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I Continue To See Green Poop, Not Green Shoots!


Parsad
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I remain completely convinced that we will continue to see pressure on homes over the next couple of years, compounded by pressure from commercial real estate losses and credit losses.  Take a look at this chart, and as expected, we are seeing considerable movement in prime losses and foreclosures.  

 

http://msnbcmedia.msn.com/i/CNBC/Sections/News_And_Analysis/_Blogs/Beat%20Blogs/Realty_Check/__DAILY%20POSTS/RC-foreclosures.pdf

 

While subprime has stabilized due to government programs and bank workouts, prime delinqencies are rising rapidly.  You now have the main drivers of consumer spending tightening their pocketbooks as they try and save their homes.  

 

As I mentioned before in a previous post, there has never been a period of such dramatic real estate losses, that wasn't accompanied by an elongated recovery process.  That enormous Thanksgiving dinner isn't going to be that much easier to digest just because you chewed your food a bit longer.   Cheers!    

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I don't disagree with anything Biggs says.  In fact, we said exactly the same thing back in the first week of March in our Annual Letter to Partners, which a few boardmembers here would be able to verify:

 

One final note on equity prices today. Just this week, the Dow Jones Index hit a 12-year low. This has

happened only two times before…from 1921-1932 and 1962-1974. After 1932, the Dow was up +60%

within two years. After 1974, the Dow was up +70% within two years.

 

As horrible as the news feels these days, valuations for stocks are probably the most attractive we have

seen in our investing life. In many sectors, they are probably the cheapest we will see in our remaining

lifetime. Without a doubt, stocks and corporate bonds provide extraordinary value at the present time. As

investors, we could not be more ecstatic!

 

Our thinking now at this point is very much in line with what Biggs says at the end of his article:

 

Does this mean we are in for a new bull market? Not necessarily. Secular bear

markets are caused by severe structural aberrations and take time to heal. In

America, such markets in 1932, 1938, and 1974 were followed by peaks and

valleys lasting years. Japan's markets have had broad trading ranges for nearly

20 years since that country's bubble burst in 1990; the old highs are still far

away. In this light, the U.S. and Europe have been in a bear market since 2000.

 

I'm afraid the odds are that over the next five years, the mature G7 economies

will grow more slowly than they have in the recent past, and financial-market

returns will be uninspiring. That said, I would also argue that the rally that

began in March has further to go, and that it's too soon to run for the hills.

It takes courage to hold fast and be a pig, as they say on Wall Streetmy money

is where my mouth is.

 

The only difference is that we aren't pigs.  We have no plans on ever getting slaughtered.  Cheers!

 

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I read a decent book about buying homes. It was written in 1999. The guy predicted that home prices would probably decline over the 2000-2010 period, especially for the average home because a lot of baby boomers would want to sell them and it would create some pressure on prices.

 

Let's say that I would have listened to this prediction and buy puts or short of a given American home prices index it it was possible to do so (that's not the kind of thing that I would do, but let's suppose that for the case in point).

 

Boy, what history can teach us!

 

Past is past. So, what's next for us? How much households that will will want to buy their first house will we have over the next decade? On the opposite side of the transaction table, how much households that will want to sell their house to move to another kind of residence will we have over the next decade?

 

What will happen to interest rates? Will the borrowing cost for buying homes will stay the same? Go higher? Lower? What impact would it have on prices?

What will happen with average household income? Will people will have the same, more or less ressources to buy homes?

 

To me, these are important questions and I have my own opinion on that. That being said, I do not think that I know much better than the average Joe on this subject, so my opinion is not very valuable so that's in my "outside of my circle of competence" bin.

 

 

 

 

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I think a distinction needs to be made -- whenever discussing the housing issue -- between supply and price.

 

Buffett, likely correctly, has explained that new household formation will sop up the rest of the overbuilding in the next 18 months as the run-rate of new dwelling construction is now well below the run rate of new household formation.  That should put things back into balance and stem the decline in prices at the lower ends of the housing spectrum.  As well, it should allow for the pace of new home construction to go back up (though of course not the level during the bubble).

 

But, that doesn't mean housing prices don't keep falling in various geographies or at various price-points.

 

In my opinion, we've worked through much of the riskiest, most speculative owners and those people have likely walked away.  I would guess a high majority of the remaining owners do not want to walk away -- even if their house falls below their purchase price.  These people are more likely to walk away if they can't pay their mortgage and that is where unemployment becomes important.  Assuming job losses stop within the next 12 to 18 months, we should be through with most of this pain, imho.

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Guest Broxburnboy

 

In my opinion, we've worked through much of the riskiest, most speculative owners and those people have likely walked away.  I would guess a high majority of the remaining owners do not want to walk away -- even if their house falls below their purchase price.  These people are more likely to walk away if they can't pay their mortgage and that is where unemployment becomes important.  Assuming job losses stop within the next 12 to 18 months, we should be through with most of this pain, imho.

 

The facts remain.. the housing situation and consumer discretionary spending are continuing to deteriorate. Until the reality and the numbers start to improve, we can't call a stabilization in this space, let alone a "green shoot".

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http://finance.yahoo.com/news/Fed-minutes-officials-saw-apf-2028717293.html?x=0&sec=topStories&pos=main&asset=&ccode=

 

Not only do I not see very many, if any green shoots, but I also think that the fed is dead wrong-at least in nominal dollars (based on the actual amount of currency). I am venturing to guess that this may be an inflationary 'bump'.

 

I think I may buy a bunch of put options in the coming weeks. I just don't see how we are out of the woods.

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This is pretty silly, why bet against a strictly monetary phenomenon?  

 

, its never made more sense to tune out short term noise and focus on making the most out of the opportunities provided.  At the rate internet use is increasing today, the entire planet will have access to the internet for the first time in less than 10 years. 

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Guest misterstockwell

 

In my opinion, we've worked through much of the riskiest, most speculative owners and those people have likely walked away.  I would guess a high majority of the remaining owners do not want to walk away -- even if their house falls below their purchase price.  These people are more likely to walk away if they can't pay their mortgage and that is where unemployment becomes important.  Assuming job losses stop within the next 12 to 18 months, we should be through with most of this pain, imho.

 

Shockingly, 1/3 of homeowners with a mortgage are underwater nationwide. Nevada leads the pack with an amazing 66% in  a negative equity position. I think prices continue to fall(huge foreclosure supply, no demand), which will pressure more and more people into negative equity, and more and more people will walk away.

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Guest Broxburnboy

 

Shockingly, 1/3 of homeowners with a mortgage are underwater nationwide. Nevada leads the pack with an amazing 66% in  a negative equity position. I think prices continue to fall(huge foreclosure supply, no demand), which will pressure more and more people into negative equity, and more and more people will walk away.

 

Yes this is a huge potential problem... will these people (a growing number) walk away from their homes, feeling cheated by the system? They are not getting bailed out.  Moral hazard is evident at the lender end of the spectrum, are homeowners expected to be the only honorable link in the debt chain, especially if home price remain low?

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During the oil bust in the early 1980’s the Calgary (Alberta) housing market collapsed & most folks were effectively bankrupt - as to get a place they had to buy at boom prices with the maximum mortgage possible.

 

The collective response was to screw the bank, & neighbors selling each other their houses for $1. When a bank did actually try to sell a foreclosed house, folks deliberately refused to counter-bid against the owners $1 offer. Depression style collective social intervention, less than 30 years ago.

 

Bankers assumed folks would never walk away from their houses - & that even if they were effectively bankrupt; as long as they could afford it, homeowners would continue to make the mortgage payment to avoid the stigma of bankruptcy. The first wave of folks really couldn’t pay - the second wave refused to pay because given the times; bankruptcy had become socially acceptable. The only reason the bankers survived was because regulators had forced them to reduce their geographic concentration, & the ‘new normal’ did not spread to other markets.

 

If I live in the US sun-belt & have a prime mortgage; why on earth would I continue to pay my mortgage?

 

1) I own the title on my property & can sell to whoever I want, for whatever price I want. And if we sell & re-buy from each other for $1 - there is no bank involvement, real-estate fees, or moving costs as neither of us need a mortgage & neither of us is physically moving.

 

2) As the bank has the financial exposure there is also no actual penalty to either of us – our ex-bankers might want us dead, but each of us now has a house worth substantially more than $1 and a materially stronger BS. We’re no longer bankrupt & our ex-bankers will no longer be a problem should they themselves go bankrupt.   

 

3) Our bankers should have been lending against the 4 C’s (Capacity, Collateral, Character, Conditions). They were actually lending Character & praying that it never changed. There will be new bankers, the neighbour & I will be financially stronger, & the bankers cannot make any money unless they lend. No long term consequence. 

 

In the early 80’s the internet was still a novelty, the cell-phone was a ‘brick’, there were no ‘social networking’ sites, & information spread fairly slowly. A very different story today.

 

Beware of falling bankers

 

SD

 

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As we also mentioned in our letters, we expect unemployment to continue to rise through the next year.  Businesses are streamlining, becoming more efficient...the cost of which is greater profitability per employee. 

 

And the unemployment numbers below are with the Federal government more than doubling the normal term of benefits.  Imagine the situation when those benefits cease, and productivity and employment don't start to increase through 2010 and 2011.  Cheers!

 

http://finance.yahoo.com/news/New-jobless-claims-dip-less-apf-386475816.html?x=0&sec=topStories&pos=4&asset=&ccode=

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Well, I do think we're on the proper subject now -- will people walk away en masse because they are underwater. 

 

Sharper -- my feeling is that if something like you describe really gained traction, laws would be passed / changed pretty quickly to make this type of maneuver unpalatable.  But, you raise in interesting point.

 

In Southern California, the last time real-estate really corrected, prices fell about 25% from 1991 to 1996 (roughly).  There was a period where a lot of people with a mortgage were underwater.  Most didn't walk away.

 

But, if you guys are right and people just keep walking away -- even with the ability to pay -- we will go into a massive depression (I guess we might anyway).

 

My feeling is that before it gets there, you'll see more and more tax breaks, incentives, loan mods (where banks get gov't money to do the mod.), etc., etc. 

 

The only way out is to inflate and I believe that is what they'll do.  If the gov't has to pass targeted programs to inflate the proper assets, I believe they'll do everything they can.

 

Interesting discussion, as always.

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Thats what the bankers thought too.

 

A) You can only pass laws pro-actively. The terms of existing contracts (mortgages) stay as they are untill both parties agree to change them. 

B) The bank can do absolutely nothing as long as the mortgage is in good standing. All they can do is grin nicely when they get a copy of the property transfer for $1

C) The existing bank goes bankrupt, but its mortgagees become solvent. Lots more votes, we get rid of the zombie, & people regain control over their lives - today. And done entirely by the people for the people in states where this will 'play' very well. 

D) At the extreme - every mortgage in the sun-belt effectively gets written down to zero, new banks spring up like weeds, & employees end up (essentially en masse) in more secure positions in far healthier institutions. 

 

Then keep in mind that its very elegant, with clear & immediate benefits.

..... and you don't need many heros to start a run

 

The people doing what the government/lobbyist would not ?

 

SD

 

 

 

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During the oil bust in the early 1980’s the Calgary (Alberta) housing market collapsed & most folks were effectively bankrupt - as to get a place they had to buy at boom prices with the maximum mortgage possible.

 

The collective response was to screw the bank, & neighbors selling each other their houses for $1. When a bank did actually try to sell a foreclosed house, folks deliberately refused to counter-bid against the owners $1 offer. Depression style collective social intervention, less than 30 years ago.

 

 

 

I would think this would be pretty hard to pull off here in the lower 48.  The sale does not extinguish the mortgage and there is a question of fraud if two sellers buy each other's houses.

 

netnet

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Guest Broxburnboy

 

During the oil bust in the early 1980’s the Calgary (Alberta) housing market collapsed & most folks were effectively bankrupt - as to get a place they had to buy at boom prices with the maximum mortgage possible.

 

 

 

Alberta has been through a credit crunch before this ..in the 1930's... many farmers were being foreclosed by (Eastern) banks and others were denied credit during the dust bowl years. The people reacted by electing a new political party who pledged to print their own money and give it away to farmers.. the new party was named Social Credit and after being denied the right to print money by the federal courts, reacted by starting their own bank.. The Treasury Branch, specifically to extend credit to farmers (then Alberta was overwhelmingly rural). Alberta also passed laws limiting the liability of mortgage creditors to the property in question... a law that remains in effect today and which paved the way for the "dollar dealers" mentioned by SharperD.

I believe South Dakota has a similar State owned bank, which holds a lot of the state's mortgages and may be the reason S. Dakota has escaped the brunt of the housing meltdown...

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