Plunging rents are great news for renters, but they’re lousy news for homeowners. Aaron Task and I discussed this issue on TechTicker this morning:
The vacancy rate for rental apartments in the U.S. is now 7.8% and climbing, says the Wall Street Journal. This is the highest vacancy rate in 23 years.
Worse, the vacancy rate is expected to keep climbing through the winter, ultimately hitting the highest rate on record.
This is good news for renters and bad news for landlords. It’s also bad news for anyone who owns and would like to sell a house.
Why are rising rental vacancies bad news for homeowners?
Because rising vacancies put pressure on rents, as landlords have to cut prices to woo a smaller pool of tenants. As rents drop, meanwhile, one of the key measures of house-price value--the price-to-rent ratio--also changes, and not for the good.
All else being equal, when rents drop, the "Housing P/E ratio" — price to rent — increases as rents decrease. This is the same thing that would happen to the P/E ratio of a stock if the company’s earnings began to shrink.
The more the rent/earnings shrink, the more expensive the house or company is as a multiple of the rent/earnings.
Will people suddenly refuse to pay as much for houses because the price-to-rent ratio rises a bit? No. But they may decide to rent instead of buy, which will remove some demand from the housing market. And, this, in turn, will put pressure on house prices.
The chart below from Calculated Risk illustrates the price-to-rent ratio over the past 15 years. As you can see, it got way out of whack during the peak bubble years and has now fallen back within the realm of normal. As rents fall, however, the ratio will start rising again.
That is, unless house prices fall, too, which is the more likely scenario.
Outside experts hired by Wells Fargo to pour through its books are reportedly shocked at the bank’s exposure to derivatives trades it took on when it acquired Wachovia may trigger huge losses at the bank, Teri Buhl reports at BankImplode.com
It appears that Wachovia wrote credit default swaps on the junior tranches of commercial mortgage backed securities it was selling, which means that it is on the hook for losses in the riskiest CMBS tranches it sold. Wells itself might not even know the size of its exposure, Buhl reports.
According to sources currently working out these loans at Wells Fargo when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer’s risk premium by writing credit default swap contracts against these subordinate bonds. Should the junior tranches eventually default, then the bank is on the hook. Dan Alpert of Westwood Capital says these were practices that he saw going on in the market at large.
Alpert says in reference to how he saw CMBS trades get done, “These guys would say ‘We’ll just take back that silly credit risk you’re worried about.’ Of course that was a nice increase to earnings when they got the security sold. The bank made money at the time.”
Buhl points out that investors might be caught off-guard if Wells has to start paying out on the swaps it sold. Wells, like most banks, almost certainly holds the credit default swap liabilities off balance sheet and most likely does not recognize them as a loss until they actually have to pay, Buhl writes. Wells says it carefully monitors its derivatives exposure. "We have provided extensive transparent disclosures on our derivatives in our 2008 annual report beginning on page 132,” Wells says.
Here’s Wells own calculation of its derivatives exposure as of the day it closed the Wachovia deal.
But it seems fair to wonder if Wells really understood all of the derivatives exposure it took on when it acquired Wachovia. Buhl wonders if Wells really has enough capital set aside to handle the derivatives liability.
…So could Wells really have enough capital to handle the liability of credit
One year after America’s brush with economic catastrophe, there’s plenty of looking back at the bubbles that caused financial chaos.
But what’s next?
There are surely dangerous economic bubbles forming as we speak. As Alan Greenspan warned this week, "They [financial crises] are all different, but they have one fundamental source," he said. "That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that it will continue."
The trick, of course, is spotting them. By definition, most people don’t spot a bubble before they form and burst.
Good news! The rate of the price decline in the housing crash has finally begun to ease.
Bad news! Prices are still falling 18% year over year.
Specifically, in April, according to the Case Shiller index, the rate of decline in nationwide house prices eased slightly in April--to 18% from 19% in March. The rate of decline has hovered around 19%-20% for the last several months. And prices have now declined a staggering 33%-34% from the peak.
As we’ve noted over this period, before house prices can start recovering, they have to stop falling. And the first step toward prices stopping falling is a decline in the RATE at which they are falling. And we are finally beginning to see that.
But we’re still talking about an astonishing rate of collapse. And we’re still looking at a peak-to-trough decline of at least 40% and probably closer to 50% nationwide, which would be unprecedented. And even today, with prices down 33%-34% from the peak, prices are still above fair value.
So the folks who use this slight moderation in the rate of decline to spin tales of a "bottom" or, worse, a "recovery" are smoking something. Prices have at least another 10%-15% to fall, and they’ll likely be falling for at least another year or two.
Here’s the small uptick in the rate of decline:
Prices have now rolled back to mid-2003 levels. They’ll likely be back to 2000 levels before we’re through.
And here’s the positive spin from the S&P press release (always look on the bright side!):
The 10-City and 20-City Composites declined 18.0% and 18.1%, respectively, in April compared to the same month in 2008. These are improvements over their returns reported for March, down 18.7% for both indices. For the past three months, the 10-City and 20-City Composites have recorded an improvement in annual returns. Record annual declines were reported for both indices with their respective January data, -19.4% for the 10-City Composite and 19.0% for the 20-City Composite.
“The pace of decline in residential real estate slowed in April,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “In addition to the 10-City and 20-City Composites, 13
The housing market is crashing, and it’s taking us, our banks, our economy, and our government down with it. Why? Because of the debt! The value of our houses is plummeting, but the value of our debt is staying just the same.
You knew that already. What you didn’t maybe know, or at least fully appreciate, is exactly what’s happening in the mortgage market that’s causing all this hideousness.
In the book, Whitney lays out the whole mortgage disaster in pictorial form, and he has been kind enough to allow us to reprint some of his charts here. If you’d like to see updated, interactive versions, please visit www.moremortgagemeltdown.com. Or just head over to Amazon and buy the book.
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
When the value of the US dollar rises, US goods become more expensive in overseas markets. General, a weaker local currency is good for economies that are driven by exports and maintain big trade surpluses.
It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny, Regular and Premium both fell five cents for the second consecutive week and are now at their lowest averages since early February. Regular is up 16 cents and Premium 16 cents from their interim lows during the second week of last November.
According to GasBuddy.com, only one state (Hawaii) has Regular above $4.00 per gallon, unchanged from last week, and no states are averaging above $3.90, down from one state (Alaska) last week. South Carolina has the cheapest Regular at $3.08.
How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's a visual answer....
Stocks were able to leverage some optimistic news and dovish words from the Fed to take another stab at an upside breakout attempt last week. Although readers have sometimes accused me of being a permabull, I am really a realist, and the reality is that the slogans like “The trend is your friend” and “Don’t fight the Fed” are truisms. And they have worked. Nevertheless, I am still not convinced that we have seen the ultimate lows for this pullback, especially given the weak technical condition of small caps.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector ...
In a note issued Monday morning, Wunderlich Securities lowered its price target on American Eagle Energy Corp (NYSE: AMZG) from $15 to $13, while maintaining a Buy rating.
The firm commented, "We factored in a lower production forecast for the second half of 2014 and first half of 2015, a higher cost of borrowing, and higher debt load. As a result, we are lowering our NAV from $15 to $13 per share."
To highlight the lower production, Wunderlich noted the company is expecting production to peak earlier than expected in the fourth quarter and at a lower amount than previous forecast.
This change in production has caused Wunderlich to drastically lower its 2014 and 2015 EPS estimates from $0.30 and $0.44 to $0.06 and $0.14, respectively.
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Investors are dumping shares in Yahoo, sending the stock down 5.0% to $40.08 after shares in Alibaba made their debut on the floor of the NYSE just before midday. Shares in BABA for their part initially traded up to a high of $99.70, a near 47% increase over the IPO price of $68.00. Typically, one would expect put options that are 5% out of the money with roughly 4-hours left to trade to see waning implied volatility. But, at the start of the trading session and ahead of the first trade for BABA, the Sep 19 ’14 40.0 strike put options were trading with 271% volatility or $0.30 per contract amid uncertainty as to how the start of trading for Alibaba would take shape.
Administradora de Fondos de Pensiones Provida S.A. (PVD) shares will not be trading on the NY Stock Exchange after today. Tomorrow, shares will be harder to sell. Strangely, I wasn't able to find information on the internet, but Paul just sent me a copy of the email he received from Interactive Brokers.
We're selling PVD out of the Virtual Portfolio today at $87.18.
From: Interactive Brokers dated July 18, 2014
Holders of AFP Provida S.A. American Depository Receipts (ADR) are advised that the Company has elected to terminate the Deposit Agreement effective 2014-09-18.
Despite the various opinions on Bitcoin, there is no question as to its ultimate value: its ability to bypass government restrictions, including economic embargoes and capital controls, to transmit quasi-anonymous money to anyone anywhere.
Opinions differ as to what constitutes "money."
The English word "money" derives from the Latin word "moneta," which means to "mint." Historically, "money" was minted in the form of precious metals, most notably gold and silver. Minted metal was considered "money" because it possessed luster, was scarce, and had perceive...
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
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