You will be amazed on how fast these homes get sold. In a single day, some 500+ homes get sold. And you will be amazed too by the number of people in the crowd. Definitely, there are still way too many would-be speculators who want to pick up investing properties on the “cheap”.

Most homes that are very far from metropolitan area are selling 50% off or more. The homes that are near to where the jobs are, they are at best 10% lower than the listing prices. And the most amazing thing is that there is a huge crowd, probably more than 1000 people. Certainly, very few of them realize that the housing markets just won’t be the next best investing vehicle, possibly for the next decade. From the number of people going to auction, I’m fairly certain that this housing bear market has definitely not hit the bottom.

Again, I have been projecting a potential intermediate bottom for housing market at about 2011, which is still 3 years from now. Depending on how the inflation unfolds, that bottom may or may not be the lowest bottom. If $US tanks and US interest rates soar, I believe that US housing markets will tank beyond the level of 2011. How high the interest rates may go under a hyper-inflationary scenario? No one knows, but I think it could be more than 10%. At an interest rate of 10%, compared to a 6% rate on 30-year mortgage, the monthly payment will go up by 46%. Alternatively speaking, for the same fixed “affordable” payment, the loan amount will go down by 32%. In that scenario, I believe housing prices will fall, despite the supposed belief that houses are a good inflation hedge (only if it’s not hyper-inflation).

Some of my colleagues at work have been buying several investment properties, and I’m talking about 3 to 6 properties. I am fearful of their bets turning bad, but since I’m no oracle, I won’t comment on their purchases. My position has been bearish, and my projection is also bearish. The nasdaq is still not even 50% of its height back in 2000. That’s how a bubble can wreck your finances for a couple of decades.

Don’t be too greedy. The only result coming out of tremendous financial leverage is either a great success or a great failure. And you know for a fact that a great success is simply a much rarer event probabilistically speaking.

I think few people realize that America/the world is facing the biggest financial storm ever, and how dangerous it is for investing in stocks before a full implosion. The housing-induced credit crisis has gone far beyond anyone can potentially control, probably not even the Fed.

Reading over so many current/future proposals from politicians and bloggers, I have my own thoughts in this. For sure, there simply isn’t a solution without pain. But there can certainly be solutions that are more fair and less pain.

One of the most fair and easiest way to help propping up the housing market is to subsidize all the buying or holding cost for primary residences. Instead of helping on the sell-side directly, the government can help the buy-side. Of course, the subsidy will indirectly go into sellers. But the solution is market-based.

Why is this a fair solution? For sellers, there is simply no direct bailout. For anyone who chooses to buy, the buying decision is done on the open market where everyone else is competing on the same ground with subsidy, and existing real estate investors will also be helped with a more stable housing price. For any renters who choose not to buy and take up the subsidy, their decision is solely of their own based upon their evaluation of the current housing market and personal circumstances.

What kind of subsidy will make sense? The easiest way is certainly done through mortgage interest reduction or tax deduction. The tax deduction cannot be limited by the amount of adjusted gross income, and has to be actually beneficial on top of the existing standard deductions. By reducing the overall housing cost, government will encourage more of it, and prop up the housing market.

Since 65% to 70% of the Americans are home owners, most of this housing aid will effectively become a tax cut for middle class. I suggest that 50% of the total amount of both property tax and mortgage interest from primary residence can be used as a tax credit (rather than tax deduction in the itemized section). Here are some examples of the housing aid scenarios, with loan interest at 6%:

1. $700K home in California with 20% down for someone with tax bracket at 28%:
Because loan amount is $560K, the interest is $42K a year, and the additional tax subsidy amount will be roughly (50% - 28%) * $42K / 12 months = $616 a month. This monthly subsidy will effectively lower the interest rate from 6% ($3357) to 4.25% ($2755). That will be a tremendous stimulus.

2. $500K home with 20% down for someone with tax bracket at 15%:
The additional tax subsidy amount will be roughly (50% - 15%) * $500K * (1-20%) * 6.00% / 12 months = $700 a month. This monthly subsidy will effectively lower the interest rate from 6% ($1852 payment) to 3% ($1686 payment). This is an even better deal for lower income people.

Effectively speaking, this tax cut will target middle-class home owners specifically. Using the assumption of a median home value of $240K, and an average tax bracket of 15%, this tax aid comes to be about $4032 dollar per family household, 110 million US households, with 70% home owners, it will be about $300 billion annually. I’m not going to re-do my numbers here, but probably instead of 50%, one could go for 40% of the interests as tax credit. This will adjust this bill from $300 billion to about $214 billion. I hesitate to go to much lower, simply because in California, where most of the housing problems are, you have to be at 25% to 28% tax bracket to afford the homes. Since one is already getting existing tax benefits at 25% to 28% through itemized deduction, the 40% as tax credit will only give 15% to 12% additional benefit.

Bottomline, this printing of tax money will be truly the best way of distributing the helicopter money, since it goes to the homeowners directly without discrimination, AND it is also tax-progressive. The rich who has a bigger loan do get a lot more, but only because they are paying a lot more for their home. But the middle class will not be left out at all, and will enjoy the biggest piece of the tax reduction. This will effectively encourage home purchase/consumption, and props up housing market. The solution is also market-based without ANY bailouts to those people who abuse the mortgage markets.

In respect to Republican tax position, this is a market-based solution. In respect to Democrat tax position, this is a tax aid for most of their incumbents. In respect to stock markets and US economy from Keynesian economics, this is a huge positive. Tax cuts stimulate economy. On the other hand, money from direct taxpayer bailouts go into the pockets of these fraudulent bankers and homeowners, and continue to encourage moral hazards and speculation.

Frugal at 1stMillionAt33.com

The Hope Now Alliance is going to freeze the rates on ARM loans instead of letting them reset. That is absolutely unfair to anyone who doesn’t benefit from such deals. Why don’t I get some free points to buy down the interest rate, paid by the alliance too? Of course, if they can get all the investors in different trenches to agree, then I have nothing to say.

In any case, the banks are desperately trying to keep the mortgage losses under cover by whatever means. This freeze of ARM rates will definitely postpone the reckoning day. I originally expect a heavy down year in 2008/2009 for real estate prices. Now I am less sure of such. However, home prices definitely won’t be going up in 2008/2009. Lending standards for new loans are still tight.

One thing that I’m most curious of on the details of the freezing plan is that on all these ARMs, there are both payment and interest rates. When the payment rate is less than the interest rate, the loan is negatively amortized. I really wonder whether they plan to freeze both payment and interest rates, or just the payment rate. My initial guess would be that it would simply the payment rate that will be frozen. In that case, no one involved will take an actual accounting loss. The interest money will continue to pile up, despite the fact that those interest money may never get paid by the subprime homeowners. Obviously, if given long enough time (and a good amount of inflation), eventually home value will exceed and allow the paid off of these interest money. However, for these mortgage investors, they are still at the losing end of the stick. The inflation will eat away any of their recovery of the interest money.

If anyone knows somebody who get into such plan, please ask him and let me know that whether both interest and payment rates are frozen. Thanks in advance.

I assume that such modified loans will still be un-transactionable, or illiquid. No one in their right mind will buy such products. But keeping these loans away from foreclosure will prevent the banks to liquidate the homes and assigned the final value to the loan at loss. And so the fairy tales will go on, and the losses can be slowly written off. Banks can then “properly” meet the capital requirement ratio from FDIC.

Did anybody who read my blog got into this world-record breaking hedge fund which returned 10X in 1 year? I got the performance number from Minyanville’s article on 1000% Subprime contained. Boy, I only wish I had more cash/money to be brave enough to take a piece of that action. If I did, I would have almost doubled my net worth (since minimum investment was $100K). Unfortunately, I didn’t. But did you?

Certainly, somebody inquired him from reading my blog. Because I was asked by the fund manager Andrew Lahde to removed the proprietary PDF file, even though I had every good intention of promoting his business.

Well, I’m sure he and his clients made out like a bandit. 10X return in one year. That’s probably good enough for the next 10 year.

Were you that lucky? I guess rich does get richer, and I just needed to be a little richer to be in the league to participate and play.

I’m very surprised that bond market has actually gone up (bond yield coming down) along with the stock market. The ^TNX (10 year treasury) has come down to 4.383%, and ^TYX (30 year treasury) has come down to 4.663%. Regardless of how the bond yields are coming down, whether via direct monetization through Fed’s printing, or bond market forecasting economic slowdown, the lower yields will definitely bring some stablizing effect to the housing market fallout.

Although I would like to say that it makes more sense to me that the bond market actions are due to Fed monetization, I cannot find any evidence in their Fed operations of permanent repo. In any case, assuming that Fed can fake everything else, the only thing that it cannot fake is the $US exchange rate with other foreign currency. Furthermore, under normal circumstances, bond yields should have risen when the stock markets go up. Although such weird episodes have happened before, the recent occurrence of synchronous rising is the first one since many months.

If the 30 years treasury yield fall further, it will be on track to match its all-time low at about 4.25% in June of 2003, and June of 2005. That’s just roughly 12% =(4.66%-4.25%) * 30 yr away from the current level. I don’t know how it could possibly make sense to any of the bond buyers, but a 30 year bonds yielding at 4.66% is simply too low. Investing money in a farm will probably bring a much better yield.

This week Fed is supposed to cut interest rate by another 0.25%. I think Bernanke going forward is more likely to surprise the market on the upside (meaning cutting more than less). His philosophy has always been that aggressive cutting can stave off crisis. The only thing that I see however is that there will soon be another bubble in either foreign markets or commodity markets or both, due to these aggressive rate cutting. It’s very important for investors not to sell out completely in the energy/precious metal sectors.

If Fed can successfully bring long term interest rates down to a very low level, then it may actually make sense to start buying real estate at the lower priced area. Although initially I was estimating that the bear market in housing will last all the way to 2012, if bond markets behave irrationally than my original thinking, then the buying time of real estate could be sooner at least for the lower priced area.

Incidentally Mark Hulbert is posting another bullish post “Ahead of the (yield) curve - Commentary: Post-Fed curve much steeper, a good sign for the economy”. I must say that everything of what he said about a smaller chance of recession based on the steepening of yield curve is correct on paper. However, I cannot agree that one can simply use only the yield curve to determine the odds of recession.

For one thing, because the long term bond markets are not collapsing or dropping dramatically after Fed raising interest rate, while the short term interest rates are falling, it appears to be a good sign that Fed still having everything under control for now, except on US dollar index cutting through multi-years support at 80. But based on Bob Hoye’s historical analysis (pg.2 at this link), such post-bubble yield curve steepening is more ominous rather than a bullish sign. Bob’s recent forecast has been quite accurate, and I would trust his words as a market historian rather than Mark Hulbert’s who has been putting out 8 to 9 bullish articles out of 10 this year. Such yield curve steepning according to Bob Hoye is simply part of the post-bubble credit contraction process. Certainly, if long term bond yields start to go up much more, they will simply deepen the housing recession. Now, I don’t care about how accurate the predicative power of yield curve. It is simply a black-and-white matter that housing markets will get worse if the bond yields go up. With the housing bubble unfolding, my only attention would be the absolute level of the long term bond yields, rather than whether the curve is inverted or not.

By the way, if I didn’t make it clear in my yesterday’s post on “is it 1998 or 1970?”, I will now. I believe that more of the emerging markets will be in the 1998-style progression, while more of the senior markets will be in the 1970-style. I think US stock market will be going thru an extended period of sideway with possibly a bullish slant, with $US falling gradually. The best thing for US dollar holders should be trading in this sideway market to make up the $US fall in purchasing power. But you do need to wait for a round of cleansing before jumping into it.

Best luck, and have patience.

At this time of home prices falling, and possibly not being able to roll over/refinance the home loan, it is important to revisit this older post of mine: Deficiency Judgment: Think Again Before You Walk Away from last year

To the current homeowners: think again before you send the keys to the bank and walk away from the house. Do you think that when the housing prices fall, you can simply walk away from all the loans? Well, if you didn’t know, I am going to explain it to you. There are loans that you can walk away, and there are loans that you cannot. It’s called a recourse or a non-recourse loan.

A non-recourse loan means that there is no other recourse available to the lenders besides taking back the home. A typical non-recourse loan is a home loan for purchase. If the house falls below the balance of the purchase loan, the buyer can walk away from the house without any serious consequences (maybe except a big blemish on the credit report). On the other hand, a recourse loan means that the homeowner is personally liable for any “deficiency” when the lenders cannot recover the loan amount by selling off the house. A typical recourse loan is a home equity loan or a line of credit from home equity. As far as I could research, I don’t think a refinanced home loan is definitely a recourse loan. But I’m almost certain that a cash-out refinanced loan is recourse loan. As far as the legal language is concerned, a refinanced loan obviously is not a loan made for purchase.

…Click to read more….

Again chances of judicial foreclosures are “usually” small. But you just don’t know what a badly hurt banker will do with a mounting losses on his back, especially with more and more home loan defaults. If it means that it will reduce his losses, he might as well create an off-the-book company to specially deal with lengthy foreclosure process with more money recovered.

Casey Serin at I am Facing Foreclosure.com is shutting down his website in about 18 days. I received an email notification from him about the news:

I’m shutting the blog down on August 3rd. That’s about 23 days from now.
….
Any publicity is good publicity. Right?

Wrong.

My marriage and my family has been affected in a big way by my actions and this toxic exposure. The internet could be a cruel place and I am the one who put myself and my family out there. If I knew things were going to get this bad I would have done investing and blogging in a much different way.

Now I may lose my wife over this.
….

I think he made a tough but wise decision. Family should be always first, money or fame second. You just cannot buy a happy family, no matter how much money you want to spend, but little time for them.

When I first heard about Casey’s blog, I wonder it was for real. At least personally I will never document my own crime if I commit such white-color crime. I assume that getting more publicity will only bring investigation (in his case, FBI) sooner, since one of the million readers must either be a policeman himself or know a policeman well enough.

In any case, he was able to sell his blog for some $20K to $30K, and also had a book publisher interested in his story. Frankly, he has a good chance of making himself a multi-millionaire if he simply play his cards right.

His blog and real estate experience is simply one of the housing bubble phenomena. Unfortunately, all the debts left behind by these liar’s loans (some 2 million in Casey’s case) will not be paid back, but rather get discounted after foreclosures. Well, as you are fully aware, the stratospheric housing price was simply too good to be true. The housing price is only as good as the loans and the money availability behind them.

Who is going to take the loss? Mainly the loan investors, but eventually the whole society takes up the cost one way or the other. We will be paying for the cost of housing bubble through the coming higher inflation and higher interest rates (if not already).

For anyone who will face a mortgage ARM reset going forward, but doesn’t have the income to pay for the monthly payment, the Ponzi game is over.

From the latest New York Times news:

The banks obviously don’t like this, because they understand that they have simply played with fire. Now they are getting caught, but still would like to continue to pass these hot potatoes (risks) to unsuspecting income investors. Without being able to extend the loans to these falling subprime borrowers, the current investors and banks will be stuck with the hot potatoes.

But don’t you wonder why banking regulators still want to increase the regulation, possibly knowing what may happen? Well, for the people in politics, they only care that when all the foreclosures are under the sun, they can at least claim that “oh yes, I did do something for this problem (by making it worse?).”

In any case, we will see more of ball kicking between government officials/politicians such as between Greenspan and Ed Gramlich.

But now Edward Gramlich, a former colleague of Greenspan, has reportedly gone on record to say the former Fed chairman blocked a proposal to increase scrutiny of subprime lenders under the Fed’s broad authority. What’s more, he asserted, that additional scrutiny might have helped curtail questionable lending practices that are now blamed for soaring defaults by mostly low-income borrowers many of whom fell prey to predatory lenders’ unscrupulous lending practices and high interest rates.

I am not sure Greenspan’s denial is in any way effective. He has got his fingerprints all over the housing bubble. How can you even deny it?

I just checked my local housing market this past weekend. It appears that prices are down at least by 5% from just a couple of months ago. This is true for both new homes and resales. End game is slowly coming. The 2008/2009 negative ARM reset is not even here with us yet. It could be ugly.

Finally, I can walk into a sale office for new homes, with the ability to purchase the home outright without putting my name down on a long waiting list. And the price got cheaper even compared to a few months ago.

Just a note to all the home buyers out there, the housing market will play through series of tango in the upcoming decline. First new home prices will undercut resale prices. This is happening now. Then resale prices need to come down to match or be lower. Then the drama replays again and again until it reaches bottom. Two months ago, some of the resale home prices are simply outrageously stupid. Why would I buy a 20 year old home which is more expensive than a new home? Be warned. Don’t be those stupid buyers. Real estate agents will be working overtime and cheat you into buying one of those resales. You think they would have told you that the new homes just around the corner are cheaper, but since they don’t get any commission from those sale, these “buyer”’s agents will rather let you lose out tens of thousands of dollars on a stupid deal, and tell you straight in the face that “home prices always go up in the long term” or “all the people who got rich made their money in real estate”. Don’t listen to their lies. Sometimes, I can’t believe how these agents can face their conscience day-in and day-out. That even includes my Christian friend (as my buyer’s agent) who hasn’t told me a thing about any new homes. I guess lack of disclosure does not officially make him guilty.

With the mortgage rates jumped up by some 0.5% in the last week, that will spell disaster for the home inventory. There seems to be a rush too for all these home builders to rush out and build up their lands. I haven’t seen so many new communities opening up for such a long while. The bad news for the builders is that each new phase gets postponed further out due to lack of demand.

Still I can’t figure out how these people around me can afford such expensive homes. If I include the opportunity cost of down payment by treating it as an interest-bearing at the same mortgage rate of 6%, a home that I just looked at for the price of $710K has a total annual cost of $60K, roughly 5,000 dollars per month. My own home has an opportunity cost of about $22K a year, or about 1,800 dollars per month. I really don’t understand how people can afford a $5,000 dollars per month, without putting up several hundreds of thousands of dollars for down payment.

Well, of course, the real estate agents still keep repeating the same words. “There is never a better time to buy a home.” “Markets have stabilized.” “Prices will not come down too much.”

I’m not really sure about that. I do hope that all of my blog readers won’t lose out when they buy their next home. It could very well determine whether you can be richer 5 to 10 years later by $100K to $200K depending on your personal situation. That gain is obviously not coming from buying a home, but rather coming from not losing that much of money in buying a home I believe. The only financial discipline that you would need to stick to is to save up your money if you’re a renter. If you tend to squander through your disposable income, you might as well buy a small home.