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Seth Chalnick

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  • The Great Reflation [View article]
    And that is precisely what I am talking about when I say the consensus view on this is wrong. The pool of outstanding ARM holders is still roughly twice as big as the entire subprime pool. There is a very good reason why they weathered the storm. In fact, there is only one reason. The Fed jumped in to stop the hemorrhaging by artificially suppressing rates and buying mortgages that no one else would. We interfered with the supply/demand model. If the Fed exits, there will be a vacuum.
    Jun 4 12:21 PM | Likes Like |Link to Comment
  • The Great Reflation [View article]
    “That is kind of a contradiction, don't you think? People who got ARMs are going to get screwed and people who paid cash are going to get screwed too?”

    No, it is not a contradiction. People buy homes for different reasons, and under different circumstances, and at different points in time.

    Buyers with ARM’s from 2005 (most of which have only recently started paying back principal after teaser interest-only periods expired), who have not been able to take advantage of today’s low 30 year fixed rate programs are susceptible to payment shock. We all watched how this plays out before rates were suppressed again.

    Today’s cash buyers are vulnerable in the sense that their cost basis is their bottom line. Buyers with loans enjoy a reasonable payment today that will seem cheap in the future. Cash buyers (with short-term exit strategies) have downside exposure if higher rates come quicker than expected. Obviously for cash buyers planning to hold for the long haul, this is less of a concern, but still, they are tying up capital today that may likely cost more to access in the future.

    “Here is an alternate scenario - the oil boom in the US…”

    Yes, this is huge. And it is one of the few things aiding this freight train of momentum that has real legs.

    Along these lines, I could also imagine another boom coming in technology.

    That said, it seems the consensus view is that the real estate crash has run its course, and will now take second stage to other markets. I think folks are underestimating just how quickly the momentum in real estate can reverse, as well as the massive trouble this could cause the broader economy all over again.

    I am not attached to being right. Actually I have been impressed that we have somehow “normalized” this insanity for this long, and it sure would be great if it continued. But as you say, I do in fact “think this time is different”.

    I agree with much of your closing paragraph. We have been attracting fewer irresponsible borrowers and cleaning up the risk with long term buyers at historically low interest rates and reasonable affordability.

    You did take liberty with my cash buyer comment… it is not a risk to the market I was warning about, but rather a risk locking in a cost basis in real cash, which can then lose value at a faster rate than consensus thinks possible.

    However, “So here is what we have - an improving economy, fewer irresponsible people owning homes… yet somehow interest rates going up a little bit so that we aren't quite at record affordability rates will tank the market. That really doesn't add up.”

    But it does add up because… while the trend of cleaning things up is healthy… the mouse is only half way through the snake.


    -For ARM holders (many of whom still cannot break even if they had to sell), a 1% increase translates to 12.5% higher payment per month.

    -For traditional buyers, their cost per month is more sensitive to rates than price. To keep their payment from increasing, a buyer of a $500k home must offer only $455k if the rate ticks up by 1%... or a 9% decrease in the home’s value.

    -A one percent increase above today’s rate is only around 33% of the way towards the 100 year average.

    -Will a little interest rate bump tank the market? No. But if the Fed exits QE # (whatever we’re up to)… what will hold rates from jumping even higher?
    Jun 3 11:21 PM | 1 Like Like |Link to Comment
  • The Great Reflation [View article]
    Wow, if we are so focused on right and wrong, why are you so fixated on "thumbs up or down"? Isn't the point of these type of forums to foster a clash of ideas and take the best of each? Why does “thumbs up” even matter to a poster who doesn't even use their real name?

    The underlying point of this article does not even require statistics to be validated. Why? Because nothing has changed. We still have the same dysfunctional, propped up, intervened with bubble that we had in 2005 where home prices are many more times the average annual income than they were prior to the bubble. And we still have more homeowners vulnerable to adjustable rate mortgages than the amount of the entire subprime umbrella.

    The very point is that all your statistics are predicated on vapor.

    I know some of the stats you rely upon to make your decisions. And I also know from direct experience how many of these stats are warped, misleading, or outdated by the time you read them. I know this because, as a leading real estate broker in a top tier county, I have direct experience on the front lines that often contradicts the published data. If you choose not to accept my informed opinion, great… that’s what makes the world go ‘round.

    For some folks who are using 4% money to make long term purchases in a home that will give them tangible and intangible value, there may never have been a better time in history than now to purchase a home. For others, who are using all cash, or who are buying with the intention of flipping in 2-5 years, they are playing with fire. If rates stay low, there is no doubt we are going to continue to see significant appreciation. If rates go up, however, prices will plummet again, and have a cascading effect on the economy. The real question is when will rates go up? The fact that they went up .5% last week, and that folks are starting to talk about the Fed exit is something to take note.
    In the stock market, the inevitable rate increase will have one of two effects: either money will shift from bonds to equities... or it will be a drag on the economy. I am in the "economic drag" camp, and would rather not earn another potential >10%, than lose a potential >5%.

    In the real estate market, the inevitable rate increase will be brutal. The lack of inventory we are experiencing is not a healthy sign that we have made it over the hump. There are still many folks who cashed out their equity, or who purchased during the boom, with zero money down, who cannot afford to sell, because their home is worth less than they owe. If we push rates up to the same 5.5% rate they had when initially buying the home, only factor principal and interest payments over the shorter term amortization schedule, then the payment shock increases enough to force marginal folks with tight budgets to tilt.
    Jun 2 04:43 PM | Likes Like |Link to Comment
  • The Great Reflation [View article]
    Well to be fair, they took away the "thumbs down" feature, so we'll never know how many people disagree with my take. Popularity notwithstanding, I remember being very unpopular in 2005 asking folks in my area what might happen if, say, prices started to come down? This did not even compute into their world view.

    Consensus opinion and prevailing pundit analysis today stand in stark contrast to the downward spiraling blueprint which we only just watched play out. Chalk it up to human nature… 2008 was rotten. People want to avoid the mere thought of that pain and who can blame them?

    The blueprint has not changed. Only the inputs have changed. Take the foot of the gas and the fundamental vacuum will resume.

    Any good debater can spin statistics to fit their agenda, and I can sit here and prove how relevant my “stat” is in my area, or I can apologize for not being a typical “fence sitter” and mitigating my comments with phrases like, “in some cases”… but the point of my comment was this: let’s not get hung up in the liberties the author took to get his point across… but rather focus on the underlying theme. The same goes for my comment.

    Not a single aspect of the real estate market was allowed to correct naturally. All of the bailouts, legislation, intervention, media propaganda, and collusion between government, banks, and the fed combined to make one heck of an artificial (re)inflation.

    I am not even debating whether or not this is a bad thing… or a bad thing much lesser than the evil alternative. I am just saying it is not sustainable. And I have not seen a single fact that attempts to prove otherwise.
    Jun 1 06:04 PM | 7 Likes Like |Link to Comment
  • The Great Reflation [View article]
    Critiquing an article is fine, but complaining about a perspective without positing facts to back it up amounts to whining. If the crash taught us one thing, it is that we, as a group, have a short memory. We want so much to believe some things, that we will patently ignore facts.

    Yes, the article takes liberties, and even acknowledges such along the way. But the message is clear: everybody agrees in hindsight that the crash was inevitable because fundamentals did not support the bubble. The subtle differences between the last bubble and today are negligible compared to the striking similarities.

    During the boom, prices nearly tripled in a short time frame. During the crash, they were only allowed to correct by 30%-40% (in most cases) before the intervention was applied. Now prices have roared back to nearly 10% off peak. It does not take a rocket scientist to figure out how we got here.

    Simply consider these questions:

    Could the “recovery” have happened without suppressed interest rates?

    Is 4% a sustainable long term rate?

    What happens when rates go up?

    If you think rates won’t increase, then how do you explain the .5% pop in four days last week?

    It would not take a “10% level” rate to be catastrophic, or even 7%, which happens to be the 100 year average. Rather, a modest 5.5% would do the job sufficiently.
    Jun 1 10:40 AM | 15 Likes Like |Link to Comment
  • Housing Is Not Sexy Anymore, But It Holds The Key [View article]
    I don't presume to have the right answer either, but when high frequency traders post three consecutive quarters without a single daily loss, while average investors can't string together 3 consecutive winning days... something is fundamentally wrong.
    Oct 2 02:55 AM | Likes Like |Link to Comment
  • 'Foreclosuregate' About to Explode [View article]
    This is such a good point.
    Oct 12 03:25 AM | 1 Like Like |Link to Comment
  • Cheat Sheet to Foreclosure Crisis [View article]
    Seems like if supply decreases, then prices should "stabilize or decline less in the short run", but one thing I have learned during this period of unprecedented intervention is that the resulting consequences can unfold unpredictably. If the future outcome of this event is uncertain, it means current and/or future values are uncertain. Uncertainty puts a drag on price as buyers' level of caution goes up.
    Oct 12 02:56 AM | Likes Like |Link to Comment
  • Strategic Defaults Threaten All Major U.S. Housing Markets [View article]
    Yeah, my comment was off base... and I see now that I framed it all wrong. It's MS's hypocracy I can't stomach, and I should have been more clear and less lazy with my words. I didn't mean to sound like I was accusing you of missing something. I just meant to highlight something that wasn't the focus of the article... my bad. Your submission is a good one, which objectively sets forth stimulating discussion points.
    Oct 4 02:26 AM | Likes Like |Link to Comment
  • Strategic Defaults Threaten All Major U.S. Housing Markets [View article]
    I find it fascinating the author makes repeated reference to Morgan Stanley as the definitive source on all things Strategic Default. Not because he is wrong to do so, but rather because of the irony.

    MS ought to know about strategic defaults since it was they themselves who walked away from $8B in real estate loan obligations in late 2009, which were purchased at the height of the market.

    But the funny thing is they must know so much about strategic defaults... perhaps more than anyone else... especially the folks on Main Street, because they we very clear to point out... and I quote:

    “This isn’t a default or foreclosure situation,” Barnes said. “We are going to give them the properties to get out of the loan obligation.”


    See the full Bloomberg article here:
    Oct 3 03:11 AM | Likes Like |Link to Comment
  • Existing Home Sales Plunge 27%, Worse Than Every Economist Forecast; Treasury Yields Hit New Lows [View article]
    All I know is, people keep saying doing this or that could threaten the nascent economic recovery. Has anyone kept track of how the nascent economic recovery has now lasted longer than the downturn? And that the recovery hasn't recovered anything, except the TBTF war-chest?
    Aug 25 02:18 AM | 3 Likes Like |Link to Comment
  • The Last World War Helped the Economy: Why Not Another One? [View article]
    Why not? We're the only ones stopping us here, not technology. In fact, it is our technology now being implemented the world over, by everyone but us, which is rendering us increasingly dependent not just on energy, but on production, innovation, information, and debt.
    Jul 21 03:26 AM | 4 Likes Like |Link to Comment
  • 10 Reasons Why We Are Headed Into a Recession [View article]
    This is patently false. They are absolutely not being modified even when people beg for it. And 60% of the few they do modify redefault. If they modified all of the loans in question to the point where there would be no more defaults, the banks would suffer losses in excess of three times subprime.
    Jul 8 10:15 PM | 12 Likes Like |Link to Comment
  • 10 Reasons Why We Are Headed Into a Recession [View article]
    Its a good thing the rates are lower today... becuase when they rise to the exact same level as the initial teaser rate, the payment shock is 40%.
    Jul 8 10:08 PM | 9 Likes Like |Link to Comment
  • On Recent FAJ Article: Dimensioning the Housing Crisis [View article]
    A lot of folks are also looking for answers to why banks are so slow to release their inventory... waiting out this deadline could be one incentive.
    Jul 2 09:42 AM | 2 Likes Like |Link to Comment