Stamper Capital & Investments, Inc.'sELEMENTS OF MARKET TOPS WEBLOGThis weblog details elements of large market tops (like Real Estate) in real time beginning July 18, 2004 (see our Annual Forecasts to view our analysis during the 2000 stock market top and decline - remember the NASDAQ fell 78%!!!). As in our Deflation Watch weblog and our Major Trend Change Indicators weblog, we are presenting the information in conjunction with a re-interpretation and/or additional interpretation of articles we see in the media.
September 19, 2007 *** Well, our forecast for the market top in real estate is pretty much in - confirmed by the latest official statistics and numerous media articles. In addition the Fed's "surprise" cutting of the Discount Rate by 50 basis points a month ago and yesterday's Fed cut of the Fed Funds Rate by 50 basis points clearly indicates that the economy is in trouble. Thus, we have decided to stop posting to this Elements of Market Tops Weblog (to us, the top is in) and will continue on our new Anatomy of a Credit Contraction and Deflationary Downturn Weblog. ***
August 28, 2007, HOUSTON CHRONICLE, "Home Prices: Steepest drop in 20 years;" "U.S. Home prices fell 3.2% in the second quarter [of 2007], the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said Tuesday." That pretty much says it. We note that this drop is across the country; we have documented many places where drops have been dramatically larger than that. We also emphasize that we believe we are still in the initial stages of the downturn, unfortunately.
ugust 13, 2007, LOS ANGELES TIMES, "Credit Fears May Curb Home Sales - Some experts see pending deals fall out of escrow in part because of the turmoil in the mortgage market;" This article highlights that loan terms are changing so quickly that it seems to be upsetting actually doing business in the real estate market. "What's unprecedented is the speed of the change of the available mortgage terms." A particular mortgage broker "....started seeing lenders change or eliminate their mortgage programs for riskier sub-prime loans about six months ago, and they seemed to do so every quarter. Then lenders started sending brokers notification of changes every month. Within the last week or so, their notices started coming EVERY DAY, and included changes in loan programs affecting EVEN THE BEST BORROWERS." The article tells about brokers having to call clients to tell them they can't get loans for purchases because the terms just changed.
April 13, 2007, CHARLOTTE OBSERVER, "No Mortgage for Those with Good Credit;" This article pretty much confirms our forecasts are coming true (unfortunately). "The abrupt end of a decade of easy lending has already moved home ownership beyond the reach of many people with lower incomes or credit problems. Now, Charlotte-area brokers say a much broader swath of people are facing barriers to borrowing."
"Interest rates also have climbed sharply on the largest loans, called 'jumbos,' because lenders can't resell them to Fannie Mae or Freddie Mac. The loans basically are reserved for the wealthy, but that's not enough comfort for lenders." The difference between a smaller "conforming loan" and a "jumbo" used to be 0.20% per year - now it has jumped to a difference of 0.75% or 7.34% for a jumbo and 6.59% for a conventional.
"The higher rates mean buyers have less money to spend." "That $600,000 buyer will no have to look at buying a $550,000 place or paying 10 per cent more per month for the same house versus last week."
July 31, 2007 - There are just too many articles to writeup now that reality is being recognized (see our Major Trend Change Indicators weblog) and the effects are snowballing. Also, the articles mostly match the forecasts we have already detailed (below and other weblogs) so we are just going to list the headlines:
7-31-07 BLOOMBERG, "Moody's Says Some 'Alt A' Mortgages Are Like Subprime." 7-31-07 BLOOMBERG, "Junk Bonds Have Worse Month in Five Years on LBO's, Subprime." 7-31-07 BLOOMBERG, "U.S. S&P/Case-Shiller Home Price Index Declines 2.8%." 7-31-07 BLOOMBERG, "American Home Can't Fund Loans, May Liquidate Assets." 7-31-07 BLOOMBERG, "Corporate Bond Risk Soars as Subprime Mortgage Losses Spread." 7-30-07 BLOOMBERG, "Five Signs That Subprime Infection is worsening." 7-28-07 BOSTON HERALD, "Crisis of Confidence: Consumers Lose Faith." 7-28-07 CHICAGO TRIBUNE, "Subprime Pain Spreads Into Office Market - As business volume plunges for real estate firms hurt by the housing slump, they and companies that service them are abandoning office space and leaving landlords and surrounding communities suffering." 7-27-07 O.C. REGISTER, "Ripple Effect - While the slowing housing market is exacting a toll on some home-accessory retailers, the larger players are gambling on opening new stores in O.C." 7-27-07 O.C. REGISTER, "O.C. Auto Sales Sink in First Half of '07." 7-27-07 O.C. REGISTER, "New-Home Sales Slump Persists Throughout U.S." 7-27-07 CBS MARKETWATCH, "Around the Globe, Rout in Credit Markets Accelerates." 7-26-07 CBS MARKETWATCH, "Subprime Could Create Global Crisis, Economist Says - World is one 'Bear-line' event away from liquidity freeze..." 7-24-07 BLOOMBERG, "Defaults on some 'Alt A' Loans Surpass Subprime Ones." 7-24-07 BLOOMBERG, "California Home-Loan Defaults Rise to Decade High as Sales Dip."
We have not seen a proliferation of articles of this type since the 2000-2002 down draft. Remember during that period the S&P 500 fell around 50% and the NASDAQ fell 78%. We would not rule out such declines from the current credit contraction.
June 26, 2007 MARKETWATCH, "Home Prices Fall at Fastest Rate in 16 years - S&P/Case-Shiller Index Shows Prices Down Annualized 2.7%;" Well, the headline says most of it. This is "...the largest decline [in the index] since September 1991." The index started in 1987. Too bad the index does not go back to the 1960's. I would have been interesting to see what it reported for the top in 1974 and for the much larger top in 1979.
We want to point out that, according to the article, "The Case-Shiller index is considered a superior gauge of home prices compared to the median sales-price data released by the Commerce Department or the National Association of Realtors, because it tracks multiple sales on the same property and is therefore not influenced by a different mix of homes sold in a period." We would add that it is probably less likely to be manipulated for political or other reasons. However, the Case-Shiller index is restricted to 20 cities.
This measurement of real estate prices is very interesting to us. Similar to this index, we have documented specific sales of multiple properties in Newport Beach which declined by over 60% from the 1979 top down to the real estate bottom in 1985 (two years after the stock market bottomed). Those drops were based on actual trades for specific houses in Newport Beach. When we see official statistics that show a little blip of a drop - we just laugh. The historical volatility of real estate has been dramatically more than we have ever seen reported; however, this Case-Shiller index may show the true reality. Of course that index is for the major cities. We have already reported articles on real estate in small cities citing price drops of over 20 percent in this current cycle.
May 29, 2007, YAHOO FINANCE, "Neighborhoods Swayed by 'Liar's Loans' - Drawn into Real Estate Frenzy, A neighborhood Finds Home Loans Too Good to be True;" This is a very telling article about what, at least in part, caused the real estate bubble. The article details how mortgage brokers used a church basement to make presentations where it is alleged they talked people into buying properties they could not afford. It is alleged that the brokers then basically "cooked the books" when filling out the loan applications. The stories of how the loan documents are astounding. For example, a woman receiving "$1,800 a month in disability payments -- as she recovered from a collapsed lung -- and sometimes receiving child support of $150 per week..." was described on the mortgage application as "...an administration manager for a medical supply company, earning $114,000 per year." It is interesting that they are debating in court whether this was outright fraud or just someone helping another get a loan. Of course, the mortgage broker got thousands of dollars in commissions and fees.
It was kind of sad reading about how these lower income people were apparently snookered - of course, the mortgage brokers involved are "blaming the victims" - the borrowers, but the other victims are those whose lives were pushed out of balance by the easy credit (fraudulent or not) and the tumultuous rise and fall of real estate 'values.' We believe stories on this subject are just starting and will be coming out for years.
Other useful facts from the article are that "liar loans" are actually officially called "stated income loans" and that they are a huge part of the "sub-prime" market. "Last year, nearly half of subprimes required little or no documentation of income, a share that has nearly tripled since the start of 2000..." It also talks about a study "...of 100 stated loan applications last year [that] found almost 60% exaggerated incomes by at least half." Another study "...found that 70% of mortgage defaults were linked to a significant misrepresentation on the original loan application." Well, with statistics like those, you can see how fraud contributed to the real estate bubble, and also how resolution back to reality is likely to contribute to deflating the bubble.
May 25, 2007, MARKETWATCH, "Existing Home Sales Fall to 4-Year Low in April - Supply of Homes on Market Rises to 15-Year high;" "Resales of homes fell 2.6% in April...the slowest pace in four years. Sales are down 10.7% since April 2006." They are talking about sales volumes, not sales prices. "The median sales price fell 0.8% year-over-year to $220,000." Importantly, "...sales [volumes] fell in all for regions [in the United States]." We point out while values and fortunes of real estate are often regional, this bubble is national (and even international).
May 24, 2007, MSN MONEY/REUTERS, "April New Home Sales Jump as Prices Fall;" Of all the articles on this subject this is the only one that had a fair headline - the rest we found left off the important part - the record falling prices part. It is remarkable how the press is trying to paint this data as positive at least in their headlines. It is most likely a demonstration of social dynamics and peer pressure in the business environment. The most important information is that "...builders slashed prices, pushing the median price of a new home to $229,100 in April [2007] from $257,600 in March [2007]" - we will calculate that for you - it was a drop of 11%!!! - another article pointed out that that 11% drop in median price was a record. A similar 5/24/07 article (BLOOMBERG, "New-Home Sales in U.S. Jump 16% to 981,000 Pace in April) points out "New-home sales, which account for about 15% of total home sales, are considered a better leading indicator of the market than existing home sales because they are recorded when a contract is signed rather than when the sales are closed. Most sales of existing homes are counted when a contract closes, usually a month or two later." Based on that we would expect that reported sales of existing homes could increase over the next couple of months but that the median price will likely be dropping quite a bit. We will see.
May 20, 2007, ORANGE COUNTY REGISTER, "High Roller of Home Loans - Daniel Sadek's Quick Loan Funding wrote $3.8 billion in subprime loans - it appears his luck has run out;" This is a fantastic story and article - the story of Quick Loan Funding and its founder/owner.
"Just five years ago he was selling cars. Then, in January 2002, he anted up $250 for a state lender license and started selling home loans through his company, Quick Loan Funding. Over the next five years, Quick Loan wrote $3.8 billion in mortgages, lending money fast - and often on onerous terms - to people with shaky credit." For our purposes that is the gist of the story - the article has great detail on the situation - we wouldn't be surprised it the story becomes a movie.
Upon reading/learning this 2002 start up wrote $3.8 billion in mortgages, I don't see how anyone could say the real estate market and the credit markets haven't been and aren't in an incredible bubble.
According to the article, Quick Loan is on the ropes like most other lower quality mortgage companies that did so well previously, when the bubble was inflating.
May 13, 2007, THE ORANGE COUNTY REGISTER, "Lending's Next Tsunami?" There have been a few of these articles recently. They are talking about the next home lending tier above sub-prime, which is called Alt-A. "Alt-A loans (one tier above subprime) are for consumers who don't submit all the documentation for a traditional straight loan."
The industries' largest Alt-A lender, which made a record $90 billion in loans last year, recently announced its "sour loans, and foreclosed real estate ballooned 75% to $324 million." It also announced that "...the Company didn't sell a single dud loan in the first three months of the year [2007] because no one wanted to pay what [the CEO] thinks they are worth." Normally, they unload their bad loans.
Cutting to the chase, an industry analyst said, "Its eerie how the sub-prime troubles appear to be repeating in Alt-A." Basically, lending standards were lowered for Alt-A loans over the past several years including:
1) low or no documentation loans representing 81% of all Alt-A purchase loans made in 2006 2) loans with a one-year fixed "teaser" rate accounting for 28% of Alt-A purchase loans 3) an 88% average loan to value on the Alt-A loan, with 55% of borrowers taking out a simultaneous second mortgage, "suggesting such borrowers didn't pay mortgage insurance and borrowed the full value of the home.
Many believe this is the end of the problem but we are believing that this is the beginning. Hopefully, the cycle has bottomed but we are much more skeptical. As the article points out there is substantial "reset" risk and the majority of these borrowers have little real equity after the simultaneous 2nd mortgages. In addition, as we have documented previously, credit standards are being raised and it may very well be that many of these borrowers will not be able to refinance. Thus, we think the correction in real estate has just begun, unfortunately.
May 9, 2007, BLOOMBERG, "S&P to Require More Protection on Second-Lien Debt;" The title pretty much says it. To us, this is more evidence of a credit tightening and a credit contraction.
May 1, 2007, BUSINESS WEEK (May 7th edition), "Why This Slump is Different;" Basically this article is all about how this time around, this real estate slump is different - interestingly before 2006 almost no one would even admit a real estate slump had ever occurred, now they are comparing them. Differences are:
Never before have prices fallen so broadly. Priced slipped year over year, the first drop nationally since the depression. Foreclosure filings jumped 42% in 2006 Those 30 days or more late on their payments increased 26% from last year Houses hitting the market with asking prices below the mortgage values
Ok those are some of the differences, but the main difference this article highlights is that "lenders are wary of holding on to properties whose values could sink further. And, unlike in previous cycles (ha, now they are admitting to cycles in the values of real estate), a big chunk of the loans made recently are held not by federally insured thrifts or banks but by hard-charging hedge funds and other big investors that are aggressively pushing lenders to stop the bleeding. What's more, the steep rise in second mortgages that accompanied the boom means lenders in foreclosure proceedings are increasing fighting one another for the scraps."
The result is a whole new vocabulary in real estate related to the deflating bubble. Most of the new terms in this article revolve around lenders trying to work out the bad loans - bad because the value of the underlying asset is worth less than the loan and the lender is going to default or already has:
Payment Plans - The lender temporarily forgives missed payments Loan Modifications - The bank reduces payments permanently Pre-foreclosure Sale - With lenders approval, owner sells the home for less than the mortgage and the lender takes the loss Mod Squad - team of workout specialists helping borrowers renegotiate
This article is well written and extensive. We would add to it that the reason it is a national phenomenon is because it isn't really a real estate thing, it is a financing or credit thing. In fact, we believe, it isn't just national, its world wide - a worldwide credit bubble. Also, though implied, the motivation of lenders to take such extreme actions is because the downside is dramatically larger than it has been before. The amount of relative debt is off the charts in real dollars and relative to real estate "values."
A related BUSINESS WEEK article, "How the Bad News Could Get Worse" details and expands the theme that real estate is much more of a tangled web this cycle. That the loans were packaged and sold by investment bankers into collateralized debt obligations (CDO's) and that, combined with second mortgages and home equity lines placed on top of first mortgages will make handling widespread defaults a long term nightmare to untangle as all the parties negotiate and sue each other.
We would say these two articles together are kind of a 'reality recognition' that could potentially lead to many parties heading for the exits all at the same time - while there is still "liquidity."
April 24, 2007, BLOOMBERG, "Subprime 'Liar Loans' Fuel Housing Bust with $1 Billion Fraud;" Basically this goes along with "bubble activities" we have documented over the years that contribute to a market becoming vastly overvalued. Turns out the industry has a nickname for "no doc" loans - yup, its "LIAR LOANS." Interestingly, it turns out that it isn't usually the borrower, or at least not the borrower acting on their own, it is both borrower and the broker. "Borrowers and brokers commit fraud when they exaggerate the applicant's income, qualifying the borrower for a home he otherwise couldn't afford." "The brokers are just putting down on paper what the underwriters would require...." Liar loans "...soared to $276 billion, or 46%, of all sub-prime mortgages last year from $30 billion in 2001..." Well, this probably explains to us how all these buyers in Newport Beach can afford to purchase the couple of thousand new $2.5 million to $5 million dollar homes that were built recently. In the old days, even with a $1 million down payment on a $3 million dollar house you would have to "make" around half of the $2 million mortgage or $1 million per year in income to qualify. Even in "the O.C." there aren't that many people who make salaries like that. It will be interesting to see how this all unravels.
April 20, 2007, SACBEE, "Property tax falling for 50,000 Sacramento County Homeowners;" Information in this article confirms to a larger extent than has been publicized elsewhere that the real estate market is dropping harder and faster rather than less and slower. "Letters to 50,000 Sacramento County homeowners are being mailed today announcing cuts of up to 10% in their fall property tax bills..." This rollback will "erase about $15 million in [annual] revenue for schools..." - which to us is potentially deflationary. "Thousands more homeowners in other area counties may see similar rollbacks." "Assessors say they make their decisions based on a home's Jan. 1 value -- a factor likely to trigger more property tax rollbacks next year if values stay flat or decline more in coming months." Some history that people in real estate seem to only now be able to recall: "The rollbacks signal a REPEAT of the 1990's when recession and job losses pushed down are housing values and 30% of Sacrament County homeowners received property tax relief." Obviously they are only rolling back property taxes because the value of the real estate has dropped quite a bit.
March 9, 2007, REUTERS, "Countrywide Financial Ends No Down Payment Lending;" "Countrywide Financial Corp. ("CFC"-NYSE), the largest U.S. mortgage lender, on Friday [March 9, 2007] told its brokers to stop offering borrowers the option of a no-money down home loan, according to a document obtained by Reuters. A similar BLOOMBERG article (on 3-9-07) points out that "...other lenders that have started requiring borrowers to put at least 5% down on homes include Washington Mutual Inc. and General Electric Co.'s WMC Finance Co. unit.
That is the news - Our analysis of this news is that this loan underwriting measure is the official beginning of the Credit Crunch and Credit Contraction. While we realize "at the time" it was easy for these companies to get caught up in the real estate bubble, probably a year from now (or even now) many people will be saying, "what were they thinking?" making 100% loan to value loans. It just goes to show how even the largest companies can get caught up in irrational business practices during certain cyclical times. Other related themes along these same lines are the "no-documentation loans" and "sub-prime lending." Years from now, people will think it unbelievable that such respected financial institutions at the time would make "no doc" loans or even "sub-prime loans."
As for our Elements of Market Tops a substantial increase in lending standards such as this (going from 100% loan to value to a max of 95% L-T-V) means less loans will be made. This experience is by definition a credit contraction. Two other "flies in the ointment" of the real estate bubble are the $1 trillion of adjustable rate loans that are re-setting in 2007 and by the end of 2008 and the admission of experts/authorities of the huge amount of underwriting (and outright fraud) to buyers that really did not qualify that happened as a result of the "no doc" and "sub-prime lending over the past few years.
This situation creates a One, Two KnockOut Punch for Real Estate: 1). Punch One - lots of supply for sale on the market as defaults step up and properties go back to the banks which then unload them on the market. Defaults from borrowers who can't make new payments when their adjustable rate mortgages reset; borrowers who purchased 100% L-T-V loans and can't make the payments; borrowers who didn't qualify in the first place, etc. 2). Punch Two - Less Demand - Fewer buyers now that the lending standards have been raised to 95% L-T-V and those who should not have qualified previously, definitely won't be qualifying in the future. 3). Third Punch - Buyers who bought on Spec, and this is a very large percentage of home ownership, will be flushed out. Thus, additional supply (and defaults).
As reported previously around 40% of the recovery since 2002 is widely attributed to the real estate industry. Thus, we believe the collapse of the real estate bubble will create a huge negative ripple across the economy. We believe collapsing prices of real estate will most likely morph into deflation in many other categories - certainly prices of other risky asset classes.
Feb 28, 2007, BLOOMBERG, "U.S. Economy: Home Sales Tumble Most in 13 Years...;" "New home sales in the U.S. tumbled last month by the most in 13 years..." The headline and first sentence give a good idea of what is going on as far as the real estate market.
Feb 27, 2007, BLOOMBERG, "Risk Returns, Not Just to the Subprime market;" "Problems in the subprime loan market have been fornt-page news for weeks, with a total of 27 mortgage lenders going belly up since December [2006]." Wow, that was a quick turn of events - 27 subprime mortgage lenders went belly up over a two month period!!! Just more evidence of the downturn in real estate and the economy. To be clear, we believe this is just the beginning.
January 8, 2007, NEW YORK, "The Year of the Price Cut;" This is from an entertainment-style magazine. The subtitle is, "Overreaching is so 2006." The author of this article utilized Streeteasy.com, an online database that gathers information on most real estate listings in New York City, to find the largest price drops. It lists six - all six are the percent change from the previous asking price to the current asking price - so these are not transactions and these are the largest drops; however, it is still telling to us. The percent changes are:
41.6% drop 37% drop 36.4% drop 36.2% drop 34.8% drop 34.9% drop
One aspect of this reporting that is interesting to us is the fact that an entertainment magazine is highlighting real estate price drops, a subject a large proportion of its readers probably are not thrilled about. Thus, the drop in prices is not new news but is likely confirmation of a trend that is already accepted.
January 7, 2007, NEW YORK TIMES, "A Phantom Rebound in the Housing Market;" This is a very interesting article because it explains how some of the statistics related to housing are potentially very misleading under the current circumstances. "But those who think that the worst may be over for the housing market should take another look at the data, economists say. For the figures on new-home sales have a strange wrinkle that, in the current environment, may lead the government to overstate sales (and to understate inventory) by up to 20 percent." "New Home Sales" are tallied by the Census Bureau, "...but here’s the rub: If a contract to buy a home, signed in November, is canceled in December, the Census Bureau does not subtract the failed transaction from the number of sales, or add the house back to its inventory total. In the last year, as the housing market has cooled, the volume of cancellations has risen to epidemic proportions..." "....as speculators who signed contracts to buy homes in new communities in hot markets like Florida simply walked away from their deposits when they realized they couldn’t flip the houses for a quick profit." Cancellations are running at 37% for Toll Brothers and 36% for Pulte Homes, for example, up from 18% and 17% the previous year, respectively. A chief economist at the National Association of Home Builders has concluded that in November 2006, cancellations constituted 38 percent of gross sales, compared with 26 percent in November 2005 and about 18 percent in the first half of 2005. "On its Web site, the Census Bureau acknowledges: 'As a result of our methodology, if conditions are worsening in the marketplace and cancellations are high, sales would be temporarily overestimated.' By how much?" One analyst "... estimates that the government is overestimating the pace of annual sales by 100,000 to 150,000." Another analyst "...estimates that the differential is even greater. 'Given the rise in cancellation rates, it suggests that between 150,000 and 200,000 home sales are being counted that actually did not occur.' ” "Just as the rising tide of cancellations leads the Census Bureau to overreport sales in the short term, it leads the government to underreport inventories. New homes on which contracts are not consummated are not added back into the inventory figure. The most recent report found that the seasonally adjusted estimate of new houses for sale at the end of November was 545,000, or 6.3 months of supply. Given the high rate of cancellations, it’s likely that inventory is substantially higher." "This much is clear: Given the failure of the reports to account for cancellations, demand isn’t as strong as it appears, and supply is greater than it seems." Thus, we conclude, be careful using the reported statistics to infer that a sustainable rebound in the real estate markets is occuring. December 18, 2006, THE ORANGE COUNTY REGISTER, "Falling Prices Trap NEW Homebuyers;" This article is about a situation here in Orange County where the market has kind of stopped. Basically, buyers purchased houses in a new development at between $888,500 and $770,000 in November 2006 with very little down and the builder subsequently cut the prices on its inventory by between $100,000 and $140,000, just a couple of months later. Thus, the owners "market value" using a drop of $100,000 has fallen by 11% to 13% very rapidly. Because the buyers had little equity, they are now underwater and some of them are in adjustable rate mortgages. It is a very unfortunate situation. While the buyers are blaming the builder, we think the problem is really much larger - as we have documented previously, the buyers appear to have been trapped in a deflating housing/credit bubble and, while real estate is certainly regional, stories like this are popping up across the country. To us, real estate is kind of turning into a game of "hot potato" as both builders and buyers are trying to avoid owning. THE WALL STREET JOURNAL ARTICLE, "The New Word In Home Sales: 'Cancelled' " (November 3, 2006) that we did not review, points out that "contract-cancellation rates for big builders were running around 40% -- about twice as high as last year's levels. That article was more about how the large builders are being stuck with inventory that is dropping in price. Anyway, our point is that the market is having some air pockets to the downside, unfortunately, for most - ugh. Also, we don't believe that we are anywhere near the bottom in real estate. We expect prices to drop fairly rapidly from here on out; however, they my drop slowly over a long period of time. Remember Japan is still in a deflationary climate 17 years after its 1989 peak.
November 29, 2006, CNNMONEY.COM, "Home Prices Post Record Drop in October [06] - Median [national] price sinks 3.5% from a year earlier, trade group sees more price declines ahead;" In this case they are referring to existing (old) homes rather than new developments. "The price of existing homes sold [nationwide] in October [06] fell for the third straight month and posted the biggest drop on record..." "The previous record drop was a 2.1 percent decline in November 1990..." "While month-to-month declines in home prices are not uncommon, year-to-year drops had been rare before the recent housing slump."
November 29, 2006, BOSTON HERALD.COM, "House Prices Plunge: All Hub gains since March '04 vanish;" Boston seems to be leading the declines with other areas joining in shortly afterwards. This article highlights "Boston house prices plunged last month at their fastest pace in more than 13 years, erasing all gains recorded since early 2004, new figures show." "It is also the sharpest 12-month pull back since 1993."
November 27, 2006, BUSINESS WEEK (December 4th edition), "A Good Tiime to Ask Santa for a New House;" Probably not - probably far too early in the cycle as the down draft is just getting started but the article does contain some recent information. "The median price of anew home in September fell by 9.7% from a year ago, the largest annual decline since 1970." "And it looks like prices in several markets wil be heading even lower in coming months." "And, the stock of completed hew homes that remain unsold as of September [2006] grew by 46% from a year ago." We do not buy that the housing market is anywhere near the bottom.
November 22, 2006, DETNEWS.COM, "The Incredible Deflating Housing Market;" The title of this one pretty much covers it. This article is oriented around Detroit but most of the information will be true across the nation over the next few months.
October 16, 3006, THE SAN DIEGO UNION TRIBUNE, 'Foreclosure rates, default notices soar - Analyst credits rise to flattening house prices;" "San Diego is experiencing mortage foreclosure rates not seen for the past eight years, two monitoring companies reported yesterday." DataQuick reported foreclosures jumped to 10x the level the were a year ago and it reported the number of "default notices" nearly tripled the amount filed in September 2005. Importantly, "the percentage of those defaults going to foreclosures last month was 35.6%, more than 7x the 5% rate a year ago." Similarly, while "...only 62 properties were classified as 'R.E.O." or real estate owned by banks - Still, that was 6x the 10 R.E.O.'s counted in September 2005...." While the absolute numbers are still relatively low representing "....a fraction of the number recorded a decade ago during San Diego's last economic downturn," a spokesman for RealtyTrac commented, "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." Thus, this is a "potential element of a market top" that is very much along the lines of what we have forecasted and have warned against and is definitely worth monitoring. The next unfortunate step, if these foreclosures continue to step up is for transacted prices to start to fall as banks will be unloading the REO they accumulate from foreclosures.
October 8, 2006, BOSTON HERALD.COM, "Condos going, going, cheap: Bidders get great deals on 31 units at Hub auction;" Importantly, for this article, all condos that "...went up for pre-construction sale four years ago...sold for the asking price." With that said, "The 31 condos up for sale in the Folio building on Broad Street sold on average for 30% below their asking prices" "-hundreds of thousands of dollars wiped off their value..." "The most expensive properties fell hardest. A $1,760,000 penthouse plunged $600,000 to just $1,140,000" or a 34% drop! The article goes on to list several examples of 30% or more drops in price.
October 6, 2006, BUSINESS WEEK, "More Scrutiny for High-Risk Mortgages;" Wow, talk about legislation or regulation following economic reality. "Five agencies, including the Federal Reserve and the Federal Deposit Insurance Corp. issued [NEW] guidelines on Sept. 29th, effective immediately, on how banks should handle nontraditional mortgages...." such as adjustable rate mortgages (ARMs) and option-arms. "The guidelines could exacerbate the slowdown in the housing market. A meaningful number of people who could borrow on very loose terms won't be able to do so in the coming months," on analyst commented. "While the guidelines are intended to protect lenders and consumers, the timing is inauspicious for a housing market already in the throes of a downturn." That pretty much says it all. We note again that it seems regulation is following market reality - a concept to think about.
October 6, 2006, THE NEW YORK TIMES, "Suit Says Neighborhood's Boom Was Build On Mortgage Fraud;" A different article on mortgage fraud. In this article it appears to other than "Joe-average" working the system. But, the article does point out that pretty much everyone in the system was incentivized to work in ways that helped out the bad guys. -"If the deal doesn't go through, nobody gets paid." Basically, in May 2005, a group of people bought up 184 duplex homes in a down-and-out neighborhood of Indianapolis for an average price of $50,000 each and sold them "less than a month later....for $120,000 a piece to church secretaries, truckers, retirees and factory workers..." Previous to these transactions, "...as recently as Sepbember 2004 homes in this neighborhood sold in range for $20,000 to $65,000. Of course the selling at more 2x the cost a month before was made possible because of credit or mortgages - and this is where the fraud comes in. This time the bank that bought the mortgages is claiming it has been defrauded by the underwriters, who underwrote the mortgages to that bank's specifications - that is the quick version. We have a few points. One is the concept of "value." Everyone thinks "value" is in stone - that it is objective. We know that when using the word "value," certain phrases are implied or were implied at some time before "value" became such an abstract term. Think, value "to whom," and "on what basis," etc. Who is not to say Google isn't worth 100% more this month than last month - or vice versa - same with real estate. Now, "price" is a different matter. Prices being where transactions took place. However, who is to say that just because someone sold at the price of $50,000 that a house isn't worth $120,000 a month later, especially if it trades there or that is the new transaction price? We believe people have been lulled into a false sense of security based on "inherent values." We believe that sometimes "values" can change dramatically up or down very quickly. However, usually the down drops are the sustainable ones. Thus, you should be very careful in risky markets where "values" are bandied about like they are cast in stone - it just isn't so. Our second point is that the fact that people would pay over 2x what someone else paid the month before, based on rents the "true values" must certainly be dramatically lower than that, that the underwriting process did not even alert anyone to these facts, and that the underwriting process most likely actually enabled the process S P E L L S "BUBBLE" to us - a bubble that can contract as fast as it inflated, unfortunately for some.
September 29th, 2006, LOS ANGELES TIMES, "More Home Buyers Stretch Truth, Budgets to Get Loans;" We believe this article points out enough facts to not only label the housing market a "bubble" but a "mania." "Lenders filed 4,228 reports of suspicious activity in the region [Southern California] during the first eleven months of the government's fiscal year [ending 9-30-06]." "...the FBI and industry experts say the trend...reflects growing deceit by AVERAGE BORROWERS who overstated their income, exaggerated their assets or hid their debts simply to qualify for a mortgage in the region's sky-high housing market." Thus, this isn't normal criminal types but "average borrowers" - regular people - ugh. "There's more of the little guy running around - people committing fraud for housing," said, Ronda Heilig, the [Federal] Bureau's mortgage fraud program manager." So there are two things going on here. One is that a lot more normal people apparently were rampantly committing mortgage fraud - that makes it a potential "mania" to us - the average person trying to keep up with the irrational herd. The second point is that these people are almost certainly not going to be able to service their mortgages - they are going to default and their houses will most likely be sold, causing further supply/demand imbalances in what will probably be proved to be an overvalued "bubble" market in most regions.
September 11, 2006, BUSINESS WEEK, "How Toxic Is Your Mortgage?" This is the cover story for that issue and it contains a lot of interesting information about Option Adjustable Rate Mortgages (O-ARMs). We will stick to just a few points. A main point with these O-ARMs is that the borrower has the choice (the option) to pay the monthly payment or to have the lender make a large part of the payment and increase the loan balance by the payment the lender makes for the borrower. Of course, the "adjustable part" of the O-ARM means that the monthly payment will eventually reset - usually a year or two after the original loan was taken out. And, in the recent episode for essentially all such borrowers, interest rates have gone up fairly dramatically so the monthly payment has gone up a lot on the reset, accordingly. Whether the borrowers understood what they were getting into will be debated likely for many years to come.
The article gives a good example of the situation for a particular O-ARM borrower: The fellow was making the $1697 minimum payment and, after a couple of months, realized the minimum payment was putting $1,000 of new debt onto his loan balance every month. He could see this was going to lead to disaster. However, his alternatives were limited. He could refinance out of the O-ARM into a standard mortgage at a monthly payment of $2,524 - quite an increase from the monthly payment he was making. Unfortunately for some borrowers, there is a large prepayment penalty of thousands of dollars to prepay their O-ARMs and often there are upfront fees on the new longer term, fixed rate loan - refinancing costs in one example are estimated at $15,000. (Currently, lower long term rates have been helping to ease the pain of borrowers changing to fixed rates, but this could change at any moment).
Another point - the lender can book, as income, part of the payment it makes for the borrower. We wonder if the lender then increases its loan loss reserves as certainly the credit quality of the loan is dropping as the Loan-to-value ratio is deteriorating (loan balance going up without the underlying asset increasing in value). The article spends some time explaining how lending standards were lowered pretty much across the board during the real estate ballooning period. Also, the article is referring to this income as "deferred interest" or "phantom income" because the lender is able to book income while not only not receiving cash but making the cash payment for the borrower.
There were $182 billion O-ARMs written in 2004 and 2005 and an additional $83 billion this year, according to the article. Importantly, for some large lenders, this "deferred interest" represents very large amounts of earnings - like 67% for FirstFed Financial Corp. The article points out that Countrywide, "America's No. 1 mortgage lender" has ARMs on its books equal to "38% of its total mortgages held..." And, get this, "Three-quarters of the Company's Option ARM borrowers chose the cheapest mortgage payment [(we interpret that as being the one which increases the loan balance the most)], according to its latest earnings release..." Wow - so a huge proportion of borrowers are digging themselves further into a hole - ugh.
Classic Bubble Recipe - Thus, it is easy to see, that without this financing technique and lowering lending standards, many buyers would not have been able to "purchase" real estate - accordingly, prices of homes likely would never have risen so high & Now, will likely drop as that this financing technique is collapsing on the borrowers who will likely have to sell their homes or give them to the lenders, unfortunately.
August 15, 2006, BLOOMBERG, "Imax Says SEC Investigating Accounting; Shares Drop;" - posted August 9, 2006 - additional articles on the BLOOMBERG: August 10, 2006, "IMAX; downgraded to sell from hold;" and previous to that: "IMAX: Sony to join in bidding for Imax; now four players interested; auction process robust;" This situation definitely has lots of elements of a market top. First, the big screen format company, IMAX, which has publicly-traded stock, is up for sale by its board of directors. Bidding interest was expected to be "robust" and the stock was trading publicly at around $8.25 per share or an equity market capitalization of $332 million. Nine buyers including Sony and private equity fund Elevation Partners, which features U2 lead singer Bono as a backer, assure that the valuation is strong. We ask sarcastically with perfect 20/20 hindsight: maybe it is too low? "Investors" move the stock price up by 31% to $10.85 per share or an equity market cap of $437 million over the next couple of weeks. Then, a huge swing over less than two weeks as explained by some analysts:
"exhibitor interest appears to have cooled" "signings [have] slowed, due to weakness in IMAX box office receipts" interest in digital cinema has slowed "revenue recognition policies are under review by the SEC" "[IMAX} management failed to find a financial buyer or investment partner"
then, IMAX shares plunged 48% in just over a week!
One key to us is that what everyone thought was a "reasonable valuation" changed in a heart beat - the new valuation is 48% lower or lower by $212 million ($5.59 per share) just like that. Thus, we think, when you say "value," you should say: " value based on which metrics?" or more importantly: "value to whom?" what if there isn't a buyer? One of the bankers trying to sell the Company said, "As the financial buyers analyzed the company, including the debt financing available, it became clear that a significant equity check likely in excess of $300 million was required to acquire the company in the range of valuation that the board of directors sought." That is very interesting because the valuation of the publicly traded equity when this thing started was $332 million so what the board was wanting seems reasonable. Of course, now the equity is trading much lower at $225 million. It just shows how quickly "value" can change in the current environment. Maybe the Company was worth more if they could get a lot of debt financing and the markets weren't offering any - that's what the banker's explanation sounds like. Maybe "value" is more dependent upon financing than people realize.
Another key to us is that the bidding process was a "trigger" that showed the public equity valuation was too high.
August 14, 2006 - Real Estate - We have spoken about and highlighted the broad market top in real estate for some time on this blog. Over the past couple of months, I have chosen not to write much on the subject because there have been so many "reality recognition articles" written and because it seems that it must be rather obvious to most that real estate has slowed and has turned down in several regions across the country - it is in pretty much all the media. We believe from now on it will be pretty much a self-documenting story.
May 17, 2006, BLOOMBERG, "U.S. Stocks Drop on Inflation Concern;" This is an interesting headline and does tell the predominant line of thinking right now (even if it turns out to be incorrect). However, we believe this logic is looking backwards into the rearview mirror of what the statistics will look like through the end of April when released, while what has happened over the past week is the real story. The real story is that the stock market and the commodity markets have had sharp reversals and have almost certainly (to us) transitioned into major downtrends. Thus, to us, stocks aren't dropping from inflation worries, they are dropping because we have entered deflation with prices of almost everything (especially riskier asset classes like junk bonds and real estate) dropping. To be more clear: previously you had some items rising in price like commodities, healthcare, and stocks and real estate. More recently real estate had been stalling. You also had some things going sideways; salaries are a good example of sideways over the past several years. And, you had lots of items dropping in price: computers, electronics, soft goods, clothing, shoes, etc.- think anything sold by Costco.. Most important to this discussion, as of a week ago, commodities and stocks have switched to dropping sharply. Thus, Prices of Pretty Much Everything are Now Dropping ====>and we conclude: deflation has most likely arrived. We will know for sure, after the fact, in a few months, but the turnaround and drop in prices of stocks and commodities is striking so far and will most likely be accompanied by falling prices of other, less liquid, investment categories such as junk bonds and real estate.
April 21, 2006, BOSTON HEARLD.COM, "Foreclosure rates in Hub through the roof;" Another "reality recognition" article. This one talks about the longer term problems of issuing easy credit. "Shady mortgage operators have been flooding unbelievably easy credit in to Boston's neighborhoods. But the payment on all those high-interest rate, no-money-down loans may no be coming due in a tidal wave of foreclosures slamming into the city's poorest ZIP codes." Foreclosures are up "...a 63% increase over last year." As bad as that increase is, certain neighborhoods are worse according to the article. "Bank notices of intent to foreclose have shot up 118 percent in Ward 18, which covers mattapan and Hyde Park." Then it states, that the "horror stories are even worse" than the statistics and it goes in to a few heartbreaking specific stories. Our point is that the slowdown is spreading - ugh.
April 21, 2006, DENVER POST, "Home Seizures' Ripple Effect;" Another "reality recognition" article. "Thousands of home in foreclosure could put Colorado's housing market under severe stress this summer, according to real estate experts."
April 16, 2006, SEATTLE POST-INTELLIGENCER, "Home Equity Lines of Credit have Cooled;" The article reviews the fact that the rates on most equity lines of credit have about doubled over the last 21 months - that most credit lines are indexed to the "prime rate" which has risen from a low of 4% to 7.75% currently. An example couple had their interest rate rise from 5.25% initially to almost 10% currently. While the article gives the information, it doesn't really highlight the conclusions other than "unfortunately, the [refinancing] window has closed for some people" - it is more concerned with refinancing. We are more concerned that peoples' cost of ownership has jumped up but their income has not. We believe that the result will be a drop in the purchased of other items. Easiest and most likely to be cut before defaulting on a mortgage due to higher interest rates maybe: cable T.V., DSL internet hookups, cellular phones, eating out, etc.
April 16, 2006, AOL MONEY & FINANCE, "Foreclosures Pick Up with Midwest Hardest Hit:" "As home-price appreciation has tapered off and mortgage rates have risen, foreclosures have started to pick up, with the Midwest region hit the hardest." Foreclosures across the U.S. have been hovering around historic lows over the past several years. But, "now, a survey of the latest data confirms, that is starting to change, with an uptick across the U.S. in foreclosure rates and mortgage delinquencies......Nationally, the number of mortgage loans that entered some stage of foreclosure rose to 117,259 in February, up 68% from the same month a year earlier....according to online-foreclosure data service RealtyTrac." And, delinquencies are up as well. Experts quoted in the article try to downplay the significance since the absolute levels are still quite low. However, while the levels are still very low, the change in direction and the rate of change and the underlying fundamentals are indicating to us a likely change in trend that should be taken seriously.
March 25, 2006, LOS ANGELES TIMES, "The Land of the Open House:" I am writing this one up a few weeks after it was published. It was on the front page of the LA Times. It is a bit shocking that apparently there have been no other stories or media outlets covering this subject - but I guess no one wants to highlight the bad news. OK here it goes: This is a long article that is basically a "case study" of how a market can collapse. Here, the author is chronicling what has happened in Merced, California, "once the state's hottest housing market..." Merced's price appreciation over the last five years was at 142%, one of the top five in the U.S. according to government figures. "After five increasingly wild years, the great real estate boom appears to be coming to a close. the Commerce Department reported Friday that sales of new homes nationwide plunged by 10.5% in February, about five times the drop analysts predicted." While the impact has yet to be felt across the country, "the good times have already ended here (in Merced, CA), in the same way slamming into a wall reduces your speed. A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all."
The article goes into trying to explain the baffling 142% rise over five years of Merced real estate (before it "hit the wall"). "This was a classic bubble, where people paid increasingly higher prices because they were sure that someone would come along and pay even more." - The Greater Fool Theory. How people from Berkeley would see something in Merced that would be worth 3-4x as much back at home and would bid it up. However, the incomes in Merced certainly don't support rising prices at $14,257 per capital or about 2/3rds the state average. "Fewer than 3% of Merced families can afford a house, according to the National Association of Home Builders' latest survey." We conclude, most of the homes are owned by speculators.
The Boom was fueled by by wild financing schemes. "Before the escalation began, 8 out of 10 home buyers in Merced County got a safe, fixed-rate loan..." "By last summer 80% of the buyers in Merced got adjustable rate loans."
Now that the boom is over, the Merced Sun-Star's Sunday real estate section has 40 pages of ads. New development are offering out loud, discounts of $40,000 and the sales people are advising the buyers to ask for a bigger discount. Rents are very low since the housing bubble begat a housing construction boom - "Every other house here is for rent" - so there is no pressure to buy. We at Stamper Capital would say that, in fact, it is now a "deflationary mindset" where people will wait because they "know" the price will be dropping in the future.
Some houses are marked with signs: "Red Tag Special."
Here is the scene that really depicts what is now going on: "The only thing worse than the real estate market here is the market for real estate agents. They've been coming down to the Auto Toyz and Auto Store used-care lots looking for work. Everyone who applied recently, about eight people, they were all realtors..." So not only are prices dropping, but the volume of sales (and sales commissions) is drying up - meaning the only way to get out of a property is to drop the price even more - ugh.
March 20, 2006, BALTIMORESUN.COM/THE WALL STREET JOURNAL, "Millions Face Squeeze on Mortgages - Many borrowers can expect large payment increases as interest rates reset;" This article contains lots of useful information about the mortgages that have financed the housing boom. "More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest rate resets in 2006 and 2007, estimates Moody's Economy.com..." One expert comments that he "...projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans." Using the figures provided, we translate that into $250 billion in mortgage defaults!!
Another expert comes up with similar figures - He estimates that about 7.7 million of adjustable rate loans made between 2004 and 2005 represent $1.9 trillion of debt. Of those, he estimates that about 1.4 million households face a jump of 50% or more in their monthly payments once their initial low-payment periods run out. Another 1.6 million households will suffer smaller increases that are still likely to strain their finances. He figures that about 1.4 million of those households will default and would cause about $110 billion of losses for lenders.
In regards to discretionary spending the article also mentions a "barrage of negative trends" that will make it tougher for strapped borrowers to make their payments much less qualify for refinancing their mortgage loans: 1. Regulators are pressing to raise or tighten their lending standards. 2. Credit-card companies have recently started requiring higher minimum payments, thus, diverting cashflow. 3. Energy costs are up sharply. 4. Property taxes are up. 5. Most of these lenders have little equity left in their homes.
A couple of examples of peoples mortgages resetting are given. One on an typical adjustable rate mortgage going up from 7.46% to 9.46%, this summer, its first reset.
The dangers of the so-called "2/28 mortgage" is also discussed. This is where the loan is to sub-prime borrowers and has a very low interest rate for the first two years and then is reset every six months for the next 28 years until it matures, is refinanced, or defaults. The example given had an initial rate of 7.1% when the loan was made two years ago. Now, two years later, based on current rates it will reset up the maximum limit of 3% to 10.1%!! Six months from now, given rates at where they are right now, it would reset up again at 11%. Thus, in less than a year, the rate (and monthly payment) has gone up 40%!
It seems the future we have been writing about and warning about is arriving - ugh.
February 7, 2006, BLOOMBERG, "Toll Says 1st-Qtr Orders Plunge 29%; Cuts Forecast;" This article is about Toll Brothers, the largest U.S. builder of luxury homes. Importantly, Toll "...said fiscal first-quarter orders plunged 29% and cut its 2006 sales forecast as buyers waited to see whether prices would fall." Buyers waiting to see whether prices will fall is a "deflationary mindset." The article also points out that Toll's stock has fallen 48% since its peak on July 20, 2005 and that the prices of shares of most other home builders have also been plunging. We take this information as another indicator that the real estate market has topped. Also, we believe the magnitude of the drop in Toll's share price is probably a reasonable indicator for the drop in prices of real estate that have risen substantially over the past several years.
January 27, 2006, BLOOMGERG, "What Growth? Economy Is Getting Worse, Americans Say;" This "under-the-radar-screen" article makes several points about "reality recognition" - what is being realized by Americans. We think these points derived from the poll this article is based on are so important that we are also including this story on our Major Trend Change Indicators and Deflation Watch weblogs. The article begins:
"The U.S. economy was robust by almost every measure last year,....[but]...Most Americans don't buy it."
What is amazing, according to the Bloomberg/LA Times poll, is that despite the rosy economic statistics, "By a 59% to 37% margin, Americans disapprove of the way Bush is handling the economy...and, by 47% to 22%, the public says the country is worse off economically since Bush became President." We aren't making a political point here - the results of this poll beg us to ask: If everything is so great, how come the majority don't like the way things are being handled and think they are worse off?
The article goes on to mention most of the problems (we have covered previously that) Americans are coming to realize. The key seems to us to be "The failure of incomes to keep pace with the economy...." and relatedly, "Real GDP growth has been relatively healthy, but most Americans don't feel it."
What is remarkable that we alluded to above is that "Most economic indicators contrast sharply with opinions expressed in the poll."
That was the "reality recognition" part, now comes the "deflation angle:" "More than three-fourths of the [poll] respondents say they will need to reduce spending if energy costs continue to rise [cutting across party lines and income groups]...Even among those earning more than $100,000 [annually], as many people say they would cut back because of energy prices as say they wouldn't." We would say this is definitely not "inflationary psychology;" maybe it is "disinflation psychology" and more likely it is "deflationary psychology." Maybe a better way to characterize it is that it is not "expansionary psychology" but is "contractionary psychology." Thus, notice that, rather than indicating they would take on more debt (maybe a new draw down on the ol'equity in the house), they are going to Cut Back - this is 75% of those polled including 50% of those making $100k or more!
"Cutting Back," to us, is the end of the Credit Expansion and the beginning of a Credit Contraction. We believe a credit contraction from the current, record high levels of debt, will most likely result in general deflation. This situation is an element of a major market top and change in psychology and human action.
January 5, 2006, BUSINESS WEEK (January 9th, 2006 edition) - several Business Week stories: We have talked a few times since mid-2005 about "reality recognition" - when "the herd" finally realizes and acknowledges major negative realities that they have been diligently avoiding for years - like a heard of ostrich taking their heads out of the sand to find that their delusions (this time of inflated wealth and investment safety) are just that - delusions - well, in this case it is basically a 50 year old belief in the "free lunch" that is about to be shattered. From the January 9, 2006 edition of BUSINESS WEEK, below, we have noted several "reality recognition" articles with very brief commentary:
"Should The Dow Ditch General Motors? - GM's troubles are skewing the index and battering investors who bet on it" - You probably already know much about how GM is floundering under tremendous competition, waning demand by saturated (and broke) consumers and unbelievable pension deficits and accounting.
"Property Market On Ice - How Deutsche Bank has chilled German real estate funds" - The German Fed closed a $7.2 billion real estate fund to "conduct an unscheduled revaluation of the fund" - meaning most likely a "sharp markdown of the underlying assets." Yes its in Germany, but the bubble and its problems are worldwide. We think it will likely be shocking to see how fast prices of real estate can fall. In this case, they might fall before owners can exit.
"So Many Lenders, So Few Takers - As housing slumps, the roof is falling in on the overbuilt mortgage industry" - Talks about the tremendously overbuilt mortgage industry and what is happening now that mortgage refinancings have peaked. The Mortgage Banking Association ..."expects mortgage originations to fall by 18.6% in 2006." Note the precision in their forecast - uhm. The article focuses on problems the industry and its players will likely encounter; however, we point out that most of the "recovery" since 2002 was in the housing/finance area and this downturn will almost certainly ripple across the entire economy.
"A New Abacus For Pensions - The FASB rules on post-retirement accounting are changing. Benefits could suffer" - Talk about understatement - for the S&P 500, company liabilities are expected to increase ..."by a couple of hundred billion dollars." We have covered this subject numerous times but here it is again. Importantly, the phase in of "reality accounting" is: "numbers on their balance sheets by the end of 2006" and more accurate recognition of pension plan gains and losses by 2009.
So, we conclude by emphasizing our point that we expect all this increasing reality recognition is due to hit the prices of risky assets at any moment.
December 19, 2005, THE BOSTON GLOBE, "Sellers Chop Asking Prices As Housing Market Slows - Cuts of Up to 20% Are Now Common As Analysts See Signs Of A 'Hard landing'" - As grim as the article's title reads, the content is even worse:
Median prices are down 7% over the past two months. - don't annualize it - ugh Reductions in asking prices of 10% to 20% are common. In Cambridge, price cuts averaged $300,000!!! Consultants are talking about a "hard landing" - that is a first in major-media print as far as we know "Agents said pricing cutting began last summer (2004) but accelerated in the past two months and is far more frenzied than in 2004. - this is key to us because we still claim real estate peaked in mid-2004 "...those who need to sell quickly - may have no choice but to entertain offers they would have scoffed at months or even weeks ago." - see how quickly things change for "less liquid investments"
The article is in reference to the market in the Boston area; however, we expect that articles like this will be common place across the U.S. in the near future.
October 14, 2005, BUSINESS WEEK (October 24, 2005 edition), "Another Fishy Hedge Fund;" October 13, 2005, BLOOMBERG, "Wood River Sued by SEC over Endwave Stake, Audits;" Not another one - ugh. Apparently, the managers of Hedge Fund manager Wood River "bet the ranch" and lost, among other mistakes. They invested more than 65% of hedge fund assets in Endwave ("ENWV"-NASDAQ), a Sunnyvale-based supplier of wireless-communications equipment. This investment represented more than 40% of Endwave's outstanding shares (and Wood River, failed to file the 13-d required when an owner goes over the 5% ownership threshold, among other possible missteps). Unfortunately, "shares of Endwave have declined by [a whopping] 76% since July [2005.] "One investor with $49 million in Wood River tried unsuccessfully to redeem the money beginning in late July..." Thus, few investors have gotten any of their money out thus far. |