US vs. Japan Land Prices Pictorial Update

In Spring of 2005 I announced It's a Totally New Paradigm

At that time the chart looked like this.



In June I announced It's time to shift the arrow on the basis of Time Magazine going gaga over real estate.



In December I wrote that It's Too Late.

When you see stuff like this, not only is it too late, it's way too late.



I am pleased to announce that we have moved the arrow once again.
The current picture looks something like this.



Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The dreaded "D" word surfaces

No, I do not mean deflation, not yet anyway. I mean discounts. Builders have been offering free upgrades such as granite countertops, better cabinets, and landscaping. They have been also offering free closing costs, increased lot sizes, and low mortgage rates. One is even offering free cruises. Today DR Horton is finally using the word "discount". They are the first builder to do so. They are still trying to disguise the amount of the discount, as they are giving a discount AND they are giving buyers a free lot and upgrades. Others will no doubt follow suit.



Mike Morgan of Morgan Florida is keeping me posted on what is happening in Florida and it's not pretty. Mike is doing everything he can too, to drum up customers. I will tell you more about that next week. For now, here are some updates from Mike Morgan.

I hope you’re all sitting down. These numbers were just released by our Board for February – Martin County, Florida. These numbers do NOT include builder inventory, so the numbers are much worse than what you see below.
2005 Inventory 1148
2006 Inventory 3594
Increase – 213%

2005 Absorption Rate = 0.19 months
2006 Absorption Rate = 21.8 months

This is not an error and the condo rate is even higher!

Is this just a Florida thing?
Nope.

NEWPORT BEACH, Calif. - Homebuilder William Lyon Homes said on Wednesday new home orders during the first quarter fell 26 percent from a year ago, while its cancellation rate for the quarter more than doubled.

LOS ANGELES, April 5 - Homebuilder Brookfield Homes Corp. on Wednesday said net orders for the first quarter fell to 227 units from 517 units a year ago, saying the decline was primarily in the San Diego/Riverside and Washington D.C. markets.

Morgan had this to say about those releases:

I think those two releases say it all. If you think this is isolated to these two builders or a region, think again. All of the big boys will have similar releases in the coming weeks. On the latest KB conference call, Ivy Zelman tried to pepper the KB execs with hard questions. Karatz’s response when he cut her off was very interesting: "do the math Ivy." Well, if the Street was doing the math, it would be clear these guys will miss their new home numbers by 15-20% this year with lower margins to boot. The incentives and commission bonuses are increasing daily.

KB reps have called me twice this week with "inventory" homes. These are homes deeply discounted because buyers (flippers) walked away from their contracts. By the way, the math for Brookfield is a 56.09% drop. I’ll bet you a dozen donuts KB, PHM, LEN and CTX report double digit drops in order this year approaching, and maybe exceeding 30%. If the Florida market is any indication, the numbers will be north of 50%.

Here is an ad from LEN that Morgan sent me.
Great Incentive on The Millbridge
April Move In!!!!!
Special 4% Realtor Commission
Was $486,365…Weekend Special……..NOW $396,365



Weekend Special? $90,000 off!
Poof. Anyone that paid full price a few months ago is now 18.5% and $90,000 in the hole, and that does not count real estate commissions either. Is Lennar using the dreaded "D" word? No, not yet. How long they can go on selling houses at full price but offering $90,000 in weekend incentives is anyone's guess.

I could not find Millbridge on any of Lennar's Florida listings but by calling a phone number on the ad I found what I was looking for: It is in Port St Lucie, Florida - The Treasure Coast. Interestingly enough there are only 3 units left, and apparently there was a closing breakdown of some kind or other. So... to get rid of those last 3 units, Lennar just repriced that entire subdivision down by close to 20%. Is that desperation by Lennar? If not, exactly what is it?

Let's finish up with more comments from Morgan.

This was our worst week yet. We went three days this week with not a single showing. That’s incredible. I have 35 listings. We usually get 2-6 showings a day. I noted a few months back that once the snowbirds left Florida in March, that we would be in deep trouble going into the Florida shoulder season of April and May. It is here and the buyers are gone. We will see a small surge in buyers for June and July as buyers jockey for school systems, but then it is a decline from August through December. January picks up with the return of the snowbirds.

Not only did we see three days without a single showing, but I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their "life savings" if they sell the homes in today’s market. Her only option is to lose her life savings trying to carry this through the next 12-24 months. I received calls from Utah, California, South Carolina, Vermont, etc. etc. All the same. "We bought a house or a couple of houses for a flip, but we can’t sell them. What do we do, Mike?" I can only tell them that the $400,000 house they bought is now only worth $325,000 - $340,000. Their 10% deposit is gone. Their $3,000 a month in carrying costs is killing them. A year from now these homes MAY be worth $350,000 - $375000 IF we have a strong market. So even a best case scenario means $36,000 in carrying costs to recoup $25,000 - $35,000. That means another $1,000 - $11,000 in losses if they wait . . . and IF the market rallies strong.

I am hoping that if prices fall far enough, the investors will step back into the market, but mortgages and insurance on investment homes is now very difficult to procure in this market. Moreover, rents are down by 20-40%, so the numbers don’t work for investors that cannot afford the 5-10% negative cash flow. The other side of that is, we will need a minimum of a 5-10% increase just to cover the negative, not to mention another 4-8% to cover the commissions. Will we see a 9-18% increase in prices? Hardly likely.

Next January we will see a surge in buying with the return of the snowbirds. They will return not as snowbirds, but as vultures, looking for the bargains at the expense of the flippers.

Don’t forget the ripple effect. Building has come to a screeching halt. Thousands of construction workers are out of work. They are forced to sell their homes, adding to the inventory. Foreclosure filings are on the rise and will hit record highs this year. Banks will suffer as well.

These issues are not isolated to Florida. I hear the same story from friends in Arizona, California, and Washington DC Metro.

By the way, I don’t even take calls from the builders anymore. They have their sales reps on the phones calling agents every day. These are the same guys that didn’t want to know us a year ago. At some point the real story will come out. Brookfield and Lyon are just two small companies that have come clean with the Street. The big boys will have no choice but to start revealing the real numbers. Incentives, free upgrades, free lots, free closing costs, credits, bonuses to agents, increased commissions all mean lower prices to the builders and lower margins. Moreover, we are now seeing a big problem getting homes to appraise for any of the higher prices that a seller might be able to snag. As prices come down, this will be come a major problem for buyers.

The totality of the circumstances paints a bleak picture.

Here's a tip of the hat to Mike Morgan for telling it like it is. Not many brokers are willing to tell people what is really going on. Morgan is one of them and I for one appreciate his honesty. I also appreciate some of the things he is doing for his clients, and I will have more to say about that later next week.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

A Path of Devastation

The Rocky Mountain News is reporting Foreclosure shock.

Denver market sees 31.5% increase from first quarter of 2005

The 31.5 percent jump is the largest year-over-year percentage increase for a quarter in almost two years.

The jump to 4,764 foreclosures compared with 3,624 in the first three months of 2005 took some experts by surprise. Public trustee offices in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas and Jefferson counties estimated the number of foreclosures they expect to open this month.

"That is disturbing," said economist Patty Silverstein of the soaring number of foreclosures.

"We still expected to see increases in 2006, but this is larger than what I would have expected. At this point in our economic recovery, we would have expected to have seen a smaller increase in foreclosures," said Silverstein, principal of Development Research Partners.

She said that a main culprit appears to be interest-only and other variable-rate loans that homeowners have taken out in huge numbers in recent years to reduce their monthly mortgage payments.

"What I see is not pretty," said Healey, who also heads the Healey Group and hosts a radio talk show called The Real Estate Advocate on KKZN (AM-760).

He said the number of unsold homes on the market has been growing by an average of 2.5 percent a week. The increasing supply is putting downward pressure on sale prices, especially for the lower-priced homes most likely to go into foreclosure.

That's a vicious cycle because it forces more sellers to lower their prices, driving even more houses into foreclosure, Healey said.

"Primarily, I see a huge glut of homes priced under $300,000," Healey said. "Under $200,000, it is just a blood bath, a path of devastation. It is just ugly."

In some areas of Adams County, sellers of lower-priced homes are finding that the market value of their home is down 15 percent to 17 percent from what they paid a couple of years ago, Healey said.

Economist Tucker Hart Adams said that foreclosures are a lagging indicator and will continue to rise even as the economy gets back on its feet.

Quotable Quotes

1. "That is disturbing"
2. "What I see is not pretty"
3. "Under $200,000, it is just a blood bath, a path of devastation. It is just ugly."

Economist Tucker Hart Adams said that foreclosures are a lagging indicator and will continue to rise even as the economy gets back on its feet.

Exactly what kind of nonsense is this: "as the economy gets back on its feet"?

We have had 15 consecutive rates hikes (presumably showing economic strength), as well as low unemployment if you happen to believe the government numbers (I don't). We have also had record low interest rates for years, so I am tired of these cheerleaders making up excuses. The "lagging indicator" of foreclosures is just another feeble excuse .

That said, Tucker Hart Adams is correct in a way. Foreclosures are indeed a lagging indicator. Unfortunately his thought process is flawed. We are so deep into a recovery that foreclosures should be falling. We are also so deep into a recovery that wages should be rising. In fact we are so freaking deep into a recovery that the recovery is nearly over. Yet here we are, foreclosures rising in a recovery, real wages falling in a recovery, and in our Alice in Wonderland scenario virtually no one sees the recession that is staring us smack in the face.

Just as every peak produces new logic proposing that "It's different this time", this bubble peak is no different. Check out the latest New Math on Homes. I was staggered by the number of economists falling for such absurd assumptions.

Every week there is another story.

• Inventory rising.
• Sales falling.
• Builders slashing prices.
• Foreclosures rise.

The real estate bears certainly were early, but it is the bulls that have zero sense of reality right now.

Builder Sells Homes For Cost

This market turned on a dime. They always do. In July of 2005 people were camping out in Florida to get in line for buying a condo. Now you have projects being cancelled, not only in Florida but Los Vegas and Massachusetts. Want to buy a home in Florida? How about 40?

The Datona Beach News Journal is reporting Builder's sale aims to move 40 homes.

Skittish investors, leery of the air seeping out of the housing bubble, have left at least one area home builder awash with completed homes and no buyers in sight.

Holiday Builders, the 30th largest builder in the nation, is hoping to turn the situation around by selling homes at what the company says are "builder's cost" this weekend.

Jennifer Youngblood, a spokeswoman for the builder, said homes that were previously priced between $219,000 and $276,000 will be sold at rates ranging from $204,000 to $249,000.

"These homes are available on a first-come, first-served basis," Youngblood said, about the properties that are spread throughout the community.

The company is staging a special sales event between 10 a.m. and 6 p.m. today at their showcase home here on Eagle Harbor Trail in an attempt to sell about 40 new homes that had been ordered by investors. Consumers should be prepared to put down $5,000 and close on the property in 45 days.

Changes in the market, including rising interest rates and an abundance of inventory, apparently caused some buyers who hoped to profit from the boom in area housing prices to walk away from the idea.

"We found ourselves in a unique situation," Youngblood said. "This is the first time that we have done something like this."

Charles Rinek, president of the Flagler/Palm Coast Home Builders Association, said he has heard of similar situations in which buyers forfeited their deposits and walked away from contracts.

Selling homes at cost huh?
How desperate is that?
If true (and it is hard to say) this builder is in deep trouble.
If it is not true then the builder is a liar (but likely in deep trouble anyway).
My guess is that they may be going near cost, but the developer is hoping to escape with profits because of the forfeited deposits.

Cancellations in Las Vegas

The Miami Herald is reporting Las Vegas a rough ride for Miami builder.

Two years ago Miami developer Jorge Perez said the Las Vegas market was ripe for the high-rise condominiums he has built so successfully in Florida. But Sin City has not been kind to South Florida's ``Condo King.''

In January Perez canceled a twin-tower condo called ICON Las Vegas. Now he's weighing selling the 25 acres on which he, along with actor George Clooney, planned to build a massive -- and much-hyped -- 11-tower condo project, Las Ramblas.

The $3 billion project was to rise near the Las Vegas Strip, and full-page newspaper ads heralded the arrival of Perez, Clooney and team as the second coming of the Rat Pack. But now Perez says demand is lower than expected and construction costs much higher -- in fact, he says, Las Vegas' condo market has dropped off more sharply than any of his other markets.

"Did we misjudge the levels of demand and costs in Las Vegas?" said Perez. "The answer is yes."

Fortune International CEO Edgardo Defortuna considered a Las Vegas project but backed out.

"The reality is that there are such wonderful, gorgeous hotels at very reasonable prices," said Defortuna. "Why would you stay in a condo when you can stay in a hotel in the middle of the action and not pay that much price?"

But not everyone is ready to throw in the towel on condos in Las Vegas. WSG's Eric D. Sheppard said the condo market is real in Las Vegas, but too many builders rushed in and sold units before understanding their construction costs.

"We are very bullish," Sheppard said. "We plan to announce a two-tower, 1,600 unit condo, condo-hotel and spa project in the next 30 days."

It seems to me that Sheppard is begging for bankruptcy. Perez and Defortuna saw the warning signs and backed out in time. Perez in particular got very lucky. Once groundbreaking starts, it is very hard to back out of it. On a condo project that size (11 towers and $3 billion on the line), Perez was going to be in one nightmare of a problem.

"The reality is that there are such wonderful, gorgeous hotels at very reasonable prices," said Defortuna. "Why would you stay in a condo when you can stay in a hotel in the middle of the action and not pay that much price?"

That indeed is the reality of the matter. Let's add to that reality.
Why would you buy a house in California or Florida when you can rent it for half as much? Please add Boston and Las Vegas to that list. Also note that the Phoenix active listing count is now over 40,000 homes. That does not include for sale by owner.

I do not know how to even begin to describe what is happening in to one of the most affluent suburbs in the nation. Please read Down and Out in Bloomfield Hills.

Outside of a few still appreciating areas (One trusted source tells me that Atlanta is still one), housing has turned. But not only has housing turned, it has turned 180 degrees. Yet Bernanke keeps hiking. Why? Bernanke hikes because he has to. The stock market, the carry trade players, 5,000 hedge funds, and the mortgage loan sharks still have not gotten the message. The message is that the Fed no longer wants speculation.

Speculation was fine "nudge nudge wink wink" when the Fed was acting to contain "the deflation monster", but now it seems that perhaps they have unleashed something else indeed: a bubble credit blowout that they do not know how to contain.

Yet each hike in rates is another nail in the coffin of housing. Given that "Housing Is The Economy, Stupid" Bernanke better damn well be praying that the markets get the message before he turns a recession into a depression with these rate hikes. Right now he simply has no choice whether he likes it or not. Market speculation is forcing his hand. Laugh if you want, but it seems to me that housing says Bernanke has overshot already. It remains to be seen how long it will take before the market gets the message.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Lacker vs. Lenders - Who to believe?

On April 4th, Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond presented his Economic Outlook.

Looking ahead, to assess the outlook for consumers’ spending, you begin with their income prospects. Expectations are that the overall labor market will continue to be strong: continued job growth, a moderate unemployment rate, and further real wage gains should lead to healthy advances in incomes and, thus, overall consumer spending.

Before turning away from households, I’d like to touch on residential housing activity. As I’m sure you know, the housing market has had an amazing run in recent years. To cite one measure, new housing starts rose from 1.57 million units in 2000 to 2.07 million units in 2005, a remarkable 5.7 percent average annual rate of increase. And that’s just the number of housing units; on top of that, the size and quality of the average new home has been steadily increasing. Another indicator of strong demand was rising prices for existing homes. For the nation as a whole, the price of a typical single-family home rose 55 percent over the same time period.

You won’t hear me use the B-word to describe this remarkable activity. Instead, I believe fundamental factors can fully explain the expansion we’ve seen in the demand for housing, particularly rising incomes, rising population, favorable tax treatment, and very low interest rates.

Looking ahead, it seems reasonable to expect the housing market to remain strong, even as some further tapering off in sales and production takes place.

The key point I would like to emphasize is that the housing phenomenon was not a mysterious, independent boost to the economy, driven by some sort of animal spirits, but instead was a rational response by households to the economic fundamentals, especially very low real interest rates. Thus, going forward, the adjustment of the housing market to evolving fundamentals will continue to fit comfortably within the standard economic framework. My assessment is that plausible rates of moderation in housing activity will not pose a problem for overall activity this year or next. Moreover, I don’t see diminished housing price appreciation as a major problem for consumer spending, since again, the primary determinant of spending is income, and we see solid and improving prospects for real incomes for the nation as a whole.

Phoenix Lending Survey

Please compare and contrast the above rose coloured outlook with the Phoenix Lending Survey.

1. Two-Thirds of Lenders Nationwide Say U.S. in Midst of Real Estate Bubble
2. Half Say Burst Has Begun or Will Shortly
3. 93 Percent of Lenders Predict Housing Prices Will Drop 10 - 20 Percent
   

Two-thirds of lenders nationwide believe a real estate bubble currently exists in the United States - and half of them believe it has already begun to burst or will burst in the next six months, according to the results of this quarter's Phoenix Management "Lending Climate in America" Survey.

A significant 93 percent of lenders surveyed expect an anticipated housing correction to result in real estate prices declining 10 to 20 percent across the country.

"In the minds of lenders, the housing bubble has moved from 'Loch Ness monster' myth status to an economic reality that could have a significant, negative impact on the lives of many Americans," said Michael E. Jacoby, Managing Director and Shareholder of Phoenix Management Services. "A year ago, 46 percent of lenders believed we were in a housing bubble. Today, that number has climbed to 66 percent - and many of them believe a correction is imminent and could lead to a drop in housing prices of up to 20 percent."

When asked when they believed the housing bubble would burst, thirty percent of lenders said it has already begun to happen. Twenty percent predicted it would occur in the next one to six months, and 27 percent thought it would happen seven to 12 months from now. Nine percent said it would occur in 2007.

Among the 92 lenders who participated in this quarter's survey, only nine percent said they did not believe a housing bubble existed.

When asked which area of the country was likely to be most affected by a housing correction, 30 percent of respondents named the Northeast, followed closely by 27 percent who predicted the West Coast. Fourteen percent named the Southeast, and five percent, each, named: the Mid-Atlantic, the Mid-West, or said all regions will be affected equally.

Half of all lenders believe a housing correction will result in real estate prices dropping up to ten percent. Forty-three percent of lenders said the decline would be as high as 20 percent.

For the first time in five years, they believe the short-term outlook for the economy is stronger than its long-term outlook.

"When we asked lenders how they expected the economy to perform over the next six months, they assigned it a high 'C' grade," Jacoby said. "But when we asked them how it would perform in the second half of 2006, they downgraded the economy to a low 'C.'

"Clearly, there are lingering concerns about whether the economy has fully rebounded in a meaningful way."

Lenders also reported lukewarm growth plans by customers. Twenty-two percent said their customers planned to make new capital investments. Sixteen percent, each, said their customers planned to: enter new markets, introduce new products or services; raise additional capital; or make an acquisition.

Only 14 percent of lenders said their customers planned to hire new employees.

About the Survey

The Phoenix Management Services "Lending Climate in America" survey is conducted quarterly to gauge shifts in lenders' attitudes toward the economy. Ninety-two lenders from commercial banks, commercial finance companies and factors across the country were surveyed this quarter. Respondents completed a written questionnaire during January and February.

Hmmm. What a quandary! Who is one to believe?

Let's start here:

You won’t hear me use the B-word to describe this remarkable activity. Instead, I believe fundamental factors can fully explain the expansion we’ve seen in the demand for housing, particularly rising incomes, rising population, favorable tax treatment, and very low interest rates.

• Rising incomes? Nope - that is a lie. Real incomes have fallen since 2002. Not only that but a study put out by the Fed itself says so. Here is a report on Federal Reserve Board’s Survey of Consumer Finances.
• Rising population? Ok - but is it rising faster than it was 5 years ago in any significant way that would cause home prices to double in many locations? Nope, California is actually losing population now.
• Favorable tax treatments - Have mortgage deductions changed in the last 5 years? I think not. Capital gains exclusions did change but that is only on the primary home and that would seem to encourage cashing out rather than buying new homes if anything.
• Very low interest rates? Ding ding, we have a winner. But is that a "fundamental reason" or a the Fed blowing a bigger bubble in the aftermath of the NasCrash?

The fact of the matter is home prices have risen in price over 3 standard deviations from the norm as compared to either wages or rents. That Mr. Lacker is the definition of a bubble.

Two thirds of lenders say we are in a bubble. Most of those that do not use the word bubble still think prices are headed for a steep correction. It should not take a genius to figure that out so one has to question the mental agility of Mr. Lacker.

Why Lend?

On that note, the telepathic question lines are open for questions. Here is the main question on everyone's mind "Ok Mish, so if we are in a bubble why does everyone keep lending?" Good question. Here are the answers:

• Lenders can pass the trash. As long as they can collect an origination fee and pass the loan off to Fannie Mae or Freddie Mac or to hedge funds willing to suck up every CDO (collateralized debt obligation) they can find, lenders are quite willing to keep making real estate loans. They keep the safest of the lot and pass the trash to someone else. The Fed has unleashed a credit derivatives monster that it does not know how to stop, and it seems some like Mr. Lacker are not even aware that it exists or the effect it has had on home prices.
• If lenders think they do not have any skin in the game they will just keep lending, bubble or not. Right now, right or wrong (and I think wrong), lenders think the popping of the bubble will not affect them. When a derivative crisis unfolds (and it is only a matter of time before it does), we are going to see some lenders go under.
• One must also point out the unshaken belief right now that everyone has in the Fed. In every problem situation for twenty years, the Fed has attempted to solve the problem by throwing money at it. A pervasive attitude seems to be the Fed once again will bail everyone out in the "unlikely" event there is some sort of major blowup. It is only a matter of time before that complacency is severely tested.
  

A second question just came in. Here it is "Mish do you have any real proof of the extent of the housing bubble?" Yes, as a matter of fact I do.

International Housing Affordability Study

I suggest everyone take a good hard look at the 2nd Annual Demographia International Housing Affordability Survey for 2006.

It is a very interesting study and as best as I can tell unbiased. Following is one of my favorite charts from the article.

Many analysts and much of the business press have followed the unprecedented housing cost price escalation with seeming glee, while ignoring the reality that household incomes have not been inflating at a corresponding rate. This superficial approach is both naïve and irresponsible. Any number of products might be imagined that might be converted into objects of financial speculation, at the same time as rendering a nation less prosperous. For example, massive and unprecedented price escalation, from speculation in food products or medical markets might serve the short-term interest of investors, while imposing broad detrimental effects. There is a public interest in maintaining house prices within the economic means of most households.

Oddly, the most affordable markets have sometimes been characterized as poor performers. There are many losers when home prices become decoupled from the underpinning income realities. Middle income and lower income households find it impossible to afford the higher prices and may be relegated to renting for many additional years, if not a lifetime. The equity that they would have built up instead goes to the pockets of landlords. Others fortunate enough to afford the higher prices must settle for more modest houses, which are likely of lower quality.

Some analysts have noted that, by mortgage qualification standards, housing affordability is no worse than in the early 1980s. However today’s unaffordability is different. The unaffordability of the early 1980s was due to high interest rates. As interest rates declined, households refinanced the debt on their homes at lower rates, improving affordability. This made the 1980s unaffordablity inherently temporary, even for those who purchased at the most unfavorable time.

Unaffordability, however, is not temporary for households who purchase homes at the excessively high prices typical of the highly regulated markets. By reducing the share of households that can afford to buy homes, high Median Multiples inevitably lead to greater income disparity. Thus, to think of rising house prices as a good thing while ignoring the incomes that support them is to miss the point completely. Australian Reserve Bank Governor Ian MacFarlane emphasized this point in parliamentary testimony with reference to the unaffordable housing prices in Sydney. The reality, of course, is that the more affordable markets are the better performers by virtue of the higher standard of living that they facilitate for more households. However, the reality is that declining housing affordability has reached crisis proportions in many markets.

The study goes on to propose that land use restrictions are the big reason behind this rise, with charts to prove it too, but in general I have to question that theory.

Have land use restrictions dramatically changed in Boston, San Diego, Las Vegas, Florida, Phoenix, etc, in the last 5 years (places where prices have doubled in that time frame)?

If not, then why would land restrictions cause a sudden explosion now as opposed to a gradual escalation over time? Would the problem go away if all restrictions were removed in LA? I think not.

Perhaps a better answer is that manias simply got more carried away in some parts of the country than others for a multitude of reasons. The study did not mention proposition 13 or low property tax rates in Florida (at least I did not see it if they did). Las Vegas and Phoenix did participate in a big way in the bubble but as best as I know land was plentiful around Las Vegas and plentiful around Phoenix as well.

If land use is such an overriding factor then one would have to say that California will not crash. Does anyone buy that theory? I don't. Did lack of land stop prices from crashing in Japan?

The progression of events seem to have been something like the following

• 1% interest rates kicked off the mania.
• People looking ahead to retirement started buying homes in warm places.
  
• The bigger the price increases, the bigger the mania and the more people wanted in.
• Those sitting on the sidelines and burnt by the Nasdaq crash started chasing the expanding housing bubble.
  
• Cash out refis accelerated whatever trend there was in place.
• Credit lending standards fell through the floor.
• Buy now before it's too late mentality kicked in. The bigger the bubble the bigger the panic buying until the supply of stupid buyers exhausted itself.
  
• Rust belt places losing jobs did not participate whether or not land use restrictions were in place.

It seems to me it was a logical progression of things that rapidly came to a head as opposed to simply land use restrictions. Those comments, however, are nitpicking at a very significant research study. A tip of the hat goes to Demographia. International readers will appreciate the analysis as well. The study has ratings for all major urban markets in the US, Canada, UK, Ireland, New Zealand, and Australia. Please take a look.

Let's now return to the original question:
Lacker vs. Lenders - Who is one to believe?
Is it close?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The Fox and the Henhouse

The LaTimes is reporting that a Bill on 401(k)s raises worries about conflicts of interest.

House leaders want to eliminate a longtime safeguard against conflicts of interest in retirement planning, creating a major sticking point in efforts to overhaul the U.S. pension system.

The proposal, championed by House Majority Leader John A. Boehner (R-Ohio), would lift a barrier to firms that run 401(k) retirement plans that keeps them from giving employees investment advice if they stand to benefit financially.

The change would allow mutual fund companies such as Fidelity Investments to both manage 401(k) plans and advise workers to steer payroll deductions into their own funds.

Boehner said his proposal would make it easier for workers to get professional investment advice. As more companies abandon their traditional pensions, there is widespread agreement that people need help to ensure that their 401(k) accounts will meet their needs in retirement.

A widespread agreement by whom?
By the foxes hired to guard the henhouse?

Here is an interesting stat: 75% of mutual funds under perform the S&P average.
Here is another interesting stat: Long Term US Treasuries have outperformed the S&P for 6 straight years. One holding the S&P for that duration has not made a dime. I do not even want to approach the issue of real returns (inflation adjusted) because it might make you sick.

Has not Wall Street been touting equities the entire time?
Who benefited? Anyone that bought the Nasdaq 100 in 2000 and held on is still down 60%.

Mish aren't you cherry picking tops?
Yes of course I am.
But question remains: are we closer to a top than a bottom?
By any reasonable measure of value (PE or dividends) valuations are not only rich but insanely rich.

The foxes will have you "averaging in" right at the top. It is of course a method guaranteed to make profits, not for you but for the foxes. There is every reason to believe that stocks are in for a period of underperformance for a decade. That is simply how things work. 25 year bull markets and obscene speculation, first in the Nasdaq and now in credit, junk bonds, housing, and consumer spending are simply not wiped out in a two year decline in one index. The cumulative bubbles here are far greater than the Nasdaq bubble in 2000. I am in survival mode here. Whatever is left of this runup in the S&P and DOW let someone else have it.

"The examples of Enron and WorldCom painfully illustrate that workers need quality advice to help them make sound investment decisions about their retirement future, and the House approach provides an important new retirement benefit to working families," Boehner said in a statement.

Enron Flashback

Excuse me but who was recommending Enron?

Flashback 07/18/2002
Abbey Joseph Cohen is still call ENRON a hold. She has yet to call for a single SELL in a market that all but eroded away. They are the biggest perpetrators.

Here is a chart showing the gross incompetence by Abby "the guru" Conehead.



The above image is just a snip from The Enron Timeline with thanks to the Big Picture Blog.

My recollection is that there was not a single sell recommendation by any major wall street brokerage until after Enron had lost over 95% of its valuation. Now we see Boehner using both Enron and Wordcom as a reason FOR letting the fox guard the henhouse. Oh the Irony.

Please someone tell me how much the brokerage houses have pumped into Boehner's campaign chest. The fact remains that no timely sell signals were isssued on Enron, Worldcom, Kmart, and now GM.

Simple, Straightforward, Wrong

Here is a snip from the book Ahead of the Market:

Most of the major brokerage firms, in addition to issuing a recommendation on a stock, also provide a recommendation on the stock's industry. An analyst's recommendation is supposed to boil all his research down into one simple actionable piece of advice, the answer to the question, "Nice ten-page report, but what should I do about the stock?"

Not surprisingly, the recommendation is probably the most widely used piece of information contained in the analysts' research reports simply because it is, at face value, easy to understand and appears to be straight-forward. Do not be fooled. An analyst's recommendation is a wolf in sheep's clothing.

It is simple.
It is straightforward.
And invariably it is wrong.

In fact, if you had bought those stocks that were the most highly recommended by analysts over the two-and-a-half-year period from April 2000 to September 2002, you would have lost a phenomenal 47%.

Worldcom Flashback

Let's check out some CNN transcripts on Wordcom.

Interview with Scott Woolley
Aired July 8, 2002 - 13:31 ET

PHILLIPS: Now we've got to talk about Jack Grubman, the Salomon Smith Barney analyst. Big player here.

WOOLLEY: Sure. You know, made $20 million a year, back in the height of the telecom boom. Was the most important influential telecom analyst on Wall Street for years and years, very plugged into these companies. Orchestrated and indeed suggested a lot of the major mergers that went through, and in WorldCom's case, turned out very badly. So he's going to take a lot of flak today. There is no question about that. I mean, he really is this poster child for the ethical problems that Wall Street has had over the past four years.

PHILLIPS: Well, he is the one who attended the WorldCom board meetings, he is the one that -- he was calling investors, telling them to sell, correct?

WOOLLEY: Yes. And I mean, he finally got around to issuing a sell recommendation on WorldCom stock a couple days before these accounting problems were issued. I mean -- but he was -- there was no bigger tout on this stock than Jack Grubman. And he was very tied in, and because he was so tied in, people assumed he knew what he was talking about, and that he had a reason for believing in this company. Ultimately it was proven that he didn't.

The Settlement

The May 01, 2003 issue of CFO issued a report entitled On Closer Examination. Let’s take a look.

As part of a more than $1.4 billion settlement Spitzer brokered with the investment banks over various misdeeds, 10 Wall Street firms, including Merrill Lynch, Credit Suisse First Boston, Smith Barney, and Morgan Stanley, will be required to pay $900 million in "retrospective relief" for investors, $450 million over five years to fund research from independent companies, and another $85 million for educating investors.

The settlement, as well as new rules from the National Association of Securities Dealers, the New York Stock Exchange, and the Securities and Exchange Commission, will also prohibit investment banks from subsidizing their research arms or influencing analysts' pay, and require analysts to disclose relationships with the companies they follow. An additional directive from the SEC will require analysts to certify that their reports reflect their true personal views.

And as long as the one-stop shop remains, analysts will have conflicts, says Haas. "As long as research still comes out of the same house as investment banking, there will be problems," he maintains. He doesn't think the disclosures about bankers' relationships with their research clients will help much, either. According to Haas, the disclosures will eventually look like boilerplate, and people will begin to ignore them.

Hill agrees that reform might not have a huge impact on the system. "You can issue all the 'thou shalt nots' you want, but investment bankers and analysts are going to talk, and [analysts] are still going to feel that they have to play ball," he argues.

A History Lesson

WhisperNumber is writing about The Firms and People that Steal Your Money.

"Those who do not learn from the mistakes of history are doomed to repeat them".

A few years back I considered myself an 'Ignorant Individual Investor'. I labeled myself within this group of investors simply because I knew very little about investing or how the Wall Street game was played. I found out during the 'bubble years' that the playing field wasn't level, and that making money turned out to be much more difficult for me than for those 'in the know'. I followed the advice of so-called 'experts', made trades based on 'research' reports, and recommendations. But what I didn't know was that many of these recommendations and reports coming from analysts and professionals were 'bunk'. In many (proven) cases information was intentionally offered to mislead, whether through fraudulent research reports, unfair research, investment banks receiving or not disclosing payments for research, or the engaging in spinning of IPO's. The companies involved in these practices include the following: Citigroup's (NYSE: C) Salomon Smith Barney unit, Merrill Lynch (NYSE: MER), Credit Suisse Group's (NYSE: CSR) Credit Suisse First Boston, Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MWD), Bear Stearns (NYSE: BSC), J.P. Morgan Chase (NYSE: JPM), Lehman Brothers (NYSE: LEH), UBS Warburg, and U.S. Bancorp's (NYSE: USB) Piper Jaffray.

These firms hope we stay ignorant and will soon forget the wrong doings they have brought upon us. As for myself, I have neither forgiven nor forgotten. In fact, I'm still quite bitter as the evolution (or better said lack thereof) within Wall Street's research and investment-banking relationships has little changed. It is this bitterness that has helped me become more aware of the field of play. It was not and still is not fair to the individual investor, and my excuse of being ignorant can only be used once. Going forward I know what I'm up against, and I wanted to remind those of you that may be slipping back into your ignorant ways that without real change, you'll have no one to blame but yourself next time. And believe me, there will be (another) next time.

Let's review some of the stories that made quick headlines:
'A top Morgan Stanley stock analyst won't face civil charges in the conflict of interest investigation of analysts and brokerage firms and will be allowed to continue working on Wall Street, a source close to the investigation said Wednesday. Mary Meeker, a leading tech stock analyst, will be criticized in the landmark settlement with Wall Street's top brokerages, but she won't face sanctions like those placed on other star analysts for allegedly misleading investors with biased stock ratings during the street's 1990s "bubble," the source said Wednesday, speaking on condition of anonymity.'

'Merrill Lynch's Henry Blodget is facing regulatory action and Salomon Smith Barney's Jack Grubman has been barred from the securities industry. Frank Quattrone, the former powerful banker in charge of the global technology group in Credit Suisse First Boston, is also being investigated by regulators.'

So what has happened since these very prominent figures have appeared in scandalous news headlines?

Mary Meeker is still at Morgan Stanley, and was recently praised in a Forbes article as "Morgan Stanley's luminary Internet analyst." She was 'allegedly' touring China at the time. And kudos to Forbes for letting bygones be bygones with Mary's 'alleged' wrong doings.

Merrill Lynch hall of famer Henry Blodgett, who privately disparaged stocks he had touted in public, is, (now get this), working for online magazine Slate.com as a reporter to cover the insider trading charges facing Martha Stewart. Slate.com can now join the ranks of CNBC, Reuters etc. for maintaining journalistic integrity. As for the regulatory action against Blodgett (a settlement with no admission of wrong doing was reached with AG Spitzer), well, that would be overlooked on anyone's resume, right?

And in a related Blodgett/Merrill story; in July of this year, Henry Paulson Jr., chief executive of the Goldman Sachs Group, chose former director of research at Merrill Lynch, Andrew Melnick, to run Goldman's research department. What's the relation here? Mr. Melnick was the supervisory analyst in charge of Henry Blodgett at Merrill Lynch. (By the way, Paulson is a Board member of the NYSE). Don't you just get all warm and fuzzy inside knowing that Goldman has taken the high road here and brought in a fresh research perspective?

Jack Grubman has moved on…uh, well…moved over to a new office at least, within Citigroup. (No, really, I couldn't make this stuff up if I tried.) Despite being banned for life from the securities industry for misleading his clients with pumped-up reports on telecommunications companies, Mr. Grubman has an office at a Citigroup bank building (he works at least 15 hours a week at the banking group to help prepare its defense against lawsuits). His $33m severance package maintains that he would have to commit time to the firm's legal team to ensure a payment of $50,000 every three months. The payment is part of a $1.2m cash deal spread over 18 months. The bank is also paying for Mr. Grubman's own legal bills. The severance package included forgiving a $15m loan he was given in 1998; another $12m came from cashed-in share options and restricted stock. Let's hope the 15 hours a week isn't too much for Jack and he spreads it out over five or six days.

Nothing has changed, and nothing will change. If you think otherwise, you're wrong or delusional. How can I be so sure? Easy. Name me one firm that has been brought to court, found guilty and duly punished with executives (remember those guys in charge?) sent off to jail? Better yet, name me more than one individual from the above mentioned firms that has been taken to court, found guilty, assets taken, restitution enforced, and sent to jail? The majority of executives and all the firms have been able to get off neither admitting nor denying wrongdoing, and have ended up paying a pittance of a fine. (By the way, many of the settlements were covered by corporate insurance policies.)

As stated in the opening sentence: "Those who do not learn from the mistakes of history are doomed to repeat them".

A question by Mish

Can I be blunt?
Hmmm. The Mish telepathic message lines are flooded with responses.
In fact, we are so close to a circuit overload that I have to stop the survey in a new record of 10 seconds flat. It seems the answer is 99 to 1 in favor of Mish being Blunt" so here goes:

Wall Street pimps like Henry Blodgett, Abbey Joseph Cohen, Jack Grubman, Mary Meeker and an endless list of others have proven time and time again they can not be trusted. $1.4 billion in fines spread out over 10 major Wall Street firms is peanuts. With fines that anemic, it is a license to bribe, steal, and cheat. I have no doubt that a big succession of "high fives" went out over that settlement. Wall Street will continue to lie, steal and cheat while smiling and telling you to "have a nice day".

If you want the fox guarding the henhouse then please write your senator or congressman and tell them it is OK with you. If not, please send them an appropriate message. Yes, you have my permission to be blunt.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/