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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-familyproperties. 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.
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.
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So purchasing SFR's for $60-70k and renting them out for $800-900/mo is a bad investment?
No really, I would like to hear your guys' thoughts on this.
From my seat in California, I see that Reggie is correct. I've also discovered another way that banks are hiding losses. They will credit bid $250k (the amount of their entire loan) for a house worth no more than $100k. Because tax law requires them to recognize the phantom interest on that "deemed paid" loan that will never be actually repaid, such a full credit bid makes absolutely no economic sense --- unless, of course, you're trying to improve earnings just before quarter's end.
I follow these ludicrous "back to beny" sales and, sure enough, several months later the same house is listed for $100k. Te $150k loss is shifted to future quarters and some other guy's department (REO).
I can provide addresses and the names of banks that are doing this.
Send me the bank info. reggie at boombustblog dot com
There are lots of tricks being played. HUD and the Fannie, Freddy houses are suddenly having their taxes being paid Ahead by 6 months to a year. Here taxes are always paid on a one year lag. The Fed is supporting the local with quiet interest free loans.
Real Estate is very local. I am a real estate agent in Ohio and the local market did not rise as far or fast nor crash as bad as much of the national market. Right now there are lots of 30-50K houses that rent for 800+ a month. Yes they are cash buyers. This ratio is only true on the Local market at This time, and many areas of the country are NOT sound investment arenas. Locally, we can confidently invest for cash flow. 150 miles north and Michigan is a real mess.
IC,
Houses for 30k that can rent for $800/mo? That is a 30+% gross yrly ROI. Are you sure about that?
I have been mainly searching in the Phoenix market and on avg have found properties in the 60k+ range that rent out for $800+
Where in Ohio are these properties? How realistic are these #'s?
How can there still be flippers left out there with cash? Wonders will never cease.
Reggie,
Another awesome observation. Thank you..Loved the interview on Bloomberg.
Reggie,
Shadow inventory is such a skewed statistic. As a Mortgage Field Services Contractor who services Fannie, BoA, WF and every other fraudclosure bank, I can attest to the hundreds of abandoned homes that have not even had a Lis Pendens filed against them yet. Hundreds upon hundreds of vacant/abandoned homes that the banks are paying to have maintained in Preservation status for the past 4 years. My locale (Central FL) is particularly hard hit.
When I see shadow inventory mentioned in the press, I cringe because of my exposure to the "real" inventory and its suppression to fly under the radar so to speak.
DaddyO
The old rule of thumb still applies. Paying more than 100X rent for any income property is stupid. Around here I see "investors" buying up $200K cracker-boxes thinking they will become the next Donald Trump by renting them at $1200/mo.
Idiots.
I'm completely ignorant of these things, not a real estate guy. The unit I'm living in (a condo in a "desirable" Boston suburb) would sell for at least $380,000. Other units in the complex have sold as high as $430, having finished basements, hardwood floors, recent remodel, etc. We pay $1900 mo rent (200x rent, coincidental, I think that it's exactly 200).
Does this mean its better to rent than to buy in this community or is that 100x thumbrule not applicable in "desirable" areas?
+ Roger ...anyone that invests in property for the next decade (or more) is toast
"buy low/sell high" works in down markets too. if you move to Tulsa you have houses for 80,000. "Sounds like a bad deal." Nice city--urban professional class on the rise--"suddenly you're selling for $140,000 a year later."
the only area of US property that's seen any price stability is that centre for cushioned cunts living in LaLa Land, Washington
..while citizens and private business began cutting their cloth to the economic winds after 2007 the socially and economically dysfunctional spoilt brats of the public sector accelerated their spending with not a budget cut in sight. Hence here we are 4 years into recession and Washington property is still holding up because DC is still swimming in other peoples money and credit lines like nothing ever happened
..if you know a way of shorting this obese political bubble please let me know as it's sure to be a spectacular crash when reality returns to these diseased DC windbags
+1
Aren't you concerned that $1200 a month is too high for the rising numbers of unemployed to pay? Guys in Chicago were buying 3 flats for $60K and renting them for Section 8 housing tenants, getting instant cash flow at the $1200 monthly level. Trying to rent single family houses is a sucker's game in this market and has been for forty years.
Chicago's usually a pretty good housing market--lot's of (excellent) supply and therefore an excellent read on demand. unlike New York which has all sorts of "government" Chicago's "free market" has always included real estate and so seems to me gives a good read nationally. If 1200 is "a suckers game" then I would say it's a "suckers game" in many other urban areas.
Thanks for sharing your very valuable insight Reggie!
Reggie, there's Aps for that:
(REK) ProShares Short Real Estate
(DRV) Direxion Daily Real Estate Bear 3x Leverage
When do you think the tipping point comes for the next leg down and time to pull the trigger?