I said it was going to happen
08-31-2006, 03:53 PM
#1
Registered User
Thread Starter
I said it was going to happen
I have been saying for the past 4 years now that housing was overpriced and that people were getting into trouble. I would tell this to people and they'd tell me I was foolish, that I was stupid, that I didn't know what I was talking about.
I said housing were going the same way the tech stocks went int he mid to late 90's. People said "No, that's the way it is now, you just have to accept it", "better buy now while the interest rates are low", "land is scarce", there are way too many people moving into the area so there's not enough houses to go around", "the DC area will always attract people and prices are just going to go higher"...
But no one listened to me. Even when the second edition of "Irrational Exuberance" (by Robert Shiller) was published that said the exact thing I was saying for 2 years previous (housing becoming the next tech stocks), people said "that can't happen in this area".
Late last year, I read an article in the Baltimore Business Journal that said between the 4th quarter of 2002 and the 4th quarter of 2005, housing prices increased 82% while personal income rose only 4% per year or 12% over the same period. When housing rises 82% and incomes rise only 12%, people are going to be spending more than they have just to keep up w/ the mortgage payments. Forget about vacations, little Johnny's college fund, that 50" plasma HDTV, a new car, etc. And god help you if you have unexpected medical bills or lose your job, something like that.
Well, it's happening, just as I said it would. The bubble is bursting and I don't feel a bit sorry for the idiots who didn't mind paying 2, 3 or 4 times what a house was really worth. People also didn't factor in the extra cost for property taxes that are way up because the "assesed value" is through the roof, the mortgage and homeowner's insurance is now twice as much or more because of a higher "assessed value", higher gasoline prices, higher home heating and electricity prices, etc.
So now, 4 years later people are just finally waking up to what I've been saying all along.
I can't wait for some asshole to go into foreclosure so that I can swoop in and buy his house for half of what he paid.
Here are a couple of articles I found on MSN that I found Interesting:
Face it: The housing bust is here
Missed in last week's 'Fed is done' euphoria was more stark evidence the housing bubble has burst. Growing numbers of homeowners can't make their payments.
By Bill Fleckenstein
Back on June 12, 2005, Time Magazine chose this headline for its cover: "Home $weet Home: Why We're Going Gaga Over Real Estate." I did not share the euphoria, as I believed that the housing bubble was about to peak.
In fact, in my column two months later -- the headline of which, "It's RIP for the housing boom," stood in stark contrast -- I said that Time's cover would be shown in retrospect as basically having marked the peak. That real-time view little more than a year ago has been validated, regrettably.
The fabled engine of our economy is clearly unwinding. The sobering implications, however, were lost on the stock market last Tuesday. That's when a weaker-than-expected PPI number incited the umpteenth Fed-is-done rally. What folks ignored that day: News from the National Association of Homebuilders that its Housing Confidence Index fell to the lowest level since early 1991.
When 'adjustable' becomes unsustainable
But the bigger picture is becoming increasingly harder to ignore. What we'll soon be seeing on a regular basis was portrayed by The Wall Street Journal last week, in a story titled "Homeowners Start to Feel the Pain of Rising Rates" (subscription required). The subtitle nicely summarizes the thrust of it: "Payments on Adjustable Loans Hit Overstretched Borrowers; 'Budgets Are Out of Whack.'"
It begins with the story of a Detroit accountant who was looking to lower her monthly payments. In 2004, she refinanced a $312,000 mortgage via an option-adjustable-rate mortgage that offered various payment choices, as do so many of these plans. Her (introductory) rate of 2.3% is now up to 8.75%, and her loan balance has grown to $324,000. She claims that the terms weren't clearly spelled out. But if she actually read the documentation, as accountants often do, and didn't get it, you can imagine how many people truly understand their mortgages. (Hint: The number rhymes with "hero.")
Since she's unable to refinance (in part, due to a nasty prepayment penalty), she must sell her house. The problem: Because everyone else is pretty much in the same boat and Detroit's economy isn't so swell, she can't -- even with having reduced her original asking price of $470,000 to $270,000. (Note: That would leave her $54,000 in the hole.)
To share some numerical dimensions of the problem: People who have ARMs are "all of a sudden finding their budgets out of whack because their house payments went up 25% or 30%," according to a Pasadena bankruptcy attorney whose comment serves as the Journal story's subtitle. According to Credit Suisse: "The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 140% this year. And, according to a UBS study: About $137.5 billion face resets this year and about $524 billion face resets over the next four years."
Aftertaste of an open spigot
The story states the problem precisely: "Yet, the downside of the lending boom (my emphasis) is starting to show." And that is what it has been: a lending boom.
As I have been saying: Although the abdication of responsibility in lending showed up in housing prices, this mania, at its heart, has been a lending mania. (If we'd had a bull market in houses that produced stupid prices -- but we didn't have folks buying homes they patently couldn't afford -- it wouldn't have to end in the absolute debacle we are headed toward.)
Ghosts of Volckers past
It's a topic at the heart of another Wall Street Journal piece last week: "How the Fed Lost Its Groove" (subscription required) by economist Henry Kaufman. He notes the explosion of liquidity and debt that has occurred in the last handful of years (though it's been going on longer than that.) Though the federal funds rate has risen from 1% to 5.25%, he points out, this hasn't slowed down a debt expansion or credit availability: "Non-financial debt in the U.S. expanded at a rate of 6% in 2001, grew by 10% in 2005, and has been swelling at an even faster rate this year. At this pace, debt is growing at an astounding 50% faster than GDP."
Kaufman also notes that credit-derivative contracts increased from roughly $4 trillion at the end of 2003 to $17 trillion at the end of 2005. This growth -- in what Greenspan and the Fed think are so wonderful -- "is not just about reducing risk; it is fueling speculation."
No safety in transparency
Kaufman cited the downside of the Fed's insistence on transparency, that being the explosion of footings on the balance sheets of financial institutions:
"How can this be? The Fed policies of measured response and transparency have improved the capacity of financial intermediaries to gauge the market impact of central-bank actions. In this kind of environment, financial intermediaries employ a variety of 'value at risk' analytical techniques, along with a wide range of credit instruments, to quantify risk within narrow bounds. Ironically, the predictability borne of the Fed's measured response and transparency encourages (my emphasis) risk-taking and speculative trading. As the Fed lowers uncertainty about the near term, investors grow bolder."
At some point (sooner, rather than later), there will be a housing-finance-related "accident," due to an incendiary combination of housing debt and derivatives. That is what lies ahead. What remains to be seen is exactly when the financial bomb gets detonated.
Meanwhile, though this mess has just started, the end game is (and has been) very predictable, as the story states: "Some borrowers are opting to sell homes they can no longer afford." Unfortunately, folks like the accountant from Detroit are going to find that as this occurs, there won't be enough buyers, as many people will need to sell. The inevitable scenario: "Some California brokers say they are beginning to see a return of 'short sales' -- transactions in which the sales price isn't large enough to cover outstanding loans." Soon, this term will be replaced by "jingle mail," which I described in my Aug. 7 column.
Ringmaster of this disaster
That, ladies and gentlemen, is how Alan Greenspan managed to make folks' lives ultimately even worse, in attempting to bail out his equity bubble with a real-estate bubble. Let's never forget who the un-indicted architect of this mess was: Alan Greenspan and the other merry pranksters at the Fed.
Of course, those folks who didn't learn anything from the equity mania, and who will turn out to have gotten themselves trapped in the housing mania, really have only themselves to blame. As I have been warning for at least a couple of years now, all of this was going to be wonderful until it wasn't. That moment in time is upon us.
-------------------------------------------------------------------------------------
Even if the Fed pauses, the trend is down
As I have said for weeks now, the Federal Reserve won't raise rates Tuesday, but that doesn't mean our big economic problems have gone away. In fact, they're getting worse.
By Bill Fleckenstein
For the last week or so, I've vacillated between which of my two opposing views was right. Here is how I described the first one, in my daily column of July 19:
"I have been reducing my short exposure in the last couple days, due to my fears of a combined Fed-is-done and no-news-period rally. The fact that so many people have been terrified by the only thing they should not fear, i.e., the Fed, made me very uncomfortable being short."
Then, I changed my mind a few days later, thinking that the tape was so weak that my former view wasn't going to matter. To quote last week's Contrarian: "In my opinion, the recent action suggests an inflection point, whereby economic weakness and disappointments are getting the upper hand."
Of course, when the tape recently toasted a weaker-than-expected GDP report -- ignoring the implications of what a slowing economy means for corporate earnings -- I was kicking myself, thinking I was right in the first place.
Vacillation aside, I believe that whatever rally the market may have left in it will be expended shortly after the Federal Open Market Committee (FOMC) meeting on Tuesday. That assumes (as I do) that the Fed will give us a "nothing done," i.e., a pause -- leaving the federal funds rate at 5.25%.
If stocks start down in the wake of that and if we begin to get more economic disappointment, you can imagine that it might disturb the bulls quite a bit, especially if they ever stop to consider some of our macroeconomic (as well as geopolitical) problems.
Will love of condo go way of dodo?
One such problem -- the rot that lies ahead for the "structured-finance" wing of the housing food chain -- was the subject of "Condo Woes," a story in last Tuesday's Wall Street Journal (subscription required). Said the story: "In the latest sign that supply of condominiums has outstripped demand, a leading national developer of condo-hotels has missed payments on loans for two major projects."
According to a Standard & Poor's report on the health of the commercial mortgage-backed securities market, the story noted, "delinquencies continue to drop, although pockets of weakness exist." The report noted that two commercial mortgages securitized by Credit Suisse (for a Chicago developer) "have caused some concerns."
have not spent much time talking about collateralized mortgage obligations, collateralized debt obligations or credit default swaps, as they are incredibly complicated. (However, the recent weakness in financial-related stocks -- like Countrywide Financial (CFC, news, msgs), Triad Guaranty (TGIC, news, msgs), AmeriCredit (ACF, news, msgs), MGIC Investment (MTG, news, msgs), Fannie Mae (FNM, news, msgs), Downey Financial (DSL, news, msgs) and New Century Financial (NEW, news, msgs) -- is plain as day.)
To spend a minute on New Century in particular, the company reported a slight miss when it reported earnings last week. But what is really important: The fact that loans it held for sale ballooned sequentially from $6.3 billion to $9.3 billion. (Of course, that's on top of the $16 billion or so that New Century holds away from that particular category.) Nevertheless, the company chose not to bump up its loan-loss reserves.
Further questionable developments: "Other income" was up radically year-over-year, and no one seems to have a good handle on exactly what's in that category. More ominously, FPDs (first-payment defaults) were up considerably. A very knowledgeable friend who's an insider in the sub prime industry said: "That is the single-worst thing you can see in a company -- people who never make the first payment. I cannot begin to tell you how bad things are, and getting worse."
Even the people who are supposed to understand these complicated products probably don't. Jim Grant, in his last couple of issues (subscription required), has attempted to delve into these markets, and folks should read him to learn more. Suffice to say, as the real-estate market unwinds, we will see enormous problems cropping up in the whole arena of structured finance and the derivatives that go with it.
I'm sure many financial institutions will be impacted negatively by these developments, but so too will many hedge funds. According to the Journal story: BlackRock affiliate Carbon Capital II was the mezzanine lender to the Chicago developer who missed his payments. The hedge fund made the payments and could take over the developer's property (though I'm not sure that was the fund's goal when it made the loan).
The toxic detritus of bad debt
This is the first I've heard of missed payments by a developer -- though I imagine that others have occurred. I expect to see many more still. However, I have heard about isolated cases of "jingle mail," where homeowners have mailed in the keys because they can't make the payments and no longer have any equity in their homes.
That phrase was a prominent feature of the S&L bust and ensuing real-estate debacle in 1990-1991 -- and something we'll be hearing lots more about in the future. As sure as I am that there's going to be a train wreck in structured finance/derivatives, I'm sure I only have the faintest idea of how bad it's really going to be.
Now to wrap up on a positive note, or make that two. My favorite silver-mining company, Pan American Silver -- whose assets are dug up from the ground, rather than synthetically created by questionable debt -- had a pretty good quarter. I say that as a biased observer, shareholder and company director, though there's radically too much emphasis on quarter-to-quarter developments, in my opinion.
And, turning to a case where quarterly results really don't matter, Nastech held its update last week. I think the important thing to note is that not only did the company not burn cash, but its cash is increasing. Which is an extremely important factoid for folks to focus on when considering a young biotech or bio-delivery company. Also, it's impressive to see the various products that Nastech has either in the clinic (clinical trials) or about to go into the clinic.
For anyone who didn't listen to the company's quarterly call last week, I suggest checking out a couple of fine synopses on the message board at investorvillage.com. (All of the knowledgeable posters have left Yahoo!, as have I.) In any case, I continue to believe that Nastech is an incredibly exciting story. I just wish we weren't entering a bear market, because even though I have a chunky position, it would be a whole lot chunkier if that were not the case.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. At the time of publication, Bill Fleckenstein was long Pan American Silver and Nastech. He was short or had long puts on Countrywide Financial, Triad Guaranty, AmeriCredit, MGIC Investment, Fannie Mae, Downey Financial and New Century Financial.
-----------------------------------------------------------------------------------------
All I can say is
HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAH!!!!!!!
Warren
I said housing were going the same way the tech stocks went int he mid to late 90's. People said "No, that's the way it is now, you just have to accept it", "better buy now while the interest rates are low", "land is scarce", there are way too many people moving into the area so there's not enough houses to go around", "the DC area will always attract people and prices are just going to go higher"...
But no one listened to me. Even when the second edition of "Irrational Exuberance" (by Robert Shiller) was published that said the exact thing I was saying for 2 years previous (housing becoming the next tech stocks), people said "that can't happen in this area".
Late last year, I read an article in the Baltimore Business Journal that said between the 4th quarter of 2002 and the 4th quarter of 2005, housing prices increased 82% while personal income rose only 4% per year or 12% over the same period. When housing rises 82% and incomes rise only 12%, people are going to be spending more than they have just to keep up w/ the mortgage payments. Forget about vacations, little Johnny's college fund, that 50" plasma HDTV, a new car, etc. And god help you if you have unexpected medical bills or lose your job, something like that.
Well, it's happening, just as I said it would. The bubble is bursting and I don't feel a bit sorry for the idiots who didn't mind paying 2, 3 or 4 times what a house was really worth. People also didn't factor in the extra cost for property taxes that are way up because the "assesed value" is through the roof, the mortgage and homeowner's insurance is now twice as much or more because of a higher "assessed value", higher gasoline prices, higher home heating and electricity prices, etc.
So now, 4 years later people are just finally waking up to what I've been saying all along.
I can't wait for some asshole to go into foreclosure so that I can swoop in and buy his house for half of what he paid.
Here are a couple of articles I found on MSN that I found Interesting:
Face it: The housing bust is here
Missed in last week's 'Fed is done' euphoria was more stark evidence the housing bubble has burst. Growing numbers of homeowners can't make their payments.
By Bill Fleckenstein
Back on June 12, 2005, Time Magazine chose this headline for its cover: "Home $weet Home: Why We're Going Gaga Over Real Estate." I did not share the euphoria, as I believed that the housing bubble was about to peak.
In fact, in my column two months later -- the headline of which, "It's RIP for the housing boom," stood in stark contrast -- I said that Time's cover would be shown in retrospect as basically having marked the peak. That real-time view little more than a year ago has been validated, regrettably.
The fabled engine of our economy is clearly unwinding. The sobering implications, however, were lost on the stock market last Tuesday. That's when a weaker-than-expected PPI number incited the umpteenth Fed-is-done rally. What folks ignored that day: News from the National Association of Homebuilders that its Housing Confidence Index fell to the lowest level since early 1991.
When 'adjustable' becomes unsustainable
But the bigger picture is becoming increasingly harder to ignore. What we'll soon be seeing on a regular basis was portrayed by The Wall Street Journal last week, in a story titled "Homeowners Start to Feel the Pain of Rising Rates" (subscription required). The subtitle nicely summarizes the thrust of it: "Payments on Adjustable Loans Hit Overstretched Borrowers; 'Budgets Are Out of Whack.'"
It begins with the story of a Detroit accountant who was looking to lower her monthly payments. In 2004, she refinanced a $312,000 mortgage via an option-adjustable-rate mortgage that offered various payment choices, as do so many of these plans. Her (introductory) rate of 2.3% is now up to 8.75%, and her loan balance has grown to $324,000. She claims that the terms weren't clearly spelled out. But if she actually read the documentation, as accountants often do, and didn't get it, you can imagine how many people truly understand their mortgages. (Hint: The number rhymes with "hero.")
Since she's unable to refinance (in part, due to a nasty prepayment penalty), she must sell her house. The problem: Because everyone else is pretty much in the same boat and Detroit's economy isn't so swell, she can't -- even with having reduced her original asking price of $470,000 to $270,000. (Note: That would leave her $54,000 in the hole.)
To share some numerical dimensions of the problem: People who have ARMs are "all of a sudden finding their budgets out of whack because their house payments went up 25% or 30%," according to a Pasadena bankruptcy attorney whose comment serves as the Journal story's subtitle. According to Credit Suisse: "The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 140% this year. And, according to a UBS study: About $137.5 billion face resets this year and about $524 billion face resets over the next four years."
Aftertaste of an open spigot
The story states the problem precisely: "Yet, the downside of the lending boom (my emphasis) is starting to show." And that is what it has been: a lending boom.
As I have been saying: Although the abdication of responsibility in lending showed up in housing prices, this mania, at its heart, has been a lending mania. (If we'd had a bull market in houses that produced stupid prices -- but we didn't have folks buying homes they patently couldn't afford -- it wouldn't have to end in the absolute debacle we are headed toward.)
Ghosts of Volckers past
It's a topic at the heart of another Wall Street Journal piece last week: "How the Fed Lost Its Groove" (subscription required) by economist Henry Kaufman. He notes the explosion of liquidity and debt that has occurred in the last handful of years (though it's been going on longer than that.) Though the federal funds rate has risen from 1% to 5.25%, he points out, this hasn't slowed down a debt expansion or credit availability: "Non-financial debt in the U.S. expanded at a rate of 6% in 2001, grew by 10% in 2005, and has been swelling at an even faster rate this year. At this pace, debt is growing at an astounding 50% faster than GDP."
Kaufman also notes that credit-derivative contracts increased from roughly $4 trillion at the end of 2003 to $17 trillion at the end of 2005. This growth -- in what Greenspan and the Fed think are so wonderful -- "is not just about reducing risk; it is fueling speculation."
No safety in transparency
Kaufman cited the downside of the Fed's insistence on transparency, that being the explosion of footings on the balance sheets of financial institutions:
"How can this be? The Fed policies of measured response and transparency have improved the capacity of financial intermediaries to gauge the market impact of central-bank actions. In this kind of environment, financial intermediaries employ a variety of 'value at risk' analytical techniques, along with a wide range of credit instruments, to quantify risk within narrow bounds. Ironically, the predictability borne of the Fed's measured response and transparency encourages (my emphasis) risk-taking and speculative trading. As the Fed lowers uncertainty about the near term, investors grow bolder."
At some point (sooner, rather than later), there will be a housing-finance-related "accident," due to an incendiary combination of housing debt and derivatives. That is what lies ahead. What remains to be seen is exactly when the financial bomb gets detonated.
Meanwhile, though this mess has just started, the end game is (and has been) very predictable, as the story states: "Some borrowers are opting to sell homes they can no longer afford." Unfortunately, folks like the accountant from Detroit are going to find that as this occurs, there won't be enough buyers, as many people will need to sell. The inevitable scenario: "Some California brokers say they are beginning to see a return of 'short sales' -- transactions in which the sales price isn't large enough to cover outstanding loans." Soon, this term will be replaced by "jingle mail," which I described in my Aug. 7 column.
Ringmaster of this disaster
That, ladies and gentlemen, is how Alan Greenspan managed to make folks' lives ultimately even worse, in attempting to bail out his equity bubble with a real-estate bubble. Let's never forget who the un-indicted architect of this mess was: Alan Greenspan and the other merry pranksters at the Fed.
Of course, those folks who didn't learn anything from the equity mania, and who will turn out to have gotten themselves trapped in the housing mania, really have only themselves to blame. As I have been warning for at least a couple of years now, all of this was going to be wonderful until it wasn't. That moment in time is upon us.
-------------------------------------------------------------------------------------
Even if the Fed pauses, the trend is down
As I have said for weeks now, the Federal Reserve won't raise rates Tuesday, but that doesn't mean our big economic problems have gone away. In fact, they're getting worse.
By Bill Fleckenstein
For the last week or so, I've vacillated between which of my two opposing views was right. Here is how I described the first one, in my daily column of July 19:
"I have been reducing my short exposure in the last couple days, due to my fears of a combined Fed-is-done and no-news-period rally. The fact that so many people have been terrified by the only thing they should not fear, i.e., the Fed, made me very uncomfortable being short."
Then, I changed my mind a few days later, thinking that the tape was so weak that my former view wasn't going to matter. To quote last week's Contrarian: "In my opinion, the recent action suggests an inflection point, whereby economic weakness and disappointments are getting the upper hand."
Of course, when the tape recently toasted a weaker-than-expected GDP report -- ignoring the implications of what a slowing economy means for corporate earnings -- I was kicking myself, thinking I was right in the first place.
Vacillation aside, I believe that whatever rally the market may have left in it will be expended shortly after the Federal Open Market Committee (FOMC) meeting on Tuesday. That assumes (as I do) that the Fed will give us a "nothing done," i.e., a pause -- leaving the federal funds rate at 5.25%.
If stocks start down in the wake of that and if we begin to get more economic disappointment, you can imagine that it might disturb the bulls quite a bit, especially if they ever stop to consider some of our macroeconomic (as well as geopolitical) problems.
Will love of condo go way of dodo?
One such problem -- the rot that lies ahead for the "structured-finance" wing of the housing food chain -- was the subject of "Condo Woes," a story in last Tuesday's Wall Street Journal (subscription required). Said the story: "In the latest sign that supply of condominiums has outstripped demand, a leading national developer of condo-hotels has missed payments on loans for two major projects."
According to a Standard & Poor's report on the health of the commercial mortgage-backed securities market, the story noted, "delinquencies continue to drop, although pockets of weakness exist." The report noted that two commercial mortgages securitized by Credit Suisse (for a Chicago developer) "have caused some concerns."
have not spent much time talking about collateralized mortgage obligations, collateralized debt obligations or credit default swaps, as they are incredibly complicated. (However, the recent weakness in financial-related stocks -- like Countrywide Financial (CFC, news, msgs), Triad Guaranty (TGIC, news, msgs), AmeriCredit (ACF, news, msgs), MGIC Investment (MTG, news, msgs), Fannie Mae (FNM, news, msgs), Downey Financial (DSL, news, msgs) and New Century Financial (NEW, news, msgs) -- is plain as day.)
To spend a minute on New Century in particular, the company reported a slight miss when it reported earnings last week. But what is really important: The fact that loans it held for sale ballooned sequentially from $6.3 billion to $9.3 billion. (Of course, that's on top of the $16 billion or so that New Century holds away from that particular category.) Nevertheless, the company chose not to bump up its loan-loss reserves.
Further questionable developments: "Other income" was up radically year-over-year, and no one seems to have a good handle on exactly what's in that category. More ominously, FPDs (first-payment defaults) were up considerably. A very knowledgeable friend who's an insider in the sub prime industry said: "That is the single-worst thing you can see in a company -- people who never make the first payment. I cannot begin to tell you how bad things are, and getting worse."
Even the people who are supposed to understand these complicated products probably don't. Jim Grant, in his last couple of issues (subscription required), has attempted to delve into these markets, and folks should read him to learn more. Suffice to say, as the real-estate market unwinds, we will see enormous problems cropping up in the whole arena of structured finance and the derivatives that go with it.
I'm sure many financial institutions will be impacted negatively by these developments, but so too will many hedge funds. According to the Journal story: BlackRock affiliate Carbon Capital II was the mezzanine lender to the Chicago developer who missed his payments. The hedge fund made the payments and could take over the developer's property (though I'm not sure that was the fund's goal when it made the loan).
The toxic detritus of bad debt
This is the first I've heard of missed payments by a developer -- though I imagine that others have occurred. I expect to see many more still. However, I have heard about isolated cases of "jingle mail," where homeowners have mailed in the keys because they can't make the payments and no longer have any equity in their homes.
That phrase was a prominent feature of the S&L bust and ensuing real-estate debacle in 1990-1991 -- and something we'll be hearing lots more about in the future. As sure as I am that there's going to be a train wreck in structured finance/derivatives, I'm sure I only have the faintest idea of how bad it's really going to be.
Now to wrap up on a positive note, or make that two. My favorite silver-mining company, Pan American Silver -- whose assets are dug up from the ground, rather than synthetically created by questionable debt -- had a pretty good quarter. I say that as a biased observer, shareholder and company director, though there's radically too much emphasis on quarter-to-quarter developments, in my opinion.
And, turning to a case where quarterly results really don't matter, Nastech held its update last week. I think the important thing to note is that not only did the company not burn cash, but its cash is increasing. Which is an extremely important factoid for folks to focus on when considering a young biotech or bio-delivery company. Also, it's impressive to see the various products that Nastech has either in the clinic (clinical trials) or about to go into the clinic.
For anyone who didn't listen to the company's quarterly call last week, I suggest checking out a couple of fine synopses on the message board at investorvillage.com. (All of the knowledgeable posters have left Yahoo!, as have I.) In any case, I continue to believe that Nastech is an incredibly exciting story. I just wish we weren't entering a bear market, because even though I have a chunky position, it would be a whole lot chunkier if that were not the case.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. At the time of publication, Bill Fleckenstein was long Pan American Silver and Nastech. He was short or had long puts on Countrywide Financial, Triad Guaranty, AmeriCredit, MGIC Investment, Fannie Mae, Downey Financial and New Century Financial.
-----------------------------------------------------------------------------------------
All I can say is
HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA HAHAHAHAH!!!!!!!
Warren
08-31-2006, 04:08 PM
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Good, now I can FINALLY get a decent home without having to pay through the nose. All those fukers that did an ARM and are screwed.....good on 'em. These assholes should've been more fiscally responsible.
08-31-2006, 06:05 PM
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no shit warrenw, it had gotten way, way out of hand. Developers around here seem to have thought that every Tom, Dick, and Harry could afford a quarter to half million for a small apartment that 6 years ago would go for maybe $800/mo. in rent.
IMHO, the problem was that artificially low interest rates made money cheap, so what used to cost $1K/mo financed now cost ~$500/mo, especially with an ARM. But the idea that an ARM rate won't go up is a fantasy sold by the lenders and willfully believed by the borrower. The not-so-funny thing is, in the terms of a 30-year financial contract written by the lender, every "possibility" is a certainty. They're not stupid, and have the benefit of far more experience than the guy/gal on the street.
And the idea that you could get in on a property with a low rate, sell at the end of the locked-in period if rates go up, and make a profit, is grounded on make-believe. If, at the end of your period of no adjustment, rates are going up and making it a necessity to sell, other buyers will be in the same boat as you, and unwilling and/or unable to borrow what you need at the new higher interest rate. So the plan to sell quickly if rates go up is ludicrous.
You're far better off borrowing far less than you can afford, and banking the savings against the day rates go up. In thirty years, they're bound to go through the roof once or twice. But who at the lending institution is going to suggest you do that?
The thing that kills me is people financing properties with huge asking prices, then expecting to get it all back even when rates go up and make money more expensive. A $500,000 condo isn't worth $500,000 when interest rates double, so you shouldn't expect the purchase agreement to exceed the one you signed when you bought unless interest rates are lower or the standard of living in the area has grown significantly. And standards of living don't change that fast, especially when interest rates are rising on ARM holders.
The #1 fallacy promoted by people selling financial products - "You will always make more money than you did the year before." :/
IMHO, the problem was that artificially low interest rates made money cheap, so what used to cost $1K/mo financed now cost ~$500/mo, especially with an ARM. But the idea that an ARM rate won't go up is a fantasy sold by the lenders and willfully believed by the borrower. The not-so-funny thing is, in the terms of a 30-year financial contract written by the lender, every "possibility" is a certainty. They're not stupid, and have the benefit of far more experience than the guy/gal on the street.
And the idea that you could get in on a property with a low rate, sell at the end of the locked-in period if rates go up, and make a profit, is grounded on make-believe. If, at the end of your period of no adjustment, rates are going up and making it a necessity to sell, other buyers will be in the same boat as you, and unwilling and/or unable to borrow what you need at the new higher interest rate. So the plan to sell quickly if rates go up is ludicrous.
You're far better off borrowing far less than you can afford, and banking the savings against the day rates go up. In thirty years, they're bound to go through the roof once or twice. But who at the lending institution is going to suggest you do that?
The thing that kills me is people financing properties with huge asking prices, then expecting to get it all back even when rates go up and make money more expensive. A $500,000 condo isn't worth $500,000 when interest rates double, so you shouldn't expect the purchase agreement to exceed the one you signed when you bought unless interest rates are lower or the standard of living in the area has grown significantly. And standards of living don't change that fast, especially when interest rates are rising on ARM holders.
The #1 fallacy promoted by people selling financial products - "You will always make more money than you did the year before." :/
08-31-2006, 06:20 PM
#5
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Well, down here in FL, housing has gone up insanely for the past few years. I also said it wont last forever, and finally it has stopped.. and is dragging along bottom. Houses are not selling, and now everyone that was so happy about the price of their house's rising so quickly... they arent able to keep up with the new taxes.
I am hoping it will continue to stay low as I would like to purchase in a few years
I am hoping it will continue to stay low as I would like to purchase in a few years
08-31-2006, 06:28 PM
#6
Well you are partially right, in some areas of the country housing prices have risen much faster than income and that might be a recipe for disaster under some conditions. BUT IT AIN'T HAPPENING AROUND HERE!
California is doing fine and has been for decades working under just that problem. Somehow it works for them.
A property is worth just exactly what people are willing to pay regardless of what the rest of the economy is doing. People need homes, it's as simple as that. Apartments are BAD. (flame suit on)
I find it interesting to hear these tales of doom over and over. They always same the same things and cite the same experts and somehow problems rarely happen EXCEPT in isolated areas. The last big problem we had was in the mid to late 80's, but interest rates rose to 16%+ almost overnight.
In this "down" economy I recently bought a 3 acre lot and before I could close on the loan the lot next door, which is smaller and not as nice as mine, sold for twice what I paid.
My house, which is in the foundation stage, has already gone up by over $100,000. How do I know this? By doing loans for other homeowners in the area and seeing their sales contracts and appraisals plus I have had to update my appraisal because construction has begun. And this is not in a hot spot.
This is not an isolated incident, I see it every month. I own a mortgage company so I get to see a lot of sales and a lot of appraisals. I am in the Dallas/ Fort Worth area and it happens much more often in the Fort Worth area than the Dallas area, but except for South and East of town I see it quite often there as well.
My company does mostly rural loans and I also see this same phenomenon all over the state of Texas in small towns, except in the Valley.
People have to have a dwelling place and the public has spoken, it must be a home! The baby boomers don't want just any home, they want one nicer than the last. It doesn't have to be bigger, just nicer.
There's a name for guys who keep waiting for housing costs to go down - renters!
California is doing fine and has been for decades working under just that problem. Somehow it works for them.
A property is worth just exactly what people are willing to pay regardless of what the rest of the economy is doing. People need homes, it's as simple as that. Apartments are BAD. (flame suit on)
I find it interesting to hear these tales of doom over and over. They always same the same things and cite the same experts and somehow problems rarely happen EXCEPT in isolated areas. The last big problem we had was in the mid to late 80's, but interest rates rose to 16%+ almost overnight.
In this "down" economy I recently bought a 3 acre lot and before I could close on the loan the lot next door, which is smaller and not as nice as mine, sold for twice what I paid.
My house, which is in the foundation stage, has already gone up by over $100,000. How do I know this? By doing loans for other homeowners in the area and seeing their sales contracts and appraisals plus I have had to update my appraisal because construction has begun. And this is not in a hot spot.
This is not an isolated incident, I see it every month. I own a mortgage company so I get to see a lot of sales and a lot of appraisals. I am in the Dallas/ Fort Worth area and it happens much more often in the Fort Worth area than the Dallas area, but except for South and East of town I see it quite often there as well.
My company does mostly rural loans and I also see this same phenomenon all over the state of Texas in small towns, except in the Valley.
People have to have a dwelling place and the public has spoken, it must be a home! The baby boomers don't want just any home, they want one nicer than the last. It doesn't have to be bigger, just nicer.
There's a name for guys who keep waiting for housing costs to go down - renters!
08-31-2006, 06:33 PM
#7
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The only problem with expecting to "buy his house for half what he paid" is that it will never happen. Almost every mortgage that is going into foreclosure was a 0-5% down purchase. So the bank still has a large note out on the house. Take for example a $300k home. Most likely it has a mortgage on it for at least $285k. Sure, the bank may due a short sale for $260k and lose $25k, but no way they will sell it for $150k and take a $150k loss. They are a BANK remember? They don't intentionally lose money. They will simply go into forebearance with the owner and work out payment arrangements. The last thing banks want is a foreclosure. They bend over backwards for homeowners to try to avoid it.
Also, these homeowners (such as the Detroit accountant) are the same ones who originally asked for the ARM loans to begin with. I am in the mortgage industry and for the last 4 years not a single client has actually asked me for a fixed rate mortgage. Every single one asks for an interest-only loan. Now typically this is because they are in dire financial situations to begin with, and can't afford their current mortgage payment. But for them to pretend they didn't know what they were getting themselves into is laughable.
Detroit
Also, these homeowners (such as the Detroit accountant) are the same ones who originally asked for the ARM loans to begin with. I am in the mortgage industry and for the last 4 years not a single client has actually asked me for a fixed rate mortgage. Every single one asks for an interest-only loan. Now typically this is because they are in dire financial situations to begin with, and can't afford their current mortgage payment. But for them to pretend they didn't know what they were getting themselves into is laughable.
Detroit
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08-31-2006, 06:43 PM
#8
Also look at the foreclosures, they still are mostly property related, not personal situation related. That's your true indicator.
In the late 80's you saw all kinds of property being foreclosed on, now it's mostly properties on busy streets, corner lots, houses near or backing up to apartments, shopping centers, railroad tracks, houses with foundation probs or other major issues, etc.
B U T you should start seeing a lot of FHA foreclosures that are person related rather than property related. When FHA became an "A-" lender a few years back we knew it was going to happen and sure enough FHA foreclosures are up - A LOT! But that's mostly low income stuff anyway and that usually has a higher foreclosure rate than the rest of the market so it's not a true indicator either.
In the late 80's you saw all kinds of property being foreclosed on, now it's mostly properties on busy streets, corner lots, houses near or backing up to apartments, shopping centers, railroad tracks, houses with foundation probs or other major issues, etc.
B U T you should start seeing a lot of FHA foreclosures that are person related rather than property related. When FHA became an "A-" lender a few years back we knew it was going to happen and sure enough FHA foreclosures are up - A LOT! But that's mostly low income stuff anyway and that usually has a higher foreclosure rate than the rest of the market so it's not a true indicator either.
08-31-2006, 07:32 PM
#9
Former Moderator
When ever anything rises, in this case real estate (Cali, NYC, Miami, etc etc)...exponentionally, and unnaturaly, it is destined to collapse. Some places sooner than others (Florida) but eventually it WILL collapse. And I will be there, like a vulture, buying a 1.3 million dollar house for the REAL price, of $350K.