Thursday, February 23, 2012

Feast or Famine

It's famine time for most people in this country, but the bankers and financiers who feasted on fraud during the last decade are now feasting on the avalanche of corruption that has hit our system at the highest levels of Government (see MF Global and Solyndra, for example). 

I wanted to do a quick follow-up on yesterday's post with some more data.  First, based on NAR data - which we know is typically bloated with overstatement - the median home price in this country has hit a new 10-year low (median = half of all sales are above that level and half are below)  LINK  I have a feeling that the data is skewed by some of the very high end sales that have occurred in NYC and I would bet that the mean, or average, sales price is lower than the median since there has been a preponderance of distressed sales at levels which occur well below the median but are "poo poo'd" by the industry as "distressed one-time events" lol.

It's mainly been the low-end that has "pulled down" market values since the financial crisis hit in 2008.  But now, for several reasons, I believe that there will be a literal flood of mid to high-end foreclosure properties that will hit the market over the next 12-24 months which will literally crush home values to even lower levels.

To begin with, banks and Fannie Mae/Freddie Mac primarily foreclosed on the large base of lower end homes over the past 4 years, as it was easier to move the REO inventory into distressed buyer hands because typically financing is not required and those homes are more easily "flipped" or rented.    Moreover, we've seen big banks like Bank of America unload large blocs of distressed property onto the balance sheets of FNM/FRE.  And we know FNM/FRE are overloaded with REO inventory because now the Fed and Obama Admin are in the process of converting a large portion of that inventory into rental units.   That move in and of itself will place downward pressure on market values because the new flood of rental space will once again skew the economics of renting vs. buying toward renting, thereby forcing home prices lower - the 'ole "income and substitution" effect we learned in Intro to Economics.

But there's another phenomenon that's witheld a lot of high end foreclosures from happening.  Banks have been allowing people who have technically defaulted on jumbo mortgages to remain in their homes without making any mortgage payments for anywhere from 1 to 3 years.  There's a mathematical reason for this.  Most jumbo mortgage paper still sits in one form or another (outright mortgages or in the form of "put backs" written into securitization documents) on bank balance sheets (off-balance sheet when in the form of a "put-back," which requires the bank to back mortgages on properties below a specified loan-to-value ratio or are non-performing).  If a bank forecloses on a $250k home with a $200k mortgage that it can unload for $200k, the bank eats only $50k.  But if a bank has to foreclose on a $2 million mortgage on a home worth maybe $1.2 million (these are real life data points), the bank eats $800k.   That write-down is a direct hit to the banks tier 1 capital ratio, which is the equivalent of cyanide to a bank.  Moreover, it's significantly more difficult for a bank to move a high 6-figure or 7-figure home.   And the number of people who can actually afford to buy a home like that is shrinking.  It's this dynamic that has created a massive "shadow inventory" of high-end homes (remember the McMansion craze?) that do not show up in the inventory numbers yet:
A huge "shadow inventory" is building of elite homes that are in default but have not been put on the market...The backlog reflects the pent-up flood of foreclosed properties of all price ranges that are expected to hit the U.S. market this year, especially after five major banks reached a $25 billion settlement last week with the U.S. over fraudulent foreclosure practices  LINK
I'm sure everyone reading this knows at least one person living in what was originally a 7-figure home and who hasn't made mortgage payments for at least a year and hasn't been contacted by the bank about foreclosure or short-sale requirements.  But this is changing, as there is now pressure on the banks to start monetizing the big base of hopelessly delinquent jumbo mortgages.  Even though banks are reporting impressive GAAP/phony earnings, they are being squeezed for actual cash flow by low interest rates and lack of lending opportunities that make economic sense and terminally delinquent jumbo mortgages are a huge cash drain to the big banks.

What really irritates me about that this whole thing is when I have to listen financial advisers, idiots on CNBC and other various "experts" proclaim at every step-down in housing values that we've hit a bottom.  We've had zero interest rates in this country for quite some time and we keep hitting new record lows in mortgage rates.  And yet, the housing market continues to plummet further into the abyss.  The only purpose served by the intervention of the Fed and the Government in the housing market has been to keep banks from choking to death on bad mortgages and, even worse, to prevent the market from freely reaching a price point which will clear the massive imbalance between true supply and real demand.  By the time we see the housing market finally "clear," - and I don't expect it to happen in my lifetime - the language of choice in our school system will be Mandarin.


  1. "...the language of choice in our school system will be Mandarin."
    - - - - - -
    Dave, we are closer to this than you may think. A few weeks ago my daughter brought home from her kindergarten class - get this - a red sheet of paper. Printed on this were two columns. The left column were chinese symbols, and the right column listed their English translations.

  2. Sometimes making $10 million is akin to just waving your make to make believe magic accounting wand over your positions...need more... wave it twice...voila...what did you think?...everybody was a genius....roflmaopimp

    February 24, 2012

    Private-Equity Fund in Valuation Inquiry
    In a case that could send ripples through the private-equity industry, federal regulators and the Massachusetts attorney general are investigating whether a fund that was part of Oppenheimer Holdings Inc. overstated the value of one of its holdings.

    The potential exaggeration in the fund grew to more than $4 million, according to documents shared with Oppenheimer investors. The bulk of this markup came as the fund was reaching out to potential investors in the fall of 2009, and helped push the fund’s reported internal rate of return to 38%, after fees, from a loss of 6.3%.

    The rules for marking to market have been watered down.
    The vote by the Financial Accounting Standards Board followed a debate in which members of Congress pushed for steps to help banks weighed down by troubled assets, while some investor groups warned that the plans would allow executives to cover up losses.

    elaborate math formulas aren't additive to productive output!


    Japan Shuts AIJ Investment to Protect Clients

    Japan’s financial regulator ordered AIJ Investment Advisors Co. to halt its business after finding the asset manager’s clients funds of about 183.2 billion yen ($2.3 billion) may be “adversely affected” and started a probe into the 263 asset managers operating in the nation.

    “We’ve ordered AIJ to halt business for a month in order to safeguard investors, as it appears client assets have been adversely affected,” Financial Services Minister Shozaburo Jimi told reporters at a briefing in Tokyo. The regulator is still investigating the firm and can’t comment on losses. The suspension lasts from today until March 23, the regulator said.

    AIJ, a Tokyo-based asset-management firm, may have lost most of the 200 billion yen ($2.5 billion) it manages for companies’ pension plans, the Nikkei newspaper said today, citing unidentified securities investigators. Regulators have been investigating AIJ since the end of January and are unable to explain where some money went, the Nikkei reported.

  4. "everyone reading this knows at least one person living in what was originally a 7-figure home and who hasn't made mortgage payments for at least a year"

    Not me. I'm clearly in a different league than you and your readers.

  5. @ Dirt Bag Ski Bum:

    Yeah, and I wager you didn't earn one cent of what you claim to have.

    Talk is cheap, especially on the Internet.

    1. What are you talking about? Please point your venom elsewhere.

      I worked my tail off, payed big income tax, was upset about that, and quit. Since I had paid off house/car debt, life is now cheap.

      (I still earn some of my ski turns.)

  6. "If a bank forecloses on a $250k home with a $200k mortgage that it can unload for $200k, the bank eats only $50k."

    I would amend that to if they unload for $150k.

    Thanks for the great blog, I love to read and get your insight.

  7. Guess they don't own gold?

    79% of fund managers didn't beat the S&P

    (MONEY magazine) -- They may dress better than average, but they usually don't invest that way: Last year 79% of large-cap fund managers trailed the Standard & Poor's 500-stock index, says Morningstar -- the worst showing since 1997.

    ...but they all take down big salaries and benefits...ON EVERYONE ELSE'S $..SEE ARNOLD

  8. Family of three dies from apparent starvation in Japan

    Discovery raises questions over the official response to rising poverty levels among the elderly and the unemployed in Japan

    Officers entered the apartment to find the victims' badly decomposed corpses lying on futons, along with the carcass of their pet cat. The fridge was empty, the cupboards contained very little food, and a few one-yen coins appeared to all the money they had.

    The discovery has raised questions over the official response to rising poverty levels among the elderly and the unemployed in the world's third-biggest economy.

    As far as welfare officials in Saitama were concerned, the family, residents of a city of 1.2 million, had simply ceased to exist.

    The victims appear to have been left to fend for themselves, despite their failure to pay their rent and utility bills. The cause of death is still unknown, but officials believe they either starved or committed suicide.

    "This is not something you'd expect in a developed country like Japan, but people are struggling to find jobs," ABC News quoted Norimichi Goishi of the Tokyo Institute for Municipal Research as saying.

    "Local officials can't always reach those in need. Deaths related to starvation are a lot more common than we think."

  9. Schapiro: Considering capital rule for money funds

    Schapiro also said the agency is seriously considering permitting a floating net asset value for money-market mutual funds, a prospect that money fund managers argue would severely hurt the industry.

    more poof to come...

  10. QE3 only needed if economy deteriorates: Fed's Bullard
    (Reuters) - A third round of Federal Reserve bond purchases should only be done if the U.S. economy deteriorates, and the United States is not in that situation now, a top Fed official said on Friday.

    Then there's the unemployment picture, which is cloudy. John Williams
    who publishes Shadow Statistics, runs the unemployment figures the
    “old way,” which is the more accurate way. John figures the true
    unemployment rate is around 22%, and I believe it. The unemployment
    rate for youngsters 18 to 25 runs nearer to 40%, and from what I hear
    if you're young you literally can't find a job. If you're looking,
    don't bother with the US Post Office.

    My view -- living standards will have to come down in the US if we are
    ever to get anywhere near full employment.

    But what about inflation? The Fed says that there is no inflation,
    that is -- if you don't consider the price of food and energy. Of
    course, those of us who pay taxes, medical bills and college tuition
    have a different take on inflation, but figures can lie and liars can

    U.S. Postal Service to Cut 35,000 Jobs as Plants Are Shut

    P&G to cut 5,700 jobs in restructuring

    Wonder what they mean by deteriorate?

  11. On GE, Just Say "No"

    I’m so sick of seeing this day after day. Washington is shelling out taxpayer money to support this successful company so they can buy locomotives from GE.
    GE pays next to no taxes in the US, they haven’t for years. But when it comes to government money, they are on the top of the list for handouts.There is only one reason that GE keeps sucking on the country’s teat, the CEO is best buds with Obama. Not only are they pals, but GE’s top honcho, Jeff Immelt, is advising the President on what to do.

    It's good to be the King..not so much the lowly citizen

  12. Looks like famine...

    Unintended Consequences

    The problem with central bank intervention is that it never works out as planned. The unintended consequences end up cancelling out the short-term benefits. Back in 2008, when the Fed introduced zero percent interest rates, everyone thought it was a great policy. Four years later, however, and we're finally beginning to appreciate the complete destruction it has wreaked on savers. Just look at the horror show that is the pension industry today: According to Credit Suisse, of the 341 companies in the S&P 500 index with defined benefit pension plans, 97 percent are underfunded today.12 According to a recent pension study by Seattle-based Milliman Inc., the combined deficit of the 100 largest defined-benefit plans in the US increased by $236.4 billion in 2011 alone.13 The main culprit for the increase? Depressed interest rates on government bonds.14

    Let's also not forget the public sector pension shortfalls, which are outright frightening. In Europe, unfunded state pension obligations are estimated to total

    $39 trillion dollars, which is approximately five times higher than Europe's combined gross debt.15 In the United States, unfunded pension obligations increased by $2.9 trillion in 2011. If the US actually acknowledged these costs in their deficit calculations, their official 2011 fiscal deficit would have risen from the reported $1.3 trillion to $4.2 trillion.16 Written the long way, that's a deficit of $4,200,000,000,000,… in one year.

  13. Ranting Andy Hoffman

    In Part 1 we talk about the fall of Greece at the hands of the IMF banksters and Silver to $50 by summer (which will help to break the backs of the criminal banking cartel). And don’t miss Part 2: $6 Trillion in seized bonds and $1,000 – $4,000 SILVER!

  14. The $15 Trillion Mystery: Opinion

    NEW YORK (Bullion Bulls Canada) -- Where did it come from? Where did it go?

    These are the two principal questions being framed today, after Lord James of Blackheath (a member of the UK House of Lords) unveiled documentation (and accusations) concerning a mounting of illegitimate cash: $15 trillion.

    At the moment, only Lord James is asking these questions. However, if he gets his way there will be an official inquiry into this massive, money-laundering operation. Already, Lord James possesses documents with the signatures of people like Alan Greenspan and Timothy Geithner on them, as well as massive transfers of funds to virtually every mega-bank in the U.S. and UK.


  15. Well Mr Bullard the energy prices will make sure you will come out with another QE3. Bit of a catch 22 the world is in.

    By the way looking at the Gold/Oil ratio we are still below the average all the way from 1900 - and then we still had "lots" of oil. The average ratio being 20 - that should give you a gold price of 2200 - 2500 already. With this kind of scenario the miners will go nowhere!

    One thing for sure is the more costly the metals are to mine the higher the actual metal price. Seems to me to get leverage I would rather leverage the metal than invest in waist of time miners.

  16. Dave, I do believe you "hit the nail on the head". The median sales price for 2010 compared to 2011 was unchanged in our market; however, the average SOLD price was lower. Why?-exactly for the reason you illustrated. Comparing January 2012 to 2011, median price was lower but average SOLD price was considerably higher. WHY? 2 sales in $500-$749,000 range & 1 sale in $750-$999,000 range which skews the data. When you look at the bottom line without breaking it down, it appears WOW prices are up.

    Real estate brokers like to brag about the highest priced home SOLD; few however want to brag about the lowest priced home SOLD & often poo-poo the stats. The truth IS, we've worked "harder" the last 4 years trying to SELL anything at all. Lower end properties have been our 'bread & butter' when higher priced properties SIT with no lookers, no buyers & no closings. Last year many 'eyes opened' when owners of those properties began to show up on the 'foreclosure' list. Our small community came to the realization the Great Recession had affected just about everyone regardless of your perceived wealth.

    Foreclosures = decrease in property values overall 'plain & simple'. Each 'reduction' makes it that much harder for the NEXT seller. At some point, when the Seller OWES more than the property could ever sell for, why hold it, especially if it's a 2nd home? Dave, you're spot-on-what's the bank going to do with this increased Shadow Inventory with no buyers? Does it really matter that interest rates are 3% if buyers can't qualify for a loan because they have no job? And what happens when the foreclosed property doesn't SELL? The price is lowered & 'here-we-go' values DECREASE, again. Now is the time when "money talks" as my grandma would say.

    Unless of HAVE a mortgage...WAIT until you get behind...& THEN, our precious government will offer you a 'bail-out'. But, for those who are NOT past due, never been late on a payment & are doing everything possible to meet their financial don't deserve a THING...keep making those payments! Well...that's for another day, right Dave?

    1. Sold my McMansion in Nov. 2004 - it's probably worth about 30% less than when I sold it, at least. Been renting ever since. The rental market has tightened and rents have risen quite a bit but that will soon change, as most of the housing starts in the last year have been multi-family units; plus the banks are getting ready to ramp up foreclosures; plus the Govt is getting ready to turn the huge pile of FNM/FRE REO into rentals. Those 3 factors will crush any "firmness" in 1-family resi units. Commercial R/E is crumbling again. We have a client in CRE and he's getting hammered.

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