More Signs Of A Topping Market - From Luxury Alternative Investments, And Some Market Chatter

It has been well publicized that asset markets have cycled higher in value in recent quarters, largely attributable to strong economic growth worldwide, and cheap and easy access to cash, credit and liquidity. Low rates from the US Federal reserve, as well as other countries like Japan (where the Fed Funds equivalent was at 0.000% for 8 years... 0%!! .... 8 years!!!) encouraged investors and consumers to borrow and invest and save, and economies boomed and everything got more expensive. We have seen it in the stock markets, bond markets, housing, commodities, precious metals, corporate buy-outs, you name it.

But there is another set of asset markets that tend to receive a little less publicity, and whose cycles often signal the peaking of exuberant money. In July 06, John Mauldin writes:

"Art, Wine & Horses

One of the recurrent themes of our research has been that it has "never been so expensive to be rich" and that this situation will only likely deteriorate. But even with that in mind, we have to admit that we have been floored by the recent activity at the high end of the market. Take wine, art & horses as examples. As most of our readers will know, modern art, fine wines, & horses, are assets that tend to peak just before the start of a pronounced downturn of the economic cycle. And interestingly, over the past couple of months, these assets have really been shooting up, breaking several records on the way:

* The US$16 million horse. A few months ago, a two-year-old colt who has yet to run a race drew a world record sale price of US$16 million at an auction in Florida, after a furious bidding war between Englishman Michael Tabor and Sheikh Mohammed bin Rashid al Maktoum of Dubai (could he be thinking that horses will run better than Dubai stocks?). The sale broke the previous record of US$13.1 million paid in the mid-1980s for Seattle Dancer. Considering that very few horses ever reach winnings of US$1 million and that the all-time leading earner, Cigar, took home close to US$ 10 million, this is a truly mind-boggling price to pay for a horse that has yet to race a single race (incidentally, Seattle Dancer, the previous record holder, went on to win a paltry US$150,000, racing only five times in his short career).

* The unbottled 2005 Bordeaux. In the world of wine investments, Bordeaux is king, with up to US$3.7 billion worth of wines changing hands every year. Over the past twelve months, much to Charles' chagrin (who likes to say that he is now too old to drink cheap wines), the price of top vintages have surged more than +45%. Much of this latest rally can be attributed to the - yet to be bottled - 2005 vintage. The 2005 vintage from some of the top chateaux are reportedly selling for around US$9,000 per case; as a comparison, in 2003, the same wines went for about US$3,800 per case... While investing in wine can be a very risky business, there is one undeniable advantage: if all else fails, it is a liquid asset...

* The US$135 million portrait. A few weeks ago, Robert Lauder bought a portrait by Gustav Klimt for a staggering US$135 million, the highest sum ever paid for a painting, eclipsing a Picasso sold for US$104 million in 2004. While we (by no means) would pass for art connoisseurs, prices do seem to have reached stratospheric heights. In his latest Gloom Boom Doom report, our good friend Marc Faber, describes his visit to the June Basel Art Fair, where one pure black canvas had a price tag of US$1.5 million... "

Sotheby's International, pedaler of all such things luxury is one good barometer of these markets. Look at a Sotheby's share price 2 year chart. Look like the peak has been reached? The company got kicked by shareholders today after a staggeringly poor auction result. Implication? Money is dried up. Sellers think the peak has been reached.

Paul McCulley of Pimco recently described liquidity as follows:

"... liquidity is not a pool of money but rather a state of mind. ... liquidity is about borrowers and lenders collective appetite for risk, a function of: The willingness of investors to underwrite risk and uncertainty with borrowed money and the willingness of savers to lend money to investors who want to underwrite risk and uncertainty with borrowed money..."

So with all that has been going on along with this subprime virus, and its mutating its way through our credit markets right now, its no wonder everyone is getting a tight grip on their wallets. As new stories about financial loss break daily, the confrontation with reality becomes more real. The reason for the lag between the rising rates (the Fed started raising rates in 2004) and the realization of a liquidity crisis is because, as McCulley puts it, liquidity has more to do with psychology than it does with capital.

Likewise, it will take some time for the recent Fed cuts (and the coming ones as well) to work their way through the markets and translate to brighter attitudes and expectations. Banks - who have tightened up guidelines after-the-fact, will not un-pucker until after a bottom in housing is evident. Great quote from Pimco's Bill Gross, who describes the current situation as "closing the barn door after the subprime mortgage horse has escaped from the barn."

Pretty much. Going to be some bumps in the road, but I would not underestimate the mortgage industry to come up with some creative ways to work through some of the problems, and rescue the good deals from distress; not everybody facing pain in the housing market right now deserves to be there. We shall see...

Considering A Short-Sale?

If you are in a situation where you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

A "short sale," in real-estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders who often would rather take a small loss than go through the lengthy and costly foreclosure process.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label. Proponents say, arguably, that they can be a “win-win-win” situation for seller, buyer and lender. Here's how: the seller gets out of the mortgage liability without facing bankruptcy, the buyer gets the home at a reduced price, and the lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too, since they don’t have to go through the lengthy foreclosure process and then having to put the property on the market and go through the whole marketing process.

I'm not sure this is a win-win-win, but maybe a win (buyer); lesser-of-two evils (lender); better-than-nothing (seller); business-as-usual (realtor).

How To Get Out Of An Option ARM

Thoughts go out to those affected by fires in Southern California.....

Why It Helps To See Things In Perspective

Check out this chart from Barry Ritholtz. There was a lot of recent media coverage about the anniversary of the 1987 stock market crash. Black Monday. It happened on October 19, and the Dow Jones was off by 22.6% There was also a lot of comparison to today's market environment. Coincidentally, the Dow had another big dip on October 19 2007, but a couple hundred points off of an index value of 14,000 is rather different than a couple hundred points from 2,000. On 10/19/07, the index lost 2.6%. Weird, but coincidental.


It was devastating at the time, but notice the "crash" in the red circle, and then in the context of the next 20 years in the market. Would you have bought the day after the crash?

Sub-prime Meltdown - Visual Tool

I think its fairly understood at this point that there has been a "meltdown" in the sub-prime lending world for home loans. The degree to which it would spill over into normal housing markets and prime home financing has been the subject of debate. I don't know why it wouldn't spill over, as the problem in the sub-prime lending was a spill-over of problems in the prime lending arena in the first place. Namely, money got too cheap and easy to get.

But take a look at this chart. Another great one from The Big Picture. It shows the delinquency rate for various recent 'vintages' of non-prime paper. 2006 and early 07 is being regarded as the worst 'vintage' because it was underwritten and funded at the peak of the lending mania.

14% of those loans are delinquent 20-24 months after origination, compared to a 3-7% delinquency rate on vintages recent previous years. 14 percent!!

It stands to reason that the Q307 paper and onward will be some of the best quality paper on the secondary market going forward, as these borrowers were scrutinized by the currently tough underwriting guidelines. I'll discuss this more in future posts...

Changes To Conforming Loan Limits?

If it were not for the current stress in the housing sector, the OFHEO would likely lower conforming loan limits for 2008 based on a decreasing value of median home prices. Many are speculating that they may raise the limit to help ease the situation... here is the latest word directly from the OFHEO...

FOR IMMEDIATE RELEASE October 16, 2007
	NO DECLINE IN 2008 CONFORMING LOAN LIMIT
	Additional Comments Sought on a Revised Loan Limit Guidance; New Mortgage Market Note on Historical Trends in Conforming Loan Limit
Washington, DC – The Office of Federal Housing Enterprise Oversight (OFHEO) announced today three actions regarding the calculation of the conforming loan limit, which establishes the maximum mortgage loan value eligible for purchase by Fannie Mae and Freddie Mac. OFHEO Director James Lockhart announced that, based on provisions in the proposed guidance, the current conforming loan limit will not be reduced for 2008. If the index used to calculate the maximum loan level should increase, the amount of the increase in 2008 would be reduced by the decline calculated in 2006 of 0.16%. Under no circumstance, however, would the maximum loan level for 2008 drop below the 2006 and 2007 limit of $417,000. OFHEO Director Lockhart also announced that OFHEO has transmitted to the Federal Register a revised Examination Guidance for procedures relating to the calculation of the conforming loan limit and implementation of increases or decreases in the limit. A proposed guidance was subject to public comment earlier this year and OFHEO has made changes to the proposed guidance in several areas. OFHEO is seeking additional comment on the revised guidance within 30 days of its publication in the Federal Register. Key provisions of the revised Examination Guidance entitled Conforming Loan Limit Calculations proposed for public comment are the following: -- As previously proposed, any decreases in the limit would be deferred one year. -- Decreases would have to total cumulatively more than three percent before a decrease would be implemented, a change from the proposed one percent de minimis amount. -- As proposed and clarified, if a loan is conforming at the time of origination, it remains conforming regardless of declines in the conforming loan limit, providing greater certainty for markets and asset securitization. -- As proposed, for simplification, the conforming loan limit will be rounded down to the nearest $100. The Guidance, as transmitted to the Federal Register for publication, may be found on OFHEO’s website at www.ofheo.gov/media/guidance/CLL101607FR.pdf. The notice for the Federal Register contains a summary of the proposed and final guidances, the revised guidance as well as an Appendix setting forth various scenarios relating to possible loan limit decreases. OFHEO also announced the publication of a new Mortgage Market Note on the conforming loan limit. The Note provides background information on the history of the conforming loan limit. It traces the growth in the loan limit relative to other key economic variables, such as household income. The Note also describes how the national loan limit has changed as compared with regional and state-level measurements of home price appreciation. The Mortgage Market Note is available on OFHEO’s website at www.ofheo.gov/media/mmnotes/MMNOTE072.pdf ###
OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

Government Taking Steps To Ease The Bubble Burst

On the docket in the US Senate right now is a piece of legislation designed to help take some of the sting out of the current burn many are experiencing in the housing arena. With lending standards being raised so suddenly, and values starting to come down on a national level, there is increasing concern of a snowball effect from the segment of homeowners who cannot re-qualify for a mortgage to replace the one they currently have. Problems arise when the homeowner's loan terms change for the worse, and they cannot sell the home or refinance the debt. Stuck between a rising payment and a hard place (to sell)...

This proposal just passed the House with 89% approval. There are three points of significance. To understand the first point, it helps to understand the "Phantom Tax". Phantom Tax is a cost incurred by somebody who has a debt that is forgiven. If a borrower owes 250k on a home, but the home is worth only 200k, and that borrower agrees into a Short Sale of the home for 200k, the borrower is receiving a benefit of 50k in forgiven debt. The IRS views this as income, and taxes the borrower accordingly... This legislation currently before the Senate seeks to eliminate this tax. Its a huge gift to homeowners caught upside-down in housing.

The legislation also calls for an extension of the mortgage insurance deduction through 2014. It is otherwise set to expire at the end of the year, making mortgage interest non-deductible to all filers.

On the other side of the equation, there needs to be a way for Uncle Sam to make up for these expected short-falls in tax revenue. So the legislation also changes the current homeowner exemption rules. Currently, the tax law allows you to live in a second home as a primary home for 2 of the last 5 years, and then take the $250k capital gains exclusion ($500k for married couples). The proposed change would require filers to pro-rate the number of years that you have lived there as your primary home when taking the exemption. For example, if you have owned the home for 4 years, but lived there for 2 as a primary home, you would only get 50% of the exclusion. There is a grandfathering provision, but it will affect anyone selling a 2nd home eligible for this exclusion for sales beginning in 2008.

If you have questions about any of this, please consult with your tax advisor, or refer to the official language in the legislation for interpretation.

Credit Market Changes Visualized

I found a few charts recently that are very useful in conveying magnitude of the recent changes we have seen in the mortgage market. The first two are courtesy of the Weldon Financial Monitor, and the last one is an excel chart from a market analyst colleague of mine. Let's take a look.

Chart 1: 30 percent of lenders across all types of credit are reporting a tightening of lending standards - over the previous year, there had been a net easing of standards for the most part. Notice the spike corresponding to the news in early August... Tougher to get financing for just about anything...

Chart 2: Specifically for home financing, the lenders report the concerns that are influencing their decision to tighten standards. Housing market woes are topping the list.


The bar for qualification has been raised, as evidenced in the charts above. Somewhere between "qualified" and "not qualified" there is a spectrum of, "qualified, but paying a premium". This spectrum, and the premiums paid has always been there, but it is much broader now, and again, the bar is lower. So more mortgage borrowers are flopping into the "qualified, but paying a premium" category.

Chart 3: Just one example of this expanded spectrum can be seen by looking at the historical spread between conforming and non-conforming (jumbo) interest rates over time. The spike in 07Q3 matches up with the charts above.


The good news is that we are seeing this spread slowly trickle back down. The markets do not expect this spread to flatten back as far as it had been in recent years, but we saw the pendulum swing from one extreme to the other, and we are in the process of returning to a more neutral ground.

Stock Market Cheatsheet

I found this on Barry Ritholtz's Big Picture blog. It seems to sum up the recent stock market sentiment pretty well:

This is circulating via email around trading desks:

>

Cheat sheet: reacting to data and market releases

weak data = Fed ease, stocks rally

consensus data = lower volatility, stocks rally

strong data = economy strengthening, stocks rally

bank loses $4bln = bad news out of the way, stocks rally

oil spikes = great for energy companies, stocks rally

oil drops = great for the consumer, stocks rally

dollar plunges = great for multinationals, stocks rally

dollar spikes = lowers inflation, stocks rally

inflation spikes = will inflate all assets, stocks rally

inflation drops = improves earnings quality, stocks rally

More Making Fun Of The Mortgage Industry

Never Take Yourself Too Seriously.

Just What We Needed

I have never been a fan of professional wrestling. One of my closest friends in college used to impersonate several of the popular wrestlers from the 80's era of WWF and clearly had an appreciation for the humorous side of the 'sport'. Its because of him that I have any awareness of some of these personalities - who all seem like cartoon characters to me.

And now that I've put some distance between myself and pro wrestling, allow me to introduce you to The Nature Boy, aka Ric Flair. He was one of my buddy's favorites: a showy, muscle and bleach job who wore outfits that would make Liberace jealous. I just read about him on wikipedia, and I guess he is argued to be the 'best wrestler of all time'. Who knew?

So why do I bring this up here? Well, my industry faces challenges when it comes to public perception. Ask a friend or neighbor, and they can tell you about a mortgage broker who fumbled a deal, lied about closing costs, etc. The public image is one of my least favorite aspects of my business. And in the wake of the current 'credit crunch', the news is full of headlines criticizing the mortgage industry for misleading and mistreating consumers (I've commented on that here and here).

And now along comes Ric Flair Finance dotcom. I mean, honestly. I guess its possible that this guy has adequate knowledge of the financial markets, the ability to handle other people's personal affairs with care and understanding, and a work ethic and moral compass to ensure a high standard for professionalism. But I don't know anybody in the business who wears a bedazzled bathrobe to the office... I'm just sayin'...

Real Estate Markets Are Local And General

Its going to be interesting to see what comes of this adjustment in housing prices. In the San Francisco Bay Area, many are defiant when it comes to bubble talk. San Francisco has some of the highest demand for housing in the nation as exhibited by the lofty price per square foot that homeowners pay. Its a city with a one of the most beautiful natural settings in the world and has a unique and vibrant culture that acts as a magnet for visitors and residents from around the country and world. Employment and recreation opportunities are abundant. Rarely will you meet someone in San Francisco who complains "I've got to get out of this town"...

But its tough to just plug your ears and ignore some of the voices out there commenting on the state of our housing market and its potential to affect the overall US economy. As I always say, the analysts all look at the same data and come up with forecasts on both extremes, and our reality is likely somewhere in the middle. Barry Ritholtz at The Big Picture has a steady flow of alarming news and charts on the housing market. And John Mauldin has my attention this week after his analysis of the recent Fed policy statement, where he suggests that the surprisingly deep rate cut is indicative of a key change in their approach - proactive versus reactive - and signifies that the Fed is fearing the effects of a housing collapse on the greater economy.

I don't mean to spread the negative-only end of the outlook, but I think its prudent to be realistic, and I try to keep my ear close to the ground for more local news and data. To this concern, I recently came across an interesting site that helps 'check the weather' in the neighborhood. Allow me to introduce you to foreclosureradar.com, where you can type in any address and see a map showing the homes in various stages of foreclosure within the specified area. Its very interesting to play with, though the specific data is only available to paying members. I think you can get a sense of your local market by keeping an eye on this, and though of course its not exactly conclusive, its at least a little informative.

Eyes On Fed Today For A Cut - How Deep?

As I mentioned last week, today's Federal Reserve meeting is drawing as much attention as I have seen in the past several years. Expectations are really all over the place, and I am expecting to see results right in the middle. Here are some of the popular sentiments up and down the scale of expectations for today:

• Fed should not hike because of inflationary fears and dollar weakness. The weakness in the dollar is assumed to be inflationary because it will cost more to buy imports. Bernanke has proven the Fed's focus first and foremost on inflation...
• The Fed is already late in making cuts, and needs to lower Fed Funds by 50 basis points (by 0.500% to 4.750%) to avoid sending our economy into recession. Job growth has been recently weak, inflation is tame, and housing and mortgages are performing poorly. Time to put some slack into the system...
• The first cut in four years will be 25 basis points (by 0.250% to 5.000%). Also, the Fed will cite inflation as a concern, but should acknowledge that it is presently contained. This strikes a balance between slowly helping the economy without inviting inflation. The Fed should have a green light to cut because their favored inflation measure, the Personal Consumption Expenditure Index (PCE) is under 2% year-over-year. The result of this will likely be a disappointed stock market (expecting the 50 basis point cut), and a mild bond market. In the bond market, it would be preferred that there were no cut in the name of inflation vigilance, but there is room for the 25 basis points, which is already factored in.

My prediction is for something close to the last scenario. But if you are pondering a rate lock decision, you should contact me to discuss your personal situation before acting.

Tax Freedom Day

This is a note to everybody, but especially those of you filing taxes on your 6 month extension. Do you know how many days of the year your work efforts are dedicated purely to paying your federal tax bill? Or how many minutes into your workday it takes before you can start earning money for food, clothing... shelter?

Tax Freedom Day - the day in the year where your federal, state and local tax is considered paid for the year, assuming 100% of your salary to date was allocated to that payment - came on April 30 this year, the 120th day of the year. This is two days later than last year. View this Special Report for some good visual tools to help understand what this means, and what other budget items cost on average.

One of the key factors in the decision to go from renting to owning a home is the tax implications. Consumers with lofty tax burdens often seek the write-off of mortgage interest - one of the country's greatest tools to incentivize the American Dream. But just owning the house is only half the battle. Make sure you maximize this deduction over time, and learn to develop a tax-efficient plan for saving and borrowing. You can do this with active management of both sides of your balance sheet. Email me for more info.

An Eye Inside Bernanke's Stubborn Stance

PIMCO's Pual McCulley provides some great insight into the mentality of the Fed in this market, specifically with regard to the debate over when to cut Fed Funds and by how much. There are enough voices out there predicting that we are already committed to a recession, and that cuts to the Fed Funds rate will not steer our economy safely away from this fate. Others think we need cuts now, but time's a-wastin'. And then there is Ben Bernanke and the Federal Reserve. Standing firm on their inflation vigilance and sending the clear message to the markets that the Fed does not intend to bail us out. Expectations of impending cuts are riding high, but Bernanke is clearly patient.

Last time the markets hit perilous times, 2000 and the bursting of the dotcom bubble, Alan Greenspan's Federal Reserve stepped in with aggressive rate cuts. This became known as the "Greenspan Put", referring to a psychological insurance policy that was created for investors with the lowered rates and provided stimulus to the economy in the face of otherwise collapsing markets. In retrospect, Greenspan has faced criticism for acting too fast and too aggressively - as well as leaving the "put" in place for too long. Investors didn't have time to learn a proper lesson...

We are the child in need of discipline, Ben is our father. He has sent us to our room without dinner, punishment for reckless misbehavior. And now he must make sure not to starve us, but cannot feed us until the reality of our misdeeds has been realized and imprinted. This is his tightrope, and we wait for the door knob to turn...

McCulley points out that Bernanke is on a mission to redefine the trigger-point for the so-called "Fed Put":

...the goal, which I applaud, is to change consensus expectations about the location of the strike price: further, much further out of the money than under the Greenspan Fed...

Its a great piece to read, and very insightful. With Bernanke due up in 1 hour with a speech from Germany, we should get a glimpse of his mood heading into next weeks big policy meeting. I don't remember a time when there were more watchful eyes on the Fed in the last few years. This will certainly be interesting...

Some Upcoming Relief For HELOC Owners

As of this morning, Fed Fund Futures are showing a 100% chance of a .250% rate cut on September 18th. And because of the weak Jobs Report on Friday, the chance of a .500% cut has risen to around 80%. The chance of the Fed Funds rate being cut by 1.000% by year end stands at 56%.

The Prime rate - which is the underlying index for your HELOC - is 3% above the Fed Funds Rate, and moves in tandem with Fed Funds. Therefore, these cuts will have a direct correlation to the rate on your HELOC, so it's worth noting the expectations.

Making Sense Of Today's Market

When speaking with clients lately, it has been made clear to me that the current state of the mortgage marketplace has affected everyone on very different levels. Some people are clearly touched by the panic and have several questions about "what does this mean to me?", while others seem oblivious that this 'credit crunch' thing has anything to do with them now or in the future. More power to them. A panic state - when widespread - is a breeding ground for irrational individual behavior.

The financial talking heads in the media have a few challenges in getting rational information through to the public. For one, many of the faces on the news channels don't always follow it themselves. But when they surround themselves with economists and analysts who do get it, they need to make sure they speak in parlance that the general public can handle. CDOs, RMBS, ISM, and BBB- are not terms that reside within the daily vocabulary of people with professions outside of the financial arena.

To that concern, here are two articles that offer a broken-down explanation of what is going on right now in the mortgage market, why 'the subprime meltdown' affects other areas of borrowing money, the role of the Federal Reserve, etc. You can access them here and here.

Lessons To Be Learned While Countrywide-Hating

Do you remember when we used to party like it was 1999? That was 1999. And then 2000 came, and the stock markets took a digger. A bunch of people lost a bunch of cash, and everyone freaked out about how crazy and dangerous the markets were. Just months earlier, everyone thought they could quit their job to make a fortune day-trading shares of BBQ.com, and other great business latest and greatest IPOs. It was easy while it was easy, and then, the bubble burst.

But what happened after a little time passed? Everyone looked back and said things like "should have seen it coming" and "that was unsustainable growth - had to correct at some point". And this is always what happens in a market cycle. It booms, it busts, and you want to be there while it's booming or your neighbor is going to drive a nicer car than you - and we don't like that. If you are tired of my references to Kindleberger's Manias Panics & Crashes, skip ahead to the next paragraph. Otherwise, please note that the author walks the reader through the common traits of all history's asset bubbles, and many of his lessons are being learned - again - by today's housing market participants. To understand the psychology that drives a market to extremes, he cites a South Sea stock investor in 1720 who said, "When the rest of the world are mad, we must imitate to some measure.", and he generalizes that "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." No wonder... its in our nature. Monkey see, monkey do. Read it now to put today's market in context with history - and to give peace with the idea that we have seen it all before, and things will get worked out.

Moving along... one of the typical components a market de-bubbling is the scapegoating. Heads need to roll, somebody needs to take the fall, etc. Its formula. And rightfully, there needs to be an understanding of the players involved in creating the bubble. But don't join the witch hunt this time, because chances are you had a piece of the action this go around. I am not going to dispute any of the accused in Barry Ritholtz's list which includes: The Federal Reserve, Borrowers, Mortgage Brokers, Appraisers, Federal Government, Fannie Mae, Lending Banks, Wall Street firms, CDO Managers, Credit Agencies (Moody's, S&P), Hedge Funds and Institutional Investors. Read his paper for elaboration on each participant.

An interesting article came out on 8/26 in The New York Times specifically flinging mud at one of the mortgage players, "America's number one lender", Countrywide. From reading it, it seems some disgruntled ex-employees ran to the press in an effort to expose some of the more eye-popping sales realities of the firm. And if this article is accurate, it would represent a disappointingly low standard of professionalism for an atmosphere where business of a financial nature is to be conducted. But who knows... the media is going to push this kind of sensational stuff to build on the souring momentum of everything connected to this phase of the market.

Keep things in perspective. Stay calm. Great time to read a book.

The Shifting Mood Of The Market

The mood on Wall Street is all over the place right now. The "Credit Crunch" or "Liquidity Crisis" now seems to be a little bit harsh of a label for what is going on. Much of that panic and fear seems to have settled down. There are still plenty of concerns, and quite a bit to get worked out in the credit marketplace, particularly in the residential mortgage market. But I like the re-classification of the whole state of affairs by Barry Ritholtz as a Credibility Crisis. There is enough underlying strength in the economy, and even the housing market to keep this from being too critical of an event.

He suggests that liquidity is not the problem. The issue is that nobody with cash is willing to take the leap into credit products because the whistle has been blown on the obfuscation of risk via derivitization. In other words, nobody can see what they are buying, and now that risk feels risky, the money has moved to the sidelines until credibility can be restored. This market stagnation has locked up a lot of the fluid movement in the market, and caused several companies to freeze up and die.

The un-levering process - where companies scale down their borrowing - has an affect of pushing prices (stocks, bonds, and other dollar-denominated assets) down further, as they sell assets to cover borrowed funds, but think of it as 'cutting to the chase'; the values clearly needed to correct back down to a more stable level. If we can find stability before selling everything too far, we get closer to that 'soft landing' type of adjustment.

The sentiment regarding the Federal Funds rate, and the role of the US Federal Reserve is also shifting. Whereas the markets immediately assumed that a cut in the Discount Rate suggested a near-term cut in the Fed Funds Rate, there is now more chatter covering the reasons why the Fed still will not rush to make these cuts. Inflation needs to prove itself a non-threat, or we start this cycle all over again without allowing investors to feel the painful results of poor judgement.

The market is eagerly awaiting the reports on PCE (August 31) and Unemployment (Sept 7) for insight into the Fed's mindset. Some say the Fed will not cut rates before Unemployment ticks up at least 0.2% (to 4.8). And the PCE reading needs to show a year-over-year of below 2.0% (currently at about 1.9, but close enough to the 2.0 to remain a concern).

Stay tuned... as I often say, there are a lot of moving targets involved, and the mood changes as the data rolls in...

How A Recession In Housing Affects The Rest Of The Economy

Watch CNBC for 5 minutes and 30 seconds and you can get a good sense of the attention being paid to the day-to-day developments in the housing and mortgage markets. At this point it is no secret (or real surprise) that the housing industry is in a recession. We have increasing inventory, slowing sales, and decreasing prices. The construction unemployment rates are rising. The mortgage industry is facing a fairly turbulent adjustment with several companies collapsing on short-notice, and leaving several consumers left waiting for the money to buy their homes.

But most agree that these adjustments are good for the industry's long-term benefit. This is typical of the market cycle. Its just that the other side of the cycle carried the industry so far for so long, that this side feels more intense.

Paul Kasriel of Northern Trust highlights some of the ways in which the housing industry's growing pains can spill over into the greater economy:

"The tentacles of the housing recession are reaching beyond consumer spending. Freight haulers, both truck and rail, are reporting weaker volume growth because of the decline in residential construction activity. With fewer housing developments popping up in suburbia, newspaper advertising revenues are being adversely affected. And the producers of construction equipment, such as Caterpillar, are experiencing softer domestic sales."

It will be interesting to watch this develop. And of particular interest will be to monitor the role of the Federal Reserve, who is attempting to tread a fine line between averting a significant economic recession and giving the market participants false confidence through bail-out gestures.

Fed Cuts Discount Rate

Jim Cramer got what he was looking for. This morning, the Fed lowered their Discount Rate by .500%, taking it from 6.250% down to 5.750%. The discount Rate is the rate at which the Fed lends money directly to commercial banks, credit unions and savings and loans, including large lenders like Countrywide and Bank of America. It is different than the Fed Funds Rate, which is the rate at which banks lend money to other banks. The Discount rate is usually held 1.000% above the Fed Funds Rate, which makes the Fed a last resort for lending institutions to borrow from. They would generally rather borrow from other banks at a lower rate, but with the current liquidity crisis making that difficult, this move will help provide some liquidity at more desirable rates in the short term.

This move has a direct benefit to banks and lenders more so than to consumers. The Fed is taking baby steps to help put some lubrication into the markets while being careful not to send the message that they will serve as a 'lender of last resort' to bail out institutions and individuals who face suffering loss as a result of poor decision making. This move softens things a little, but is not a bail-out move. They will let the markets second-guess recent behavior and correct themselves, but need to help guide so as to avoid a complete systemic breakdown. Its a fine line, and this is a baby step. The next few weeks will certainly be interesting, to see how much adjustment can be made, and how much stability can be built back

What Do Fed Rate Actions Do To Mortgage Rates?

Thanks to this chart from HSH, you can see that the answer is "not much", at least not for mortgages based on long-term rates. The Fed changes the short-term or "overnight" rates to affect the costs of borrowing so that institutions and individuals will be more or less inclined to borrow to fund growth or expenditures. Higher rates means less spending, and the Fed has recently raised rates 17 times to try and slow down our hot economy to a more sustainable pace.

Mortgage rates are determined by the trade value of mortgage backed securities (RMBS), which are bond-type securities whose cashflow is generated by mortgage debt. The liquid value of these bonds reflect longer-term expectations of economic performance, and do not always move with the Fed Funds rate.

Back when the Fed was still raising rates (the incline on the tan line), there was a lot of expectation that this would pressure up the other longer-term rates. But it didn't, and we wound up with a flat and inverted yield curve. Then we heard an ongoing debate between economists who felt the inverted yield curve indicated the foretelling of a recession, and those who felt that this was a poor predictive tool. Now there are more folks on the recession bandwagon...

A higher Fed Funds rate does affect homeowners with significant home equity lines of credit however. HELOCs are based on the Prime rate, which moves in lock-step with the Fed Funds rate. If you have a sizable HELOC, you've probably already noticed your financing get a little top-heavy over the last few years. You will see some relief if the Fed starts to cut rates soon.

Contagion Visualized

Take a look at the interactive map of the credit crunch from Financial Times...

Fed Steps In To Calm Nerves?

Markets sure can be moody. Yesterday and today, the US Federal Reserve 'injected liquidity' into the markets to the tune of $38 billion in an effort to try and calm things down. Expectations of Federal Funds rate cuts have quickly changed, with 33% chance of a cut before the next Fed meeting in September. Last time the Fed changed rates off the scheduled meetings was in the wake of 9-11.

So the stock markets around the globe have been in a roil over all of this credit crunching. Shouldn't they be happy to see the Fed taking action? Or does the fact that they are reacting on the fly suggest to the markets that the Fed is officially acknowledging a problem? Security vs. Uncertainty. Markets hate uncertainty, and there will be a negative tone out there until it has evaporated.

While the Fed was raising rates in this last cycle - 17 consecutive 0.250% hikes over a two year period - mortgage rates often went down at each interval. This is often counter-intuitive, but if you can read between the lines it makes sense. Even though Fed rate hikes meant that the environment for interest rates was rising, the fact that the Fed was doing battle with inflation by raising over-night rates made bond investors happy, so they bought more bonds and brought long term rates lower. Security vs. Uncertainty again.

Meanwhile, check out Mr. Mad Money flipping his lid while talking about the current market conditions. Just another measurement of our current state of markets in 'panic mode'. If you are (or are not) familiar with Jim Cramer, here's a great chance to get a glimpse of the guy.

So Much For The Soft Landing Theory?

Holy smokes! The market is changing quickly, as the 'other side' of the cycle has arrived with a thud. Rates and products in the mortgage market are changing rapidly, and many homeowners are going to get caught up in the crossfire. Last week at American Home Mortgage, 800 Million dollars of would-be loan funds piled up in just 3 days as the company announced that it would not fund deals that had already signed. Forget those in underwriting, application, etc. 800 Million dollars - that's a lot of homes! Think of the domino effect of broken purchase contracts, failed credit payments, etc. This kind of spiral is what causes the market to buckle, and why a quick change in liquidity is referred to as a "crunch" or "crisis". Read more about it here, or here, or here.

As for today specifically, Mortgage Bonds are trading higher on unexpected news from Europe connected to US sub-prime mortgage investing problems, as well as Stocks trading lower off the same news. French Bank BNP Paribas, second largest bank in Europe, announced it has temporarily halted withdrawals in three of its mutual funds that have exposure to US subprime credit. As you can imagine, investors like you and I, who are told that their own funds are not available for withdrawal, would be quite worried. In the day's only economic news, Initial Jobless Claims edged higher by 7,000 claims to 316,000, the highest weekly total since June 30 - a positive factor for the Bond market.

I often talk about the book "Manias, Panics and Crashes". About a year ago I started reading this book again, and everyone looked at me like I was a doomsayer. But there is so much historical information in this book that can be applied to the current situation. It gives a detailed look at the anatomy of an asset cycle, and when and where systemic breakdown can occur. Rather than stick your head in the sand, take a look at it and consult with a professional about your finances, so that you can be sure you are prepared to weather this storm in housing and the mortgage market. Are you liquid enough to get through this?? It promises to get at least a little uglier before the dust settles. But this correction will be healthy for the long run.

If You Pay Somebody Else's Mortgage, Can You Deduct Interest?

In another good bit from the Kiplinger Tax Letter, according to the IRS, the answer is no. Even if you actually paid any of it yourself. You have to be liable on the loan and an equitable owner to be eligible.

But Kiplinger's points to a limited exception based on a ruling back in 1997. It says that a couple could deduct interest that they paid on a home loan, that their relatives signed for. The reason was that the couple had poor credit, and the relatives stepped in to help. But the occupants of the home made the payments, lived in the house, and made all repairs and improvements. They experienced all benefits and burdens of ownership.

I guess the IRS does not concern themselves with risk of foreclosure as one of the 'burdens' of ownership. The charitable relatives took on this burden, but Uncle Sam doesn't seem to mind.

San Francisco Real Estate Professionals And The IRS

When it comes to defining a Real Estate Professional for tax purposes - which comes in handy if you are a high income earner and have passive losses on rental property - the IRS essentially says that you need to have an active role in managing the property, and spend at least 750 hours a year in doing so (That's about 1/3 of your 40 hour work week). Then your losses are not 'passive', and there is no limit to the detectability. Otherwise, your cap is $25k per year. Oh, but if your income is over a certain limit, you lose the write-off...

...still with me? One more step, and its key. If you cannot deduct losses based on income being too high, you can defer these losses until the sale of the property, and reduce your gain by the exact amount of losses racked up over the years.

In San Francisco, and California in general, this is a big deal. Incomes here are on the high end, and rental losses are as well, as the rental cost vs ownership costs for property are at a historical gap. Gaining access to the 'Real Estate Professional' treatment has potentially significant implications.

According to the Kiplinger Tax Letter a recent IRS ruling has clarified a deeper-level detail of this test, which helps tax payers gain the 'Real Estate Professional' status. It allowed a couple to have extra time to elect to treat multiple properties as a single entity, thereby working around the time test for each property individually.

More info on the IRS Real Estate Professional test can be found here. Please also consult with your tax planner if you think you need to navigate this test or have any landlord or passive loss issues related to real estate.

Foreclosure Chart, The Return Of The Investor?

RealEstateJournal posted this chart courtesy of Realtytrac showing the foreclosure data monthly in a quick article with tips for buying foreclosure homes. You can note a slight drop from May to June, but I don't think many are expecting that the housing market has 'bottomed-out' just yet. Today's release of New Home Sales data was a disappointment, and showed that we are still not eating away at the inventory.

I see continued optimism from real estate insiders, one notable exception would be Angelo Mozilo, CEO of Countrywide, who has made a few comments over the last 6 months relating this housing recession to the Great Depression, that this is the worst market he has seen, and enacted layoffs and cost-cutting measures. He has also been under the microscope for selling $118 million of his company's stock - a clear sign of lowered expectations... what are you gonna do...

I posted here back in May of 06 that the caliber of real estate investor had significantly changed, and that the pros had vanished. Soon after, the amateurs disappeared as well, and the only investor activity we have seen recently has been folks looking to capture a good gain on an inflated property, and 1031-Exchange it into something different.

In the last few weeks however, I have seen quite a bit more investor interest. Folks who are not afraid and who know that a market like this has "deals". They embrace the Warren Buffett's mantra of "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." But I wonder if they are premature and if the market is going to deteriorate significantly further before things settle down. I know those builders do not want to hold inventory into a declining market, so I expect to see further cuts in prices, and increased incentives. I'm not buying into the media's doom & gloom rhetoric, but I do not think there is any reason to be anxious just yet... Deals are certainly out there...

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco Bay Area

Has Been Stein Seen the Light?

Somebody forwarded to me an article by Ben Stein recently, and I noticed a stark contrast to the tone of the last Ben Stein article I recall reading back in January. I remember thinking when I read the first article that he was missing a key component of understanding housing as an investment. I assumed that he was not ignorant, but rather opted to deliver a streamlined and simplified message to his audience.

In the first article, Stein misses the concept of leverage when discussing return on housing. With leverage, you have to shift the focus to return on investment, not return on asset. I know he knows this, but now you can get an idea of why I had not - until the other day - read another of his articles.

So in the recent article, his tune changes a bit. He isn't as suggestively sour on the financial aspects of house-as-investment, and focuses on pre-paying mortgage debt. But comparing the two pieces provides a great example of the fact that the decision to 'buy the house' and the decision to 'pay off the mortgage' need to be looked at as wholly separate investment decisions. They are totally unrelated. Stein seems ho-hum about buying a house for financial reasons (again, ignores the leverage component), but once you own the home, he suggests liquidity is more important than retiring debt.

I like the direction he is heading in...

John C. Glynn, CMPS

Real Estate Finance & Mortgage Planning

San Francisco Bay Area

Dead Fish Don't Have A Mortgage Plan

I knew this kid in High School who was about as anti-establishment as they come. Pretty interesting guy, but somewhat difficult to get to know or get a good read on. When the senior year yearbooks came out, the quote beneath his name read: "Only dead fish follow the stream". It captured what I perceived to be at the core of his personality. And the message was clear. What's a worse thing to be than a dead fish? And what could be more true an image?

... 14 years later, it remains one of the more memorable from that sea of inside jokes, cliche inspiration, failed attempts at humor, and so on. It popped into my head again recently when I read a headline about a mortgage survey administered by Re/MAX in the Detroit area. It made the case that some 2/3 homeowners with a 'nontraditional' mortgage were planning to refinance. This was yet another media criticism of the mortgage industry, and the 'nontraditional' loan type. The media has made the terms 'exotic' and 'nontraditional' synonymous with 'dangerous' and 'rip-off' in the context of the mortgage industry.

This got me thinking, as the 2/3 number seemed extreme to me. I can't imagine that 2/3 of the people with 'nontraditional' loans need to refinance into a market that is close to its 5 year high water mark. Generally, the media refers to anything that isn't a 15 or 30 year fixed loan as 'nontraditional', but it would help to have clarification.

Refinancing always involves a cost/benefit analysis and can be viewed as a snapshot of one's financial and credit profile as well as of the marketplace for money at any given point in time. "Based on where I am today, does the market offer me something better?" Something has to improve. It is unlikely that loans originated in the last few years are eligible for lower rates today - credit is at/near its tightest and most expensive levels in the last 5 years (though there are some cases). So this statistic has to refer to people who are looking for more protection in the form of longer fixed rate periods. They are likely rolling into a higher rate, higher payment or both.

Of people who need to refinance, there are a few possible motivations: they were misguided when they took out their current loan, they are misguided about what they need going forward, or more innocently, things have just simply changed.

Among those who intend to refinance based on changes in life, those who are not taking out cash are going to be refinancing specifically to change the terms of their loan. And if this specific sector is equal to 2/3 of those with 'nontraditional' mortgages, then this would indeed be worthy of a news headline with a story about how 'nontraditional mortgages' are bad for your financial health.

But I doubt this is the case. Cash-out refinancers would be re-financing regardless of the current loan (to a degree). The misguided folks are not adequately understanding how to evaluate the cost/benefit proposition, or they didn't when they took out that last loan.

The key takeaway here is that life does in fact change. Among this 2/3 figure, there are likely those who knew life would be changing around this time, and took out a mortgage that fit the timeline of expected change, and saved a bundle in the process. They are the guided ones. The 'dead fish' are the folks who are letting the current push them around.

Living fish also follow the stream for the most part, but they navigate. They know when to resist the current, move to the side, etc, as opposed to banging into rocks and driftwood - and washing up on shore.

Let's face it. Resistance can get you in trouble. Defiance can get you hurt. But if there is a stampede headed for a narrow escape, sometimes you'll be better off figuring out a different way out rather than trying to squeeze through that door with the rest of them - or better yet - knowing how to avoid being stuck in the first place. Don't be a dead fish. Get a plan in place.

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

CDC National Health Interview Survey Has Some Interesting Data

For example, it found that adults in wireless-only households were more likely than adults in households with landlines to report binge-drinking, smoking, uncovered health insurance, and limited access to health care.

Shocking! How many "adults" do you know who don't have a landline phone? Its a youtube generation thing folks, or at least a more youthful one. My guess is that if we controlled this study for age distribution, we would conclude that:

"younger people are more likely to use cell phones in favor of having a landline phone"

As opposed to:

"people in households with no landline tend to be binge-drinkers"

No knock against the youthful cell phone sector here - my mother is brilliant, but teaching her to use a computer was maddening because she learned how to type on a typewriter. Word Processing felt weird and strange. Just took her longer to adopt the idea, but now she's working on a PHD and setting the curve academically. Try doing that today without a computer.

To all you cell-phone only kids out there, there once was a time when we had to plug the phone into the wall, and dial with our fingers. I know, crazy, right?

Who wants a drink?

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

Family & Estate Planning Basics

A good checklist found in a recent article in Money Magazine is below. These are items that you should discuss with your parents - at any age. You don't need all the info now, but you should know how to find it:

-Will
-Life Insurance Policies
-Long-Term-Care Policies
-Banking & Brokerage Accounts
-Social Security Cards
-Medicare & Insurance Cards
-Doctor's Names & Numbers
-List of Medications
-Lawyer & Accountant Numbers

Seems pretty basic, but helpful to review. I mention it here because of the frequency with which I work with people who have lost their parents, and are facing major financial implications that we are coordinating through strategic mortgage planning. Its not a fun topic to discuss, but help yourself by cutting out some of the chaos that ensues when you cannot find the items listed above.

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

If You're Like Me, Refurber Might Be For You

I grew up the son of a proficient handy-man. When I was a kid living with my parents, my dad made a living in the courtroom, but somehow knew everything possible about how to take care of the home. Gardening, fix-ups, painting, moving, storing, and especially anything requiring a 'gnarly set of tools' - he could do it. As a kid, I assumed it was a rite of man, and that it would someday translate to me... somehow.

Then I eventually moved out into a flat in San Francisco. My roommates and I didn't have time for home improvement projects, with all the work and happy hours. But more importantly, we didn't have space for tools. Therefore, we ignored basic property maintenance and called the landlord when necessary (remind me to post later on how to find tenants for your precious home who were NOT like us...). Eventually I realized I had some challenges. Seriously. At one point I tried to hack up a dried Christmas tree with a pocket knife so we could use it for indoor fires. The butcher knife didn't work. The end of that story has to do with a call to the fire department (see parenthetical comment above), but let's keep me on point here...

I moved again, and now I have space for tools. I also have a bigger house, that I care more about, and no landlord to do the dirty work. It is my domain. And I still feel like I know nothing. I am trying to accumulate a good set of tools, and a good set of experiences with these tools, but every little project always turns out bigger than expected, in physical and intellectual scope. It gets overwhelming, and can be demoralizing at times. I have dreams that I am walking through Home Depot in my underwear (no, not really).

So where do I turn for help? I buy books and manuals for specific projects. I call my dad to come over and help when he's up for it (almost always is). I hired a gardener when I realized I couldn't keep up with the yard. And I go online. A luxury that was not available in my dad's time, and until recently, one that usually did not live up to its potential with all the message boarding and googling and waiting and waiting when I want to screw in my light bulb right now, darn it!

Enter Refurber. This site centralizes the effort. Its a social network (web 2.0 for 'community') of people all built around handy-manning, refurbishing, repairing, and remodeling. Its a fantastic resource. Forget the random message boards and obscure sites. This is a place where people who have as big of a tool shed as my dad - and know how to use it - come to boast about their work, get excited about sharing tips, and find value in helping their virtual neighbors. Check it out.

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

Trabajadores Escondidos - Why Construction Industry Contraction and Unemployment Data Do Not Correlate

With the slow-down in the housing market comes a slow-down in the housing industry. This is why economists fear that a drastic correction in housing prices will have the kind of ripple effect that could send the US Economy into a recession. If the appetite for housing slows, fewer construction workers (and Realtors, mortgage brokers, appraisers, title/escrow... etc) can find employment. We are seeing pretty big drops in some of the housing construction data now - fewer homes being built, fewer permits applied for - and expectations have been that we would see a rise in unemployment related to this. The housing industry is assuredly large enough to influence that number.

But the unemployment rate has remained stubbornly low, keeping pressure on the Federal Reserve to watch out for 'wage-based' inflation, aka too many workers making too much money. So where are all the laid-off construction people now, if not unemployed?

A few months ago I read a fascinating piece forwarded by a favorite economist and author, John Mauldin, which explored not only the concept that much of the construction labor is undocumented workers, and therefore not showing up in official unemployment records, but also the impact this might have on the global economy. Much of the money earned by undocumented workers is sent back across borders to Latin American family back home. The central banks of these countries literally count on this cash in their economy, and it affects their own policy decisions and economic steering. The essay's question: do these countries know as much about this housing slow-down as we do? If not, there is risk of a ripple-effect well beyond our borders. And in today's global economy, those ripples bounce back and forth across borders. Interesting stuff.

Last month at the Pacific Coast Builders Conference in San Francisco, there was a panel titled Immigration, Labor and the Future of the American Workforce which focused on the importance of immigrant laborers to the home-building industry. And Jerry Nickelsburg with the Anderson Forecast group at UCLA recently published a report about a study on these "Hidden Workers".

With the immigration debate and legislation proposals, keep an eye on this topic in the coming months...

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

The Yield Curve Is Sloping Upwards

With the current sell-off in the bond market, we have finally returned to an upward sloping yield curve in the 2yr - 10yr chart. It's still pretty flat, and bonds have started to retrace some of the steps they took during that little three-week selling frenzy, but we have not had an upward slope for a long time. Check out this site for a great illustration of the yield curve over the last 9 years or so (make sure to hit the 'animate' button). If it didn't make a lot of sense before, this will help. Pay close attention to the last few years where we see the Federal Reserve's steady 0.250% rate hikes (on the left) and the corresponding long term rates (on the right). This stubborn long-term rate has stayed relatively calm in the face of all those Fed tightening moves.

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

Warren Buffett On Opportunity Cost

Its no breaking news that you can learn a lot about investment and prosperity from a guy like Warren Bufett. I saw a blurb recently about the Berkshire Hathaway annual shareholder's meeting, and clicked my way into this 5 page document he wrote in 1996 titled "An Owner's Manual", where he outlines his basic economic principles of business operation. There is some great insight here, particularly on the last page where he describes the difference between intrinsic value vs. book value.

This passage uses a well-constructed example of the opportunity costs of college education to illustrate the difference between "Book Value" and "Intrinsic Value", two important business valuation metrics. This same exact principle applies to debt and wealth management when we talk about the use of the marginal dollar.

Most people can clearly evaluate the cost of not paying off a dollar's worth of mortgage principle - we call it interest. But we see most people mistakenly value the actual cost of paying the mortgage principle back, measured in foregone return on investment and foregone liquidity, as well as increased risk and tax exposure.

Its tough to set your financial priorities in order when you don't know what they all cost. With the mortgage being the largest 'bank account' most people have, it is critical that the mortgage plan is congruent with these priorities - adequately valued. Take a look at this for evidence of how 'most people' are missing opportunities to build a better bottom line. Good mortgage planning can take this concept even farther in the right direction.

John C. Glynn, CMPS
Real Estate Finance & Mortgage Planning
San Francisco

Measuring Affordability In Real Estate

There was an interesting article today in Realty Times discussing the currently escalating energy costs, and the implications for home sizes and housing decisions. One might think that with gas prices rising so quickly, the average consumer might alter their behavior reflecting sensitivity to these costs.

The author makes the case that it would take a true energy crisis to change the current course of larger average home sizes (20% are 4 or more bedrooms, nationwide!). One interesting detail is the fact that garage doors are being built with larger dimensions to accommodate the larger, gas-guzzling SUV cars that so many Americans love to drive.

I don't think the average home builder can respond to the weekly changes in gas prices, and expect to see some of the energy-conscious construction trends become more wide-spread. There has been a lot of buzz for months about "green construction" in my area (San Francisco Bay Area), but the building industry has to deliver based on some amount of lag time.

A little over a year ago, the Brookings Institute issued an insightful report about "The Housing Affordability Index, A New Tool for Measuring the True Affordability of a Housing Choice". One of the key issues that hit home for me was the discussion on a consumers tendency to mis-appropriate values of things like commuting, environment, time, road-rage, etc.

We have seen a huge growth of housing in the areas to the East of the Bay Area over the last several years. As a result, tons of homes have been built in towns like Tracy, Stockton and Modesto. There have also been entire up-start communities built at former cattle ranches like Mountain House. Most of this growth has been by people who work in the Bay Area, but cannot afford - or do not want to pay for - the houses. If you doubt this, try driving east on Interstate 580 during afternoon commute hours.

Reading the Brookings paper, you might gain a sense of how to evaluate things like:

• -gas costs, auto wear and tear costs
• -time spent commuting measured against time spent with spouse, kids, etc.
• -psychological costs of road-rage
• -physical health costs of traffic stress, sitting in smog and exhaust fumes
• -health care costs related to the above
• -living away from urban cultural centers, food choices, arts, etc.

Everyone will have a different set of priorities of course. But you need to know how to measure the cost of missed opportunity, and other things that cannot be easily defined in dollar amounts.

If you need help figuring out how your mortgage plan can be molded to accommodate your life's priorities rather than restrict you from them, its time to talk.

John C. Glynn, CMPS

Real Estate Finance & Mortgage Planning

San Francisco

More Movement For Change To Real Estate Commission Model

The Federal Trade Commission has issued a lengthy report getting behind the movement for change to the way Real Estate commissions are structured for residential US Real Estate transactions.

I wrote about this in a previous post with a similar report from the AEI-Brookings Joint Center for Regulatory Studies. I'm a huge fan of the Freakanomics guys; they have some interesting criticism of the Realtor commission model despite a few oversights and a petty undertone. Also, 60 Minutes has a story coming up this Sunday about alternative compensation models. Its unclear if they will contribute to this debate with balanced representation, but the fact is that this issue continues to be one of the biggest in the Real Estate business today.

It continues to be a very interesting battle, and the National Association of Realtors (NAR) has their defenses of course. Problem is, most of it sounds 'defensive'. There is some merit to the claims made by NAR, but the inherent problems with professionalism and integrity within this business make these defenses 'not applicable in all cases'. Some good insight to their viewpoints can be found here (see links at bottom of that page for more).

At the bottom line is a comment I give frequently: work with a professional. It holds true in Real Estate and financial services as much as it does in medicine or auto repairs.

The Accidental Landlord

With the turn in the real estate cycle upon us, there is a whole new sector of realty animal, who find themeselves on the wrong side of the buy & flip fringe. Whether they bought yesterday, or 10 years ago, they intended to sell right now. But a few things needed to happen first: Entitlement changes, condo conversions, marital separations, graduating high schoolers, etc. And while they were waiting, the market changed.

And so by the time it became feasible to sell, these folks didn't like the conditions or the values, so they decided to keep the property and rent it out. And here they are, the 'Accidental Landlords'. According to this site, 1 in 5 landlords was an accidental case. Demographic details are also available at the site.

All the action happens at the margins. Watch these cases to see the emerging trends in the market. This is a potential flop in the supply/demand dynamics of rental and ownership housing. These are likely your first sellers when market conditions inch up.

If you are in the position of feeling forced to hold inventory, its imperative that your financing plan allows you the flexibility to withstand cashflow fluctuations. Don't let selling a home be a limiting factor if you want to move. Learn how you you can prioritize these goals with financing strategies by talking with a certified mortgage planner.

Rocker's House Sells At 37% BELOW Asking!!

Is this a sign of the times? Jack White, of The White Stripes, recently sold his home in Detroit for $590k, a full $340k below the original asking price of $930k. Wow!

I often talk about real estate values being a function of 'micro markets', where local trends may be different from larger national ones. And Detriot has had one of the slowest markets in the past several years. But this is an interesting case - 37% is a big discount!

The value of the home - or anything - is a function of the pool of willing buyers, and what they are willing to pay for it. I don't know how White could have been so far off with the original asking price. I wonder if he expected the fame tie-in to bring a premium to the sale price. But this is a guy who recently put out an album called "Get Behind Me Satan"; not necessarily a title that would be expected to have broad appeal to the folks in the top tax brackets... and the custom design clearly limited the appeal to average home buyers. You'ld have to be a major fan to want to buy the home with White's sense of style. So limiting the appeal to a pool of buyers who may not share his own socioeconomic profile seems to balance out as a 'net negative' in terms of being a high profile case.

No matter what the reason, his expectations were way off.

Home Monitoring Technology

The technology productivity paradox is a theory that says with increased technological development, our productivity advances at a slower rate. Rationalizations of this concept have a broad base of argument.

In a more sociological sense, it could also be considered that a paradoxical effect of technological prosperity is that we, armed with greater access to information, will become so burdened by it that we experience a deterioration in our quality of life. Its a slippery slope.

I saw an article today that summarized an assortment of home monitoring services that can be accessed (some very inexpensively!) from computers, cell phones and even blackberries. You can watch streaming video of your front porch, receive text messages if a door or window is opened, or get a daily email summary tracking movement of people in your home while you are away.

I can see the appeal of all of these, but I wonder what it must be like to go on vacation and be constantly aware of a device in your pocket that could go off at any time without warning to alert you that the gardener accidentally ran over a sprinkler head. Is it worth it?

We have alarms, and alarm servicing companies. The whole point is for them to filter the alerts and decide if its a problem worth interrupting your nap on the beach over. The neighbors are there to watch the dog, and pick up the mail. Do you really need to confirm that it gets done from across the country?

I see the value of 'piece of mind'. But I wonder what the point is of trying to get away if you are going to rely on the constant engagement of technology and to be plugged in all the time. Remember 10 years ago before everyone had a cell phone? Every time I fly somewhere, it cracks me up when the plane lands and half of the passengers start checking voice mail and making calls. What did they do before? Did they run to the pay phone by the baggage terminal, or did they just relax a bit and plug back in when they got home or to the office?

I don't know. Love the concept and appreciate the technology, but tough to find the right balance here between 'peace of mind' and getting away to actually 'get away'...

Are Real Estate Values A Roller Coaster Ride?

Robert Shiller is a Yale Economist who has enjoyed some fame for his book Irrational Exuberance, which was a timely publication that predicted the market correction on the heels of the tech bubble. He's also stayed in the news with an 'Exuberance' redux, where he has predicted the bubble in housing values - every year since the tech bubble. Today's post isn't meant to take away from his theories and predictions, so for now, lets just agree that 'even a broken clock is correct twice a day'... and we can get back into why I say that later on (if interested).

Shiller recently published an index of real estate values indexed for inflation. Before you look at it, we get a pretty fun visualization of of this chart from blogger Richard Hodge. Its worth taking the ride first. Shiller's data is plotted here.

Too Many Jobs!

Non-Farm Payroll and Unemployment data were released today, and the US Economy is still chugging along... For those who feel Federal Reserve Chairman Ben Bernanke will lower rates in the near future, this news serves as a little cold water splash in the face. Unemployment is too low. Plain and simple.

There were 180k new jobs last month, versus the expectation of 135k. Unemployment dipped to 4.4%, versus the expected 4.6%. This is going to keep wage-side inflation persistent, since employers will need to compete for skilled workers by raising pay. And Bernanke has made it clear that no rate cuts will come until the inflation cinders have ceased to smolder. He may even need to hike rates one more time to cap things off.

The Fed Funds Rate remains a moving target, and the timing for adjustment of this rate back down has extended beyond what analysts expected a year ago. Evidence of inflation beyond the Fed's comfort zone has persisted in these types of news reports, and we won't see a change in Bernanke's tone until inflation gets back under 2%.

The meltdown in subprime lending is not going to directly lead to a Fed cut as many have speculated. Even if the housing market languishes due to an increase in supply and decrease in buyers, this needs to trickle through to the data in reports like those given today before the Fed will respond. Perhaps with all the mortgage companies shutting down, we will see a counter-weight to this tight job market...

... I'll be careful what I wish for.