Market? What Market?

In really IMPORTANT news, my sister Diana gave birth to her first child yesterday. Apparently she was in labor when she sent me the link to the video of highlights of the USA-Poland soccer match. I expect the kid to be named Pele. Or Mia, I guess, since it's alleged to be a girl.

Love you, kid.

A Conversation About Congressional Meddling

I spoke at some length to Chris Cannon, one of Utah's Congressmen, the other day, and I wanted to report on that conversation. I've said in this forum many, many times that the thing that could make this economic downturn a complete catastrophe - the ONLY thing - is mucking about by Congress. Well, it appears that the mucking about is inevitable.

The topics were three, essentially: what's going on with credit markets, what the effect of the raising of conforming and FHA loan limits will be, and what is happening with housing in general. I reverse order, here was my report.

The housing market is weak. There is still too much inventory (houses for sale) for the demand (buyers) to absorb them all. But that number is getting better. We're down to 9.8 months of inventory, which is the lowest in some time, and average sale price has dropped record amounts. In other words, the market is working. Is there pain? Sure. Markets always cause pain, but they cause it the same way surgeons do - they cut what's necessary and allow the body to heal as rapidly as possible. ONLY markets can do this. No government can do this kind of surgery without making the disease worse.

Going forward, I expect the government to take dramatic action that will completely change how the mortgage market functions in this country. It will not be a change for the better. Yes, it will likely keep rates low, yes it will probably make loan limits higher permanently and get rid of the "jumbo" classification (a silly division anyway - what's the risk difference between $416,000 and $417,500?), but it will both restrict credit availability in the standard mortgage market (in other words, if you don't have at least 10% down and a 700+ credit score, forget buying a house) and force people into government loans, FHA and VA, which carry large upfront costs, effectively reducing sale prices and home equity by 1.5%.

Secondly, conforming and FHA home loan limits have been raised, but not nearly as much in some areas as in others. In Salt Lake County, Park City, and (no kidding) Tooele, the new FHA loan limit is $729,750, the maximum allowable. In Davis County, the limit is $397,500, and in Utah County, the limit is $323,750. This means that a small house in Alpine is not going to be FHA available, but a $700,000 mansion in Tooele is. Only the government could come up with numbers like this. Bluffdale houses are eligible up to $730k; Lehi houses less than half that. Really, really stupid.

Conforming limits haven't been announced yet, but they're going to be similarly idiotic. There's a really good dissection of the unintended consequences of this government tinkering here; suffice it to say that unless the government reins in FNMA and FHLMC, there just won't be any sanity to how this process works. And increasing the loan limits, while directly good for FHA borrowers, is NOT good for conventional borrowers - it raises everyone's rates, and the credit and rate restrictions in the $417k+ market (supposed to be affected by the conventional limit rise), which will NOT go away, will make it so that nobody can get those loans at attractive rates anyway.

And thirdly, the credit markets are screwed up. There is a big gap now between the 10-year bond yield and the 30-year mortgage rate, a larger spread than we've seen in forever, and that is a reflection of the fear in the market about the subprime "crisis" and mortgage foreclosures. Markets need time to figure out what the real exposure is to failing loans. This process cannot - CANNOT - be improved by government intervention. Already we have the entrance into the market of private firms that plan to buy failing loans and renegotiate them. Those loans are being dumped right now for pennies on the dollar; they can be restructured to provide 50 cents or better. The market sees an opportunity here, meaning that it will immediately generate business to take advantage of that opportunity. These new players will do two things: backstop the potential loss for regular lenders and discover very quickly how many of these losses there are, and how big they are. The only thing the government can do here is to relieve regulation on these companies, making it easier for them to raise capital and get working. Nothing else will help.

It reminds me a lot of the broadband explosion in the US. I remember government hearings on forcing companies to deploy broadband according to some bureaucrat's timetable for rollout. The companies that were there resisted this regulation, and managed to stall any major government action. Of the five companies that were there for the hearings only two of them are still in existence in their form at the time; two are gone altogether, and one was bought by Qwest. The major players in broadband are not only completely different now than they were, they've also deployed broadband about five times as fast as government was mandating. As in most things, the government's action was not only stupid, it was predictably stupid. It cannot react fast enough. No government, however constituted, ever could.

Bottom line, as we always say here: there are really smart people out there. Get the &#$%^ out of their way and let them work.

Cannon gets this stuff; I wish I were sure that he was going to be able to make a difference. The urge to tinker is just so strong in government. Most people what run for office do so because they love power, and what good is power if you don't use it to make yourself look important?

Think of the Possibilites

I never watched "Remington Steele". I was really too young to be interested in the show, and we didn't watch evening TV at my house, except on special occasions. However, I remember a snatch one episode, from way, way back in the past, that made a huge impression on me, and that I have never forgotten.

For those not in the know, Remington Steele was the show that made Pierce Brosnan a star. It starred the uber-cute Stefani Zimbalist, who was a real detective but couldn't get jobs because she was a woman. So she made up a fictitious male name, put it on the door, and presto! Business was good. Then a man shows up and says he's Remington Steele. Hijinks ensue.

Anyway.

I remember this one episode - just a piece of it really - where "Remington" (nobody ever does know his real name) tells Laura (Zimbalist) a story. Laura's house has just been blown up, and she's shaken and scared and weepy. So he tells her a story.

He laughs. "Markos," he says.

"Markos?" Laura questions, thinking she's going to find out his name.

"Markos Androkos," he says. "Little man. Neck so short he said it wasn't worth washing. Black mustache, thick like wire. A big smile with a gold tooth in it right here. Oh, boy, he worked us like dogs, he did. 'Harder, Xenos!' he'd scream to me. 'Work harder! Don't you want us all to be rich?! Hey? Hey?'" He laughed again.

Laura watched as he moved to sit down. "Markos."

"Had a little cargo ship- and family that seemed to include half of Greece. Oh, but he fed you well, and at the time, that was enough to keep his name in my book. He used to cram every crack in that ship with anything for anyone, so long as it got him another dollar closer to buying that bloody tanker. Night runs were a speciality."

"A smuggler," Laura realized.

"Oh, yes, and a damn good one. Oh, you'd love the party he threw when he finally bought that bloody tanker. Oh, God. Had his tooth all shined and gleaming and polished. Huh. And more food and music and wine than I'd ever seen in my entire life. 'Drink, Xenos! We are peasants,' he said, filling my glass for the countless time. 'But tomorrow-" Steele rises. "'Tomorrow, eh, tomorrow, we are tycoons, eh?'" Laura laughs at his story, at the little man he's describing so well.

"And were you?" she asks as he sits beside her, his expression darkening.

"Well, we all went down to the pier at dawn to watch it arrive. She wasn't out there more than two miles before an explosion in the engine room ripped through the side of the hull - and before we could believe what was happening, it sank like a stone. Since he was twelve, he wanted nothing else. And like that-" he snapped his fingers "-it was gone. No more. The pier became so quiet we could hear each other breathe." He chuckled. "And then Markos, he starts to laugh. And I don't mean a nervous titter, but a full bellied, spit in the sky, all out laugh. I couldn't bloody believe my ears. I was furious. 'Why are you laughing?' I screamed at him. 'Because, Xenos because from now on - everything is new again, eh? Eh? Just think of the possibilities.'" Laura smiles. "Think of the possibilities," he tells her.

The show aired in September of 1983. I was 15. And that story has stayed with me since.

So remember, no matter how bad things look, no matter what happens, just keep going. And when things are really, really bad -

Think of the possibilities.

Stop the Presses

You didn't think I was gone forever, did you? Well, okay, kinda.

The below is cribbed by my father (attribution below), and reposted here for your enjoyment.

Stop the Presses
By Roger Schlesinger
Tuesday, March 4, 2008

Do I have a hot news story for you? Not exactly. I wrote stop the presses because I would like to see the news media stop reporting on the real estate industry until (a) they get it right; (b) they quit calling everything "the subprime crisis" (c) their stories are put into context (d) and that once in a while they give the other side of the real estate story and not just the one that makes the sky seem lower than the ground!

Enough already!

Real Estate is here to stay and probably is the best buy we have seen in years for three reasons, which are all related: the weak dollar, the net population growth and the fact that the inflation genie is out of the bottle. All three will help stem the tide of the nay saying that is flowing from your local or national news person. And these facts aren't made up, or taken out of contact or sensationalized to sell "The News".

Do we have a weak dollar? You betcha! Is this good for us? That is a matter of constant debate. However, weak anything usually isn't good. Then how can it help real estate?

This is number one of the three reasons why real estate is very desirable at this time. Before I go any further I wish to remind the reader that everything I say must be tempered by the three main words in real estate: location, location and location.

The Euro is now over $1.50 versus the dollar and this gives all those who hold Euros a giant discount on dollar denominated assets: real estate being a major one. Therefore we are having a buying spree by foreigners from various locations taking advantage of our real estate. Note: In the western United States Canadians are buying in ever increasing numbers in desirable second home locations. The Loonie, Canada's currency is now over $1.02 versus the dollar which is up from around 62 cents less than a decade ago. Increased demand is directly coming from the buying power of foreigners because of the weakness of the dollar versus their currency.

Second point is the net increase in population from the increase of births over deaths and immigration (measurable legal immigration). We are growing about 1,100,000 family units a year that need housing and we are currently ramped down to about 700,000 new units a year. Obviously with unsold new homes flooding the markets in some areas and generally existing in all markets to some degree the need for these additional units won't kick in for a year or so, but the need is not going away and the building will start again. Builders are poised to start building at the first sign of a bottom and the start of the real estate turn around.

Third and most important point is inflation. Simply put, the imbalance of supply and demand. This can come from either too little supply or too much demand or both. Look at the gasoline prices in this country. Generally it is believed that with China's entry into the 20th century the demand for oil and oil products has jumped dramatically thus causing a quick and large increase in the price. There is also the fact that OPEC is controlling the supply which helps create shortages and thus, higher prices. The same price action will occur again in real estate because of excessive demand and not enough supply.

The problem most people face is the fear of being too early or not getting the lowest price possible. Let me tell you why this is "fools gold" thinking. The average American will not find out that real estate has turned for 4 to 6 months after it happens. When real estate is purchased an offer from a buyer to a seller is accepted. The we have the escrow or closing period of any where from 30 days to 90 days, probably averaging about 45 days. Those who track real estate sales do so at the end of every month. If you buy something on March 15th and it closes May 2nd then those who report will get the info in June. You will know about it at the end of June which puts you about 4 months behind the buyer.

IF ENOUGH BUYERS ACT AT ONE TIME TO START A TREND you will miss the beginning and the prices that are "oh so affordable" now will be but a distant memory.

Lets look at the stock market and compare and contrast it to real estate. The stock market is the nations investment arena, or so say those connected to the market. In 2000 it self destructed and the world had come to an end. By 2007 it hit new highs thus completing an investment cycle. The real estate market is different to a degree and that is what makes it better. No one has to invest in the stock market and the reason they do is to make their money grow. That is the main purpose of the stock market as far as investors are concerned.

Real estate is a great investment to make your money grow but it also has a utility that the stock market doesn't possess: a place to live. Everyone needs a place to live and that gives the real estate market the edge, in my opinion, over the stock market. Forget the tax advantages of deducting the interest on the mortgage, or the tax free accumulation of money created by the $250,000 profit exclusion upon sale of an owner occupied house per person (husband and wife get $500,000), real estate is a real shelter, pure and simple. That is why my money is where my mouth is, so to speak.

The best thing that can happen is the rebounding of the real estate market and most of the problems that are hurting Wall Street would be gone. Loan portfolios would once again be worth face value and we could get on with the normal business of both banks and brokerage firms. This would really be a win, win situation.

Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.