Monday, March 29, 2010

If You Wait Long Enough, Everything Comes Back

Hard to believe but another 5-7 inches of rain here between today and tomorrow. Spring time has started off a little spotty so far. That's New England I guess.

Another "Peak" to be Concerned About?
Most are well aware of the "Peak Oil" line of thought. There are many more including:
-Peak Gold Mining
-Peak Credit
-Peak Water

Ad to this the possibility of "Peak Phosphorus"? From the great site The Straight Dope:
Dear Cecil:
I've recently read claims that world reserves of phosphates, a mined resource essential in the production of agricultural fertilizer, are rapidly running out. The potential implications of this fact, if it is a fact, make global warming sound like a back-bencher in the End o' Civilization tournament. Can you, in your vast knowledge, shed any light on the subject? Is peak phosphorus worth worrying about, and if it isn't, is it not worth worrying about like a random wasp isn't worth worrying about, or not worth worrying about like the hounds of inescapable doom slavering on your neck aren't worth worrying about?
— Arcadia

Cecil replies:
Now, Arcadia. Let's not be dramatic. Yes, we face the dread prospect of peak phosphorus. However, we're also looking at peak oil, peak uranium, peak coal — hell, even peak gallium, a metal used in electronics and solar cells that may have reached peak production eight years ago. The obvious question is, how much worse can things get?

Answer: a lot, maybe. Without oil, uranium, or coal we'll be short of energy, which is bad enough. But without phosphorus we'll starve.
Another thing to worry about!

If You Wait Long Enough, Everything Comes Back
The policy of the United States in regards to the banking structural issues and for Real Estate in particular is to hunker down, pretend everything is ok, and wait for the inevitable rebound in prices that will bring the banks back to where they were before all hell broke loose. If one considers the course of action favored by most market participants over time this is no surprise.

Common thought is that markets are "forward looking" and price in events and/or conditions about 6-12 months ahead of time. This is convenient and plays to the idea that markets have any idea what is going on.

I have written plenty about how the housing market can never really move on unless prices reach their equilibrium level. In some places that level may well have been reached. For others there is still a long way to go. Government programs have been fighting this process tooth and nail. This waste of capital has robbed prospective new buyers from stepping in at lower prices. It is not just the big players either, as Housing Wire shows:
Marshall & Ilsley Extends Foreclosure Moratorium Through June
Monday, March 29th, 2010, 4:49 pm
Wisconsin’s largest bank with $57.2bn in assets, Marshall & Ilsley, extended its foreclosure moratorium another 90 days through June 30, 2010
The initial moratorium began Dec. 18, 2008 as part of the M&I Homeowner Assistance Program and covers all owner-occupied residential loans for customers who agree to workout a new repayment plan. M&I extended its moratorium three times before, once at the end of June 2009, again in September and once more just before Christmas.
Just keep waiting.

It seems a bit funny that all across the country there are millions of delinquent mortgages and yet the banks are in no hurry to do anything about it. 2 years mortgage/rent free tales abound.

So how long can the waiting go on? I think this should be a question Ben Bernanke and Tim Geithner should have to answer. Some "waiting to get back even" time lines from recent history:

Late 1980's Housing Bust
While regional differences make it hard to cast a broad net, the late 1980's to early nineties housing bust took about 10 years (1989-1999) for prices in Metro Boston to get back to even.

Stock Market Bust early 2000's
Calculated Risk's chart of the S&P 500 Closing Prices

Even after the big rally, it is 1998 all over again!

It is clear that when things go bad they tend to go bad for a while. Will foreclosures be postponed for 10 years? Will Fannie Mae, Freddie Mac, and the FHA buy every mortgage for the next decade? At what point are support efforts going to stop? These are answers I would like to know.

Of course some things pan out faster. The government was able to make a few bucks off their Citigroup stock purchase:

Maybe that 8 Billion will come in handy when the FED has to unload a trillion in MBS paper they paid full price for!

All this great news has had an effect. As Econompic shows us, it seems the US consumer is going back to the spending that is expected of them:

With high unemployment, massive "under-employment", and falling wages I have no idea where this money is coming from. Maybe all that cash is from a mortgage free year? With taxes of all sorts set to go higher I fully expect the US consumer to do their duty to the bitter end.

Of course how bad can things be? Geekologie unearths a sure fire winner of a business idea if I ever heard of one: Paying girls to play online video games with you! This will be a huge winner I predict:
Paying Girls to Play Video Games With You

Have a good night.


CT-Hilltopper said...

Hello, my friend!

It's raining again. A nice gentle rain I can handle right now, anything else would freak me out. LOL

It's amazing...Last year at this time, you, Jeff, and I were sitting here waiting for the end of the world, and now, a full year has passed, and here we are. Still waiting for the end of the world as we know it. We know it's coming.

It's been death by degrees...a slow disintegration of our economy. No matter how much the government props it up, it gets fundamentally weaker every day. So we will still be here watching, waiting, sharing stories and helping each other through.

As long as my power doesn't go out again.

getyourselfconnected said...

So good to see you!

Heavy duty rain here so trying not to drown. Check out the Generac series of generators; full install about 4k for a 8kw unit, not too bad.

What is so funny about last year this time and now is.......nothing has changed. Glad everyone else has donned a party hat and decided to ignore things.

All my best!

GawainsGhost said...

Peak phosphorous? That's a new and ominous one.

Here's another. Interesting editorial in the local paper this morning by Andres Openheimer, on the soon to be failed state of Mexico. Forget the rampaging violence of the drug cartels (17,000 murdered in just the last four years), there are several very serious issues that threaten Mexico's stability and survival.

1. It's running out of oil and will exhaust its reserves by 2017. What will happen when 40% of the state's revenues run dry?

2. It's running out of water. Extremely poor management of natural resources will decimate the farming industry and croplands.

3. Its school system is in shambles, leaving the country without an educated or even an educable workforce. (This explains why wealthy Mexican nationals buy houses here, so they can send their kids to school in Texas.)

4. It has failed to invest in infrastructure, ports, airports, roads, etc., so it will be unable to compete with more advanced countries like China, India, Brazil, to name a few, in the global economy.

5. It has a large population of indigenous poor people in the lower parts of the country that have been unable to make the transition to modernity and are becoming increasingly rebelious.

All of that spells disaster. Mexico could very easily spiral out of control in the near future, and that would be devastating to the economies of the border states, from California to Texas, which depend on cross-border commerce.

I remember in the early 80s when the peso devalued and Mexico underwent a sovereign wealth crisis. It literally destroyed the economy of South Texas and wiped out the real estate industry. There were 44,000 foreclosures in the first month, and 1/3 of the real estate companies went bankrupt and disappeared within 90 days. Investment, growth and economic development didn't return to this area for 20 years.

This time it could be much worse. Just a little drop of sunshine with my morning coffee.

GawainsGhost said...

Anyway, speaking of housing prices, yeah, you're right, GYC, they have to come down to a level more in line with incomes, especially in the bubble areas. Southern CA, for example, saw price increases of 300% in just a few years, so they have a long way to fall.

But the problem is manifest and multifold. First, the banks don't want to accelerate foreclosures, because to do so would flood an already saturated market with inventory and send prices crashing down. The sheer number would be unservicable, as their simply aren't enough agents to handle the workload. Plus, foreclosure is an expensive process, which would make the writedowns on the loans even more severe.

But that's only part of it. The real issue is with second and third liens, HELOCs, which are rendered worthless upon foreclosure. The losses on these loans would make just about every bank in the country insolvent and would destroy the credit markets. That would lead to a real crisis, so it's better to pretend and extend for as long as possible. But the day of reckoning will come, sooner or later.

To further exacerbate the problem, the lend-to-anyone-then-securitize-to-sell frenzy that drove the bubble made it virtually impossible to implement foreclosure in many cases. No one knows who really owns the note! So all someone who is facing foreclosure has to do is show up at court and say, produce the note. If the foreclosing authority cannot, the judge has no choice but to stop the process and cannot order the eviction.

The whole thing is a mess. Wasn't creative financing and complex securitization a wonderful thing? It only took eight years to blow up the banking system and the entire global economy, not to mention the real estate market.

GawainsGhost said...

Let me give you an example of what I deal with on a daily basis.

I got an assignment on this repossessed house, so I went over there to check it out. Gutted. Boarded up window, broken door from kitchen to garage, broken door from garage to patio, it wasn't even secure! No appliances, missing lights, sheetrock damage, bad paint, cheap lineolum improperly installed, crappy carpet covered with stains, broken interior doors off hinges. A real piece of work.

So I'm taking pictures and making notes, and I'm thinking this house isn't worth $50,000. It sold for over $90,000 a few years ago.

I started doing research to write the price opinion, but the problem was there weren't any comps! All of the sales of similar homes in the city were in the $70-$90,000 range. The only one that came close was this one house--same size, same age, missing a/c, missing water heater, no appliances, torn out carpet, missing lights. It sold for $66,000 last month.

For several hours over two days I struggled with this report, wondering how I was going to deduct for condition to arrive at a proper valuation for this dump. (The website won't allow for adjustments over a certain percentage of comparable sales price, yet another little glitch keeping prices artificially high.)

My mother started getting after me because the price opinion was due Monday, and I told her I was having a real hard time with this one. So she went over there this weekend, then called from the house. "Oh, my God! This house is awful. You need to be looking in the $30-$40,000s." There are none, not unless you want to go far outside the neighborhood, hell the entire city.

She said she could find some, but couldn't. Finally, we picked the best comps available, deducted $15,000 for repairs and arrived at a price opinion of $49,900, the low end of what we could come to. This took all day Sunday.

Now, here is what is going to happen with this house. An investor is going to buy it quick. It's the lowest priced house on the market. He's going to put in $15-$20,000 in repairs, then probably sell it for around $80,000 in a few months. And pocket a nice profit.

The vicious cycle continues.

S. Gompers said...

Peak Phosphorus is only a big deal for corporate farming interests, and lazy people to sorry to grow any of their own food. Phosphorus is cheap and quick for mass production.

Individuals using small scale organic methods of growing and then canning their own produce show tremendous success rates on very limited resources.

After all, “Victory gardens” helped win the big one years ago…

And corporate farming is showing a significant drop in nutritional levels of grains, etc., as they continue to burn up the soil with chemicals.

As to peak oil, I am merely an electrical engineer/ EMT/ several other things…, but as a scientist you may be able to shed some light on something that has been floating around for years known as abiotic oil.

I would be interested if you have any ideas on this…

Americans must get used to relying on themselves again, for everything in the deck is stacked against them in the world of excess they have been used to.

I guess you did not like Micky Ward from your lack of response on the last post you made… I loved his body shots…

getyourselfconnected said...

You sure a Cowboys football blog is your calling? That is some good inside stuff!

abiotic oil is a very interesting area of thought. We know that sevearl space bodies, most notably Titan, had vast lakes of pure hydrocarbons. These obvioulsy were not formed by decaying plant matter. There is plenty of thought about microbiological processes that could make oil, and I am an experienced microbiologists, so all I can say is that it is quite possible. One enzyme I use everyday is PFU DNA polymerase (I prefer the phusion enzyme) which has high activity after numerous cycles of 99 degrees, it is an extremophile. The most solid arguemnt agaist this is that oil fields are not replensished to any real degreee. This discussion is a good one but out of the scope of the comments section.

I missed yoyr last post; Mickey Ward would come to my gym often (Lowell West End) toi do sparring with some of the fighters there. I got to see him up close many, many times. His dad was a cop who would come in for sandwiches at the deli i worked at and I made both Mickey and his dad sandwiches a few times. He was a very good fighter that got better as he got older which is rare.

sedintary state said...

>Maybe all that cash is from a mortgage free year?

I think you solved the mystery!