Tuesday, April 22, 2008

Real Estate the Tip of the Iceberg

On one side you have the upside down home owner, who is about to walk away and give the bank the keys. But the other side, the bank paid the seller real money for the house and the new owner signed a note to pay the debt. Many suggest that this serves the banks right for loaning the money so carelessly in the first place. Think twice about that, the money paid wasn't the bank's, it belonged to a depositor. Banks don't lose money, people do!

Today the Bank of England announced that they are offering to swap 100 billion of government bonds for mortgage securities. Welcome to the Bernanke bailout party. Amazingly we are 8 months into this mess and still, no one has lost a dime.

If we can agree that real estate is only the tip of the iceberg, then it becomes apparent that the financial banking system, is in a very precarious position. Throw in hedge funds and the visual aid is no longer to scale, it's not big enough (use your imagination). The Iceberg represents real money borrowed from someone who works for a living or has money in an investment vehicle. It doesn't belong to a hedge fund, bank, IRA or 401k, it belongs to real people.

Industries are downsizing and laying off people. The big auto companies and the airlines have reset their pay scale to be more competitive. The housing industry has [fill in the blank]. More people are looking for work. These major events should raise some alarm, but curiously no one seems to notice. The unemployment numbers are starting to add up.

Look for a major bankruptcy's like the one in 1932 when Ivar Kreuger the famous Swedish Match King committed suicide. The guy was the "Warren Buffet" of his time.

This is a slow but methodical meltdown. Real estate is where all of the castles have been built, and the stock market is our sand box to play in. Maybe Icebergs are a little like our government, most of it is hidden from view.

To a majority of Americans "The Economy" is just a concept, little understood. Most people have never studied basic economics. The "Group Think" is that Congress can fix what is broken. Congressional solutions are a little like trying to use your clothes dryer to dry the kitchen dishes and glassware. When the buzzer goes off, you can rest assured that everything is dry! You end up getting what you were promised, but it's not quite what you had in mind.

Copyright 2008 All rights reserved


renter_smurf said...

I am amazed by the optimism of everyone who is in the real estate game right now... and I mean simple homeowners. Here in the OC, my engineering pal mentioned that peak real estate prices will be making a come back later this year!!! I wonder how optimistic the stock market gamblers of 1929 were. Thanks for bringing the reality.

Dan Mac said...

One of your best analogies yet!

I'm Not POTUS said...

But that is levered money?
The actual cash on deposit +/-(7:1) and invested in hedge funds +/-(40:1) is only a fraction of the berg.
I think it is more apt to say that when the iceberg melts the leverage away, the melt water floods the entire berg. The berg shrinks to nothing and there aren't enough life boats.

Jim in San Marcos said...

Hi Renter_smurf

You're right doom and gloom won't sell real estate, you have to really go out of your way to put a positive slant on it.

A lot of people I know don't even read the paper unless it's the sports section. So it's easy to see how your friend might believe that.

You still can't rent a home out for what the house payment is, and that has to change.

It use to be more expensive to rent than to own, that's why everyone bought a home, looks like things have changed a bit. Years back the renter paid a premium for the freedom to pick up and move at the drop of a hat. Now the homeowner today can do the same thing. Things have been turned upside down.

Thank you for your comments

Jim in San Marcos said...

Hi Dan Mac

I'm glad you liked it. Thank you

You made my day.

Jim in San Marcos said...

Hi Im Not Potus

I'm not sure we are in agreement. I figure the housing mess around 10 trillion, Savings at 17 trillion and derivatives at about 52 trillion

My basic point (if you read between the lines) is that the people at the head of the line get their money back. The ones further back get an education.

I see the hedge funds/derivatives market insuring 52 trillion dollars will just plain vaporize. I could be wrong on this, it's kind of hard to fit a picture to an economic concept:>)

I like your blog, here is a Link to it for other readers. You ought to write more often

Thank you for your comments

I'm Not POTUS said...

Thanks Jim,

I'm working on an obituary for Greenspans' legacy as the next post. I limit blog entries to ideas or notions that I don't see in other places. If more people enjoy the insight, I'll post more often.

I agree with your numbers, I was concerned that some folks might think of all that ice in the picture as real money.

Cash is king and the Fed is giving it to the investors and leaving us with bad debts.

I'm having a hard time trying to call when deflation will hit. Too many monkeys playing with the levers of commerce.

The earnings reports for the Investment Banks show that most of the "reported" profit is still based on Level 3 valuations...????
The Ratings Agencies false AAA are the only thing keeping this circus going. When those fail the FED will have to come clean or think up a new scam to keep the show going. Guess which one they will choose?

Anonymous said...

Oh tip of the iceberg is a GREAT title...to the first poster, don't be amazed by the optimism - it's all media manipulation to dump this junk real estate in Southern California. These suckers are now eating it as reality sets in and their 500K or 700K little house isn't worth half that. With the reality of this now, the economy, the markets, the country when could they ever sell these places? They can't! ...A fool and his money is soon parted, and that includes all these suckers who bought into the idea that little shacks in LA from Santa Monica to Culver City were ever worth 500K, these houses in 1975 were under 75K people. How dumb are people? It's greed. It is simply hilarious the stupidity of people and the BS they will buy into, now lets see what these get rich quick simpletons are going to do with their 500K (or worse) dumps that they now couldn't give away. Two lessons learned in round of LA BullS. 1. A fool and his money are soon parted. 2. There is no such thing as making big money fast.

Matt said...

This is scarey! In the early days of this mess my wife and I were feeling pretty good about things. We sold a little before peak and were willing to rent until prices came back to earth. Now we are moving for the third time - this time because our landlord has to sell to avoid capital gains. We offered to buy at $280k, he believes the house is worth $390k, zillow puts it at 316k. Now our cash sits in the bank eroding away and we have the fear that it could be wiped out if things go really haywire. Were do you find peace in this? I'm tired of being stressed by the endless "what to do" question.

Are we a bunch of negaholics, so focused on whats wrong with the world we are missing out on what is right? I ask that bloggers who write these (excellent) articles add a couple of paragraphs at the end with actions that can be taken either at the individual level or the group level to make the world a better place. Just a thought.

JOHN said...

Usa CAN BE #1 This Way!

1=250-300 Nuke plants @$1B each=Grants! Similar designs 4 easy build & maintenance!
2=New law 50% of all cars in 5 years must be Electric & 25% must 50 mpg hybrids!
3=100% Employment by 2009 from above!
4=In 5yrs oil/coal consumption down 50-75%!
5=In 10yrs USA will be #1 AGAIN!
6=USA Debt & Social Security paid in Full!
7=If necessary, Guzzler tax for big engines & Tax Credit for Sipper & Elect. Cars!
8=$1-2 Trillion Cost to reduce oil 70%!
9=Tell me Johnjasonchun.com is not right!
10=USA will be #1 again till 2050 or longer!
11=We can buy out Canada & Mexico based on Energy Efficiency and Surplus!

JOHN said...

12=Every Illegal can get a temp 5 year green card by purchasing a home in foreclosure and making payments for the term of their green card. Filing a tax return, paying taxes and staying employed. 5 years extension for being good. 11th year can file for citizenship!

zapparulez said...

I couldn't have put the current situation under a better analogy. I've felt for about a year now that housing was just the catalyst to something much bigger.

If only the damn Fed would stop debasing our currency and LET those who made bad decisions lose everything. The only thing the Fed is doing is destroying the dollar while holding back the flood waters.

The problem is, the Fed is running out of sand bags and soon the flood will be much worse. I expect the wave to come crashing through hard and fast...it will make the housing downturn look like a walk in the park.

Anonymous said...

I wonder how optimistic the stock market gamblers of 1929 were

Too funny!

Sounds like your pal owes money on a house!

Anonymous said...

Great article. I will post it on my site www.RunOnTheBank.org The "doomsday" clock is ticking, but instead of a countdown to nuclear war it is a countdown to the SECOND GREAT DEPRESSION. Withdraw your bank deposits, sell your stocks, transfer your retirement accounts to Credit Unions (as CD's), learn a trade that is useful, stock up on food, provisions, and tools that you will need in your new occupation. Get ready to DUCK AND COVER. All of us can learn to be prudent survivalists. Be cautious of Realtors, bankers, and anyone who gets paid for not doing real work.

Jason said...

3=100% Employment by 2009 from above!
anyone who believes 100% employment is a good idea should go back and investigate what happened to the economy of the USSR around 1970 as a result of a very effective full employment policy. The only persons who should be in favor of a full employment policy for America are its enemies.

Real Estate Developers said...

Very Good article, you make some interesting points.

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