Wednesday, 04 May 2011 09:09

There's Stinky Gas Inside Of This Mini-Housing Bubble, You Don't Want To Be Around When It Pops!

Yesterday, I revisited the US employment vs  inflation situation, which itself was an extension of my warnings on Employment and Real Estate Recovery. In the second post, I included the story from a BoomBustBlogger who was an investor of a large multi-family properties. As a BoomBustBlogger, he uses math to make decisions and the math simply doesn't pan out. Of course, due to .gov bubble blowing, unintended consequences often occur and this time around it is a bubble within a bubble burst in multi-family housing. The dilemma is, do you pull the trigger m/f investments that have increasing net effective rents even though we are almost certain to have higher interest rates (see Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate), more of a depression in housing (In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse), stagflation (Inflation + Deflation = Stagflation ~ Lower Real Estate Values!) and most importantly... obvious activity that is indicative of rampant speculation that goes against the fundamentals...

I will try to use math to address this conundrum in my next post as I'm running out, but realize that the recessionary (depressionary) pressures of s/f housing is not going anywhere soon. Let's look at the data taken from the February 11. 2011 HUD FHA Portfolio Analysis report:

A 54% jump in FHA REOs should be screaming the obvious at investors. If you don't hear it, you're the patsy! I see that sales are down significantly. Is it due to inefficiencies at HUD or the fact that the investment market has been saturated by REO homes going into a still rapidly declining market that has input costs steadily rising as true economic unemployment rises at the same time?

As you can see, the Case Shiller Index shows a marked drop in prices, and the drop is accelerating over time - halted only by .gov bubble blowing which has effectively worn off. In addition, the Case Shiller index shows a very, need I say unrealistically optimistic view of the market.

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The near term outlook actually looks worse. Dig deeper into the FHA portfolio report and you will see, contrary to proclamations from the management of big banks such as JP Morgan, et. al., that people are getting into more trouble in regards to their homes, not less...

These numbers corroborate what I have dug up regarding the shadow inventory available to subscribers, (see the latest Shadow Inventory Analysis Spreadsheet online) in that although shadow inventory looks bleak, there is a massive wave of unseen inventory waiting in the banking rafters.

Of course, JP Morgan says I'm wrong and they have released all sorts of loss reserves and provisions to pad lackluster earnings that would have assuredly resulted in a string of analyst misses to prove their point. I really want my readers to put these facts and figures into perspective in regards to banks such as JPM, for There’s Something Fishy at the House of Morgan...


JPMorgan’s Q1 net revenue declined 9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5% y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13% y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net revenues, noninterest expenses were flat at $16bn. Non-interest expenses as proportion of revenues went was 63% in Q1 2011 compared with 58% a year ago and 61% in Q4 2010. However, due to substantial decline in provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to $1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).


Lower reserve for loan losses and consequent decline in Eyles test (an efficacy of ability to absorb credit losses) coupled with higher expected wave of foreclosures which is masked by lengthening foreclosure period and overhang of shadow inventory, advocate a cautionary outlook for banking and financial institutions. As a result of consecutive under-provisioning since the start of 2010, JP Morgan’s Eyles test have turned negative and is the worst since at least the last 17 quarters. The estimated loan losses after exhausting entire loan loss reserves could still eat upto 8% of tangible equity.


Next up, I will try to give a mini-freebie in regards to my views on apartments.

Last modified on Thursday, 14 July 2011 09:30


  • Comment Link Reggie Middleton Tuesday, 10 May 2011 04:26 posted by Reggie Middleton

    Th market will probably turn around when and if rates rise with significant volatility.

  • Comment Link Brian Monday, 09 May 2011 13:47 posted by Brian

    What are you views on the stock market in relation to the housing market. Is this latest bull run going to crash when people realize housing isn't coming back?

  • Comment Link Reggie Middleton Friday, 06 May 2011 05:19 posted by Reggie Middleton

    "But then you criticize people who.want to profit from renting out properties."

    And when did I do that? I don't criticize people who want to rent out properties, I just believe they are not looking at the medium term picture. They can, of course, do as they please. It's their money.

    The subleasing idea may be a good one if you craft the lease carefully and the lessor goes for it.

    "The reason for the rise in rental income is simply due to the fact that few people want to buy a home in this environment. So they have to rent. Until people begin to buy homes again, there is little why leaseholders should decrease their sublease rates"

    That's a reason for firming rents, but there is still a lot of supply on the market and when interest rates risk cap rates will rise with it pushing rental property values down. In order for values to increase, NOI has to rise faster than rates. That is probably not going to happen.

  • Comment Link doug at HU Friday, 06 May 2011 00:42 posted by doug at HU

    Hi, you always say that the value of real estate is going down and will keep sliding for years possibly in Americ a because of several factors. Rising yields, unemployment, high commodity and utility costs... sale prices have yet to breakout to the upside when viewing average home sale prices over the last ten years.

    But then you criticize people who.want to profit from renting out properties. You suggest strongly that rent prices will decrease. I do not have national data but I believe that while average sale price are declining, average rental prices arid rising . Do you have data that suggests otherwise....

    The reason for the rise in rental income is simply due to the fact that few people want to buy a home in this environment. So they have to rent. Until people begin to buy homes again, there is little why leaseholders should decrease their sublease rates.

    Herein lies my suggestions or solution. Lease a property and sublease it... people still.need a place to live but refuse to buy a home. There is fundamentally no reason to lower rental fees over the near to long term... ten years of subleasing is good advice now. Do you not agree?

    I am personally waiting for average sale prices of residential property to make a new low under the 2009 low. Then I will identify property to sublease.

  • Comment Link Farmer Don Thursday, 05 May 2011 09:07 posted by Farmer Don

    The two that interviewed you were clueless.
    You had to rephrase their questions into something meaningful!

    Love your blog.
    Like your practical attitude, with out rants about the Fed, Government, bankers etc. taking up valuable time explaining the economic situation.

  • Comment Link Marty Wednesday, 04 May 2011 13:08 posted by Marty


    A quick note to say "nice job"! I really enjoy your data-driven analysis and you've just been added to my Favorites tab.


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