December 2006

In December 4 mortgage originators terminated their operations:

  • Sebring Capital * Dec 1st
  • Ownit * Dec 7th
  • Harbourton mortgage * Dec 20th
  • Mortgage Lenders Network * Dec 29 (yesterday)

It’s about once per week now.


Now the official media and Greenspan himself are declaring that the housing had bottomed. Good article on this on BP. Indeed, there are many positive surprises coming lately. Sales are improving, inventories are declining.

I give all the credits to Bernanke. He managed to print the huge amount of new money lately while keeping inflation at bay. Most impressive was summertime, when he managed to hold off from printing too much money (even though real estate was in freefall) and convinced the market that he is serious about inflation, which crushed the 10-year bond benchmark index from 5.25% to 4.60%.

When inflation worries faded back in September, the printing machine was turned at full speed on, and now we feel that it’s slowly getting better.

So did the real estate bottom? Of course not. All past real estate declines took from 3 to 6 years, and we barely finished the first year.

But now, when inflation worries are behind us, the Fed are in power to make this decline slow and low. It’s like a Chinese water torture, it will be many years of real estate prices either falling or at least trailing inflation.

By the end of the next year the toxic option mortgages will be mostly gone. Three mortgage originators are already broke in the last few weeks. It will take few more bankruptcies before the Wall Street will completely refuse to pay more than $0.95 for any $1 of any kind of subprime loan. Suddenly, taking a loan or refinance will become hard as usual. Do you remember the times where the lender will not lend you anything until you put 20% down? I don’t know about 20%, but 10% down without any piggybacks will become a requirement a year from now. Mark my word.

The record now percentage of homeowners will slowly decline to historic averages. The number of renters and landlords will increase dramatically.

But what’s most important, the real estate will lose its investment appeal. People will treat real estate as a place to live, not like a saving account. As now one try to purchase the biggest house he can afford, people in future will try to find the smallest and cheapest house that still fits their family in. Suddenly, we will have a lot of extra real estate, which nobody needs.

The home construction will decline below 1 million homes/year. Probably 0.9 million is a good bottom call. Obviously, the construction and related employment will decline by 40% or so. A lot of well paid construction workers will become burger flippers, which prompts me to call a decline in overall consumption levels. Think Japan. Japan is struggling for the last 15 years that people just do not consume enough. We’ll have this, too.

How to prepare for all this? I don’t know exactly. Finding the most stable long-term job will help. Getting new skills will help. Save money in treasury bonds is a very good idea. It will help a lot to understand that money != happiness. Prepare to be happy for cheap. Buy the book of all tourist attractions in your state, the trail map of nearest forests. Subscribe to Netflix and put a 100 movies in the queue. Buy everything on Ebay, sell everything you don’t need on Ebay, too. Look for your health, lose weight, stop smoking. Say no to french fries and crispy chickens with trans fats. Your next car should be very small and efficient.
Be happy with what you already have, because you won’t have anything besides you already have anyway 🙂

As reported here,

Harbourton Capital Group, Inc. (Harbourton or the Company) (OTC:HBTC) today announced that effective December 20, 2006, Harbourton Mortgage Investment Corporation (HMIC), its wholly owned mortgage-banking subsidiary, ceased funding new mortgage loans and initiated a process to wind down its operations.

HMIC was forced to take these actions when it was unable to satisfactorily resolve mortgage repurchase claims asserted by selected investors that had purchased mortgage loans from HMIC.

As we see, the inability of certain mortgage originators to re-purchase bad loans back from the Wall Street is a problem now. The ABX-HE-BBB- 06-2 index, which tracks the performance of low-grade mortgage-backed securities issued in first half of 2006, is under stress since the Ownit crash and still not recovered.

The wave of events from this crash is still coming. As we see, now Wall Street has to watch not only the performance of those loans, but also the ability of originator to fulfill its obligations.

People say that trends and opportunities are defined by the difference between perception and reality. I will take this winter blog post as a basis to illustrate this on example. Let speak about wealth and consumption.

Wealth and consumption are friends, foes, neighbors and sometimes they sleep in the same bed. Wealth affects consumption. Consumption creates wealth. Wealth created by consumption affects consumption. And so one. We need just few numbers:

  1. The wealthiest 20% of U.S. population possess 90% of all financial assets (stocks, bonds and so one), 91% of non-financial assets and 65% of real estate equity
  2. The bottom 80% of population owes 50% of all debt
  3. The bottom 80% also make up 62% of all consumption

In order to make conclusions we just need to plug in some numbers:

  1. All equities are $7.86 trln (2004, we don’t need exact data for 2006)
  2. All non-financial assets $40 trln
  3. All housing equity $9.4 trln

Suppose that this year the change in values of those assets were (we don’t need exact numbers):

  1. All equities +10%
  2. All non-financial assets +5%
  3. Housing equity -10%

After we do just a little math we will find that total asset change this year was:

  1. The wealthiest 20% of population gained $0.7 trln on equities, $1.8 trln on non-financials and lost $0.6 trln on housing for a total gain of $1.9 trln
  2. The bottom 80% of population gained $0.08 trln on equities and $0.18 trln on non-financials. They lost $0.33 trln on housing equity – for a total loss of $0.07 trln!

The conclusion is simple. Wealth and consumption are disconnected now. Those who make up 62% of all consumption are losing wealth, but those who are gaining wealth this year do not consume that much. But wealth may not increase for a while without gains in consumption, as all those profits and valuations are derived, after all, from consumption.

Consumption has to drop and the wealth has to follow. It’s all as simple as that.

Announced here:

To All HMIC Business Partners,

It is with deep regret that we announce Harbourton Mortgage Investment Corporation will cease operations effective the close of business today, December 20th, 2006.

We are extremely proud to have had the opportunity to serve our Brokers, Investors and Business Partners and wish everyone much success in the future.

Another subprime mortgage banker, Fieldstone Investment, seems to be in trouble. Here is the chart:

80 economists pulled the 2007 stocks forecasts from their… thinking spots. The collective mind put S&P500 at +7% by the end of 2007, Nasdaq +9%, Russell 2000 +6%. Barry’s comment is here.

All right. I think predicting the stock market is absolutely impossible, let me, just for fun, pull some numbers from my ass:

  • DJ mid year 11,000
  • DJ year end 11,000
  • S&P 500 mid year 1,200
  • S&P 500 year end 1,100
  • Nasdaq mid year 2,000
  • Nasdaq year end 1,800
  • 10-year bond mid year 4.45
  • 10-year bond year end 4.50
  • Current asset allocation: 5% stocks long, 5% stocks short, 10% international bonds, 30% domestic bonds (no junk), 40% cash.

But I think all this is just a game. Frankly, I have no clue where it’s all going 🙂

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