Author Archives: Ramsey Su

     

 

 

Medical vs. Financial Engineering

I broke my elbow a month ago, pretty badly as I was told.  The surgeon screwed the pieces back together, using a steel alloy bracket and six screws.  Two hours later, I left the hospital with no cast, a bandage (just to cover a very ugly scar), a prescription for painkillers and therapy started a week later.

 

 

Elbow collectionThis isn’t Ramsey’s elbow specifically, but a random post surgery elbow collection from the inter-webs, to illustrate how it’s done. The contraption in the lower right-hand corner is generally used to hold an elbow together after a complicated fracture. As you can see from the x-rays, this is then complemented with additional thingamabobs as required.

Image source: eortopedi.com

 

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Restless Peasants

First, a few quick words on Brexit.  Being the always positive and optimistic person that I am (big grin), I see one very positive outcome of Brexit – it is a revolution without bloodshed.

 

mo' peasantsThe peasants are getting restless…

Illustration via squadron.com

 

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Is it Time to Buy Income-Producing Real Estate? 

No, No, No. Much to the dismay of my real estate buddies, who are complaining about how high prices while watching the cash flow of their portfolios bursting at the seams from a few good years of rent increases, the answer is no.

 

1-Chart-Cap-rates2REIT cap rates (as of mid 2015, they have declined further since then)

 

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A Sudden Turn for the Worse

Freddie Mac posted a loss of $354 million this quarter, versus a $2.16 billion gain the previous quarter.  Fannie Mae did slightly better with net earnings of $1.1 billion, which were still substantially down from $2.5 billion the previous quarter though.

 

10621303-freddie-mac-hqFreddie Mac HQ – a strange time for posting losses

Photo via nytstyle.com

 

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A Mountain of Debt – But at Least We Have an iPhone

Whenever I encounter someone from the younger generation (40 years or younger), I make it a point to apologize for leaving them a country in far worse shape than the one I enjoyed.  Surprisingly, none of them believe that apologies are necessary, as most have no clue what I am talking about.

 

good-bad-times-joker-tattoo-design

 

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An Ominous Jump in Delinquent Mortgages

Black Knight Financial Services used to be LPS.  The name was changed after the sale to Fidelity.

 

arbeitssklaveImage via housingwire.com

 

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Something Needs to be Done – A Glimpse of the Future

In the summer of 2016, US and global economic growth rates are nowhere close to estimates.  In fact, a global recession, or worse, is imminent.  At home, student loan defaults are now close to 100%.  The unemployment rate is climbing, as minimum wage workers finally realize that the financial pain of working or not working is identical.  In Euro-land, as the weather warms up, the never-ending flotillas from Northern Africa resume swamping the Southern shores.

 

NIRPA black hole opens up in the world of centrally planned money

Illustration by Denis Cristo

 

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Rate Hikes and the Fed’s Goals

Finally, a 1/4% increase in Federal Funds rate. The immediate response from the banks was 1/4% hike in the prime rate to 3.5%.  This may have some effect on HELOCs.  Adjustable mortgages facing reset may also see some changes.  These minor adjustments should however have no direct impact on the real estate market.

As for the 30 year mortgage rate, so far the reaction has been nothing more than normal daily fluctuations.  Even if mortgage rates eventually settle at a 1/4% higher level, that is only $30 a month for a $200,000 mortgage, or $60 to $70 a month extra in household income to qualify for the same mortgage. A quarter point should not make much of a difference but what about half a percent or more?

 

ph mansionThis mansion in Pacific Heights, San Francisco was sold for a record price of $31 m. in 2015 – it netted its owners a $4 m. profit in less than two years. Reportedly no improvements were made to the property. SF is one of the regions in which bubble conditions are not merely noticeable, but are better described as “raging”.

Photo credit: Zilov / MLS

 

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Government Handouts Galore

Time flies.  It has been over seven years since the agencies, Freddie and Fannie, were placed under the conservatorship of the Treasury.  Think of it as a bankruptcy filing.   The difference being that there has been no reorganization plan, nor a liquidation plan.  In fact, there has been no plan at all, aside from letting the hole be dug deeper and deeper.

 

FNM HQFannie Mae’s headquarters in Washington – not bad for a technically insolvent company

Photo credit: Picture Alliance / DPA / EPA

 

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What is Judgment Day?

It is like ancient times that the Feds, under Greenspan, somehow decided that US needed to follow a zero interest rate policy, a policy now known as the ZIRP.  It was 2008 when Bernanke gave birth to the term Quantitative Easing, QE. QE was followed by Operation Twist, and its sequels – QE2 and QE3.

The new buzzword is “normalization”.  Normalization is the reversal of the QE operations and the raising of interest rates to above zero.  Whether we agree or disagree is irrelevant.  The fact is that the BLS just declared the unemployment rate is at 5%, a level that should justify initiating the normalization process starting with the next FOMC meeting in December. In other words, judgment day is at hand.

 

judayBatten down the hatches, judgment day approacheth

Image credit: World Wrestling Entertainment (WWE)

 

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Something has Changed

Last month, I posed the question “Is it time to short the home builders?”  My conclusion at the time was pretty much a “wait and see”.  Circumstances have changed.  I believe the builders are now short candidates.

 

glencartoon

Beware of politicians trying to fix the housing market (the Johnson-Crapo GSE reform bill actually failed last year)

Cartoon by Glenn Foden

 

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Useless Methodologies

Traditional real estate indicators have not served much purpose as predictors of the real estate market. As an example, here is a recent report by the Mortgage Bankers Association titled Housing Demand: Demographics and the numbers behind the coming multi-million increase in households. Superficially, the report makes a lot of sense, supported by many beautiful charts and figures.  Yet, my gut feel is these methodologies are of little use in the future.

 

banknote-1000-greek-drachma-apollo-19871,000 Greek drachma from 1987, depicting the Olympian god Apollo.

 

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Most read in the last 20 days:

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