Let's face it.

While the economy tanks and our home values fall further and further, all we (as the American people) do is point fingers. The evil predatory lenders? Sure. The Washington bureaucrats who pumped artificial dollars into the credit market? Absolutely. The realtors and other real estate professional who coaxed the innocent buyers into properties with the false sense of "neverending real estate price increase"? You betcha.

But let's face the truth. No one put a gun to the buyer's head and asked him/her to sign on the dotted line. Whatever happened to "caveat emptor"? Let buyer beware!

Truth and matter is that if there is STILL a real estate boom going on and there is no sub-prime mortgages (i.e. risky mortgages for risky borrowers), the politicians would be bitchin' and moanin' about how poor people do not have the same equal opportunity and how this must be changed.

Let's face the reality:

1. Politicians love to talk smack (i.e. complain a lot) because it makes them look like they actually care about the little people that would re-elect them, not to mention complaining is the #1 PR tactics that gets TV airtime.
   
2. Poor people ARE credit risks because they are not financially capable of repaying large loans. For example, everyone has a lazy irresponsible cousin that's always asking you for money. How come you don't lend that cousin you money? And even if you did, do you charge him generous low interest rates or high rates with short term limit?
3. Encouraging bad behavior is not the best way to solve it. Bailing out homeowners is NOT the way to go about solving this problem. The problem we have now is more about the American mentality as much as it is a financial problem. Even a well-respected news company like SFGate is encouraging people to walk away from their homes if they're underwater.

What we need to do is, quite frankly, let people burn. Why tax good people to bail out those few who made the system crash? What about future real estate busts? What about big business failures? Where do we draw the line?

What's more important is the aggregate "credit score" of US as a nation. China and other countries lent us money in form of ownership of treasuries and bonds. Our credit score "dinged" in these foreign investors' point of view, which means no more line of credit, no more lending, no nada.

In the boom times, everyone thinks the prices have nowhere to go but up. So everyone gets greedy, all the way from the end buyer of the CMOs and CMBs, to the lenders/mortgage brokers, to the realtors, to the home buyers, etc etc. But now there's a huge flame burning, and all the rats have left the jungle. Instead of trying to keep old, stale shrubs and weed in the jungle, let them burn and clear the way for the new and improved generation.

It's time to plant new seeds.

Basic conditions that led to the bubble

- government incentive to increase home ownership

- declining interest / declining savings rate

- increased foreign ownership of US treasuries

- declining spending and GDP

Excellent summary.

Regardless, I would argue that the current state of economy is way more resilient and robust than ever in history. Even with the current level of hysteria in the market, the current unemployment rate is still very low relative from the historical perspective.

What most of these news articles and "professionals" tend to forget is that the US population has GROWN, so one cannot compare the Great Depression to the current level of economic recession. Why? Now, the US population is well over 300 MILLION. Percentage is a relative measure, and so are these numbers in these "professional" reports.

Yeap, there are a lot of Chicken Littles out there, screaming blood and doom. Instead, why not look on the positive side? 8% unemployment means that the 92% of the working force have jobs!

This is historical low. In fact, this level has not been around since 2003:

Here's a little trivia. What interest rate is this referring to? Mortgage rates? Credit card rates? LIBOR? WSJ prime rate? 

In fact, none of the above. When the Federal Reserve changes "the interest rate", it's actually referring to the federal funds rate.

Banks, just like people, sometimes need to borrow because the government requires that each bank maintain a certain level of cash in its reserve in case of excess withdrawal from its customers. Of course, no one can predict how much people will deposit or withdraw, so this level is usually off. In that case, banks borrow/lend to each other in order to maintain this regulatory limit. The interest rate that the banks can charge each other is determined by the federal funds rate.

So how does this affect us as real estate investors? Very simple: the same way that a retailer's costs are offset to the consumer. The higher the cost of business, the higher the cost that the end consumer pays.

If I borrow at 5% from John, I have to charge at least 6% when I lend to Peter. If, on the other hand, Steve offers to lend me at 4%, guess what? Peter can borrow at 5% instead.

Investors, now is the time to move your butt and get busy. Once the liquidity crisis is over and real estate market bottoms out, it's going to be a buffet style feast time!

According to the Time Magazine:

Goldman Sachs reportedly plans to cut 10%, or 3,250 workers, from its payrolls. Barclay's, too, is expected to eliminate 3,000 jobs from the former investment banking division of Lehman Brothers, which it acquired in September. And Merrill Lynch's John Thain recently said he expects thousands of job cuts in the wake of his firm's acquisition. All told, Hintz expects Wall Street employment to fall by 25%, which could mean a loss of 43,250 jobs in New York City alone, and over 200,000 jobs nationwide, by the end of 2009.

Wow. This real estate subprime mess has FAR greater effect than anyone would have ever thought. I bet the financial genies like Alan Greenspan would have never guessed this would be .. wel, this bad.

In my previous post about the relationship between wall street and, well, the rest of America, anyone can see that the insurance industry along with the lending industry are the two biggest drivers in the American capitalist economy. When these drivers take a nap, the whole world economy comes to a halt.

What is more interesting is the potential level of damage that this can have on local areas that are heavily dependent on construction as major source of employment. Las Vegas, for example, has 16% of its total employ-ble workforce dedicated to the construction industry.

Math is very simple. No loan = no mortgage = no new housing starts = no construction. Unfortunately, most of the US is close to Las Vegas when it comes to employment profile.

I hate being the Chicken Little nor am I the economic Nostradamus, but heck, i think the next 3-5 years would be an awesome time to see what happens to the global economy.

If you are coming, definitely drop me a private message and let me know.

According to Forbes.com, Stephen Rotella

became the President and Chief Operating Officer of Washington Mutual in 2005 and became a member of the Executive Committee at that time. He is responsible for overseeing the Company's retail, home loans, credit card and commercial lines of business, the technology group and marketing.

His house is listed at $6.25m for 7,430 sq. ft house in prime Seattle, WA area. Not certain who the lender on the house is, but he is foreclosing, according to the 360Digest.com posting. Interesting enough, Zillow Zestimate is at only $4.4m. Mr.Rotella, now you know how the rest of the people feel in the real estate market.

Of course, even if WaMu got bought for pennies on the dollar and blood is spilt all over Wall Street and even Main Street, Mr.Rotella managed to get a $19m cash severance from WaMu's parent company JP Morgan and Chase Co.

Interesting story, yet i find this a little disturbing.

I just wonder which one of Mr.Rotella's WaMu employees had the nerve to foreclose on this boss' house.

Not just real estate, but even big internet companies serving the real estate market like Zillow are affected.

But have no fear! RedMol.com is here to stay! ;)

Lehman Brothers and this $700 billion bailout might not have seen its worst yet.

The financial crisis is not over. If things were back to normal, banks would be lending to each other and to businesses and individuals. But measures of bank lending risk suggest fear is 12 times as high as it would be in normal times. The reason? Banks know more than you do about what's wrong. And they're not talking about it because they don't want you to withdraw your deposits and sell your stock. What they know is that on October 21st, some of the biggest players on Wall Street could be required to come up with $400 billion that some may not be able to pay.

Apparently, the SEC gave Lehman Brothers"infinite" amount of debt , and along with it, a ton of insurance to protect against loss of that infinite debt. Oct 21st is the day that the insurance companies will be required to pay the beneficiaries of this insurance in case of default, which, as the main stream media points out over and over and over again, happened.

$400B is quite a large amount of sum, considering that the bailout is set at $750B (with LOTS of political pork attached to it, thus the financial institution bailout is actually less).

Next week should be an interesting week for the stock market.

Terrell Owens and Emmitt Smith are the two prominent (one current, one ex-) members of Dallas Cowboys that are active in the real estate business. "TO" is more of an investors, while Emmitt Smith plays the role of a developer in the Dallas/Ft. Worth real estate market. Though T.O might seem like a brash young player in the professional athlete business, he seems to be quite savvy in knowing when to buy and keeping his assets confidential:

"I don't want to talk about my stuff," Owens said, when asked why he decided to invest in Dallas real estate.

But what's more impressive is Mr.Smith, who:

In his first deal, Smith helped the firm sign Mervyn's, a California-based department store chain, to anchor a $45 million, 230,000-square-foot project in Phoenix, where he last played for the Cardinals two seasons ago.

With access to $50 million in capital, Smith has several other projects in the works. He has a letter of intent to develop a 65-acre site in a densely populated yet underserved area near northwest Fort Worth (it was formerly a college operated by a Masonic lodge), and he's haggling over another potential project in southeast Fort Worth.

On one of the sites, Smith plans to build a complex with as much as 600,000 square feet of retail space, more than double the size of the Phoenix property. "There's a huge need for top-quality retail in these areas, and I understand how the deals are cut," Smith said before lunch. "I'm not an engineer. I'm not a contractor. And I'm still learning the jargon. But I understand deals, and the only way to grow is to be in the middle of the deals."

Watch out, Donald Trump. This guy knows how to tackle in the football field AND on the negotiation table.