A few of us were reminiscing this weekend over on the Stool Pigeons Wire about certain calls on the housing market made by yours truly back in mid decade, the biggest one being that I sold my house in Florida in June of 2005–actually April, with a June closing. Sold it myself in fact, by auction. I’m not one to gloat over things I have gotten right in the past. In this business, it’s about what have you done for me lately. Furthermore, you could argue that I was early, too early, and you would be right.You see, this isn’t about blowing my own horn, it’s about the fact that the mainstream financial media sucks.
The whole idea in the Wall Street media that only Nouriel Roubini saw this mess coming is just another example of their pattern of self justification. Their reasoning goes that if only Roubini saw it, then he must be some kind of special genius, and that excuses them for not reporting on the biggest story of the century until after it was too late. Even with Roubini and the few other token bears they feature from time to time, they never fail to point out all the things that person got wrong, an honor they don’t bestow on their multitude of bullish prognosticators, whom they invariably allow to get off scott-free, with nary a mention of their horrendous track records.
My take is that–Hey! I saw this mess coming, and I’m no genius. I just pay attention. And in fact, countless others saw it–thousands of message board posters, and probably millions who remained silent, not to mention virtually all of the well known bear pundits and analysts. There was no shortage of people who were justifiably worried and complained loudly about it. The mainstream media, on the other hand, all had their heads stuck up their asses. They were a complicit and necessary component of the financial massacre about to befall us.
As an example of the things that were foreseeable and foreseen, here are some comments I wrote for my subscribers in Q4 of 2003.
12/03 The following is a reprise of my general overview of the implications of the demise of the mortgage bubble for the benefit of new subscribers. Since this was written in Q4 2003, it has become clear that massive buying of Treasuries by the Bank of Japan has been pumping liquidity into the bubble, keeping it on life support, and mitigating mortgage bubble deflation impacts. How long the BoJ will continue this is anybody’s guess.
In recent weeks we have begun hearing of troubles at some mortgage lenders, troubles that Doc forecast as soon as the refi bubble collapsed. First there’s the very big problem of what unstable bond markets do to mortgage portfolios. Mortgage bankers trade these markets and the wild volatility increase we have seen in the bond market is something new. It is a given that some firms have been hard hit. But so far they have been able to sweep the damage into off balance sheets subs. We have seen that game before. It is called Endrun, or the new version Scamalot.
Then there is the problem that the mortgage finance industry invested and staffed at bubble levels. Volume is down by half and more. There will be massive layoffs. On top of portfolio losses, gross over-investment in office space and equipment will have to be written off. This is what bubbles do. Because the mortgage industry was the engine of the credit bubble, its impending collapse will be the trigger for worldwide financial implosion. The next uptick in long term interest rates will be the death knell, not only for this industry, but for the pyramid scheme credit bubble economy as a whole.
New mortgage demand will uptick on any uptick in rates as buyers rush into the market to beat further increases, but as rates go higher, overall loan demand will again shrink as refi borrowers are priced out of the market. If rates uptrend, refi demand will dry up completely. The boom took care of any pent-up demand. It could take years to rebuild. Even if rates remain well below peak levels, volume will not recover to anywhere near the extent necessary to reflate the credit bubble which has been driving stock prices higher. Without the ever growing flood of cash out refi money, the credit bubble will implode. So will the real estate bubble, as the macro-leverage from extracting equity from existing properties disappears. So far the implosion has been in slow motion, with limited apparent damage. The slowness of the turn has fooled many observers into thinking the pie is still growing. Doc thinks otherwise. It’s like watching the Queen Mary move. The ship is so big that no one notices that it has moved until the gangway collapses.
In August, the MoGauge collapse broke below the November 1992 lows. The drop in lending volume exposes rising default rates and puts many portfolios under water. Defaults must eventually be written off. As long as loan portfolios grew faster than default rates this was not a problem. As portfolio growth slows, defaults take a bigger chunk out of already razor thin capital ratios. This is where leverage kills. Dramatic losses will force many lenders to stop lending, and to liquidate in an attempt to maintain capital levels. Barring a miracle, this will eventually snowball into a chain reaction, systemic blow up that will cripple worldwide financial markets. The only questions have been whether the Fed (and Bank of Japan) can engineer enough of a decline in rates to forestall this outcome, and for how long. Weakness in the dollar threatens to unglue all financial markets. The Fed has its hands tied. If they try to force long rates lower, it could trigger a dollar collapse. If long rates are allowed to rise, the liquidity crunch will worsen. Refi activity will collapse, causing a severe liquidity crisis, and stalling the economy.
As buyers qualify for smaller mortgages, the housing market will gradually grind to a halt, while sellers refuse to face reality. The process will be uneven, and bond market rallies will only prolong the agony. After months of this, a trend of declining and uneven market activity will force sellers to adjust their asking prices. House prices will start to fall in response, but it will be several months before the impact is seen in the market data, and reported by the media. Once the spiral starts, it will become self-feeding. It might take a year or more until the process becomes evident in the economic data. By the time it’s on the nightly news, it will be too late. Most of the damage will have been done.
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My tone became more and more strident and hysterical (about the only two tones in my repertoire) throughout 2004 – 2006. On April 7, 2005 I wrote a report entitled ” Mortgage Liquidity Steady, Real Estate Bubble Blow-Off.” Here are a few quotes from that piece:
The real problems will begin when borrowers can no longer make the rising payments on variable rate mortgages. This year most borrowers will see their interest rates increase by the maximum of 2%. Some of them will simply stop making payments. Others will put their homes on the market. Some will return to renting. In a myriad of ways, the mortgage liquidity pool will begin to dry up.
The percentage of borrowers taking ARMs remains near record levels in spite of the fact that 1 year ARM rates have risen sharply since last March 2004. Heavy ARM demand is a good contrary indicator, signaling that short term rates are headed up. The public’s record on this is perfect, taking the lowest percentage in ARM’s when rates are high, and vice versa.
Lenders may be eating some of the increase in the first year teaser rate, and passing some or all of it along in points. This will blow up when borrowers face their first anniversary adjustment, with the rate going to market.
Purchase mortgage activity has recovered to the two year trend since the early January breakdown. The chart looks like classical technical action of the first stage of trend reversal, but the other shoe has yet to drop. Apparently, if fixed rates stay in the 6% range, the purchase market can continue to perk along. But it’s the refi market that is most critical. If rates uptick at all from here, refi volume should drop sharply. At that point, the crunch would be on.
Meanwhile data from the Federal Housing Finance Board showed a residential real estate market apparently in a massive, probably final blowoff phase as of January. What the chart does not show is the reduction in volume that first accompanies rising rates. As rates rise, first transaction volume declines. Then if the rate rise continues, the market begins to recognize that with falling prices. Sellers are usually the last to get the news. Prices may appear to stay high, or even go higher months after the bubble actually ends, but the truth is that fewer sellers can get their price. By the time the point of recognition arrives, it is too late.
It was around that time that, increasingly worried about the likelihood of a collapse, I put my house up for sale. At the time I related my experience:
The day to day experiences leading up to auctioning my home this Sunday night in the red hot Palm Beach County real estate scene in some ways are a microcosm of the times. I thought I’d share some of those experiences with you.
The craziness started before last week as I rushed last minute preparations for our scheduled open houses Saturday and Sunday. Fixing up and prettying up around the house, along with creating, organizing and producing information packages for the sale took every minute of the day for the last 10-12 days. All was finally ready by Saturday morning. I scheduled the open houses for Saturday and Sunday12-5 last weekend and this coming weekend, ran ads that I would sell the house to the highest bidder on Sunday April 10 in two major metropolitan dailies, and ran around all over the neighborhood putting up signs Saturday morning.
Through last week, the phone rang off the hook. I took 60 some calls by Saturday morning. I briefly explained to the callers that I would sell the house to the highest bidder. Most were confused at first, but when I explained that we should both come out ahead because I wasn’t paying a huge brokerage commission, they warmed up to the idea.
They started coming to the door right away on Saturday in a steady stream. I’d say the majority came from the signs I had put up around the neighborhood, but a good many of those who called showed up. The house was a huge hit. Many of the visitors made themselves right at home for a good part of the afternoon, sitting at a table by the pool overlooking our little lake. I had bought and placed a slew of flowering plants to put around the gardens and the place looked great. We also did the cookies in the oven thing. Better yet we served them. A seller serving cookies to little kids is the antithesis of the intimidation that most people experience when faced with buying a home. I wanted to put everyone at ease. Hey, I’m a nice guy! I WANT all of them to win. But there can only be one high bidder. The best part is that they aren’t bidding against or negotiating with me. The highest bidder will buy the house. The market will decide what it’s worth.
Sunday was more of the same, only more so. We had a steady stream of people in the house for 5 solid hours with but a few breaks. The phone was ringing continuously all day. All kinds of people were showing up, including the usual assortment of real estate brokers, mortgage brokers, and “investors”‚ waving cash in my face if I would sell them the house right there.
I told one and all the same thing. You are welcome to participate in the bidding beginning Sunday night April 10, at 8:00. I told the brokers they were welcome to bid on behalf of their buyers so long as it was clear that they were representing the buyer, not me, and that the buyer’s bid would be net to me. Whatever commission was to be paid was between the buyer and the broker. Mostly they scoffed or smirked. I did not tell them that I had over thirty years experience in real estate brokerage, mortgage brokerage, commercial real estate appraisal, market analysis and financial analysis. I just let them smirk and grimace, and tell me sweet little lies. It’s all part of being a nice reasonable seller. So, I just smiled, and explained to them that I wanted to control the process, save the commission, thank you, and let the best bid win. They have no answer. None.
Those who were interested signed up on an initial bidding sheet. By the end of the day Sunday, 24 bidders had signed up for the April 10 round robin. 14 of them were already above my silent reserve. I am quite sure that most of the others would bid past that point as well, but it’s pretty clear that the high bidders intend to force them out quickly. The initial bids are in a pack. One bidder who has been out looking for a long time, and has already lost out on one property he wanted, because he was outbid on a traditional listing, jumped out ahead of the pack early by $50,000. The primary advantage to being high man on the sheet is that you get the first call. By the end of the day Sunday, the pack was closing in on the leader with the gap closing to $40,000.
I imagine the pack will close in on the leader by next weekend, but I have a feeling that the lead guy will be the winning bidder come next Sunday when we go through the round robin. It will be interesting to see if a dark horse emerges from the pack. It will be most interesting to see how far things go in terms of price. I will give you all the details on the actual pricing from start to finish after the contract is concluded.
Today, I got 13 more calls on the ad. I’ve lost count how many that is total. Between answering the phone and greeting folks at the door Saturday and Sunday, it got a wee bit chaotic. This week I increased the suggested price in the ad by $15,000. I imagine another hundred people might still show up next weekend, and that by the time I start the round robin, there will be 50 bidders or more.
I plan to eliminate a few by stipulating I will not consider any bids with more than 80% financing at some point. When I’m down to the last four or five bidders, I will qualify them by the size of the down payment. If the bids are close, and the bidding goes above what other houses in the neighborhood have sold for lately, I may take the lower bid with the higher down payment. When it comes to a sale of a home in this market, from my perspective, cash is king. I don’t want a problem with the appraisal.
And that’s pretty much how it went. I ended up with 4 bidders furiously pushing the price up until one emerged the “victor.” I even threw out one bidder who was basing his bid on 100% financing. The other 3 had 20% down payments. I entered into a contract with the high bidder and closed the sale in June 2005. Prices in Florida peaked a few months later in October, but sales volume had declined by so much that in actuality those peak numbers presented a false picture. By October, most sellers were not getting their price.
And the rest is history.