MaxedOutMama

What might be the effect of non-US buyers on the RE market? Particularly in desirable areas like the Florida coast or the Utah ski areas, I'd think European buyers (for example) would be snatching up bargains and thus helping to set a floor under prices.
 

Hi Mama; Here's the ABS CDX run from this morning.

~06-2 Spreads ~ 06-1 Spreads
AAA 9 / 7 11 / 9
AA 15 / 13 15 / 11
A 50 / 46 49 / 44
BBB 140 / 134 125 / 118
BBB- 250 / 242 235 / 227

How do you think these spreads look relative to your forecast of house prices?
 

David - last year there was already huge foreign speculation buying in many FL areas. Miami, in particular. Since Miami seems to be leading the way down, I'd say not much more effect on foreign buyers. The foreign news has been far franker than US news for months on the risks, and I notice that a lot of Europeans with an interest seem to be hanging at some of these bubble blogs.
 

Churchill Fan,
I do have confidence that economies are somewhat predictable if you know the interactors influencing them. But I don't think we know the fundamentals on even the next set of interactors this time, so bonds and derivatives may offer relatively little reliable information. Also, when derivatives and credit swaps so dominate a market, risk information can easily be lost.

However, when I see 9/14's TCM yields:
3-month 4.95
6-month 5.12
5-year 4.74
7-year 4.75
20-year 4.99
30-year 4.92,

I say to myself "No one knows what's happening." To me this is the sign of turbulence and unpredictability indicating that we do not know and cannot properly assess risk. Then I look at CD rates, with the six month and 5 year showing small increases from last week, and I say to myself that the flux points are six-nine months and five-seven years. This also tells me that no one knows what's going to happen, and that the basic uncertainty is near-term recession and mid-term depression/deflation.

The depositories are all scrambling for deposits, and I don't think that's a healthy sign.

I'm beginning to wonder if the high-risk tranches (whether officially designated as such or not) aren't sequestered in held portfolios in various firms which have accepted holding the risk because of the very high immediate and intermediate profits on selling the profitable segments and the ability to report phantom income in the near-term. If so, the market has relatively little information with which to work.

The massive shift in mortgage financing over the last five years has left us with little historical correlation to various technical indicators, so I am concentrating on whatever actual market information I can glean.

As for setting floors, if NJ goes much lower I will say that there is no long-term floor that can be set higher than a 35% drop, because the combination of the highest income state having relatively severe housing deflation is an indicator that public debt has overtaken that economy, and NJ is not that different quantatively than CA or areas around DC. Of course, that would mean something like a depression is possible.

We have clearly reached a ceiling. (Is Golden West going to go to .05% interest on their option ARMS? I heard they're back down to 1.5% already.)

The interactors dictating a floor are unknown. One of them definitely is how many people are (like me) financial conservatives who will buy in when they see real value. I have asked several people in this blog and others whom I know in real life, and they all seem to be looking below 30%. This is not a good sign.

And one further note: last year I was trying to get some of my banks in FL to at least consider modifying their HELOC terms and lending limits based on the property insurance problem ALONE, and I did not succeed. I was deeply disturbed by the combination of high LTV's and high property insurance deductibles.

This means to me that the entire market had reached a point of cohesive irrationality that wiped all information out of the financial system. It is the areas that are seeing the high property insurance combined with massive tax hikes, combined with overbuilding and speculation that are producing the 40% drops out there. This was entirely predictable last year.

One of my private indicators is early retirements by bank execs, and that index is off the scale.
 

Hi Mama, thanks for sharing your thoughts. I think Wall Street is to blame- now hear me out on this. Remember back pre 2000 NASDAQ crash, there were 1500 stocks covered by the street, 1490 buy rec's and 10 neutrals? Well the new gig in town is Hedge Funds. Something like 1/3 of the street's revenues are from the HF's. Goldman Sachs has a staff of 5 just to find new HF's office space. The funds, eager to put a return on capital, in a low return environment, have taken to selling volatility. There are various ways they're doing this. But as it relates to the mortgage market, it's buying the junk pieces as you suggest, and hoping the high yields will help them "Beat the clock" before something goes wrong. I'm sure the flat curve is hurting that approach. The CDX run I sent you yesterday is another way they can get short vol and earn the carry without getting they're hands dirty clearing the actual mortgages- and not even put up any margin in the process. If real estate prices drop by more than the 35% your suggesting, than the problems in the street will make LTCM look like a graden party.
 

Churchill Fan, the research that I've been doing all tends to support your conclusion. Junk RE bonds can be made profitable to financiers in the short term, but the mortgages destroy wealth of the homeowners and the idiots who eventually end up with them.

I'm starting to suspect that this is Enron on a larger scale.
 

Morning Mama. Perhaps you can give me some suggestions how to profit from the coming debacle. I've tried being long the curve when 2/10's got close to flat, but with the negative carry it's tough to hang on to. Same problem being long Credit Default swaps. Those to me are the most obvious ways to profit from a real estate led slowdown. It's unusual to see the curve flat when the front end has eases priced in the red euros.
 

I think the uncertainties are such that it would be hard indeed to know how to profit from this, other than by making sure your own cashflow is sound. If the worst happens, there will be plenty of investment ops out there. If it doesn't, sitting on the sidelines for a while will not kill you.

I also have a rule that I will not seek a profit directly from disaster. I think this is the error that the street has made in this instance. It believed it could control the risks by credit swaps, etc, instead of by avoiding unsound investments. Well, I think the brilliant ones stand a good chance of getting bitten in the butt by reality, because one simply cannot profit overall from any investment practice which strips money away from the rank and file to a large extent. These mortgages that were made knowing that the borrowers couldn't keep up with them without pulling $ out of equity were always going to end up by pulling money out of the economy.

I sure hope that this lesson is relearned quickly and well.
 

Thank you Mama; To be flat is a position, too. Don't get your hope up about the street learning any lessons. The medium changes, but the outcome is always the same. Keep up the good work. I might change my screen name to "Mama Fan"!
 

CF, thanks for your kind words, and don't change your screen name! I like to think of Churchill's superior ability to confront reality, especially at this time.

I don't feel very good about my failures in this area, and I think it says a lot about how we got here.