Anybody who has been following me since 2006 knows me to be a real estate bear. I was massively bullish from 2000 to 2005, after which I started selling off my investment assets. No, it wasn't perfect timing, luck or a gift from God. It's called a spreadsheet. Simply do the math and the truth will be self-evident! The Wall Street Journal and Bloomberg ran articles earlier this week on the home market tumbling further in the US: Home Market Takes a Tumble -

I warned thoroughly of this occurrence throughout last year and this - see The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium Monday, February 7th, 2011. The .gov bubble blowing accomplished the mission of taking observers eyes off of the fundamentals and macro environment and back into optimism central. To Bloomberg TV's credit, they gave me the opportunity to call it like it is.

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Yesterday, I bluntly called out the European state of economic affairs as I saw them in "Liar, Liar, European Pants on Fire!" Today, I present the article published by Property EU, one of the leading real estate publications in Europe which illustrates much of my thoughts on the topic of how and why Europe is nowhere near out of its economic malaise, and more importantly how this may pull the value of real estate down. The vast majority of European banks lend against real estate and when the value of said collateral goes down in conjunction with the value of what many are carrying on their books at par as risk free and hold to maturity assets at 30+x leverage... Well, you can use your imagination for the Lehman like results... 
This week I will go through several property devaluation scenarios as applied to what looks like very promising cash flow scenarios using real life examples of NYC commercial real estate starting tomorrow, and culminating with a more in depth analysis for subscribers next week. The most interesting part of the analysis will be the application of our real asset protection program to hedge against the risk of property value decline. Stay tuned, it should be exciting, and if you are not a finance nerd like me - at the very least interesting...

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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:

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A reader wrote me complaining about the nonsensical bubble blowing in multi-family properties before the last bubble was even finished bursting. I feel his pain. Let's run through a quick pictorial of how I see the macro climate for real estate as of right now...

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I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): File Icon JPM Q1 2011 Review & Analysis.

Here we go...

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.

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Monday, 25 April 2011 11:04

On Employment and Real Estate Recovery

A regular commentator on BoomBustBlog has been attempting to make the case for a housing recovery based upon rising employment metrics. He has, particularly, pointed out rising hourly earnings. I thought I would take this time to point out that average hourly earnings can rise due to the fact that less people are working. The aggregate employment in the US has literally fell off of a cliff. Since you know that I love pictures, let's do this graphically...

Below you have a chart of total hours worked in the US with the average hourly earnings superimposed on top. As you can see, two and a half years and trillions of dollars of stimulus and QE later, we have barely budged. There was no multiplier effect. In essence, what you had was a divisor effect, and the money would have shown up more on a dollar for dollar basis if it was simply given to the populace! Of course, that wouldn't have kicked the inevitably deflation of the banking system down the road, now would it have?

Notice that despite the severe drop in total hours worked, average hourly earnings have increased. This can easily mislead someone who is not paying attention. Read more on this topic here:

and on the real estate issue...

Here are the BoomBustBlog Real Estate Channels:

  1. Residential Real Estate
  2. Commercial Real Estate
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For anybody who didn't catch the hint, another banking crisis the continuation of the banking crisis is inevitable. I've said it before, Is Another Banking Crisis Inevitable? This is the current landscape, undoubtedly fudged over by optimistic marks.

Banks NPAs to total loans

Source: IMF, Boombust research and analytics

Euro banks remain weak as compared to their US counterparts

Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.

I really do mean substantial!

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I made a brief appearance on Bloomberg yesterday with the lovely Lisa Murphy, in which she introduced me as the fellow "who correctly predicted the housing bust, and a skeptic of the NRA's predictions who considers their forecasts a "joke", and doesn't mince his words". I couldn't help but laugh at the joke that wasn't funny, lending credence to the NAR...

Yes, it brought a smile to my face as you can see from the video below.

So, what's my beef with the National Association of Realtors?

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Note: Tune into Bloomberg TV at 1:12 pm EST to see me discuss the ins and outs of real estate Hopium on the "Fast Forward With Lisa Murphy" segment.

Struggle is not only Good it is necessary for a healthy, functional market!   The Market Wants to Fly on its own!

Let's start this post off with a popular parable.

Once an academic and self proclaimed (albeit not necessarily mistaken) intellectual was playing outdoors and found a most exquisite caterpillar whose colors and patterns gave it a most fantastic presence. He carefully picked it up and took it home to show his colleagues and peers. Together, they studied this caterpillar and wrote papers and hyper-intellectual dissertations on it. They even went so far as to name it. They called it, "Keynesian!" and vowed to each other that they would take great care of it.

The intellectual spent the considerable resources available to him as the chairman of the most powerful hedge fund cum central bank in the world to cater to, and study this Creature called Keynesian. Every day he watched the caterpillar and brought it new plants to eat. One day the caterpillar climbed up the stick and started acting strangely. The academic worriedly called international colleagues and together they came to the understanding that the caterpillar was creating a cocoon. The academic  explained to his colleagues how the caterpillar was going to go through a metamorphosis and to become a butterfly.

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My condolences truly go out to the people of Japan. A massive earthquake, a horrifyingly destructive tsunami, and then multiple nuclear emergencies and radiation poisoning is more distress than any nation had had to endure in such a short period of time in recent history. I am reticent to discuss the ramifications of such, alas that is the crux of the analysis of BoomBustBlog. I have noticed that many professional investors are detached from the real world causes and consequences of volatility and large swings in the markets. In a way, I can sort of understand. It's like playing a video game. All you are doing is pushing buttons in reactions to changing pixels on a glowing screen. Unfortunately, the reality of the matter is sometimes much more than that. Thus, as we go on to illustrate what I see will probably come out of this situation, let’s keep in mind that real people are getting hurt to very significant extent. Real children, real families, real grandparents...

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