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Dear Friends and Clients,
What
Happened to the Newsletters?
If
you’ve not been receiving my newsletters lately, it’s
because I haven’t been sending them.
About
mid July last year I realized something was very much amiss
within the real estate market.
I’m pretty much always on top of the local market, but
up until then, I never had to pay much attention to the back end
of the financing area of the business. Interest rates go up,
and interest rate go down…
this was much more than that.
And I
didn’t know what was really going on.
I figure it’s pretty hard to competently
advise one’s clients when you yourself don’t know what’s
happening or why.
So I
got on the Internet and started reading… four to six hours a day,
every day. It took
4 months before I really began to understand what was happening. And now…
It’s like
sitting in a lawn chair watching a train
wreck in slow motion - exciting but morbid.
And
with it an in-depth education about securitized financing,
mortgage backed securities- RMBS and CMBS, collateralized debt
obligations- CDO’s, CDO’s squared, synthetic CDO’s,
tranches- senior, mezzanine and equity, derivatives, CDS’s and
counter party risk, monoline insurers and fraudulent rating
agencies, SIV’s.
About
insane leverage and mis-priced risk, off-balance-sheet money
market funds “breaking the buck” because of MBS investments. About the Minsky moment,
parallels to the South Sea Bubble of the early 1700’s (history
continues to repeat itself – especially once the last
generation has left the building). About King County
investing in a AAA rated SIV that was downgraded to junk status
just 3 weeks later.
Early
on I had visions of writing a two-page newsletter that would
explain it all in simple, easy-to-understand terms that
wouldn’t cause eyes to glaze over.
But alas,
I’m not that good a writer.
In
simplest terms, sub prime loan defaults are only the tip of the
iceberg - the catalyst triggering a blowup of bigger problems. Risk was mis-priced,
leverage became extreme (bubble), and liquidity is now an issue
(the classic Minsky moment).
Credit was substituted for money. A lot of people bought
homes they couldn’t afford (forget rate resets – they
couldn’t make the payments from the beginning) with 100% (or
more) financing. About 70% of all exotic mortgages involved
fraud somewhere along mortgage originate and distribute
pipeline.
There’s
another way to come up to speed on the market and economy
If you
really want to understand what’s going on, contact me by phone
or email. I’d be
happy to send you a catalogue of good articles to get you
started (warning - they’re a lot longer than two pages). Also, I continue to read
hundred of posts and articles daily. I send out regular emails with the best of what
I’ve read to a list of people who want to stay abreast of the
economy and market. I’d
be happy to add you to that distribution list. There will be no quiz…
If you
don’t have the time and/or energy to dig deep into current
economic events, just realize the economy is very fragile
right now. The
fed is (frantically) doing things that haven’t been seen since
the Great Depression.
And
although I don’t want to be an alarmist, I strongly urge you
to do two things for yourself. If you have a money
market fund, check if it has exposure to mortgage backed
securities. Ditto for your mutual fund(s). You’re at risk if you
have investments with MBS exposure, so you may want to consider
an alternative place for your money. If you’re comfortable
with the risks, great… just
know about it. Call
or email me if you want an in-depth explanation.
Check to
make sure you’re under the FDIC limits
for insured deposits in any one institution.
This
includes savings accounts and certificates of deposit. You can find the
coverage rules at http://www.fdic.gov/deposit/index.html.
If you’re fortunate enough to have over $100,000 in any one
bank ($250K for an IRA), you most likely have money at risk for
no reason. Don’t
be complacent – it’s easy to fix!
To not
protect yourself, especially when it costs
next to nothing to so, is foolish!
Be
aware the FDIC is now hiring people in anticipation of pending
bank failures.
So, does
this mean the world is coming to an end?
Nope. People are still buying
and selling real estate. Buying
opportunities are more abundant, but so are the risks (you need
to buy right). Selling
is still a process of packaging, pricing, and presentation to
maximize sales price. But
sellers can no longer expect the market to eventually “catch
up” and erase their mistakes.
Accuracy and skill matter – again.
If you
don’t need to buy immediately, wait until the right
opportunity comes along. I’d
be looking, but not in any big hurry. (If you aren’t looking
you won’t recognize it when the “deal” with your name on
it comes along.) Sellers
should either sell now or plan on waiting a few years. In other words, it will
probably get worse before it gets better. That said Washington and
Oregon are doing as well as anywhere in the country. Washington has an
unemployment rate at 4.5%, which is quite low.
And
there are (more) fed programs in the works that could alter the
marketplace (for better or worse).
All
that said, keep in mind one thing…
I cannot
tell the future. My
crystal ball has never
gotten out of the repair shop.
I can
only report on what’s happening now and what’s scheduled to
happen.
Speaking
of reporting, I’ve been working on a real estate blog
for some time. For
those of you who don’t know, blog is short for web log. Sort of like a running
commentary on whatever subject(s) you choose. People are free to
comment, to agree, disagree, expand or expound.
I blog
at www.edgewoodblog.com
about real estate in general and Edgewood, Milton, Fife, etc. in
particular. I
invite you to stop by, have a look, and say hello - comment on
any post. I
welcome your on-line comments (don’t worry, you can’t screw
it up and you can’t make a mistake and you won’t look
foolish.)
I’m ready
for spring. What’s
with this snow the end of March?
It’s
been a pretty fruitful this year on the farm with 6 new lambs
(more expected). That’s in addition to 9 ewes and a couple of
new steers (purchased in October). With that many animals,
I’m a bit tired of mucking out the barn (I’m a softie when
it’s raining and cold out).
I’d rather be bicycling outside. Oh well, at least the
garden soil benefits.
What a
difference a few years make!
My son
Devon is due out in May from Minneapolis. I’m really looking
forward to his visit. I
cannot believe how different he is now compared to when he was
17. Three years of
prefrontal cortex development brings forth amazing results… like a miracle. For those of you struggling with behavior issues
during the silly years, take heart. He’s even
enthusiastically talking college…
Baring
a new train wreck on a new subject, newsletters are back on
schedule.
I hope
this finds you well and happy.
Lee R.
Mason
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