This Looks Like the Opposite of an Opportunity

Saw this today.

First, Whitney didn't predict squat. She "predicted" that Citigroup was in trouble in Fall 2007 a week before Chuck Prince resigned and that Merrill Lynch and Lehman were in trouble two weeks before they collapsed. That's called being Captain Obvious. I started telling people to get out of real estate in December 2005, ratcheted it up in December 2006, and set off flares in April 2007. Where's my genius award?

Second, given the cost of financing and the lack of regulation of buyers, all this opportunity is going to do is going to do is concentrate yet more wealth in the hands of the 1%.

A New Rant

A new rant just posted at Pacemaker:

Real estate crashes are built into the plan and are not a bug but a feature.  And with every crash, assets are further concentrated at the top of the wealth scale.  Let's look at the last crash.  The end of the boom was signaled Thanksgiving 2006 when Chase and Wells simultaneously (But certainly without collusion.  It's a miracle!)  converted the lines of credit that were an essential part of their mortgage programs into 60-month amortized loans, closing off access to credit for thousands of small businesses.  Why?  Well after spending the boom dead to the world, SEC and DOJ had been politically forced into semi-comatose states and had given Chase and Wells taps on the shoulders.  They hurriedly solidified their LOC positions into conventional loans before throwing a few of their lackeys under the bus the following Spring to placate the regulators.  By then the cat was out of the bag.  But the crash didn't happen.  Because the players still had too much Quatsch on their books, and their shovels were only so big.  They had to find marks to unload it to.  Failing that, they had to find marks to hedge it.  And they had to position for post-crash opportunities.  It took a year.  There was turbulence along the way.  New Century and American Home Mortgage went Chapter 11, a bunch of funds either closed or froze withdrawals, and B of A snapped up Countrywide, ostensibly as a bailout of Countrywide, but really to shore up B of A's balance sheet.  Then the players pulled the plug, and the spring unwound.  IndyMac, Bear, and Lehman folded up; Chase pushed WaMu off a cliff so it could grab its assets and shore up its balance sheet; a bunch of players, but especially Chase and Goldman, broke AIG and the Greatest Balance Sheet on Earth by loading it with rigged CDSs and other hedge positions; the houses that had put enough lipstick on their positions to keep from folding got absorbed, so B of A got Merrill Lynch, and MUFG got Morgan Stanley; and Wells got a seat at the big-boy table by winning the Wachovia sweepstakes.  Then it spread to other industries, and to the rest of the world, and everyone got a nice Mike Tyson square in the face.

And since then?  Let's just say China is not the only bubble out there.  For example, right here in Salt Lake City we've been frantically tearing down commercial property and slapping up 5-8 story apartment and condo blocks.  And the financing makes no sense, even with tax weirdness thrown in.  Rates of return that should only acceptable on government securities, but here they are on real estate.  But with interest rates effectively at zero, I guess anything is preferable.  And with that we can see the game is once again afoot.  Build it, then flip it out in the current inflated market to marks who are desperate for any return above 0%, then sit on your cash and wait for the next crash so you can buy it all back on the cheap.  And are the regulators looking into any of this?  Don't be silly.  They'd rather be looking at every mortgage and rent payment in the country than at which financial institutions have all their money tied up in cash, waiting to throw the switch on the next collapse.  And the grift goes on.

Speaking of Shills

I just have to shake my head at this flack piece by Dana Peterson, EVP and Chief Economist for The Conference Board.  First a bit about Ms. Peterson.  She was appointed to her position a year ago after doing undergrad and grad in economics (*SNORT*), a stint at the DC Fed, and several years as an economist at Citi.  In other words she has no real-world knowledge of real estate of business and only a selective and pigeon-holed knowledge of finance.  And she's wholly owned by The Powers That Be (TPTB).  As for The Conference Board, it was founded over a century ago by leading industrialists and financiers as the National Industrial Conference Board, and its job was to block labor organization and promote open-shop laws.  In spite of the name change, nothing has really changed there.  It has been declared "a trusted source" by the usual suspects (*COUGH*Chicago Tribune*COUGH*Wall Street Journal*COUGH*) but really just cranks out "research" designed to show that everything is proceeding smoothly and to keep regulators and media from looking into what TPTB are doing at the expense of the rest of us.  Which brings us to this article.

Ms. Peterson's thesis is we're not in a real estate bubble.  First off, she gets the dates of the prior bubble wrong.  In 2005 the bubble was already late-stage, and as I noted in my prior post, it lasted until 2008 due to the machinations of the perpetrators.  Second, she says fraud isn't driving the market increases this time, basic supply and demand are.  This is true in a narrow and frankly sick sort of way.  As she states, there is a percentage of Millennials who are moving into the housing market.  She doesn't state this is a decided minority of Millennials who overwhelmingly into two groups: those who've hit the jackpot and landed stable, well-paying jobs, and those whose parents can boost them (There is of course significant overlap.).  The bulk of Millennials are either scraping by in rentals they can barely afford or are still in the folks' basements (And by the way, there are plenty of folks older than Millennials scraping by with barely affordable rentals, right up to those of us on the cusp of retirement.  But TPTB like to flog us for not having $1,000,000 saved away.  We really do live in a bottomless crock.).

So I don't agree with Ms. Peterson that there is some youth parade driving the market.  The reason is the same as it has been to some extent all the way back to the 70s: There aren't enough stable, living wage jobs to support a healthy single-family residence market.  Since so much of our economy is dependent on that market, we've invented unhealthy ways of keeping it going, such as all the mortgage fraud 15 years ago.  These methods invariably produce bubbles, and the bubbles invariably pop.

I would also note Ms. Peterson is wrong about there being a big change in the mortgage market from fifteen years ago (There is one exception I'll look at below.).  The same banks (or their successors) are at play, the same secondary market, and the same securitization model funneling into REITs.  And if you think Dodd-Frank really makes a difference, I have some oceanfront property in Yuma, Arizona to sell you.

So if the kids aren't alright and we don't have a bunch of mortgage fraud going on, what is driving the market?  The answer actually lies in Ms. Peterson's article.  Fifteen years ago there weren't enough good borrowers, so they were manufactured via fraud.  Lots of creative financing: no down payment, no documentation, high loan-to-value (even over 100%), and variable interest rates everywhere.  As Ms. Peterson notes, the mortgages this time are overwhelmingly conventional.  Now ask yourself who can get these loans?  One group is the fortunate few who have either made it or whose parents did.  The other group is the one really driving this market: corporate landlords.  And that's not good.  Corporate landlords have deep pockets for obtaining financing, and they're using it to snap up single family residences to convert to rentals and older commercial properties to tear down and redevelop into mid-rise apartments and condos.  There are entire housing subdivisions being built out there to be flipped as a package to a corporate landlord, and the entire subdivision will then be rental houses.  So the housing supply is shrinking, which in turn drives prices up, which makes TPTB and their kids the only ones who can afford to buy, causing another shift of assets from ordinary people to the top.  So everyone has to rent, and rents are sky-rocketing as a result.  Bye bye affordable housing.

So what is TPTB's game?  What happens to their investments if only the top 10% can afford to live in them?  Are they really making a sucker's bet?  I don't think so.  I think they believe we've hit End Game.  They know everyone has to live somewhere and they can always count on their pet government entities to bulldoze homeless camps as needed.  I think they believe the next crash, and it will happen, will result in neofeudalism with them as the lords and ordinary people as serfs, exchanging their freedom for some hovel to live in.

So keep putting lipstick on that pig, Ms. Peterson.  But until you have some actual evidence for what you're shoveling, I'm not buying a bit of it.

More Market Craziness

As I recently blogged, markets are not making sense.  One of the things I noted was gas prices, which are jumping back up a full month before Labor Day and without any change in the threat posturing in the Middle East.  Prices are going up because they just can.  I also commented about the crazy money going into multi-family housing.  This week I learned it's worse than I thought.  The cap rates on these projects are running as low as 4%.  There is much debate about what all goes into a cap rate, but for our purposes it is the annual rate of return an investor expects from an investment.  A high cap rate indicates a risky, volatile, short-term investment.  The investor needs a high rate of return to get its return and quickly flip the investment.  In contrast, a low cap rate indicates a safe, stable, long-term investment.  4% is low.  In fact to get lower, you have to go into the world of government and high-grade corporate bonds.  Serious buy-and-hold strategies with almost guaranteed returns.  Is multi-family construction that stable?  Not hardly.  Which means Mr. Market has a fire hose of money aimed at a sector that can't give adequate returns.  Just like the Dotcom Boom.  Just like mortgage-backed securities.  Just like oil shale and tar sands.  Which means we're just pumping up another bubble.  When people talk about markets, what they are really talking about is marks.  Don't be their next mark.

This is a Market?

I commented recently about how the real estate market seems to be perpetually warped.  Investment money is supposed to pursue a return, preferably the best one available, but what we in fact have is money being frantically thrown at one bubble after another, twisting supply and demand into unrecognizable states and consequently twisting the market into something that isn't really a market, at least not one of any use, unless by "use" you mean "running serial con games."

Real estate is not unique in this.  Look at gas prices.  Historically, gas prices come down after Memorial Day.  This year, they've come down a ton.  And they've done so in the face of a major piece of news: tensions between the US and Iran that could shut down the Strait of Hormuz.  If markets were actually functioning, oil speculators would take this news and jump into the spot and futures markets with both feet, driving prices up Memorial Day be hanged.  But that isn't happening.  And even stranger, no one is commenting on this.  I'm left singing Led Zeppelin, "And it makes me wonder."

More Vacancies

And once again I am left scratching my head over local real estate management practices.  First, though, a moment of silence for the downtown Baskin-Robbins.  It's closed, and it sports a fatuous sign inviting you to the Sugarhouse location, a wholly useless alternative for anyone downtown.  All that's left for ice cream downtown is chi-chi shops with such high fat content your arteries clog just walking by and inhaling.

Anyway.  Also closed now are all but one of the Firestone service centers in the valley.  Apparently, they couldn't agree on a new master lease.  I imagine Bridgestone (Firestone's parent) was driving a pretty hard bargain, and I imagine the landlord did not want taken advantage of, but now the landlord is stuck with a bunch of vacant properties and no revenue stream to cover the expenses.  Not a good business model.  Apparently Burt Bros. is expanding into a few of them, but don't expect me to darken their door any time soon, given that they borked two of my cars on three separate occasions.

At least the landlord doesn't have to worry about a pile of similar buildings being slapped up in competition.  The hot money is now in multi-family residential.  Man, I would like to be able to follow the tax and accounting tricks that make chronic overbuilding make sense.  There must be something there.  All I know is that we have medium-rise condos and apartments popping up like mushrooms on the Olympic Peninsula.  And don't think they're taking advantage of affordable housing programs.  A $400,000 condo or $2,000/month apartment isn't affordable housing.  Makes you wonder if there are enough people who can afford all this new space.  Probably aren't.  In which case, here comes the next bubble, everyone get ready for a big POP!

Housing Market Slowdown

As I wrote in my previous post, rental housing is tight because people can't afford to buy.  The pundits are finally waking up to the fact that the housing market is slowing down and so the merry-go-round is about to stop again.  As a preliminary note, the only reason the housing market has been increasing is because a lot of hot, commercial money has been jumping in to snap up tons of houses for potential rentals or tear-down redevelopment; owner-occupied housing, which creates the community stability and social benefits we traditionally look for from this market, has not been making the difference.

The pundits talk about rising prices and rising interest rates forcing people out of the market, but they are ignoring, perhaps deliberately, the elephant in the room.  Too many people lack the economic stability to make such a long-term purchase.  Their income hasn't been steady for the last several years (if ever), they don't know how steady it will be over the next five years (It probably won't be.), and they don't even know if they'll be here for the next five years (probably not).  People can't buy, and even if they can, they don't have a good reason to.

A Back Door Hit to Affordable Housing

Let's face it, affordable housing is expensive. For developers and lenders, that is. The margin simply isn't there, so affordable housing wouldn't get built without incentives to give it a boost. The biggest boost has been tax credits and deductions. The problem is that credits are valuable only if there are taxes to credit against, and deductions valuable only if there are profits to deduct from. As you may have noticed, profits have been a little thin on the ground for developers and lenders lately. Consequently, they're abandoning affordable housing projects they only got into for the tax breaks. So not only has the credit crunch taken a significant percentage of the population out of the purchasing market, and not only are rents shooting up because of the sudden increase in demand, but the affordable housing in the pipeline is contracting. That means the affordable housing run-out from this downturn will be with us for several years at least.

Hey, maybe they can take the dark space in the malls and convert it to housing units.