However, there are some interesting facts to consider besides traditional logic…

Contrived Attrition?

The ironic part is that the forces that helped bring this market to its knees may be the same that build it back up.  Let me explain…

Back in July 2008 I questioned whether some of ‘this’ wasn’t a bit contrived…I still do.

These two posts written in July 2008 speculated on possible alternative reasons Fannie and Freddie stock was plummeting…special note to the link citing the  Financial Accounting Standards Board decision to favor a simpler accounting method for Qualified Special Purpose Entities that serviced mortgages into securities for the benefit of adjusting distressed borrowers ARM’s.  What?  In a nut shell, at the end of the day, lenders wouldn’t be able to bury losses from the public’s eyes like they used to and their financial reports would suffer.

Coincidentally or not, on July 6, 2007 the SEC eliminated the ‘Uptick Rule‘ which was implemented in 1938 to curb the type of concentrated short selling of stocks where speculators make money when the stock price drops.

New accounting methods for financial institutions will show increased losses on paper, naturally priming the pump for plummeting stock prices.  Sans uptick rule, speculators smell bearish conditions and short stocks with fervor, driving companies and portfolios values into the ground.

By October 2008 blood was in the streets and investors start shorting financial institutions stocks in historical volume, acting as if they were…going out of business…? Fannie and Freddie are sequestered from the chaos.

Conventional money (401(k), Mutual Funds, regular people etc) got the hell out of the way and out of the market.  Institutional investors ate each other for lunch. Everything went ‘Pear Shaped’.  Many stocks are today worth less thah 50% of their value from 18 months ago.

The Government announces plans that they are going to Bailout ‘the worthy’ using a hodge-podge of methods, some useful others akin to little more than a circle-jerk, including buying preferred and common shares of these floundering financial (and related industry) behemoths that are ‘too important to fail’.

The Return of ‘Favorable’ Accounting and Keeping The Bears on a Leash…

March 10th 2009…The Dow surged 6%+ on the following news (Courtesy Wall Street Journal)

Federal Reserve Chairman Ben Bernanke said in a speech it was important to address the valuation of illiquid assets. Banks want leeway in accounting for illiquid holdings, and investors were encouraged by Mr. Bernanke’s statement, though he said that he wouldn’t support the suspension of mark-to-market rules.

“Bernanke said the magic words — that the Fed was considering looking at accounting standards,” said Fred Dickson, market strategist at D.A. Davidson.

It would appear after looking at yesterdays market swing that the accounting standards that Mr Bernanke is alluding to will favor banks, shoring up value in investors eyes, hence the mini-rally. Were his words transcribed as ‘We’ll let you get back to some creative accounting soon’

Barney Frank also stated the SEC may reinstate the ‘uptick rule’ as early as April, which has to re-establish overall market confidence by keeping the Bears on a bit of a leash, mitigating the extreme volatility.

Is it That Crudely Simple?

Was this all contrived to flush out all of the ‘toxic’ securities faster rather the wade in the muck for years?  Where the floodgates purposely opened only to close them back up when the time was right?

I’m often asked when I think the real estate and mortgage market will bottom out.  My answer usually coincided with the end of the 2-5 year period after NINJA (No Income/Asset/Job) loans were banished from the marketplace…around September 2007…so September 2009 is when support could naturally start to manifest.

There are now a myriad of artificial factors suggesting this ‘time to bottom’ could be ‘moved up’.  Coupled with the news yesterday, it very well could be sooner (end of ‘09) rather than later (end of ‘12).

A real sign that the markets are back on track would be when lenders will get back to sensible underwriting standards.  From 2002 to 2007 mortgage underwriting was as fast and loose as a brothel in Amsterdam.  2008-current, you can’t pull a pin out of a lenders ass with a John Deere tractor they’re so tight.  There is a middle ground, which is a topic for another post…

I’m not here to call the beginning of the end to these crazy economic times, there is still a looong way to go with many details to be worked out and ups/downs in front of us…I just can’t help but wonder aloud if aspects of this ‘economic meltdown’ weren’t contrived to push the crap out of the system quicker, knowing full well there would be (justified? acceptable??) collateral damage…It sounds ridiculous to say, yet resonates as plausible to the (my) mind…

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Contrived Attrition? Washingtons Play in The Fall and Rise of Wall Street

Between all the yelling and screaming three points are compelling to me.

1.  The FBI is investigating every company that is ripe for or has already received a ‘Wall Street Welfare Check’ (aka bailout), for fraud.

Whats does this mean to me?  The politicians have called in the hounds to flush out a few scapegoats.  Considering there is a very fine line between a ‘high risk investment’ and ‘fraud’, there is a lot of chalk dust being kicked up right now, blurring those lines.  Yesterdays ‘investment’ looks to become tomorrows ‘fraudulent transaction’.

Politicians, never afraid to insert sharp objects into the dorsal side of public adversity (even if it was very recently a friendly opportunity), appear to be on a witch hunt, ready to burn the C-Suite executives that ran their personal beltway lobbyist cash machine Company’s on Wall Street at the stake in an epic public spectacle.

Seems to me that Washington will blame this entire mess on the ‘monsters’ they helped create and took gobs of cash from (legally of course), still profit from it all and then claim they did everyone a favor by cauterizing losses now instead of letting the bleeding continue at a far higher cost.

2. The S.E.C. has banned short selling on over 1000 different financial institutions.

Shorting stock is the equivalent of betting that a companies stock price will fall, and profiting from that fall, should it happen.  Short selling is the reason you hear people say that you can make money when the market is going up and down.   Heavy ’shorting’ tends to drive down the price, value and thus liquidity of a company.

Apparently a vast majority of the the recent ’shorts’ came from overseas, most specifically London’s and Dubai’s markets.  London has also initiated a similar ban.  Is it possible that there is a case of ‘economic terrorism’ here?  I’m not usually one for conspiracy theories, and usually brush off such notions for what they’re worth, but this one has me thinking…it is plausible.

The government could never lend credibility to this theory even if it were true or our entire economy would sink faster than the Titanic.  Consumers would withdraw all their money from financial institutions, go all 2nd Amendment and bear arms, looting and rioting would probably ensue.

A more likely explanation lies in the fact that if the Government is going to write a check to bailout a company, they don’t want anyone ‘riding down’ their investment any further.  In any case, banning a practice that’s been part of a capitalistic ‘free’ market almost since its inception is…interesting?

3. Warren Buffet is back in the game.  He made a $5B investment in Goldman Sachs which would lend one to believe that one of history’s savviest, fundamentally sound investors believes the market is at bottom or damn near close.

The deal was a sweet one for Berkshire Hathaway…Buffett paid a low price, got a high return (yield) and insulated it all with attractive warrants that are already well in the money, all for Wall Streets strongest name, Goldman Sachs.  Maybe the man with a name and credibility almost as big as his wallet can infuse some much needed confidence into our battered economy.

Whatever happens from here forward, getcha popcorn ready…it’s going to be great theater.

Aside: Someone better watch Lou Dobbs before he goes postal and starts ‘offing’ politicians.  Lou’s pretty pissed about all this.

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Political Fear and Loathing on Wall Street

I read this quote from my own sidebar and it struck a note…market prognosticators are lucky they’re not judged for accuracy.

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The Only Function of Economic Forecasting is to Make Astrology Look Respectable

If you want to make money on a commodity (like property) you must buy it lower than you sell it for, in short…Buy Low, Sell High. (Yes there are plenty of ways to make money when a commodities value goes south too…short selling, put options et.al., but thats not pertinent here.)

Markets across the nation are generally soft right now and getting softer. Why? Foreclosures and other ‘fire sales’ by individuals who bought real estate during the stooopid appreciation curve are starting to effect the current and immediate future value of property. There is an innate lag effect as these reduced sales prices are booked as sold, thus becoming viable comparables for new sales, thus driving down overall values going forward.

So, for once I’m going to agree with the NAR and say: ‘It is a great time to buy real estate.’ Property is on sale and it’s not uncommon to find deals 20%-40% off on the open market, not just via foreclosure or short selling.

According to Biz 2.0, the following cities are about prime for buying:

1. Dallas/Ft Worth, TX
2. Indianapolis, IN
3. New Orleans, LA
4. Atlanta, GA
5. Montgomery AL
6. Memphis, TN
7. Mobile, AL
8. Austin, TX
9. Houston, TX
10. St. Louis, MO

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There are a few things about these cities that intrigue me…(I’ll bold out the reasons speculation for appreciation is high, so you can look for such trends in other markets).

First, none of these cities experienced the rapid appreciation curve that consumed many markets, so there is/was far less room to fall. They’re all in the South/South East, not areas of the country where ‘Housing Bubble’ crossed many pundits lips. Ominously absent are any cities in California…which is an economy in and of itself. It’s hard to tell where, when, what, or how this market will shake out…

Mobile, Montgomery, and New Orleans were ravished by Hurricane Katrina, thus making them prime rebuild areas. New construction will help raise values in a market, especially these…they really have no where to go but out of the ground and up.

St. Louis is the very definition of ‘average’. It’s in the middle of the country, average per capita income equals the national average ($36k), it’s pretty much an average city…The optimism comes from the fact that people are moving back to the urban core, where developers are converting old warehouses into swanky lofts, apartments, and condos. Urban sprawl steadily depreciated city real estate for years as the population moved to the suburbs, polarizing it from achieving any measurable appreciation during the refi boom.

Indianapolis is one of two state capitals on this list. State capitals mean government jobs, government jobs mean above average salaries and security, which equate to a solid economy. Plus the Colts won the Super Bowl…

Atlanta has the state of Georgia to partially thank for appearing on this list. The state is a pioneer of many anti-predatory mortgage laws that kept artificial housing appreciation from getting out of hand. Atlanta is also a hub of industry (Fortune 500 companies are also abundant in Hotlanta) making it a hot spot for young professionals just entering the job market. Hartsfield airport is an international hub and the worlds busiest. All of these factors make for a very active market, consistent turnover of housing inventory will spell an earlier relief for the center of the Dirty South…

Memphis was considered to be one the foreclosure capitals of the United States very early in the game, it was the early mover to bottom out, if you will. This is another ‘no where but up’ scenario…as a matter of fact Memphis is now considered one of the most undervalued cities in America.

Dallas/Ft. Worth. The Metroplexicalmegapolitan. I recently moved to Plano, TX (Northeast side of Dallas), and this area is freaking HUGE. It just goes and goes and goes…according to Business 2.0, this area will add 6.4 Million more people to it’s infrastructure in the next two decades. WTF, thats ridiculous. Moving from Greensboro NC, the 3rd largest city in the entire state, Plano has more people and it’s just a measly little suburb…Everything is big in Texas.

Houston. Hot, humid, and hot…did I say humid? All I remember about Houston, besides it being prohibitively hot and humid, is sitting in the most amazing traffic jams. Being the oil and gas hub of the USA is a plus for the economy and apparently the inner city is going through a housing revitalization…apparently other people really don’t care to sit in traffic when it’s 105 degrees with 95% humidity either.

Austin. Solid industry with big name tech companies like Dell and IBM, being the state capital (see Indianapolis), as well as home to the University of Texas makes Austin an uber-progressive city. The inner cities housing infrastructure is new and highly coveted. Austin retains many college grads where other college towns typically lose their graduates to other cities.

The three cities in Texas: Dallas/Ft Worth, Houston, and Austin.
While each city has their upsides as far as industry and the such, there is one main reason why three cities from Texas made this list that the article failed to identify.
There is a lending law in the Lone Star state that prohibits anyone from taking cash out of their home in excess on 80% of it’s appraised value. You can buy property at (up to) 100% of it’s purchase price, but you cannot cash-out anything above 80%. This law has effectively prevented consumers from using their house as an ATM, thus repressing the artificial appreciation that has stung places like California so hard.
You can get alot of house for your money in Texas, and land too.

This is a law that should be looked at real hard by other states in the Union. It’s a simple and effective measure to countering irrational personal finance decisions and keeps home values in relative check.

There are many other cities that should have made the list, but 10 was a good number. In any case, I don’t see cities like Montgomery, Mobile, Memphis, and St Louis as the next great places to live, though for investors looking to make some nice acquisitions and gains, all of the above markets seem ready to put the days of a housing recession behind them.

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10 Cities that are Prime for Real Estate Investment