If you saw the Dec 14, 2008, 60 Minutes broadcast featuring a segment titled, “A Second Mortgage Disaster On The Horizon?” you’d probably be scratching your head asking yourself when this meltdown will end.

The segment had Scott Pelley interviewing Whitney Tilson an investment fund manager who is supposedly the new guru on the mortgage bubble explosion.

Tilson is part of Amherst Securities. Amherst is an investment firm specializing in mortgages. Amherst is widely regarded as mortgage and financial detectives. If a guy was going to be funny he could call them the CSI of the mortgage trade. On the other hand, what isn’t funny is the possibility Tilson’s predictions that Alt-A and option ARM loans are about to add to the already huge pool of misery.

He says his data tells him that even though there are the billions of dollars in sub-prime mortgages that reset last year and this year, the full impact of the Alt-A and option ARM resets haven’t hit yet. Tilson says this has the potential to add another $1 trillion in Alt-A mortgages and about $500 to $600 billion in option ARMs to the pool.

I guess if this actually happens we could say we are now talking about real money given all of the bailout dollars being bandied about and given away like they were food samples at the local big warehouse store. The ha ha part to this is that food samples seem to be harder to get than dollars.

Misery On Top Of Misery

To make matters worse, a lady named Sean Egan was also interviewed. Egan runs a credit rating firm that analyzes corporate debt. So do a lot of other people. However, Egan has been cited by Fortune Magazine as being one of six Wall Street pros who predicted the fall of the financial giants. Her expectations for 2009 is that it will be miserable and 2010 not only miserable but probably even worse.

Now this flies in the face of what all the federal government talking heads were, and are, saying. From the Prez on down, the word is recovery begins to happen in mid 2009 and continues through 2010 when the worse should be over. Personally I believe the private sector talking heads but that’s me.

Tilson did do some propagandizing for the stock market but this post isn’t about the stock market, it’s about real estate. It seems to me if these two people are anywhere near the bull’s eye of accurate prognostication, real estate bargains will be available for at least two years. Given that is true, it seems we need not be in a rush to buy a property simply because it is way below market. After all, there will be a new glut of inventory in the very near future that will further depress prices.

My Plan

I don’t know about you, but I plan on saving all my nickels and dimes for the new year’s real estate fishing trip in my back yard. I should be able to land a few whales. I can only speak for my back yard which is Nevada, the leader in foreclosures, but I would imagine whales are alive and well in every market.

I define whale as that house today going for at most 40% (flexible to 45%) of the 2006 price. 2006 is my arbitrary date. Pick your own.

I won’t go into my data analysis method because you undoubtedly have your own. If it has worked well for you in the past, it will work well for you in the future. Good luck and may the real estate gods smile on your new year of opportunities.

Photo Credit: Tim Morris

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Tags: bailout, Economy, recession, recovery, stock market

Here’s just a very small sample of headlines from recent days about the economic doom and gloom being caused by the ever deepening mortgage crisis that started in this country but has now reached out its tentacles to squeeze the testicles of just about every European and Asian nation and threatens to plunge the developing world into economic chaos.

Think that’s rather strong, do you?

“Retail stocks slump as Black Friday joy fades”
“10-Year Treasury yield at 2 and a half year low”
“Citigroup shares below $30; first time in more than five years!”
“Markets plunge on credit woes.”

And those headlines are just a one hour slice of the 24 hour news cycle earlier this week.

Let’s take a closer look at these tidbits of terrible news shall we?

Investors worried about rising mortgage defaults and credit market losses, says Reuters, sent stocks tumbling Monday putting Wall Street “on the verge of its worst one-month slump in five years.”

Think that’s bad? Hold on and listen to this:

“On a points basis, the Dow is less than 200 points away from its worst monthly slide EVER.”
That’s “ever” as in, well, “ever!”

Investors seem to be fleeing risk faster than New England swimmers tried to flee the Great White in “Jaws.” They are seeking the higher and safer grounds of government bonds.

Citigroup is the largest U.S. bank by assets. But, that didn’t stop its shares from tumbling Monday, sinking below the 30 dollar benchmark set back in 2002….and, as a way to bring Christmas cheer to its embattled employees, it is reportedly thinking about what are being called “massive” layoffs that could mean as many as 45 thousand people flung out the door.

Why? . . . What do you think! “Mounting concern about mortgage losses…”

MOUNTING CONCERN???? MOUNTING??? I think we are way, way, way past “mounting”–unless, that is, you are using “mounting” to mean how all of us are being f—–royally?

The problem, of course, is that no one…and I mean no one…really knows where the bottom to this debacle really is: will we reach it next month, next year, next two years??? No wonder people are freaking out.

And, it is not just here in the U.S. The runoff from our subprime sewage is polluting the international waters, too. Britain is worried. France is worried. Japan is worried. Even India is worried and can you name the last time it was worried about anything?? Actually, I think I read that India outsources its worries.

Okay. I know this is starting to sound pretty darn dark. I know we all were brought up to believe that if you walk through a storm and keep your head held high (write to the Jerry Lewis telethon if you want the exact words to that song) things will work out in the end. But, suppose if you walk through a storm with your head held high, your head just gets really wet?

And, you know how when times are tough and the tough get going we are supposed to look for that light at the end of the tunnel? What happens if there is no light? What happens if the tunnel turns out to be a vault whose steel doors will shut behind us once we enter, leaving us to suffocate in our own subprime morass?

Oh, and Happy Holidays to all!!!

Tags: citgroup, mortgage crisis, stock market, subprime, u.s. treasury, Wall-Street

In more than 15 years in the financial services industry I worked with many different investment theories and with almost as many different kinds of investors. Some were extremely conservative and would only invest in bonds or CDs while others were aggressive speculators dabbling in various options strategies or betting on the futures market. There were the technical investors with their charts and graphs looking for trend lines and breakout patterns and those who followed the fundamentals such as the earnings and growth prospects of various companies. What stood out for me, however, were the stock market investors who favored growth or value. A growth investor would seek out companies that had the potential for future earnings growth, and therefore, price appreciation. The value investor would search for companies that were undervalued by the market with the idea that at some point the market would recognize the discrepancy and the stock price would rise.

While both investment theories were valid, market conditions had a tendency to favor one over the other at different times. Within the industry we were constantly on the lookout for a change in the current trend. Were we in a growth phase or was the trend turning towards value? An investor who spotted the change in trend at an early point could shift strategy and benefit from the changing climate. However there were many who could not spot the change until well after it occurred and were always chasing the market after it had shifted. A bull market run up in the stock market didn’t end gradually, it usually ended with a speculative blow-off. Inexperienced investors would jump in and the end of the bull market cycle and bid prices up to unreasonable levels. The rationale was that “it was different this time”, “it’s the new economy”, “old rules don’t apply anymore”, and hearing statements like this was usually a signal that the pendulum was about to swing back in the other direction. Most bull markets would end with a correction where prices would fall a bit and start moving up after a period of time. A much steeper drop, such as the 1987 stock market crash, usually followed a major market run-up. Novice investors would run from the market with their tail between their legs vowing that they would never buy a stock again. The value investor loves a market decline. This is where he could step in a buy solid stocks that had been oversold and suffered a price drop that was below the theoretical value of the company. These bargains could be scooped up and held on to until the next rise in market prices.

Real Estate Market vs. Stock Market
In comparing the real estate market to the stock market you have some very significant differences. The stock market has almost instant liquidity, you don’t need to advertise your stock or list it on the MLS and wait for a buyer. A stock doesn’t have carrying costs, mortgage payments, vacancies etc. What the real estate market does have is the extraordinary power of leverage. Through the use of a margin purchase you can obtain a maximum 2 to 1 leverage on a stock but in real estate a 5% down payment gives you 20 to 1 leverage. This means that if you put 5% down and your property appreciates only 5% you have doubled your money!

The parallel that we can draw from the stock market is that the bull market in real estate has peaked and we definitely saw it end with a speculative blow-off. The wanna-be investor cashed in his home equity and used easy mortgage money to buy investment property because, after all, everyone knows that real estate always goes up. This was what Alan Greenspan once called “irrational exuberance” or a frenzy of speculation. Prices were bid up to unsustainable levels and there had to be a correction in the market. Where are all of the investors and agents who claimed that it was not a problem to have negative cash flow because you were going to make so much more in appreciation? Perhaps they realize now that what they were touting wasn’t investing but speculating. These inexperienced investors are being forced out of the market, many of them never to return.

Cash Flow is King for Value Investors
The value investors are now able to come into the market and find properties at bargain prices. Cash flow is king once again and built-in equity is paramount. The current glut of unsold homes will eventually be sold and the market will return to a level of sanity we haven’t seen in a while. The get-rich-quick schemer will find a new fad to throw his money at. The savvy real estate investor will buy properties because they make economic sense, not because he is speculating on price appreciation.

What we can learn here is that while every type of investment has its’ own unique characteristics, they all share some similarities. The most notable common trait is the human element. When greed overtakes sanity and reason you will find people making rationalizations to justify their behavior. All of the excuses as to why this market is different are your signal to head for the exits and wait to capitalize on the change in the trend.

The poet, novelist and philosopher, George Santayana, said it best:

Tags: bull market, cash-flow, Economy, growth, real estate, real estate investing, stock market, value