Falling Up: The New Business Model

So this weekend, like many of you SA fans, I was reading some articles, logging some comments, and cheering and booing alternatively with the small voice that is my thumbs… when I came across this submission by Reggie Middleton, entitled “Banking Sector: Worst Is Yet to Come”.

The bulls and bears were trading punches over the strength of Reggie’s stimulating argument, whereupon I delivered a somewhat lengthy, extremely bearish left-hook from another (real estate-centric) perspective, which remained unchallenged throughout the thread.

Then, further down the line, a commenter with the handle “dragonpaw” made reference to my post and only half rhetorically asked what in the world am I thinking by continuing to serve in a REALTOR capacity, in light of my somehow missing the ascot-wearing-schmoozey-agent prerequisite, and calling as I do, for an imminent correction to an over-engineered head fake? He also expressed surprise at my willingness to add fuel to the fire.

Dragonpaw, I take your question as a resounding compliment. Truth is I DID consider a career change before the subprime collapse, where I am on the record as having predicted it, and then again afterwards, when I realized even though I was smart enough to predict it, that I wasn’t smart enough to capitalize on it… and once more, about a year ago, when I went on record as predicting the future prime collapse.

This year I have been “falling up”… tracking to earn near “boom-time” profits, but working three times harder, and struggling everyday to act out of integrity in the face of blatant stupidity, mass hypnosis, and ruthless competition.

But I’m good at what I do… I love what I do… and by the way, in case you haven’t noticed, unemployment is pushing approximately 20% these days, so it’s not like there are many alternatives. There’s a silver lining to being a free market capitalist type: I might not make any money… but at least no one can fire me!

Truth be told, my blatant honesty isn’t going to “add fuel to the fire”. First, the fire is already raging. And second, nobody seems to listen to me anyway, except for people of like opinion. But if I can help a few people who aren’t as insulated as they think, to sell a little quicker, for a little less than they had hoped, a little earlier, so that they don’t catch a falling knife later, then there’s some value in that.

And if people look back on my public messages and private advice, with appreciation for separating advice from commission, even as the overwhelming majority took solace in the lukewarm justification of technical statistics and comforting rhetoric… then I will still be in business on the other side of this mess. And more importantly I will look back with a clean conscience.

Furthermore, right now there is nothing free about this market. This year 80% of San Diego homes sold for less than $500k. Currently 57% of all active homes in San Diego are priced higher than $500k. Last year we had a record number of foreclosures. Since then, we have only had an increase in loan defaults. Loans are actually defaulting now at an increasingly faster pace. And yet inventory is down, not up. And sales volume does not come close to absorbing the "shadow inventory". Believe it or not, as a realtor I am not automatically immune to becoming sick when listening to party line misrepresentation of statistics.

The banks have not been putting their non-performing assets on the market, and they are piling up. And yet, there is precious little supply on the lower end, where it potentially makes intrinsic sense for certain well qualified buyers to step in on a case-by-case basis. And there is no demand on the higher end for either the houses that are about to get their value cut by a fundamental correction of another 30%... nor the financing that underpins their transactions.

So as far as I’m concerned, let the government and the banks (what’s the difference anyway?) get what they have coming to them. Let’s clean house, get through the chaos, and start building value again where there’s value to be had. The days of smoke and mirrors are behind us. It’s just a matter of time until Wall Street catches up to this new reality. We are fast approaching another six-month period where there won’t be enough credit or reasonably priced supply to get any deals done anyway. Better to take our medicine sooner rather than later, and get on with it, so we can finally put this “other shoe dropping” argument to rest.

I know I’m ready. I’ve been practicing what I preach for a long time. I figure this is why I’m still in business while about 75% of my competition is not. And I know my fellow free market advocates on Reggie’s thread, and other threads like it, are up to the challenge. And this is a good thing, because the rest of the country is going to need some strong shoulders to carry our sorry selves out of this next crisis.

When people talk about optimism as a method to push through fundamental problems, I think they’re acting out of cowardice. But when they are ready to be optimistic about what value they can personally create to effect positive change AFTER they see reality for what it is… then I guess we’ll have more reason to take them seriously.

Hey dragonpaw, one of your thumbs ups came from me.

Disclosure: long VIX calls, long JPM puts

Comments

[Reggie Midd...:]

Kudos!

Oct 05 06:29 AM

[LilBob:]

I agree with Reggie for shouting kudos to this article. I personally believe there's still a great deal of opportunity right now. I have family in Sarasota and I watch that real estate market pretty closely. My brother and I have even been kicking around the idea of getting into homebuilding down there-focusing on tiny little single story retirement cottages-which we know we'd be able to sell. It's really a shame that too many of the wrong kind of homes were built. Anyone who can manage to keep their construction costs down, create very simple yet attractive cottage style floorplans and focus on the entry level-sub $125,000-market can still make money in real estate.

Oct 05 07:23 AM

[Michael Clark:]

I like about everything you say in this article. I'm following you now. I like honesty -- and sometimes (during brutal times) the honesty needs to be brutal. Keep it coming.

Oct 05 07:40 AM

[perceptions...:]

Whilst the current Bank failure headlines says something about the current status of US banks, it is also worth a thought what their status would be IF, MARK-to-MARKET VALUATION had been left to stand, instead of being suspended by the US Federal Government?

If banks were reporting current market values on their assets, Residential housing in particular, then the majority of banks would now be under water!

Oct 05 08:06 AM

[Graham Jervis:]

www.zerohedge.com/arti...

Interesting Article, probably backs up Reggie's argument.

Oct 05 08:35 AM

[Leftfield:]

You set a great example of getting the facts out there and then proceeding. Otherwise, it's, ready, fire, aim.
Glad you're doing well in a tough business.

Oct 05 09:30 AM

[reneeg:]

Would you explain why bank are keeping properties off the market? This doesn't make sense to me. I've read that these properties are being bundled with other mortgages that will balance risk (RE-MIC). In the long term, won't these properties be sold eventually at an even greater loss as the properties deteriorate. Who really owns the houses that are left behind?

Oct 05 11:09 PM

[Seth Chalnick:]

Hi Reneeg,

In short, there are probably many reasons why banks are keeping properties off the market, though I’m not sure which is the most compelling. Actually I’m not sure anyone is… even the banks themselves.

Here are a few likely reasons:

-So they don’t flood the market with inventory thereby putting downward (spiraling) pressure on home prices.

-So they don’t publicly acknowledge the amount of non-performing assets, which would put downward pressure on their share prices (not to mention, call into question the stability of their very business model, and by extension, the world financial markets too).

-So that the public can "catch their breath" and confidence can be inspired to resume spending. (The government and banks are working together on this one.)

For more in-depth coverage of these questions and more importantly, the very importance of asking these types of questions… check out my SA article called, “Here’s a Statistic I Dare You to Challenge”.

Hope this helps,

sc

Oct 06 11:02 PM

[reneeg:]

thanks!!!

Oct 08 03:24 AM