Tuesday, May 03, 2005

Financial Media Begin To Call For Action

Some in the financial media are finnaly calling for action. "James 'Rev Shark' DePorre counters Jim Cramer's suggestion that the Fed should mandate larger down payments in order to tamp down the real estate market."

If anyone has Cramers' "suggestion", please post it in the comments.

34 Comments:

At 12:43 PM, Anonymous Anonymous said...

raising "margin requirements" for real estate is absurd.

right now, you can basically buy homes on 100% margin.

if this were allowed in the stock market, people could buy shares of nasdaq tech stocks with no money down and i'm sure the market would be much higher.

why are you people so negative? what's wrong with a little healthy speculation? you can't win if you don't play.

 
At 12:48 PM, Anonymous Anonymous said...

"why are you people so negative? what's wrong with a little healthy speculation? you can't win if you don't play."

Duh? Stop baiting this excellent blog with your stupidity.

 
At 12:56 PM, Anonymous mark twain said...

what's wrong with a little healthy speculation?

There are two times in a man's life when he should not speculate: when he can't afford it and when he can.

 
At 12:59 PM, Anonymous Anonymous said...

But why not speculate? In california creditors are allowed to come after homeowners for either the home, or the difference in their upside-down mortgage.

basically, in california everyone can walk away from their mortgage and drop the keys off with the bank, and their credit report will stay spotless AND the creditors can't come after them for any losses.

tell me how it is possible to lose in california real estate under those circumstances? it's free money, plain and simple.

only a fool wouldn't take that bet.

 
At 1:07 PM, Anonymous Anonymous said...

I remember when I bought my first home in 1993, around the post-bubble bottom , most banks wouldn't approve mortgage more than 4 times of annual gross income, unless there is enough down payment like at least 15%. If you already have other loans or mortgage to pay off, the total credit you could get still had to meet the 4 times gross requirement. What happened to that practice? If credit sources are still this picky, the bubble would not have started.

 
At 1:07 PM, Blogger deb said...

Anyone who's refi'd and cashed out can be pursued for the difference. Non-owner occupants are not protected either. I also believe that borrowers are not protected from liens in 2nd (or lower) position. In other words, only people who bought with a single mortgage, never took any cash out, and occupy the property are protected from lender recourse. That pretty much rules out the speculators.

I worked with people who lost their homes in the early 90's. With 20/20 hindsight, I don't think any of them would tell you that it was worth the risk to buy in 89-90.

 
At 1:08 PM, Anonymous Anonymous said...

"But why not speculate? In california creditors are allowed to come after homeowners for either the home, or the difference in their upside-down mortgage."

Yeah, BUT...this only counts for 1st mortgages and not for 2nd's. And with the HUGE quantities of 80/20's out there, a lot of people will get their credit trashed when this thing crashes.

 
At 1:09 PM, Anonymous Anonymous said...

--DO NOT FEED THE TROLLS--
--DO NOT FEED THE TROLLS--
--DO NOT FEED THE TROLLS--

 
At 1:14 PM, Anonymous BKlawyer said...

Anonymous 12:59's statements are incorrect. The only way to get the "zero money down" is an 80/20+ loan. The buyer is not protected on the 20% second or the HELOC, or any of the other wacky finance products used to purchase or refi the home. The loans DO show on their credit report as will the late payments, etc.

Here in San Diego they're loading up on the supply of homes and I'm seeing more and more give-backs of the "zero down" homes. People purchasing multiple homes who are well aware that the rents don't cover the mortgage(s). They hope that the "guaranteed" 30% appreciation will make up for the rental losses when they finally sell. Pure speculation.

 
At 1:20 PM, Blogger desi dude said...

I know we should not feed the trools.
But some education is not forbidden isnt it.

Some states have anti-deficiency laws which protect purchasers of residential real property used as his/her primary residence pursuant to a purchase money mortgage. In the event that the purchaser fails to make the mortgage payment and the property is foreclosed (title taken by the lender through a legal procedure) and sold to pay the mortgage, a deficiency between the sale price and the outstanding balance of the mortgage could occur. Under anti-deficiency laws, if the mortgage is a purchase money mortgage for the purchase of a dwelling occupied by the purchaser, the purchaser will not be held responsible for any deficiency - the lender can only recover the property and the proceeds of a subsequent sale - the purchaser does not pay any deficit between the sale proceeds and the outstanding loan balance.

http://real-estate-law.freeadvice.com/mortgage_matters/potential_deficiency_balance.htm

Anti-deficiency laws typically provide no protection for non-purchase money mortgages (such as a second mortgage obtained after the original acquisition) and there is no protection when the property is not used as the primary residence of the purchaser.


I know of an acquaintance who had to pay the second mortgage in full due to foreclosure on his primary residence in the bust of 70s.

more information on foreclosure,
http://www.bob-taylor.com/forclose.htm

Even if there is no foreclosure, you may also incur tax liability if you agree to give a 'deed in lieu of foreclosure" to your lender or if your lender agrees to a "short sale" or a "short payoff." This occurs because the foregoing results in ' debt forgiveness" and may result in taxable income to you! Again, the rules are complex and you need to have a specialist apply the rules to your particular circumstances.

It is always good to evaluate the risk instead of coming these blogs and flaming people.

 
At 1:23 PM, Blogger deb said...

I know we shouldn't respond to the troll, but he brought up such a great point.

I think that many homeowners and buyers believe that they are protected from being pursued by their lender for a deficiency judgement, when in fact they are not. Lenders are encouraging risk taking behavior that has ramifications way beyond what the borrowers are made aware of.

 
At 1:26 PM, Anonymous Anonymous said...

I read Cramer every day, and can pretty much paraphrase todays comments in the context of his longer term thesis:
There is a real estate shortage because we aren't making any more of it. The fed hates the fact that RE speculators are making so much money and is raising short term rates to kill this. But long rates (which haven't budged) are what matters to RE, so fed can keep raising to 7% without impacting RE. Meanwhile the rate cuts are killing the economy and will put GM and Ford into bankruptcy. I don't want to violate Cramer's copyright, so a brief fair usage comment is best:
"all we really want from the Fed is a statement that says: "We encourage homeowners to put more money down when they buy, and we will be going to Congress to say that. Only that way will we be sure that we can at least slow the process of housing so that maybe the builders can momentarily catch up to the demand. I don't know which is more aggravating, how obvious all of this stuff is or how ossified the Fed is in dealing with the housing crisis. We do know, by the way, that even when it has the right instruments -- margin rates against the dot-coms -- it won't use them. That's because Alan Greenspan stopped being creative long ago, if he ever was."

 
At 1:32 PM, Anonymous Anonymous said...

Sorry, previous post obviously should have said "rate hikes are killing the economy," not rate cuts.

 
At 1:50 PM, Anonymous Anonymous said...

BKLAWYER

1) Are you actually seeing a large increase in inventory?

I know everyone has been keeping an eye on San Diego, thinking it might be the first to go, looks like it might be on it's way.

2) Are you already seeing people walk away from their properties?

If people are already walking away from their properties, it's going to get real ugly. I mean the market is only softening there and already they are walking away, what's going to happen when they see actual values decrease.

 
At 2:00 PM, Anonymous Anonymous said...

Speculation is good. It takes prices where they should go faster than they otherwise would. Any one who is NOT buying a house now but intends to buy one later is speculating. In this case speculating on a downturn. This is the thinking mans speculation. In the current situation it will surely pay rewards but will require patience.

One of the reasons that the housing market is so so cyclical is because it is so difficult to go short. Thus the downturn has to wait until prices are so out of wack that enough people are prepared to sell and rent. A very difficult decision to make. For those prepared to make the decision (few indeed) their profits will show who had the better judgement. Under the system of capitalism speculation guides money to the hands of those who best forsee the future.

 
At 2:13 PM, Anonymous Anonymous said...

I just want to comment about trolls, since not everyone on this blog may be aware of what they are.

Trolls write things on discussion boards that are guaranteed to generate controversy, then they get amusement when people respond in fury to their posting. The content of the troll's post is often completely at odds with what the troll him or herself really thinks. The troll above may very well believe there IS a housing bubble, for example, but they know that won't generate controversy here, and so they write the opposite. Trolls are not seriously interested in discussion or the content of your reply. All they want is attention. The more upset you get with them, the more attention they get and the happier they are, and the more trolling they will do in the future.

I've done some trolling of my own over the years, and so I can understand the childish pleasure of it. I also understand that the only way to discourage trolls is to ignore them. If too many people "feed" trolls, the level of discussion on a bulletin board will quickly degenerate.

 
At 2:22 PM, Anonymous Anonymous said...

"There is a real estate shortage because we aren't making any more of it. The fed hates the fact that RE speculators are making so much money and is raising short term rates to kill this."

Cramer has some interesting statements, and I can agree with some of them. However, there is no real estate shortage. Population of many markets is not increasing at all (Bay Area has net population loss for several years.) Yet prices still increase due to speculative "demand".

Is the Fed irritated about all of the RE speculation? Possibly, but there is arguably a bigger bubble in the bond market. Greenspan does want long rates to rise, that much is certain. His comments about the conundrum as well as his stance about Asian currency markets confirm this.

In the end, Greenspan can't "will" the long term rates to rise. He can only make comments and raise short rates. And neither of these seems to have much effect. It's debatable as to whether or not a RE bubble pop will pop the Great Credit Bubble or if this must happen in the reverse order.

Cramer's concept of getting the Fed or Congress to demand 20% down is wishful thinking and those policies will only be instituted after RE crashes.

 
At 2:42 PM, Anonymous Anonymous said...

"Cramer has some interesting statements, and I can agree with some of them. However, there is no real estate shortage. Population of many markets is not increasing at all (Bay Area has net population loss for several years.) Yet prices still increase due to speculative "demand"."

Population reduction does not necessarily mean less demand because one household can have more than 1 property. Furthermore, lower interest rate and laxed lending practices created the demand that otherwise wouldn't in a normal growth.

In regards to the comment by Anom @1:26 PM. Short term interest rate to 7% will have an impact to RE b/c ARMS are based on prime which is based on short term interest rate.

 
At 2:43 PM, Anonymous Anonymous said...

Great points from the 2:00 and 2:13 anons.

 
At 2:45 PM, Anonymous Anonymous said...

" At 1:09 PM, Anonymous said...

--DO NOT FEED THE TROLLS--
--DO NOT FEED THE TROLLS--
--DO NOT FEED THE TROLLS--"

On the contrary, please feed them and rehash basic assumptions as necessary. If a blog discourages debate then it becomes little more than an echo chamber for True Believers. This blog hits high on search engines so there are bound to be many, many newbies reading it.

The last thing that should happen is for this site to become one-sided like a political party site.

I want the best balanced view on the topic--and to seriously evaluate everything from home appreciation to a crash.

-Generic

 
At 2:56 PM, Anonymous Anonymous said...

2:45 PM I hestitate to respond to you, since you may be a troll yourself, but let me reiterate what I said above, trolls are NOT interested in content. They are only interested in controversy. They will alternate positions on the subject at hand to generate the maximum controversy. That is, the same person will say "There is NO housing bubble" one minute and then "There is a HUGE housing bubble" the next minute. This is not an issue of alterative points of view--it is simply childishness. If trolls are not discouraged, by starving them of the attention they so desire, then the number of comments on this blog will soon swell to the hundreds, and most of these comments will read something like "hey, retard, why don't you get a life and quit being a bitter asshat", blah, blah, blah. This is the fate of too many open discussion boards on the internet.

 
At 2:59 PM, Anonymous Rob said...

Anon 2:00
"One of the reasons that the housing market is so so cyclical is because it is so difficult to go short."

I have heard it said many ways, "everybody needs a place to live", "renting is a hassle", "RE isn't liquid like the equities market" etc.... but you hit it right on, you can't short it. All you can do is sell if you think it is going down, and rent. But you have to rent from someone who is long, providing them with at least some of the funds to finance the property, thereby prolonging any correction.

 
At 3:00 PM, Anonymous Anonymous said...

"I hestitate to respond to you, since you may be a troll yourself, but let me reiterate what I said above, trolls are NOT interested in content..."

First, provide a way to distinguish a troll from a serious difference of opinion.

Go to a dead back-slapping board if you want. This one could turn stale by killing anonymous users through a registration procedure.

 
At 3:17 PM, Anonymous BKlawyer said...

1. My experience is based on my own eyes, clientele, my own research and "drive through" of neighborhoods I was shopping in about a year ago. Not exactly scientific but I've seen the numbers.

2. Yes, I am seeing "walk aways" all the time.

http://realtytimes.com/rtcpages/20050425_foreclosuresup.htm

 
At 3:20 PM, Anonymous Anonymous said...

"One of the reasons that the housing market is so so cyclical is because it is so difficult to go short."

Hum... Can you short a REIT fund? That would do more or less the same thing, in an indirect way.

If the REIT loses money and people take funds out, sooner or later someone needs to sell a property to get the cash and pay them, I would guess.

Don't know much about how REIT funds work, so maybe I am talking out of my behind.

 
At 3:23 PM, Anonymous Anonymous said...

I think most REITs are close-end and people don't cash-out, they just sell the shares in the open market.

 
At 4:18 PM, Anonymous Anonymous said...

There are tons of residential REITS traded on the open market. In fact, I rent in property owned by Archstone-Smith (NYSE:ASN). The problem with shorting them is that they aren't purely priced on the value of the underlying real estate, but on the cash flow that they generate from operations (e.g. rent minus expenses). In other words, REIT investors ARE honoring the traditional metric of "housing P/E" although the yields are around 5% and therefore REITS might be overpriced by traditional metrics. Another thing to consider, if you short them, you will have to pay the dividend yourself as long as you maintain short position.

Another idea discussed on this board from time to time is to short the homebuilders (TOL, KBH, PHM, etc...) but that is a risky strategy since these stocks have gone parabolic and you need lots of luck to call the top on them.

Personally, I find shorting the market too risky, and I am invested in short term treasuries, gold, and defensive stocks. By the way, you can buy gold directly as a stock now, ticker either GLD or IAU.

 
At 4:23 PM, Anonymous Anonymous said...

Anon 4:18

any thoughts on CEF?

 
At 5:36 PM, Anonymous Anonymous said...

"only a fool wouldn't take that bet."

I think that is why they say: "A fool and his money are soon parted !"

Do you really think you can take a loss and just walk ? I somehow think that banks will not let that happen, one way or another. If it is true that you can walk, we are all going to take a financial bath when our banks collapse.

 
At 8:30 PM, Anonymous Anonymous said...

5:36

You wonder why Bush rush that Bankruptcy Bill last month ... Whats the rush you wonder?

 
At 8:43 PM, Anonymous Anonymous said...

(any thoughts on CEF)
I have never shorted a closed end fund. It might be hard to short it because in order to short any stock, you actually have to borrow it which means the broker has to find actual stock in someone's margin (not cash) account for you to borrow. I have shorted ETFs before, and if you want to research that you can start at www.ishares.com and take a look at as IYR or ICF which are designed to be easy to short, but they have lots of commercial and mall REITS in the mix. The main advantage of ETFs is they tell you exactly what their holdings are so you know the exact NAV at any time.
By the way, I don't advocate shorting REITs. I actually own some REITS because they are generally well run BUSINESSES which generate good profits and cash flow and distribute ALL of the profits to the shareholders. Also, I am retired so I am less risky with my investments, 50% US Treas, 20% gold, 30% defensive, dividend paying stocks.

 
At 1:46 AM, Anonymous bob r said...

But long rates (which haven't budged) are what matters to RE, so fed can keep raising to 7% without impacting RE.

This is complete nonsense. At some point, increases in short-term rates MUST begin to push up long-term rates. It's simple economics.

For instance: Let's say the Fed makes five more 1/4-point hikes in the discount rate, bringing it to 4.25% by the end of this year. (This is not an outlandish possibility, by the way, especially if inflation continues to grow).

Do you really think that the 10-year treasury, which is what determines the 30-year mortgage rate, would remain at it's current 4.20% yield? Why would investors tie up their money for 10 years when they can just drop it into a money-market fund and get the same rate with no tie-up whatsoever?

 
At 6:50 AM, Anonymous Anonymous said...

bob r,

who cares about the long rate... i could careless about it... if that goes up, that's not what's going to pop this bubble... it's the short rate... the flatter the yield curve, the more "creative financing" will get hammered... the rising short term rate is what's going to shake-out the speculators...

 
At 7:10 AM, Anonymous Anonymous said...

Slightly over two months after a regulation that a seller would have to pay off second home before selling, the condo price (most new homes built these days are condos) fell a sharp 30% within the past month. Can the Fed do the same thing to inject some sanity to the RE market in this country?

 

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