Texas Taxes

The Southlake Times Star is reporting Texas has ninth highest property tax burden.

A new national study shows Texas has the ninth highest property taxes in the nation as a percentage of personal income.

For much too long, Texans angry over their property taxes have been dismissed as selfish misers. The conventional wisdom has been that Texas is one of the nation’s lowest tax states and complainers should just be glad they don’t live in Massachusetts. However, the Tax Foundation’s national report on property taxes released earlier this month shows Texas homeowners are being drowned in rising property taxes, forcing some to flee their homes for the safer ground of lower appraised property.

The report documents how property taxes have skyrocketed relative to personal incomes. From 1999 to 2005, property tax appraisals in Texas went up 75 percent, while personal incomes rose only 35 percent. This is the result of rising property appraisals, on which state and local governments have been cashing in rather than rolling back tax rates accordingly. No wonder many Texans are struggling to simply pay their property tax bill.

For example, residents of Houston endure the highest effective property tax rate of any major city in the nation at $2.99 per $100 valuation. While other cities had a much higher statutory rate, they had significant exemptions. As a result, Houston's effective property tax rate is nearly three times that of New York City and more than five times that of Denver.

In addition, Fort Bend, Williamson, and Tarrant counties made the Tax Foundation's dubious list of the 20 counties with the highest median property taxes paid as a percentage of the median home value. The other 20 counties were in New York, New Jersey, Pennsylvania, and Illinois.

Relief is already on the way. Legislation passed in the last special session will reduce the current maximum school property tax rate of $1.50 to $1.33 in 2006 and $1.00 in 2007. Just as importantly, starting in 2007, rollback elections will automatically be required when appraisal creep effectively produces a school property tax increase of more than four cents per $100 valuation.

Now, Gov. Perry’s panel is preparing to unveil recommendations that will go further in relieving property taxes. It’s widely rumored the proposal will include finally placing meaningful restraints on the de facto property tax increases that can be levied by local governments through skyrocketing appraisals.

In addition to adopting the panel’s recommendations for reforming appraisals, the $15 billion surplus lawmakers will have in-hand this session should be used to provide an additional 25-cent tax rate reduction. With a stroke of the pen, Texas taxpayers can be given needed relief.

Other Texas Taxes

Property taxes may be high but Bankrate.com shows Texas has no personal income taxes. Texas does have a huge list of other things that are taxed as shown on this list of Texas Taxes. One of the most interesting ones to me was the Controlled Substances Tax on Marijuana.



Somehow I have a feeling they are not collecting taxes on Marijuana to the full extent of the law. Also on the list of taxes are things like gasoline, coin operated machines, phones, fireworks, hotels, oysters, oil wells, boats, batteries, utilities, cement production, mixed beverages, etc, etc, and sales taxes at the following rate.



Most items on the list amounts to a tax on consumption. If you buy oysters or gasoline, batteries or boats, you are going to get taxed on it in addition to state sales taxes, city sales taxes, and local sales taxes.

Winners and Losers

Those in high income brackets get a break on income taxes, and it seems that property owners take it through the nose regardless of income bracket. Here is the key stat "From 1999 to 2005, property tax appraisals in Texas went up 75 percent, while personal incomes rose only 35 percent." Property taxes went up far faster than personal incomes. Gasoline prices went up faster than incomes, housing prices went up faster than incomes, and for the masses nearly everything went up faster than incomes. This is of course no reflected in a savings rate that is negative for 18 consecutive months.

A Taxing Conundrum

It seems we have a bit of a conundrum here, actually many of them. How does the state lower taxes and maintain services? The problems will vary state by state and taxing body by taxing body.

Heaven help those who have reassessments every 3 or 4 years but whose last assessment happened in June of 2005. Property values are declining but rates will be set based on the tip top of the bubble. That last sentence looks at things from the point of view of the property owner. From the point of view of the taxing bodies, how are they going to cope with falling property values if budgets were set based on the common belief that property values only go up?

The easy answer (and correct answer) is that it is easy to cut spending simply by cutting waste. I happen to agree with that answer. If I had my way I would slash military spending, pull out of Iraq, eliminate Fannie Mae, eliminate the Dept of Homeland Security since every one of those is an unnecessary waste.

Balance the Budget

Yes I realize I just switched gears from state to federal but here is your chance to balance the budget. This web site gives you the opportunity to Balance the Federal Budget. Just use the drop-down menus and pick your spending levels.

I did it almost exactly on the first crack.
I cut Military spending 50%
I cut the war in Iraq 70%
I cut agriculture 70%
I cut commerce and housing 70%
I cut corporate tax breaks 40%
I cut housing tax benefits 40%

Budget Totals
Old budget was $3747.36 billion
($2672.527 billion in spending, $1074.833 billion in tax expenditures and cuts).

New budget is $3333.42 billion
($2348.21 billion in spending, $985.21 billion in tax expenditures and cuts).
You have cut the deficit by $413.94 billion.
Your new deficit is $-12.93 billion.

Notice I only cut 6 programs. There are dozens. Furthermore, the programs I cut (farming and military) probably do not affect that many people. It is amazingly easy to balance the budget (in theory). I did not cut anything 100% nor did I cut many programs.

Back to the State

The Boston Globe is reporting Property tax bills rising across state.

Average hike is 5.3%; Hub much higher.
Massachusetts property owners will again see substantial increases in their property tax bills this year, even as home sales have cooled.

The average tax bill for a single-family home will rise to $4,003 in 2007, 5.3 percent more than last year and up 49 percent from the 2000 tax bills, according to a Globe examination of 298 of the state's 351 cities and towns. Most of the new tax rates go into effect in bills that are going out this week .

Homeowners in Boston, Fall River, and Wayland will see double-digit percentage increases this year, while several communities near Boston will see average increases of 3.6 percent or less, including Brookline, Lincoln, Newton, Salem, and Somerville.

Of the 298 cities and towns examined, the Globe found that 281 of them are increasing their average tax bills in 2007. The increase continues a trend of recent years, when property taxes rose by about 5 percent annually. The biggest recent increase was in 2002, when taxes rose by 6.7 percent.

The average tax bill on a single-family home in Boston will jump 12.3 percent to $3,093 in 2007. That's on top of a 9.6 percent jump between 2005 and 2006.

Communities set property values annually, but every third year the assessing departments use a more comprehensive process that typically includes physical inspections of some homes and takes into account physical improvements.

Tax bills are rising as home values in many areas are declining; this year's assessments reflect values as of Jan. 1, 2006, and were calculated based on 2005 activity, when the real estate market was much more active. Since then, sales of single-family homes in Massachusetts have fallen dramatically.

Governor-elect Deval Patrick made the state's tax situation a major campaign theme, saying he would find ways to help cities and towns reduce property taxes by providing more local aid and allowing communities to raise revenue through such means as local meals taxes.

Great. Let's tax restaurant owners to relieve home owners. Yeah, that's the ticket. Unlike the Federal Government, State Governments require a balanced budget. Heading into a recession it is going to be a huge struggle for people to pay rising property taxes when unemployment rises (and it will), when global wage arbitrage starts affecting more white collar workers (and it will), and when retail stores stop expanding (and they will). Cutting services or raising meal taxes in response will simply put more people out of work.

This post originally appeared in WhiskeyAndGunpowder.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Kiss Secured Funding Goodbye

Kiss Another One Goodbye
Secured Funding "The Home Equity Funding Specialist" Closes Shop

Dear Valued Customers,

Based upon market conditions and limited product availability, we are ceasing wholesale operations. We have stopped accepting new applications, and will have until the 12th of January to fund out the pipeline. We appreciate your patience as we undergo this transition.

Thank you for your support

Transition?
Transition to what?
Oblivion?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Reduced in Key West

Following is another update on Key West from a friend on the Motley FOOL posting under the name "FreeThinkerKW". He lives and rents in Key West. Previous updates were Shell Shocked in Key West in November 2006 and A Lit Fuse in Key West in December 2006. Following is the January 2007 update from FreeThinkerKW.

The Keys are a chain of islands connected by over 125 miles of bridges and roads to the mainland of Florida. They are divided into the Upper Keys, Middle Keys, and the Lower Keys of which Key West is the endpoint.

Last week in all the Keys only 13 properties traded hands, two of which were parcels of land.

In the Lower Keys, we are now approaching 1700 homes on the market. Last week, zero homes sold in Key West. That is a record breaking 3 out of 4 weeks no home has sold on our island.

Last weekend, real estate agents tooted their horns for 2006. One office in particular with 13 sales for all of 2006 has 9 sales agents in the photos. Of those 13 sales, 10 were for less than $500,000. I am looking over these sales and I'm wondering, "How the heck do those 9 agents hope to live off 13 sales for an entire company?"

Next, we are seeing "Just Sold" sashes over pictures of houses that a realtor is trumpeting in adds in the paper. A small bit of diligence on my part found that most of these "Just Sold" ads are trumpeting sales from months ago. This is the feeble attempt of Key West realtors to make it seem as though real estate is actually selling down here. Yet the "Good Deeds" printed every Friday are telling the real story. [Mish note: "Good Deeds" is a list of all home sales in the Key West Citizen.]

Last year's number one cliche in Key West was "For Sale", this year's cliche will be "Reduced". You just cannot imagine what is happening now in Key West in an attempt to move these lovely homes.

The panic is settling in.

Last year, home prices dropped in all the Keys. The same thing is happening all over Florida. However, the NAR down here has played footloose and fancy free with its statistics and has done an admirable job pushing the lie that housing prices actually went up in 2006 down in Florida. Oh man, talk about the BIG LIE. We've got brand new condos with signs drapped over the balconies saying, "Never Lived In, Resale Lower than Original Sale Price."

When a 22 home auction garners no minimum bids, and when those 22 homes were already being offered at lower than appraised value, then you know the NAR is full of caca.

No longer do you list a house in the morning for $500,000 and by sunset see it sold to the highest bidder for $550,000. Those days died 18 months ago.

Despite the new reality, the local NAR is coming up with ways to finagle statistics and trumpet the fact that median sale price hasn't dropped. When you talk this kind of craziness to a local, we all laugh at the absurdity of the lies being told to lure naive Northerners to buy. The interesting thing is now even some of the Northerners are not being buffaloed. They fly into our airport, they rent bicycles, they ride our city streets, and like a flip book cartoon they see, "Just reduced, just reduced, just reduced."

If anybody tells you Florida Real Estate did not go down in price last year, just smile, and walk away from that person. They are delusional to the max. They don't live here, or they are on drugs, or they are part of the Real Estate cartel.

What is happening statewide is a rout in real estate. Prices are falling like chum through the ocean with the Realtor fishermen hoping to land a big one before darkness sets in. Yet somehow, David Lereah is keeping a straight face and finding one shaky statistic after another to show real estate is not going down in price in Florida. I just don't understand how someone can lie for a living.

Thanks FreeThinker. Keep those updates coming.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Gold, Silver, Crude, Copper Update

The question of the day is "What are commodity charts suggesting?"
Let's take a look starting with the commodities index itself.

Click on any chart for a better view.

Monthly $CRB chart



The monthly $CRB chart is busted. It is right now on the 50MA that I believe is not likely to hold. A drop to the 200MA near 250 just might be in the cards.

$CRB Weekly Chart



Trendlines do not get much easier to follow than that. This one was right along the 50 MA for over 3 years. The trendline on crude is very similar. Given the weight in energies, that should be expected. This can easily be either an A-B-C correction lower or the start of something more serious. For now, it looks ominous.

Monthly Crude



This is another clear trendline.
It has also busted.
Very few thought we would ever see crude at $40 again.
I thought $45-50 when it was near $80.
That does not seem so outrageous now and $40 is clearly not out of the question.

Weekly Crude



Crude weekly is another busted chart.
Support zones are as shown.

Copper Monthly



Dr. Copper seems to have a date with 220.
If it goes no further the monthly trendline will hold.

Copper Weekly



The weekly chart of copper suggests a bounce off 220 as well.
If that fails to hold, the monthly chart will be busted as well.

Silver Monthly



Silver monthly is still intact.
Technically this chart can go either way but I suspect a breakdown as opposed to a breakout.

Silver Weekly



Silver is still holding the weekly trendline. It is now do or die with the 200MA long in the rear view mirror. A move there is not out of the question but as for now I suspect $10 will hold.

Gold Monthly



For all the consternation over gold, the monthly trendline is nowhere close to being in jeopardy but a drop to $500 is not out of the question.

Gold Weekly



Weekly gold has broken its trendline. But unlike crude or copper or the $CRB this pattern does not lend to possible impulsive decline interpretations. Also (for now anyway) the 50 MA is still holding unlike $CRB, copper, or crude.

In light of the above I still favor junior miners in gold and silver over other commodity plays. Several junior exploration stocks had a decent day today including MRB (nice bounce off the 50 EMA), GBN (bounce off the 200 EMA), and DLKM (strong bounce off support in what appears to be a bull flag forming).

If commodity prices hold, the value remains in juniors. If commodity prices collapse (and they could), bulls could be in trouble. Given my beliefs about deflation and gold, for safety preferences I prefer gold over silver and energy. For bigger swings both ways, silver may be more attractive to others. Given the situation in Iraq and Iran, as well as a likely US recession, energy is a huge wildcard. Does anyone really know what Bush will do? Because of the collapse in housing I have not been enthusiastic about copper for a long time.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Significant Shifts In Psychology

I find myself coming back to the same quote from an Interview with Paul Kasriel

Mish: How does inflation start and end?
Kasriel: Inflation starts with expansion of money and credit.
Inflation ends when the central bank is no longer able or willing to extend credit and/or when consumers and businesses are no longer willing to borrow because further expansion and /or speculation no longer makes any economic sense.

The two key words in the above paragraph are "able and willing".

Loan Standards

With that in mind please consider Lenders begin to tighten loan standards.

Sunday, December 31, 2006
As more homeowners skip out or fall behind on their mortgage payments, some lenders have started tightening their underwriting standards.

That might not be enough to save them from losses. Mortgage lenders, such as Countrywide Financial Corp., Downey Financial Corp. and FirstFed Financial Corp., try to avoid risky "subprime" borrowers and have become more cautious about whom they lend to in general. Also, they're setting aside more reserves for potential defaults. But the increasing popularity of second mortgages could end up undermining their efforts.

"Mortgages that have a second mortgage behind them run a far higher risk of default," says Zach Gast, a financial analyst in Rockville, Md., for the Center for Financial Research & Analysis, an independent research group. Gast says borrowers' debt-to-income levels are similar for all mortgages, regardless of whether payments are late or current, suggesting the second mortgages are the main culprit tipping borrowers into delinquency or default.

Fannie Mae

On December 20th Fannie Mae announced Selling and Servicing Amendments the most significant of which was "requiring borrowers to be qualified at a fully-indexed rate that assumes a fully-amortizing repayment schedule."

The Washington Post reported on Janunary 2nd States Swift to Warn Mortgage Lenders.

Nineteen states and the District of Columbia have moved quickly to warn state-regulated lenders about the hazards to consumers from nontraditional mortgages.

Tens of thousands of state-licensed lenders and mortgage brokers are affected by the advisories, also known as a "guidance." Such loans include interest-only mortgages and other arrangements where the borrower cuts monthly costs by paying back less than full interest and principal.

The states are following closely behind federal banking regulators, who issued a sternly worded advisory in late September to the lenders they supervise, telling them they should not make these loans to borrowers who may be unable to repay them. Within 24 hours of the federal guidance's release, six states had issued similar warnings to their own lenders, a notable flurry of activity in a field known for its slow-moving bureaucracies.

Significant Shift In Lending Standards

This is an initial but very significant shift in lending psychology and it does not matter whether the 800 lb. gorilla (Fannie Mae) is leading or following. What we clearly see is a change in trend at the national and state levels. Prior to this shift recall that down payments were gradually lowered to zero (and in fact to a negative 25% in some cases via 125% mortgages) and credit standards were lowered and lowered and lowered again. This is the first significant shift in lending psychology that we have seen in ages and it is going to dry up mortgage lending in its wake.

Subprime Lending

Immediately prior to this shift we saw three subprime lenders blow up. I talked about Ownit Mortgage in Demise Come Quickly, the Denver Post talked about Sebring Capital Partners in Mortgage bank abruptly closes, and the Seattle Times reported The party's over at Kirkland mortgage company. Those are all recent (December 2006) happenings.

The Wall Street Journal is reporting HSBC Sours on American Loans.

HSBC Holdings PLC is learning that the U.S. lending business may not be so easy.

The London bank is facing rising problems with its U.S. consumer-loans portfolio nearly four years after its acquisition of Household International Inc., a U.S. lender that specialized in subprime loans, or loans to people with spotty credit records. The acquisition has been well-received because it raised HSBC's U.S. profit, complementing its huge Europe and Asia businesses.

Last month, the U.S. unit said a portfolio of consumer loans it acquired recently had quickly soured. This month, HSBC underscored the loan situation was worsening. That has led ...
[subscription required for rest of article]

To kick off the new year Reuters is reporting Mortgage Lenders Network stops loans, sets layoffs.

NEW YORK, Jan 2 (Reuters) - Mortgage Lenders Network USA, a large U.S. subprime lender, said it has stopped funding loans and accepting applications for loans, citing deteriorating conditions in the mortgage market, and has temporarily laid off about 80 percent of its 1,800 employees.

The retrenchment is the latest sign of stress among subprime lenders, which make higher-cost loans to people with weaker credit histories. It comes less than a week after similar-sized rival Ownit Mortgage Solutions Inc. filed for Chapter 11 bankruptcy protection.

Unlike most subprime rivals, Mortgage Lenders increased its lending throughout 2006. It made $3.31 billion of subprime loans in the third quarter, ranking 15th nationwide, according to data from National Mortgage News.

The firm, however, said wholesale market conditions have "deteriorated dramatically" in the last two months. Chief Executive Mitchell Heffernan said wholesale broker originations will stop until credit quality and margins return to "acceptable levels." The firm said it plans to maintain its $17.8 billion servicing portfolio.

David Olson, president of Wholesale Access, which tracks the mortgage industry, said Mortgage Lenders' retrenchment was unsurprising in light of subprime lenders' struggles. "Profits are way down, and margins are razor-thin or even negative," he said.

Foreclosures

There is a clear reason for this attitude shift given that a recent Study Predicts Foreclosure for 1 in 5 Subprime Loans.

About one in five subprime mortgages made in the last two years are likely to go into foreclosure, according to a report released yesterday, ending the dream of homeownership for millions of Americans.

At that rate, about 1.1 million homeowners who took out subprime loans in the last two years will lose their houses in the next few years, the report said. The foreclosures will cost those homeowners an estimated $74.6 billion, primarily in equity.

The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody’s Economy.com. Researchers examined more than six million mortgages made from 1998 until the third quarter of 2006; the report is the first nationwide study on the performance of subprime mortgages. It includes projected foreclosure data for all major metropolitan statistical areas. The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C.

The report offers a somber assessment of loans that had helped millions of Americans with blemished credit attain homeownership. About 2.2 million borrowers who took subprime loans from 1998 to 2006 are likely to lose their homes.

Insurance Attitudes

The Sun Journal is reporting It may get harder and harder to get home insurance.

The gist of the above article is that Allstate and State Farm have both moved out of coastal areas but some owners do not seem concerned. What follows now are my comments. Although some owners may be unconcerned (for now), for those on the margin, this is a big deal. Regardless of why it is happening, the inability to get insurance at a reasonable rate can only do one thing to property values.

Here is the pertinent quote from the article: "It’s kind of hard to figure out right now what other insurance companies are going to do. The state sets the rate, and I don’t see a large increase in premiums, but it might be more difficult to find insurance."

Given that corporations are becoming more risk adverse, as long as the "state sets the rate" it is going to be increasingly difficult to find insurance. That is to the detriment of property owners in the riskiest areas.

Is Downsizing the Next Trend?

The LA Times is reporting What was supersized may one day be downsized.

The size of the average American house more than doubled between 1950 and 1999, according to U.S. Census Bureau statistics. From 1982 to 2004, the typical new single-family house grew about 40% from 1,690 square feet to 2,366 square feet. In the face of these increases, however, the size of the average American household has shrunk from 3.3 to 2.6 people.

This seeming paradox betrays the trend toward ever-larger houses for what it is: a real estate fashion, and an irrational one at that. And like all fashions, it's doomed to reverse eventually. ...

Today's McMansions, with their overbearing scale and frenetic ornamentation, are a pretty close match for Victorian excess.

And after their inevitable fall from grace, time won't be treating them any better.

We have yet to see a shift in attitude on home sizes, but as boomers retire does anyone doubt it is coming?

Behavioral Psychology

I discussed other aspects of psychology in How Will Deflation Play Out?

Behavioral Psychology

• There will be shift away from consumption to saving
• There will be a shift away from risky assets to less risky assets (and lower returns)
• There will be changes in retirement plans
• There will be a shift in mentality from "have to have it now" towards some semblance of planning.

Those are good things actually and they will allow for replenishment of the pool of real savings that has now been completely exhausted.

In response to the above, Robert Campbell chimed in with "There will be willingness of consumers to pay off their existing debt as opposed to taking on more new debt."

Bingo. I certainly agree with Campbell and we can also add a shift towards downsizing to the list as well. However, I do need to correct a statement that I made in that article. I said "Deflation will cause a pronounced shift in consumer behavior and investment psychology." That sentence should actually be reversed. It will primarily be changes in psychology that fuel deflation as opposed to the other way around.

As evidence please remember summer of 2005 when investors were camping out overnight and entering lotteries just to buy Florida condos. Prices were rising every month leading up to that point. What happened was an abrupt change in investor psychology. It was only months later that condo prices declined substantially. Thus it was not price changes that caused changing attitudes. It was changing attitudes that led to declining demands for mortgage credit which in turn was followed by price declines. Since then we have seen dramatic declines in the prices of condos even as long term mortgage rates were essentially unchanged.

Truck Tonnage

One of the arguments that inflationists have long posed is as follows: Consumers will always be willing to borrow and banks will always be willing to lend. We now have the second crack (one from each side) that suggests both ideas may be false. Here is a third factor to consider.

The American Trucking Association (ATA) is reporting Truck Tonnage Index Plummeted 3.6 percent in November.

Wednesday, Dec. 27, 2006
The American Trucking Associations’ advanced seasonally adjusted for-hire Truck Tonnage Index plunged 3.6 percent in November after falling 1.9 percent in October.



“November 2006 marked the single worst month for for-hire truck tonnage since the last recession,” said ATA Chief Economist Bob Costello. “Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear. The most troubling number is the 8.8 percent contraction from November 2005, despite the fact that year-over-year comparisons are difficult due to the very robust volumes during the same month last year. One month certainly doesn’t make a trend, but if we continue to see year-over-year reductions of similar magnitudes in the next couple of months, it could indicate a greater economic slowdown than economists are projecting at this point.”

Trucking serves as a barometer of the U.S. economy because it represents nearly 70 percent of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods.

Home Depot

Trucking is just further confirmation of other sudden abrupt trend changes most notably at Home Depot where Sales Falloff Kills Staff Increase Plan.

November 30, 2006 -- Home Depot abruptly shelved a much-touted plan to improve customer service by hiring more store-level employees - just a month after rolling it out. The about-face appears to be the result of a sales slowdown that is far more severe than the company anticipated, sources said. Rather than hiring additional employees, all stores - even those $40-million-plus high-volume locations - were told to cut staff hours by 200 per week because of falling sales.

The reason? Sales were falling short of internal projections, the result of a housing market that had stopped booming.

Will Printing Presses Stop Deflation?

Time and time again I am told that the Fed will "Print its way out of deflation". Except for a few diehard deflationists like me, that is the near universal opinion. Yet no inflationist that I am aware of has ever addressed shifts in psychology. No matter how hard Japan tried, the Japanese Central Bank could not get consumers to spend. The US is different we are told time and time again. Are we?

Six Questions

1. Can the Fed create jobs?
2. Can the Fed raise wages?
3. Can the Fed revive the housing bubble?
4. Can the Fed put money directly into consumer pockets?
5. Can the Fed reverse consumer psychology?
6. Is the Fed willing to cause hyperinflation?
   

Hopefully it is clear that the Fed can not create jobs or raise wages. History suggests that a reversal of a housing bubble takes a long time and this was no ordinary bubble but rather the largest on record in terms of prices to wages and prices to rent.

The answer to 4 is the Fed can not put money into consumer pockets thus the "helicopter drop" theory is a bluff at least as far as the Fed is concerned. Congress could "drop money" (or start job work programs or raise the minimum wage) but that leads to many other questions: 4a) Will they? 4b) To the right people? 4c) At a fast enough rate to matter? 4d) Without hurting the private sector in some other fashion? 4e) Would helicopter drop money IF offered lead to an expansion of credit and money faster than bankruptcies and debt repayments? 4f) Would banks stand for it?

Congress could also do something totally inane like pass something similar to the Smoot Hawley Tariff act which would increase the deflationary downturn just as it did in the great depression. With all those IF's in question number 4 above, inflationists sure have a tough row to hoe and they still have to face questions number 5 and 6 which I believe are both a resounding no.

Attitudes can only go so far before they reverse course. When consumers were camping out overnight to buy condos and knocking on strangers' doors and getting into bidding wars to buy houses, that trend was bound to reverse. With negative savings rates for 18 consecutive months that trend is bound to reverse. The belief that nothing can shatter US consumer spending habits will be the next bubble to burst. Given that consumer spending is 75% of the economy, a massive reversal in consumer and lending psychology spells trouble for the economy regardless of what the Fed does. That reversal is at hand.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

A Bubble In Risk

Bennet Sedacca, President of Atlantic Advisors LLC just sent out the following article that he graciously agreed to share. It was also posted earlier today on Minyanville. From Bennet:

I just got a good chuckle reading a Bloomberg article. Here are a couple of excerpts.

• Ukraine's largest poultry farmer, Myronivsky Hliboproduct, sold bonds for the first time, spurred by investor demand for higher yields. The company...raised $250 million to expand into beef, goose liver...at 10.25%...Moody's rates the securities B2.
• European bearing Corp in Moscow sold $150 million of 9.75% notes, its first offering to international bondholders.
• Treofan Holdings GmbH, a Raunheim, Germany-based maker of wrapping for cigarette packs sold 170 million euros of 11% bonds...boosting its ratio to more than 7 times earnings. The company probably will spend more than it earns in 2007, S & P says. The bonds have Caa ratings from Moody's and CCC+ from S & P and are trading at 101.4 cents on the euro.

Let me state here and now that this borders on lunacy, and along with the parabolic rise in emerging/developing markets, feels like too much money is chasing too few assets. After all, between M3 and foreign money, that’s $2 trillion a year in demand.

Prudence is again being penalized.

Oh by the way, according to Merrill Lynch, European junk bonds have narrowed by 14 HUNDRED BASIS POINTS to 2.35 above Treasuries.

Pardon moi???? You want me to buy what? Is this a joke or something?
It must be April’s Fools day…

According to Bloomberg, “nowhere have yields fallen more than for securities with the lowest credit ratings”. Bonds ranked Caa by Moody's and CCC by S&P (the category above default), pay 4.6 percentage points more than government securities, DOWN FROM 42 PERCENTAGE POINTS 5 YEARS AGO, Merrill says....

On top of this, REIT's now trade 250 basis points below historical yields relative to 10 year Treasuries.

The same goes for Utilities which are now yield an eye popping 3.2%, (please note sarcasm) and at 19 x earnings.

So much liquidity is being created that we are seeing a bubble develop in risk generally.
I guess I'll just have to miss this party. When it ends the hangover will be long....

Bennet Sedacca

Thanks Bennet, and not a day goes by that I wonder when it will end. There are some signs that psychology is changing in many places (more on that later tonight) but it still has not hit either the junk bond market or the stock market .... yet. Pension plans in particular seem more than willing to assume any risk.

Smack in the face Lennar Posting Quarterly Loss After Land Writedowns the California Public Employees' Retirement System ("CalPERS") picked up land that Lennar was dumping. Let's review what Lennar is saying:

Jan. 2 (Bloomberg) -- Lennar Corp., the fourth-largest U.S. homebuilder, had its first quarterly loss in at least a decade after it wrote down property investments and relinquished part of its stake in a company that controls 15,000 acres in southern California.

The loss in the fiscal fourth quarter was 88 cents to $1.28 a share after a pretax charge of as much as $500 million, Miami-based Lennar said today in a statement. Quarterly profit was $3.54 a share a year earlier.

"Market conditions continued to weaken during the fourth quarter and we have not yet seen tangible evidence of a market recovery," Chief Executive Officer Stuart Miller said in the statement.

Is land the deal of a lifetime now or was it the deal of a lifetime 10 years ago?
Consider this press release issued by Lennar: Lennar and LNR Expand Their Strategic LandSource Partnership to Include MacFarlane Partners' Venture and CalPERS.

MIAMI, Jan. 2 /PRNewswire-FirstCall/ -- Lennar Corporation (NYSE: LEN and LEN.B), one of the nation's largest homebuilders, and LNR Property Corporation ("LNR"), one of the nation's leading real estate, finance, management and development companies, announced today that they have reached an agreement to admit a new partner into their existing strategic joint venture, LandSource Communities Development LLC ("LandSource"). The new partner is MW Housing Partners, which is co-managed by MacFarlane Partners and includes the California Public Employees' Retirement System ("CalPERS").

The agreement also provides for a new non-recourse debt facility. In exchange for a 62% interest in LandSource, the MW Housing venture will contribute cash and property with a combined value of approximately $900 million. The property, which is part of an existing land bank relationship between MW Housing Partners and Lennar, is being contributed based on today's fair market value. Lennar will continue to have options to purchase those homesites at the market price at the time of the exercise.

"We are excited to be investing in such prime property in Los Angeles, a market that we have favored for its long-term growth prospects," said Victor B. MacFarlane, founder and managing principal of MacFarlane Partners. "This is a once-in-a-lifetime opportunity that few pension managers and investors have the resources and the capabilities to participate in thanks in large part to the flexibility and vision of our long time partner, CalPERS."

Exactly what sense does it make for pension plans to be picking up land being dumped by homebuilders right as one of the biggest bubbles ever is popping?

CalPERS must be thinking land prices only go up over the long haul. Someone must have forgotten to tell Japan that since Japanese land prices fell for 18 consecutive years. The hangover from this party will indeed be long.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Lennar Lays an Egg / Defective Homes Update from Morgan

Bloomberg is reporting Lennar to Post Quarterly Loss After Land Writedowns.

Jan. 2 (Bloomberg) -- Lennar Corp., the fourth-largest U.S. homebuilder, had its first quarterly loss in at least a decade after it wrote down property investments and relinquished part of its stake in a company that controls 15,000 acres in southern California.

The loss in the fiscal fourth quarter was 88 cents to $1.28 a share after a pretax charge of as much as $500 million, Miami-based Lennar said today in a statement. Quarterly profit was $3.54 a share a year earlier.

"Market conditions continued to weaken during the fourth quarter and we have not yet seen tangible evidence of a market recovery," Chief Executive Officer Stuart Miller said in the statement.

Lennar said it's taking the charge to write down land it doesn't intend to purchase. It's also writing off deposits and pre-acquisition costs for land it has under option.

Lennar will report fourth-quarter earnings on Jan. 17. In preliminary results released today, Lennar said new home orders slid 6 percent in the quarter ended Nov. 30 to 9,606 and declined 3 percent to 42,212 for fiscal 2006. The backlog of orders at Nov. 30 was valued at $4 billion, down from $6.9 billion a year earlier.

Fourth-quarter profit before the charges will be 70 cents to 75 cents a share and gross margins on home sales will be "materially lower" for the quarter and the fiscal year, Lennar said.

Lennar vs. Toll Brothers

Miller's statement "Market conditions continued to weaken during the fourth quarter and we have not yet seen tangible evidence of a market recovery" sure seems like a far cry from Robert Toll's Proclamation that things are dancing above the bottom:

"We've got an indication and it seems as though we are no longer bouncing along on the bottom as we had been in probably our most serious market, the northern Virginia, Maryland, DC suburbs and that we appear to be dancing a little bit above the bottom right now so who knows."

It will be interesting to see if Toll lays an egg in its next report as well. In the meantime inquiring minds just might be wondering about the expression "To Lay an Egg". Here goes:



History of Warnings at Lennar

CNNMoney is reporting Lennar warns on earnings.

Home builder sees no sign of market recovery, cuts fourth quarter earnings target again; write downs and asset revaluations will cause net loss.

The company says it now expects to earn between 70 to 75 cents a share in the fiscal fourth quarter, completed Nov. 30, excluding valuation adjustments and write-offs. Analysts surveyed by Briefing.com had forecast EPS of $1.07.

The company had already issued a warnings on the period in late September, when it said it expected to earn $1.00 to $1.30, rather than the $1.60 a share that was the forecast at that time.

Including those value adjustments and write-offs, Lennar said it will post a net loss per share between 88 cents to $1.28, compared to the net income of $3.54 a share a year earlier.

"While we are hopeful that low interest rates, strong employment and a healthy economy will help stimulate a recovery in 2007, we have continued to focus on strengthening our balance sheet by delivering our backlog, selling inventory aggressively and renegotiating our land positions," said a statement from CEO Stuart Miller.

Lennar could not even meet its previously lowered guidance of $1.00-$1.30. Ignoring writeoffs, Lennar only expects to post .70-.75 for the quarter. There is no realistic way to spin this as positive but that did not stop Lennar from trying.

Strategic Partnership

Consider this press release issued today by Lennar: Lennar and LNR Expand Their Strategic LandSource Partnership to Include MacFarlane Partners' Venture and CalPERS.

MIAMI, Jan. 2 /PRNewswire-FirstCall/ -- Lennar Corporation (NYSE: LEN and LEN.B), one of the nation's largest homebuilders, and LNR Property Corporation ("LNR"), one of the nation's leading real estate, finance, management and development companies, announced today that they have reached an agreement to admit a new partner into their existing strategic joint venture, LandSource Communities Development LLC ("LandSource"). The new partner is MW Housing Partners, which is co-managed by MacFarlane Partners and includes the California Public Employees' Retirement System ("CalPERS").

As of July 1, 2006, LandSource had assets with a book value of approximately $1.3 billion, with its primary investment being The Newhall Land and Farming Company ("Newhall"), which owns 15,000 acres of land in the rapidly growing Santa Clarita Valley, approximately 30 miles north of downtown Los Angeles. With 23,000 residential homesites, Newhall owns some of the last remaining large, undeveloped, but entitled, land in the greater Los Angeles area. It also owns 700 acres of commercial land and other property in the Santa Clarita Valley. Under the terms of the agreement, the LandSource assets are valued at approximately $2.6 billion, with a potential increase adjustment to that value of over $600 million.

The agreement also provides for a new non-recourse debt facility. In exchange for a 62% interest in LandSource, the MW Housing venture will contribute cash and property with a combined value of approximately $900 million. The property, which is part of an existing land bank relationship between MW Housing Partners and Lennar, is being contributed based on today's fair market value. Lennar will continue to have options to purchase those homesites at the market price at the time of the exercise.

Commenting on the transaction, Stuart Miller, President and CEO of Lennar, and Jeffrey Krasnoff, President and CEO of LNR, issued a joint statement, "We are very pleased to expand our partnership to include MacFarlane Partners and CalPERS, which will add their strong financial resources and expertise in creating one of the nation's premier land companies. LandSource has created value through the continued development of Newhall and growing its land portfolio in targeted high growth markets. Today's announcement is a validation of this value creation, as we combine our respective residential and commercial expertise with the collective expertise and capital resources of our new partner. LandSource, building on the unique talent of our Newhall team in mixed use development, will become a new strategic platform for opportunistic land acquisition and value creation."

"We are excited to be investing in such prime property in Los Angeles, a market that we have favored for its long-term growth prospects," said Victor B. MacFarlane, founder and managing principal of MacFarlane Partners. "This is a once-in-a-lifetime opportunity that few pension managers and investors have the resources and the capabilities to participate in thanks in large part to the flexibility and vision of our long time partner, CalPERS."

Once in a lifetime opportunity?

If this really is a "once in a lifetime opportunity" for CalPERS then why is Lennar dumping it? Ramsey Su on Silicon investor had these comments:

Nov 05 qtr, LEN earnings - 3.54
Nov 06 qtr, LEN earnings guidance - .70 to .75

Nov 05 qtr deliveries 14,403
Nov 06 qtr deliveries 14,006

It is quite obvious what happened to the margins of LEN just to keep that level of deliveries.

Land in Southern Calif, close to the major cities, is indeed in short supply. If you look at the homebuilders' profit margins during the last couple of boom years, California had always been a big, if not the biggest, contributor. One may argue that LEN needed the cash so badly that they have to give up on a prized possession? I bet you LEN can't give away a similar parcel in Texas or South Florida right now.

Of course, the attention tomorrow would be focused on this "fantastic" land deal and not the warning.

If Lennar entered this deal because they had to (they needed the cash) not because they wanted to, just what does that say about their strategic planning? Heck, what do these repeated warning for the same quarter suggest? Even if Lennar felt they had to unload the land, that does not necessarily mean that CalPERS got a good deal. It all depends on what happens to land prices headed forward. Land prices fell 18 straight years in Japan but no one seems to think they can fall even as much as 6 straight years here.

Defective Homes

Mike Morgan at Morgan Florida sent me an update last week about defective homes and it fits in nicely today.

I’ve received a few questions about our website www.Lennar-Homes.info, and why investors will be interested in the issues surrounding Defective Homes. The answer is quite simple, in that one of the negative residuals to the housing boom is Defective Homes and the cost to the builders. We have only concentrated on Lennar to date, but that will be expanded in Q1 to include two other public builders, and by the end of the year we anticipate a group of comprehensive websites covering all public builders.

This headache is only just starting for the builders. Take one look at what is going on in Florida, New Jersey, and North Carolina, and you will see that Housing Lemon Laws are just around the corner. The following cases are all currently active.

• Florida Arbitrator Certifies Class Action Against Ryland Homes in Florida
• North Carolina Who Pays for Faulty Construction?
• New Jersey SCI finds Panorama of Waste, Fraud and Abuse in New Home Construction. SCI calls for system wide overhaul to protect consumers.

The Ryland case will be interesting, and devastating to the industry if they lose. In a report commissioned by State Farm Insurance, it appears the insurance industry is already making subrogation claims against Ryland, win or lose in the class action. These claims average about $20,000 each. If the entire 6,000 homes falls into this group, we’re talking about $120M. Even if Ryland wins the class action, how do they explain away the problems they face with the insurance industry, when it is clear the insurance companies have already made up their minds that they are not going to foot the bill?

In regard to our Lennar website. It is only in the initial stages, and we will be expanding as soon as our non-profit status is finalized.

Mike has informed me that the legal paperwork regarding non-profit status has been sent in and that he hopes to be ready to rock and roll with more "Defective Home" ideas soon, regardless of builder. If you are personally involved in a dispute or major problem with a home builder please Email Mike Morgan at Morgan Florida.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/