Tuesday, July 17, 2007


Poulsbo (EB) - The Institute for Economic Reality has raised its CRASH-CON rating from CRASH-CON 3 to CRASH-CON 2.

The IER has been tracking the secondary market for mortgage backed securities, specifically collateralized debt obligations (CDO) and how they are funded by the large New York money center corporations.

Today, Bear Stearns Cos. of New York, finally came clean and told the world how their hedge funds have performed with CDOs.

Bear Stearns Cos. Inc. has told investors in its two troubled collateralized debt obligation (CDO) funds that the funds are now essentially worthless.

Yes, you read that correctly.

BSC told its investors that their investment is a total loss. Zero. Toilet paper.

I seriously doubt BSC is the only grenade rolling around on the floor.

Once the big banks get whacked, the sea of liquidity contracts.

That liquidity has been behind the zany increase in mortgages in the past 4 years.

More information as it breaks.

Ernst Stavro Bloviator,
Senior Fellow - IER

Sunday, July 15, 2007

Prepare to Set CrashCon 2

Poulsbo - Due to the impending death of the "mark-to-model" concept in valuing mortgage backed securities (MBS), the Institute For Economic Reality will likely issue a CrashCon 2 setting sometime on Monday July 16.

Further details to follow.

All interested parties are advised to pay close attention to Bear Stearns hedge funds.

Ernst Stavro Bloviator,
Senior Fellow - Institute For Economic Reality

Tuesday, June 12, 2007


Last Saturday, Steven Gardner of the Kitsap Sun, reported that Kitsap home sellers are coping with declining demand for their homes. This could have been a long overdue article on how economic reality applies to everyone, regardless of how special they may believe they are. Unfortunately, Gardner didn't present any skeptical analysis of what his "experts" were telling him, or give any real perspective on how national trends might weigh on Kitsap families. He essentially asked a glorified used car salesman if this was a good time to buy a used car.

If you were waiting for the peak time to sell your house, it may have already passed you by for now.
How true. Given that the PNW has had the luxury of watching every other market in the country roll over into a seller's nightmare, I am amazed that most of us have spent that opportunity to wax eloquently on how special we all are how economic reality does not apply to us.

Nonetheless, it's clear the market was hotter for sellers a year ago. The 2,488 active listings in May was 41.5 percent higher than the number a year ago. At the same time, there was a 12 percent drop in the number of sales and a 15.4 percent decrease in pending sales.
It might explain the increased number of "for sale" signs, including the ones that show "price reduced."
41.5% isn't exactly a seasonal aberration. It is a defined shift in the market.

Rich Jacobson with Windermere Real Estate in Silverdale:
"It's not quite the seller's market from a year ago. Buyers are more cautious now; days on the market have gone up, prices have gone down. They're not jumping on the first thing they see."
So, were the last few years a healthy market or a speculative frenzy? If it was a frenzy, can our market end up like Salinas, California?

[Glen] Crellin [director for the Washington Center for Real Estate Research], and Jacobson agree that even though conditions are not what they were a year ago, the pendulum is still on the seller's side. Part of that has come because the Puget Sound region has not suffered the problems other areas have.

Crellin said he believes innovative lending was not as popular around here as it was in other parts of the country, meaning people here are not foreclosing at the rate their peers are elsewhere.
This is where they lose all remaining credibility. Yes, we are not seeing the phenomenal increases in foreclosures, because we have been in a bull market. If someone gets into financial trouble, they throw it on the market, and it is gone. They walk away with some profit and everyone wins. This is true in every market that is a raging sellers speculative frenzy.

"Innovative lending" [what a euphemism] is very much alive in the PNW. Washington ranks 5th in the nation for "innovative lending." There is absolutely no reason to believe that our innovative lending will end up any different than what pushed Boston, Florida, Arizona, Vegas, and California over the brink. To think otherwise is utter foolishness, or panglossian arrogance.

There might be hope ahead for sellers.
The National Association of Realtors projects the median price nationally will slip 1.3 percent overall this year, but it should begin increasing in 2008.
The NAR recently abandoned this projection. They are now predicting at least twice the damage. Keep in mind, the NAR didn't even recognize the apex of the national real estate market until 18 months after the fact. Their disgraced spokesman, David Lereah, kept telling us that all was well, when in fact it was not. The NAR, along with most RE "experts" failed to see the nation-wide slump that is hanging over every market when it was about to happen, so I wonder how they can so confidently predict what 2008 will look like.

With all the ARM/subprime resets that are looming in the next 4 years, with the steepest part of the reset schedule due over the next 2 years, how can '08 be ripe for improvement? The homebuilders finally threw in the towel on predicting a turnaround, and they are now slashing prices to move inventory.

Jacobson said he believes most homes locally will see an increased value of 4 to 5 percent next year over this one.
It's one thing to give an opinion. It's quite another to be quoted as an "expert" and give a wildly unsubstantiated prediction that flys in the face of the macro economic reality. Just how does Mr. Jacobson arrive at his 4-5% increase? History? Wishful thinking?

Finally, the absolutely most irresponsible statement I have read from a real estate agent in our market.

"The doom and gloom really doesn't apply in the Pacific Northwest," Jacobson said, adding that it's particularly true in Kitsap County, because of the stable military presence and the housing prices compared with the market closer to Seattle. "We're still a great value over here."
Right...just like that used car was only driven by a little old lady to and from church on Sundays.

How does the PNW get the immunity idol against "doom and gloom?" Honestly, are we on a different currency? Do the laws of economics not apply to myopic, provincial communities? What makes us so special, but not Boston, San Diego, Phoenix, Sarasota, and Vegas? The Navy? Is Norfolk immune and special? The weather? We are better than San Diego or Sarasota? What is the education disparity between Boston and Bremerton?

How many people have overpurchased on the belief that we are insulated against the economic realities that are befalling the rest of the nation?

Real estate agents are sales people - not financial advisers with a fiduciary responsibility. Their loyalty is to the seller. Their job is to find the dumbest person with the largest stash of cash and get them to the closing (typically Californians). The buyer is a pigeon to be plucked. Caveat emptor.

Stable military presence? As long as Norm Dicks is alive, that may be true. How old is Norm? If the military is so stable, why did prices skyrocket over the past few years? Did the Navy suddenly start spending 60-100% more on wages and compensation?

I wish the Kitsap Sun would spill some ink on real estate speculators, toxic loan applicants and purveyors, and ask some questions that challenge the prevailing "wisdom" that Kitsap is special and immune from real estate reality.

How about looking into how Kitsap has had one of its biggest building booms since WW2, but every school district (X-Bainbridge) is losing enrollment?

What happens to a school teacher that extends himself to buy a nicer piece of property (on the assumption that the rising real estate market will liquefy the financial strain) when the market turns? Can a decidedly middle income person survive a 15% downturn that lasts for 10 years? How about a 30% downturn? 50%?

What happens to people with "good credit, good jobs, and good educations" that lose their homes to foreclosure? Perhaps buying a Kitsap Sun reporter a airplane ticket to Florida or Boston would be a good investment. "Coming to a Real Estate Market Near You..."

What happens when a commissioned officer fails to sell his house when he transfers? What is the Navy's view on an officer with excessive debt? Bankruptcy? Tax liens? How does an officer do his job on a nuclear submarine without a security clearance?

How about macro-economic issues? What happens to local home prices if mortgage rates hit 7%? 9%? 12%? What happens when 20% down payments and job verifications are absolutely necessary? How many local Kitsap homeowners have $80K in liquid assets? How about first-time home buyers? What happens if X-Cals dry up? Can real estate outstrip incomes over a long period of time? If so, how?

What happens if Norm Dicks gets hit by a bus? What happens if we lose Keyport? What happens if we lose subs to the Atlantic Fleet? What if PSNS loses business?

Kitsap is overpriced by any reasonable metric. Yes, we are cheaper than King County, but King County isn't a one industry county. It's still an hour minimum commute, and that commute is getting more expensive. It takes more than a feeling of "golly gee, I'm so special" for real estate to appreciate. Beanie Babies once appreciated so fast, they became a national phenomenon.

At the end of the speculative cycle, houses will be priced on the ability for people to buy them with prevailing lending standards on prevailing incomes. That is traditionally 2-3.5X income. For most of Kitsap, that translates to homes that sell for less than $200K.

Yes, you read that correctly.

It is going to be an ugly story when middle income households are $200K upsidedown on their "dreamhomes." The Kitsap Sun will have no shortage of people willing to cry a river on how unfortunate they are. Naturally, it will be the fault of someone else. I seriously doubt anyone will look in the mirror and say, "Yup. I screwed up. I tried to get rich by speculating in a consumer commodity at the top of the market. I ignored all the warning signs. I listened to people that had a powerful incentive to lie to me. I will NEVER do that again."

It isn't different this time. We are not special. We are not immune.

Friday, February 23, 2007


Poulsbo (EB) - The Institute for Economic Reality, a one man think tank based in Poulsbo, Washington, has just upgraded its economic alert status. On Friday, February 23, 2007, at 0745 PST, the IER raised the alert level to CRASH-CON 3, and advised all interested parties to prepare for further deterioration of the national and local real estate markets.

Previously, the IER had been sitting on a CRASH-CON 4 rating, which is a general warning that the current market is unsustainable, and an eventual crash is forthcoming. With the heightened alert level, the IER is processing many hostile economic phenomena which will weigh heavily on the local real estate market.

The IER identified the rapid implosion of the sub prime lending industry as the main factor in the upgrade of the CRASH-CON alert system. An entire swath of borrowers/buyers is being removed from the potential pool of stupid parties to real estate transactions. Also, many sub prime mortgages are resetting and defaults are skyrocketing in many markets. This puts in additional pressure on an already building inventory of overpriced homes.

Dr. Eleua von Bloviator, the mind behind the mayhem, has predicted that the Spring and Summer of 2007 will see an unprecedented increase in available housing units for sale. With millions of vacant homes for sale through the winter, and builders reaching full capacity in production, along with many overextended owners looking to get out of their investment during the selling season, Dr. E expects inventories to reach panic levels.

The normally reclusive didactic curmudgeon warned of how his arch enemy, the Real Estate Industrial Complex (REIC), might spin the Spring and Summer data. "I have no doubt the REIC will sift the low sales figures for any bright spots and publish only that data. They will state the market is healthy, prices are rising, and their particular market is 'special' and immune from any economic reality. At the end of the day, it will be easy to identify a real estate agent at Wal-Mart. She will be the 40-something woman in high heels, driving a Lexus, yakking on a cell phone, and stocking up on Depends."

The IER is actively looking at the next level in the real estate finance food chain. Once any credible data presents itself that banks like Wells Fargo, or Washington Mutual are about to take a header due to insane lending practices (lending money to people that will never pay it back, only to make up the difference collecting fees), a CRASH-CON 2 rating will be issued.

The IER has contacted associate agencies regarding heightened alert levels. The Great Unwashed are only instructed to take precautions commensurate with CRASH-CON 3.

We now return you to your regularly scheduled "what me worry?" lifestyle.

CRASH-CON 5: Normally sustainable real estate market. Speculation is limited to dim-witted Californians paying too much for their "Bainbridge Island Dream Home."

CRASH-CON 4: Widespread speculation by your average Joe. Everyone thinks they are going to finance their retirement by speculating in overpriced real estate. No fear, and inflection points are not yet visible. The number of real estate agents grows in numbers that allow for Congressional representation. REIC says this is as affordable as it will ever get.

CRASH-CON 3: Inflection points are starting to coalesce. REIC gets very testy, and calls a bottom. Widespread abject stupidity reigns supreme. Catalyst for downturn solidifies. Bull mentality is at zenith. Most bears have capitulated and are now believing in the 'New Paradigm.'

CRASH-CON 2: Inflection point has passed. REIC gets violent. Money is evaporating. Inventory is very high. Huge swaths of land have been deforested to create "For Sale" signs. Californians are yesterday's news. Mainsteam Media finally gets a clue. REIC calls the bottom every other week. Major disembowelment of real estate finance.

CRASH-CON 1: Full-blown panic, despair, and financial ruination. People swear off ever buying another home. REIC all in witness relocation program or living in South America under assumed names. Foreclosures and REO are outselling the REIC. Nobody is calling a bottom. Former Bears are endzone dancing. MSM runs articles about how only idiots buy homes. People actually talk about something other than how rich they are becoming by investing in real estate. CNBC is now public access TV featuring Al Gore talking about something stupid.

Sunday, January 28, 2007

East Palo Alto: A Steaming Pile of Real Estate Anxiety

Yesterday, I was fumbling through the My Documents file in my computer. It is amazing what a trip down memory lane your My Docs file can be. I stumbled upon this posting that I wrote in early '05, for a now-defunct housing bubble blog. I thought is summed up the real estate market pretty well, and captures what life was like at the top of the bubble.

Enjoy, and take the opportunity to mouth-off at the end of the article.

The Rationale Behind Chronic Apoplectic Tantrums

ap·o·plec·tic adj.
Of, resembling, or produced by apoplexy: an apoplectic fit.

Having or inclined to have apoplexy.
Exhibiting symptoms associated with apoplexy.
Extremely angry; furious

It was another peaceful day in North Texas. Our wildflowers are in full bloom, all the grass and trees are green, crystal clear blue skies are the norm, and temperatures oscillate between the mid 60s and mid 80s. Children play in the park, teens hold carwash fundraisers, and Californians call to talk about real estate.

It was almost peaceful.

The latest tidbit of insanity that I care to share with all of you concerns the absolute mindlessness of the bi-coastal real estate bubble. Many believe that no bubble exists; these people all live in the coastal regions, and are complete morons. My latest example of how the bi-coastal real estate market is just a bundle of high priced twaddle comes from the epicenter of urban crime in Northern California – East Palo Alto.

Let me set the stage for East Palo Alto, California. For years it lead the entire nation, not just California, in murders per capita. Yes, in the modern Olympiad of senseless human slaughter, East Palo Alto was able to swipe the gold medal from perennial heavyweights such as: Detroit, Compton, Washington DC, Gary, and East St. Louis. Rape, larceny, assault, and home invasion are graded events, and there is enough crack to last 10 lifetimes. It is the type of place where if you get a flat tire, you drive on the rim until you get out of town.

I lived in Mountain View, which is about 10 minutes to the south, and my parent's gardener lived in EPA. Soanne was about 6'5" and 300# - mostly muscle. He has the physique that would inspire an Oakland Raider offensive lineman to address him as “sir.” One night, he was at home with the wife and a bazillion kids taking in a night of NBC tv. Suddenly, there was a blast at the front door, and 4 kids presented themselves. The intro was made with a smoking shotgun (that's how they removed the 4 locks on the front door), and they announced they were taking possession of Soanne's TV, stereo, and assorted valuables.

Yikes! This was just a few short years ago.

So, I decided to take a look at http://www.realtor.com/ and see what kind of money it takes for homes in the alimentary discharge of Northern California to trade hands. I first put in $350K-$450K as my search criteria, and did not match a single property. My heart began to race. I entered in $10K-$1M, and the lowest price home listed for $485K.

The worst POS in the nastiest neighborhood in all of Northern California lists for $485K. But it is nice. 1020sf, 2 bed, 45 years old (it didn’t say if it was a meth lab, or how many bullet holes are in the exterior – I’ll have to check the disclosure), and you have to walk outside to get to the garage (a serious safety concern).

Let’s get some perspective on the sustainability of the California market.

Rather than go to another prison inmate training facility to compare notes, I thought I would take you to another city in another state that was the polar opposite of EPA, California.

I like to use my home city of Highland Village, Texas. Highland Village, Texas is located about 25 miles north of Dallas along the shores of Lake Lewisville. The averages household income (reported) is $105K, and it sports the LOWEST crime rate in Texas for the past 4 years. It is 95% European descent, and everyone speaks the same language. If it were relocated to Northern California, it would be Alamo, or Mercer Island in the Pacific NW. Let’s look at what the same $485K would buy you in a very nice suburb of Dallas, Texas.

Using the same search engine, I found this humble abode (now delisted).
4000sf, 4 bed, 3.5 bath, 8 years old, floor-ceiling Austin stone fireplace (very nice), gourmet kitchen, 3 car garage, .4 acres, and a full size indoor basketball court with 20’ ceilings. The neighborhood is in the nicest part of the nicest part of Highland Village (Lakeside part of Highland Shores).

Oh, by the way…if you paid asking for this house, you would still have $35K left over, compared to the crack-house in East Palo Alto, California.

Yes, there is the weather. That explains the disparity. For 80 days in Highland Village, you will sweat your balls off. Granted, you could play basketball in your indoor court, or take the $35K and go on vacation. Either way, Texas is the second most populous state, and the millions that call Texas home seem to get along just fine. The remaining 265 days in Texas are just wonderful. The winters are like fall, and the spring is absolutely beautiful.

East Palo Alto does have great weather. It is right in the middle of the mid-Peninsula microclimate, and it is very nice. Granted, you will be stuck in your 1000sf house all 365 days a year, or risk having a 9mm hole bored into your skull.

EPA is quite neighborly, as the would-be high school students routinely visit to help distribute pharmaceuticals, and recycle home electronics and automobiles; but at least the weather is nice, and did I mention the 10% state income tax, and schools that rival DC, West Virginia, Mississippi, Arkansas, and Hawaii? Good thing you don’t need an air conditioning unit, as the local gangs would probably be fencing them outside of Home Depot.

So, what can we conclude about this? At $485/sf in the hemorrhoid of Northern California, these would-be real estate tycoons are taking a very risky gamble. I wonder how long the arbitrage that presently exists between the coasts and fly-over country will last? My guess would be for it to end very soon. These otherwise intelligent people are risking an entire life’s fortune on what would be euphemistically called a steaming pile of real estate anxiety. They all must sell to an even more deluded group of morons, or will have to become very comfortable with living in a horribly shuddersome neighborhood, as they will be trapped.

Mr. Market can turn on a dime. Unless the entire city becomes gentrified, my guess is the urge to sell will become quite pronounces at the first sign of trouble. Our new residents could have bankers trying to rob them by day, and the thugs by night. What a wonderful “investment.”