The 24m2 (258 sq ft) Zoku Loft is designed as a living/working hybrid for ‘global nomads’ who typically seek temporary residence for between five days and several months. The designers add:
“In a regular hotel room or studio apartment, the bed always dominates. At Zoku, a big kitchen table serves as focal point. Use it to work across time zones, host dinner parties or gently rest your head after making a deadline. You decide. Then feel free to change your mind. The same goes for swapping the art on your walls, after which you can enjoy the view from your comfy Muuto design furniture.”
The loft has space-saving features like a retractable staircase and hide-away storage areas. It also includes a king size bed, dishwasher and commonly used home/office supplies. The first Zoku lofts are set to open in August in the eastern Canal District of Amsterdam. You can find much more information at the links below.
Seven years ago, the American home ownership “dream” was shattered when a housing bubble built on a decisively shaky foundation burst in spectacular fashion, bringing Wall Street and Main Street to their knees.
In the blink of an eye, the seemingly inexorable rise in the American home ownership rate abruptly reversed course, and by 2014, two decades of gains had disappeared and the ashes of Bill Clinton’s National Home ownership Strategy lay smoldering in the aftermath of the greatest financial collapse since the Great Depression.
In short, decades of speculative excess driven by imprudence, greed, and financial engineering and financed by the world’s demand for GSE debt had come crashing down and in relatively short order, a nation of homeowners was transformed into a nation of renters.
It wasn’t difficult to predict what would happen next.
As demand for rentals increased and PE snapped up foreclosures, rents rose, just as a subpar jobs market, a meteoric rise in student debt, tougher lending standards, and critically important demographic shifts put further pressure on home ownership rates. Now, America faces a rather dire housing predicament: buying and renting are both unaffordable. Or, as WSJ put it last month, “households are stuck between homes they can’t qualify for and rents they can’t afford.”
We’ve seen evidence of this across the country with perhaps the most telling statistic coming courtesy of The National Low Income Housing Coalition who recently noted that in no state can a minimum wage worker afford a one bedroom apartment.
In this context, Bloomberg is out with a list of 13 cities where single-family rents have risen by double-digits in just the last 12 months. Note that in Iowa, rents have risen more than 20% over the past year alone.
Landlords have been preparing to raise rents on single-family homes this year, Bloomberg reported in April. It looks like those plans are already being put into action.
The median rent for a three-bedroom single-family house increased 3.3 percent, to $1,320, during the second quarter, according to data compiled by RentRange and provided to Bloomberg by franchiser Real Property Management. Median rents are up 6.1 percent over the past 12 months. Even that kind of increase would have been welcome in 13 U.S. cities where single-family rents increased by double digits.
It’s more evidence that rising rents have affected a broad scope of Americans. Sixty percent of low-income renters spend more than 50 percent of their income on rent, according to a report in May from New York University’s Furman Center. High rents have also stretched the budgets of middle-class workers and made it harder for young professionals to launch careers and start families.
“You’re finding that people who wouldn’t have shared accommodations in the past are moving in with friends,”says Don Lawby, president of Real Property Management. “Kids are staying in their parents’ homes for longer and delaying the formation of families.”
And for those with short memories, we thought this would be an opportune time to remind you of who became America’s landlord in the wake of the crisis…
Examining the reasons to buy a house today may give us some idea where the housing market is heading in the future.
There are three reasons to buy a house:
Reason 1 – Utility
A house (any dwelling) is a shelter. It provides enjoyment, a home to raise one’s family, or just a place to watch that big screen TV. Utility is not quantifiable and it differs from household to household.
Reason 2 – Savings
If financed, a mortgage is a way of saving something every month until the mortgage is paid in full. If paid for, the savings come in the form of “owners’ equivalent rent”, which is what the census bureau uses to measure inflation in housing.
Reason 3 – Asset appreciation
At 5% appreciation per year, a $100k house today will be worth $412k in 30 years. Even a more modest 3% appreciation would result in better than a double.
Why Not to Buy a House Today
Based on the reasons above, it appears to be a slam dunk decision. Why would anyone not want to buy a house? There are three obstacles:
Obstacle 1 – Affordability
Housing, as a percentage of household income, is too expensive. A decade of ill-conceived government intervention and Federal Reserve accommodations prevented natural economic forces from driving house prices to equilibrium. As a result, not only is entry difficult, but many are struggling and are stuck in dire housing traps. Corelogic estimated that as of the 1st quarter of 2015, 10.2% of mortgages are still under water while 9.7 million households have less than 20% equity.
Obstacle 2 – High Risk
Say you are young couple that purchased a home two years ago, using minimal down financing. The wife is now pregnant and the husband has an excellent career opportunity in another city. The couple has insufficient savings and the house has not appreciated enough to facilitate a sale, which results in negative equity after selling expenses. The house can become a trap that diminishes a life time of income stream.
Obstacle 3 – “Dead zones”
Say you live in the middle of the country, in Kane County Illinois. For the privilege of living there, you pay 3% in property taxes. That is like adding 3% to a mortgage that never gets paid down. Your property would have to appreciate 3% per year just to break even. By the way, “appreciation” is unheard of in Kane County, good times or bad. There are many Kane Counties in the US. Real estate in these counties should be named something else and should not be co-mingled with other housing statistics. Employment is continuing to trend away from these areas. What is going to happen to real estate in these markets?
The Kane County court house: where real estate goes to vegetate
The factors listed above are nothing new. They provide some perspective as to where are are heading. Looking at each of the reasons and obstacles, they are all trending negatively.
The country is spending too much on housing, a luxury that is made possible by irresponsible Fed policies. 50% debt to income ratios are just insane and Ms. Yellen has the gall to call mortgage lending restrictive. Can we not see what is happening to Greece?
Mortgage backed securities held by the Federal Reserve System, a non-market central economic planning institution that is the chief instigator of house price inflation. Still growing, in spite of QE having officially ended – via Saint Louis Federal Reserve Research, click to enlarge.
Real estate is an investment that matures over time. The first few years are the toughest, until equity can be built up. With appreciation slowing, not to mention the possibility of depreciation, it is taking much longer to reach financial safety. The current base is weak, with too high a percentage of low equity and no equity ownership. The stress of a recession, or just a few years of a flat market, can impact the economy beyond expectations. The risks that might have been negligible once upon a time are much higher today. Many who purchased ten years ago are still living with the consequences of that ill-timed decision today.
By stepping back and looking at the big picture, we can see that real estate should be correcting and trending down. The reasons why our grandparents bought their homes have changed. Government intervention cannot last forever. It will change from accommodation to devastation, when they finally run out of ideas.
Conclusion
In summary, my working life had its origins in real estate and I am not trying to bite the hand that fed me. However, the reality is that the circumstances that prevailed when I entered the market are non-existent today. I seriously doubt that I would chose real estate as a career, or as an investment avenue, if I were starting over. As for buying a house, I would consider it more of a luxury as opposed to an investment, and one has to be prepared for the possibility of it being a depreciating asset, especially if one decides to move.
RealtyTrac has released its June and Midyear 2015 U.S. Home Sales Report, which shows distressed sales, cash sales and institutional investor sales in June were all down from a year ago to multi-year lows even as sales to first-time home buyers and other buyers using FHA loans increased compared to a year ago in June and reached a two-year high in the second quarter. Buyers using Federal Housing Administration (FHA) loans—typically low down payment loans utilized by first-time home buyers and other buyers without equity to bring to the closing table—accounted for 23 percent of all single family home and condo sales with financing—excluding all-cash sales—in the second quarter of 2015, up from 20 percent in the first quarter and up from 19 percent in the second quarter of 2014 to the highest share since the first quarter of 2013.
The report also shows 914,291 single family and condo sales through April 2015—the most recent month with complete sales data available—at the highest level through the first four months of a year since 2006, a nine-year high.
“As the investor-driven housing recovery faded in the first half of 2015, first-time home buyers, boomerang buyers and other traditional owner-occupant buyers started to step into the gap and pick up the slack,” said Daren Blomquist, vice president at RealtyTrac. “This is good news for sellers in many markets, providing them with strong demand from a larger pool of buyers, and U.S. sellers so far in 2015 are realizing the biggest gains in home price appreciation since 2007. In June sellers sold for above estimated market value on average for the first time in nearly two years.”
Cash buyers down nationwide, up in New York City and 20 other markets All-cash buyers accounted for 22.9 percent of all single family home and condo sales in June, down from 24.7 percent of all sales in the previous month and down from 29.1 percent of all sales in June 2014 to the lowest share of monthly cash sales nationwide since August 2008. The June cash sales share was almost half the peak of 42.1 percent in February 2011. Metros with highest share of cash sales in June were Homosassa Springs, Florida (53 percent), Naples-Marco Island, Florida (52 percent); Miami (50 percent); Sebastian-Vero Beach, Fla. (50 percent); and New York (49 percent).
“The first six months of sales in South Florida have been at a record pace. The millennials are entering the market along with many home buyers who had difficulty during the last recession while the investor market has quieted,” said Mike Pappas, CEO and president of Keyes Company, covering the South Florida market. “It is a real market with real buyers and sellers. The buyers have many lending options and are still enjoying low interest rates and many sellers are selling at their peak prices.”
In New York and 20 other markets analyzed for the report, the share of cash sales increased from a year ago, counter to the national trend. The New York metro share of cash sales increased from 40 percent in June 2014 to 49 percent in June 2015. Other markets with an increasing share of cash sales included Raleigh, North Carolina; Greenville, South Carolina; Bellingham, Washington located between Seattle and Vancouver, Canada; Knoxville, Tennessee; Providence, Rhode Island; and San Jose, Calif.
“Cash buyers have been a significant player in the Seattle housing market over the past 18 months, but the modest drop in this buyer segment doesn’t come as a surprise given the aggressive rise in home prices in recent months,” said Matthew Gardner, chief economist at Windermere Real Estate, covering the Seattle market. “Higher prices are forcing these buyers to dig deeper into their pockets and this process has started to push some out of the market. The same can be said for first time buyers; many of them are having a hard time qualifying for a loan also due to the rise in home prices in Seattle.”
Institutional investor share in June matches record low Institutional investors—entities purchasing at least 10 properties during a calendar year—accounted for 1.7 percent of all single family and condo sales in June, the same share as in May but down from 3.5 percent of all sales in June 2014. The 1.7 percent share of institutional investor sales in May and June was the lowest monthly share going back to January 2000—the earliest data is available—and was less than one-third of the monthly peak of 6.1 percent in February 2013.
Metro areas with the highest share of institutional investor sales in June 2015 were Macon, Georgia (10.2 percent); Columbia, Tenn. (9.5 percent); Memphis, Tenn. (8.7 percent); Detroit (7.8 percent); and Charlotte (5.3 percent).
Other major metros with a high percentage of institutional investor sales included Tampa (4.3 percent); Atlanta (4.0 percent); Tulsa, Oklahoma (3.9 percent); Oklahoma City (3.7 percent); and Nashville (3.7 percent).
The share of institutional investors increased from a year ago in just four markets: Detroit; Macon, Georgia; Lincoln, Nebraska; and Birmingham, Alabama.
Distressed sales drop to new record low Distressed sales—properties in the foreclosure process or bank-owned when they sold—accounted for eight percent of all single family and condo sales in June, down from 10.6 percent of all sales in May and down from 19.0 percent of all sales in June 2014 to the lowest monthly share since January 2011—the earliest that data is available. The share of distressed sales reached a monthly peak of 45.9 percent of all single family and condo sales in February 2011.
Metro areas with the highest share of distressed sales in June were Salisbury, North Carolina (30.6 percent); Gainesville, Ga. (23.8 percent); Jacksonville, N.C. (22.2 percent); Boone, N.C. (22.1 percent); and Marion, Ohio (21.9 percent).
Major metro areas with a high share of distressed sales in June included Chicago (14.7 percent); Baltimore (14.4 percent); Orlando (13.8 percent); Jacksonville, Fla. (13.6 percent); and Memphis (13.4 percent).
Markets with highest and lowest share of FHA loan purchases in first half of 2015 Nationwide, buyers using FHA loans accounted for 22 percent of all financed sales in the first half of 2015, up from 19 percent of all sales in 2014 and up from 20 percent of all sales in 2013.
Among markets with a population of 1 million or more, those with the highest share of buyers using FHA loans in the first six months of 2015 were Riverside-San Bernardino-Ontario in inland Southern California (35 percent); Las Vegas (32 percent); Oklahoma City (31 percent); Salt Lake City (30 percent); and Phoenix (29 percent).
Major markets with the lowest share of buyers using FHA loans in the first six months of 2015 were San Jose, California (7 percent); Hartford, Connecticut (10 percent); San Francisco (12 percent); Boston (12 percent); and Milwaukee (13 percent).
First-half 2015 sellers realized highest home price gains since 2007 Single family home and condo sellers in the first half of 2015 sold for an average of 13 percent above their original purchase price, the highest average percentage in home price gains realized by sellers since 2007, when it was 30 percent.
Major markets where sellers in the first half of 2015 realized the biggest average home price gains were San Jose, Calif. (41 percent); San Francisco (37 percent); Denver (29 percent); Portland (25 percent); Los Angeles (25 percent); and Seattle (20 percent).
There were six major markets where sellers in the first half of 2015 on average sold below their original purchase price: Chicago (seven percent below); Cleveland (seven percent below); Hartford, Conn. (three percent below); Jacksonville, Fla. (two percent below); St. Louis (one percent below); and Orlando (one percent below).
Homes sold in June sold above estimated market value on average Single family homes and condos in June sold for an average of $291,450 compared to an average $287,634 estimated market value for those same homes at the time of sale—a 101 percent price-to-value ratio. June was the first time since July 2013 that the national price-to-value ratio exceeded 100 percent.
Major metro areas with the highest price-to-value ratios—where homes sold the most above estimated market value—were San Francisco (106 percent); Hartford, Conn. (105 percent); Baltimore (105 percent); Rochester, N.Y. (104 percent); and Providence, R.I. (103 percent).
Other major markets with price-to-value ratios above 100 percent in June included Washington, D.C. (103 percent); Phoenix (103 percent); Sacramento (103 percent); Portland (103 percent); Seattle (102 percent); San Jose (102 percent); and St. Louis (102 percent).
Sales volume at highest level since 2006 in 16 percent of markets analyzed The number of single family homes and condos sold in the first four months of 2015 were at the highest level in the first four months of any year since 2006 in 43 out of 264 (16 percent) metropolitan statistical areas with sufficient home sales data. Markets at nine-year highs included Tampa; Denver; Columbus, Ohio; Jacksonville, Fla. and San Antonio.
There were 23 markets where sales volume in the first four months of 2015 was at 10-year highs, including Denver; Columbus, Ohio; San Antonio; Tucson, Ariz.; and Palm Bay-Melbourne-Titusville, Fla.
Among major metro areas with a population of one million or more, 22 out of 51 markets (43 percent) were at eight-year highs for single family home and condo sales in the first four months of the 2015, including New York, Dallas, Houston, Seattle and Portland.
New York City, Los Angeles, Honolulu: They’re all places you would think would be popular destinations for Americans. So it might come as a surprise that these are among the cities U.S. residents are fleeing in droves.
The map below shows the 20 metropolitan areas that lost the greatest share of local people to other parts of the country between July 2013 and July 2014, according to a Bloomberg News analysis of U.S. Census Bureau data. The New York City area ranked 2nd, losing about a net 163,000 U.S. residents, closely followed by a couple surrounding suburbs in Connecticut. Honolulu ranked fourth and Los Angeles ranked 14th. The Bloomberg calculations looked at the 100 most populous U.S. metropolitan areas.
Interestingly, these are also the cities with some of the highest net inflows of people from outside the country. That gives many of these cities a steadily growing population, despite the net exodus of people moving within the U.S.
So what’s going on here? Michael Stoll, a professor of public policy and urban planning at the University of California Los Angeles, has an idea. Soaring home prices are pushing local residents out and scaring away potential new ones from other parts of the country, he said. (Everyone knows how unaffordable the Manhattan area has become.)
And as Americans leave, people from abroad move in to these bustling cities to fill the vacant low-skilled jobs. They are able to do so by living in what Stoll calls “creative housing arrangements” in which they pack six to eight individuals, or two to four families, into one apartment or home. It’s an arrangement that most Americans just aren’t willing to pursue, and even many immigrants decide it’s not for them as time goes by, he said.
In addition, the growing demand for high-skilled workers, especially in the technology industry, brought foreigners who possess those skills to the U.S. They are compensated appropriately and can afford to live in these high-cost areas, just like Americans who hold similar positions. One example is Washington, D.C., which had a lot of people from abroad arriving to soak up jobs in the growing tech-hub, Stoll said.
Other areas weren’t so lucky. Take some of the Rust Belt cities that experienced fast drops in their American populations, like Cleveland, Dayton and Toledo, even though they are relatively inexpensive places to live. These cities didn’t get enough international migrants to make up for the those who left, a reflection of the fact that locals were probably leaving out of a lack of jobs.
This is part of a multiple-decade trend of the U.S. population moving away from these manufacturing hubs to areas in the Sun Belt and the Pacific Northwest, Stoll said. Retiring baby boomers are also leaving the Northeast and migrating to more affordable places with better climates.
This explains why the majority of metropolitan areas in Florida and Texas, as well as west-coast cities like Portland, had an influx of people.
El Paso, Texas, the city that residents fled from at the fastest pace, also saw a surprisingly small number of foreigners settling in given how close it is to Mexico.
“A lot of young, reasonably educated people are having a hard time finding work there,” Stoll said. “They’re not staying in town after they graduate,” leaving for the faster-growing economies of neighboring metro areas like Dallas and Austin, he said.
Methodology: Bloomberg ranked 100 of the most populous U.S. metropolitan areas based on their net domestic migration rates, from July 1, 2013 to July 1, 2014, as a percentage of total population as of July 2013. Domestic migration refers to people moving within the country (e.g. someone moving from New York City to San Francisco). A negative rate indicates more people leaving than coming in. International migration refers to a local resident leaving for a foreign country or someone from outside the U.S. moving into the U.S.
WASHINGTON (AP) — Americans bought homes in June at the fastest rate in over eight years, pushing prices to record highs as buyer demand has eclipsed the availability of houses on the market.
The National Association of Realtors said Wednesday that sales of existing homes climbed 3.2 percent last month to a seasonally adjusted annual rate of 5.49 million, the highest rate since February 2007. Sales have jumped 9.6 percent over the past 12 months, while the number of listings has risen just 0.4 percent.
Median home prices climbed 6.5 percent over the past 12 months to $236,400, the highest level reported by the Realtors not adjusted for inflation.
Home-buying has recently surged as more buyers are flooding into the real estate market. Robust hiring over the past 21 months and an economic recovery now in its sixth year have enabled more Americans to set aside money for a down payment. But the rising demand has failed to draw more sellers into the market, causing tight inventories and escalating prices that could cap sales growth.
“The recent pace can’t be sustained, but it points clearly to upside potential,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
A mere five months’ supply of homes was on the market in June, compared to 5.5 months a year ago and an average of six months in a healthy market.
Some markets are barely adding any listings. The condominium market in Massachusetts contains just 1.8 months’ supply, according to a Federal Reserve report this month. The majority of real estate agents in the Atlanta Fed region – which ranges from Alabama to Florida- said that inventories were flat or falling over the past year.
Some of the recent sales burst appears to come from the prospect of low mortgage rates beginning to rise as the Federal Reserve considers raising a key interest rate from its near-zero level later this year. That possibility is prompting buyers to finalize sales before higher rates make borrowing costs prohibitively expensive, noted Daren Blomquist, a vice president at RealtyTrac, a housing analytics firm.
The premiums that the Federal Housing Administration charges to insure mortgages are also lower this year, further fueling buying activity, Blomquist said.
It’s also possible that home buyers are checking the market for listings more aggressively, making it possible for them to act fast with offers despite the lack of new inventory.
“Buyers can more quickly be alerted of new listings and also more conveniently access real estate data to help them pre-search a potential purchase before they even step foot in the property,” Blomquist said. “That may mean we don’t need such a large supply of inventory to feed growing sales.”
Properties typically sold last month in 34 days, the shortest time since the Realtors began tracking the figure in May 2011. There were fewer all-cash, individual investor and distressed home sales in the market, as more traditional buyers have returned.
Sales improved in all four geographical regions: Northeast, Midwest, South and West.
Still, the limited supplies could eventually prove to be a drag on sales growth in the coming months.
Ever rising home values are stretching the budgets of first-time buyers and owners looking to upgrade. As homes become less affordable, the current demand will likely taper off.
Home prices have increased nearly four times faster than wages, as average hourly earnings have risen just 2 percent over the past 12 months to $24.95 an hour, according to the Labor Department.
Some buyers are also bristling at the few available options on the market. Tony Smith, a Charlotte, North Carolina real estate broker, said some renters shopping for homes are now choosing instead to re-sign their leases and wait until a better selection of properties comes onto the market.
New construction has yet to satisfy rising demand, as builders are increasingly focused on the growing rental market.
Approved building permits rose increased 7.4 percent to an annual rate of 1.34 million in June, the highest level since July 2007, the Commerce Department said last week. Almost all of the gains came for apartment complexes, while permits for houses last month rose only 0.9 percent.
The share of Americans owning homes has fallen this year to a seasonally adjusted 63.8 percent, the lowest level since 1989.
Real estate had until recently lagged much of the six-year rebound from the recession, hobbled by the wave of foreclosures that came after the burst housing bubble.
But the job market found new traction in early 2014. Employers added 3.1 million jobs last year and are on pace to add 2.5 million jobs this year. As millions more Americans have found work, their new paychecks are increasingly going to housing, both in terms of renting and owning.
Low mortgage rates have also helped, although rates are now starting to climb to levels that could slow buying activity.
Average 30-year fixed rates were 4.09 percent last week, according to the mortgage giant Freddie Mac. The average has risen from a 52-week low of 3.59 percent.
The Southern California housing market, known for its dramatic swings, is settling into a more normal, healthy pattern.
Home sales are up. All-cash and investor purchases are down. And home prices are rising at a more sustainable pace than in the last few years.
Economists said those factors put the regional housing market on a path for growth that won’t wash away in a tsunami of foreclosures and ruined credit scores.
“The healing continues,” said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate.
On Thursday, fresh evidence of that trend emerged in a report from CoreLogic. Home sales posted a sizable 18.1% pop in June from a year earlier, while the median price rose 5.7% from June 2014 to $442,000, the real estate data firm said.
The sales increase, the largest in nearly three years, put the number of sales just 9.6% below average, CoreLogic said. A year ago, sales were nearly 24% below average.
Notably, it appears more families are entering the market as the economy improves. Although still elevated in comparison to long-term averages, the share of absentee buyers — mostly investors — slid to 21.1%, the lowest percentage since April 2010, CoreLogic said.
“This is the real recovery,” Christopher Thornberg, founding partner of Beacon Economics, said of a market where increasingly buyers actually want to live in the houses they purchase. “The last was the investor recovery.”
Sustained job growth has given more people the confidence to buy houses, CoreLogic analyst Andrew LePage said. California added a robust 54,200 jobs in May, one of the strongest showings in the last year.
The housing market improvement extends nationally, with sales of previously owned homes up in May to the highest pace in nearly six years, partly because more first-time buyers entered the market, according to data from the National Assn. of Realtors.
One factor driving deals is an expected decision from the Federal Reserve to raise its short-term interest rate later this year, real estate agents say.
In response, families rushed to lock in historically low rates this spring, agents say. CoreLogic’s sales figures represent closed deals, meaning most went into escrow during May.
Leslie Appleton-Young, chief economist for the California Association of Realtors, cautioned that the market still has too few homes for sale and that prices have risen to a point where many can’t afford a house.
Unless that changes, sales are unlikely to reach levels in line with historical norms, she said.
“I am not saying the housing market isn’t robust,” she said.
“I think housing affordability is a big issue…The biggest problem is losing millennials to places like Denver and Austin and Seattle.”
For now, deals are on the rise and people are paying more.
Sales and prices climbed in all six south land counties: Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura. In Orange County, the median price rose 4.9% from a year earlier to $629,500.
In Los Angeles County, prices climbed 8.7% to $500,000.
Russian buyers are scrambling to buy bargain properties in Greece as the financial meltdown has eroded luxury real-estate prices, Damien Sharkov reported for Newsweek.
Just to give you an idea of the scale of sales: The Greek real-estate agency IRM Aegean Estate has put properties in package deals, with two villas in Corfu —private beach and all — selling together for $4.9 million.
According to the German magazine Bild, the number of luxury Greek villas bought by Russians has more than doubled in the past year, Newsweek reported.
That’s partially because of Russia’s own currency crisis — rich people are looking for safe places to park cash — but also because real-estate prices in Greece have fallen roughly 50% since 2009, Bild reported.
“If a villa on the Greek island of Syros still cost €1.6m a few years ago, it is now selling for just €800,000,” IRM founder Isabelle Razi told Newsweek. That’s a fall to roughly $870,000 from $1.74 million with today’s exchange rates.
The strengthening relationship between Russian buyers and their Greek holdings is mirrored by ties between their national governments.
Last month the two countries agreed to build a $2.27 billion gas pipeline, Sharkov reported for Newsweek, and some critics are concerned the move signifies a tug-of-war between the West and Russia, as Athens may be inching toward the Kremlin’s umbrella of influence.
Along Manhattan’s 57th Street, stretching from Columbus Circle on the west side to Park Avenue on the east, you’ll soon find more than a half-dozen glittering, ultra-exclusive condominium towers that will offer unparalleled views of Central Park — and virtually the entire city. Welcome to Manhattan’s Billionaires’ Row, the current trophy real estate of the 1%.
The mega projects, with some penthouse floor plans such as those at 432 Park Ave. expanding to more than 8,200 square feet, are expected to list on average for more than $14.5 million (or $4,375 a square foot). Some even have living rooms bigger than most condominium units in Manhattan (the average size of a condo unit in Manhattan being 1,100 square feet.)
The sky-high prices on Billionaires’ Row will also help push the average price for a unit at new developments in Manhattan to $7 million (or $2,787 a square foot) by 2017, according to Gabby Warshawer, head of research for CityRealty, a New York real-estate research firm. Manhattan condo units on average were just $1 million as recently as 2005, says Warshawer.
An inside look at ‘Billionaires’ Row’
For the Manhattan, and global, elite, trophy apartments in the sky, overlooking Central Park, will set new marks for luxury and price.
Aside from the luxuriously appointed apartments and the central location, there’s something else that’s appealing about the apartments: As Noble Black, a real-estate agent who has marketed condominium units in One57, points out, unlike many city co-ops — whose boards are famously picky and have turned down such notables as pop singer Madonna and former President Richard Nixon as potential residents — buyers on Billionaires’ Row don’t need to open up their financial books to co-op boards or even submit to interviews.
Here’s a look at what $14 million–plus will buy you along Billionaires’ Row …
These sky-high trophy homes overlooking Central Park set new marks for both luxury and price
157 West 57 St.
One57, built by developer Extell, was the first on the Billionaires’ Row strip to be built and is 75 stories tall and more than 1,000 feet high. The building, which includes a Park Hyatt hotel with services catering to owners’ every whim, with room service, maid service and a spa and gym, saw its penthouse apartment sell for a record $100.5 million in December 2014 to a yet-unnamed buyer. All told, the entire building’s 92 condo units were worth an estimated $2 billion and will sell for an average of $6,300 a square foot, according to CityRealty.
111 West 57th St.
Built by JDS Development Group, this extraordinarily slender skyscraper will rise 80 stories and more than 1,400 feet. That’s taller than the Empire State Building. The 60 apartments will start at $14 million according to the developer’s website and rise to $100 million, according to CityRealty. Completion is expected in 2018.
550 Madison Ave.
The rehab of the 37-story Sony Building will include a $150 million penthouse and possibly a five-star hotel. The skyscraper, completed in 1983, was sold to Joseph Chetrit, a real-estate developer for more than $1 billion in 2013. The sell-out price for the property will likely approach $2 billion, or more than $4,400 a square foot, CityRealty says.
432 Park Ave.
Currently the tallest residential building in the city at 1,396 feet, the condominium development by CIM Group/Macklowe Properties recently sold its penthouse for $99.5 million.The building’s total sales will be worth an estimated $3 billion (or nearly $6,300 a square foot), according to CityRealty, assuming the 144-unit building is sold out. Closings on the remaining units — which range from $17 million to $81 million — are expected to start at the end of the year.
53 W. 53rd St.
Hines Development’s 77-story condominium has been in the works for 10 years but has only recently started marketing its 100-plus units. The 1,050-foot-high trapezoidal tower with geodesic elements is set to be completed in 2018 and to include a unit priced at $70 million, according to CityRealty. All told, the sell-out price is anticipated at upward of $2 billion.
According to the National Association of Realtors (NAR), the U.S. housing market will continue its gradual pace of recovery as more home buyers enter a tight housing market for the balance of 2015, being nudged by rising mortgage rates and improving consumer confidence.
NAR’s chef economist Lawrence Yun has released the following observations for the US economy at large, and for the U.S. housing market specifically:
The U.S. Economy
GDP growth was slightly negative in the first quarter but will pick up in the second half. For the year as whole, GDP will expand at 2.1 percent. Not bad but not great. A slow hum.
Consumer spending will open up because of lower gasoline prices. Personal consumption expenditure grew at 2.1 percent rate in the first quarter. Look for 3 percent growth rate in the second half.
Auto sales dropped a bit in the first quarter because of heavy snow, but will ramp up nicely in the second half.
Spending for household furnishing and equipment has been solid, growing 6 percent in the first quarter after clocking 6 percent in the prior. Recovering housing sector is the big reason for the nice numbers.
Spending at restaurants was flat. That is why retail vacancy rates are not notching down.
Online shopping is up solidly. That is why industrial and warehouse vacancy rates are coming down.
Spending for health care grew at 5 percent in the first quarter, marking two consecutive quarters of fast growth. The Affordable Care Act has expanded health care demand. The important question for the future is will the supply of new doctors and nurses expand to meet this rising demand or will it lead to medical care shortage?
Business spending was flat in the first quarter but will surely rise because of large cash holdings and high profits.
Spending for business equipment rose by 3 percent in the first quarter. Positive and good, but nothing to shout about.
Spending for business structures (building of office and retail shops, for example) fell by 18 percent. The freezing first-quarter weather halted some construction. This just means pent-up construction activity in the second half.
In the past small business start-ups spent and invested. It was not uncommon to experience double-digit growth rates for 3 years running for business equipment. Not happening now. But business spending will inevitably grow because of much improved business financial conditions of lower debt and more profits and rising GDP.
What has been missing is the “animal spirit” of entrepreneurship. The number of small business start-ups remains surprisingly low at this phase of economic expansion.
Residential construction spending increased 6 percent in the first quarter. Housing starts are rising and therefore this component will pick up even at a faster pace in the second half.
Government spending fell by 1 percent. At the federal level, non-defense spending grew by 2 percent, while national defense spending fell by 1 percent. At the state and local level, spending fell by 1 percent.
The federal government is still running a deficit. Even though it is spending more than what it takes in from tax revenue, the overall deficit level has been falling to a sustainable level. It would be ideal to run a surplus, but a falling deficit nonetheless does provide the possibility of less severe sequestration.
U.S. government finances are ugly. Interestingly though, they are less ugly than other countries. That is why the U.S. dollar has been strengthening against most other major currencies. It’s like finding the least dirty shirt from a laundry basket.
Imports have been rising while exports have been falling. The strong dollar makes it so. Imports grew by 7 percent while exports fell by 6 percent. The net exports (at minus $548 billion) were the worst in seven years. Fortunately, with the West Coast longshoremen back at work, the foreign trade situation will not worsen, which means it will help GDP growth.
All in all, GDP will growth by 2.5 to 3 percent in the second half. That translates into jobs. A total of 2.5 million net new jobs are likely to be created this year.
Unemployment insurance filings have been rising in oil-producing states of Texas and North Dakota.
Unemployment insurance filings for the country as a whole have been falling, which implies lower level of fresh layoffs and factory closings. That assures continuing solid job growth in the second half of the year.
We have to acknowledge that not all is fine with the labor market. The part-time jobs remain elevated and wage growth remains sluggish with only 2 percent annual growth. There are signs of tightening labor supply and the bidding up of wages. Wages are to rise by 3 percent by early next year. The total income of the country and the total number of jobs are on the rise.
The U.S. Housing Market Mid-2015 Trends
Existing home sales in May hit the highest mark since 2009, when there had been a homebuyer tax credit … remember, buy a home and get $8,000 from Uncle Sam. This tax credit is no longer available but the improving economy is providing the necessary incentive and financial capacity to buy. Meanwhile new home sales hit a seven-year high and housing permits to build new homes hit an eight-year high. Pending contracts to buy existing homes hit a nine-year high.
Buyers are coming back in force. One factor for the recent surge could have been due to the rising mortgage rates. As nearly always happens, the initial phase of rising rates nudges people to make decision now rather than wait later when the rates could be higher still.
The first-time buyers are scooping up properties with 32 percent of all buyers being as such compared to only 27 percent one year ago. A lower fee on FHA mortgages is helping.
Investors are slowly stepping out. The high home prices are making the rate of return numbers less attractive.
Buyers are back. What about sellers? Inventory remains low by historical standards in most markets. In places like Denver and Seattle, where a very strong job growth is the norm, the inventory condition is just unreal – less than one month supply.
The principal reason for the inventory shortage is the cumulative impact of homebuilders not being in the market for well over five years. Homebuilders typically put up 1.5 million new homes annually. Here’s what they did from 2009 to 2014:
550,000
590,000
610,000
780,000
930,000
1.0 million
Where is 1.5 million? Maybe by 2017.
Building activity for apartments has largely come back to normal. The cumulative shortage is on the ownership side.
Builders will construct more homes. By 1.1 million in 2015 and 1.4 million in 2016. New home sales will follow this trend. This rising trend will steadily relieve housing shortage.
There is no massive shadow inventory that can disrupt the market. The number of distressed home sales has been steadily falling – now accounting for only 10 percent of all transactions. It will fall further in the upcoming months. There is simply far fewer mortgages in the serious delinquent stage (of not being current for 3 or more months). In fact, if one specializes in foreclosure or short sales, it is time to change the business model.
In the meantime, there is still a housing shortage. The consequence is a stronger than normal home price growth. Home price gains are beating wage-income growths by at least three or four times in most markets. Few things in the world could be more frustrating and demoralizing than for renters to start a savings program but only to witness home prices and down payment requirements blowing past them by.
Housing affordability is falling. Home prices rising too fast is one reason. The other reason is due to rising mortgage rates. Cash-buys have been coming down so rates will count for more in the future.
The Federal Reserve will be raising short-term rates soon. September is a maybe, but it’s more likely to be in October. The Fed will also signal the continual raising of rates over the next two years. This sentiment has already pushed up mortgage rates. They are bound to rise further, particularly if inflation surprises on the upside.
Inflation is likely to surprise on the upside. The influence of low gasoline prices in bringing down the overall consumer price inflation to essentially zero in recent months will be short-lasting. By November, the influence of low gasoline prices will no longer be there because it was in November of last year when the oil prices began their plunge. That is, by November, the year-over-year change in gasoline price will be neutral (and no longer big negative). Other items will then make their mark on inflation. Watch the rents. It’s already rising at near 8-year high with a 3.5 percent growth rate. The overall CPI inflation could cross the red line of above 3 percent by early next year. The bond market will not like it and the yields on all long-term borrowing will rise.
Mortgage rates at 4.3% to 4.5% by the year end and easily surpassing 5% by the year end of 2016.
The rising mortgage rates initially rush buyers to decide but a sustained rise will choke off as to who can qualify for a mortgage. Fortunately, there are few compensating factors to rising rates.
Credit scores are not properly aligned with expected default rate. New scoring methodology is being tested and will be implemented. In short, credit scores will get boosted for many individuals after the new change.
FHA mortgage premium has come down a notch thereby saving money for consumers. By the end of the year, FHA program will show healthier finances. That means, there could be additional reduction to premiums in 2016. Not certain, but plausible.
Fannie and Freddie are owned by the taxpayers. And they are raking-in huge profits as mortgages have not been defaulting over the past several years. The very high profit is partly reflecting too-tight credit with no risk taking. There is a possibility to back a greater number of lower down payment mortgages to credit worthy borrowers without taking on much risk. In short, mortgage approvals should modestly improve next year.
Portfolio lending and private mortgage-backed securities are slowly reviving. Why not? Mortgages are not defaulting and there is fat cash reserves held by financial institutions. Less conventional mortgages will therefore be more widely available.
Improving credit available at a time of likely rising interest rates is highly welcome. Many would-be first-time buyers have been more focused about getting a mortgage (even at a higher rate) than with low rates.
All in all, existing and new home sales will be rising. Combined, there will be 5.8 million home sales in 2015, up 7 percent from last year. Note the sales total will still be 25 percent below the decade ago level during the bubble year. Home prices will be rising at 7 percent. For the industry, the business revenue will be rising by 14 percent in 2015. The revenue growth in 2016 will be additional 7 to 10 percent.
As noted previously, we are in a new dark age where college does not pay. At $1.3 trillion, the student debt balance is not getting any smaller. Facing a lifetime of debt slavery, the millennial generation is doing whatever they can to avoid homelessness. Whether it’s stripping or working at Rent A Gent, all options are on the table. Now, they are flocking to Seeking Arrangement to prostitute themselves so they can pay for school. Since 2009, the number of student sugar babies has increased by 1,200%!
The labor force participation rate for college graduates has been on a relentless downtrend.
It is getting even more expensive to go to school. Even after adjusting for inflation, college costs have gone up more than 400% in the last 30 years.
Many young people don’t see any good alternatives to going to school, so they jump in head first. Facing enormous bills, they turn to sites like Seeking Arrangement for help. These aren’t just women either. 15% of student sugar babies are men, and plenty of sugar mommas are on the site too.
Here are the numbers.
And here are the sugar babies by major.
The abundance of nurses on Seeking Arrangement shouldn’t be surprising for regular readers. Personal care aides and nurses are the fastest growing jobs in America.
Here are the perks of Seeking Arrangement.
And here are the sugar babies.
Previously, it was common for students to take food and service jobs, but soon, you will hear college students casually sharing their day with their sugar daddy. Welcome to the modern hooker economy.
A job seeker yawns as he waits in front of the training offices of Local Union 46, a union representing metallic lathers and reinforcing iron workers, in the Queens borough of New York.
WASHINGTON (AP) — Even after another month of strong hiring in June and a sinking unemployment rate, the U.S. job market just isn’t what it used to be.
Pay is sluggish. Many part-timers can’t find full-time work. And a diminished share of Americans either have a job or are looking for one.
Yet in the face of global and demographic shifts, this may be what a nearly healthy U.S. job market now looks like.
An aging population is sending an outsize proportion of Americans into retirement. Many younger adults, bruised by the Great Recession, are postponing work to remain in school to try to become more marketable. Global competition and the increasing automation of many jobs are holding down pay.
Many economists think these trends will persist for years despite steady job growth. It helps explain why the Federal Reserve is widely expected to start raising interest rates from record lows later this year even though many job measures remain far below their pre-recession peaks.
“The Fed may recognize that this is a new labor-market normal, and it will begin to normalize monetary policy,” said Patrick O’Keefe, an economist at accounting and consulting firm CohnReznick.
Thursday’s monthly jobs report from the government showed that employers added a solid 223,000 jobs in June and that the unemployment rate fell to 5.3 percent from 5.5 percent in May. Even so, the generally improving job market still bears traits that have long been regarded as weaknesses. Among them:
— A shrunken labor force.
The unemployment rate didn’t fall in June because more people were hired. The rate fell solely because the number of people who had become dispirited and stopped looking for work far exceeded the number who found jobs.
The percentage of Americans in the workforce — defined as those who either have a job or are actively seeking one — dropped to 62.6 percent, a 38-year low, from 62.9 percent. (The figure was 66 percent when the recession began in 2007.) Fewer job holders typically means weaker growth for the economy. The growth of the labor force slowed to just 0.3 percent in 2014, compared with 1.1 percent in 2007.
“It is highly unlikely that we are going to see our (workforce) participation rate move anywhere near where it was in 2007,” O’Keefe says.
This marks a striking reversal. The share of Americans in the workforce had been steadily climbing through early 2000, and a big reason was that more women began working. But that influx plateaued in the late 1990s and has drifted downward since.
— The retirement of the vast baby boom generation.
The aging population is restraining the growth of the workforce. The pace of retirements accelerated in 2008, when the oldest boomers turned 62, when workers can start claiming some Social Security benefits. Economists estimate that retirements account for about half the decline in the share of Americans in the workforce since 2000.
From that perspective, the nation as a whole is beginning to resemble retirement havens such as Florida. Just 59.3 percent of Floridians are in the workforce.
— Younger workers are starting their careers later.
Employers are demanding college degrees and even postgraduate degrees for a higher proportion of jobs. Mindful of this trend, teens and young people in their 20’s are still reading textbooks when previous generations were punching time clocks.
The recession “basically told everybody that they need an education to get better jobs,” says John Silvia, chief economist at Wells Fargo. “So how would young people respond? They stayed in school.”
Fewer than 39 percent of 18- and 19-year-olds are employed, down from 56 percent in 2000. For people ages 20 to 24, the proportion has fallen to 64 percent from 72 percent.
— The number of part-timers who would prefer full-time work remains high.
About 6.5 million workers are working part time but want full-time jobs, up from 4.6 million before the recession began. This is partly a reflection of tepid economic growth. But economists also point to long-term factors: Industries such as hotels and restaurants that hire many part-timers are driving an increasing share of job growth, researchers at the Federal Reserve Bank of San Francisco have found.
As more young adults put off working, some employers are turning to older workers to fill part-time jobs. Older workers are more likely to want full-time work, raising the level of so-called involuntary part-time employment.
Many economists also point to the Obama administration’s health care reforms for increasing part-time employment. The law requires companies with more than 100 employees to provide health insurance to those who work more than 30 hours.
Michael Feroli, an economist at JPMorgan Chase, says this could account for as much as one-third of the increase in part-time jobs.
— Weak pay growth.
The average hourly U.S. wage was flat in June at $24.95 and has risen just 2 percent over the past year. The stagnant June figure dispelled hopes that strong job growth in May heralded a trend of steadily rising incomes.
In theory, steady hiring is supposed to reduce the number of qualified workers who are still seeking jobs. And a tight supply of workers tends to force wages up.
Yet a host of factors have complicated that theory. U.S. workers are competing against lower-paid foreigners. And automation has threatened everyone from assembly line workers to executive secretaries.
Still, economists at Goldman Sachs forecast that average hourly pay will grow at an annual pace of about 3.5 percent by the end of 2016. That is a healthy pace. But it will have taken much longer to reach than in previous recoveries.
Crude oil prices closed down 4% yesterday, breaking through a 2-month support level at $57/barrel, after an EIA report showed an unexpected build in inventories.
I argue that the domestic supply/demand balance has not improved and is just as bearish now as it was last winter when oil was in free fall.
Based on my analysis of supply/demand data presented in this article, I believe crude oil has further to fall.
My trading strategy, including holdings, price targets, and entry/exit points are discussed in detail.
After trading tightly range-bound between $58/barrel and $61/barrel since mid-April, crude oil finally broke down yesterday, after an EIA Petroleum report showed that crude oil inventories increased more than expected. The commodity slid 4.2% – its largest single-day loss since April 8 – to a 9-week low closing price of $56.92/barrel. The commodity is down 6.6% since recording a peak of $61/barrel one week ago on Tuesday. Further weighing on prices were unclear reports of a draft of an Iranian nuclear deal that would relax sanctions and permit a resumption of exports, as well as continued fears over Greece’s exit from the eurozone. This article will discuss yesterday’s EIA inventory report and use this data to support my argument that crude oil supply and demand remain just as unbalanced presently as when oil was trading at $45 per share, justifying my continued bearish position on the commodity.
In yesterday’s Petroleum Report for the week ending June 26, the EIA announced that crude oil inventories increased by 2.4 million barrels, versus the analyst consensus for a 2-million barrel storage withdrawal. The storage build was also markedly bearish compared to last week’s 4.9 million barrel withdrawal, last year’s 3.2 million barrel withdrawal and the 5-year average 4.1 million barrel withdrawal. It was the first storage injection in 9 weeks since the week ending April 24. Storage injections during the final week of June are highly unusual, and last week’s build was the first storage injection during the last week of June since the week ending June 29, 2007, and only the third this millennium.
At 480 million barrels, total crude oil storage is 90 million barrels above the five-year average inventory level and 80 million barrels above last year’s level, versus a 84 and 75 million barrel surplus last week, respectively. The increase in crude oil surplus is a sharp departure from the past two months which had seen surpluses, versus the five-year average decline in 8 of the past 9 weeks from a peak of over 113 million barrels. Figure 1 below shows the storage surplus versus the five-year average and 2014 over the past year.
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Figure 1: Crude oil storage surplus versus 2014 and the 5-year average showing an increase in the surplus after several weeks of decline. [Source: Chart is my own, data from the EIA.]
What happened over the past week that led to such an abrupt change in crude oil supply/demand balance?
Not much, I argue. And that is the problem.
There are three components of US supply/demand balance – domestic production, demand (measured by refinery inputs), and imports.
Domestic production was largely unchanged last week, declining by 9,000 barrels per day, from 9.604 million barrels per day the previous week to 9.595 million barrels last week. Domestic production remains at record highs, despite an oil rig count that has fallen 60% since October. Production is up 1.2 million barrels year-over-year.
Crude oil demand was likewise flat week-over-week, declining a negligible 1,000 barrels per day last week to 16.531 million barrels per day. Demand is up 313,000 barrels per day year-over-year. Note that this is well shy of the 1.2 million barrel per day year-over-year increase in production. As a result, the purely domestic supply/demand picture – demand minus US production – is markedly loose compared to last year. Figure 2 below compares the purely domestic supply/demand picture for 2015 versus 2014.
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Figure 2: Purely domestic crude oil supply/demand balance equal to demand minus domestic production. Supply/demand remains loose to 2014 and has been flat over the past 2 months, indicating minimal tightening of the market. [Source: Chart is my own, data from the EIA.]
Note that last year at this time, demand exceeded domestic production by 7.8 million barrels per day, while last week, this spread was just 6.9 million barrels. Further, despite all of the hullabaloo over record demand and declining domestic production, this spread is sitting near the 2015-to-date average of 6.6 million barrels, and has been essentially flat since late April.
It is the third component of the US supply/demand picture – imports – that drove last week’s bearish storage build and had been masking the persistent supply/demand mismatch shown above in Figure 2 that allowed crude oil to rally more than 30% off the March lows. Imports increased by 748,000 barrels per day last week to 7.513 million barrels per day. It was the largest week-over-week increase since the week ending April 3rd and the largest daily average since the week of April 17th. Nevertheless, the 7.5 million barrel per day tally was a mere 170,000 barrels per day above the 1-year average import level. Figure 3 below plots crude oil imports versus the 1-year average over the last 12 months.
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Figure 3: Crude oil imports versus the 1-year average. After 2 months well below the 1-year average, crude oil demand rebounded last week. [Source: Chart is my own, data from the EIA.]
Note that after hovering in the 6.75-7.25 million barrel per day range since late April, last week’s imports were merely a return to the baseline. Furthermore, imports have room to go even higher. Figure 4 below shows the week-over-week change and the departure from 2015-to-date average imports by country.
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Figure 4: Crude oil imports by nation with week-over-week and departure versus the 2015 average included. While imports from Canada rebounded last week, large deficits versus the 2015 average remain in Canada, Saudi Arabia, and Mexico. [Source: Chart is my own, data from the EIA.]
Note that the second-largest weekly increase in imports last week came from our biggest oil trading partner, Canada, where imports increased by 142,000 barrels per day. However, thanks to persistent wildfires in Alberta’s prolific oil sands, imports are still 187,000 barrels per day below their 2015 average. As these wildfires have largely diminished, I expect Canadian imports will continue to increase, from 2.8 million barrels per day last week back to their 3.0 million barrel per day 2015 average in coming weeks. An even more impressive departure versus the 2015 average was seen in Saudi Arabia, where imports remained flat at 700,000 barrels per day last week, more than 250,000 barrels below their 2015 average of 992,000 barrels per day. Saudi Arabia is a country whose rig count is at record highs and which is spearheading the effort to destroy the US shale oil industry, so I expect these imports will recover rapidly over the next month. Finally, our third-largest trading partner, Mexico, saw its imports slide 290,000 barrels per day last week, and currently sit 215,000 barrels per day below its 2015 average – likely another short-term anomaly. Were just these three countries to have had their imports at 2015 baseline levels, last week’s storage build would have been a massive 7.1 million barrels. The gains seen in Venezuela, Kuwait, and other smaller trading partners that sent tallies above their 2015 averages may be at least partially attributable to a surge in Gulf Coast imports following delays caused by Tropical Storm Bill, and therefore, may decline in coming weeks. However, I expect the net change in imports to be upwards over the next month, putting further pressure on the supply/demand balance.
My rationale for emphasizing imports compared to US production and demand is that I believe that they have been artificially creating the appearance of a tightening supply/demand balance. Thanks to wildfires in Canada, Tropical Storm Bill interrupting shipments in the Gulf of Mexico, and unrest in the Middle East, imports during April, May, and early June (as shown in Figure 3) were depressed below the five-year average. This correlated strongly with a transition to storage withdrawals that helped to fuel the back-end of crude oil’s 30% rally from the March low of $43/barrel to $61/barrel. Figure 5 below compares crude oil weekly storage injections/withdrawals to imports.
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Figure 5: Crude oil storage changes versus imports. There is a strong correlation between storage withdrawals between May and late June and a decline in imports. Storage injections resumed last week, following a surge in imports. This supports imports being the major driver of the domestic supply/demand balance over the past few months. [Source: Chart is my own, data from the EIA.]
During this same period (as shown in Figure 2), domestic production and demand remained relatively unchanged. As a result, I firmly believe that the decline in imports hoodwinked many investors into thinking that the supply/demand balance was permanently tightening, due either to increasing demand from cheap oil or declining production from the declining rig count, when it was really a temporary drop in imports. Now that imports have returned to a baseline level, this “masking” of the supply/demand balance has been lifted, and the result was a bearish injection similar to those seen during oil’s springtime free fall – but during a time when the market expects withdrawals. It is therefore unsurprising that oil retreated to the tune of 4% yesterday.
What I believe to be even more concerning is that there is little room to go higher on the demand front. Refinery utilization – the percentage of US refinery capacity that is being utilized to convert crude oil to gasoline and other finished products – was at 95.0% last week. This is the highest refinery utilization during the final week of June over the last 10 years. Figure 6 below shows refinery utilization for the last week of June from 2006 to the present.
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Figure 6: Refinery utilization during the final week of June for the past 10 years showing that, at 95%, 2015’s utilization is the highest of the decade. [Source: Chart is my own, data from the EIA.]
Furthermore, the maximum refinery utilization during any week in the last 10 years was 95.4%, recorded several times, most recently last December. As a result, at 95.0% refinery, utilization is nearly at its maximum capacity. The fact that we saw a 2.4 million barrel storage injection, with demand near its maximal level pulling hard at crude oil inventories and with imports still with room to run higher, suggests to me that oil still has room to fall.
Oil’s 4% decline to under $57/barrel represented a major breakdown not only from a fundamental level, as discussed above, but from a technical level. During the 44-day period from April 29 to June 30, crude oil had traded within a tight $4.17 range between $61.43/barrel and $57.26/barrel, the narrowest range since March 2004. Oil broke out of that range yesterday. Figure 7 plots the price of crude oil over the last 3 months, showing the rally, range-bound action, and the breakdown yesterday.
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Figure 7: Crude oil prices over the last 2 months showing range-bound trading largely between $58/barrel and $61/barrel. followed by a breakdown yesterday. [Source: Chart is my own, data from the EIA.]
Now that oil has fallen below its 2-month support level, I would not be surprised if more investors head for the exits.
I continue to hold three positions betting on a continued downtrend in crude oil prices. I own a 10% short position in the popular United States Oil ETF (NYSEARCA:USO) – increased from 5% last week – a large 15% short position in the leveraged VelocityShares 3x Long Crude Oil ETN (NYSEARCA:UWTI), and a 5% short position in the Market Vectors Russia ETF (NYSEARCA:RSX). The latter provides short exposure to an oil-driven economy, as well as the turmoil encompassing Europe. The short UWTI position is a higher-risk play on leverage-induced decay due to choppy trading. USO, of course, is a safer direct play on declining oil prices.
Should oil drop to $55/barrel – which has long been my short-term price target – I will begin to aggressively cover my UWTI short position to protect profits in a highly volatile trade, which is currently up 20% and would likely be pushing 35% if oil reaches $55/barrel. I will likewise plan to close out my RSX short around the same level to lock in profits, should the European crisis appear to be resolving.
However, I plan to hold USO for the foreseeable future. Following yesterday’s decline, contango in the oil futures market is again rising, with the 4-month spread up to $1.21, or 2.2%, after bottoming out at $0.86 last week. Should oil continue to fall, the contango will likely widen further, and I could easily see contango-generated returns topping 5% on a position held through the Fall. I feel USO is a safer, less volatile long-term hold than UWTI (despite the fact that UWTI triples the contango-generated gains and also benefits from leverage-induced decay). My price target to close out my USO position is currently $50/barrel. Factors that would likely cause me to cover sooner would include any socioeconomic forces that look like they would suppress imports for an extended period, or if US production (finally) begins declining in a meaningful way. As a result, my “stop” is a fundamental stop, and I do not have a specific stop price. Should oil rally in the face of the current bearish fundamentals, I will even consider adding to my USO short position up to 15%. If I had no crude oil short exposure, I would be reluctant to open a position here with oil down 7% in a week. Rather, I would wait for a bounce before initiating any position.
In conclusion, I believe that US crude oil demand and production remain in a stable, bearish pattern. Instead, the fundamental supply/demand picture is, and has been, dictated by fluctuations in crude oil imports. I do not believe that the underlying fundamental picture has changed since March, and that a return to baseline import levels last week following months of temporary suppression unmasked this persistent supply/demand imbalance. With crude oil demand unlikely to go higher with refineries near peak capacity, domestic production stable, and crude oil imports with room to go even higher, particularly from Canada and Saudi Arabia, I expect continued weakness in crude oil in the months to come. Once the summer driving season fades and demand declines, I would not be surprised to see the domestic oil surplus climb back above 100 million barrels over the next 1-3 months. Further exacerbating bearish sentiment are the possible resumption of Iranian exports and continued anxiety over Greece and the eurozone, although I believe these fears to be secondary to the ongoing domestic storage glut. My 1-3 month price target is $55/barrel, with a potential to drop as low as $50/barrel during this time. As a result, I plan to hold my large basket of crude oil short positions in USO, UWTI, and RSX.
Additional disclosure: As noted in the article, I am also short RSX and UWTI.
“Today is Day 1 of Year 7 of the ‘recovery’, and yet economists everywhere proclaims 3% growth is just around the corner,” rages Jim Bianco as he addresses what ‘bugs him’, exclaiming “that ship has sailed.” Bianco and Santelli go on to slay Keynesian big government dragons and the incessant bullshit from officials like Jack Lew who opine on Greece and other potential systemic risks as being a non-event – “what is priced in is that everything will work itself out at the 11th hour,” leaving a huge asymmetric risk.
California’s massive housing market is slowing down in almost every way imaginable, according to the latest California Real Property Report from PropertyRadar.
California single-family home and condominium sales dropped 3.5% to 36,912 in May from 38,249 in April.
However, the report explained that what is unusual this month is that the decrease in sales was due to a decline in both distressed and non-distressed property sales that fell 8.6% and 2.5%, respectively. The monthly decline in non-distressed sales is the first May decline since 2005.
On a yearly basis, sales were up slightly, gaining 2.3% from 36,096 in May 2014.
“With the exception of a few counties, price increases have slowed considerably,” said Madeline Schnapp, director of economic research for PropertyRadar. “You cannot defy gravity.”
“The environment of rising prices on lower sales volumes was destined not to last. Higher borrowing costs since the beginning of the year and decreased affordability was bound to impact sales sooner or later. We may also be seeing the fourth year in a row where prices jumped early in the year, only to roll-over and head lower later the rest of the year,” Schnapp continued.
Back in March, PropertyRadar’s report showed California was finally ramping up for the spring homebuying season, posting that March single-family home and condominium sales surged to 31,989, a 33.1% jump from 24,031 in February. It was the biggest March increase in three years.
Meanwhile, May’s median price of a California home was nearly unchanged at $396,750 in May, down 1.8% from $404,000 in April.
Within California’s 26 largest counties, most experienced slight increases in median home prices, edging higher in 21 of California’s largest 26 counties.
Year-over-year, the median price of a California home was nearly unchanged, up 0.4% from $395,000 dollars in April 2014.
While at the county level most of California’s 26 largest counties exhibited slower price increases, four counties continued to post double digit gains.
Wm. Mack Terry explained the basics of how rates impact bank stocks at Bank of America in 1974. Net income goes up, margins go up, and stock price goes down.
We value a bank by replication, assembling a series of Treasury securities with the same financial characteristics as a bank. All of Mr. Terry’s conclusions are correct.
A more technical analysis and references are provided. Correlations with 11 different Treasury yields are added in Appendix A. Finally, a worked example is given in Appendix B.
We want to thank our readers for the very strong response to our June 17, 2015, note “Bank Stock Prices and Higher Interest Rates: Lessons from History.” For those readers who asked “is the correlation between Treasury yields and bank stock prices negative at other maturities besides the 10 year maturity?” – we include Appendix A. Appendix A shows that for all nine bank holding companies studied, there is negative correlation between the bank’s stock price and Treasuries for all maturities but two. One exception is the 1-month Treasury bill yield, which is the shortest time series reported by the U.S. Department of the Treasury. The 1-month Treasury bill yield has only been reported since July 31, 2001. The correlation between the longer 3-month Treasury bill yield series and the stock prices of all nine bank holding companies is negative. The other series that occasionally has positive correlations is the 20 year U.S. Treasury yield, which is the second shortest yield series provided by the U.S. Department of the Treasury.
In this note, we use modern “no arbitrage” finance and a story from 1974 to explain why there is and there should be a negative correlation between bank stock prices and interest rates. We finish with recommendations for further reading for readers with a very strong math background.
Wm. Mack Terry and Lessons from the Bank of America, 1974
In the summer of 1974 I began the first of two internships with the Financial Analysis and Planning group at Bank of America (NYSE:BAC) in San Francisco. My boss was Wm. Mack Terry, an eccentric genius from MIT and one of the smartest people ever to work at the Bank of America. One day he came to me and made a prediction. This is roughly what he said:
“Interest rates are going to go up, and two things are going to happen. Our net income and our net interest margins are going to go up, and our senior management is going to claim credit for this. But they’ll be wrong when they do so. Our income will only go up because we don’t pay interest on our capital. Shareholders are smart and recognize this. When they discount our free cash flow at higher interest rates, even with the increase on capital, our stock price is going to go down.”
Put another way, higher rates never increase the value of investments of capital funds, and the hedged interest rate spread is a long term fixed rate security that drops in value when rates rise. That is unless the leading researchers are completely wrong in their finding that credit spreads narrow when rates rise.
Everything Mack predicted came true. The 1-year U.S. Treasury yield was in the 8 percent range in the summer of 1974. It ultimately peaked at 17.31% on September 3, 1981. The short run impact of the rate rise was positive at Bank of America, but the long run impact was devastating. By the mid-1980s, the bank was in such distress that my then employer First Interstate Bancorp launched a hostile tender to buy Bank of America.
Their biggest problem was an interest rate mismatch, funding 30 year fixed rate mortgages with newly deregulated consumer deposits when rates went up.
The point of the story is not the anecdote about Bank of America per se. Why was Mack’s prediction correct? We give the formal academic references below, but we can use modern “no arbitrage” financial logic to understand what happened. We model a bank that’s assumed to have no credit risk by replication, assembling the bank piece by piece from traded securities. This was the approach taken by Black and Scholes in their famous options model, and it’s a common one in modern “no arbitrage” finance. We take a more complex approach in the “Technical Notes” section. For now, let’s make these assumptions to get at the heart of the issue:
We assume the bank has no assets that are at risk of default.
All of its profits come from investing at rates higher than U.S. Treasuries and by taking money from depositors at rates lower than U.S. Treasury yields
We assume that the bank borrows money in such a way that all assets financed with borrowed money have no interest rate risk: the credit spread is locked in. We assume the net interest margin is locked in at a constant dollar amount that works out to $3 per share per quarter.
We assume this constant dollar amount lasts for 30 years.
With the bank’s capital, we assume the bank either buys 3-month Treasury bills or 30-year fixed rate Treasury bonds. We analyze both cases.
We assume taxes are zero and that 100% of the credit spread cash flow is paid out as dividends to keep things simple.
We assume the earnings on capital are retained and grow like the proceeds of a money market fund.
We use the U.S. Treasury curve of June 18 to analyze our simple bank. The present value of a dollar received in 3 months, 6 months, 9 months, etc. out to 30 years can be calculated using U.S. Treasury strips (zero coupon bonds) whose yields are shown here:
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We write the present value of a dollar received at time tj as P(tj). The first quarter is when j is 1. The last quarter is when j is 120. The cash flow thrown off to shareholders from the hedged borrowing and lending is the sum of $3 per quarter times the correct discount factors out to 30 years.
The sum of the discount factors is 81.02. When we say “the sum of the discount factors,” note that means that the entire 30 year Treasury yield curve is used in valuing the bank’s franchise, even if the bank makes that $3 per quarter rolling over short term assets and liabilities. When we multiply the sum of the discount factors by $3 per quarter, the value of the hedged lending business contributes $3 x 81.02 = $243.06 to the share price. This calculation is given in Appendix B.
How about the value of earnings on capital? And how much capital is there? The short answer is that it doesn’t matter – we’re just trying to illustrate valuation principals here. But let’s assume the $3 in quarterly “spread” income, $12 a year, is 1% of assets. That makes assets $1200 (per share). With 5% capital, we’ll use $60 as the bank’s capital. We analyze two investment strategies for capital: Strategy A is to invest in 3-month Treasury bills. They are yielding 0.01% on June 18. Strategy B is to invest in the current 30 year Treasury bond, yielding 3.14% on June 18. Let’s evaluate the stock price right now under both strategies. If rates don’t move, the current outlook is this if the bank invests its capital in Treasury bills using Strategy A:
Net income will be $12.006 per year. The value of capital at time zero is $60 because we’ve invested $60 in T-bills worth $60. The value of the hedged “spread lending” franchise, discounted over its 30-year life, is $243.060. That means the stock price must be the sum of these two pieces or there’s a chance for risk-less arbitrage. The stock price must be $303.060.
What happens to the stock price if, one second after we buy the stock, zero coupon bond yields across the full yield curve rise by 1%, 2%, or 3%? This is a mini-version of the Federal Reserve’s Comprehensive Capital Analysis and Review stress tests. The stock price changes like this:
Higher rates are “good for the bank” in the sense that net income will rise because earnings on the 3-month Treasury bills will be 1%, 2% or 3% higher. This is exactly what Mack Terry explained to me in 1974. This has no impact on stock price, however, because the investment in T-bills is like an investment in a money market fund. Since the discount factor rises when the income rises, the value is stable. So the value of the invested capital is steady at $60. See the “Technical Notes” references for background on this. What happens to the value of the spread lending franchise? It gets valued just like a constant payment mortgage that won’t default or prepay. The value drops from $243.06 to either $215.04, $191.55 or $171.72. The calculations also are given in Appendix B. The result is a stock price that’s lower in every scenario, dropping 9.25%, 17.00% or 23.54%.
But wait, one might ask. Won’t the amount of lending increase and credit spreads widen at higher rates? Before we answer that question, we can calculate our breakeven expansion requirements. For the value of the lending franchise to just remain stable, we need to restore the value from 215.04, 191.55 or 171.72 to 243.06. This requires that the cash flow expand by 243.06/215.04-1 in the “up 1%” scenario. That means our cash flow has to expand by 13.03% from $12 a year to $13.56 per year. For the up 2% and up 3% scenarios, the increases have to be by 26.89% or 41.54%.
Just from a common sense point of view, this expansion of lending volume seems highly unlikely at best. A horde of academic studies discussed in Chapter 17 of van Deventer, Imai and Mesler also have found that when rates rise, credit spreads shrink rather than expand. Selected references are given in the “Technical Notes.”
Is Strategy B a better alternative? Sadly, no, because the income on invested capital stays the same (3.14% times $60) and the present value of the 30-year bond investment falls. Here are the results:
Good News and Conclusions
There is some good news in this analysis. Given the assumptions we have made, this bank will never go bankrupt. Because the assets funded with borrowed money are perfectly hedged from a rate risk point of view, the bank is in the “safety zone” that Dr. Dennis Uyemura and I described in our 1992 introduction to interest rate management, Financial Risk Management in Banking. The other good news is that Mack Terry’s example shows that the entire spectrum of Treasury yields is used to value bank stocks because the cash flow stream from the banking franchise spans a 30-year time horizon.
This example shows that, under simple but relatively realistic assumptions, the value of a bank can be replicated as a portfolio of Treasury-related securities. This portfolio falls in value when rates rise. The negative correlation between Treasury yields that 30 years of history shows is not spurious correlation – it’s consistent with the fundamental economics of banking when interest rate risk is hedged.
Wm. Mack Terry knew this in 1974, and legions of interest rate risk managers of banks have replicated this simple example in their regular interest rate risk simulations that are required by bank regulators around the world. What surprises me is that people are surprised to learn that higher interest rates lower bank stock prices.
Technical Notes
When writing for a general audience, some readers become concerned that the author only knows the level of analysis reflected in that article. We want to correct that impression in this section. We start with some general observations and close with references for technically oriented readers:
For more than 50 years, beginning with the capital asset pricing model of Sharp, Mossin and Lintner, securities returns have been analyzed on an excess return basis relative to the risk free rate as a function of one or more factors. It is well known that the capital asset pricing model itself is not a very accurate description of security returns as a function of the risk factors.
Arbitrage pricing theory expanded explanatory power by adding factors. Merton’s inter-temporal capital asset pricing model (1974) added interest rates driven by one factor with constant volatility.
Best practice in modeling traded asset returns is defined by Amin and Jarrow (1992), who build on the multi-factor Heath, Jarrow and Morton interest rate model which allows for time varying and rate varying interest rate volatility. Amin and Jarrow also allow for time varying volatility as a function of interest rate and other risk factors.
This is the procedure my colleagues and I use to decompose security returns. An important part of that process is an analysis of credit risk, as explained by Campbell, Hilscher and Szilagyi (2008, 2011). Jarrow (2013) explains how credit risk is incorporated in the Amin and Jarrow framework. This is the procedure we would explain in a more technical forum, like our discussion with clients.
References for random interest rate modeling are given here:
Heath, David, Robert A. Jarrow and Andrew Morton, “Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approach,” Journal of Financial and Quantitative Analysis, 1990, pp. 419-440.
Heath, David, Robert A. Jarrow and Andrew Morton, “Contingent Claims Valuation with a Random Evolution of Interest Rates,” The Review of Futures Markets, 9 (1), 1990, pp.54 -76.
Heath, David, Robert A. Jarrow and Andrew Morton,”Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claim Valuation,” Econometrica, 60(1), 1992, pp. 77-105.
Heath, David, Robert A. Jarrow and Andrew Morton, “Easier Done than Said”, RISK Magazine, October, 1992.
References for modeling traded securities (like bank stocks) in a random interest rate framework are given here:
Amin, Kaushik and Robert A. Jarrow, “Pricing American Options on Risky Assets in a Stochastic Interest Rate Economy,” Mathematical Finance, October 1992, pp. 217-237.
Jarrow, Robert A. “Amin and Jarrow with Defaults,” Kamakura Corporation and Cornell University Working Paper, March 18, 2013.
The impact of credit risk on securities returns is discussed in these papers:
Campbell, John Y., Jens Hilscher and Jan Szilagyi, “In Search of Distress Risk,” Journal of Finance, December 2008, pp. 2899-2939.
Campbell, John Y., Jens Hilscher and Jan Szilagyi, “Predicting Financial Distress and the Performance of Distressed Stocks,” Journal of Investment Management, 2011, pp. 1-21.
The behavior of credit spreads when interest rates vary is discussed in these papers:
Campbell, John Y. & Glen B. Taksler, “Equity Volatility and Corporate Bond Yields,” Journal of Finance, vol. 58(6), December 2003, pages 2321-2350.
Elton, Edwin J., Martin J. Gruber, Deepak Agrawal, and Christopher Mann, “Explaining the Rate Spread on Corporate Bonds,” Journal of Finance, February 2001, pp. 247-277.
The valuation of bank deposits is explained in these papers:
Jarrow, Robert, Tibor Janosi and Ferdinando Zullo. “An Empirical Analysis of the Jarrow-van Deventer Model for Valuing Non-Maturity Deposits,” The Journal of Derivatives, Fall 1999, pp. 8-31.
Jarrow, Robert and Donald R. van Deventer, “Power Swaps: Disease or Cure?” RISK magazine, February 1996.
Jarrow, Robert and Donald R. van Deventer, “The Arbitrage-Free Valuation and Hedging of Demand Deposits and Credit Card Loans,” Journal of Banking and Finance, March 1998, pp. 249-272.
The use of the balance of the money market fund for risk neutral valuation of fixed income securities and other risky assets is discussed in technical terms by Heath, Jarrow and Morton and in a less technical way:
Jarrow, Robert A. Modeling Fixed Income Securities and Interest Rate Options, second edition, Stanford Economics and Finance, Stanford, 2002.
Jarrow, Robert A. and Stuart Turnbull, Derivative Securities, second edition, South-Western College Publishing, 2000.
Appendix A: Expanded Correlations
The expanded correlations in this appendix use data from the U.S. Department of the Treasury as distributed by the Board of Governors of the Federal Reserve in its H15 statistical release.
It is important to note that the 1-month Treasury bill rate has only been reported since July 31, 2001, and that is the reason that the correlations between bank stock prices and that maturity are so different from all of the other maturities. The history of reported data series is taken from van Deventer, Imai and Mesler, Advanced Financial Risk Management, 2nd edition, 2013, chapter 3.
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Bank of America Corporation Correlations
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Bank of New York Mellon Correlations
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BB&T Correlations
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Citigroup Inc. Correlations
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JP Morgan Chase & Co. Correlations
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State Street Correlations
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Sun Trust Correlations
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U.S. Bancorp Correlations
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Wells Fargo & Company Correlations
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Appendix B
Valuing the Banking Franchise: Worked Example
The background calculations for today’s analysis are given here. The extraction of zero coupon bond prices from the Treasury yield curve is discussed in van Deventer, Imai and Mesler (2013), chapters 5 and 17.
These loans are growing quickly beyond wire houses, but some are concerned about the risks and conflicts of interest
Traditionally a major focus at bank-owned brokerage firms, securities-backed loans — where a wealthy investor puts up their portfolio as collateral for a big-money purchase &mash; are increasingly being marketed through independent registered investment advisers.
In the past two years, use of the products has soared as custodians beef up their lending capabilities. Pershing Advisor Solutions, a subsidiary of The Bank of New York Mellon Corp., began offering the loans to RIAs last year and has already issued 254 of them worth $1 billion through more than 20% of its 570 RIA clients. Fidelity Investments, which serves about 3,000 RIAs, has seen balances for securities-backed loans increase 63% in its RIA segment over the past two years.
“Non purpose loans have gotten more attention over the last year-plus with the custodians,” said John Sullivan, a former lending specialist at Smith Barney who is now a relationship manager at Dynasty Financial Partners. “Every effort is being made by firms like Dynasty and the various custodians that are out there to be able to replicate or in some cases exceed the existing platform” at the wirehouses.
For years, the loans have been a popular product at the wirehouses, including Bank of America Merrill Lynch and Morgan Stanley Wealth Management. They are billed as a way for wealthy investors to make large purchases, such as a yacht or vacation home, without having to sell a portion of their portfolio or incur capital gains taxes in the short term. Bank of America Merrill Lynch had $11.7 billion in margin loans outstanding, according to its most recent SEC filings from March.
There is no upfront cost to set up a securities-based line of credit, and firms offer competitive rates, which are sometimes lower than a traditional bank loan and are particularly attractive now with low interest rates. The loans can be made in a relatively shorter period of time than traditional bank loans as well. They take as few as eight business days at Pershing.
But there are other reasons firms, including the wirehouses like securities-backed lending. The loans provide another income source from clients in fee-based accounts and can be more profitable for the firm than other investment products because they don’t have to share as much of the revenue with their advisers who sells the clients on the loan.
“Lending growth will enhance the stability of revenue and earnings for the firm as a whole and make our client relationships deeper and stickier,” Morgan Stanley & Co.‘s former chief financial officer, Ruth Porat, said in an earnings call in July.
RIAs specifically don’t receive any additional compensation from a bank or custodian for selling securities-backed loans, but there are other benefits. For example, the loans allow wealthy clients to make multimillion dollar purchases without cutting into the assets under management. Bob LaRue, a managing director at BNY Mellon, said new business from clients often results as well — and, of course, the dollars left in the portfolio have the potential for gains, which raise AUM.
Herein lies the rub, according to Tim Welsh, president and consultant of Nexus Strategy, a wealth management consulting firm. “They don’t sell, so the assets under management stay the same — so it inherently has a conflict of interest,” he said.
That can be a problem, Mr. Welsh said, particularly because client demand typically is highest for these kinds of loans at the wrong time.
“In every bull market I’ve seen, this is always a predictor of the top,” Mr. Welsh said. “When people start borrowing money against their assets, they’re really confident that they’re going up. And investors are always one step behind in terms of tops and bottoms.”
The risk is that if the value of a client’s portfolio drops, the firm can sell the securities or ask that the client put down more money to back that up. Using securities as collateral can be subject to greater volatility than other types, such as a home equity loan.
“When the markets rationalize, bills come due, and if you don’t have liquidity, all of a sudden you have to sell,” Mr. Welsh said. “It definitely raises the risk profile up immediately.”
“Once again, super-cheap financing based on an asset whose value can fluctuate wildly (a stock and bond portfolio, in this case) is being used for the purchase of assets that can be significantly less liquid, like real estate, fine art or business expansion,” Mr. Brown wrote in a story last year on the growth of the loans in the wirehouse space. “Don’t say I didn’t warn you.”
Regulators have taken notice as well. The Financial Industry Regulatory Authority Inc., which oversees broker-dealers, warned in January that it was looking into the marketing of securities-backed loans as part of this year’s regulatory agenda.
“Finra has observed that the number of firms offering [securities-backed loans] is increasing, and is concerned about how they are marketed,” the regulator said.
That said, Mr. Sullivan and others who defend securities-backed lending said it works well if that risk is taken into account.
“It’s really about staying invested for the long-term and meeting short-term cash flow needs with some borrowing that’s not going to exceed a certain percentage on the assets,” Mr. Sullivan said.
Mr. LaRue said advisers have to consider whether it makes sense to trade leverage for the tax benefits.
“The appropriateness of leverage depends on each individual client’s needs,” he said. “If you are borrowing [to avoid the capital gains] taxes and keep a favorable investment strategy in place, then perhaps leveraging those assets at a low interest rate makes sense.”
Self-directed investors take appropriate steps to protect their assets should they become fully disabled, but ignore the threat posed by the changes characteristic of early dementia.
The many different causes of dementia have very different patterns of onset. Some are particularly dangerous to investors because sufferers don’t immediately lose their memories – just their judgment.
Because physicians are slow to pronounce people incapable of managing their affairs, a proactive strategy is needed to protect you from yourself should you lose judgment or emotional control.
By the time they have reached retirement age, most investors who have significant assets have made wills, set up trusts, and acted responsibly to make sure that after their deaths their money goes where they want it to go. Most have also drawn up Powers of Attorney, which give someone they choose the ability to manage their affairs if they are incapacitated by illness or dementia and no longer able to manage them on their own. They also discuss with their spouse or heirs how they would suggest these beneficiaries invest their money once they have passed on.
Having done this, these retirees relax, convinced they have taken care of all the unpleasant situations we all prefer not to think about, and can safely go back to not thinking about them.
But this kind of planning does not take care of the biggest threat to the assets of these self-directed investors: the very poor decisions they are likely to make with their investments should they become one of the one in seven people who will begin to experience the earliest phases of dementia in their late sixties or subsequent decades.
Dementia Can Be Very Hard to Detect
Unless you have seen a loved one go through this process, you are probably unaware of how insidious it can be, and, most importantly for your assets, how long a person who is in these early phases of mental deterioration can keep their loved ones from realizing just how poorly they are functioning and continue to manage their money while making increasingly poor decisions as their brains erode.
The most typical pattern with many forms of dementia is that loved ones only realize there is a problem after the big checks have been written to scammers, the good investments sold at bad prices, or the abusive annuities and whole life policies purchased.
People are able to make these disastrous investing decisions in the earliest stages of dementia because their loved ones, who assume dementia announces itself with forgetfulness, don’t realize there are quite a few syndromes that develop into dementia whose first symptoms are not forgetfulness, but are instead loss of judgment, impulse control, and emotional balance.
Dementia Is Not One Condition But Many With Different Patterns of Onset
That is because there are many different conditions that produce dementia which afflict the elderly. They include the classic form of Alzheimer’s, where the earliest symptoms are the loss of memory and verbal abilities. But the elderly also develop vascular dementia, where they experience a series of micro strokes that slowly diminish their faculties. And when this happens, the symptoms depend heavily on which parts of the brain are affected by the strokes.
Other conditions that cause differing forms of cognitive deterioration including Parkinson’s Disease, Lewy Body Dementia, and Frontotemporal Dementia. In some of these conditions, the emotions deteriorate before other cognitive abilities fade, leaving the person prone to excessive fear or rage. In others, risk-taking behavior accelerates. People with these conditions may lose their fear of strangers and their ability to discriminate between friends and exploiters, making them very easy to con.
Similar changes in mood, cognition, and behavior can also be caused by pharmaceutical drugs commonly prescribed to the elderly, sometimes in combinations that can be toxic to the elderly brain.
When memory loss is evident, relatives are quick to suspect dementia. If you get lost driving home, your loved ones likely to take a look at how you are managing your finances and if they see problems, intervene. People who have these forms of dementia are themselves more likely to be aware that something is wrong, early on, too, and ask for help.
If you are repeatedly forgetting how to find your investment accounts on your computer and forgetting which bank you put your money in, as terrible as your condition may be, it is less threatening to your portfolio than when you have other, more subtle forms of deterioration. Because when these more subtle forms occur, people are much less likely to be aware that they have become impaired, and are much more resistant to having others take over managing their affairs.
Loss of Impulse Control, Mood, and Judgment, Not Memory, Pose the Biggest Threats to Your Portfolio
In these more subtle forms of dementia, the first symptoms are not memory loss. Instead they involve loss of impulse control, emotional balance, or judgment. When dementia presents in this fashion, and you start exhibiting more signs of rage or anxiety than normal, your loved ones will tend to assume you are just getting crotchety, as is to be expected with the elderly.
But when that anxiety leads you to sell all your stocks one morning because you read a MarketWatch scare headline that terrified you, the damage to your retirement can be irreversible. Likewise, if the emotion that goes out of control as your frontal cortex deteriorates is greed, you may sell all your dividend stocks and put them into the tech IPOs or penny stock biotech, because some pumper posting online has told you it is a sure ten-bagger that will make you rich.
While doctors can usually pick up that a patient is suffering from classic Alzheimer’s with a few simple screening tests, they are slow to diagnose dementia in older people based only on more subtle changes in their mood, emotions, or even behavior.
Relatives may be helpless to call a doctor’s attention to these problems as HIPAA forbids doctors to even discuss a person’s health with a concerned relative or friend unless the patient has specifically authorized them to do so in writing.
Relatives may not even know there is a problem when the person with very early dementia is an experienced investor who manages their own portfolio. While they may notice there is a problem when grandpa, who never gambled, starts going to the casino every week, when grandpa starts gambling with naked options bought on margin, the only evidence is buried in his account statements, which are available online only to those who are able to log into grandpa’s account.
So this is why it is when people are in these very early phases of dementia that the worst kinds of financial elder abuse occur. This is when elderly retired professors likely wire all the money in their savings accounts to Nigeria. It is then that elderly widows fall in love with handsome young strangers they meet on cruise ships and turn their assets over to them to invest. There is an entire industry made up of boiler shop weasels who do nothing but telemarket the elderly all day hoping to find one in this state on whom they can unload penny stocks and sleazy annuities.
It Can Happen Here
Readers who are currently managing their assets very well will nod their heads, all the while thinking, “This can’t happen to me.” But the sad fact is that it can. Because the hallmark of this kind of dementia is that it can happen to anyone and when it does, it comes on so insidiously that, unlike classic Alzheimer’s, the person affected has no idea that it has affected them. NIH research has found that one in seven Americans over age 71 is affected by some form of dementia. Various studies suggest that the incidence rises with each subsequent decade of age.
If you are affected by the earliest stages of dementia, it will be very hard for you to realize anything is wrong, even if you have made plans about handing over control of your investments should you become impaired. You might start buying and selling more impulsively without noticing it. You may lose your ability to analyze stocks using the techniques that you used to build up your portfolio and rely increasingly on what TV pundits or writers on sites like this tell you are “can’t fail” opportunities. While markets are rising, the damage might be slight. But your ability to weather a bear market may decline, and worst case, you will end up like the many retirees who sold everything in 2008 and never reentered the market.
So, to protect your assets as you age from what you might do as you begin to lose your judgment or emotional control, you need to do more than choose someone to exercise your Power of Attorney, because that person can only step in when you have been declared incompetent.
What You Can Do Now To Keep Your Investments Safe Later
The first and most important thing is to make sure that your loved ones understand how dangerous the early, hard to detect changes caused by dementia can be. Make them aware that what may seem like small behavioral changes they see in you may be more significant than they appear and that the time to act is before you have made some unrecoverable error of judgment.
Make Your Doctor an Ally
Sign the forms available at your physician’s office that give your loved ones the ability to talk to your doctors about your mental state, if they see behaviors that trouble them so that the doctor can help them determine if you may be posing a risk to yourself. If there is any doubt, get a referral to a gerontologist, a doctor who specializes in the treatment of the elderly.
Periodically ask your loved ones if they detect differences in your emotions, judgment, or behavior, which might mean that you are making questionable decisions. If they admit that they do, take immediate steps to bring in another individual to keep an eye on your investments.
Instruct your loved ones that if your emotional control goes and you get angry in inappropriate ways when told you are mismanaging your investments, they should contact your physician and begin the process of bringing in someone else to check that you are still capable of managing your assets.
To facilitate this process give your doctor now, while you are obviously mentally capable, a notarized statement describing the kinds of circumstances under which you would want the doctor to declare you incapable of managing your finances. Also give a copy of this statement to your POA.
Make it clear that significant signs of poor judgment or loss of emotional control, not just memory loss, should be grounds for such a declaration. Without such a declaration from your physician, your POA cannot take over the managing of your finances no matter how much you may need it. And without such a statement from you, doctors may err on the side of caution and declare you mentally capable as long as you know what day it is and can repeat a list of words a few minutes after hearing them.
Bring Your POA into Your Investment Process Now While You Are Functioning Well
Another important thing to do is to give the person you have appointed as your Power of Attorney the ability to see how you are investing, so they can intervene before you make severe mistakes. Give them the ability to access and review your investment records. If you are not comfortable having them access your accounts, at least ask them to review your transactions periodically to make sure that you aren’t departing from your usual investment style. Let this person periodically look over your bank and credit card statements, too, looking for unusual spending patterns.
If you aren’t comfortable giving them this access now, when you can explain the decisions you make and how you are using your money, you might consider finding another person to act as your POA. If you don’t trust them with your accounts now, when you are there to oversee things, how can you trust them to manage your money for you should you become incapacitated?
By working jointly with your POA now, you will get a much better idea of whether they are the right person to manage your affairs should the need arise. They, in turn, will get a much better understanding of why you are invested the way you are and how to manage your investments in harmony with the principles you embrace.
You should also discuss with your POA any major gifts you plan to make to charities. A lot of seemingly legitimate charities, including religious groups, hospitals, and universities, target well-off older people with high-pressure sales tactics, wining and dining them and offering to name things after them in return for large donations. To avoid being exploited by charities as you age, write out a list now of which institutions you plan to contribute to and in what amounts, and give this document to the person you have chosen as your POA so they can refer to it in the future and keep you from being swayed by marketers who appeal to your vanity as your emotions and judgment begin to weaken.
Another approach that may be helpful to some investors, rather than relying entirely on their appointed power of attorney, is to develop a “buddy system” with another retiree or two who invest using a style similar to their own. Keep each other up-to-date with portfolio changes, and ask that if your buddy observes behavior that sets off warning signals, they inform your family that it might be time to call for help.
Consider Paying a Professional
If the person you have appointed as your POA turns out not to be able to understand your current investments, this is a good sign that you are investing in a way that could be very perilous to your retirement savings should anything happen to you. Since you may live for a decade or more in a condition where your POA would have to manage your resources, and since managing them well means the difference between living in an upscale assisted living facility and a hellhole nursing home, it is essential that if your POA can’t understand and manage your current investment strategy on their own, you either find one who can, simplify your investments to where your current POA can manage them, or turn your assets over to a well-recommended professional fee-paid investment advisor.
If your POA is your spouse, you might want to reconsider this choice if they are near your age because the risk of developing subtle mental changes also applies to them. Some studies suggest that dementia is actually more prevalent among older women than it is in men, possibly because less healthy men are less prone to survive to older ages so older men who do survive are more healthy.
If you can’t find a relative who has the understanding, education and integrity needed to manage your investments, you may have to enlist the services of a carefully screened, fee-paid financial advisor. This will involve trade-offs, as advisors will invest their way, not yours. But even the worst advisor is more likely to preserve your wealth better than an ignorant relative or a spouse who is also becoming demented.
And if you need to find such an advisor, the time to do it is now, when your brain is working well. Intellectual incapacity can strike very suddenly, and you should not expect a POA who is overwhelmed with the responsibility of handling your affairs to be able to find someone capable of managing your affairs when they are in the middle of a crisis involving hospital visits or moving you to a rehabilitation facility or into assisted living.
When you interview advisors, ask probing questions to see how well they listen and how willing they are to invest your money the way you want it invested. Ask who takes over if they retire or leave. If you can’t find an advisor you trust, or balk at paying their hefty fees, an inexpensive, partially automated advisory service like the Vanguard Personal Advisor Service might be a safe choice. If Vanguard’s index funds are good enough for Warren Buffett to recommend to his own wife, they probably will work for you. The fee-paid Vanguard service supposedly will also optimize your investment allocation to take into account your tax situation.
If you don’t have family or don’t trust your family with your financial affairs, it is essential that you find someone now who can take on this role. Perhaps a trusted accountant or attorney would be the appropriate person to turn to. Yes, it will cost money, but not nearly as much as you can lose if you don’t take steps to protect yourself from what happens should you unknowingly experience the early stages of dementia.
Consumers taking out a second mortgage will now have to consider the fact that if they encounter financial difficulties and file for bankruptcy, they won’t be able to strip off the additional loan obligation.
The Wall Street Journal reports that the Supreme Court ruled in favor of banks when it came to determining that struggling homeowners can’t get rid of a second mortgage using Chapter 7 bankruptcy protection, even if the home’s value is less than the amount owed on the first mortgage.
Monday’s unanimous ruling involved two cases in which Florida homeowners sought to cancel their second mortgages – issued by Bank of America – under the argument that when both primary and subsequent loans are underwater, the second is worthless.
The homeowners in the cases were previously allowed by lower courts to nullify the second mortgages. Back in 2013, those rulings were affirmed by the Atlanta-based 11th U.S. Circuit Court, the Associated Press reports.
However, Bank of America maintained that the rulings conflicted with Supreme Court precedent, arguing that even if the primary mortgage is underwater, it shouldn’t affect the lien securing the second loan.
According to the bank, there remains a possibility that the second loan would be repaid if the property’s value rose in the future.
The company also claimed that after the Circuit Court ruling, hundreds – if not thousands – of struggling homeowners had moved to nullify their second loans, the AP reports.
Justice Clarence Thomas said on Monday that the SCOTUS decision took into consideration the shifting nature of property, the WSJ reports.
“Sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings,” he wrote in the decision.
Not buying a home right now will cost you, because home prices and interest rates are going to rise. Many renters would like to own, but they can’t afford down payments or don’t qualify for mortgages. Those two conclusions, drawn from separate reports released this week, sum up the housing market dilemma for many young professionals: Buyers get more for their money than renters—but most renters can’t afford to enter the home buying market.
The chart below comes from data published today by realtor.com that estimates the financial benefits of buying a home based on projected increases in mortgage rates and home prices in local housing markets. Specifically, it shows the amount that buyers gain, over a 30-year period, over renters in the country’s largest metropolitan areas.
The penalties for waiting to buy tend to be greater in smaller metro areas, especially in California. For example, the estimated cost of waiting one year was $61,805 in San Jose and $65,780 in Santa Cruz. Over the course of 30 years, homeowners save more than $1 million in Santa Cruz, the largest amount of any U.S. city.
To compile those numbers, realtor.com compared median home prices and the cost of renting a three-bedroom home in 382 local markets, then factored in estimates for transaction costs, price appreciation, future mortgage rates, and interest earned on any money renters saved when it was cheaper to rent.
In other words, researchers went to a lot of trouble to quantify something that renters intuitively know: They would probably be better off if they could come up with the money to buy. Eighty-one percent of renters said they would prefer to own but can’t afford it, according to a new report on Americans’ economic well-being published by the Federal Reserve.
Not all markets favor buyers over renters. In Dallas, the benefit of buying was about $800 over 30 years, according to realtor.com’s model, which expects price appreciation to regress to historical norms. In many popular markets, though, there are greater benefits to owning.
“It shouldn’t be a surprise that the places where you can have the highest reward over time also have the highest prices,” said Jonathan Smoke, chief economist for realtor.com. “It’s not true that if you’re a median-income household, that you can’t find a home that’s affordable, but in places like San Jose and Santa Cruz, less than 10 percent of inventory would be affordable.”
Or as Logan Mohtashami, a senior loan officer at AMC Lending Group in Irvine, Calif., told Bloomberg Radio this week: “The rich have no problem buying homes.”
The ultra-luxury housing market is scaling new heights as a record number of properties around the world command prices topping $100 million.Demand for mega-mansions and penthouses has accelerated as wealthy buyers seek havens for their cash and search for alternative investments such as art and collectible real estate, according to a report Thursday by Christie’s International Real Estate, owned by auction house Christie’s. Five homes sold for more than $100 million last year, with at least 20 more on the market with nine-figure asking prices, the brokerage said.“You’re looking at a universe of over 1,800 billionaires who are starting to become members of this club of collectors of the most unique and incredible real estate in the world,” Dan Conn, chief executive officer of Christie’s International Real Estate, said in a telephone interview. “It’s something they’ll hold onto for a lifetime, the same way they’ll hold onto a Picasso or a Warhol or any number of the great pieces of art we’ve sold over the years.”
Sales are likely to increase this year with more newly built properties and off-market homes trading for at least $100 million, Conn said. Demand is growing among affluent Americans and Europeans; billionaires from unstable economies, such as Russia and Middle Eastern countries; and buyers from mainland China, who were barred from investing overseas before 2012 and since have snapped up houses in cities including Hong Kong, Los Angeles, New York and London, he said.
The penthouse and pool area of the Tour Odeon residential apartment block. At least 18 residences have asking prices of $100 million or more, led by the $400 million Monaco penthouse. Source: Realis/SCI Odeon via Bloomberg
‘Can Boast’
“People want trophy homes,” Eyal Ofer, a Monaco-based shipping and real estate magnate, said in interview earlier this week at the Milken Institute Global Conference in Beverly Hills, California. “They’re a scarce commodity. And they’re better than gold because you can boast about it.”
Last year’s sales of homes for at least $100 million were led by an East Hampton, New York, estate purchased for $147 million by Barry Rosenstein, managing partner at hedge fund Jana Partners. The other top sales were a $146 million villa in Saint-Jean-Cap-Ferrat, France; a $120 million estate in Greenwich, Connecticut; a $104 million Hong Kong residence; and a $100.5 million duplex penthouse in New York’s One57 condominium tower, according to Christie’s.
Not all the properties went for close to the asking price. The Greenwich estate that sold for $120 million was originally listed for $190 million.
‘Fundamentally Different’
The fact that asking and sales prices for ultra-luxury properties are reaching new heights isn’t a sign of problems in the broader market and shouldn’t raise concerns that last decade’s housing bubble will be repeated, Conn said.
“I think of this market as fundamentally different from the rest of the market,” Conn said in an interview Thursday on Bloomberg Television’s “Market Makers.” “In order to buy one of these properties, you have to be in the billionaires club.”
Just one home sale exceeded the $100 million mark in 2013, following four such transactions in 2012 and three in 2011, Christie’s reported.
Residences currently on the market with asking prices at that level include a $400 million Monaco penthouse, a $365 million London manor and a $195 million estate in Beverly Hills, California, according to Christie’s. France’s Cote d’Azur, a getaway for jet-setters, has homes with asking prices of $425 million and $215 million.
The report analyzed home sales in 10 cities known for prime property and 70 additional markets, including weekend getaways, vacation resorts and suburban locations. The 10 cities are Dubai, Hong Kong, London, Los Angeles, Miami, New York, Paris, San Francisco, Sydney and Toronto.
Location, Privacy
The average starting price for a luxury home was $2 million in the areas Christie’s studied. It defines a luxury home as having a combination of location, such as a prominent street address, and amenities such as privacy, urban conveniences or collectible architectural quality.
London luxury homes averaged $4,119 a square foot, the most expensive of the top 10 cities. Beverly Hills and neighboring areas of Los Angeles had the highest luxury entry-price point, at $8 million. Toronto had the fastest sales pace, with prime properties finding a buyer an average of 31 days after listing. Dubai had the highest share of international and non-local buyers, at 75 percent.
To target prospective clients in competitive markets, tech-savvy agents are teaming up with firms that identify potential buyers using increasingly precise metrics. WSJ’s Stefanos Chen reports. Photo: Jason Henry for The Wall Street Journal
Tech-savvy agents are teaming with data companies to identify cognition
Sitting in bed at 1:40 a.m. one morning last November, Jon Hoefling was thinking about selling his 4,300-square-foot home in Morgan Hill, Calif. While browsing Facebook on his phone, he clicked on a real-estate ad offering to estimate his home’s value. His future listing agent, who paid for the ad, was waiting.
Mr. Hoefling, the 50-year-old owner of an office-furniture resale company, had been targeted for the ad—along with 1,500 others in California’s Silicon Valley area—by an algorithm that identified him as a likely home seller. The telltale signs: Mr. Hoefling has lived in the home for more than 15 years, and his home’s market value is high for the area. Most important, his youngest son will soon leave for college. Empty nesters might as well wear a bull’s-eye.
To target prospective clients in competitive markets, tech-savvy agents are buying data subscriptions and teaming up with firms that identify potential buyers using increasingly precise metrics. Exotic-car owners can be courted to buy a car-collector’s mansion. Equestrians are rounded up for ranch homes
Last year, Sotheby’s International Realty announced a partnership with Wealth-X, a consulting group that uses public records and research staff to manually track the habits of “ultrahigh-net-worth individuals.” There are about 211,000 people world-wide valued at more than $30 million, according to the company’s president and co-founder, David Friedman—and the firm’s goal is to write a detailed dossier on each one of them.
These reports may contain everything from an individual’s net worth and social circles to even more personal details. For example, the dossier for one Australian multimillionaire notes that he is likely fond of topiary, because he proposed to his wife in front of a massive topiary created by artist Jeff Koons.
Mark Lowham, managing partner at TTR Sotheby’s in Washington, D.C., enlisted Wealth-X to help find a buyer for a penthouse apartment listed at $9 million in the Georgetown neighborhood. His team first established a basic description of the people they were looking for: Homeowners with a combined income of $2 million who have lived in a house assessed at more than $4 million for at least five years.
Consulting group Wealth-X was enlisted to find prospective buyers for this penthouse, which is asking $9 million in Washington, D.C. Photo: Sean Shanahan.
Then, they got more specific: Art collectors, because the condo has ample wall space. Empty nesters, because they prefer single-floor living. Private-aircraft users, because the area attracts jet-setters.
Using a combination of data from Wealth-X and their client contact base of about 700,000, they might be left with 400 targeted leads, Mr. Lowham says. The listing isn’t public yet, but the next step is to launch a mail campaign to their targeted list of prospects.
Sophisticated data collection has been crucial to the growth of the Agency, says Billy Rose, co-founder of the Beverly Hills, Calif.-based real-estate firm. His company, which launched in 2011, closed on 12 transactions of $20 million or more last year. He says the Agency so far has spent about $800,000 to create a database of people with high-net worth. “When I have a house coming up for sale with a garage for six cars, I’ll reach out to my Lamborghini owners,” he says.
Mr. Rose declined to describe the sources that make up the database, but says they have 100,000 individuals in their direct network and another half-million through partnerships. People familiar with the system say it incorporates data from credit-card companies, as well as sales information from luxury brands.
Scanning obituaries for leads has long been a tactic of up-and-coming real-estate agents looking for new business. Today, the practice is getting a 21st-century makeover. Tracking major life events—marriage, divorce, death, all of which frequently entail a home purchase or sale—is big business for a number of new firms.
In Cuba, 220 miles south of Miami, real estate is considered hotter than any other commodity on the world market today. But most Americans and foreigners so far are mostly shut out of this potentially lucrative product.
That’s because Raul Castro, President since 2006, has become an ardent pro-business advocate in a Communist country. He is allowing Cuban residents to buy and sell their own homes. That has never happened in such volume since Raul’s ailing brother Fidel took over the island country 54 years ago.
But while bonafide Cuban residents may be enjoying what they perceive as a real estate revolution, foreigners, meanwhile, are blocked out of this new market. That has been the situation since 1962 when Fidel Castro seized nearly all foreign-owned real estate in Cuba without giving them a peso for it.
At that time, Fidel, now 88, nationalized most private companies. He also confiscated property belonging to Cubans who fled the country. Raul so far is not saying whether his government would give back those properties to Cubans who later return to permanently reside in Cuba.
So what can frustrated, cash-loaded American and foreign investors do right now to enter the Cuban real estate arena? Nothing legally by Americans specifically, based on the Trading With the Enemy Act passed by the U.S. Congress in 1961. But plenty of action is possible in under-the-table activity involving Americans and foreigners.
For example, an American investor could consider funneling funds to a Cuban resident friend in Cuba to purchase properties and hold the title under the friend’s name. The hope here is that Raul Castro’s government, sometime in the near future, would allow non-Cuban Americans to legally buy real estate in Cuba with no restrictions attached.
The risk, of course, is that such a move by Raul might be many years away, thereby leaving the property in the Cuban friend’s name for an unknown period.
Another example of how some non-American, non-Cuban investors are skirting Cuban property purchase laws, involves the investor marrying a Cuban woman and both beginning to live permanently in Cuba. The property could be bought in the woman’s name. She would hold the title for life. And if the two divorce, the property remains in the woman’s name. True love would have to blossom and endear in this situation.
But what about Cuban Americans now permanently living in South Florida and other U.S. locations? They, too, would be shut out of the market under the U.S. Trading With the Enemy Act. However, there are more loopholes around for them than there are for other American and foreign investors.
For instance, right now Cuban Americans can send $8,000 annually to relatives and others in Cuba. On top of that amount, they can also bring with them up to $10,000 in cash each time they visit the island.
Using that formula, Cuban Americans quickly could be accumulating thousands in funds for their relatives to buy properties — in the relatives’ names, of course. The hope is that Raul Castro might change the regulations in his lifetime to allow Cuban Americans to buy in their own name.
Although the current real estate rush in Cuba sounds exciting to Cuban residents at least, there still remain several roadblocks, even for them. For example, permanent resident Cubans can own only two homes, a primary residence and a vacation site. This allows the government to continue keeping tight control over the market.
So can a non-American, non-Cuban buy anything at all right now in Cuba?
The answer is yes, with qualifications. There still are around two dozen dilapidated apartment buildings developed 20 years ago in the Havana market. Foreigners are allowed to buy them. And unconfirmed reports from Cuban Americans claim those properties are being scooped up quickly.
Additionally, Raul Castro previously announced his Communist government has decided to go ahead with long-delayed plans to develop a golf resort and sell million-dollar-plus villas, townhouses and apartments to foreigners and Cuban residents – but not to legitimate Americans, of course. That project’s development and completion, however, are perceived to be five to 10 years away.
But how can Cuban residents today find out what properties are available in their own home markets? Not easily, because most Cubans still don’t have Internet access because the government hasn’t gotten around to building a working cyberspace infrastructure for them to use. The ban on cell phone use was only lifted in 2006.
Instead, many Cubans turn to local weekly or daily penny-saver-like shopper tabloids that sell for pennies to a dollar a copy.
According to Cuban-American real estate broker Pablo Tacon, who is opening a new office in Havana this month called Cuba Tacon Inmobiliaria — it’s a tale of two markets in Cuba. Simply put, there are two different ways in which Cuba’s real estate market functions; one for the locals, the other for outsiders.
Tacon tells The World Property Journal, “One market is called Permuta, which is for Cuban Nationals only as the buyers and the sellers amongst themselves, with the Permutaeros as agents; the other is for foreign investors only with particular designated properties and intermediaries.”
In many ways, Cuba’s way of transacting real estate today is archaic, opaque and fragmented. Yet, given it natural beauty, proximity to the Florida, thawing U.S. political relationship and global tourism allure, Cuba could deliver big results in the coming decade for property speculators worldwide.
Just like “America’s time-share king”, America just keeps on making the same mistakes over and over again. Prior to the financial collapse of 2008, time-share mogul David Siegel and his wife Jackie began construction on their “dream home” near Disney World in Orlando, Florida. This dream home would be approximately 90,000 square feet in size, would be worth $100 million when completed, and would be named “Versailles” after the French palace that inspired it. In fact, you may remember David and Jackie from an excellent 2012 documentary entitled “The Queen of Versailles”. That film documented how the Siegels almost lost everything after the financial collapse of 2008 devastated the U.S. economy because they were over leveraged and drowning in debt.
But since that time, David’s time-share company has bounced back, and the Siegels now plan to finally finish construction on their dream home and make it bigger and better than ever before.
But before you pass judgment on the Siegels, it is important to keep in mind that weare behaving exactly the same way as a nation. Instead of addressing our fundamental problems after the last financial crisis, we have just continued to make the exact same mistakes that we made before. And ultimately, things are going to end very, very badly for us. As Americans, we like to think that we are somehow entitled to the biggest and best of everything. We have been trained to believe that we are the wealthiest and most prosperous nation on the entire planet and that it will always be that way. This generation was handed the keys to the greatest economic machine in world history, but instead of treating it with great care, we have wrecked it.Our economic infrastructureis being systematically dismantled, Wall Street has been transformedinto the biggest casino in the history of the planet, we have piled up a mountain of debt unlike anything the world has ever seen, and the reckless Federal Reserve is turning our currency into Monopoly money. All of our decisions have been designed to make things better for ourselves in the short-term without any consideration about what we were doing to the future of this country.
That is why “Versailles” is such a perfect metaphor for America. The Siegels always had to have the biggest and the best of everything, and they almost lost it all when the financial markets crashed…
David Siegel (“They call me the time-share king”) and his wife, Jackie Siegel — titular star of the 2012 documentary “The Queen of Versailles” — began building their dream home near Disney World about a decade ago. Soon it became evident that the sheer size of the mansion was almost unprecedented in America; it’s thought that only Biltmore House and Oheka Castle are bigger and still standing, and both of those are now run as tourist attractions, not true single-family homes.
But when the bottom fell out of the financial markets in 2008, their fortunes were upended too. By the time the documentary ended, their dream home had gone into default and they’d put it on the market. The listing asked for $100 million finished — “based on the royal palace of Louix XIV of the 17th century or to the buyer’s specifications — or $75 million “as is with all exterior finishings in crates in the 20-car garage on site.”
But just like the U.S. economy, the Siegels have seemingly recovered, at least for the moment.
The unfinished home sits on 10 acres of lakefront property and when completed will feature 11 kitchens, 30 bathrooms, 20-car garage, two-lane bowling alley, indoor rollerskating rink, three indoor pools, two outdoor pools, video arcade, ballroom, two-story movie theater modeled off the Paris Opera House, fitness center with 10,000-square-foot spa, yoga studios, 20,000-bottle wine cellar and an exotic fish aquarium.
Two tennis courts, a baseball diamond and formal garden will be included on the grounds.
The couple admitted that some of their plans for the house – such as children’s playrooms – will have to be modified now that their kids are older.
However, they are determined to see the project through.
‘I’m not at the ending to my story yet, but so far, it’s a happy ending, and I’m really looking forward to starting the next chapter of my life and moving into my palace, finishing it and throwing lots of parties – anxious for the world to see it,’ Mrs Siegel said.
It is easy to point fingers at the Siegels, but the truth is that they are just behaving like we have been behaving as an entire nation.
When our financial bubbles burst the last time, our leaders did not really do anything to address our fundamental economic problems. Instead, they were bound and determined to reinflate those bubbles and make them even larger than before.
Now we stand at the precipice of the greatest financial crisis in our history, and we only have ourselves to blame.
Just consider what has happened to our national debt. Just prior to the last recession, it was sitting at about 9 trillion dollars. Today, it has just crossed the 18 trillion dollar mark…
You may not think that you are to blame for this, but most of the people that will read this article voted for politicians that fully supported all of this borrowing and spending. And yes, that includes most Democrats and most Republicans.
We have stolen trillions of dollars from future generations of Americans in a desperate attempt to prop up our failing standard of living in the present. What we have done is a horrific crime, and if we lived in a just society a whole lot of people would be going to prison over this.
A similar pattern emerges when we look at the spending habits of ordinary Americans. This next chart shows one measure of consumer credit in America. During the last recession, we actually had a brief period of deleveraging (which was good), but now we are back on the exact same trajectory as before…
Even though we had a higher standard of living than all previous generations of Americans, that was never good enough for us. We always had to have more, and we have borrowed and spent ourselves into oblivion.
We have also shown absolutely no respect for our currency. Having the primary reserve currency of the world has been an incredible advantage for the U.S. economy, but we are squandering that privilege. Like I said at the top of the article, the Federal Reserve has been treating the U.S. dollar like Monopoly money in recent years in an attempt to prop up the financial system. Just look at what “quantitative easing” has done to the Fed balance sheet since the last recession…
Most of the new money that the Fed has created has been funneled into the financial markets. This has created some financial bubbles which are absolutely insane. For example, just look at how the NASDAQ has performed since the last financial crisis…
These Fed-created bubbles are inevitably going to implode, because they have no relation to economic reality whatsoever. And when they implode, millions of Americans are going to be financially wiped out.
Just like David and Jackie Siegel, we simply can’t help ourselves. We just keep on making the same old mistakes.
And in the end, we will all pay a great, great price for our utter foolishness.
The tale of this otherwise humble two-story home selling for more than $1.2 million has gone viral and has much of the real-estate chattering class talking.
“This is not a joke,” wrote SFist’s Jay Barmann. “[T]his is the world we live in.” He called the 1907 four-bedroom, two-bath Craftsman home “ramshackle.” A “total disaster,” chimed in Tracy Elsen, a real-estate blogger in San Francisco.
Indeed, it might not look like much from the outside or on the inside, but where it is — 1644 Great Highway, San Francisco, CA, 94122 — is where it is.
The 1,832-square-foot house, listed on Redfin.com as a “contractor’s special” in a “deteriorative state” that “needs everything,” just sold, on March 24, for a whopping $1.21 million in cash (or $660 a square foot) after being listed in February for $799,000 (a premium of $411,000). At that per-square-foot price, this house, on San Francisco’s often-chilly western fringe, was more expensive than the going rates in Boston, Washington and New York.
The home, even though it has been gutted, has an unobstructed view of the Pacific Ocean and sits a short walk across San Francisco’s Great Highway to the beach, and it is just five blocks from San Francisco’s famed Golden Gate Park. Oh, and it’s got off-street parking, not a small thing in the City by the Bay.
The house sold for $340,000 in August of 1997 and was sold for $935,000 in June of 2008, when it looked a lot better.
A minimalist museum and a literary landmark
Since then, the house has taken a pounding. Many of the Craftsman-era fixtures common to Bay Area homes, including stained glass and Tiffany-style lamps, have been ripped out, as have most of the fixtures and carpeting and, evidently, the outdoor hot tub that was listed in 2008 but not mentioned in the 2015 listing. A second-story deck in the front of the house with a view of the ocean remains, but it is badly weathered, as is the forest-green paint, in sharp contrast with the careful upkeep evident in 2008.
But some of what made this home a gem in 2008 remains intact, including its picture windows, its decked garden, the fireplaces with wood mantels, the built-in cabinets common to Craftsman homes, the wainscoting and a gas O’Keefe & Merritt stove that dates back to the late 1940s or early 1950s (collector’s items that are prized by many homeowners in the Bay Area).
And given the fact that San Francisco’s median home price recently hit $1 million, and that it rose 10% between February 2014 and February 2015 and is expected to gain another 4.3% through February 2016, the price for this house, on this lot, might just prove to be a bargain.
“Come down to Houston,” William Snyder, leader of the Deloitte Corporate Restructuring Group, told Reuters. “You’ll see there is just a stream of consultants and bankruptcy attorneys running around this town.”
But it’s not just in Houston or in the oil patch. It’s in retail, healthcare, mining, finance…. Bankruptcies are suddenly booming, after years of drought.
In the first quarter, 26 publicly traded corporations filed for bankruptcy, up from 11 at the same time last year, Reuters reported. Six of these companies listed assets of over $1 billion, the most since Financial-Crisis year 2009. In total, they listed $34 billion in assets, the second highest for a first quarter since before the financial crisis, behind only the record $102 billion in 2009.
The largest bankruptcy was the casino operating company of Caesars Entertainment that has been unprofitable for five years. It’s among the zombies of Corporate America, kept moving with new money from investors that had been driven to near insanity by the Fed’s six-plus years of interest rate repression.
Next in line were Doral Financial, security services outfit Altegrity, RadioShack, and Allied Nevada Gold. The first oil-and-gas company showed up in sixth place, Quicksilver Resources [Investors Crushed as US Natural Gas Drillers Blow Up].
Among the largest 15 sinners on the list, based on Bankruptcydata.com, are six oil-and-gas related companies. But mostly in the lower half. So far, larger energy companies are still hanging on by their teeth.
This isn’t the list of a single troubled sector that ran out of luck. This isn’t a single issue, such as the oil-price collapse. This is the list of a broader phenomenon: too much debt across a struggling economy. And now the reckoning has started.
So maybe the first-quarter surge of bankruptcies was a statistical hiccup; and for the rest of the year, bankruptcies will once again become a rarity.
Wishful thinking? The list only contains publicly traded companies that have already filed. But the energy sector, for example, is full of companies that are owned by PE firms, such as money-losing natural gas driller Samson Resources. It warned in March that it might have to use bankruptcy to restructure its crushing debt.
Similar troubles are building up in other sectors with companies owned by PE firms. As a business model, PE firms strip equity out of the companies they buy, load them up with debt, and often pay special dividends out the back door to themselves. These companies are prime candidates for bankruptcy.
Restructuring specialists are licking their chops. Reality is setting in after years of drought when the Fed’s flood of money kept every company afloat no matter how badly it was leaking. These folks are paid to renegotiate debt covenants, obtain forbearance agreements from lenders, renegotiate loans, etc. At some point, they’ll try to “restructure” the debts.
“There is a ton of activity under the water,” explained Jon Garcia, founder of McKinsey Recovery & Transformation Services.
Just on Wednesday, gun maker Colt Defense, which is invoking a prepackaged Chapter 11 filing, proposed to exchange its $250 million of 8.75% unsecured notes due 2017 for new 10% junior-lien notes due in 2023, according to S&P Capital IQ/LCD. But at a pro rata of 35 cents on the dollar!
Equity holders are out of luck. The haircut would “address key issues relating to Colt’s viability as a going concern,” the filing said. It would allow the company “to attract new financing in the years to come.” Always fresh money!
Also on Wednesday, Walter Energy announced that it would skip the interest payment due on its first-lien notes. In early March, when news emerged that it had hired legal counsel to explore restructuring options, these first-lien notes plunged to 64.5 cents on the dollar and its shares became a penny stock.
None of them has shown up in bankruptcy statistics yet. They’re part of the “activity under water,” as Garcia put it.
But these Colt Defense and Walter Energy notes are part of the “distressed bonds” whose values have collapsed and whose yields have spiked in a sign that investors consider them likely to default. These distressed bonds, according to Bank of America Merrill Lynch index data, have more than doubled year over year to $121 billion.
The actual default rate, which lags behind the rise in distressed debt levels, is beginning to tick up. Yet it’s still relatively low thanks to the Fed’s ongoing easy-money policies where new money constantly comes forward to bail out old money.
But once push comes to shove, equity owners get wiped out. Creditors at the lower end of the hierarchy lose much or all of their capital. Senior creditors end up with much of the assets. And the company emerges with a much smaller debt burden.
It’s a cleansing process, and for many existing investors a total wipeout. But the Fed, in its infinite wisdom, wanted to create paper wealth and take credit for the subsequent “wealth effect.” Hence, with its policies, it has deactivated that process for years.
Instead, these companies were able to pile even more debt on their zombie balance sheets, and just kept going. It temporarily protected the illusory paper wealth of shareholders and creditors. It allowed PE firms to systematically strip cash out of their portfolio companies before the very eyes of their willing lenders. And it prevented, or rather delayed, essential creative destruction for years.
But now reality is re-inserting itself edgewise into the game. QE has ended in the US. Commodity prices have plunged. Consumers are strung out and have trouble splurging. China is slowing. Miracles aren’t happening. Lenders are getting a teeny-weeny bit antsy. And risk, which everyone thought the Fed had eradicated, is gradually rearing its ugly head again. We’re shocked and appalled.
Fed’s Dudley Warns about Wave of Municipal Bankruptcies
The Fed is doing workshops on municipal bankruptcies now.
It has been a persistent ugly list of municipal bankruptcies: Detroit, MI; Vallejo, San Bernardino, Stockton, and Mammoth Lakes, CA; Jefferson County, AL. Harrisburg, PA; Central Falls, RI; Boise County, ID.
There are many more aspirants for that list, including cities bigger than Detroit. Detroit was the test case for shedding debt. If bankruptcy worked in Detroit, it might work in Chicago. Illinois Gov. Bruce Rauner wants to make Chapter 9 bankruptcies legal for cities in his state, which is facing its own mega-problems.
“Bankruptcy law exists for a reason; it’s allowed in business so that businesses can get back on their feet and prosper again by restructuring their debts,” Rauner said. “It’s very important for governments to be able to do that, too.”
His plan for sparing Illinois that fate is to cut state assistance to municipalities, which doesn’t sit well with officials at these municipalities. Chicago Mayor Rahm Emanuel’s office countered that balancing the state budget on the backs of the local governments is itself a “bankrupt” idea.
Puerto Rico doesn’t even have access to a legal framework like bankruptcy to reduce its debts, but it won’t be able to service them. It owes $73 billion to bondholders, about $20,000 per-capita – more than any of the 50 states. If you own a muni bond fund, you’re probably a creditor. Bond-fund managers use its higher-yielding debt to goose their performance. But now some sort of default and debt relieve is in the works. The US Treasury Department is involved too.
“People before debt,” the people in Puerto Rico demand. It’s going to be expensive for bondholders.
That’s the ugly drumbeat in the background of New York Fed President William Dudley’s speech today at the New York Fed’s evocatively named workshop, “Chapter 9 and Alternatives for Distressed Municipalities and States.”
So they’re doing workshops on municipal bankruptcies now….
“We at the New York Fed are committed to playing a role in ensuring the stability of this important sector,” he said, referring to the sordid finances of state and local governments. But he wasn’t talking about future bailouts by the Fed. He was issuing a warning to municipalities and their creditors about “the emerging fiscal stresses in the sector.”
It’s a big sector. State and local governments employ about 20 million people – “nearly one in seven American workers.” The sector accounts for about $2 trillion, or 11%, of US GDP. And its services like public safety, education, health, water, sewer, and transportation, are “absolutely fundamental to support private sector economic activity.”
The problem is how all this and other budget items have gotten funded. There are about $3.5 trillion in municipal bonds outstanding. So Dudley makes a crucial distinction:
When governments invest in long-lived capital goods like water and sewer systems, as well as roads and bridges, it makes sense to finance these assets with debt. Debt financing ensures that future residents, who benefit from the services these investments produce, are also required to help pay for them. This principle supports the efficient provision of these long-lived assets.
“Unfortunately,” he said, governments borrow to “cover operating deficits. This kind of debt has a very different character than debt issued to finance infrastructure.” It’s “equivalent to asking future taxpayers to help finance today’s public services.”
In theory, 49 states require a balanced budget every year, but it’s easy enough to “find ways to ‘get around’ balanced budget requirements” and cover operating expenses with borrowed money, he said, including the widespread practice of “pushing the cost of current employment services into the future” by underfunding pensions and retiree healthcare benefits for current public employees.
The total mountain of unfunded liabilities remains murky, but estimates for unfunded pension liabilities alone “range up to several trillion dollars.” With these unfunded liabilities, employees are the creditors. That would be on top of the $3.5 trillion in official debt, where bondholders are the creditors.
And eventually, high debt levels and the provision of services clash as in Detroit and Stockton, he said, and render public sector finances “unsustainable.”
But cutting services to the bone to be able to service the ballooning debt entails a problem: citizens can vote with their feet and move elsewhere, thus reducing the tax base and economic activity further. To forestall that, municipalities may alter their priorities and favor the provision of services over debt payments. “This may occur well before the point that debt service capacity appears to be fully exhausted,” he said.
In other words, the prioritization of cash flows to debt service may not be sustainable beyond a certain point. While these particular bankruptcy filings [by Detroit and Stockton] have captured a considerable amount of attention, and rightly so, they may foreshadow more widespread problems than what might be implied by current bond ratings.
That was easy to miss: foreshadow more widespread problems than what might be implied by current bond ratings. Dudley in essence said that current bond ratings – and therefore current bond prices and yields – don’t reflect the ugly reality of state and municipal financial conditions.
It was a warning for states and municipalities to get their financial house in order “before any problems grow to the point where bankruptcy becomes the only viable option.”
It was a warning for public employees and retirees – in their role as creditors – to not rely on promises made by their governments concerning pensions and retiree healthcare benefits.
And it was a warning for municipal bondholders that their portfolios were packed with risky, but low-yielding securities that might end up being renegotiated in bankruptcy court, along with claims by public employees and what’s left of their pension funds. And it was a blunt warning not to trust the ratings that our infamous ratings agencies stamp on these municipal bonds.
Some states are worse than others. Even with capital gains taxes from the booming stock market and startup scene raining down on my beloved and crazy state of California, it ranks as America’s 7th worst “Sinkhole State,” where taxpayers shoulder the largest burden of state debt.
Crude oil has already bounced back by 30 percent over the past month. But according to Richard Ross of Evercore ISI, currency market moves are predicting more upside for the battered commodity.
Over the past week, oil-exposed currencies such as the Canadian dollar, the Norwegian krone and the Australian dollar have surged in value against the U.S. dollar. And since these currencies tend to be correlated with crude, Ross extrapolates that oil has more upside.
Crude-exposed currencies “are really firming here, and they have been firming over the past month or so along with crude oil itself, and I think that holds bullish implications,” Ross said.
Looking at the Canadian currency in particular, Ross predicts that “the Canadian dollar continues to firm against the U.S. dollar, and this should be supportive of crude.”
Even the crumbling Russian ruble has had a great run over the past month, Ross points out.
“Earlier this year, the ruble was staring into the abyss,” he said in a Thursday “Trading Nation” segment. “Strength in the Russian ruble, once again, has a positive read-through for crude oil.”
However, not everyone buys the thesis.
Referring to the commodity currencies, Boris Schlossberg of BK Asset Management said that “they’re kind of reactive. It’s hard to make that case completely.”
In other words, crude is driving currencies like the Canadian dollar, and not the other way around.
The hottest single-family housing markets in the nation are located across the Southwest and the South, according to the latest data released by Auction.com.
Among the nation’s 49 largest markets, Denver topped the list when it came to a combination of strong housing demand and favorable affordability coupled with a vibrant economy and demographic conditions. According to Auction.com, Denver experiences a 9.2 percent year-over-year home price growth and a 4.6 percent year-over-year home sales growth.
But why Denver, of all places?
“I’m tempted to tell you it is a Rocky Mountain high,” said Rick Sharga, executive vice president at Auction.com. And while Sharga admitted that the legalization of recreational marijuana in Colorado has helped to boost Denver’s tourism and hospitality industries, the city is enjoying a sturdy economic growth in the professional services sector. “They have exceptional job growth, about three times the national average.”
Rounding out the top 10 for the strongest markets are San Antonio, Nashville, Fort Lauderdale, Dallas, Fort Worth, Seattle, San Francisco, Phoenix and Charlotte. Conspicuously absent from the upper level of strong markets were Northeastern cities—the highest ranked on the Auction.com list was Boston in 34th place.
“We are seeing sort of the opposite of what we’re seeing in the South or Southwest,” said Sharga about the Northeast’s economic health and housing environment. “The population growth is flat or negative and there is not a lot of the job growth that we see in other markets.”
As a national whole, Sharga stated that housing has seen and hopes to see better days. “We’re off to a worse than expected start,” he said of the 2015 housing picture. “I expect a fairly healthy spring, approaching five units in sales. But we should be in the area of six units in sales.”
Consumer demand for housing has dropped to its lowest recorded level due to reduced confidence in financial security and income raises, a new survey from Fannie Mae says.
The government-sponsored enterprise’s March national housing survey found that 41% of Americans expect their financial situation to improve over the next year, and 22% said their income had increased substantially over the last year.
Most importantly, the percentage of respondents who said they planned to buy a home dropped five basis points to 60%, an all-time survey low.
“We’ve seen modest improvement in total compensation resulting from a strengthened labor market,” Fannie Mae chief economist Doug Duncan said in a release.
“However, income growth perceptions and personal financial expectations both eased off of recent highs, consistent with Friday’s weak jobs report. Simultaneously, the share of consumers expecting to buy on their next move has declined. Meanwhile, the wait for housing expansion continues.”
Back in early 2007, just as the first cracks of the bursting housing and credit bubble were becoming visible, one of the primary harbingers of impending doom was banks slowly but surely yanking availability (aka “dry powder”) under secured revolving credit facilities to companies across America. This also was the first snowflake in what would ultimately become the lack of liquidity avalanche that swept away Lehman and AIG and unleashed the biggest bailout of capitalism in history. Back then, analysts had a pet name for banks calling CFOs and telling them “so sorry, but your secured credit availability has been cut by 50%, 75% or worse” – revolver raids.Well, the infamous revolver raids are back. And unlike 7 years ago when they initially focused on retail companies as a result of the collapse in consumption burdened by trillions in debt, it should come as no surprise this time the sector hit first and foremost is energy, whose “borrowing availability” just went poof as a result of the very much collapse in oil prices.
As Bloomberg reports, “lenders are preparing to cut the credit lines to a group of junk-rated shale oil companies by as much as 30 percent in the coming days, dealing another blow as they struggle with a slump in crude prices, according to people familiar with the matter.
Sabine Oil & Gas Corp. became one of the first companies to warn investors that it faces a cash shortage from a reduced credit line, saying Tuesday that it raises “substantial doubt” about the company’s ability to continue as a going concern.
It’s going to get worse: “About 10 firms are having trouble finding backup financing, said the people familiar with the matter, who asked not to be named because the information hasn’t been announced.”
Why now? Bloomberg explains that “April is a crucial month for the industry because it’s when lenders are due to recalculate the value of properties that energy companies staked as loan collateral. With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend. And that will only squeeze companies’ ability to produce more oil.
Those loans are typically reset in April and October based on the average price of oil over the previous 12 months. That measure has dropped to about $80, down from $99 when credit lines were last reset.
That represents billions of dollars in reduced funding for dozens of companies that relied on debt to fund drilling operations in U.S. shale basins, according to data compiled by Bloomberg.
“If they can’t drill, they can’t make money,” said Kristen Campana, a New York-based partner in Bracewell & Giuliani LLP’s finance and financial restructuring groups. “It’s a downward spiral.”
As warned here months ago, now that shale companies having exhausted their ZIRP reserves which are largely unsecured funding, it means that once the secured capital crunch arrives – as it now has – it is truly game over, and it is just a matter of months if not weeks before the current stakeholders hand over the keys to the building, or oil well as the case may be, over to either the secured lenders or bondholders.
The good news is that unlike almost a decade ago, this time the news of impending corporate doom will come nearly in real time: “Publicly traded firms are required to disclose such news to investors within four business days, under U.S. Securities and Exchange Commission rules. Some of the companies facing liquidity shortfalls will also disclose that they have fully drawn down their revolving credit lines like Sabine, according to one of the people.”
Speaking of Sabine, its day of reckoning has arrived
Sabine, the Houston-based exploration and production company that merged with Forest Oil Corp. last year, told investors Tuesday that it’s at risk of defaulting on $2 billion of loans and other debt if its banks don’t grant a waiver.
Another company is Samson Resource, which said in a filing on Tuesday that it might have to file for a Chapter 11 bankruptcy protection if the company is unable to refinance its debt obligations. And unless oil soars in the coming days, it won’t.
Its borrowing base may be reduced due to weak oil and gas prices, requiring the company to repay a portion of its credit line, according to a regulatory filing on Tuesday. That could “result in an event of default,” Tulsa, Oklahoma-based Samson said in the filing.
Indicatively, Samson Resources, which was acquired in a $7.2-billion deal in 2011 by a team of investors led by KKR & Co, had a total debt of $3.9 billion as of Dec. 31. It is unlikely that its sponsors will agree to throw in more good money after bad in hopes of delaying the inevitable.
The revolver raids explain the surge in equity and bond issuance seen in recent weeks:
Many producers have been raising money in recent weeks in anticipation of the credit squeeze, selling shares or raising longer-term debt in the form of junk bonds or loans.
Energy companies issued more than $11 billion in stock in the first quarter, more than 10 times the amount from the first three months of last year, Bloomberg data show. That’s the fastest pace in more than a decade.
Breitburn Energy Partners LP announced a $1 billion deal with EIG Global Energy Partners earlier this week to help repay borrowings on its credit line. EIG, an energy-focused private equity investor in Washington, agreed to buy $350 million of Breitburn’s convertible preferred equity and $650 million of notes, Breitburn said in a March 29 statement.
Unfortunately, absent an increase in the all important price of oil, at this point any incremental dollar thrown at US shale companies is a dollar that will never be repaid.
Does anyone actually like cold calling? I’m definitely not a natural cold caller. And I’m assuming there are a fair number of you out there who would rather generate listings through other methods. So, I’m focusing on providing the best tactics for you get more listings, listing leads, and ultimately more money all without you having to do cold calling.
This is a slightly taboo topic but presents a great opportunity for agents looking for listings. Did you know that most judges mandate that couples sell their current property? This is part of the reason for the huge number of divorcees that list their homes each year!
Over 31% of people going through a divorce will list their home within 6 months of filing for their divorce. This gives you a huge opportunity! Not only can you list their property, but you can garner two buyers from the transaction.
If 31% of people going through a divorce end up selling their home and there are 1.2 million divorces in the United States a year, that means over 300,000 people list their home within 6 months of filing.
That’s a lot of transactions in a very short period of time! And a list of VERY motivated sellers.
There is very little competition for being the divorce listings expert! You can easily setup Facebook ads like this that target these home sellers:
And then use landing pages to collect their contact information:
This method will make you the divorce listings expert in no time! You should even place a section on your website or blog about this topic to start collecting leads.
2) Inherited Homes
Did you know that over 1 million people inherit a home every year? That’s an amazing opportunity for agents!
Think about it, would you want to move into a home that you recently inherited? Probably not. It might not be in the right location. Maybe it needs too many repairs. A huge majority of these new homeowners end up selling the property.
You need to target these people! And here’s how:
1) You’ll first want to find an online search for all the local cases in your county. This is typically held on a “county clerk’s” website. And you are looking for cases in regards to “inheritance.” A simple Google search will do the trick:
Then, you’ll have access to search public data and records. You should be able to secure the name of the former property owner. At this point, you head over to YellowPages and click “Search People.” Enter the person’s name into the form:
You should be able to find the address of the property that was recently inherited. Now, simply prospect away!
Do you mail FSBO’s? I’m sure a lot of you answered yes to that question. But how many of you have a pre-thought out series of mailers that you send once every 4-7 days? The percentage of realtors that follow up with their mailer is very small. In fact, over 65% of sales people never follow up with a marketing idea.
That’s bad. It takes between 5 and 12 points of contact for someone to be interested in doing business with you. You have to nurture these people along and get them warm to the idea of doing business with you. One way of doing this is sending FSBO’s a series of mailers. How many pain points does the typical prospecting session for FSBO’s contain? It’s usually 3-7 different pain points! You can think of 5 different things you’d like to explain to a FSBO, write them out in letter format, and then mail them to the home owner.
The marketing costs for this are incredibly low! Maybe 5 stamps, a Real Estate Logo, and some paper? The thing with FSBO’s is that they’ve probably been burned by a realtor before. So, you’re instantly standing out from the crowd by being the most persistent person out there.
I can’t stress enough the value of following up with your marketing actions. This is the key to experiencing great success in real estate.
4) Vacant Homes
The US Census Bureau shows that there were 104 million vacant homes at the end of the 1st quarter in 2014. By the end of the second quarter, there were only 93.2 million vacant homes. By the end of the third quarter, 96.1 vacant homes. And by the end of the fourth quarter, 94.5 vacant homes.
That’s a lot of transactions taking place!
If I were a realtor, I’d hire an admin or local college student to help prospect vacant homes. You can pay them hourly or work out a commission based arrangement for finding properties. This way, you save your time while still being the first realtor to find the vacant properties! Once you find them, it’s just a matter of time before the previous homeowner wants to sell.
You can use your local county clerk’s website to prospect for homes that might be vacant.
5) Look Into Property Taxes
Speaking of the county clerk’s website again, you can research homes that are behind in paying their property taxes while you are there! These houses give you an enormous opportunity! Did you know that over 23% of homes that are sold in any given year have some type of back tax to pay?
The fact that this many sellers are behind on property taxes is a critical determining factor in finding motivated sellers! You can prospect for these buyers in several ways.
1) Launch a niche SEO Campaign for keywords related to property taxes and selling your home. Look at this:
2) Start advertising online: Google Adwords and Facebook ads are very expensive if you target: Dallas Homes For Sale. But if you’re targeting “Sell A Home Quickly In Dallas Due To Taxes” there is a lot less competition!
3) Mail Individuals You Find On The Clerk’s Website: You can create a series of mailers you send to people who are behind on their taxes!
6) Partner With Small Local Banks Or Small Builders
Finally, you aren’t in this battle alone! Small local banks, builders, mortgage providers, plumbers, electricians, marriage counselors, dentists, etc., etc., etc. are all looking for business just like you. They are entrepreneurs looking to grow their businesses. And most of them probably wouldn’t mind a realtor giving them referrals. Why not start with the YellowPages and find a business in each major category to be your recommended provider?
Now, this won’t help you if you just spend 1 hour once talking with that person. Be sure to put them into your CRM, and follow up with them every month. Maybe even get coffee with them once a month. Figure out concrete ways for the two of you to work together! Incorporate this spirit of working together into your entire real estate brand and real estate slogans.
We’ve been saying for quite some time now that the US equity market’s seemingly inexorable (until this week) tendency to rise to new highs in the absence of the Fed’s guiding hand is almost certainly in large part attributable to the fact that in a world where you are literally guaranteed to lose money if you invest in safe haven assets such as negative-yielding German bunds, corporations can and will take advantage of the situation by issuing debt and using the proceeds to buy back stock, thus underwriting the rally in US equities. Here’s what we said after stocks turned in their best month in three years in February:
It also explains why, in the absence of the Fed, stocks continue to rise as if QE was still taking place: simply said, bondholders – starved for any yield in an increasingly NIRP world – have taken the place of the Federal Reserve, and are willing to throw any money at companies who promise even the tiniest of returns over Treasuries, oblivious if all the proceeds will be used immediately to buyback stock, thus pushing equity prices even higher, but benefiting not only shareholders but management teams who equity-linked compensation has likewise never been higher.
If you need further proof that this is precisely what is going on in US markets, consider the following from Citi:
Companies are rapidly re-leveraging…
…and the proceeds sure aren’t being invested in future productivity, but rather in buy backs and dividends… …and Citi says all that debt issued by struggling oil producers may prove dangerous given that “default risk in the energy space has jumped [and considering] the energy sector now accounts for 18% of the market”… …and ratings agencies are behind the curve… We’ll leave you with the following:
To be sure, this theater of financial engineering – because stocks are not going up on any resemblance of fundamental reasons but simply due to expanding balance sheet leverage – will continue only until it can no longer continue.
In “Underwater Homeowners Here To Stay” we highlighted a report from Zillow which showed that negative equity has now become a permanent fixture of the US housing market. The report also showed that the percentage of homeowners who are underwater was flat from Q314 to Q414, breaking a string of 10 consecutive quarters of declines. We also recently noted that a completely ridiculous new home sales print that defied all logic notwithstanding, housing data, including starts and existing home sales, has come in below expectations. On a side note, home price appreciation has outpaced wage growth at a rate of 13:1, to which we would add:
Of course, the biggest determinant of home price appreciation over the past 2 years has nothing to do with US consumers, or household formation, as confirmed by the collapse in first-time home buyers or the unprecedented depression in new mortgage origination, and everything to do with what we first suggested is one of the main drivers of the US housing bubble – foreigners parking their illegally procured cash in the US and evading taxes, now that US housing, with the NAR’s anti-money laundering exemption blessing, is the new normal’s Swiss Bank Account. That and flipping homes from one “all-cash” buyer to another “all-cash” buyer in hopes of a quick capital appreciation and the constant presence of the proverbial dumb money.
Against this backdrop, Deutsche Bank is out predicting that a sluggish US housing market is likely to impact the supply of MBS going forward. As DB notes, housing isn’t the GDP contributor it once was and not by a long shot. Not only that, but when it comes to recoveries, the housing market’s GDP contribution was 7 times below its post WW2 average in year one and has fared even worse since. Here’s DB with more:
The contribution of housing to US GDP continues to run at some of the lowest levels since the end of World War II. New construction of single- and multi-family homes, renovations, broker fees and the like still only make up a bit more than 3% of current GDP, well below the post-war average of 4.7%. Not only has the level of lift from housing come in low, but it has bounced out of the last official recession slowly, too. Housing on average has contributed a half a percentage point to GDP a year after the end of every post-war US recession. This time around, housing added only 7 bp. And the contribution of housing in the second and third years after the recent recession also has fallen well below post-war averages.And while “insufficient supply” (not enough homes) was cited as a possible contributor to the existing home sales miss, DB notes that at least as of today, there appears to still be a “supply hangover” (although it’s waning):
US home ownership started the decade at 66.9%, peaked in 2004 at 69.2% and ended at 66.5%. It has since dropped to 64.0%. The exodus of owners initially threatened to leave a lot of extra houses behind and reduce the need to build new ones. But investors have come in to pick up the keys, and many houses have found a new home in the market for single-family rentals. This has helped reduce the supply of distressed homes, although it’s still higher than the levels that prevailed in the early 1990s when homeownership last ranged around 64% . The supply hangover isn’t done but should be in the next two or three years.
And demand isn’t looking so hot either:
Demand has likely played a part in slow housing, too, starting with owners that bought their homes in the last decade. Thanks to a 38% drop in home prices nationally from 2006 to 2012, according to Case-Shiller, a lot of those owners walked out the front door without any equity and without the ability to reenter the market as buyers. This has almost certainly contributed to the drop in rental unit vacancies from 10.6% in mid-2009 to 7.0% today. As for potential new owners, Americans, even before the crisis, started moving into their own place at a much slower pace than the long-term average of 1.2 million new households a year, that is, until recently. Demand from former and potential new owners has been soft.
Even in the best case scenario is which supply falls and demand rises, banks’ reluctance to lend could end up hobbling the market for the foreseeable future.
Although the market seems to be clearing out the lingering housing supply and the economy and the labor market look likely to repair demand, the availability of credit could prove to be the lasting constraint. Today’s lending standards reflect limits designed to keep the last decade’s boom and bust from happening again. Borrowers today without the ability to repay will not get a loan. But it looks like some borrowers with the ability to repay—but with low FICO scores or with needs that keep them outside the agency or prime jumbo markets—will also not get a loan. The market is reducing risk today to avoid risk tomorrow. But it also is likely reducing housing growth today to avoid a downturn tomorrow.
And here’s further confirmation of this from BofAML:
So there is your housing recovery in a nutshell: supply hangover, lackluster demand, and reluctant lenders all coalescing in a housing market whose contribution to US economic growth is virtually nonexistent.
And if you’re looking for the next shoe to drop, here’s a hint:
“Mortgage Rates need to go up. There it is. They do. These rates are killing the industry. The DC Real Estate Market is the Poster Child for why interest rates need to go up.”
Since the beginning of this year, I have lost two clients to the decision to rent for another year. I have written 11 contracts for would-be home buyers, and I have only been able to secure two of those contracts. I promise this is not because I’m a horrible agent. It is because I have a conscience, and I don’t let clients do stupid things on my watch.
The bidding wars are insane and when the going gets tough, I advise people to take their money and keep looking. I realize that steering people away from buying houses and wishing rates would go up makes me the anti-Agent, but flying with the pack is overrated.
It is profoundly problematic for interest rates to stay so low for this long. The primary reason is that it shifts demand and supply into different time frames instead of letting the economy adjust and self-correct.
Buyers live in “today,” and if they think rates will go up, they panic. If rates tick up an eighth of a point, they feel robbed and cheated. They lament the fact that they didn’t get the house they bid on last week. Then, a few days pass, and rates drop back down, and they kick up their feet and start singing again. They run back out to see more houses. Feeling the looming threat of a rate increase again, they scramble to buy something – anything, just to lock in the low rate. Operating solely out of fear of a rate hike, they become desperate. They make the mistake of overpaying.
We see it every single day, but it bears repeating: low rates encourage desperate buyers to bid prices up, sometimes to an unrealistic number. The demand of the future is effectively robbed because next year’s home buyer is buying now.
That desperate buyer out there? They are not the only one. There are plenty of others, competing for homes and driving prices up, all in the name of interest rates and not necessarily because of real need. Many of these buyers will get homes that need work, are imperfect, are not in desirable areas, because it was all they could get, and they wanted to lock in while the rates were low.
Instead of a balanced market where these less than desirable homes sell for lower prices, the low rates make even the duds look better. Two more problems stem from this scenario.
First, these homes will still be duds in several years unless the location magically improves or the owner renovates to make the home more desirable. When markets are more balanced, buyers aren’t interested in these homes if they can get one in a better area or better condition for a similar price.
Second, many of the homes purchased today would be on the market again in 5-10 years due to normal changes in people’s lives that require them to sell. If prices stabilize or even slide when this looming rate hike hits, anyone who overpaid will be faced with three options: sell for a loss (which many won’t do), stay, or rent the house to someone else. So now the supply for the future is compromised too.
Many of today’s home sellers have locked in or refinanced at low rates and can make money if they rent. They can move on to another house and let their current one become an investment. And look at that! They don’t even have to refinance to loan-to-value ratios of 75% that are required of investors.
If they recently refinanced while this was their primary home, they can have a much higher loan-to-value ratio than if they were to purchase the same house at the same price but strictly as an investment. Why sell? Seems like a home run to just rent it, which many do, so they can take some monthly cash flow with them and move on. So there’s another house that will not be on the market for sale this spring.
There are also cases where people need or want to move, but are priced out of buying anything else. I recently had a chat with someone who asked my advice on this issue. Because of a schooling situation with their child, they were considering moving from Maryland to Virginia for several years, then moving back and wanted to know what they could sell their house for. I asked why they would sell it, given the costs of selling, moving, buying, selling again, and moving back. They wisely noted, “Yes, and in 3 years, we probably couldn’t afford our neighborhood again since we really couldn’t afford to buy again right now.”
I stopped them from four needless transactions and advised them to rent their home out and rent a place to live so they could come back to their home when they were ready. Well, there’s another four transactions that won’t be happening in the next decade. And I’m not sorry.
After this weekend of house tours, I’ll be writing 5 contracts for 2 different clients with the hopes that they each walk away with a house. Crossing my fingers. And I’ve told both of these clients as well as all my others: things are looking too unstable for the near future and not to plan on selling in the next 10 years. They need to buy the best house they can get for the best deal possible, not be afraid to walk away from overpriced homes, and not get into a bidding war. If they can commit to that, they stand a chance of making a decent investment.
Investors are crowding into self-storage as the sector continues to post the highest long-term returns of any commercial property type, according to a recent quarterly industry survey.
Marc Boorstein, a principal with Chicago-based MJ Partners Self Storage Group, said in his full year and fourth quarter overview that the average 2014 investment return for self-storage REITs was 31.4 percent. The REITs are the major owners in a largely fragmented sector, as about 80 percent of self-storage properties are owned by small mom-and-pop-type firms. But according to Boorstein, private equity is starting to enter the sector.
Long-term returns for self-storage beat out all other commercial real estate sectors, Boorstein says. The five-year average return for self-storage is at 24.4 percent, the 10-year average is at 17.8 percent and the 15-year average is at 20.3 percent, beating out the closest sector, multifamily, by about 400 basis points for each category. These numbers, as well as a lack of new supply and unusually high demand, have led to increased competition for assets.
“There’s just a lot of transaction activity going on, for every $50 million portfolio there [are] 20 offers,” Boorstein says. “Average occupancy has increased to more than 91 percent, and new supply was at less than 100 new properties last year. That compares to about 3,665 new properties that opened in the peak year of 2005. Even if we have 300 to 500 new properties in 2015, as Extra Space Storage CEO Spencer Kirk predicts, that’s still not enough to even match the population growth.”
The recession created more renters, and the urban movement further increased self-storage customer base, Boorstein notes. Investors have flocked to the industry because of how quickly rents can be increased. A customer who pays $125 per month will tend not to move if the rent is increased incrementally, to $140 per month.
“That doesn’t sound like much each month, but multiply that by owning a thousand units and that’s a huge impact on revenue,” Boorstein says. New income generators such as self-storage insurance and improved digital advertising and management platforms have also boosted bottom lines, he adds.
The returns have attracted private equity firms new to the sector, such as the Carlyle Group partnering with self-storage operator William Warren Group last year, as well as increased activity from investors such as Prudential, Fortress, Morgan Stanley and Harrison Street. The four major REITs—Public Storage, Extra Space Storage, CubeSmart and Sovran Self Storage—are able to take down the large deals of more than $75 million, but there are aggressive bidding wars by private equity for the smaller portfolios, Boorstein says.
“If it’s a mid-sized deal, say between $20 million and $70 million, there’s four times as many private equity groups looking to purchase than there were two years ago,” he says. “There [are] groups bidding that have barely been in the market that long. Cap rates have plunged because of all this competition and partnering that’s going on.”
For example, Roseville, California-based Life Storage secured more than $120 million from TPG Real Estate and Jasper Ridge Partners late last year. “Not only is there strong continued support for self-storage, the industry remains very fragmented, which should provide opportunities for consolidation and attractive follow-on acquisitions,” said Avi Banyasz, partner and co-head of TPG, in a statement regarding the investment.
Michael Mele, senior director with Marcus & Millichap’s national self-storage group, says he agrees that private investment in the sector is “bigger than it has ever been.” He says while these investors can’t compete with the REITs in the large deals, there’s much more competition for the second-tier properties.
“Mom-and-pop ownership of self-storage is declining because of the demand by private investment,” Mele says. “There’s also a continued consolidation of the industry, with a lot more private firms going after large portfolios with the help of the REITs, or using the REITs as third-party managers. You’re going to start seeing, in major and secondary markets, the same people owning many of the properties.”
Scott Humphreys, self-storage acquisitions director at Austin, Texas-based Virtus Real Estate Capital, says a new trend in the industry being employed by many of the REITs and larger regional players is purchasing sites in construction or shortly after they open. This eliminates some of the risk/liability associated with the development timeframe, and has also allowed the REITs to move forward with new site development without the added overhead and expense of keeping a full coterie of development resources in house. For example, Extra Space recently bought a portfolio of three self-storage properties in Austin from Endeavor Real Estate Group. All three properties were new, with two of the three having been opened less than a year at the time of sale.
“The difficult element to this type of purchase is the valuation gap, and determining how much to pay for yet-to-be leased space,” Humphreys says. “In core and growth markets, the risk is obviously not as great, and this allows you to rely on ‘merchant-build’ type development resources who know the local municipalities, and their nuances, well.”
While much of America struggled during the last financial crisis, Texas grew in greater economic stature on a number of levels. Fueled by a thriving energy economy, strong tech sector and job market, one strong growth area was real estate development.
Texans have always had a strong affinity to golf so it’s no surprise real estate communities, resorts and private clubs feature golf as a central component. Two top leisure properties in Texas are 72-hole Horseshoe Bay Resort in Texas Hill Country and TPC Four Seasons at Las Colinas, home to the AT&T Byron Nelson Championship.
On the private club front, the “Big D” features a collection of renowned golf clubs, including Brook Hollow Country Club, Dallas National and Preston Trail Golf Club, where initiation fees start at $125,000.
The following is a handful of golf and resort-style communities leading the Lone Star State’s leisure real estate sector today.
Vaquero Club, Westlake, Texas
When it comes to country club living, this Dallas-area private club is as luxurious as they come. Originally developed by Discovery Land Company, the Beverly Hills, Calif.-based company known for creating such elite clubs as Estancia in Scottsdale, Ariz. the Madison Club in La Quinta, Calif., and Kukio on the Big Island of Hawaii, Vaquero Club is now member-owned and fresh off an extensive $2.8 million renovation to its Tom Fazio-designed golf course.
According to club executives, part of the motivation behind the project was to enhance real estate vistas and create a more core-golf experience. A perfect example of this took place on the club’s drivable par-4 fourth hole, where new tee boxes were added, as well as on nine other holes.
This means resident members inside Vaquero’s stately manors have even more beautiful views to enjoy. Of an estimated dozen listings by the Jeff Watson Group of Briggs Freeman Sotheby’s International Realty, Vaquero’s most affordable home is currently listed at $1.295 million for a 4-bedroom, 4 1/2 -bath residence and it goes up to $5.995 million for a 5-bedroom estate on 3.8 acres featuring a 5-car garage and wine cellar with 1,500-bottle capacity.
The Vaquero Club consists of 385 equity memberships with an initiation fee approaching $200,000. Besides world-class golf, the club also offers a family-friendly Fish Camp, wine programs and other member amenities and services.
Cordillera Ranch, Boerne, Texas
Located 30 minutes northwest of San Antonio, Cordillera Ranch is a debt-free 8,700-acre master-planned residential community in the Texas Hill Country. The family-owned and operated development is not short on activities, considering residents of the gated community can join The Clubs of Cordillera Ranch that feature seven resort-style clubs in one location: The Golf Club, The Social Club, The Tennis and Swim Club, The Equestrian Club, The Rod and Gun Club, The Spa and Athletic Club and The River Club.
Opened in 2007, the community’s Jack Nicklaus Signature golf course has consistently been ranked among the best in Texas, most recently placing fifth on the Dallas Morning News‘ annual poll. Its par-3 16th has claimed the No. 1 spot as “Most Beautiful Hole” by the same publication for the past five years.
Among the community’s newest real estate offerings are golf course frontage lots, villas and an entirely new section aimed at young families. Overall, Cordillera Ranch boasts ¼-acre villa homes, valley-view and Guadalupe River-front homes, hilltop home sites and 1-to-10-acre estate residences.
According to the developer, 2014 was a banner year in both real estate and membership sales. For instance, Cordillera Ranch sold 33 homes at an average of $886,000 and total lot sales increased by 32 percent.
Trending in 2015: 46 new homes are under construction totaling more than $60 million in new starts – easily the highest total of any upscale community in the San Antonio area, according to the developer. Another 39 homes are in the architectural review approval process – a 65 percent increase over 2013.
Since its inception in 1997, more than 1,200 lots have been sold and approximately 700 homes have been completed. At final build-out, this low-density Hill Country community will total approximately 2,500 homes and preserve approximately 80 percent of the land in its natural vegetation. More than 70 new members were added in 2014, bucking the national trend of private club membership attrition.
“We’re excited and humbled to be a leader in the luxury lifestyle category,” says Charlie Hill, Vice President of Development at Cordillera Ranch. “With the economy thriving and the San Antonio area continuing to prosper, we expect the upward trend in real estate sales to continue in 2015.”
Cordillera Ranch credits much of its growth to being in the highly acclaimed Boerne School District, which is regarded as one of the best in Texas and boasts schools ranked in numerous national-best lists. The community is also benefitting from being in the prosperous Eagle Ford Shale. While other oil-rich areas have struggled with the drop in oil prices, the Eagle Ford Shale has continued to produce. That has attracted oil and gas executives to come to the Texas Hill Country and settle down in communities like Cordillera Ranch.
Boot Ranch, Fredericksburg, Texas
Three years after being put up for sale, the once-bankrupt Boot Ranch community has kicked back into high sales gear. This posh 2,051-acre master-planned golf community in Texas Hill Country’s Gillespie County started selling luxury lots in 2005 and opened a golf course designed by PGA Tour star Hal Sutton in 2006.
But sales were sluggish as the real estate market started to collapse worldwide and Lehman Brothers eventually foreclosed on the property in 2010. Then, the Municipal Police Employees Retirement System of Louisiana, one of Sutton’s original backers and a past partner on the project, sued a number of Boot Ranch partnerships and corporations, putting the project under further stress.
With all of these financial and legal troubles behind them, Boot Ranch is now able to focus on a revitalized real estate market and the renewed life is paying off for this private golf and family community near the popular town of Fredericksburg.
Case in point is Boot Ranch is coming off an eight-year record high for home and property sales, highlighted last year by $13.781 million in year-to-date sales through Sept. 30. Of the $13.781 million in sales, $9.057 million came from estate home sites; another $1.524 million was from Overlook Cabin home sites and $2.825 million were sales of fractional shares of the club’s Sunday Houses.
Overall, Boot Ranch sold 135 lots last year and had 16 homes completed with another 20 under construction or in the planning stages. Boot Ranch real estate options range from fractional ownership shares of 4,500-square-foot Sunday Houses to large Overlook Cabins priced from the $800,000s to estate home sites from $300,000 to $2.5 million for 2-18 acres.
“The booming demand for luxury ranch living is a byproduct of the successful Texas economy, particularly the energy business,” says Sean Gioffre, Boot Ranch director of marketing and sales. “The advent of hydraulic fracturing and the achievements of prized shale formations, like the Eagle Ford, Permian and Bakken, have pushed oil and gas production to record highs. With low interest rates, many people are looking to second homes as a hedge against inflation and as a tangible asset in which to put their money.”
Five miles north of the historic town of Fredericksburg, Boot Ranch is a master-planned retreat featuring one of the rare Sutton-designed courses, and a 34-acre practice park comprised of a short game range and executive par-three course. Other amenities at Boot Ranch include access to the 55,000-square-foot Clubhouse Village, casual and fine dining, a fully-stocked wine cellar, golf shop, ReStore Spa & Fitness Center, the 4.5-acre Ranch Club with pavilion, pools, tennis and sports courts, 10 member/guest lodge suites, a trap and skeet range overlooking Longhorn Lake, hiking, mountain biking, canoeing and fishing.
Construction is under way on a fishing pier and comfort station near Boot Ranch’s signature tenth hole on the golf course.
“We call Boot Ranch the ‘American Dream Texas Style,'” says co-director of marketing and sales Andrew Ball. “The motivation for buyers seems to be for recreational property – somewhere where owners can golf, fish, dine, swim, relax and generally enjoy the Texas outdoors. Many people say they just want to get their kids and grandkids out of the city, even if for only a few days or weeks at a time.”
Traditions Club and Community, Bryan, TX
This new upscale golf and country club development gives Texas A&M loyalists something else to brag about in Aggieland. Located less than 10 minutes from 10 minutes from a bustling college town and burgeoning health and research center, it’s no surprise why this is shaping up to be another successful Texas real estate project.
Traditions Club and Community is the private golf and residential community in “Aggieland” and home to the Texas A&M men’s and women’s golf teams. Located in Bryan-College Station, the club rests in the shadow of the university and in the heart of The Research Valley’s “One Health Plus Biocorridor.”
From custom-garden homes to large estate lots, Traditions Club has a wide range of developments that cater to many buyers. Future plans to attract even more residents call for a multi-use retail, entertainment and health/fitness complex to be built within the neighboring Biocorridor area that would mirror one of the top suburbs in Houston, The Woodlands.
Traditions’ tournament-caliber, Jack Nicklaus/Jack Nicklaus II-designed golf course hosts many high-profile junior, collegiate and amateur events. Other amenities include a 21,000-square foot, four-building clubhouse with men’s and women’s locker rooms; 25-meter junior Olympic lap and sport-leisure pools; family swim center with beach-like wading pool; and fully-equipped fitness center.
Casual fare is offered at the Poole Grille and fine dining at the clubhouse, home to an impressive wine cellar. Overnight accommodations are available in two-, three- and four-bedroom cottages and casitas located just walking distance from all the club’s amenities.
Overlooking stately oak trees, gently rolling terrain and the lush green fairways of the golf course, the Traditions Club and Community is an enclave of custom estates, Game Day Cottages, cozy casitas, villas, garden homes and luxurious condominiums. Home sites range from .25 acres up to an acre, with homes spanning 1,800 to 8,000 square feet.
Traditions Clubhouse
The newest phase being marketed is the Blue Belle home sites, a collection of 34 lots designed for two and three-bedroom custom homes. Overlooking a heavily wooded and rolling landscape in a peaceful and quiet enclave, the home sites encompass up to one-third of an acre and are priced with the home. The residences range from 2,200 to 3,500 square-feet and start in the low $400,000s.
Blue Belle residents can enjoy the outdoors without having to worry about extensive home and yard maintenance. Creative landscaped patios open up to peaceful settings that exemplify private community living. A multi-use trail meandering around a small lake is perfect for short walks and hikes
Interiors exude Texas Hill County elegance, with hardwood flooring, granite countertops, gourmet kitchens, high ceilings and open living area. The floor plans are highly personalized, providing a rich, distinguished selection of upscale finishes and features.
“Real estate sales in vibrant college towns like Bryan/College Station continue to thrive as master-planned communities like Traditions build to suit an array of buyers,” says Spencer Clements, Traditions Club Principal. “Empty-nesters or those seeking a second home with minimal maintenance will find Blue Belle offers the square-footages, relaxing setting and customized features catering to their needs and lifestyle.”
Tribute, The Colony, Texas
The Tribute, a Matthews Southwest, Wynne/Jackson master-planned community on the shores of Lake Lewisville, is one of the more ambitious golf and country club developments in the Dallas-Fort Worth metroplex.
Located just 23 miles from Dallas-Fort Worth International Airport, the Tribute is a 36-hbole upscale semi-private facility whose original plans call for 1,150 single-family homes, 160 golf villas, 183 townhomes, and 700 European condominium units.
The community’s newest course, Old American Golf Club, opened in the summer of 2009 and was designed by Tripp Davis and PGA Tour player and native son Justin Leonard. When Old American opened (it was originally called the New Course), the developers offered premium lake-view, golf course-fronting lots in the Balmerino Village.
This initial phase of lots, located adjacent to the No. 5 green and the No. 6 tee box featured unobstructed views of Lake Lewisville and ranged in price from $135,000 to $275,000 for little more than 1/3 of an acre.
What makes the Tribute so unique it its Scottish links-inspired setting. For instance, the Tribute’s namesake layout, or “Old Course” as it’s often called, is patterned after the legendary courses of Scotland and the Open Championship what with its wind-swept dunes and fescue grasses.
The first and 18th holes share the same broad fairway, just the Old Course at St. Andrews, and you’ll also find a likeness of Royal Troon’s Postage Stamp hole and experience replica holes from Prestwick, Muirfield, Western Gailes and Royal Dornoch. For a special treat, make sure to stay in one of the overnight guest suites above the clubhouse that overlook the course.
The Tribute’s newest course pays homage to famed golf course architects such as Donald Ross and A.W. Tillinghast, many of whom came to the United States from Great Britain around the turn of the century.
According to an Old American spokesman, the new course currently has about 58 resident members of the club, which represents approximately 25 percent of the overall membership. Among the other amenities enjoyed by members are first-class amenity centers, pools, parks, playgrounds, on-site schools, hike-and-bike trails, landscaped canals and hundreds of acres of accessible open space reminiscent of the Scottish Highlands.
On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however.
Behind the facade of stability, the re-balancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations.
So said the International Energy Agency in its Oil Market Report on Friday. West Texas Intermediate plunged over 4% to $45 a barrel.
The boom in US oil production will continue “to defy expectations” and wreak havoc on the price of oil until the power behind the boom dries up: money borrowed from yield-chasing investors driven to near insanity by the Fed’s interest rate repression. But that money isn’t drying up yet – except at the margins.
Companies have raked in 14% more money from high-grade bond sales so far this year than over the same period in 2014, according to LCD. And in 2014 at this time, they were 27% ahead of the same period in 2013. You get the idea.
Even energy companies got to top off their money reservoirs. Among high-grade issuers over just the last few days were BP Capital, Valero Energy, Sempra Energy, Noble, and Helmerich & Payne. They’re all furiously bringing in liquidity before it gets more expensive.
In the junk-bond market, bond-fund managers are chasing yield with gusto. Last week alone, pro-forma junk bond issuance “ballooned to $16.48 billion, the largest weekly tally in two years,” the LCD HY Weekly reported. Year-to-date, $79.2 billion in junk bonds have been sold, 36% more than in the same period last year.
But despite this drunken investor enthusiasm, the bottom of the energy sector – junk-rated smaller companies – is falling out.
Standard & Poor’s rates 170 bond issuers that are engaged in oil and gas exploration & production, oil field services, and contract drilling. Of them, 81% are junk rated – many of them deep junk. The oil bust is now picking off the smaller junk-rated companies, one after the other, three of them so far in March.
On March 3, offshore oil-and-gas contractor CalDive that in 2013 still had 1,550 employees filed for bankruptcy. It’s focused on maintaining offshore production platforms. But some projects were suspended last year, and lenders shut off the spigot.
On March 8, Dune Energy filed for bankruptcy in Austin, TX, after its merger with Eos Petro collapsed. It listed $144 million in debt. Dune said that it received $10 million Debtor in Possession financing, on the condition that the company puts itself up for auction.
On March 9, BPZ Resources traipsed to the courthouse in Houston to file for bankruptcy, four days after I’d written about its travails; it had skipped a $60 million payment to its bondholders [read… “Default Monday”: Oil & Gas Companies Face Their Creditors].
And more companies are “in the pipeline to be restructured,” LCD reported. They all face the same issues: low oil and gas prices, newly skittish bond investors, and banks that have their eyes riveted on the revolving lines of credit with which these companies fund their capital expenditures. Being forever cash-flow negative, these companies periodically issue bonds and use the proceeds to pay down their revolver when it approaches the limit. In many cases, the bank uses the value of the company’s oil and gas reserves to determine that limit.
If the prices of oil and gas are high, those reserves have a high value. It those prices plunge, the borrowing base for their revolving lines of credit plunges. S&P Capital IQ explained it this way in its report, “Waiting for the Spring… Will it Recoil”:
Typically, banks do their credit facility redeterminations in April and November with one random redetermination if needed. With oil prices plummeting, we expect banks to lower their price decks, which will then lead to lower reserves and thus, reduced borrowing-base availability.
April is coming up soon. These companies would then have to issue bonds to pay down their credit lines. But with bond fund managers losing their appetite for junk-rated oil & gas bonds, and with shares nearly worthless, these companies are blocked from the capital markets and can neither pay back the banks nor fund their cash-flow negative operations. For many companies, according to S&P Capital IQ, these redeterminations of their credit facilities could lead to a “liquidity death spiral.”
Alan Holtz, Managing Director in AlixPartners’ Turnaround and Restructuring group told LCD in an interview:
We are already starting to see companies that on the one hand are trying to work out their operational problems and are looking for financing or a way out through the capital markets, while on the other hand are preparing for the events of contingency planning or bankruptcy.
Look at BPZ Resources. It wasn’t able to raise more money and ended up filing for bankruptcy. “I think that is going to be a pattern for many other companies out there as well,” Holtz said.
When it trickled out on Tuesday that Hercules Offshore, which I last wrote about on March 3, had retained Lazard to explore options for its capital structure, its bonds plunged as low as 28 cents on the dollar. By Friday, its stock closed at $0.41 a share.
When Midstates Petroleum announced that it had hired an interim CEO and put a restructuring specialist on its board of directors, its bonds got knocked down, and its shares plummeted 33% during the week, closing at $0.77 a share on Friday.
When news emerged that Walter Energy hired legal counsel Paul Weiss to explore restructuring options, its first-lien notes – whose investors thought they’d see a reasonable recovery in case of bankruptcy – dropped to 64.5 cents on the dollar by Thursday. Its stock plunged 63% during the week to close at $0.33 a share on Friday.
Numerous other oil and gas companies are heading down that path as the oil bust is working its way from smaller more vulnerable companies to larger ones. In the process, stockholders get wiped out. Bondholders get to fight with other creditors over the scraps. But restructuring firms are licking their chops, after a Fed-induced dry spell that had lasted for years.
Investors Crushed as US Natural Gas Drillers Blow Up
The Fed speaks, the dollar crashes. The dollar was ripe. The entire world had been bullish on it. Down nearly 3% against the euro, before recovering some. The biggest drop since March 2009. Everything else jumped. Stocks, Treasuries, gold, even oil.
West Texas Intermediate had been experiencing its biggest weekly plunge since January, trading at just above $42 a barrel, a new low in the current oil bust. When the Fed released its magic words, WTI soared to $45.34 a barrel before re-sagging some. Even natural gas rose 1.8%. Energy related bonds had been drowning in red ink; they too rose when oil roared higher. It was one heck of a party.
But it was too late for some players mired in the oil and gas bust where the series of Chapter 11 bankruptcy filings continues. Next in line was Quicksilver Resources.
It had focused on producing natural gas. Natural gas was where the fracking boom got started. Fracking has a special characteristic. After a well is fracked, it produces a terrific surge of hydrocarbons during first few months, and particularly on the first day. Many drillers used the first-day production numbers, which some of them enhanced in various ways, in their investor materials. Investors drooled and threw more money at these companies that then drilled this money into the ground.
But the impressive initial production soon declines sharply. Two years later, only a fraction is coming out of the ground. So these companies had to drill more just to cover up the decline rates, and in order to drill more, they needed to borrow more money, and it triggered a junk-rated energy boom on Wall Street.
At the time, the price of natural gas was soaring. It hit $13 per million Btu at the Henry Hub in June 2008. About 1,600 rigs were drilling for gas. It was the game in town. And Wall Street firms were greasing it with other people’s money. Production soared. And the US became the largest gas producer in the world.
But then the price began to plunge. It recovered a little after the Financial Crisis but re-plunged during the gas “glut.” By April 2012, natural gas had crashed 85% from June 2008, to $1.92/mmBtu. With the exception of a few short periods, it has remained below $4/mmBtu – trading at $2.91/mmBtu today.
Throughout, gas drillers had to go back to Wall Street to borrow more money to feed the fracking orgy. They were cash-flow negative. They lost money on wells that produced mostly dry gas. Yet they kept up the charade. They aced investor presentations with fancy charts. They raved about new technologies that were performing miracles and bringing down costs. The theme was that they would make their investors rich at these gas prices.
The saving grace was that oil and natural-gas liquids, which were selling for much higher prices, also occur in many shale plays along with dry gas. So drillers began to emphasize that they were drilling for liquids, not dry gas, and they tried to switch production to liquids-rich plays. In that vein, Quicksilver ventured into the oil-rich Permian Basin in Texas. But it was too little, too late for the amount of borrowed money it had already burned through over the years by fracking for gas below cost.
During the terrible years of 2011 and 2012, drillers began reclassifying gas rigs as rigs drilling for oil. It was a judgement call, since most wells produce both. The gas rig count plummeted further, and the oil rig count skyrocketed by about the same amount. But gas production has continued to rise since, even as the gas rig count has continued to drop. On Friday, the rig count was down to 257 gas rigs, the lowest since March 1993, down 84% from its peak in 2008.
Quicksilver’s bankruptcy is a consequence of this fracking environment. It listed $2.35 billion in debts. That’s what is left from its borrowing binge that covered its negative cash flows. It listed only $1.21 billion in assets. The rest has gone up in smoke.
Its shares are worthless. Stockholders got wiped out. Creditors get to fight over the scraps.
Its leveraged loan was holding up better: the $625 million covenant-lite second-lien term loan traded at 56 cents on the dollar this morning, according to S&P Capital IQ LCD. But its junk bonds have gotten eviscerated over time. Its 9.125% senior notes due 2019 traded at 17.6 cents on the dollar; its 7.125% subordinated notes due 2016 traded at around 2 cents on the dollar.
Among its creditors, according to the Star Telegram: the Wilmington Trust National Association ($361.6 million), Delaware Trust Co. ($332.6 million), US Bank National Association ($312.7 million), and several pipeline companies, including Oasis Pipeline and Energy Transfer Fuel.
Last year, it hired restructuring advisers. On February 17, it announced that it would not make a $13.6 million interest payment on its senior notes and invoked the possibility of filing for Chapter 11. It said it would use its 30-day grace period to haggle with its creditors over the “company’s options.”
Now, those 30 days are up. But there were no other “viable options,” the company said in the statement. Its Canadian subsidiary was not included in the bankruptcy filing; it reached a forbearance agreement with its first lien secured lenders and has some breathing room until June 16.
Quicksilver isn’t alone in its travails. Samson Resources and other natural gas drillers are stuck neck-deep in the same frack mud.
A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. It too hired restructuring advisers to deal with its $3.75 billion in debt. On March 2, Moody’s downgraded Samson to Caa3, pointing at “chronically low natural gas prices,” “suddenly weaker crude oil prices,” the “stressed liquidity position,” and delays in asset sales. It invoked the possibility of “a debt restructuring” and “a high risk of default.”
But maybe not just yet. The New York Post reported today that, according to sources, a JPMorgan-led group, which holds a $1 billion revolving line of credit, is granting Samson a waiver for an expected covenant breach. This would avert default for the moment. Under the deal, the group will reduce the size of the revolver. Last year, the same JPMorgan-led group already reduced the credit line from $1.8 billion to $1 billion and waived a covenant breach.
By curtailing access to funding, they’re driving Samson deeper into what S&P Capital IQ called the “liquidity death spiral.” According to the New York Post’s sources, in August the company has to make an interest payment to its more junior creditors, “and may run out of money later this year.”
Industry soothsayers claimed vociferously over the years that natural gas drillers can make money at these prices due to new technologies and efficiencies. They said this to attract more money. But Quicksilver along with Samson Resources and others are proof that these drillers had been drilling below the cost of production for years. And they’d been bleeding every step along the way. A business model that lasts only as long as new investors are willing to bail out old investors.
But it was the crash in the price of “liquids” that made investors finally squeamish, and they began to look beyond the hype. In doing so, they’re triggering the very bloodletting amongst each other that ever more new money had delayed for years. Only now, it’s a lot more expensive for them than it would have been three years ago. While the companies will get through it in restructured form, investors get crushed.
HOUSTON – It’s official: The shale oil boom is starting to waver.
And, in a way, it may have souped-up rigs and more efficient drilling technologies to thank for that.
Crude production at three major U.S. shale oil fields is projected to fall this month for the first time in six years, the U.S. Energy Information Administration said Tuesday.
It’s one of the first signs that idling hundreds of drilling rigs and billions of dollars in corporate cutbacks are starting to crimp the nation’s surging oil patch.
But it also shows that drilling technology and techniques have advanced to the point that productivity gains may be negligible in some shale plays where horizontal drilling and hydraulic fracturing have been used together for the past several years.
Because some plays are already full of souped-up horizontal rigs, oil companies don’t have as many options to become more efficient and stem production losses, as they did in the 2008-2009 downturn, the EIA said.
The EIA’s monthly drilling productivity report indicates that rapid production declines from older wells in three shale plays are starting to overtake new output, as oil companies drill fewer wells.
In the recession six years ago, the falling rig count didn’t lead to declining production because new technologies boosted how fast rigs could drill wells.
But now that oil firms have figured out how to drill much more efficiently, “it is not clear that productivity gains will offset rig count declines to the same degree as in 2008-09,” the EIA said.
Overall, U.S. oil production is set to increase slightly from March to April to 5.6 million barrels a day in six major fields, according to the EIA.
But output is falling in the Eagle Ford Shale in South Texas, North Dakota’s Bakken Shale and the Niobrara Shale in Colorado, Wyoming, Nebraska and Kansas.
In those three fields, net production is expected to drop by a combined 24,000 barrels a day.
The losses were masked by production gains in the Permian Basin in West Texas and other regions.
Efficiency improvements are still emerging in the Permian, faster than in other oil fields because the region was largely a vertical-drilling zone as recently as December 2013, the EIA said.
Net crude output in the Bakken is expected to decline by 8,000 barrels a day from March to April. In the Eagle Ford, it’s slated to fall by 10,000 barrels a day. And in the Niobrara, production will dip by roughly 5,000 barrels a day.
But daily crude output jumped by 21,000 barrels in the Permian and by 3,000 barrels in the Utica Shale in Ohio and Pennsylvania.
Landlords in Venice and other tourist-friendly areas are converting units into short-term rentals, worsening the area’s housing shortage, a study says.
The last time he advertised one of his apartments, longtime Los Feliz landlord Andre LaFlamme got a request he’d never seen before.
A man wanted to rent LaFlamme’s 245-square-foot bachelor unit with hardwood floors for $875 a month, then list it himself on Airbnb.
“Thanks but no thanks,” LaFlamme told the prospective tenant. “You’ve got to be kidding me.”
But he understood why: More money might be made renting to tourists a few days at a time than to a local for 12 months or more.
About 12,700 rental units were listed on Airbnb in Los Angeles County on Dec. 22, 2014, but they were not spread out equally. In parts of Venice and Hollywood, Airbnb listings accounted for 4% or more of all housing units.
As short-term rental websites such as Airbnb explode in popularity in Southern California, a growing number of homeowners and landlords are caving to the economics. A study released Wednesday from Los Angeles Alliance for a New Economy, a labor-backed advocacy group, estimates that more than 7,000 houses and apartments have been taken off the rental market in metro Los Angeles for use as short-term rentals. In parts of tourist-friendly neighborhoods such as Venice and Hollywood, Airbnb listings account for 4% or more of all housing units, according to a Times analysis of data from Airbnb’s website.
That’s worsening a housing shortage that already makes Los Angeles one of the least affordable places to rent in the country.
“In places where vacancy is already limited and rents are already squeezing people out, this is exacerbating the problem,” said Roy Samaan, a policy analyst who wrote the alliance’s report. “There aren’t 1,000 units to give in Venice or Hollywood.”
Fast-growing Airbnb and others like it say they help cash-strapped Angelenos earn a little extra money. Airbnb estimates that 82% of its 4,500 L.A. hosts are “primary residents” of the homes they list, and that nearly half use the proceeds to help pay their rent or mortgage. And the effect on the broader housing market is so small that it’s all but irrelevant, said Tom Davidoff, a housing economist at the University of British Columbia whom Airbnb hired to study its impact.
“Over the lifetime of a lease, rents maybe go up 1.5%,” he said. “That’s peanuts relative to the increases we’ve seen in housing costs in a lot of places.”
But there are growing signs of professionalization of the short-term rental world, from property-manager middlemen like the one who e-mailed LaFlamme to Airbnb “hosts” who list dozens of properties on the site. The Los Angeles Alliance study estimates that 35% of Airbnb revenue in Southern California comes from people who list more than one unit.
“I don’t think anyone would begrudge someone renting out a spare bedroom,” Samaan said. “But there’s a whole cottage industry that’s springing up around this.”
City Council member Mike Bonin, whose coastal district includes Venice, and Council President Herb Wesson want to study how these rentals have affected the city. No regulations have been drafted, and Bonin said the council would seek extensive community input. Current rules bar short-term rentals in many residential areas of the city, but critics say they’re rarely enforced.
As city officials craft new ones, they’ll certainly be hearing from Airbnb and its allies. Last year, the company spent more than $100,000 lobbying City Hall and released a study touting its economic impact in L.A. — more than $200 million in spending by guests, supporting an estimated 2,600 jobs. A group representing short-term rental hosts has made the rounds of City Council offices as well.
This industry “needs to be regulated and regulated the right way,” said Sebastian de Kleer, co-founder of the Los Angeles Short Term Rental Alliance and owner of a Venice-based vacation rental company. “For a lot of people, this is a very new issue.”
Neighborhood groups are sure to weigh in too, especially in Venice.
The beach neighborhood has the highest concentration of Airbnb listings in all of metro Los Angeles. Data collected by Beyond Pricing, a San Francisco-based start-up that helps short-term rental hosts optimize pricing, show that in census tracts along Venice Beach and Abbott-Kinney Boulevard, Airbnb listings accounted for 6% to 7% of all housing units — about 10 times the countywide average.
A letter last fall from the Venice Neighborhood Council to city officials estimated that the number of short-term rental listings in the area had tripled in a year, citing a “Gold Rush mentality” among investors looking for a piece of the action. That’s hurting local renters, said Steve Clare, executive director of Venice Community Housing.
“Short-term rentals are really taking over a significant portion of the rental housing market in our community,” Clare said. “It’s going to further escalate rents, and take affordable housing out of Venice.”
Along the Venice boardwalk, a number of apartment buildings now advertise short-term rentals, and houses on the city’s famed “walk streets” routinely show up in searches on Airbnb. Even several blocks inland, at Lincoln Place Apartments — a 696-unit, newly renovated complex that includes a pool, gym and other tourist-friendly amenities — Roman Barrett recently counted more than 40 listings on Airbnb and other sites. Barrett, who moved out over the issue, said Airbnb effectively drives up the rent. He paid $2,700 a month for a one-bedroom; now he’s looking farther east for something he can afford.
“It’s making places like Santa Monica and Venice totally priced out. Silver Lake is impossible. I’m looking in Koreatown right now,” Barrett said. “They need to make a law about this.”
A new law of some sort is the goal at City Hall. New York, San Francisco and Portland, Ore., have crafted regulations to govern taxes, zoning and length of stay in short-term rentals, and Airbnb says it’s glad to help in that process here.
“It’s time for all of us to work together on some sensible solutions that let people share the home in which they live and contribute to their community,” spokesman Christopher Nulty said in a statement Tuesday.
Will Youngblood, the man who e-mailed LaFlamme about managing his apartment in Los Feliz, says he’d also appreciate clearer rules and an easier way to pay occupancy taxes.
Youngblood runs five Airbnb apartments, mostly in Hollywood. A former celebrity assistant, he’s been doing this for two years; it’s a full-time job. Most of Youngblood’s clients own their homes but travel a lot or live elsewhere. One, he rents and lists full time. He’s been looking around for another.
“I’m honest about what I do,” he said. “Some [landlords] are like, ‘That’s insane. No way.’ Other people say, ‘We’d love that.'”
If the city decides it doesn’t like what he’s doing, Youngblood said, he’ll go do something else. But for now, he said, it’s a good way to make some cash and meet interesting people.
But he won’t meet LaFlamme. The longtime landlord concedes he “might be old-fashioned,” but he just doesn’t like the idea of strangers traipsing through his apartments. He prefers good, long-term tenants, and in L.A.’s red-hot rental market he has no problem finding them.
“I almost find it painful to rent things these days,” he said. “There’s so much demand and so many people who are qualified and nice people who I have to turn away.”
For that apartment in Los Feliz, LaFlamme said, he found a tenant in less than 24 hours.
RealtyTrac’s Q1 2015 Zombie Foreclosure Report, found that as of the end of January 2015, 142,462 homes actively in the foreclosure process had been vacated by the homeowners prior to the bank repossessing the property, representing 25 percent of all active foreclosures.
The total number of zombie foreclosures was down 6 percent from a year ago, but the 25 percent share of total foreclosures represented by zombies was up from 21 percent a year ago.
“While the number of vacated zombie foreclosures is down from a year ago, they represent an increasing share of all foreclosures because they tend to be the problem cases still stuck in the pipeline,” said Daren Blomquist vice president at RealtyTrac. “Additionally, the states where overall foreclosure activity has been increasing over the past year — counter to the national trend — tend to be states with a longer foreclosure process more susceptible to the zombie problem.”
“In states with a bloated foreclosure process, the increase in zombie foreclosures is actually a good sign that banks and courts are finally moving forward with a resolution on these properties that may have been sitting in foreclosure limbo for years,” Blomquist continued. “In many markets there is plenty of demand from buyers and investors to snatch up these distressed properties as soon as they become available to purchase.”
Florida, New Jersey, New York have most zombie foreclosures
Despite a 35 percent decrease in zombie foreclosures compared to a year ago, Florida had the highest number of any state with 35,903 — down from 54,908 in the first quarter of 2014. Zombie foreclosures accounted for 26 percent of all foreclosures in Florida.
Zombie foreclosures increased 109 percent from a year ago in New Jersey, and the state posted the second highest total of any state with 17,983 — 23 percent of all properties in foreclosure.
New York zombie foreclosures increased 54 percent from a year ago to 16,777, the third highest state total and representing 19 percent of all residential properties in foreclosure.
Illinois had 9,358 zombie foreclosures at the end of January, down 40 percent from a year ago but still the fourth highest state total, while California had 7,370 zombie foreclosures at the end of January, up 24 percent from a year ago and the fifth highest state total.
“We are now in the final cycle of the foreclosure crisis cleanup, in which we are witnessing a large final wave of walkaways,” said Mark Hughes, Chief Operating Officer at First Team Real Estate, covering the Southern California market. “This has created an uptick in vacated or ‘zombie’ foreclosures and the intrinsic neighborhood issues most of them create.
“A much longer recovery, a largely veiled underemployment issue, and growing examples of faster bad debt forgiveness have most likely fueled this last wave of owners who have finally just walked away from their American dream,” Hughes added.
Other states among the top 10 for most zombie foreclosures were Ohio (7,360), Indiana (5,217), Pennsylvania (4,937), Maryland (3,363) and North Carolina (3,177).
“Rising home prices in Ohio are motivating lending servicers to commence foreclosure actions more quickly and with fewer workout options offered to delinquent homeowners, creating immediate vacancies earlier in the foreclosure process,” said Michael Mahon, executive vice president at HER Realtors, covering the Ohio housing markets of Cincinnati, Dayton and Columbus. “Delinquent homeowners need to understand how prices have increased in recent months, and how this increase in equity may provide positive options for them to avoid foreclosure.”
Metros with most zombie foreclosures: New York, Miami, Chicago, Tampa and Philadelphia. The greater New York metro area had by far the highest number of zombie foreclosures of any metropolitan statistical area nationwide, with 19,177 — 17 percent of all properties in foreclosure and up 73 percent from a year ago.
Zombie foreclosures decreased from a year ago in Miami, Chicago and Tampa, but the three metros still posted the second, third and fourth highest number of zombie foreclosures among metro areas nationwide: Miami had 9,580 zombie foreclosures,19 percent of all foreclosures but down 34 percent from a year ago; Chicago had 8,384 zombie foreclosures, 21 percent of all foreclosures but down 35 percent from a year ago; and Tampa had 7,838 zombie foreclosures, 34 percent of all foreclosures but down 25 percent from a year ago.
Zombie foreclosures increased 53 percent from a year ago in the Philadelphia metro area, giving it the fifth highest number of any metro nationwide in the first quarter of 2015. There were 7,554 zombie foreclosures in the Philadelphia metro area as of the end of January, 27 percent of all foreclosures.
Other metro areas among the top 10 for most zombie foreclosures were Orlando (3,718), Jacksonville, Florida (2,368), Los Angeles (2,074), Las Vegas (1,832), and Baltimore, Maryland (1,722).
Metros with highest share of zombie foreclosures: St. Louis, Portland, Las Vegas
Among metro areas with a population of 200,000 or more and at least 500 zombie foreclosures as of the end of January, those with the highest share of zombie foreclosures as a percentage of all foreclosures were St. Louis (51 percent), Portland (40 percent) and Las Vegas (36 percent).
Metros with biggest increase in zombie foreclosures: Atlantic City, Trenton, New York
Among metro areas with a population of 200,000 or more and at least 500 zombie foreclosures as of the end of January, those with the biggest year-over-year increase in zombie foreclosures were Atlantic City, New Jersey (up 133 percent), Trenton-Ewing, New Jersey (up 110 percent), and New York (up 73 percent).
It’s the great credit divide in American housing: If you buy a home and pay your mortgage on time regularly, your credit score typically benefits. If you rent an apartment and pay the landlord on time every month, you get no boost to your score. Since most landlords aren’t set up or approved to report rent payments to the national credit bureaus, their tenants’ credit scores often suffer as a direct result.
All this has huge implications for renters who hope one day to buy a house. To qualify for a mortgage, they’ll need good credit scores. Young, first-time buyers are especially vulnerable — they often have “thin” credit files with few accounts and would greatly benefit by having their rent histories included in credit reports and factored into their scores. Without a major positive such as rent payments in their files, a missed payment on a credit card or auto loan could have significant negative effects on their credit scores.
You probably know folks like these — sons, daughters, neighbors, friends. Or you may be one of the casualties of the system yourself, a renter with a perfect payment history that creditors will never see when they pull your credit. Think of it this way and the great divide gets intensely personal.
But here’s some good news: Growing numbers of landlords are now reporting rent payments to the bureaus with the help of high-tech intermediaries who set up electronic rent-collection systems for tenants.
One of these, RentTrack, says it already has coverage in thousands of rental buildings nationwide, with a total of 100,000-plus apartment units, and expects to be reporting rent payments for more than 1 million tenants within the year. Two others, ClearNow Inc. and PayYourRent, also report to one of the national bureaus, Experian, which includes the data in consumer credit files. RentTrack reports to Experian and TransUnion.
Why does this matter? Two new studies illustrate what can happen when on-time rent payments are factored into consumers’ credit reports and scores. RentTrack examined a sample of the tenants in its database and found that 100% of renters who previously were rated as “unscoreable” — there wasn’t enough information in their credit files to evaluate — became scoreable once they had two months to six months of rental payments reported to the credit bureaus.
Tenants who had scores below 650 at the start of the sampling gained an average of 29 points with the inclusion of positive monthly payment data. Overall, residents in all score brackets saw an average gain of 9 points. The scores were computed using the VantageScore model, which competes with FICO scores and uses a similar 300 to 850 scoring scale, with high scores indicating low risk of nonpayment.
Experian, the first major credit bureau to begin integrating rental payment records into credit files, also completed a major study recently. Using a sample of 20,000 tenants who live in government-subsidized apartment buildings, Experian found that 100% of unscoreable tenants became scoreable, and that 97% of them had scores in the “prime” (average 688) and “non-prime” (average 649) categories. Among tenants who had scores before the start of the research, fully 75% saw increases after the addition of positive rental information, typically 11 points or higher.
Think about what these two studies are really saying: Tenants often would score higher — sometimes significantly higher — if rent payments were reported to the national credit bureaus. Many deserve higher credit scores but don’t get them.
Matt Briggs, chief executive and founder of RentTrack, says for many tenants, their steady rent payments “may be the only major positive thing in their credit report,” so including them can be crucial when lenders pull their scores.
Justin Yung, vice president of ClearNow, told me that “for most [tenants] the rent is the largest payment they make per month and yet it doesn’t appear on their credit report” unless their landlord has signed up with one of the electronic payment firms.
Is this something difficult or complicated? Not really. You, your landlord or property manager can go to one of the three companies’ websites (RentTrack.com, ClearNow.com and PayYourRent.com), check out the procedures and request coverage. Costs to tenants are either minimal or zero, and the benefits to the landlord of having tenants pay rents electronically appear to be attractive.
According to the payroll jobs report today (March 6) the economy created 295,000 new jobs in February, dropping the rate of unemployment to 5.5%. However, the BLS also reported that the labor force participation rate fell and the number of people not in the labor force rose by 354,000.
In other words, the unemployment rate dropped because the labor force shrunk.
If the economy was in recovery, the labor force would be growing and the labor force participation rate would be rising.
The 295,000 claimed new jobs are highly suspect. For example, the report claims 32,000 new retail jobs, but the Census Bureau reports that retail sales declined in December and January. Why would retailers experiencing declining sales hire more employees?
Construction spending declined 1.1% in January, but the payroll jobs report says 29,000 construction jobs were added in February.
There is no sign in the payroll jobs report of the large lay-offs by IBM and Hewlett Packard.
These and other inconsistencies do not inspire confidence.
By ignoring the inconsistencies the financial press does not inspire confidence.
Let’s now look at where the BLS says the payroll jobs are.
All of the goods producing jobs are accounted for by the 29,000 claimed construction jobs. The remaining 259,000 new jobs–90%–of the total–are service sector jobs. Three categories account for 70% of these jobs. Wholesale and retail trade, transportation and utilities account. for 62,000 of the jobs. Education and health services account for 54,000 of which ambulatory health care services accounts for 19,900. Leisure and hospitality account for 66,000 jobs of which waitresses and bartenders account for 58,700 jobs.
These are the domestic service jobs of a turd world country.
John Williams (shadowstats.com) reports: “As of February, the level of full-time employment still was 1.0 million shy of its pre-recession peak.”
Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns have attracted a worldwide following. His latest book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is now available.
43% of adults would prefer homes bigger than where they currently live, but attitudes differ by age. Baby boomers would prefer to upsize rather than downsize by only a small margin, while the gap among millennials is much wider, with GenXers falling in between. Would-be downsizers outnumber upsizers only among households living in the largest homes.
Last year, we found that Baby Boomers were especially unlikely to live in multi-unit housing. At the same time, we noted that the share of seniors living in multi-unit housing rather than single-family homes has been shrinking for decades. These findings got us thinking about how the generations vary in house-size preference. So we surveyed over 2000 people at the end of last year to figure out if boomers have different house-size preferences than their younger counterparts. And that led us to ask: What size homes do Americans really want?
Most Americans are not living in the size home they want
As a whole, Americans are living in a world of mismatch – only 40% of our respondents said they are living in the size home that’s ideal. Furthermore, over 43% answered that the size of their ideal residence is somewhat or much larger than their current digs. Only 16% told us that their ideal residence is smaller than their existing home. However, these overall figures mask what is going on within different generations.
It’s natural to think that baby boomers are the generation most likely to downsize. After all, their nests are emptying and they may move when they retire. As it turns out though, more boomers would prefer to live in a larger home than a smaller one: 21% said their ideal residence is smaller than their current home, while 26% wanted a larger home – a 5-percentage-point difference. Clearly, boomers don’t feel a massive yearn to downsize. On the contrary, just over half (53%) said they’re already living in their ideally sized home. Nonetheless, members of this generation are more likely to want to downsize than millennials and GenXers.
In fact, those younger generations want some elbow room. First, the millennials. They’re looking to move on up by a big margin: just over 60% told us their ideal residence is larger than where they live now – the largest proportion among the generations in our sample. By contrast, only a little over 13% of millennials said they’d rather have a smaller home than their existing one – which is also the smallest among the generations in our sample. The results are clear: millennials are much more likely to want to upsize than downsize.
The next generation up the ladder, the GenXers, are hitting their peak earning years and many in this group may be in a position to trade up. Many aren’t living in their ideally sized home. Just 38% said where they live now is dream sized. Nearly a majority (48%) said their dream home is larger, while only 14% of GenXers would rather have a smaller home. This is the generation that bore the brunt of the foreclosure crisis. So, some of this mismatch could be because a significant number of GenXers lost homes during the housing bust and may now be living in smaller-than-desired quarters. But a much more probable reason is that many GenXers are in their peak child-rearing years. With kids bouncing off the walls, the place may be feeling a tad crowded.
Even the groups that seem ripe for downsizing don’t want smaller homes
Of course, age doesn’t tell the whole story about why people might want to downsize. It could be that certain kinds of households, – such as those without children, and living in the suburbs or in affordable areas – might be more likely to live in larger homes than they need. But our survey shows that households in these categories are about twice as likely to want a larger than a smaller home. For those with kids especially, the desire to upsize is strong: 39% preferred a larger home versus 18% who liked a smaller home. For those living in the suburbs, the disparity is even greater – 42% to 16%. And even among those living in the most affordable zip codes, where ideally-sized homes might be within the budgets of households, 40% of our respondents preferred larger homes versus 20% who said smaller.
Are all households more likely to upsize than downsize?
At this point you might be asking, “Are there any types of households that want to downsize?” The answer is yes. But only one kind of household falls into this category – those living in homes larger than 3,200 square feet. Of this group, 26% wanted to downsize versus 25% that wanted to upsize – a slight difference. But, when we looked overall at survey responses based on the size of current residence, households wanting a larger home kicked up as current home size went down. We can see this clearly when we divide households into six groups based on the size of the home they’re living in now. Among households living in 2,600-3,200 square foot homes, 37% prefer a larger home versus 16% a smaller home; in 2,000–2,600 square foot homes, its 34% to 18%; 38% to 18% in 1,400–2,000 square foot homes; 55% to 13% in 800–1,400 square foot homes; and 66% to 13% in homes less than 800 square feet. This makes intuitive sense. Those living in the biggest homes are most likely to have gotten a home larger than their ideal size. And those in the smallest homes are probably the ones feeling most squeezed.
The responses to our survey show significantly more demand for larger homes than for smaller ones. But the reality, of course, is that households must make tradeoffs between things like accessibility, amenities, and affordability when choosing what size homes to get. The “ideal” sized home for most Americans may be larger than where they’re living now. But that spacious dream home may not be practical. As result, the mismatch between what Americans say they want and what best suits their circumstances may persist.
The chart below showing the annual increase, or rather, decrease in US factory orders which have now declined for 6 months in a row (so no one can’t blame either the west coast port strike or the weather) pretty much speaks for itself, and also which way the US “recovery” (whose GDP is about to crash to the 1.2% where the Atlanta Fed is modeling it, or even lower is headed.
As the St Louis Fed so kindly reminds us, the two previous times US manufacturing orders declined at this rate on an unadjusted (or adjusted) basis, the US economy was already in a recession.
And now, time for consensus to be shocked once again when the Fed yanks the rug from under the feet of the rite-hike-istas.
The March 2015 Texas Home buyers and Sellers Report from the Texas Association of Realtors shows that between July 2013 and June 2014 median household income for Texas home buyers increased 5.9 percent year-over-year compared with a national increase of only 1.4 percent.
The study shows that between July 2013 and June 2014 median household income for Texas home buyers increased 5.9 percent year-over-year compared with a national increase of only 1.4 percent. However, the percentage of first-time home buyers in Texas fell 4 points to 29 percent, compared to a 5 percent decline nationally to 33 percent.
Home buyers in Texas are also two years older compared to the previous period, edging up to 45 years of age, and 72 percent of home buyers are married, compared to 65 percent nationally.
Texans are also buying larger and newer homes than other buyers across the U.S. In Texas, the typical three-bedroom, two-bathroom home had 2,100 square feet and was built in 2002, compared to the typical national home built in 1993 with 1,870 square feet.
Forty-seven percent of first-time home buyers in Texas said that finding the right property was the most difficult step in buying a home, as did 48 percent of repeat home buyers.
For Texans selling homes, 21 percent said that the reason for selling was because of job relocation, followed by 16 percent who said that their home was too small. The median household income for a Texas home seller was $120,800, compared with a national media income of $96,700 among home sellers.
Texas home buyers (overall): July 2013 – June 2014
Median household income: +5.9% to $97,500
Percent of homes bought that were new: 28% (-1% from July 2012 – June
2013)
Percentage of first-time home buyers: 29% (-4% from July 2012 – June
2013)
Age of typical home buyer: 45 years old (+2 years from July 2012 – June 2013)
Average age of first-time home buyer: 32 years old (+1 year from July
2012 – June 2013)
Average age of repeat home buyer: 50 years old (unchanged from July 2012 – June 2013)
Median household income for first-time home buyers: +5.8% to $72,000 (compared to July 2012 – June 2013)
Median household income for repeat home buyers: -8.9% to $97,500 (compared to July 2012 – June 2013)
Percent of married home buyers: 72% (+1% from July 2012 – June 2013)
New homes purchased: 28% (-2% from July 2012 – June 2013)
Median household income for home sellers: $120,800
Age of average home seller: 49 years
National home buyers (overall): June 2013 – July 2014
Median household income: +1.4% to $84,500
Percent of homes bought that were new: 16% (constant from July 2012 – June 2013)
Percentage of first-time home buyers: 33% (-5% from July 2012 – June 2013)
Age of typical home buyer: 44 years old (+2 years from July 2012 – June
2013)
Average age of first-time home buyer: 31 years old (unchanged from July
2012 – June 2013)
Average age of repeat home buyer: 53 years old (+1 year from July 2012 – June 2013)
Median household income for first-time home buyers: +2.3% to $68,300 (compared to July 2012 – June 2013)
Median household income for repeat home buyers: -1% to $95,000 (compared to July 2012 – June 2013)
Percent of married home buyers: 65% (-1% from July 2012 – June 2013)
New homes purchased: 16% (unchanged from July 2012 – June 2013)
Stephen Schwarzman, CEO and co-founder of Blackstone Group, the world’s largest private-equity firm with $290 billion in assets under management, made $690 million for 2014 via a mix of dividends, compensation, and fund payouts, according to a regulatory filing. A 50% raise from last year.
The PE firm’s subsidiary Invitation Homes, doped with nearly free money the Fed’s policies have made available to Wall Street, has become America’s number one mega-landlord in the span of three years by buying up 46,000 vacant single-family homes in 14 metro areas, initially at a rate of $100 million per week, now reduced to $35 million per week.
As of September 30, Invitation Homes had $8.7 billion worth of homes on its balance sheet, followed by American Homes 4 Rent ($5.5 billion), Colony Financial ($3.4 billion), and Waypoint ($2.6 billion). Those are the top four. Countless smaller investors also jumped into the fray. Together they scooped up several hundred thousand single-family houses.
A “bet on America,” is what Schwarzman called the splurge two years ago.
The bet was to buy vacant homes out of foreclosure, outbidding potential homeowners who’d actually live in them, but who were hobbled by their need for mortgages in cash-only auctions. The PE firms were initially focused only on a handful of cities. Each wave of these concentrated purchases ratcheted up the prices of all other homes through the multiplier effect.
Homeowners at the time loved it as the price of their home re-soared. The effect rippled across the country and added about $7 trillion to homeowners’ wealth since 2011, doubling equity to $14 trillion.
But it pulled the rug out from under first-time buyers. Now, only the ludicrously low Fed-engineered interest rates allow regular people – the lucky ones – to buy a home at all. The rest are renting, in a world where rents are ballooning and wages are stagnating.
Thanks to the ratchet effect, whereby each PE firm helped drive up prices for the others, the top four landlords booked a 23% gain on equity so far, with Invitation Homes alone showing $523 million in gains, according to RealtyTrac. The “bet on America” has been an awesome ride.
But now what? PE firms need to exit their investments. It’s their business model. With home prices in certain markets exceeding the crazy bubble prices of 2006, it’s a great time to cash out. RealtyTrac VP Daren Blomquist told American Banker that small batches of investor-owned properties have already started to show up in the listings, and some investors might be preparing for larger liquidations.
“It is a very big concern for real estate professionals,” he said. “They are asking what the impact will be if investors liquidate directly onto the market.”
But larger firms might not dump these houses on the market unless they have to. American Banker reported that Blackstone will likely cash out of Invitation Homes by spinning it off to the public, according to “bankers close to the Industry.”
After less than two years in this business, Ellington Management Group exited by selling its portfolio of 900 houses to American Homes 4 Rent for a 26% premium over cost, after giving up on its earlier idea of an IPO. In July, Beazer Pre-Owned Rental Homes had exited the business by selling its 1,300 houses to American Homes 4 Rent, at the time still flush with cash from its IPO a year earlier.
Such portfolio sales maintain the homes as rentals. But smaller firms are more likely to cash out by putting their houses on the market, Blomquist said. And they have already started the process.
Now the industry is fretting that liquidations by investors could unravel the easy Fed-engineered gains of the last few years. Sure, it would help first-time buyers and perhaps put a halt to the plunging home ownership rates in the US [The American Dream Dissipates at Record Pace].
But the industry wants prices to rise. Period.
When large landlords start putting thousands of homes up for sale, it could get messy. It would leave tenants scrambling to find alternatives, and some might get stranded. A forest of for-sale signs would re-pop up in the very neighborhoods that these landlords had targeted during the buying binge. Each wave of selling would have the reverse ratchet effect. And the industry’s dream of forever rising prices would be threatened.
“What kind of impact will these large investors have on our communities?” wondered Rep. Mark Takano, D-California, in an email to American Banker. He represents Riverside in the Inland Empire, east of Los Angeles. During the housing bust, home prices in the area plunged. But recently, they have re-soared to where Fitch now considers Riverside the third-most overvalued metropolitan area in the US. So Takano fretted that “large sell-offs by investors will weaken our housing recovery in the very same communities, like mine, that were decimated by the sub prime mortgage crisis.”
PE firms have tried to exit via IPOs – which kept these houses in the rental market.
Silver Bay Realty Trust went public in December 2012 at $18.50 a share. On Friday, shares closed at $16.16, down 12.6% from their IPO price.
American Residential Properties went public in May 2013 at $21 a share, a price not seen since. “Although people look at this as a new industry, there’s really nothing new about renting single-family homes,” CEO Stephen Schmitz told Bloomberg at the time. “What’s new is that it’s being aggregated, we’re introducing professional management and we’re raising institutional capital.” Shares closed at $17.34 on Friday, down 17.4% from their IPO price.
American Homes 4 Rent went public in August 2013 at $16 a share. On Friday, shares closed at $16.69, barely above their IPO price. These performances occurred during a euphoric stock market!
So exiting this “bet on America,” as Schwarzman had put it so eloquently, by selling overpriced shares to the public is getting complicated. No doubt, Blackstone, as omnipotent as it is, will be able to pull off the IPO of Invitation Homes, regardless of what kind of bath investors end up taking on it.
Lesser firms might not be so lucky. If they can’t find a buyer like American Homes 4 Rent that is publicly traded and doesn’t mind overpaying, they’ll have to exit by selling their houses into the market.
But there’s a difference between homeowners who live in their homes and investors: when homeowners sell, they usually buy another home to live in. Investors cash out of the market. This is what the industry dreads. Investors were quick to jump in and inflated prices. But if they liquidate their holdings at these high prices, regular folks might not materialize in large enough numbers to buy tens of thousands of perhaps run-down single-family homes. And then, getting out of the “bet on America” would turn into a real mess.
The Chicago Business Barometer plunged 13.6 points to 45.8 in February, the lowest level since July 2009 and the first time in contraction since April 2013. The sharp fall in business activity in February came as Production, New Orders, Order Backlogs and Employment all suffered double digit losses, leaving them below the 50 level which separates contraction from expansion.
New Orders suffered the largest monthly decline on record, leaving them at the lowest since June 2009. Lower order intake and output levels led to a double digit decline in Employment which last month increased markedly to a 14-month high.
Disinflationary pressures were still in evidence in February, although the slight bounce back in energy costs pushed Prices Paid to the highest since December – although still below the breakeven 50 level. Some purchasers cited weakness in some metals prices including copper and brass, but others said suppliers were slow to pass along lower prices to customers.
Commenting on the Chicago Report, Philip Uglow, Chief Economist of MNI Indicators said, “It’s difficult to reconcile the very sharp drop in the Barometer with the recent firm tone of the survey. There’s some evidence to point to special factors such as the port strike and the weather, although we’ll need to see the March data to get a better picture of underlying growth.“
Blame it on the Ports
Everyone was quick to blame this on the ports and bad weather.
But the LA port issue has been festering for months. Weren’t economists aware of the ports? Of bad weather?
China has long frustrated the hard-landing watchers – or any-landing watchers, for that matter – who’ve diligently put two and two together and rationally expected to be right. They see the supply glut in housing, after years of malinvestment. They see that unoccupied homes are considered a highly leveraged investment that speculators own like others own stocks, whose prices soar forever, as if by state mandate, but that regular people can’t afford to live in.
Hard-landing watchers know this can’t go on forever. Given that housing adds 15% to China’s GDP, when this housing bubble pops, the hard-landing watchers will finally be right.
Home-price inflation in China peaked 13 months ago. Since then, it has been a tough slog.
Earlier this month, the housing news from China’s National Bureau of Statistics gave observers the willies once again. New home prices in January had dropped in 69 of 70 cities by an average of 5.1% from prior year, the largest drop in the new data series going back to 2011, and beating the prior record, December’s year-over-year decline of 4.3%. It was the fifth month in a row of annual home price declines, and the ninth month in a row of monthly declines, the longest series on record.
Even in prime cities like Beijing and Shanghai, home prices dropped at an accelerating rate from December, 3.2% and 4.2% respectively.
For second-hand residential buildings, house prices fell in 67 of 70 cities over the past 12 months, topped by Mudanjiang, where they plunged nearly 14%.
True to form, the stimulus machinery has been cranked up, with the People’s Bank of China cutting reserve requirements for major banks in January, after cutting its interest rate in November. A sign that it thinks the situation is getting urgent.
So how bad is this housing bust – if this is what it turns out to be – compared to the housing bust in the US that was one of the triggers in the Global Financial Crisis?
Thomson Reuters overlaid the home price changes of the US housing bust with those of the Chinese housing bust, and found this:
The US entered recession around two years after house price inflation had peaked. After nine months of recession, Lehman Brothers collapsed. As our chart illustrates, house price inflation in China has slowed from its peak in January 2014 at least as rapidly as it did in the US.
Note the crashing orange line on the left: year-over-year home-price changes in China, out-crashing (declining at a steeper rate than) the home-price changes in the US at the time….
The hard-landing watchers are now wondering whether the Chinese stimulus machinery can actually accomplish anything at all, given that a tsunami of global stimulus – from negative interest rates to big bouts of QE – is already sloshing through the globalized system. And look what it is accomplishing: Stocks and bonds are soaring, commodities – a demand gauge – are crashing, and real economies are languishing.
Besides, they argue, propping up the value of unoccupied and often unfinished investment properties that most Chinese can’t even afford to live in might look good on paper, but it won’t solve the problem. And building even more of these units props up GDP nicely in the short term, and therefore it’s still being done on a massive scale, but it just makes the supply glut worse.
Sooner or later, the hard-landing watchers expect to be right. They know how to add two and two together. And they’re already smelling the sweet scent of being right this time, which, alas, they have smelled many times before.
But it does make you wonder what the China housing crash might trigger when it blooms into full maturity, considering the US housing crash helped trigger of the Global Financial Crisis. It might be a hard landing for more than just China. And ironically, it might occur during, despite, or because of the greatest stimulus wave the world has ever seen.
Stocks, of course, have been oblivious to all this and have been on a tear, not only in China, but just about everywhere except Greece. But what happens to highly valued stock markets when they collide with a recession? They crash.
What to Expect When This Stock Market Meets a Recession
Last week I had a fascinating conversation with Neile Wolfe, of Wells Fargo Advisors, LLC., about high equity valuations and what happens when they collide with a recession.
Here is my monthly update that shows the average of the four valuation indicators: Robert Shiller’s cyclically adjusted price-to-earnings ratio (CAPE), Ed Easterling’s Crestmont P/E, James Tobin’s Q Ratio, and my own monthly regression analysis of the S&P 500:
Based on the underlying data in the chart above, Neile made some cogent observations about the historical relationships between equity valuations, recessions and market prices:
High valuations lead to large stock market declines during recessions.
During secular bull markets, modest overvaluation does not produce large stock market declines.
During secular bear markets, modest overvaluation still produces large stock market declines.
Here is a table that highlights some of the key points. The rows are sorted by the valuation column.
Beginning with the market peak before the epic Crash of 1929, there have been fourteen recessions as defined by the National Bureau of Economic Research (NBER). The table above l ists the recessions, the recession lengths, the valuation (as documented in the chart illustration above), the peak-to-trough changes in market price and GDP. The market price is based on the S&P Composite, an academic splicing of the S&P 500, which dates from 1957 and the S&P 90 for the earlier years (more on that splice here).
I’ve included a row for our current valuation, through the end of January, to assist us in making an assessment of potential risk of a near-term recession. The valuation that preceded the Tech Bubble tops the list and was associated with a 49.1% decline in the S&P 500. The largest decline, of course, was associated with the 43-month recession that began in 1929.
Note: Our current market valuation puts us between the two.
Here’s an interesting calculation not included in the table: Of the nine market declines associated with recessions that started with valuations above the mean, the average decline was -42.8%. Of the four declines that began with valuations below the mean, the average was -19.9% (and that doesn’t factor in the 1945 outlier recession associated with a market gain).
What are the Implications of Overvaluation for Portfolio Management?
Neile and I discussed his thoughts on the data in this table with respect to portfolio management. I came away with some key implications:
The S&P 500 is likely to decline severely during the next recession, and future index returns over the next 7 to 10 years are likely to be low.
Given this scenario, over the next 7 to 10 years a buy and hold strategy may not meet the return assumptions that many investors have for their portfolio.
Asset allocation in general and tactical asset allocation specifically are going to be THE important determinant of portfolio return during this time frame. Just buying and holding the S&P 500 is likely be disappointing.
Some market commentators argue that high long-term valuations (e.g., Shiller’s CAPE) no longer matter because accounting standards have changed and the stock market is still going up. However, the impact of elevated valuations — when it really matters — is expressed when the business cycle peaks and the next recession rolls around. Elevated valuations do not take a toll on portfolios so long as the economy is in expansion.
How Long Can Periods of Overvaluations Last?
Equity markets can stay at lofty valuation levels for a very long time. Consider the chart posted above. There are 1369 months in the series with only 58 months of valuations more than two Standard Deviations (STD) above the mean. They are:
September 1929 (i.e., only one month above 2 STDs prior to the Crash of 1929)
Fifty-one months during the Tech bubble (that’s over FOUR YEARS)
Six of the last seven months have been above 2 STDs
The speaker of California’s State Assembly is seeking to raise new funds for affordable housing development by adding a new $75 fee to the costs of recording real estate documents.
Toni Atkins, a San Diego Democrat, stated that the new fee would be a permanent addition to the state’s line-up of fees and taxes and would apply to all real estate documents except those related to home sales. Atkins conspicuously avoided citing the $75 figure in a press statement issued by her office, only briefly identifying it as a “small fee” while insisting that she had broad support for the plan.
“The permanent funding source, which earned overwhelming support from California’s business community, will generate hundreds of millions annually for affordable housing and leverage billions of dollars more in federal, local, and bank investment,” Atkins said. “This plan will reap benefits for education, healthcare and public safety as well. The outcomes sought in other sectors improve when housing instability is addressed.”
Atkins added that her plan should add between $300 million to $720 million a year for the state’s affordable housing endeavors. But Atkins isn’t completely focused on collecting revenue: She is simultaneously proposing that developers offering low-income housing should receive $370 million in tax credits, up from the current level of $70 million.
This is the third time that a $75 real estate transaction fee has been proposed in the state legislature. Earlier efforts were put forward in 2012 and 2013, but failed to gained traction. Previously, opponents to the proposal argued that transactions involving multiple documents would be burdened with excess costs because the fee applies on a per-document basis and not a per-transaction basis.
One of the main opponents of Atkins’ proposal, Jon Coupal, president of the Howard Jarvis Taxpayers Association, told the San Francisco Chronicle that the speaker was playing word games by insisting this was merely a fee and that she was penalizing property owners to finance a problem that they did not create.
“It’s clearly a tax, not a fee,” said Coupal. “There is not a nexus between the fee payer and the public need being addressed. It’s not like charging a polluter a fee for the pollution they caused. It’s a revenue that is totally divorced from the so-called need for affordable housing.”
The Fed should reject its inclination to raise rates, according to Jeffrey Gundlach. It’s rare that he agrees with Larry Summers, but in this case the two believe that the fundamentals in the U.S. economy do not justify higher interest rates.
Gundlach, the founder and chief investment officer of Los Angeles-based Doubleline Capital, spoke to investors in a conference call on February 17. The call was focused on the release of the new DoubleLine Long Duration Fund, but Gundlach also discussed a number of developments in the economy and the bond market.
Signals of an impending rate increase have come from comments by Fed governors that the word “patient” should be dropped from the Fed meeting notes, according to Gundlach. That word has taken on special significance, he explained, since Janet Yellen attached a two-month time horizon to it.
“If they drop that word,” Gundlach said, “it would be a strong signal that rates would rise in the following two months.”
The Fed seems “philosophically” inclined to raise rates, Gundlach said, even though the fundamentals do not justify such a move. Strong disinflationary pressure coming from the collapse in oil prices should caution the Fed against raising rates, he said.
Gundlach was asked about comments by Gary Shilling that oil prices might go as low at $10/barrel. “We better all hope we don’t get $10,” he said, “because something very deflationary would be happening in this world.” If that is the case, Gundlach said investors should flock to long-term Treasury bonds.
“I’d like to think that the world is not in that kind of deflationary precipice,” he said.
Oil will break below its previous $44 low, Gundlach said. But he did not put a price target on oil.
Gundlach warned that by mid-year, if the Fed does raise rates, “the sinister side of low oil may raise its head.” At that time, lack of hiring or layoffs in the fracking industry could cripple the economy, according to Gundlach.
In the short term, Gundlach said that the recent rise in interest rates is a signal that the “huge deflationary scare” –which was partly because of Greece – has dissipated. Investors should monitor Spanish and Italian yields, he said. If they remain low, it is a signal that Greece is not leaving the Eurozone or that, if it does, “it is not a big deal.”
This is the war on success that our government is waging. They are almost trying to make the economy worse by putting companies out of business. To Quote Jim Clifton of Gallup:
Our leadership keeps thinking that the answer to economic growth and ultimately job creation is more innovation, and we continue to invest billions in it. But an innovation is worthless until an entrepreneur creates a business model for it and turns that innovative idea in something customers will buy. Because we have misdiagnosed the cause and effect of economic growth, we have misdiagnosed the cause and effect of job creation.
For the first time in 35 years, American business deaths now outnumber business births.
Let’s get one thing clear: This economy is never truly coming back unless we reverse the birth and death trends of American businesses. It is catastrophic to be dead wrong on the biggest issue of the last 50 years — the issue of where jobs come from…when small and medium-sized businesses are dying faster than they’re being born, so is free enterprise.
And when free enterprise dies, America dies with it.
Recent court decisions against Fannie Mae and Freddie Mac shareholders have put to rest the notion that the two mortgage giants exist as anything but instrumentalities of the U.S. government, according to a report released Thursday by Kroll Bond Rating Agency.
Private equity investor groups recently have raised lawsuits against the Federal Housing Finance Agency, in an effort to regain control of the two entities. The failure of these legal actions points to the de facto nature of the two entities as sovereign credits, given their complete backing by the U.S. government.
The KBRA report also suggests that Fannie Mae and Freddie Mac have morphed into insurance agents rather than insurance companies, since they cannot produce the capital to bear the risk of their guarantees that the FHFA prices to begin with.
Still, the two bodies’ investors take issue with the 3rd Preferred Stock Purchase Agreement that directs all of Fannie Mae and Freddie Mac’s profits to the government, the KBRA report said.
But these investors’ suits have been unsuccessful because, in judges’ eyes, the legislation passed by Congress that saved Fannie Mae and Freddie Mac from the brink gives the U.S. Treasury and FHFA the right to manage the two companies as they see fit. But KBRA finds instead that “the 3rd PSPA simply compensates the Treasury for the capital injection made in 2008 and, more important, the open-ended support of the U.S. taxpayer.”
The report goes on to argue that these investors misinterpret the support the U.S. government lent to the two mortgage entities. Prior to the capital injection, Fannie Mae and Freddie Mac had negative net worth, meaning that Treasury’s aid only brought them to zero.
But, as the report reads, all of the profits the two make now represent therefore the return on the government’s investment, so to recapitalize Fannie Mae and Freddie Mac would essentially involve taxpayer money, which the report found “galling.”
“They are not talking about injecting any of their own cash into the companies,” KBRA writes. “If you accept the idea that the taxpayers are due a return on both the implicit and explicit capital advanced to keep the mortgage market operating, there are no earnings to be retained in the GSEs.”
The report did contend that while this may not spell out good news for the two mortgage agencies’ equity investors, it should end some of the uncertainty bond investors have faced by confirming their standing in the eyes of government.
Fannie Mae hit more than a few financial potholes during 2014, closing the year with significantly lower net income and comprehensive income and a stated concern that things may not get better during 2015.
The government-sponsored enterprise reported annual net income of $14.2 billion and annual comprehensive income of $14.7 billion in 2014, far below 2013’s levels of $84 billion in net income and $84.8 billion in comprehensive income.
The fourth quarter of 2014 was especially acute: Fannie Mae’s net income of $1.3 billion and comprehensive income of $1.3 billion for this period, a steep drop from the net income of $3.9 billion and comprehensive income of $4.0 billion for the third quarter. Fourth quarter net revenues were $5.5 billion, down from $6 billion for the third quarter, while fee and other income was $323 million for the fourth quarter, compared with $826 million for the third quarter. Net fair value losses were $2.5 billion in the fourth quarter, up substantially from $207 million in the third quarter.
Fannie Mae explained that its fourth quarter results were “driven by net interest income, partially offset by fair value losses on risk management derivatives due to declines in longer-term interest rates in the quarter.” Nonetheless, Fannie Mae reported a positive net worth of $3.7 billion as of Dec. 31, 2014, which resulted in a dividend obligation to the U.S. Department of the Treasury of $1.9 billion that will be paid next month.
In announcing its 2014 results, Fannie Mae offered a blunt prediction that this year will see continued disappointments.
“[Fannie Mae] expects its earnings in future years will be substantially lower than its earnings for 2014, due primarily to the company’s expectation of substantially lower income from resolution agreements, continued declines in net interest income from its retained mortgage portfolio assets, and lower credit related income,” said Fannie Mae in a press statement. “In addition, certain factors, such as changes in interest rates or home prices, could result in significant volatility in the company’s financial results from quarter to quarter or year to year. Fannie Mae’s future financial results also will be affected by a number of other factors, including: the company’s guaranty fee rates; the volume of single-family mortgage originations in the future; the size, composition, and quality of its retained mortgage portfolio and guaranty book of business; and economic and housing market conditions.”
Default Risk Index For Agency Purchase Loans Hits Series High
The default risk for mortgage loan originations rose in January, marking the fifth straight month-over-month increase, according to the composite National Mortgage Risk Index (NMRI) released by AEI’s International Center on Housing Risk.
In January, the NMRI for Agency purchase loans increased to a series high of 11.94 percent. That number represented an increase of 0.4 percentage points from the October through December average and a jump of 0.8 percentage points from January 2014.
“With the NMRI once again hitting a series high, the risks posed by the government’s 85 percent share of the home purchase market continue to rise,” said Stephen Oliner, co-director of AEI’s International Center on Housing Risk.
Default risk indices for Fannie Mae, FHA, and VA loans hit series highs within the composite, according to AEI. The firm attributes to the consistent monthly increases in risk indices to a substantial shift in market share from large banks to non-bank accounts, since the default risk tends to be greater on loans originated by non-bank lenders.
AEI’s study for January revealed that the volume of high debt-to-income (DTI) loans has not been reduced by the QM regulation. About 24 percent of loans over the past three months had a total DTI above 43 percent, compared to 22 percent for the same period a year earlier. The study also found that Fannie Mae and Freddie Mac were compensating to a limited extent for the riskiness of their high DTI loans.
Further, the NMRI for FHA loans in January experienced a year-over-year increase of 1.5 percentage points up to 24.41 percent – meaning that nearly one quarter of all recently guaranteed home purchase loans backed by FHA would be projected to default if they were to experience an economic shock similar to 2007-08. AEI estimates that if FHA were to adopt VA’s risk management practices, the composite index would fall to about 9 percent.
“Policy makers need to be mindful of the upward risk trends that are occurring with respect to both first-time and repeat buyers,” said Edward Pinto, co-director of AEI’s International Center on Housing Risk. “Recent policy moves by the FHA and FHFA will likely exacerbate this trend.”
AEI said the cause of the softness in mortgage lending is not tight lending standards, but rather reduced affordability, loan put back risk, and slow income growth among households.
More than 180,o00 home purchase loans were evaluated for the January results, bringing the total number of loans rated in the NMRI since December 2012 to nearly 5.5 million, according to AEI.
Current government regulations imposed by the Bureau of Land Management are harming energy production and holding back the U.S. economy, a new study reveals.
“While federally owned lands are also full of energy potential, a bureaucratic regulatory regime has mismanaged land use for decades,” write The Heritage Foundation’s Katie Tubb and Nicolas Loris.
The report focuses on the Federal Lands Freedom Act, introduced by Rep. Diane Black, R-Tenn., and Sen. James Inhofe, R-Okla. It is designed to empower states to regain control of their lands from the federal government in order to pursue their own energy goals. That is a challenge in an oil-rich state like Colorado.
“We need to streamline the process as there are very real consequences to poor [or nonexistent] management,” Tubb, a Heritage research associate, told The Daily Signal.
“Empowering the states is the best solution. The people who benefit have a say and can share in the benefits. If there are consequences, they can address them locally with state and local governments that are much more responsive to elections and budgets than the federal government.”
Emphasizing the need to streamline the process, Tubb pointed to the findings in the new report.
“The Bureau of Land Management estimates that it took an average of 227 days simply to complete a drill application,” Tubb said.
That’s more than the average of 154 days in 2005 and more than seven times the state average of 30 days, according to the report.
The report blames this increase in the application process on the drop in drilling on federal lands.
“Since 2009,” Tubb and Loris write, “oil production on federal lands has fallen by nine percent, even as production on state and private lands has increased by 61 percent over the same period.”
Despite almost “43 percent of crude oil coming from federal lands,” government-owned lands have seen a 13-point drop in oil production, from 36 percent to 23 percent.
The report also examines the recent oil-related job boom.
“Job creation in the oil and gas industry bucked the slow economic recovery and grew by 40 percent from 2007 to 2012, in comparison to one percent in the private sector over the same period,” according to the report.
That boom has had a big impact on jobs.
“Energy-abundant states like Colorado and Alaska would stand to benefit tremendously. We’ve seen oil and natural gas production increase substantially in Colorado over the past eight years, bringing jobs and economic activity to the state,” said Loris, an economist who is Heritage’s Herbert and Joyce Morgan fellow.
Tubb cautioned that any change will happen slowly. “The federal government likely will not release the land that easily.”
Loris agreed, noting the long-running debate about the Arctic National Wildlife Refuge.
“It was no surprise that the Alaskan delegation was up in arms when the administration proposed to permanently put ANWR off limits to energy exploration,” Loris told The Daily Signal. “Many in the Alaskan delegation and Alaskan natives, including village of Kaktovik—the only town in the coastal plain of ANWR, support energy development.”
“We are putting power to the people,” Tubb concluded.
The Baltic Dry Index, usually referred to as the BDI, is making historical lows in recent weeks, almost every week.
The index is a composition of four sub-indexes that follow shipping freight rates. Each of the four sub-indexes follows a different ship size category and the BDI mixes them all together to get a sense of global shipping freight rates.
The index follows dry bulk shipping rates, which represent the trade of various raw materials: iron, cement, copper, etc.
The main argument for looking at the Baltic Dry Index as an economic indicator is that end demand for those raw materials is tightly tied to economic activity. If demand for those raw materials is weak, one of the first places that will be evident is in shipping prices.
The supply of ships is not very flexible, so changes to the index are more likely to be caused by changes in demand.
Let’s first look at the three cases where the Baltic Dry Index predicted a stock market crash, as well as a recession.
1986 – The Baltic Dry Index Hits Its first All-time Low.
In late 1986, the newly formed BDI (which replaced an older index) hit its first all-time low.
Other than predicting the late 80s-early 90s recession itself, the index was a precursor to the 1987 stock market crash.
(click to enlarge)
1999 – The Baltic Dry Index Takes a Dive
In 1999, the BDI hit a 12-year low. After a short recovery, it almost hit that low point again two years later. The index was predicting the recession of the early 2000s and the dot-com market crash.
(click to enlarge)
2008 – The Sharpest Decline in The History of the BDI
In 2008, the BDI almost hit its all-time low from 1986 in a free fall from around 11,000 points to around 780.
(click to enlarge)
You already know what happened next. The 2008 stock market crash and a long recession that many parts of the global economy is still trying to get out of.
Is It Real Causation?
One of the pitfalls that affects many investors is to confuse correlation and causation. Just because two metrics seem to behave in a certain relationship, doesn’t tell us if A caused B or vice versa.
When trying to navigate your portfolio ahead, correctly making the distinction between causation and correlation is crucial.
Without doing so, you can find yourself selling when there is no reason to, or buying when you should be selling.
So let’s think critically about the BDI.
Is it the BDI itself that predicts stock market crashes? Is it a magical omen of things to come?
My view is that no. The BDI is not sufficient to determine if a stock market crash is coming or not. That said, the index does tells us many important things about the global economy.
Each and every time the BDI hit its lows, it predicted a real-world recession. That is no surprise as the index follows a fundamental precursor, which is shipping rates. It’s very intuitive; as manufacturers see demand for end products start to slow down, they start to wind-down production and inventory, which immediately affects their orders for raw materials.
Manufacturers are the ultimate indicator to follow, because they are the ones that see end demand most closely and have the best sense of where it’s going.
But does an economic slowdown necessarily bring about a full-blown market crash?
Only if the stock market valuation is not reflecting that coming economic downturn. When these two conditions align, chances are a sharp market correction is around the corner.
2010-2015 – The BDI Hits All-time Low, Again
In recent weeks, the BDI has hit an all-time low that is even lower than the 1986 low point. That comes after a few years of depressed prices.
(click to enlarge)
Source: Bloomberg
What does that tell us?
The global economy, excluding the U.S., is still struggling. Numerous signs for that are the strengthening dollar, the crisis in Russia and Eastern Europe, a slowdown in China, and new uncertainties concerning Greece.
The U.S. is almost the sole bright spot in the landscape of the global economy, although it’s starting to be affected by the global turmoil. A strong dollar hits exporters and lower oil prices hit the American oil industry hard.
Looking at stock prices, we are at the peak of a 6-year long bull market, although earnings seem to be at all-time highs as well.
What the BDI might tell us is that the disconnect between the global economy’s struggle and great American business performance across the board might be coming to an end.
More than that, China could be a significant reason for why the index has taken such a dive, as serious slowdowns on the real-estate market in China and tremendous real estate inventory accumulation are disrupting the imports of steel, cement and other raw materials.
Conclusion
The BDI tells us that a global economic slowdown is well underway. The source of that downturn seems to be outside of the U.S., and is more concentrated in China and the E.U.
The performance of the U.S. economy can’t be disconnected from the global economy for too long.
The BDI is a precursor for recessions, not stock market crashes. It’s not a sufficient condition to base a decision upon, but it’s one you can’t afford to ignore.
Going forward, this is a time to make sure you know the companies you invest in inside and out, and make sure end demand for their products is bound for continued growth and success despite overall headwinds.
#SwissLeaks what the media has termed it is a trove of secret documents from HSBC’s Swiss private banking arm that reveals names of account holders and their balances for the year 2006-07. They come from over 200 countries, the total balance over $100 billion. But nowhere has the HSBC Swiss list touched off a more raging political debate than in India.
That’s why to obtain and investigate the Indian names, The Indian Express partnered in a three-month-long global project with the Washington-based International Consortium of Investigative Journalists (ICIJ) and the Paris-based Le Monde newspaper. The investigation revealed 1,195 Indian HSBC clients, roughly double the 628 names that French authorities gave to the Government in 2011. The new revelation— published as part of a global agreement — is expected to significantly widen the scale and scope of the ongoing probe by the Special Investigation Team (SIT) appointed by the Supreme Court.
For years, when banks have been caught laundering drug money, they have claimed that they did not know, that they were but victims of sneaky drug dealers and a few corrupt employees. Nothing could be further from the truth. The truth is that a considerable portion of the global banking system is explicitly dedicated to handling the enormous volume of cash produced daily by dope traffickers.
Contrary to popular opinion, it is not “demand” from the world’s population which creates the mind destroying drug trade. Rather, it is the world financial oligarchy, looking for massive profits and the destruction of the minds of the population it is determined to dominate, which organized the drug trade. The case of HSBC underscores that point. Serving as the central bank of this global apparatus, is HSBC.
East India Company Origins
The opium trade began in the early 1700s as an official monopoly of the British East India Company, which conquered India, and ran it on behalf of the British Crown and the financiers operating through the City of London. Indian-grown opium became a key component in the trade for tea and silk in China. The East India Company had a thriving business selling British textiles and other manufactured products in India, and selling Chinese silk and tea in Britain. But the Company ran into problems with the opium end of the trade. The influx of opium caused major problems for China, and led the Emperor to issue an edict in 1729 prohibiting opium consumption. Then, in 1757, the Emperor restricted all foreigners and foreign vessels to a trading area in the port city of Canton. A stronger edict in 1799 prohibited the importation and use of opium under penalty of death.
None of this stopped the British from continuing to flood China with opium, creating millions of addicts, but it did cause the East India Company to protect its tea and silk trade by shifting its Chinese opium operations to nominally independent drug runners who bought opium legally from the East India Company in Calcutta, and smuggled it into China. The most prominent of these drug-running firms was Jardine Matheson & Co. It was founded in 1832 by two Scotsmen, William Jardine and James Matheson. Jardine had been a ship’s surgeon with the East India Company, while Matheson was the son of a Scottish baronet. The firm today is controlled by the Keswick family. In 1839, the Chinese Emperor launched an anti-opium offensive, which included the confiscation of all opium stocks in the hands of Chinese and foreign merchants. The merchants put up a fight, but were ultimately forced to concede, turning in their opium stocks after being indemnified against losses by British officials.
In response, however, the British launched a propaganda campaign against China, accusing it of violating Britain’s right to “free trade.” Britain sent its fleet to China, to force the Chinese to capitulate to the opium trade. The action, known as the First Opium War, resulted in the Treaty of Nanking in 1842, under which China not only capitulated to the opium trade, but also agreed to pay reparations to the opium runners and gave the British control of the island of Hong Kong. However, the treaty did not specifically legalize opium, so the British launched a second Opium War, which resulted in the 1856 Treaty of Tientsin, which legitimized the opium trade and opened China up to foreigners even more.
As the opium and other trade with China expanded, Britain’s new territory of Hong Kong became a major imperial commercial center. The opium dealers gathered together to form a bank, the Hongkong and Shanghai Bank, as the financial flagship of the British opium trade. Over time, the bank—now known as HSBC—would extend its reach into the drug fields of the Middle East and Ibero-America, as befitting its role as the financial kingpin of Dope, Inc.
Role of Secret Societies
In 1783 Lord Shelbourne launched the Chinese opium trade with Scottish merchants from the East India Company and members of the House of Windsor-allied Knights of St. John Jerusalem.
Shelbourne’s chief propagandist was Adam Smith who worked for East India Company, which emerged from the slave-trading Levant Company and later became known as Chatham House, home to the powerful Royal Institute for International Affairs (RIIA). In 1776 the high seas pirate Adam Smith wrote Wealth of Nations, which became the bible of international capitalism.
In the Far East the British organized the Chinese Triad Society, also known as the Society of Heaven and Earth, to smuggle their opium. Beginning in 1788 the Freemason Grand Lodge of England established lodges in China, one of which was the Triad Society. Another was known as the Order of the Swastika.
In 1839 William Jardine- a Canton-based opium trafficker- steered Britain into the first Opium War after Chinese officials confiscated his stash. The second Opium War lasted from 1858-1860. Lord Palmerston commanded both expeditions for the Brits. He was also the High Priest of Scottish Rite Freemasonry in the British Empire.
Throughout the 19th century the British families of Matheson, Keswick, Swire, Dent, Inchcape, Baring and Rothschild controlled the Chinese heroin traffic. The Inchcape’s and Baring’s Peninsular & Orient Steam Navigation Company (PONC) transported the dope around the world.
To the US West Coast, the families brought Chinese coolies to build JP Morgan’s railroads, slave laborers who were kidnapped (shanghaied) by the Triads. The Triads came along too, setting up opium dens in San Francisco and Vancouver and using a network of Chinatowns as a channel for heroin. This network exists today. To the US East Coast the families brought African slaves and cotton. These same families built plantations and became kings of southern cotton on the backs of shanghaied Africans.
The American families Perkins, Astor and Forbes made millions off the opium trade. The Perkins’ founded Bank of Boston, which is today known as Credit Suisse First Boston. The Perkins and Morgan families endowed Harvard University. William Hathaway Forbes was a director at Hong Kong Shanghai Bank shortly after it was founded in 1866. John Murray Forbes was the US agent for the Barings banking family, which financed most of the early drug trade. The Forbes family heirs later launched Forbes magazine. Steve Forbes ran for President in 1996. John Jacob Astor invested his opium proceeds in Manhattan real estate and worked for British intelligence. The Astor family home in London sits opposite Chatham House.
These families launched the Hong Kong Shanghai Bank Corporation (HSBC) after the second Opium War as a repository for their opium proceeds. HSBC, a subsidiary of the London-based HSBC Holdings, today prints 75% of Hong Kong’s currency, while the British Cecil Rhodes-founded Standard Chartered Bank prints the rest. HSBC’s Hong Kong headquarters sits next to a massive Masonic Temple.
Freemasonry is a highly secretive society, making it an ideal vehicle for global drugs and arms trafficking. According to 33rd Degree Mason Manly Hall, “Freemasonry is a fraternity within a fraternity – an outer organization concealing an inner brotherhood of the elect…the one visible and the other invisible. The visible society is a splendid camaraderie of ‘free and accepted’ men enjoined to devote themselves to ethical, educational, fraternal, patriotic and humanitarian concerns. The invisible society is a secret and most august fraternity whose members are dedicated to the service of an arcanum arcandrum (sacred secret).”
Wealth derived from selling this Chinese opium during British colonial rule, helped build many landmarks on India’s west coast. The Mahim Causeway, The Sir JJ School of Art, David Sassoon Library and Flora Fountain, landmarks in modern Mumbai, were built by prominent Parsi and Jewish traders from profits made by a flourishing opium and later cotton trade with China.
Prominent families from Mumbai’s past, names that adorn today’s famous institutions such as the Wadia’s, Tata’s, Jejeebhoy’s, Readymoney’s, Cama’s and Sassoon’s sold opium to China through the British. By the end of the nineteenth century, when the opium trade went bust, cotton from India’s western state of Gujarat, which had already developed strong trade links with Canton profited. The Paris’s ploughed profits from the trade with the Chinese back into India, setting up several schools, hospitals and banks. Historical records prove that some of India’s prominent Parsi traders at the time, were founders of the Hong Kong and Shanghai Banking Corporation (HSBC) founded in 1865. For a detailed report read Rothschild colonization of India.
It is this deadly opium empire that Gandhiji was very much conscious about and spoke out against for which he was jailed in 1921 by India’s British rulers for “undermining the revenue”. Having seen generations of Chinese youths rendered docile and passive Gandhijis was concerned over opium and its deadly effects on India which is clear from his letters. These opium production activities ran until 1924 in India and were stopped with the heroic efforts of Mahatma Gandhi who first agitated to remove opium production from India and destruction of China using Indian soil. Finally the British transferred the entire production to Afghanistan in 1924 handing the production to southern Afghani tribals which after 90 years became the golden crescent of opium production. Though the production is in the hands of Afghan tribals the distribution finance market control is still exercised by the same old British business houses or their proxies.
Afghan Opium for Bankers and Terrorists
There is a general impression that Afghanistan has always been the center of opium production. In fact, it has not. Prior to the Soviet invasion in 1979, opium production in Afghanistan was less than 1,000 tons; that grew to 8,200 tons (based on conservative UN Office on Drugs and Crime/UNODC figures) in 2008. Throughout this period, Afghanistan was in a state of war. Following the Soviet invasion, the anti-Soviet powers, particularly, the US, UK, and Saudi Arabia, began generating larger amounts of drug money to finance much of the war to defeat the Soviets. Since 1989, after the Soviet withdrawal, there has been an all-out civil war in Afghanistan, as the US-UK-Saudi-created mujahideen dipped further into the opium/heroin money.
What was happening in Afghanistan during this period that caused opium production to soar to those levels? History shows that the US invasion in 2001 came close to wiping out the Taliban forces; the Afghan people, at least at that point in time, because of the Pakistani-Saudi links to the Taliban and the oppressive nature of the Wahhabi-indoctrinated regime, supported the invading American and NATO forces. That began to change in 2005.
The year 2005 is important in this context, since one of the most damning parts of the US Senate report details HSBC’s relationship with the Saudi-based Al Rajhi Bank, a member of Osama bin Laden’s “Golden Chain” of important al-Qaeda financiers. The HSBC-Al Rajhi relationship has spanned decades; perhaps that is why, even when HSBC’s own internal compliance offices asked that it be terminated in 2005, and even when the US government discovered hard evidence of Al Rajhi’s relationship with terrorism, HSBC continued to do business with the bank until 2010.
In fact, the report said, Al Rajhi’s links to terrorism were confirmed in 2002, when US agents searched the offices of a Saudi non-profit US-designated terrorist organization, Benevolence International Foundation. In that raid, agents uncovered a CD-ROM listing the names of financiers in bin Laden’s Golden Chain. One of those names was Sulaiman bin Abdul Aziz Al Rajhi, a founder of Al Rajhi bank.
Recently an operation by German Customs official revealed that the British Queen financed Osama Bin Laden. German officials in an operation raided two containers passing through Hamburg Port and seized 14,000 documents establishing that Osama bin Laden was funded by UK Queen’s bank Coutts, which is part of the Royal Bank of Scotland.
HSBC & 26/11 Mumbai Attacks
Why did HSBC not terminate its links with the Al Rajhi in 2005? The answer lies in what was then put in place in Afghanistan to generate large amounts of cash. When it comes to opium/ heroin and offshore banks, Britain rules supreme. In 2005, poppy fields in southern Afghanistan began to bloom, and it became evident to the bankers and the geo-politicians of Britain and the US that cash to support the financial centers and the terrorists could be made right there.
It was announced on Jan. 27, 2006 in the British Parliament that a NATO International Security Assistance Force (ISAF) would be replacing the US troops in Helmand province as part of Operation Herrick. The British 16 Air Assault Brigade would make up the core of the force. British bases were then located in the districts of Sangin, Lashkar Gah, and Gereshk.
As of Summer 2006, Helmand was one of the provinces involved in Operation Mountain Thrust, a combined NATO/Afghan mission targeted at Taliban fighters in the south of the country. In July 2006, the offensive essentially stalled in Helmand, as NATO (primarily British) and Afghan troops were forced to take increasingly defensive positions under heavy insurgent pressure. In response, British troop levels in the province were increased, and new encampments were established in Sangin and Gereshk. In Autumn 2006, some 8,000 British troops began to reach “cessation of hostilities” agreements with local Taliban forces around the district centers where they had been stationed earlier in the Summer, and it is then that drug-money laundering began in earnest.
This drug money, at least a good part of it, is generated in this area with the help of Dawood Ibrahim, who also played a role in helping the Mumbai attackers by giving them the use of his existing network in Mumbai. At the time, Ibrahim worked on behalf of the British, and ran his operation through the British-controlled emirate of Dubai. Drugs came into Dubai through Dawood’s “mules,” protected by the Pakistani ISI and British MI6; the dope was shipped in containers which carried equipment sent there for “repair” from Kandahar and elsewhere in southern Afghanistan. British troops controlled Helmand province, where 53% of Afghanistan’s gargantuan 8,200 tons of opium was produced in 2007.
The drugs were converted, and still are today, to cash in Dubai, where Dawood maintains a palatial mansion, similar to the one he maintains in Karachi. Dubai is a tax-free island-city, and a major offshore banking center. The most common reason for opening an offshore bank account is the flexibility that comes with it.
With the development of the Dubai International Financial Centre (DIFC), which is the latest free-trade zone to be set up there, flexible and unrestricted offshore banking has become big business. Many of the world’s largest banks already have significant presence in Dubai – big names such as Abbey National Offshore, HSBC Offshore, ABN Amro, ANZ Grindlays, Banque Paribas, Banque de Caire, Barclays, Dresdner, and Merrill Lynch, all have offices in the Emirate already.
In addition to Dubai, most of the offshore banks are located in former British colonies, and all of them are involved in money laundering. In other words, the legitimization of cash generated from drug sales and other smuggled illegitimate goods into the “respectable banks” is the modus operandi of these offshore banks. The drugs that Dawood’s mules carry are providing a necessary service for the global financial system, as well as for the terrorists who are killing innocents all over the world.
In December of 2007, this Britain-run drug-money-laundering and terrorist-networking operation was about to be exposed when Afghan President Hamid Karzai learned that two British MI6 agents were working under the cover of the United Nations and the European Union behind his back, to finance and negotiate with the Taliban. He expelled them from Afghanistan. One of them, a Briton, Michael Semple, was the acting head of the EU mission in Afghanistan and is widely known as a close confidant of Britain’s Ambassador, Sir Sherard Cowper-Coles. Semple now masquerades as an academic analyst of Afghanistan, and was associated with the Harvard Kennedy School’s Carr Center. The second man, an Irishman, Mervin Patterson, was the third-ranking UN official in Afghanistan at the time that he was summarily expelled.
These MI6 agents were entrusted by London with the task of using Britain’s 7,700 troops in the opium-infested, Pushtun-dominated, southern province of Helmand to train 2,000 Afghan militants, ostensibly to “infiltrate” the enemy and “seek intelligence” about the lethal arms of the real Taliban. Karzai rightly saw it as Britain’s efforts to develop a lethal group within Afghanistan, a new crop of terrorists.
The drug money thus generated to fund the financial centers and terrorists through HSBC was also responsible for ongoing terrorist attacks that have destabilized most of South Asia. The most important of these was the massive attack on Mumbai.
The mode used to launder such drug money is through diamonds. A 2003 Report assessed various alternative financing mechanisms that could be used to facilitate money laundering and or terrorist financing. Trading in commodities, remittance systems, and currency were assessed on each of their abilities to earn, be moved, and store value. Diamonds were the only alternative financial device that fit into all of these assessment criteria.
Diamonds can be vulnerable for misuse for money laundering and terrorist financing purposes because they can transfer value and ownership quickly, often, with a minimal audit trail. They provide flexibility and an easy transportation of value.
Top diamond traders of the country, several of whom are now settled abroad, figure on what the media calls as the #SwissList, with mostly Mumbai addresses given. Many persons on the list are Gujarati diamond merchants with offices all over world having roots in Palanpur.
However their involvement in not just limited to money laundering. Almost 6 months before 26/11 2008 Mumbai Attacks the Financial Intelligence Unit of India (FIU-IND) (the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions) was already tracking the diamond industry for suspicious activities by terrorists.
“A year ago, some people from Mumbai began purchasing diamonds worth crores of rupees. When the industry tried to trace the traders, they turned out to be non-existent,” said Vanani.
The FIU traced all foreign transactions of Surat’s diamond industry, especially those emanating from Belgium. It found that a great deal of money was being invested by terrorist groups.
However in May 2014 eight of these Belgium based diamond dealers were given a clean chit by the Income Tax department in the black money case. The I-T department said a probe was initiated against the eight individuals, but there was no proof of tax evasion by them. Why is the Government reluctant in disclosing Black Money related data; be it NDA and even UPA before it ? For a detailed report on the issue read 26/11 – The Black Money Trail.
From the Far East to the Middle East to Ibero-America to India, everywhere the drug trade is flourishing, you will find HSBC. It may not handle the dope, but it does handle the money, making sure that the “citizens above suspicion” who run the empire get their cut of the proceeds. Now HSBC has been caught red-handed laundering money in the U.S., India, China, Argentina almost everywhere the sun shined through the colonies. This is a bank which has abused us, assaulted our people, and violated the law with abandon. Isn’t it time we set an example and revoke its charter to do business here in India ?
HSBC Whistle Blower Spills Lynch Evidence To Senate
NEW YORK – The Senate Judiciary Committee on Wednesday conducted a two-hour session with HSBC whistle blower John Cruz in its investigation of attorney general nominee Loretta Lynch’s role in the Obama administration’s decision not to prosecute the banking giant for laundering funds for Mexican drug cartels and Middle Eastern terrorists, WND sources have confirmed.
The staff of the Senate Judiciary Committee focused Wednesday on Cruz’s allegations, first reported by WND Feb. 6, that Lynch, acting then in her capacity as the U.S. attorney for the Eastern District of New York, engaged in a Department of Justice cover-up. Obama’s attorney general nominee allowed HSBC to enter into a “deferred prosecution” settlement in which the bank agreed to pay a $1.9 billion fine and admit “willful criminal conduct” in exchange for dropping criminal investigations and prosecutions of HSBC directors or employees.
On Feb. 12, the Senate Judiciary Committee announced Chairman Sen. Chuck Grassley, R-Iowa, had decided to postpone the Senate vote on Lynch’s confirmation until the last week of February, when Congress returns from the Presidents Day recess. The decision is widely attributed to allowing Vitter and the Senate Judiciary Committee staff time to pursue the allegations concerning Lynch’s role in the HSBC scandal.
Cruz called the $1.9 billion HSBC fine “a joke,” explaining to WND that HSBC bank auditors had told him in 2009 that senior managers and compliance officers in New York were fully aware the London-headquartered bank was engaged in a criminal scheme to launder money internationally for Mexican drug cartels and Middle Eastern terrorists.
“The auditors warned me investigating the money laundering could cost me my job,” Cruz said. “The auditors told me in 2009 that nobody in the bank was going to go to jail and that HSBC had already put aside $2 billion in reserves to pay the fine they somehow had reason to suspect back then that the Department of Justice would demand to settle the case.”
Cruz argued that a $1.9 billion fine of an international bank the size of Hong Kong Shanghai Bank, the official name of HSBC, amounted to no more than “a few days operating profit.” He described it as “a cost of doing business” once HSBC had decided to launder money for international criminals.
Foster is considered on Capitol Hill to be one of the Senate’s best, most experienced investigators. A graduate of Georgetown University Law Center, he had more than 15 years experience directing fact-finding inquiries for the Senate Committee on Finance, Senate Homeland Security Committee and the House Committee on Government Reform, before becoming chief investigative counsel for the Senate Judiciary Committee in January 2011.
The Senate Judiciary Committee’s staff questioning of Cruz and his attorney focused on approximately 1,000 pages of HSBC customer account records that Cruz turned over to WND early in 2012. The records were pulled from the HSBC computer system before he was fired by HSBC senior management who didn’t want to investigate his claim to have discovered illegal money-laundering activity at the bank.
As WND reported in a series of articles beginning Feb. 1, 2012, Cruz was able to document a complex criminal scheme that involved wiring billions of dollars of money for Mexican drug cartels and Middle Eastern terrorists thorough thousands of bogus accounts created through identity theft. The scheme used the names and Social Security numbers of hundreds of unsuspecting current and former customers. It allegedly had the active participation of regional bank managers, branch managers and employees, as well as bank compliance officials at hundreds of HSBC locations throughout the nation. The money ultimately was wired by the bank to undisclosed bank accounts internationally.
Foster, on behalf of the Senate Judiciary Committee, has requested that Cruz to submit some 70 hours of conversations Cruz secretly recorded of bank management and compliance officers in New York. He also recorded his conversations with law-enforcement authorities, including the Suffolk County District Attorney’s office, the Department of Homeland Security and the IRS.
Cruz played for WND an audio recording he made of a phone call he placed to Jeremy Scileppi, the bureau chief at the office of the Suffolk County district attorney June 25, 2012. Scileppi told Cruz Suffolk County did not want to duplicate other investigations of HSBC money-laundering allegations.
Scileppi explained the Suffolk district attorney had turned over Cruz’s documentation to HSBC security personnel, “so the bank could conduct their own internal investigation,” as well as to the Brooklyn district attorney’s office and to the FBI, a division of the Department of Justice, as is the U.S. attorney’s office for the Eastern District of New York.
“We generally back off the investigation if the FBI or another federal agency is involved,” Scileppi explained. The way it works is that we don’t want two different agencies to chase the same squirrel up the same tree from two different sides, because, then, nobody gets the squirrel. The FBI told us to back off because they were working the HSBC money-laundering investigation.”
Cruz: ‘DHS stonewalled’
One day after WND’s first article on the HSBC money-laundering scandal was published in February 2012, WND received an email from Sgt. Frank J. DiGregorio, a DHS employee in New York.
“I have read your article in WND pertaining to the allegations by John Cruz against HSBC Bank. As a supervisor for Homeland Securities Investigators, I would very much like the opportunity to meet with Mr. Cruz and speak with him,” DiGregario said.
On Feb. 7, 2012, WND attended a meeting with DiGregorio and Graham R. Klein, special agent for the Department of Homeland Security, in an office building on Manhattan’s lower east side that bore no DHS designation, with Cruz attending by telephone.
With Cruz’s approval, WND handed over to DHS all the written documentation and audio recordings Cruz had provided, offering with Cruz’s permission to assist in the investigation in any way possible.
In a meeting lasting over an hour that Cruz audio-recorded without WND’s knowledge, DiGregorio and Klein promised to investigate the evidence and allegations Cruz had presented.
“This is an ongoing investigation,” DiGregorio told WND at the conclusion of the meeting. “Cruz made very serious allegations, and it takes time for us to do our work. But we have not forgotten about Cruz, and we will get back to him just as soon as we can.”
DiGregorio explained that as a detective sergeant in the office of the Queens County district attorney, he is currently assigned to Homeland Security Investigations, where he supervises Special Agent Klein.
Subsequent to the meeting, Cruz told WND he was shocked DHS claimed it was their first contact with him.
“Back in 2010, my attorney turned over information regarding HSBC to DiGregorio,” Cruz said, as reported by WND in an article published May 13, 2012. “Then, on Feb 7, 2012, Homeland Security said my attorneys never spoke to them, that they didn’t know who I am.”
Cruz was shocked.
“DiGregorio called me; he was belittling me,” Cruz recounted. “DiGregorio said I was a disgruntled employee, that I was just here for the money. They said, ‘Why did it take you two years to come forward?’”
IRS continues to stonewall Cruz
WND reported May 13, 2012, Cruz explained he had also presented his allegations and evidence to Internal Revenue Service Special Agent David Wagner and Supervisory Special Agent Kevin B. Sophia. Both were of the U.S. Department of Treasury, IRS, Criminal Investigation Division.
“I met with them in Denver, Colorado, on April 12, 2012, at the IRS office,” Cruz said. “I gave them a computer disc with all the HSBC documents on it. Agent Sophia asked, ‘What would make us believe HSBC employees would acknowledge illegal activity?’ I told them I recorded everything.”
Cruz also handed over to the IRS two discs with approximately 19 to 20 hours he had recorded of his discussions with HSBC employees concerning his allegations.
Cruz told WND the IRS agents were overwhelmed with the volume and detail of the information he handed over.
“The IRS agents said, ‘This is mind-boggling,’” Cruz recounted. “They told me that if the information on the computer disk and in the audio files was as I represented, the IRS agents were talking about arresting HSBC bank employees.”
Cruz noted the IRS was stunned at the dollar magnitude of the suspicious bank transactions he had documented, noting that billions of dollars in tax revenue was being lost, with bank employees transferring money into and out of bogus accounts set up for illegal gain.
The IRS explained to Cruz that the individuals whose identities may have been stolen to set up the apparently fraudulent accounts would also have to be investigated, to see if they were part of the suspicious activity or merely victims.
Either way, the Social Security numbers associated with the suspicious HSBC accounts turned out to be authentic numbers identified in many cases with present or former customers of the bank. And the billions of dollars traveling through the accounts had never been reported for income tax purposes.
“The IRS denied my request to be a whistle blower in the HSBC case,” Cruz told WND. “The IRS said the information I provided did not result in the collection of any fines, so I was not owed any fee by the federal government.”
Cruz: ‘I no longer trust DHS or the IRS’
As WND also reported May 13, 2012, Cruz handed over to WND audio recordings he made of his meetings with DHS and IRS officials – recordings he made without disclosing to the DHS and IRS.
Cruz explained that he no longer trusts even federal law enforcement to do their job investigating and prosecuting HSBC employees who may be involved in illegal bank transactions, as he alleges.
“It’s a circle,” Cruz explained. “I turn over the information to law enforcement, and law enforcement turns around and gives the information right back to the bank for the bank to conduct their own internal investigation.”
Cruz says he was fired by HSBC for bringing forth his charges.
“This is how the bank and employees in the bank make money,” he argued, explaining why he was fired instead of being given awards for meritorious service disclosing the suspicious activities. “It’s a lot easier to make money off fraudulent transactions than it is to make money off legal transactions.”
He indicated he was not concerned HSBC and/or its employees might sue him for libel or defamation.
“Sue me,” he said defiantly, “sue me all you want. Then bring out the proof. I will ask for every document. I will ask for a lot of documents. I will show that I am right, and I will give every tape recording to the public on air, so they can listen to these individuals talking.”
Cruz explained he taped the conversations with federal law enforcement authorities “to cover myself.”
“You never know what’s going to happen,” he explained. “Somebody could say, ‘Oh, you’re involved.’ I need to explain that I’m not involved, but that I reported it. Then, if they deny I reported it, I have the tapes to prove I reported it.”
Cruz affirmed to WND he was accusing by name federal officials in DHS and IRS, as well as officials in the district attorneys offices in Suffolk County and Queens County, New York, of not taking steps to stop immediately what he alleges is money laundering billions of dollars in the United States around the world.
He noted his contact with the IRS was relatively recent, and he has reason to believe the IRS has opened an investigation.
IRS agents Wagner and Sophia did not return WND calls for comment.
HSBC ‘a criminal organization’
Cruz began working at HSBC Jan. 14, 2008, as a commercial bank accounts relationship manager and was terminated for “poor job performance” on Feb. 17, 2010, after he refused to stop investigating the HSBC criminal money-laundering scheme from within the bank.
In his position as a vice president and a senior account relationship manager, Cruz worked in the HSBC southern New York region, a which accounts for approximately 50 percent of HSBC’s North American revenue. He was assigned to work with several branch managers to identify accounts to which HSBC might introduce additional banking services.
Cruz told WND he recorded hundreds of hours of meetings he conducted with HSBC management and bank security personnel in which he charged that various bank managers were engaging in criminal acts.
“I have hours of hours of recordings, ranging from bank tellers, to business representatives, to branch managers, to executives,” he said. “The whole system is designed to be a culture of fraud to make it look like it’s a legal system. But it’s not.”
Cruz explained that after many repeated efforts, he gave up on the idea that HSBC senior management or bank security would pursue his allegations to investigate and stop the wrongdoing.
“My conclusion was that HSBC wasn’t going to do anything about this account, because HSBC management from the branch level, to senior bank security, to executive senior management was involved in the illegal activity I found,” he said.
After repeated attempts to bring the information to the attention of law enforcement officers, Cruz hit a brick wall until WND examined his documentation and determined his shocking allegations were sufficiently substantiated.
“HSBC is a criminal organization,” he stressed. “It is a culture of crime.”
The intervention by the world’s central banks has resulted in today’s bizarro financial markets, where “bad news is good” because it may lead to more (sorry, moar) thin-air stimulus to goose asset prices even higher.
The result is a world addicted to debt and the phony stimulus now essential to sustaining it. In the process, a tremendous wealth gap has been created, one still expanding at an exponential rate.
History is very clear what happens with dangerous imbalances like this. They correct painfully. Through class warfare. Through currency crises. Through wealth destruction.
Is that really the path we want? Because we’re for sure headed for it.
Fast-rising rents have made it difficult for many Americans to save up a down payment for a home purchase—and experts say that problem is unlikely to go away any time soon.
Late last year, real estate firm Zillow reported that renters living in the United States paid a cumulative $441 billion in rents throughout 2014, a nearly 5 percent annual increase spurred by rising numbers of renters and climbing prices. Last month, the company said that its own Rent Index increased 3.3 percent year-over-year, accelerating from 2013 even as home price growth slows down.
Results from a more recent survey conducted by Zillow and Pulsenomics suggest that rent prices will continue to be a problem for the aspiring homeowner for years to come.
Out of more than 100 real estate experts surveyed, 51 percent said they expect rental affordability won’t improve for at least another two years, Zillow reported Friday. Another 33 percent were a little more optimistic, calling for a deceleration in rental price increases sometime in the next one to two years.
Only five percent said they expect affordability conditions to improve for renters within the next year.
Despite the challenge that rising rents presents to home ownership throughout the country, more than half—52 percent of respondents—said the market should be allowed to correct the problem on its own, without government intervention.
“Solving the rental affordability crisis in this country will require a lot of innovative thinking and hard work, and that has to start at the local level, not the federal level,” said Zillow’s chief economist, Stan Humphries. “Housing markets in general and rental dynamics in particular are uniquely local and demand local, market-driven policies. Uncle Sam can certainly do a lot, but I worry we’ve become too accustomed to automatically seeking federal assistance for housing issues big and small, instead of trusting markets to correct themselves and without waiting to see the impact of decisions made at a broader local level.”
On the topic of government involvement in housing matters: The survey also asked respondents about last month’s reduction in annual mortgage insurance premiums for loans backed by the Federal Housing Administration (FHA). The Obama administration has projected that the cuts will help as many as 250,000 new homeowners make their first purchase.
The panelists were lukewarm on the change: While two-thirds of those with an opinion said they think the changes could be “somewhat effective in making homeownership more accessible and affordable,” just less than half said the new initiatives are unwise and potentially risky to taxpayers.
Finally, the survey polled panelists on their predictions for U.S. home values this year. As a whole, the group predicted values will rise 4.4 percent in 2015 to a median value of $187,040, with projections ranging from a low of 3.1 percent to a high of 5.5 percent.
“During the past year, expectations for annual home value appreciation over the long run have remained flat, despite lower mortgage rates,” said Terry Loebs, founder of Pulsenomics. “Regarding the near-term outlook, there is a clear consensus among the experts that the positive momentum in U.S. home prices will continue to slow this year.”
On average, panelists said they expect median home values will pass their precession peak ($196,400) by May 2017.
OPEC is supposedly out to beat, or at least curtail the growth of American shale oil production.
For a host of reasons, especially the much shorter capex cycle for shale, they will not succeed unless they are willing to accept permanent low oil prices.
But, permanent low oil prices will do too much damage to OPEC economies for this to be a credible threat.
We’re sure by now you are familiar with the main narrative behind the oil price crash. First, while oil production outside of North America is basically stagnant since 2005.
The shale revolution has dramatically increased supply in America.
(click to enlarge)
The resulting oversupply has threatened OPEC and the de-facto leader Saudi Arabia has chosen a confrontational strategy not to make way for the new kid on the block, but instead trying to crush, or at least contain it. Can they achieve this aim, provided it indeed is their aim?
Breakeven price At first, one is inclined to say yes, for the simple reason that Saudi (and most OPEC) oil is significantly cheaper to get out of the ground.
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This suggests that all OPEC has to do is to keep output high and sooner or later the oversupply will work itself off the market, and expensive oil is more likely to see cutbacks than cheaper oil, although this critically depends on incentives facing individual producers.
Capex decline It is therefore no wonder that we’ve seen significant declines in rig counts and numerous companies have announced considerable capex declines. While this needs time to work out into supply cutbacks, these will eventually come.
For instance BP (NYSE:BP) cutting capex from $22.9B in 2014 to $20B in 2015, or Conoco (NYSE:COP) reducing expenditures by more than 30% to $11.5B this year on drilling projects from Colorado to Indonesia. There are even companies, like SandRidge (NYSE:SD), that are shutting 75% of their rigs.
Leverage It is often argued that the significant leverage of many American shale companies could accelerate the decline, although it doesn’t necessarily have to be like that.
While many leveraged companies will make sharp cutbacks in spending, which has a relatively rapid effect on production (see below), others have strong incentives to generate as much income as possible, so they might keep producing.
Even the companies that go belly up under a weight of leverage will be forced to relinquish their licenses or sell them off at pennies to the dollar, significantly lowering the fixed cost for new producers to take their place.
Hedging Many shale companies have actually hedged much of their production, so they are shielded from much of the downside (at a cost) at least for some time. And they keep doing this:
Rather than wait for their price insurance to run out, many companies are racing to revamp their policies, cashing in well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals. [Reuters]
Economics Being expensive is not necessarily a sufficient reason for being first in line for production cuts. For instance, we know that oil from the Canadian tar sands is at the high end of cost, but simple economics can explain why production cuts are unlikely for quite some time to come.
The tar sands involve a much higher fraction as fixed cost:
Oil-sands projects are multibillion-dollar investments made upfront to allow many years of output, unlike competing U.S. shale wells that require constant injections of capital. It’s future expansion that’s at risk. “Once you start a project it’s like a freight train: you can’t stop it,” said Laura Lau, a Toronto-based portfolio manager at Brompton Funds. Current oil prices will have producers considering “whether they want to sanction a new one.” [Worldoil]
So, once these up-front costs are made, these are basically sunk, and production will only decline if price falls below marginal cost. As long as the oil price stays above that, companies can still recoup part of their fixed (sunk) cost and they have no incentive to cut back production.
But, of course, you have tar sand companies that have not yet invested all required up-front capital and new capex expenditures will be discouraged with low oil prices. So, there is still the usual economic upward sloping supply curve operative here.
Swing producer The funny thing is American shale oil is at the opposite end of this fixed (and sunk) cost universe, apart from acquiring the licenses. As wells have steep decline curves, production needs constant injection of capital for developing new wells.
Production can therefore be wound down pretty quickly should the economics require, and it can also be wound back up relatively quickly, which we think is enough reason why American shale is becoming the new (passive) swing producer. This has very important implications:
The relevant oil price to look at isn’t necessarily the spot price, but the 12-24 months future price, the time frame between capex and production.
OPEC will not only need to produce a low oil price today, that price needs to be low for a prolonged period of time in order to see cutbacks in production of American shale oil. Basically, OPEC needs the present oil price to continue indefinitely, as soon as it allows the price to rise again, shale oil capex will rebound and production will increase fairly soon afterwards.
So basically, shale is the proverbial toy duck which OPEC needs to submerge in the bathtub, but as soon as it releases the pressure, the duck will emerge again.
Declining cost curves The shale revolution caught many by surprise, especially the speed of the increase in production. While technology and learning curves are still improving, witness how production cost curves have been pushed out in the last years:
There is little reason this advancement will come to a sudden halt, even if capex is winding down. In fact, some observers are arguing that producers shift production from marginal fields to fields with better production economics, and the relatively steep production decline curves allow them to make this shift pretty rapidly.
Others point out that even the rapid decline in rig count will not have an immediate impact on production, as the proportion of horizontal wells and platforms where multiple wells are drilled from the same location are increasing, all of which is increasing output per rig.
Another shift that is going on is to re-frack existing wells, instead of new wells. The first is significantly cheaper:
Beset by falling prices, the oil industry is looking at about 50,000 existing wells in the U.S. that may be candidates for a second wave of fracking, using techniques that didn’t exist when they were first drilled. New wells can cost as much as $8 million, while re-fracking costs about $2 million, significant savings when the price of crude is hovering close to $50 a barrel, according to Halliburton Co., the world’s biggest provider of hydraulic fracturing services. [Bloomberg]
Production cuts will take time The hedging and shift to fields with better economics is only a few of the reasons why so far there has been little in the way of actual production cuts in American shale production, the overall oil market still remains close to record oversupply. The International Energy Agency (IEA) argues:
It is not unusual in a market correction for such a gap to emerge between market expectations and current trends. Such is the cyclical nature of the oil market that the full physical impact of demand and supply responses can take months, if not years, to be felt [CNBC].
In fact, the IEA also has explicit expectations for American shale oil itself:
The United States will remain the world’s top source of oil supply growth up to 2020, even after the recent collapse in prices, the International Energy Agency said, defying expectations of a more dramatic slowdown in shale growth [Yahoo].
OPEC vulnerable itself Basically, the picture we’re painting above is that American shale will be remarkably resilient. Yes, individual companies will struggle, sharp cutbacks in capex are already underway, and some companies will go under, but the basic fact is that as quick as capex and production can fall, they can rise as quickly again when the oil price recovers.
How much of OPEC can the storm of the oil price crash, very much remains to be seen. There is pain all around, which isn’t surprising as one considers that most OPEC countries have budgeted for much higher oil prices for their public finances.
(click to enlarge) You’ll notice that these prices are all significantly, sometimes dramatically, higher than what’s needed to balance their budgets. Now, many of these countries also have very generous energy subsidies on domestic oil use, supposedly to share the benefits of their resource wealth (and/or provide industry with a cost advantage).
So, there is a buffer as these subsidies can be wound down relatively painless. Some of these countries also have other buffers, like sovereign wealth funds or foreign currency reserves. And there is often no immediate reason for public budgets to be balanced.
But to suggest, as this article is doing, that OPEC is winning the war is short-sighted.
Conclusion While doing damage to individual American shale oil producers and limiting its expansion, the simple reality is that for a host of reasons discussed above, OPEC can’t beat American shale oil production unless it is willing to accept $40 oil indefinitely. While some OPEC countries might still produce profitably at these levels, the damage to all OPEC economies will be immense, so, we can’t really see this as a realistic scenario in any way.
According to LaSalle Investment Management’s new 2015 Investment Strategy Annual (ISA) report, money will continue to flow into real estate from across the capital markets worldwide, but investors should be increasingly concerned about getting caught late in the cycle and should anticipate the next cyclical downturn in a few years. ISA report states that different regions of the world will be growing at different speeds in 2015, investors need to prepare their portfolios for world where interest rates begin to rise more quickly in some parts than others. Jacques Gordon, LaSalle’s Global Head of Research and Strategy said, “Where we are in the real estate cycle is one of the most commonly asked questions of real estate investment managers and with good reason. Investors are concerned about what might happen if capital markets turn away from property. Timing strategies are difficult to apply to a relatively illiquid asset class like real estate. Nevertheless, adjusting portfolios as assets and markets move through their respective cycles can improve performance by enhancing returns and reducing risk.”ISA Investor Advice Includes:
Diversify their holdings across a number of countries that are in different stages of the capital market cycle.
Anticipate different interest rate environments by allocating to real estate assets with income streams that keep pace with rising inflation or debt costs in growing economies like the U.K or the U.S. Also, focus on high quality properties and locations in markets where growth/interest rates will stay “lower for longer”, such as Japan or Western Europe.
Invest in secular trends, rather than cyclical ones, that will be less exposed to a downturn. The ISA found that investments linked to Demographics, Technology and Urbanization (DTU) – first identified last year – are likely to be key in helping investors to identify such trends.
Continue to place a high emphasis on sustainability factors, like energy efficiency and recycling, when buying, improving and operating buildings. Tenants and the capital markets will be paying much more attention to environmental standards in the years ahead.
Gordon also noted that markets around the world are at very different stages in terms of market fundamentals and capital markets, and hence future performance. Thus, it makes sense to have an investment program that takes advantage of real estate cycles. Examples of cycle-sensitive strategies include: Harvesting gains and selling properties in frothy capital markets, taking advantage of higher levels of leasing/rental growth in growth markets, and focusing on locations/sectors that are positioned to qualify as mainstream “core” assets in a few years. Other themes for 2015 identified by the ISA include:
Money is likely to continue to flow into real estate as long as the yields on property continue to offer a premium to investment-grade bonds.
The debt markets are also embracing real estate, although lending is not yet as aggressive as it was during the peak of the credit bubble.
Taken together, this is likely to keep pushing prices up, while continuing to lower the expected future returns on real estate.
It could also lead to an escalation in new development. After many years of low levels of new construction in nearly all G-20 countries, most major markets can easily absorb moderate additions to inventory without creating an oversupply problem.
Key Trends in The United States Overall, North America is in a good position for 2015 with healthy real estate markets and economic growth. Despite global headwinds, the U.S. economy and real estate markets will improve at a faster pace over the next three years, a welcome trend after five years of below average recovery. Capital flows to real estate will remain very strong next year, with overall real estate transaction levels close to or surpassing the pre-recession peak. Both equity and debt will be plentiful, and lenders will become increasingly aggressive in deploying capital. In addition, occupancy rates will continue to improve for industrial, retail and most notably office in 2015. However, occupancy rates will be stable in the apartment sector as new supply matches demand, while rental rates in select markets such as San Francisco, New York City and Portland will outpace the national average. The Investment Strategy Annual also predicts that many firms will be willing to pay higher rents in 2015 for properties located in Central Business Districts, because these locations greatly improve the ability to recruit talented Millennials. Moreover, E-commerce will continue to take market share in the retail sector, although new fashion trends, convenience, services, and out-of-home dining will keep the best shopping centers full and able to raise rents. Urban retail will continue to outperform due to strong tenant demand and little new supply. Key Trends in Canada The Investment Strategy Annual predicts that Canada’s near-term economic growth in 2015 will trail the United States, yet remain ahead of most other G7 countries. While slower global growth could impact demand in Canada’s resources sector, improvement in the U.S. economy will benefit Canada in the form of stronger export volumes in 2015 and beyond. Private consumption is forecast to grow more slowly in 2015 given elevated housing prices and high household debt levels. Stronger business investment and government expenditures should partially offset this. Growth in the Alberta oil sands will slow in 2015 as oil prices face downward pressure and U.S. production escalates. However, traditional oil and gas drilling is re-emerging as fracking technology improves and pipeline expansion delays have been alleviated by significant growth in rail transport. Consequently, economic growth and real estate demand in cities in Western Canada will continue to outpace the nation. In addition, e-commerce adoption will continue to grow as a share of overall retail trade and drive further changes among retailers and distribution chains in Canada. Retailers with a proven, established e-commerce platform will grow at the expense of those with less efficient or no models. Key Trends in Mexico Given its close links to the U.S., Mexico’s economy should outperform many other emerging markets in 2015 and beyond. Economic growth should accelerate in 2015, led by export-oriented manufacturing. In addition, the negative effects of the 2014 tax reforms will fade out and the government will implement a more expansive fiscal policy for large infrastructure projects.
One-Sixth of U.S. Office Space Under Construction Is Here, but Need Is Waning
Construction giant Skanska AB is developing two office buildings in Houston’s “Energy Corridor.” The one that is nearly complete is mostly leased; the other building doesn’t yet have any tenants. Photo: Michael Stravato for Wall Street Journal. Article byEliot Brown
HOUSTON—The jagged skyline of this oil-rich city is poised to be the latest victim of falling crude prices.
As the energy sector boomed in recent years, developers flocked to Houston, so much so that one-sixth of all the office space under construction in the entire U.S. is in the metropolitan area of the Texas city.
But now, the need for more offices is drying up, thanks to a drop in oil prices that has spun energy companies from an outlook of optimism and growth to anxiety and cutbacks. Oil prices have fallen by more than 50% since June.
Demand for office space is “going to basically stop,” said Walter Page, director of office research at property data firm CoStar Group Inc. “It hurts a lot more when you have a lot of construction.”
By the end of 2014, construction had started on about 80 buildings with about 18 million square feet of office space in the greater Houston area, according to CoStar. Many of the buildings were planned or started when oil was above $100 a barrel. On Tuesday, oil futures traded around $50. The amount under construction is equal to Kansas City, Mo.’s entire downtown office market and is 16% of all U.S. office development under way.
The rush of building has created thousands of jobs—not only at building sites, but also at window manufacturers, concrete companies and restaurants that feed the workers.
But just as the wave of office-space supply approaches, energy companies, including Halliburton Co. , Baker Hughes Inc., Weatherford International and BP PLC, have collectively announced that more than 23,000 jobs would be cut, with many of them expected to be in Houston.
Fewer workers, of course, means less need for office space. Employers have rushed to sublease space in recent months, with 5.2 million square feet of space on the market as of last month, up about 1 million square feet from mid-2014, according to brokerage firm Savills Studley. BP, for example, is trying to sublet 240,000 square feet of space at its campus in the Westlake neighborhood, which represents about 11% of BP’s space at the campus, according to CoStar. A BP spokesman said the company is “consolidating” its footprint.
But the current building boom is Houston’s biggest since the 1980s, when an oil bust, coupled with a rash of empty skyscrapers, made Houston a national symbol of overbuilding. Then, armed with debt from a banking sector eager to lend, developers brought a tidal wave of building to Houston, in some years increasing the office stock by well over 10%. Vacancy rates shot up past 30% from single digits, property values plummeted and landlords defaulted on mortgages.
That contributed to a wave of failures for banks stuffed with commercial-property loans. More than 425 Texas institutions between 1980 and 1989 failed, including nine of the state’s 10 largest banks.
Few are predicting a shock near that scale this time. Even if oil prices stay low, the local economy is more diversified than in the 1980s with sectors such as health care and higher education comprising a larger share of the workforce. In addition, new construction represents about 6.3% all the area’s total office stock, and there is far less speculative construction done before a tenant is signed up.
“Everybody here in Houston is waiting to exhale,” said Michael Scheurich, chief executive of general contractor Arch-Con Corp., which currently is building two midsize office projects in the area. Mr. Scheurich said his company has grown to about 80 employees from fewer than 25 in 2011 amid the construction boom. Now he is hoping the local economy will have “a soft landing.”
Still, cranes abound throughout Houston, thanks to publicly traded real-estate companies, pension funds and other interests like Swedish construction giant Skanska AB, which are funding construction without as much reliance on debt as in the 1980s.
‘Everybody here in Houston is waiting to exhale.’
—Michael Scheurich, chief executive at Arch-Con Corp.
Running west from the downtown along Interstate 10, numerous midsize construction projects aimed at the “upstream” companies focused on energy extraction are being built in the so-called Energy Corridor.
Analysts say this shows how the sector is highly susceptible to booms and busts because of the long lag time between when buildings are started and when they are delivered, compounded by the tendency of developers and financiers to start projects en masse, late in cycles.
Developers are often victims of “herding and group think,” said Rachel Weber, an urban planning professor at the University of Illinois at Chicago who is writing a book about office over development in Chicago. “There is a sense that if everybody is moving in the same direction and acting the same way, that you do better to mimic that kind of behavior.”
Many of those building are bracing for a sting in the short-term. It could be even more painful if oil prices stay low.
It “is going to be a soft year—it’s hard not to see that,” said Mike Mair, an executive vice president in charge of Houston-area development for Skanska. The company is putting the finishing touches on a new 12-story tower in the Energy Corridor that is 62% leased. Construction is under way on a nearly identical building next door for which it doesn’t have any tenants.
Still, Mr. Mair said he believes in the city’s economic strength in the mid- and long-term, giving him confidence to finish work on the second tower. “I’m not afraid of ’16 and ’17,” he said.
It “is going to be a soft year—it’s hard not to see that,” said Mike Mair, an executive vice president in charge of Houston-area development for Skanska. The company is putting the finishing touches on a new 12-story tower in the Energy Corridor that is 62% leased. Construction is under way on a nearly identical building next door for which it doesn’t have any tenants.
Still, Mr. Mair said he believes in the city’s economic strength in the mid- and long-term, giving him confidence to finish work on the second tower. “I’m not afraid of ’16 and ’17,” he said.
Of course, higher vacancy rates would mean lower rents, which is good for anyone signing a lease. Rents at top-quality buildings averaged $34.51 a square foot at the end of 2014, up about 15% from early 2012, according to CoStar. But brokers say landlord incentives have grown, and rents typically follow the direction of oil prices, with a lag of one or two quarters. Still, the rents are a bargain compared with other major cities such as New York, where top-quality offices rent for an average $59 a square foot.
The city of Houston, for one, could be a beneficiary of lower rents. The government had been planning to build a new police department headquarters at an estimated cost of between $750 million and $1 billion.
Late last month, the mayor’s office said it was examining the possibility of leasing the building that Exxon Mobil is leaving, which would cost far less than the city’s original plan.
When “CBS This Morning” co-host Norah O’Donnell asked the chief executive of Zillow recently about the accuracy of the website’s automated property value estimates — known as Zestimates — she touched on one of the most sensitive perception gaps in American real estate.
Zillow is the most popular online real estate information site, with 73 million unique visitors in December. Along with active listings of properties for sale, it also provides information on houses that are not on the market. You can enter the address or general location in a database of millions of homes and probably pull up key information — square footage, lot size, number of bedrooms and baths, photos, taxes — plus a Zestimate.
Shoppers, sellers and buyers routinely quote Zestimates to realty agents — and to one another — as gauges of market value. If a house for sale has a Zestimate of $350,000, a buyer might challenge the sellers’ list price of $425,000. Or a seller might demand to know from potential listing brokers why they say a property should sell for just $595,000 when Zillow has it at $685,000.
Disparities like these are daily occurrences and, in the words of one realty agent who posted on the industry blog ActiveRain, they are “the bane of my existence.” Consumers often take Zestimates “as gospel,” said Tim Freund, an agent with Dilbeck Real Estate in Westlake Village. If either the buyer or the seller won’t budge off Zillow’s estimated value, he told me, “that will kill a deal.”
Back to the question posed by O’Donnell: Are Zestimates accurate? And if they’re off the mark, how far off? Zillow CEO Spencer Rascoff answered that they’re “a good starting point” but that nationwide Zestimates have a “median error rate” of about 8%.
Whoa. That sounds high. On a $500,000 house, that would be a $40,000 disparity — a lot of money on the table — and could create problems. But here’s something Rascoff was not asked about: Localized median error rates on Zestimates sometimes far exceed the national median, which raises the odds that sellers and buyers will have conflicts over pricing. Though it’s not prominently featured on the website, at the bottom of Zillow’s home page in small type is the word “Zestimates.” This section provides helpful background information along with valuation error rates by state and county — some of which are stunners.
For example, in New York County — Manhattan — the median valuation error rate is 19.9%. In Brooklyn, it’s 12.9%. In Somerset County, Md., the rate is an astounding 42%. In some rural counties in California, error rates range as high as 26%. In San Francisco it’s 11.6%. With a median home value of $1,000,800 in San Francisco, according to Zillow estimates as of December, a median error rate at this level translates into a price disparity of $116,093.
Some real estate agents have done their own studies of accuracy levels of Zillow in their local markets.
Last July, Robert Earl, an agent with Choice Homes Team in the Charlottesville, Va., area, examined selling prices and Zestimates of all 21 homes sold that month in the nearby community of Lake Monticello. On 17 sales Zillow overestimated values, including two houses that sold for 61% below the Zestimate.
In Carlsbad, Calif., Jeff Dowler, an agent with Solutions Real Estate, did a similar analysis on sales in two ZIP Codes. He found that Zestimates came in below the selling price 70% of the time, with disparities ranging as high as $70,000. In 25% of the sales, Zestimates were higher than the contract price. In 95% of the cases, he said, “Zestimates were wrong. That does not inspire a lot of confidence, at least not for me.” In a second ZIP Code, Dowler found that 100% of Zestimates were inaccurate and that disparities were as large as $190,000.
So what do you do now that you’ve got the scoop on Zestimate accuracy? Most important, take Rascoff’s advice: Look at them as no more than starting points in pricing discussions with the real authorities on local real estate values — experienced agents and appraisers. Zestimates are hardly gospel — often far from it.
Farmer Mac, the Fannie Mae of agriculture, trades at 1 times book and 7 times earnings despite delivering sustainable 15-20% ROEs.
Organizational improvements are finally enabling Farmer Mac to rapidly gain share; penetration remains low, so the growth runway is long.
Investors drew the wrong lesson from Fannie Mae’s failure. GSE privileges enable super profits from mundane activities. Fannie failed because it strayed from its core business.
Farmer Mac’s Birth
During the late 1980s, plunging agricultural prices threatened the solvency of the Farm Credit System (FCS), a problem congress tried to address in the usual manner. They bailed it out. Non-FCS banks weren’t happy about that since they thought the FCS’ (“unfair”) advantages were the primary cause of the boom-bust cycle that required the bailout in the first place. So congress chartered Farmer Mac (NYSE:AGM) to help level the playing field for banks by providing a secondary market for their loans.
The FCS is old and big; it was chartered by the Feds in 1916 and it supplies ~40% of US farm credit. (All you really need to know about the FCS is that its institutions have lower long-term funding costs than deposit fueled banks; and they’re supposed to restrict their lending to agricultural and certain rural development situations.) It’s hierarchically structured and cooperatively owned. Agricultural operators borrow from and own stock in its retail lenders (Farm Credit Associations, FCAs, of which there are presently ~80); FCAs borrow from and own stock in wholesale lenders (Farm Credit Banks, FCBs, 4); who borrow from and own stock in the FCS Funding Corp. which taps capital markets; these proceeds then flow down through wholesalers to retailers to farmers. The FCS Insurance Corp. which has a $10b line of credit with Treasury guarantees FCS bond issuances. The system can borrow longer and cheaper than any purely private sector entities of lesser quality than, say, ExxonMobil, which enables the usual GSE competitive edge (like Fannie Mae, (OTCQB:FNMA) at funding long-term fixed rate assets. The system is exempt from taxes on certain types of lending. For these privileges the FCS is constrained to lend to underserved rural America, which it likes to define as widely as possible (a wholesaler recently lent to Verizon Wireless!). Though wholesale FCS institutions are in some ways similar to AGM they’re not allowed the leverage necessary to be an effective maker of secondary markets; and they can’t deal with non-FCS lenders (commercial banks). (See Bert Ely’s articles on the FCS for an insightful banker side point of view.) Anyway, back to the chronology.
Ag Banks, by which I mean non-FCS commercial banks with agriculturally concentrated portfolios, always hated the FCS for their privileges. So you can imagine their displeasure with the 1987 FCS bailout.
Farmer Mac was the bone congress threw to banks to apologize for the bailout of their rival. If a bank couldn’t offer a borrower as low a long-term fixed rate as a “predatory” FCS lender, they could still originate the loan and keep the customer by selling it to AGM. The rate ought to be FCS competitive since AGM, with their $1.5b emergency Treasury line of credit, can borrow cheap and long like the other GSEs. And banks could still make maybe 0.7% risk-free for servicing the sold loan. That was the idea at least, but it’s taken some time for things to work that way.
1996 Reform Launches Farmer Mac..Sort of
AGM, which was chartered in 1987 and operationalized in 1989, had nothing to do with the ag recovery that was gaining steam in 1995. They’d executed less than $1b in securitizations (transactions where purchased loans are pooled, made into a bond, guaranteed by AGM and sold) to that point, a trivial fraction of their potential addressable market. When AGM’s charter was initially being considered experts had expected $2-3b in securitizations per year.
In 1995 having never turned a profit and with just 43%, or $12m, of their original capital remaining, AGM appealed to congress to liberalize their straitjacket of a charter. They got what they asked for in the form of the 1996 Ag Reform Act.
The first key change was the elimination of the skin in the game rule that required originators to hold loan residuals, the first 10% loss position on loans sold. That provision in practice meant sellers retained all the credit risk. So selling banks had been getting neither relief of credit risk nor required capital.
Secondly, the Act let AGM bypass loan poolers (insurers and big banks) to buy loans directly from originators. It’s unclear to me why direct purchase was ever forbidden since an extra pooling intermediary adds cost and complexity, and makes both AGM and ag banks dependent on the efforts and interests of third parties. But anyway, the 1996 Act transformed AGM. The removal of these two key restrictions let them generate the business volume necessary to immediately turn and remain profitable. Business volume and profits grew rapidly from 1996 through 2003. Though the majority of the growth, especially between 2000 and 2003, was generated by transactions between FCS lenders and Farmer Mac!
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Internal Problems Limit Farmer Mac’s Growth With non-FCS Lenders
Much of their growth in this era was produced by a product called long-term standby purchase commitments (LTSPCs) which are sold primarily to FCS associations (they generate the Guarantee fee income you see above). These “credit enhancements,” or default insurance, are promises to buy defaulted loans from a predefined eligible pool in exchange for a guarantee fee of 20-50 bps assessed based on the size and quality of the pool. They reduce a lender’s required capital and credit concentrations, but leave it with the interest rate risk. The FCS prefers them to outright loan sales because they’re simple and cheap and because the FCS is less worried about rate risk than banks are. FCS lenders like LTSPCs; banks like outright loan sales. (AGM’s LTSPCs are held off-balance sheet, but they are required to allocate capital to them.)
By 2003 the popularity of LTSPCs meant that the FCS was doing three times more business with AGM than banks; an irony and an outrage for AGM’s initial supporters!
In 2003 the Independent Community Bankers Association (ICBA) told congress that AGM wasn’t doing a good job for its constituents. You see, there are 1,500 ag banks in the US and yet in any given year between the late 1990s and 2010 only 40-80 of them transacted with AGM. Of those, the top 10 would often comprise 90% of their volume. So most years AGM truly mattered to less than 1% of US ag banks! In contrast, ~30 of the 80 FCS associations bought LTSPCs each year. This is not how Farmer Mac was supposed to operate.
The asymmetry between FCS and bank participation was caused by two things. First, ag banks tend to be smaller than FCS lenders, and AGM’s programs were too clunky and time consuming for small lenders to participate in. Second, AGM was less rigid in the loan structures they were willing to guarantee with LTSPCs than the ones they’d purchase.
All Systems Go
Flash forward. After a decade of little quantifiable progress in expanding breadth, the number of banks who sold loans to AGM in 2013 nearly tripled to 220 from 80 in 2010; eligible and approved sellers tripled too, to more than 600. Here is the path of the dollar volume of loan purchases between 2008 and 2013: $196m, $195, $382, $495, $570, $825. Most tellingly, the top ten 2013 loan sellers comprised just 53% of AGM’s record $825m in 2013 volume. Breadth of participation is exploding. Right now.
What changed?
First, whereas the ICBA said underwriting took weeks or months back in 2003, AGM now targets two days. The 2005 launch of their web-based underwriting system (AgPower LOS), and its subsequent iterative improvement, deserves much of the credit.
Second, AGM was a young company back in 2003; officially 14 years old, but really just seven. It didn’t help that the data required to model prepayment speeds and credit losses was tough to come by. The result was rigid underwriting. For example, in 2003 the vast majority of their fixed rate portfolio loans carried prepayment protection, which borrowers hate; now it’s just 2%. (AGM never cared about prepayment protection in their LTSPC book because the lender kept the loans and interest rate risk on their own book.)
Third, was their outreach. AGM formed alliances with the American Banking Association (ABA) in 2005, and ICBA in 2009 featuring, among other things, pricing discounts for members and a commitment to get in the field to educate and learn from ag banks. This doesn’t sound important, but I gather that sleepy $25m rural banks aren’t the most proactive institutions, which in some ways is a good thing when I think about Countrywide and Indymac. Anyway.
In 2010, a ripe AGM collided with an amenable macro environment, with borrowers scrambling to refinance into long-term fixed rate loans, and their volume exploded. Today 75% of new loan and LTSPC transaction volume comes from non-FCS bank lenders, which is the way it always should have and would have been if AGM’s organization weren’t so immature until recently.
The fraction of US ag banks working with AGM has tripled from 5% to 15% since 2010; and AGM’s share of existing farm debt is still well under 5%. Low and rapidly growing penetration is the sort of thing you want to get exposure to. CEO Tim Buzby told the ABA in 2013, “…if you had told me five years ago that we were going to purchase $1 billion in loans [including $400m USDA guaranteed loans] in 2012, I would have said, ‘You need to explain to me how we’re going to do that.’ Now, if you told me that we’re not going to do $2 billion annually five years from now, I’d ask you to explain to me why not.'”
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[The source for the graphics and tables are AGM’s most recent investor presentation.]
Let me summarize before I move on. AGM’s charter restricted their growth before 1996; its liberalization enabled rapid (but narrowly fueled) growth and increasing profitability through 2003. With their addressable FCS market addressed, growth then stalled due to organizational problems that hindered their ability to serve non-FCS banks, which is ironic because it’s these entities who their funding capabilities complement best. More efficient underwriting, smarter and more flexible pricing, and successful outreach programs prepared the ground that spurred re-ignition of gradual growth in 2008-2010 and explosive growth post-2010 when the macro environment turned favorable. AGM has been posting 15-20% ROEs since 2010 and looks poised to do similarly in the future, as they continue to penetrate a huge non-FCS addressable market.
GSE Business Model Fundamentals
An institution’s structure determines what it ought to do. Farmer Mac can borrow cheap and long; and it’s allowed ~3 times the leverage of an ordinary bank. Therefore they are uniquely capable of transforming low credit risk, low fixed rate assets into substantial ROEs. And since it’s easy to underwrite prime assets originated by third parties they can run the business with 1/10th the overhead of an ordinary bank, amplifying their competitiveness in their niches.
Basic ag loans and LTSPCs, the stuff I’ve talked about so far, are actually the riskiest and most profitable bucket of assets AGM is exposed to. The other half of their program volume (assets + off-balance sheet guarantees) contains virtually no credit risk. For example, 13% of assets are USDA guaranteed rural loans backed by the full faith and credit of the US government. Another 32% are general obligation bonds issued by high quality credits like Metlife, all of which are 100-111% collateralized by eligible ag loans. Last, 17% of volume is a combination of direct and AgVantage (collateralized bond) exposure to Rural Utilities loans, which are highly regulated entities that enjoy the safety of cost-plus pricing. Their charter was expanded to include this business in 2008.
Spreads are low in these other business lines, but a 0.6% match-funded spread (locked-in by matched duration debt issuance) with no credit risk, requiring little labor to underwrite, levered 25-30 times (including preferred equity; 40 times on common equity), is a highly profitable risk adjusted deal. GSE charter privileges let you earn big profits in mundane ways.
Getting back to the “Farm & Ranch Segment,” which is how AGM collectively refers to their portfolioed ag loans and off-balance sheet guarantees: I’d mentioned that these are their riskiest assets. How risky?
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Not very. Cumulative losses are 1 bp per year; that is $1 on each $10,000 of loans. Total historical losses of $31m equate to about $2.00 per share fully-taxed. AGM’s actual book value is ~$30; it’d be $32 if they’d never lost a penny since 1989. Excluding a 2006 foray into ethanol facilities, which has been aborted, historical losses are half as large, 1/2 bp per year.
Credit losses are historically immaterial. And by every metric credit is more pristine than ever. The weighted average loan-to-value ratio is presently 44% based on originally appraised real estate values; factoring in land price appreciation, the market LTV is surely below 40%. That sort of collateral with sub 0.5% delinquency rates means minimal credit risk.
GSE privileges are valuable if you don’t venture from the core business model, which is pretty simple: don’t take substantial credit risk. Ever. Fannie imploded because, in an effort to gain back lost market share and to prove their social worth, they ventured into subprime and alt-a exposures between 2004-2006. Their prime book of business did just fine during this period.
AGM is priced at 1 times their ~$30 book value; and ~7 times their ~$4-4.40 EPS run-rate. With the organization and processes (finally) in place to play an ever increasing role in non-FCS agricultural/rural lending, I think they can grow program volume and earnings by 10-15% per year; and that they can maintain ROE in a 13-20% range indefinitely, at manageable risk. Obviously the market disagrees. What is AGM worth? Play around with how book value grows over long horizons at a 15%+ ROE; and with expansion in P/Book from a starting value of 1.0 to an ending value of 2.0, or 3.0. A 15% ROE for five years and an ending P/Book of 2.0 gives us a target of $120, 300% upside.
The Bear Thesis
Its corporate governance is awkward to say the least. Us “C” class shareholders can’t vote. The A and B shares are respectively restricted to non-FCS financial institutions, and FCS ones, who each elect 5 board reps. The remaining 5 reps of the 15 member board are presidential appointees who, I’d assume, are there to make sure everyone plays nice. As AGM’s role in banking grows at the expense of the FCS board, which seems to be functioning fine presently, may become more interesting. Further, AGM and the FCS share a common regulator, the Farm Credit Agency (FCA). If you ask bankers they’ll tell you the FCA is captured by the FCS. That’s not clear to me but do your own diligence.
Secondly, though AGM’s assets appear superbly safe, their leverage means the error margin is small. For example, AGM may not have survived 2008 if not for a capital injection from a group of concerned counterparties. The problems stemmed not at all from the core business; their liquidity portfolio contained Fannie and Lehman preferred stock! They’ve since tightened their investment standards considerably, but the Fannie/Lehman writedowns were life threatening only because AGM is so levered. Relatedly, though AGM’s interest rate risk management has dealt well with the stress of the last 7 years, and their duration gap never is more than a few months, it’s hard to tell what would happen if rates spiked 3-5% quickly.
Lastly, with the sector so healthy and liquid, there’s the risk that AGM won’t be needed. Back in 2003-2004, AGM blamed its shrinking program volume on just that. But in retrospect, I think we see that the problems were internal, not macroeconomic, because today, in a similarly healthy environment, we see their program volume and breadth marking new records quarterly.
Wrapping It Up
Michael Burry allocates his attention to investments that inspire in investors a reaction of superficial disgust; “ick!”. AGM does that. People see AGM and think Fannie, Leverage, whoa what happened in 2008 and what heck is an LTSPC? (Like this Seeking Alpha contributor does here.) Sure, they’ve been delivering ~18% ROEs in recent years, but that probably just reflects the blow-up risk they’re taking.
All these impressions are wrong in a nuanced way. AGM’s leverage has proven appropriate, maybe even inadequate, relative to the volatility of their core assets. Fannie was one of the best performing stocks on earth for 15 years; and their implosion was the product of stupidly straying into credit markets they never belonged in during the biggest housing bubble ever. And AGM’s problems in 2008 reflected specific, fixable mistakes in their liquidity portfolio, not a fundamental problem with the core business.
With a broader view we see a company that is constantly, concretely, and quantifiably improving its ability to translate its unique privileges into an abnormally high and steady return on equity. And those of us prone to long term, optimistic thinking can’t help but analogize to Fannie’s millionaire making run between 1984 and 1999.
I could be wrong. But I don’t think many folks have put the time in to find out.
Economic conditions are ripe for real estate trusts with short-term leases to improve, while longer lease duration REIT types will advance at a reduced rate.
A presentation that suggests storage REITs are expensive and as such, other short-term lease property sectors are more desirable.
A review of 5 U.S. REITs set to outperform, specifically in the apartment and hotel spaces.
“Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength.”– Arnold Schwarzenegger
One of the most popular long-term holdings for income investors involves the real estate market. While single-property investments carry returns through a landlord-type management system, whether personally attained or through a management company, REITs (real estate investment trusts) offer professionally managed real estate portfolios that operate property, manage an ideal portfolio and use leverage to grow.
An investor with an after-debt market value of $1 MM in a personal real estate book could offer between one and several properties depending on market value, as well as income which investors call the “nut.” While is well known, these mom-and-pop type investors could fare much better in terms of growth and reduced risk to trade their entire real estate portfolio (save their own home) for a slice of several multi-million and billion-dollar, professionally managed REITs that pay dividends.
With the U.S. economy expanding and rates set to rise, major implications signal that the environment exists now to favor REITs with short-term leases, especially in terms of single-family and longer-term lease holdings in the real estate market.
The U.S. REIT Market Sub-Sectors
The REIT market is heavily divided into several sub-sectors, such as hotels, apartments and healthcare. While there are non-traditional categories as well, such as resource, mortgage (mREITs) and structural REITs (such as cell phone towers, golf courses, etc…), this article focuses on what is known as traditional, equity REITs (eREITs).
The following map is a guide to discovering the wonderful world of REITs.
REIT Categories Set To Outperform Today
When it comes to REIT diversification, most investors classify their REIT portfolio in a traditional sense and avoid the non-traditional areas such as resource and mREITs. Income investors who do use mREITs to boost portfolio yield would be smart to categorize them as dividend stocks, as they do not generally own real estate.
Today the U.S. economy is fascinating investors as it continues to grow in the face of global turbulence, albeit at a slower post-recessionary recovery rate than normal. While this fact has caused concern, the economic trade-off is potentially very lucrative: slower long-term growth versus higher short-term growth followed by a recession.
In times of recession, short-term leases are not generally favorable as there is a general decline in demand for real estate. Those with long-term leases in stable sectors would be preferred, as companies such as Wal-Mart Stores, Inc. (NYSE:WMT) and other stable, long-term leaseholders would continue to operate.
In times of economic improvement, short-term leases are favored as there is a general uptick in demand for real estate. More people are working in upturns, which increases the supply of those looking to spend on all sorts of goods and services, of which real estate benefits.
Where Is The U.S. Economy Headed?
In looking at the U.S. unemployment rate, the clear trend is that more workers are entering the workforce (source:BLS) and that this trend will continue into 2015 with an estimated year-end unemployment rate of 5.2-5.3% (source:FOMC).
In addition to a trend of higher U.S. employment, U.S. GDP growth is also expected to continue to trend higher in 2015. The real GDP growth of 2.4% in 2014 is expected to increase to a range of 2.6% to 3.0% according to the Fed (central tendency), while Goldman Sachs (NYSE:GS) anticipates 3.1% growth on the heels of world GDP growth of 3.4%.
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In addition to favorable U.S. macroeconomic conditions, the U.S. dollar has trended higher in terms of both the U.S. dollar index versus leading currencies as well as in terms of emerging market and commodity nation currencies.
Termed currency risk, the flight to U.S. dollars increases the value of U.S. assets in terms of other global currencies while promoting the U.S. in terms of lowered-borrowing costs and an increase in investment demand.
All of these circumstances favor the U.S. real estate market and as such, the conditions for short-term lease operators in diversified publicly traded REITs are favorable for success.
5 Short-Term Lease REITs Set To Outperform
There are a few short-term lease operator types that may do well, which includes the residential, storage and hotel categories of the traditional REIT class.
While the self-storage outlook remains bright as this property sector has a short duration and a lower economic sensitivity to the business cycle, the aggregate sector valuation is high and the accompanying yields are relatively low with modest growth prospects.
In addition to the high valuations and low yields, the top U.S. storage REITs have increased on average 26% in the past six months. The following charts include Public Storage (NYSE:PSA), Extra Space Storage Inc. (NYSE:EXR), Cube Smart (NYSE:CUBE), and Sovran Self Storage Inc. (NYSE:SSS).
These companies are all large players in the self-storage segment of the traditional, equity REIT class.
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There has been a huge run-up in the self-storage REITs over the past six months, with annualized returns of 52.89% on an equal-weighted average. When compared to the U.S. traditional equity REIT market as represented by the Vanguard REIT ETF (NYSEARCA:VNQ), self-storage has significantly outperformed.
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In looking at the average yield in the self-storage property sector versus the VNQ, self-storage is more expensive.
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With the apartment and hotel sectors, there are companies that offer above-average yields while taking advantage of the short lease-durations that should outperform in conjunction with U.S. economic growth.
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To refocus on the lease durations, hotels are able to raise prices very quickly, while apartment landlords may increase rents after a year. Also, to note, the barriers to entry are constrained in a construction/approval cycle of two years for hotels and 1 to 1.5 years for the hotel and apartment landlords, respectively. Finally, the economic sensitivity is highest here, which equates to a faster uptick in demand during economic booms.
Hotel & Apartment Landlords To Outperform
The larger REITs in any property sector are generally more expensive versus smaller peers, which equates to a lower dividend and much larger acquisitions or developments needed (relative to smaller peers) to move the growth needle.
As seen by the average annualized six-month return of the five hotel and apartment REITs selected for this portfolio versus the VNQ, there hasn’t been such a dramatic over-performance versus the traditional equity REIT index.
In terms of yield, the group here easily outperforms the VNQ as well, with an average yield of 4.89%, versus 3.35% for VNQ. This represents 46% more income for investors of this select REIT portfolio versus the VNQ.
Camden is the top under $10 billion apartment community landlord that focuses on high-growth markets in the sun-belt states.
Camden’s Diversified Portfolio As Of 11/5/14
The company recently announced a raise to their quarterly dividend by 6.1% and as such, their 5-year CAGR (compound annual growth rate) of their dividend is an impressive 9.24%.
The company also has $1 billion in development projects that are currently in construction and has $684 million in the pipeline for future development. Using the midpoint of 2015 FFO guidance of $4.46 per share and a share price of $76.99, the company has a FWD P/FFO ratio of 17.26, or a FWD FFO yield of 5.8%.
Mid-America Apartment Communities is slightly smaller than CPT with a market capitalization of $5.92 billion versus CPT’s $6.83 billion. MAA is also a takeover candidate, as the company is valued at much less than CPT (16.1x 2014 FFO versus CPT 18.3x 2014 FFO) but has a very similar and overlapping portfolio.
MAA raised their dividend 5.5% this year and over the past five years, the company has a dividend CAGR of 4.6%.
APTS is a new player to the U.S. REIT market; however, it is only valued at 9.69x 2014 FFO and is run by John Williams, the founder of Post Properties Inc. (NYSE:PPS), a $3.3 billion apartment landlord and developer.
APTS Property Map
The company recently traded at $10.05 per share, just above the 2011 IPO price of $10. Regarding the dividend, the quarterly payout was raised 9.4% in December 2014.
From their first December payout of $0.125 in 2011 to the recent December 2014 payout of $0.175 (due to short operating history), the company has a three-year dividend CAGR of 11.87%, which is higher than both CPT and MAA’s 5-year CAGR.
Chatham is a small-cap hotel operator that has shown significant growth over the past year. They have converted the dividend to monthly distributions, which is sure to appease income investors. Since going public in 2010, the dividend has increased by an average of 11.38% per year.
Chatham is an owner of the business/family segment of the hotel properties. Name brands include Residence at Marriott, Courtyard by Marriott, Homewood Suites by Hilton, Hyatt Place and Hampton Inn. While diversified, the company has a major interest in Silicon Valley, CA, home of several major U.S. technology companies.
The company just financed a secondary offering that raised ~$120 million in gross proceeds, which surely will help fuel future growth in same-store sales as well as property acquisitions.
Hospitality Properties Trust is the owner of hotels as well as travel centers throughout the U.S. They own mid-tier hotels in a similar fashion to Chatham, including similarly branded properties such as Courtyard by Marriott and Residence Inn by Marriott.
HPTProperty Map
With gas prices down and the economy up, both car travel and commercial trucking should have strong demand this year. As such, the travel center aspect of the business should do well.
The company offers a high-yield of ~6% currently, however the five-year dividend CAGR is less impressive at 1.72%. Investors should look at this company to operate in more of a bond-like fashion, with limited dividend increases and a slow increase in the value of the stock.
Conclusion
While many investors have suffered losses from the energy sector as well as many foreign holdings over the past year, one can only look forward to succeed. With the economic conditions ripe for short lease-duration U.S. REITs to advance, the potential return within this area of investment is too alluring to ignore.
When considering hotels, apartments and storage, storage looks expensive with a huge recent run-up while hotels and apartments look appealing. Rather than surrender to index investing, smart investors may choose to strengthen their portfolio with hotel and apartment REITs that are positioned today for continued growth and above-average dividend distributions.
According to RealtyTrac, the first wave of 7.3 million homeowners who lost their home to foreclosure or short sale during the foreclosure crisis are now past the seven-year window they conservatively need to repair their credit and qualify to buy a home as we begin 2015.
In addition, more waves of these potential boomerang buyers will be moving past that seven-year window over the next eight years corresponding to the eight years of above-normal foreclosure activity from 2007 to 2014.
“The housing crisis certainly hit home the fact that home ownership is not for everyone, but those burned during the crisis should not immediately throw the baby out with the bathwater when it comes to their second chance at home ownership,” said Chris Pollinger, senior vice president of sales at First Team Real Estate, covering the Southern California market which has more than 260,000 potential boomerang buyers. “Home ownership done responsibly is still one of the best disciplined wealth-building strategies, and there is much more data available for home buyers than there was five years ago to help them make an informed decision about a home purchase.”
Nearly 7.3 million potential boomerang buyers nationwide will be in a position to buy again from a credit repair perspective over the next eight years.
Markets with the most potential boomerang buyers over the next eight years among metropolitan statistical areas with a population of at least 250,000.
Markets with the highest rate of potential boomerang buyers as a percentage of total housing units over the next eight years among metro areas with at least 250,000 people.
Markets most likely to see the boomerang buyers materialize are those where there are a high percentage of housing units lost to foreclosure but where current home prices are still affordable for median income earners and where the population of Gen Xers and Baby Boomers — the two generations most likely to be boomerang buyers — have held steady or increased during the Great Recession.
There were 22 metros among those with at least 250,000 people where this trifecta of market conditions is in place, making these metros the most likely nationwide to see a large number of boomerang buyers materialize in 2015 and beyond.
The latest data from the S&P/Case-Shiller Home Price Indices found housing prices slowing down during November 2014, leading to concern of a possibly weak housing market for this year.
The 10-City Composite gained 4.2 percent year-over-year in November, but that was down from 4.4 percent in October. The 20-City Composite gained 4.3 percent year-over-year, which was down from 4.5 percent in October. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.7 percent annual gain in November 2014, slightly above the 4.6 percent level recorded one month earlier.
However, there was good news from November’s numbers: Miami and San Francisco posted annual gains of 8.6 percent and 8.9 percent, respectively, while Tampa, Atlanta, Charlotte, and Portland also saw year-over-year housing price increases.
David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, acknowledged that the housing market could be stronger.
“With the spring home buying season, and spring training, still a month or two away, the housing recovery is barely on first base,” Blitzer said. “Prospects for a home run in 2015 aren’t good. Strong price gains are limited to California, Florida, the Pacific Northwest, Denver, and Dallas. Most of the rest of the country is lagging the national index gains. Moreover, these price patterns have been in place since last spring. Existing home sales were lower in 2014 than 2013, confirming these trends.
“Difficulties facing the housing recovery include continued low inventory levels and stiff mortgage qualification standards,” Blitzer added. “Distressed sales and investor purchases for buy-to-rent declined somewhat in the fourth quarter. The best hope for housing is the rest of the economy where the news is better.”
SkyMall, the mail-order catalogue company that hawked its quirky wares to millions of bored airline passengers for 25 years, has filed for bankruptcy.
The in-flight purveyor of items you didn’t know you needed – from a glow-in-the-dark toilet seat to a serenity cat pod to baby blanket that looks like a tortilla – has gone belly up, the apparent victim of stiff competition from online retailers.
The company’s revenue plunged from $33.7 million in 2013 to $15.8 million during the first nine months of 2014, and company officials said e-commerce was largely to blame.
“With the increased use of electronic devices on planes, fewer people browsed the SkyMall in-flight catalog,” acting CEO Scott Wiley said in a statement on Friday.
The decreased readership led Delta Air Line to cancel the catalogue last year and Southwest Airlines planned to follow suit, according to the bankruptcy documents.
“We are extremely disappointed in this result and are hopeful that SkyMall and the iconic ‘SkyMall’ brand find a home to continue to operate.”
So does the Twitterverse, which erupted with sadness and nostalgia at news of the loss:
“Goodbye life-size Garden Yeti: A tribute to SkyMall, the best inflight magazine ever,” tweeted one fan.
“What the hell am I going to read on flights now? A real book?!? I think not,” tweeted another.
The global economy is producing far to much supply of most things, chasing to-little-demand from cash strapped consumers.
Prices of other industrial commodities are in steep decline.
Billions of dollars in investment capital are “risk off”.
An untold number of jobs spread across America are at risk.
Television pundits and business writers who are relentlessly pounding the table on how cheaper home heating oil and gas at the pump is going to provide a consumer windfall and ramp up economic activity have a simplistic view of how things work.
Oil-related companies in the U.S. now account for between 35 to 40 percent of all capital spending. Announcements of sharp cutbacks in capital spending and job reductions by these companies create big ripples, forcing related companies to trim their own budgets, revenue assumptions, and payrolls accordingly.
The announcements coming out of the oil patch are picking up steam and it’s not a pretty picture. Last week Schlumberger said it would eliminate 9,000 jobs, approximately 7 percent of its workforce, and trim capital spending by about $1 billion. Yesterday, Baker Hughes, the oilfield services company, announced 7,000 in job cuts, roughly 11 percent of its workforce, and expects the cuts to all come in the first quarter. Baker Hughes also announced a 20 percent reduction in capital spending. This morning, the BBC is reporting that BHP Billiton will cut 40 percent of its U.S. shale operations, reducing its number of rigs from 26 to 16 by the end of June.
When Big Oil cuts capital spending, we’re not talking about millions of dollars or even hundreds of millions of dollars; we’re talking billions. Last month, ConocoPhillips announced it had set its capital budget for 2015 at $13.5 billion, a reduction of 20 percent. Smaller players are also announcing serious cutbacks. Yesterday Bonanza Creek Energy said it would cut its capital spending by 36 to 38 percent.
Other big industrial companies in the U.S. are also impacted by the sharp slump in oil, which has shaved almost 60 percent off the price of crude in just six months. As the oil majors scale back, it reduces the need for steel pipes. U.S. Steel has announced that it will lay off approximately 750 workers at two of its pipe plants.
On January 15, the Federal Reserve Bank of Kansas City released a dire survey of what’s ahead in its “Fourth Quarter Energy Survey.” The survey found: “The future capital spending index fell sharply, from 40 to -59, as contacts expected oil prices to keep falling. Access to credit also weakened compared to the third quarter and a year ago. Credit availability was expected to tighten further in the first half of 2015.” About half of the survey respondents said they were planning to cut spending by more than 20 percent while about one quarter of respondents expect cuts of 10 to 20 percent.
The impact of all of this retrenchment is not going unnoticed by sophisticated stock investors, as reflected in the major U.S. stock indices. On days when there is a notable plunge in the price of crude, the markets are following in lockstep during intraday trading. Yes, the broader stock averages continued to set new highs during the early months of the crude oil price decline in 2014 but that was likely due to the happy talk coming out of the Fed. It is also useful to recall that the Dow Jones Industrial Average traveled from 12,000 to 13,000 between March and May 2008 before entering a plunge that would take it into the 6500 range by March 2009.
Both the Federal Open Market Committee (FOMC) and Fed Chair Janet Yellen have assessed the plunge in oil prices as not of long duration. The December 17, 2014 statement from the FOMC and Yellen in her press conference the same day, characterized the collapse in energy prices as “transitory.” The FOMC statement said: “The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”
If oil were the only industrial commodity collapsing in price, the Fed’s view might be more credible. Iron ore slumped 47 percent in 2014; copper has slumped to prices last seen during the height of the financial crisis in 2009. Other industrial commodities are also in decline.
A slowdown in both U.S. and global economic activity is also consistent with global interest rates on sovereign debt hitting historic lows as deflation takes root in a growing number of our trading partners. Despite the persistent chatter from the Fed that it plans to hike rates at some point this year, the yield on the U.S. 10-year Treasury note, a closely watched indicator of future economic activity, has been falling instead of rising. The 10-year Treasury has moved from a yield of 3 percent in January of last year to a yield of 1.79 percent this morning.
All of these indicators point to a global economy with far too much supply and too little demand from cash-strapped consumers. These are conditions completely consistent with a report out this week from Oxfam, which found the following:
“In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just 5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years.”
The oil boom that lifted home prices in Texas, Oklahoma and Louisiana is coming to an end.
Crude oil prices have crashed since June, falling by more than 54 percent to less than $50 a barrel. That swift drop has started to cripple job growth in oil country, creating a slow wave that in the years ahead may devastate what has been a thriving real estate market, according to new analysis by the real estate firm Trulia.
“Oil prices won’t tank home prices immediately,” Trulia chief economist Jed Kolko explained. “Rather, falling oil prices in the second half of 2014 might not have their biggest impact on home prices until late 2015 or in 2016.”
History shows it takes time for home prices in oil country to change course.
Kolko looked at the 100 largest housing markets where the oil industry accounted for at least 2 percent of all jobs. Asking prices in those cities rose 10.5 percent over the past year, compared with an average of 7.7 percent around the country.
Prices climbed 13.4 percent in Houston, where 5.6 percent of all jobs are in oil-related industries. The city is headquarters to energy heavyweights such as Phillips 66, Halliburton and Marathon Oil. Asking prices surged 10.2 percent in Fort Worth and 10.1 percent in Tulsa, Oklahoma. In some smaller markets, oil is overwhelmingly dominant — responsible for more than 30 percent of the jobs in Midland for instance.
The closest parallel to the Texas housing market might have occurred in the mid-1980s, when CBS was airing the prime-time soap opera “Dallas” about a family of oil tycoons.
In the first half of 1986, oil prices plunged more than 50 percent, to about $12 a barrel, according to a report by the Brookings Institution, a Washington-based think tank.
Job losses mounted in late 1986 around Houston. The loss of salaries eventually caused home prices to fall in the second half of 1987.
That led Kolko to conclude that since 1980, it takes roughly two years for changes in oil prices to hit home prices.
Of course, there is positive news for people living outside oil country, Kolko notes.
Falling oil prices lead to cheaper gasoline costs that reduce family expenses, freeing up more cash to spend.
“In the Northeast and Midwest especially, home prices tend to rise after oil prices fall,” he writes in the analysis.
Oilfield worker on a rig Active pumping rig located on Highway 385 south of Odessa, photographed Tuesday, Sept. 24, 2014. James Durbin/Reporter-Telegram. Source: MRT.com
MIDLAND — With oil prices plummeting by more than 50 percent since June, the gleeful mood of recent years has turned glum here in West Texas as the frenzy of shale oil drilling has come to a screeching halt.
Every day, oil companies are decommissioning rigs and announcing layoffs. Small firms that lease equipment have fallen behind in their payments.
In response, businesses and workers are getting ready for the worst. A Mexican restaurant has started a Sunday brunch to expand its revenues beyond dinner. A Mercedes dealer, anticipating reduced demand, is prepared to emphasize repairs and sales of used cars. And people are cutting back at home, rethinking their vacation plans and cutting the hours of their housemaids and gardeners.
Dexter Allred, the general manager of a local oil field service company, began farming alfalfa hay on the side some years ago in the event that oil prices declined and work dried up. He was taking a cue from his grandfather, Homer Alf Swinson, an oil field mechanic, who opened a coin-operated carwash in 1968 — just in case.
“We all have backup plans,” Allfred said with a laugh. “You can be sure oil will go up and down, the only question is when.”
Indeed, to residents here in the heart of the oil patch, booms and busts go with the territory.
“This is Midland and it’s just a way of life,” said David Cristiani, owner of a downtown jewelry store, who keeps a graph charting oil prices since the late 1990s on his desk to remind him that the good times do not last forever. “We are always prepared for slowdowns. We just hunker down. They wrote off the Permian Basin in 1984, but the oil will always be here.”
It is at times like these that Midland residents recall the wild swings of the 1980s, a decade that began with parties where people drank Dom Pérignon out of their cowboy boots. Rolls-Royce opened a dealership, and the local airport had trouble finding space to park all the private jets.
By the end of the decade, the Rolls-Royce dealership was shut and replaced by a tortilla factory, and three banks had failed.
There has been nothing like that kind of excess over the past five years, despite the frenzy of drilling across the Permian Basin, the granddaddy of U.S. oil fields. Set in a forsaken desert where tumbleweed drifts through long-forgotten towns, the region has undergone a renaissance in the last four years, with horizontal drilling and fracking reaching through multiple layers of shale stacked one over the other like a birthday cake.
But since the Permian Basin rig count peaked at around 570 last September, it has fallen to below 490, and local oil executives say the count will probably go down to as low as 300 by April unless prices rebound.
The last time the rig count declined as rapidly was in late 2008 and early 2009, when the price of oil fell from more than $140 to under $40 a barrel because of the financial crisis.
Unlike traditional oil wells, which cannot be turned on and off so easily, shale production can be cut back quickly, and so the field’s output should slow considerably by the end of the year.
The Dallas Federal Reserve recently estimated that the falling oil prices and other factors will reduce job growth in Texas overall from 3.6 percent in 2014 to as low as 2 percent this year, or a reduction of about 149,000 jobs created.
Midland’s recent good fortune is plain to see. The city has grown in population from 108,000 in 2010 to 140,000 today, and there has been an explosion of hotel and apartment construction. Companies like Chevron and Occidental are building new local headquarters. Real estate values have roughly doubled during the past five years, according to Mayor Jerry Morales.
The city has built a new fire station and recruited new police officers with the infusion of new tax receipts, which increased by 19 percent from 2013 to 2014 alone. A new $14 million court building is scheduled to break ground next month.
But the city has also put away $39 million in a rainy-day fund for the inevitable oil bust.
“This is just a cooling-off period,” Morales said. “We will prevail again.”
Expensive restaurants are still full and traffic around the city can be brutal. Still, everyone seems to sense that the pain is coming, and they are preparing for it.
“We are responding to survive, so that we may once again thrive when we come out the other side,” said Steven H. Pruett, president and chief executive of Elevation Resources, a Midland-based oil exploration and production company. “Six months ago there was a swagger in Midland and now that swagger is gone.”
Pruett’s company had six rigs running in early December but now has only three. It will go down to one by the end of the month, even though he must continue to pay a service company for two of the rigs because of a long-term contract.
The other day Pruett drove to a rig outside of Odessa he feels compelled to park to save cash, and he expressed concern that as many as 50 service workers could eventually lose their jobs.
But the workers themselves seemed stoic about their fortunes, if not upbeat.
“It’s always in the back of your mind — being laid off and not having the security of a regular job,” said Randy Perry, a tool-pusher who makes $115,000 a year, plus bonuses, managing the rig crews. But Perry said he always has a backup plan because layoffs are so common — even inevitable.
Since graduating from high school a decade ago, he has bought several houses in East Texas and fixed them up, doing the plumbing and electrical work himself. At age 29 with a wife and three children, he currently has three houses, and if he is let go, he says he could sell one for a profit he estimates at $50,000 to $100,000.
Just a few weeks ago, he and other employees received a note from Trent Latshaw, the head of his company, Latshaw Drilling, saying that layoffs may be necessary this year.
“The people of the older generation tell the young guys to save and invest the money you make and have cash flow just in case,” Perry said during a work break. “I feel like everything is going to be OK. This is not going to last forever.”
The most nervous people in Midland seem to be the oil executives who say busts may be inevitable, but how long they last is anybody’s guess.
Over a lavish buffet lunch recently at the Petroleum Club of Midland, the talk was woeful and full of conspiracy theories about how the Saudis were refusing to cut supplies to vanquish the surging U.S. oil industry.
“At $45 a barrel, it shuts down nearly every project,” Steve J. McCoy, Latshaw Drilling’s director of business development, told Pruett and his guests. “The Saudis understand and they are killing us.”
Pruett nodded in agreement, adding, “They are trash-talking the price of oil down.”
“Everyone has been saying ‘Happy New Year,’” Pruett continued. “Yeah, some happy new year.”
NEW YORK (Reuters) – DoubleLine Capital’s Jeffrey Gundlach said on Tuesday there is a possibility of a “true collapse” in U.S. capital expenditures and hiring if the price of oil stays at its current level.
Gundlach, who correctly predicted government bond yields would plunge in 2014, said on his annual outlook webcast that 35 percent of Standard & Poor’s capital expenditures comes from the energy sector and if oil remains around the $45-plus level or drops further, growth in capital expenditures could likely “fall to zero.”
Gundlach, the co-founder of Los Angeles-based DoubleLine, which oversees $64 billion in assets, noted that “all of the job growth in the (economic) recovery can be attributed to the shale renaissance.” He added that if low oil prices remain, the U.S. could see a wave of bankruptcies from some leveraged energy companies.
Brent crude approached a near six-year low on Tuesday as the United Arab Emirates defended OPEC’s decision not to cut output and traders wondered when a six-month price rout might end.
Brent has fallen as low as just above $45 a barrel, near a six-year low, having averaged $110 between 2011 and 2013.
Gundlach said oil prices have to stop going down so “don’t be bottom-fishing in oil” stocks and bonds. “There is no hurry here.”
Energy bonds, for example, have been beaten up and appear attractive on a risk-reward basis, but investors need to hedge them by purchasing “a lot, lot of long-term Treasuries. I’m in no hurry to do it.”
High-yield junk bonds have also been under severe selling pressure. Gundlach said his firm bought some junk in November but warned that investors need to “go slow” and pointed out “we are still underweight.”
Gundlach said U.S. stocks could outperform other countries’ equities as the economic recovery looks stronger than its counterparts, though double-digit gains cannot be repeated.
He also reiterated that it’s possible yields on the benchmark 10-year Treasury note could drop to 1 percent in 2015. The 10-year yield traded around 1.91 percent on Tuesday, little changed from late on Monday after hitting 20-month low of 1.8640 percent.
“The 10-year Treasury could join the Europeans and go to 1 percent. Why not?” Gundlach told Reuters last month. “If oil goes to $40, then the 10-year could be going to 1 percent.”
The yield on 10-year German Bunds stood at 0.47 percent on Tuesday.
This is the title of the latest webcast from DoubleLine Capital’s Jeffrey Gundlach, who just wrapped up a webcast giving his outlook for 2015.
We last heard from Gundlach in December when he held a presentation called “This Time It’s Different,” in which he talked about the oil markets, the dollar, and how the 10-year Treasury bond could get to 1%.
Among the things Gundlach believes 2015 has in store for the market is more volatility, lower Treasury yields, and a Federal Reserve rate hike, “just to see if they can do it.”
Gundlach spent a good chunk of his open talking about the effects that the decline in oil will have on jobs growth and capital investment in the US, noting that 35% of capital investment from the S&P 500 is related to the energy sector.
The bull case for the US in 2015, Gundlach said, is predicated primarily on the strength of the US labor market. Meanwhile the chart of the year so far is the US 10-year yield against other major economies, with the US clearly having space to converge towards the super-low yields seen on 10-year bonds in Japan, Germany, and Switzerland.
We’ve broken out a number of Gundlach’s slides below and added commentary taken as he spoke live on Tuesday.
Gundlach says of the title that it stands for the fifth year that he’s being these webcasts, but also has a market theme. “Most risk markets have gone into a V since about June.”
Says that the “touchdown” part of the drop in oil is that consumers get more money in their pocket. “I think that’s one of the reasons, rightly, that people view the oil decline as somewhat positive.”
Gundlach says that there is a sinister side to the oil decline, which is potential impacts on employment in the US, particularly in the energy space.
Gundlach says “all of the job growth” from the recession until today can be attributed to the shale oil boom.
“It wasn’t the US of A in 2014, but the US of Only.”
US stocks were the only really strong equity markets among major developed economies. Chinese and Indian stocks were big winners among emerging markets.
Gundlach says he’s been positive on the US dollar since 2011. This was a huge consensus trade in 2014, and Gundlach says sometimes the consensus is right.
“It looks to me like the dollar is headed higher.”
Gundlach says he knows long dollar is a crowded trade, but the fundamentals bolstering a strong dollar remain in tact.
Additionally, Gundlach thinks the Fed will raise rates with a few more months of strong payrolls gains, which will only make the dollar stronger.
Oil prices have been correlated with GDP growth 18 months forward.
And so this chart implies 3+% global growth going forward.
“On balance this should be viewed as an encouraging indicator.”
Gundlach doesn’t think, however that global growth is going to be upgraded in 2015, and like the last several years will be downgraded as the year goes along.
Gundlach says US outperformance “isn’t really a great sign.” But says US is probably the preferred place to invest against the rest of the world, however.
“It’s almost impossible for the gains from June 2014 to now to be repeated this year.”
“I’ll bet you dollars to donuts the red line goes down.”
Gundlach says that oil just can’t stop going down. Last year, Treasury yields couldn’t stop going down, and this year oil can’t seem to stop going down.
Adds that contrarianism is dagnerous in commodities and stocks, says that contrarian investing is tempting, but oil is just a dangerous trade right now.
Gundlach says that once oil broke $70, it would create acceptance that oil isn’t going back to $95, causing producers to increase production because they need the revenue, not cut production to boost prices.
Gundlach says the bond chart of the year is part of the argument about why oil at $40, weighing on inflation, could bring the 10-year below its 2012 lows.
Gundlach says that with online sales at 9% of retail sales coming online, it seems low. But consider that you can’t buy gasoline online, you don’t really buy groceries online.
“I think of all the car companies, Tesla is less of a car company than any other.”
“I’m surprised that anyone would change their car buying habits based on the six-month price of oil. Tesla isn’t so much a play on cars being sold, but on batteries being transformative in many phases of life.”
Gundlach again talking about potential for Tesla’s batteries to get homes entirely off the grid.
“Tesla has as good a chance as anybody to develop a battery that can change the world.”
Says that the stock is hugely overvalued if you just look at the auto sales.
Everyone wants to be hip, and the latest trends in design can help distinguish one home from another. And it’s not all flash; many new home fads are geared to pare maintenance and energy use and deliver information faster. Here’s a look at what’s coming.
This time of the year, we hear from just about every sector of the economy what’s expected to be popular in the coming year. Foodies with their fingers on the pulse of the restaurant industry and hot TV chefs will tell us to say goodbye to beet-and-goat cheese salad and hello roasted cauliflower, and there’s no end to the gadgets touted as the next big thing.
In real estate, however, trends typically come slowly, often well after they appear in commercial spaces and fashion. And though they may entice buyers and sellers, remind them that trends are just that—a change in direction that may captivate, go mainstream, then disappear (though some will gain momentum and remain as classics). Which way they’ll go is hard to predict, but here are 21 trends that experts expect to draw great appeal this year:
Coral shades. A blast of a new color is often the easiest change for sellers to make, offering the biggest bang for their buck. Sherwin-Williams says Coral Reef (#6606) is 2015’s color of the year because it reflects the country’s optimism about the future. “We have a brighter outlook now that we’re out of the recession. But this isn’t a bravado color; it’s more youthful, yet still sophisticated,” says Jackie Jordan, the company’s director of color marketing. She suggests using it outside or on an accent wall. Pair it with crisp white, gray, or similar saturations of lilac, green, and violet.
Open spaces go mainstream. An open floor plan may feel like old hat, but it’s becoming a wish beyond the young hipster demographic, so you’ll increasingly see this layout in traditional condo buildings and single-family suburban homes in 2015. The reason? After the kitchen became the home’s hub, the next step was to remove all walls for greater togetherness. Design experts at Nurzia Construction Corp. recommend going a step further and adding windows to better meld indoors and outdoors.
Off-the-shelf plans. Buyers who don’t want to spend time or money for a custom house have another option. House plan companies offer myriad blueprints to modify for site, code, budget, and climate conditions, says James Roche, whose Houseplans.com firm has 40,000 choices. There are lots of companies to consider, but the best bets are ones that are updating layouts for today’s wish lists—open-plan living, multiple master suites, greater energy efficiency, and smaller footprints for downsizers (in fact, Roche says, their plans’ average now is 2,300 square feet, versus 3,500 a few years ago). Many builders will accept these outsiders’ plans, though they may charge to adapt them.
Freestanding tubs. Freestanding tubs may conjure images of Victorian-era opulence, but the newest iteration from companies like Kohler shows a cool sculptural hand. One caveat: Some may find it hard to climb in and out. These tubs complement other bathroom trends: open wall niches and single wash basins, since two people rarely use the room simultaneously.
Quartzite. While granite still appeals, quartzite is becoming the new hot contender, thanks to its reputation as a natural stone that’s virtually indestructible. It also more closely resembles the most luxe classic—marble—without the drawbacks of staining easily. Quartzite is moving ahead of last year’s favorite, quartz, which is also tough but is manmade.
Porcelain floors. If you’re going to go with imitation wood, porcelain will be your 2015 go-to. It’s less expensive and wears as well as or better than the real thing, saysarchitect Stephen Alton. Porcelain can be found in traditional small tiles or long, linear planks. It’s also available in numerous colors and textures, including popular one-color combos with slight variations for a hint of differentiation. Good places to use this material are high-traffic rooms, hallways, and areas exposed to moisture.
Almost Jetson-ready. Prices have come down for technologies such as web-controlled security cameras and motion sensors for pets. Newer models are also easier to install and operate since many are powered by batteries, rather than requiring an electrician to rewire an entire house,says Bob Cooper at Zonoff, which offers a software platform that allows multiple smart devices to communicate with each other. “You no longer have to worry about different standards,” Cooper says.
Charging stations. With the size of electronic devices shrinking and the proliferation of Wi-Fi, demand for large desks and separate home office is waning. However, home owners still need a dedicated space for charging devices, and the most popular locations are a corner of a kitchen, entrance from the garage, and the mud room. In some two-story Lexington Homes plans, a niche is set aside on a landing everyone passes by daily.
Multiple master suites. Having two master bedroom suites, each with its own adjoining bathroom, makes a house work better for multiple generations. Such an arrangement allows grown children and aging parents to move in for long- or short-term stays, but the arrangement also welcomes out-of-town guests, according to Nurzia Construction. When both suites are located on the main level, you hit the jackpot.
Fireplaces and fire pits. The sight of a flame—real or faux—has universal appeal as a signal of warmth, romance, and togetherness. New versions on the market make this amenity more accessible with more compact design and fewer venting concerns. This year, be on the lookout for the latest iteration on this classic: chic, modern takes on the humble wood stove.
Wellness systems. Builders are now addressing environmental and health concerns with holistic solutions, such as heat recovery ventilation systems that filter air continuously and use little energy, says real estate developer Gregory Malin of Troon Pacific. Other new ways to improve healthfulness include lighting systems that utilize sunshine, swimming pools that eschew chlorine and salt by featuring a second adjacent pool with plants and gravel that cleanse water, and edible gardens starring ingredients such as curly blue kale.
Storage. The new buzzword is “specialized storage,” placed right where it’s needed. “Home owners want everything to have its place,” says designer Jennifer Adams. More home owners are increasingly willing to pare the dimensions of a second or third bedroom in order to gain a suitably sized walk-in closet in their master bedroom, Alton says. In a kitchen, it may mean a “super pantry”—a butler’s pantry on steroids with prep space, open storage, secondary appliances, and even a room for wrapping gifts. “It minimizes clutter in the main kitchen,” says architect Fred Wilson of Morgante-Wilson.
Grander garages. According to Troon Pacific, the new trends here include bringing the driveway’s material into the garage, temperature controls, sleek glass doors, specialized zones for home audiovisual controls, and a big sink or tub to wash pets. For home owners with deeper pockets, car lifts have gone residential so extra autos don’t have to be parked outside.
Keyless entry. Forget your key (again)? No big deal as builders start to switch to biometric fingerprint door locks with numerical algorithms entered in a database. Some systems permit home owners to track who entered and when, says Malin of Troon Pacific.
Water conservation. The concerns of drought-ravaged California are spreading nationwide. Home owners can now purchase rainwater harvesting tanks and cisterns, gray water systems, weather-controlled watering stations, permeable pavers, drought-tolerant plants, and no- or low-mow grasses.
Salon-style walls. Instead of displaying a few distinct pieces on a wall, the “salon style” trend features works from floor to ceiling and wall-to-wall. Think Parisian salon at the turn of the century. HGTV designer Taniya Nayak suggests using a common denominator for cohesiveness, such as the same mat, frame color, or subject matter. Before she hangs works, she spaces them four to five inches apart, starting at the center and at eye level and working outward, then up and down. She uses Frog Tape to test the layout since it doesn’t take paint off walls. Artist Francine Turk also installs works this way, but prefers testing the design on the floor like a big jigsaw puzzle.
Cool copper. First came pewter; then brass made a comeback. The 2015 “it” metal is copper, which can exude industrial warmth in large swaths or judiciously in a few back splash tiles, hanging fixture, or pots dangling from a rack. The appeal comes from the popularity of industrial chic, which Restoration Hardware’s iconic style has helped promote, says designer Tom Segal.
Return to human scale. During the McMansion craze, kitchens got so big they almost required skates to get around. This year we’ll see a return to a more human, comfortable scale, says Mark Cutler, chief designer of design platform nousDecor. In many living or family rooms that will mean just enough space for one conversation grouping, and in kitchens one set of appliances, fewer counter tops, and smaller islands.
Luxury 2.0. Getting the right amount of sleep can improve alertness, mood, and productivity, according to the National Sleep Foundation. With trendsetters such as Arianna Huffington touting the importance of sleep, there’s no doubt this particular health concern will go mainstream this year. And there’s no space better to indulge the desire for quality rest than in a bedroom, says designer Jennifer Adams. “Everyone is realizing the importance of comfort, quality sleep, and taking care of yourself,” she says. To help, Adams suggests stocking up on luxury bedding, a new mattress, comfortable pillows, and calming scents.
Shades of white kitchens. Despite all the variations in colors and textures for kitchen counters, backsplashes, cabinets, and flooring, the all-white kitchen still gets the brass ring. “Seven out of 10 of our kitchens have some form of white painted cabinetry,” says builder Peter Radzwillas. What’s different now is that all-white does not mean the same white, since variations add depth and visual appeal. White can go from stark white to creamy and beyond to pale blue-gray, says Radzwillas. He also notes that when cabinets are white, home owners can choose bigger, bolder hardware.
Outdoor living. Interest in spending time outdoors keeps mushrooming, and 2015 will hold a few new options for enhancing the space, including outdoor showers adjacent to pools and hot tubs along with better-equipped roof decks for urban dwellers. Also expect to see improvements in perks for pets, such as private dog runs and wash stations, says landscape architect Jean Garbarini of Damon Farber Associates.
While it’s fun to be au courant with the latest trends, it’s also wise to put what’s newest in perspective for your clients. Remind them that the ultimate decision to update should hinge on their needs and budgets, not stargazers’ tempting predictions.
Bill Gross, the former manager of the world’s largest bond fund, said the Federal Reserve won’t raise interest rates until late this year “if at all” as falling oil prices and a stronger U.S. dollar limit the central bank’s room to increase borrowing costs.
While the Fed has concluded its three rounds of asset purchases, known as quantitative easing, interest rates in almost all developed economies will remain near zero as central banks in Europe and Japan embark on similar projects, Gross said today in an outlook published on the website of Janus Capital Group Inc. (JNS:US), where he runs the $1.2 billion Janus Global Unconstrained Bond Fund.
“With the U.S. dollar strengthening and oil prices declining, it is hard to see even the Fed raising short rates until late in 2015, if at all,” he said. “With much of the benefit from loose monetary policies already priced into the markets, a more conservative investment approach may be warranted by maintaining some cash balances. Be prepared for low returns in almost all asset categories.”
Benchmark U.S. oil prices fell below $50 a barrel for the first time in more than five years today, as surging supply signaled that the global glut that drove crude into a bear market will persist. Gross, the former chief investment officer of Pacific Investment Management Co. who left that firm in September to join Janus, said in a Dec. 12 Bloomberg Surveillance interview with Tom Keene that the Fed has to take lower oil prices “into consideration” and take more of a “dovish” stance.
Yields on the 10-year U.S. Treasury note fell to 2.05 percent today, the lowest level since May 2013. Economists predict the U.S. 10-year yield will rise to 3.06 percent by end of 2015, according to a Bloomberg News survey with the most recent forecasts given the heaviest weightings.
For the second straight month, Midland showed the nation’s largest over-the-year percentage gain in employment, according to figures released last week by the Bureau of Labor Statistics.
Midland reported a 6.2 percent increase in employment during the month of November. The number of employed increased from 95,200 to 96,000. Odessa (a drilling town next door to Midland) was second in the nation with a growth rate of 4.7 percent.
Midland also bettered its position among the metropolitan statistical areas with the lowest unemployment rates. In October, Midland was tied for fifth with a 2.5 percent jobless rate. In November, with the rate dropping to 2.3 percent, Midland was ranked fourth. Lincoln, Nebraska, took home the top spot with a 2.1 percent rate. Makato, Minnesota, and Fargo, North Dakota, tied for second at 2.2 percent.
There were 14 MSAs with unemployment rates at or below 3 percent during the month of November, including Odessa at 2.8 percent. There were 34 MSAs at 3.5 percent or below.
The following are the lowest unemployment rates in the nation during the month of November, according to the Bureau of Labor Statistics:
Lincoln, Nebraska, 2.1
Mankato, Minnesota, 2.2
Fargo, North Dakota, 2.2
Midland 2.3
Bismarck, North Dakota, 2.5
Ames, Iowa, 2.5
Logan, Utah, 2.5
Iowa City, Iowa, 2.6
Rochester, Minnesota, 2.6
Grand Forks, North Dakota, 2.7
Sioux Falls, South Dakota, 2.7
Odessa 2.8
Minneapolis, St. Paul, 3.0
Omaha, Nebraska, 3.0
Lowest rates from October:
Bismarck, North Dakota, 2.0; Fargo, North Dakota, 2.2; Lincoln, Nebraska, 2.3. Also: Midland 2.5
Lowest rates from September:
Bismarck, North Dakota 2.1; Fargo, North Dakota 2.3; Midland 2.6
Lowest rates from August:
Bismarck, North Dakota 2.2, Fargo North Dakota 2.4; Midland 2.8.
Lowest rates from July:
Bismarck, North Dakota, 2.4; Sioux Falls, South Dakota, 2.7; Fargo, North Dakota, 2.8; Midland 2.9.
Lowest rates from June:
Bismarck, North Dakota, 2.6, Midland 2.9, Fargo, North Dakota, 3.0.
Lowest rates from May:
Bismarck, North Dakota, 2.2, Fargo, North Dakota, 2.5, Logan, Utah, 2.5, Midland 2.6.
Having totally and utterly failed in 2014, the consensus for 2015 is once again higher rates (well they can’t go any lower right?) with year-end 2015 expectations of 3.006% currently (having already plunged from over 3.65% in July). However, at the other end of the spectrum, DoubleLine’s Jeff Gundlach told Barron’s this weekend, the 10-yr Treasury yield may test the 2012 low of 1.38% as the Fed’s short-term rate increase is poised to trigger “surprising flattening” of the yield curve. Source:Zero Hedge
Gundlach’s forecast is ‘very’ anti-consensus…
as the curve has already flattened dramatically…
Following the 2002-06 path almost unbelievably perfectly…
Gundlach adds,
U.S. GDP growth for ’15, ’16 may not achieve 3%+ target as dollar strength hurts exporters, oil price drops cause deflationary pressure, job and spending cuts for energy industries, Gundlach said
USD appreciation will continue as growth stumbles in other parts of the world, making U.S. bonds “all the more attractive” for foreign buyers, Gundlach said
“Trouble lies ahead” for the euro zone; people in Europe “are obviously losing confidence and scared” as German yield turns negative, Gundlach told Barron’s
This story by Matt Schfrin appears in the November 24, 2014 issue of Forbes.
The master of his domain: DoubleLine founder Jeffrey Gundlach relaxes among his Warhols in Los Angeles (photo: Ethan Pines
Bill Gross’ spectacular fall from the top of the bond market has put tens of billions in play at a time when minuscule yields demand a fixed-income superstar. A brilliant, battle-scarred billionaire, Jeffrey Gundlach, stands ready to be coronated.
Bond manager Jeffrey Gundlach is wearing a white T-shirt, faded blue jeans and worn leather boat shoes as he traipses about the blooming morning glories in his perfectly landscaped backyard, perched high above a canyon overlooking the deep blue Pacific Ocean. It’s the middle of the afternoon on a work Monday in October; European bank stocks are tumbling; oil prices are down 25% since June; and against the backdrop of an anemic economy and 2.25% ten-year Treasury, the Federal Open Market Committee is about to make an important announcement. These are unsettling times in the financial markets, but for Gundlach it’s a picture-perfect autumn day in southern California, and he is living in paradise.
What’s next for the Fed? Gundlach would much rather discuss the iconic framed “Lemon Marilyn,” by Andy Warhol, above his mantel or how his “Progressions,” by minimalist Donald Judd, in the hallway is influenced by the Fibonacci sequence. “It is negative and positive space governed by a rule that happens to describe the shape of the solar system, which is exactly the opposite of what was popular in the ’50s, all this emotional stuff,” he says, pointing to his de Kooning. A few moments later he is explaining to a visitor that the geometry of the lot on which his new 13,000-square-foot, $16 million Tuscan mansion sits was designed to be in perfect harmony with the canyon cliff side it mirrors.
It is a paradise, but importantly Gundlach is finally feeling at ease because his new sanctuary is well fortified. Anyone wanting to get close to him or his prize paintings must breach the 8-foot wall surrounding his suburban residence or face the scrutiny of an armed naval vet at his front gate who asks visitors for a picture ID. Gundlach makes a point to show off one of the 50 concrete foundation caissons supporting his property. Each measures 3 feet in diameter and extends down as much as 75 feet through the porous desert soil into California bedrock.
After 30 years of staring into the black-and-green abyss of a Bloomberg terminal managing bond portfolios, Gundlach is making a statement with his magnificent new residence, one that underscores his ascendance in the business. Casa Gundlach is unlikely to succumb to the sudden mudslides known to take down other California palaces in places like Mill Valley or Malibu. And with a stellar performance record, $60 billion in assets under management and a killer contemporary art collection accumulated over the last decade, Jeffrey Gundlach has finally joined the billionaires club. More importantly, Los Angeles-based DoubleLine Capital, the house that Gundlach built in under five years, couldn’t be on better footing.
Just about a month earlier Bill Gross of Pacific Investment Management Co., the reigning master of the bond universe for two decades, requested an audience with Gundlach. In a scene that can only be described as Shakespearean, the incumbent bond king drove an hour up the 405 Freeway in the middle of the afternoon to Gundlach’s new castle to more or less grovel at his feet. Gross was certain PIMCO’s German owners were about to fire him, and he was asking his nemesis for a job–a portfolio manager position at DoubleLine. Gross said he wanted to run an “unconstrained” bond fund a small fraction of the size of the $200 billion-plus Total Return Fund he was famous for building. With the sun falling over the Pacific and shimmering on the surface of Gundlach’s infinity pool, Gross was deep in suck-up mode.
“He said to me, ‘I’m Kobe Bryant, you’re LeBron James. I’ve got five rings, you’ve got two, but you are maybe on your way to five and you’ve got time,’ ” says Gundlach, 55. (Gross, 70, refuses to comment on the meeting.) “ Bill was in his own world,” says a house-proud Gundlach, with a tone of disdain. “He doesn’t say anything [about my place]. Nothing. Doesn’t eat anything or even take a sip of water in three hours.”
Gross left the meeting with no deal in hand and ultimately jumped to Denver-based stock manager Janus Capital. From his office in Orange County’s Newport Beach, Gross now manages a $79 million mutual fund for Janus, roughly 0.03% the amount of assets he used to control.
Though a Gundlach-Gross alliance would have surely quickened the asset flight to DoubleLine from PIMCO–which has reported redemptions of $48 billion since Gross was forced to resign on Sept. 26–Gundlach claims to be relieved. “Our clients would have asked, ‘What is this? How is this going to work?’ I hear he is a difficult guy.”
Jeffrey Gundlach: A big thinker whose ambitions go beyond bonds (photo credit: Ethan Pines)
With Gross’ banishment the battle was over, but the spoils of the greatest market share shakeup in the history of the $45 trillion bond business is just getting under way. There may be as much as $100 billion in PIMCO assets in play, and DoubleLine is vying for them against larger rivals BlackRock, Dodge & Cox, Loomis Sayles and even index fund giant Vanguard. All are strong competitors, but none has lead managers like Gundlach, who combine bold market predictions with impressive long-term performance.
Gundlach’s superstar status can be viewed as both a blessing and a curse for DoubleLine. Like Gross–who has helped transform stodgy bond investing from a financial backwater to a lucrative playground for young M.B.A.s and Ph.D.s–Gundlach is well known for his arrogance, eccentricities and volatility. Institutional investors loathe the type of drama that unfolded at PIMCO–also, unfortunately, the hallmark of Gundlach’s style.
“You can’t please everybody, and I’m not gonna try,” insists Gundlach, as Pandora’s Sinatra Radio streams over his home’s sound system. “They point to our key man risk, and we say, ‘Everyone knows that it is key man reward.’ ” The lesson of Bill Gross is: Don’t put your money with a star manager who is owned by a parent company that controls him.”
The importance of being in control is something that Gundlach learned the hard way. For most of his 24-year tenure at Los Angeles’ Trust Company of the West (TCW), leading up to 2009, Gundlach was pegged as a star, a brash and brilliant money manager with a knack for calling markets. His specialty is mortgage-backed securities. The mutual fund he managed through 2009 beat 98% of all mutual funds in its category for a decade. Even more impressive was that he correctly foresaw the coming collapse of the housing market in 2007 and managed to hold on to more of his pre-crisis gains than any of his peers. In 2005, at age 46, he was made chief investment officer of mighty TCW, and by 2009 he was overseeing some $70 billion of its $110 billion in assets under management. In 2009 alone Gundlach’s annual compensation totaled no less than $40 million.
But despite his immense contribution to TCW’s success, at the end of the day Gundlach was still just a hired hand with no equity or control of his own destiny. He wanted more. He wanted to be named chief executive of TCW, but perhaps because of his abrasive style, the firm’s French owners, Société Générale and its billionaire founder, Robert Day, didn’t think he was fit for the job.
DoubleLine’s global developed credit chief Bonnie Baha and Luz Padilla (seated), who heads the firm’s emerging markets team (photo credit: Ethan Pines for Forbes)
“Look, it is clear that Jeffrey doesn’t suffer fools gladly, and he doesn’t tolerate people not thinking before opening their mouths,” says Bonnie Baha, a 19-year TCW veteran who has witnessed Gundlach’s biting tongue but is currently DoubleLine’s global developed credit chief.
Gundlach’s unhappiness prompted him to consider alternatives. He was courted by competitors, including Western Asset Management and PIMCO, which according to court documents considered him a potential successor to Gross. Then on Friday, Dec. 4, 2009, just after the market closed in New York, TCW fired Gundlach preemptively and had its outside counsel chase him out of its downtown L.A. office tower. In an effort to prevent institutional investors from taking their money and leaving with him, TCW simultaneously acquired cross-town bond manager Metropolitan West. In what former TCW employees describe as a surreal scene, Gundlach team members showed up the following Monday morning to find Met West traders sitting at their desks.
Despite promises of huge pay raises by TCW, 40 Gundlach loyalists defected, and within a month Gundlach had formed DoubleLine Capital. He found backers in Howard Marks and Bruce Karsh of Oaktree Capital Management, who had a similar acrimonious divorce from TCW 14 years earlier. (Distressed bond specialist Oaktree shares an office tower with DoubleLine and still owns 20% of the firm.) TCW had been gutted of its best fixed-income talent, and some $30 billion in assets eventually fled the firm.
But the drama was only beginning. Ugly lawsuits and counter lawsuits were filed. Gundlach was sued for more than $300 million and accused of everything from stealing hard drives to maintaining stashes of porno and pot. Distraught, Gundlach called a meeting of the 45 TCW coworkers he had lured away with a handshake promise of equity. His new firm had no assets and faced an immense potential liability, but he pledged that if the firm was forced out of business, he would find them all jobs. Gundlach counter sued for more than $500 million in fees he said he was owed.
The whole ordeal lasted two years, including a six-week jury trial in Los Angeles County Superior Court. All the while Gundlach and his bond traders persevered. The group continued to outperform, and DoubleLine assets swelled. By late 2010, barely a year after the firm opened its doors, assets reached $7 billion, hitting break-even, according to Gundlach.
Ultimately in late 2011 the jury found that Gundlach & Co. stole TCW’s trade secrets, but no damages were awarded. Instead, the jury awarded Gundlach $67 million for compensation he was owed. Before the appeals could be filed, TCW and Gundlach settled.
By then DoubleLine funds were already a screaming success and fast on the way to $50 billion in assets. Meanwhile, Morningstar’s “fund manager of the decade,” Bill Gross, was suffering from subpar returns in his mighty PIMCO Total Return fund. In 2011 he bet wrong on rates, missing the rally in Treasury bonds. That left PIMCO’s Total Return fund 87th among its competitors, returning just 4.2% to investors, compared with 9.5% for Gundlach’s flagship Total Return fund.
On Dec. 4, 2012, exactly three years from the day he had been fired from TCW, Gundlach rented a restaurant in the lobby of TCW’s headquarters to throw a lavish party. Cristal champagne was flowing, and his now wealthy employees and partners were treated to filet mignon and tuna tartare. A banner that read “DoubleLine $50 billion” was hung over the bar for all of TCW’s remaining salary men to see as they filed out of the building.
A brilliant analytical thinker who is both meticulous with his facts and mercenary in making rational decisions, Gundlach cares deeply for the loyalists who followed him to DoubleLine but rarely shows any emotion. He almost never socializes with his 125 co-workers.
A native of suburban Buffalo, N.Y., Gundlach’s DNA practically preordained him for entrepreneurial success. His paternal grandfather, Emanuel, was the son of a German minister and became a stockbroker during the roaring 1920s. Gundlach claims his grandfather foresaw the 1929 crash and banked the sizable sum of $30,000 ($400,000 in today’s dollars) ahead of the Great Depression. He then became a bathtub chemist, concocting hair tonic from the roots of witch hazel shrub. His product, Wildroot Hair Cream, became a national brand by the 1950s.
“He would give us bottles when I was a kid,” says Gundlach. “It was called greasy kid’s stuff. You know, like the Fonz.”
Gundlach’s uncle Robert was a physicist and renowned inventor, coming up with a process that allowed Rochester, N.Y.’s Haloid Photographic Co. (later known as Xerox) to make the copy machine commercially viable.
Gundlach’s father was a chemist for coatings maker Pierce & Stevens, and his mother a teacher and homemaker from a working-class family. Though the extended Gundlach clan spent summers at his grandfather’s rural upstate New York retreat, Starlit, his branch of the family never enjoyed the affluence of his famous uncle Robert, who had dozens of Xerox patents. “My uncle was very parsimonious–never wanted to spend a dime,” laments Gundlach.
Thus Gundlach was raised squarely in the middle class and to this day is uncomfortable hobnobbing with moneyed society members. Gundlach recalls that his maternal grandparents had such a distrust for the upper crust that they lobbied for his older brother Brad to go to the University of Buffalo over Princeton. (He eventually chose Tiger orange and black.) To this day Gundlach continues to brag about his “hammer swinging” eldest brother, Drew, who never went to college and remodels houses in upstate New York. Gundlach spends his Fourth of July and Thanksgiving holidays at Drew’s home.
Gundlach was a top student in high school with a near perfect score on the math SAT. Financial aid allowed him to attend Dartmouth, where he graduated summa cum laude in 1981 with a degree in math and philosophy. He considered becoming a philosophy professor, but then after studying the works of Austrian-British philosopher Ludwig Wittgenstein, he gave up. “I stopped caring about philosophy,” he says, explaining, “Wittgenstein was a mathematical philosopher, and his whole thing is that philosophy is just words that don’t mean anything. It’s like a fly that goes into a fly bottle and can’t find its way out. What is the meaning of life? It sounds like a , but it doesn’t mean anything.”
So Gundlach dived deeper into mathematics and was accepted in the doctoral program at Yale.
“My thesis was the probabilistic implications of the nonexistence of infinity,” explains Gundlach. “There is no infinity. It’s an illusion; there is absolutely nothing empirical that suggests infinity exists and nothing that operates under the assumption of infinity that has any practical implications.”
Apparently Gundlach’s thesis not only didn’t please his Yale advisor but was diametrically opposed to the work of one of the most influential mathematicians since Aristotle, Austrian logician Kurt Gödel and his Incompleteness Theorem.
So in 1985 Gundlach, who had been playing drums in bands while at Dartmouth and Yale, donned a spiky bleached-blond haircut and moved to Los Angeles to become an alternative rock star. A series of bands he played in, including one called Radical Flat, had limited success, and Gundlach was forced to hold down a day job in the actuarial department of Transamerica. He decided to apply for a job in the investment business after he watched a Lifestyles of the Rich and Famous episode lauding the profession as the highest paying.
A blind solicitation letter ultimately landed Gundlach in the fixed-income department of the Trust Company of the West. He devoured the math-heavy bond market primer Inside the Yield Book the week before starting, learned trading on the job and eventually came to be the most powerful mortgage-backed securities money manager in the company.
It’s late October, and Gundlach is delivering the keynote speech at ETF.com’s Inside Fixed Income conference in Newport Beach, Calif. before an audience of 175 investment professionals and advisors. It’s about a month after the Bill Gross resignation bombshell shook the bond market, so attendance is higher than expected and the audience hangs on his every word.
“People like my macro stuff,” he muses. “There is very little patience for long wonky bond presentations, but people are interested in different ways of interpreting the forces behind macroeconomic events and geopolitics.”
His 56-slide PowerPoint presentation is entitled This Time It’s Different–directly thumbing his nose at legendary investor Sir John Templeton’s famous warning that those are the four most dangerous words in investing.
But Gundlach means it. His first slide is a quote from Greek philosopher Heraclitus: “No man ever steps in the same river twice, for it’s not the same river, and he’s not the same man.”
Gundlach is referring to the bizarre current market environment and insists that analysts studying the economic and monetary policy axioms of the past are making a serious mistake.
“In the past the feds would raise rates to be preemptive against inflation. There is no inflation today, and you see finance ministers saying that one of the dark clouds hanging over the global economy is that inflation is not accelerating,” he says. “So raising interest rates against that mentality is very different, and taking an average of the past rate-raising cycles is not going to give you a good road map as to where things go this time around.”
Here is the new bond king’s view of the world today:
The Fed may raise the federal funds rate for the wrong reasons.
“They don’t really need the rates to be higher, but they seem to want to reload the gun so they aren’t stuck at zero without any tools.”
Deflationary forces will accelerate if the Fed raises rates.
“With a tightening, the dollar is going to not just be strong, but it will run up like a scalded dog. If that happens, then commodity prices are going down, we will import deflation and you will see an episode of deflationary scare.”
The long end of the Treasury curve will stay put and possibly go down further.
“There’s a 30% chance that importing deflation creates a panic into Treasurys creating a ‘melt-up,’ moving rates to German Bund levels today of around 1%.
It’s not okay to own risk assets when the Fed starts hiking rates.
“What is fascinating is, if you sell junk bonds and buy Treasurys, the minute the Fed hikes the first time, going back to 1980, in every case you did well.”
Don’t be surprised to see the yield curve flatten and possibly invert.
“Long rates have done nothing but fall. That tells me the market is saying to the Fed, ‘Go ahead, make my day.’ The curve is going to invert when and if fed funds hit 2.5 to 3%.”
Be long the dollar, especially in emerging market bonds.
“We have been all dollar [denominated in our foreign bond holdings] since 2011. For a while it didn’t really matter, but now it matters a lot. If you are nondollar you are really in trouble.”
Stay away from home builders, TIPs and mortgage REITs, and oil will fall further.
“I am convinced the Saudis want the price of a barrel of oil to go to $70. They don’t care if they run a short-term deficit if it slows down U.S. fracking and turns the screws on countries in their region that mean them harm.”
As we get closer to 2020 interest rates and inflation (and taxes) could really start rising.
“We are in the calm right now before the hurricane. I’m talking about the aging of the great powers, which is undeniable and can’t be quickly reversed. The retiree-to-worker ratios, the size of labor forces globally. China will have no one in the labor force. Italy’s losing 39% of labor force in the next generation and a half. Japan has an implosion of working population and no immigration. Russia is facing one of the greatest demographic crisis in the history of the world, absent famine, war and disease. It’s pretty bad. Italy has no hope,” says Gundlach matter-of-factly.
“The Federal Reserve bought the bonds from the deficits of 2011, 2012 and 2013, and those will roll off increasingly over time. Come 2020 you are not just financing massive entitlements like Social Security and Medicare but also old debt. No one talks about that. It’s a big deal. China doesn’t have the demographics to buy that debt. Who’s going to buy it?”
The coming debt storm–which Gundlach says is too early to worry about tactically–will hit financial markets just as DoubleLine approaches its tenth anniversary in business.
Giant pension funds and endowments are typically plodding in the redeployment of assets because it often requires coordinating board meetings, soliciting bids from new firms, listening to presentations and gathering votes. But with tens of billions likely to shift out of PIMCO over the next few months, DoubleLine is buzzing with activity. The task at hand is proving to existing clients and to new ones that the drama days are over and DoubleLine is all grown up.
“I don’t think the controversies surrounding his TCW days are really relevant anymore in the analysis of DoubleLine,” says Michael Rosen, the chief investment officer at Angeles Investment Advisors, whose firm advises on $47 billion in pension and endowment money and who had resisted recommending DoubleLine to clients in the past. “That is ancient history at this point.”
Perhaps because of Gundlach and DoubleLine’s toxic inception the majority of its $60 billion in assets is held by individuals in the firm’s mutual funds, predominantly his mortgage-heavy DoubleLine Total Return Bond Fund, which has $38 billion under management and is up 8.93% annually since inception in 2010, and DoubleLine Core Fixed Income Fund, which is up 7.19% annually since inception. DoubleLine also has $4.5 billion in its Opportunistic Income, a hedge fund strategy, which uses leverage and deploys an amalgam of its manager’s best ideas.
So far Gundlach reports that it has gulped down $4 billion in new assets since Gross’ departure. However, competitors like BlackRock, Loomis Sayles and Vanguard are also seeing big inflows.
Somewhat unique to DoubleLine among big competitors is that it has no interest in the low-fee bond index fund money that BlackRock and Vanguard specialize in. He also insists he will close his funds to new investors before they get too large. “Our so-called flagship strategy Total Return will never go to $100 billion unless the bond market grows ten times in size,” he says. “We are not ambulance chasers.” Still Gundlach is clearly drooling at the prospect of feasting on PIMCO’s remains, because he doesn’t hesitate to gun at his competition.
What does he say about the reorganization of Bill Gross’ famous Total Return Fund? “Who’s managing it?” says Gundlach. “I don’t buy for a second that they will all work together and with no conflict. ”
Of PIMCO’s newly named Chief Investment Officer Daniel Ivascyn: “ He is their hottest performer in recent times. I hear he is reasonably good at explaining things, the fact that he read from a teleprompter and couldn’t answer any of the real questions notwithstanding. I’m sure he’s articulate.”
Gundlach even feels the need to neutralize two seemingly nonexistent threats, Bill Gross and Mohamed El-Erian, the former PIMCO co-chief investment officer executive, who remains on the payroll of PIMCO parent Allianz.
“People are too harsh on Gross’ performance. It’s not bad, it’s just average,” he says. “This past year it’s been bad, but for 5 years it’s been average.”
As for El-Erian, “Mohamed’s track record is hard to find, and when you find it, it’s bad.”
Gundlach protege, Jeffrey Sherman: Gumdlach says he is the rare quant manager with the “special sauce.” (photo credit: Ethan Pines for Forbes)
Meanwhile DoubleLine is bending over backward to show off the breadth and depth of its bench as Gundlach’s top portfolio managers make the rounds with salesmen. Key in this pursuit are veteran emerging markets manager Luz Padilla, global developed credit manager Bonnie Baha, mortgage-backed manager Vitaliy Liberman and a young portfolio manager named Jeffrey Sherman.
Sherman, 37, rides shotgun to Gundlach at DoubleLine’s monthly fixed-income asset allocation meeting, attended by all key portfolio managers. Gundlach sits at the head of the table, but Sherman organizes large parts of the 70-plus slides Gundlach presents at these important meetings covering macro themes and sector allocations for the firm’s multi-asset strategies. Sherman is emerging as the front-runner to eventually succeed Gundlach.
With his shoulder-length brown hair parted in the middle and his hipster beard, Sherman gives off a laid-back California surfer vibe, yet he impresses visitors with his ability to demystify complicated economic concepts as well as articulate big-picture strategies.
“What we are trying to do in these asset allocation programs is look at the entire portfolio. We are not allocating to each sector and asking each manager to outperform each month, we are thinking about how the whole portfolio works,” says Sherman, mentioning that government bond chief Gregory Whiteley, for example, is currently being asked to underweight his sector and hold long-duration bonds. “We are paid not on assets that each one of us is managing but on the collective success of the firm. That is very deeply entrenched in our process and very different from other firms.”
Like Gundlach, Sherman has humble roots. Neither of his parents attended college: His father worked in the oilfields of Bakersfield, Calif., and his mother is a bookkeeper. Also like Gundlach, a scholarship helped pay for his applied mathematics degree at University of the Pacific, where he also taught statistics. Upon graduating in 1999, Sherman saw the wave of quants heading to Wall Street and wound up pursuing an M.S. in financial engineering from Claremont Graduate University. A summer internship led him to the risk analytics department of TCW, and ultimately he defected to DoubleLine.
“Sherman is extremely analytic, which I am always attracted to,” says Gundlach. “But he also understands psychology. There are a lot of people who are quants, and they think you can explain the world with an econometric model. You just get the coefficients right and you can explain everything about the future. Sherman understands all of the coefficients and can derive all the equations just like I used to do, but he understands that it won’t predict where the market is going to be in a month. He is also good at explaining, which, of course, is the secret sauce of this business.”
In addition to Sherman’s key role in DoubleLine’s multi-asset strategies, Gundlach has put him in charge of new product development. This is critical to long-term growth because DoubleLine is still largely perceived as a mortgage bond specialist.
Besides two new NYSE-listed closed-end funds, DoubleLine has developed a commodities strategy, gathered $164 million in an enhanced S&P 500 stock index fund created in partnership with Nobel laureate Robert Shiller and started a small-cap stock fund. It’s also developing an infrastructure loan fund and a commercial-mortgage-backed-securities fund.
“I am really interested in doing distressed funds when the credit cycle turns, but you have to wait,” says Gundlach in anticipation of the debt woes on the horizon. “That’s one reason why we have been expanding our capabilities in bank loans, high yield, emerging markets debt and CMBS.”
Original backer Oaktree Capital, which has never wavered in its Gundlach bet, has already taken out more than $90 million in distributions on its original $20 million investment ( Oaktree also invested $20 million in DoubleLine’s hedge fund) through September 2014, and its 20% stake is estimated to be worth close to $400 million. Says Howard Marks, Oaktree chairman: “Jeffrey thinks beyond being a bond manager, and I don’t know if you noticed, he is a pretty confident guy.”
Gundlach is so self-assured that he has even taken to painting in the style of the masters in his art collection. Piet Mondrian–the inspiration for DoubleLine’s red, blue and black logo–is his favorite. Says Gundlach, “I knocked [Mondrian] off. Very hard to do. Surprisingly hard. Hard to make the lines crisp. Mine are more crisp than his, but that’s because I used tape.” Gundlach pauses, reflecting on his work. “It’s an interesting thing: There is this moment when you are not sure if you are done or not.”
Oil consumption remains strong and is likely to increase thanks to cheaper prices.
Historically oil rebounds quite quickly, especially when the U.S. and global economy are growing.
Investors are overly negative on oil ever since the OPEC meeting, but production cuts could still be on the way.
Ever since the November 27th OPEC meeting the price of oil has plunged by about 20% and many stocks are off by much, much more. The doomsayers and shorts are out in force now, emboldened by the weakness in this sector. There is a tremendous amount of negative sentiment towards oil now. But this extreme level of negativity appears to be very overdone. It also seems to be based on psychology, forced margin call selling, panic selling and tax-loss selling. With all these factors, it’s been a perfect storm that has brought some small-cap oil stocks back to levels not seen since the depths of the financial crisis. Back in 2009, oil plunged to the $40 range, but the U.S. and the global economy were in free fall and oil consumption was also falling. The factors that drove oil to collapse in 2009 like bank failures, financial system imploding, home prices collapsing, massive layoffs, and other negatives that just do not exist today. That is why it does not make sense to be expecting oil to plunge back towards the lows seen in 2009. Furthermore, it is really important to realize that even when oil plunged in 2009, it rebounded very, very quickly (in spite of all the doomsayers back then). That is another big factor to consider because since the global economy is significantly stronger now, it could rebound sooner than most investors realize. Here are a few more reasons why this is a buying opportunity as oil is not likely to go down much more and why it is not likely to stay down for very long:
Reason #1: Energy company insiders are calling the recent plunge in stocks a “fire sale” and they are buying at a pace that has not been seen in years. Oil industry insiders have seen the ups and downs in oil prices and have experienced market pullbacks before. If oil company insiders are buying en masse now, there is a good chance that they see bargains and a strong future for oil. This supports the idea that there is a disconnect between the current market price of many oil stocks and the longer-term fundamentals of this industry. Citigroup (NYSE:C) recently made a strong case that indicates there is a disconnect between asset prices in the oil industry and the fundamentals. A Bloomberg article details some of the recent insider activity, it states:
“This is an absolute fire sale,” he said. “It’s an overreaction and the result is it’s oversold.” With valuations at a decade low, oil executives such as Rochford and Chesapeake Energy Corp.’s (NYSE:CHK) Archie Dunham are driving the biggest wave of insider buying since 2012, data compiled by the Washington Service and Bloomberg show. They’re snapping up stocks after more than $300 billion was erased from share values as crude slipped below $70 for the first time since 2010.”
Reason #2: Just because OPEC did not act at the November 27th meeting, it does not mean they won’t act. OPEC is scheduled to meet again in 2015, but there is always the possibility for an emergency meeting at any time. Even a statement from OPEC discussing the willingness to cut production or to address “cheating” by some members who are producing more than their quota allows could cause a significant short-covering rebound in the oil sector. A CNBC article points out that some industry watchers believe OPEC could act soon with an extraordinary or “emergency” meeting, it states:
“We see the possibility they call an extraordinary meeting sometime next year,” said Dominic Haywood, crude and products analyst with Energy Aspects. “We think they’re going to address countries not living within their quota.” OPEC has a quota of 30 million barrels a day, but it has been producing more.
On December 2, a Saudi Prince stated that his country would cut production if other countries would also participate. This seems the first “olive branch” since the OPEC meeting and it appears to be in response to the slide in oil since that meeting took place.
Reason #3: The perceived “glut” of oil is much smaller than most people realize. Furthermore, that excess supply could be taken out rather rapidly because cheaper oil is likely to lead to more demand and consumption. Toyota (NYSE:TM) just reported that sales of its 4Runner sport utility vehicle just jumped by 53% in November and sales of the Prius fell by 14% in the same period. This is just one example of how quickly demand for oil can rise and if you multiply even slight increases in global oil consumption because of much lower prices the numbers get quite large. Urban Carmel (a former McKinsey consultant and President of UBS Securities in Asia) believes that oil is going back to $80 per barrel and a recent article he wrote explains why the perceived glut is not going to last long, he states:
“Excess oil supply (over demand) is presently about 1 mbd. That would be a problem for oil prices except for one thing: existing fields lose about 6% of their production capacity each year, equal to about 5.5 mbd. That means that even if demand is flat, at least 4.5 mbd in new production is needed. Opec has spare capacity of only about 3 mbd. The remainder must come from new investment. New deep water and oil sand projects have a breakeven cost of about $80-90. There will be little incentive to make these investments unless the price of oil is at least $80. If the price stays lower than $80, supply will be insufficient for demand. It’s exactly under those circumstances that spikes higher in oil prices have occurred in the past.”
Reason #4: Oil can be very volatile, but it historically rebounds very quickly because it is used in very large quantities every day. The chart below shows that oil has reached a level that is giving investors a buy signal. Also, it is worth noting that prior oil price slides typically lasted about 20 weeks and the current slide is on week 25 which is another sign a rebound is way overdue. Oil and most oil stocks are extremely oversold now and that means a powerful relief and short covering rally could be coming soon. Some “smart money” investors are recognizing the buying opportunity at hand. Hedge funds are starting to position for a rebound in oil as there is a growing belief that the oil slide has run its course and is now due for a rally.
Oil is already down by about 40%, and the global economy is not in a current state that would support drastically lower prices as some are predicting. It is worth noting that most analysts and economists have a terrible track record when it comes to forecasting oil prices. If you had told anyone that oil was going to surge to over $100 within a couple years of the financial crisis you would have been ridiculed. I believe that the inaction at the OPEC meeting triggered margin call selling, and as we know, selling begets selling especially at this time of year when tax-loss selling fuels even more downside pressure. Some investors are making too much of the oil price decline by trying to connect the dots which should not be connected. I don’t believe that oil’s decline is a major sign of global economic weakness, I believe it is partially because supplies are temporarily a bit higher than needed, the dollar has been strong, and because too many speculators held futures contracts that were suddenly liquidated after the OPEC meeting sparked a sell-off. This has created bargains, especially in small-cap oil stocks. I have been primarily focusing my buying on companies that have no direct exposure to the price of oil and significant contract backlogs. This has led me to buy stocks like McDermott International (NYSE:MDR) which is now incredibly cheap at less than $3 per share. This company is an engineering and construction firm that specializes in the energy industry. It has a $4 billion contract backlog and it has about $900 million in cash and (incredibly) a market cap of just $584 million. That means that this company could buy all the outstanding shares and still have over $300 million left in cash on the balance sheet. McDermott shares are also trading for less than half of the stated book value which is $6.30 per share. On November 14, David Trice (a director) bought 20,000 shares at $4.16, which was about $83,000 worth of stock. But, due to immensely negative sentiment in the oil sector, panic selling, margin call selling, and tax-loss selling, this stock is down by about 40% just from when this insider bought, even though this company has no direct exposure to oil prices and enough business (with the $4 billion+ contract backlog) to keep it busy for the next two years. It also does projects for the natural gas industry and investors seem to have overlooked that natural gas prices have remained solid.
I also see opportunity in Willbros Group (NYSE:WG) which trades for just over $4 now (down from a high of about $13 this year). It specializes in pipeline projects for the energy industry which includes oil and gas, petrochemicals, refining as well as electric power. This stock took a hit several weeks ago when the company announced it would restate earnings due to a charge on a pipeline project that was estimated to reverse about $8 million in previously reported pre-tax income. This caused the company to be delayed in filing the latest financial report and the market overreacted by knocking off about $160 million in market cap in just a few days after the restatement issue was announced. Willbros Group has a strong balance sheet and a $1.7 billion backlog which absolutely dwarfs the restatement numbers and the market cap of just about $215 million. It also recently announced plans for an asset sale that is estimated to generate up to $125 million. For more details, read my recent article on Willbros Group.
I expect that small cap stocks like McDermott and Willbros will rebound as tax-loss selling should fade by December 19th which is the Friday before the holiday season. This causes most traders and investors to have completed their tax planning issues before taking off for the holidays and that often leads to a significant “Santa Claus” and “January Effect” rally in beaten-down small caps.
Keep An Eye On Futures
Oil Futures Structure Seen as Encouraging Traders to Store Crude.
Brent oil in a contango will encourage traders to take delivery of crude and wait for higher prices, according to U.S. economist Dennis Gartman.
Brent for February delivery is $6.10 a barrel cheaper than the February 2016 contract. February Oman oil traded on the Dubai Mercantile Exchange is $8.30 cheaper than the year later contract after being $6 more expensive about six months ago.
“Not enough people pay attention to the importance of term structure,” Dennis Gartman, author of the Suffolk, Virginia-based Gartman Letter, said yesterday in a phone interview. “The market is saying it will pay traders to go into storage.”
Gartman said contango arbitrage is easier to trade on the broader benchmarks than the Oman contract because banks prefer to provide financing for markets that are more heavily traded. Investors can earn a “nearly riskless return” of 8 percent by selling crude futures and storing oil at current prices, Gartman said.
The cost of warehousing and lending has hindered popularity of the trade, Gartman said. Shipbroker Charles R. Weber said this month that oil tanker rates are too high to spur floating storage. There are 28.8 million barrels of oil being stored at Cushing, Oklahoma, about three million barrels above the 2014 average.
The United States is now the world’s largest and fastest-growing producer of hydrocarbons. It has surpassed Saudi Arabia in combined oil and natural gas liquids output and has now surpassed Russia, formerly the top producer, in natural gas. [ZH: that’s about to change]
The increased production of domestic hydrocarbons not only employs people directly but also radically reduces the drag on growth and job formation associated with America’s trade deficit.
As the White House Council of Economic Advisers noted this past summer: “Every barrel of oil or cubic foot of gas that we produce at home instead of importing abroad means more jobs, faster growth, and a lower trade deficit.” [the focus now is not on the oil produced at home, which is set to plunge, but the consumer “tax cut” from plunging oil prices]
Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.
All told, about 10 million Americans are employed directly and indirectly in a broad range of businesses associated with hydrocarbons.
There are 16 states with more than 150,000 people employed in hydrocarbon-related activities. Even New York, which continues to ban the production of shale oil & gas, is seeing job benefits in a range of support and service industries associated with shale development in adjacent Pennsylvania.
Direct employment in the oil & gas industry had been declining for 30 years but has recently reversed course, with the availability of new technologies to develop shale fields. Nearly 300,000 direct oil & gas jobs have been created following the 2003 nadir in that sector’s direct employment.
The five super-major oil companies—Exxon, BP, Chevron, Shell, Conoco—that operate in the U.S. account for only 10 percent of Americans working directly in the oil & gas business.
Meanwhile, more than 20,000 other firms are directly involved in the oil & gas industry, and they produce over 75 percent of America’s oil & gas output. The median independent oil & gas firm has fewer than 15 employees. (Note that these data exclude gasoline stations, which employ nearly 1 million people and are overwhelmingly owned by individuals or small businesses.)
As in the oil & gas industry, most Americans are employed by firms with fewer than 500 employees. Small businesses not only employ half of all American workers but also generate nearly half the nation’s economic output. Young firms tend to be small firms; and young firms tend to emerge disproportionately in areas of rapid growth or new opportunities—such as in and around America’s shale fields.
A broad array of small and midsize oil & gas companies are propelling record economic and jobs gains—not just in the oil fields but across the economy. The enormous expansion in employment, exports, and tax revenues from the domestic oil & gas revolution is largely attributable to a core and defining feature of America: small businesses.
The oil & gas sector boom creates “induced” and energy-related jobs. For every direct job, there are, on average, three jobs created in industries such as housing, retail, education, health care, food services, manufacturing, and construction.
In the 10 states at the epicenter of oil & gas growth, overall statewide employment gains have greatly outpaced the national average. There we see the ripple-out effect on overall (not just oil & gas) employment. The shale boom’s broad jobs benefits are most visible in North Dakota and Texas, of course, where overall state employment growth in all sectors has vastly outpaced U.S. job recovery. Similarly, in the other states that have experienced recent growth in hydrocarbon production—notably, Pennsylvania, Colorado, Louisiana, Oklahoma, Wyoming—statewide overall (again, not just oil & gas) employment growth has also outpaced the U.S. recovery.
In addition to the direct and induced jobs, America is beginning to see the economic and jobs impact of a renaissance in energy-intensive parts of the manufacturing sector, from plastics and chemicals to fertilizers. Examples include an Egyptian firm planning a $1 billion fertilizer plant in Iowa and a South Korean tire company with an $800 million plan for a Tennessee plant. Germany’s BASF recently announced expansion of its American investments, including production and research. BASF calculated that its German operations’ energy bill would be $700 million a year lower if it could pay American prices for energy
The Marcellus shale fields in Pennsylvania were responsible for enabling statewide double-digit job growth in 2010 and 2011 and now account for more than one-fifth of that state’s manufacturing jobs. For every $1 that the Marcellus industry spends in the state, $1.90 of total economic output is generated.
The typical wage effect of the oil & gas revolution is most clearly visible in Texas. In the 23 counties atop the Eagle Ford shale, average wages for all citizens have grown by 14.6 percent annually since 2005, compared with the 6.8 and 6.3 percent average for Texas and the U.S., respectively, over the same period. The top five counties in the Eagle Ford shale have experienced an average 63 percent annual rate of wage growth. These are the kinds of wage effects sought in every state and by every worker.
Given the persistent, slow job recovery from the Great Recession, there could not be a more important time in modern history to find ways to foster more small businesses of all kinds, given that they are not only the core engine for growth but also frequently grow rapidly.
Punchline #1:
The $300–$400 billion overall annual economic gain from the oil & gas boom has been greater than the average annual GDP growth of $200–$300 billion in recent years—in other words, the economy would have continued in recession if it were not for the unplanned expansion of the oil & gas sector.
Punchline #2:
Hydrocarbon jobs have provided a greater single boost to the U.S. economy than any other sector, without requiring any special taxpayer subsidies—instead generating tax receipts from individual incomes and business growth.
And the final punchline:
The National Association of Manufacturers estimated that the shale revolution will lead to 1 million manufacturing jobs over the coming decade. Manufacturing jobs pay nearly 30 percent more than the industrial average and generate $1.48 of economic activity for every $1 spent, making manufacturing the highest economic multiplier of all industrial sectors.
Sorry, not anymore.
Now, thanks to John Kerry’s “secret pact“, and America’s close “ally” in the middle-east, Saudi Arabia whose “mission” it no longer to bankrupt Russia but to crush America’s shale industry, the only question surround the only bright spot for America’s economy over the past 6 years is how long before most of the marginal producers file Chapter 11, or 7.
The American Revolution and its ultimate victory was hinged on a pivotal time in history, Christmas 1776, and it was all due to George Washington…
This Christmas, remember this lesson from history when Patriot George Washington gave the greatest Christmas present to the United States. The gift of hope. The gift of victory. The gift of America.
The Continental Army and the American Revolution was all but over in December 1776 and on the American side, despair and hopelessness were the order of the day.. The United States of America was finished.
It appeared that New York and New Jersey would be firmly back under King George’s “protection” within just a few months. They had already humiliated the Continentals out of New York, inflicting heavy damage on Washington’s army. The Continental Army was disintegrating. Unpaid, ill-equipped, cold, and hungry, soldiers in the Continental Army were deserting or walking away as soon as their enlistments expired.
There was no reason for the British to mess up their Christmas in 1776. Everything was going their way.
In those days, it was customary that armies rest and refit in the winter months in preparation for the campaign seasons of spring and summer. And the British were all about custom and tradition.
The situation was worse than grim for the Americans and the cause was all but over. Except for one man, that is – a man who refused to give up. George Washington.
In spite of countless setbacks and up against incredible odds, Washington never threw in the towel. He never gave up.
In a display of desperation and determination, on Christmas night 1776, General George Washington led the rag-tag Continental Army across the Delaware River to attack the outpost at Trenton, New Jersey.
Washington’s army commenced its crossing of the half-frozen river at three locations. The 2,400 soldiers led by Washington successfully braved the icy and freezing river and reached the New Jersey side of the Delaware just before dawn.
Washington’s force, separated into two columns, and reached the outskirts of Trenton. Trenton’s 1,400 defenders were groggy from the previous evening’s festivities and underestimated the Patriot threat after months of decisive British victories throughout New York. Washington’s men quickly overwhelmed their defenses, and surrounded the town. Several hundred escaped, and nearly 1,000 were captured at the cost of only four American lives.
It was a brilliant victory for George Washington – and a tremendous morale boost for the Americans. Within a few days, Washington followed up his victory with another at Princeton, and then quartered his troops at Morristown. The British were forced to redeploy in a way that gave up most of New Jersey and limited their reach in New York. It was a masterful campaign that stabilized the American Revolution and made victory possible.
The lesson learned… Unconventional warfare, thinking outside the box, and a surprise attack when the enemy was most vulnerable – all made the difference in the ultimate victory. One battle, although itself not extremely significant, made all the difference for the eventual outcome. It boosted moral. It gave hope to those on the fence… You see, one person can make a difference. It could even be you…
The American Petroleum Institute said last week the U.S. oil and natural gas sector was an engine driving job growth. Eight percent of the U.S. economy is supported by the energy sector, the industry’s lobbying group said, up from the 7.7 percent recorded the last time the API examined the issue. The employment assessment came as the Energy Department said oil and gas production continued to make gains across the board. With the right energy policies in place, API said the economy could grow even more. But with oil and gas production already at record levels, the narrative over the jobs prospects may be failing on its own accord…. The API’s report said each of the direct jobs in the oil and natural gas industry translated to 2.8 jobs in other sectors of the U.S. economy. That in turn translates to a total impact on U.S. gross domestic product of $1.2 trillion, the study found.
According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence. The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation.
The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.
Another way of visualizing the impact of the shale industry on the US economy comes courtesy of this chart from the Manhattan Institute which really needs no commentary:
The Institute had this commentary to add:
The jobs recovery since the 2008 recession has been the slowest of any post recession recovery in the U.S. since World War II. The number of people employed has yet to return to the 2007 level. The country has suffered a deeper and longer-lasting period of job loss than has followed any of the ten other recessions since 1945.
There has, however, been one employment bright spot: jobs in America’s oil & gas sector and related industries. Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.
In addition, America is seeing revitalized growth and jobs in previously stagnant sectors of the economy, from chemicals production and manufacturing to steel and even textiles because of access to lower cost and reliable energy.
The surge in American oil & gas production has become reasonably well-known; far less appreciated are two key features, which are the focus of this paper: the widespread geographic dispersion of the jobs created; and the fact that the majority of the jobs have been created not in the ranks of the Big Oil companies but in small businesses, even more widely dispersed.
Fast forward to today when we are about to learn that Newton’s third law of Keynesian economics states that every boom, has an equal and opposite bust.
Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the “recovery” has been flooded with.
Here is JPM’s Michael Feroli explaining why Houston suddenly has a very big problem.
In less than five years Texas’ share of US oil production has gone from around 25% to over 40%
By some measures, the oil intensity of the Texas economy looks similar to what it was in the mid-1980s
The 1986 collapse in oil prices led to a painful regional recession in Texas
While the rest of the country looks to benefit from cheap oil, Texas could be headed for recession
The collapse in oil prices will create winners and losers, both globally and here in the US. While we expect the country, overall, will be a net beneficiary from falling oil prices, two states look like they will bear the brunt of the pain: North Dakota and Texas. Given its much larger size, the prospect of a recession in Texas could have some broader reverberations.
By now, most people are familiar with the growth of the fossil fuel industry in places like Pennsylvania and Ohio. However, that has primarily been a natural gas story. The renaissance of US crude oil production has been much more concentrated: over 90% of the growth in the past five years has been in North Dakota and Texas; with Texas alone accounting for 67% of the increase in the nation’s crude output over that period.
In the first half of 1986, crude oil prices fell just over 50%. At the end of 1985, the unemployment rate in Texas was equal to that in the nation as a whole; at the end of 1986 it was 2.6%- points higher than the national rate. There are some reasons to think that it may not be as bad this time around, but there are even better reasons not to be complacent about the risk of a regional recession in Texas.
Geography of a boom
The well-known energy renaissance in the US has occurred in both the oil and natural gas sectors. Some states that are huge natural gas producers have limited oil production: Pennsylvania is the second largest gas producing state but 19th largest oil producer. The converse is also true: North Dakota is the second largest crude producer but 14th largest gas producer. However, most of the economic data as it relates to the energy sector, employment, GDP, etc, often lump together the oil and gas extraction industries. Yet oil prices have collapsed while natural gas prices have held fairly steady. To understand who is vulnerable to the decline in oil prices specifically we turn to the EIA’s state-level crude oil production data.
The first point, mentioned at the outset, is that Texas, already a giant, has become a behemoth crude producer in the past few years, and now accounts for over 40% of US production. However, there are a few states for which oil is a relatively larger sector (as measured by crude production relative to Gross State Product): North Dakota, Alaska, Wyoming, and New Mexico. For two other states, Oklahoma and Montana, crude production is important, though somewhat less so than for Texas. Note, however, that these are all pretty small states: the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP. Finally, there is one large oil producer, California, which is dwarfed by such a huge economy that its oil intensity is actually below the national average, and we would expect it, like the country as a whole, to benefit from lower oil prices.
Texas-sized challenges
As discussed above, Texas is unique in the country as a huge economy and a huge oil producer. When thinking about the challenges facing the Texas economy in 2015 it may be useful, as a starting point, to begin with the oil price collapse of 1986. Then, like now, crude oil prices collapsed around 50% in the space of a few short months. As noted in the introduction, the labor market response was severe and swift, with the Texas unemployment rate rising 2.0%-points in the first three months of 1986 alone. Following the hit to the labor market, the real estate market suffered a longer, slower, burn, and by the end of 1988 Texas house prices were down over 14% from their peak in early 1986 (over the same period national house prices were up just over 14%). The last act of this tragedy was a banking crisis, as several hundred Texas banks failed, with peak failures occurring in 1988 and 1989.
How appropriate is it to compare the challenges Texas faces today to the ones they faced in 1986? The natural place to begin is by getting a sense of the relative energy industry intensity of Texas today versus 1986. Unfortunately, the GSP-by-industry data have a definitional break in 1997, but splicing the data would suggest a similar share of the oil and gas sector in Texas GSP now and in 1985: around 11%. Employment in the mining and logging sector (which, in Texas, is overwhelmingly dominated by the oil and gas sector) was around 3.7% in 1985 and is 2.7% now. This is consistent with a point we have been making in the national context: the oil and gas sector is very capital-intensive, and increasingly so. Even so, as the 1986 episode demonstrated, there do seem to be sizable multiplier effects on non-energy employment. Finally, there does not exist capital spending by state data, but at the national level we can see the flip side of the increasing capital intensive nature of energy: oil and gas related cap-ex was 0.58% of GDP in 4Q85, and is 0.98% of GDP now.
Given this, what is the case for arguing that this time is different, and the impact will be smaller than in 1986? One is that now, unlike in 1986, natural gas prices haven’t moved down in sympathy with crude oil prices, and the Texas recession in 1986 may have owed in part also to the decline in gas prices. Another is that, as noted above, the employment share is somewhat lower, and thus the income hit will be felt more by capital-holders – i.e. investors around the country and the world. Finally, unlike 1986, the energy industry is experiencing rapid technological gains, pushing down the energy extraction cost curve.
While these are all valid, they are not so strong as to signal smooth sailing for the Texas economy. Financially, oil is a fair bit more important than gas for Texas, both now and in 1986, with a dollar value two to three times as large. Moreover, while energy employment may be somewhat smaller now, we are not talking about night and day. The current share is about 3/4ths what it was in 1986. (Given the higher capital intensity, there are some reasons to think employment may be greater now in sectors outside the traditional oil and gas sectors, such as pipeline and heavy engineering construction).
As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession. Such an outcome could bring with it the usual collateral damage that occurs in a slowdown. Housing markets have been hot in Texas. Although affordability in Texas looks good compared to the national average, it always does; compared to its own history, housing in some major Texas metro areas looks quite dear, suggesting a risk of a pull-back in the real estate market.
The national economy performed quite well in 1986, in spite of the Texas recession. We expect the US economy will perform well next year too , though some regions – most notably Texas – could significantly under perform the national average.
* * *
So perhaps it is finally time to add that footnote to the “unambiguously good” qualified when pundits describe the oil crash: it may be good for everyone… except Texas which is about to enter a recession. And then Pennsylvania. And then North Dakota. And then Colorado. And then West Virginia. And then Alaska. And then Wyoming. And then Oklahoma. And then Montana, and so on, until finally we find just where the new equilibrium is following the exodus of hundreds of thousands of the best-paying jobs created during the “recovery” offset by minimum-wage waiters, bartenders, retail workers and temps.
Many investors are still skeptical that Saudi Arabia will hold firm on oil production.
Increased global consumption due to falling prices is unlikely to offset North American production.
US consumption is in a secular, structural decline due to increased efficiency and demographic changes. That’s unlikely to change any time soon.
The floor may not be where the Saudis think it is.
Investors are slowly waking up to the fact that Saudi Arabia is willing to take OPEC hostage to defend its market share, with Oil Minister Ali Al-Naimi declaring that –
In a situation like this, it is difficult, if not impossible, that the kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others’ shares.
Alas, rather than embrace the cheap petroleum paradigm that has dominated most of the 20th century, many investors continue to cling to old shibboleths. Case in point: Brian Hicks, a portfolio manager at US Global Investors, recently noted that –
The theme going into 2015 is mean reversion. Oil prices are below where they should be (emphasis mine), and hopefully they will start gravitating back to the equilibrium price of between $US80 and $US85 a barrel.
I emphasize the words “below where they should be” because the notion that oil (NYSEARCA:USO) prices belong somewhere – and it’s always higher, somehow – is the linchpin of the bullish thesis. But the question of why a high price regime should prevail over a low price regime is never satisfactorily explained.
Higher extraction costs? A sizable chunk of those costs are sunk costs that can simply be ignored in production decisions and lowering the effective breakeven price. A tighter focus on already drilled wells in areas with mature infrastructure could lower costs even further. Moreover, service sector costs fall as rigs are idled. Depleted reserves? Most resource-producing basins are experiencing an increasing yield over time despite the rapid depletion of individual wells. A lot of that is due to extraction efficiency, which is increasing at a phenomenal rate; in fact, one rig today brings on four times the amount of gas in the Barnett Shale than it did in 2006. Drill times in the Bakken are also falling, while new well production per rig is steadily rising since 2011.
Drill Times (Spud to Rig) 2004-2013
(SOURCE: ITG Research)
Technically oversold? Good luck catching that knife. Traders have been pounding the table on “oversold conditions” since $80. Proponents of the Oversold Hypothesis who like to point historical examples of oil’s extreme short-term volatility for validation are conveniently ignoring the vast number of counter-examples like this TIME Magazine headline from June, 1981, which almost reads as if it could have been written yesterday:
(Source: TIME Archives)
1981 is an intriguing date for another reason: It marked the first time in over a decade that Non-OPEC nations countries outproduced OPEC. Despite repeated cuts by OPEC, it took five years for capitulation to set in. Nor are lower prices guaranteed to lead to cuts. Indeed, when oil prices plummeted from $4/bbl to 35 cents in 1862, the Cleveland wildcatters didn’t idle their pumps; they pumped faster to pay the interest on their debt.
Don’t Iran and Venezuela require higher oil prices in order to balance their budgets and head off domestic upheaval? Please. The Saudis don’t care about Iran’s budget problems. Venezuela is a non-entity despite it’s immense reserves. In fact, Venezuela’s hell-in-a-handbasket status was one of the major reasons for Cuba’s recent defection to the US.
Asian stimulus? The only reason that Japanese consumers know that oil prices are lower is from Western news headlines. The share of a day’s wages to buy a single gallon of gas in Japan is 5.59% vs. 2.45% in the US. Nevertheless, the Japanese are riding high compared to the BRICS: In Brazil, it’s 17.62%; in Russia, 7.95%; in India it’s 114.92%; in China it’s 23.54%. Not the most fertile ground for a demand-side revolution; especially since oil is priced in dollars rather than yen, reals, rubles, or rupees.
What about the US? Won’t lower prices lead to higher consumption? Despite what you read about our “insatiable thirst” for oil, Americans don’t actually drink the stuff. Our machines do, and those machines are becoming more and more efficient due to CAFE standards and new transportation technologies, especially NGVs. Demographic changes are also leading a secular decline in consumption. Fig. 2 below highlights the steady march down for miles traveled per capita as the Baby Boomers retire to slower paced lives.
(Source: Citigroup, Census, CIRA)
The reality is that there’s little that an uptick in demand can do to offset oil’s continuing price collapse if the Saudis aren’t prepared to cut to the bone. The wildcatters certainly aren’t going to; on the contrary, they have every incentive (and no real alternative at this point) to pump like crazy to pay down debt and break OPEC’s back. Most doom and gloom prognostications for North American shale use full-cycle breakeven estimates like the ones presented in Figure 2.
Full-Cycle Breakeven Costs by Resource (Assuming Zero Efficiency Gains)
Unfortunately for the bulls, all-in sustaining cost (full-cycle capex) is a totally irrelevant metric for establishing a floor on commodity prices. Commodities prices are based on the marginal cost of production of the most prolific producers, not the full-cycle costs of marginal, high cost producers lopped in with the market leaders. As Seth Kleinman’s group at Citi has pointed out –
…what counts at this stage is half-cycle costs, which are in the significantly lower band of $37 to $45 a barrel. This means that the floor is falling and may not be nearly as firm as the Saudi view assume(s).
About 20 privately owned Greek islands are currently up for sale, some for the first time in generations.
Skorpios island was sold last year to Ekaterina Rybolovleva, daughter of Russian billionaire Dmitry Rybolovlev. European Pressphoto Agency. Article written byStelios Bouras and Nektaria Stamoul
It’s the ultimate dream property of the super rich: your own Greek island, drenched in sunshine and surrounded by turquoise water.
Traditionally, these islands have rarely come up for sale, staying in the same families from one generation to the next. But Greek’s private-island property market is perking up, bolstered by growing interest from foreign investors, a drop in prices and changes to Greek tax laws. Some 20 privately owned Greek islands are currently up for sale.
Brett Taylor/The Wall Street Journal
Greek shipping tycoon Aristotle Onassis and Jacqueline Kennedy on Skorpios in 1969. They were married there the previous year. Agence France-Presse/Getty Images
Notable new island-owners include Ekaterina Rybolovleva, the 25-year-old daughter of Russian billionaire Dmitry Rybolovlev. Early last year, a company belonging to a trust affiliated with Ms. Rybolovleva bought the Greek isle of Skorpios from Athina Onassis Roussel, the granddaughter of Greek shipping tycoon Aristotle Onassis. (The island was the site, 45 years earlier, of the wedding of the magnate and former first lady Jacqueline Kennedy.) The sale price was reportedly £100 million, or $158 million; a representative for Ms. Rybolovleva confirmed the sale but wouldn’t comment on the price.
“After Skorpios was sold, and especially during the past year, there has been an intense interest in the islands’ market,” says Alexandros Moulas, an agent for real-estate firm Savills . “An intermediate usually gets in touch with us and the name of the actual investor is kept as a closely guarded secret.”
Ms. Rybolovleva’s neighbor a few islands to the south on the islet of Oxia, is reportedly the former emir of Qatar, Sheik Hamad bin Khalifa Al-Thani. Last year, the Athens-based investment group Pima bought the islet—a 1,236-acre uninhabited island in the Ionian Sea off Greece’s west coast—for about €5.5 million, or $6.9 million. A representative for the investment group says Pima was acting on its own, though two local government officials say the group was buying on behalf of the former emir. Efforts to reach the former emir were not successful.
Prices for these islands can run anywhere from a few million euros to more than €100 million, depending on amenities such as running water, electricity—and, in some cases, mooring facilities for a yacht. Still, property experts say prices are down overall—as much as 30% from pre-crisis levels.
Most of the 20 islands on the market are completely undeveloped; some have wooded areas, while others are mostly rock. Nissos island, in the Ionian sea five nautical miles off mainland Greece, is priced at about $6.8 million and can accommodate six houses of up to 130 square meters each, according to broker Savills. Nearby Omfori Island, priced at nearly $62 million, has one small building on the island with permissions in place to build on 20% of the 1,112-acre island, according to the real-estate listings site Private Islands Online.
The Ionian island of Oxia. Agence France-Presse/Getty Images
With some 6,000 islands and islets, Greece has no shortage of supply, but island ownership can come with its share of headaches. Most islands aren’t suitable for development, and access to many of them is difficult—especially given Greece’s restrictions on private seaplanes. The red tape is fearsome: To buy an island, up to 32 bureaucratic steps are required, including background checks to determine whether a prospective buyer would pose a threat to the country’s national security.
Another turnoff for some buyers is that, in Greece, all beaches are public. That means no matter how remote the island or how high the price tag, anyone with a yacht can show up, uninvited, for a swim.
Sometimes, there are issues with the locals. Greek businessman Yannis Perrotis, managing director of real-estate company Atria Property Services, set his sights on developing the small, privately owned island of Arkoudi in the Ionian Sea almost a decade ago. He is considering building an exclusive super high-end resort with luxury villas, a hotel spa, a marina, and recreational and sports facilities and sports facilities—all at a cost of between $312 million and $375 million.
But Mr. Perrotis discovered that his uninhabited island actually had residents: a shepherd and his flock of goats. It took him more than two years to get them off the island.
“I went through a few years of real trials and tribulations followed by a few years of anger,” said Mr. Perrotis. “But now I have something in my hands that has additional value and tangible prospects.”
Some Greek island owners—many bequeathed their islands from distant family forebears—are reassessing the value of their land in the face of the financial crisis and the new tax laws. Athens, under pressure from its international creditors from the Eurozone and the International Monetary Fund to fix its public finances, this year introduced its first permanent tax on real estate.
After a decade in which only a handful of deals have taken place, say property experts, suddenly, a private island has become a possession that many owners no longer have the luxury to maintain.
“I have customers telling me they need to sell as quickly as possible. They say they can’t handle the tax burden,” says Yannis Kriaras, a real-estate agent based on the island of Crete. “Most of them resent having even inherited an island.”
Disparate Impact: The president’s new credit watchdog agency is warning lenders they could be investigated for discrimination if they scrutinize welfare recipients applying for home loans. Here we go again.
In an agency bulletin, the Consumer Financial Protection Bureau specifically advised mortgage lenders not to verify the income of people receiving Social Security Disability Insurance benefits.
SSDI enrollment has exploded under Obama, and fraud is rampant in the program. A recent probe by Congress found doctors rubber-stamping claims for the generous benefits. A random review found more than 1-in-4 cases failed to provide evidence to support claims.
No wonder mortgage lenders are asking for verification.
Last year, the number of Americans receiving payments skyrocketed to a record 15 million-plus. A disproportionate share of enrollees are African-American — blacks make up 12% of the population, but over 17% of all SSDI recipients — and black groups have complained to regulators that mortgage underwriters are making unreasonable demands for income verification.
The NAACP argues disability payments are a “critical source of financial support” for blacks, noting their average monthly benefit is almost $1,000.
“The program’s benefits provide a significant income boost to lower-earning African-Americans,” NAACP asserted, noting the share of blacks on federal disability is more than double that for whites.
In response, CFPB has issued a five-page edict warning mortgage lenders they could face “disparate impact” liability if they question whether “all or part” of a minority applicant’s income “derives from a public assistance program.”
If they know what’s good for them, they’ll “avoid unnecessary documentation requests and increase access to credit for persons receiving Social Security disability income.”
In a separate warning, HUD was more forceful: “A lender shouldn’t ask a consumer for documentation or about the nature of his or her disability under any circumstances.”
We can’t say we’re shocked. As we’ve reported — contrary to other media reporting — CFPB’s new Qualified Mortgage rule mandates payments from “government assistance programs are acceptable” forms of income for home loan qualification. (It’s in the 804-page regulation, if financial journalists would just take the time to read it.)
More, the Justice Department has ordered the biggest mortgage lenders in the country, including Wells Fargo and Bank of America, to offer loans to people on “public assistance.” They’re even required to post branch notices promoting the risky welfare acceptance policy.
The administration is actually forcing banks to target high-risk borrowers for 30-year debt under threat of prosecution.
Though President Obama’s worried about a plunge in new-home buying among jobless minorities, he’s just setting them up for failure all over again. A mortgage requires a stable job and income to avoid defaults and foreclosures.
Failure to require income documentation contributed to the mortgage crisis and was something CFPB was created to stop.
Exempting public-assistance income from the rules exposes the bogus nature of Obama’s financial “reforms.”
“Our biggest worry is the end of the liquidity cycle. The Fed is done. The reach for yield that we have seen since 2009 is going into reverse”, said Bank of America.
The OPEC oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over the coming months as market forces shake out the weakest producers, Bank of America has warned.
Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source of gas for Europe.
Francisco Blanch, the bank’s commodity chief, said OPEC is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.
The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.
The bank said in its year-end report that at least 15pc of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may soon have to cut back on production.
The claims pit Bank of America against its arch-rival Citigroup, which insists that the US shale industry is far more resilient than widely supposed, with marginal costs for existing rigs nearer $40, and much of its output hedged on the futures markets.
Bank of America said the current slump will choke off shale projects in Argentina and Mexico, and will force retrenchment in Canadian oil sands and some of Russia’s remote fields. The major oil companies will have to cut back on projects with a break-even cost below $80 for Brent crude.
It will take six months or so to whittle away the 1m barrels a day of excess oil on the market – with US crude falling to $50 – given that supply and demand are both “inelastic” in the short-run. That will create the beginnings of the next shortage. “We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.
Mrs Schels said the global market for (LNG) will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.
If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs. It has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LGN itself has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas at all within a couple of years.
Bank of America said the oil price crash is worth $1 trillion of stimulus for the global economy, equal to a $730bn “tax cut” in 2015. Yet the effects are complex, with winners and losers. The benefits diminish the further it falls. Academic studies suggest that oil crashes can ultimately turn negative if they trigger systemic financial crises in commodity states.
Barnaby Martin, the bank’s European credit chief, said world asset markets may face a stress test as the US Federal Reserve starts to tighten afters year of largesse. “Our biggest worry is the end of the liquidity cycle. The Fed is done and it is preparing to raise rates. The reach for yield that we have seen since 2009 is going into reverse”, he said.
Mr Martin flagged warnings by William Dudley, the head of the New York Fed, that the US authorities had tightened too gently in 2004 and might do better to adopt the strategy of 1994 when they raised rates fast and hard, sending tremors through global bond markets.
Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expect to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said.
What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.
These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.
‘Funding problems are increasing dramatically. We think Russia is now flirting with systemic problems,’ said Danske Bank
The currency has been in free fall since Saudi Arabia and the Gulf states vetoed calls by weaker OPEC members for a cut in crude oil output. ByAmbrose Evans-Pritchard,The Telegraph
The Russian Rouble has suffered its steepest one-day drop since the default crisis in 1998 as capital flight accelerates, raising the risk of emergency exchange controls and tightening the noose on Russian companies and bodies with more than $680bn (£432bn) of external debt.
The currency has been in free fall since Saudi Arabia and the Gulf states vetoed calls by weaker OPEC members for a cut in crude oil output, a move viewed by the Kremlin as a strategic attack on Russia.
A fresh plunge in Brent prices to a five-year low of $67.50 a barrel on Monday caused the dam to break, triggering a 9pc slide in the Rouble in a matter of hours.
Analysts said it took huge intervention by the Russian central bank to stop the rout and stabilize the Rouble at 52.07 to the dollar. “They must have spent billions,” said Tim Ash, at Standard Bank.
It is extremely rare for a major country to collapse in this fashion, and the trauma is likely to have political consequences. “This has become disorderly. There are no real buyers of the Rouble. We know that voices close to president Vladimir Putin want capital controls, and we cannot rule this out,” said Lars Christensen, at Danske Bank.
“Funding problems are increasing dramatically. We think Russia is now flirting with systemic problems,” he added.
Some Russian banks have already started limiting withdrawals of dollars and euros to $10,000, an implicit lock down for big depositors.
Rouble against the dollar since December 2012.
Russian premier Dmitry Medvedev said 10 days ago that capital controls are out of the question. “The government, myself, my colleagues and the central bank have repeatedly stated that we are not going to impose any special restrictions on capital flows,” he said.
Ksenia Yudaeva, the central bank’s deputy governor, said the authorities are battening down the hatches for a “$60 oil scenario” lasting deep into next year. “A long decline is highly probable,” she said.
Russia has lost its ranking as the world’s eighth biggest economy, shrinking in just nine months from a $2.1 trillion petro-giant to a mid-size player comparable with Korea or Spain.
In a further setback, Mr Putin gave the clearest signal yet that the South Stream gas pipeline – intended to supply Europe without going through Ukraine – may never be built. “If Europe does not want to carry it out, then it will not be carried out,” he said.
Oil and gas provide two-thirds of Russia’s exports and cover half of its fiscal revenues, a classic case of the “Dutch Disease” that leaves the country highly exposed to the ups and down of the commodity cycle.
Protracted slumps in crude prices crippled the Soviet Union in late 1980s, and caused Russia to go bankrupt in the late-1990s. “The Rouble will not stabilize until oil does,” said Kingsmill Bond, at Sberbank.
The bank said Russia faces a mounting deficit on its capital account. The country is no longer generating a big enough trade surplus to cover capital outflows. Sberbank warned that reserves are “likely” to fall to levels that ultimately require capital controls, unless Western sanctions are lifted.
While Russia has $420bn of foreign reserves, this war chest is not as a large as it seems for a country with chronic capital outflows that relies heavily on foreign funding. Lubomir Mitov, from the Institute of International Finance, said investors may start to fret about reserve cover if the figure falls to $330bn.
The Rouble’s slide has led to fury in the Duma, where populist politician Evgeny Fedorov has called for a criminal investigation of the central bank. Critics say the institution had been taken over by “feminist liberals” and is a tool of the International Monetary Fund. The office of the Russia general prosecutor said on Monday it was opening a probe.
The central bank has refused to intervene to defend the Rouble over recent weeks, letting the exchange rate take the strain rather than burning through reserves to delay the inevitable, as Nigeria and Kazakhstan are doing. It squandered $200bn of reserves in a six-week period in late 2008 and triggered an acute banking crisis, learning the hard way that currency intervention entails monetary tightening.
By letting the Rouble fall, it shields the Russian budget from the slump in global oil prices, though not entirely. Deutsche Bank said the fiscal balance turns negative at crude prices below $70.
Yet the devaluation is causing prices to spiral upwards in the shops and may at some point cause a self-feeding crisis if it evokes bitter memories of past currencies crashes. The finance ministry said it expects inflation to reach 10pc in the first quarter of 2015.
There is already a dash to buy washing machines, cars and computers before they shoot up in price, a shift in behavior that signals stress.
The Rouble slide is ratcheting up the pressure on Russian companies facing $35bn of redemptions of foreign debt in December alone, mostly in dollars. Yields on Lukoil’s 10-year bonds have jumped by 250 basis points since June to 7.5pc.
Most Russian companies have been shut out of global capital markets since the escalation of Western sanctions, following the downing of Malaysia Airlines Flight 17 in July. They are forced to pay back debt as it comes due, seek support from the Russian state or default. The oil giant Rosneft has requested $49bn in state aid.
Sberbank said companies must repay $75bn next year in dollar debt and cannot hope to roll over more than a tiny sliver of this. Nor can they expect more than $10bn of fresh capital from China.
The bank said there are companies that are profiting nicely from the devaluation, since they sell abroad yet their costs are local. These include the base metals groups Norilsk and Rusal, as well as steel producers, and fertilizer groups such as Uralkali and PhosAgro. “Some of these are making a lot of money right now, and their stocks are flying,” said one trader.
The Russian equity index is trading at 0.5pc of book value. Rarely has a market ever been so cheap.
As we reported earlier using ShopperTrak data, the first two days of the holiday shopping season were already showing a -0.5% decline across bricks-and-mortar stores, following a “cash for clunkers”-like jump in early promotions which pulled demand forward with little follow through in the remaining shopping days. However, not even we predicted the shocker just released from the National Retail Federation, the traditionally cheery industry organization, which just reported absolutely abysmal numbers: sales during the four-day Thanksgiving holiday period crashed by a whopping 11% from $57.4 billion to $50.9 billion, confirming what everyone but the Fed knows by now: the US middle class is being obliterated, and that key driver of 70% of US economic growth is in the worst shape it has been since the Lehman collapse, courtesy of 6 years of Fed’s ruinous central planning.
Demonstrating the sad state of America’s “economic dynamo”, shoppers spent an average only $380.95, down 6.4% from $407.02 a year earlier. In fact, as the NRF charts below demonstrate, there was a decline across virtually every tracked spending category (source):
As the WSJ reports, NRF’s CEO Matt Shay attributed the drop to a combination of factors, including the fact that retailers moved promotions earlier this year in attempt to get people out sooner and avoid what happened last year when people didn’t finish their shopping because of bad weather.
Also did we mention the NRF is perpetually cheery and always desperate to put a metric ton of lipstick on a pig? Well, hold on to your hats folks:
He also attributed the declines to better online offerings and an improving economy where “people don’t feel the same psychological need to rush out and get the great deal that weekend, particularly if they expected to be more deals,” he said.
And of course the sprint vs marathon comparisons, such as this one: “The holiday season and the weekend are a marathon not a sprint,” NRF Chief Executive Officer Matthew Shay said on a conference call. Odd how that metaphor is never used when the (seasonally-adjusted) sprint beats the marathoners.
So there you have it: a 11% collapse in retail spending has just been spun as super bullish for the US economy, whereby US consumers aren’t spending because the economy is simply too strong, and the only reason they don’t spend is because they will spend much more later. Or something.
Apparently the plunge in Americans who even care about bargains is also an indication of an economic resurgence:
The retail trade group said the number of people who went shopping over the four-day weekend declined by 5.2% to 134 million, from 141 million last year.
Finally, what we said earlier about a surge in online sales, well forget it – it was a lie based on the now traditional skewed perspectives from a few self-serving industry organizations:
Despite many retailers offering the same discounts on the Web as they offered in stores, the Internet didn’t attract more shoppers or more spending than last year. Online sales accounted for 42% of sales racked up over the four-day period, the same percentage as last year, though up from 26% in 2006, the trade group said.
In fact, it was worse: “Shoppers spent an average $159.55 online, down 10.2% from $177.67 last year.”
But the propaganda piece de resistance is without doubt the following:
“A highly competitive environment, early promotions and the ability to shop 24/7 online all contributed to the shift witnessed this weekend,” Mr. Shay said.
So to summarize: holiday sales plunged, and Americans refused to shop because the economy is “stronger than ever” and because Americans have the option of shopping whenever, which is why they didn’t shop in the first place. That, and of course plunging gasoline prices leading to… plunging retail sales, just as all the economists “correctly” predicted.
Which U.S. state has the wealthiest residents of them all? It’s the home state of Facebook Chief Executive Mark Zuckerberg but not America’s richest man, Bill Gates, who lives in the state of Washington.
California is the state with the highest number of ultra wealthy individuals, according to a report from private wealth consultancy Wealth-X. There are 13,445 ultrahigh-net-worth individuals — defined as those with $30 million and above in net assets — based in the Golden State, up 6% on a year-over-year basis. They’re mostly located in San Francisco (5,460 people) and Los Angeles (5,135). In fact, California’s population of ultra wealthy individuals is larger than the ultrawealthy population in the entirety of the United Kingdom (11,510).
Facebook founder Mark Zuckerberg: Born in New York state, resides in California.
Other states are experiencing a super-rich surge. New York was No. 2 on the list, with 9,530 ultrahigh-net-worth individuals in 2014, up 6% in the last year, and — perhaps unsurprisingly — 8,655, or 91%, of them were based in New York City. The population of people with $30 million or more rose 14% on a year-over-year basis to 80 in North Dakota, which is currently experiencing an energy oil boom. Florida’s ultrahigh-net-worth population increased by more than 10%, adding almost 500 new individuals to 4,710 in 2014 due to strong growth in the state’s financial and real-estate sectors.
It is possible that a miracle intervenes and that the price of oil bounces off and zooms skyward. We’ve seen stocks perform these sorts of miracles on a routine basis, but when it comes to oil, miracles have become rare. As I’m writing this, US light sweet crude trades at $76.90 a barrel, down 26% from June, a price last seen in the summer of 2010.
But this price isn’t what drillers get paid at the wellhead. Grades of oil vary. In the Bakken, the shale-oil paradise in North Dakota, wellhead prices are significantly lower not only because the Bakken blend isn’t as valuable to refiners as the benchmark West Texas Intermediate, but also because take-away capacity by pipeline is limited. Crude-by-rail has become the dominant – but more costly – way to get the oil from the Northern Rockies to refineries on the Gulf Coast or the East Coast.
These additional transportation costs come out of the wellhead price. So for a particular well, a driller might get less than $60/bbl – and not the $76.90/bbl that WTI traded for at the New York Mercantile Exchange.
Fracking is expensive, capital intensive, and characterized by steep decline rates. Much of the production occurs over the first two years – and much of the cash flow. If prices are low during those two years, the well might never be profitable.
Meanwhile, North Sea Brent has dropped to $79.85 a barrel, last seen in September 2010.
So the US Energy Information Administration, in its monthly short-term energy outlook a week ago, chopped down its forecast of the average price in 2015: WTI from $94.58/bbl to $77.55/bbl and Brent from $101.67/bbl to $83.24/bbl.
Independent exploration and production companies have gotten mauled. For example, Goodrich Petroleum plunged 71% and Comstock Resources 58% from their 52-week highs in June while Rex Energy plunged 65% and Stone Energy 54% from their highs in April.
Integrated oil majors have fared better, so far. Exxon Mobil is down “only” 9% from its July high. On a broader scale, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is down 28% from June – even as the S&P 500 set a new record.
So how low can oil drop, and how long can this go on?
The theory is being propagated that the price won’t drop much below the breakeven point in higher-cost areas, such as the tar sands in Canada or the Bakken in the US. At that price, rather than lose money, drillers would stop fracking and tar-sands operators would shut down their tar pits. And soon, supplies would tighten up, inventories would be drawn down, and prices would jump.
But that’s not what happened in natural gas. US drillers didn’t stop fracking when the price of natural gas plunged below the cost of production and kept plunging for years. In April 2012, it reached not a four-year low but a decade-low of about $1.90 per million Btu at the Henry hub. At the time, shorts were vociferously proclaiming that gas storage would be full by fall, that the remaining gas would have to be flared, and that the price would then drop to zero.
But drillers were still drilling, and production continues to rise to this day, though the low price also caused an uptick in consumption that coincided with a harsh winter, leaving storage levels below the five-year minimum for this time of the year.
The gas glut has disappeared. The price at the Henry hub has since more than doubled, but it remains below breakeven for many wells. And when natural gas was selling for $4/MM Btu at the Henry hub, it was selling for $2/MM Btu at the Appalachian hubs, where the wondrous production from the Marcellus shale comes to market. No one can make money at that price.
And they’re still drilling in the Marcellus.
Natural gas drillers had a cover: a well that also produced a lot of oil and natural gas liquids was profitable because they fetched a much higher price. But this too has been obviated by events: on top of the rout in oil, the inevitable glut in natural gas liquids has caused their prices to swoon too (chart).
Yet, they’re still drilling, and production is still rising. And they will continue to drill as long as they can get the moolah to do so. They might pick and choose where they drill, and they might back off a smidgen, but as long as they get the money, they’ll drill.
Money has been flowing into the oil and gas business like a tsunami unleashed by yield-desperate investors who, driven to near insanity by the Fed’s policies, do what the Fed has been telling them to do: close their eyes and hold their noses and disregard risk and hand over their money, and borrow money for nearly free and hand over that money too.
Oil and gas companies have issued record amounts of junk bonds. They’ve raised record amounts of money via a record number of IPOs. They’ve raised money by spinning off assets into publicly traded MLPs. They’ve borrowed from banks that then packaged these loans into securities that were then sold. The industry has taken this cheap money and has drilled it into the ground.
This is one of the consequences of the Fed’s decision to flood the land with free liquidity. When the cost of capital is near zero, and when returns on low-risk investments are near zero as well, or even below zero, investors go into a sort of coma. But when they come out of it and realize that “sunk capital” has taken on a literal meaning, they’ll shut off the spigot.
Only then will drilling and production decline. As with natural gas, it can take years. And as with natural gas, the price might plunge through a four-year low and hit a decade low – which would be near $40/bbl, a price last seen in 2009. The bloodletting would be epic. To see where this is going, watch the money.
I was out on the West Coast recently delivering a sales workshop for a group of about 40 loan originators. Our mission was to explore ideas for capitalizing on the summer home buying season and discover ways to increase their purchase loan application volume.
Early in the session, I handed out colored index cards and asked the participants to record their answers to this question: If a mortgage originator is serious about growing his or her purchase loan business over the next few months, what are three things he or she should be doing?
Everyone wrote down their best ideas, and I collected the cards so we could see their advice.
As you might imagine, we ended up with a lot of reoccurring themes and ideas. Overall, here are the top five suggestions they offered:
1. Work hard; put in the hours it takes.
2. Get out and see your Realtor and business partners.
3. Contact your database with cards and letters asking for referrals.
4. Attend local events and talk to people who might be in the market to buy.
5. Follow up on your pre-approvals, your leads and the contacts you make.
What do you notice about this list? There is nothing new! In all 40 index cards I collected, there was not a single suggestion that was original, earth-shattering or eye-popping. And that is exactly the point I wanted to make to that group and to you today: there is nothing new about success.
There are mortgage originators in the market today with 15 to 20 loans in their pipelines. There are originators closing $5 million a month and more.
Are they doing anything special? Absolutely not. Do they have “secrets” and strategies most others have never considered? Far from it. High producers and top performers have come to terms with the most important lesson about success—that success in this business is primarily caused by one enormously important factor: consistency.
Taking our cue from the list above, let’s apply this rule:
1. It’s not about working hard every so often, it’s about working a full eight- to nine-hour day, every day, five days a week. There’s no coming in late and no blowing out early on Friday afternoon. You can’t take two-hour lunch breaks and run personal errands on work time. You have to work hard at your job and put in a full day, every single day. Consistently.
2. It’s not about getting out to see your Realtor and other business partners when you can, when you are caught up, or when you feel like it. It’s about getting out to visit your Realtor and business partners every week, week after week. Consistently.
3. It’s not about contacting your database with an arbitrary email at accidental intervals. It’s about having a pre-determined marketing plan to contact your database with cards, letters and phone calls on an ongoing monthly basis. Consistently.
4. It’s not about attending a local community, networking or industry event once every few months or on the off-chance when the opportunity arises. It’s about getting out of the office once or twice a week to meet new people, make new contacts and generate potential prospects. Consistently.
5. It’s not about following up on your leads and pre-approvals when you get time (after you’ve read all your emails or once you have combed through your loan files for the 10th time today). It’s about following up on potential leads, referrals and pre-approvals every single day. Consistently.
“Success is not sexy,” a very successful loan originator once told me. “Success comes from doing the simple, basic, mundane things you need to do day after day after day.” His recommendation is right on.
Too many mortgage originators today are searching for that magic pill that will make them more successful without having to exert much effort. Guess what; it doesn’t exist. There is no easy road to success in this business—never has been, never will be. Success is the end result of doing the right things consistently over a long period of time.
As we discovered at my sales seminar, most of the loan originators in attendance knew what to do and most were doing all the right things.
But for many, their production volume wasn’t where they wanted it to be because they weren’t doing what they needed to do consistently. They were working hard, but not every day. They were connecting with their Realtors, but not all that often.
They were building and marketing a database, but only when they had time to get around to it. They were engaged in some networking events, but maybe only once every few months.
And they were following up on their pre-approvals and prospects in a haphazard, random sort of way.
Does that also describe how you are running your business right now? If so, perhaps the most effective strategy to growing your purchase loan business over the summer home buying season has less to do with adding new activities and more to do with doing what you are already doing, but with more (wait for it…) consistency.
You have a tremendous opportunity ahead of you over the upcoming months. Activity is picking up, buyers are out there looking at properties, homes are selling, and mortgages are being made.
If you are consistent in doing what you need to do you’ll score a lot of opportunities, take a lot of applications, help a lot of people, close a lot of loans, and make a lot of money. Isn’t that what this business is all about?
Doug Smith is a nationally known industry speaker, author and sales trainer. For more information, please visithttp://www.DougSmithOnline.com or call Douglas Smith & Associates at 877-430-2329.
OPEC published its recent global oil market outlook, which offers a slightly different and instructional viewpoint.
OPEC sees its share of crude oil/liquids production reducing in light of increases in U.S. and Canada production.
OPEC also indicates a pivot toward Asia, where it sees the greatest demand for its primary exports in the future.
In perusing through OPEC’s recently released “World Oil Outlook,” several viewpoints are noteworthy. According to OPEC, demand grows mainly from developing countries and U.S. supply slows its run up after 2019. After 2019, OPEC begins to pick up the slack, supplying its products more readily. In OPEC’s view, Asia becomes a center of gravity given global population growth, up nearly 2 billion by 2040, and economic prosperity. The world economy grows by 260% versus that of 2013 on a purchasing power parity basis.
During the period 2013-2040, OPEC says oil demand is expected to increase by just over 21 million barrels per day (mb/d), reaching 111.1 mb/d by 2040. Developing countries alone will account for growth of 28 mb/d and demand in the OECD will fall by over 7 mb/d (p.1). On the supply side, “in the long-term, OPEC will supply the majority of the additional required barrels, with the OPEC liquids supply forecast increasing by over 13 mb/d in the Reference Case from 2020-2040,” they offer (p.1). OPEC shaved off 0.5 million barrels from their last year’s forecast to 2035. Asian oil demand accounts for 71% of the growth of oil demand.
The oil cartel released its World Oil Outlook last week, showing OPEC crude production falling to 29.5 million barrels per day in 2015 and 28.5 million barrels per day in 2016. This year’s average of 30 million barrels per day has helped flood the market and push oil prices to multi-year lows.
In the period to 2019, this chart illustrates where the barrels will flow:
Prices
With regard to price, OPEC acknowledges that the marginal cost to supply barrels continues to be a factor in expectations in the medium and long term. This sentiment has been echoed by other E&P CEOs in various communiques this year. OPEC forecasts a nominal price of $110 to the end of this decade:
On this evidence, a similar price assumption is made for the OPEC Reference Basket (ORB) price in the Reference Case compared to that presented in the WOO 2013: a constant nominal price of $110/b is assumed for the rest of the decade, corresponding to a small decline in real values.
Real values are assumed to approach $100/b in 2013 prices by 2035, with a slight further increase to $102/b by 2040. Nominal prices reach $124/b by 2025 and $177/b by 2040. These values are not to be taken as targets, according to OPEC. They acknowledge the challenge of predicting the world economy as well as non-OPEC supply. The Energy Information Administration (EIA) forecast a price for Brent averaging over $101 in 2015 and West Texas Intermediate (WTI) of over $94 as of their October 7th forecast. (This will have likely changed as of November 12th after the steep declines of October are weighed into their equations.) WTI averaged around the $97 range for 2013 and 2014. Importantly, U.S. supply may ratchet down slightly (green broken line) in response to price declines, if they continue.
It’s also the cars, globally
In 2013, OPEC says gasoline and diesel engines comprised 97% of the passenger cars total in 2013, and will hold 92% of the road in 2040. The diesel share for autos rises from 14% in 2013 to 21% in 2040. Basically, the number of cars buzzing on roads doubles from now to 2040. And 68% of the increase in cars comes from developing countries. China comprises the lion’s share of car volume growing by more than 470 million between 2011-2040, followed by India, then OPEC members will attribute 110 million new cars on the road. These increases assume levels similar to advanced economy (OECD) car volumes of the 1990s. In spite of efficiency and fuel economy, oil use per vehicle is expected to decline by 2.2%.
Commercial vehicles gain 300 million by 2040 from about 200 million in 2011. There are now more commercial vehicles in developing countries than developed.
U.S. Supply and OPEC
According to OPEC, U.S. and Canada supply increases through the period to 2019, the medium term. After 2017, they believe U.S. supply tempers from 1.2 million barrels of tight oil increases between 2013 and 2014 to 0.4 million in 2015, and less incremental increases thereafter. This acknowledges shale oil’s contribution to supply, with other supply sources declining, i.e., conventional and offshore.
OPEC Suggests:
The amount of OPEC crude required will fall from just over 30 mb/d in 2013 to 28.2 mb/d in 2017, and will start to rise again in 2018. By 2019, OPEC crude supply, at 28.7 mb/d, is still lower than in 2013.
However, the OPEC requirements are expected to ramp back up after 2019. By 2040, they expect to be supplying the world with 39 mb/d, a 9 million barrel/d increase from 2013. OPEC’s global share of crude oil supply is then 36%, above 2013 levels of about 30%. A select few firms like Pioneer Natural Resources (NYSE:PXD), Occidental Petroleum (NYSE:OXY), Chevron (NYSE:CVX) and even small-cap RSP Permian (NYSE:RSPP) are staying the course on shale oil production in the Permian for the present. After the first of the year, they will evaluate the price environment.
How does this outlook by OPEC inform the future? From the appearances in its forecasts, OPEC has slightly lower production in the medium term (to 2019), a decline of 1.3 million b/d in 2019 from the 2014 production of 30 million b/d. Thus, the main lever for an increase in prices for oil markets is for OPEC to restrict production, or encourage other members to keep to the current quota of 30 million b/d. Better economic indicators also could help. However, Saudi Arabia, the swing producer, has shown interest in maintaining its market share vis-à-vis the price cuts it has offered China, first, and then the U.S. more recently.
The global state of crude oil and liquids and prices has fundamentally changed with the addition of tight oil or shale oil, particularly from the U.S. While demand particulars have dominated the price regime recently, the upcoming decisions by OPEC at the late November meeting will have an influence on price expectations. In an environment of softer perceived demand now because of global economics and in the future because of non-OPEC supply, it would seem rational for OPEC to indicate some type of discipline among members’ production.
Source: OPEC “2014 World Oil Outlook,” mainly from the executive summary.
When it comes to housing, sometimes it seems we never learn. Just when America appeared to be recovering from the last housing crisis—the trigger, in many ways, for 2008’s grand financial meltdown and the beginning of a three-year recession—another one may be looming on the horizon.
There are at several big red flags.
For one, the housing market never truly recovered from the recession.TruliaChief Economist Jed Kolko points out that, while the third quarter of 2014 saw improvement in a number of housing key barometers, none have returned to normal, pre-recession levels. Existing home sales are now 80 percent of the way back to normal, while home prices are stuck at 75 percent back, remaining undervalued by 3.4 percent. More troubling, new construction is less than halfway (49 percent) back to normal. Kolko also notes that the fundamental building blocks of the economy, including employment levels, income and household formation, have also been slow to improve. “In this recovery, jobs and housing can’t get what they need from each other,” he writes.
Americans are spending more than 33 percent of their income on housing.
Second, Americans continue to overspend on housing. Even as the economy drags itself out of its recession, a spate of reports show that families are having a harder and harder time paying for housing. Part of the problem is that Americans continue to want more space in bigger homes, and not just in the suburbs but in urban areas, as well. Americans more than 33 percent of their income on housing in 2013, up nearly 13 percent from two decades ago, according to newly released data from the Bureau of Labor Statistics (BLS). The graph below plots the trend by age.
Over-spending on housing is far worse in some places than others; the housing market and its recovery remain highly uneven. Another BLS report released last month showed that households in Washington, D.C., spent nearly twice as much on housing ($17,603) as those in Cleveland, Ohio ($9,061). The chart below, from the BLS report, shows average annual expenses on housing related items:
(Bureau of Labor Statistics)
The result, of course, is that more and more American households, especially middle- and working-class people, are having a harder time affording housing. This is particularly the case in reviving urban centers, as more affluent, highly educated and creative-class workers snap up the best spaces, particularly those along convenient transit, pushing the service and working class further out.
Last but certainly not least, the rate of home ownership continues to fall, and dramatically. Home ownership has reached its lowest level in two decades—64.4 percent (as of the third quarter of 2014). Here’s the data, from the U.S. Census Bureau:
(Data from U.S. Census Bureau)
Home ownership currently hovers from the mid-50 to low-60 percent range in some of the most highly productive and innovative metros in this country—places like San Francisco, New York, and Los Angeles. This range seems “to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread home ownership is no longer the key to a thriving economy,” I’ve written.
What we are going through is much more than a generational shift or simple lifestyle change. It’s a deep economic shift—I’ve called it the Great Reset. It entails a shift away from the economic system, population patterns and geographic layout of the old suburban growth model, which was deeply connected to old industrial economy, toward a new kind of denser, more urban growth more in line with today’s knowledge economy. We remain in the early stages of this reset. If history is any guide, the complete shift will take a generation or so.
It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.
The upshot, as the Nobel Prize winner Edmund Phelpshas written, is that it is time for Americans to get over their house passion. The new knowledge economy requires we spend less on housing and cars, and more on education, human capital and innovation—exactly those inputs that fuel the new economic and social system.
But we’re not moving in that direction; in fact, we appear to be going the other way. This past weekend, Peter J. Wallison pointed out in a New York Times op-ed that federal regulators moved back off tougher mortgage-underwriting standards brought on by 2010’s Dodd-Frank Act and instead relaxed them. Regulators are hoping to encourage more home ownership, but they’re essentially recreating the conditions that led to 2008’s crash.
Wallison notes that this amounts to “underwriting the next housing crisis.” He’s right: It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.
During the depression and after World War II, this country’s leaders pioneered a series of purposeful and ultimately game-changing polices that set in motion the old suburban growth model, helping propel the industrial economy and creating a middle class of workers and owners. Now that our economy has changed again, we need to do the same for the denser urban growth model, creating more flexible housing system that can help bolster today’s economy.
The dramatic resurgence of the oil industry over the past few years has been a notable factor in the national economic recovery. Production levels have reached totals not seen since the late 1980s and continue to increase, and rig counts are in the 1,900 range. While prices have dipped recently, it will take more than that to markedly slow the level of activity. Cycles are inevitable, but activity is forecast to remain at relatively high levels.
An outgrowth of oil and gas activity strength is a need for additional workers. At the same time, the industry workforce is aging, and shortages are likely to emerge in key fields ranging from petroleum engineers to experienced drilling crews. I was recently asked to comment on the topic at a gathering of energy workforce professionals. Because the industry is so important to many parts of Texas, it’s an issue with relevance to future prosperity.
Although direct employment in the energy industry is a small percentage of total jobs in the state, the work is often well paying. Moreover, the ripple effects through the economy of this high value-added industry are large, especially in areas which have a substantial concentration of support services.
Employment in oil and gas extraction has expanded rapidly, up from 119,800 in January 2004 to 213,500 in September 2014. Strong demand for key occupations is evidenced by the high salaries; for example, median pay was $130,280 for petroleum engineers in 2012 according to the Bureau of Labor Statistics (BLS).
Due to expansion in the industry alone, the BLS estimates employment growth of 39 percent through 2022 for petroleum engineers, which comprised 11 percent of total employment in oil and gas extraction in 2012. Other key categories (such as geoscientists, wellhead pumpers, and roustabouts) are also expected to see employment gains exceeding 15 percent. In high-activity regions, shortages are emerging in secondary fields such as welders, electricians, and truck drivers.
The fact that the industry workforce is aging is widely recognized. The cyclical nature of the energy industry contributes to uneven entry into fields such as petroleum engineering and others which support oil and gas activity. For example, the current surge has pushed up wages, and enrollment in related fields has increased sharply. Past downturns, however, led to relatively low enrollments, and therefore relatively lower numbers of workers in some age cohorts. The loss of the large baby boom generation of experienced workers to retirement will affect all industries. This problem is compounded in the energy sector because of the long stagnation of the industry in the 1980s and 1990s resulting in a generation of workers with little incentive to enter the industry. As a result, the projected need for workers due to replacement is particularly high for key fields.
The BLS estimates that 9,800 petroleum engineers (25.5 percent of the total) working in 2012 will need to be replaced by 2022 because they retire or permanently leave the field. Replacement rates are also projected to be high for other crucial occupations including petroleum pump system operators, refinery operators, and gaugers (37.1 percent); derrick, rotary drill, and service unit operators, oil, gas, and mining (40.4 percent).
Putting together the needs from industry expansion and replacement, most critical occupations will require new workers equal to 40 percent or more of the current employment levels. The total need for petroleum engineers is estimated to equal approximately 64.5 percent of the current workforce. Clearly, it will be a major challenge to deal with this rapid turnover.
Potential solutions which have been attempted or discussed present problems, and it will require cooperative efforts between the industry and higher education and training institutions to adequately deal with future workforce shortages. Universities have had problems filling open teaching positions, because private-sector jobs are more lucrative for qualified candidates. Given budget constraints and other considerations, it is not feasible for universities to compete on the basis of salary. Without additional teaching and research staff, it will be difficult to continue to expand enrollment while maintaining education quality. At the same time, high-paying jobs are enticing students into the workforce, and fewer are entering doctoral programs.
Another option which has been suggested is for engineers who are experienced in the workplace to spend some of their time teaching. However, busy companies are naturally resistant to allowing employees to take time away from their regular duties. Innovative training and associate degree and certification programs blending classroom and hands-on experience show promise for helping deal with current and potential shortages in support occupations. Such programs can prepare students for well-paying technical jobs in the industry. Encouraging experienced professionals to work past retirement, using flexible hours and locations to appeal to Millennials, and other innovative approaches must be part of the mix, as well as encouraging the entry of females into the field (only 20 percent of the current workforce is female, but over 40 percent of the new entries).
Industry observers have long been aware of the coming “changing of the guard” in the oil and gas business. We are now approaching the crucial time period for ensuring the availability of the workers needed to fill future jobs. Cooperative efforts between the industry and higher education/training institutions will likely be required, and it’s time to act.
Billionaire real estate investor Jeff Greene’s massive Palazzo di Amore in Beverly Hills hit the market today for $195 million, making it America’s new most expensive home for sale.
Set on 25 acres overlooking Los Angeles about five to seven minutes by car to Rodeo Drive, the estate includes a 35,000-square-foot main home plus a 15,000-square-foot entertainment center and a separate guest home, containing a total of 12 bedrooms and 23 bathrooms across the various structures. The massive Mediterranean-style spread also comes with a working vineyard that produces six types of wine. Joyce Rey and Stacy Gottula, both of Coldwell Banker Previews International, are the listing agents.
Building the Palazzo was a seven-and-a-half-year labor of love for Greene. In 2007 the real estate investor, who has a net worth of $3 billion, according to Forbes, purchased the home out of bankruptcy proceedings from the previous owners–a Middle Eastern businessman and his wife–paying a reported $35 million. “I have no logical explanation for why we spent the next seven-and-a-half years building this house,” Greene told Forbes. “But that’s the world of building very detailed custom homes.”
Greene hired mega-mansion builder Mohamed Hadid to do the lion’s share of the design, but remained intimately involved in nearly every decision (along with his wife), pouring in tens of millions to complete the estate. (Finishing touches were just put on last month.) At one point, a Peruvian woodcarver was on site for four months to hand-carve the fireplace mantels, Greene says.
Because the property was purchased out of bankrutpcy, Greene got the deed but not the house plans, he says. The partially-finished palazzo had no driveways, so Greene and Hadid had to design and build one. Same for the swimming pool. The land also came with a curious concrete foundation with nothing on it. At first, Greene and his wife planned to tear it out. Then they changed course to: ”Let’s just build an entertainment complex,” Greene says. Today, that space houses a bowling alley, a 50-seat private screening room, and a ballroom with a DJ booth and a revolving dance floor
Palazzo di Amore would make the ideal setting for some grand entertaining. The first floor of the main house features a chef’s kitchen with a commercial size walk-in refrigerator, plus a secondary staff kitchen, butler’s pantry, two staff rooms, a three-car attached garage and two private offices with separate entry. The living room, dining room, breakfast room, game room, office and family room all open onto grounds that face a waterfall set into the hillside. A separate guest house brings the total livable square footage to 53,000. And the property features garage parking for 27 cars and can accommodate up to 150 cars on site.
Plus, what better way to impress all these hypothetical guests than with your own private wine? When Greene purchased the land in 2007, the vineyards were producing grapes but hadn’t yet been turned into wine. So the billionaire hired three full-time people to turn make the vineyards productive. Now, “Beverly Hills Vineyards” produces between 350 and 500 cases a year of six varietals: Sangiovese, Syrah, Cabernet, Merlot, Rose, and Sauvignon Blanc. “We drink it all the time,” Greene says.
The estate also features facilities for showing off that home-grown wine, with a 3,000-bottle wine cellar as well as a tasting room in the main house; as well as lower-level space for an additional 10,000 bottles (plus barrels) in a temperature-controlled room, flanked by an additional tasting room.
Of course, the home would also make a fabulous private retreat. The private living space on the second floor of the main home contains two wings, one with a guest suite and the 5,000-square-foot master suite, with hand-carved fireplace mantel, Juliet balconies, and his-and-hers baths. The ‘his’ bath features a Turkish-style spa with hand-painted wood panels, a fireplace, and floor-to-ceiling Moroccan tiles. On the opposite wing, there are four additional bedroom suites, including one VIP suite with silk-upholstered walls and a full kitchen. The grounds surrounding the home contain a 128-foot reflecting pool and fountain. Also, a swimming pool, a spa, a barbecue area and a tennis court.
The massive Mediterranean-style spread was originally designed by architect Bob Ray Offenhauser and designer Alberto Pinto. Rey, the listing agent, says she expects the home to sell to a foreign buyer, since all the Los Angeles area homes over $50 million sold this year have gone to foreigners.
To date, the most expensive home sold in the U.S. is the $147 million East Hampton spread picked up by Jana Partners founder Barry Rosenstein earlier this year. The record-setting price tag is based on nation-wide sales of major properties priced around $100 million, Rey says. She cited Copper Beech Farm, the $120 million Greenwich, Conn., property that sold earlier this year, as well as the penthouse at One57, the new luxury condominium towers in Midtown Manhattan, that billionaire Bill Ackman and a group of investors reportedly purchased for north of $90 million. “None of those properties had the land, the amenities that we’re offering here,” Rey says.
As for Greene, who lives in Florida and has a home in Malibu and another house in the Hamptons, he’s simply ready to move on with his life. ”I’m a control freak, and that’s why these projects aren’t good for me,” he says. “It’s just too many years, too long. But hopefully the buyer will come along who will appreciate the fruits of our labor.”
In a recent Wall Street Journal article, several couples across the country are quoted saying that instead of downsizing to a new home, they are choosing to live with their adult children.
This is what many families across the country are doing for both a “peace of mind” and for “higher property values.”
“For both domestic and foreign buyers, the hottest amenity in real estate these days is an in-law unit, an apartment carved out of an existing home or a stand-alone dwelling built on the homeowners’ property,” writes Katy McLaughlin of the WSJ. “While the adult children get the peace of mind of having mom and dad nearby, real-estate agents say the in-law accommodations are adding value to their homes.”
And how much more are these homes worth? In an analysis by Zillow, the homes with this type of living accommodations were priced about 60 percent higher than regular single-family homes.
Local builders are noticing the trend, too. Horsham based Toll Brothers are building more communities that include both large, single-family homes and smaller homes for empty nesters, the company’s chief marketing officer, Kira Sterling, told the WSJ.
This new class action against Ocwen addresses the marked-up default services fees that Ocwen is charging homeowners, particularly distressed homeowners, as part of a scheme of self-dealing with companies such as Altisource, and with the involvement of William C. Erbey, Executive Chairman, who has a leadership role on the Board of Ocwen and Altisource:
Weiner v Ocwen Financial Corporation a Florida Corporation COMPLAINT. Weiner v. Ocwen Fin. Corp. and Ocwen Loan Servicing, LLC, No 2:14-cv-02597 (E.D.Cal.), filed Nov. 5, 2014.
52. Ocwen’s scheme works as follows: Ocwen directs Altisource to order and coordinate default-related services, and, in turn, Altisource places orders for such services with third-party vendors. The third-party vendors charge Altisource for the performance of the default-related services, Altisource then marks up the price of the vendors’ services, in numerous instances by 100% or more, before “charging” the services to Ocwen. In turn, Ocwen bills the marked-up fees to homeowners.
58.Thus, the mortgage contract discloses to homeowners that the servicer will pay for default-related services when reasonably necessary, and will be reimbursed or “paid back” by the homeowner for amounts “disbursed.” Nowhere is it disclosed to borrowers that the servicer may engage in self-dealing to mark up the actual cost of those services to make a profit. Nevertheless, that is exactly what Ocwen does.
[Ed.: Explanation of Modern Relationship Between Loan Servicers and Home Loan Borrowers]
America’s Lending Industry Has Divorced itself from the Borrowers it Once Served
18. Ocwen’s unlawful loan servicing practices exemplify how America’s lending industry has run off the rails.
19. Traditionally, when people wanted to borrow money, they went to a bank or a “savings and loan.” Banks loaned money and homeowners promised to repay the bank, with interest, over a specific period of time. The originating bank kept the loan on its balance sheet, and serviced the loan — processing payments, and sending out applicable notices and other information — until the loan was repaid. The originating bank had a financial interest in ensuring that the borrower was able to repay the loan.
20. Today, however, the process has changed. Mortgages are now packaged, bundled, and sold to investors on Wall Street through what is referred to in the financial industry as mortgage backed securities or MBS. This process is called securitization. Securitization of mortgage loans provides financial institutions with the benefit of immediately being able to recover the amounts loaned. It also effectively eliminates the financial institution’s risk from potential default. But, by eliminating the risk of default, mortgage backed securities have disassociated the lending community from homeowners.
21. Numerous unexpected consequences have resulted from the divide between lenders and homeowners. Among other things, securitization has led to the development of an industry of companies which make money primarily through servicing mortgages for the hedge funds and investment houses who own the loans.
22. Loan servicers do not profit directly from interest payments made by homeowners. Instead, these companies are paid a set fee for their loan administration services. Servicing fees are usually earned as a percentage of the unpaid principal balance of the mortgages that are being serviced. A typical servicing fee is approximately 0.50% per year.
23. Additionally, under pooling and servicing agreements (“PSAs”) with investors and note holders, loan servicers assess fees on borrowers’ accounts for default-related services. These fees include, inter alia, Broker’s Price Opinion (“BPO”) fees, appraisal fees, and title examination fees.
24. Under this arrangement, a loan servicer’s primary concern is not ensuring that homeowners stay current on their loans. Instead, they are focused on minimizing any costs that would reduce profit from the set servicing fee, and generating as much revenue as possible from fees assessed against the mortgage accounts they service. As such, their “business model . . . encourages them to cut costs wherever possible, even if [that] involves cutting corners on legal requirements, and to lard on junk fees and in-sourced expenses at inflated prices.”3
25. As one Member of the Board of Governors of the Federal Reserve System has explained: While an investor’s financial interests are tied more or less directly to the performance of a loan, the interests of a third-party servicer are tied to it only indirectly, at best. The servicer makes money, to oversimplify it a bit, by maximizing fees earned and minimizing expenses while performing the actions spelled out in its contract with the investor. . . . The broad grant of delegated authority that servicers enjoy under pooling and servicing agreements (PSAs), combined with an effective lack of choice on the part of consumers, creates an environment ripe for abuse.4 (citing See Sarah Bloom Raskin, Member Board of Governors of the Federal Reserve System, Remarks at the National Consumer Law Center’s Consumer Rights Litigation Conference, Boston Massachusetts, Nov. 12, 2010, available at http://www.federalreserve.gov/newsevents/speech/raskin20101112a.htm (last visited Jan. 23, 2012).
The presumption that North American shale oil production is the “swing” component of global supply may be incorrect.
Supply cutbacks from other sources may come first.
Growth momentum in North American unconventional oil production will likely carry on into 2015, with little impact from lower oil prices on the next two quarters’ volumes.
The current oil price does not represent a structural “economic floor” for North American unconventional oil production.
The recent pull back in crude oil prices is often portrayed as being a consequence of the rapid growth of North American shale oil production.
The thesis is often further extrapolated to suggest that a major slowdown in North American unconventional oil production growth, induced by the oil price decline, will be the corrective mechanism that will bring oil supply and demand back in equilibrium (given that OPEC’s cost to produce is low).
Both views would be, in my opinion, overly simplistic interpretations of the global supply/demand dynamics and are not supported by historical statistical data.
Oil Price – The Economic Signal Is Both Loud and Clear
The current oil price correction is, arguably, the most pronounced since the global financial crisis of 2008-2009. The following chart illustrates very vividly that the price of the OPEC Basket (which represents waterborne grades of oil) has moved far outside the “stability band” that seems to have worked well for both consumers and producers over the past four years. (It is important, in my opinion, to measure historical prices in “today’s dollars.”)
(Source: Zeits Energy Analytics, November 2014)
Given the sheer magnitude of the recent oil price move, the economic signal to the world’s largest oil suppliers is, arguably, quite powerful already. A case can be made that it goes beyond what could be interpreted as “ordinary volatility,” giving the hope that the current price level may be sufficient to induce some supply response from the largest producers – in the event a supply cut back is indeed needed to eliminate a transitory supply/demand imbalance.
Are The U.S. Oil Shales The Culprit?
It is debatable, in my opinion, if the continued growth of the U.S. onshore oil production can be identified as the primary cause of the current correction in the oil price. Most likely, North American shale oil is just one of several powerful factors, on both supply and demand sides, that came together to cause the price decline.
The history of oil production increases from North America in the past three years shows that the OPEC Basket price remained within the fairly tight band, as highlighted on the graph above, during 2012-2013, the period when such increases were the largest. Global oil prices “broke down” in September of 2014, when North American oil production was growing at a lower rate than in 2012-2013.
(Source: OPEC, October 2014)
If the supply growth from North America was indeed the primary “disruptive” factor causing the imbalance, one would expect the impact on oil prices to become visible at the time when incremental volumes from North America were the highest, i.e., in 2012-2013.
Should One Expect A Strong Slowdown in North American Oil Production Growth?
There is no question that the sharp pullback in the price of oil will impact operating margins and cash flows of North American shale oil producers. However, a major slowdown in North American unconventional oil production growth is a lot less obvious.
First, the oil price correction being seen by North American shale oil producers is less pronounced than the oil price correction experienced by OPEC exporters. It is sufficient to look at the WTI historical price graph below (which is also presented in “today’s dollars”) to realize that the current WTI price decline is not dissimilar to those seen in 2012 and 2013 and therefore represents a signal of lesser magnitude than the one sent to international exporters (the OPEC Basket price).
(Source: Zeits Energy Analytics, November 2014)
Furthermore, among all the sources of global oil supply, North American oil shales are the least established category. Their cost structure is evolving rapidly. Given the strong productivity gains in North American shale oil plays, what was a below-breakeven price just two-three years ago, may have become a price stimulating growth going into 2015.
Therefore, the signal sent by the recent oil price decline may not be punitive enough for North American shale oil producers and may not be able to starve the industry of external capital.
Most importantly, review of historical operating statistics provides an indication that the previous similar WTI price corrections – seen in 2012 and 2013 – did not result in meaningful slowdowns in the North American shale oil production.
The following graph shows the trajectory of oil production in the Bakken play. From this graph, it is difficult to discern any significant impact from the 2012 and 2013 WTI price corrections on the play’s aggregate production volumes. While a positive correlation between these two price corrections and the pace of production growth in the Bakken exists, there are other factors – such as takeaway capacity availability and local differentials – that appear to have played a greater role. I should also note that the impact of the lower oil prices on production volumes was not visible in the production growth rate for more than half a year after the onset of the correction.
(Source: Zeits Energy Analytics, November 2014)
Leading U.S. Independents Will Likely Continue to Grow Production At A Rapid Pace
Production growth track record by several leading shale oil players suggests that U.S. shale oil production will likely remain strong even in the $80 per barrel WTI price environment. Several examples provide an illustration.
Continental Resources (NYSE:CLR) grew its Bakken production volumes at a 58% CAGR over the past three years (slide below). By looking at the company’s historical production, it would be difficult to identify any impact from the 2012 and 2013 oil price corrections on the company’s production growth rate. Continental just announced a reduction to its capital budget in 2015 in response to lower oil prices, to $4.6 billion from $5.2 billion planned initially. The company still expects to grow its total production in 2015 by 23%-29% year-on-year.
(Source: Continental Resources, October 2014)
EOG Resources (NYSE:EOG) expects that its largest core plays (Eagle Ford, Bakken and Delaware Basin) will generate after-tax rates of return in excess of 100% in 2015 at $80 per barrel wellhead price. EOG went further to suggest that these plays may remain economically viable (10% well-level returns) at oil prices as low as $40 per barrel. The company expects to continue to grow its oil production at a double-digit rate in 2015 while spending within its cash flow. EOG achieved ~40% oil production growth in 2012-2013 and expects 31% growth for 2014. While a slowdown is visible, it is important to take into consideration that EOG’s oil production base has increased dramatically in the past three years and requires significant capital just to be maintained flat. Again, one would not notice much impact from prior years’ oil price corrections on EOG’s production growth trajectory.
(Source: EOG Resources, November 2014)
Anadarko Petroleum’s (NYSE:APC) U.S. onshore oil production growth story is similar. Anadarko increased its U.S. crude oil and NLS production from 100,000 barrels per day in 2010 to close to almost 300,000 barrels per day expected in Q4 2014. Anadarko has not yet provided growth guidance for 2015, but indicated that the company’s exploration and development strategies remain intact. While recognizing a very steep decline in the oil price, Anadarko stated that it wants “to watch this environment a little longer” before reaching conclusions with regard to the impact on its future spending plans.
(Source: Anadarko Petroleum, October 2014)
Devon Energy (NYSE:DVN) posted company-wide oil production of 216,000 barrels per day in Q3 2014. While Devon will provide detailed production and capital guidance at a later date, the company has indicated that it sees 20% to 25% oil production growth and mid‐single digit top‐line growth “on a retained‐property basis” (pro forma for divestitures) in 2015.
The list can continue on.
In Conclusion…
Based on preliminary 2015 growth indications from large shale oil operators, North American oil production growth in 2015 will likely remain strong, barring further strong decline in the price of oil.
No slowdown effect from lower oil prices will be seen for at least six months from the time operators received the “price signal” (August-September 2014).
Given the effects of the technical learning curve in oil shales and continuously improving drilling economics, the current ~$77 per barrel WTI price is unlikely to be sufficient to eliminate North American unconventional production growth.
North American shale oil production remains a very small and highly fragmented component of the global oil supply.
The global oil “central bank” (Saudi Arabia and its close allies in OPEC) remain best positioned to quickly re-instate stability of oil price in the event further significant decline occurred.
Count Dracula, the central character of Irish author Bram Stoker’s classic vampire novel, eagerly left for England in search of new blood, in a story that popularized the Romanian region of Transylvania. Today, house hunters are invited to make the reverse journey now that Romania is a member of the European Union and that restrictions were lifted this year on purchases of local real estate by the bloc’s nationals.
Britain’s Prince Charles, for one, unwinds every year in Zalanpatak. The mud road leading to the remote village stretches for miles, with the clanging of cow bells accompanying tourists making the trek.
Elsewhere in the world, the heir to the British throne occupies great castles and sprawling mansions. In rural Romania, he resides in a small old cottage. His involvement, since 2006, in the restoration of a few local farmhouses has given the hamlet global popularity and added a sense of excitement about Transylvania living.
A living room in Bran Castle, a Transylvania property marketed as Count Dracula’s castle. The home is for sale, initially listed for $78 million.
Transylvania, with a population of more than seven million in the central part of Romania, has a number of high-end homes on the market. And, yes, one is a castle. Bran Castle in Brasov county is marketed as the home of Count Dracula. In reality it was a residence of Romanian Queen Marie in the early 20th century. In 2007, the home was available for $78 million. The sellers are no longer listing a price, said Mark A. Meyer, of Herzfeld and Rubin, the New York attorneys representing the queen’s descendants, but will entertain offers.
Foreign buyers had been focused on Bucharest, where there was speculative buying of apartments after the country joined the EU in 2007. But Transylvania has been luring house hunters away from the capital city.
A guesthouse on the property in Zalanpatak, Transylvania, that is owned by Britain’s Prince Charles. His presence has boosted interest in Romanian real estate.
Transylvania means “the land beyond the forest” and the region is famous for its scenic mountain routes. Brasov, an elegant mountain resort and the closest Transylvanian city to the capital, has many big villas built in the 19th century by wealthy merchants. A 10-room townhouse from that period in the historic city center is listed for $2.7 million. For $500,000, a 2,200-square-foot apartment offers rooftop views of the city and the surrounding mountains.
A seven-bedroom mansion in the nearby village of Halchiu, close to popular skiing resorts, is on the market for $2.4 million. The modern villa features two huge living rooms, a swimming pool, a tennis court and spectacular views of the Carpathian Mountains.
The village, founded by Saxons in the 12th century, has rows of historic houses across the street. Four such buildings were demolished to make way for the mansion, completed in 2010.
A $2.4 million mansion is for sale in Halchiu village.
“Rather than invest a million or more to buy an existing house, the wealthy prefer to build on their own because construction materials and work is cheaper,” said Raluca Plavita, senior consultant at real-estate firm DTZ Echinox in Bucharest.
Non-EU nationals can’t purchase land outright—although they may use locally registered companies to circumvent the restriction—but they can buy buildings freely, said Razvan Popa, real-estate partner at law firm Kinstellar. High-end properties are out of reach for many Romanians, who make an average of $500 in monthly take-home pay.
The country saw a rapid inflation of real-estate prices before 2008, on prospects of Romania’s entry to the EU and the North Atlantic Treaty Organization, as well as aggressive lending by banks. Values then fell by half during the global financial crisis.
The economy is stronger now, with the International Monetary Fund estimating 2.4% growth this year. But the country is still among Europe’s poorest. Its isolation during the dictatorship of Nicolae Ceausescu gave it a bad image.
The interior of the seven-bedroom Halchiu mansion, which was built on the site of four traditional Saxon homes.
“Interest in Romania isn’t comparable with Prague or Budapest where some may be looking to buy a small apartment with a view of Charles Bridge or the Danube,” said Mr. Popa, the real-estate lawyer.
The international publicity around Prince Charles’s properties offers a counterbalance to some of the negative press Romania has received in Western Europe, which is worried about well-educated Romanians moving to other countries to provide inexpensive labor.
The Zalanpatak property is looked after by Tibor Kalnoky, a descendant of a Hungarian aristocratic family. The 47-year-old studied in Germany to be a veterinarian and, after reclaiming family assets in Romania, has managed the prince’s property and has hosted him during his visits.
These occasional visits are enough to attract scores of tourists throughout the year to the formerly obscure village in a Transylvanian valley. The fact that few street signs lead there,that the property offers no Internet or TV and that cellphone signals are absent for miles, seems only to add to the mystery of the place.
Kenny DeLaGarza, a building inspector for the city of Midland, at a 600-home Betenbough development.
Single-family home construction is expected to increase 26 percent in 2015, the National Association of Home Builders reported Oct. 31. NAHB expects single-family production to total 802,000 units next year and reach 1.1 million by 2016.
Economists participating in the NAHB’s 2014 Fall Construction Forecast Webinar said that a growing economy, increased household formation, low interest rates and pent-up demand should help drive the market next year. They also said they expect continued growth in multifamily starts given the nation’s rental demand.
The NAHB called the 2000-03 period a benchmark for normal housing activity; during those years, single-family production averaged 1.3 million units a year. The organization said it expects single-family starts to be at 90 percent of normal by the fourth quarter 2016.
NAHB Chief Economist David Crowe said multifamily starts currently are at normal production levels and are projected to increase 15 percent to 365,000 by the end of the year and hold steady into next year.
The NAHB Remodeling Market Index also showed increased activity, although it’s expected to be down 3.4 percent compared to last year because of sluggish activity in the first quarter 2014. Remodeling activity will continue to increase gradually in 2015 and 2016.
Moody’s Analytics Chief Economist Mark Zandi told the NAHB that he expects an undersupply of housing given increasing job growth. Currently, the nation’s supply stands at just over 1 million units annually, well below what’s considered normal; in a normal year, there should be demand for 1.7 million units.
Zandi noted that increasing housing stock by 700,000 units should help meet demand and create 2.1 million jobs. He also noted that things should level off by the end of 2017, when mortgage rates probably will rise to around 6 percent.
“The housing market will be fine because of better employment, higher wages and solid economic growth, which will trump the effect of higher mortgage rates,” Zandi told the NAHB.
Robert Denk, NAHB assistant vice president for forecasting and analysis, said that he expects housing recovery to vary by state and region, noting that states with higher levels of payroll employment or labor market recovery are associated with healthier housing markets
States with the healthiest job growth include Louisiana, Montana, North Dakota, Texas and Wyoming, as well as farm belt states like Iowa.
Meanwhile Alabama, Arizona, Nevada, New Jersey, New Mexico and Rhode Island continue to have weaker markets.
Despite an improving job market and low interest rates, the share of first-time homebuyers fell to its lowest point in nearly three decades and is preventing a healthier housing market from reaching its full potential, according to an annual survey released by the National Association of Realtors (NAR). The survey additionally found that an overwhelming majority of buyers search for homes online and then purchase their home through a real estate agent.
The 2014 NAR Profile of Home Buyers and Sellers continues a long-running series of large national NAR surveys evaluating the demographics, preferences, motivations, plans and experiences of recent home buyers and sellers; the series dates back to 1981. Results are representative of owner-occupants and do not include investors or vacation homes.
The long-term average in this survey, dating back to 1981, shows that four out of 10 purchases are from first-time home buyers. In this year’s survey, the share of first-time home buyers dropped five percentage points from a year ago to 33 percent, representing the lowest share since 1987 (30 percent).
“Rising rents and repaying student loan debt makes saving for a down payment more difficult, especially for young adults who’ve experienced limited job prospects and flat wage growth since entering the workforce,” said Lawrence Yun, NAR chief economist. “Adding more bumps in the road, is that those finally in a position to buy have had to overcome low inventory levels in their price range, competition from investors, tight credit conditions and high mortgage insurance premiums.”
Yun added, “Stronger job growth should eventually support higher wages, but nearly half (47 percent) of first-time buyers in this year’s survey (43 percent in 2013) said the mortgage application and approval process was much more or somewhat more difficult than expected. Less stringent credit standards and mortgage insurance premiums commensurate with current buyer risk profiles are needed to boost first-time buyer participation, especially with interest rates likely rising in upcoming years.”
The household composition of buyers responding to the survey was mostly unchanged from a year ago. Sixty-five percent of buyers were married couples, 16 percent single women, nine percent single men and eight percent unmarried couples.
In 2009, 60 percent of buyers were married, 21 percent were single women, 10 percent single men and 8 percent unmarried couples. Thirteen percent of survey respondents were multi-generational households, including adult children, parents and/or grandparents.
The median age of first-time buyers was 31, unchanged from the last two years, and the median income was $68,300 ($67,400 in 2013). The typical first-time buyer purchased a 1,570 square-foot home costing $169,000, while the typical repeat buyer was 53 years old and earned $95,000. Repeat buyers purchased a median 2,030-square foot home costing $240,000.
When asked about the primary reason for purchasing, 53 percent of first-time buyers cited a desire to own a home of their own. For repeat buyers, 12 percent had a job-related move, 11 percent wanted a home in a better area, and another 10 percent said they wanted a larger home. Responses for other reasons were in the single digits.
According to the survey, 79 percent of recent buyers said their home is a good investment, and 40 percent believe it’s better than stocks.
Financing the purchase Nearly nine out of 10 buyers (88 percent) financed their purchase. Younger buyers were more likely to finance (97 percent) compared to buyers aged 65 years and older (64 percent). The median down payment ranged from six percent for first-time buyers to 13 percent for repeat buyers. Among 23 percent of first-time buyers who said saving for a down payment was difficult, more than half (57 percent) said student loans delayed saving, up from 54 percent a year ago.
In addition to tapping into their own savings (81 percent), first-time homebuyers used a variety of outside resources for their loan downpayment. Twenty-six percent received a gift from a friend or relative—most likely their parents—and six percent received a loan from a relative or friend. Ten percent of buyers sold stocks or bonds and tapped into a 401(k) fund.
Ninety-three percent of entry-level buyers chose a fixed-rate mortgage, with 35 percent financing their purchase with a low-down payment Federal Housing Administration-backed mortgage (39 percent in 2013), and nine percent using the Veterans Affairs loan program with no downpayment requirements.
“FHA premiums are too high in relation to default rates and have likely dissuaded some prospective first-time buyers from entering the market,” said Yun. “To put it in perspective, 56 percent of first-time buyers used a FHA loan in 2010. The current high mortgage insurance added to their monthly payment is likely causing some young adults to forgo taking out a loan.”
Buyers used a wide variety of resources in searching for a home, with the Internet (92 percent) and real estate agents (87 percent) leading the way. Other noteworthy results included mobile or tablet applications (50 percent), mobile or tablet search engines (48 percent), yard signs (48 percent) and open houses (44 percent).
According to NAR President Steve Brown, co-owner of Irongate, Inc., Realtors® in Dayton, Ohio, although more buyers used the Internet as the first step of their search than any other option (43 percent), the Internet hasn’t replaced the real estate agent’s role in a transaction.
“Ninety percent of home buyers who searched for homes online ended up purchasing their home through an agent,” Brown said. “In fact, buyers who used the Internet were more likely to purchase their home through an agent than those who didn’t (67 percent). Realtors are not only the source of online real estate data, they also use their unparalleled local market knowledge and resources to close the deal for buyers and sellers.”
When buyers were asked where they first learned about the home they purchased, 43 percent said the Internet (unchanged from last year, but up from 36 percent in 2009); 33 percent from a real estate agent; 9 percent a yard sign or open house; six percent from a friend, neighbor or relative; five percent from home builders; three percent directly from the seller; and one percent a print or newspaper ad.
Likely highlighting the low inventory levels seen earlier in 2014, buyers visited 10 homes and typically found the one they eventually purchased two weeks quicker than last year (10 weeks compared to 12 in 2013). Overall, 89 percent were satisfied with the buying process.
First-time home buyers plan to stay in their home for 10 years and repeat buyers plan to hold their property for 15 years; sellers in this year’s survey had been in their previous home for a median of 10 years.
The biggest factors influencing neighborhood choice were quality of the neighborhood (69 percent), convenience to jobs (52 percent), overall affordability of homes (47 percent), and convenience to family and friends (43 percent). Other factors with relatively high responses included convenience to shopping (31 percent), quality of the school district (30 percent), neighborhood design (28 percent) and convenience to entertainment or leisure activities (25 percent).
This year’s survey also highlighted the significant role transportation costs and “green” features have in the purchase decision process. Seventy percent of buyers said transportation costs were important, while 86 percent said heating and cooling costs were important. Over two-thirds said energy efficient appliances and lighting were important (68 and 66 percent, respectively).
Seventy-nine percent of respondents purchased a detached single-family home, eight percent a townhouse or row house, 8 percent a condo and six percent some other kind of housing. First-time home buyers were slightly more likely (10 percent) to purchase a townhouse or a condo than repeat buyers (seven percent). The typical home had three bedrooms and two bathrooms.
The majority of buyers surveyed purchased in a suburb or subdivision (50 percent). The remaining bought in a small town (20 percent), urban area (16 percent), rural area (11 percent) or resort/recreation area (three percent). Buyers’ median distance from their previous residence was 12 miles.
Characteristics of sellers The typical seller over the past year was 54 years old (53 in 2013; 46 in 2009), was married (74 percent), had a household income of $96,700, and was in their home for 10 years before selling—a new high for tenure in home. Seventeen percent of sellers wanted to sell earlier but were stalled because their home had been worth less than their mortgage (13 percent in 2013).
“Faster price appreciation this past year finally allowed more previously stuck homeowners with little or no equity the ability to sell after waiting the last few years,” Yun said.
Sellers realized a median equity gain of $30,100 ($25,000 in 2013)—a 17 percent increase (13 percent last year) over the original purchase price. Sellers who owned a home for one year to five years typically reported higher gains than those who owned a home for six to 10 years, underlining the price swings since the recession.
The median time on the market for recently sold homes dropped to four weeks in this year’s report compared to five weeks last year, indicating tight inventory in many local markets. Sellers moved a median distance of 20 miles and approximately 71 percent moved to a larger or comparably sized home.
A combined 60 percent of responding sellers found a real estate agent through a referral by a friend, neighbor or relative, or used their agent from a previous transaction. Eighty-three percent are likely to use the agent again or recommend to others.
For the past three years, 88 percent of sellers have sold with the assistance of an agent and only nine percent of sales have been for-sale-by-owner, or FSBO sales.
For-sale-by-owner transactions accounted for 9 percent of sales, unchanged from a year ago and matching the record lows set in 2010 and 2012; the record high was 20 percent in 1987. The share of homes sold without professional representation has trended lower since reaching a cyclical peak of 18 percent in 1997.
Factoring out private sales between parties who knew each other in advance, the actual number of homes sold on the open market without professional assistance was 5 percent. The most difficult tasks reported by FSBOs are getting the right price, selling within the length of time planned, preparing or fixing up the home for sale, and understanding and completing paperwork.
NAR mailed a 127-question survey in July 2014 using a random sample weighted to be representative of sales on a geographic basis. A total of 6,572 responses were received from primary residence buyers. After accounting for undeliverable questionnaires, the survey had an adjusted response rate of 9.4 percent. The recent home buyers had to have purchased a home between July of 2013 and June of 2014. Because of rounding and omissions for space, percentage distributions for some findings may not add up to 100 percent. All information is characteristic of the 12-month period ending in June 2014 with the exception of income data, which are for 2013.
According to a Reuters report, the FBI has opened a criminal probe of American Realty Capital Properties.
This follows the disclosure of accounting errors by the company.
This investigation is in addition to a SEC inquiry.
American Realty Capital Properties (NASDAQ:ARCP) just cannot catch a break. Reuters reported that the Federal Bureau of Investigation has opened a criminal investigation into ARCP, according to their sources. The FBI is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, according to the Reuters report.
This news comes just days after the company announced a series of accounting errors which had been intentionally not corrected and thus concealed from the public. The amount of money involved, roughly $9.24 million GAAP and $13.60 million AFFO, was relatively small. However, these accounting errors resulted in the resignation of two senior executives, chief financial officer, Brian Block, and chief accounting officer, Lisa McAlister.
Shares of ARCP were trading for as low as $7.85 each on Wednesday, before recovering to $10 per share after CEO David Kay held fairly well received conference call explaining what happened. In the call, Mr. Kay stressed that ARCP’s key metrics were sound. He reaffirmed that the dividend policy will not change, noting that the operating metrics were not impacted and that the NAV is unchanged at $13.25. Nevertheless, the stock continued to fall, closing the week at below $9 per share. In total, ARCP’s stock has fallen 30% since news of the accounting errors first arose, wiping out $4 billion in market value.
Conclusion:
This is quite the shocking development. Not only is the FBI looking into ARCP, but also the Securities and Exchange Commission, which announced its own investigation of the accounting errors late last week. Furthermore, the company was placed on CreditWatch with negative implications by S&P, which risks putting the credit rating into junk territory.
As I noted in my earlier article, accounting issues equal an automatic sell in my book. I sold most of my ARCP holdings on Wednesday, though I still kept some shares, opting instead to sell calls on the remaining position. I now lament that choice as I fear the stock can fall further. An FBI criminal probe is no small matter and represents a clear material risk. What an absolute disaster.
Update: American Realty Capital Properties: The Turmoil Is Only Getting Worse
ARCP sent shock waves through the analyst community last week after the REIT said its financials should no longer be relied upon and said goodbye to the CFO and CAO.
ARCP is now also attracting heat from the FBI.
In addition, RCS Capital Corporation cancels Cole Capital transaction.
Investors in American Realty Capital Properties (NASDAQ:ARCP) need to demonstrate that they have nerves of steel at the moment. After the company reported that it overstated its AFFO last week, and that its Chief Financial Officer and Chief Accounting Officer departed as a result of the accounting scandal, more bad news are seeing the light of day.
First of all, as various news outlets reported, the Federal Bureau of Investigation is putting up some additional heat on ARCP. As Reuters reported:
(Reuters) – U.S. authorities have opened a criminal probe of American Realty Capital Properties in the wake of the real estate investment trust’s disclosure that it had uncovered accounting errors, two sources familiar with the matter said on Friday.
The Federal Bureau of Investigation is conducting the investigation along with prosecutors from U.S. Attorney Preet Bharara’s office in New York, the sources said. Further details of the probe could not be learned.
The involvement of the New York U.S. Attorney’s office is particularly bad news as Preet Bharara takes a tough stance with companies that break the law or push its limits too far. While the criminal probe certainly is bad news and comes in addition to the involvement of the SEC, something else caused massive irritation among ARCP shareholders today: The Cole Capital deal with RCS Capital Corporation (NYSE: RCAP) is in real danger.
According to ARCP’s latest (and angry) press release:
In the middle of the night, we received a letter from RCS Capital Corporation purporting to terminate the equity purchase agreement, dated September 30, 2014, between RCS and an affiliate of ARCP. As we informed RCS orally and in writing over the weekend, RCS has no right and there is absolutely no basis for RCS to terminate the agreement. Therefore, RCS’s attempt to terminate the agreement constitutes a breach of the agreement. In addition, we believe that RCS’s unilateral public announcement is a violation of its agreement with ARCP. The independent members of the ARCP Board of Directors and ARCP management are evaluating all alternatives under the agreement and with respect to the Cole Capital® business, generally. ARCP management and the independent members of the ARCP Board of Directors are committed to doing what is in the best interests of ARCP stockholders and its business, including Cole Capital.
That’s right. Since the FBI now has its fingers in the pie, and the SEC, management at RCS Capital has informed ARCP that it is terminating the deal. Whatever side you are one, you’ve got to admit: American Realty Capital Properties is just falling apart.
The once mighty real estate investment trust has lost a staggering 36% of its market capitalization since shares closed at $12.38 on October 28, 2014, which is a tough pill to swallow for those investors who pledged allegiance to American Realty Capital Properties, despite the turbulence that erupted a week ago.
Technical picture Shares of American Realty Capital Properties are trading extremely weakly today in light of the new information, and I continue to see further downside potential for this REIT in the near term.
It seems as if all the forces of the universe are conspiring to bring American Realty Capital Properties down to its knees, and an investment in this REIT is not recommendable at the moment.
Source: StockCharts.com
Bottom Line: The American Realty Capital Properties’ story has gotten significantly worse today: In addition to two of the most important executives abruptly leaving the company amid an accounting scandal, the SEC and the FBI are investigating the company, lawyers are very likely going to hit ARCP with litigation, and the latest transaction is in the process of collapsing.
Bulls must either have nerves of steel or clinging to hope. In any case, ARCP’s prospects have gotten much worse today, and I continue to expect further downside potential driven by litigation concerns, potential fines and extremely negative investor sentiment.
American Realty Capital Comes Clean, And I Feel Dirty
American Realty Capital’s restatement has created rampant volatility in a stock already under the gun.
Why I decided to sell half of my position in the company.
Important portfolio takeaways for investors of all kinds.
This is one of the tougher articles I’ve written for Seeking Alpha. Asset allocation and portfolio strategy for income investors has been my focal point of writing over the past three years. I’ve always been of the opinion that talking about how to fish trumps simply giving someone fish to chew on.
Still, I mention equity-income stocks all the time in articles, but it’s rare that I write focus articles. On October third, I wrote, “American Realty Capital Properties: 30% Total Return Next Year“. Less than a month later, I find that post in an inverse position, with American Realty Capital (NASDAQ:ARCP) having dropped around 30% in market value.
First, I will tell readers that I sold a bit more than half of my position as a result of ARCP’s restatement, and still retain shares. However, it is now one of my smallest income portfolio positions and one that I have lost a majority of my conviction in. ARCP, in my mind, has transitioned from being a higher-risk investment into now becoming day-trader fodder, and at least for the near term, highly speculative. I would have been all over this thing during my trading days, but having become more conservative today with less portfolio churn, it has little room in my portfolio.
I considered all options here. I thought about increasing my position, extinguishing it altogether, selling put options at attractive premiums, or potentially doing nothing. Being so supportive of this story over the past year, I was mostly disappointed that I had to put any thought into the matter at all. For a variety of reasons, I came to the conclusion that halving the position — taking a loss, which I needed to do anyway for taxes — was a prudent near-term choice. I will revisit the decision in a month, and could conceivably buy back those shares once wash sale rules have passed.
Though selling during a period of fear and volatility is not typically in my playbook, following this restatement, I have lost confidence in this story. If you follow me, you know that I certainly identified the elevated risk that ARCP brought to real estate investors. Over the past six months, here are some comments that I made in regard to ARCP in several articles:
If you invest in ARCP today, you should expect the unexpected.
Given all the deals and potential for a misstep, there is heightened risk in owning ARCP.
But with the baggage it continues to drag along with it…..it may not necessarily be appropriate for more conservative investors
I do not consider the stock a table pounding buy.
I even compared Nick Schorsch to Monty Hall from “Let’s Make A Deal,” following the Red Lobster purchase and flip-flop on the strip mall IPO-then-sale.
As the year wore on, however, my convictions rose, since the company did not materially change its guidance to investors, despite all the acquisition activity. I figured if there were a stumble, it would have been disclosed earlier this year as the various acquisitions had time to be absorbed into operations.
While there was much criticism over the Cole quasi-divestiture to RCS and lowered guidance, I remained resolute, thinking there wasn’t another buyer, and this at least got Cole out from under the ARCP umbrella.
Of course as we now know, some financial disclosures were not to be relied upon and guidance should have been changed. If there were not so much other controversy with regard to this company, I doubt the stock would have tanked as much as it has. When you have a managerial crisis of confidence already in place and make a restatement announcement, you create panic. If we take this on face value, it does not appear to be a huge restatement, but taken in totality, this is a monumental, perhaps insurmountable, credibility problem. It’s now all aboard for the ambulance-chasing lawyers.
At this point I have decided that it is in my best interest to rip the towel in half and throw it in. I see it as a hedge against further deterioration in this story that I would not necessarily rule out given the loose management style that I and every ARCP investor knew existed.
We’re not talking about some low level accounting bean counter or paper pusher that seems to have perpetrated this; we’re talking about CFO Brian Block, assumedly someone that David Kay and Nick Schorsch had drinks with regularly. So when Kay defended the culture at ARCP on the conference call by uttering, “We don’t have bad people, we had some bad judgment there,” forgive me if I now wonder if he really has a clue how good, sweet, and honest his executives and rank-and-file workers really are. Although the restatements appear isolated to this year’s AFFO, we’ll have to see if anything turns up in 2013. While I’d like to give this company the benefit of the doubt once again, I’m finding myself staring at a slippery slope of hope that another shoe will not drop.
Still, I did not jettison the entire position because these are emotional times, and the glass-is-half-full part of me says the market is overreacting. We are, keep in mind, still talking about a high-quality portfolio of real estate, not a biotech company whose sole drug was deemed inefficacious by the FDA. In the end, however, I had to make a decision for my own portfolio that I deemed appropriate. This was it.
Meanwhile, I would not criticize nor blame someone for selling out here and moving on to more stable pastures. Fellow REIT writer Brad Thomas apparently has. On the flip side, I could see the more adventurous or those with continued conviction buying in now or upping exposure. The “right” thing to do for many investors may be to simply hold through the volatility. As I opined in a past article on ARCP:
But with the considerable sentiment overhang and “show me” attitude of the market, it could take some time and a strong stomach to see it through.
The sentiment “overhang” has basically become something much worse. And at this point I wouldn’t even want to predict how much time it could take for a rebound. Your stomach constitution will need to be stronger than I first suspected.
Portfolio Takeaways
I’ve had more than one reader tell me that the various risks I identified made them conclude that ARCP was not a stock they should own. And given what has happened here, at least for the near-term, that was obviously a prudent decision. We must all come to personal conclusions as to how much risk we are willing to take to attain income and capital growth goals.
For investors of all types, the most important thing to take away from this near-term “disaster” is that diversification and limiting position size is critical. If ARCP amounted to a couple of percent, or less, of a portfolio, the stock’s tank may not be all that impacting. If it was a more concentrated portion of the overall pie, it becomes a more painful near-term event and makes various portfolio maneuver decisions more challenging to come to.
In the end, portfolio management is a personal endeavor that amounts to an inexact science. Whether you think what I’ve done with my ARCP position is right or not is not really all important. The more important thing is whether you are comfortable with the personal portfolio decisions you make or not, why you make them, and whether they are right for your situation.
I’ve used the word “I” more than I normally would in an article. This one was indeed about me and owning up to putting wholesale trust in a management team that apparently I shouldn’t have. And it was a about a decision I really didn’t want to make as a result. Unfortunately, we have to take the bad with the good in the investment world, brush ourselves off, move on, and continue to make personal decisions that are right for our portfolios.
The excesses of 1980s New York investment banking as captured best (and with just a dose of hyperbole) by Bret Easton Ellis’s American Psycho may be long gone in the US, but they certainly are alive and well in other banking meccas, such as the one place where every financier wants to work these days (thanks to the Chinese government making it rain credit): Hong Kong. It is here that yesterday a 29-year-old British banker, Rurik Jutting, a Cambridge University grad and current Bank of America Merrill Lynch, former Barclays employee, was arrested in connection with the grisly murder of two prostitutes. One of the two victims had been hidden in a suitcase on a balcony, while the other, a foreign woman of between 25 and 30, was found lying inside the apartment with wounds to her neck and buttocks, the police said in a statement. | A spokesman for Bank of America Merrill Lynch told Reuters on Sunday that the U.S. bank had, until recently, an employee bearing the same name as a man Hong Kong media have described as the chief suspect in the double murder case. Bank of America Merrill Lynch would not give more details nor clarify when the person had left the bank.
Britain’s Foreign Office in London said on Saturday a British national had been arrested in Hong Kong, without specifying the nature of any suspected crime.
The details of the crime are straight out of American Psycho 2: the Hong Kong Sequel. One of the murdered women was aged between 25 and 30 and had cut wounds to her neck and buttock, according to a police statement. The second woman’s body, also with neck injuries, was discovered in a suitcase on the apartment’s balcony, the police said. A knife was seized at the scene.
According to the WSJ, the arrested suspect, who called police to the apartment in the early hours of Nov. 1, was until recently a Hong Kong-based employee of Bank of America Merrill Lynch.
Filings with Hong Kong’s securities regulator show that the suspect was an employee with the bank as recently as Oct. 31.The man had called police in the early hours of Saturday and asked them to investigate the case, police said.
Hong Kong’s Apple Daily newspaper said the suspect had taken about 2,000 photographs and some video footage of the victims after the killings including close-ups of their wounds. Local media said the two women were prostitutes.
The apartment where the bodies were found is on the 31st floor in a building popular with financial professionals, where average rents are about HK$30,000 (nearly $4,000) a month.
According to the Telegraph the suspect, who had previously worked at Barclays from 2008 until 2010 before moving to BofA, and specifically its Hong Kong office in July last year, had apparently vanished from his workplace a week ago. It has also been reported that he resigned from his post days before news of the murders emerged.
And as usual in situations like these, the UK’s Daily Mail has the granular details. It reports that the British banker arrested on suspicion of a double murder in Hong Kong has been identified as 29-year-old Rurik Jutting.
Mr Jutting, who attended Cambridge University, is being held by police after the bodies of two prostitutes were discovered in his up-market apartment in the early hours of yesterday morning.
Officers found the women, thought to be a 25-year-old from Indonesia and a 30-year-old from the Philippines, after Mr Jutting allegedly called police to the address, which is located near the city’s red light district. The naked body of the Filipina victim, who had suffered a series of knife wounds, was found inside the 31st-floor apartment in J Residence – a development of exclusive properties in the city’s Wan Chai district that are popular with young expatriate executives.
The second woman was reportedly discovered naked and partially decapitated in a suitcase on the balcony of the apartment. She is believed to have been tied up and to have been left there for around a week.
Sex toys and cocaine were also reportedly found, along with a knife which was seized by officers.
Mr Jutting’s phone is today being examined by police in a bid to identify possible further victims, according to the South China Morning Post.
It is understood that photos of the woman who was found in the suitcase, apparently taken after she died, were among roughly 2,000 that officers found on the device.
Mr Jutting attended Winchester College, an independent boys school in Hampshire, before continuing his studies in history and law at Pembroke College, Cambridge, where he became secretary of the history society.
He appears to have worked at Barclays in London between 2008 and 2010, when he took a job with Bank of America Merrill Lynch. He was moved to the bank’s Hong Kong office in July last year.
A spokesman for Bank of America Merrill Lynch confirmed that it had previously employed a man by the same name but would not give more details nor clarify when the person had left the bank.
CCTV footage from the apartment block, located near Hong Kong’s red light district, showed the banker and the Filipina woman returning to the 31st floor shortly after midnight local time yesterday.
He allegedly called police to his home at 3.42am, shortly after the woman he was seen with is believed to have been killed.
She was found with two wounds to her neck and her throat had been slashed. She was pronounced dead at the scene.
The body on the balcony, wrapped in a carpet and inside a black suitcase, which measured about three feet by 18 inches, was not found by police until eight hours later.
A police source quoted by the South China Morning Post said: ‘She was nearly decapitated and her hands and legs were bound with ropes. ‘She was naked and wrapped in a towel before being stuffed into the suitcase. Her passport was found at the scene.’
Wan Chai, the district where the apartment is located, is known for its bustling nightclub scene of ‘girly bars,’ popular with expatriate men and staffed by sex workers from South East Asia. Police have today been contacting nearby bars in an attempt to find out more about the background of the two murdered women.
One resident in the 40-storey block, where most of the residents are expatriates, said he had noticed an unusual smell in recent days. He told the South China Morning Post that there had been ‘a stink in the building like a dead animal’.
And just like that, the worst excesses of the “peak banking” days from 1980, when sad scenes like these were a frequent occurrence, are back.
Government workers remove the body of a woman who was found dead at a flat in Hong Kong’s Wan chai district in the early hours of this morning. A British man was been arrested in connection with the murders.
A second victim was found stuffed inside a suitcase on the balcony of the residential flat in Hong Kong
The 40-storey J Residence is reportedly a high-end development favored by junior expatriate bankers
Bank Of America Psycho Killer Was Busy Helping Hedge Funds Avoid Taxes During His Business Hours
The most bizarre story of the weekend was that of Bank of America’s 29-year-old banker Rurik Jutting, who shortly after allegedly killing two prostitutes (and stuffing one in a suitcase), called the cops on himself and effectively admitted to the crime having left a quite clear autoreply email message, namely “For urgent inquiries, or indeed any inquiries, please contact someone who is not an insane psychopath. For escalation please contact God, though suspect the devil will have custody. [Last line only really worked if I had followed through..]”
But while his attempt to imitate Patrick Bateman did not go unnoticed, even if it will be promptly forgotten until the next grotesquely insane banker shocks the world for another 15 minutes, the question that has remained unanswered is what did young Master Jutting do when not chopping women up.
The answer, as the WSJ has revealed, is just as unsavory: “he had been part of a Bank of America team that specialized in tax-minimization trades that are under scrutiny from prosecutors, regulators, tax collectors and the bank’s own compliance department, according to people familiar with the matter and documents reviewed by The Wall Street Journal.”
Basically, when not acting as a homicidal psychopath, Jutting was facilitating full-blown tax evasion, just the activity that every developed, and thus broke, government around the globe is desperately cracking down on, and why every single Swiss bank is non-grata in the US and may be arrested immediately upon arrival on US soil.
Mr. Jutting, a U.K. native and a competitive poker player, worked in Bank of America Merrill Lynch’s Structured Equity Finance and Trading group, first in London and then in Hong Kong, according to these people and regulatory filings. Mr. Jutting resigned from the bank sometime before Oct. 27, which police say was the date of the first murder, according to a person familiar with the matter.
The trading group, known as SEFT, employs about three dozen people globally, one of these people said. It helps hedge funds and other clients manage their stock portfolios, often through the use of derivatives, according to the people and internal bank documents.
Mr. Jutting joined Bank of America in 2010 and worked three years in its London office, the bank’s hub for dividend-arbitrage trades, the people familiar with the matter say. He moved to Bank of America’s Hong Kong office in July 2013.
Ironic, because it was just this summer that a Congressional panel headed by Carl Levin was tearing foreign banks Deutsche Bank and Barclays a new one for providing structures such as MAPS and COLT, which did precisely this: give clients a derivative-based means of avoiding taxation (as described in “How Rentec Made More Than 34 Billion In Profits Since 1998 “Fictional Derivatives“).
As it turns out not only did a US-based bank – Bank of America – have an entire group dedicated to precisely the same type of hedge fund, and other Ultra High Net Worth, clients tax evasion advice, but it also housed a homicidal psychopath.
Perhaps if instead Levin had been grandstanding and seeking to punish foreign banks, he had cracked down on everyone who was providing this service, Jutting’s group would have been disbanded long ago, and two innocent lives could have been saved, instead allowing the alleged cocaine-snorting murderer to engage in far more wholesome, banker-approrpriate activities:
During his time in Asia, Mr. Jutting’s pastimes apparently included gambling. In a Sept. 14 Facebook post, he boasted of winning thousands of dollars playing poker at a tournament in the Philippines. He signed off the post: “God I love Manila.” The comment drew eight “likes.”
Alas one will never know “what if.”
But we are certain that with none other than America’s most prominent bank, the one carrying its name, has now been busted for aiding and abetting hedge fund tax evasion around the globe, it will get the same treatment as evil foreign banks Barclays and Deutsche Bank, right Carl Levin?
When it comes to Internet speeds, the U.S. lags behind much of the developed world.
That’s one of the conclusions from a new report by the Open Technology Institute at the New America Foundation, which looked at the cost and speed of Internet access in two dozen cities around the world.
Clocking in at the top of the list was Seoul, South Korea, where Internet users can get ultra-fast connections of roughly 1000 megabits per second for just $30 a month. The same speeds can be found in Hong Kong and Tokyo for $37 and $39 per month, respectively.
For comparison’s sake, the average U.S. connection speed stood at 9.8 megabits per second as of late last year, according to Akamai Technologies.
Residents of New York, Los Angeles and Washington, D.C. can get 500-megabit connections thanks to Verizon, though they come at a cost of $300 a month.
There are a few cities in the U.S. where you can find 1000-megabit connections. Chattanooga, Tenn., and Lafayette, La. have community-owned fiber networks, and Google has deployed a fiber network in Kansas City. High-speed Internet users in Chattanooga and Kansas City pay $70, while in Lafayette, it’s $110.
The problem with fiber networks is that they’re hugely expensive to install and maintain, requiring operators to lay new wiring underground and link it to individual homes. Many smaller countries with higher population density have faster average speeds than the United States.
“Especially in the U.S., many of the improved plans are at the higher speed tiers, which generally are the most expensive plans available,” the report says. “The lower speed packages—which are often more affordable for the average consumer—have not seen as much of an improvement.”
Google is exploring plans to bring high-speed fiber networks to a handful of other cities, and AT&T has also built them out in a few places, but it will be a long time before 1000-megabit speeds are an option for most Americans.
For the second straight month, Midland posted the third lowest unemployment rate in the nation, according to figures released Wednesday by the Bureau of Labor Statistics.
Bismarck, North Dakota, topped the list for the fourth straight month with a jobless rate of 2.1 percent. Fargo, North Dakota, was second at 2.3. Midland and Logan, Utah, tied for third at 2.6.
A total of 10 metropolitan statistical areas around the nation posted unemployment rates of 3.0 percent or lower. Midland was the lone MSA in Texas at or below 3.0.
Midland again ranked near the top of the list of MSAs in the nation when it came to percentage gain in employment. Midland’s 6.4 percent growth ranked second to Muncie, Indiana (8.9 percent). In September, Midland showed a work force 100,100, an increase of nearly 5,000 from September 2013.
The following are the lowest unemployment rates in the nation during the month of September, according to the Bureau of Labor Statistics.
Bismarck, North Dakota 2.1
Fargo, North Dakota 2.3
Midland 2.6
Logan, Utah 2.6
Sioux Falls, South Dakota 2.7
Grand Forks, North Dakota 2.8
Lincoln, Nebraska 2.8
Mankato, Minnesota 2.9
Rapid City, South Dakota 2.9
Billings, Montana 3.0
Lowest rates from August
Bismarck, North Dakota 2.2, Fargo North Dakota 2.4; Midland 2.8. Also: Odessa 3.4
July
Bismarck, North Dakota, 2.4; Sioux Falls, South Dakota, 2.7; Fargo, North Dakota, 2.8; Midland 2.9. Also: Odessa 3.6
June
Bismarck, North Dakota, 2.6, Midland 2.9, Fargo, North Dakota, 3.0. Also: Odessa 3.6
May
Bismarck, North Dakota, 2.2, Fargo, North Dakota, 2.5, Logan, Utah, 2.5, Midland 2.6. Also: Odessa 3.2
If you really would rather own the property than the note, take a few lessons in fraud from Owen Financial Corp. According to allegations from New York’s financial regulator, Benjamin Lawsky, the lender sent “thousands” of foreclosure “warnings” to borrowers months after the window of time had lapsed during which they could have saved their homes[1]. Lawskey alleges that many of the letters were even back-dated to give the impression that they had been sent in a timely fashion. “In many cases, borrowers received a letter denying a mortgage loan modification, and the letter was dated more than 30 days prior to the date that Ocwen mailed the letter.”
The correspondence gave borrowers 30 days from the date of the denial letter to appeal, but the borrowers received the letters after more than 30 days had passed. The issue is not a small one, either. Lawskey says that a mortgage servicing review at Ocwen revealed “more than 7,000” back-dated letters.”
In addition to the letters, Ocwen only sent correspondence concerning default cures after the cure date for delinquent borrowers had passed and ignored employee concerns that “letter-dating processes were inaccurate and misrepresented the severity of the problem.” While Lawskey accused Ocwen of cultivating a “culture that disregards the needs of struggling borrowers,” Ocwen itself blamed “software errors” for the improperly-dated letters[2]. This is just the latest in a series of troubles for the Atlanta-based mortgage servicer; The company was also part the foreclosure fraud settlement with 49 of 50 state attorneys general and recently agreed to reduce many borrowers’ loan balances by $2 billion total.
Most people do not realize that Ocwen, although the fourth-largest mortgage servicer in the country, is not actually a bank. The company specializes specifically in servicing high-risk mortgages, such as subprime mortgages. At the start of 2014, it managed $106 billion in subprime loans. Ocwen has only acknowledged that 283 New York borrowers actually received improperly dated letters, but did announce publicly in response to Lawskey’s letter that it is “investigating two other cases” and cooperating with the New York financial regulator.
WHAT WE THINK: While it’s tempting to think that this is part of an overarching conspiracy to steal homes in a state (and, when possible, a certain enormous city) where real estate is scarce, in reality the truth of the matter could be even more disturbing: Ocwen and its employees just plain didn’t care. There was a huge, problematic error that could have prevented homeowners from keeping their homes, but the loan servicer had already written off the homeowners as losers in the mortgage game. A company that services high-risk loans likely has a jaded view of borrowers, but that does not mean that the entire culture of the company should be based on ignoring borrowers’ rights and the vast majority of borrowers who want to keep their homes and pay their loans. Sure, if you took out a mortgage then you have the obligation to pay even if you don’t like the terms anymore. On the other side of the coin, however, your mortgage servicer has the obligation to treat you like someone who will fulfill their obligations rather than rigging the process so that you are doomed to fail.
Do you think Lawskey is right about Ocwen’s “culture?” What should be done to remedy this situation so that note investors and homeowners come out of it okay?
Thank you for reading the Bryan Ellis Investing Letter!
— Ocwen posts open letter and apology to borrowers Pledges independent investigation and rectification October 27, 2014 10:37AM
Ocwen Financial (OCN) has taken a beating after the New York Department of Financial Services sent a letter to the company on Oct. 21 alleging that the company had been backdating letters to borrowers, and now Ocwen is posting an open letter to homeowners.
Ocwen CEO Ron Faris writes to its clients explaining what happened and what steps the company is taking to investigate the issue, identify any problems, and rectify the situation.
Click here to read the full text of the letter.
“At Ocwen, we take our mission of helping struggling borrowers very seriously, and if you received one of these incorrectly-dated letters, we apologize. I am writing to clarify what happened, to explain the actions we have taken to address it, and to commit to ensuring that no borrower suffers as a result of our mistakes,” he writes.
“Historically letters were dated when the decision was made to create the letter versus when the letter was actually created. In most instances, the gap between these dates was three days or less,” Faris writes. “In certain instances, however, there was a significant gap between the date on the face of the letter and the date it was actually generated.”
Faris says that Ocwen is investigating all correspondence to determine whether any of it has been inadvertently misdated; how this happened in the first place; and why it took so long to fix it. He notes that Ocwen is hiring an independent firm to conduct the investigation, and that it will use its advisory council comprised of 15 nationally recognized community advocates and housing counselors.
“We apologize to all borrowers who received misdated letters. We believe that our backup checks and controls have prevented any borrowers from experiencing a foreclosure as a result of letter-dating errors. We will confirm this with rigorous testing and the verification of the independent firm,” Faris writes. “It is worth noting that under our current process, no borrower goes through a foreclosure without a thorough review of his or her loan file by a second set of eyes. We accept appeals for modification denials whenever we receive them and will not begin foreclosure proceedings or complete a foreclosure that is underway without first addressing the appeal.”
Faris ends by saying that Ocwen is committed to keeping borrowers in their homes.
“Having potentially caused inadvertent harm to struggling borrowers is particularly painful to us because we work so hard to help them keep their homes and improve their financial situations. We recognize our mistake. We are doing everything in our power to make things right for any borrowers who were harmed as a result of misdated letters and to ensure that this does not happen again,” he writes.
Last week the fallout from the “Lawsky event” – so called because of NYDFS Superintendent Benjamin Lawsky – came hard and fast.
Compass Point downgraded Ocwen affiliate Home Loan Servicing Solutions (HLSS) from Buy to Neutral with a price target of $18.
Meanwhile, Moody’s Investors Service downgraded Ocwen Loan Servicing LLC’s servicer quality assessments as a primary servicer of subprime residential mortgage loans to SQ3 from SQ3+ and as a special servicer of residential mortgage loans to SQ3 from SQ3+.
Standard & Poor’s Ratings Services lowered its long-term issuer credit rating to ‘B’ from ‘B+’ on Ocwen on Wednesday and the outlook is negative.
—- Ocwen Writes Open Letter to Homeowners Concerning Letter Dating Issues October 24, 2014
Dear Homeowners,
In recent days you may have heard about an investigation by the New York Department of Financial Services’ (DFS) into letters Ocwen sent to borrowers which were inadvertently misdated. At Ocwen, we take our mission of helping struggling borrowers very seriously, and if you received one of these incorrectly-dated letters, we apologize. I am writing to clarify what happened, to explain the actions we have taken to address it, and to commit to ensuring that no borrower suffers as a result of our mistakes.
What Happened Historically letters were dated when the decision was made to create the letter versus when the letter was actually created. In most instances, the gap between these dates was three days or less. In certain instances, however, there was a significant gap between the date on the face of the letter and the date it was actually generated.
What We Are Doing We are continuing to investigate all correspondence to determine whether any of it has been inadvertently misdated; how this happened in the first place; and why it took us so long to fix it. At the end of this exhaustive investigation, we want to be absolutely certain that we have fixed every problem with our letters. We are hiring an independent firm to investigate and to help us ensure that all necessary fixes have been made.
Ocwen has an advisory council made up of fifteen nationally recognized community advocates and housing counsellors. The council was created to improve our borrower outreach to keep more people in their homes. We will engage with council members to get additional guidance on making things right for any borrowers who may have been affected in any way by this error.
We apologize to all borrowers who received misdated letters. We believe that our backup checks and controls have prevented any borrowers from experiencing a foreclosure as a result of letter-dating errors. We will confirm this with rigorous testing and the verification of the independent firm. It is worth noting that under our current process, no borrower goes through a foreclosure without a thorough review of his or her loan file by a second set of eyes. We accept appeals for modification denials whenever we receive them and will not begin foreclosure proceedings or complete a foreclosure that is underway without first addressing the appeal.
In addition to these efforts we are committed to cooperating with DFS and all regulatory agencies.
We Are Committed to Keeping Borrowers in Their Homes Having potentially caused inadvertent harm to struggling borrowers is particularly painful to us because we work so hard to help them keep their homes and improve their financial situations. We recognize our mistake. We are doing everything in our power to make things right for any borrowers who were harmed as a result of misdated letters and to ensure that this does not happen again. We remain deeply committed to keeping borrowers in their homes because we believe it is the right thing to do and a win/win for all of our stakeholders.
We will be in further communication with you on this matter.
Sincerely, Ron Faris CEO
YOU DECIDE — Ocwen Downgrade Puts RMBS at Risk
Moody’s and S&P downgraded Ocwen’s servicer quality rating last week after the New York Department of Financial Services made “backdating” allegations. Barclays says the downgrades could put some RMBS at risk of a servicer-driven default.
The quintessential ingredient in the stew that makes up a thriving housing market has been evaporating in America. And a recent phenomenon has taken over: private equity firms, REITs, and other Wall-Street funded institutional investors have plowed the nearly free money the Fed has graciously made available to them since 2008 into tens of thousands of vacant single-family homes to rent them out. And an apartment building boom has offered alternatives too.
Since the Fed has done its handiwork, institutional investors have driven up home prices and pushed them out of reach for many first-time buyers, and these potential first-time buyers are now renting homes from investors instead. Given the high home prices, in many cases it may be a better deal. And apartments are often centrally located, rather than in some distant suburb, cutting transportation time and expenses, and allowing people to live where the urban excitement is. Millennials have figured it out too, as America is gradually converting to a country of renters.
So in its inexorable manner, home ownership has continued to slide in the third quarter, according to the Commerce Department. Seasonally adjusted, the rate dropped to 64.3% from 64.7 in the prior quarter. It was the lowest rate since Q4 1994 (not seasonally adjusted, the rate dropped to 64.4%, the lowest since Q1 1995).
This is what that relentless slide looks like:
Home ownership since 2008 dropped across all age groups. But the largest drops occurred in the youngest age groups. In the under-35 age group, where first-time buyers are typically concentrated, home ownership has plunged from 41.3% in 2008 to 36.0%; and in the 35-44 age group, from 66.7% to 59.1%, with a drop of over a full percentage point just in the last quarter – by far the steepest.
Home ownership, however, didn’t peak at the end of the last housing bubble just before the financial crisis, but in 2004 when it reached 69.2%. Already during the housing bubble, speculative buying drove prices beyond the reach of many potential buyers who were still clinging by their fingernails to the status of the American middle class … unless lenders pushed them into liar loans, a convenient solution many lenders perfected to an art.
It was during these early stages of the housing bubble that the concept of “home” transitioned from a place where people lived and thrived or fought with each other and dealt with onerous expenses and responsibilities to a highly leveraged asset for speculators inebriated with optimism, an asset to be flipped willy-nilly and laddered ad infinitum with endless amounts of cheaply borrowed money. And for some, including the Fed it seems, that has become the next American dream.
Despite low and skidding home ownership rates, home prices have been skyrocketing in recent years, and new home prices have reached ever more unaffordable all-time highs.
One of the most surprising developments in the aftermath of the housing crisis is the sharp rise in apartment building construction. Evidently post-recession Americans would rather rent apartments than buy new houses.
When I noticed this trend, I wanted to see what was behind the numbers.
Is it possible Americans are giving up on the idea of home ownership, the very staple of the American dream? Now that would be a good story.
What I found was less extreme but still interesting: The American dream appears merely to be on hold.
Economists told me that many potential home buyers can’t get a down payment together because the recession forced them to chip away at their savings. Others have credit stains from foreclosures that will keep them out of the mortgage market for several years.
More surprisingly, it turns out that the millennial generation is a driving force behind the rental boom. Young adults who would have been prime candidates for first-time home ownership are busy delaying everything that has to do with becoming a grown-up. Many even still live at home, but some data shows they are slowly beginning to branch out and find their own lodgings — in rental apartments.
A quick Internet search for new apartment complexes suggests that developers across the country are seizing on this trend and doing all they can to appeal to millennials. To get a better idea of what was happening, I arranged a tour of a new apartment complex in suburban Washington that is meant to cater to the generation.
What I found made me wish I was 25 again. Scented lobbies crammed with funky antiques that led to roof decks with outdoor theaters and fire pits. The complex I visited offered Zumba classes, wine tastings, virtual golf and celebrity chefs who stop by to offer cooking lessons.
“It’s like an assisted-living facility for young people,” the photographer accompanying me said.
Economists believe that the young people currently filling up high-amenity rental apartments will eventually buy homes, and every young person I spoke with confirmed that this, in fact, was the plan. So what happens to the modern complexes when the 20-somethings start to buy homes? It’s tempting to envision ghost towns of metal and pipe wood structures with tumbleweeds blowing through the lobbies. But I’m sure developers will rehabilitate them for a new demographic looking for a renter’s lifestyle.
House flippers buy run-down properties, fix them up and resell them quickly at a higher price. Above, a home under renovation in Amsterdam, N.Y. (Mike Groll / Associated Press)
Can you still do a short-term house flip using federally insured, low-down payment mortgage money? That’s an important question for buyers, sellers, investors and realty agents who’ve taken part in a nationwide wave of renovations and quick resales using Federal Housing Administration-backed loans during the last four years.
The answer is yes: You can still flip and finance short term. But get your rehabs done soon. The federal agency whose policy change in 2010 made tens of thousands of quick flips possible — and helped large numbers of first-time and minority buyers with moderate incomes acquire a home — is about to shut down the program, FHA officials confirmed to me.
In an effort to stimulate repairs and sales in neighborhoods hard hit by the mortgage crisis and recession, the FHA waived its standard prohibition against financing short-term house flips. Before the policy change, if you were an investor or property rehab specialist, you had to own a house for at least 90 days before reselling — flipping it — to a new buyer at a higher price using FHA financing. Under the waiver of the rule, you could buy a house, fix it up and resell it as quickly as possible to a buyer using an FHA mortgage — provided that you followed guidelines designed to protect consumers from being ripped off with hyper-inflated prices and shoddy construction.
Since then, according to FHA estimates, about 102,000 homes have been renovated and resold using the waiver. The reason for the upcoming termination: The program has done its job, stimulated billions of dollars of investments, stabilized prices and provided homes for families who were often newcomers to ownership.
However, even though the waiver program has functioned well, officials say, inherent dangers exist when there are no minimum ownership periods for flippers. In the 1990s, the FHA witnessed this firsthand when teams of con artists began buying run-down houses, slapped a little paint on the exterior and resold them within days — using fraudulent appraisals — for hyper-inflated prices and profits. Their buyers, who obtained FHA-backed mortgages, often couldn’t afford the payments and defaulted. Sometimes the buyers were themselves part of the scam and never made any payments on their loans — leaving the FHA, a government-owned insurer, with steep losses.
For these reasons, officials say, it’s time to revert to the more restrictive anti-quick-flip rules that prevailed before the waiver: The 90-day standard will come back into effect after Dec. 31.
But not everybody thinks that’s a great idea. Clem Ziroli Jr., president of First Mortgage Corp., an FHA lender in Ontario, says reversion to the 90-day rule will hurt moderate-income buyers who found the program helpful in opening the door to home ownership.
“The sad part,” Ziroli said in an email, “is the majority of these properties were improved and [located] in underserved areas. Having a rehabilitated house available to these borrowers” helped them acquire houses that had been in poor physical shape but now were repaired, inspected and safe to occupy.
Paul Skeens, president of Colonial Mortgage in Waldorf, Md., and an active rehab investor in the suburbs outside Washington, D.C., said the upcoming policy change will cost him money and inevitably raise the prices of the homes he sells after completing repairs and improvements. Efficient renovators, Skeens told me in an interview, can substantially improve a house within 45 days, at which point the property is ready to list and resell. By extending the mandatory ownership period to 90 days, the FHA will increase Skeens’ holding costs — financing expenses, taxes, maintenance and utilities — all of which will need to be added onto the price to a new buyer.
Paul Wylie, a member of an investor group in the Los Angeles area, says he sees “more harm than good by not extending the waiver. There are protections built into the program that have served [the FHA] well,” he said in an email. If the government reimposes the 90-day requirement, “it will harm those [buyers] that FHA intends to help” with its 3.5% minimum-down-payment loans. “Investors will adapt and sell to non-FHA-financed buyers. Entry-level consumers will be harmed unnecessarily.”
Bottom line: Whether fix-up investors like it or not, the FHA seems dead set on reverting to its pre-bust flipping restrictions. Financing will still be available, but selling prices of the end product — rehabbed houses for moderate-income buyers — are almost certain to be more expensive.
The slump in the oil price is primarily a result of extreme short positioning, a headline-driven anxiety and overblown fears about the global economy.
This is a temporary dip and the oil markets will recover significantly by H1 2015.
Now is the time to pick the gold nuggets out of the ashes and wait to see them shine again.
Nevertheless, the sky is not blue for several energy companies and the drop of the oil price will spell serious trouble for the heavily indebted oil producers.
Introduction:
It has been a very tough market out there over the last weeks. And the energy stocks have been hit the hardest over the last five months, given that most of them have returned back to their H2 2013 levels while many have dropped even lower down to their H1 2013 levels.
But one of my favorite quotes is Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.” To me, you don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else is.
In my view, this slump of the energy stocks is a deja-vu situation, that reminded me of the natural gas frenzy back in early 2014, when some fellow newsletter editors and opinion makers with appearances on the media (i.e. CNBC, Bloomberg) were calling for $8 and $10 per MMbtu, trapping many investors on the wrong side of the trade. In contrast, I wrote a heavily bearish article on natural gas in February 2014, when it was at $6.2/MMbtu, presenting twelve reasons why that sky high price was a temporary anomaly and would plunge very soon. I also put my money where my mouth was and bought both bearish ETFs (NYSEARCA:DGAZ) and (NYSEARCA:KOLD), as shown in the disclosure of that bearish article. Thanks to these ETFs, my profits from shorting the natural gas were quick and significant.
This slump of the energy stocks also reminded me of those analysts and investors who were calling for $120/bbl and $150/bbl in H1 2014. Even T. Boone Pickens, founder of BP Capital Management, told CNBC in June 2014 that if Iraq’s oil supply goes offline, crude prices could hit $150-$200 a barrel.
But people often go to the extremes because this is the human nature. But shrewd investors must exploit this inherent weakness of human nature to make easy money, because factory work has never been easy.
Let The Charts And The Facts Speak For Themselves
The chart for the bullish ETF (NYSEARCA:BNO) that tracks Brent is illustrated below:
And the charts for the bullish ETFs (NYSEARCA:USO), (NYSEARCA:DBO) and (NYSEARCA:OIL) that track WTI are below:
and below:
and below:
For the risky investors, there is the leveraged bullish ETF (NYSEARCA:UCO), as illustrated below:
It is clear that these ETFs have returned back to their early 2011 levels amid fears for oversupply and global economy worries. Nevertheless, the recent growth data from the major global economies do not look bad at all.
In China, things look really good. The Chinese economy grew 7.3% in Q3 2014, which is way far from a hard-landing scenario that some analysts had predicted, and more importantly the Chinese authorities seem to be ready to step in with major stimulus measures such as interest rate cuts, if needed. Let’s see some more details about the Chinese economy:
1) Exports rose 15.3% in September from a year earlier, beating a median forecast in a Reuters poll for a rise of 11.8% and quickening from August’s 9.4% rise.
2) Imports rose 7% in terms of value, compared with a Reuters estimate for a 2.7% fall.
3) Iron ore imports rebounded to the second highest this year and monthly crude oil imports rose to the second highest on record.
4) China posted a trade surplus of $31.0 billion in September, down from $49.8 billion in August.
Beyond the encouraging growth data coming from China (the second largest oil consumer worldwide), the US economy grew at a surprising 4.6% rate in Q2 2014, which is the fastest pace in more than two years.
Meanwhile, the Indian economy picked up steam and rebounded to a 5.7% rate in Q2 2014 from 4.6% in Q1, led by a sharp recovery in industrial growth and gradual improvement in services. And after overtaking Japan as the world’s third-biggest crude oil importer in 2013, India will also become the world’s largest oil importer by 2020, according to the US Energy Information Administration (EIA).
The weakness in Europe remains, but this is nothing new over the last years. And there is a good chance Europe will announce new economic policies to boost the economy over the next months. For instance and based on the latest news, the European Central Bank is considering buying corporate bonds, which is seen as helping banks free up more of their balance sheets for lending.
All in all, and considering the recent growth data from the three biggest oil consumers worldwide, I get the impression that the global economy is in a better shape than it was in early 2011. On top of that, EIA forecasts that WTI and Brent will average $94.58 and $101.67 respectively in 2015, and obviously I do not have any substantial reasons to disagree with this estimate.
The Reasons To Be Bullish On Oil Now
When it comes to investing, timing matters. In other words, a lucrative investment results from a great entry price. And based on the current price, I am bullish on oil for the following reasons:
1) Expiration of the oil contracts: They expired last Thursday and the shorts closed their bearish positions and locked their profits.
2) Restrictions on US oil exports: Over the past three years, the average price of WTI oil has been $13 per barrel cheaper than the international benchmark, Brent crude. That gives large consumers of oil such as refiners and chemical companies a big cost advantage over foreign rivals and has helped the U.S. become the world’s top exporter of refined oil products.
Given that the restrictions on US oil exports do not seem to be lifted anytime soon, the shale oil produced in the US will not be exported to impact the international supply/demand and lower Brent price in the short-to-medium term.
3)The weakening of the U.S. dollar: The U.S. dollar rose significantly against the Euro over the last months because of a potential interest rate hike.
However, U.S. retail sales declined in September 2014 and prices paid by businesses also fell. Another report showed that both ISM indices weakened in September 2014, although the overall economic growth remained very strong in Q3 2014.
The ISM manufacturing survey showed that the reading fell back from 59.0 in August 2014 to 56.6 in September 2014. The composite non-manufacturing index dropped back as well, moving down from 59.6 in August 2014 to 58.6 in September 2014.
(click to enlarge)
Source: Pictet Bank website
These reports coupled with a weak growth in Europe and a potential slowdown in China could hurt U.S. exports, which could in turn put some pressure on the U.S. economy.
These are reasons for caution and will most likely deepen concerns at the U.S. Federal Reserve. A rate hike too soon could cause problems to the fragile U.S. economy which is gradually recovering. “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” the U.S. central bank’s vice chairman, Stanley Fischer, said.
That being said, the US Federal Reserve will most likely defer to hike the interest rate planned to begin in H1 2015. A delay in expected interest rate hikes will soften the dollar over the next months, which will lift pressure off the oil price and will push Brent higher.
4)OPEC’s decision to cut supply in November 2014: Many OPEC members need the price of oil to rise significantly from the current levels to keep their house in fiscal order. If Brent remains at $85-$90, these countries will either be forced to borrow more to cover the shortfall in oil tax revenues or cut their promises to their citizens. However, tapping bond markets for financing is very expensive for the vast majority of the OPEC members, given their high geopolitical risk. As such, a cut on promises and social welfare programs is not out of the question, which will likely result in protests, social unrest and a new “Arab Spring-like” revolution in some of these countries.
This is why both Iran and Venezuela are calling for an urgent OPEC meeting, given that Venezuela needs a price of $121/bbl, according to Deutsche Bank, making it one of the highest break-even prices in OPEC. Venezuela is suffering rampant inflation which is currently around 50%, and the government currency controls have created a booming black currency market, leading to severe shortages in the shops.
Bahrain, Oman and Nigeria have not called for an urgent OPEC meeting yet, although they need between $100/bbl and $136/bbl to meet their budgeted levels. Qatar and UAE also belong to this group, although hydrocarbon revenues in Qatar and UAE account for close to 60% of the total revenues of the countries, while in Kuwait, the figure is close to 93%.
The Gulf producers such as the UAE, Qatar and Kuwait are more resilient than Venezuela or Iran to the drop of the oil price because they have amassed considerable foreign currency reserves, which means that they could run deficits for a few years, if necessary. However, other OPEC members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room to maneuver to fund their budgets.
And now let’s see what is going on with Saudi Arabia. Saudi Arabia is too reliant on oil, with oil accounting for 80% of export revenue and 90% of the country’s budget revenue. Obviously, Saudi Arabia is not a well-diversified economy to withstand low Brent prices for many months, although the country’s existing sovereign wealth fund, SAMA Foreign Holdings, run by the country’s central bank, consisting mainly of oil surpluses, is the world’s third-largest, with assets totaling 737.6 billion US dollars.
This is why Prince Alwaleed bin Talal, billionaire investor and chairman of Kingdom Holding, said back in 2013: “It’s dangerous that our income is 92% dependent on oil revenue alone. If the price of oil decline was to decline to $78 a barrel there will be a gap in our budget and we will either have to borrow or tap our reserves. Saudi Arabia has SAR2.5 trillion in external reserves and unfortunately the return on this is 1 to 1.5%. We are still a nation that depends on the oil and this is wrong and dangerous. Saudi Arabia’s economic dependence on oil and lack of a diverse revenue stream makes the country vulnerable to oil shocks.”
And here are some additional key factors that the oil investors need to know about Saudi Arabia to place their bets accordingly:
a) Saudi Arabia’s most high-profile billionaire and foreign investor, Prince Alwaleed bin Talal, has launched an extraordinary attack on the country’s oil minister for allowing prices to fall. In a recent letter in Arabic addressed to ministers and posted on his website, Prince Alwaleed described the idea of the kingdom tolerating lower prices below $100 per barrel as potentially “catastrophic” for the economy of the desert kingdom. The letter is a significant attack on Saudi’s highly respected 79-year-old oil minister Ali bin Ibrahim Al-Naimi who has the most powerful voice within the OPEC.
b) Back in June 2014, Saudi Arabia was preparing to launch its first sovereign wealth fund to manage budget surpluses from a rise in crude prices estimated at hundreds of billions of dollars. The fund would be tasked with investing state reserves to “assure the kingdom’s financial stability,” Shura Council financial affairs committee Saad Mareq told Saudi daily Asharq Al-Awsat back then. The newspaper said the fund would start with capital representing 30% of budgetary surpluses accumulated over the years in the kingdom. The thing is that Saudi Arabia is not going to have any surpluses if Brent remains below $90/bbl for months.
c) Saudi Arabia took immediate action in late 2011 and early 2012, under the fear of contagion and the destabilisation of Gulf monarchies. Saudi Arabia funded those emergency measures, thanks to Brent which was much higher than $100/bbl back then. It would be difficult for Saudi Arabia to fund these billion dollar initiatives if Brent remained at $85-$90 for long.
d) Saudi Arabia and the US currently have a common enemy which is called ISIS. Moreover, the American presence in the kingdom’s oil production has been dominant for decades, given that U.S. petroleum engineers and geologists developed the kingdom’s oil industry throughout the 1940s, 1950s and 1960s.
From a political perspective, the U.S. has had a discreet military presence since 1950s and the two countries were close allies throughout the Cold War in order to prevent the communists from expanding to the Middle East. The two countries were also allies throughout the Iran-Iraq war and the Gulf War.
5)Geopolitical Risk: Right now, Brent price carries a zero risk premium. Nevertheless, the geopolitical risk in the major OPEC exporters (i.e. Nigeria, Algeria, Libya, South Sudan, Iraq, Iran) is highly volatile, and several things can change overnight, leading to an elevated level of geopolitical risk anytime.
For instance, the Levant has a new bogeyman. ISIS, the Islamic State of Iraq, emerged from the chaos of the Syrian civil war and has swept across Iraq, making huge territorial gains. Abu Bakr al-Baghdadi, the group’s figurehead, has claimed that its goal is to establish a Caliphate across the whole of the Levant and that Jordan is next in line.
At least 435 people have been killed in Iraq in car and suicide bombings since the beginning of the month, with an uptick in the number of these attacks since the beginning of September 2014, according to Iraq Body Count, a monitoring group tracking civilian deaths. Most of those attacks occurred in Baghdad and are the work of Islamic State militants. According to the latest news, ISIS fighters are now encamped on the outskirts of Baghdad, and appear to be able to target important installations with relative ease.
Furthermore, Libya is on the brink of a new civil war and finding a peaceful solution to the ongoing Libyan crisis will not be easy. According to the latest news, Sudan and Egypt agreed to coordinate efforts to achieve stability in Libya through supporting state institutions, primarily the military who is fighting against Islamic militants. It remains to be see how effective these actions will be.
On top of that, the social unrest in Nigeria is going on. Nigeria’s army and Boko Haram militants have engaged in a fierce gun battle in the north-eastern Borno state, reportedly leaving scores dead on either side. Several thousand people have been killed since Boko Haram launched its insurgency in 2009, seeking to create an Islamic state in the mainly Muslim north of Nigeria.
6)Seasonality And Production Disruptions: Given that winter is coming in the Northern Hemisphere, the global oil demand will most likely rise effective November 2014.
Also, U.S. refineries enter planned seasonal maintenance from September to October every year as the federal government requires different mixtures in the summer and winter to minimize environmental damage. They transition to winter-grade fuel from summer-grade fuels. U.S. crude oil refinery inputs averaged 15.2 million bopd during the week ending October 17. Input levels were 113,000 bopd less than the previous week’s average. Actually, the week ending October 17 was the eighth week in a row of declines in crude oil runs, and these rates were the lowest since March 2014. After all and given that the refineries demand less crude during this period of the year, the price of WTI remains depressed.
On top of that, the production disruptions primarily in the North Sea and the Gulf of Mexico are not out of the question during the winter months. Even Saudi Arabia currently faces production disruptions. For instance, production was halted just a few days ago for environmental reasons at the Saudi-Kuwait Khafji oilfield, which has output of 280,000 to 300,000 bopd.
7)Sentiment: To me, the recent sell off in BNO is overdone and mostly speculative. To me, the recent sell-off is primarily a result of a headline-fueled anxiety and bearish sentiment.
8)Jobs versus Russia:According to Olga Kryshtanovskaya, a sociologist studying the country’s elite at the Russian Academy of Sciences in Moscow, top Kremlin officials said after the annexation of Crimea that they expected the U.S. to artificially push oil prices down in collaboration with Saudi Arabia in order to damage Russia.
And Russia is stuck with being a resource-based economy and the cheap oil chokes the Russian economy, putting pressure on Vladimir Putin’s regime, which is overwhelmingly reliant on energy, with oil and gas accounting for 70% of its revenues. This is an indisputable fact.
The current oil price is less than the $104/bbl on average written into the 2014 Russian budget. As linked above, the Russian budget will fall into deficit next year if Brent is less than $104/bbl, according to the Russian investment bank Sberbank CIB. At $90/bbl, Russia will have a shortfall of 1.2% of gross domestic product. Against a backdrop of falling revenue, finance minister Anton Siluanov warned last week that the country’s ambitious plans to raise defense spending had become unaffordable.
Meanwhile, a low oil price is also helping U.S. consumers in the short term. However, WTI has always been priced in relation to Brent, so the current low price of WTI is actually putting pressure on the US consumers in the midterm, given that the number one Job Creating industry in the US (shale oil) will collapse and many companies will lay off thousands of people over the next few months. The producers will cut back their growth plans significantly, and the explorers cannot fund the development of their discoveries. This is another indisputable fact too.
For instance, sliding global oil prices put projects under heavy pressure, executives at Chevron (NYSE:CVX) and Statoil (NYSE:STO) told an oil industry conference in Venezuela. Statoil Venezuela official Luisa Cipollitti said at the conference that mega-projects globally are under threat, and estimates that more than half the world’s biggest 163 oil projects require a $120 Brent price for crude.
Actually, even before the recent fall of the oil price, the oil companies had been cutting back on significant spending, in a move towards capital discipline. And they had been making changes that improve the economies of shale, like drilling multiple wells from a single pad and drilling longer horizontal wells, because the “fracking party” was very expensive. Therefore, the drop of the oil price just made things much worse, because:
a)Shale Oil: Back in July 2014, Goldman Sachs estimated that U.S. shale producers needed $85/bbl to break even.
b) Offshore Oil Discoveries: Aside Petr’s (NYSE: PBR) pre-salt discoveries in Brazil, Kosmos Energy’s (NYSE: KOS) Jubilee oilfield in Ghana and Jonas Sverdrup oilfield in Norway, there have not been any oil discoveries offshore that move the needle over the last decade, while depleting North Sea fields have resulted in rising costs and falling production.
The pre-salt hype offshore Namibia and offshore Angola has faded after multiple dry or sub-commercial wells in the area, while several major players have failed to unlock new big oil resources in the Arctic Ocean. For instance, Shell abandoned its plans in the offshore Alaskan Arctic, and Statoil is preparing to drill a final exploration well in the Barents Sea this year after disappointing results in its efforts to unlock Arctic resources.
Meanwhile, the average breakeven cost for the Top 400 offshore projects currently is approximately $80/bbl (Brent), as illustrated below:
(click to enlarge)
Source: Kosmos Energy website
c) Oil sands: The Canadian oil sands have an average breakeven cost that ranges between $65/bbl (old projects) and $100/bbl (new projects).
In fact, the Canadian Energy Research Institute forecasts that new mined bitumen projects requires US$100 per barrel to breakeven, whereas new SAGD projects need US$85 per barrel. And only one in four new Canadian oil projects could be vulnerable if oil prices fall below US$80 per barrel for an extended period of time, according to the International Energy Agency.
“Given that the low-bearing fruit have already been developed, the next wave of oil sands project are coming from areas where geology might not be as uniform,” said Dinara Millington, senior vice president at the Canadian Energy Research Institute.
So it is not surprising that Suncor Energy (NYSE:SU) announced a billion-dollar cut for the rest of the year even though the company raised its oil price forecast. Also, Suncor took a $718-million charge related to a decision to shelve the Joslyn oilsands mine, which would have been operated by the Canadian unit of France’s Total (NYSE:TOT). The partners decided the project would not be economically feasible in today’s environment.
As linked above, others such as Athabasca Oil (OTCPK: ATHOF), PennWest Exploration (NYSE: PWE), Talisman Energy (NYSE: TLM) and Sunshine Oil Sands (OTC: SUNYF) are also cutting back due to a mix of internal corporate issues and project uncertainty. Cenovus Energy (NYSE:CVE) is also facing cost pressures at its Foster Creek oil sands facility.
And as linked above: “Oil sands are economically challenging in terms of returns,” said Jeff Lyons, a partner at Deloitte Canada. “Cost escalation is causing oil sands participants to rethink the economics of projects. That’s why you’re not seeing a lot of new capital flowing into oil sands.”
After all, helping the US consumer spend more on cute clothes today does not make any sense, when he does not have a job tomorrow. Helping the US consumer drive down the street and spend more at a fancy restaurant today does not make any sense, if he is unemployed tomorrow.
Moreover, Putin managed to avoid mass unemployment during the 2008 financial crisis, when the price of oil dropped further and faster than currently. If Russia faces an extended slump now, Putin’s handling of the last crisis could serve as a template.
In short, I believe that the U.S. will not let everything collapse that easily just because the Saudis woke up one day and do not want to pump less. I believe that the U.S. economy has more things to lose (i.e. jobs) than to win (i.e. hurt Russia or help the US consumer in the short term), in case the current low WTI price remains for months.
My Takeaway
I am not saying that an investor can take the plunge lightly, given that the weaker oil prices squeeze profitability. Also, I am not saying that Brent will return back to $110/bbl overnight. I am just saying that the slump of the oil price is primarily a result from extreme short positioning and overblown fears about the global economy.
To me, this is a temporary dip and I believe that oil markets will recover significantly by the first half of 2015. This is why, I bought BNO at an average price of $33.15 last Thursday, and I will add if BNO drops down to $30. My investment horizon is 6-8 months.
Nevertheless, all fingers are not the same. All energy companies are not the same either. The rising tide lifted many of the leveraged duds over the last two years. Some will regain quickly their lost ground, some will keep falling and some will cover only half of the lost ground.
I am saying this because the drop of the oil price will spell serious trouble for a lot of oil producers, many of whom are laden with debt. I do believe that too much credit has been extended too fast amid America’s shale boom, and a wave of bankruptcy that spreads across the oil patch will not surprise me. On the debt front, here is some indicative data according to Bloomberg:
1) Speculative-grade bond deals from energy companies have made up at least 16% of total junk issuance in the U.S. the past two years as the firms piled on debt to fund exploration projects. Typically the average since 2002 has been 11%.
2) Junk bonds issued by energy companies, which have made up a record 17% of the $294 billion of high-yield debt sold in the U.S. this year, have on average lost more than 4% of their market value since issuance.
3) Hercules Offshore’s (NASDAQ:HERO) $300 million of 6.75% notes due in 2022 plunged to 57 cents a few days ago after being issued at par, with the yield climbing to 17.2%.
4) In July 2014, Aubrey McClendon’s American Energy Partners LP tapped the market for unsecured debt to fund exploration projects in the Permian Basin. Moody’s Investors Service graded the bonds Caa1, which is a level seven steps below investment-grade and indicative of “very high credit risk.” The yield on the company’s $650 million of 7.125% notes maturing in November 2020 reached 11.4% a couple of days ago, as the price plunged to 81.5 cents on the dollar, according to Trace, the Financial Industry Regulatory Authority’s bond-price reporting system.
Due to this debt pile, I have been very bearish on several energy companies like Halcon Resources (NYSE:HK), Goodrich Petroleum (NYSE:GDP), Vantage Drilling (NYSEMKT: VTG), Midstates Petroleum (NYSE: MPO), SandRidge Energy (NYSE:SD), Quicksilver Resources (NYSE: KWK) and Magnum Hunter Resources (NYSE:MHR). All these companies have returned back to their H1 2013 levels or even lower, as shown at their charts.
But thanks also to this correction of the market, a shrewd investor can separate the wheat from the chaff and pick only the winners. The shrewd investor currently has the unique opportunity to back up the truck on the best energy stocks in town. This is the time to pick the gold nuggets out of the ashes and wait to see them shine again. On that front, I recommended Petroamerica Oil (OTCPK: PTAXF) which currently is the cheapest oil-weighted producer worldwide with a pristine balance sheet.
Last but not least, I am watching closely the situation in Russia. With economic growth slipping close to zero, Russia is reeling from sanctions by the U.S. and the European Union. The sanctions are having an across-the-board impact, resulting in a worsening investment climate, rising capital flight and a slide in the ruble which is at a record low. And things in Russia have deteriorated lately due to the slump of the oil price.
Obviously, this is the perfect storm and the current situation in Russia reminds me of the situation in Egypt back in 2013. Those investors who bought the bullish ETF (NYSEARCA: EGPT) at approximately $40 in late 2013, have been rewarded handsomely over the last twelve months because EGPT currently lies at $66. Therefore, I will be watching closely both the fluctuations of the oil price and several other moving parts that I am not going to disclose now, in order to find the best entry price for the Russian ETFs (NYSEARCA: RSX) and (NYSEARCA:RUSL) over the next months.
Now, as during World War II and up to 1951, the US Federal Reserve practiced what is now called quantitative easing (QE). Then, as now, nominal interest rates were low and the real ones negative: The Fed’s policy did not so much induce investments as it allowed the government to accumulate debts, and prevent default.
Marriner Eccles, the Fed chairman during the 1940s, stated explicitly that “we agreed with the Treasury at the time of the war [that the low rates were] the basis upon which the Federal Reserve would assure the Government financing” – the Fed thus carrying out fiscal policy. Real wages stagnated then as now, and global savings poured into the US.
With the centrally controlled war economy, there was no sacrifice buying Treasuries. Extensive price controls, whose administration was gradually dismantled after 1948 only, did not induce investments. Citizens backed this war, and consumer oriented production was not a priority. Black markets thrived, and the real inflation was significantly higher than the official one computed from the controlled prices.
Still, even the official cumulative rate of inflation was 70% between 1940-7. Yet interest rates during those years hovered around 0.5% for three-months Treasuries and 2.5% for the 30-year ones – similar to today’s.
When the Allies won the War, there were many unknowns, among them the future of Europe, Russia, Asia, and there was much uncertainty about domestic policies in the US too: how fast the US’s centralized “war economy” would be dismantled being one of them. As noted, the dismantling started in 1948, but the Fed gained independence and ceased carrying out fiscal policy in 1951 only.
Mark Twain said history rhymes but does not repeat itself. Though now the West is not fighting wars on the scale of World War II, there is uncertainty again in Southeast Asia and the Middle East, in Europe, in Russia and in Latin America. Savings continue to pour in the US, into Treasuries in particular, much criticism of US fiscal and monetary policies notwithstanding.
In the land of the blind, the one-eyed person – the US – committing fewer mistakes and expected to correct them faster than other countries, can still do reasonably. And although domestically, the US is not as much subject to wage and price controls as it was during and after World War II, large sectors, such as education and health, among others, are subject to direct and indirect controls by an ever more complex bureaucracy, the regulatory and fiscal environment, both domestic and international is uncertain, whether linked to climate, corporate taxes, what differential tax rates would be labeled “state aid”, and others.
Many societies are in the midst of unprecedented experiments, with no model of society being perceived as clearly worth emulation.
In such uncertain worlds, the best thing investors can do is be prepared for mobility – be nimble and able to become “liquid” on moments’ notice. This means investing in deeper bond and stock markets, but even in them for shorter periods of time – “renting” them, rather than buying into the businesses underlying them, and less so in immobile assets. Among the consequence of such actions are low velocity of money (with less confidence, money flows more slowly) and less capital spending, in “immobile assets” in particular.
As to in- and outflows to gold, its price fluctuations post-crisis suggest that its main feature is being a global reserve currency, a substitute to the dollar. As the euro’s and the yen’s credibility to be reserve currencies first weakened since 2008, and the yuan, a communist party-ruled country’s currency is not fit to play such role, by 2011 the dollar’s dominant status as reserve currency even strengthened.
First the price of gold rose steadily from US$600 per ounce in 2005 to $1,900 in 2011, dropping to $1,200 these days. And much sound and fury notwithstanding, the exchange rate between the dollar, euro and yen are now exactly where they were in 2005, with the price of an ounce of gold doubling since.
The stagnant real wages in Main Street’s immobile sectors are consistent with the rising stock prices and low interest rates. Not only are investors less willing to deploy capital in relatively illiquid assets, but also that critical mass of talented people, I often call the “vital few”, has been moving toward the occupations of the “mobile” sector, such as technology, finance and media.
Such moves put caps on wages within the immobile sectors. Just as “stars” quitting a talented team in sports lower the compensation of teammates left behind, so is the case when “stars” in business or technology make their moves away from the “immobile” sectors. Add to these the impact due to heightened competition of tens of millions of “ordinary talents” from around the world, and the stagnant wages in the US’s immobile sectors are not surprising.
This is one respect in which our world differs from the one of post-World War II, when talent poured into the US’s “immobile” sectors, freed from the constraints of the war economy. It differs too in terms of rising inequality of wealth. The Western populations were young then, hungry to restore normalcy, and able to do that in the dozen Western countries only, the rest of the world having closed behind dictatorial curtains.
This is not the case now: the West’s aging boomers and its poorer segments saw the evaporation of equities in homes and increased uncertainty about their pensions in 2008. They went into capital preservation mode with Treasuries, not stocks. At the age of 50-55 and above, people cannot risk their capital, as they do not have time and opportunities to recoup.
However, those for whom losing more would not significantly alter their standards of living did put the money back in stock markets after the crisis. As markets recovered after 2008, wealth disparities increased. This did not happen after World War II; even though stock markets did well, they were in their infancy then. Even in 1952, only 6.5 million Americans owned common stock (about 4% of the US population then). The hoarding during the war did not find its outlet after its end in stock markets, as happened since 2008 for the relatively well to do.
The parallels in terms of monetary and fiscal policies between World War II and today, and the non-parallels in terms of demography and global trade, shed light on the major trends since the crisis: there are no “conundrums.” This does not mean that solutions are straightforward or can be done unilaterally. The post -World War II world needed Bretton-Woods, and today agreement to stabilize currencies is needed too.
This has not been done. Instead central banks have improvised, though there is no proof that central banks can do well much more than keep an eye on stable prices. The recent improvised venturing into undefined “financial stability”, undefined “cooperation” and “coordination”, and the Fed carrying out, as during World War II, fiscal rather than monetary policy, add to fiscal, regulatory and foreign policy uncertainties, all punish long-term investments and drive money into liquid ones, and society becoming a “rental”, one, with shortened horizons.
Jumps in stock prices with each announcement that the Fed will continue with its present policies and favor devaluation (as Stan Fisher, vice chairman of the Fed just advocated) – does not suggest that things are on the right track, but quite the opposite, that the Fed has not solved any problem, and neither has Washington dealt with fundamentals. Instead, with devaluations, they have avoided domestic fiscal and regulatory adjustments – and hope for the resulting increased exports, that is, relying on other countries making policy adjustments.
Reuven Brenner holds the Repap Chair at McGill University’s Desautels Faculty of Management. The article draws on his Force of Finance (2002).
Melvin Watt, director of the Federal Housing Finance Agency, outlined ways in which his agency would clarify actions it takes against bankers on loans that go bad. (Jacquelyn Martin / Associated Press).
Hoping to boost mortgage approvals for more borrowers, the federal regulator of Fannie Mae and Freddie Mac told lenders that the home financing giants would ease up on demands that banks buy back loans that go delinquent.
Addressing a lending conference here Monday, Melvin Watt, director of the Federal Housing Finance Agency, outlined ways in which his agency would clarify actions it takes against bankers on loans that go bad after being sold to Freddie and Fannie.
The agency’s idea is to foster an environment in which lenders would fund mortgages to a wider group of borrowers, particularly first-time home buyers and those without conventional pay records.
To date, though, the agency’s demands that lenders repurchase bad loans made with shoddy underwriting standards have resulted in bankers imposing tougher criteria on borrowers than Fannie and Freddie require.
A lot of good loans don’t get done because of silly regulations that are not necessary. – Jeff Lazerson, a mortgage broker from Orange County
Those so-called overlays in lending standards, in turn, have contributed to sluggish home sales, a drag on the economic recovery and lower profits on mortgages as banks reduced sales to Fannie and Freddie and focused mainly on borrowers with excellent credit.
Watt acknowledged to the Mortgage Bankers Assn. audience that his agency in the past “did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan.”
Going forward, Watt said, Fannie and Freddie would not force repurchases of mortgages found to have minor flaws if the borrowers have near-perfect payment histories for 36 months.
He also said flaws in reporting borrowers’ finances, debt loads and down payments would not trigger buy-back demands so long as the borrowers would have qualified for loans had the information been reported accurately. And he said that the agency would release guidelines “in the coming weeks” to allow increased lending to borrowers with down payments as low as 3% by considering “compensating factors.”
The mortgage trade group’s chief executive, David Stevens, said Watt’s remarks “represent significant progress in the ongoing dialogue” among the industry, regulators and Fannie and Freddie. Several banks released positive statements that echoed his remarks.
Others at the convention, however, said Watt’s speech lacked specifics and did little to reassure mortgage lenders that the nation’s housing market would soon be back on track.
“The speech was horribly disappointing,” said Jeff Lazerson, a mortgage broker from Orange County, calling Watt’s delivery and message “robotic.”
“They’ve been teasing us, hinting that things were going to get better, but nothing new came out,” Lazerson said. “A lot of good loans don’t get done because of silly regulations that are not necessary.”
Philip Stein, a lawyer from Miami who represents regional banks and mortgage companies in loan repurchase cases, said the situation was far from returning to a “responsible state of normalcy,” as Watt described it.
“When the government talked of modifications in the process, I thought, ‘Oh, this could be good,'” Stein said. “But I don’t feel good about what I heard today.”
Despite overall improvements in the economy and interest rates still near historic lows, the number of home sales is on pace to fall this year for the first time since 2010 as would-be buyers struggle with higher prices and tight lending conditions
Loose underwriting standards–scratch that, non-existent underwriting standards–caused the mortgage meltdown. If borrowers are willing to put down just 3% for their down payment, their note rate should be 0.50% higher and 1 buy-down point. The best rates should go to 20% down payments.
Once-torrid price gains have cooled, too, as demand has subsided. The nation’s home ownership rate is at a 19-year low.
First-time buyers, in particular, have stayed on the sidelines. Surveys by the National Assn. of Realtors have found first-time owners making up a significantly smaller share of the housing market than the 40% they typically do.
There are reasons for this, economists said, including record-high student debt levels, young adults delaying marriage, and the still-soft job market. But many experts agree that higher down-payment requirements and tougher lending restrictions are playing a role.
Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA, said he’s of a “mixed mind” about the changes.
On one hand, Gabriel said, tight underwriting rules are clearly making it harder for many would-be buyers to get a loan, perhaps harder than it should be.
“If they loosen the rules a bit, they’ll see more qualified applicants and more applicants getting into mortgages,” he said. “That would be a good thing.”
But, he said, a down payment of just 3% doesn’t leave borrowers with much of a cushion. If prices fall, he said, it risks a repeat of what happened before the downturn.
“We saw that down payments at that level were inadequate to withstand even a minor storm in the housing market,” he said. “It lets borrowers have very little skin in the game, and it becomes easy for those borrowers to walk away.”
Selma Hepp, senior economist at the California Assn. of Realtors, said lenders will welcome clarification of the rules over repurchase demands.
But in a market in which many buyers struggle to afford a house even if they can get a mortgage, she wasn’t sure the changes would have much effect on sales.
“We’re still unclear if we’re having a demand issue or a supply issue here,” said Hepp, whose group recently said it expects home sales to fall in California this year. “It may not have an immediate effect. But in the long term, I think it’s very positive news.”
Watt’s agency has recovered billions of dollars from banks that misrepresented borrowers’ finances and home values when they sold loans during the housing boom. The settlements have helped stabilize Fannie and Freddie, which were taken over by the government in 2008, and led many bankers to clamp down on new loans.
Fannie and Freddie buy bundles of home loans from lenders and sell securities backed by the mortgages, guaranteeing payment to investors if the borrowers default.
Three months ago, the CEO of Total, Christophe de Margerie, dared utter the phrase heard around the petrodollar world, “There is no reason to pay for oil in dollars,” as we noted here. Today, RT reports the dreadful news that he was killed in a business jet crash at Vnukovo Airport in Moscow after the aircraft hit a snow-plough on take-off on 10/20/2014
The airport issued a statement confirming “a criminal investigation has been opened into the violation of safety regulations,” adding that along with 3 crew members on the plane, the snowplow driver wasalso killed.
Christophe de Margerie was responding to questions about calls by French policymakers to find ways at EU level to bolster the use of the euro in international business following a record U.S. fine for BNP.
”Doing without the (U.S.) dollar, that wouldn’t be realistic, but it would be good if the euro was used more,” he told reporters.
“There is no reason to pay for oil in dollars,” he said. He said the fact that oil prices are quoted in dollars per barrel did not mean that payments actually had to be made in that currency.
“Oh, hey! How ya’ doin’?” Raleigh Ornelas hollers, leaning out the window of his spotless white pickup truck. He’s recognized the man across the street, a developer standing in front of a Tuscan-style mansion under construction. “Where have you been hiding at? I call you, you don’t call me.”
Ornelas is an informal broker in Arcadia, Calif., a Los Angeles suburb at the foot of the San Gabriel mountains. He’s been keeping an eye out for the builder, an Asian man with a slight comb-over who goes by Mark. Ornelas has found two older homeowners who’ve finally agreed to sell their properties, and he knows that Mark, like all developers here, needs land on which to build mansions for an influx of rich clients from mainland China.
Ornelas rattles off addresses on a nearby street. “Three-eleven, that guy, he’s wack,” he says, shaking his head. “He wants 2.8.” He means million dollars. “And then 354, they want $2 million.”
The lot is 17,000 square feet. “Seventeen for 2 mil?” Mark asks, incredulous.
“I know,” Ornelas says. “They’re going crazy.”
A year ago the property would have gone for $1.3 million, but Arcadia is booming. Residents have become used to postcards offering immediate, all-cash deals for their property and watching as 8,000-square-foot homes go up next door to their modest split levels. For buyers from mainland China, Arcadia offers excellent schools, large lots with lenient building codes, and a place to park their money beyond the reach of the Chinese government.
The city, population 57,600, projects that about 150 older homes—53 percent more than normal—will be torn down this year and replaced with mansions. The deals happen fast and are rarely listed publicly. Often, the first indication that a megahouse is coming next door is when the lawn turns brown. That means the neighbor has stopped watering and green construction netting is about to go up.
Damon Casarez for Bloomberg Businessweek. Ornelas matches sellers with developers. Deals happen fast; many aren’t listed publicly.
This flood of money, arriving from China despite strict currency controls, has helped the city build a $20 million high school performing arts center and the local Mercedes dealership expand. “Thank God for them coming over here,” says Peggy Fong Chen, a broker in Arcadia for many years. “They saved our recession.” The new residents are from China’s rising millionaire class—entrepreneurs who’ve made fortunes building railroads in Tibet, converting bioenergy in Beijing, and developing real estate in Chongqing. One co-owner of a $6.5 million house is a 19-year-old college student, the daughter of the chief executive of a company the state controls.
Arcadia is a concentrated version of what’s happening across the U.S. The Hurun Report, a magazine in Shanghai about China’s wealthy elite, estimates that almost two-thirds of the country’s millionaires have already emigrated or plan to do so. They’re scooping up homes from Seattle to New York, buying luxury goods on Fifth Avenue, and paying full freight to send their kids to U.S. colleges. Chinese nationals hold roughly $660 billion in personal wealth offshore, according to Boston Consulting Group, and the National Association of Realtors says $22 billion of that was spent in the past year acquiring U.S. homes. Arcadia has become a hotbed of the buying binge in the past several years, and long-standing residents are torn—giddy at the rising property values but worried about how they’re transforming their town. And they’re increasingly nervous about what would happen to the local economy if the deluge of Chinese cash were to end.
Back on the street corner, Ornelas and Mark agree to meet for coffee to discuss other deals. Before he drives away, Ornelas asks if the developer wants to speak with a reporter. Mark declines, saying he tries to keep a low profile. “See?” Ornelas says as he pulls away, leaning toward the passenger seat and raising his eyebrows. “Everything’s hush-hush here in Arcadia.”
For almost a century after its founding in 1903, Arcadia was white and conservative. In the late 1930s more than 90 percent of the city’s property owners signed agreements, circulated by the Chamber of Commerce, to sell only to white buyers. Its Santa Anita racetrack held about 19,000 Japanese Americans as they were relocated to internment camps during World War II. In the early 1980s an influx of immigrants from Taiwan arrived, drawn in large part to the great public schools. A second wave came from Hong Kong after the 1989 Tiananmen Square protests. The city’s Asian population grew from 4 percent in 1980 to 59 percent in 2010. There were tensions at first—a letter in a local newspaper praised a proposed ban on non-English storefronts, writing, “Please leave your Asian signs in the old country and get Americanized.” Over time, the new residents got involved in civic life, joining the Rotary Club, entering local government, and opening businesses such as Din Tai Fung Dumpling House, a Taiwanese restaurant tucked in the corner of a strip mall.
Arcadia has no real downtown, only low-rise commercial stretches lined with real estate offices and boba tea shops; Din Tai Fung is the closest thing there is to a central hub. Hostesses with walkie-talkies manage the hourlong wait of people clamoring for plump soup dumplings and pork buns. It was here, a decade ago, that Ornelas broke into Chinese real estate. Leaving lunch one day, he spotted a Ferrari parked outside. “Boy, that’s a beautiful car,” he said. The owner was Chinese and asked Ornelas if he wanted to take it for a drive. Ornelas squeezed in and took a quick spin. As he returned, a white man walked by and made a racial slur about the owner.
“I said, ‘Leave the guy alone,’ ” Ornelas recalls. The talk escalated into a fistfight, which ended badly for the heckler. Ornelas is a Vietnam veteran who spent years bare-knuckle boxing for cash while working as a longshoreman. “The Chinese guy goes, ‘I’m a stranger. Why did you stick up for me?’ I said, ‘We’re all equal in this world, man.’ ” After that, Ornelas says, “I just met people from him, and then I got into different developers.”
“Obviously if your house isn’t feng shui-friendly, it’s like we’re not even going to have a conversation”
Ornelas matches them up with sellers. He swings by garage sales to chat up owners, and as he drives Arcadia’s streets, he looks for signs a homeowner may need money. On a blistering hot day in July, he goes scouting through the city’s foothills. “The roof is popping in that one there,” he says, pointing to an older ranch house. “This one, they put a new roof on, but the house is in bad shape.” Ornelas stops at a corner lot, where a property is under construction. “Look at how big that house is,” he says. “Ooof. Gigantic.”
As Ornelas tells it, last year the real estate website Zillow (Z) had estimated the property’s value at $1.2 million when he, on behalf of a developer, offered the owner $1.5 million. The owner’s brother, who worked in law enforcement, called Ornelas to ask if he was laundering money. “I told him, ‘That’s what the house is worth to me,’ you know? And he kind of investigated to see if it was dirty money. Everything was on the uppity-up, so he sold it to us.” Where Ornelas’s tales can be checked against public records, they stand up—Zillow did make the lower estimate, the house did sell for $1.5 million, and the owner’s brother is a sergeant with the county sheriff’s department. (The lawman didn’t respond to a request for comment.)
Next, Ornelas drives over to one in a string of construction sites in the city’s Upper Rancho neighborhood, where large lots line curving streets shaded by gracious oak trees. At the site, buzz saws blare, and stacks of plywood lie on a concrete foundation. Richard Smith, the sun-tanned owner of a construction company working on seven homes in Arcadia, walks over to talk shop. Smith is building the 11,000-square-foot home for a developer who expects to sell it, he says, for $8 million to $9 million. Smith grew up in Arcadia, and his company has only Asian clients. They have certain preferences. “Obviously, if your house isn’t feng shui-friendly, it’s like we’re not even going to have a conversation,” he says. That means minding the number of stairs, the directions rooms face, and how materials line up. “And understanding the value of water, that’s probably one of my key strengths,” he says. “If you go to any successful businessman in China, or even here, they generally will have a picture of water behind their desk.” He whips out his phone and swipes to photos of a project with a waterfall cascading off the top of a gazebo and into a backyard pool.
Photograph by Damon Casarez for Bloomberg BusinessweekA teardown that sold for $2.75 million in July 2013
Smith says many of the newest buyers in Arcadia don’t speak English. “They’ve just come here,” he says. “They’re on that EB—what’s it called?” He means the EB-5 visas that the U.S. grants to foreigners who plow at least $500,000 into American development projects. Congress created the program in 1990 to spur investment, and demand for the visas has grown recently. This year, for the first time, the government gave away the annual allocation of 10,000 visas before the year was over, with Chinese nationals snapping up 85 percent. Brokers in the area say it’s the most common way buyers are coming to town. “Once they obtain residency, they want to bring their family over and get the United States education,” says real estate agent Ricky Seow. “They can start a new life in California.” Taillights whiz by as 19-year-old Cheng Qianrong heads east along the freeway that runs from Los Angeles International Airport toward Arcadia, in a video she posts in June to her 22,000 Instagram followers. Later that night she stands in a marble kitchen, points a gold iPhone at a mirror, and, with a hip to the side, snaps a picture of her reflection, writing, “I’m finally home.
A sophomore studying business at the University of Oregon, Cheng, who goes by Heli in the U.S., is a minor social media celebrity in China. In selfies, her long, straight hair and wide-eyed gaze make her look younger than she is. Her followers express awe for her style and gush at photos of her enjoying a smoothie; posing with stuffed animals; and smiling with a birthday cake made to look like a stack of Tiffany boxes.
In late 2013, Cheng and her mother, Wang Jun, bought a 9,000-square-foot house with a pool and spa in Arcadia for $6.5 million. According to an L.A. property filing, Wang’s husband is Cheng Qingtao. He’s CEO of China Huayang Economic & Trade Group, one of the first state-owned companies set up by the central government, which still owns a majority stake. Heli’s two-story chateau-style home is only a few miles from one owned by her aunt, who’s married to Cheng’s older brother, Cheng Qingbo. Qingbo was the first private owner of railroads in China and, by 2013, was the country’s 257th-richest person, worth an estimated $1.06 billion, Hurun says. In June, Shanghai police arrested Qingbo for allegedly duping people into investments, including a project that, China Business News says, didn’t exist.
For most Arcadians, it would be hard to know if Heli owned the house next door. A member of one homeowners association estimates that about 20 percent of the new purchases sit empty, and for those who don’t speak Mandarin, language barriers have made it hard to share more than a wave with neighbors. For many sales, public records provide no way to understand who the new owners are. A recorded deed may show just an English transliteration of a buyer’s name, with no signature. Some public documents provide small clues: a second address in a luxury condo near Tiananmen Square; a seal if a document has been notarized at the U.S. Embassy in Guangzhou; a husband who relinquishes rights to the land to his wife; or a signature in Chinese characters.
Chinese nationals hold $660 billion in personal wealth offshore; they spent $22 billion on U.S. homes in the past year
Some of those clues match up with public documents in China. A mile north of the Chengs, Fu Youhong and Zhang Jian, a couple who founded a pharmaceutical distributor in China before starting a business converting agricultural waste into energy, bought a $3.5 million home advertised as a “spectacular brand-new French Normandy Estate.” Pesticide manufacturer Huifeng International USA got into the boom early, in 2012, and for $3.4 million bought a house with a grand circular staircase and Swedish sauna. The company says the property is used as an office for its trading business and not as a personal home. And a $3.2 million property in one of Arcadia’s rare gated communities was sold to a woman from Guangzhou named Zeng Fang, who runs a network of immigration sites, one of which, baby-usa.net, tells Chinese mothers they can deliver babies at Arcadia Methodist Hospital.
A few miles south, another new house, this one with Tuscan styling and Moorish window treatments, sold last year to a woman named Jin Liping. Her husband, Du Jianming, is the owner of one of China’s largest private builders of steel structures. His company has built bridges in Shanghai and connecting railways on the Tibetan Plateau. His wife bought the 8,000-square-foot house in Arcadia for $4.8 million in September 2013, around the same time the couple faced financial pressures at home. They lost three lawsuits in China related to unpaid loans, but their home in California looks in peak condition, with little red ribbons tied around the topiary by the front door.
A goldenrod-yellow house on South 6th Avenue belongs to Tao Weisheng and Du Xiaojuan, who develop homes and run hotels in Chongqing. Tao is known in China for collecting calligraphy and paintings—and for reportedly paying bribes to bureaucrats. According to state-run media, in 2004, Tao and a business partner paid a local official’s gambling debt at a Macau casino. The official had given them a land certificate they needed for a loan. In 2010 the court found the official guilty of taking a bribe and gave him a suspended death sentence. The prosecutor didn’t charge Tao and his partner. The homeowners or their representatives declined to comment or did not respond to interview requests.
Lately, groups of Chinese investors have pooled their money to buy Arcadian homes, which often aren’t occupied. More than 400 residents showed up at a community meeting with the police department this spring, in part concerned about a spate of burglaries targeting empty mansions. When there are leaks or other problems with a property, even the city struggles to identify who’s responsible. “Who do we contact? Where do we contact them?” says Jim Kasama, the community development administrator for the city’s building department. “Sometimes it’s not that easy.” Arcadia is on track to bring in record revenue this year. In the fiscal year ended in June, fees from building permits and development reached $7.9 million, a 72 percent increase from the previous year. Its quiet streets are busy with gardeners blowing leaves and laborers laying roofs. This summer, the high school updated its gym and cafeteria. For a generation of older homeowners, the boom has created one hell of a nest egg. The Great Recession hit many retirees hard, but now they’ve sold and moved to cheaper places a few miles away. As Smith, the contractor, says, “They still live close, but they’ve got 2 million bucks in their bank account.”
With so many homes vacant and language barriers prevalent, distrust is building. There are strange rumors—local officials on the take; bridal studios as fronts for massage parlors—and stranger truths. Just steps from the Arcadia police station, a local TV news reporter uncovered a hotel being used for birth tourism. A member of one homeowners association says a developer told the local board at various meetings that three separate homes he was building were all for his own family. When the board called him on it, he said his wife couldn’t decide which one she wanted.
“The growth we’re experiencing isn’t typical,” Kasama says. “It’s not like we have new subdivisions. It’s the houses that are growing.” The city’s homeowners associations can do only so much—three years ago, the city changed a regulation that limits their ability to cap the size of houses.
Neighborhood disputes are getting intense. Dong Chang, a local dermatologist who told the Rotary Club that he left Taiwan in the early 1970s with “two bags of rice and a frying pan,” is suing the developer building a mansion next door for cutting down an old oak tree on his property. He’s seeking about $280,000, saying the harm was “intentional, fraudulent, oppressive, malicious, and despicably done.”
Courtesy City of ArcadiaA red sign reading “Cannon against dogs” hangs from one of two replica cannons a developer installed pointing to his neighbor across the street
Then there’s the cannon incident. That battle went down on West Las Flores Avenue, on a block with a mix of older homes and newer construction, including a house owned by David Tran, the Huy Fong sriracha magnate. A family moved into a new home in 2008 and flanked the front walkway with two waist-high lion statues, the “fu dogs” that guard imperial Chinese palaces. A few years later, a developer named Ricky Tang began building his own home across the street. Tang didn’t care for the lions, but their owners refused to remove them. In January 2011, according to city records, Tang mounted two replica cannons on top of a construction trailer in the front of his lot, aiming back at the lions. A red sign reading “Cannon against dogs” in Chinese hung from each cannon. “The neighbor across the street took offense,” Kasama says. “He felt they looked threatening.” Soon a city-owned Prius pulled up, lights flashing, with an official entreating Tang to take down the weaponry. He acquiesced after a month of haggling. Tang didn’t respond to a request for comment.
Mary Garzio, a widow who’s Tang’s neighbor, calls him “a very nice man.” She says he’s been wooing her to sell her 73-year-old house for $3 million in cash. He brings over fruit and says she can live rent-free until she gets settled elsewhere. “He says, ‘You’re a good neighbor, Mary. I don’t want you to leave, but I want your home.’ ” Arcadia’s Chinese buyers may have made their wealth in different ways, but they face a common problem: getting their cash to America. China controls the flow of its currency, restricting residents from converting more than $50,000 in yuan into foreign denominations each year. At that pace it would take half a lifetime for a couple to buy a $4 million home.
Jeff Needham, a senior vice president at HSBC (HSBC), says it’s most common for buyers to transfer money from personal or business accounts they already have in Hong Kong, which doesn’t impose caps. “In most of our buyer situations, they have funds outside China already that they have accumulated over years,” he says, adding that the bank verifies the source of the funds.
It’s trickier for those without accounts in Hong Kong. Chen Ping, a local broker, says there’s a common workaround. “We call it ‘head-count wiring,’ ” she says. Buyers line up other people—friends, family, or, if need be, paid strangers—to each transfer a share. “I once had a customer who bought a $1.9 million house in Arcadia who said, ‘Not a problem. I have more than enough head counts,’ ” Chen says. Many buyers have legitimate ways to wire the funds, says broker Imy Dulake, but “there is no way we can have this much cash coming in legally.”
When they can’t get enough money through, property records show many get mortgages to buy the homes, often putting at least 40 percent down. Others buy with all cash and later take out home-equity loans, freeing up funds for other investments in the U.S. without going through the rigmarole of getting money across the Pacific again. Dozens of Chinese homeowners in Arcadia have loans from HSBC and East West Bancorp (EWBC), both of which have branches in China. HSBC’s Needham says the bank gives “premier” clients a discounted rate, and it can underwrite loans in the U.S. based on international credit scores and assets overseas. East West didn’t respond to requests for comment.
Even as they fret about their town, longtime Arcadians worry about a sudden end to the money. What happens if the U.S. limits visas, the Chinese government clamps down, or the émigrés pick another place to park their cash? “How high we go, we can’t foresee, because we never know the policy changes,” real estate agent Seow says. This summer, after an exposé on China Central Television, the Bank of China ended a government program that quietly let some customers convert an unlimited amount of yuan into dollars and transfer it overseas. And President Xi Jinping’s anticorruption campaign has raised the specter of a larger slowdown. “I was in escrow on a property before this crackdown, and oh my God, they could not get their money out” of China, broker Dulake says. The sale fell through.
Stig Hedlund lives on the block with the cannons, in a house built in 1937 by his grandfather, a civil engineer who laid out many of the city’s roads when everything was still alfalfa fields. Now Hedlund is wondering if he should leave. He’s received nice offers for his house, like when a broker and a couple drove up his driveway unannounced in a black Mercedes one Sunday morning; the broker knocked on the front door, saying the couple wanted to buy his home. He’d like to wait until his last son graduates from college, but he fears his “five-year plan” will make him miss the boom. When he reads news about recent protests in Hong Kong, he wonders how China’s response will ripple across the mainland. “If a communist government starts putting the kibosh, isn’t it more incentive to get money out of the country?” he asks. Or would a crackdown mean he blows his chance to sell? It’s a question central to Arcadia’s gardeners and construction workers, the car salesmen and the boba tea makers, who all rely on the money surging out of China. For now, Hedlund figures he can wait a little longer. He hears Ornelas just brokered a sale down the street for $2.8 million.
According to CoreLogic, cash sales made up 32.9 percent of total U.S. home sales in July 2014, the lowest share since August 2008, and down from 35.9 percent in July 2013.
Month over month, the cash sales share was mostly flat, falling only one tenth of a percentage point from June 2014, however, cash sales share comparisons should be made on a year-over-year basis due to the seasonal nature of the housing market. The year-over-year share has fallen each month since January 2013. Prior to the housing crisis, the cash sales share of total home sales averaged approximately 25 percent. The peak occurred in January 2011, when cash transactions made up 46.3 percent of total home sales.
Real estate owned (REO) sales had the largest cash sales share in July 2014 at 56.3 percent, followed by re-sales (32.4 percent), short sales (31.1 percent) and newly constructed homes (16 percent). While the percentage of REO sales that were cash transactions remained high, REO transactions made up only 7.1 percent of total sales in July and, therefore, did not have a large influence on the overall cash sales share. In January 2011, when the cash sales share was at its peak, REO sales made up 23.9 percent of total sales. A trend to watch is the cash share of re-sales, which has fallen almost 15 percentage points from its peak cash share of 47.1 percent in February 2011. This category will determine the direction of cash sales going forward, since re-sales make up the largest share at 81 percent of all sales.
Florida had the largest share of any state at 49.7 percent, followed by Alabama (47.6 percent), New York (44.5 percent), West Virginia (42 percent) and Idaho (39.9 percent). Of the nation’s largest 100 Core Based Statistical Areas (CBSAs) measured by population, West Palm Beach-Boca Raton-Delray Beach, Fla. had the highest share of cash sales at 57.9 percent, followed by Cape Coral-Fort Myers, Fla. (57.3 percent), Miami-Miami Beach-Kendall, Fla. (56.5 percent), North Port-Sarasota-Bradenton, Fla. (55.8 percent) and Detroit-Dearborn-Livonia, Mich. (55.8 percent). Washington-Arlington-Alexandria, D.C.-Va.-Md had the lowest cash sales share at 15.4 percent.
It’s now called a “collapse”: The US benchmark light sweet crude plunged 4.6% to settle at $81.84 a barrel on Tuesday, the lowest since June 2012. In London, Brent made a similar journey to $85.04, its lowest level since November 2010. Explanations abound why this is suddenly happening, after years of deceptive calm.
Is it some harebrained plot to punish Russia by destroying its economy? Signs of success are everywhere. The ruble is in free fall despite the central bank’s efforts to prop it up. Yield on Russia’s 10-year note is nearly 10%. The government’s budget, heavily dependent on oil revenues, is in trouble. And every unit of foreign currency that isn’t nailed down is fleeing the country.
Or is it a plot by Saudi Arabia to squash the US shale oil boom? In November last year, the Saudi Gazette published an editorial on the “successful, wise, and balanced OPEC strategy” that led to “unprecedented” stability of oil prices for the past few years of around $106 a barrel. But couched in words such as “skeptics are demanding,” it uttered the threat to raise OPEC production until the price would drop “below $70 a barrel” to “remove the shale oil from the world oil production map….”
Or is it the combination of surging production in the US and sagging demand around the world, particularly in China and Europe?
Demand for oil would inch up this year at the slowest rate since the terrible year of 2009, the IEA predicted. OPEC might not be willing or able to lower production, it said. Why? Because of the US shale boom. And so, “Further oil price drops would likely be needed for supply to take a hit – or for demand growth to get a lift.”
Whatever the reasons for the market chaos, we already know what it has accomplished in the US: Investors who were long when they sleepwalked into this new era that started in late June have had their heads handed to them. WTI gave up 21% in less than four months. Over the same period, the SPDR Oil & Gas Equipment & Services Fund (XES), a basket of the largest oil- and gas-related stocks, plummeted 33%. Shares of smaller oil and gas companies have gotten demolished.
Reason for this mayhem: the toxic mix of high debt and plunging oil price.
The oil and gas sector is capital intensive. Drillers have borrowed phenomenal amounts of money, which was nearly free and grew on trees, to acquire leases and drill wells and install processing equipment and infrastructure. Even as debt was piling up, the terrific decline rates of fracked wells forced drillers to drill new wells just to keep up with dropping production from old wells, and drill even more wells to show some kind of growth. One heck of a treadmill. Funded in part by junk bonds [read… Where Money Goes to Die: How Fracking Blows Up Balance Sheets of Oil and Gas Companies].
Junk bond issuance has been soaring as the Fed repressed interest rates and caused yield hungry investors to close their eyes and take on risks, any risks, just to get a teeny-weeny bit of extra yield. Demand for junk debt soared and pushed down yields further. And even within this rip-roaring market for junk bonds, according to Bloomberg, the proportion issued by oil and gas companies jumped from 9.7% at the end of 2007 to 15% now, an all-time record.
While the overall high-yield market is down 2.3% since the end of August, oil and gas junk debt has dropped 4.6%. But it hides the bloodletting beneath the surface.
Samson Investment, an oil and gas explorer headquartered in Tulsa, OK, owned by private equity firm KKR, extracted $2.25 billion of new money from gullible investors in July. In early August, these junk bonds still traded at 103.5 cents on the dollar. Then reality sank in, and that formerly low-risk paper plunged to 77.5 cents on the dollar.
Not just in fracking la-la land. Paragon Offshore, an offshore driller, completed its spinoff from Noble in early August. Its stock started trading at $17.50 a share and immediately plunged and is now down a cool 68% in the first 10 weeks as an independently traded company. In July, it also sold $580 million in 10-year junk bonds to your conservative-sounding bond fund at 100 cents on the dollar. Now they trade for 77.3 cents on the dollar.
Hercules Offshore, a Houston-based drilling company with the appropriate ticker HERO, saw its shares plunge 81% since July last year to $1.47 on Tuesday. In March, it had the temerity to sell – or rather investors had the Fed-induced idiocy to buy – for 100 cents on the dollar $300 million in junk bonds that now trade at 66 cents.
This is what happens at the tail end of a credit bubble. Investors still lust for high-risk debt because it offers a little more yield in the era of ZIRP, but that yield did not compensate investors for the risks they were taking on. Companies and Wall Street did what the Fed had wanted them to do: issue junk and push it into retirement portfolios where it can quietly decompose. And bamboozled investors – thinking that the Fed was the greatest thing since sliced bread – took this debt with a desperate grin.
Now that the bottom is falling out, it is getting more expensive for these companies to borrow. Newly awakened investors are demanding to be compensated at least a little for the risk, and that risk has now been exacerbated by the collapse of the price of oil. That’s the toxic mix.
If the money stops growing on trees, the jig is up for many of these over-indebted companies, and the American fracking boom may well do what other oil booms have done before, and what OPEC would like it to do: grind to a halt. And investors who’ve done what the Fed had wanted them to do – take on risks with their eyes closed – would lose their oil-stained shirts.
(Reuters) – Saudi Arabia is quietly telling oil market participants that Riyadh is comfortable with markedly lower oil prices for an extended period, a sharp shift in policy that may be aimed at slowing the expansion of rival producers including those in the U.S. shale patch.
Some OPEC members including Venezuela are clamoring for urgent production cuts to push global oil prices back up above $100 a barrel. But Saudi officials have telegraphed a different message in private meetings with oil market investors and analysts recently: the kingdom, OPEC’s largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.
The discussions, some of which took place in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto strategy of holding prices at around $100 a barrel for Brent crude in favor of retaining market share in years to come.
The Saudis now appear to be betting that a period of lower prices – which could strain the finances of some members of the Organization of the Petroleum Exporting Countries – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater, according to the sources, who declined to be identified due to the private nature of the discussions.
The conversations with Saudi officials did not offer any specific guidance on whether – or by how much – the kingdom might agree to cut output, a move many analysts are expecting in order to shore up a global market that is producing substantially more crude than it can consume. Saudi pumps around a third of OPEC’s oil, or some 9.7 million barrels a day.
Asked about coming Saudi output curbs, one Saudi official responded “What cuts?”, according to one of the sources.
Also uncertain is whether the Saudi briefings to oil market observers represent a new tack it is committed to, or a talking point meant to cajole other OPEC members to join Riyadh in eventually tightening the taps on supply.
One source not directly involved in the discussions said the kingdom does not necessarily want prices to slide further, but is unwilling to shoulder production cuts unilaterally and is prepared
OPEC ANGST
With most other members of the cartel unable or unwilling to reduce their own output, the group’s next meeting on Nov. 27 is set to be its most difficult in years. OPEC has agreed to cut production only a handful of times in the past decade, most recently in the aftermath of the 2008 financial crisis.
On Friday, Venezuela – one of the cartel’s most price-sensitive members – became the first to call openly for emergency action even earlier. Foreign Minister Rafael Ramirez said “it doesn’t suit anyone to have a price war, for the price to fall below $100 a barrel.”
On Sunday, Ali al-Omair, oil minister of Saudi Arabia’s core Gulf ally Kuwait, appeared to be the first to articulate the emerging view of OPEC’s most influential member, saying output cuts would do little to prop up prices in the face of rising production from Russia and the United States.
“I don’t think today there is a chance that (OPEC) countries would reduce their production,” state news agency KUNA quoted him as saying.
Omair said that prices should stop falling at around $76 to $77 a barrel, citing production costs in places like the United States, where a shale oil boom has unexpectedly reversed dwindling output and pushed production to its highest level since the 1980s.
Saudi oil officials have made no public comments on the deepening swoon in markets. Senior officials did not reply to questions from Reuters about recent briefings.
to tolerate lower prices until others in OPEC commit to action.
DON’T BE SURPRISED BELOW $90
Global benchmark Brent crude oil futures have fallen steadily for almost four months, dropping 23 percent from a June high of over $115 a barrel as fears of a Mideast supply disruption ebbed, U.S. shale production boomed and demand from Europe and China showed signs of flagging. [O/R]
Until recently, Gulf OPEC members have been saying that the price dip was a temporary phenomenon, betting on seasonal demand in winter to prop up prices. But a growing number of oil analysts now see the latest slide as something more than a seasonal downswing; some say it is the start of a pivotal shift to a prolonged period of relative abundance.
Rather than fight the decline in prices and cede market share in the face of growing competition, Saudi Arabia appears to be preparing traders for a sea change in prices.
The Saudis want the world to know that “nobody should be surprised” with oil under $90 a barrel, according to one of the people. Another source suggested that $80 a barrel may now be an acceptable floor for the kingdom, although several other analysts said that figure seemed too low. Brent has averaged around $103 since 2010, trading mostly between $100 and $120.
While the latest discussions are the bluntest efforts yet to signal the shift in Saudi strategy, early signs had already begun sending shivers through the oil market. In early October the kingdom cut its official selling prices more sharply than expected in a bid to maintain customers in Asia, widely seen as the opening shots in a price war for Asian customers.
“Riyadh’s political floor on oil prices is weakening,” Robert McNally, a White House adviser to former President George W. Bush and president of the Rapidan Group energy consultancy, wrote in a note to clients following a trip to Saudi last month.
McNally said he is not aware of any specific Saudi price or timing strategy, but told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the U.S. shale oil sector.”
As that message began to dawn last week, the price rout quickened, with Brent lurching to its lowest level since 2010.
“Until about three days ago the absolute and total consensus in the market was the Saudis would cut,” said McNally. That is no longer a foregone conclusion, he said. “The market suddenly realizes it is operating without a net.”
The numerous outfits that attempt to measure home price levels and movements in the US all come up with different numbers, and often frustratingly so, in part because they measure different things. Some measure actual cities, others measure the often multi-county area of the entire metroplex. So the absolute price levels differ, and timing may differ as well, but the movements are roughly the same.
The chart by the Atlanta Fed overlays three of the major real estate data series – the Federal Housing Finance Agency’s House Price Index, the CoreLogic National House Price Index, and the S&P/Case Shiller Home Price Index (20-city). And one thing is now abundantly clear:
Year over year, home-price increases are fading from crazy double digit gains last year toward….?
Note the great housing bubble that the Greenspan Fed instigated with its cheap-money policies that then led to the financial crisis. It was followed by a hangover.
And the show repeats itself:
The ephemeral bump in home prices in 2010 and 2011 was a result of federal and state stimulus money (via tax credits) for home buyers. It was followed by a hangover.
The hefty home price increases of 2012 and 2013 were nourished by investors, including large Wall Street firms with access to nearly free money that QE and ZIRP made available to them. They plowed billions every month into the buy-to-rent scheme. When prices soared past where it made sense for them, they pulled back. And now the hangover has set in.
There is no instance in recent history when home prices soared like this beyond the reach of actual home buyers, then landed softly on a plateau to somehow let incomes catch up with them. Despite the well-honed assurances by the industry, there is no plateau when home prices are inflated by outside forces. When these forces peter out, the hangover sets in.
How long the current hangover will last and how far prices have to drop before demand re-materializes even as interest rates are likely to be nudged up remains a guessing game. So far, prices are still up on a national basis year over year. But in some areas, price changes have started to go negative on a monthly basis. And the trend has been relentless.
Someday perhaps, governments and central banks will figure out that every stimulus and money-printing binge is followed by a hangover. And when that hangover gets painful, suddenly there are new screams for more stimulus and another money-printing binge, regardless of what will come as a result of it, or after it fades.
Petroamerica was a fantastic buying opportunity at C$0.39 in August 2014.
The stock trades less than 1 times its 2014 EBITDA at the current price of C$0.25.
An once-in-a-lifetime buying opportunity is an understatement, and I do pound the table on the value this stock currently represents.
Introduction
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Petroamerica Oil (OTCPK:PTAXF) was an exploration company a few years ago that managed to become a well-established oil producer in Colombia. Petroamerica is the definition of a cash cow with a rock solid balance sheet and working capital surplus of US$74 million (see Q2 2014 report) that can withstand any short-term and mid-term volatility of the oil price, as mentioned in my “Top Idea” article in late August 2014.
Aside the consistent production growth on a YOY basis, the company also managed to diversify its asset base while increasing significantly its RLI (reserves life index) pro forma the recent transformative acquisition of Suroco Energy. But this deal coincided with the overall correction of the energy sector and the market did not pay attention to it. So Petroamerica remained a grossly undervalued company at C$0.39 per share in late August 2014.
But Albert Einstein has said: “Two things are infinite: the universe and human stupidity. But I’m not sure about the former”. Einstein could not describe better the reason why Petroamerica has dropped over the last weeks, despite the fact it was already a fantastic buying opportunity at C$0.39. The stock was beaten out primarily by the herd mentality, and the fools abandoned the ship, creating an once-in-a-lifetime buying opportunity.
And believe it or not, the phrase “once-in-a-lifetime buying opportunity” is a vast understatement, because Petroamerica trades below 1 times its 2014 EBITDA at the current price of C$0.25 per share.
As such, I decided to pound the table on the value this company currently represents. Given that I compared Petroamerica primarily to its Colombian, Peruvian, Chilean and Brazilian peers in my “Top Idea” article, this time I will compare Petroamerica to other junior oil-weighted competitors (production up to 10,000 boepd) with onshore production and properties in Argentina, Africa and Middle East.
In Part 1, the peers are from Argentina, Nigeria and Kurdistan. In Part 2, the peers will be from other countries which are equally high risk jurisdictions. All these regions carry much higher geopolitical risk than Colombia’s, while the energy companies there receive Brent pricing.
The Irrational Valuation Is Beyond Any Comprehension
As mentioned above, Argentina, Kurdistan and Nigeria carry much higher geopolitical risk than Colombia’s. And there is no question about this, given the continued headwinds all the energy companies have been facing in these three countries on a permanent basis.
The nationalization fears always linger over Argentina during the last years primarily due to YPF’s (NYSE:YPF) nationalization by the Argentinean Government. These fears coupled with a non-business friendly environment have made several big energy companies dump their Argentinean assets to the local producers and exit Argentina. For instance, both Apache (NYSE:APA) and Gran Tierra Energy (NYSEMKT:GTE) sold their Argentinean assets recently and decided to focus their resources to safer areas. The deal will allow Gran Tierra to further focus on Colombia, Peru and Brazil, Gran Tierra’s CEO Dana Coffield said.
Kurdistan has been in the center of violence in the Middle East over the last ten years, let alone now due to the existence of ISIS (Islamic State of Iraq).
Meanwhile, the piracy and the illegal bunkering coupled with the frequent shutdowns, field pipeline and export facility losses have been hampering for years the smooth execution of the business plans of the Nigerian oil producers. This is why, several major players have sold their assets and have left Nigeria during the last years. They went to greener pastures because they were not able to handle all these headwinds anymore.
In contrast, a huge land rush is happening in the energy sector in Colombia, which is undergoing an evolution over the last years. The number of majors coming in Colombia has been increasing, thanks to several reasons that were analyzed in my latest “Top Idea” article (i.e. improved political and security climate with the funding help of the US).
After all, let’s see now Petroamerica’s peers from Argentina, Nigeria and Kurdistan:
I am a strong believer that many investors have never heard about most of these companies. And I am also absolutely sure that Petroamerica’s sellers over the last days are definitely among the investors who see most of these companies for the first time in their life.
Well, this does not surprise me and the ignorance has always been one of the primary factors leading to market inefficiency. As such, some more information about Petroamerica’s competitors is more than necessary:
1) Oryx Petroleum’s single producing asset is in Kurdistan, as shown below:
(click to enlarge)
“Source: Oryx website”
Oryx also has non-producing assets in Nigeria, Senegal and Congo, as shown below:
“Source: Oryx website”
“Source: Oryx website”
“Source: Oryx website”
2) Mart’s single-producing asset is the Umusadege field situated in Nigeria, as shown below:
“Source: Mart website”
3) Eland’s producing properties are in Nigeria, as illustrated below:
4) Apco’s producing properties are in Argentina (Neuquen Basin, Northwest Basin, San Jorge Basin, Austral Basin) and Colombia, as illustrated below:
(click to enlarge)
“Source: Apco website”
5) Americas Petrogas’ producing properties are in Argentina, as illustrated below:
“Source: Americas Petrogas website”
6) Andes’ producing properties are in Argentina while the company also has non-producing assets in Colombia, Brazil and Paraguay, as illustrated below:
(click to enlarge)
“Source: Andes website:
7) President’s main producing properties are in Argentina, where the company gets most of its production, as illustrated below:
“Source: President website”
President has also a small producing asset in the US and non-producing assets in Paraguay, as illustrated below:
“Source: President website”
and below:
“Source: President website”
I must also point out that:
1) I took into account the working capital surplus or deficiency to calculate the Net Debt and thereby the Enterprise Value accurately ($1 = C$1.11, 1GBP=$1.61).
2) I excluded the EV/2P Reserves key ratio. I did this because this is a backward-looking ratio referring to the companies’ reserves as of December 2013, while we are already in Q4 2014 and the companies have completed a significant part of their drilling programs.
3) The EBITDA estimates are based on a $90/bbl (Brent) scenario by year end.
That being said, I will proceed with the calculations on these two key metrics:
1) Per EV/Production: Here is the table with the first key metric:
Company
EV($ million)
Q4 2014Production
(boepd)(*)
EV———
Q4 2014
Production (*)
($/boepd)
AndesEnergia
350
1,600(100% light oil)
218,750
PresidentEnergy
90
600(~80% light oil & NGLs)
150,000
OryxPetroleum
880 (**)
10,000(100% light oil)
88,000
AmericasPetrogas
95
1,100(100% light oil)
86,364
MartResources
460
5,500(100% light oil)
83,636
Eland Oiland Gas
210
3,000(100% light oil)
70,000
Apco Oiland Gas
420
7,300(56% light oil & NGLs)
57,534
PetroamericaOil
125
7,400+(97% light/medium oil & NGLs)
16,892
(*): Estimate, based on the latest corporate guidance.
(**): Pro forma the offering of July 2014.
2) Per EV/EBITDA: Let’s check out now the table below with the second key metric:
Company
EV($ million)
2014 EBITDA($ million) (*)
EV———
2014 EBITDA
AndesEnergia
350
10
35
OryxPetroleum
880 (**)
35
25.14
Eland Oiland Gas
210
10
21
PresidentEnergy
90
10
9
AmericasPetrogas
95
15
6.33
Apco Oiland Gas
420
75
5.6
MartResources
460
140
3.29
PetroamericaOil
125
130
0.96
(*): Estimate, based on the latest production guidance.
(**): Pro forma the offering of July 2014.
My Takeaway
Hamsters and gerbills have short-term memories lasting a few hours. I think that the average investor’s memory is better than hamster’s. Reptiles and amphibians have memories lasting few months. And I believe that often the average investor’s memory is hardly better than reptiles’. As such, he forgets quickly without learning from his previous mistakes, and is always ready to throw again and again the baby out with the bath water. This is the case with Petroamerica, since I recommended it at C$0.39 per share in late August 2014.
Since late August 2014, the stock has dropped due to a combination of these reasons:
1) A temporary production disruption in the Putumayo Basin, where Suroco Energy has its producing property (Suroriente Block). As a result of this temporary production restriction, the updated guidance of 7,460 boepd in Q4 2014 was below original 2014 expectations. Nevertheless, it must be pointed out:
a) This temporary disruption did not take place in the Llanos Basin, where Petroamerica has its core producing properties.
b) Suroco’s properties were producing less than 30% of the total Petroamerica’s production.
c) Petroamerica has clearly stated that the production has resumed and normal production operations along with oil evacuation were restored in the Putumayo properties as of October 1, 2014.
d) The YOY production growth is still here, given that Petroamerica was producing 4,390 boepd in Q1 2013 and 6,400 boepd in Q1 2014. Based on the updated guidance of 7,460 boepd, the YOY production growth between Q1 2014 and Q4 2014 is almost 20%.
2) The correction of the oil price and the energy stocks.
3) A dwindling amount of 20 cent warrants holders sold. According to the presentation of September 2013 (slide 29), there were 32.85 million warrants as of August 2013, and according to the latest presentation (slide 23), there were only 9.15 million warrants left as of August 2014.
These warrants were issued as a sweetener for the 2015 note offering, when Petroamerica was a start-up business a few years ago. Those warrant holders have been exercising and cashing out over the last years.
4) The weak hands, the ignorant investors and the short-term traders sold too, running for the hills, so the drop accelerated. Most of them bought on the “Top Idea” article about Petroamerica and were getting shaken out.
The thing is that none of the sellers has realized why he is selling Petroamerica and whether there is a better value out there. None of the sellers has realized the big picture associated with Petroamerica’s peers in Colombia, as described in my “Top Idea” article. None of the sellers has realized the big picture associated with Petroamerica’s peers in Argentina, Africa, and Kurdistan, as described above.
And I am determined to present again the big picture with the help of another article (Part 2) over the next days, because Petroamerica currently is the cheapest oil-weighted producer among all the publicly-traded energy companies in the international markets.
There is not another oil producer that currently trades below 1 times its 2014 EBITDA, while having a pristine balance sheet. And given that my database includes all the publicly-traded energy companies in the US, Canada, Europe, Asia and Australia, I challenge all to write an article about a cheaper energy company with a better balance sheet than Petroamerica’s.
Last but not least:
1) My articles about Petroamerica (Top Idea, Part 1) are based on a relative valuation analysis. In other words, if Brent drops and remains at $90/bbl for many months, it will affect all Petroamerica’s peers that receive Brent pricing. If Brent drops and remains below $90/bbl for many months, it will not affect only Petroamerica’s top and bottom lines.
Based on this easy to understand fact, the current mind-blowing valuation gap between Petroamerica and its peers (Latin American, African, Middle East) is completely unjustifiable, no matter what the Brent pricing is. It does not play one single role whether Brent is at $100/bbl or at $90/bbl.
Petroamerica’s peers currently trade between 4 and 35 times their 2014 EBITDA, while Petroamerica currently trades below 1 times its EBITDA, at the current price of C$0.25 per share. And to be fair, Petroamerica deserves a premium compared to many of its peers, given that many of its peers are leveraged with worse balance sheets and operations in highly risky juridictions, as shown in both my Petroamerica-related articles.
To say it differently, while Petroamerica’s peers have been dropping over the last couple of weeks, Petroamerica should have risen all these days to catch up with its peers’ valuation, closing the tremendous valuation gap.
2) All my previous five energy picks from Colombia (C&C Energia, Petrominerales, Parex, Canacol, Suroco Energy) have risen between 70% and 160% since I recommended them. And Petroamerica Oil at C$0.39 per share was fundamentally better and cheaper than these five companies, let alone now at C$0.25 per share.
3) Three of my previous Colombian picks (C&C Energia, Petrominerales, Suroco Energy) were acquired between 4 and 6 times their EBITDA.
4) Just a few days ago, privately held Pluspetrol Resources agreed to buy Apco Oil and Gas for $427 million, which is 5.6 times its 2014 EBITDA. Apco operates primarily in Argentina and also has some producing Blocks in Colombia, as shown in the previous paragraph.
Apparently, the blindingly obvious is not blindingly obvious for the average investor, and this is why he is always doomed to lose in the stock market. Thanks to the average investor, the smart money makes easy money.
Disclaimer:This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
WASHINGTON (Reuters) – Federal Reserve officials on Saturday took stock of a slowdown in the global economy and said it could delay an increase in U.S. interest rates if serious enough.
Most notably, Fed Vice Chairman Stanley Fischer said the effort to finally normalize U.S. monetary policy after years of extraordinary stimulus may be hampered by the global outlook.
“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” he said at an event sponsored by International Monetary Fund.
Nevertheless, he said betting in financial markets on the timing of a U.S. rate hike appeared “roughly” on the mark given the Fed’s current expectations on how the economy’s recovery would unfold.
The IMF trimmed its global growth forecast ahead of its fall meetings this weekend, where discussions focused on ways to stimulate global demand and prevent the euro zone from slipping back into recession.
“I am worried about growth around the world, there are more downside risks than upside risks,” Fed Governor Daniel Tarullo said at a conference the Institute of International Finance sponsored on the sidelines. “This is obviously something we have to think about in our own policies.”
Chicago Federal Reserve Bank President Charles Evans said a strengthening of the dollar and weak growth abroad could mean slower inflation in the United States, and less justification for the U.S. central bank to raise rates.
The renewed concerns about Europe could represent a serious complication for the Fed, which had been expected to begin bumping up benchmark borrowing costs in the middle of next year.
Fischer spoke in part to calm concerns among developing nations about a potential tightening in U.S. monetary policy, saying the Fed would only move rates higher if the U.S. economy was ready for it. Overall, he said, rising borrowing costs in the United States were unlikely to disrupt flows of capital and investment around the world.
“The normalization of our policy should prove manageable,” Fischer said. “We have done everything we can, within the limits of forecast uncertainty, to prepare market participants for what lies ahead.”
“In determining the pace at which our monetary accommodation is removed, we will, as always, be paying close attention to the path of the rest of the global economy and its significant consequences for U.S. economic prospects.”
Large developing nations like India and Brazil have been concerned a rise in U.S. rates could suck investment away from their economies, just as they earlier criticized the Fed’s bond-buying stimulus as a “currency war” that caused a fast increase in their currency values.
Fischer said in the keynote IMF address that the Fed’s crisis programs, which pumped trillions of dollars into global markets, have on the whole benefited the rest of the world.
“The net effect on foreign economies appears to be both modest in magnitude and most likely positive, on net, for most countries,” he said.
In addition, he said U.S. central bank officials have given national governments and investors plenty of time and clear signals to prepare for a shift in policy.
The Fed is “going to great lengths to communicate policy intentions,” Fisher said. “Markets should not be greatly surprised by either the timing or the pace of normalization.”
(Reporting by Howard Schneider; Additional reporting by Jason Lange and Douwe Miedema; Editing by Andrea Ricci)
Many owners of mineral rights in Texas have become the recipients of hundreds of thousands—or even millions—of dollars as a result of the oil boom that has struck the state. With areas such as the Permian Basin and Eagle Ford Shale in Texas producing more oil than ever before, those who own mineral rights have often times been fortunate when it comes to cashing in on their rights.
However, those without mineral rights have benefited from the oil boom in numerous ways as well. Thousands of people within the state who simply own land have made huge profits through other means connected to oil and natural gas. One such way that landowners have become rich quick has been through profiting by the means of payouts for pipeline development in Texas.
Pipelines Companies Paying More than Ever Before
Pipelines In Texas – How Landowners Without Minerals are Profiting from the Boom In order to retrieve and transport oil and natural gas, pipeline, and lots of it, is needed in the Eagle Ford Shale and Permian Basin areas. As such, pipeline companies have been paying landowners for years for the rights to lay pipeline across the landowners’ property. As the oil boom continues to surge, though, pipeline companies are paying landowners more than ever before.
Take, for example, the 2014 case set in Johnson County in Texas, where Peregrine Pipeline Co. offered $80,000 to a landowner for the rights to lay pipeline across one mile of vacant land. When the landowner stated that he believed the price to be much too low, the case went to court. The outcome? The Johnson County jury agreed with the landowner—the price was too low. As a result, the landowner was awarded a higher offer, a much higher offer: $1.6 million, plus interest, to be exact.
But the example of Peregrine isn’t the only one in the state; juries awarded $650,000 in 2010 to a family in McMullen County, and nearly $800,000 to a family in Denton County in the same year.
Why the High Payouts?
Like any basic case of supply and demand, both landowners and pipeline companies in Texas have realized that the demand for land is worth more than it has ever been before. As the production of oil and natural gas continues to increase to almost unheard of rates, the oil and gas industry is struggling to lay pipelines quickly enough to keep up with the surge. As such, in order to operate as quickly and efficiently as possible, they’re offering big payouts to landowners. And if they don’t, the landowners are countering with higher offers, when understanding the value of their property. Plus, because of the high costs of going to court—both financially and in relation to time—pipeline companies are more and more willing to pay higher amounts to landowners to avoid a courtroom debacle.
Home builder KB Homes, when it reported earnings for the quarter ended August 31, revealed that the average price of the homes it sold rose 9% to $327,000. In the West, prices jumped by 20% to $579,700. With these juicy price increases, sales in dollars were up 7% from a year ago. But the number of homes it sold actually declined by 2%. That’s how the housing market in America operates these days – even at the high end that KB Homes serves.
At the same moment, the Commerce Department reported that new home sales suddenly jumped by 18% in August from July, and a breath-taking 33% from August last year, after having been in the doldrums or declining for months (PDF). But the margin of errors are elephantine (±16.3% and ±21.7% respectively), so a grain of salt comes in handy.
With such an enormous jump in sales, if it doesn’t get revised back down next month, you’d think that inventories of homes for sale would have been drawn down during the month. On the surface, that happened: supply dropped from 6 months to 4.8 months. But…
The actual inventory of new homes still for sale at the end of August, despite the burst in sales, rose 2% to 206,000, from July’s 202,000 – and was up 16% from August a year ago. August and July were the only two months in the 12-month period when inventory was over 200,000 new homes. Among these homes, the inventory of “completed” homes – rather than “not started” and “under construction” – jumped 23%. These homes, despite the presumed spurt in sales, are stacking up!
Now RealtyTrac found that sales of all residential properties – single family homes, condominiums, and town homes – in August dropped 0.5% from the already dismally low level of July to an estimated annual pace of just over 4.5 million. Year over year, a 16% plunge!
Until mid-2013, the annual rate had been rising toward 5.5 million homes. Investors had been scouring the hottest markets, buying up homes by the thousands, and driving up prices in the process. But they succeeded so well in driving up prices that their equation wasn’t working anymore. And they walked. What was left was a toxic mix [read…. After Mucking up the Housing Market, Investors Flee].
Mid-2013, everyone thought the housing market was once again entering the paradise of eternally rising prices and sales. But in the fall, the hot air started hissing out of it. Sales spiraled down, amidst a slew of now ludicrous industry excuses.
This chart shows the change of the annual rate of sales every month, starting January last year (fat line, left scale). Note how beautifully it rose toward 5.5 million homes in mid-2013. Then investors began to bail out. The light blue bars (right scale) indicate the year-over-year percentage changes in the annual rate of sales, which has plummeted relentlessly over the last 12 months:
But here is the miracle: Despite plunging sales, the median price rose 3% from July to $195,000 – the highest since August 2008 – and was up 15% from a year ago. These soaring prices are hurtling along on the same time-honored collision course with plunging sales. In the past, that type of race ended in a crash.
And there is a Fed-induced twist to just about everything in this economic “recovery”: the higher end, where the beneficiaries of the Fed’s “wealth effect” operate, is doing well, while the bottom is falling out at the lower half: The share of sales in the price range below $200,000 dropped 9% year over year. With the median sale price at $195,000, over half of the homes sold were in this miserable category.
But the categories above $200,000 gained in share. Homes over $1 million saw their share explode by 38% year over year – even as the total home sales pie shrank by 16%!
This chart shows how the overall sales pie is split up, with the lower half of the housing market in terrible shape, while at the expensive end, the Fed’s “wealth effect” has kicked in nicely. The problem? The number of people who can afford a $1 million home is minuscule.
The housing market has become Exhibit A of what happens when the Fed is trying to engineer a “recovery” by dousing Wall Street with free money that then needs a place to go. It went everywhere, and in late 2011, it found fertile grounds in the American Dream. The middle class had no chance against the hundreds of billions of dollars that suddenly poured in. Now it’s largely priced out of the market.
Sellers are feeling it too. They’re still clinging to their dreams of big gains even if they can’t sell the home because potential buyers can’t afford it. Then something gives. This is precisely where the last housing crash began.
The Fed has liberally taken credit for this “recovery” of the housing market, but it is doubtful that it will liberally take credit for the main-street consequences of its actions.
It was always considered a childhood fantasy for most growing up to discover untouched parts of the world. Whether in the hopes of finding gold or other discoveries, this dream seemed only futile. There are hundreds of places in the world that are relatively left uninhabited, but still come with a lot of history, myths, or interesting stories. Most are known tourist sites, others receive relatively small numbers of visitors a year. Today, we will take a look at 10 of these locations available all around the world.
1. Teotihuacán
The civilization of Teotihuacán was established with the building of the step pyramid pictured above. Teotihuacán lived and prospered, but the climate of the hot region made it uninhabitable. Now, after being visited and even sanctified by various groups, ending with the Aztecs, it has become a tourist attraction for those coming to Mexico.
2. Ctesiphon
The lost city of Ctesiphon’s past, now located in Iraq, was one of the largest civilizations in the world. Now, mainly known for the building pictured above, it has been uninhabited since the year 639. Mesopotamia was an important region that included various important figures in history and religion. Now, despite being a tourist site, some have found difficulty visiting the site due to it’s nearby volatile location.
3. Ani
Churches and medieval architecture graced this 10th century former capital of the modern-day country of Armenia/Turkey. For three centuries the city was famous, but Mother Nature was the downfall of Ani. A destructive earthquake all but leveled the area. This not only leveled buildings, it toppled the economic health of Ani, and this ultimately caused those who survived to leave for other trade routes. The vast landscape is now peppered with ruins, rocks, and rubble, but there are still various buildings that still stand and await your visit.
4. Persepolis
Persepolis was the capital city of the Persian Empire. It was a city filled with art that didn’t survive its downfall. The disheartening truth about this lost city, compared to the others listed, is that Persepolis failed from the destruction of another group of individuals behind Alexander the Great. While this didn’t prevent Persepolis from surviving, it did make it difficult to thrive and Persepolis eventually became uninhabited.
5. Machu Pichu
Machu Pichu is somewhat of a poster child for lost cities. It is the most visited, the most pictured, and some have contested it’s the most picturesque. The rocks and former terraces, combined with the high elevations of Peru that make it jaw-dropping on a partly clouded day make it a must see for anyone visiting Peru. Despite it’s notoriety, Machu Pichu has only been in the world scope for a little over a century. It certainly makes you wonder what other parts of the world go undiscovered.
6. Chan Chan
Machu Pichu isn’t the only lost city in modern-day Peru. Chan Chan is quite stunning and the intricate art work that still stands in the adobe brick common of the region is very unique. This beauty is overshadowed by the reasoning behind its demise, occurring after the Incan conquest of the city in the late 1400s. Since then, the thousands of previous residents of the now lost city are replaced by tourists visiting Peru.
7. Timgad
Founded by Emperor Trajan in 100 AD, Timgad was what we would now call an overcrowded city. While the population wasn’t extravagantly grand in the beginning, the city in modern-day Algeria simply wasn’t large enough to hold that population growth. While conquest by the Berber community that still is situated to this day in much of North Africa was the cause of Timgad’s demise, overpopulation could have also contributed to the inability to protect all of its citizens.
8. Sukhothai
This modern-day Thai lost city is unique not only in the beautiful art and statues left behind, but also in its claim to fame as one of the oldest cities of traceable history. It was vibrant, large, and had a huge population to match. However, the establishment of the city of Ayutthaya proved that Sukhothai was unable to survive, with the population leaving for better opportunities in the newly established city. Once Sukhothai was conquered, there was no question the city would ultimately see its demise.
9. Mohenjo-daro
Mohenjo-daro is one of the first instances of the modern city centres that we know of today. From Mohenjo-daro, we see characteristics of a modern route, including streets and homes. After almost a millennium of existence, what is most haunting about the transition to becoming a lost city is that it is unknown how it became such. Accounts and historical evidence, along with the well-advanced construction and climate in this modern-day Pakistani locale, don’t point to a cause of demise.
10. Petra
Petra has come to symbolize Jordan. This lost city, located in the south of the country, was once the Nabataean capital city. Now, one of the most famous tourist attractions in the Middle East is getting the respect and reverence that was lost before its discovery in the early 1800s. Prior to that, Petra fell to becoming a lost city after natural disasters severed any further development and trade routes, one of the most important on the Silk Road. If you are visiting Jordan, being able to see this once vibrant lost city is a must.
Midland’s real estate prices have risen again after a one-month drop, according to data released by the Real Estate Center at Texas A&M University.
Median home prices rose $2,400 year-over-year for August, from $246,800 in 2013 to $249,200 in 2014. The number of homes sold also rose by 29, and the overall dollar value of sold homes rose by over $6 million, an almost 13 percent increase from August of last year, according to the data.
While median home sale prices have continued to rise, the range of home prices has also changed dramatically in the last 10 years. In 2006, homes priced below $100,000 made up 33.1 percent of the real estate market. In 2013, the last full year that data is available, homes worth less than $100,000 made up only 5.4 percent of Midland’s real estate market, an 83.6 percent decrease in market availability over nine years for homes priced under $100,000, according to the data.
The decrease in the number of cheaper homes on the market has been coupled with a massive increase in homes on the market worth more than $200,000. Since 2004, property priced more than $200,000 has grown from 21.6 percent of the market to 59.6 percent in 2013. Homes between $100,000 and $199,000 saw their share drop 10.7 percent to just over one-third of the real estate market, according to the data.
The rapid growth in prices has been attributed to the booming oil industry, which has brought to Midland and the Permian Basin thousands of jobs and a skyrocketing demand for homes. The growth has led to a severe housing shortage in Midland and also has driven construction of housing and apartment developments throughout Midland, especially in the north and west parts of the city.
More than 1,300 residential lots have been platted, and more than 2,300 apartment units built since January 2013, according to the city.
On the heels of……………
Home Values Up, Rank First In State: Sales volume tops record-high 200 in June
Home values in Midland grew by more than 23 percent year-over-year in June, pushing the Tall City’s median price back to the No. 1 slot statewide for the second time this year.
The volume of homes sold is traditionally strongest during summer months, but the number of transactions in June surged beyond the average and to the highest level in Midland’s documented history.
More than $70.8 million was either financed or spent on real estate purchases last month, about 55 percent more than June 2013, according to the latest data from the Real Estate Center at Texas A&M University.
The median home price last month was $283,100, as 208 single-family homes, townhouses and condominiums were sold. The sales volume grew about 14.3 percent year-over-year, up from 182 transactions in June last year.
Previously, the highest number of homes sold in one particular month was 202, recorded in August 2011.
No other Texas city recorded a higher June median home price than Midland, which hasn’t happened since January. The Tall City also broke its own record for highest median home price.
The new record tops the previous milestone, $251,500, by $31,600.
Midland’s growth mirrors the statewide trend. There were 29,412 home sales completed in Texas last month, the most since June 2006 when 31,431 transactions took place, the data show.
Additionally, the median home value statewide increased by about 7.1 percent year-over-year, up to a new Texas record: $193,700. The total value of home sales throughout the Lone Star State topped $7.4 billion last month, setting yet another record.
It’s less common to see a West Texas city boast such high home values, the Real Estate Center’s data indicate. Counties surrounding Austin, Houston and Dallas typically record the highest median home prices.
Collin County, near Dallas, ranked No. 1 in May for its relatively steep home prices. The area was still strong in June, boasting the third-most expensive homes in Texas.
Home values in Odessa are also among the highest in West Texas, yet still fall well below the median price in Midland. Last month, the median value of an Odessa home was $176,500.
The paper examines the impact of student debt on purchase activity for households under age 40. Those households account for around two-thirds of student debt holders. It concludes that sales of new and existing home will total 5.26 million this year, with some 414,000 “lost” households as a result of rising student debt burdens.
Higher debt burdens will defer home purchases for many borrowers while requiring others to buy a less expensive home in order to qualify for a loan or save for a down payment.
The paper estimates that every $250 per month in student loan debt reduces borrowers’ purchasing power by $44,000, and since 2005, some 3.8 million additional households have at least $250 per month in student debt.
Put differently, around 35% of households under age 40 have monthly student debt payments exceeding $250, up from 22% of households in 2005.
The typical first-time buyer can qualify for a $234,080 mortgage without any student debt, but that figure falls as the monthly debt burden rises. (The analysis assumes that the traditional first-time buyer has income of $61,000.) Mortgage lenders generally won’t extend credit to borrowers whose total debt payments exceed 43% of their gross incomes.
The analysis assumes that most borrowers with $750 or more in monthly student debt payments will be priced out of the market unless they’re making much more money than the traditional first-time buyer. For the typical entry-level buyer with $750 in monthly student debt payments, they can qualify for a $103,280 mortgage.
But the analysis finds that many borrowers with modest monthly student debt payments are also lost transactions this year. It concludes that around 57,000 households with student debt payments of less than $100 won’t be buying homes this year, and that around 127,000 borrowers with payments between $100 and $250 are lost.
When Tom Greco bought his four-bedroom home three decades ago, he assumed he’d pay off the mortgage before retirement — just as his parents did.
Things didn’t work out that way.
Instead, his $4,500 monthly mortgage payments — a consequence of several equity withdraws over the years — became a financial drag.
“It’s pretty hard to retire with that,” the Irvine attorney, 66, said.
More and more older homeowners are carrying mortgage debt, a burden that threatens to delay their retirement and curtail spending among the massive baby boomer population.
Nearly a third of homeowners 65 and older had a mortgage in 2011, up from 22% in 2001, according to an analysis from the Consumer Financial Protection Bureau, using the latest available data.
Tom Greco and his wife are downsizing from an Irvine house to a Lake Forest condo. To retire, Greco needs to reduce his mortgage payment. (Allen J. Schaben / Los Angeles Times)
The debt burden also grew — with older homeowners owing a median of $79,000 in 2011, compared with an inflation-adjusted $43,400 a decade earlier.
For decades, Americans strove hard to pay off their mortgages before retirement, an aspiration that when achieved was celebrated with mortgage-burning parties.
But for the latest retirees, reaching that goal, if they ever had it, is increasingly less likely.
Baby boomers bought homes later in life, and with smaller down payments, than previous generations, said Stacy Canan, deputy assistant director of the consumer bureau’s Office for Older Americans. Many also refinanced during the housing bubble and used cash from their equity withdraws to pay off other debt, take vacations or put children through college. Surging home prices and low interest rates made that possible.
Then the recession hit. Job losses delayed attempts to pay off mortgages. And many baby boomers took in their adult children after the collapse, refinancing to help their kids weather a brutal job market, said James Wells, a housing counselor with ClearPoint Credit Counseling Solutions.
“Before, the children could take care of themselves,” he said. “Now, not so much.”
The number of mortgage-holding households headed by someone 65 or older rose from 3.8 million in 2001 to 6.1 million a decade later, the consumer bureau said.
Rising debt levels also reflect a psychological shift among Americans, financial advisers and economists say.
“People who lived through the Great Depression came out of that period with a great aversion to debt,” said Lori Trawinski, director of banking and finance with AARP’s Public Policy Institute. “As a culture we have loosened our opinion of debt.”
As baby boomers enter retirement age — 10,000 per day, according to one estimate — the decisions that once supported an easier lifestyle could make later years tougher. Some may have to keep working to pay their mortgage, and others will have to cut back on other expenses to retire, the bureau’s Canan said.
“People will indeed have to do some juggling of their budgets,” she said.
Jacqueline Murphy is doing just that. The former clerical worker for the New York City Police Department retired in March, thinking her pension and Social Security, coupled with a part-time job, would allow her to live comfortably and cover mortgage payments on the Bronx town home she bought for $375,000 during the housing bubble.
But the 63-year-old hasn’t yet found a part-time gig, and a large chunk of her income is going to the $2,200-a-month mortgage.
So she’s cutting back. She keeps the lights off as much as possible, has cut back on gardening to reduce the water bill, and sometimes gets help from family to buy groceries.
“I thought retirement was going to be wonderful,” she said. “Now that I am retired, I am sorry that I did. I am focused on how I am going to make it to next week, how am I going to make it to the next mortgage payment, and I am constantly worried.”
Wells, the housing counselor, said those he counsels often didn’t budget for reduced retirement income when they refinanced to help their children, fix a car or take a vacation. They were working then, so the payments seemed reasonable.
“They are not really thinking long term at that point,” he said.
Greco, the Orange County attorney, said he took a “shortsighted view.” Enticed by dropping interest rates, he refinanced his Irvine home four times.
He then used the money from the cash-out refinancings to pay down credit card debt and finance home renovations, including a pool he himself designed.
“A foolish move,” he said of the refinancing, but one that many others, including friends, did as well.
A recent study from Harvard University’s Joint Center for Housing Studies showed that of mortgage holders ages 65 to 79, nearly half spent 30% or more of their income on housing costs. Of mortgage holders 80 or older, 61% pay that amount on housing.
And the debt carries further risks.
Sudden changes in expenses, such as those stemming from health problems, can expose seniors with mortgages to greater financial peril, the consumer bureau’s study said. And if another downturn comes, retirement savings and investments are likely to take a hit, raising the chance of foreclosure.
One option is to downsize.
That’s the choice Greco made. In August, he and his wife sold their Irvine house. Next month they plan to move into a Lake Forest condo, knocking down their mortgage payment by thousands of dollars. Even after downsizing, Greco said, he simply can’t retire as he wishes. There’s the condo mortgage and other debt he must pay.
So instead, he plans to gradually work less and less. He started this month, a day after his 66th birthday, by working half-days on Fridays.
In five years, he hopes to have paid down the condo loan enough to get a reverse mortgage that will allow him to only take on cases that interest him.
Reverse mortgages allow people at least 62 years old to receive payments based on the equity in their homes. But unlike a traditional home equity loan, a reverse mortgage does not require monthly payments. The loan, which is easier to qualify for than a home equity line of credit, doesn’t come due until the home is sold or the borrower moves out or dies.
Having to still work is not the ideal situation, Greco said, but retirement will be far easier without the Irvine house as an anchor.
Australian prefab architecture specialists Modscape Concept have designed an exciting five story home that clings to a cliff’s edge. Aptly called Cliff House, the design was created in response to a growing number of clients exploring design options for living on extreme coastal plots in Australia. The modular home was inspired by the shape of barnacles clinging to a hull of a ship, and it extends off the side of a cliff, rather than sitting upon it.
Rather than being a disruption built along the skyline, Cliff House almost propels off of it, acting as an extension to the natural topography. The unique positioning also gives the home’s residents an incredible connection to the ocean below, while alleviating construction problems associated with building on uneven rock.
The prefab modules are arranged in a vertical floor plan, the rooms stacked atop each other and held securely in place with engineered steel pins. Residents would enter at the floor level with the cliff top, which includes an outdoor patio adjacent to their parking space. An elevator or stairs connects each floor, with the bedroom, living area and kitchen each having separate space on the various floors. The interior features minimal furniture throughout, in order to emphasize the connection to the ocean and the horizon. At the lowest floor, the home opens up to another outdoor space, which seems to float above the water. Patio furniture, an outdoor kitchen and a jacuzzi tub extend the luxurious feeling of being perched above the ocean.
Although still a concept, Cliff House could provide efficient and innovative housing in rocky areas deemed unlivable.
The city of Midland’s Planning and Zoning Commission approved three new phases of projects that will add more than 250 new homes to Midland’s burgeoning housing market within the next year, according to the developers.
D.R. Horton gained approval for a final plat of its Adobe Meadows Addition in the north and a zone change for their Legacy Addition development in the west. Combined, the two developments had more than 200 homes approved by the planning and zoning session.
The homes are being built at a time when Midlanders are experiencing skyrocketing rents and home prices. The median home price in Midland for July was $247,900, a 7.1 percent increase year-over-year from July 2013. Since July 2009, when home prices slumped due to the Great Recession, home prices for July have increased by 48.2 percent.
“D.R. Horton wouldn’t be doing two developments at the same time if they didn’t think that this was a market they could be in and do well in,” said Eric West, a civil engineer for Parkhill, Smith & Cooper working with D.R. Horton. “Certainly, we think that both of these neighborhoods are going to be neighborhoods that will serve the community well.”
According to West, the Adobe Addition is already moving into the second stage of building, while the Legacy Addition broke ground on its infrastructure in the spring. West said house construction will begin in the next few months. He said he expects Legacy to be completed sometime in the next two years.
The other development approved Monday was a zone change for the second phase of Daybreak Estates. The zone change of a 24-acre plot of land to the east of phase one of Daybreak Estates will make way for a second phase of 60-70 homes, according to Andrew Mellen of Midland’s Maverick Engineering.
Mellen said that phase one laid out 167 lots, four of which have been built and more than 40 have been sold. In all the project has four stages and when it is completed will have more than 500 homes.
Mellen did not want to guess when the development would be completed, but he said the first phase broke ground in the summer of 2013 and that phase two won’t start until December or January.
For all the talk of expanding the credit box and opening up credit to previously underserved borrowers, there have been no significant fluctuations or improvements to mortgage credit availability since 2009, according to a new report from Bank of America Merrill Lynch (BAC).
In this week’s Securitization Weekly Overview, BofAML’s Chris Flanagan, Gregory Fitter and Mao Ding said that there has been little improvement there has been to mortgage credit availability in the last five years.
And the analysts write that the lack of available mortgage credit is holding down the economic recovery.
“We think tight mortgage credit and weak demand for mortgage credit are key driving forces behind the slow growth recovery story and the positive technical story for securitized products,” the analysts said.
“In turn, we think this mortgage production weakness will keep long-term interest rates biased lower and help drive the yield curve flattening process that started at the beginning of 2014 and should persist until the end of 2016.”
The analysts also predict that the “historically depressed” levels of mortgage production aren’t going to improve for the next several years.
Just how bad has it been, click on the chart below, which shows the Mortgage Bankers Association’s Mortgage Credit Availability Index over the last ten years.
There have been moderate increases in mortgage credit availability in the last several years, as evidenced by the chart below from the MBA, but it still isn’t even scratching the surface of where things were in 2008, when the MCAI peaked at 868.71.
Additionally, tight credit and other repercussions of the housing crash are driving down homeownership without any signs that the trend will reverse.
Click the chart below to see the declining rate of homeownership since 2004.
Former Goldman Sachs executive Joshua Pollard sent a sobering 18-page report to the White House on September 17 warning of a potential downturn in home prices that could put the country back into a recession before the ripples of the previous one settle.
According to Pollard, the former head of the Goldman’s housing research team, home price appreciation is outpacing income, and the United States is on the brink of a 15 percent decline in home prices over the next three years. Rising interest rates and values will cause already overvalued homes (Pollard says values are 12 percent higher than they should be) to be even further out of sync with reality and generate an unnatural surplus that will itself lead to a slowdown in investor purchases.
Flipped homes have declined 50 percent in the last year, and home flippers are losing money outright in New York City, San Francisco, and Las Vegas according to the report.
If Pollard is correct, the impact on the U.S. economy would be seismic. Overvalued homes, according to his report to President Obama, make up $23 trillion of consumer asset value and “serve as the psychological linchpin” for $17 trillion of invested capital.
Put together, that 15 percent decline translates to a $3.4 trillion cut to consumers’ net worth.
“As an economist, statistician and housing expert, I am lamentably confident that home prices will fall,” he wrote. “Home price devaluation will expose a major financial imbalance that could lower an entire generation’s esteem for the American dream.”
Student debt and a 45 percent underemployment rate for recent college grads has handicapped millennial buyers already, Pollard wrote.
Pollard outlined three distinct stages of the decline—the first of which, the “hot-to-cool” stage, is already underway. This is where home price growth slows and turns negative in large markets across the country. Investors slow their purchases, home builders lose pricing power as absorption rates decline, and press outlets shift their market pieces from positive to mixed.
In Stage II, the “demand-to-supply” phase, new negative shocks cause investors to shift from raising prices in an effort to outbid competition to reducing prices to beat future declines. In Stage III, the “deflation and response” phase, consumers come to the decision that now is a bad time to buy a home. Fewer people seek mortgages and banks become less willing to lend. Consequently, deflation hits, taking jobs with it and triggering calls for new policy.
In other words, Pollard fears the recent past will be prologue. His report squarely targets public finance and housing officials and calls upon the White House to devise “forward-looking monetary policy that balances the risk of raising interest rates,” create a skilled trade externship program for laborers whose jobs are most at risk whenever housing investments drop, and “forcefully re-balance number of homes to the number of households” by reducing the number of new builds as well as the number homes that can force prices down—particularly those that are already vacant, unsafe, and expensive to rehabilitate, the report states.
“The shift from a good market to a bad market occurs quickly, exaggerated by the circular currents of confidence from consumers, investors and lenders in Unison,” Pollard wrote. “When unnatural levels of demand or supply impact the market, prices are pushed in lockstep.”
History may repeat itself, but in few places are its cycles so maddeningly short as on Wall Street, where the recent advent of rent-backed securities has whipped financiers into another feeding frenzy. The innovators of this hot new financial product have found a way to slice, dice and repackage debt tied to thousands of real-estate-owned (REO) homes — a process that may sound awfully familiar.
That’s because it is: Rent-backed securities are the direct descendants of the mortgage-backed securities that crashed the economy in 2008. This time, however, investors’ income streams are coming not from monthly payments on frequently predatory mortgages but from the rent checks of thousands of ordinary tenants in single-family homes.
When rent-backed securities premiered on the market in October 2013, the $479 million offering from the private equity giant Blackstone Group generated more demand from investors than the private equity firm could accommodate. Since then, Blackstone and several other firms specializing in the rental of single-family homes have sold more than $3 billion of these bonds. REO-to-rental securitization has been hailed as an exciting new asset class, with financial analysts at Keefe, Bruyette & Woods estimating that it could swell into a nearly $1 trillion industry over the next six years.
The market reached a fever pitch this summer. In July and August alone, three firms have introduced three new REO-to-rental securitization deals, ranging from $310 million to $720 million in value. The companies issuing bonds backed by their single-family home rentals have assured investors that this strategy is a perfectly safe way to return some liquidity to the recovering housing market while providing a boost to the economy at large.
A new rental empire
Why is Wall Street playing landlord in the first place? Over the past two years, investors have acquired more than 200,000 homes — mostly foreclosures being sold off at bargain-basement prices — and refashioned them into a new single-family home rental empire servicing those struggling to find affordable housing. For Wall Street, rental securitization is the next logical step. The financial leverage it provides allows REO-to-rental firms to continue apace with purchases of new properties; meanwhile, bondholders are entitled to the cash flow from rental incomes, plus any gains that result from selling properties that have appreciated in value.
This scheme has helped halt the free fall of property prices, stabilizing the housing market and earning praise from some analysts. But is this really what a housing recovery looks like? New renters in single-family homes are frequently foreclosure victims, in some cases even renting back homes they previously owned. Would-be homebuyers, meanwhile, are squeezed out of the market by large institutional investors and have little choice but to continue renting. Hundreds of thousands of tenants have thereby found themselves the prostrate subjects of this new rental empire, leaving Wall Street landlords poised to benefit from rising rents catalyzed by historic levels of demand.
Lewis Ranieri, the man credited with pioneering rental-backed securities, has assured investors that while the last scheme may not have worked out so well, new rental-backed bonds carry no risk because renters provide a steady cash flow and rental homes can always be sold to compensate for any disruption to investors’ income stream. Others, however, aren’t so sure. In a letter (PDF) sent to federal housing and finance regulators in March, a coalition of 75 housing and consumer advocacy groups demanded more robust intervention, warning, “We are poised to experience another crisis if federal regulators fail to recognize and take corrective action to address red flags that are all too familiar.”
Among those red flags is the fact that REO-to-rental securitization deals have relied on projected occupancy rates that real estate professionals have called unrealistic at best — particularly given the wide geographic distribution of properties and firms’ inexperience in managing them. Blackstone’s first offering, for example, assumed a 94 percent occupancy rate and claimed that 100 percent of properties were occupied when the deal was launched. But within a few months, 8.3 percent of these properties were vacant or occupied by delinquent renters, causing rental income to fall by 7.6 percent. Reported vacancies have also been on the rise this summer after Blackstone offered a second, $1 billion bond in May and Colony Capital launched a $514 million deal in March.
“We need a larger conversation about whether we should cut Wall Street out of the housing recovery altogether“.
In short, REO-to-rental securitization completes a cycle in which Wall Street firms and the banks backing them (the institutional owners of Blackstone include Morgan Stanley, Citibank and Bank of America) have reaped profits from the crisis they helped sow and in doing so planted the seeds for the next crash.
Costs to tenants
The transformation of rental homes into an asset class has tangible costs for tenants. Since investors-turned-landlords must meet obligations to bondholders, they’re likely to shake down their renters to make up for any shortfalls resulting from high vacancy or turnover rates.
The evidence so far suggests that this is creating a bevy of problems. Earlier this year, two colleagues and I broke the story at In These Times that Invitation Homes, the Blackstone Group subsidiary created to purchase and manage properties nationwide, may be using leases that violate local housing laws in order to maximize revenue. A lease we obtained from a Chicago tenant contained several provisions that housing attorneys say may be illegal. Among them, the lease attempts to shift responsibility for maintenance onto tenants by stipulating that they must rent the property “as is.”
A report (PDF) released in July by the Right to the City Alliance and Strategic Actions for a Just Economy concluded that such problems are widespread. Interviews with hundreds of Invitation Homes tenants in Atlanta, Los Angeles and Riverside, California, revealed unresolved plumbing and electrical problems when tenants moved in, exorbitant rent increases of 37 to 53 percent for lease renewals and aggressive rent collection techniques that have included delivery of eviction notices the same day rent was due. One Los Angeles couple is suing Invitation Homes, alleging that they were sickened and their belongings damaged by mold and persistent water leaks in their rental home and that the company demanded they continue to pay rent even after they were forced to move out of the property and stay with relatives.
Worst of all, housing advocates fear renters could face mass evictions even if they have never missed a payment, in the event that a bond blows up or Wall Street landlords decide to sell their homes to meet obligations to bondholders.
Cut Wall Street out?
Rep. Mark Takano, D-Calif., has joined the chorus of housing advocates calling on Congress to hold hearings on rental-backed securities. Groups such as the Right to the City Alliance, meanwhile, are advocating policy solutions such as a financial transaction fee on rental bonds and just-cause eviction laws that better protect tenants from being thrown out at the whim of the market. Such measures could help stem the tide of risky securitization and hold investor-landlords more accountable to tenants and communities.
But the shifts underway require a larger conversation about whether we should cut Wall Street out of the housing recovery altogether, thereby preventing investors from continuing to extract profit by betting on the fates of entire communities.
To this end, some communities are attempting to preserve affordable housing by taking it off the market entirely, managing it instead through nonprofit community land and housing trusts. While that is an important alternative strategy for rehabilitating vacant and foreclosed homes, such trusts are limited in number and are hard pressed to contend with investors ostensibly pursuing the same goals.
Without the enormous injection of capital that these investors continue to provide, the logic goes, the housing market would remain stagnant. But as fewer and fewer Americans are able to own homes, it’s time to rethink the idea that a housing recovery is synonymous with a rise in home prices and view it instead from the perspective of the growing numbers struggling to find affordable housing. From that vantage point, a real recovery could not be farther off.
WASHINGTON — For more than 20 years, Mark Vinciguerra’s small bank specialized in making home loans to first-time buyers in the Toledo, Ohio, suburbs. Then the recession hit, and auditors at Fannie Mae and Freddie Mac came knocking.
The mortgage giants demanded he buy back more than 200 loans he’d sold them that were teetering into foreclosure, claiming the bank had failed to meet their quality standards. Vinciguerra ultimately repurchased only five loans, but endless hassles over the others shattered his willingness to take a chance on some moderate- and low-income borrowers.
‘‘Like so many lenders, we thought: ‘Heck, we’re just going to raise the bar,’’’ said Vinciguerra, who insisted the loans went bad because of skyrocketing unemployment. ‘‘We’d like to be serving those people again, but there’s no trust in the system right now.’’
Just as the housing recovery should be taking off, lenders are turning away potential buyers by demanding unusually high credit scores for government-backed loans — exceeding the government’s own criteria in a bid to insulate themselves from penalties and lawsuits. The reluctance to lend has alarmed policy makers and heightened tensions between them and lenders.
The White House has summoned banking executives for a meeting Sept. 17, frustrated that its many pleas to ease lending criteria have not been heeded.
But lenders say the mixed messages they’re getting from Washington give them no incentive to widen access to credit. The government, determined to prevent a repeat of the irresponsible lending practices that sparked the housing bust, has forced lenders to buy back billions of dollars in loans and continues to trumpet massive legal settlements with the industry. The largest came two weeks ago when Bank of America agreed to pay $17 billion to resolve claims that it sold the government defective mortgages.
‘‘The mortgage industry is basically ticked off,’’ said Guy Cecala, publisher of the trade journal Inside Mortgage Finance.
The situation is untenable for lenders, said David Stevens, president of the Mortgage Bankers Association. It’s also creating a homeownership opportunity gap.
‘‘It’s very clear that the proverbial 1 percent, the wealthy American who wants to buy a home, is going to get credit,’’ Stevens said. ‘‘It’s some of the average entry-level or move-up buyers who are getting boxed out.’’
Fannie, Freddie, and the Federal Housing Administration collectively own or back nearly half of all US mortgages, Inside Mortgage Finance says. None of them makes loans, though they are critical to making mortgages widely available.
Fannie and Freddie buy loans from lenders, package them into securities, and sell them to investors. For a fee, they guarantee the mortgages and then pay investors if the loans default. The FHA insures the lenders it works with against losses if loans go bad.
But housing experts say the government’s push to hold the industry accountable for loose lending in the past is unintentionally steering lenders toward the highest-quality borrowers, undermining the institutions’ mission to serve the broader population, including moderate- and low-income families.
‘‘What we have now is a system, because of tight lending standards, that is excluding far more borrowers who are going to succeed than fail,’’ said Barry Zigas, at the Consumer Federation of America.
Industry insiders say the administration could help by encouraging regulators to ease up. Lenders should be held accountable for the type of fraudulent activity that took place before the housing crisis, such as falsifying documents or faking tax returns, they say. But they argue the government should not be scouring loan files for minor errors.
Industry insiders also argue for clearer rules governing when Fannie, Freddie, and the FHA can take action against a lender. Many lenders said they had been asked to buy back loans or reimburse the government for losses even when their lending practices had nothing to do with the loans’ default.
Bill McCue, president of McCue Mortgage Co. in Connecticut, said investors routinely refuse to buy FHA-insured mortgages if the borrowers have credit scores below 640, even though the FHA typically permits scores as low as 580.
There are 13 million potential borrowers with scores between 580 and 640, yet FHA-backed loans to people below the 640 threshold were basically nonexistent last year, according to an analysis by the Urban Institute.
‘‘Are the lower-credit-score borrowers a little more risky than someone with an 800 credit score? Certainly,’’ said FHA Commissioner Carol Galante. ‘‘But this is how families get into the middle class and succeed.’’
By now, everyone’s heard the stories, or knows someone who is involved.
Hotel rooms in the Midland-Odessa area going for $400, or more, per night. Trailer parks, even in neighboring towns like Snyder, Andrews and Seminole with no vacancies. People leaving careers they’ve trained or earned degrees for, or both, for the high-paying oil field jobs. Fast-food workers earning close to $20 per hour.
Those are just some of the examples of how the recent boom in the oil and gas business has impacted economically not only the Permian Basin but all of West Texas. But the impact goes well beyond that.
Bradley Ewing, a professor of energy economics in the Texas Tech University Rawls College of Business, recently co-authored a report, “Economic Impact of the Permian Basin’s Oil and Gas Industry” which shows the region is now one of the biggest oil and gas producers in the world with an economic impact felt across the country.
“We’re delighted that Professor Ewing, with his exceptional professional background in this field, has been able to provide this important document which we hope will serve the Permian Basin well,” said Robert V. Duncan, vice president for research at Texas Tech. “We look forward to being of service to society in this regard in the future.”
Click to enlarge.
For the report, the Permian Basin was defined as the area stretching from Hale County north of Lubbock to the Rio Grande Valley and into parts of southeastern New Mexico. It includes the Delaware and Midland basins as well as several known resource plays such as Wolfberry, Spraberry, Bone Springs, San Andres, Clearfork, Cline Shale and Wolfcamp.
Ewing and his team found that the Permian Basin has the greatest rig count of any basin or region in the world and represents 27 percent of the total rig count in the United States and 56 percent of the total rig count in Texas.
According to the report, which estimates the economic impact for 2013, the Permian Basin’s oil and gas industry creates and sustains more than 546,000 jobs, with an economic output of $137.8 billion, and creates more than $71.1 billion to the gross state products of both Texas and New Mexico.
“The industry’s activities generate and sustain jobs, income, output and provide substantially to the gross state products of both Texas and New Mexico,” the report stated. “In addition, through various measures of taxation, the industry provides many localized benefits to the citizens of both Texas and New Mexico.”
In Texas alone, the Permian Basin is estimated to produce and sustain more than 444,000 jobs with $113.6 billion in economic output, and contribute more than $60.2 billion in gross state product for the state. For New Mexico, the Permian Basin is estimated to produce and sustain more than 94,000 jobs with $22.7 billion in economic output and more than $10.2 billion contributed to the gross state product.
Click to enlarge.
Much of the growth of the rig count can be attributed to wells that are being drilled horizontally, which includes the increasingly popular multi-state hydraulic fracturing. According to the report, since Dec. 27, 2013, the number of horizontal, oil-directed rigs in the Permian Basin rose by 63 percent, which accounts for half of the total increase in those types of rigs in the United States.
The economic impact, however, is not felt just in drilling and exploration, but also in all the other industries that provide support.
“Ultimately, economic impacts derive from the exploration, drilling and production of oil and gas, which require a multitude of support activities for oil and gas operations,” the report said. “These core activities, in turn, lead to a number of non-core but very critical midstream supply chain activities, such as pipeline, transportation, refining and equipment manufacturing.”
The “secondary effects” of oil and gas drilling and exploration impact not only suppliers to the industry but also wholesale, retail, real estate and housing and financial services.
“Having studied the industry for a number of years, we were not surprised at the magnitude of the impacts from our researchers’ point of view,” Ewing said. “However, what stands out to us is the greater importance the oil and gas industry plays in the overall stability of the Permian Basin’s economy.”
Because of the way the industry functions in the area, Ewing and his team concluded the region’s economy is becoming more stable and the growth sustainable.
The economic impact is felt in all industries that provide support, from drilling to housing and retail.
“The more recent performance of the industry is linked to greater economic stability,” Ewing said. “Moreover, the research indicates the economics of the industry and region are sustainable. However, that is dependent on infrastructure and capital formation keeping pace.”
This report marks the second one this summer Ewing has helped produce for the petroleum industry. In July, he was commissioned for a report on the economic impact the Texas oil and gas pipeline industry has on the state.
“This research solidifies Texas Tech as the leader in the area of energy economics and petroleum engineering research,” Ewing said.
In addition to Ewing, others who helped research and write the report included Marshall C. Watson, department chair for Texas Tech’s Bob. L. Herd Department of Petroleum Engineering, Terry McInturff, professor and chair of the Rawls College of Business Area of Energy, Economics and Law, Russell McInturff, a professor in the Area of Energy, economic and law, as well as petroleum engineering doctoral students Tariq Ali, Roland O. Ezewu and Ibegbuna Ezisi.
Editor’s Note: This is the first in a series looking at the “Economic Impact of the Permian Basin Oil and Gas Industry,” a study released Thursday by Texas Tech University and the Permian Basin Petroleum Association.
LUBBOCK — It’s not a secret that the oil and gas industry has an impact on Midland County and the Permian Basin. But on Thursday, Texas Tech University released a study which attached figures to that impact.
— A $42 billion economic impact in Midland County.
— $137 billion in economic output generated in the 46 counties of the Permian Basin in 2012.
— More than 546,000 jobs sustained in the Permian Basin.
— The largest rig count of any region in the world (469 as of Dec. 27, 2013)
In a report full of “off-the-chart” statistics on the 2013 impact of oil and gas inside the oil patch, Texas Tech professors, researchers and contributors noted not only the oil and gas industry’s dominance, but the opportunity for sustainable growth for the region and a more stable economy than has been experienced in the past, as well.
“This (report) will open a lot of eyes to the actual impact,” said Ben Shepperd, president of the Permian Basin Petroleum Association. “It is off the charts and growing.”
Texas Tech University prepared the report for the PBPA. Shepperd said that, while people in the industry hear the “continual drumbeat of national and statewide totals,” he was not familiar with any study that focused on the “Permian” — the oil-producing region he called the “granddaddy.” This report, he said, will help tell what the Permian Basin means to Texas and the nation.
Just in Texas alone, the regional oil and gas industry contributed more than $60.2 billion to the gross state product. The Permian Basin also was home to 56 percent of the rigs in Texas — 27 percent of the total rigs in the U.S., according to the report.
“Part of our challenge is telling our story, the jobs out here,” Shepperd said. “Most members of the Texas Legislature don’t live in West Texas. It is up to us to tell the positive oil and gas story that exists.”
Bradley Ewing, a professor of Energy Economics at Tech’s Rawls College of Business, said the report solidified the Permian Basin’s importance in the global economy. The report said the Permian Basin was home to 14 percent of the world’s rigs.
“Going forward, we have the idea that this is big,” Ewing said. “The other parts of the world, they will learn what is driving the growth and sustainability.”
The report states that crude oil production in the Basin is around 1.4 million barrels a day, an increase from 2005 when 253 million total barrels were produced. The report also says technology and other factors are in place to make this surge in productivity different than those in previous decades. Ewing said the potential for sustainability exists for a couple of decades, at least.
Shepperd cited the Energy Information Agency when he said it appears that the production and revenue growth in 2014 will be “25 percent higher” than 2013.
“Those are huge numbers,” he said.
Some Midlanders might think a study wasn’t needed to illustrate the impact. Sales tax numbers, home prices and workforce populations are at an all-time high, while unemployment rates are among the lowest in the nation. The report showed no county felt the impact of the oil and gas industry more than Midland. Almost $11 billion in total labor income and more than $42.8 billion in total impact put Midland in a league of its own. Ector County was second in impact ($17.6 billion), Lea County, New Mexico, was third ($11.1 billion). Midland, Ector and Lea were also the top three when it came to employment.
“This economic impact has legs to it,” Shepperd said. “Because of technological advances, we can expect the level of activity to continue. I think there is truth to it lasting for decades to come.”
As the Labor Day weekend marked the unofficial end to summer, the latest mortgage application data reaffirmed a continuing sense of stagnation. But while many mortgage professionals view the fall months as a prime season for new housing activity, one key concern arises on whether first-time home buyers will be able to participate in the market. In a recent survey, it seemed that Texas and Colorado have taken the lead as the nation’s top states for attracting first-time home buyers.
First, let’s consider how summer wrapped in housing. According to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Application Survey for the week ending Aug. 29, the Market Composite Index increased 0.2 percent on a seasonally adjusted basis, but decreased one percent on an unadjusted basis from one week earlier. The seasonally adjusted Purchase Index decreased two percent from one week earlier, while the unadjusted Purchase Index decreased four percent compared with the previous week and was 12 percent lower than the same week one year ago.
In comparison, the Refinance Index increased one percent from the previous week and the refinance share of mortgage activity increased to 57 percent of total applications, the highest level since March 2014, from 56 percent the previous week.
The challenge of attracting first-time home buyers to the market has perplexed many across the industry, especially in view of the macroeconomic challenges that impact the U.S. population. However, there are certain slices of the national picture that appear to be enjoying much more first-time home buyer activity than others.
In a survey recently released by WalletHub, 11 of the top 20 markets considered to be the best for first-time homebuyers are located in Texas, while six of the top 20 markets can be found in Colorado. Oklahoma ranked at number one (with Broken Arrow) and number three (with Norman).
On the flip side, the 20 markets considered to be the least-friendly for first-time homebuyers were divided primarily between California, New Jersey, Connecticut and Massachusetts. The city of Richmond, Calif., ranked dead last on WalletHub’s list, which covered 300 local markets, while California cities monopolized the bottom-five rungs for both lowest housing affordability and highest price to rent ratio (Santa Barbara came in dead last in both categories). The one area where California outpaced the rest of the nation came in lowest property crime rate per capita, with Mission Viejo taking the first spot; Miami Beach had the highest property crime rate per capita.
Richie Bernardo, a WalletHub financial writer who presented the data, noted that the determination for these finds were based on a variety of factors, ranging from housing-related factors (including affordability, price to rent ratios, real estate taxes and home price appreciation) and standard of living considerations (including median annual income rates, property crime statistics and home energy costs).
“Those markets at the top of the list tend to have the highest incomes and lowest costs of living,” said Bernardo, adding that the inclusion of non-housing data was included to provide “a well-rounded perspective” on the national picture.
For Texas-focused mortgage professionals, the Lone Star State’s dominance came as no surprise.
“Texas has a thriving economy,” said Mark Greco, president of Austin-based 360 Mortgage Group LLC. “Gov. Rick Perry did an incredible job in getting the word out about how great Texas is. In terms of land mass, the state has a tremendous amount of potential for builders. There is also no state income tax–and we have a huge amount of people moving into Texas from California. Compared to California, Texas is a bargain.”
Greco added that he has been a witness to the bold expansion of the Texas residential markets. “I’ve been here pretty much all of my life,” Greco continued. “I’ve seen Austin grow from 350,000 to just under two million people. A lot of corporations have moved here, and a lot of young talent that commerce has attracted to Austin and central Texas.”
Greco noted, with a laugh, that there was one downside to this boom.
“From an economic perspective, there has been great growth–but from a personal perspective, I wish everyone would get off the road so we would have less traffic,” noted Greco.
Todd Potter, senior vice president and national sales manager for Houston-based Envoy Mortgage, observed that the ethnic and racial demographics in Texas are also helping to encourage first-time home buyers.
“In looking at statistics from the MBA, the minority home ownership percentage has been growing at a much faster pace than other segments of the marketplace,” said Potter. “The MBA projects that about 40 percent of the mortgage market by the end of 2020. Texas, of course, is north of Mexico, and the pride of home ownership for the Hispanic population is very strong. I wouldn’t think that New England or the Northeast or the upper-Northwest would see that sort of growth.”
As for the Colorado market, Erick Strobel, owner and operator of Johnstown, Colo.-based Strobel Financial LLC, was not the least bit surprised by its strong showing in the WalletHub top 20.
“Colorado cities have scored well as the best places to live and best markets for first-time homebuyers as a result of job opportunities, family safety, beauty, space to build and moderate weather,” Strobel said. “As a resident for 30 years, I can say it has been an ideal place to raise a family and own a home. Opportunity continues to be available through the many universities, biotech companies, Denver International Airport and military bases. Families here take refuge in healthy lifestyles, organic foods and beautiful places to visit. The big secret is the weather–moderate winters, and mild, mostly sunny, days convince people to stay.”
However, the WalletHub list had a couple of anomalies: Detroit ranked first for lowest price to rent ratio and second for highest housing affordability, but last for lowest median home price appreciation. Honolulu ranked first for lowest real estate tax rate, but came in last for highest total home energy costs.
Did you notice that Midland’s civilian labor force has topped 100,000? Oil Editor Mella McEwen reported this most recently in Tuesday’s edition, and all we have to say is: wow.
Most people who keep up with this type of information expected this day to come, but we still believe topping six figures this summer is significant because it happened so quickly.
One decade ago, according to city of Midland numbers, the city’s total population was around 100,000. Oh, how things have changed. McEwen reports that since July 2004 the Midland metropolitan statistical area’s labor force gained an estimated 35,214 people, according to the Texas Workforce Commission. Evidence of a turbo-charged economy can be seen as the MSA gained more than 24,000 workers since July of 2009.
We wish we could tell you how many people are in Midland and its MSA at this time. We don’t know. Estimates range from 125,000 to 140,000. Anything, it seems, is possible. What we do know are the facts.
The MSA gained more than 1,600 workers from June to July and more than 4,500 workers from July 2013 to July 2014. The city expects nearly 8,000 single-family lots or apartment units were or will be developed between 2013 and 2014. In 2015, that number should be around 3,667, according to the city. A growth rate of 4.5 percent to 5 percent — not in population but available workers — will offer challenges in terms of housing.
It’s likely that some of these workers have families, causing the number of students at MISD to increase. On Wednesday, MISD reported an enrollment of 24,072 — which is more than 1,000 greater than the figure reported to the Texas Education Agency at the end of October 2013.
However, we also think a bright spot will emerge. We need more workers to come to this area. We need workers to man the jails, build housing and develop other infrastructure, work in the restaurants, drive the buses and offer help in our stores, schools, etc. We need to replace those who have made their way into the oilfield. This newspaper is not going to be down on the oil industry’s ability to attract workers. We want a strong industry for the long term. We want our community’s leaders to keep a sense of urgency to get us through the short term and plan for the long term.
We have confidence Midlanders will get this right.
Home flippers are hardy folks who dive head-first into housing markets to buy homes at a discount from estimated market value, rehab them if they have to, trim the trees and cut the weeds out front, and flip the unit in less than a year, hopefully at a premium over estimated market value. If all works out, they’re rewarded with fat returns on investment.
It involves leverage, so some of the risks get shuffled off to the lender. It involves skills, connections, knowledge, and a good dose of luck. Above all, it requires the ability to buy low and sell high. To take home some serious dough, flippers need to purchase at double-digit discounts below “estimated market value” (based on AVM) and add enough value to sell at a premium over estimated market value. In the intervening months, home prices must also jump. So double-digit home price increases over the last two years have made flipping a lot more profitable. And easier.
This is the magic mix. If the conditions are met, the equation works out. If not, it’s a leveraged bet that can go to heck in a hand basket.
But flipping has started to run out of air in much of the country. And in the multi-county metro area of San Francisco, flipping collapsed in the second quarter, and flippers for the first time in years, started wading into red ink.
Home sales in the US have been declining since last fall, with mortgage applications plummeting at double-digit rates year over year. All sorts of excuses were dragged out of the closet, from tight inventories to bad weather, until inventories started to balloon and the weather was gorgeous, and sales were still dropping. Now it’s perfectly clear even to the most recalcitrant economists why: soaring prices have moved homes out of reach for many potential buyers. At first, the swoon in unit sales didn’t seem to have any impact on prices. But now the inevitable is happening: over the last few months, price increases have shriveled before our very eyes, and in some markets, on a monthly basis, outright price declines have started to crop up.
On Friday, in a section ominously titled, “Price Drops: ‘There’s Blood in the Water,’” Redfin reported on the growing prevalence in July of sellers having to lower listing prices as homes, rather than stirring up bidding wars, sit around for weeks or months. Redfin expects this trend to continue, with prices “potentially” declining month over month in September and October. “If that happens, it will be the first three-month price decline since the fall 2012,” it explained.
And our hardy home flippers, who dive head-first into these markets? They’re the first to notice when the water has been drained out of the pool. And flipping as a business model is suddenly no longer so appealing. Home sales overall are dropping, and flipping as a percent of total sales has swooned, and profits have come under pressure, and the time it takes to flip a home has soared, and year over year the volume of flips has plunged 61%. Money no longer grows on trimmed trees, freshly painted walls, and rehabbed bathrooms [read… The Home-Flipping Bubble Implodes].
But real estate is local, and some flipping markets have been getting hit particularly hard while others still manage to hang in there.
In a new report, RealtyTrac listed the ten best and the ten worst markets for flipping in the second quarter. Across all markets, according to the report, flippers on average were able to buy properties 8% below their “estimate market value” (AVM) and sell them at 6% above their estimated market value. The worst market for flipping?
The multi-county metro area of San Francisco!
Flipping as a percent of total sales plunged by over one-third year over year to 5.6% of total home sales. As home prices soared to levels that made otherwise rational people giddy and incoherent, flippers ran out of an ingredient in the magic mix, namely being able to buy low. Or perhaps the paint wasn’t right, or the granite in the kitchen was the wrong color, and steep losses suddenly ruined the fun.
Last year in Q2, flippers in the San Francisco metro area still earned an ROI of a breathtaking 45%, on homes that were already high-dollar deals by national averages. But this year in Q2, it became apparent that, instead of buying low, they’d been buying high recently: at an average premium of 34% over estimated market value, according to RealtyTrac. But potential home buyers revolted against these prices. And flippers were forced to sell low, that is they could only sell at a 10% premium. And the average ROI dropped into the negative, to -9%.
Red ink also washed over the Las Vegas/Paradise metro area, a former can’t-lose-money-here flipper’s casino, where flipping in Q2 dropped to 8% of total sales, and the average ROI was -4%.
There were still plenty of markets in Q2 where flipping homes produced excellent returns for flippers who knew what they were doing, where buying low was still possible, and where subsequent home-price increases still played along. But Housing Bubble 2 is displaying more and more aspects of having run its course. And that includes trouble in new single-family homes: dropping sales, swooning prices, and ballooning inventories. Read… Drowning in Unsold New Homes?
The Tall City still boasts third most expensive homes in Texas Source: MRT.com
Midland home values failed to live up to record growth during the early summer months, falling 12 percent move-over-month in July.
Still, the Tall City’s median home price of $247,900 grew more than 7 percent from last year as 214 single-family homes, townhouses and condominiums were sold, according to recent data from the Real Estate Center at Texas A&M University.
In all, about $58.7 million was either financed or spent on real estate purchases last month — a 17 percent drop from June but 21 percent more than July of last year — the data show.
June’s record price of $283,100 topped the previous milestone of $251,500, set in January of this year, according to the data. But last month’s price fell 12 percent — about $35,200 — from June.
Midland’s declining month-over-month home values mirrors the statewide trend. While the number of home sales completed in Texas last month remained steady, July’s record median price of $191,500 dropped 12.6 percent from the previous month.
Counties around Austin, Houston and Dallas typically report the highest median home prices, according to the Real Estate Center’s data.
Collin County, near Dallas, bumped the Tall City out of the No. 1 slot with its $270,500 home values in July, while Fort Bend’s median home price of $266,400 came in second.
While still below Midland, the data shows Odessa’s home values are among the highest in the region at $178,000, a slight growth over June.
Median home prices: TOP 5
Collin County: $270, 500
Fort Bend: $266, 400
Midland: $247,900
Austin: $247,000
Montgomery County: $246,700
REGION
Midland: $247,900
Odessa: $178,000
San Angelo: $162,900
Abilene: $146,300
Lubbock: $137,300
Source: Real Estate Center at Texas A&M University
Pro Teck Valuation Services’ July Home Value Forecast (HVF) reports this month that many of the West Coast metro areas are toward the top of the market ranking while the East Coast is toward the bottom. The authors look at the top and bottom 10 rankings from 2011 to see if there are any major similarities or differences in the markets today. New top and bottom 10 market rankings are also updated for the month.
In July’s Home Value Forecast update, interestingly, the authors found that Seattle moved from the bottom 10 in 2011 to the top 10 in 2014. Seattle had its highest percentage of REO properties between the first quarter of 2011 and first quarter of 2012, and hit the bottom in average price per living area in third quarter of 2011, according to the HVF. The higher numbers of REOs were quickly worked through the system (non-judicial foreclosure process), leading to a sustained recovery today.
This authors also saw this trend by comparing REO to Regular sold price per square foot of living area. July’s HVF says that the “REO discount” (REO price/Regular sale price) was largest in Seattle from the second to fourth quarter of 2011, averaging 40 percent. Today that number is 24 percent and trending toward historical norms.
“Looking back, we see a very different picture,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “The top markets in the East had significant price declines from their peak levels, which had been moving sideways or slightly downwards for more than two years. On the West Coast, in 2011, the bottom market home prices, including Seattle, held up quite well since the peak in the market and they were able to more quickly work through their REO inventory.”
This month’s Home Value Forecast update also includes a listing of the 10 best and 10 worst performing metros as ranked by its market condition ranking model. The rankings are run for the single – family home markets in the top 200 CBSAs on a monthly basis. They highlight the best and worst metros with regard to a number of leading real estate market indicators, including: sales/listing activity and prices, months of remaining inventory (MRI), days on market (DOM), sold-to-list price ratio and foreclosure and REO activity.
“All of our top 10 markets are from the western United States and all are exhibiting traits of very tight market – low inventory (active listings down), low Months of Remaining Inventory (MRI), lower days on market and high sale price to list price ratio,” said O’Grady. “These hot markets are leading to very competitive prices for sellers.”
“We believe that higher foreclosure numbers and more than six months inventory in all of the markets are the reasons the metros in the bottom ten continue to see a slower recovery,” added O’Grady. “However, many of the indicators are trending positive.”
The bottom CBSAs for July were:
►Akron, Ohio
►Gary, Ind.
►Hagerstown-Martinsburg, Md.-W.Va.
►Jacksonville, N.C.
►Lakeland-Winter Haven, Fla.
►Mobile, Ala.
►Orlando-Kissimmee-Sanford, Fla.
►Racine, Wis.
►Tampa-St. Petersburg-Clearwater, Fla.
►Youngstown-Warren-Boardman, Ohio-Pa.
The world is awash in inaccurate sound bites related to mortgage credit. We spoke with numerous industry executives and identified three truths that need to be clarified:
1. Low income buyers actually have it easy. Buyers with poor credit and low income are finding it quite easy to buy a home below the FHA limit.
2. Many affluent buyers find it very difficult. Automated underwriting prevents many highly qualified borrowers, especially affluent retirees, self-employed, or commissioned salespeople from getting a mortgage because their income situation does not fit squarely in the credit box.
3. Industry executives are unintentionally preventing a recovery. Mortgage industry executives lobbying for the good old days where FHA limits were higher, fees were lower, and documentation was easier need to stop whining because they look very unreasonable to regulators and politicians who are not sympathetic.
Our purpose here is to shed some light on what is actually happening—- because if there were clarity around this, we would have:
1. More entry-level home buyers. Many qualified people are not even shopping for a home because they presume they cannot get a mortgage. We provide several examples of easy qualification below.
2. More affluent home buyers. More good loans to very qualified buyers would be made if underwriters were allowed to use good business sense rather than fill in automated forms. As we did our research, we heard many stories of buyers reluctantly paying cash or deciding not to move at all and telling their friends who then also elect not to move. These include business owners, retirees, and commissioned salespeople.
3. More relocating home buyers. Many relocating employees are renting simply because they cannot provide historical pay stubs at their new employer. Given their track record of steady employment and desirability to multiple employers, does that make any sense?
In the aftermath of the housing crisis, the reality is that we are lending aggressively to the poor and conservatively to the rich. While the Dodd-Frank rules were written with good intent, let the truth be known, so more first-time buyers can take advantage of current programs to buy homes. Let the bankers use good judgment again, so more affluent buyers can get a mortgage.
Easy Money through FHA
FHA federally insures 95%+ loan-to-value (LTV) mortgage loans made to people with poor credit and low incomes.
Here are three recently approved loans, all through FHA or VA:
1. Recent foreclosure. 96.5% loan on a $170,000 house, coupled with $36,000 in income, a foreclosure three years ago contributing to their 620 FICO score, and debt service equal to 55% of their gross income
2. 57% of income needed to pay debts. 96.5% loan on a $165,000 home, coupled with $38,000 in income, a 642 FICO score, and debt service equal to 57% of their gross income
3. Fixed income and disabled. 100% loan on a $160,000 home to someone permanently disabled with a 601 FICO score and a $34,000 fixed income
Tight Money above FHA Limits
Affluent commissioned salespeople, self-employed, newly employed, and retirees who don’t have steady paychecks have tremendous difficulty getting a mortgage because they either:
1. Report inconsistent income to the IRS
2. Cannot provide extended income history from a new employer, or
3. Do not have sufficient current income to qualify but are trying to keep some cash in the bank or delay paying taxes on an IRA distribution.
Here are six borrowers who were denied a mortgage:
1. 27% LTV. A couple with a 780 FICO score who wanted a $300K loan on a $1.1 million house and would have $300K in reserves after closing, but whose verifiable income was only 30% above the proposed mortgage payment.
2. 801 credit score. Newly retired couple with fantastic 801 credit score, $1 million in retirement accounts, and $400,000 in savings after they were going to put down $350,000 on a $550,000 home purchase, but whose Social Security income was less than double the proposed mortgage payment.
3. Affluent business owner. Owners of a small retail business who were turning the business over to their children to manage, with the intent of collecting dividend income; who had $500K in cash savings and wanted a 50% LTV.
4. Relocating borrower. A US citizen who has been working overseas takes a job in the US, has a 700 FICO, 20% down payment, and plenty of reserves, but cannot produce a W-2 because he do not exist in the country in which he was working and hasn’t started his new job yet.
5. New employee. A prospective borrower qualified in every way except she had only been in her current job for five months and had worked in the family business previously where she did not get a W-2.
6. Loan = 15% of applicant’s assets. A retiree who wanted a 50% LTV and had assets six times the proposed loan amount was turned down and eventually paid cash.
Mortgage Industry Vets Tell It Like It Is
We expect the borrowers and outcomes profiled above will be surprising to many. We also want to share the following sound bites from mortgage industry veterans to offer surprising clarity on other areas of debate:
1. Loans today are easier than the 1990s. “For the average borrower, I believe it was more difficult to qualify for a mortgage in the 1990s.”
2. Huge improvements are being made in conforming loans. “For a while, if you didn’t have a credit score over 720 and you wanted a loan with less than 20% down, you were pretty much looking at an FHA loan. During this period, it’s fair to say that sales were being seriously impacted by 20%+. Slowly at first, and now more rapidly, things are changing. Credit requirements for 95% conventional financing are as low as 620, and MI companies have lowered premiums and relaxed guidelines. Banks have been peeling back overlays. You aren’t likely to get a conventional loan with a ratio above 45% anymore, but nor could you really get that back in the 90s either.”
3. Disposable income is more important than gross income. “Our industry needs to focus more on disposable income versus debt-to-income ratios, meaning a borrower who makes $2,200 a month with a 40% debt-to-income ratio is more risky than someone who makes $12,000 a month with a 50% debt to income ratio. The first borrower has very little cushion after income taxes, utilities, car insurance, food, etc. for emergencies. But the person making $12,000 a month would have much more left over after all of these other debts.”
4. Stated income should have its place. “There is a time and a place for Stated Income, not “No Doc” loans, but Stated Income loans. They were a great tool back in the 2000s that rarely went bad if they were used properly because the borrower had a lot of their own capital invested in the home.”
5. Income is the problem. “The challenge is not credit based, it’s income based. Home valuations have increased at a steeper trajectory than income. Also, the new buyer pool is saddled with student loans and other debt, which has really created the (disposable) income issue. I believe credit is much more accessible than the media/public portrays (in terms of credit scores, LTV’s, etc.) My opinion will remain our immediate challenge is income/debt/DTI.”
When Lobbying Hurts the Industry More than It Helps
This analysis would not be complete without addressing the many frustrations we heard from people wishing the good old days would come back. We believe those who share these complaints are hurting the mortgage recovery because they provide ammunition for the interest groups that do not want to see large levels of default ever again. Here are a few common complaints that we believe need to stop, at least until we fix the major problems. In reality, most regulators and decision makers do not agree that federally insured institutions should:
1. Help tax cheats. Affluent people who report low incomes to the IRS are not going to get a lot of sympathy in today’s regulatory or political environment. They will need to make large down payments.
2. Lower FHA limits. FHA dramatically increased their loan limits in 2008 to help stem the housing crisis and then dropped them to more normal limits this year. While that has hit a few home builders in a few markets particularly hard (and it has slowed economic growth in those markets), FHA is now back to historical normal limits. Given all the assistance FHA is already providing and the housing recovery that is taking place, it is unlikely Congress will decide to revert to another loan limit increase.
3. Stop or reverse FHA fee increases. FHA has increased their insurance costs, particularly on high LTV / low FICO loans. All in, a borrower with poor credit and low savings is still paying the equivalent of less than a 5.5% interest rate, so there is little sympathy here as well. If fees were 75 basis points lower, and rates were 75 basis points higher, the borrower would be in the same place. While underwriters may not like it, many folks in DC believe that now is the time in the recovery for the FHA to shore up their reserves.
4. Bring back seller-funded down payment assistance and closing costs. The government determined these programs resulted in risky loans that may have even been above 100% LTV on day one. Now is not the time to lobby for these programs.
5. Loosen documentation. Several industry veterans said that today’s documentation is not too much more difficult than it was in the 1980s before automated underwriting took place. While costly and perhaps a bit overboard for many, less than full documentation is not going to garner a lot of sympathy today either.
6. Have sympathy for those who sold short. Short sellers include very honorable people who did everything they could to help the bank recover as much as possible, as well as less honorable people who strategically forced the banks to take huge losses even though they could have kept their mortgage current. At this point in the recovery, asking short sellers to wait four years to get a federally insured or guaranteed mortgage is not viewed as unreasonable.
7. Offer FHA terms on homes above the FHA limit. There are borrowers who cannot qualify for a FHA loan but want to buy a home above the FHA limit and do not qualify for a conforming loan. They are not going to get a lot of sympathy right now either, as homes above the FHA limit are more expensive than half of the homes being sold in the market.
To the extent that any of these scenarios above can produce good loans, banks or non-banks will start making them and charging the appropriate risk-based return.
We could go on and on with respect to loans that industry executives think banks should be making, but instead we hope to focus people’s attention on the paradox in today’s lending environment and the current reality that could help buoy sales.
Summary
In conclusion, let’s:
1. Get the word out that loans below the FHA limit are readily accessible, with monthly payments that are a great historical value in comparison to gross incomes.
2. Let the bankers use manual underwriting in instances where they can document that the loan has a very low likelihood of losses.
City’s labor force passes 100,000 for first time. By Mella McEwen
Stability continues to dominate Midland’s labor market as summer progresses.
Midland’s unemployment rate inched up to 2.9 percent in July from 2.8 percent in June but is well below the 3.6 percent reported last July, the Texas Workforce Commission said Friday. Midland continues to report the state’s lowest unemployment, followed by Odessa at 3.6 percent.
For the first time, Midland’s civilian labor force crossed the 100,000 mark, with the commission putting the labor force at 100,121, up from 98,462 in June.
Midland Mayor Jerry Morales said Midlanders need to understand the city’s population is growing at a 3.5 percent to 4 percent annual rate. Normal growth rate for communities Midland’s size is 1 percent to 1.5 percent, he said.
With more than 100,000 residents at work, “we really need to work on housing, road infrastructure and annexing more land,” he said.
He said he is excited to see so many people working in the community and pleased that Midland has plentiful jobs.
“All industries are looking for all kinds of workers,” he said.
Willie Taylor, chief executive officer of Workforce Solutions Permian Basin, said there is a demand for a wide variety of jobs, from teachers to medical workers to truck drivers. The Permian Basin is “definitely” a job-seeker’s market, he said.
He said he is amazed at the continued growth, given the intense competition for workers.
“Look at the pipeline of potential workforce and work with our schools, our colleges, retired residents returning to the workforce, those recruited from the military,” Taylor said. “There’s a lot of competition and for us to grow as we have is amazing.
“Our biggest concern is making sure we have an adequate workforce.”
Job creation in Midland grew significantly, with 900 jobs being added from June to July for a 1 percent growth rate. Midland’s dominant industrial sector — mining, logging and transportation — continued to dominate job growth, adding 600 jobs from June to July for a 2.2 percent growth rate. Trade, transportation and utilities, financial activities, professional and business services and other services added 100 jobs each. The only loss was 100 jobs in leisure and hospitality. The remaining industrial sectors were unchanged.
For the 12 months between July 2013 and July 2014, Midland added 5,300 new jobs for a growth rate of 6.2 percent. Mining, logging and construction added 3,400 new jobs for a 13.9 percent growth rate. Trade, transportation and utilities added 700 new jobs during that time, followed by leisure and hospitality with 500 new jobs. The only job losses were in education and health services, down 300 jobs, and information, down 100 jobs.
Statewide, the unemployment rate was 5.1 percent, unchanged for the third consecutive month. The state added 46,600 seasonally adjusted non-farm jobs, the commission reported.
“Texas employers continue to propel the Texas economy’s expansion by adding 396,200 jobs over the last year, a 3.5 percent annual growth rate,” said Andres Alcantar, TWC chairman. “The Texas economic engine is strong, with every major industry posting positive annual growth in July.”
All major industries in Texas expanded last month, with professional and business services leading the way by adding 10,600 jobs in July.
“The professional and business services industry is thriving, with opportunities that range from legal advice and representation to security guards to landscaping,” said Commissioner Ronny Congleton. “Industries across the board are hiring, and that is good news for job seekers in Texas.”
Private employers added 42,400 jobs in July, said Commissioner Hope Andrade.
“Mining and logging posted an annual growth rate of 7.8 percent in July, which marked the 51st consecutive month of positive annual growth and underscored the industry’s role in the state’s overall economic success,” Andrade said.
While Midland had the state’s lowest unemployment, the highest was in McAllen-Edinburg-Mission at 9.9 percent.
Just The Facts:
Preliminary local jobless rates for July with June numbers in parentheses:
The Midland Central Appraisal District released certified valuations for 2014 earlier this week, and as expected, Midland’s market value and taxable value have both increased by the billions.
In Midland County, the total market value for 2014 came out to $23.3 billion, a 15 percent increase from 2013. But the county’s taxable value came out to $21.1 billion, $2.2 billion less than the market value.
“That’s a hefty increase from one year to the next in market value,” said Karr Ingham, an Amarillo-based economist.
The increases in billions held true for other taxing entities. The market value within the city of Midland’s boundaries reached $11.1 billion, a $1.6 billion increase. The city’s taxable amount, $10.1 billion, increased by $2.4 billion.
And within the Midland Independent School District, the market value jumped from $18.9 billion to $21.8 billion and the taxable value’s increased from $16.9 billion to $18.9 billion.
The distinction between the market value and the taxable value is caused by property tax exemptions. Some exemptions include a residence homestead, veterans’ exemptions and charitable organization exemptions.
The increase in valuations is reflective of the housing conditions, Ingham said, adding that it is no surprise.
The year-to-date average home sale price increased 14.2 percent to $246,259, and the year-to-date sales of existing homes increased 3.7 percent to 1,579 sales, according to Ingham’s June Midland-Odessa Regional Economic Index that he prepares for the Midland Development Corp. and Security Bank.
“In the second quarter of 2014, the number of (home) sales is going up and the price is just skyrocketing in terms of the average price,” Ingham said. “So the condition of the housing market, which is being driven by what’s going on in the oil and gas business, really has everything to do with the appraised value of housing on which taxes are levied.”
MCAD’s role in the property tax system is to assess property values and collect the property taxes for the taxing entities, and hear the protests of property owners who dispute the assessed values. Bundick said the district heard 3,000 protests this year, but also noted it is not MCAD that controls property values.
“That’s our philosophy, to basically study and reflect the market value rather than play some active role in setting the values,” said Jerry Bundick, MCAD’s chief appraiser.
MCAD’s assessed valuations are close to the sale price of the home, but the district utilizes a mass appraisal method rather than individual appraisal. Bundick said MCAD does not typically go inside a person’s home and find unique qualities to assess valuations. Instead, the district uses market indicators such as condition and square footage to appraise.
“I’m sure there’s an effort on the part of the appraisal district to try to keep a lid on these appraised values, but housing there is worth more, each and every year, because of essentially the housing shortage that’s driving up prices.”
One Midland Realtor said there are many nuances to the relationship between property valuations and the price of homes.
“There’s a lot of new construction, then there are a lot of areas where there are old homes but new homes are being constructed around them,” said Susan Palmer, a Realtor with Legacy Real Estate. “Then there are areas where they are doing updates to existing properties. So, they (property valuations) are probably reflective of the true market, but you really can’t just put a blanket over it and say that’s what our value is.”
As for the market’s demand, Palmer said the market is still having to deal with the number of new people and families moving into Midland who are looking for a new home. She also discussed how some Midlanders, mostly those close to retiring or retired, are considering selling their homes and moving out of Midland.
“They’re thinking they’ll eventually move closer to their kids,” Palmer said. “Or, some people who thought that might not be a possibility down the road are making those decisions sooner than later, just because they know the values of their house are at a premium right now.”
And if the premium pricing trend continues, Palmer acknowledged how some residents, such as teachers or public servants may be priced out of the market, whether they’re trying to rent or buy.
“That’s what we’re seeing all across town,” Palmer said. “People are struggling to bring people in because they can’t find comparable housing like they were used to from the cities they’re from.”
District 2 Councilman John Love III, who works in an office in Midland’s Southside, said a lot next door to the office was once on sale at a county auction. He was interested in bidding for it, as the lot was valued at $700.
“Well, it sold for $4,700,” Love said. “There was a $4,000 premium on this property. So that plus the construction of the home made the property look extremely high. … That’s just another example of how speculation on land is causing the value of property to increase all over town.”
The home on the lot went on the market for $147,000, he said.
Clingstone, a cedar-shingled house built in 1905 and currently owned by retired Boston architect Henry Wood, stands on a rock in Rhode Island’s Narragansett Bay.
A panoramic view of Clingstone in Narragansett Bay. The Rhode Island house sits only 20 feet above sea level.
View from one of ten bedrooms.
A fireplace in the central hallway.
Henry Wood’s granddaughter, Roma Taitwood (in pink), dances with Betty Hasse in the main hallway.
Visitors grab a snack from the kitchen before heading to the beach.
The dining room seats fourteen.
An early sketch of the house.
Retired architect Henry Wood, 80, bought the 10,000 square foot home nearly 50 years ago. It had been unoccupied for 20 years and was in poor condition.
Clingstone is “green,” or sustainable, from the windmill on the roof to the composting toilets. The windmill provides electricity. Solar panels heat water for household use.
Visitors head to the boat dock for a trip to a beach.
The porch gives a view of Narragansett Bay — as does every other part of the house.
Desktop collectibles in a bedroom.
The dock where visitors to Clingstone arrive and depart.
From a bedroom window where sailboats and power boats glide by.
Queen Mary 2 dwarfed Clingstone as it sailed by years ago. The photo hangs above a doorway inside the house.
Clingstone is perched on a rock amid the larger islands of Narragansett Bay.
In wintertime, the House on a Rock stands out in the icy gray seascape.
Rodney Durham stopped working in 1991, declared bankruptcy and lives on Social Security. Nonetheless, Wells Fargo lent him $15,197 to buy a used Mitsubishi sedan.
“I am not sure how I got the loan,” Mr. Durham, age 60, said.
Mr. Durham’s application said that he made $35,000 as a technician at Lourdes Hospital in Binghamton, N.Y., according to a copy of the loan document. But he says he told the dealer he hadn’t worked at the hospital for more than three decades. Now, after months of Wells Fargo pressing him over missed payments, the bank has repossessed his car.
This is the face of the new subprime boom. Mr. Durham is one of millions of Americans with shoddy credit who are easily obtaining auto loans from used-car dealers, including some who fabricate or ignore borrowers’ abilities to repay. The loans often come with terms that take advantage of the most desperate, least financially sophisticated customers. The surge in lending and the lack of caution resemble the frenzied subprime mortgage market before its implosion set off the 2008 financial crisis.
Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.
The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.
And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.
The New York Times examined more than 100 bankruptcy court cases, dozens of civil lawsuits against lenders and hundreds of loan documents and found that subprime auto loans can come with interest rates that can exceed 23 percent. The loans were typically at least twice the size of the value of the used cars purchased, including dozens of battered vehicles with mechanical defects hidden from borrowers. Such loans can thrust already vulnerable borrowers further into debt, even propelling some into bankruptcy, according to the court records, as well as interviews with borrowers and lawyers in 19 states.
In another echo of the mortgage boom, The Times investigation also found dozens of loans that included incorrect information about borrowers’ income and employment, leading people who had lost their jobs, were in bankruptcy or were living on Social Security to qualify for loans that they could never afford.
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Credit
Many subprime auto lenders are loosening credit standards and focusing on the riskiest borrowers, according to the examination of documents and interviews with current and former executives from five large subprime auto lenders. The lending practices in the subprime auto market, recounted in interviews with the executives and in court records, demonstrate that Wall Street is again taking on very risky investments just six years after the financial crisis.
The size of the subprime auto loan market is a tiny fraction of what the subprime mortgage market was at its peak, and its implosion would not have the same far-reaching consequences. Yet some banking analysts and even credit ratings agencies that have blessed subprime auto securities have sounded warnings about potential risks to investors and to the financial system if borrowers fall behind on their bills.
Pointing to higher auto loan balances and longer repayment periods, the ratings agency Standard & Poor’s recently issued a report cautioning investors to expect “higher losses.” And a high-ranking official at the Office of the Comptroller of the Currency, which regulates some of the nation’s largest banks, has also privately expressed concerns that the banks are amassing too many risky auto loans, according to two people briefed on the matter. In a June report, the agency noted that “these early signs of easing terms and increasing risk are noteworthy.”
Despite such warnings, the volume of total subprime auto loans increased roughly 15 percent, to $145.6 billion, in the first three months of this year from a year earlier, according to Experian, a credit rating firm.
“It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds,” said Mark T. Williams, a former bank examiner with the Federal Reserve.
In their defense, financial firms say subprime lending meets an important need: allowing borrowers with tarnished credits to buy cars vital to their livelihood.
Lenders contend that the risks are not great, saying that they have indeed heeded the lessons from the mortgage crisis. Losses on securities made up of auto loans, they add, have historically been low, even during the crisis.
Autos, of course, are very different than houses. While a foreclosure of a home can wend its way through the courts for years, a car can be quickly repossessed. And a growing number of lenders are using new technologies that can remotely disable the ignition of a car within minutes of the borrower missing a payment. Such technologies allow lenders to seize collateral and minimize losses without the cost of chasing down delinquent borrowers.
That ability to contain risk while charging fees and high interest rates has generated rich profits for the lenders and those who buy the debt. But it often comes at the expense of low-income Americans who are still trying to dig out from the depths of the recession, according to the interviews with legal aid lawyers and officials from the Federal Trade Commission and the Consumer Financial Protection Bureau, as well as state prosecutors.
While the pain from an imploding subprime auto loan market would be much less than what ensued from the housing crisis, the economy is still on relatively fragile footing, and losses could ultimately stall the broader recovery for millions of Americans.
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Rodney Durham, 60, of Binghamton, N.Y., had his car repossessed.Credit Heather Ainsworth for The New York Times
The pain is far more immediate for borrowers like Mr. Durham, the unemployed car buyer from Binghamton, N.Y., who stopped making his loan payments in March, only five months after buying the 2010 Mitsubishi Galant. A spokeswoman for Wells Fargo, which declined to comment on Mr. Durham citing a confidentiality policy, emphasized that the bank’s underwriting is rigorous, adding that “we have controls in place to help identify potential fraud and take appropriate action.”
The Mitsubishi was repossessed last month, leaving Mr. Durham without a car. But his debt ordeal may not be over.
Some lenders go after borrowers like Mr. Durham for the debt that still remains after a repossessed car is sold, according to court filings. Few repossessed cars fetch enough when they are resold to cover the total loan, the court documents show. To get the remainder, some lenders pursue the borrowers, which can leave them shouldering debts for years after their cars are gone.
But for now, Mr. Durham, who is disabled, has a more immediate problem.
“I just can’t get around without my car,” he said.
The Brokers
Outside, the banner proclaimed: “No Credit. Bad Credit. All Credit. 100 percent approval.” Inside the used-car dealership in Queens, N.Y., Julio Estrada perfected his sales pitches for the borrowers, including some immigrants who spoke little English.
Sure, the double-digit interest rates might seem steep, Mr. Estrada told potential customers, but with regular payments, they would quickly fall. Mr. Estrada, who sometimes went by John, and sometimes by Jay, promised others cash rebates.
If the soft sell did not work, he played hardball, threatening to keep the down payments of buyers who backed out, according to court documents and interviews with customers.
The salesman was ultimately indicted by the Queens district attorney on grand larceny charges that he defrauded more than 23 car buyers with refinancing schemes.
Relatively few used-car dealers are charged with fraud. Yet the extreme example of Mr. Estrada comes as some used-car dealers — a business that has long had a reputation for aggressive pitches — are pushing sales tactics too far, according to state prosecutors and federal regulators.
And these are among the thousands of used-car dealers who are working hand-in-hand with Wall Street to sell cars. Court records show that Capital One and Santander Consumer USA all bought loans arranged by Mr. Estrada, who pleaded guilty last year. Since then, Mr. Estrada was indicted on separate fraud charges in March by Richard A. Brown, the Queens district attorney. That case is still pending.
To guard against fraud, the banks say, they vet their dealer partners and routinely investigate complaints. Capital One has “rigorous controls in place to identify any potential issues,” said Tatiana Stead, a bank spokeswoman, adding that last year “we terminated our relationship with the dealership” where Mr. Estrada worked. Dawn Martin Harp, head of Wells Fargo Dealer Services, said that “it’s important to note that not all claims of dealer fraud turn out to be fraud.”
James Kousouros, Mr. Estrada’s lawyer, said that “for those individuals for whom Mr. Estrada bore responsibility, he accepted this and is committed to the restitution agreed to.” Some civil lawsuits filed by borrowers were found to be without merit, he said.
For their part, car dealers note that like any industry they sometimes have rogue employees, but add that customers are overwhelmingly treated fairly.
“There is no place for fraud or any other nefarious activities in the industry, especially tactics that seek to take advantage of vulnerable consumers,” said Steve Jordan, executive vice president of the National Independent Automobile Dealers Association.
In their role as matchmaker between borrowers and lenders, used-car dealers wield tremendous power. They make the pitch to customers, including many troubled borrowers who often believe that their options are limited. And the dealers outline the terms and rates of the loans.
In interviews, more than 40 low-income borrowers described how they were worn down by used car dealers who kept them in suspense for hours before disclosing whether they even qualified for a loan. The seemingly interminable wait, the borrowers said, left them with the impression that the loan — no matter how onerous the terms — was their only chance.
The loans also came with other costs, according to interviews and an examination of the loan documents, including add-on products like unusual insurance policies. In many cases, the examination by The Times found, borrowers ended up shouldering loans that far exceeded the resale value of the car. A reason for that disparity is that some borrowers still owe money on cars that they are trading in when they purchase a new one. That debt is then rolled over into the new loan.
“By the end, they are paying $600 a month for a piece of junk,” said Charles Juntikka, a bankruptcy lawyer in Manhattan.
The dealers have an incentive to increase both the size and the interest rate of the loans.
The arithmetic is simple. The bigger size and rate of the loan, the bigger the dealers’ profit, or so-called markup — the difference between the rate charged by the lenders and the one ultimately offered to the borrowers. Under federal law, dealers do not have to disclose the size of the markup.
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Dolores Blaylock, 51, of Austin, Tex., and her father, Fidencio Muñiz, 84. Like many buyers, she found she had unwittingly purchased an add-on — in her case, a life insurance policy.Credit Erich Schlegel for The New York Times
To buy her 2004 Mazda van, Dolores Blaylock, 51, a home health care aide in Austin, Tex., said she unwittingly paid for a life insurance policy that would cover her loan payments if she died.
Her loan totaled $13,778 — nearly three times the value of the van that she uses to shuttle her father, who uses a wheelchair, to his doctor’s appointments.
Now, Ms. Blaylock says she regrets ever buying the van, which frequently breaks down. “I am afraid to drive it out of town,” she said.
In some cases, though, the tactics veer toward outright fraud. The Times’s scrutiny of loan documents, including some produced in litigation, found that some used-car dealers submitted loan applications to lenders that contained incorrect income and employment information. As was the case in the subprime mortgage boom, it is unclear whether borrowers provided incorrect information to qualify for loans or whether the dealers falsified loan applications. Whatever the cause, the result is the same: Borrowers with scant income qualified for loans.
Mary Bridges, a retired grocery store employee in Syracuse, N.Y., said she repeatedly explained to a car salesman that her only monthly income was about $1,200 in Social Security. Still, Ms. Bridges said that the salesman falsely listed her monthly income as $2,500 on the application for a car loan submitted by a local dealer to Wells Fargo and reviewed by The Times.
As a result, she got a loan of $12,473 to buy a 2004 used Buick LeSabre, currently valued by Kelley Blue Book at around half that much. She tried to keep up with the payments — even going on food stamps for the first time in her life — but ultimately the car was repossessed in 2012, just two years after she bought it.
“I have always been told to do the responsible thing, but I said, ‘This is too much,’ ” the 76-year-old widow said.
The dealer agreed to pay Ms. Bridges $1,000 after Syracuse University law students threatened to file a lawsuit accusing the company of violating state and federal consumer protection laws.
But Wells Fargo, which resold the car for $4,500 last July, is still pursuing Ms. Bridges for $2,900 — a total that includes her remaining loan balance and an $835 fee for “cost of repossession and sale,” according to a copy of a letter that Wells Fargo sent to Ms. Bridges last August. (Wells Fargo declined to comment on Ms. Bridges.)
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Shahadat Tuhin, 42, with his daughter Sadia Oishika, 10. He says his auto dealer used deceptive practices.Credit Hiroko Masuike/The New York Times
Even when authorities have cracked down on dealers, borrowers are still vulnerable to fraud. Last June, Shahadat Tuhin, a New York City taxi driver, bought a car from Mr. Estrada, the salesman in Queens who less than a year earlier had been indicted.
The charge by the Queens district attorney didn’t keep him out of the business. While his criminal case was pending, the salesman persuaded Mr. Tuhin to buy a used car for 90 percent more than the price he agreed upon. Needing the car to take his daughter, who has a heart condition, to the doctor, Mr. Tuhin said he unwittingly signed for a $26,209 loan with completely different terms than the ones he had reviewed.
Immediately after discovering the discrepancies, Mr. Tuhin, 42, said he tried to return the car to the dealership and called the lender, M&T Bank, to notify them of the fraud.
The bank told him to take up the issue with the dealer, Mr. Tuhin said.
M&T declined to comment on Mr. Tuhin, but said it no longer does business with that dealership.
The Money
Investors, seeking a higher return when interest rates are low, recently flocked to buy a bond issue from Prestige Financial Services of Utah. Orders to invest in the $390 million debt deal were four times greater than the amount of available securities.
What is backing many of these securities? Auto loans made to people who have been in bankruptcy.
An affiliate of the Larry H. Miller Group of Companies, Prestige specializes in making the loans to people in bankruptcy, packaging them into securities and then selling them to investors.
“It’s been a hot space,” Richard L. Hyde, the firm’s chief operating officer, said during an interview in March. Investors are betting on risky borrowers. The average interest rate on loans bundled into Prestige’s latest offering, for example, is 18.6 percent, up slightly from a similar offering rolled out a year earlier. Since 2009, total auto loan securitizations have surged 150 percent, to $17.6 billion last year, though some estimates have put the total volume even higher. To meet that rising demand, Wall Street snatches up more and more loans to package into the complex investments.
Much like mortgages, subprime auto loans go through Wall Street’s securitization machine: Once lenders make the loans, they pool thousands of them into bonds that are sold in slices to investors like mutual funds, pensions and hedge funds. The slices that include loans to the riskiest borrowers offer the highest returns.
Rating agencies, which assess the quality of the bonds, are helping fuel the boom. They are giving many of these securities top ratings, which clears the way for major investors, from pension funds to employee retirement accounts, to buy the bonds. In March, for example, Standard & Poor’s blessed most of Prestige’s bond with a triple-A rating. Slices of a similar bond that Prestige sold last year also fetched the highest rating from S.&P. A large slice of that bond is held in mutual funds managed by BlackRock, one of the world’s largest money managers.
Private equity firms have also seen the opportunity in auto subprime lending. A $1 billion investment by Kohlberg Kravis Roberts & Co., Centerbridge Partners and Warburg Pincus in a large subprime lender roughly doubled in about two years. Typically, it takes private equity firms three to five years to reap significant profit on their investments.
It is not just the private equity firms and large banks that are fanning the lending boom. Major insurance companies and mutual funds, which manage money on behalf of mom-and-pop investors, are also snapping up securities backed by subprime auto loans.
While there are no exact measures of how many of these loans end up on banks’ balance sheets, interviews with consumer lawyers and analysts suggest the problem is spreading, propelled by the very structure of the subprime auto market.
The vast majority of banks largely rely on dealers to screen potential borrowers. The arrangement, which means the banks rarely meet customers face to face, mirrors how banks relied on brokers to make mortgages.
In some cases, consumer lawyers say, the banks actually ignore complaints by borrowers who accuse dealers of fabricating their income or even forging their signatures.
“Even when they are presented with clear evidence of fraud, the banks ignore it,” said Peter T. Lane, a consumer lawyer in New York. “The typical refrain is, ‘It’s not our problem, take it up with the dealer.’ ”
It could quickly become the banks’ problem, analysts say, if questionable loans sour, causing losses to multiply.
For now, the banks are not pulling back. Many are barreling further into the auto loan market to help recoup the billions in revenue wiped out by regulations passed after the 2008 financial crisis.
Wells Fargo, for example, made $7.8 billion in auto loans in the second quarter, up 9 percent from a year earlier. At a presentation to investors in May, Wells Fargo said it had $52.6 billion in outstanding car loans. The majority of those loans are made through dealerships. The bank also said that as of the end of last year, 17 percent of the total auto loans went to borrowers with credit scores of 600 or less. The bank currently ranks as the nation’s second-largest subprime auto lender, behind Capital One, according to J. D. Power & Associates.
Wells Fargo executives say that despite the surge, the credit quality of its loans has not slipped. At the May presentation, Thomas A. Wolfe, the head of Wells Fargo Consumer Credit Solutions, emphasized that the overall quality of its auto loans was improving. And Tatiana Stead, the Capital One spokeswoman, said that Capital One worked “to ensure we do not follow the market to pursue growth for growth’s sake.”
Prestige says its loans experience relatively low losses because borrowers have discharged many of their other debts in bankruptcy, freeing up more cash for their car payments. Another advantage for the lender: No matter how tough things get for troubled borrowers, federal law prevents them from escaping their bills through bankruptcy for at least another seven years.
“The vast majority of our customers have been successful with their loans and leave us with a much higher credit score,” said Mr. Hyde, Prestige’s chief operating officer.
The Risks
All it took was three months.
Dolores Jackson, a teacher’s aide in Jersey City, says she thought she could handle the $540 a month on the 2012 Chevy Malibu she bought in January 2013.
But the payments on the $27,140 loan from Exeter Finance, which is owned by Blackstone, quickly overwhelmed her, and she prepared to declare bankruptcy in April.
“I was drowning,” she said.
Other borrowers have also found themselves quickly overwhelmed by car loan payments.
Even after getting a second job at Staples, Alicia Saffold, 24, a supply technician at the Fort Benning military base in Georgia, could not afford the monthly payments on her $14,288.75 loan from Exeter. The loan, according to a copy of her loan document reviewed by The Times, came with an interest rate of nearly 24 percent. Less than a year after she bought the gray Pontiac G6, it was repossessed.
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Marcelina and Jonathan Mojica, and their dog, Lilly. “The car gets more money than what we put in our fridge,” Mr. Mojica said.Credit Damon Winter/The New York Times
In the case of Marcelina Mojica and her husband, Jonathan, they are keeping up with their payments on their $19,313.45 Wells Fargo auto loan — but just barely. They are currently living in a homeless shelter in the Bronx.
“The car gets more money than what we put in our fridge,” said Mr. Mojica, 28. Such examples of distress underscore the broader strains within the subprime auto loan market.
Exeter Finance declined to comment on Ms. Saffold or Ms. Jackson, but Blackstone, its parent company, emphasized that the credit quality of its lender’s loans was improving and that it worked hard to ensure its customers received the best rates. To ensure the accuracy of loan documents, Blackstone said, employees vet both dealers and borrowers.
“Exeter Finance believes it’s important to provide people with the option to finance transportation essential to their livelihood,” said Mark Floyd, the company’s chief executive.
Still, financial firms are beginning to see signs of strain. In the first three months of this year, banks had to write off as entirely uncollectable an average of $8,541 of each delinquent auto loan, up about 15 percent from a year earlier, according to Experian.
Some investors think the time is right to start selling their holdings. Earlier this year, for example, private equity firms, including K.K.R., sold most of their stake in the subprime auto lender, Santander Consumer USA, when the lender went public. Since the company’s initial public offering, the stock has fallen more than 16 percent.
While losses from soured car loans would be far less than those on subprime mortgages, the red ink could still deal a blow to the banks not long after they recovered from the housing bust. Losses from auto loans might also cause the banks to further retrench from making other loans vital to the economic recovery, like those to small business and would-be homeowners.
In another sign of trouble ahead, repossessions, while still relatively low, increased nearly 78 percent to an estimated 388,000 cars in the first three months of the year from the same period a year earlier, according to the latest data provided by Experian. The number of borrowers who are more than 60 days late on their car payments also jumped in 22 states during that period.
As a result, some rating agencies, even those that had blessed auto loan securitizations with high ratings, are starting to question the quality of the loans backing those securities, and warn of losses that investors could suffer if the bonds start to sour. Describing the potential trouble ahead, Kevin Cole, an analyst with Standard & Poor’s, said, “We believe these trends could lead to higher losses and weakened profitability in a few years.”
If those losses materialize, they could pummel a wide range of investors, from pension funds to insurance companies to mutual funds held by Americans preparing for retirement. For the huge baby-boomer generation, including many whose savings were sapped by the 2008 crisis and the ensuing recession, any losses from the auto loan securities could deal them another setback.
“Borrowers are haunted by this debt, and it can crater their credit scores, prevent them from getting other loans and thrust them even further onto the financial margins,” said Ahmad Keshavarz, a consumer lawyer in New York.
Some borrowers are stuck making payments on loans that were fraudulently made by dealers, according to an examination of dozens of lawsuits against dealers. There are no exact measures of just how many people whose cars have been repossessed end up in this predicament, but lawyers for borrowers say that it is a growing problem, and one that points to another element of subprime auto lending.
Thanks to an amendment to the Dodd-Frank financial overhaul, the vast majority of dealers are not overseen by the Consumer Financial Protection Bureau. Since its start in 2010, the agency has earned a reputation for aggressively penalizing lenders, but it has limited authority over dealers.
The Federal Trade Commission, the agency that does oversee the dealers, has cracked down on certain questionable practices. And although the agency has won a number of cases against dealers for failing to accurately disclose car costs and other abuses, it has not taken aim at them for falsifying borrowers’ incomes, for example.
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Alicia Saffold, 24, received a loan with an interest rate of nearly 24 percent. Her car was soon repossessed.Credit Tami Chappell for The New York Times
And the help is not coming fast enough for borrowers like Mr. Durham, the retiree in Binghamton; Mr. Tuhin, the taxi driver in Queens; or Ms. Saffold, the technician in Georgia.
“Buying the car was the worst decision I have ever made,” Ms. Saffold said.
Bank earnings decreased in the first quarter (Q1) of 2014, down 7.6% from a year earlier. Lost revenue due to decreased mortgage activity was mostly to blame, according to the Federal Deposit Insurance Corporation (FDIC). Total reported net income for FDIC-insured banks and savings institutions was $37.2 billion in Q1 2014.
FDIC chairman Martin J. Gruenberg attributes the loss both to a decline in both purchase and refinance mortgages, as well as shrinking margins due to high interest rates. Indeed, the dollar amount of mortgage originations and refinances for one-to-four family residential homes was a whopping 71% lower than in Q1 2013.
Our message to lenders: get used to it. Lower profit margins are here to stay for the next 20-30 years as banks struggle to keep mortgage rates enticing to homebuyers while maintaining their margins. That’s because we’re entering the upswing of a 60-year rate cycle: roughly 30 years of falling interest rates, followed by 30 years of rising interest rates. We hit the bottom of the cycle at the end of 2012, followed by a premature rate spike in mid-2013, seen in this chart:
Together with outrageous home prices in the aftermath of 2013’s speculator free-for-all, today’s higher mortgage rates equal reduced buyer purchasing power.
The good news is that mortgage rates aren’t expected to increase for several more months. Mortgage rates will rise when members of the bond market push long-term rates higher in anticipation of the Federal Reserve (the Fed) raising rates in the latter half of 2015. The Fed’s hope is the U.S. economy will be fully recovered and picking up steam by the time they act to raise rates in 2015. Thus, more financially able home buyers will be better equipped to deal with higher rates and bank profits won’t feel the blow too much. However, once mortgage rates begin to increase, they will continue to rise for two-three decades.
The Australian government has voted to repeal its carbon tax, becoming the first major power to do so. For those (like us at IER) who believe carbon taxes harm consumers in exchange for no corresponding environmental benefits, the move signals benefit for the Australian people. Yet the episode also carries lessons for the U.S. debate: By showing the fragility of foreign participation in a carbon scheme, the Australians have also repealed the intellectual case for an American carbon tax.
Prime Minister Tony Abbott, who made a pre-election “pledge in blood” to voters and business to prioritize growth above climate shift, delivered on his promise after independent senators with deciding votes in the upper house sided with his conservatives, following a power shift this month that ended years of domination by the pro-environment Greens party.
“Today the tax that you voted to get rid of is finally gone, a useless destructive tax which damaged jobs, which hurt families’ cost of living and which didn’t actually help the environment is finally gone,” a jubilant Mr. Abbott told voters in a news conference after the Senate’s decision.
Indeed, in a lengthy study commissioned by IER (which I explain in this post), Australian economist Alex Robson explained last September that the introduction of Australia’s carbon tax went hand-in-hand with spiking electricity prices and a weakening labor market. Here is one key graph from Robson’s report:
Furthermore, beyond the macro statistics, Robson’s study included anecdotal evidence of specific firms that had laid off workers, where the owners themselves cited Australia’s carbon tax as a key factor.
Aussie Episode Repeals CASE for U.S. Carbon Tax
Yet the whole episode has implications on the American debate too. First of all, everyone acknowledges that unilateral U.S. action will do just about nothing. For example, the Obama Administration’s new proposed rules on power plants by themselves will reduce global warming by a whopping—drumroll please—0.02 degrees Celsius by the year 2100.
The progressives who clamor for a carbon tax know this, though they try not to draw attention to such an awkward fact. The response is to claim that the U.S. government must exercise “leadership” on climate change, and that if Americans don’t take bold steps to limit emissions—even though these steps by themselves will do virtually nothing—then we can’t possibly expect China or India to follow suit.
In this context, we can see the significance of the Australian repeal. If even a thoroughly developed country like Australia abandons its carbon tax soon after its introduction because of economic difficulties, then how can we possibly expect the people in China or India to consign themselves to slower economic growth, for decades on end, in order to placate Western environmentalists?
Finally, the Australian case also puts the nail in the coffin of a typical “conservative” argument for a carbon tax, which claims that it will provide “policy certainty” to businesses so that they can invest in “green technology” with confidence. No, a U.S. carbon tax would do no such thing. Even if a carbon tax were implemented, business owners would still have to wonder whether future voters would come to their senses and repeal it, as happened in Australia.
Conclusion
Australia’s repeal of its unpopular carbon tax shows that their citizens (by electing Abbott whose position was crystal clear) favor economic growth over symbolic gestures that don’t even achieve environmental objectives. Furthermore, the Australian repeal devastates the case for a U.S. carbon tax. Nobody can realistically argue at this point that foreign governments will faithfully implement strong limits on emissions, and the claim that a carbon tax would provide “policy certainty” also goes out the window. Let’s hope the “scientific empiricists” who favor a carbon tax adjust their views in light of this new evidence.
Source: U.S. Energy Information Administration calculations, based on data from Drillinginfo Note: Production through December 2013 is reported. Production from January 2014 through May 2014 is estimated. Glorieta and Yeso are separate formations combined for this article. Additional amounts of Permian production come from other formations not included in this graph.
The Permian Basin in Texas and New Mexico is the nation’s most prolific oil producing area. Six formations within the basin have provided the bulk of Permian’s 60% increase in oil output since 2007. Crude oil production in the Permian Basin has increased from a low point of 850,000 barrels per day (bbl/d) in 2007 to 1,350,000 bbl/d in 2013.
Largely as a result of this growth, crude oil production from Permian Basin counties has exceeded production from the federal offshore Gulf of Mexico region since March 2013, making the Permian the largest crude oil producing region in the United States. In 2013, the Permian Basin accounted for 18% of total U.S. crude oil production. The recent increase in Permian crude oil production is largely concentrated in six low-permeability formations that include the Spraberry, Wolfcamp, Bone Spring, Glorieta, Yeso, and Delaware formations. Production from these formations has helped drive the increase in Permian oil production—particularly since 2009—despite declining production from legacy wells.
Almost three-quarters of the increase in Permian crude oil production came from the Spraberry, Wolfcamp, and Bone Spring formations. Counties in these three formations have driven the increase in the Permian Basin’s horizontal, oil-directed rig activity in recent months. Production from these three formations collectively increased from about 140,000 bbl/d in 2007 to an estimated 600,000 bbl/d in 2013, increasing their share of total Permian oil production from 16% to 44%. Three other formations—the Delaware formation and the adjacent Glorieta and Yeso formations—also increased production from 2007 to 2013, but to a lesser extent. Production from these three formations rose from 61,000 bbl/d in 2007 to an estimated 112,000 bbl/d in 2013.
The Permian Basin region encompasses an area approximately 250 miles wide and 300 miles long, and it contains many potentially productive low-permeability oil formations. Although oil production has previously come from the more permeable portions of the Permian formations, the application of horizontal drilling and hydraulic fracturing has opened up large and less-permeable portions of these formations to commercial production. This is especially true for the Spraberry, Wolfcamp, and Bone Spring formations, which have initial well production rates comparable to those found in the Bakken and Eagle Ford shale formations.
Source: U.S. Energy Information Administration, U.S. Geological Survey, University of Texas Bureau of Economic Geology, and Drillinginfo Note: Wolfcamp is found throughout the entire Permian Basin area.
Odessa American Online – The Odessa metro area’s population growth should outpace the Midland metro by nearly 18,000 people during the next five years, according to a recent projection from Ray Perryman, the economist who runs the Perryman Group.
The metropolitan statistical areas of both cities stand out as among the fastest growing in the nation, with an influx population amid an oil boom that exceeds historical trends.
But why would the Odessa MSA’s population growth be greater?
Perryman said the main reason is that the Odessa MSA, which includes all of Ector County, sees additions to the west of the city and outside the city limits — in various communities of Gardendale, Penwell, Notrees and West Odessa.
“The growth does pose some capacity issues that will require careful planning,” Perryman said.
In 2013, Perryman calculated the Odessa MSA’s population at 170,746 people. The Midland MSA had slightly fewer people, about 168,108.
The economist projected the Odessa MSA will grow to 211,209 people in 2018 at an annual rate of about 4.35 percent. Meanwhile, the Midland MSA, will increase to about 190,747 people, a rate of about 2.56 percent.
Rapid population growth makes reliable figures difficult to come across, said Guy Andrews, economic development director for the Odessa Chamber of Commerce, who fields requests for such information from developers considering whether to expand into the area.
“It really is difficult, because you’ve got so many people living in temporary housing and that sort of thing, just to get a handle on that,” said Andrews, who planned to use the recent report to answer developers’ inquiries.
Perryman’s estimates relied on preliminary censuses for 2012 and 2013 that Perryman said he buttressed with other data. Census estimates extrapolate historical data, but a sudden boom muddles that outlook.
So Perryman’s projections prove useful in giving those interests a sense of what the market will look like in the three years it could take them to develop an apartment complex, for example, or a housing subdivision.
The challenges of such increases in population include the well-documented strains such as shortages in law enforcement officers and teachers, along with a rise in crime and living expenses. Then there are the logistics of just absorbing the people, developing enough housing and other infrastructure such as roads and utilities.
“That level of expansion kind of puts a strain on the organization, but we are keeping up,” said Randy Brinlee, the city’s director of planning and transportation. “We are trying to be prepared for it.”
In the meantime, higher-than expected crude prices so far this year meant a boost for the Odessa and Midland economies that may delay the long-expected relief on the housing and labor markets, according to another economist, Karr Ingham, who prepares monthly reports for Midland and Odessa development organizations.
Yes, the banks don’t want you to see what they’re doing–or not doing, as the case may be. Specifically, they don’t want you to see that they have separated your note from your deed of trust/mortgage. In my opinion (and I am not an attorney) there are two main, unstated reasons for the existence of MERS: 1) to separate the security document from the note and 2) to purport to rejoin them as if they’d never been separated at the time of foreclosure.
The purpose of point 1 above (the purpose of point 2 is self-explanatory): for banks/financiers to be able to pledge or “sell” the same note multiple times (see this, this, and this)–i.e., rehypothecate–without having to indicate that the note has been sold multiple times in the county land records (via assignments in said records that used to be required for each sale of the note). That’s MERS’ stated reason for existence:
“Through this role as mortgagee or beneficiary in the security instrument, our members no longer need to record assignments of the mortgage when ownership of the promissory note or servicing rights transfer between members because the security instrument—the mortgage or deed of trust—remains in the name of MERS. This reduces work and at least $30 in assignment recording fees.”
The new feudalism is here
What MERS doesn’t mention here is that MERS not only reduces work and assignment costs, it also reduces transparency and certainty in the land/title records. MERS reduces transparency and certainty in the land/title records to effectively a state of being completely opaque.
That is to say, the use of MERS subverts the entire purpose of property records–which is to accurately determine which entity owns which piece of real estate. I believe the reason for this subversion is to create exactly the situation we are now in–to have the courts rule that the banks own all real property regardless of mountains of evidence to the contrary in order to establish de facto feudalism as discussed in “Who Owns What: Banks And The New Feudalism.“ From that article:
“Durbin says, “[the banks] frankly own the place.” And that’s the name of the game, isn’t it–ownership? As we’re seeing, that’s how ownership is being resolved in the courts: the banks own everything, the people own nothing, despite the litany of well-known fraud and wrongdoing that Dayen points out above. The question of who owns what is being decided, right now, and the decision is almost unanimously in favor of the banks, not the people. And that’s not an accident. It’s the new feudalism, and it based on nothing more than paper…”
It is worth noting that today is Bastille Day, the annual commemoration of a seminal moment of the French Revolution: the storming of the Bastille. About three weeks later, French feudalism was abolished. How can it be that we are letting our own Bastille–i.e., the system of money as debt–fill up with debt peons without doing anything about it? How can it be possible that we could be less informed or less motivated than 18th-century peasants to get out from under this crushing tyranny of debt and the new feudalism it has established?
How to get QE money–have “bad mortgages” on your books
Not only does this rehypothecation/multiple-pledging allow more money to be made from one piece of collateral, it also allows for more QE/bailout money to be funneled to a given bank because it stands to reason that the more junk/toxic assets (i.e., rehypothecated/multiple-pledged notes) a bank can be shown to hold, the more QE/bailout money it will receive. QE was confirmed to be a massive Wall Street bailout by a former Federal Reserve official:
“I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
…Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.”
So if you’re a bank with more crap bonds–i.e., mortgage-backed securites a/k/a re-hypothecated, multiple-pledged notes–you not only were made whole by QE, but you were also pushed to new profit highs. See–the MERS system is a great tool for both stealing houses and for stealing cash from the taxpayers…I mean, reducing paperwork and costs.
Garfield on the MERS problem
Neil Garfield of Living Lies today points out the following regarding MERS:
“The principal point is that public records are intended to provide certainty in the marketplace. MERS does the opposite. If you see MERS in the title chain, it means automatically that the loan is subject to claims of securitization. And we now know that most such claims are false. Hence satisfactions of mortgage, the filings of lis pendens, notices of sale, notices of default, substitutions of trustees, and all those robo-signed, forged, fabricated assignments, allonges etc. are all clouds on title.”
No kidding.
Garfield then favorably posts a section from the case of Dow v. PHH Mortgage, a Wisconsin Supreme Court review of an appeals court decision, which states in part:
“The lack of disclosure may create substantial difficulty when a homeowner wishes to negotiate the terms of his or her mortgage or enforce a legal right against the mortgagee and is unable to learn the mortgagee’s identity.
Public records will no longer contain this information as . . . the MERS system will render the public record useless by masking beneficial ownership of mortgages and eliminating records of assignments altogether. Not only will this information deficit detract from the amount of public data accessible for research and monitoring of industry trends, but it may also function, perhaps unintentionally, to insulate a noteholder from liability, mask lender error and hide predatory lending practices.“
The justice gives MERS and the banksters too much credit (pun intended) here–a purported noteholder’s insulation from liability is not at all an unintentional function of MERS. As we have seen, it is the primary–though for good reason, unstated–function of MERS. In other words, MERS is the invisibility cloak of the banksters.
IMPORTANT NOTE/DISCLAIMER: The above article is not legal advice and was not written by an attorney. It is merely a collection of common-sense, rational observations written by a sane, rational layperson with common sense. It is recommended that you consult with an attorney for any and all legal advice and/or action.
Last week, Zero Hedge first reported on this side of the Pacific, some very troubling news: the biggest offshore buyer of luxury US real estate, that would be Chinese money laundering oligarchs and other member of the upper class, may be locked out of any future US housing purchases for a long, long time. The reason: an unexpected revelation by the power state CCTV channel revealed that contrary to popular disinformation, some of the largest Chinese banks – the PBOC included – were not only permitting but actively encouraging Chinese “money laundering” far above the $50,000/year statutory limit, the immediate result of which was soaring prices of the luxury segment of the US housing market.
We summarized the next steps last Thursday:
“So what happens next? Assuming there is the anticipated resulting backlash and crackdown on Chinese banks, which will finally enforce the $50K/year outflow limitation, this could well be the worst possible news not only for Chinese inflation, which suddenly – no longer having a convenient outlet for the unprecedented liquidity formed in the country every month – is set to soar, but also for the ultra-luxury housing in the US.
Because without the Chinese bid in a market in which the Chinese are the biggest marginal buyer scooping up real estate across the land, sight unseen, and paid for in laundered cash (which the NAR blissfully does not need to know about due to its AML exemptions), watch as suddenly the 4th dead cat bounce in US housing since the Lehman failure rediscovers just how painful gravity really is.”
We forgot to mention one other thing that would promptly happen: the rest of the US mainstream media would quickly catch to this critical story which is still woefully unreported.
First, the WSJ, from earlier today, which basically provides a recap of what we wrote before:
China’s major banks have halted an experimental program, sanctioned by the country’s central bank, that helped citizens transfer large sums overseas despite government capital controls, according to people with knowledge of the matter.
The halt, which the people said was likely to be temporary, comes after the program was criticized by China’s powerful state television broadcaster, underscoring the political sensitivity of the issue of wealthy Chinese moving money abroad. Experts said the criticism could set back China’s efforts to ease its grip on the country’s financial system.
* * *
The controversy comes at a politically sensitive time. China’s top leadership is deepening a nationwide effort to fight corruption, with a focus on officials suspected of trying to move abroad assets they might have gotten through bribes or other illegal means. Earlier this month, Liu Yunshan —a member of the Communist Party’s top decision-making body who is in charge of the country’s propaganda apparatus—called on the government to address the problem of what are known in the country as naked officials, or those whose families have moved overseas.
Analysts and economists have widely acknowledged that China’s closed capital-account system has become more porous and that the rules are routinely circumvented. A 2008 report by the PBOC said that up to 18,000 corrupt officials and employees of state-owned enterprises had fled abroad or gone into hiding since the mid-1990s, and that they were suspected of having taken $123 billion with them. A favored method, according to the PBOC report, involved squirreling cash away with the help of loved ones emigrating abroad.
The CCTV report brought to light a trial program the PBOC launched about two years ago that allowed a few approved banks, including Bank of China, ICBC and China Citic, to start offering cross-border yuan remittance services for Chinese individuals through their branches in the southern province of Guangdong. The PBOC never publicly announced the program because it intended to carry out the trial quietly, the people familiar with the matter said.
“The program itself is neither illegal nor improper as it’s been approved by the central bank, but the question is if any particular bank has gone too far by offering clients services they are not supposed to,” said a senior executive at a big state-owned bank in Beijing. “We all had to put a brake on it before the central bank draws a conclusion from its investigation.”
Of course the program was legal and proper: it served a key purpose – to keep Chinese hot money inflation under control, by which we mean, exporting it to the US housing market. This is what we said last week:
Why would the PBOC agree to quietly bless this activity which it has, at least openly, blasted vocally in the past?
Simple – to keep inflation in check.
Recall that China is a country which creates nearly $4 trillion in bank deposits every year. Also recall that back in 2011 China nearly chocked when inflation briefly soared out of control, leading to sporadic “Arab Spring” type riots in various cities. And since China simply can not reduce the pace of its loan creation at the macro level without crushing the economy, what it needs is to find outlets – legal or otherwise – that permit the outflow of funds.
Which is why it is not at all surprising that as SCMP reports, the scheme was launched in 2011, just as China’s scary encounter with soaring inflation was unfolding and Beijing needed a fast way to solve the overabundance of domestic liquidity. Basically at that point the central bank agreed to keep its eyes shut as wealthy oligarchs transferred funds to developed world nations, something the US government and NAR were delighted by as it kept real estate prices (if only at the very top) soaring, dragging the entire housing market higher with them. Furthermore recall: the one thing the Fed has wanted more than anything for the past several years is inflation. And since the US economy is nowhere near strong enough to create the kind of inflation needed, with the bulk of the Fed’s reserves ending up in the capital markets and the latest and greatest credit bubble, the Fed would be more than happy to import some of China’s inflation from it, even if that means a housing market which at the upper end is no longer accessible to anyone but the 0.0001%.
This explains the following qualifier from the WSJ:
Officials close to the PBOC said on Monday that it isn’t likely that the central bank will withdraw the trial program altogether, as it is in keeping with Beijing’s broader effort to make it easier for funds to move in and out of the mainland and to promote the yuan’s use overseas. In its latest announcements aimed at gradually freeing up the flow of money, China’s foreign-exchange regulator on Monday issued revised rules that would make it easier for Chinese companies to keep overseas profits and dividends earned in other countries.
Some analysts say the halting of the business amounts to a setback to the government’s reform efforts, at least for now. “This action highlights the tension between the benefits of easing restrictions on capital flows and the risks of allowing freer movement of capital in the absence of effective regulation of financial institutions,” said Eswar Prasad, a China scholar at Cornell University.
Worse, should the hot money flow into ultra luxury US real estate stop, watch as New York City double (and triple) digit million duplex and triplex condo plummet in value as the dumb, marginal money is locked out for good.
Which brings us to the next account of the same story: that of Bloomberg, and its specifics of just how it took place. According to Bloomberg the endorsed money laundering program was introduced in 2011 for overseas property purchases and emigration and, drumroll, doesn’t constitute money laundering, Bank of China said in a July 9 statement. The transfers were allowed by regulators and reported to them, the bank said.
“What it shows is the government has been trying to internationalize the renminbi for a lot longer than we thought,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Ltd., said by phone, using the official name for China’s currency and referring to policy makers’ long-stated goal of allowing the yuan to become freely convertible with other currencies. “I’m rather encouraged by this news because this is the way they need to go.”
China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly. Policy makers have taken steps in recent years, including allowing freer movements of capital in and out of China, as they seek to boost the global stature of the not-yet-fully convertible yuan.
“There’s a silver lining in this incident as it may force the regulators to address the issue in a more open and transparent way,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said by phone. “This is an irreversible trend.”
The issue came to light after CCTV said Bank of China helped customers transfer unlimited amounts of yuan abroad through a product called Youhuitong, which means “superior foreign-exchange channel.”
Of course, this being China, it is far more likely that the “incident” will force the regulators to step aside and keep this all too critical overflow valve of China’s epic hot money, amounting to over nearly $4 trillion in credit money created out of thin air every year, perfectly function for future needs. Especially considering the original report has now been permanently “suicided.” That’s right: any reference to this story in China no longer exists!
The Guangdong branch of China’s currency regulator, the State Administration of Foreign Exchange, picked Bank of China, China Citic Bank Corp. (998) and a foreign lender to let individuals transfer yuan abroad in a trial the banks were told not to promote, Time Weekly reported in April 2013. A Beijing-based Citic Bank press officer declined to comment on the program.
While Bank of China didn’t provide figures, the 21st Century Business Herald estimated the lender has moved about 20 billion yuan ($3.2 billion) abroad through Youhuitong, citing people with knowledge of the trial program. “Many commercial banks” in Guangdong offer a similar service, Bank of China said in its statement, without naming them.
On CCTV’s website, the report on Bank of China hasn’t been viewable since at least July 12. Today, the story link led only to a series of advertisements. A spokeswoman for CCTV’s international relations department, which handles foreign media inquiries, didn’t immediately respond to an e-mailed request for comment on why the story wasn’t available.
And the details:
Youhuitong customers would typically deposit yuan with Bank of China at least two weeks before the transfer, the person said. Once approved, the customer and the bank agree on an exchange rate before the funds are moved to an overseas account designated by the customer, he said. Money destined for real estate would go directly to the property seller’s account to ensure the cash won’t be misused, he said.
Remember: the program is endorsed not only by the PBOC but certainly by the Fed which is delighted in importing tens of billions in offshore money spurring inflation in the US, even if it is very localized, asset-price inflation:
A Beijing-based press officer for Bank of China declined to comment. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. (939), the nation’s two largest banks, declined to comment on whether they offer similar products.
HSBC Holdings Plc (5), which runs the largest branch network among foreign banks in China, offers its Chinese clients another way to access offshore mortgages while avoiding the cap on foreign-exchange conversion, according to a person familiar with the mechanism, who asked not to be identified without having authorization to speak publicly.
Customers deposit yuan with HSBC’s mainland unit or purchase its wealth-management products, and the bank’s overseas branch then issues a foreign-currency denominated mortgage using the China deposits as collateral, the person said.
“We seek to abide by the rules and laws of the jurisdictions and geographies in which we operate,” said Gareth Hewett, a Hong Kong-based HSBC spokesman.
Translation: unlike money laundering originating at BNP or elsewhere in continental Europe, this particular instance of offshore funds parking in US real estate has been blessed by Janet Yellen. Why? “Clearly the property market wouldn’t nearly be so robust as it is today without mainland money,” Mizuho’s Antos said. “How did they do it? With Bank of China’s help. There has been a tremendous amount of mainland money flowing offshore and it couldn’t have happened without” official approval.”
And it’s not just the US:
Chinese have become the biggest investors in Australia’s commercial and residential property, with purchases surging 42 percent to A$5.9 billion ($5.6 billion) in the year to June 2013, according to the country’s Foreign Investment Review Board.
Vancouver’s real estate market has also seen the impact, having been “fueled tremendously in the last couple of years by high-end wealthy Chinese and Hong Kong buyers,” according to real estate agent Malcolm Hasman.
But it’s the US that would be crushed should Chinese money laundering into ultra luxury real estate – something we said is happening in 2012 – cease. From Bloomberg:
While Chinese buyers’ $22b in spending on U.S. homes in yr through March is “small fraction” of total existing-home sales, a halt in spending would “make a big impact” in cities with the most Chinese buyers, including Los Angeles, Las Vegas, NYC, San Francisco, Nela Richardson, Redfin chief economist, says in note to Bloomberg First Word. She notes Redfin agents have told her Chinese buyers will sometimes have several family, friends transfer $50k at closing, in keeping with yuan cap
Chinese parents also buy high-end properties where kids are going to college, use them as vacation homes or rentals after graduation
Raymond James also piggybacked on our conclusion adding that on the West Coast, Chinese, Taiwanese, Filipino buyers have been scouring parts of Orange County, and Las Vegas; and clearly it may hurt Lennar, SPF if travel/capital flows are suddenly restricted.
Because remember: there is good illegal money laundering, such as this one, and then there is bad illegal laundering, that which does not end up being invested in the massively overvalued luxury segment of the US housing market.
And that is all you need to know on a topic which will hardly receive much more coverage in any media outlets in the US, and certainly not China.
You have to love how the Federal Reserve downplays inflation when they are the primary source of it with other central bankers for this monetary phenomenon. They continue to play inflation down because it gives them the power to continue to use policies that seem to only aid their banking allies while making working Americans poorer by the day. Inflation has a slow eroding power that is not readily visible since it usually takes time to work through a system. Looking at a broader time frame however it becomes readily apparent that inflation is hitting our system hard and most working families don’t need an advanced degree in economics to understand this. According to the CPI, the overall rate of inflation since January of 2000 has been 39 percent. The Fed prefers to use the PCE Deflator measure and this only has inflation running at a 31 percent rate. But when we actually look at the cost of goods and services across the spending spectrum we realize that inflation is very much alive and well with us.
Examining the cost of goods and services since 2000
Americans eat, pay mortgages/rent, and tend to drive a lot. We also have the aspiration of sending our kids to college for a better and more educated life. When sick, we want to have access to healthcare. All of these services and goods are much more expensive since 2000. Inflation is very much alive when we look at the cost of goods and services.
Take a look at some major spending categories since January of 2000:
A gallon of gas is up 176 percent since 2000. Ground beef is up 96 percent. Your typical college tuition is up 68 percent. A new car will now cost you 55 percent more than it would have in 2000. Your average home is now up 50 percent even though we went through the biggest housing bubble our nation has faced (largely driven by cheap and dangerous banking policy). Yet the overall CPI is only registering a 39 percent increase. The Fed looks at the PCE Deflator and this is only up 31 percent. So it is no surprise why the Fed has aggressively ramped up monetary policy. Don’t think so? Look at the current monetary base:
The jump from $800 billion to over $4 trillion is largely driven by large commercial banks offloading debt instruments to the Fed. This has done very little in helping the balance sheet of Americans but has essentially been a shadow bailout for the beleaguered banking sector.
The primary reason Americans feel poorer is that wages are simply not keeping up:
The CPI is up 39 percent while nominal wages are up 30 percent. The blue line is the most important above. That is, wages are not keeping up with the increase in the cost of goods and services and this is by the more conservative CPI measure. If you look at the Case Shiller housing measure, you will see your typical house is now 50 percent more expensive and this is the biggest expense for Americas. Your new car is up 55 percent in cost since 2000. College tuition is up 68 percent or nearly twice the rate of wage growth. Healthcare spending per capita is up 104 percent so there is no way wage growth is keeping up with this.
That is the insidious problem with inflation. Some might think that with meager wage growth that somehow they are keeping up. But the Fed has flooded the system with access to debt and this debt has largely benefitted big banks. Big investors are now using cheap debt since they are the people creating access to debt instruments (i.e., mortgages, auto loans, credit card debt) and would rather use the money on buying up real assets instead of lending these out to Americans. For example, since the housing bubble burst a large part of single family home buying has come from investors. This has driven up prices for no other reason that investors have easy access to debt created by loose monetary policy. Little benefit is derived from the public outside of more money being spent on housing with weaker wages.
Those that lived through the 1970s will tell you that inflation without real growth is problematic for an economy. Yet we have a generation that has seemed to have forgotten history. What is more problematic this time is that wage inflation is simply not to be had. So Americans again are forced to go into massive debt to purchase homes, buy cars, or simply to send their kids to college. This is why we now have $1.2 trillion in student debt while many young graduates are unable to service their debt because wages are coming from the growing low wage service sector.
When you hear that inflation does not exist, simply look at the price of goods and services over the last decade and look at your paycheck. You might care to differ.
Back in December when the Fed started its “tapering” operation, with the goal of terminating it by the end of 2014, it was only natural to assume that the Fed’s retreat would result in higher yields this year, especially on long-maturity Treasuries and mortgage-backed securities (MBS).
After all, the Fed has been the largest buyer of Treasuries and MBS in the history of the world since it began its “quantitative easing” (QE) program in late 2008. At that time, the Fed had apprx. $750 billion worth of Treasuries and MBS on its balance sheet. Today, that number is north of $4 trillion! Of this amount, over half ($2.4 trillion) is in long-dated Treasuries. QE has been the largest central bank asset purchase program ever recorded by far.
By late 2012, the Fed’s purchases of long-dated Treasuries and MBS climbed to a staggering $85 billion per month – just over $1 trillionadded in 2013 alone. The Fed has been reducing these monthly asset purchases by $10 billion at each policy meeting since last December. Following the last policy meeting on June 17-18, the Fed’s QE purchases are now down to $35 billion per month. The plan is that these purchases will wind-down to zero before the end of this year.
Virtually every forecaster I read predicted that the Fed’s withdrawal from QE would result in higher interest rates for long-dated Treasuries and mortgage rates. Yet to the surprise of just about everyone, longer-term Treasury yields have plunged this year.
The Problem: A Shortage of Long-Dated Bonds
One reason that Treasury yields have fallen significantly this year is that there is a shortage of long-dated Treasuries. The Fed is partly to blame. Through its massive QE purchases of Treasuries and MBS, the Fed now owns about 20% of all Treasuries, or $2.4 trillion. Banks, on the other hand, hold only $547 billion of tradable Treasuries and government agency-related debt.
In addition, the Fed’s holdings have shifted in ways that leave fewer central-bank-owned Treasuries available to be borrowed. This shift was caused by “Operation Twist” during the November 2011 to December 2012 period when the Fed sold shorter-dated Treasuries and bought more longer-dated bonds, which reduced the available pool of long bonds even more.
Adding to the problem, major US banks have also increased their purchases of Treasury debt, in part due to the Dodd-Frank law that was supposedly designed to limit risk taking by large US banks. Demand for Treasuries from large pension funds and foreign investors has also increased this year. Also, some of the outsized gains from the stock market last year have made their way into Treasuries.
Finally, the government itself has been selling fewer Treasuries in recent years as the federal budget deficits have fallen significantly. During the Great Recession, budget deficits ran over $1 trillion a year. The budget deficit for FY2012 was $1.1 trillion. However, in FY2013 the deficit fell sharply to $680 billion, down 37%.
For FY2014, the Congressional Budget Office estimates that the deficit will fall even further to $492 billion, and many believe it will be closer to $400 billion, as the economy shows more signs of strength. For FY2015, the deficit is expected to be $462 billion or less.
The point is, with budget deficits less than half of the $1 trillion or so that they were in President Obama’s first term, the government is selling less than half the amount of Treasuries it was just a few years ago. This, too, adds to the shortage of Treasuries.
The bottom line: When Treasuries are in short supply and demand is strong
as it has been this year, buyers bid up the prices of these securities. When
bond prices go up, yields fall.
This helps explain why interest rates have come down this year at a time when almost everyone expected them to rise. It also explains why the Fed would like investors to sell their bonds to help alleviate the shortage. Of course, Fed Chair Janet Yellen would never say that!
It remains to be seen if this trend of lower interest rates will continue as the economy gathers momentum. While I didn’t mention it above, no one expected the economy to tank 2.9% in the 1Q and this, too, helped bring interest rates down more than expected.
As you can see in the chart above, the 30-year T-bond yield bottomed in late May at 3.30% and has been rising since then. If the first estimate of 2Q GDP comes in above 3% on July 30, I would expect that we’ve seen the bottom in long rates for this cycle.
Update: for a deeper look at this issue, click here for an Zero Hedge article on this topic.
No idea is more central to Americans’ outlook than the American dream — the belief that with hard work and the freedom to pursue your destiny, you can achieve success and provide better opportunities for your children.
But the financial crisis, housing bust and Great Recession have caused more of us to worry that the American dream is out of reach.
“For the vast majority of Americans, there is a sense that achieving the American dream is becoming more difficult,” wrote Mark Robert Rank, Thomas A. Hirschl and Kirk A. Foster in a new book, “Chasing the American Dream.”
In fact, three-quarters of Americans polled by the Brookings Institution in 2008 said the dream was harder to attain.
They’re right to worry. An analysis by USA Today shows that living the American dream would cost the average family of four about $130,000 a year. Only 16 million U.S. households — around 1 in 8 — earned that much in 2013, according to the U.S. Census Bureau.
In an interview, Hirschl, a professor at Cornell University, stressed that for the dozens of people researchers there surveyed and interviewed, the American dream was not about becoming one of the 1 percent.
“It’s not about getting rich and making a lot of money. It’s about security,” he said. It’s also as much about hope for the next generation as it is about the success of this one. “They want to feel that their children are going to have a better life than they do.”
In their book, the authors write that besides economic security, the American dream includes “finding and pursuing a rewarding career, leading a healthy and personally fulfilling life, and being able to retire in comfort.”
With that in mind, USA Today added up the estimated costs of living the American dream:
• Owning a home is central to the American dream. So, we took the median price of a new home ($275,000), subtracted a 10 percent down payment, then projected the annual cost of a 30-year mortgage at 4 percent interest. We also added annual maintenance costs of 1 percent of the purchase price. Total: $17,062 a year.
• We used the U.S. Department of Agriculture’s April 2014 figure of $12,659 for a moderate-cost grocery plan for a family of four.
• In May, AAA estimated it would cost $11,039 a year to own one four-wheel-drive sport utility vehicle.
• The Milliman Medical Index pegged annual health insurance premiums and out-of-pocket medical expenses at $9,144.
• We used various estimates for the costs of restaurants and entertainment; one family summer vacation; clothing; utilities; cable or satellite; Internet and cellphone; and miscellaneous expenses.
• Total federal, state, and local taxes were pegged at 30 percent for households at this income level, based on a model developed for Citizens for Tax Justice.
• USA Today calculated current educational expenses for two children at $4,000 a year and college savings — all of it pretax, we assumed — at $2,500 a year per child, based on various rules of thumb.
• Finally, the maximum annual pretax contribution to a retirement plan for people under 50 is $17,500. That’s slightly less than 15 percent of this American dream household’s annual earnings, in line with financial planners’ recommendations.
Total: $130,357.
It sounds like a lot — and it is, in a country where the median household income is about $51,000. Add one more child and another vehicle and you could easily reach $150,000
There are big regional variations, too. It costs a lot less to live the American dream in, say, Indianapolis or Tulsa than it does in metro areas like New York or San Francisco, where housing prices and taxes are sky high.
Nonetheless, it’s clear that though the American dream is still alive, fewer and fewer of us can afford to live it.
David Stevens, president and chief executive officer of the Mortgage Bankers Association, stands with his daughter Sara Stevens in the Senate Russell Building in Washington, D.C., on June 5, 2014.
David Stevens, chief executive officer of the Mortgage Bankers Association, has spent his career lauding the merits of home ownership. One person still isn’t buying it: his daughter.
Sara Stevens, 27, knows interest rates are low, rents are high and owning a home can build wealth. She also had a front-row seat to the worst real-estate slump since the Great Depression.
“The world has changed,” she said.
Six years since the collapse of Lehman Brothers triggered a financial meltdown, some young adults are more risk averse and view the potential upsides of status and wealth more skeptically than before the crisis, altering the home ownership calculation. It’s more than the weight of student loans, an iffy job market and tight credit — even those who can buy are hesitant.
The doubt is so pervasive that it’s eroded entry-level sales and hampered the recovery. In May, the share of first-time buyers fell for the third month, to 27 percent, according to the National Association of Realtors. Historically, it’s been closer to 40 percent of all buyers.
“We have a younger generation that has sat on the front lines of this housing recession,” said Stevens, 57. “They’re clearly being more thoughtful about it and they’re clearly deferring that decision.”
Dad’s sales pitches started when Sara was 4 years old, big sister to a fussy newborn. To calm the baby, he would load both girls into the family’s Ford Taurus.
Early Indoctrination
“We would drive around neighborhoods and he would point out houses,” chattering about curb appeal and prices, Sara said. “I’ve heard about this my whole life. In my head, I always figured at the age of 27 or 28 I’d buy.”
She can, but hasn’t. She’s a legislative aide to Senator Michael Bennet, a Colorado Democrat. Her fiancé, Dan Nee, is a software developer. Their jobs are steady and their combined income is $107,500. The car is paid for and dad is ready to help with a down payment.
They surf listings on Zillow Inc. from their 765-square-foot one-bedroom in Arlington, Virginia, which costs $2,195 a month, not including parking, utilities and a $35 fee for Max the cockapoo. They have about $25,000 in student debt.
The couple’s rent-or-own conundrum is complicated by the quality of their apartment, which is in the thick of urban nightlife and steps from a subway line to Sara’s job on Capitol Hill. More-affordable neighborhoods have higher crime and fewer amenities, or they’re farther from downtown and require a second car. A fixer-upper, while cheaper, means headaches.
Financially Insecure
“A house is a five- to 10-year commitment,” Sara said. “I’m hesitant about diving in and feeling like I’m not financially ready.”
She and other millennials — the generation born beginning in the early 1980s — started coming of age just as housing collapsed. Sara was just out of college in 2009 when President Barack Obama put her dad in charge of the Federal Housing Administration. Part of his job was to lobby Congress not to dismantle the financial architecture that had made it possible for generations of Americans — including himself — to buy homes. He also was juggling pleas from family and friends who couldn’t pay their adjustable-rate mortgages or sell their devalued houses.
“I watched cousins and other family members go through pretty tough situations in 2008 and 2009,” Sara said. “I can’t tell you how many of them he tried to help get out of bad mortgages.”
Generational Impact
As FHA commissioner, her dad would wonder aloud how the recession might affect Sara and her generation.
Most still aspire to own, though just 52 percent consider homeownership an “excellent long-term investment,” according to an April survey from the Chicago-based John D. and Catherine T. MacArthur Foundation. And almost three-fourths of adults 18 to 34 years old say the U.S. still is in the throes of a housing crisis, a bigger share than any other age group.
Without first-time buyers, current owners have a harder time selling and trading up, depressing the market and dragging down the economy. U.S. homeownership fell for the ninth straight year in 2013, to 65.1 percent, according to the Commerce Department. The MBA is projecting sales will decline for the first time in four years.
“We need more warm bodies buying homes and first-time buyers are the way to get it,” said Mark Fleming, the Vienna, Virginia-based chief economist of property-data firm CoreLogic Inc.
Taking Plunge
David Stevens took the plunge in 1984, when he was 27 and engaged, like Sara is now. The rate on a 30-year fixed mortgage averaged 13.9 percent as Paul Volcker, then chairman of the Federal Reserve, tried to tame inflation. Home prices were picking up again after back-to-back recessions had reined in double-digit increases seen during the late 1970s.
Stevens paid $73,400 for a three-bedroom, one-bath rambler near Denver. He assumed a 12.5 percent FHA mortgage, putting no money down. Colorado had been hammered by a plunge in oil prices and the seller owed more on the house than it was worth.
“It was similar to the environment we’re in now,” Stevens said, calling the house “an incredible deal.”
On paper, young adults are better positioned to buy now than they were 30 years ago. Affordability for entry-level buyers is more than twice as good, according to the National Association of Realtors. Mortgage payments as a share of income, at 14.2 percent, are half what they were, according to the Realtors. Unemployment among 25- to 34-year-olds, 6.9 percent in the first quarter of this year, was 7.9 percent at the start of 1984.
Greater Urgency
Back then, there was an urgency to get into the market, said John Buckley, managing director of the Harbour Group, a Washington public relations firm and consultant on the MacArthur Foundation’s report. It’s different now, said Buckley, who was a spokesman for President Ronald Reagan’s re-election bid in 1984.
“There was a sense that the window was closing to get a good deal and be able to participate in the American dream,” Buckley said. Today, there’s “tremendous uncertainty about whether the value of that investment is going to be worth the commitment and risk.”
Of course it’s more than negative psychology at work. Student loan debt has more than tripled in the past decade, to more than $1.1 trillion. And it’s harder to get a mortgage. While Fannie- and Freddie-backed borrowers have an average score of 740, most young adults have credit scores below 700, according to FICO, a credit-reporting company.
Channeling Grandma
“We’ve weathered the storm of the crash and Lehman going under better than they have,” said Fleming, 42, calling millennials jaded. “Like their grandparents who went through the depression, they’re apprehensive about overextending themselves.”
At the Stevens household, it’s not lost on Sara that a cheerleader-in-chief for housing can’t get a rah-rah out of his daughter, especially when she’s done everything right. She has an education, a job and dad’s support, financially and otherwise.
“I am incredibly lucky,” she said. “My parents have positioned me well and they’ve given me resources to take on a house if I really wanted to. I think that’s part of his worry. If we’re still having this conversation, what’s it like for a whole generation of other kids?”
The Kane County court house: where real estate goes to vegetate
To target prospective clients in competitive markets, tech-savvy agents are teaming up with firms that identify potential buyers using increasingly precise metrics. WSJ’s Stefanos Chen reports. Photo: Jason Henry for The Wall Street Journal
The beach neighborhood has the highest concentration of Airbnb listings in all of metro Los Angeles. Data collected by 
Oilfield worker on a rig
Source:
In 2009, 60 percent of buyers were married, 21 percent were single women, 10 percent single men and 8 percent unmarried couples. Thirteen percent of survey respondents were multi-generational households, including adult children, parents and/or grandparents.
In addition to tapping into their own savings (81 percent), first-time homebuyers used a variety of outside resources for their loan downpayment. Twenty-six percent received a gift from a friend or relative—most likely their parents—and six percent received a loan from a relative or friend. Ten percent of buyers sold stocks or bonds and tapped into a 401(k) fund.
The biggest factors influencing neighborhood choice were quality of the neighborhood (69 percent), convenience to jobs (52 percent), overall affordability of homes (47 percent), and convenience to family and friends (43 percent). Other factors with relatively high responses included convenience to shopping (31 percent), quality of the school district (30 percent), neighborhood design (28 percent) and convenience to entertainment or leisure activities (25 percent).
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The economic impact is felt in all industries that provide support, from drilling to housing and retail.
For Texas-focused mortgage professionals, the Lone Star State’s dominance came as no surprise.
As for the Colorado market, Erick Strobel, owner and operator of Johnstown, Colo.-based 
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Easy Money Martin 