Well that was an interesting day on Wall Street. First we get a notice that holiday sales were lackluster and we are teetering on the verge of recession (if we aren’t already in one). Goldman Sachs is predicting a recession by the end of the year and stocks were heading sharply lower today. Yesterday, stocks shot up toward the end of the day for no apparent reason (PPT) which is becoming a more and more common occurrence and today, stocks went up strongly on rumors that Bank of America was going to take over Countrywide. Of course you will remember that BofA came in and bought $2 billion worth of Countrywide and before the news today, was looking at a loss of $1.4 billion. The stock shot up 50 percent which shows how volatile the market is right now. Why BofA would buy Countrywide especially on the verge of insolvency is beyond me but the major theme here is there is way too many people in the know playing this like a chess game for short term market moves; which means if you are an average Joe trying to make a buck investing you are going to get your you know what handed to you. The fundamentals still show the company as extremely weak. In fact, early today Countrywide’s entire market cap was lower than its REO portfolio! Yesterday, they also reported that foreclosures soared and doubled:

In Wednesday’s monthly operating report, Countrywide said, among the 9 million mortgages for which it processes payments, the foreclosure rate doubled in December, to 1.44 percent from 0.7 percent a year earlier. Defaults rose to 7.2 percent from 4.6 percent over the same time.

Yes, great time to hop into the market. BofA risks inheriting a toxic mortgage portfolio and all the bad press that will be coming out with stories like this one from the NY Times about the company. Either way, even if the deal does go through it won’t do anything to stop the declining housing market.

The market also jumped up since the Fed essentially gave a verbal acknowledgment that they are willing to do anything and everything to keep this inflated credit bubble going without facing the correction which the market is desperately trying to have.

“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said in prepared remarks before the Women in Housing and Finance and Exchequer Club in Washington, D.C.”

California Dreaming

In a few words, you can kiss the dollar good bye. Many things are playing out simultaneously. But here in California, we are dealing with our own massive demon. We are facing a $14.5 billion short fall in our budget and the Governator just released his plan:

SACRAMENTO — Facing the worst fiscal crisis of his tenure, Gov. Arnold Schwarzenegger today proposed a $141-billion spending plan that would reduce healthcare programs for the poor, close 48 state parks, release tens of thousands of nonviolent inmates early and make substantial changes in almost every area of the state’s budget.

At the same time, he proposed expanding the state’s debt load by more than $40 billion to finance more construction at public schools, colleges and other major institutions.

Let me get this straight, you are suggesting poor people will continue to go uninsured and even have less healthcare (hard to have less when you don’t have any to start with), close 48 parks (how much political will do they have?), release inmates so they can go out into a job market with no jobs (guess how that will work out), and go further into debt? Sounds like a plan to me! God forbid he mention the word tax but this deficit is way too deep and think about this for a second, they are going to cut more jobs in a market where the private sector is already cutting jobs and thus create a spiral downward.

Real Homes of Genius – OC Style

Before I blow a fuse and do a Chuck Norris roundhouse on this computer (I’m talking about Chuck Norris Texas Ranger and not Chuck Norris the Huckabee spokesman), let us do another Real Home of Genius to bring us back into reality. Today we salute you Costa Mesa with our Real Home of Genius award.

I keep hearing these perma-bull housing pundits saying “well California is really different, 1 out of every 2 people is an uber wealthy person. The top 10 percent of California will keep real estate in the stratosphere.” Such absurd concoctions and if we were really in that good of shape, would we be considering letting out inmates to balance the budget? They usually counter, “well OC is a very different place. We have super real estate spider senses and are immune to the world.” They usually forego talking about Santa Ana, Anaheim, Costa Mesa, Stanton, Westminster, Seal Beach, or Garden Grove where the majority of the population reside. These are working class neighborhoods and not your Newport Beach or Laguna Hills areas. So let us take a look at a short sale in this prime county that is in Costa Mesa.

We are now seeing a new phenomenon. Some people bought homes thinking that it was the real bottom and they were getting a great steal, not the bottom of 2006 or 2007 but the current bottom. All false bottoms needn’t apply. This great 3 bedroom 1 bath home spans out over 1,265 square feet. The bank is now the proud owner but you could remedy that with your offer. Someone figured that they would sweep in, probably listened to one of these false bottom prophets, and thought they were getting a great price. Let us look at what transpired here:

Sale History

10/15/2007: $561,000

11/27/2006: $792,000

02/24/2005: $585,000

Someone last year, only three months ago thought they were getting a rock bottom bargain. After all, they were buying this home for $231,000 off the peak price in 2006. What a fantastic deal. But only a few short months later, this home is currently listed at $495,000 with no takers. The previous buyers are no longer in the equation and now the bank owns this place. By the way, from the $792,000 peak we are talking about a 37+ percent drop in a little more than one year. This in the fabled OC.

Why such a radical market shift in the last year? How about this:

“Countrywide continued to shift away from risky subprime loans to people with shaky credit histories, with fundings totaling just $6 million last month, down from $3.73 billion in December 2006.”

Now that is what you call turning off the spigots. That is why we are seeing this massive blood bath in California.  My question is, who in the heck got that $6 million in subprime through? Keep in mind there is pressure for caps to be raised beyond the $417,000 mark and since every shack in California is priced over this mark, we will expect a massive decline to this level.  What they really want is a way for the government to step in and pick up all the toxic subprime and Alt-A portfolios and essentially pass the bill to you, the frugal and responsible savers and earners.  Why live within your means when our Federal and State governments can’t?  If anything bad happens you can simply fire up the credit machine. We are getting a lot of desperate perma-bulls calling for this saying it would be good for the bubblistas and keeping inflated prices:

“The current loan limit is 417,000 usd, but both companies and many members of Congress have said raising the limit would allow Fannie and Freddie to buy more mortgages, thus pumping money back into the system that can be used to create new home loans.

‘Secretary Paulson, the mortgage bankers and others have called for raising the loan limit,’ he said. ‘I agree, and Fannie Mae is ready to take action.”

More like they have their bibs on ready to eat delicious rancid mortgage crap.  More genius ideas are also mentioned in the article:

“This will require innovative high quality products that replace the sloppy credit that has been — appropriately — withdrawn from the market,’ Mudd said.

As one example, he said that some financial institutions have developed a 40-year mortgage aimed at reducing payments and keeping them steady over the life of the loan.”

Why not create a 90 year mortgage and call it what it is, renting! There is a general concept in the debt markets that a debt securitized by an asset should not go beyond the life of the asset. For example, a home typically will give you 30 years of usability (and beyond of course). A car would give you 5 years before the underlying asset either needs to be replaced or isn’t worth much. That is why 7 year car loans do not make sense and 50 year home loans do not make sense.

Being an election year, expect the unexpected but the bottom line is the housing market is done for many years.

Today we salute you Costa Mesa with our Real Home of Genius award.

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This entry was posted on Friday, January 11th, 2008 at 5:47 am and is filed under Real-estate news. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.