Monday, June 16, 2008

Bail Now or Later?

From the Sacramento Business Journal:

With most of the country still reeling from the subprime mortgage meltdown, Mark Hanson is warning of the next looming blow. Hanson, a bank consultant and former mortgage broker from the Bay Area who writes a blog under the name "Mr. Mortgage," is among a handful of industry soothsayers who expect another big wave of foreclosures to hit sometime around 2010, driven by defaults among people holding less risky loans known as "alternative-A."..."I think we are through the subprime blowup, but that's nothing compared to what's coming," said Hanson, who made similar predictions on CNN in April.
Others in the industry say such predictions amount to Chicken Little panic. "I hear that, too -- that there's another subset of groups that haven't come due yet," said Jeff Tarbell, broker of record for Sacramento's Comstock Mortgage. But Tarbell said he's not concerned about a second foreclosure tsunami because borrowers who owe more than their homes are worth aren't waiting for their mortgage rates to reset. Those inclined to bail are already doing so, he said.
Tarbell, who hosts the weekly "Talking Money with Jeff Tarbell" on KHTK-AM 1140, said upside-down borrowers looking at the prospect of an interest rate reset in a couple of years called his show frequently early this year, and seemed unlikely to sit tight until their loans reset. "It's like I'm Dr. Phil," he said. "I'm doing grief counseling. They have realized they are in a negative equity situation and they're not going to sit around and wait. How many people are going to be willing to double their monthly payment when they're upside-down on the house?"
From the Sacramento Business Journal:
In the good old days of a few years ago, opening an escrow on a house meant the sale was practically a done deal. Today, it's a toss-up whether a deal will make it to closing or fall apart before the sale is completed. Title companies say they are working hard to keep their escrow-closing rates above 50 percent in the face of declining home prices and tighter lending criteria..."I would say 70 percent would be normal...said Casey Sheehan, senior vice president of Old Republic Title Co. in Folsom. The past year has not been normal. "Just generally speaking in our industry, I think title companies are struggling to close 50 percent of what they open," Sheehan said.
The near future isn't looking much better. "The perception was that 2007 would be the worst, and in 2008 we'd start to see a turnaround. And we didn't," said Lenora Shealy, vice president and escrow administrator for Fidelity National Title Insurance Co. in Rancho Cordova.
From the Sacramento Business Journal:
Standard Pacific sold all of its inventory in the Sacramento region during a recent sales push and has about 200 lots left that are ready to build. It has no immediate plans for new lots once that inventory is sold, but the company, backed with the fresh cash, is looking. Deals are unlikely to happen until new-home prices start rising again or the price for lots falls far enough to make a profit. "I don't see it happening this year or next year," Nicholson said. 'We're going to continue to be in survival mode."
From the Sacramento Business Journal:
Aarrow Advertising, founded by two San Diego teenagers in 2002, specializes in "human directionals" -- people skilled at an aerobic form of sign spinning. Armed with iPods and energy, Aarrow employees were a regular sight on the streets near subdivisions, twirling, tossing and waving oversized arrows to attract visitors.
Aarrow general manager Ly Hai, 25, estimated that during the peak market, homebuilders made up about 75 percent of the company's clientele...[H]omebuilders have dropped to about half of Aarrow's business in Sacramento and other cities that have been hit harder by the downturn, Hy said. "As the recession came, the home developers are the ones that could no longer afford to keep a regular human directional out every weekend," Hy said.
Aarrow has picked up work in the past year from apartment complexes and retail businesses, from chiropractic stores to Round Table Pizza.
From the Sacramento Bee:
The Kings are more than just a sports team to Sacramento. They are like a mirror for the region. When the Kings arrived in Sacramento in 1985, an emerging city embraced the club with the innocent enthusiasm of new homeowners. When the Kings ascended to prominence in 2002, the local economy and housing markets were booming – and Sacramentans gladly dropped bundles on soaring ticket prices.

When the team tumbled a few years back, it was like the housing market meltdown: The prices at Arco Arena were not equal to the value of the product, so the old barn grew barren, like someone had foreclosed on the empty seats.


Patient Renter said...

The perception was that 2007 would be the worst, and in 2008 we'd start to see a turnaround

Sure, that was the perception among everyone who failed to forsee the bubble. Have you not learned yet? Get a clue, the mainstream economists don't know WTF they're talking about.

If you still believe those people, do it at your own risk, but don't play dumb a year from now when, surprise!, there is a recession, alt-a is worse than subprime, more lenders blowup, forclosures don't abate, a big bank goes down (and is bailed out), etc. The "who would have known" game doesn't work.

Diggin Deeper said...

And I would add mortgage rates could move much higher as would be buyers choke on higher payments along with higher energy and food costs.

One factor that's easily overlooked is that world population has doubled since 1970 This plays right into energy, food, and water issues we're facing today. While the pat answer is "bubble based on speculation", you don't add 3 billion people to the food chain and not expect them to meet their basic needs, or develop their economies in attempts to move forward.

There doesn't seem to be any easy or quick solutions and its going take time... maybe as long as it took the Japanese to climb out of their 16-17 year recession.

Get ready to do more with less.

sacramentia said...

DD -

I had some family in town over the weekend with ties to Argentina. He was saying that his relatives who are farmers in Argentina are not planting crops because the fuel makes it unprofitable to do so. This is not good for the supply side of the food equation. And they are having trouble finding fuel.

Diggin Deeper said...

"This is not good for the supply side of the food equation."

We all know that high oil prices drive everything from corn prices to the cost of sending a FedEx package. What's more it's not beyond the possibility that we will have gasoline shortages again in this dead on hurricane could do that overnight.

As all this relates to Sacto real estate... commodity price inflation added to real estate and dollar price deflation, is a recipe for a long tough recession and the only way out is for very high interest rates which would further crater the market.

Sure the price of oil should come down. Facts are pure and simple... it's a supply driven bull market and supplies are not being replaced as fast as they're being used.

I just read an article that basically said that by 2010 oil production (from the wellhead) will decline worldwide by 2% per year while at the same time demand will grow by 1% per year...certainly not moving in the right direction if both supply and demand are in equilibrium. In the 60's the world was replenishing oil reserves to the tune of 60 Billion barrels per year. Today, we're lucky if we can find 10 Billion barrels per year to replace the oil we use.

I really do believe that $4 gas will be a bargain over the next several years. I also think we're well on our way to 10% interest rates or higher over the same period.

luca said...

wow- diggin deeper if your right 10% interest rates will more than bring housing in the central valley back to reality. People will not be able to sell homes for the life of them...,.,.arhhh

James said...

"I also think we're well on our way to 10% interest rates or higher over the same period."

I am just throwing this out for argument sake, but if the 10 year note is 10%, we would expect inflation numbers to be running 8-9%. Wouldn't high inflation beget higher wages as many COLA increases are indexed on CPI? This would make a higher monthly payment affordable, thus driving up the nominal price of a house. On an inflation adjusted basis, assets would remain steady in value.
So, if you truly believe this, then would it not make more sense to purchase now and lock in a low long-term rate. As wages grow, you are brining in more per month, yet debt coverage remains constant. As a renter your rents would also increase at a rate close to CPI, so on a cash flow basis, you would actually be better by owning a house. In the long run, does a temporary 5-10 drop in the home price really matter? If one is looking to buy for the short run, then one should continue to rent.
In 1991 my parents built their home for $260,000. Over the next few years they watched the value sink to $230,000. They thought is was the end of the world and paid their mortgage in disgust every month. Now the same Granite Bay home is worth about $550-600,000 and was appraised at the peak for just under $800,000. If they had waited a few years and saved $30,000, would it really made a big difference in the long run? Same goes for this market. We are down nearly 41% in Sac. Most think the bottom will come at 50% which could happen in the next year. Rates increasing from 6% to 10% over the next few years, will have a much greater impact on your delayed purchase. Lets say you buy a house for $250m today and get a 6% rate vs. buying a 227m (a 9% decline) house at a 10% rate. The monthly payment on the first scenario would be $1500, on the second it would be $2000 per month. So what is better? Unless we see another 25% drop in inflation adjusted home prices, waiting does not make sense.
You may argue rates will come down, that they might, but how long will it take? How long will you be making higher payments? How much will your rent increase during the periods of high inflation while you are waiting to buy? It is a very, very hard call to make.
There is another factor, that is owning a house. It is so nice to be able to do what you want with your own home. Don't like the color of the front door? Paint it. Want to get a dog, adopt one. No asking permission.

Deflationary Jane said...

Well good freaking luck getting a COLA raise if you work in Gov for the next 5 years or so. Been there, done that.

Wage inflation will be kept down by globalization, just like it has been for the last decade. Don't believe me? Ask anyone in the tech field.


Looks like the easy money has already has been made. Now these mortgage brokers and sign spinners will need to find real jobs.

sacramentia said...

Wage inflation will be kept down by globalization, just like it has been for the last decade. Don't believe me? Ask anyone in the tech field.

Agree with you comment on wages, and if there is no wage inflation and food and fuel just keep getting more expensive, that will be deflationary for everything else. The consumer is already tapped on debt so there is no money left to run up prices in aggregate.

The market may dictate high rates for the 10yr, but I think the Fed will be holding rates low and talking about 'inflation' for several years.

And I'm betting on a green energy bubble to bail us out eventually.

James said...

"And I'm betting on a green energy bubble to bail us out eventually."

I agree whole heartedly on the green energy bubble. The legislation is in and is being created to force a new asset bubble. This economy has become a bubble economy. Buy green stock, ride the wave until it seems way beyond illogical, then cash in and wait for the next bubble.

As far as wage increases, there is more than tech and govt out there. A survey of my world of friends and family indicates plenty of wage increases. Keep in mind wage increases can also come from promotions and job changes. As far as non-profits and associations in Sacramento, each of the directors or ED's that I know receive annual COLA increases or are planning on providing raises in excess of 2-4% this year. (I interview and review the financials of literally hundreds of business and non-profits a year in my job, so I think I have a decent pulse on Nor-Cal small business, 5-100MM revenues). My father in law is a very high ranking public employee who was recently told he makes $30,000 too much, so he took a lobbying job making nearly twice as much. I would call that a pay raise. My friends in the banking world have all experienced 5-10% annual wage growth in the last few years with no indication (outside of my quant friends in NYC) of slower wage growth. My sister is a high school math teacher and her union secured a nice raise this year. My father is retired and his SSI receives annual CPI adjusted increases, plus his retirement portfolio is heavy in TIPS. My brother in law is a BK attorney in Sac and has doubled his income in the last year. I am a VP of commercial banking for a major regional bank and will most likely rec a 5-8% raise this year on top of the 10% for 2007. My good friend is a walnut farmer and is making record profits. And the list goes on from PGA golf pro's receiving nice raises to mineral rights attorneys to doctors expecting significant wage growth. Most of the people around me seem to be getting raises and expecting them to continue.
I guess it depends on perspective.

My guess for commodity prices...China and India will eventually have a slowdown and demand for resources will take a break. Oil will find resistance at $150 bbl and might make $175-200, but any mention of ANWR, developments in tar oil production, or T. Boone Pickens saying the price is too high can easily send crude down $30-40 per bbl in a matter of weeks. Most traders estimate at least this much speculation in the crude futures. I am out of the market as it is just too hot right now.
The dollar is finding a bottom and at some point will regain strength as the world finds weaknesses with the euro. The eventual drop in commodity prices will further support the dollar. Inflation will be contained while the consumer will blindly spend every dollar like they always do, thus setting us up for another more volatile gyration next decade.

Sold in '05 said...

I have to say that wage inflation will be VERY slow if at all. In order to support paying higher wages, business will need higher revenues and a recession is not conducive to that. The other thing that might push wages up would be a tightening in the labor pool. This also seems very unlikely, between globalization and rising unemployment due to the slowing economy.

I also don't see how landlords could demand higher rents, at least in the Sacramento market. The supply of rentals, especially houses, is super high and with so many vacant homes in the area is unlikely to drop much even with foreclosure people moving into the rental home market. My personal rent has risen zero dollars over the three years we have been here even though we have refused to extend our lease beyond it's current month to month status. The landlords have NO leverage in this market to demand higher rents. Things may change once the total cost of buying actually crosses below the cost of rent but for now, in 95747 it is still more expensive to buy than rent, although the gap is closing.

The old tired argument that you should hurry up and buy before interest rates rise is just pure realtwhore B.S. I will GLADLY pay 15% interest on a $200k house rather than buy that same stucco crap box for $500k at 5%. Interest rates can be refinanced, principle can not. Case closed. Real-estate peddlers are no better than their brethren the used car salesman... "Who cares what the sales price is? Look at the great payment you're getting!"

Diggin Deeper said...

"Wouldn't high inflation beget higher wages as many COLA increases are indexed on CPI?"

It would but first off, you've got to believe the CPI. It's probably leaving out half the real core inflation rate....

James said...

Sold in 05

How long do you think this recession will last? In 3-5 years you don't think we will see any wage growth? I'm not saying the response is immediate. It never is in this scenario.

"I will GLADLY pay 15% interest on a $200k house rather than buy that same stucco crap box for $500k at 5%."

My point was we have already had most of the drop. A $500m stucco box is not going to find a $200m price. They have already dropped 40%. So getting a low rate now at basically bottom prices is not a bad idea.

Are you still Stuck in 05?

Deflationary Jane said...

When you measure wage inflation, it's for the same job with the same duties. People advance to better positions all the time but it's not the same.

Getting paid $7.75 in 2000 and $8.50 in 2008 to flip burgers as a line cook is wage inflation. Earning $10.25 in 2008 at the place down the street as a burger flipping assistant manager is not wage inflation. It's a career advancement.

Pay increases in wages for upper management has been pretty consistent. That has not been happening for entry and service level employees. That is why you hear a lot about the deepening divide between the haves and the have nots.

That said, the one place I've seen huge wage inflation is in local munis. I didn't believe it until recently. I was floored.

And in case you missed it James, I had lots to say about projections coming from BEA and BLS. They are using growth figures from late 05 which overstate growth rates in both population and wages. I think the state of AZ had to revise several years of growth estimates because of this. I'd have to find the story again.

As to inflation/deflation, think of the average joe and his earnings as a pie. The pie can't get bigger because of external pressures. So when the dollar tanks, everything that is imported or that has lots of fuel in it's creation goes up and up. What that in turn means is that anything produced and measures domestically has to shrink to a smaller slice of the pie.

RE and other like assets are just the first slice to be hit since it's a domestic product that isn't tied to other people's wages in production.

James said...

Jane, I know the technical definition of wage inflation, but changing jobs does create a form of wage inflation. Typically a job is refilled at a higher wage than the previous person holding the position. This creates does not get captured in data.

Take a look a housing prices during other periods of high inflation. They do catch up with inflation.

James said...

Also, the burger flippers are not the ones buying houses, its "haves" who are buying. Would it not be more prudent to study the incomes and projections of these persons to gain a better understanding of the real estate market?

Ollop said...

"Take a look a housing prices during other periods of high inflation. They do catch up with inflation."


I think you have a good point with this statement. I've been considering it lately since I have to move and either sell my house at a capital loss or rent it out on a negative cash flow basis for an undetermined number of years.

The counter argument I keep coming back to is that those other periods of high inflation were not immediately preceded a huge run-up (bubble) in home prices and subsequent collapse. I agree with you that a large portion of the price correction *may* have occurred. However, I think there is zero to low risk that prices will catch up with inflation anytime in the next 5 to 10 years.

So in my case, I am probably better served financially to realize the capital loss now rather than carry a negative cash flow for an undetermined time.