Category: Articles

Here is the original post from 12/26/2008

Zell makes some interesting comments on commercial real estate (CRE).

“Well, there’s been a lot of speculation and a lot of journalists have written about the impending demise of commercial real estate,” he said. “First of all, I think that the fact that interest rates are as low as they are means that even if people are under water in commercial real estate, they still can carry it. And if you’re under water and you can carry it, the last thing you’re going to do is sell it, because you don’t get anything.”
“So therefore, that’s why we have no transactions,” he said. “And I think it’s going to take two or three years before we start seeing that happen.”

While I wholly disagree with Zell on residential real estate (RRE), on the CRE side, his comments do make a level of practical sense. While it is true that there will be a few implosions, a housing style bust may not be in the offing. A simple reason may be the string of payments. Unlike a homeowner who loses their job then their home, the owner of CRE has a buffer. First the rents of the tenants pay the loans, and only when they are not enough to cover, do the owner then dip into their own pockets.

In short, the risk/payment responsibility is dispersed among several parties. Again, this is not to say that there will not be defaults, many of them or that REIT’s will not suffer, it is just the widespread and pervasive losses we are seeing in RRE may not be in the cards (losses here are defined foreclosures on CRE).

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This is a long read but a must read none-the-less.

Robert Rodriquez

Disclosure (“none” means no position):

For those thinking we have enough oil and gas, you may want to take a gander at the data Mr. Simmons has put together. I am solidly in the “there is not enough” camp.

When do we feel the pain of that? We’ll, consider two successive quarters of -6% GDP growth in the US (and a third that looks only marginally better), the consumer of 25% of all the World’s energy and we still have $66 a barrel oil (USO). What happens to the price of oil when we actually begin to grow? $90?? $100??? $150??

Please take a close look at this…

Simmons “Two Oxymorons: Energy Independece, Security”

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Lifelock, Onion, GM, Murder

– Just do not get this one

– Why do they not have a regular TV gig?

– Finally….done

– This will be turned by the media into the “mainstream”….

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Asset Growth & Stock Price

Disclosure (“none” means no position):

The 45% drop in the US equity markets has caused even stalwarts to question the wisdom of the “buy and hold” strategy. But rule-based approaches for deciding when to buy or sell suffer the same problem. Sometimes they work and sometimes they don’t. In this presentation, Dr. Mike Bowles shows how familiar data-mining tools can be used to derive a robust algorithmic trading system.

A simple rule-based approach trend-following system serves as a starting point. He looks at that system’s characteristics and then employs a neural net to predict which of the system’s trades should be taken and which ones should be skipped.

Bowles demonstrates that this significantly improves the performance of the trading system (Sharpe’s ratio of 1.6 to Sharpe’s ratio 3.6). This example illustrates one way in which data mining tools have proven useful to practitioners of quantitative finance.

Disclosure (“none” means no position):

So Extreme Left Wing Hack Paul Krugman came up with this one today in an article about those concerned with the possibility of inflation. In it he claimed “I suspect that the scare is at least partly about politics rather than economics.”

He later went on to say:

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Oh, so the Fed is not printing “lots of money”? We’ll, let’s just ask the Chairmnan of said Fed and see what he says.

For those who do not wish to watch the video, here is the applicable exchange:

Asked if it’s tax money the Fed is spending, Bernanke said, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”

“You’ve been printing money?” Pelley asked.

“Well, effectively,” Bernanke said.

So, the obvious conclusions are either:

I was going to piece this in but it really needs to be read in its entirety. Any bold highlights are mine.

The Mortgage Bankers Association came out with their Q1 report today and then updated their forecast:

WASHINGTON, D.C. (May 28, 2009) — Foreclosure actions were initiated on 1.37 percent of first mortgages during the first quarter of 2009, according to the Mortgage Bankers Association. This was a 29 basis point increase over the fourth quarter of 2008 and a 36 basis point increase from one year ago. Both the level of foreclosures started and the size of the quarter over quarter increase are record highs.

According the MBA’s National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties was 8.22 percent on a non-seasonally adjusted basis, down 41 basis points from 8.63 percent in the fourth quarter of 2008. Delinquency rates always decline in the first quarter of the year due to a variety of seasonal factors. After accounting for these factors, the seasonally adjusted delinquency rate was 9.12 percent of all loans outstanding as of the end of the first quarter of 2009, up 124 basis points from the fourth quarter of 2008, and up 277 basis points from one year ago.

The seasonally adjusted rate is the highest in the MBA’s records going back to 1972 and the unadjusted rate is the highest recorded in the first quarter of any year back to 1972.

This means now that on every quantifiable level, this housing bust is far worse than the most recent one in the early 1990’s. Read more on that and its effect here.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the first quarter was 3.85 percent, an increase of 55 basis points from the fourth quarter of 2008 and up 138 basis points from one year ago. Both the foreclosure inventory percentage and the quarter to quarter increase are record highs.

The combined percentage of loans in foreclosure and at least one payment past due, meaning the percentage of mortgage holders not current on their mortgages, was 12.07 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

“The increase in the foreclosure number is sobering but not unexpected. The rate of foreclosure starts remained essentially flat for the last three quarters of 2008 and we suspected that the numbers were artificially low due to various state and local moratoria, the Fannie Mae and Freddie Mac halt on foreclosures, and various company-level moratoria,” said Jay Brinkmann, MBA’s chief economist. “Now that the guidelines of the administration’s loan modification programs are known, combined with the large number of vacant homes with past due mortgages, the pace of foreclosures has stepped up considerably.”

“In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures. What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans. More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults.

This means that the housing bust has cycled from a sub-prime to Alt-A to now an employment issue. Since we were already in the midst of the drop when the layoff began, those losing job had no way to sell their homes. Now even good borrowers with conforming loans are defaulting at a record rate.

“What has not changed, however, is the oversized impact of California, Florida, Arizona and Nevada in driving up the national numbers. Those states continue to account for about 46 percent of the foreclosure starts in the country, and represented 56 percent of the increase in foreclosure starts, including half of the increase in prime fixed-rate foreclosure starts.

“It is difficult to overstate the severe impact home price declines have had on mortgage performance in those four states. 10.6 percent of the mortgages in Florida are now somewhere in the process of foreclosure. In Nevada it is 7.8 percent, Arizona 5.6 percent and California 5.2 percent.

“In the first three months of this year, foreclosure actions were started on 3.4 percent of the mortgages in Nevada, 2.8 percent of the mortgages in Florida, 2.5 percent of the mortgages in Arizona and 2.2 percent of the loans in California. In comparison, the states with the highest foreclosure rates in the hard hit Midwest were Michigan and Illinois at 1.5 percent and Indiana and Ohio at 1.3 percent.

“While the national foreclosure start rate was 1.37 percent in the first quarter, in California, Florida, Nevada and Arizona it was 2.45 percent. Absent those four states, the national rate would have been 1.01 percent.

“Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve. MBA’s forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010. Since changes in mortgage performance lag changes in the level of employment, it is unlikely we will see much of an improvement until after that,” said Brinkmann.

Wanr more bad news? What could be worse? Well, we are actually in a trough for Alt-A and Option Arm resets as the following chart shows:

Simply put? It gets worse from here and here is already real bad…

Socialism, Harvard, Cuban, Dasan

– Funny what the NY Times determined was socialism before today

– In financial trouble. Hat tip reader Alex

– Always fighting somebody

– Nice post on an investment thesis

Disclosure (“none” means no position):