Tuesday, January 16, 2007

1929 Revisited

It looks as if the housing blogger’s are ready to deliver the "coup de grace." Real estate is starting to drop in price. This impending collapse of housing has other implications. Not all of them are obvious.

Everyone who files bankruptcy or goes into foreclosure will be virtually eliminated from purchasing a home for years. The list of potential buyers of real estate will be cut drastically. That’s good news for rentals.

As a lending institution picks up more REO’s, you’ll see their lending standards become more selective. As markets drop, even the new lending standards will produce losses. The first to enjoy the new banking standards will probably be the Condo owners. Lenders will not want to touch this class of properties. I sold one on North River Rd, Oceanside in 2000 for $45,000, prices now are at $260,000, 850 sq ft.

Indirectly in the fracas, would be the real estate appraiser. In order to salvage an image of creditability, without being held responsible for the whole mess, they would have to find an appraisal method that could be sanctioned by the banks; quite possibly a roll back to the 1999 year pre bubble values. These values would be low, but lending institutions would be comfortable that the loan isn’t going to turn into an REO.

I’ve heard that 70% of the US population changes their address every 5 years. If you bought before 2003, it looks as if you still have that option and can pick up and move. Otherwise enjoy your financial mouse trap.

Congress (god bless those whose good intensions seem to screw up everything) removed the capital gains tax on selling your home. Well, that also removes the deduction for a loss. Add on top of that the 1099 you get from the bank for a short sale of your home. So if you do it this year, the 1099 might be for $80,000. Wait till next year and it could be $180,000 and maybe $300,000 if you last a year longer.

RealtyTrac.com is showing 3,462 Bank REO’s for San Diego right now. San Diego realtors didn’t sell 3,000 houses last month. This pretty much suggests that the lenders are feeling some pain. Couple this with the outright real estate fraud in the Temecula area reported by the North County Times, last week, and the outlook gets worse.

If you picture a tree, and each leaf is a house and the branches and the trunk are our financial institutions, you begin to realize the size of the problem.

If you picture a baby boomer standing on a three legged stool (labeled “retirement fund”) and imagine kicking out one of the legs, it doesn’t bode well.

Interest rates could go through the roof. Forget Bernenke and the Fed Funds Rate. That rate has to do with the loaning of funds to a Bank on an overnight basis when a couple of million dollars in checks hang up for some reason. The Fed covers the bank for the night and gets a check for a couple of hundred the next day. My eyes gloss over whenever someone decides to enlighten me on the significance of the Fed Funds Rate, they raised the rate 17 times and the RE loan rate went up one half point. What we are talking about are big foreign investors trying to get their money out of US banks.

At this point, I could be accused of forecasting Gloom and Doom. But look at it from a different light. From 1980 to now, everything has gone up for no real reason. EVERYONE was a successful investor. Now the mood seems to be changing, and it’s a group sort of thing. I believe that the herd is about to turn. What we are about to witness, is reminiscent of 1929.


Anonymous said...

If we are reminiscent of 1929, then what is the smart play as far as investments goes? Where does one hold their assets to not lose all their money?

Jim in San Marcos said...

What you need to realize is that if it is reminicent of 1929, everyone is fully invested and has no cash. If they need to raise cash to cover other expenses they will have to sell something at a discount.

You would be buying what no one else wants and be paying very little for it.

Cash will be a very powerful tool.

You are waiting to make the investment. You're not trying to figure out what things to hold that would be advantagous in a bad decline.

Anonymous said...

It's about time people started to see the light.

Investments are only worth what a buyer will pay. Look on ebay if you don't believe me.

As more and more of the same item are being sold in a market the lower it's value will be.

Regarding the 1929 loss in value compared to now. The federal reserve played a big hand in the unraveling. They kept the interest rate high knowing that it was pushing banks into insolvency. The reasoning was that if you made too many bad loans your bank deserved to go out of business. In todays market it's highly unlikely that the fed will increase the interest rate to a point where it pushes banks into problems. What this will do is ease the housing/lending markets slowly into the dulldrums. Eventually it will turn around. But I'm projecting 10-15 years.

Anonymous said...

Question: On the short sale that bank issues the 1099 and then the borrower owes income tax on that. And bankruptcy never discharges a tax lien, correct? Not that this will ever survive politically, but can the IRS attach social security benefits for an unpaid tax lien?

Jim in San Marcos said...

Social Security benefits can't be touched by the IRS. Retirement benefits are exempt from just about anything look at OJ Simpson.

It doesn't mean that you are free and clear, The IRS will wait for you to die and then harvest your estate, kind of what they did to the comedian Red Foxx.

You can now pay your taxes with a Visa card, so now it looks as if you might be able to turn a tax lien into an unsecured debt. Its an interesting thought, but I'm not sure how the new bankruptcy laws effect all of this.