Blood In The Water

Last week we were bombarded with a ton of news regarding the housing slow down and people screaming over ARMS and interest rate mortgages as they start to kick in.

This is an excerpt from the Financial Times.

Prices of existing homes fell for the first time in 11 years and the backlog of available homes for sale was at its highest since current measures began, underlining the significant slowdown in the housing market.
Existing-home sales slipped 0.5 per cent to an annual rate of 6.30m units in August from a level of 6.33m July, according to the National Association of Realtors. They were 12.6 per cent down on the year before

Housing inventory levels rose 1.5 per cent to a 7.5 month supply at the current sales pace, compared with 6.3 months in July, and 4.7 months at this time last year. The inventory was at its highest since since condominiums were added to the survey in 1999. Existing home sales account for about 85 per cent of the housing market. They have fallen every month since March.

Economists had expected a fall in sales to 6.2m, following a sharp 4.1 per cent decline in sales in July.

This should not be a surprise to any of us. We all expected that as interest rates began to kick up and as more inventory hit the market, buyers would begin to step back and take a breather.

Despite the evidence, there are people who are still maintaining the position that the Titanic has not hit he iceberg and that sinking feeling is just the market adjusting not the ship plummeting to the ocean floor

Blanche Evans, the author of “Bubbles, Booms, and Busts: Make Money in Any Real Estate Market," throws in her two cents over this market in a recent NYT article

That title is completely misleading. You can’t make money in any real estate market. If you are in a market where buyers aren't buying or sellers aren’t selling then you are not making any money. There are also a ton variables that are out of your control that can prevent your profits.

No. I haven’t read her book. And after hearing her advice on how to weather the storm, you will see why.

If you must move because of a job or some other reason during a buyers’ market, she recommends renting your house until the market improves.

What if you can’t rent your house out? What do you do then? What if it doesn’t appeal to clients? What if no one wants to rent. Then what do you do? Even in Manhattan which is at a historical low in rental vacancies there are apartments that are vacant due to undesirable location, undesirable rent or the rent is too high to justify the apartment.

And let’s say you do rent the apartment. Is the rent going to be enough to cover your mortgage payments? If it doesn't you stil have to cover those payments out of your own pocket. And even if it does cover your mortgage it won’t for long if you have an ARM or an interest only mortgage.

For sellers, Ms. Evans emphasizes that the most important factor is how long they have owned their home. “You may not make as much, but if you’ve owned your home for several years, you’re still going to make money,” she said.
Her advice: Don’t sell unless you have to.

Guess what genius. A lot of people have to sell. There is an massive amunt of people who took interest only loans or ARMs to buy overpriced homes. By betting on appreciation they figured they could flip their homes in the next couple of years. But with the market tanking and interest rates kicking up, these sellers are stuck in the middle.

“People who owe more than their house is worth took a risk and are paying the price of that risk,” Ms. Evans said. “Some risk and get the reward; others risk and they lose. But it’s a calculated risk, because you can buy a home with very little down. So you’re actually risking other people’s money.”

OMFUG! Yes. You are risking other people’s money. They are called lenders. But guess what? You still have to pay that money back plus interest. Calculated or not it’s a risk.

“ Stay put and improve your home,” she said. “Wait out the slump. Use the down market as an opportunity to update your house and make sure it looks good. Then when the market improves, your property will compare more favorably with others. A house is a use asset. You can live in it while it grows in value, but you have to maintain it. You can’t hold a stock certificate over your head when it rains and expect to stay dry.”

Okay. If another f**king realtor makes the argument that you can’t use a stock certificate or a bond as shelter I am going to be beat them with a chair. Stocks, bonds, real estate are in different asset classes. They have their unique strengths and weaknesses. One of the key strengths of real estate is that it is in limited supply and it is immoveable. However depending on the market it is also its greatest weakness. To use an extreme example if you have a house that is next to a toxic waste dump, no amount of sprucing is going to increase its value. However if you bought stock in a company and you find out that they have been building homes near toxic waste plants, all it takes is a keystroke or two and you can dump that stock.

“ This is all about improving your position,” Ms. Evans said. “When things are bad, they’re not bad for everybody; they may not be bad for you. That’s when you should improve your position. Buy, sell or hold. It’s a poker game.”

And a lot of these people don’t realize they are holding a dead man’s hand. There is no way to improve their position. All they can do is fold. I know the teeming millions will scream” Shut the f**k up Grunt. All you do is b***h, b***h, b***h. But if you read Bob Tedeschi’s article on interest rate mortgages you will see that I am not the crackpot that a lot of people think I am.

ARM’s have come in and out of vogue, but their latest surge began about five years ago, when the Federal Reserve Board started cutting key short-term interest rates in an effort to stimulate the economy. But now that the Fed’s focus is on reining in inflation, rates have risen steadily. The increases have caught many homeowners in a “can’t pay, can’t sell, can’t refinance” vise, in which their ARM payments are outpacing their incomes and their homes have not appreciated enough to help cover the cost of a refinanced mortgage or to allow them to sell and walk away. For them, foreclosure looms.

Bernake recently put the brakes on interest rates but don't let that lull you in a false sense of security. According to Daniel Gross if the rates don't get us then interest will.

MANY analysts believe that the Federal Reserve has stopped raising short-term rates. And in recent weeks, long-term interest rates have fallen as investors have fretted about slowing growth. But because the government continues to replace lower-yielding securities issued in the last 10 years with higher-yielding debt, the government’s interest cost is also expected to continue to grow rapidly. The Congressional Budget Office projects that the interest bill, after climbing nearly 20 percent this year, will rise 13.2 percent in 2007, to $240 billion, and more than 8 percent in 2008, to $270 billion. With each passing year, interest payments are likely to eat up a bigger chunk of total spending and crowd out other priorities.

Another indication of how bad things are going get is how the brokerage industry is weathering the storm. In a recent NY Sun article Ms. Esses of Bellmarc gives the rundown of how brokers are faring.

• Everything now is negotiated downward from the initial asking price, by a minimum of 5% to 7%.

• Prices are down at least 10% from a year ago on practically everything.

• While American buyers are hesitant and reluctant, "the Chinese and Russians are coming into the market like crazy."

• Three- and four-bedroom apartments on Fifth and Park avenues are still being quoted at $15 million and $16 million, but there are a lot more of them on the market.

• Chelsea and the West Village are the hottest areas in the market, while the Upper West Side — where prices have risen out of sight — is moving very slowly. The Hamptons have turned especially soft.

• Look for boards to become much more lenient and flexible. It's only a matter of time.

She also puts her take on a crash.

"We're in a transition stage where sellers will have to come down in price, and right now it's a waiting game to see what the buyer will do," Ms. Esses said. "Since there's only one Manhattan, I don't see a crash. But who knows?"

The article makes note of the reversal of fortune for brokers.

In recent years it's estimated that the ranks of brokers expanded nationally by more than 200,000 at new and existing real estate firms. With the housing slowdown accelerating, many more career changes are likely.

In effect, the end of the current real estate boom is also signaling the end of the seemingly nonstop national flight into the real estate brokerage business by those folks who figured such an entry was practically a guarantee of a lucrative six- or seven-figure annual income.

Jonathan Miller also throws in his two cents about the gap between buyers and sellers which he addressed in a previous Curbed entry.

Real estate appraiser Jonathan Miller, president of Miller Samuel, also cites a sharply slowing trend, with actual sales activity flat. There's a big gap between buyers and the sellers, and more realism will be required by the sellers, he said. His reasoning: swelling inventories, especially condominiums, which he notes increased nearly 6% between the end of June and the end of August. He largely attributes this to new development, which he says is adding product to the market faster than it can be absorbed.

So the game of chicken is still on. And everyday there are more casualties in the broker community.

Early in 2004, Mark Clemente left his uncle's dry-cleaning plant in Detroit to go east and, hopefully, make his fortune in real estate. Shortly thereafter, he became a broker at E&G Realty, a small firm in Newark, N.J., where he earned a respectable $195,000 in his first year.

But it has been downhill ever since. The housing slump and fierce brokerage competition led to the demise of E&G. Mr. Clemente's income collapsed, and over the past six months he has held a number of part-time jobs, including one making sandwiches at a Queens delicatessen that paid him $100 a week. "I'm going home; my real estate career is over," he said the other day.

So where does that leave the Grunt? Let's just say I have a contingency plan or two. More on that later.