Sunday, May 01, 2005

REIT Insider Has Left The Building

Here is something to think about from Elliott Wave Intl. as we head into a big week on Wall Street. "Barron's magazine last week reported that a top exec at a real estate investment trust sold his shares for $18.3 million."

"There is no question that insiders are selling; during this past March insiders sold 60 times more company shares than they purchased (60:1), close to the most extreme ratio ever. How extreme is this? Historically speaking, a 20:1 selling to buying ratio is considered a bearish indicator; today's figure is 3x as great."


At 2:47 PM, Blogger John Law said...

I bet there excuses for selling will be:

1. I've made a lot of money and want to lock in gains(if they're smart they'll say their financial planners told them that).

2. I was told to diversify so I wouldn't lose big like people did in 2000(and if they're smart they'll say there financial planner told them that).

either way, they're selling, and not because they think business is heading up.

At 3:05 PM, Blogger John Law said...

whoa now!

"the CEO of Toll Brothers, Robert Toll, sold 20% of his stock in the last few months.  This would not have caught our attention–and scorn–had he not gone on CNBC to tout his company’s stock while he was selling it.  “The shorts are gonna get crushed,” he boasted. “You ain’t seen nothing yet.”  This “pump and dump” technique is a page ripped out of the playbook of the tech executives from the great tech bubble."

this is one of the best articles I've seen on the bubble.


At 3:25 PM, Anonymous Anonymous said...

That Prudentbear analysis is really excellent! It should be required reading for anyone involved in real estate, especially anyone thinking about buying a house right now.

As for Robert Toll...what a sleazebag! I hope the SEC investigates him for stock manipulation.

At 4:03 PM, Anonymous Anonymous said...

Good article

On a related note, here is a nice web site that shows the particular gap between income and housing cost by occupation.

At 7:07 PM, Anonymous Anonymous said...

anyone catch tonights premiere of "American Dad" ? by the creators of "Family Guy"

basically the gist of the entire episode was that the wife in the family started making huge bucks as a real estate agent..

then at the end, greenspan raised interest rates 20 points and "overnight, every real estate agent in america is now unemployed"

and then greenspan was attacked in the groin by his pet dog, named "Fannie Mae"

LOL! how mainstream can the knowledge of this bubble be before it finally pops?

At 7:35 PM, Blogger mspenelope said...

Hey Anon 707
That story is so hilarious!
Don't you think this story is just a way to start planting seeds (of doubt and caution)in the minds of the people that haven't figured it out yet? It's pretty perfect timing since a lot of people are predicting something big could take place this week!

At 8:53 PM, Anonymous American in Japan said...

"The eventual decline in home prices will follow an all too familiar pattern. As prices fall, the confidence of homeowners and potential buyers will erode and the most recent buyers–especially those that are overleveraged–will be the first to feel the pinch. As prices begin to fall, many would-be sellers who held out for higher prices will list their homes, increasing the inventory of available homes for sale. Prices will slump further as this inventory increases along with the time it takes to sell a home. Banks and lending institutions will then take on more foreclosed homes and try to quickly sell them. Lending policies will tighten, effectively closing the barn door after the horse has left the stable, thus gradually returning the mortgage market to its more old fashioned roots. Larger down payments and less creative financing will be required, which will decrease the size of the potential pool of home buyers. At this point it will be evident that the same reinforcing mechanism which propelled prices higher is now working in reverse to orchestrate their decline."

This is ezactly how the Japanese RE bubble burst. Exactly. I know, I was there. And, like Japan, I expect to see a 75% drop in prices in some markets (like the SF Bay Area) when it's all finished.

At 9:00 PM, Anonymous Anonymous said...

Hey Ben, another way to margin into real estate. Don't think we've covered this one on this blog yet:

Pledged-asset mortgages --

At 9:13 PM, Blogger PunKtilious said...

A little off subject, but will indirectly effect the markets in general. Keep an eye on North Korea.

At 9:15 PM, Blogger goleta said...

American in Japan,

I think you're absolutely right. Just that we don't know how long the decline will take. Even when it reaches the bottom, it might stay there for years, the time needed to rebuild confidence.

For Japan's case, I guess the confidence never comes back after 18 years. Our RE decline has a good chance to be that long too, as 77 million of boomers will start taking money from social security in 3 years. When the down trend becomes obvious, the earlier they downgrade to a smaller home or condo for retirement, the more money they will get.

At 9:42 PM, Anonymous dryfly said...

I hope Robert Toll is one of the first they haul in front of the judges when they start to convene the ‘Troikas’… after the revolution.

After reading about this pump-n-dump I'm sure he'll be sentanced to '9 mm'...

At 9:55 PM, Anonymous Anonymous said...

7:07 anon:

That's hilarious. You know it's a bubble when everyone agrees it's a bubble and yet it still goes on. I remember U.S. News & World Report had a cover story titled "When Will the Bubble Burst?" back in 1999.

Greenspan, on his last day at work, should go on national TV, announce an immediate 10% hike, and then, gathering an immense gulp of air into his superannuated lungs, lean forward into the microphones and scream: "TIIIIMMMM-BBBBERRRR!!!"

At 9:56 PM, Anonymous Anonymous said...

After read the Prudentbear analysis, I feel the house prices CAN not go down, otherwise the entire states will be in big trouble.

I am wondering in order to avoid this dilemma, the Fed will let dollar go down more to sustain RE bubble.
any opinions for this thought ?

At 10:00 PM, Blogger mspenelope said...

Below are highlights from an article that appeared today in our local newspaper, but the story is only available today......
What will home mortgage borrowers do when boom goes bust?
Some analysts and policy groups believe over-extended buyers are being set up for a fall.

The highly competitive home-mortgage industry may be setting up consumers to fail when the current housing boom ends
Demos, a public-policy advocacy group, characterizes the situation as "a house of cards."
Home buyer Katherine Norris is one of those highly leveraged buyers. Norris, 27, and her brother Benjamin, 24, recently used an interest-only loan and a "piggyback" adjustable loan to buy a townhome in Santee, near San Diego, with no money down.

The siblings plan to refinance within five years, before the interest-only loan's low-cost introductory period ends. Norris, an executive assistant, is counting on San Diego County's low housing supply to push prices higher.

"We don't think (the market) has anywhere to go but up," she said. "They are not building tons of new homes, and it is a very desirable place to live."

Even highly leveraged real estate investments are safer than rolling the dice with stocks and bonds, she added.

"If the bottom were to fall out of the market tomorrow, I still have a house to show for it. Both of us have steady jobs. Unless a disaster happens, we are pretty confident. The market is going to correct itself; it may even drop a little, but in the long run it is going to go up."

David Lereah, chief economist for the National Association of Realtors, dismisses gloomy forecasts, such as the Demos report, as "overly dramatic." He foresees a strong national housing market for the rest of the decade.

Javier Silva, author of the "House of Cards" Demos report, points out that mortgage brokers and lenders normally repackage and sell their loans to investors. That means they make their profit on the front end of transactions and have little to lose if borrowers go into foreclosure.

A generation ago, local lenders "provided the mortgage, so the lender had a vested interest in making sure that loan would perform," he said. "The bank would actually hold the loan for the whole 30 years."

Because loans now typically are held for a short time by originators, "due diligence is often ignored," he asserted.

At 10:01 PM, Blogger John Law said...

unless the Fed finds a way to make people borrow money to buy a house, they can't stop it.

At 10:24 PM, Anonymous Anonymous said...

"Even when it reaches the bottom, it might stay there for years, the time needed to rebuild confidence."

Agreed, although it won't be difficult to know when the time comes to re-enter the market. Whether 1 year or 10 years, rent as 1% of price is a good signal. Another is 8-10 times annual rent. When the "p/e" of homes is balanced, it will be a safe time to re-enter. Even if RE falls a bit more than this, it will return to this level in short order. The SoCal bust and recovery in the late 80's/early 90's is an example of this.

"I am wondering in order to avoid this dilemma, the Fed will let dollar go down more to sustain RE bubble."

With inflation already gaining momentum, I don't believe the Fed will risk hyper-inflation by lowering/maintaining ultra-low rates. Some on the blog believe that the Fed will risk it in the event of a dollar crises or financial bubble collapse. I guess time will tell...

At 6:34 AM, Blogger deb said...

I think the fed will sacrafice housing (and the stock market) if neccessary to protect the US Gov't ability to borrow money by selling bonds & notes. If they can't borrow any more, or only at horrific rates, they are done. Hyperinflation would decimate their ability to borrow.

At 7:31 AM, Anonymous Anonymous said...

Pledged-asset mortgages ----

Interesting, I havn't heard of those, but I am never surprised whith what those lttle financial devils can come up with.

At 7:57 AM, Anonymous proudrenter said...

---Agreed, although it won't be difficult to know when the time comes to re-enter the market. Whether 1 year or 10 years, rent as 1% of price is a good signal. Another is 8-10 times annual rent.---

If you are correct, prices have a long way to fall in my area in NorCal. The home I rent for $4,500 is worth $2.2M. According to your calculation, it should be worth $430K-$540K. A home down the street just rented for $2,750 and is worth $1.2M. Your calculations say it should be worth $265-$330K.

At 9:55 AM, Anonymous Anonymous said...

"A home down the street just rented for $2,750 and is worth $1.2M. Your calculations say it should be worth $265-$330K."

Depreciation of this magnitude sounds crazy, but is it? My brother-in-law owns a house in Redwood City. It's just a regular house, 2,200sf, in a good (not great) neighborhood in the flat area, not the hills. He had it appraised at 1.2M recently and yet his income is about 85K, and his neighbors are all regular workers with similar incomes.

Rent on a 1.2M house should be around 10K, but it won't be anywhere near that in that area of Redwood City.


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