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.
Yesterday we showed how 'isolated' Russia was (if you chose to look only at isolating parts of the world). Today, we glimpse at the world's views on China vs US... As The Global Post notes, we know that only 35 percent of Americans have a favorable view of China. But what about the rest of the world?
For would-be stock market traders, the idea of making a living in in the stock market is intriguing. Imagine: rolling out of bed, grabbing your slippers, a cup of coffee, turning on your laptop, glancing at a couple charts, clicking on "buy," and raking in the money. Or don't even get out of bed!
What is often not completely understood, however, is that trading is not easy. The simple advice of "buy low, sell high" is difficult to follow. Further, moving into the world of options adds another level of complexity and is quite daunting.
So, if I just described you, and you want to enhance your understanding of options, take the time to learn the facts presented in Understanding Options, a new ebook by John F. Carter. John is the founder of SimplerOptions.com and author of the book &qu...
The S&P 500 opened fractionally higher and hit its 0.14% intraday high moments later. The 10 AM August Manufacturing Report came in stronger than expected, but an hour later, the index started a selloff that would send it to its -0.43% intraday low in the early afternoon. A modest rally trimmed the loss to -0.05% at the close.
The S&P 500 went nowhere today, but Treasuries stirred a bit. The yield on the 10-year Note closed at 2.42%, up 7 bps from Friday's close.
Here is a 15-minute chart of the past five sessions.
Today's trading volume picked up after the pre-Labor Day doldrums but remains below its 50-day moving average.
For a longer-term perspective, here is a pair of charts based on daily closes starting with the all-time high prior to the Great Recessio...
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Buffalo Wild Wings Inc. (Ticker: BWLD) shares are in positive territory in early-afternoon trading on Thursday, reversing earlier losses to stand up 0.50% on the session at $148.50 as of 12:15 pm ET. Options volume on the restaurant chain is running approximately three times the daily average level due to heavy put activity in the October expiry contracts. It looks like one or more traders are buying the Oct 140/145 put spread at a net premium of roughly $1.45 per contract. As of the time of this writing, the spread has traded approximately 3,000 times against very little open interest at either striking price. The put spread may be a hedge to protect a long stock position against a roughly 6% pullback in the price of the underlying through October expiration, or an outright bearish play anticipating a dip in BWLD shares in the next couple of months. The spread makes money at expiration if shares in BWLD decline 3.3% from the current price of $148.50 to breach the breakeven point...
Gradient Senior Analyst Nicholas Yee reports on six companies that are using a variety of techniques to shift pretax profits to lower-tax areas. Featured in this USA Today, article, the companies include CELG, ALTR, VMW, NVDA, LRCX, and SNPS.
Mt Gox may be long gone in the annals of bankruptcy, but its founder refuses to go gentle into that insolvent night. And, as CoinDesk reports, the disgraced former CEO of the one-time premier bitcoin trading platform has decided to give it a second try by launching new web hosting service called Forever.net and is registered under both Karpeles’ name and that of Tibanne, the parent company of Mt Gox.
Author Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation's top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants' malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990)... Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).
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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...
I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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