell at anything below $20 while another portion of the investing public are happy with $15. This is what makes a market and what causes people to buy when others are selling.

If Barry won't say it, I'll say it. Housing prices are 20% too high. If the economy creeps along for another decade or so, Housing prices are 30% too high at this point. Anyone who's capable of buying now and acting on that impulse is trying to catch a falling knife. That's my opinion and I'm sticking by it. Link to the article below:

House Prices Are Still 10% Too High, Says Barry Ritholtz
http://finance.yahoo.com/tech-ticker/house-prices-are-still-10-too-high-says-barry-ritholtz-535388.html?tickers=&sec=topStories&pos=2&asset=&ccode=
Money-manager Barry Ritholtz has a message for the National Association of Realtors, the trade group that always puts a sunny spin on the outlook for the housing market, no matter how horrific the facts may be:
You're making the problem

Ritholtz, who runs Fusion IQ and writes The Big Picture blog, says that the NAR's happy spin is making homeowners too optimistic about the prices they'll be able to get--thus encouraging them to price their houses too high.