Tuesday, October 11, 2005

Bill Fleckstien: Empty houses, falling prices: A boom dies

In Contrarian Chronicles on MSN, Bill Fleckstein has this to say:

It's looking more and more like June was the peak (witness last week's disappointing new-home sales, pre-Katrina), as various problems begin to surface around the country.

To some degree, the housing market is a compendium of local markets, unlike the "centrally located" though all-encompassing stock market bubble. There is no Nasdaq or Dow Jones housing index. For that reason, as the housing bubble unwinds, it won't be quite so obvious to folks around the country unless it's happening in their community. ...

That house prices have gone up a lot is not in itself the problem. If they'd risen in an environment where folks were behaving prudently with their financing arrangements (i.e., putting 5%, 10%, 15% or 20% down and taking out 10-, 15- or 30-year mortgages), we might be set up for a dip in prices, as has occurred from time to time. But that's not what we'll witness, thanks to the complete abdication of responsibility on the part of financial institutions, where seemingly no loan was turned down. Thus, those of us who talk about a housing bubble are really referring to a credit bubble.
Good Points. Then he takes a swipe at Greenspan:

That leads me to Alan Greenspan -- the very man who created the conditions for the stock bubble and the housing bubble -- who (1) claimed that real estate couldn't experience a bubble, (2) actually suggested that folks obtain adjustable-rate mortgages as short-term rates were making their lows, and (3) has been unable to realize that the Fed should have been warning banks about their imprudent lending standards.

But if you can't see a problem, you can't try to head it off at the pass -- just as he was oblivious to the bad real-estate loans and junk-bond "investments" that helped precipitate the 1990-91 S&L collapse.

Ironically, in 1985, as a paid consultant to Charles Keating's Lincoln Savings & Loan, Greenspan proclaimed that its management was "seasoned and expert" -- with a "record of outstanding success in making sound and profitable direct investments." He later wrote a letter to Edwin Gray, then-chairman of the Federal Home Loan Bank Board, telling Gray to "stop worrying so much," and "that deregulation was working as planned." Greenspan noted 17 S&Ls that had just reported record profits. Within four years, 15 of those 17 institutions were out of business, costing the Federal Savings & Loan Insurance Corp. $3 billion.

Just as the masthead of my daily column says "All roads lead to inflation," by my reckoning all financial problems lead back to Greenspan. I have not penned a Greenspan rant in some time. Given all the focus on his speech last week -- and the fact that he's getting ready to ride off into the sunset -- I will have a special follow-up column tomorrow to reprise his comments. Stay tuned.

But the best quote from the article is "Against this backdrop of abuse, the story quotes one brave Columbus appraiser named Lori Austin: 'Nobody's looking out for the buyer.' Well, that, in fact, is true. No one is looking out for the buyer."


  1. I've been saying this for a long time. This is and always has been a finance or credit bubble.

    Cheap money, easy credit, "smart choice" interest-only loans have put a lot of people in houses they wouldn't otherwise be able to afford, and who will soon find out they can't.

    Blame the mortgage brokers, not the realtors. A realtor is an agent of the seller. The seller sets the price. The realtor simply markets the property, attracts willing buyers and negotiates the sale. It is not the realtor's responsibility to get financing for the buyer. It is solely the buyer's responsibility to get his financing. If the buyer takes out a risky loan to purchase a house, that is not the fault of the realtor or the seller. It is the fault of the buyer and the lender.

    It is simply not true that there is no one looking for the buyer. All one has to do is sign a buyer's representation contract with a realtor, who will then represent his interests. Any realtor worth his salt would never recommend a high-risk loan. It's not in the realtor's interest to convince a buyer to take out a loan that will only lead to him losing the house after a few years. It's not good business, and it's unethical.

    When anyone asks me, I always recommend putting 20% down and taking out a 15-year fixed rate mortgage. That's the best way to finance the purchase of a home.

  2. "All one has to do is sign a buyer's representation contract with a realtor, who will then represent his interests."

    Yes, but what if his interest is to forego buying and rent instead?

  3. If that were the case, why then sign a buyer's representation agreement?


  4. Maybe the potential homebuyer does not know that it his interest is to rent and not buy. Would a realtor ever tell a person that it is in thier interest to rent instead of buy?

  5. Good God! I have seen, lived thru, owned homes, thru 3 complete Real Estate cycle in So. Cal. Its More like 5 years of Feast and 8 years of famine. I took the money and ran last month, banked it in CD's and money markets.
    For what it is worth 5-6 years ago I saw Bill F take alot of heat and pure rudness for his correct advice in the Dot-Gone Bubble...BTW given in time to leave the sinking ship.In debates with the likes of joey-bag-of donuts from the Bull Lynch em all co.
    I am no pro, but remain profoundly fearfull of the results of all of these lenders in essesnce buying all of this inflated RE with zero and sub zero down payments.
    Having been raised with little and poor I can tell you for sure what we and all others would have done. First never make a payment after times get tough. Then fight like hell to be evicted easy 6-9 months.... Few tricks you can doubble that, then screw them keys in the mail box! Then Mr. Wiseguy try to get blood from a turnip. Cry and whine.... then threaten.... then cry....then beg.... then beg somemore.... then go piss up a rope .....you have been played Alfie FICO score 3