A Way Out Of This Mess

The following is a letter that I have given to Inslee, Cantwell, and Murray. I have also put this to every member of the House Financial Services Committee and the Senate Banking Committee.

If you agree with this, please visit:

www.fedupusa.org

Please take this letter, put it under your name and send it to your representitives. I have been working with Inslee's staff in DC to get this into the hands of someone that can get this moving. If you would like to help, please do so. Call Inslee's office at 202-225-6311 and tell them you like the FedUpUSA.org proposal and want to see it implemented. It gives Congress a "way out" of the current mess that Paulson and Bernanke have trapped them.

If you are in Norm Dicks' district, I encourage you to press his office. He is one of the most powerful members of Congress and he can get things done.

Please leave a comment if you have any questions. Due to the serious nature of this matter, I will have to pass on my normal snarky tone. I hope you understand.



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A Solution That Works

The Honorable Jay Inslee:

By now, you have been thoroughly deluged by angry phone calls and letters from your constituents. They do not wish to pay Wall Street bankers trillions of dollars of their hard earned money for putting our financial system at this level of peril. You should respect their wishes.

However, you can’t leave without doing “something,” and that “something” always seems to come with a hefty price tag and an uncomfortable level of trust given to those, who for the last 18 months, have told us not to panic and that all is well. There is a solution that costs the government nothing, eliminates “moral hazard,” and ensures we never have to do this again. Any variation of the current proposal lacks all these features.

The solution is to fix the problem, not paper it over.

For the past 13 months, every “crisis” in the banking sphere has descended from three basic flaws in the current regulatory structure:

- Over leverage. The failures of the Bear Stearns, Lehman Bros., Merrill Lynch and various hedge funds descend directly from their level of financial leverage. At the present levels of leverage, one mistake and you are dead. Back when these financial institutions were regulated to carry no more than 12:1 leverage, we didn’t have banks blowing up every 13 weeks.

- Unregulated derivatives. This is what caused the trillion dollar insurance company, AIG, to be taken under by the Treasury Department. Financial service providers made billions writing insurance policies that were unregulated and carried no regulatory oversight that ensured they would be paid in the event they were triggered. No other category of insurance policies is unregulated in this manner. Warren Buffet refers to these instruments as “financial weapons of mass destruction.” The notional value of these numbers in the tens of trillions.

- Fictional Accounting. This is the precise reason that “short sellers” have pounced on the various financial institutions. The current accounting allows banks to intentionally produce fraudulent financial statements, regarding the value of various assets they claim as part of their net worth. The short sellers understand that the value of these stocks are grossly under their current price and act accordingly. Banning short selling does not change the fact that these companies are priced well above their value. You NEVER see short sellers attempt this with healthy, truthful companies.

The solution is to pass a comprehensive regulatory reform bill that:

- Reduces leverage to safe levels. This needs to happen over the next two quarters. Company reports shall be required to show that financial leverage is within statutory limitations, or enforcement action will follow.

- Put Credit Default Swaps on a regulated exchange. This ensures the insured party can be paid and prevents the nightmare scenario of a chain-reaction of defaults across the system. The equity options markets are a good example of how this needs to be structured. No company may be allowed to write these derivatives without the capital backing necessary for performance.

- End fictitious accounting practices. Every company must mark all of their assets to current market value on their quarterly and annual statements. Each asset must have its own accounting as to its value. This way, full transparency is brought to the marketplace and investors know exactly what they are buying. This will end the practice of hiding unhealthy companies within the larger herd of structurally sound companies, as is the current practice in the US banking system. Capital will immediately flow to the healthy companies and the assets of the unhealthy companies will be taken into the market and deployed to their most efficient use. The current practice only serves to cast a pall of doubt over the entire sector until it fails en masse.

Note that these proposals end the current “crisis” within two quarters. These proposals do not cost the taxpayer one dime. They fix the problem, and most importantly, they eliminate the enormous moral hazard that is present in any derivation of the current Paulson/Bernanke proposal. They establish the framework for building a healthy, stable, and useful financial system in the United States. “Bailouts” and dark-of-night enforcement changes are obviated.

The Congress retains all of its financial oversight and regulatory powers. The Administration is consigned to its enforcement role, as the Founders had set forth.

For more information, please go to:

www.FedUpUSA.org

We are a non-partisan organization dedicated to banking transparency and regulatory reform. Our proposal is simple, effective, permanent, and cost neutral. We are not coming to you at the last minute with some hideous scenario that we denied for 18 months.

We are giving you a way out of the present mess in a manner that the taxpayers you have been hearing on your telephones will cheer.

Please do the right thing. Do not give our money to Wall Street. Force them to take their marks like the rest of America.

Very truly yours,

Enabling Act of 2008: The Rise of The Fourth Reich

The following is a letter that I have sent to Senators Murray and Cantwell, as well as Congressman Inslee. Please feel free to copy this and send it to anyone you believe will benefit from the content.

Enabling Act of 2008

Dear Member of Congress:

You are being asked to assign unprecedented powers to an unelected, and unaccountable former Wall Street banker, under the guise of bringing stability to the markets and solvency to our banking system. With one hastily thrown together vote, you are going to create the most powerful human being in world history – Henry Paulson.

This is being done for the purposes of fixing a “crisis” that has suddenly, in the last hour, been presented to Congressional leaders. This act would remove the constitutionally mandated powers of regulation of the money supply, and the value thereof, from Congress and give it to an unelected member of the President’s cabinet. According to the act, this person would be above judicial review, and be allowed a $700,000,000,000 revolving line of credit to print money on behalf of the United States government. That is more power than anyone has ever had – anyone. Caesar did not have this power.

This should sound eerily familiar.

In March of 1933, after the “crisis” of the Reichstag Fire, newly named Chancellor of Germany, Adolf Hitler, petitioned the German Reichstag to give him plenary powers over the affairs of German government. The Reichstag transferred its power, on an emergency basis, to the Cabinet of Germany for a period of four years, and this was called “The Enabling Act”. This was to deal with the perceived “crisis” of Communists within the German government, when the “crisis” was never fully substantiated. It is believed by most historians that the Reichstag Fire was a deliberate act to coax the Reichstag into giving up its power.

That history did not end well.

You are being goaded into giving Henry Paulson plenary powers over the economy and government spending, money supply, and value of that money. Those powers belong to you, held in trust for the citizens of the United States. Our Founders gave you those powers TO PREVENT THE VERY SCENARIO THAT SECRETARY PAULSON HAS PRESENTED TO YOU.

You are being manipulated.

For the past 13 months, Paulson, and Federal Reserve Chairman, Bernanke have repeatedly given public statements through the various media, and have testified to Congress on the soundess of our banking system. As that time has worn on, they have repeatedly come to Congress for various bailouts (Bear Stearns, AIG, Fannie/Freddie), as well as acted to install confidence through the manipulation of the Federal Reserve Monetary Policy, and announcing various liquidity programs to keep money in the banking system (TAF, TSLF). While they have been taking extraordinary measures to shore-up the banking system, they have always maintained that the system is sound and just needs a little time to get through a “soft spot,” or a “contained” problem (Subprime).

You now know that they were lying the entire time. There is no way to sugar coat this. They have been lying to you since March of 2007. They are lying now. This was plainly known to many in the professional and amateur investment community, recently smeared as “short sellers.” It turns out that the cynics were right all along.

Ask yourself, why didn’t they come to you for this unprecedented bailout last October, when Paulson attempted the same thing with various Wall Street banks? Surely, the problem was known last fall when Paulson attempted to create his “super SIV.”

Had he come to you at that time, there would have been at least 11 months to debate the issue, open it for public review, and deal with it while the stock market was trading at an all-time high. Why did he wait until the weekend before the Congressional recess for the bi-annual election cycle, and present the plan over a weekend where the public could not comment? Why did he have to wait until the stock market teetered on collapse, and the credit markets were frozen solid?

He needs a “crisis” so you will not oppose him.

Ask yourself, why did the Senate Majority Leader and Speaker of the House, as late as September 16, attempt to leave the issue in Washington and head back to their districts, leaving the Administration to clean up the mess, then suddenly have a change of heart less than 36 hours later? What was said? Why are the details of the briefing given to Congressional leaders not available for public review? Why are you being asked to vote for something so hastily and without proper briefing or public review? Does Democracy flourish in the dark, or does tyranny and fraud?

We know the following:

-Paulson and Bernanke have lied for the duration of the credit crisis.
-Every bailout has been bigger, more frequent, and has resulted in a much bigger “crisis.”

Now, Paulson and Bernanke are telling you that they really are telling you the truth and this bailout will work.

You are being played.

They are framing the issue in terms of Congress voting to rescue the banks and the markets. Let me be clear on this point: YOU ARE NOT VOTING ON THE HEALTH OF THE BANKS OR THE MARKETS. YOU ARE DECIDING WHO GETS WHAT MONEY IS LEFT OVER AFTER THEY FAIL. The markets (equity and credit) are going to experience a large dislocation, or in the common lexicon, “a crash.” That is an absolute certainty. You are merely deciding if the US citizens are going to keep their money, or give it to Wall Street bankers. You are deciding if the US government is going to survive or collapse. Giving Paulson unlimited spending powers will ensure that the government collapses. That is a certainty.

Paulson and Bernanke need to be removed from office for malfeasance. For 18 months, the health of the banking system has been very suspect. They have known all along what is happening and have failed to act. Their actions have been limited to lying to Congress and the American people and manipulating the accounting to cover the insolvency of the US banking system.

You are being asked to abdicate. The American people want their Constitution and their government to survive. We will rebuild what Wall Street has destroyed, but we need to keep our money in order to do it.

Vote against this unprecedented power grab. History shows the folly of such endeavors.

Very truly yours,
//signed//

When Is The Bottom? - IER House Valuation Workshop

At the Institute For Economic Reality, we are always trying to help people out of their self-imposed, colo-cranial economic impairments. Judging by the volume of chatter on how the real estate market is suddenly "affordable," it would appear that we have our work cut out for us.

When home prices have gone up 150-200% in a decade, a 15% rollback isn't exactly a buying opportunity. Keep in mind that during the run up, the "experts" all predicted that prices would not decline, but would level-off and allow incomes to catch up. When confronted with a slowdown, these same experts said that a 10-15% rollback would represent the "worst-case" scenario.

The delusion is understandable. Bainbridge Island is populated with Babyboomers, and Boomers have seen property prices increase for the bulk of their life. In fact, real estate is the one "investment" that Mouseketeers think they know well. The prospectus for a Boomer's investment in real estate goes something like this:

Property prices have gone up, so they will continue. My real estate agent said this is the "bottom," and I had better buy now or be priced out forever (they would never tell me something that is self-serving and against my interests).

Is there an objective metric to value a home? Should you jump all over a home that has been reduced in price $10,000, or wait for a better value?

As we like to say at the Institute For Economic Reality, the difference between a good home and a good investment is the price you pay for it. There are many good houses on the market, but we have yet to find a good investment.

For example, if we have a home that is located in a neighborhood where the median household income is around $75K (the Bainbridge median), and the home represents the median home, what would the value be? Let's say that it rents for $2100/mo, with property taxes of $3600/yr.

Why is the rental rate important? Given that all but the truly clueless believe we have been in a credit bubble, and that bubble distorted the prices of things purchased with credit (homes), we should expect to see a difference between the bubble value (price), and the non-bubble value (rental value). This is because rents do not move up and down in a credit bubble, as easy credit terms are not available to renters like they are to home owners. Put in another way, you never heard advertisements on the radio, or TV that told renters that they could reduce their payments and get more house, with cash back, and no credit checks. These programs were only available to people that were buying or refinancing homes. Renters had to rely on good, old-fashioned income ratios to qualify for their leases, and the rates they pay reflect the true value of the property.

After all, the only "dividend" the mortgage throws off is not having to "throw your money away on rent."

The difference between the rental value and the price is the speculative premium. That is the amount of money that you are committing to attempt to capture a rising sales price of the home. Given the recent national obsession with the concept, it should be no wonder to people that people have committed lots and lots of money to chasing higher resale values.

$2100/mo equates to $25,200/yr in gross income. That's all you get. That is the absolute maximum amount of cash the home can generate. That also presumes that you keep all of it.

The county assessor still gets her chunk.

The property manager gets her chunk (unless you do you own management).

The property still needs maintenance, and that comes out of the owner's pocket.

The house will likely be vacant from time to time.

If this is your biggest "investment," then you need insurance.

If taxes consume $3600/yr, and property managers get 10% (likely 15%), and the house is vacant 10% of the time, while you are dumping $500/yr into maintenance (optimistic), then your net cash generation, before income taxes, is $ 15,160/yr. This presumes you paid cash for your house and there is no mortgage. Your insurance is $900/yr.

That is your return on investment. What yield are you seeking? Are you going to accept a yield that is below that of US Treasury debt? If so, why are you risking so much for an investment that yields less than the safest investment on earth? You have to command a higher interest rate than that of a T-Bill, or CD at your local bank.

How much of a premium do you need? That varies by individual, but given that real estate is actually somewhat risky (vacancy rates, tax hikes, bad tenants, unforeseen maintenance expenses), you should ask for a few hundred basis points above Treasury debt. If the 10 year T-Bill is yielding 4%, and a bank CD is yielding 5%, one would think that an 8% ROI would not be unreasonable. If I am only going to get 5%, why would I even bother with all the fuss and hassle of putting up with renters and a home that needs maintenance, when I can take my money to the bank and spend my time golfing?

At 8%, your yield goal multiplies your net cash by 12.5 to arrive at the value of your "investment." $15,160 / .08 = $189,500.

YIKES! Can anyone find a Bainbridge home for this price? If so, does it rent for $2100/mo?

If we raised the rent to $2200/mo, did our own property management, and lowered our yield to 6%, we still arrive at $312,667. This presumes that with the orgy of building that has taken place, the amount of rentals on the market would command such a price. Keep in mind that $2200/mo is 35% of the median income for Bainbridge Island. Home costs have historically capped-out around 28%, and the renter will normally carry his own insurance.

If that house has a current market value of $650,000, then the speculative premium is $460,500 (or 71% of the price) for the realistic example, and $337,333 (or 52% of the price) for the delusional "investor" that is content to take large risks and expend a lot of effort to barely beat the local bank's CD.

In order for the rental value to equal the speculative/market value of the property, the "investor" would have to be content with a 2.3% ROI in the managed property, or 2.9% ROI in the unmanaged property. Just for perspective, a 120 day CD at American Marine Bank goes out at 2.45%, and I'm guessing you don't have to worry about fixing a roof, replacing a water heater, or scramble to find tenants when September comes around.

The above example is EBIT (earnings before income taxes and interest), but the overwhelming majority of "investors" will carry a mortgage. This begs the question, "Does it cash flow?"

Let's see. If we have a 6.5% mortgage and a 15% down payment, then our payments on a 30 year-fixed run $41,944/yr. That's an annual cash-flow loss of $26,784, assuming there are no further hikes in taxes, maintenance, or any prolonged vacancy period. Remember, our rental assumptions were fairly optimistic.

At the end of 10 years, the total cash outlay was $267,840 in direct cash-flow losses, plus the original 15% down payment of $97,500 for a grand total of $365,340, or $3,044/mo (average).

You should have $182,144 in equity, but you still have to pay approximately 7% in closing costs and real estate fees to get at that money, which reduces your equity to $136,644, assuming you broke even on your house price (sold it for what you paid). Remember, we are not calculating speculative premium, but are merely looking at the value of the investment without the idea that home prices will perpetually escalate. Prices can go either way.

So....our "investment" cost us $228,696 over 10 years. That is money that we flushed away. It would be more if that original $365,340 was earning 5% in a CD, but for our comparison, we assumed the "investor" kept his cash in his mattress.

In order to beat the 5%, our home price would have to appreciate to offset the amount our negative cash-flow would have grown to at 5%, which is $508,619. That is the amount the owner would pocket at the closing. If the "investor" owes the bank $467,856 at the 10 year mark, then the property needs to sell for $976,474 AFTER REAL ESTATE FEES AND CLOSING COSTS! In order to pay Cookie and Candi, we need to sell our "investment" for $1,049,972.

Good luck with that.

Is this scenario reasonable? Look at the price/income ratio.

Currently, the median household income for Bainbridge Island is $75K/yr, which puts our $650K median house at 8.67X income. If we assume an above-trend line income growth for Bainbridge of 3%, then in 10 years the median income will be $100,700, which puts our price/income ratio at 10.4X income. You would have to assume that we would get an above-average income growth (after a spectacular 25 year bull market), and that future buyers would wish to buy your tired rental for an 10.4X ratio, when you only paid 8.67X.

Keep in mind that prior to the credit bubble, a 4X income ratio was considered very exotic and the normal range is from 2.5-4X income. Sub-2X incomes are not unheard of in some parts of the country with high incomes.

What would the value of the median Bainbridge home be if ratios were in historic norms?

$187,500 to $300,000. (Didn't we see $189K earlier in this example?)

What if we overshoot in the correction to 1.75X? After all, we have lots of new inventory with a population that can't even keep schools open. If a major Seattle employer gets wiped-out in the credit crunch for writing zany loans and playing fast-and-loose with their accounting, that will be a gut-punch for Bainbridge incomes. What Might that business be called? (Edit: On 9/25/08, WaMu was seized by the FDIC)

Also, how many new Bainbridge residents have been selling real estate for a living? How many write loans, do appraisals, home repairs, additions, and speculative building?

Had enough? I have not. Let's look at sustainable lending, as the unsustainable lending is what got us in trouble in the first place.

If we assume that the only debt our prospective home buyer has is the mortgage on his house, and that historical, sustainable mortgage debt loads have topped-out at 28% of gross income, then how much house can we buy at 6.5% and $75K/yr gross income? They can afford $21,000 for principal, interest, taxes, and insurance (we will assume no HOA), which equates to $217,343 if we still have the taxes and insurance listed above. If we drop the taxes to 1.5% of purchase price, then the house value goes up to $221,136.

Remember, other debt (student, plastic, auto, personal) will start to weigh on a bank's ability to fund your mortgage. Our example was a "debt-free" person seeking a mortgage. How many of those people in the median income range do you know?

All the above examples presumed that we are not in a massive economic downturn and that interest rates remained at 6.5%. Both of these assumptions are not realistic. Run the numbers with mortgage rates at 9% to 14% and you will likely get a feel for what the next 10 years will look like.

I hope you enjoyed our workshop. The Institute For Economic Reality seeks to push back the frontiers of economic cluelessness. By now, you should be familiar with the amount of speculative premium that exists in Bainbridge Island real estate. Your homework assignment is to calculate the value of a second/third/vacation home with people laboring to make their payments under the above mentioned conditions. Remember, the latest "bailout" from Hank Paulson removes the tax write off for the "2 in the last 5" provision of a secondary home.

Stay solvent.

Ernst Stavro Bloviator
Senior Fellow, IER.

Is Bainbridge A Bargain? No, But It Will Be.

You know it's bad when the "Open House" signs outnumber the "Obama '08" signs by 2:1.

This is Bainbridge Island, Washington - the "Martha's Vineyard of the West" (yes, they really say that, and it is embarassing)- a place where smug, liberal dreamers come and bask in everlasting home appreciation.

One problem...homes are not appreciating. It turns out that Bainbridge Island is in the same credit pool as the rest of the nation. Believe it or not, Bainbridge Island has to borrow money from the same places that troglodytes in Nevada, Florida, Indiana, Texas, and Kentucky borrow money. For some odd reason, there isn't a boutique lending facility with special rates and conditions for the anointed in 98110 (or 98061 if you are really hip-n-trendy).

Could it be that people on Bainbridge are being confronted with the economic reality that there is a finite amount of money suitable to be set against a 30 year old, drafty home? I guess the idea that we are "special" isn't moving homes as it once did. Perhaps we were never "special," but just a convenient place for Californians to sell out of mediocrity and go slumming up north with all their hard-won home equity. Now that Californians are likely to be facing foreclosure, they don't have all those Bongo-bucks to throw around anymore.

My sources tell me that an abrupt change happened in October '07, with regard to the X-Cal market. It confirmed my hunch and the most recent numbers certainly solidify that assumption.

If the median house on Bainbridge Island is somewhere between $625-$850K (let's call it $750K for good measure), and the median household income is a hair over $75K, that might have quite a bit to do with the rollback in prices.

$75K/yr = $6250/mo. That's the income without all the zany home appreciation money that people were sucking out of WaMu refis and HELOCs by the boatload. In other words, if we don't count new debt as income, the median household on Bainbridge has to get by on less than $6500/mo.

Subtract $700 in federal taxes (it is likely higher)
Food - $500
Gasoline - $150 (assuming a Prius with an "OBAMA '08" sticker)
Insurance - $100
Utilities - $300
MC/Visa - $1000
Health - $500
Prop tax - $300
Prop insurance - $75
Auto debt - $400
Ferry - $150
Home maintenance - $200

That's a pretty spartan Bainbridge lifestyle. That presumes no annual trips to the Himalayas, Botox/Viagra, private schools, college debt, professional fees, B&B trips to Napa, Burning Man, visits to the shrink, bail money for "Paint Night," dinner parties with the Hip and Trendys, orthodontia, Eurail passes for the kiddies, 401(k) contributions, life insurance, pet day spa, and trimming down to the NYT Sunday Edition.

Assuming this is the median Bainbridge lifestyle and income, that leaves $1875/mo for the house payment. At 6.5%, 30 years, and 20% down, that's a $370,471 house. This presumes that every last dime went to the house and the median person has $75K in liquid cash to throw at the mortgage. At 7%, the house price drops to $352K, and at 8% the median Bainbridge household can afford $319,200.

Although it is fair to note that by using canvas shopping bags, you can save a nickel at Central Market for every plastic bag you don't use. While that $1.50 can get you a cheap cup of coffee once per month, the smugness of knowing that you single-handedly saved the planet can not be measured in dollars. Drive up in your Toyota Pious, complete with "OBAMA '08" bumpersticker, and you have just exercised the "nuclear option" of eco-smugness.

Let's look at it from a debt to income perspective. With a house payment of $1875 + $75 + $300, that makes the home DTI of 36%, which is too high by normal underwriting standards. Given the unrealistic budget outlined above, the high ratio makes sense. The price still has to come down.

Before the lending madness of the past decade, it was considered to be prudent to establish a 28% cap on home costs (not including maintenance) versus gross income.

$6250 x 28% = $1750, which makes us $125 overbudget. Take out that $125, and your home prices at 6.5%, 7%, and 8% drop to $345,700, $328,500, and $297,900 respectfully.

We won't consider further debt encumbrances like college loans, payments on the snazzy new Prius, or any lingering damage on the plastic.

Keep in mind that the person in the above scenario needed to save somewhere between $60K and $75K to drop 20% for the down payment. The budget does not have any savings of any kind.
If I recall correctly, the median price for Bainbridge Island during the years prior to the housing bubble was right in the mid-$300K range. Coincidence?

Studies of the value of a home, as measured by EBIT, cash flow, and rental substitution also peg the median value in the low to mid $300K range. Assuming that we don't get a rollback in income and that we don't overshoot in the correction (both wildly optimistic assumptions), we are looking at a substantial correction in Bainbridge Island real estate of 2/3 off the peak price. Supply has shifted dramatically upward, and when the speculative premium becomes a discount, 75-80% off the peak valuation will certainly be common.

When I ride on the ferry, I never hear anyone bragging about how expensive their homes are. Back in 2005, that's all I would hear. I don't see as many California license plates as I once did.

The tide is going out.

Ernst Stavro Bloviator,
Senior Fellow - Institute For Economic Reality

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.

SET CRASH-CON 1.

The Institute For Economic Reality has moved the CRASH-CON rating to CC-1, which is the first time since the late January stock market scare.

Ernst Stavro Bloviator, Senior Fellow at the IER, issued the following statement:

The CRASH-CON rating is now moved to CC-1, and will not be moved back until significant improvement in the financial health of the US economy is apparent. Markets may rally on government intervention, but they are still fundamentally unhealthy and the extreme risk is on the downside.

Last week, Bear Stearns Inc. collapsed in one of the most breathtaking waterfalls in the history of the stockmarket. The other investment banks, mortgagae banks, home builders, and insurance companies will soon follow.

They are in the same business and all built their business on the same, stupid lie: REAL ESTATE ALWAYS GOES UP.

For 26 years, the US economy has been based upon the build-out of the Finance, Insurance, Real Estate and Tech industries. All of these will be a shadow of their former selves, and unemployment will skyrocket north of 25%. Home prices will crash to 20% of its peak value, and governments will be starved for tax revenue.

Expect extreme volitility with a sharp downward bias on everything that is related to finance, insurance, real estate, and tech.

Bear Stearns is not the only grenade rolling around on the floor. Remember, as of Wednesday, their CEO said that all the rumors circulating about the financial health of Bear Stearns were untrue.

How many other CEOs are saying the same thing?

Bear Stearns stock lost 97% of its value in just over two weeks.

The dream is over. The alarm clock is ringing. Reality is brewing. The morning headlines are in 200 font.

It's 1:00pm. Do You Know Where Your AAA Rating Is?

Drip

Drip

Drip

Egan-Jones downgraded Ambac/MBIA to junk today.

Drip

Drip

Drip

Pressure mounting on S&P, Moody's, and Fitch

Drip

Drip

Drip

Need to raise $30B to stay AAA for each company. There are 7 companies.

Drip

Drip

Drip

Egan-Jones was first to identify Enron and Worldcom as problem children.

Drip

Drip

Drip

Egan-Jones is paid by investors. Moodys/S&P/Fitch are paid by issuers.

Drip

Drip

Drip

You can bet the securities litigators are dancing naked on the rooftops.

Drip

Drip

Drip

It's just a matter of time. Very little time.

Drip

Drip

Drip

CRASH-CON 1 is looming.

Keep Your Hands Inside The Car - The Financial E-Ticket Ride Is About To Begin

Sources close to the situation indicate the Institute For Economic Reality is preparing to issue a CRASH-CON 1 rating.

This letter has the potential to start the chain-reaction of financial implosion in the United States.

Ernst Stavro Bloviator was asked how people should prepare for the coming carnage and what would be a safe investment.

"Short the phonebook. It's too late to sell your overpriced Bainbridge real estate."

Further updates as time permits. The IER is busy preparing for CC-1 and will update this station as scheduling allows.

Until then, you are reminded to keep your crash helmet at the ready.

We now return you to the indecypherable display of fiscal incompetance that Wall Street/Washington has forced upon us.

Stand Down From CRASH-CON 1

The Institute For Economic Reality has cancelled its CRASH-CON 1 rating after the US financial markets stabilized when the Federal Reserve lowered the Federal Funds Target 75bp to quell the abject panic in the US markets.

Ernst Stavro Bloviator, Senior Fellow at the IER, issued the following statement:

"Today was a contest to see who would panic loudest, and the Federal Reserve won. Either the Federal Reserve member banks have had a complete collapse in commercial lending, or the FED has gone insane. Either choice is not good for the long-term health of the financial markets. Market activity in commercial credit will be interesting to watch in the next few weeks."

"I am sure that some of the dim bulbs that sell real estate will be chirping about how this solves their problems. My challenge to them is to show the linkage between the Fed Funds Target and mortgages and consumer credit. It isn't there, but they will insist it is."

The IER has reduced the CRASH-CON alert system to CC-2B, and could issue a CC-1 at anytime. People are advised to keep alert for deterioriating fundamentals.

We now return you to the mindlesss speculation and historical ignorance that created this problem in the first place.

Set CRASH-CON 1

Poulsbo (IER)- The Institute For Economic Reality, a one-man think-tank, based in Poulsbo, Washington, has upgraded the Crash-Con rating system to CRASH-CON 1, citing worldwide stock market plunges over the King Holiday in the United States.

People would be well advised to prepare for major swings in market averages, and the potential for a short-lived "Bear Market Rally" that should last until early next week, before plunging further.

IER Senior Fellow, Ernst Stavro Bloviator, issued the following statement with the CC-1 rating:

"It appears that the investing public is starting to connect the dots between bond insurance defaults and overall market risk. This could not have come at a worse time for the Babyboomer Generation, as their eldest members are now approaching their peak asset accumulation years. Come to think of it, their peak asset earnings may have come and gone on October 10th, 2007."

"The overrepresentation of Babyboomers in Bainbridge Island real estate ownership, sales, and management will likely make this asset class particularly vulnerable to this market eventuality."

Stay tuned to this channel for further updates. We now return you to your regularly scheduled crash, already in progress.

Set CRASH-CON 2 - LEVEL Bravo

Poulsbo (EB) - The Institute for Economic Reality has raised its CRASH-CON rating from CRASH-CON 2 to CRASH-CON 2 - LEVEL Bravo. The IER has been tracking the rapid and relentless deterioration of the financial network of the United States, and has concluded that the next level of awareness must be set.

The IER issued the upgrade from CC-2 to CC-2B, which is a heightened state of CC-2, but not quite a full-blown crash warning. Take the time to prepare. Get in cash. CC-1 will likely come before April.

Earlier today, AMBAC (ABK) was warned by Moody's that it's AAA rating might be in jeopardy.

Moody's Investors Service has placed the Aaa insurance financial strength ratings of Ambac Assurance Corporation and Ambac Assurance UK Limited on review for possible downgrade. Moody's also placed the ratings of the holding company, Ambac Financial Group, Inc. (senior debt at Aa2), and related financing trusts on review for possible downgrade. Moody's stated the rating action follows Ambac's announcement of record losses, a capital raising plan, and the retirement of its CEO.

The IER believes that once the monoline insurers of structured debt get downgraded, the financial instruments they insure will also be instantly downgraded. Given that these insurers are ridiculously undercapitalized, it will only take a default in one or two percent of these insured obligations to fully bankrupt the insurer.

At that point, we roll back to the 70s in terms of our finances - if we are lucky.

Example:
Big Bank A has $100B worth of structured debt on its balance sheet. It carries these assets at full value of $100B, and carries no reserve against their default.

Why no reserve?

They don't need reserves because they have insurance in the form of a CDS (credit default swap) that is issued by another large financial institution.

They have reserves, right? Nope. They have insurance.

The insurance company has reserves, right? Wrong. That's why the monoline insurerers have lost 90% of their value in 3 months. ABK lost 60% on this morning's opening trade, and it is still AAA rated!

So, what is backing up the debt? Bank reserves? Nope, they have insurance. Insurance reserves? Nope. They are undercapitalized. The insurer has a signature that says the debt is AAA.

Bank A's $100B is backed up by two signatures and the full faith and credit of the insurance company.

At least when the US government issues debt on "full faith and credit," it has 8,000 nuclear warheads, 12 carrier groups, and 110,000 IRS agents to carry through on that promise.

So, if the mortgage backed security defaults, because we actually come to find out that real estate, even Bainbridge Island real estate, can go down in value, and this causes people not to pay on a depreciating asset, and the bank eats all the depreciation due to lax lending, what happens?

CDO defaults.
Bank makes claim to issuer of CDS (credit default swap).
CDS writer can't pay.
CDS writer makes claim to insurer.
Insurer can't pay.

Original bank now has to dip into reserves to pay. This results in massive writedown of company assets. Now, BANK A is insolvent and suing BANK B (CDS writer) who is now insolvent, who sues insurer, who is out of business.

BOOM! Down goes Frasier! Down goes Frasier! Down goes Frasier!

The entire US banking system goes "poof" in a chain-reaction of bad, uncollateralized debt explosion.

This is not some freaky, tinfoil hat theory. This is Wall Street circa 2008. This is happening right now.

The entire expansion of credit (money) in the past 6 years has been driven by this kind of uncollateralized debt that is called "collateralized debt." The collateral is nothing more than a signature. The assumption was that, "real estate always goes up."

If that were true, none of this would be happening. Unfortunately, it isn't true and we are now going to pay dearly for believing a lie.

We now return you to your regularly scheduled financial immolation...already in progress.

-Ernst Stavro Bloviator,
Senior Fellow, IER.

Oh, and if it was not enough that the US financial system was resting on dumb, debt-laden "home owners" who believed their RE agent's line of BS...

If you really don't want to sleep for a week, read how safe your
"insured" deposits are at your favorite deposit institution.

2008 will be the year nobody forgets.

Shotgun Wedding: Wall Street Style

Well, the eventuality of Countrywide finding the end of its rope finally came. For those who are surprised by this, I would like to warn you that a large bright light will appear on the Eastern horizon in the early morning. Don't worry; it is supposed to happen. Seriously, this was as predictable as the sunrise.

Earlier this week, Countrywide was rumored to be preparing for bankruptcy. Naturally, the company officially denied it. A day later, Countrywide was in talks to be purchased by another likely insolvent puking dog - Bank Of America. This rumor was true.

I actually believe that the CFC BK rumor was genuine and they were preparing to file. It fits. It makes sense. We all know it. That's why The Tan Man looted the company over the past year. Actually, Countrywide is just the first bank in the conga line to federal bankruptcy.

Now, the press would want us to believe that Bank Of America sees value in Countrywide. Perhaps they see this in the servicing portfolio, but when you buy the company, you buy everything, including the crap and the legal exposure.

Why do this if you can get it cheaper in bankruptcy court?

Good question (if I say so, myself).

Well, if you are holding several tens or hundreds of billions of dollars of financial toxic waste on your balance sheet, and you just had your financial results certified for your upcoming annual report to the SEC, the ABSOLUTE LAST THING YOU WANT is for the value you assigned to your assets to be marked at 20% of what you say they are worth.

So, here is my theory on how the Countrywide buyout went down.

Try this scenario:

Countrywide General Council: Moz, we are in trouble, and we won't make it through the end of January. You gotta declare BK.

Tan Man: Getouttahere! We are just fine.

CWGC: Nope. Accounting says we are down to pawning our toner cartridges and your suits. Your suits only pawn in Miami and in Tijuana, so that leaves us with the toner.

TM: No kidding? Hmmm...

(places phone call to airport)

TM: Hey! This is Moz. Get my G-IV fired up. Destination? Hawaii.

CWGC: Moz, I don't think that will work. You are going to be the posterboy for the entire mortgage mess. Think Ken Lay...

TM (talking to airport): Hey! You still there? Make the destination Paraguay via the Caymans.

TM (to CWGC): Paraguay doesn't extradite, do they?

CWGC: How about dealing with the situation. You can reorganize the company, but you will probably be out.

TM: What then?

CWGC: You will probably be indicted on any number of fiduciary violations and SEC infractions.


TM: ...and?

CWGC: Does a public disembowelment mean anything to you?

TM: Prison?

CWGC: Possible. They didn't get Ken, so they are going to be looking for someone else.

TM: White collar?

CWGC: No. Federal "pound-me-in-the-ass" prison. No tanning bed, and I don't think you will like the pinstripes they wear in that place. (thinks to himself) Yeah, but the suit will be an improvement.

TM: No kidding?

CWGC: No kidding.

TM: Hmmm...I have an idea. (pages secretary) Get Paulson on the phone.

(5 mins elapse)

Secretary: Mr. Mozillo, Hank Paulson on line 2...

TM: Hank, how are you doing?

HP: T-t-t-ter-rr-rr-ible. Markets are going to crash next week when the financials report. We are out of tricks and Bernanke is being an academic.

TM: Hey, "we" have a problem.

HP: Skin cancer? Sorry to hear that.

TM: NO! you idiot. We are bankrupt.

HP: Yes, we have been bankrupt since the first Bush Administration.

TM: NO! Countrywide is bankrupt.

HP: Really? Can't you hide it?

TM (looking at CWGC who is shaking head): Uhhh...not this time. It's not like August.

HP (puts TM on hold and pages secretary): Can you get the Paraguayan Ambassador on the horn. I might need to move the family. Also, get me the customer service desk at Banco Cayman...and the Goldman Sachs Derivatives Desk on a scrambled line.

HP (takes TM off hold): S-s-sucks to be you.

TM: No, Hank. I don't think you get it. It sucks to be "you."

HP: How so?

TM: Picture this..."mark to market", "acceleration event," and "bank run." We got lots of stuff that is level 3.

HP: (silence)

TM: Are you hearing me? Is this going in, Hank? Do you understand what I'm talking about? If I go to BK, all my toxic waste gets marked to market, which is zero.

HP: (silence)

TM: You there? How would you like all the financials to report earnings and have marked their waste well above what I am about to report. It would ruin the entire industry.

HP: (big thud as he falls out of chair)

TM: How about this. You need to find someone to buy this crap and do it without using the open market. I've got an appointment at Malibu Tan, so I can't do it. Thanks, Hank, you are a pal.

HP: Th-th-that's n-n-not m-m-my j-j-j-j-job.

TM: OK Hank, have it your way. (hangs up phone)

TM (to CWGC): Float a rumor that we are about to declare BK. Do it in an unofficial way that we can deny.

CWGC: No problem. (leaves room)

TM goes to Malibu Tan.

[[later that afternoon]]

CW secretary: Hello, Countrywide Executive Offices, can you hold?

HP (shouting): I WILL NOT HOLD FOR ONE...

CWS: Thanks for holding, how can I help you.

HP: I need to speak to The Moz ASAP!

CWS: Whom may I say is calling?

HP: Hank Paulson. Page that overgrown pimp right now or the IRS will probe every orifice in your rotting corpse!

CWS: Please hold.

CWS (to Moz): Mr. Mozillo, Hank Paulson on line 2.

TM: Hank! Good to hear from you.

HP: You slimy, overaged, melonoma ridden pimp! What in the world are you doing with leaking that you are going BK? Did you see what that did to the markets? I've got more crap coming down the next two weeks than you can possibly fathom.

TM: Hank, calm down...Do we have a deal?

HP: Yes. I had a raging party out in the Hamptons and got video of Lewis and a goat.

TM: Convenient.

HP: Here is the deal. You "officially deny" your BK rumor and BoA buys your rancid company and keeps your trash off the street.

TM: I want IRS immunity...and $115million...and use of the G-IV...and free tans for life...and a gift certificate for "Guido's Custom Apparel of Brooklyn."

HP: I'M GOING TO GIVE IT TO YOU RIGHT IN YOUR....!!

TM: That's very unbecoming of you. Perhaps I should just retire right now...

HP: NO NO NO!!! OK, you win. You get the pimp suits.

TM: Thanks Hank. I always liked working with you. Tell Kenny Lewis that I want an up-front parking spot. Good day, bro.

-------------------

How likely is it that this was orchestrated to keep Tan Man's junk off the market? BOA would have lost a minimum 10X what they paid for CW if it was marked to reality. So would everyone else. The financials all report next week and their reports would have been a prelude to a system-wide bankruptcy, had they marked all their assets to market, rather than to the fantasy they now are valued.

This is a shotgun wedding, where Mozillo was wearing the wedding dress, but the BoA shareholders ended up being the bride.

Comments?

Set CRASH-CON 2.

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

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

KITSAP SELLERS, I'D LIKE YOU TO MEET REALITY

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.

The IER Sets CRASH-CON 3

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.

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.”

Real Estate Agent Rosetta Stone

POULSBO-(ESB) A dramatic development in the ongoing struggle to crack the cipher used by the Real Estate Industrial Complex (REIC), known as FLEECE (Freaking Liars Endangering Economic Certitude for Everyone), was achieved by the Poulsbo based Institute for Economic Reality.

After risking his life, health, and most of his Friday evening, Dr. Eleua von Bloviator discovered a translation algorithm that actually translates the raging torrent of Bravo-Sierra found on most MLS entries into plain-spoken English.

News of the discovery was released with this statement:

"The days of obfuscating and misdirection are numbered. Thanks to the hard work of those at the IER, everyday country bumpkins can understand just what in the world they are reading on the Multiple Listing Service. We certainly hope this serves to level the playing field for everyone involved in real estate transactions.

For those that continue to believe the extortionate effluvium that the REIC employs, we are working on a cure for stupidity. Either that, or move out of Seattle."

Dr. Eleua von Bloviator could not be reached for comment, but released a statement through his publicist.

"It's all insanely, overpriced crap! Don't these people know that the REIC and government are in cahoots to relieve them of all their money? Who is the PEAK IDIOT? What's the frequency, Ken? The Housing Bubble is just the sequel to the Equity Bubble, but this will make Breakin' 2: Electric Boogaloo look like a stroke of genius! New Coke, parachute pants, and WHAM! Hey! Don't steal my hubcaps! ARMs will adjust. What then, Carnack? The Refs wanted the Steelers to win. Area 51. Does anyone have any lithium?"

Mathematicians at the NSA are trying to decode Dr. E's comments.

The IER has released for publication, some of the more common phrases used by real estate agents in their FLEECE cipher. The list follows:

"return to normal" is REIC-speak for "we have no freaking clue what is happening, but we slap up this euphemism to keep the panic down to a dull roar. All we know is the salad days of 20% y/y appreciation, and bidding wars are over."

"passive security system" = bars on the windows

"vibrant neighborhood" = multi-linguistic ghetto

"peakaboo view" = in the dead of winter, during a 50 knot gale, you may, if conditions are perfect, be able to use a 500 power telescope from the upper windows in the laundry room, and be able to see more than 1/4 mile for half of a second.

"looking for an owner that will give plenty of TLC" = crack house.

"recent thorough renovation" = granite countertops with Made in China cabinets from Home Depot.

"quaint/charming" = smaller than a NYC studio apartment

"professionally decorated" = gay chic.

"blue ribbon schools" = we, along with 99.999999999999% of all sellers, believe our school district is the best in the state.

"exemplary schools" = our graduates can read their diploma

"won't last! HOT! HOT! HOT!" = recently relisted due to lack of activity over the past 6 months.

"professionally landscaped" = lawn service.

"natural setting" = house being overrun by vegetation.

"convenient walk to..." = can get to your destination with less than a gallon of gas. The walk refers to the distance to your garage.

"terrestrial view" = no view

"semi-private" = zero-lot-line zoning.

"classic architecture" = 70s style tri-level.

"two mile exercise loop outside the front door" = you can run on the county road that goes by your house. (serious! That was used on an Agate Pass home I almost bought)

"shows like a model" = the owners have vacated the house and are moving on.

"old world charm" = 95 year old woman, painted the house pink prior to WW2.

"good investment potential" = you wouldn't want to live here.

"highly desirable neighborhood" = characterless track home.

"priced for immediate sale" = we hope you don't lowball us.

"good highway access" = freeway noise will rattle the fillings out of your teeth.

"revived in-town location" = chalk outlines have been washed away.

"gourmet kitchen" = kitchen

"country setting" = you need a 4x4 to get from the paved road to the driveway (not recommended for pregnant women)

"peaceful and serene" = UPS won't even deliver here

"shop" = rotted-out 6x8 woodshed

"watch the eagles soar from the comfort of your Bainbridge dream home" = roof needs replacing

"eclectic" = owner's multiple do-it-yourself projects make the place look like Fred Sanford lives here.

"unlimited potential" = tremendous money pit

"active community" = neighborhood youth actively recycle (fence) anything they can see in your car, or through your window.

"Japanese garden" = ungroomed bamboo tree and ceramic frog.

"park-like setting" = clear-cut

"high quality construction" = at least one person on the job site speaks English. Builder's pending law suits have not yet bankrupted him.

"affordable fixer" = Has been neglected for 50 years, and you are the over ambitious sucker that we are looking for.

"seasonal pond" = mosquito breeding ground. Wetland that renders most of the property worthless and will be protected by a phalanx of overeager civil servants. Will be taxed at waterfront rates.

June Price Update: Bainbridge Average Up, Median Down

Sorry for the late update, but here are the numbers for June '06 compared to June '05.

Average price of a Bainbridge Island home is up 6% Y-O-Y ($558,661 from $525,395).

Median price of a Bainbridge Island home is down 1% Y-O-Y ($481,000 from $485,000).

86 homes were sold in 6/06 compared to 50 sold in 6/05, so sales volume is up.

I don't think there is much to make of this data, other than when combined with the previous two months data, it shows Bainbridge homes are not as "hot" as is commonly thought. This really shows that the old Real Estate Agent maxim of "getting in while you can" is not as compelling as it has been in the very recent past.

Kitsap county homes increased 14% and 10% (average, median) on a Y-O-Y basis. Bainbridge is the laggard for the rest of the county in home appreciation.

My view is that prices are moderating and will start to show consistant Y-O-Y declines. I still hold to my 20 cents on the dollar by 2010 prediction. Once California shows complete inversion of appreciation, you will see an amplified response on Bainbridge (since we are California's 59th county).

Comments are always welcome. If you know any Realtors that can contribute one way or another, please direct them to this site.

Eleua