For JayB

[KaskadskyjKozak]

Linky

[JayB]

The dynamic in Seattle - rising inventories, slowing sales, and increasing median closed-sale price doesn't surprise me too much,

and I imagine this reflects a shift in the distribution of sales activity towards the higher end of the price range. Having said that, I would have put YOY price growth in the low single digits even in "median closed price" metric. IMO, and in the opinion of most institutions that need accurate info to base their decisions on, the Case-Shiller-Weiss index is way more accurate, but even those figures will show positive YOY numbers for July when they come out in a couple of months.

 

However, given the massive and near unprecedented changes in the secondary market for mortgage-based securities that have transpired in the past couple of weeks - especially the large and/or exotic types that can't be resold to FNMA or GNMA - I feel pretty confident that the data will show an inflection point for Sept-Aug of 07, when the changes in the mortgage market start to register in the closed-sale stats. Look for increasing inventory,

a fairly substantial decline in sales, and higher DOM through next spring as sellers refuse to capitulate on price and a lack of buyer participation brought on by either failure to qualify for loans big enough to get them into a home that suits their taste, or flat-out balking at the asking price. By late next summer, folks who are either foreclosed on or are in must-sell mode due to divorce, job-related relocation, etc will start to capitulate and begin the process of selling below comps and move the market lower.

 

So - just to make this more interesting, I am willing to bet a cam or ice-screw of your choosing - that the Case-Shiller-Weiss stats for every county within commuting range to Seattle will be negative between October of '07 and October 08 will be negative.

 

Summary of what's transpired in the past couple of weeks posted below:

 

" Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch

Nouriel Roubini | Aug 09, 2007

 

The global market turmoil got ugly today forcing the ECB and the Fed to inject liquidity in the financial system as the concerns about subprime, credit and debt turned into a full blown liquidity run and crisis. As in 1998 at the time of the LTCM crisis, Fed and global central banks decided to ease monetary policy in between meeting and injected a large amount of liquidity into the system. Coming two days after the Fed tried to prevent perceptions of a Bernanke put by signaling in its FOMC no Fed easing and no bail out of the financial system, the Fed actions today are certainly ironic if necessary given the massive liquidity seizure in the financial markets.

 

 

But the current market turmoil is much worse than the liquidity crisis experienced by the US and the global economy in the 1998 LTCM episode. Let me explain why. Economists distinguish between liquidity crises and insolvency/debt crises. An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most case also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced. In emerging market crises of the last decade, we had liquidity crises (i.e. a solvent but illiquid sovereign) in Mexico, Korea, Brazil, Turkey; we had debt/insolvency crises (a sovereign that was both illiquid and insolvent) in Russia, Ecuador, Argentina.

 

 

The 1998 LTCM crisis was mostly a liquidity crisis: the US was growing then at 4% plus, the internet bubble had not burst yet, we were in the middle of the New Economy productivity boom, households were not financially stretched and corporations were not financially stretched with debt either. In spite of those sound and solvent fundamentals the collapse of Russia – a country then with the GDP of a country such as the Netherlands – caused a global liquidity seizure and crisis of the type experienced by credit markets in the last few weeks: sudden demand for cash liquidity, sharp increase in the 10 year swap spread, sharp increase in the VIX gauge of investors’ risk aversion, liquidity drought in the interbank and euro-dollar market, deleveraging of highly leveraged positions, reversal of the yen carry trades. With the exception of the credit event in Russia, this was not a credit/insolvency crisis. And since it was a liquidity crisis the Fed easing – 75bps – was successful in restoring in a matter of weeks calm and liquidity in financial markets. Even that liquidity episode had painful credit fallout: it is not remembered by most but the entire subprime mortgage industry went bankrupt in 1999 following the LTCM liquidity crisis. So a liquidity shock even triggered credit events.

 

 

Today we do not have only a liquidity crisis like in 1998; we also have a insolvency/debt crisis among a variety of borrowers that overborrowed excessively during the boom phase of the latest Minsky credit bubble. You have hundreds of thousands of US households who are insolvents on their mortgages. And this is not just a subprime problem: the same reckless lending practices used in subprime – no downpayment, no verification of income and assets, interest rate only loans, negative amortization, teaser rates – were used for near prime, Alt-A loans, hybrid prime ARMs, home equity loans, piggyback loans. More than 50% of all mortgage originations in 2005 and 2006 had this toxic waste characteristics. That is why you will have hundreds of thousands – perhaps over a million - of subprime, near prime and prime borrowers who will end up in delinquency, default and foreclosure. Lots of insolvent borrowers.

 

 

You also have lots of insolvent mortgage lenders – not just the 60 plus subprime ones who have already gone out of business – but also plenty of near prime and prime ones. AHM – who went bankrupt last week – was not exposed mostly to subprime; it was exposed to near prime and prime. Countrywide has reported sharp losses not only on subprime lending but also on prime ones. So on top of insolvent households/mortgage borrowers you have plenty of insolvent mortgage lenders, subprime and - soon enough - near prime and prime.

 

 

You will also have – soon enough – plenty of insolvent home builders. Many small ones have gone out of business; it is likely that some of the larger ones will follow in the next few months. Beazer Homes – a major home builder - last week had to refute rumors of its impending insolvency; but so did AHM a few weeks its insolvency. With orders for home builders falling 30-40% and cancellation rates above 30% a few will become insolvent over the next year or so.

 

 

We also have insolvent hedge funds and other funds exposed to subprime and other mortgages. A few – at Bear Stearns, in Australia, in Germany, in France – have already gone bankrupt or are near bankrupt. You can be sure that with at least of $100 billion of subprime alone losses – and most losses are still hidden given the reckless practice of mark-to-model rather than mark-to-market - many more will. In the meanwhile the CDO, CLO and LBO market have completed closed down - a “constipated owl” where “absolutely nothing moves” the way Bill Gross of Pimco put it. This is for now a liquidity crisis in these credit markets; but credit events will occur given that the underlying problem was not of of liquidity but rather one of insolvency: if you take a bunch of to be defaulted subprime and near prime mortgages and you repackage them into RMBS and then these RMBS are repackaged into various tranches of CDO, the rating agencies may be using magic voodoo to turn those junk BBB- mortgages into AAA tranches of CDO; but this is only voodoo as the underlying assets are going to be defaulted on.

 

 

And the recent sharp widening in corporate credit spreads is not just a sign of a liquidity crunch; it is a sign that investors are realizing that there are serious credit/solvency problems in parts of the corporate system...."

[KaskadskyjKozak]

 

In the meantime, I'll enjoy my growing equity. ;-)

[JayB]

That's great. Houses are great for the long term, and if you find something you like in a place where you want to live, and you can afford the fully-indexed payments while still funding your retirement, emergency savings, etc, etc, etc, etc - then buying a home is rarely a bad choice - but their status as a long-term investment vehicle has been vastly exagerated, especially after accounting for interest, taxes, maintenance, transaction fees, inflation, etc. For the next 3-5 years, they will be less ideal as a means to fulfill a highly-leveraged get-rich-quick scheme.

 

Anyhow - How about that bet? I choose a number-two link-cam if you're game...

[olyclimber]

Well, if I can't get my zero down interest only loan, how DO you expect me to make money in the highly profitable housing market?

[KaskadskyjKozak]

That's great. Houses are great for the long term, and if you find something you like in a place where you want to live, and you can afford the fully-indexed payments while still funding your retirement, emergency savings, etc, etc, etc, etc - then buying a home is rarely a bad choice - but their status as a long-term investment vehicle has been vastly exagerated, especially after accounting for interest, taxes, maintenance, transaction fees, inflation, etc. For the next 3-5 years, they will be less ideal as a means to fulfill a highly-leveraged get-rich-quick scheme.

 

Anyhow - How about that bet? I choose a number-two link-cam if you're game...

 

The only bet I'd consider relates to the property value increase on my home as per zillow.com

[KaskadskyjKozak]

That's great. Houses are great for the long term, and if you find something you like in a place where you want to live, and you can afford the fully-indexed payments while still funding your retirement, emergency savings, etc, etc, etc, etc - then buying a home is rarely a bad choice - but their status as a long-term investment vehicle has been vastly exagerated, especially after accounting for interest, taxes, maintenance, transaction fees, inflation, etc. For the next 3-5 years, they will be less ideal as a means to fulfill a highly-leveraged get-rich-quick scheme.

 

Anyhow - How about that bet? I choose a number-two link-cam if you're game...

 

and I disagree profoundly... owning a home is a great long-term investment, and a great way to ease your tax burden, enabling you to put more money into retirement, and have the ability to fund those expensive college educations down the road (HELOC, or down-size home, etc)

 

[JayB]

That's great. Houses are great for the long term, and if you find something you like in a place where you want to live, and you can afford the fully-indexed payments while still funding your retirement, emergency savings, etc, etc, etc, etc - then buying a home is rarely a bad choice - but their status as a long-term investment vehicle has been vastly exagerated, especially after accounting for interest, taxes, maintenance, transaction fees, inflation, etc. For the next 3-5 years, they will be less ideal as a means to fulfill a highly-leveraged get-rich-quick scheme.

 

Anyhow - How about that bet? I choose a number-two link-cam if you're game...

 

and I disagree profoundly... owning a home is a great long-term investment, and a great way to ease your tax burden, enabling you to put more money into retirement, and have the ability to fund those expensive college educations down the road (HELOC, or down-size home, etc)

 

This is the common perception, but it's not one I've heard offered forth by many folks who know what they're talking about that don't have their livelihood tied to the construction, sale, financing, etc of homes in one way or another. Money in a diversified portfolio constructed by someone that knows what they're doing produces better real returns with lower risk than residential housing in every long-term scenario that accurately measures total costs and total returns.

 

Most people will buy a home for a multitude of reasons, some financial, some non-financial. For those who buy, buying a smaller home than you can afford and putting the difference in a diversified portfolio - ideally in a tax advantaged retirement account of some sort - will be a better choice than maxing out your mortgage payment on a primary residence or a combination of a primary residence and a second home in just about every conceivable long term scenario.

 

http://finance.yahoo.com/real-estate/article/102603/why-your-home-is-not-the-investment-you-think-it-is

 

 

 

[Jim]

Most people will buy a home for a multitude of reasons, some financial, some non-financial. For those who buy, buying a smaller home than you can afford and putting the difference in a diversified portfolio - ideally in a tax advantaged retirement account of some sort - will be a better choice than maxing out your mortgage payment on a primary residence or a combination of a primary residence and a second home in just about every conceivable long term scenario.

 

Have to agree with that scenario. Conversely if one were going to be in an area at least 5-7 yrs then I would defenitley buy rather than rent as you will make some money, or at the least, loose less money, than the rathole of rent.

[KaskadskyjKozak]

That's great. Houses are great for the long term, and if you find something you like in a place where you want to live, and you can afford the fully-indexed payments while still funding your retirement, emergency savings, etc, etc, etc, etc - then buying a home is rarely a bad choice - but their status as a long-term investment vehicle has been vastly exagerated, especially after accounting for interest, taxes, maintenance, transaction fees, inflation, etc. For the next 3-5 years, they will be less ideal as a means to fulfill a highly-leveraged get-rich-quick scheme.

 

Anyhow - How about that bet? I choose a number-two link-cam if you're game...

 

and I disagree profoundly... owning a home is a great long-term investment, and a great way to ease your tax burden, enabling you to put more money into retirement, and have the ability to fund those expensive college educations down the road (HELOC, or down-size home, etc)

 

This is the common perception, but it's not one I've heard offered forth by many folks who know what they're talking about that don't have their livelihood tied to the construction, sale, financing, etc of homes in one way or another. Money in a diversified portfolio constructed by someone that knows what they're doing produces better real returns with lower risk than residential housing in every long-term scenario that accurately measures total costs and total returns.

 

Most people will buy a home for a multitude of reasons, some financial, some non-financial. For those who buy, buying a smaller home than you can afford and putting the difference in a diversified portfolio - ideally in a tax advantaged retirement account of some sort - will be a better choice than maxing out your mortgage payment on a primary residence or a combination of a primary residence and a second home in just about every conceivable long term scenario.

 

http://finance.yahoo.com/real-estate/article/102603/why-your-home-is-not-the-investment-you-think-it-is

 

 

 

What pundits say is one thing; reality is another. And anything in the aggregate blurs the possibilities of the individual.

 

I made much more money off my 1st home than I did off of 10-15% stashed into a 401(k), Roths, and other investments over the same time frame (yes, factoring in the amount of $ going into each).

 

And then there is that pesky, intangible quality of life issue...

 

[JayB]

In 95% percent of all markets, I'd agree. After the recent, unprecedented credit-fueled run-up, I'm not so sure - but if you factor in the non-financial benefits of home ownership, then things become a bit fuzzier. I've briefly looked at what half-a-mil gets you in Ballard, and I can't fathom any scenario in which that would make plunking down that kind of money, or paying three times that over the life of a conventional loan, or at least 2X as much in mortgage payments as the same property would rent for - for the kind of property that you get for that price.

 

 

 

However - forced savings of some sort are just about always better than no savings at all, which is the situation that an awful lot of people in this country are in from one month to the next, so that's another benefit for folks that would spend the rent vs mortgage differential instead of investing it.

 

[KaskadskyjKozak]

In 95% percent of all markets, I'd agree. After the recent, unprecedented credit-fueled run-up, I'm not so sure - but if you factor in the non-financial benefits of home ownership, then things become a bit fuzzier. I've breifly looked at what half-a-mil gets you in Ballard, and I can't fathom any scenario in which that would make plunking down that kind of money, or paying three times that over the life of a conventional loan, or at least 2X as much in mortgage payments as the same property would rent for - for the kind of property that you get for that price.

 

However - forced savings of some sort are just about always better than no savings at all, which is the situation that an awful lot of people in this country are in from one month to the next, so that's another benefit for folks that would spend the rent vs mortgage differential instead of investing it.

 

 

Keep waiting... and watching... and you'll get zero return.

[JayB]

Depending on the movement of the market, investing the rent-vs-mortgage differential in a diversified portfolio may not return as much as paying the mortgage on a comparable home home, but the risk is far lower, and the liquidity is much higher, and the transaction costs are at least three orders of magnitude lower.

 

The returns on *not* buying anything in Boston in 2005 for the same reasons that I'd be very reluctant to buy pretty much anywhere in 2007 have been greater than zero on a nominal basis, and when you factor in typical maintenance, transaction fees, inflation, etc the balance-sheet looks even better.

 

Investing is like avalanche forecasting on a slope-by-slope basis, or making the decision about whether a snow-bridge will hold. No one can tell what a particular slope or ice-bridge will do at any given point in the future, but you can analyze the risks and make decisions based on the risk-factors that you can identify. I may choose to walk around a snow-bridge that a 300lb'er decides to spend a half-hour salsa dancing and squat-thrusting on top of before he crosses to the other side, and nothing happens, but I don't mind walking a bit longer if it gains me the certainty that I'll avoid taking the big plunge...

 

 

[KaskadskyjKozak]

Depending on the movement of the market, investing the rent-vs-mortgage differential in a diversified portfolio may not return as much as paying the mortgage on a comparable home home, but the risk is far lower, and the liquidity is much higher, and the transaction costs are at least three orders of magnitude lower.

 

Buying property AND investing is more diversified than renting alone.

 

Liquidity? You mean like the 20% tax hit from early withdrawal on a 401(k)? Or maybe you mean the "loan" that you must pay-off IN FULL if you leave your employer (or are laid off or fired). No risk there, eh? And so liquid!

 

Or I guess you could completely forgo the tax benefit of the 401(k) for the "liquidity" of your own investment account - outside of retirement. But wait, then you'll lose those matching funds.

 

Oh dear!

 

[JayB]

Toss some R.E.I.T's into the mix and you've got a stake in a nationwide mix of residential/commercial/industrial properties that's way more diversified than a single home, that you can sell at the push of a button.

 

How about if we just trade a cam of my choosing for your home and call it even....