13 June 2009
11 June 2009
10 June 2009
Jim Grant on CNBC Today: "Fed Would Be Shut Down If It Were Audited"
"If the Fed examiners were set upon the Fed's own documents—unlabeled documents—to pass judgment on the Fed's capacity to survive the difficulties it faces in credit, it would shut this institution down," he said. "The Fed is undercapitalized in a way that Citicorp is undercapitalized."
Grant said he would support legislation currently making its way through Congress calling for an audit of the Fed.
http://www.cnbc.com/id/31204170/site/14081545?ref=a1anews.com
Business/Economic Headlines: 10 June 09
Crude passes $70, US revises predictions
Time: "The Jobs Aren't Coming Back Any Time Soon"
Roubini: 9 Reasons The Recovery Will Be A Bust
Dow notches 3 last closes above its 200 day moving average for the first time in 18 monthsFiat Said to Buy Chrysler Assets Today to Form New Automaker
London subway workers walk off the job
Mish: Oakland California Ponders Bankruptcy
EXCLUSIVE: The New York Fed Has Been Captured By Citigroup, Top Obama Official Complains
09 June 2009
Headlines For Business/Economic News 9 June 09
The Learjet Repo Man
Jim Kunstler: "Lagging Recognition"
U.S. Said to Plan Approval Today for 10 Banks to Repay TARP
Work begins on nation's largest mass transit project: 6,000 expected jobs to be created
Will the Great Recession let lousy teachers off the hook?
Meltdown 101: Why GM, Chrysler want fewer dealers
Mish: "Brain Dead Union Leaders"
Sarah Palin rips President Obama, tells Fox News his economic policy is leading U.S. to socialism
08 June 2009
What Robert Shiller Forgot To Mention In His New York Times Op-Ed Yesterday
Shiller starts out by saying,
HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time.
I agree with Professor Shiller, especially when he says Real Estate is an asset class which can retract in price for years. I know this for a fact having studied the great Florida Real Estate Crash of 1928. Many of the mansions sold in 1928 have still not returned to their former price (figuring in inflation) after 81 years of Real Estate market moves.Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.
Where I was hoping Shiller would continue going with his thinking was his mention of the price to rent ratio when he said,
I will return to this mention in another blog later, because it brings up a subject I promised this weekend to write about this week: affordability.Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.
Shiller continues his opinion piece by bringing up something most all students on the Housing Crash are very familiar with:
Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient.
Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.
But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.
There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years.
The downleg of the Japanese Housing Bubble Crash took fifteen years before hitting a bottom. See chart below:
Let's see. Our Housing Bubble took 10 years to blow (1996 through 2006) and we are only in year 3 of our downleg. Meanwhile, Realtors are pounding their Sweat Lodge tom-toms and are singing, "The bottom is here! The bottom is here! There's never been a better time to buy Real Estate."
To which I will remind readers: almost all Realtors denied their was a Bubble until it burst. Then these vested interest members of the Real Estate cartel claimed the bursting was only a temporary stall in housing price declines. Now after 2 to 3 years of declines, Realtors, after washing the egg off their faces, and brushing the Crow feathers from their mouths, are telling us "the bottom is here!"
Realtors, in my view, are setting up their profession to further ridicule and it won't be long til home buyers and sellers are lowering their opinions of the Realtor profession even further . . . and that's saying something as Americans now think Realtors are lower than used car salesmen.
Do you think I'm using hyperbole to bust on Realtors? Let's look back at the near past. I'll remind you the National Association of Realtors' Chief Economist and Cheerleader-In-Chief, David Lareah, released a book as the market was topping titled (and I am not making this up): "Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them"
Notice too, Lareah released his book in 2005 and changed its title in 2006 to a more hopeful and less assertive title of "Why The Real Estate Boom Will Not Bust". Of course, I caught the book cover change in one of my earliest posts to this blog titled "David Lareah R.I.P." two years ago on June 19, 2007.
Moving on with Shiller's Op Ed piece from yesterday, he makes a very reasonable argument as to why people were too slow to sell their homes as the Bubble began to burst. He says, Why does this happen? One could easily believe that people are a little slower to sell their homes than, say, their stocks. But years slower?
Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.
I've been saying this for the past three years to my friends in denial who always point out, "Everyone wants to move to Key West."
My answer has been, "You can wish in one hand and face reality in the other. If you can't sell your home up North at a profit, you certainly don't want to move to Key West in a housing market which is still declining."
Today I add more arguments such as, "Keep in mind, too, that 24% of all Americans with mortgages are now upside down. And don't forget the majority of Option ARMageddon loans will reset in 2010 through 2013, while Commercial Real Estate is just beginning its crash and credit card foreclosures will cut off millions of Americans from credit in the future."
And even if your home up North is paid off, why sell into a declining market up there in hopes to catch a "bottom" in Key West, a market you do not know?
Shiller continues,
Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.
Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.
In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.
This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.
Again, I was hoping Shiller would take on the most important issue in Housing today, affordability, and I was especially hoping to read his views on unemployment statistics, the two worker heads of a family, real wage contraction since Reagan was President, and the shadow statistics government hides from the electorate.
(No problem, I'll attack this issue of affordability later this week. And I realize Professor Shiller is aware of this issue but was probably relegated to an 800 to 1000 word piece by the Editors of the New York Times. Hence he didn't have the space to write about affordability.)
Shiller then wraps up his piece with examples which strike close to home:
Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.
My response: Shiller could change the adjective "young" in the first sentence to "middle-age" and it would describe my girlfriend and I to a "T". What he doesn't mention is that rents are falling in tandem with housing prices all over America, and this continues to skew the price/rent ratio for affordability.
Speaking of elderly people, Shiller says:
On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.
As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011.
In 2007, my girlfriend helped one of her elderly friends in Key West to move from her paid off home (a cottage house in Old Town Key West) to a North Carolina retirement community.
At the market top in 2005-2006 in Key West, this dilapidated home was appraised for $600,000. This sweet lady offered to sell it to us for $400,000. We passed on the offer, and yet just last year (2008) someone finally purchased the place for $300,000. I shook my head in disbelief as both I and my girlfriend knew that house needed at the very least $100,000 in major renovation to be livable. I'll not be surprised when this new homeowner is foreclosed upon as that house is not worth $200,000 today.
Finally, Shiller finishes his piece by saying,
All of these people could be made to change their plans if a sharp improvement in the economy got their attention. The young couple could change their minds and decide to buy next year, and the elderly couple could decide to further postpone their selling. That would leave us with a buyer and no seller, providing an upward kick to the market price.
For this reason, not all economists agree that home price declines are really predictable. Ray Fair, my colleague at Yale, for one, warns that any trend up or down may suddenly be reversed if there is an economic “regime change” — a shift big enough to make people change their thinking.
But market changes that big don’t occur every day. And when they do, there is a coordination problem: people won’t all change their views about homeownership at once. Some will focus on recent price declines, which may seem to belie any improvement in the economy, reinforcing negative attitudes about the housing market.
Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.
To which I will add this brings to mind another glaring omission in this piece. What Professor Shiller did not even allude to is the coming Option-ARM Tsunami which I wrote about last week in my piece titled "Note to All Key West Realtors Who Say "The Bottom Is Here" . . . Get Ready For The Next Big Drop In Prices As DEBT Becomes The Ultimate 4 Letter Word"
As always, Caveat Emptor,
Rock Trueblood
07 June 2009
The Higher They Come, The Harder They Fall, One And All
The Santa Maria "Luxury Suites" Interior Courtyard . . . Just Steps Away From The Ocean In Key West FloridaNow when these Santa Maria Condotel units were being constructed, I remember this stripper doing the following math for me built on the faulty assumption that her unit would rent at the preposterous rate of $440.00 per night! (So help me, ask anyone in town how empty the parking lot of this Santa Maria was night after night upon first opening at a non-negotiable rate of $440.00 per night). But she said this Realtor who turned her on to this great deal did say, conservatively, rates could drop down to $400.00 nightly during the weeks of Off Season. Still, he assured her, she'd make money month in, month out.
Cost of one luxury Condotel unit: $1,295,000
To arrange to buy one of these, she had to put down a $200,000 non-refundable deposit which would be used as a downpayment on her loan, once the unit was built and the purchase was closed.
Hence, she would be financing $1,095,000 at what was then higher lending rates than today. I distinctly remember her telling me her monthly mortgage payment would be in the vicinity of $7,000 and that with mortgage payments, maintenance, taxes and management fees for 90% occupancy, she'd be paying something like $9,000 a month while raking in at least $11,000 - $11,500 revenue for every 27 days out of every month it was rented out.
And to make more money monthly, she planned to leverage into one condo after another with her bank and tip money (keep in mind both her Realtor and Banker were spending thousands on her company in our champagne room during the go-go years of the Housing Bubble), and eventually own 5 to 6 units which would give her enough cash flow to quit dancing and go into Real Estate flipping full-time.
She replied, "Rocko, these are luxury condominiums. I've seen the plans for the grounds, I've seen the plans for the interior. People will come from all over the world and want to taste Key West's finest luxury project. Besides, as people make more money from Real Estate, I can always sell my places for higher prices and move on to the next deals."
What Went Wrong With The $1,295,000 Condo Unit
No more than six months after discussing her $200,000 deposit for a yet to be built Santa Maria condo, this woman strapped on her high heels and came back to work full-time, (instead of just working part-time the busy weekends of Boat Race Week, Bike Week,) etc., for some quick easy money for shopping and living expenses. Her dabbling in Real Estate was coming to a fast close.
Due to a slowing national Economy and burgeoning inventories of Real Estate on the mainland, the Housing Crash trickle down began in earnest in Key West. This woman had finally read enough on the Internet about what was beginning to take place on the mainland (Miami already had 25,000 condos For Sale with another 45,000 - 60,000 being built). She read more and more about home prices falling, despite the pounding on the table by the National Association of Realtors that Real Estate would always go up.
The flip of her second Key Haven home (the one she took a HELOC on for $200,000) was not going as planned. She sold it (luckily in my opinion) with only $20,000 grand profit. She saw Real Estate pricing hit a wall in her old neighborhood, and she saw the first Reductions In Prices start to take place in many lower priced Key West homes.
So this dancer became really nervous. She sensed this Housing Bubble/Housing Crash story had legs. She walked away from her $200,000 deposit!
This lady smartened up real fast and figured if she got stuck with a $1,095,000 mortgage and room rates for hotels were beginning to stall, she would never make her monthly nut of $9,000 built on a 90% occupancy at $400 to $440 a night. So, she never took possession of a condo as it was a few months from completion. She could see the handwriting on the wall: the majority of Key West tourists were no longer going to be able to afford $300 a night rooms at a chain hotel, much less a $440 a night luxury condo. (This dancer also had concierges and Hotel managers as her clients in our Champagne Room who were warning her about the coming Recession in Tourism.)
To rub salt into the wound of her giant $200,000 loss, about the beginning of 2006 there was less tip money being tossed around in the stripclub and fewer champagne rooms being sold as money got too tight to mention with former "Masters Of The FIRE Economy Universe" who were selling fewer loans, homes, appraisals, insurance and construction came to a grinding halt everywhere on the island.
Meanwhile, the local NAR reps were still trumpeting "There has never been a better time to buy a home!" in their ads. The new thing was rates were lower, so the local Real Estate cartel was assuring people . . . "you can buy more home!"
Dodging The $1,095, 000 Hangman's Noose Was The Right Thing To Do
Months after this dancer came back to work, the new Santa Maria condotels opened for business. Night after night, I would go by the empty parking lot (2 to 5 cars were parked there on weekends in the beginning) and follow the slow awakening of the management of Santa Maria on hotels.com. About three months after their opening, I finally saw a crack in the rates they were charging. The $440 a night rate dropped to $420, then $400, and finally dropped to $390. Within a year's time, the rates dropped another 25% or more.
Keep in mind that to make money off these units, an owner needed 90% occupancy at $400 minimum.
Also, during this time was a big article in the Key West Citizen which covered the travails of a half-dozen or more people who walked away from their deposits on these overpriced condotels. Some of them were wanting to sue the developer for being too slow on the building or some other excuse, but my dancer told me she had washed her hands of a brewing class action lawsuit as she didn't want to tie up her time and emotions in a negative slugfest. She was determined to move on and bank all her tip money in CDs and start anew whenever the Housing Bubble Crash ended.It's Not The Fall That Hurts, It's When You Hit The Ground
Make no mistake, Real Estate is still falling in Key West. And it's now happening quickly on the high end.
Remember those $440 a night stays at the Santa Maria? I just tickled this from http://www.hotels.com/: $279.36 for a three night stay. (You may see a higher or lower rate show up as special weeks such as Lobster Week, Hemingway Days, Fantasy Fest, etc., come and go.) This is a far cry from the $440 a night needed at 90% occupancy to make one of these condos profitable at the former price of $1,295,000.
But wait have the condos finally shown a crack in pricing if you want to buy one? Yes, they have. And in a very dramatic way.
Are you ready for the latest "Reduction In Price" for a Santa Maria condotel?
MLS#:108510
Status: Active
Original Price: $1,195,000
Listing Price: $499,000
Price Per Sq. Ft. $550.17
Address: 1401 Simonton St 18
Key/Island: Key West
Neighborhood:Old Town-S of Truman
Subdivision:Filer Boyle Sub
Mile Marker:1.0
Prop Type: Condo
Days on Market:399
Bedrooms 2
Bathrooms: 2.1
Square Ft. 907
Lot Sq. Ft. 0
Year Built: 2007
Taxes: $1,658 (subject to change)
Tax Year: 2007
Exemptions: None
So there we have it. On the market for 399 days (as of today June 7, 2009), this luxury condo is now selling at a price that is cheaper than a dodgy downtown condo circa 2005, or similar sized condo uptown in an undesirable location and building circa 2005 which sold for $600,000.
The drop from the original price of $1,195,000 to the listing price of today at $499,000 is a drop of 63% in less than 16 months time. Does that sound like a bottom in Real Estate prices to you?
Keep in mind these are the nicest Condotel units on this island. Really, truly, if I can snag one at at $200,000 to $250,000 in the future, I wouldn't rent it out, I'd live there. I'd rate the design for the interior courtyard five stars.
Dogged condos in my building (built in the early 80s with very poor infrastructure design) are selling for 66% off their 2005 prices ($500,000 to $600,000) and are going to drop more as tons of foreclosures enter the system. Thus, high-end will follow the low end off a cliff.
There are currently 17 homes and condos in around Key West which cost their mortgage holders $1,000,000 or more and which are now in some stage of foreclosure. I have heard time and again from wishful builders, Realtors and lenders that Key West high-end properties would weather this Financial Tsunami much better than the low end stuff. How wrong they were . . . again.
And these are the same Real Estate cognoscenti who would have you believe the bottom in Real Estate prices is here?
As always,
Caveat Emptor,
Rock Trueblood in Key West