Monday, September 28, 2009
More Bearish Real Estate Info
Those who have done their homework and "get it" that real estate is toast don't need any more data. Housing is done. Kaput. Put a fork in it. STAY AWAY!
Whatever you think is a good deal now will be significantly overpriced in 1-2 years. We just had the top in 2005-2006, so the bottom takes more than a few years to occur, particularly in bubble states like California, Florida, Nevada and Arizona. The depth of the fraud that fed the final upward push in sales and prices is slowly being discovered and reported. Of course, this is several years too late, but mainstream media sources were busy promoting the bubble housing mania instead of cautioning people to beware. Now they are cheerleading every sub-1% blip in the data as "the bottom" and a "great time to buy," just like they did all the way down when the tech bubble collapsed in 2000. Wash. Rinse. Repeat.
This article shows the depths of the fraud in some markets. This was the moral hazard fostered by the U.S. government, which encouraged reckless lending on homes (Alan Greenspan thought exotic mortgage products designed to explode in the "homeowner's" face were peachy keen and said so publicly). Fannie and Freddie purchased many of these toxic mortgages, giving them the implied backing of the U.S. Government.
Wall Street basically told mortgage originators to bring them any loans on any houses, regardless of quality, and those who did so were rewarded financially. Americans who took on houses they knew they couldn't afford were allowed to get something for nothing, albeit temporarily and with a great cost to society and America's reputation in the financial sphere.
The way the fraud works, with various twists, is to create "straw" or artificial buyers by enticing them with kickback payments. The builder and/or a mortgage originating company helps the pseudobuyer fill out the paperwork using a "no documentation loan." The pseudobuyer (i.e. fraud accomplice and/or naive speculator) intentionally overpays for the house in return for a cash kick-back at closing. The builder gets the house off their books at a profit. The mortgage originator gets their fees plus any kickback if one is arranged. Wall Street and Uncle Sam get toxic garbage.
In the case of Wall Street, the toxic garbage is re-sold to institutional investors like pension funds and mutual funds, and labeled as a high-grade/"AAA", ultra-safe investment by firms like Moody's who openly solicited bribes and/or exorbitant fees to put their stamp of approval on a shitty product. Wall Street gets a lot of this stuff off their books, but is so drunk with greed and feelings of invincibility that some of the firms keep some on their own books as a speculative investment. The government, of course, is "fully invested" for the long haul. This is why Fannie and Freddie are costing U.S. taxpayers trillions of dollars.
Now, on a much larger scale were those buyers who weren't committing fraud but rather were chasing the American Dream. People who were running as fast as they could (sprinting, really) to get a leg up on their competition (the Joneses). In areas like southern Florida, southern California, Las Vegas and parts of Arizona, this required more and more toxic loan products to get people into a high end ($500,000-$1.5 million) home that was far beyond their means.
This high-end real estate is the next shoe dropping right now. These high-end homes will become absolute bargains as the pool of available buyers shrinks massively once the current economic conditions play out and lending returns to rational standards. Of course, the government is pledging taxpayer money to disallow reason to return to lending, which is why 90% of new mortgage loans are now backed by the U.S. government. Private firms know the game is over and can't find anyone to lend to that is of interest to them/meets their new more stringent loan guidelines!
Please don't forget this chart, which anyone who has done any investigation into the current housing debacle has hopefully seen by now:
Those Alt-A and option ARM mortgages are now blowing up right on schedule, are for homes with higher values than subprime-backed homes, and will be "contained" (to use Bernanke's phrase) about as well as subprime was. The high end of the real estate market in many areas is about to detonate and it will be even uglier than subprime. Living in a home that once cost a million dollars while squatters and decay cause blight in the home next door will cause a lot of people to lose it. And you can bet many will walk away from their obligations, damn the consequences, once they realize just how much they've been had. When you paid $1 million for a house and a foreclosure next door goes for $500,000, how can you possibly justify continuing to throw good money after bad based on a vague concept of ethics that our federal government and financial institutions refuse to follow? This is especially true once the following happens to your "re-cast" option ARM loan:
The bulk of these option ARM loans are based in California, which already has a 12% unemployment rate that is continuing to rise. By the way, 80-90% of people with these Option ARM loans have actually been paying the "minimum allowable payment" that creates negative amortization, so this re-cast scenario is not hypothetical - it is actually happening! And this is a "re-cast," of the loan, which is different than an interest rate change. It means the entire terms of the loan change from "pay less than interest only every month while your principal owed goes up every month" to "your loan balance is now above the limits we put in small print at the closing, so now we want a traditional fixed 30 year interest and principal payment every month starting right now or you are in default." Interest rates could be at less than zero and these loans would still explode on cue (except for the fact that people are walking away before this can even happen). And Alt-A is one step behind option ARM in terms of toxicity (notice they are both spiking together in the first chart above).
This means we have 2 years (give or take) before we even hit the peak of foreclosure activity. On top of this, banks are now delaying foreclosure proceedings for up to 2 years (at times, delays are mandated by the government itself!), banks are renting homes and/or failing to list or auction homes once they have taken them back (Wells Fargo execs need a place to party, after all), and the government is stepping in to try to artificially prop up the housing market with taxpayer money (which, of course, will fail utterly and completely).
Translation: DON'T START LOOKING TO BUY A HOME YET. WAIT. IT'S WAY, WAY TOO EARLY. DEALS OF A LIFETIME ARE ONLY A FEW SHORT YEARS AWAY (it may take 5-10 years, but why rush to buy a depreciating asset?). RENT WILL BE DROPPING DURING THIS TIME, SO YOU WILL BE "MAKING MONEY" IN HOUSING BY NOT BEING LOCKED INTO A MORTGAGE AND THUS BEING ABLE TO SPEND LESS EVERY YEAR ON THE SAME ROOF OVER YOUR HEAD.
And once CNBC finally tells you to sell your home and/or walk away from your mortgage, it will be time to buy again. Wash. Rinse. Repeat.