Friday, July 15, 2005

Bill Cara is back baby!

I can't get enough of this guy. If you haven't read his latest post then you should. He mentions at the bottom of his post that he's probably going to do his weekend review of the markets again after a tragic family related hiatus, so check sometime later this weekend for his comprehensive market analysis. I never miss it.


At 4:40 PM, Blogger HulkHogan said...

What the sheezy? He told us all to stop trading! How reassuring, lol!

By the way, Cara makes a good point about the real estate market being "on the verge", sort of.

The real estate market generally works like this:

When interest rates are high, home prices must come down for homes to remain affordable. If prices continue to increase along with interest rates, monthly mortgage payments get more and more ridiculous to the point where noone wants to purchase a home.

The problem is, banks have begun to do these negative-amortization loans to get around the problem of simultaneous property value and rate inflations. Basically, you get a negative amortization loan for your house, and with this loan, you can actually make a payment BELOW the monthly required payment that would normally go towards the principle and/or interest of the loan.

If you make this low payment, they add the difference between your payment and the accrued interest you didn't pay back onto the end of the loan, essentially meaning that you owe more money than you did when you opened the mortgage.

The problem that this creates is this:

If your loan balance continues to increase, and your property value doesn't increase faster than the principle of your loan, you find a bunch of people in California (where these loans are prevalent) that owe 2 million dollars on a 1.5 million dollar home. Suddenly, you can't sell your house to get out from under your mortgage debt, and if you default on your loan, the bank can't sell your house to make up their losses.

Considering the risks, I am rather stunned that this type of mortgage is even a legal form of financing, and I hope there are some federal restrictions.

But there is basically two ways the real estate bubble will "pop", so to speak:

1) Increasing interest rates will start to drive down property values because people will not be able to afford monthly payments

2) When people default on all these negative amortization loans, and the banks realize they've really screwed themselves because they can't recoup their losses on the sale of the repossessed property, they'll quit doing those loans. When that happens, people will no longer be able to afford homes in California at their current prices (750,000 is the average price of a home out there, I believe).

The first scenario would probably be a wide-spread occurrence, but the second scenario will more heavily impact certain areas where real estate prices have increased by incredible levels in the last decade.

It will be interesting to watch.

And by the way, when the negative-am bubble pops in California, you're going to be able to find some incredible deals on real-estate if you have some cash and are dying to move to California ;)

At 5:28 PM, Blogger jontait said...

Matt thanks for the great post. I want anybody else reading this to know that Matt (hulkhogan) works at a bank, so he knows what he is talking about.

You know I'm drooling all over FNM as a short candidate and I bet we can come up with some other great shorts for when the time is right.

By the way Matt, Bill Cara knows what he's talking about too, so when he says the market is getting lofty, I start hedging. Basically, he's saying that all the low-hanging fruit in the market has probably been picked over the last couple of weeks and the down-side risk is getting higher all the time. He's not saying to sell everything and run for the hills, rather its time to get defensive and I agree. Before I even read his post I had initiated a new short position in the QQQQ, but I am still very much net long right now.

At 5:58 PM, Blogger HulkHogan said...

Yeah, see, you guys that have margin can short, so news like this from him isn't "bad" for you, per se, but for me, not having margin, I can't even take short positions, so when the market goes to bear, I take a time out, heh.

At 6:20 PM, Blogger Roberto said...

I am glad to see Bill is back as well. I have been talking about the lofty real estate market on my blog for months now. The clock is ticking

At 7:49 PM, Blogger jontait said...

Roberto, nice blog. Added NasdaqTrader to my blogroll.


Post a Comment

<< Home