The Rude Awakening
Laguna Beach, California
Tuesday, March 27, 2007 ------------------------- - Mish's housing Report - What you had to say,
- More woes for lofty lenders,
- Another Oscar in the pipes for the "Goreacle" and more…
------------------------- You are receiving this email as a part of your Subscription to Agora Financial. Should you wish to unsubscribe please follow the instructions at the bottom of this email. ------------------------- Joel Bowman, late for yet another train in New York, briefly reports… Last week I wrote, "It seems every man with a doormat, and some without, have an opinion about the subprime housing sector." Well, it seems that every Rude Awakening reader (most WITH doormats, we would assume) also have plenty to say regarding the issue. After publishing our two part interview with Mike "Mish" Shedlock, author of The Housing Tsunami research report, we were inundated with reader mail. Before we get into Part II of the Housing Mailbag, you might want to take a gander at the interview that almost caused our Rude Awakening inbox to explode. The Housing Tsunami, Part I - A Conversation with Mike "Mish" Shedlock The Housing Tsunami, Part II - A Conversation with Mike "Mish" Shedlock
And now, the mail… ---------------------------- Dear Rude, I enjoy reading about the housing market. I experienced exactly what has been written about. In October 2004, we purchased a home for $275k using an interest only loan (I really shouldn't have qualified for that much) and I lost my job in June 2005. We barely kept up with the payments and escaped foreclosure by two weeks in late August of 2006. We will not be able to finance another home (credit wise) until September of 2007. Since property values are going to continue to decline, I do not want to buy prematurely. We had to negotiate a "short-sale" with the lenders for me to sell our home. The sale price was $259k. After sales commission to the agents, we lost $37,000 on our "asset" almost two years after we purchased the house. When I talked with the lender who allowed the short sale, I asked if there were a lot of short sales in the process and she said they had a lot of requests like mine (April 2006). Your Faithful Reader,
Mike C. ---------------------------- Dear Rude, I am a financial planner in Southern California and our firm has a little over 2500 clients ranging from "welfare to wealthy" and everything in between. We too have been warning our clients about the housing bust for over 2 years as well as the use of "creative" financing with pay-option ARMS. We have had a tremendous number of clients worried about their payments going up $600-1500 per month and wondering if they can hang-on for the duration. Housing prices are steadily declining and as the builders try to clear out their remaining inventory of homes, the prices are lower than what many people originally paid for their homes-not to mention all of the cash-out refinances that have placed them upside down. Many prime borrowers will feel the squeeze as well when they're loans reset and home prices are in freefall. One more thing adds a tremendous weight to the situation. Although there were approximately 75 million baby boomers born between 1946 and 1964, there are currently well over 100 million due to immigration and such. With the US population odometer clicking over to 300 million in 2006, approximately one third of the population will be attempting to downsize and/or retire over the next 20-25 years. This will put even greater pressure on the housing sector not to mention the stock market and our consumer-driven economy. Walter D. -------------------------- Hello. I enjoy the comments. However, I would like to note that it is important to realize some of the issues behind banks' falling loan loss reserves. Most importantly in the context of this discussion is the fact that the SEC does not like banks to "manage" their earnings. That is, they would complain about banks' socking money away in loan loss reserves, and then pulling the money out at some future date when better earnings numbers are needed. So, the SEC requires that you only keep in reserve what you feel you are likely to lose in the upcoming year. This has become very difficult of late, because this credit cycle has been very strong. Many banks over the past year or two have shown net recoveries, not even credit losses. So, if you had some large losses several years ago, but cannot show recent losses, they are suspicious that you are managing your earnings when you say that your reserves should not be going down. One can try to haggle with the regulators, to say that you anticipate problems, etc., but it is not so easy. The FDIC, by the way, doesn't mind if you have extra reserves - they think it's a great idea, since their concern is solvency. Banks' loan loss reserves are not decreasing because bankers are not smart or don't have a good memory - there are often perverse regulatory reasons at work. Best regards,
Anonymous --------------------------- Dear Rude, I think Mr. Shedlock is all "mished-up". We had a housing bubble and the idiots who lent money to idiots who could fog a mirror ought to be in the trouble they are in, but otherwise we'll have a modest correction that we will work through, because the basic underlying fact is we have a growing population that will shortly absorb the excess inventory and real estate will then resume its 8-9% annual increases, especially as the dollar falls off a global cliff, value wise. Yawn. But to make it interesting, Mr. Shedlock should hook up with Al the Goreacle and do a documentary on Global Overlending, demonstrating how] it is proven scientific fact that the average house will sink 2 feet due to the shaky financing it was built with, and if nothing is done about subprime lending practices, a global financial meltdown is coming. I see another Oscar is the Goreacle's future already. Lewis B. --------------------------- Dear Rude, Three points: 1. Between 1985 and 2006, national median house prices are up by the factor 3.1. During the same period, M3 is up by the factor 3.3. This suggests to me that perhaps national median house prices are about right, just reflecting the money supply increase.
2. Of course, median house prices have risen far faster in some (bubble) regions. California has the added feature of no deficiency judgment, meaning home owners can just walk away from their homes and the lenders cannot touch their other assets. This is not the case in Colorado, Louisiana, and (probably) most other states.
3. My guess is that Mish is only partly right; the damage will be somewhat confined to California, Florida, Arizona, Nevada, etc Paul N. | 
