There’s Stinky Gas Inside Of This Mini-Housing Bubble, You Don’t Want To Be Around When It Pops!

Yesterday, I revisited the US employment vs  inflation situation, which itself was an extension of my warnings on Employment and Real Estate Recovery. In the second post, I included the story from a BoomBustBlogger who was an investor of a large multi-familyproperties. As a BoomBustBlogger, he uses math to make decisions and the math simply doesn’t pan out. Of course, due to .gov bubble blowing, unintended consequences often occur and this time around it is a bubble within a bubble burst in multi-family housing. The dilemma is, do you pull the trigger m/f investments that have increasing net effective rents even though we are almost certain to have higher interest rates (see Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate), more of a depression in housing (In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse), stagflation (Inflation + Deflation = Stagflation ~ Lower Real Estate Values!) and most importantly… obvious activity that is indicative of rampant speculation that goes against the fundamentals…

An update from said BoomBustBlogger:

Reggie, if you have the time, just curious to see your thoughts on below.  I have held off buying apts in Phoenix for all the reasons you have explained, BUT, prices are jumping $20-$30k/unit this year.

NERs and NOIs are growing modestly, BUT prices are jumping like crazy.  Bidding frenzy.  Guys buying and trying to flip properties within a year or two.  2006/07 all over again. Scary times!!!

thanks

I will try to use math to address this conundrum in my next post as I’m running out, but realize that the recessionary (depressionary) pressures of s/f housing is not going anywhere soon. Let’s look at the data taken from the February 11. 2011 HUD FHA Portfolio Analysis report:

A 54% jump in FHA REOs should be screaming the obvious at investors. If you don’t hear it, you’re the patsy! I see that sales are down significantly. Is it due to inefficiencies at HUD or the fact that the investment market has been saturated by REO homes going into a still rapidly declining market that has input costs steadily rising as true economic unemployment rises at the same time?

As you can see, the Case Shiller Index shows a marked drop in prices, and the drop is accelerating over time – halted only by .gov bubble blowing which has effectively worn off. In addition, the Case Shiller index shows a very, need I say unrealistically optimistic view of the market.

The near term outlook actually looks worse. Dig deeper into the FHA portfolio report and you will see, contrary to proclamations from the management of big banks such as JP Morgan, et. al., that people are getting into more trouble in regards to their homes, not less…

These numbers corroborate what I have dug up regarding the shadow inventory available to subscribers, (see the latest Shadow Inventory Analysis Spreadsheet online) in that although shadow inventory looks bleak, there is a massive wave of unseen inventory waiting in the banking rafters.

Of course, JP Morgan says I’m wrong and they have released all sorts of loss reserves and provisions to pad lackluster earnings that would have assuredly resulted in a string of analyst misses to prove their point. I really want my readers to put these facts and figures into perspective in regards to banks such as JPM, for There’s Something Fishy at the House of Morgan…

JPMorgan’s Q1 net revenue declined 9% y-o-y ad 3% q-o-q to $25.2bn as non-interest revenues declined 5% y-o-y (down 5% q-o-q) to $13.3bn while net interest income declined 13% y-o-y and (-2% q-o-q) to $12.5bn. However, despite decline in net revenues, noninterest expenses were flat at $16bn. Non-interest expenses as proportion of revenues went was 63% in Q1 2011 compared with 58% a year ago and 61% in Q4 2010. However, due to substantial decline in provision for credit losses which were slashed 83% y-o-y (63% q-o-q) to $1.2bn from $7.0bn, PBT was up 78% y-o-y (15% q-o-q).

Lower reserve for loan losses and consequent decline in Eyles test (an efficacy of ability to absorb credit losses) coupled with higher expected wave of foreclosures which is masked by lengthening foreclosure period and overhang of shadow inventory, advocate a cautionary outlook for banking and financial institutions. As a result of consecutive under-provisioning since the start of 2010, JP Morgan’s Eyles test have turned negative and is the worst since at least the last 17 quarters. The estimated loan losses after exhausting entire loan loss reserves could still eat upto 8% of tangible equity.

Next up, I will try to give a mini-freebie in regards to my views on apartments.

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