Wednesday, April 30, 2008

For The Record: KLK vs Eleua III - IT'S ON!!!

Yesterday, there was a great exchange on the Seattle PI Real Estate Professional blog that was debating if 2008 was a good time to buy. It was your standard REIC tripe about how today represented a screaming buy which was countered by a handful of economic realists (Bubble Bloggers - BBs). Let it suffice to say that the BBs kicked the crap out of the REIC and the REIC scuttled the thread.

After all, mushrooms and buyers of real estate have two things in common: both are best if kept in the dark and fed a steady diet of Bravo-Sierra.

Kary L Krismer, a retired attorney and real estate agent has thrown down the gauntlet again. He is waving his red cape in front of the BBs and daring us to respond.

This time the comments will be saved on this forum to prevent the REIC from taking their ball and going home.

Pop some corn, crack a beer and enjoy the show. REIC comments are in italics and my responses are in normal font.

But bubble bloggers find their places to share ideas, and convince one another that their thoughts are mainstream, and even worse--correct.

Bubble Bloggers (BBs) don't need to convince themselves they are correct. Many forums have sprung up on the net that allow BBs to share ideas and refine their views. Widespread censorship of dissenting views is not practiced as BBs tend to enjoy a healthy exchange of ideas. BBs find it frustrating when myopic simps offer an open forum to debate the existence and aftermath of the RE bubble and then shut off debate as soon as they lose.

I'm not aware of one BB that believes his thesis is anything close to 'mainstream.' Every BB I know (including yours truly) believes his thesis is a decidedly minority opinion and uses his efforts to attempt to educate those in the mainstream.

As for being correct, the BBs have been the only ones correct in this debate. The biggest national news story over the past year has been the bursting of the REIC bubble. Only a true believer in the REIC cult would attribute that to a 'lucky guess' on the part of the BBs.

KLK said
As to being incorrect and fringe, if bubble bloggers beliefs were common, more than 10% of listings would be sold without a buyer's agent on the other side. That apparently isnt' the case based on the limited searches I've done (I can't track it directly, I can only determine where there is no co-broker). If bubble bloggers beliefs were common, more people would be using rebate brokers, but they aren't (one limited search I did put that number in King County under 2% of all transactions).

I will admit that I have no idea what this has to do with the presence of a huge credit bubble that was manifested in residential real estate. Would it matter if the Realtor wore boxers or briefs? BBs need that important information to determine if home prices have skyrocketed in the face of stagnating wages and incomes and a normal correction is in order.

Given my inability to connect the dots on this, I'll concede this point to KLK, but I want to go double-or-nothing on the boxers vs briefs issue.

KLK said:
If bubble bloggers were correct, we wouldn't be looking at the median SFR price in King County increasing $10,000 for the second month in a row, which would put it within $10,000-$15,000 of last April. True we might very well have less volume than March, but that was true last April too. And true we will definitely have less volume than last April, which is very troubling (as is the effect of the price of gas on the economy).

WOW! Two whole months in one county in the USA. Now, that's a stat I can hang my hat on.

If the lower end is sluggish, but the upper end keeps moving, the median will rise with a falling mean. This is typical bubble behavior as people that view homes as investments will react the same way stock holders do. They will sell the grade B stocks and pile into the Blue Chips. This sends the indicies higher but still represents a net outflow of money in the investment arena. Eventually, the Blue Chips collapse under their own weight and the entire complex suffers.

Either way, two months of a squiggle on a chart is hardly worth pronouncing a bottom when your own post shows that there was an entire year's worth of deterioriation.

Higher prices on lower volume, like in stocks, is a bearish indicator.

I still find it amazing that Seattle area RE agents can look over the national landscape, see the carnage, and think they are going to be just fine.

KLK said:
Oh, and most importantly, if bubble bloggers were correct, the economy and banking system would have collapsed by now, and house prices would be less than 70% of their peak.

I really don't know how to respond to this without being overtly rude and obnoxious. I'm wondering if you have picked up a newspaper anytime within the past 9 months, as this has been the #1 topic in the nation (after Brad and Joline's baby).

The banking system has imploded. The reason you can't see it stems from the FEDERAL RESERVE cannibalizing itself to the tune of almost $400B in order to keep this rancid system from having to take its marks and file for bankruptcy. The latest H.3 from the FED shows that the "non-borrowed reserves" (that's what the member banks have on hold at the FED) has deteriorated from $42.5B in 4/07 to a -$99B in 4/08. That's a swing of almost $144B in one year, or $12B/mo. Most of the damage has occurred in the past 4 months.

Why is this significant? Great question.

Banks are required to hold in reserve money to offset losses in their loan portfolios. For decades, the amount of required reserves and the amount of "non-borrowed" reserves has never dipped below the mid 90% range. In fact, before all this started happening, the accounting for this has been very mundane and stagnant over the decades. Starting in December 07, the amount of these reserves not only left their historic 95%+/- level, but descended well below the zero line, and now we are holding in excess of -200%.

Let me repeat myself. THIS HAS NEVER HAPPENED IN YOUR LIFETIME! The FED has burned through almost 75 years of reserves in less than 6 weeks, and burned through 3 times 75 years of reserves in 4 months.

Then, in mid-March, the FED, JPMorgan, and the US Treasury had to hatch an illegal, unauthorized bailout of Bear Stearns Corporation, which has the US taxpayer on the hook for $29B. Congress and the Federal Reserve Act contain no such provision for this action.

Why did they do it? Had BSC been allowed to liquidate their portfolio, your banking crash would have happened in the week leading up to Easter 2008.

Just about every bank is raising capital as fast as they can to cast into the gaping maw of the mortgage defaults that are hitting each and every one of them.

The FED now has to take the most rancid collateral to keep money in the banks, as private sources of funding for banks has dried to a trickle. The FED also has pumped the banking slosh to historic levels to keep overnight lending moving, and even with that, they still have to create a new "facility" every month to keep the slosh from freezing up.

The US Treasury is hatching some new scheme every month to keep home prices aloft and banks from being forced to take their marks. This doesn't happen in 'good times.' It happens in times like now and the 1930s. The government knows it's a bubble and they are spending all your money in a futile attempt to prevent it from destroying the economy.

Your banks have collapsed. You just don't know it yet. I certainly hope you don't have your money in the US banking system, or you will be living in a Pioneer Square flophouse before you know it.

BTW, I fully acknowledge that Seattle real estate has shown resistance to the price drops seen further down the coast. You say that 30% off the peak isn't bad, I'm wondering how that squares with what people in LA/SF/SD are thinking. That's almost 1/3 of the value that has disappeared within 18 months. If you buy that Seattle real estate is linked to X-Cals buying (and you would have to be a special kind of clueless not to), you can see that 1/3 off is just around the corner.

Don't worry. Higher end properties will eventually sell for 80% off the peak. It's coming.

KLK said:
Yes, I'm being very Seattle specific, as are bubble bloggers when they sarcastically say: "Seattle is special." Actually I tend to be neighborhood specific--not depending much on county-wide stats (there are no true Seattle stats), but for purposes of these discussions, county-wide stats are good enough.
You're right that the lower end cut hurt the upper end eventually. I've mentioned that myself several times. If people can't sell their old house, it's harder to move up to a new house.

Most BBs talk about how national trends will weigh on local markets. Local REIC members like to hide behind the idea that Seattle has some sort of immunity against these trends, and BBs like to point out the folly of that idea.
You can get as specific as you want. You can retreat to the Pacific NW, King County, Seattle, Queen Anne, 6th Ave. W, or the NW corner of Howe and 6th for all I care. At some point, the macro-economic trends will bring reality to whatever doorstep you wish to call your base. Look beyond your horizons to see what is coming. Good grief! People are paying you good money to give them relevant information, so how about looking up for a change to see what is coming your way?
Yes, if people can't sell their old house, they will not be able to move up.
So....what happens if Joe Hippen and Mary Trendy can't sell their Orange County tri-level because they are 30% underwater? How does that translate to sales in the PNW?
My RE friends that sell on Bainbridge say that the market for X-Cals died an abrupt death in October 07, and the remaining sales are locals moving around on the island or from Mercer/Bellevue.
That has killed the top half of the market. No more funny-money loans in California equates to no more funny-money equity transports from California.