Seth Chalnick

How Bloomberg Fabricates U.S. Housing Numbers

To those who say that actual foreclosures have not increased by as much as the author says.

That's not the point.

The point is that loan defaults have been increasing. And the problem is that there is no answer for the defaults. So the banks aren't even foreclosing anymore.

How Bloomberg Fabricates U.S. Housing Numbers

To the folks who think the low LIBOR rates are going to help things for the time being, you are missing something subtle but huge, which most of America is also missing. 50% of all re-sets will also switch to p&i re-amortized over the remaining 25yrs.

This creates a substantial payment shock even with the rate being lower. When the rate gets back up there, fogettaboudit. If you are one of the "lucky" ones who still gets the i/o option for another 5 years... yes it's true, your monthly pmt goes down while the rates stay low... good luck though in another 5 years when the remaining balance re-amortizes to the remaining 20yrs.

It does not matter if you are "well insulated". It matters that even a small percentage of your neighbors (in real life a huge percentage) are not. They will go to refi. They will not be approved. They will try to short sell. They will not be able to. They will walk. Your property value will go down for real this time.

How Bloomberg Fabricates U.S. Housing Numbers

Bravo Mr. Nielson, for publishing the web's first coherent explanation for banks holding back inventory:

"Now, with the U.S. housing market collapsing, these credit default swaps are being triggered. Selling these foreclosed properties locks-in the banks' losses – causing these massive obligations to come due."

Are swaps and derivatives so confusing that the investor consensus assumes that all toxic assets have already been baked into the market outlook?

This is not a rhetorical question.

We witnessed subprime havoc and now it seems most asset manager types have this idea that the toxic assets were all bundled in with prime assets… since nobody knew what was what, and that everything as a whole has already been written down.

But I used to work on Wall Street, and I know that many asset managers are basically just sales guys who push what their analysts tell them to push, and that many analysts types are myopic materialistic ivy league model writers who are driven by peer pressure and perverse incentives to tow the company line.

I'm just a residential real estate guy... but it seems to scream out to me that the prime loans have not yet defaulted... so how could they already be discounted? The subprime assets weren't written down until people defaulted on making payments.

And I see now, with first hand experience, even while everyone is making the call that real estate has bottomed… that a major portion of non-performing loans that defaulted to date (I'd actually say the majority of them) have not yet been dealt with. The mark to market accounting change and the not so subtle short supply of inventory artificially created demand compared to same period last year results... but fundamentally nothing has even changed.

And now we are starting to see the 5yr i/o loans expiring and this bucket of loans is approximately 3 times LARGER than the subprime bucket… with average loan amounts that are LARGER than subprime... and even the same subprime neighborhoods are mostly comprised of hard working blue collar 5yr i/o holders who haven't even been tested yet... unless you count the test of still paying your mortgage on time even though you are earning about 30% less than before while debt payments that are higher than before… even though your deadbeat subprime neighbor walked AFTER getting a loan mod that you deserved but they received and then re-defaulted on because their credit was already shot, etc.

If the 5yr i/o pool is 3 times larger… and it’s not baked in yet… and the default rate is much greater than expected, though only by people who subjectively gauge and report the market’s expectations rather than looking at fundamental math and the recent blueprint that is called the subprime crisis… it seems that smoke and mirrors are perhaps the best chance we may have after all. It’s all starting to make sense now.

Falling Up: The New Business Model

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

RealtyTrac: Q2 Foreclosure Activity Highest on Record

The scariest thing about this whole mess is that many of the average (and most of the higher-end) homeowners do not yet see this problem for what it is.

In areas like San Diego, median prices are being calculated and published way out of context.

Check out this statistic published yesterday in an insipid San Diego Union Tribune article:

“San Diego County's median home price rose for the third consecutive month in June, hitting $314,250, the highest figure since October, and raising hopes that the region's slumping housing market may finally be poised for a comeback.”

These market segments are experiencing an artificial short supply (via foreclosure moratoria, etc.). This creates an extremely false short-term “seller’s market” phenomenon. Limit the supply, preserve or increase the demand, prices rise...

What’s worse is that this same artificial short supply is starting to bleed up from the $300k market to the $500k market… creating basically one huge lower-end head fake.

Unfortunately we’re missing a good opportunity to deal with this situation now, before the REAL problem begins: the high-end correction. fyi, I recently posted a pretty comprehensive SA article about this, called “Here’s a Statistic I Dare you to Challenge”.

Actually I was wrong when I started this comment by saying “the scariest thing… etc.” I should have reserved this designation for the real scariest thing, which is the idea of “owning to rent” that’s been stimulating a lot of chatter in the SA comments lately. I guess I’m sort of losing track the magnitude and priority of scary things these days.

Navigating Today's Real Estate Market

Thanks for the validation netreality. As you know, it’s funny how a simple reading of the entire post serves to highlight my sentiment as being even more bearish than some the critics!

I guess it was my bad for hamming it up too much though… :)

Yeah, the artificial inventory stockpile is insane and just getting worse. On the higher-end, here in San Diego, prices are finally starting to decrease, but I'm hesitant to call them "deals" just yet, as this outlook may be relative to existing prices only. Future price drops may make today’s “deals” look like tomorrow’s bummers... sort of like how P/E ratios are low at 8-10... but only if the "E" part doesn't decrease further.

But hey, on the other hand… everybody and their brother who bought 2-4 years ago who followed conventional wisdom at the time thought they were right. If I had to pick, I’d rather be unpopular in buying now, getting a $200k discount, compared to the folks who enjoyed “being right” two years ago. Of course, I’d rather be both right and happy waiting another year or so in most market segments. Ha.

Navigating Today's Real Estate Market

markg,

1. I'm just a dumb realtor... can you please rephrase your question in a way that makes sense to someone who can't read your mind?

i.e. what do you mean, "would sell"?... they sold. and what do you mean, "in this price range"? you cut and paste the same four prices ranges I listed.

Do you mean "would sell if all of the shadow inventory being artificially held back... actually got listed on the MLS?"

2. Is this rhetorical?

3. Well, they are in Oceanside... and they're selling for $325k... what do you expect?

Here's a question for you? Did you read the whole article?

Navigating Today's Real Estate Market

Jeandit75- yeah, in the light of a new day, I agree the last line was shameless, so I take it back. I’m used to writing content for my own blog and social networks… this isn’t the forum for that, so my bad.

However since I admit the primary purpose of SA is not to promote our services… take me at face value when I say the purpose is to provide informed opinions in a forum that stimulates a clash of ideas.

As an industry-insider I see some things non-real estate professionals do not.

I think some of you gave up reading after the first paragraph or two. That’s ok… I see how it could be viewed as the typical cheerleader BS. It wasn’t meant that way.

This artificially stimulated, ultra-low-end “seller’s market IS such an oddity. That’s why I juxtaposed these isolated experiences with my extremely bearish forecast about the bulk of the correction that has yet to begin.

The point is these lame statistics are leading to the mother of all head fakes.

Mad Hedge, well said. Nym and Roger… thanks for the support.

Larry G presents a perfectly reasonable opinion about the opening anecdote seeming contrived. However, I belabored the point for a reason. People have been taking this elevated low-end activity as a sign that the overall market has turned the corner. The purpose of this piece was to expose this sentiment for the absurdity that it is.

If you haven’t given up on me yet, I invite you to re-read the piece from this perspective. How many realtors do you know who would flat out put it on the line and tell people not to buy a $700k+ home if they are at all concerned with protecting their financial investment?

Accuritz- “The problem with the real estate industry is how they present data. We should present data as the whole, than the sub-groups.”

I agree wholeheartedly with the first sentence. I couldn’t disagree more with the second. The (failed?) goal of this piece was to prevent half-baked statistics relevant only to the lowest end of the market from being misconstrued as relevant to the broader market.

“73% of sales below $400K does not sound like a problem. And to state people are holding back inventory and not selling; Well that is a remarkable observation! “

Um… in the market I am reporting on, from 2005 through 2007, $700+ homes represented an average of 22% of sales. Today they average less than 8%. On what planet does this not sound like a problem? And this is before the real loan re-sets begin in earnest.

Regarding holding back inventory, I believe you misconstrued the context. For clarification, I invite you to review:

seekingalpha.com/artic...

Anyway thanks to all for reading my article and for your thoughtful comments.

Here's a Statistic I Dare You to Challenge

Thank you very much for reading my article and for providing such thoughtful feedback.

I believe the only direct question asked of me was by ‘More Cowbell’ regarding the commercial sector outlook. I really can’t offer up the same inside scoop about this, but on a gut level, I feel like office buildings and shopping malls are about to get their heads handed to them. I was a buyer of SRS (ultra short commercial) until I realized that the underlying basket of companies have some exposure to the downside along with the broader market, but are somewhat better positioned to get through this, i.e. medical buildings, etc. I also can’t stand how the group can lose value over time… and SRS still goes down? Leveraged ETF’s are so weird that I’d rather just buy puts since at least I understand the risk. I have not yet identified which companies look spotty, so I’m all ears.

The only point of clarification I’d like to make is that “the real estate market” is highly segmented... by region… and by price point. Most of the inventory being held back is in the low end of the market. There are rumors of properties in Rancho Santa Fe being withheld to keep the market from crashing… but it’s nothing more than rumor as far as I can tell. The high end stuff has plenty of inventory… but it’s not shadow. It’s flat out sitting on the MLS with no buyers. This trend will likely continue and worsen as more and more “prime” people start to default.

Countrywide REOs Move Back to Early 2007 Levels

donogrp you're absolutely right about getting a better sense of healing when nod's slow down... but I respectfully disagree about the loan mod's, at least as they have been handled thus far... and we can only hope that banks get with the short sale program, but as of yet, only about 15% of short-sales ever close.

As for loan mod's, more than half of the good citizens who have received mod's... are already back in default... and this statistic... is more than 8 months old! The reason is because the mod's have been given to people who have no incentive to pay perfectly good money on a depreciating asset since they have no good credit profile left to defend.

The mod's should have been going to the folks who have never missed a payment... but these folks... the ones who played by the rules... don't qualify.

In the case of both mod's and short sales, the unfortunate truth of the matter is that individual incentives of bank managers are not in alignment with what it will take for a broader economic recovery.

Countrywide REOs Move Back to Early 2007 Levels

go rockerchic! "Note the words 'listed for sale' which make all the difference here". You are seemingly the only person in the free world to recognize this small, yet gigantic omission.

Folks... there have not been any new foreclosures in like, 18 months (in the critical states like CA, FL, etc). There was a national moratorium, then state moratoriums in effect ever since the big recession year that has been swept under the rug... until now... via moratoriums, change in mark-to-market accounting practices, subsidized rates, media spin taking out of context half baked statistics like the one posted herein, etc.

What do you guys think has been happening in the last 18 months... fewer defaults? Slowing rate of defaults? There is a dam ready burst and the funny thing is the prime loans that have not yet re-set yet are starting to come due as we speak... and this basket of toxic assets is... no joke... around three times larger than the "subprime" basket.

If a measly little subrime correction brought the financial world to its knees, then how the hell can the whole world be smoking crack in unison right now saying that it was all inevitable... all that leverage... tsk tsk... and then not see this:

That we're about to see the correction START.

The ironic thing is that the one market segment (low end housing) where it potentially makes sense to buy right now... and where there is huge demand... is the one market segment where artificial short supply is killing a golden opportunity to stabilize at least one market segment bottom, stimulate the economy, and create jobs.

Markets Are Working: CA Home Sales Increase +100% as Home Prices Fall

Its not "the real estate market" that's finding a bottom... its demand increasing a little bit on the lowest end of the spectrum. The $700k to $2m market is still only off about 10%... and we'll see it collapse about 40% off peak prices before this is over... the only question is whether the low end will find a bottom and bridge the gap to the high end... or whether we see asset deflation across the board as this mess continues to unravel.

See my seeking alpha article posted mid december. This was easy to predict then, and its even easier to see now.

Housing Solution: Crashing Home Prices or Cheaper Mortgages?

What many folks are missing today is the huge disconnect between high-end properties that haven't even corrected YET, and low-end properties that are selling at rock bottom anyway you slice it.

On the low-end:
• Prices have dropped below the cost to buy the lot and build the home.
• Net annual return on an all-cash purchase exceeds 5%.
• You have to win seller acceptance over competing offers within a matter of days.

On the “upper middle class” end:
For homes currently valued between $750k and $2m… the correction has not even begun in earnest. A huge percentage of these homeowners have ARMs. None have reset yet. They will. Its not the interest rate adjustment that will push them over the edge… since their fully indexed rate will still be low, at least for now. It is the fact that some of these loan programs force principal and interest payment re-amortization over the remaining 25 years. Some marginal folks will need to sell. And when they do, since there is exactly zero market for making loans in this segment, people will face increasing pressure to get out, which at best, will put downward pressure on prices, and at worst, spiral into another “sup-prime” type debacle. And that’s with LIBOR staying low.

We just saw the blueprint of how this plays out in sub-prime. It is not a socio-demographic thing, but rather a math thing. These homes will decline in value, 35-40% off peak prices, and the lower-end homes currently trading below intrinsic value will hold their own, or come up a bit to bridge the gap, as foreclosure displacement puts upward pressure on the rental market.

So my take to the question posed in the article above? Crashing prices, which umm... makes mortgages cheaper.