Real Homes of Genius: That Ben Bernanke is Funny! Sesame Street Cerritos Style.

Oh that Ben Bernanke, aka Boom Boom, aka Helicopter Ben, aka Big Baller, aka credit liquidity magician. After talking to the market with a stern voice and demonstrating that he does have some restraint with rate cuts, he follows the next day by opening up a corner loan shark store. While they don’t have a problem having troubled buyers calling up a toll free number and opening up their financial books as if it were a therapy session, they want to keep a lid on what is going on with troubled banks:

“Some market observers suggested that banks would likely be to able to avoid the so-called stigma associated with the discount rate and borrow money through the auction process at a lower rate than the discount rate.”

After all, you wouldn’t want to hang out with a schizophrenic bank and have your friends and family start whispering behind your back. So even though the discount rate only saw a .25 basis-point cut, we now realize that many beleaguered banks can go even further off the books and borrow money at lower rates. Now riddle me this, where can you as an American go and borrow funds lower than the discount rate? As you are starting to realize there is a two-tiered system where banks have certain privileges bestowed to them that the common person is not. We all know this but it is one thing when banks act responsibly and manage their budgets wisely, instead they act like a bunch of drunk frat boys at a college party. The credit keg stand that the Fed is doing is simply breath taking. At what point can we stop this credit binge? In fact, the markets are realizing more and more that the Fed is having less and less of an impact because in reality, the consumer is starting to feel the pressure of all consuming debt loads. Then we have the pot calling the kettle black. Freddie Mac has a YouTube video showing how to avoid fraud. Bwahaha! I think this is five years too late but better late than never. I’m sure some sub-prime pusher in their PR department is developing a video called, “What you can do with us to stop us from giving you stuff that is financially horrible.” Simply astounding.

Even though the market initially responded positively to Boom Boom, housing stocks have not. In fact, they are continuing their downward spiral into the abyss. When you take a few seconds to look at the income statements and balance sheets of the big players, you will realize that they are on the edge of insolvency. If we were to look at a person with debt higher than their asset worth, monthly carrying costs that can’t be met with current income, and a portfolio of depreciating assets we would recommend them to seriously consider bankruptcy. You would think someone had gone off their meds if they were suddenly given more credit in the face of their proven inability to financially manage their funds. Well this is what is happening with banks and the Fed. All this rhetoric and confusion is there to masquerade the fact that these irresponsible lenders got swept up into the greed and now the piper is faintly coming over the hill. It looks like the market is finally starting to see past some of this hogwash. The market was punished even in the face of a rate cut because it wasn’t enough; the user needs his dosage upped. Today stocks are currently up but housing stocks are taking another hit. And why wouldn’t they? WaMu announced they are completely shutting off their sub-prime outlet and eliminating 2,600 jobs. This is a new tactic we are seeing. I guess their premise is if we are open with the current mess it is like admitting that you have a problem and people will be more understanding. This tactic may work. On the other hand we have Countrywide taking the Baghdad Bob approach and saying, “everything is fine! Please, look the other way.” Back in October this was played up:

Countrywide on Friday reported more than $1 billion in third-quarter losses, mostly on write-downs related to bad loans, but promised that it had taken steps to adapt its business and would report profits in the fourth quarter and in 2008.”

That is a ridiculous assertion and this is what was pushed:

Countrywide Financial Corp., the nation’s largest mortgage lender, reported a $1.2 billion loss in the third quarter as fallout from rising home loan defaults and the ongoing housing downturn put a crimp on the company’s loan originations and forced the company to set aside millions in loan-loss provisions and writedowns. Management predicted it will turn a profit in the fourth quarter and in 2008 and cited efforts to shift funding of its home loan originations through its banking arm.”

When this was announced, CFC was trading at $17.51 while today it is trading for $10.43, a drop of 40 percent in market cap in a little over a month. We have about 3 weeks left in this quarter and how they will turn a 4th quarter profit is beyond me. We will see in late January or early February the actual books and see if this is the case. My take with them being part of Paulson’s elite team of the Hope Now Alliance, desperate times call for desperate measures. There was also a post from a realtor attending one of their conferences this week which offers more insight into where the company is today. With this as our back drop, let us jump into the trenches and see what is happening on main street USA.

Sesame Street Cerritos California

Can you tell me how to get to Profitability Street? Our next home takes us to the middle class city of Cerritos. Today’s home is a nice 4 bedroom 2 bath home which is what any professional working couple would imagine being a starter home. The home is listed at $660,000 and is now back to 2005 prices. The home sold in May of 2005 for $648,000 and with the current price, is practically breaking even. If someone bought this home on a 2/28 mortgage it has already recast and the new payments are probably the reason for the current short sale. And as we all know, there are so many preconditions for the Hope Now rate freeze that this home would not qualify. So they have two options, either lower the price and sell or foreclose.

cerritos.JPG

We are in the land of multiple prices. Here are the various price points:

The Zestimate comes in at: $748,000

zestimate.GIF

Previous sale in 05/2005: $648,000

Current Sale Price: $660,000

A neighbor home just sold in October 2007 for: $600,000

neighbor.GIF

Who is right on Sesame Street? As you can see, prices are all over the map and we are now starting to see the price pressures strike more desirable areas in Southern California. We have yet to see the credit crunch impact prices in prime areas and 2008 is the year of reckoning since now we will see the “prime” Alt-A loans and other NINJA products resetting from supposedly prime and high FICO score models of financial responsibility. Last night flipping throught he channels Suze Orman is now doing a live show and she had this woman from the Inland Empire talking about the inability to support her rate reset and how she was high school valedictorian. This is beyond being smart. This is about spending more than you earn or can support. In fact, if the mentality was the same as it was a few decades ago it wouldn’t matter if prices dropped since you saw your home as a place rooted in the community and not a commodity to be flipped. Plus, you were on a fixed note. Now everyone in high priced metro areas has some sort of elixir mortgage and no one has any historical data to see how things will play out when things go bad. Thanks Alan Greenspan for pumping ARMs! You were spot on. Only doctors, lawyers, and high paid professionals used these products. It isn’t a shock that a sub-prime loan goes into default since that by its nature is highly likely but when you see prime notes hitting snags the market will quickly shift because then it signifies that everyone is now involved in this mess. We are all now living on Sesame Street.

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8 Responses to “Real Homes of Genius: That Ben Bernanke is Funny! Sesame Street Cerritos Style.”

  • There is a lot of hypocrisy in the system now. If my credit gets worse, the interest rate I pay goes up. With the bank’s credit getting worse, they demand a lower rate from the Fed. Struggling individuals get pushed over a cliff when the stumble financially but banks get a helping hand. It’s just not right. If I had an account with Country Wide or Citi, I’d be inclined to demand a much higher interest rate to make up for the risk of lending them my money.

  • New Zealand Renter

    Hi Doc,

    As bad as US Alt-A is, much of the world is in worse shape. Let me explain how New Zealand housing works.

    First of all, unrealized profits on stock and bond investments are calculated at the end of the year and taxed as regular income, up to a 39% rate. Contrast that to US 401k or IRA plans which aren’t taxed until withdrawn or regular stock accounts which are taxed only when sold and then at 15% long term capital gains rate if held over two years. However there are no NZ capital gains taxes on real estate. Interest on mortgages on owner occupied houses is not tax deductible, however, interest on mortgages on investment properties is deductible. So due to these distortions, everyone aspires to be a property investor and no one owns stocks. US households have 38% of net assets in RE, in NZ households have 72% of net assets in RE. NZ households are also more indebted, 160% of annual income versus 140% of annual income in the US.

    Now about those 30 year fixed rate mortgages. They don’t exist here. All you can get is ARMs with a two to five year fixed rate. At present the two year rate is 9.19%. However during recent peak home sales the rates were high 6% to low 7%, these are adjusting higher now. Since young people don’t save, the majority of loans have been 100% LTV, no down payment. Prices of both homes and vacant lots have doubled over the last four years while wages have grown 3% per year. Sales volumes have really dropped off over the last six months, days on market and inventories are rising. However, median home sale prices have held up nicely.

    The newspapers say that the market is going to have a soft landing with prices at a permanently high plateau. Despite this island being the size of Britain with one fifteenth the population, they aren’t making any more land. And everyone wants to live here, except the quarter of native born NZ college graduates who emigrate to Australia, so it is hard to import Chinese, Indians, and Pacific Islanders fast enough to keep the population growing. Anyway, they say that prices being six times household income nationwide is the new permanent reality and there has never been a better time to buy.

    How many houses should I buy?

  • @ NZ Renter

    Buy all you want once prices drop 90%. The US is leading the way into Great Depression Part II, but we are just warming up the crowd for the main attraction.

    From what I hear the UK has similar issues.

  • new zeeland renter:

    You write “NZ households are also more indebted, 160% of annual income versus 140% of annual income in the US.”

    Could you explain what you are including as ‘debt’ in those numbers?

    While many (but not the majority) of homes in the US do not have a mortgage, most do. Before the bubble hit, US households would traditionally put down 10-20% of the price, finance the rest and were purchasing properties that were 2.8 – 3 times their income. That alone puts US household mortgage debt at 224% of income. And, now with the bubble that ratio is even higher.

    And then start adding on the non-mortgage consumer debt (cars, creditcards……) which has grown 3 times faster than income or inflation since 1990.

  • @Nz Renter
    Cheers down under….. That was a really good info from beautiful New Zealand.
    I visit NZ often, love the south Island, and I know that nz banks have always given a high interest rate on a short term deposit, 1 – 90 days, but now I can see why, so must be hard to own your own house.
    Here in Denmark – (not in the Euro, but tied to it 1€ = 7,5 Dkr), we can deduct 1/3 of the interest on all loans. I have taken a 5% fixed loan – for all 30 years at 5.06%, with the first 10 years interest only, as I invested it in gold/silver.
    That means I am paying 3% the next 10 years, so I am betting on that metals with rise with the mega inflation on the way, so I am already well ahead on my investment.The best thing is, that the principle is already DOWN,..6%… due to the % rate is now 5.6% = 96% of original debt…!!!
    So every 1% the % rates goes up, it cuts my dbt by 8%…….
    Now i am getting 4.5% on the rest of that money…In the SAME bank……
    but no worries, NZ, here I come….again….

    Merry Christmas to all
    And have a happy new year
    Mike

  • finally someone shows how rediculous Zillow is. can you send you article to them so they can wake up? or maybe they don’t want to wake up. maybe they want to keep the smoke screen going. I think they are on the NAR’s payroll.

  • Market fluctuations sure make it difficult to accurately gauge what prices should be. I really think this shows how inaccurate Zestimate’s can be.

    Interesting information, but somewhat disappointing about gauging the market.

  • Mike you should check out Zillow’s discussion boards. It is a tale of two worlds:

    Home owners claim their neighbor’s house is worse than theirs and threatons class action law suit (because a lot of buyers use Zestimate when they buy houses). Nice to have such a neighbor.

    People probably on the side line siting recent price numbers and telling Zillows they routinely overprice by 30%, and also threatons law suit (because sellers use Zestimate when they sell houses).

    Interesting that the owners completely ignore the other group, hence no argument at all.

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