It is one thing to watch squiggly lines, or pretty, but largely meaningless bubble charts explaining a snapshot phenomenon or one transpiring over time. It is something else to actually be in a rollercoaster which recreates the experience of the Vancouver real estate market. Which is why the following animation from Vancouver Condo Info is rather cool. “This is a roller coaster simulation of the last 35 years of the Vancouver Real Estate market. The actual graph you’re riding is the inflation adjusted value of a house in Vancouver BC based on data collected by Royal LePage and calculated by the UBC Centre for Urban Economics and Real Estate. Some of the peaks and troughs have been rounded to keep the train from flying off the tracks, but other than that slight modification it is a precise scale model of the red line on this graph: cuer.sauder.ubc.ca/?cma/?data/?ResidentialRealEstate/?HousingPrices/?housing-pri-vancouver.pdf. When the housing bubble of the early eighties popped in this city some house prices dropped by 50% over the next couple of years and didn’t reach their inflation adjusted real price again for 25 years. What would a real estate market bust look like these days?”



Vancouver RE market rollercoaster from Vancouver Condo Info on Vimeo.

And for those who would like to try their skill at converting charts, such as for example the Fed’s balance sheet (warning: it will be a boring ride), or the S&P in the last decade, or for a true free fall, CNBC’s Nielsen ratings, can do so using NoLimits Roller Coaster Simulation here.

The Hard Truth About Residential Real Estate. Anyone who believes that housing is on the rebound, and that now is the time to buy, should take a very hard look at the numbers I dredged up for my spring lecture and luncheon tour. There are 140 million personal residences in the US. Today, there are 19 million homes either directly or indirectly for sale. According to a survey by Zillow.com, a real estate appraisal website, 5 million homeowners plan to sell on any improvement in prices. Add to that 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 19 million homes. Now, let’s look at the buy side. There are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers. Here is where it gets really interesting. There are 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year. You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much lower standard of living than their parents. Throw in the disappearance of state and federal first time buyer tax credit. You can count on a jump in long term capital gains taxes and state and local property taxes, further diminishing property’s appeal. If you are looking for a final stick to break the camel’s back, how about eliminating, or substantially reducing the home mortgage interest deduction? Add it all up, and there is a massive structural imbalance in residential real estate that will take at least a decade more to unwind. We could be looking at a replay of the same 26 year period from 1929 to 1955 when prices remained flat, and we are only 3 years into it! A second down leg in the real estate market seems a no brainer to me, as is the secondary banking crisis that follows. Perhaps that’s why hedge funds have been big sellers of the homebuilder’s ETF (XHB).What’s a poor homeowner to do? Don’t ask me. I sold everything in 2005 when my research threw up these numbers, and have been happily renting ever since. And, if the toilet blocks up, I just call the landlord.

-

Today’s EUR trading session which begins in about 4 hours, may be rather violent. While on one hand we have bond-negative news out of Spain, the biggest news once again comes out of theSwiss journal NZZ, which citing greek newspaper Kahtimerini, discloses that insolvent Greece has less than two months of cash left, or enough to last it until July 18, unless a new installment in the bailout tranche is approved for the country by the now headless IMF, and the suddenly insolvent ECB. Insolvent, because as Spiegel will report in its headline article tomorrow, and as we have noted many times before, the bank is “suddenly” finding itself lending out money collateralized by now virtually D-rated bonds: something not even Trichet will be able to spin off to the increasingly malevolent media. Per Dow Jones: “Skeleton risks amounting to several hundreds of billions of euros are on the balance sheet of the European Central Bank, magazine Der Spiegel writes in a preview of its edition to be published Monday. Those risks arise because banks, above all from Greece, Ireland, Portugal and Spain, have provided as collateral asset-backed securities that are unfit for central bank loans as their debt rating is low or non-existent, the magazine says.” Alas, the European central bank’s dirty laundry is being exposed just as a rift between the bank and Germany: its most solvent backer, is starting to develop. Also from Dow Jones: “German Finance Minister Wolfgang Schaeuble cautioned in an interview published Sunday that there shouldn’t be a conflict with the European Central Bank over a possible restructuring of Greek debt. “If in the end it should come to an extension of bonds, of course, we need the approval of the IMF and above all of the ECB. Under no circumstances should it come to a conflict with the ECB,” Schaeuble told Bild am Sonntag. “I advise all of us to use restraint in public debates about this question.” Several ECB officials have rejected a restructuring of Greek debt and have warned of possible catastrophic consequences, while European finance ministers are slowly warming up to the possibility of some kind of restructuring as a last resort.” Thus the crunch time for Europe’s latest kick the can down the road round, once again centered on a bankrupt Greece, may be coming fast, and this time with a rather furious Germany.

From NZZ:

If experts from the EU, the International Monetary Fund (IMF) and the European Central Bank (ECB) do not give the go ahead for the next installment of the bailout package totaling 12 billion euros by the end of June give, then Greece will become insolvent on July 18, as the conservative Journal “Kathimerini” reported.

In the coming days Athens will fast track an aggressive privatization program. According to media reports, real estate should be taxed higher than before.

Further cuts in wages and pensions in the public sector and pensions are no longer excluded. In addition, state-run enterprises are privatized and will sell real estate, they said. The new savings program should be approved by parliament in early June.

Prime Minister Giorgos Papandreou noted in an interview with the Sunday edition of the newspaper “Ethnos” denying any form of debt restructuring. This would be no debate. Greece will repay all his debts, he said.

The head of the Euro Group, Jean-Claude Juncker, has proposed the privatization of state property Greece after the German model of trust. I would appreciate it if our Greek friends would start following the example of the German Treuhand privatization agency, a non-governmental, “Juncker said in an interview with the magazine” Der Spiegel “. This institution should be staffed with foreign experts. “The European Union will support the privatization program in the future as closely as we would conduct themselves,” Juncker announced.

The potential revenue he estimated at “significantly more than the 50 billion proposed by the Greek government.” The EU is also expected from Greece, “that the two major political groupings in the country put aside their petty disputes,” said the euro-group leader: “Government and opposition parties should jointly declare that they are committed to the reform agreements with the EU . ‘Only when Greece had consolidated its budget, one could initiate a “soft debt restructuring.” Then we can consider to extend the maturities of public and private loans and interest rates lower, “said Juncker.

And regarding the €50 billion privatization prgoram by the Greek government, Alex Gloy of Lighthouse Investment Management asks:

Re: EUR 50bn privatization by Greek government – has anybody dared to ask:

• Who exactly is going to purchase those state-owned assets? Domestic buyers? Those are busy trying to get their Euros out of the country (‘s banks) before it’s too late. Foreigners? Which foreigner would fork over dear Euros now only to find a Drachma-denominated (and quickly depreciating) asset shortly afterwards?
  
• Who would invest in a country whose entire banking system is hanging on a thread (which the ECB is threatening to cut)?
  
• Why buy assets that could be nationalized when a populist / communist government takes over after Greeks are (rightly) enraged about suffering endless austerity?
  
• Why not ask Deutsche Telekom what they think about their 30% stake in OTE (Hellenic Telecom), bought for EUR 3.8bn (at EUR 27.50-29 per share, now: EUR 7.60). Buyer’s remorse came at the end of 2011. Deutsche Telekom hat to write off EUR 1.3bn on their Greek (and Romanian) investment. DTE management must hate themselves for having given the Greek government a put option for additional 10% stake until end of 2011. Why hasn’t the Greek government exercised yet? Don’t they need the cash? Only explanation: the Germans are twisting some Greek arms to try to make that put option “expire”. Full deal structure here.

All great questions, most of which bring even further credibility to the Andrew Lilico-proposed next steps for Greece.

The Federal Reserve has tried its best to hide the secrets of past banking blunders deep in its balance sheet. Commercial real estate (CRE) loans made in haste during the real estate bubble are part of this national disgrace in banking folly. As theFederal Reserve and U.S. Treasurydigitally print the dollar into oblivion the bad CRE loans still linger in the Fed balance sheet. As it turns out the Fed has become the dumping ground for all things real estate and has traded toxic loans for quality liquidity to fuel the banks back up. CRE debt in the form of empty shopping malls, failed hotels, and tumbleweed occupied strip malls is only a flavor of what the Fed is taking on. Yet many of these loans are still occupying the balance sheet of many banks. As it turns out, there was so much junk in the CRE market that the Fed could only balloon their balance sheet and still not encompass one half of the CRE market. Many CRE loans are coming due in 2012. Is the day of reckoning for CRE coming in 2012?

$ 150 billion coming due in CRE loans in 2012

Over $ 150 billion in CRE loans are maturing in 2012 bringing the day of reckoning closer. Why is this a problem? First, the CRE market has completely imploded:

Source: MIT

CRE values just like residential real estate have cratered and are down over 50 percent since their peak. Much of these properties require actual economic streams of income coming in for example in strip mall rents or hotel occupancies to keep servicing the debt. Unlike a home that has other sentimental values a CRE property is strictly a business decision. The Federal Reserve is seeing the tanking of valuations at the absolute worst time. The Fed treating the crisis as one of liquidity simply exchanged U.S. Treasuries for toxic CRE debt to drinking buddy banks. After all what is the harm in keeping the junk for a few years and when prices recover, a simple hand off and the public has no idea what happened except they just have to contend with greater goods inflation as their purchasing power falls through the floor. However the bailouts of 2007 never helped the overall economy because the crisis is one of solvency, not liquidity. The working and middle class are struggling because their purchasing power has washed away over the decades and the bailouts were simply geared to the too big to fail banks.

CRE is a giant problem because the number of buyers vying for a strip mall is relatively small. Unlike a residential property, if the price drops low enough on a home the market will respond. If a strip mall was poorly built in a bad location you may have no buyers regardless of cost. And make no mistake banks have shut the door on CRE fairly hard:

Source: World Property Channel

The fiasco in CRE can only last so long. The Fed balance sheet has exploded during this crisis and you can rest assured billions of dollars in CRE loans are floating in the un-audited figures:

CRE is merely following the pattern outlined by the residential real estate bubble effectively creating a situation where a double bubble developed:

Source: The American

2012 is looking like the day of reckoning for CRE debt. First, you have an American public that is absolutely frustrated by the ineffective handouts to the banking system of the country. The hunger for a full Fed audit is getting louder and louder. Politicians will sway in the way of their financial backers but only to the extent they feel they can get away with their smoke and mirrors and deceive the public. That shell game is becoming harder and harder to maintain. At what point does the government step in and do what is best for the economy and not the big banking interests? How does bailing out a failing hotel or empty strip mall really help the average working American? It doesn’t. Banks were eager to make these loans and profited handsomely during the bubble. Now they don’t want to deal with the consequences of taking on too much risk so they rather socialize the losses on the public. This is not capitalism but a banking corporatocracy. CRE debt will come due in large amounts in 2012 and unless prices soar to the sky in the next year, some major rebalancing will need to occur.

There is no inflating out of the real estate mess and CRE is no exception. Unless household incomes go up disposable income is going to get tighter. We are already seeing more money being eaten up by food and energy and baby boomers will definitely see more money flowing into the healthcare industry complex. From one frying pan to another it will become about priorities and CRE will move lower on the list. The day of reckoning for CRE is coming next year and only time will tell how the market will respond.

Famed doomsayer Marc Faber did not disappoint at the Ira Sohn investing conference Wednesday.
In a wide-ranging presentation filled with shots at Ben Bernanke and the Fed commissioners, Faber predicted the Fed will continue to print money.
That means cash and bonds should not be considered safe assets.
He also ominously predicted escalating tension with China and in the Middle East: “You have to prepare for the next war, and, in war commodities go ballistic.”
He urged investors to diversify assets and hold everything from precious metals and commodities to real estate and equities.
And if they hold gold, it might be good to spread their holdings all over the world — Australia, Switzerland, Singapore, Beijing.
“You have to prepare yourself. Diversify.”