CNN is featuring a great article that highlights how it’s difficult to believe what so-called experts predict will happen in the housing market.

Before you put much hope in forecasts for a 2008 rebound in the battered housing market, consider this: A year ago at this time many top economists were looking for that recovery to begin in 2007.

Instead, the year saw historic declines in nearly every measure of housing strength and home building, and left a trail of predictions from some of the nation’s top economists that look - at best - foolish.

Anyone can be an expert at anything. It’s about time a mainstream media outlet is reminding us of these incorrect predictions.

“A lot can go wrong here,” said David Wyss, chief economist at Standard & Poor’s.

“I thought we’d have problems, but I thought it’d be a smoother adjustment,” Wyss said about the problems that developed in mortgage-backed securities. “The financial side was much worse than I thought it was going to be.”

A year ago Wyss was forecasting a 7 percent drop in home prices from peak levels. Instead prices fell nearly 10 percent from the July 2006 record.

“Everyone thought I was nuts. Now it turns out I was an optimist,” he said.

There are two lessons to be learned:

1. It’s difficult to predict exactly what will happen with the housing market (or any market for that matter)
2. Don’t believe predictions from so-called experts

The build-up or inflation of the housing bubble was based heavily on speculation without much regard to market fundamentals. The future of the housing market will likely be determined by the same speculation, for better or for worse.

Kool-Aid, Real Estate | No Comments »

The New York Times is reporting that in several cities officials can’t keep up on mortgage fraud investigation cases.

The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said.

…

“I don’t think any law enforcement agency can keep up with mortgage fraud, because it’s such a growth industry,” said Chuck Cross, vice president of mortgage regulatory policy for the conference of state bank supervisors, an organization of regulators and bankers. “There’s too many cases, not enough agents.”

Mortgage fraud covers crimes like false statements on mortgage applications and elaborate “flipping” schemes that involve multiple properties and corrupt appraisers, title companies and straw buyers.

In one common flipping plot, someone buys a house, has it appraised for more than its true value and sells it to a straw buyer for the inflated price, pocketing the difference. The straw buyer lets the house fall into foreclosure, leaving the bank with the loss.

Why wouldn’t banks go after any money from the straw buyer? If the laws are written so you can simply walk away from a house without having to pay anything back, then we’re likely to see more and more fraud schemes revealed.

Kool-Aid, Real Estate | No Comments »

Financial Times has a nice op-ed that discusses how despite liquidity injections from the central banks, commercial banks still can’t manage to straighten their mess out. (the full article was available earlier, but now requires free registration to be read in its entirety)

The combined central bank injection of liquidity last week was impressive. Still, more than five months after the interbank market froze, banks’ thirst for cash seems unquenchable. The central banks have done everything they can to keep financial markets orderly. They took the risk of feeding the moral hazard beast and what did they achieve? So far they have avoided the much-feared “Big Crunch”, but the end of the tunnel is not yet in sight. The time has come to ask the harder question: do commercial banks get it?

What are they drinking? We have an idea.

Obviously, shareholders do not like the dilution of their stakes, but this is what shareholding is all about. If a company has suffered, or is about to suffer, heavy losses, its shareholders will have to bear part of the trouble. Delaying tactics prolong the misery without solving the problem, which will not go away.

Shareholders have no problem enjoying immense profits during good times. It’s nice to see someone point out how delay tactics have no real effect in solving the problems. We’ve heard many delay tactics proposed for the mortgage markets such as bailouts and temporary rate freezes, but ultimately they have no effect on solving the problem.

Credit, Financial Market, Kool-Aid | No Comments »

In our last post, we hinted at some discussion that this bubble is bigger than anyone had expected. After a weekend skiing in Utah, the KoolAidMan still couldn’t get away from Real Estate!

Throughout the day, several people had been discussing Real Estate. In the lodge restaurant, there was a table of three or four Realtors on their weekend ski adventure, enjoying their lunch and talking about how much money they made in the past few years (who openly talks about how much money they make?) and how things just keep going up and up. Later in the day, on more than one occasion, discussions were overheard with things like “I bought my PC (Park City) house in 98 for $250K and now it’s worth $1.5M. I’m trying to sell it now and that’ll be my retirement!”

We’re at a point where we’ve never been in history; we’re in uncharted territory. Who knows what’s going to happen. The only thing that is certain is that people are still drinking Kool-Aid and only listening to what they want to hear.

Kool-Aid, Real Estate | 2 Comments »