Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Saturday, April 08, 2006

Bubble Story Time....

Who doesn't love a good fairy tale?

This one brought to you by: There Is No Bubble

(preview) pssst... Realatopia sounds so much like Sonoma... hmm I bet he's been here. :-D

"Once upon a time in the happy kingdom of Realatopia there lived a great prince named Realtor. Prince Realtor was renown throughout the kingdom as the wisest prince who ever lived. And he was much loved, for when Prince Realtor looked around his kingdom he saw that all his subjects were rich and happy."

"Nothing it seems could ever break the spell that he held over his happy subjects. But one day the court jester, a fool named Renter, began going around telling tales of the fearsome bubble monster."

"He said the monster was 20 feet tall, and could eat a granite countertop in a single bite. He said the monster was coming and would ruin them all.At first nobody took the fool serious. He was, after all, a court jester."

"But after a while the happy people of Realatopia began to feel uneasy. Maybe there was something to this fool's ramblings. Maybe there really was a bubble monster coming to destroy their happy homes. Finally when the people could stand no more, they went to Prince Realtor and begged him to slay this bubble monster before it descended on their once happy land...."

"So the prince declared throughout the land that he would send out his two most brave knights to slay this unearthly beast. They were two knights who knew no fear and could conquer any foe. They were Option Loan and his brother Interest-only Loan. These two Loan brothers were already legendary amongst the people of Realatopia." (Read the rest)

For those of you who don't like fairy tales, but like to read nightmare inducing slasher stories... here's one for you (brought to you by Financial


"Once the Fed Chair sounds the alarm about commercial real estate loans, it starts an entire chain of events that ultimately and unequivocally leads to economic recession. Here’s what happens. Out of the blue (that seems to be a favorite modus operandi for all Fed operations) those friendly back-slapping Federal Reserve examiners (not really, they are never overly nice — okay I’ve met two or three out of a pool of three hundred — Mike, Eddie, Eric, you know who you are and I know you read my stuff) show up with a scowl that droops like the golden arch."

"They ask for the files, a table, an outlet, a coffee pot, and the key to the little boys and girls room. About two days after they arrive, the banker knows something has changed, something serious, and he gets this knot in the pit of his stomach that will last for about three years."

"Examiner Margo asks for a meeting with banker Joe. She brings her supervisor to raise the fear level of the meeting. The Bank’s President, Joe, brings his top commercial lender for protection of his fanny, and that lender brings his junior lender who will ultimately be the sacrificial lamb and get the ax should things blow up."

"Bottom line: Margo feels that a good commercial real estate loan, paying on time, plenty of collateral, doesn’t quite throw off enough cashflow on its financial statements in file, and is now suddenly rated below satisfactory. Not quite doubtful. What this means is the banker now has to set aside 20 percent of the loan in reserves for possible losses. That reduces income, and he has a big one-time hit coming to earnings this quarter."

"The banker defends the loan with dexterity — he has to fight back, but cannot tick them off too much as they hold all the cards — but the discussion is going nowhere. Finally Margo’s supervisor, Lead Examiner Harry, whose head hasn’t moved an inch — just his eyes, rolling back and forth from speaker to speaker — drones out, “This loan is less than satisfactory,” then gets up and goes back to his room full of tables, laptops, and loan files."

"This goes on for days. Toward the end of the examination, about a month later, they bring out the heavy artillery. More senior examiners from the regional office arrive and the meetings get larger and longer as satisfactory loans have now been declared doubtful, and doubtful loans are now downgraded to total loss. They especially target commercial real estate loans. First ones to go. Again, nothing regarding the loan itself has changed, the game is one of judging the subjective quality of the loans, and for no apparent reason, the subjective quality of myriad loans has remarkably deteriorated."

"The banker is left with a list of suddenly crappy loans in his portfolio, and a required loan loss reserve that is about 80 percent higher than he has on the books. He is then told in a wrap-up meeting that because of this “loan quality problem” in his bank, his bank’s overall rating has been dropped from a 1 to a 2 or a 2 to a 3 (banks are rated 1 to 5 with 1 being the best. Ratings below “2” get bank presidents fired. Ratings below 3 get the Chairman of the Board of Directors removed, with lots of fearful warnings to the Board of Directors of the bank about Director liability and civil money penalties)."

"This rating is confidential, with criminal prosecution should the banker reveal it. In fact everything in the examination report is confidential, with criminal penalties should he reveal its contents. There is no appeals process."

"Needless to say, after the examiners pack up their newspapers, laptops, and locked suitcases, the banker and his crew of commercial real estate lenders are left in shock. The Board of Directors gets a visit about a month later from the Head examiner and the top Regulatory folks at the regional Fed office. If they bring someone from “Washington D.C.,” then the bank President and Senior Lender are toast."

"The Board of Directors politely listen as the Head Examiner and his boss cite every blemish and foul found in the place with smiles intermittently flashed with icy stares, a game of intimidation. Warnings are given, then the Fed folks get up, make sure they shake everybody’s hand in the room as if its “business, not personal,” and leave."

"At the end of the day, a junior lender gets canned, the Board steps up the heat on the President to do something about this, and banker Joe and his senior lender immediately decide to stop making commercial real estate loans."

"For the economy, this means a credit crunch has started. Expansion stops. Willing buyers can no longer obtain financing to buy properties. This reduces demand for properties at the exact same time bankers are encouraging these suddenly classified borrowers on their books to sell their properties and pay back the loans. This increases the supply of properties for sale at the exact wrong time, lowering prices."

"But the black hole is just getting started — just beginning to suck the economy into the abyss."

"About six month later, property values have dropped from this excess of supply and lack of demand due to the curtailing of bank commercial real estate loans. This means the collateral values of the loans on the bank’s books have declined."

(read the rest) yikes... that is a scary one...

Here's another one from PrudentBear

The (Rude) Awakening
April 9, 2006

by: Doug Wakefield the president of Best Minds, Inc., a Registered Investment Advisor, and editor of the monthly newsletter The Investors Mind: Anticipating Trends through the Lens of History.

"Last week, a friend sent me a link to a Saturday Night Live (SNL) skit, wherein they present a “new consumer credit program.” It’s called, Don't Buy Stuff You Cannot Afford. What follows is a conversation between one of SNL’s “credit counselors,” as he happens upon a couple trying to balance their checkbook."

Wife: (sighs) I just can't get these numbers to add up.

Husband: Like, we're never going to get out of this hole.

Wife: Credit card debt, does it ever end?

Credit Counselor (CC): [walks in] Maybe I can help.

Husband: We sure could use it.

Wife: We've tried debt consolidation companies.

Husband: We've even taken out loans to help make payments.

CC: Well, you're not the only ones. Did you know that millions of Americans live with debt they cannot control? That's why I developed this unique new program for managing your debt. It's called, [presents book] Don't Buy Stuff You Cannot Afford.

Wife: Let me see that... [Grabs book, reads] "If you don't have any money, you should not buy anything." Hmm, sounds interesting?

Husband: Sounds confusing.

Wife: I don't know honey; this makes a lot of sense. There's a whole section here on how to buy expensive things using money you save.

Husband: Give me that... [Grabs book, looks at it] And where would you get this saved money?

CC: I tell you where and how in Chapter 3.

Wife: Ok, so what if I want something, but I don’t' have any money?

CC: You don't buy it.

Husband: Well, let's say I don't have enough money to buy something. Should I buy it anyway?

CC: No-o-o-o.

Husband: Now I'm really confused!

CC: It's a little confusing at first. It's in the book. It's only one page long. The advice is priceless, and the book is free.

Wife: Well, I like the sound of that.

Husband: Yeah, we can put it on our credit card.

CC: [shakes head]

Announcer: So get out of debt now. Write for your free copy of Don't Buy Stuff You Cannot Afford. If you buy now, you'll also receive Seriously, If You Don't Have the Money, Don't Buy It, along with a 12-month subscription to "Stop Buying Stuff Magazine." So order today!

"While satire can be useful in pointing out the folly of America’s unprecedented borrowing and spending binge, the remedy will likely be so harsh that it precludes humor. Yet, the aspect of the effects of this credit phenomenon on the average American has long concerned me."

"So, with your permission, I will continue the story of the couple above, whom I’ll call Bob and Sally Smith, in my own admittedly dour way. If you are fortunate enough to be reading this article with no credit problems, you still have been, and will be, affected by this historic, reckless expansion of credit."

"Beyond the effects of inflation, and the probability of deflation, the consequences of our profligacy will not play out in a vacuum and will not be nearly as hygienic as an academic discussion of this problem."

"In response to the bursting of the stock market bubble of the late ‘90s, in 2001, the Federal Reserve began slashing interest rates, from 6.5 to 1 percent by 2003, bringing rates to their lowest levels since the Great Depression. Not surprisingly, as the credit spigot was opened wide, housing prices went parabolic."

"The unsustainable stock prices of the late ‘90s gave way to the unsustainable real estate prices of today. In 2004 and 2005, thousands of articles warned of a real estate bust, but the bust has yet to occur. Over the last two years, like us, many have cautioned that the stock market is again nearing a significant decline, yet no such decline has unfolded."

"So, if things have been “good” for so long (three years is forever to most Americans), why do we so doggedly hold to the idea that there is a problem and that our current course is not self-sustaining?"

"I think that we are nearing the end of this present course, and while no person can know that this is “the top” (until it is too late to do anything about it), keeping watch for “the top” has never been more crucial. So once again, this time – through the eyes of Mr. and Mrs. Smith, we will look at the line of dominoes, the first of which is teetering and appears to be starting to fall."

"The Smiths have heard stories from friends, family, and associates that are very close to their own experience. One day, Bob recognizes a common denominator and becomes concerned. He realizes that a lot of the people he knows have taken on increasing amounts of debt and ponders whether his small view of the world is a microcosm of what is happening on a much larger scale across the U.S. While they are certainly not “pessimists,” the Smiths decide to do some research on debt, which eventually leads them to a website called,"

"As they take in the size of household debt and the pace at which it’s growing, and realize that this is not a few families in their circle of friends, but Prudent Bear displayes charts that look at the debt of 300 million people that comprise the United States, they become increasingly ill at ease."

"Bob and Sally have had enough bad news for one night and decide to veg out in front of the TV for a while. While they are watching their favorite nighttime drama, their show is interrupted by a funny commercial that starts off with a man riding his lawnmower over the front lawn of his new house. He talks to the audience about how he owns a new house, a new boat, a new car, a new country club membership, and his new lawnmower. And, with a smile on his face, he says, “How do I do it. I’m in debt up to my eyeballs.”'

"The solution, of course, is to “have bankers compete for your debt.” For the first time, it seems to Bob that the lack of a suggestion that the man on the commercial lower his lifestyle or stop spending is a rather grievous omission."

"Concerned that this massive amount of debt is starting to look like a ponzi scheme, where people take on more debt to pay for their existing debt (or debt payments), the Smith’s decide to explore the financial state of our country a little more." ... (read more)


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