Here is what Andrew sent me after seeing my recent blog post about March 2004.

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Wednesday, February, 25 2004

There He Goes Again

In recent months the statements of Fed Chairman Alan Greenspan have become increasingly confusing and self-contradictory. So much so, that an impartial observer must conclude that his motives are somewhat less than honest.

This week, the Chairman was true to form as he continued misleading the public with respect to the enormous risks facing the U.S. economy. Rather than expressing an obvious concern over the increasing use of adjustable rate mortgages (ARM's) he instead praised them, encouraged greater use, and expressed regret that too many homeowners were wasting money on fixed rate mortgages. In the same speech he declared that the high levels of consumer debt did not concern him because the cost of servicing that debt was so low. Given that reality, one would assume he would hope most borrowers would lock in those low rates. After all, when rates do ultimately rise, higher rates would certainly make the debt load unmanageable. These comments are even more peculiar given the concerns he expressed the following day over the mortgages insured by Fanny Mae and Freddie Mac, as ARM's have a much greater default risk than do traditional fixed rate mortgages!

Rather than a reflecting the sophistication on the part of savvy American home owners, as Greenspan suggests, the reality is that most homeowners are choosing ARM's because that it is either the only way they can afford to buy a home, or it is the only way they can afford to make ends meet. The average ARM is 50% larger than the average fixed rate, suggesting that the larger the mortgage the more likely it is that the borrower needs the lower payments to qualify. Also, financially distressed homeowners typically refinance fixed rates mortgages into ARM's to save money. In so doing, they trade the benefits of lower current payments for the risks of higher future payments. Given the facts that interest rates and domestic savings are at historic lows, the budget and current account deficits are surging, commodities prices are soaring, and the dollar is collapsing, this is perhaps the worst time in history to make such a trade-off.

What Alan Greenspan is in effect saying to homeowners, or potential home buyers, is "go ahead, get that ARM, don't worry about rising interest rates, I've got your back. It's O.K. to pay $500,000 for that two-bedroom town home that sold for $300,000 two years ago, because you can afford the payments with an ARM. Can't afford the car payments on that brand new imported SUV? Just refinance your fixed rate mortgage into an ARM. After all, you’re just wasting money with that fixed rate mortgage."

Is it possible that Greenspan really is this naive? Or does he see the danger posed by ARM's, but does not want to acknowledge his concerns publicly? I believe that he is so worried about the proliferation of ARMs that his comments were intentionally designed to defuse any legitimate fears that may be developing, particularly among America's creditors, concerning this issue. Also, I believe Greenspan's comments are specifically designed to help keep the housing bubble, and by extension the U.S. economy, expanding. Greenspan knows that the only way most home buyers can afford these ridiculously high prices is with ARM's. Without them, housing prices would collapse. He also knows how important re-fi money is to the U.S. consumer. Since long term interest rates cannot fall low enough to facilitate another wave of fixed rate re-fi's, he is trying to encourage homeowners to re-finance on last time: fixed to ARM.

Isn't it odd for Greenspan to even make recommendations concerning which type of mortgage homeowners should choose? After all, he doesn't comment on what stocks investor should buy, or what bond maturities to favor. He even refuses to comment on the dollar. You would think Greenspan would not want to put himself into a position of having to raise interest rates after encouraging home owners to refinance into ARM's. Do such comments actually tie his hands in some respect? Do they leave the Fed or the U.S. government vulnerable to legal action from bankrupt ARM borrowers, who relied on the chairman's comments in their decision to opt for the riskier loan?

The reality is that such absurd comments by Greenspan further reveal that his statements are more propaganda than sincere expressions of opinion. He says whatever he thinks he has to say to sustain the bubble economy, regardless of his personal beliefs. Everything he says is designed to postpone the day of reckoning as long as possible, no matter how much worse that day will become as a result. It is only when viewed from this perspective that Greenspan's comments make sense.

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Schiff's piece looks pretty smart in retrospect, doesn't it?

Back then, prices were going up. Now they're going down. The nation's mood could not be different. Euphoria then; a deep purple funk now.

So back to the question. Where were you in March 2004? Negotiating for a nifty option ARM? Scouting out a home in a new subdivision in the remotest exurbs? At the time--and this was before things really got crazy on prices and crappy mortgages--everything seemed possible.

I searched the Factiva database for housing-related articles that appeared in local newspapers in March 2004. Here are a few I found.

From The Desert Sun newspaper in the Coachella Valley, east of L.A. and San Diego:

"World Development, the Palm Desert company putting up Waring Palms, is having a hard time keeping up with Coachella Valley's sizzling demand for new homes, said Executive Vice President Scott Stokes. He and other builders say they can't find enough skilled workers in the valley to build as fast as customers are buying their homes."

From The Patriot Ledger of Quincy, Mass.:

"Another big boom emanated from the South Weymouth Naval Air Station property this week, but it had nothing to do with planes.

"Rumors started flying that 3,000 or 4,000 homes could be part of plans for the 1385-acre property that lies in Weymouth, Abington and Rockland. Numbers like that scare the wits out of local residents and officials because of the impact so many homes would have on local services. The reaction was predictable."

From the San Antonio Express-News:

"Jaime Arechiga - a Laredo land developer who expanded his horizons to San Antonio four years ago - is carving up lots all over Bexar County and New Braunfels.

"'I'm in the community. I'm here to stay,' said Arechiga, who now maintains residences in Laredo and San Antonio."

From the Las Vegas Business Press:

"New legislation and rising land prices are helping fuel Southern Nevada's condominium market. In 2003, vacant land prices averaged $202,100 an acre in the Las Vegas Valley, a 27 percent increase from the previous year, says Applied Analysis, a locally-based economic research firm. The southwest submarket reported the largest land appreciation at $244,200 an acre, a 32 percent increase over 2002."

From The Washington Times:

"As home prices climb in the Washington area, buyers in the upscale home market can expect to spend more than ever before for a home with opulent features.

"Home price is not simply a function of the quality of construction and finishes, nor is it based solely on size. Prices often are based more on location. Buyers of luxury homes are sometimes looking for an exclusive, gated community; sometimes wanting plenty of land for privacy; and sometimes desiring a home as close as possible to Washington.

"Many buyers want to live in a planned community with recreational amenities and the convenience of a local retail center. Some luxury homes are found in developments with these amenities, often including a golf course.

"Other expensive homes are smaller homes in fashionable enclaves on small homesites.

"Priced from the $700,000s and up, upscale homes do share an abundance of opulent features such as hardwood flooring throughout the main level; two- or three-piece crown and chair-rail moldings; oversized ceramic-tile flooring; or even marble flooring in the baths and a master bath with a tub and a separate shower upgraded with more space, a seat, steam showers and multiple shower heads. 'Walk-through' showers with two doors or even without doors and just perhaps a glass-block divider are becoming popular for those homes with the space for an extended master bath."

How silly that seems now.

Last but not least, here's an excerpt from an article by Michael Gregory in Investment Dealers Digest that all of us should have paid more attention to:

"But despite the benefits of structure that allow them triple-A-status, events in recent years have shown that asset-backed securities have their own risks. The collapse of Heilig-Meyers in late 2000, the messy servicing transfer that followed and the ultimate disturbing recoveries to the once triple-A-rated bonds offer the clearest lesson of the huge risks for ABS investors."

Happy new year!

Specialist in Spruce Creek Fly-In, the world’s premier fly-in country club community. Pilot and home owner within the community for over 9 years.

More…

My favorite movie, hands down, is It’s a Wonderful Life. Director Frank Capra’s tale of a small town banker who realizes in the midst of a banking panic who his true friends are is holiday classic for good reason.

I got this email advice recently from life coach Patrick Wanis:

"George Bailey experiences an epiphany and has a renewed zest for life. We can do the same but we must first lower our expectations and let go of the myths that even the movie created while still seeing the beauty and magic that does exist. Yes, we all would love to have the perfect family and perfect life but we must accept that it simply doesn't exist.

Learn to become grateful for whatever you have and to become aware of your significance. If all you have is your health, be thankful for that; if it is cold outside, be grateful that you are warm and have shelter. If you are feeling alone, useless or invisible, write a list of the people whose life or lives you are impacting in a positive way. If you cannot come up with one name, then go out and donate one hour to serving at a soup kitchen or the like. You will realize how you can bring joy to others and you will realize that your life isn't so bad after all."

"May your Holidays be blessed and may you find love, joy and inner peace," he concludes.

I couldn’t have said it better myself.

Happy Holidays!