Thursday, February 5, 2009

Real Estate Update

Its amazing to watch from the front lines what is happening in the real estate market right now. You hear about the massive losses the major banks are taking in the news everyday, but because most people are not in the real estate business they cannot see where these losses emerge from. (Anyone still left in this business is crazy, myself included)

In Charlotte for example the real estate market stayed strong for about two years longer than the rest of the country. This caused massive new land development to take place between 2006 and 2007. Thousands and thousands of acres were cleared across the city, the roads were put in, and the water and sewer was run underground.

The developers then went out with their fresh new parcels and marketed them to home builders across the city. The home builders poured into these developments eager to sell homes to oncoming home buyers.

Then a problem emerged in mid 2008. The buyers went away completely. The bottom dropped out of the market and was then clobbered by the news that the major bank employers of the area are going to become fractions of their former selves.

So the builders are now packing up their bags and leaving the neighborhoods. The developers are now stuck with the land which they are paying massive payments on every month. Developers and builders are folding across the city. Massive tracts of land and spec homes that were built on these projects are now going back to the banks.

This is the other side of the losses the banks are taking on that you don't hear about in the news. Most of these losses have not hit the balance sheets of the banks but are oncoming like a freight train. This is only the residential side of the business. The commercial sector has an oncoming nightmare approaching as retail and office buildings shut down across the country.

This is not only happening in Charlotte, but in just about every major city in the country, and in most cities it is much worse than it is here.

All these bad loans go back to the banks. Who now pays for these bad loans? The government.

That's why its amazing to watch it happen from both sides of the coin. The government is paying for all the losses on the front end with the developers and builders, and on the flip side, every new home owner coming into the market receives a home loan from Fannie Mae and Freddie Mac, which is also paid for by the government.

It is obvious that anyone buying a home right now is going to get destroyed, as the real estate market continues to collapse. All these bad loans will go back on the books of Fannie and Freddie to be socialized by the public.

The losses of Fannie/Freddie and the investment banks are paid for by treasuries issued by the government and sold to foreign countries around the world. January saw the worst decline for any year on record in treasury bonds, meaning the appetite for this debt is fading fast. Will this trend continue? I believe it will, and it will be the biggest story of 2009.

Wednesday, February 4, 2009

A Year Later

Its unbelievable how much this world has changed in twelve months.

Last February we lived in a world where no major investment bank had failed and many were still believed to be solid businesses and excellent long term investments.

Last February Bank of America was trading at $40 a share, and Wachovia was trading at $35 per share. These are two of the largest employers in the city I currently live; Charlotte, NC. People I know here own a tremendous amount of stock in both companies.

Today both stocks trade for around $5 per share. The value of both of these stocks would currently be $0, if not for the life support they are currently on from the Federal government. They are zombie banks being kept alive to protect a financial meltdown in the derivatives market.

The people I talk to are shocked to this day at the amount these stocks have fallen. Many of them have lost a tremendous amount of their retirement money based on the fall in the share prices.

Ironically, I look at what has happened over the past 12 months with Bank of America and Wachovia as exactly what is about to happen with our country as a whole.

A bank's value is represented by its stock price. Its stock price is determined by supply and demand in the free market. People believed in the long term value of these two banks stocks only 1 year ago, thus creating prices around $40 per share. Their portfolio was not much worse than it is today, the pubilc just mistakenly believed in its value.

The value of a country is represented by the strength of its currency. Its currency value is determined by supply and demand in the free market. People today believe in the long term value of our currency. Why? Because today it is in strong demand.

I remember getting laughed at last year when I told people that I thought the investment bank's share prices would plunge in value. That they would be worthless.

I get the same reaction today when I talk about the dollar. People think it is a ridiculous concept to say that our currency is going to plunge in value. Why? Because today it is in strong demand. I believe that will change in the next 24 months.

Many of these people I speak to had 40-50% of their retirement in Bank of America or Wachovia stock. What percentage of American's wealth do they keep in dollars? What protection do they have if the perception of our currency changes in the mind of investors around the world?