Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees! Thursday, April 15th, 2010
Was this hard to see coming? Of course not - at least if you were looking! For those that may doubt that I have my finger on the real asset pulse of the markets, I practically wrote today's headlines 5 years ago! Let's jump into our time machine, shall we
September 1st, 2007: The very first post on BoomBustBlog tells the whole story for the next 6 years!
For those who really have a life and do not have the time to read building company annual reports, here is a bullet list of tidbits that all will find interesting, particularly in light of today's mortgage environment (pardon if their is info that you are already privy to, this is a comprehensive summary, but I am sure everybody is to find something that is of illuminating):
obstacle for most purchasers of our homes." For the record, second lien loans are not being bought in any volume for the week ending the day of this writing. It is the second lien loan that is used to get cash strapped buyers into homes. This is a problem for LEN, if it accounts for up to 66% of their sales. They say they issue FHA and VA loans, but fail to break out a granular analysis. "
During the recent time of high demand in the homebuilding industry, many home buyers financed their
purchases using non-traditional adjustable rate or interest only mortgages or other mortgages, including sub-prime mortgages, that involve significantly lower initial monthly payments. As a result, new homes have been more affordable in recent years. However, as monthly payments for these homes increase either as a result of increasing adjustable interest rates or as a result of principal payments coming due, some of these home buyers could default on their payments and have their homes foreclosed, which would increase the inventory of homes available for resale.
Reggie's grassroots analysis:
The S&P index severely understates the glut in housing and the downward pressure on pricing. It uses the repeat sales methodology which only includes houses have that have been sold at least twice, which excludes all new construction. So the homebuilder’s product which is being slashed in price with butcher knives and cleavers don’t even show up in the index, and these homes must be slashed enough to sell in a slow market that no longer has cheap credit, has much competition in excess supply, and no longer has the phantom appraisal pricing which helped sustain the bubble in the first place (more on this later).
The index also fails to include anything but single family detached and semi-detached housing, so coops and condos aren’t included in the mix. This means that areas like Manhattan and Brooklyn, South Miami and Las Vegas, DC and Cally are severely under counted. The mere act of excluding condos (the worst victim of boom time speculation) instantaneously makes things look a lot better than they are.
Also excluded are properties who experienced larger than median jumps in pricing, which where considered to be investor properties (benefiting from significant renovation in anticipation of resale). Investor properties constitute a very significant amount of the current prime and sub-prime defaults now.
Mentioned earlier was the push from appraisers eager to win new business. In the residential investment game, you (as in bank, mortgage banker, mortgage broker, real estate broker, investor, seller, and everyone in between) push the appraiser to come in with the highest value possible to allow you to a.) get the biggest loan possible, b.) obtain the most preferential pricing/terms (lower LTV) possible, c.) get as much from the sale as possible, or d.) all of the above. In the comparable valuation game, you pick comparables and adjust them for particulars to come up with a valuation. Once that inflated value is actually recorded in the city register, it's inflated value is used to further hyper-inflate other deals, and the upward spiral continues. The appraiser, in the boom times, picked the highest prices (which were inflated) to get a highest price (which itself was inflated) that is added into the records to make (guess what???) higher prices. Throw the petrochemical fuel of very cheap money and easy credit NINJA loans and it is easy to see how this housing boom was more than a boom, it was a speculative explosion in real asset prices that usually average 1%-3% a year in appreciation doing about 12%-100% in many places.
The caveat is, this works both ways. When the appraisers get busted for being too aggressive (and threatened with litigation and discipline - if you read the articles, they have been passing the buck saying they were pressured into inflating numbers) they start getting overly conservative and do the opposite. The banks also stop looking the other way since they may actually have to use their own money to fund/keep these loans instead of the OPM method of MBS/CDO fame. So now, the guys are looking for the lowest average prices in an attempt to be conservative, and the process reverses itself.
Now, we haven't even gotten to the commercial sector yet, where the real money is thrown around. Speculation and credit underwriting lite is coming home to roost in a sector near you.
Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt IThursday, October 11th, 2007
Do you remember when I said Commercial Real Estate was sure to fall?Thursday, December 20th, 2007 by Reggie Middleton
My first post on my blog in September warned about the coming drop in real estate prices. I revisited the topic a couple of weeks ago, as I prepared the research of a short position in the sector. Well, we are almost done with the research and the position and I will release a summary of the research and the performance (expected and actual) of the position after Christmas.
Check this out from January 2008
A couple of weeks ago I informed BoomBustBlog.com readers that I was working on a big project concerning commercial real estate short candidates. I stated last year that I was sure CRE was headed down, hard. Well, I am now ready to start releasing the results of my research over the next week or so. Unfortunately, the market has moved against the subject of my research fiercely as I was completing it, but it appears to be far from over. Who is the subject of that research, you ask? General Growth Properties (GGP). I have actually seen this company pop up in the media and a few discussion groups from time to time, but they have no idea what the management of this company has been up to. First, a little background on how I got here. Those who are not versed in commercial real estate valuation are urged to read my quick and dirty primer on CRE valuation .
I told members of my analytical team to screen the commercial real estate trust, service, and development sector for the usual suspects, starting with the the guys that purchased Sam Zell’s flipped properties from Blackstone. I made some of the companies available via blog post and download: Commercial Real Estate Cos. (43 kB). Forest City Enterprise Peer Comparison (198.98 kB), Vonardo Realty Trust (146.49 kB). After and exhaustive screen and resultant short list, we chose GGP. I then instructed the team to canvass local and national brokers (4), databases (5) and data aggregators (several) to get the most precise localized rental and expenses figures possible. This data, as well as purchase dates, prices, management actions, capital improvements, etc. were used to plug into models such as this 33 page illustrative example, GGPs Woodlands Village (612.34 kB), to ascertain the true value of GGP’s portfolio. We also measured and valued their development operations, joint ventures, CMBS financing, off balance sheet vehicles and master planned communities. Sum total, I now have roughly 2 gigabytes of “REAL” valuation data on my servers covering 260 properties owned or partly owned by GGP. A this point, I may know more about their operations than they do.
What is more telling is the window of understanding this opens into the commercial real estate space in the US. It is my opinion that most are extremely over-optimistic regarding the prospects for this space.
And here we are Now, in 2011...
The “American Realist” Says: Past as Prologue – Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!! Wednesday, May 18th, 2011
In the post that followed said appearance, Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate, I ran down what I perceived to be the major risks of real estate in the states today, and that is a departure from the fundamentals and bleak macro outlook. During the Q&A at Roubini's crib, where I was actually guilty of accusing Nouriel of being too optimistic (I know, that's probably a first - but if anyone were to do such it would probably end up being me), participants were suggesting in a rather optimistic fashion that if a hard landing or recessionary environment were to come it would presage a time to buy assets at value prices. Of course, that is assuming those assets that you got very cheap didn't then proceed to get much cheaper. Nouriel replied exactly as I would have (and have in the past, particularly during my Keynote at the ING Valuation Conference in Amsterdam), and that was that it simply cannot taken as a given that assets prices will cyclically snap back in a year or even two. Now, I do have an investment strategy that I plan to pursue in regards to real estate, but it is quite different from what I see being bandied about today and over the last 8 years or so. To wit (as excerpted from the link directly above):
... It is the reporting company’s responsibility to report, not to obfuscate. The big problem with this “hide the market marks” thing is that markets tend to revert to mean. Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now. That is what happened in Japan over the last 21 years!!! That’s right, it wasn’t a lost decade in Japan, it was a lost 2.1 decades!
- They refused to mark assets to market
- They attempted to prop up zombie banks
- They failed to promptly clean up NPAs in the banking system
- They looked the other way in regards to real estate value shenanigans
Residential Real Estate
Bloomberg: US Home Prices Fell 5.5% in 1st Quarter, The Most Since The Hear Of The Crash! Doesn't that indicate to you that the crash is not over, and is not only ongoing but actually accelerating?
U.S. home prices dropped 5.5 percent in the first quarter from a year earlier, the biggest decline in almost two years, as sales of discounted foreclosures undermined real estate values.
Prices fell 2.5 percent from the fourth quarter, the Washington-based Federal Housing Finance Agency said today in a report. Economists projected a 1.2 percent drop from the previous three months, according to the median of five estimates in a Bloomberg survey.
The FHFA’s measure, based on properties with loans backed by mortgage financiers Fannie Mae or Freddie Mac, has fallen for 15 straight quarters as lenders seize homes and sell them at cut-rate prices that drag down overall values. Foreclosures and short sales, in which banks agree to let properties sell for less than their loan balances, have accounted for about 38 percent of transactions this year, based on the monthly average of data from the National Association of Realtors.
“Dumping foreclosures on the market and selling them at distressed prices affects the whole real estate market,” said Richard DeKaser, an economist at Parthenon Group in Boston. “It puts downward pressure on prices, even for homes that aren’t in foreclosure.”
From and editorial perspective, we have been here before: The Residential Real Estate Week in Review, or I Told You We’re In A Real Estate Depression! The MSM is Just Catching Up Thursday, May 12th, 2011
I'd like to make it perfectly clear that we have a very long ways to go in regard to residential housing price collapse. I have been 100% on point regarding this topic since 2000, it is now 2011 and I have never been more confident.
Reggie Middleton on Bloomberg TV's Fast Forward
Bloomberg TV: "The risk/reward ratio in commercial real estate does not look good!"
Bloomberg TV & Reggie Middleton on the Flawed Case Shiller Index: "That's what they said in Japan about 12 years ago, look where they are now!"
- “As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The “New” Tobacco Companies”
- Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! Monday, January 10th, 2011
- JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Wednesday, March 2nd, 2011
- As JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The “New” Tobacco Companies”
Bloomberg reports that Foreclosures Prompt Four U.S. Cities to Sue Banks for Mowing, Home Repairs. I discussed this in detail both on Boombustblog and on the Max Keiser show: Reggie Middleton On Max Keiser Discussing Tradable Fraud, Goldman’s Facebook Deal & Phantom Bank Earnings
For more detail, reference I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What! Monday, January 17th, 2011. You would be shocked at the amount of so-called professionals and experts who told me this could never happen! I pushed further, with articles that expanded on the topic last year as well:
Now, in May, my proclamations from last year and the first quarter look prophetic. They are not, they are the result of objective analysis. Either way, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse.
In There’s Stinky Gas Inside Of This Mini-Housing Bubble, You Don’t Want To Be Around When It Pops! I illustrated the poor macro and fundamental conditions that made it impossible for a housing recovery to occur in the near term.
Nobody wants to admit it, but the 2008 never finished - The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance.