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April 18, 2006

Echoes of 1990
by John Rubino

There's a remarkable exchange in this morning's Yahoo! message board for KBH, the big homebuilder, some of which appears below. It needs little explanation, other than to say that REO stands for "real estate owned," a measure of what banks have repossessed from borrowers.

Echos of 1990?
by: PBernhardt (M/Albany, CA)
Long-Term Sentiment: Strong Sell
04/17/06 09:34 am

I found this in the comments section

http://www.blogger.com/comment.g?blogID=18675105&postID=114523706536759710

(res ipsa loquitor)

"I'm the former RTC REO Marketing Analyst, but prefer to be Anonymous because I know some people are going to become very alarmed and very angry when I discuss what happened the last time.

When I left the RTC at HomeFed Bank in 1991, the RTC was in the process of closing down. It was the tail end of that cycle.

While at the RTC, I personally sold bank REO for 20%-30% of what it appraised for just two and three years earlier. Not for 20-30% less, but 20-30% of that real estate's former value from just 2-3 years earlier.

Mortgage defaults and bank REO are increasing rapidly already as of today. Keep in mind that banking regulators will never give lenders leeway to play the market so to speak, or hold on to REO in the hope of an improving market to get a better price or to cover their nut (i.e., mortgage). They HAVE to get those non-performing assets OFF their books. I have lots of stories about those days and I'm convinced this time it will be far worse because back then we didn't have any of the Geo-Political crises we have now (rampant illegal immigration, wars, we're a bigger debtor nation, we have a bigger trade imbalance with China than we ever had with Japan I'm sure, etc., etc.), interest rates that were artificially depressed to levels not seen in 40 years, dangerous and irresponsible lending products, and because the advent of the internet now facilitates the free flow of information much faster. Look at all the housing bubble blogs there are with all the reliable data they are providing. It's almost an avalanche of data supporting why all but the most ill-informed should not be looking to buy for at least 2 years.

I remember telling people in 1989-1990 that the writing was on the wall and nobody listened because there was no publicly available data (brokers like me knew based on MLS data only available to members) to cite in support of the impending crash, and the media, especially newspapers, weren't going to report it because their largest advertising constituency is Realtors/brokers.

With the internet and the info that is available on it, you'll soon see the amount of time it takes for real estate to crash significantly compacted this time. Just look how fast things have turned bad since just before the holiday season started last year.

Homeowners are now increasingly starting to put their homes up for sale to get an early start on the summer home buying season, and some are just now realizing how inventories on their local MLS's have tripled, quadrupled and worse. As of today, ZipRealty reports that San Diego is just about 4 weeks away (based on the average daily increase in inventory I have been monitoring since late last summer) from breaking the old record of 19,250 during the last down cycle.

I know some have said that you can't use that figure because San Diego has a larger population today, but I disagree and here's why. There are far more FSBO related companies today than 15 years ago because of the Internet and collectively, many of their their thousands of listings are not included in the ZipRealty figures. Also keep in mind that last year population in the County went down, and don't be surprised when it goes down again after this year finishes up.

Look how the tone of articles from mainstream media in the last 2 months alone have changed. Panic has already set in for many, but they have no idea how ugly it will get."

Echos of 1990? ptII
by: PBernhardt (M/Albany, CA)
Long-Term Sentiment: Strong Sell
04/17/06 09:35 am

"The one thing I'm always amazed to find out is how many borrowers think that when their home goes back to the bank, that's the end of their problems. What they don't realize is that if the lender writes off or forgives any debt to them (i.e., short sale, etc.) the former borrower will get a 1099 for the amount of that forgiven debt as though they had received it as income. If they sold their home through a short sale at the begining of the year and they got a 1099 by January 30th of the following year, they not only have to pay taxes on that forgiven debt, but now penalties and interest too, because it was due (unless you pay estimated quarterly taxes) at the time the debt was forgiven. I personally knew a borrower who had 11 rental properties and after he lost the first one to foreclosure, he got hit with a huge IRS penalty. He started selling off the others, but had huge tax hits because of depreciation recapture, and because the market was getting worse, he could not sell some for what he owed. I was an underwriter at the time and on paper, just prior to losing his first property he had equity of over $1,000,000; but in the end he lost it all because he couldn't sell in a market where bank REO dominated, and when he tried, the tax hit from depreciation recapture buried him further.

The same sheeple psychology that drove everyone to ignore cash flow fundamentals by flipping condos and homes based on the greater fool theory, will invert like it did in 1990, and for the next few years you'll hear nothing about real estate except how terrible of an investment it is, and it will be true for those who either bought with high leverage or refinanced with max cash out based on the value of their homes in the last 2 years.

And anyone who says rents will catch up to all the adjusting I.O. and ARM loans is in fantasy land.

Between 1990 & 1994, I had my landlord reduce my rent three times by simply giving notice that I could rent a better condo at the beach for less. And you know why that's possible? Because of all the bank REO that was (and will be again) unloaded on the market. Owners who buy REO can easily compete on price alone. Market rent is meaningless to them. I rent a $750K place now and have been renting since we sold our residence in 2002 and our rent is under $2,000 and in the 5 years we'll have been here, the rent will have only increased by 3% from 2002 through 2007.

To those who ask how long to wait and how low will it get, here's my answer. Even though the Internet will compact the time it takes to crash, I still say don't even think about buying for at least another 18 months. Don't be fooled by ocassional news or market conditions that lead you to think things have turned better because that always happens on the way down, just as it does with stocks on companies you know are "Dead Man Walking".

As far as the percentage, don't think in terms of what percentage it will go down relative to the overall market, but what discount you can get on hardship situations, like bank REO. I think you will be able to get property for 20-30% of what it appraised for in 2005. Trust me. Even if you don't for whatever reason, others who are diligent will.

In 1995, my wife and I bought a La Jolla 1-BR condo one block to WindanSea beach with a peek ocean view off the balcony. It was in default and we bought it for a total price of $104,000 AND got the broker to kick in half his commission. That's how bad it was last time : )"

Re: Echos of 1990? ptII
by: marc_wohlbier
Long-Term Sentiment: Strong Sell
04/17/06 10:27 am

I can vouch for what you are saying I was with the FDIC from '87 to '94 at the Houston Consolidated Office (Bank Liquidation) there is no doubt that this period is worse than then. This company, if I read the earnings report correctly, had a 40% drop in net profit yet it keeps hanging. The crooked deals that I saw were not to be believed and yes we sent out 1099's like snow flakes with debtors calling us in a rage. These hb stocks should be at half the current value and be under investigation for all the crooked deals in which they are involved but that won't happen. Once Clinton got in and Bill Siedman out huge pools of assets were bulk sold with the debtors buying back their own notes at .10 on the dollar with the tax payer picking up the tab. Gold is up $10.00 today and HB stocks are being supported by means that are more foul than fair IMHO.

John Rubino
DollarCollapse.com

John Rubino is co-author, with GoldMoneys James Turk, of The Coming Collapse of the Dollar and How to Profit From It (Doubleday, December 2004), and author of How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He now writes for Fidelity Magazine, CFA, and Proto.

Copyright © 2006-2008 John Rubino

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