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Thursday, March 23, 2006

Freddie Mac CFO Resigns

Don't be deluded by articles saying that RE is in for a "soft landing", or that housing sales are up. There's a long lag time between signing a contract and closing, so leading indicators like PMI and mortgage applications are more indicative. They aren't looking good. They don't look bad enough to justify the sales drop-off in hot markets, so that is coming because speculators are bailing.

Now comes the credit crunch. There is no way with the affordability stats I am looking at that housing could have been bid up as far as it has honestly. That means that mortgage-holders have not been properly qualified, which means that there is far more risk in mortgages than we know. So it is quite significant that Freddie Mac's CFO just resigned, and it's going to add to the generalized wariness in the RE financial markets:
Martin Baumann, the respected chief financial officer of Freddie Mac (FRE.N: Quote, Profile, Research), has resigned less than three years after taking the job at the second-largest U.S. mortgage funding company, which is still recovering from an accounting scandal.
...
"The timing of the departure is unusual, as is the fact that no successor is named and the search is just getting under way," said Ed Groshans, an analyst with Fox-Pitt, Kelton.

On March 10 Freddie Mac said it would delay until May the release of its quarterly and full-year financial results in order to implement an accounting change. It said it would hold a conference call with investors on March 30 to discuss this.
Fannie Mae is still messed up also. The Fed has been worried for years about potential risk to the Treasury from these mortgages. Freddie Mac went into the "exotic" market more strongly than Fannie Mae. I don't know what the real effects will be.

Look, a market that can even dream that this is worth 2 million is not even remotely rational. And this market is about to correct itself. There are going to be newly built ghost towns in a few places. Here's an erst-while broker who spent a long time blogging about the CA market and those "exotic" mortgages. It's extremely factual and extremely informative.

No one can know right now how bad this is going to be, but if you are exposed cut your exposure. You are exposed if you have less than 10% equity in your home in an average area, and if you have less than 30% equity in your home at today's evaluations in one of these "hot" markets. You are in a bad, bad way if you are exposed and have a loan that is going to reset within the next three years to a payment you are not sure you can afford. Do whatever you have to do now, because in six months you probably will have absolutely no leverage. Right now the weakness seems to have been induced by speculators selling. In six months what's really happening will have percolated through to the average homeowner, the banks will trying to cut their risks, and the sharks will be circulating.

One of the totally unpredictable factors about the coming recession is how many people are like me and Chief No-Nag. We cleared all our debt and are sitting on cash. Late this summer I will bail from most of the stocks, except for my Euro hedge, and then we will sit and watch for the opportunities that will be created as everything overcorrects. I have been watching the stock market, and I do not like the stocks that are rising. Dumb money seems to be moving from RE to stocks. I've got to tell you that I will not be finding good opportunities in these overbuilt and overvalued areas, but some money should be flowing back into the US market overall once things really do slump. Any time CA gets in trouble it hurts the entire US economy though, and SoCal is not looking good. But a lot of people did make money on this thing. If enough are sitting on it and move it back into the US economy in a sensible way, it will buffer the downturn.

From August of last year:
Fifty-three metropolitan areas representing 31% of the total U.S. housing market are considered extremely overvalued and confront a high risk of future price corrections, a study conducted by National City Corp. says. The study determines a market extremely overvalued if prices are 30% above where the study estimates they should be based on historic price data, area income, mortgage rates and population density.
See the whole chart. Or look at another chart with aggregated areas here.

1 Santa Barbara, Calif. 69%; 2 Salinas, Calif. 67%; 3 Naples, Fla. 62%; 4 Riverside, Calif. 60%
5 Merced, Calif. 59%; 6 Stockton, Calif. 58%; 7 Port St. Lucie, Fla. 58%; 8 Madera, Calif. 57%
9 Napa, Calif. 57%; 10 Medford, Ore. 55%; 11 Sacramento, Calif. 54%; 12 Modesto, Calif. 53%
13 San Diego, Calif. 53%; 14 Santa Rosa, Calif. 52%; 15 Chico, Calif. 52%; 16 Barnstable Town, Mass. 50%
17 San Luis Obispo, Calif. 49%; 18 Oxnard, Calif. 48%; 19 Fresno, Calif. 48%; 20 Los Angeles, Calif. 48%
21 Miami, Fla. 46%; 22 West Palm Beach, Fla. 46%; 23 Vallejo, Calif. 45%; 24 Ocean City, N.J. 45%
25 Bend, Ore. 45%; 26 Sarasota, Fla. 45%; 27 Redding, Calif. 44%; 28 Fort Lauderdale, Fla. 43%
29 Nassau-Suffolk, N.Y. 42%; 30 Santa Ana, Calif. 41%; 31 Atlantic City, N.J. 41%;
32 Bakersfield, Calif. 40%; 33 Oakland, Calif. 39%; 34 Santa Cruz, Calif. 39%
35 Palm Bay, Fla. 38%; 36 Las Vegas, Nev. 38%; 37 Poughkeepsie, N.Y. 37%; 38 Vero Beach, Fla. 37%
39 San Jose, Calif. 36%; 40 Bellingham, Wash. 35%; 41 Panama City, Fla. 35%; 42 Calif.pe Coral, Fla. 35%
43 Providence, R.I. 34%; 44 Reno, Nev. 33%; 45 Kingston, N.Y. 32%; 46 Visalia, Calif. 32%
47 Deltona, Fla. 31%; 48 Boston, Mass. 31%; 49 Washington D.C. 31%; 50 Essex County, Mass. 30%
51 San Francisco, Calif. 30%; 52 Prescott, Ariz. 30%; 53 Duluth, Minn. 30%

Comments:
MOM:

"There is no way with the affordability stats I am looking at that housing could have been bid up as far as it has honestly."

Oh, now, MOM, a bit of hucksterism and flim-flammery is as American as California Gold Rushes and Florida Land deals, ain't it?

Reckon every few decades they have to beat the flock of suckers out of their nests on Wall Street, so they have to have SOME kind of net to snare 'em with, eh?

Sailed with a Bosun about 8 years ago on one of my Baltimore "houseboats" who was one of those "day-trader" characters.

Fella,(who wasn't my cuppa tea), bragged on how if his portfolio kept going the way it had been, he then could not AFFORD to work.

Saw the mug a year or two ago at the hall, scrapin' for a job as a rope-choking paintbrush-operator AB,(a demotion from Bosun).

And so it goes...
 
MOM, why late summer to unload equities?
 
Bilgeman, Your highness, bubbles and irrational expectations are more than just american - it's human. If you look at the Asian bubbles, they had the same components.

But when only 10 - 20% of the population can afford to actually, you know, purchase your product, common sense ought to tell you that the price of the product must come down.

Regarding the day traders, I nearly freaked out of my skull when I saw an article about Forex trading on 1% margins. Your friend might be in that market right now!

SC&A, most the stocks I have are going to go up in the short term. But they are late in their cycles and are likely to drop late this year because of several factors. I don't buy glitzy stocks, and right now the solid stocks don't seem to be benefiting much from the movement of money going into the market.

One is the palpable uneasiness in banking circles about commercial lending portfolios. This signals weakness. I don't like the interest rate yields. These usually presage a recession. The auto industry is in deep trouble. What the Arab nations are going to do is up in the air yet, but the odds are that they will move into Euros somewhat. There is talk that Boeing could lose some of its sales in response to the Dubai deal. The US current account looks awful. All companies that rely on the Asian market (like Motorola) are very vulnerable if H5N1 becomes more infectious, so some currently very profitable companies could take a big hit from that. The US poultry industry will take a hit regardless; some employees are being told to expect layoffs in a few months in that industry. Basically, there are too many negative trends.

A weaker dollar could help some of our remaining manufacturers, but if you look at international trends they are somewhat dubious as well.
 
UNLIKE THE NASDAQ/INTERNET/NEW-ECONOMY BUBBLE - WHICH I CALL "BUBBA'S BUBBLES" FOR SHORT - THE RE BUBBLE IS SMALL/LOCAL AND BACKED WITH PROPERTY WHICH HAS REAL/INTRISIC VALUE.

THEREFORE IT WILL NOT CRASH.

SOME PRICES MAY DECLINE A LITTLE.
SOME PROPERTIES MAY TAKE LONGER TO SELL.

THE OVERHEATED MARKETS WILL CORRECT THEMSELVES AS OTHER PEOPLE/BUYERS COME OUT OF THE WOODWORK TO TAKE ADVANTAGE OF THE LULL/SOFTER PRICES.

THERE'S ANOTHER FACTOR WHICH IS GOING TO EFFECT MARKETS: BABYBOOMER RETIREMNTS.

THEY WILL SELL FIRST HOMES AND MOVE INTO SECOND HOMES.THIS WILL HELP BUYERS. AND MERELY REDUCE THE PROFITS OF TH BOOMERS - FROM OUTRAGEOUS TO VERY GOOD.

I WON'T LOSE ANY SLEEP FOR THEM.

A BIRD FLU PANDEMIC IS MORE LIKELY THAN A USA RE CRASH.

ALDABESS!
 
btw: i am still waiting for the Krugman Crash!
 
Reliapundit -
Eventually, the drop in inflated home values will rationalize the market and be a good thing. That's indisputable.

But real drops in RE prices are ALREADY occurring and will increase in hot areas. There are quite a few areas in which prices have tripled over just a few years. This does not represent real value. Bradenton/Sarasota saw over a 40% increase in one year, for example.

Furthermore, there have been plenty of precedents for this drop in speculative RE frenzies in the past. For some reason they seem to be concentrated on areas favorable for retirement.

Many of the people who expect to retire in next five years have already bought a second home using the equity in their first.

You are fooling yourself. The 29% drop in sales of new homes in February shows just how many speculators were in the market. Note that it was concentrated in a few areas. That's almost solely speculators walking away, and in some cases walking away from their deposits.

The Fed has come out and said it will not drop interest rates to try to rescue these localized inflations.
 
PS: Krugman is a dishonest jerk. But even a stopped clock is right twice a day. (That's the old version of clocks with hands 'n mechanical gears.)
 
er um sales of existing homes last month were actually 2.5% AHEAD of the same month last year.

AP spun the story to make it look worse than it is. by using a comparison to the previous month.

markets ebb and flow. they do NOT crash all the time. crashes are rare.

if the first home a boomer used for the doremi to buy his second home sells for less, then they'll make less profit. but still make a profit.

i wont cry for them or loose sleep for them.

most markets are NOT overheated. when those that are cool down it's a good thing. and sooner rather than later the market comesa back. basic demgrpahics make it so, and no one can change that: there are more and more buyers coming into the market.

so chill baby!
 
But new homes sales were down 10.5%. In some local markets sales were down 40 to 50%.

Those stats are from closings, so they are indicators of the market a few months ago. The new home sales reflect some investors bailing and even walking away from their deposits, which is increasing inventory.

I'm sorry - you are wrong on this one. Even in my area the more conservative bankers were calling me last year wanting to do two things - add hybrids (loans in which the buyer is not paying down in the first 3 years of the loan), and add "Payable on Demand" clauses to all their consumer home loans. I didn't do either.

Most areas will not see the huge drops. Condos will go down almost or remain static for several years almost across the board.

Bankers are running scared and will be looking to shelter themselves from risk. WaMu has already changed the way they qualify buyers for these loans. This credit tightening will cut down the pool of buyers. Bankers are also cutting back on stated-income loans and taking a harder look at appraisals.

Real estate is local. That's true. It is also true that there are overall market forces which are going to exert a downward pressure overall though. In the markets with the best fundamentals, the "step-up" housing will retain its value. That's about all that can be said for sure right now.

In 5-7 years all of this will have washed out, but right now there are very substantial risks.
 
M-O-M:

"Regarding the day traders, I nearly freaked out of my skull when I saw an article about Forex trading on 1% margins. Your friend might be in that market right now!"

Ha-ha! No doubt he would be...all those years spent in the paint locker, breathing Volatile Organic Chemicals...bound to have SOME effect.

Funny thing is, we had installed a DirectTV system on the ship,(NOT and easy task, by the way), but the "Full Monty" cost each of us 3 lousy bucks a month...

...and everybody coughed up the dough,EXCEPT for the character whose left eye tracked left to right and whose right eye tracked right to left from watching the stock price crawlers...HIM we had to threaten with Mr. Tire Iron on Mr. Kneecap. (Go figure!).

"But when only 10 - 20% of the population can afford to actually, you know, purchase your product, common sense ought to tell you that the price of the product must come down."

Common sense should tell you that winning the Lotto is well-nigh impossible too...so where does all the money come from?
I haven't noticed business types being any more immune to the "fever" than anyone else...in fact, in my experience they've been MORE susceptible to it.
(I worked for Kozlowski's Tyco cable ships for more than awhile too).

As for Brother Reliapundit's point about "intrinsic value"...
..this is true, but I'd observe that two cinder blocks ALSO have intrinsic value,(Mexicans in the Inflation 80's knew this), but their value is as cinder blocks.

If, however, you buy two cinderblocks wrapped in duct tape sealed inside a color TeeVee box as a color teevee from the trunk of some mug's car, then their intrinsic value matters very little to the reality of the fact that you've been chumped, doesn't it?

Life in the Big City

Regards;
 
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